FIRST UNION EQUITY AND INCOME FUNDS
(Portfolios of First Union Funds)
Trust Shares
- --------------------------------------------------------------------------------
Supplement to Prospectus dated February 28, 1994
Effective September 1, 1994, First Union Equity and Income Funds (the
"Funds"), with the exception of First Union Managed Bond Fund, will offer
Class D Investment Shares ("Class D Shares"). Class D Shares will be
similar to Class C Shares in all respects except: Class D Shares will have
a contingent deferred sales charge of 1.00%, which terminates after one
year, and the Class D Shares will not automatically convert into Class B
Shares after seven years.
Effective September 1, 1994, Class C Shares will assess a shareholder
service fee of 0.25% of the average daily net asset value, of which all or
a portion may be waived at any time.
A. Please delete the "Summary of Fund Expenses" table on pages 4 and 5 and
replace it with the following:
- ------------------------- SUMMARY OF -------------------------
- ------------------------- FUND EXPENSES -------------------------
FIRST UNION EQUITY AND INCOME FUNDS
TRUST SHARES
<TABLE>
<CAPTION>
Fixed High Grade Managed U.S.
Balanced Income Tax Free Bond Government Utility Value
Fund Fund Fund Fund Fund Fund Fund
-------- ------ ---------- ------- ---------- ------- -----
Trust Shares--Shareholder Transaction Expenses
<S> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)................................ None None None None None None None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)................................ None None None None None None None
Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds,
as applicable)..................................................... None None None None None None None
Redemption Fee (as a percentage of amount redeemed,
if applicable)..................................................... None None None None None None None
Exchange Fee........................................................ None None None None None None None
Annual Trust Shares Operating Expenses*
(As a percentage of average net assets)
Management Fee (after waiver) (1)................................... 0.50% 0.50% 0.49% 0.50% 0.49% 0.00% 0.50%
12b-1 Fees.......................................................... None None None None None None None
Total Other Expenses (after waiver) (2)............................. 0.16% 0.16% 0.28% 0.20% 0.25% 0.92% 0.17%
Total Trust Shares Operating Expenses (3)......................... 0.66% 0.66% 0.77% 0.70% 0.74% 0.92% 0.67%
</TABLE>
(1) The management fees of High Grade Tax Free, U.S. Government and Utility
Funds have been reduced to reflect the voluntary waivers by the Adviser. The
Adviser may terminate these voluntary waivers at any time at its sole
discretion. The maximum management fee for High Grade Tax Free, U.S. Government
and Utility Funds is 0.50%.
- ------------------------- SUMMARY OF -------------------------
- ------------------------- FUND EXPENSES -------------------------
(continued)
FIRST UNION EQUITY AND INCOME FUNDS TRUST SHARES
(2) Total Other Expenses for Managed Bond Fund would have been 0.23%, absent
the voluntary waiver by the administrator of certain of its fees. Total Other
Expenses for Utility Fund are estimated to be 1.66%, absent the anticipated
voluntary waiver by the administrator. The administrator may terminate these
voluntary waivers at any time at its sole discretion.
(3) The total Trust Shares Operating Expenses for Managed Bond Fund would have
been 0.73%, absent the voluntary waiver described above in note 2.
Total Trust Shares Operating Expenses for High Grade Tax Free and Utility Funds
are estimated to be 0.78% and 2.16%, respectively, absent the anticipated
voluntary waivers described above in notes 1 and 2.
Fixed Income, U.S. Government and Value Funds' Trust Shares Annual Operating
Expenses were 0.66%, 0.48% and 0.65%, respectively, for the year ended December
31, 1993. Total Trust Shares Operating Expenses for U.S. Government Fund,
absent the voluntary waiver of the management fee by the Adviser, were 0.79%
for the year ended December 31, 1993.
The Annual Trust Shares Operating Expenses, except for the Balanced, High Grade
Tax Free, Managed Bond, and Utility Funds, in the table above, are based on
expenses expected during the fiscal year ending December 31, 1994. Total Trust
Shares expected operating expenses for U.S. Government Fund would be 0.75%,
absent the voluntary waiver described above in note 1.
Fixed Income and Value Funds are no longer allocating certain expenses as
incurred by each class.
* High Grade Tax Free, U.S. Government and Utility Funds' expenses in this
table are estimated based on average expenses expected to be incurred during
the fiscal year ending December 31, 1994. During the course of this period,
expenses may be more or less than the average amount shown.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Funds 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.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
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.
The Funds charge no redemption fees for Trust
Shares.
Balanced Fund................................ $7 $21 $37 $82
Fixed Income Fund............................ $7 $21 $37 $82
High Grade Tax Free Fund..................... $8 $25 N/A N/A
Managed Bond Fund............................ $7 $22 $39 $87
U.S. Government Fund......................... $8 $24 $41 $92
Utility Fund................................. $9 $29 N/A N/A
Value Fund................................... $7 $21 $37 $83
</TABLE>
The above example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown. This example
for Trust Shares of High Grade Tax Free, U.S. Government and Utility Funds is
based on estimated data for the fiscal year ending December 31, 1994.
The information set forth in the foregoing table and example relates only to
Trust Shares of the Funds. The Funds (other than Managed Bond Fund) also offer
three additional classes of shares called Class B Shares, Class C Shares and
Class D Shares. In general, all expenses are allocated based upon the daily net
assets of each class. Class B Shares are subject to a 12b-1 fee of 0.25 of 1%.
Class C Shares are subject to a 12b-1 fee of 0.75 of 1% and a shareholder
service fee of 0.25 of 1%. Class D Shares are subject to a 12b-1 fee of 0.75 of
1% and a shareholder service fee of 0.25 of 1%. In addition, Class B Shares
bear a maximum front-end sales charge of 4.75%. Class C Shares bear a maximum
contingent deferred sales charge of 5.00% and Class D Shares bear a maximum
contingent deferred sales charge of 1.00%. See "Fees and Expenses" and "Other
Classes of Shares."
September 1, 1994
FEDERATED SECURITIES CORP.
- --------------------------------------------------------------------------------
Distributor
G00389-13-A (9/94)
FIRST UNION
- --------------------- EQUITY AND INCOME ---------------------
- --------------------- FUNDS ---------------------
Portfolios of First Union Funds
TRUST SHARES
- --------------------------------------------------------------------------------
P R O S P E C T U S
February 28, 1994
First Union Funds (the "Trust") is a mutual fund with 15 portfolios, offering a
variety of investment opportunities. The Trust currently includes seven
diversified Equity and Income Funds, three diversified Money Market Funds, and
five non-diversified Single State Municipal Bond Funds. They are:
Equity and Income Funds
. First Union Balanced Portfolio;
. First Union Fixed Income Portfolio;
. First Union High Grade Tax Free Portfolio (formerly, First Union Insured Tax
Free Portfolio);
. First Union Managed Bond Portfolio;
. First Union U.S. Government Portfolio;
. First Union Utility Portfolio; and
. First Union Value Portfolio.
Money Market Funds
. First Union Money Market Portfolio;
. First Union Tax Free Money Market Portfolio; and
. First Union Treasury Money Market Portfolio.
Single State Municipal Bond Funds
. First Union Florida Municipal Bond Portfolio;
. First Union Georgia Municipal Bond Portfolio;
. First Union North Carolina Municipal Bond Portfolio;
. First Union South Carolina Municipal Bond Portfolio; and
. First Union Virginia Municipal Bond Portfolio.
This prospectus provides you with information specific to the Trust Shares of
First Union Equity and Income Funds. It concisely describes the
information which you should know before investing in Trust Shares of any of
the First Union Equity and Income Funds. Please read this prospectus carefully
and keep it for future reference.
You can find more detailed information about each First Union Equity and Income
Fund in its Statement of Additional Information dated February 28, 1994, filed
with the Securities and Exchange Commission and incorporated by reference into
this prospectus. The Statements are available free of charge by writing to
First Union Funds, Federated Investors Tower, Pittsburgh, PA 15222-3779 or by
calling 1-800-326-2584.
The Trust is sponsored and distributed by third parties independent of First
Union National Bank of North Carolina ("First Union"). 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
UNION, ARE NOT ENDORSED OR GUARANTEED BY FIRST UNION, AND ARE NOT INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
FOR A DESCRIPTION OF THE NATURE AND LIMITATIONS OF MUNICIPAL BOND INSURANCE,
SEE "FIRST UNION HIGH GRADE TAX FREE PORTFOLIO--MUNICIPAL BOND INSURANCE," PAGE
19.
- --------------------------------------------------------------------------------
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.
- ------------------------- TABLE OF -------------------------
- ------------------------- CONTENTS -------------------------
SUMMARY 2 SHAREHOLDER GUIDE 31
- -------------------------------------- --------------------------------------
SUMMARY OF FUND EXPENSES 4 HOW TO BUY SHARES 33
- -------------------------------------- --------------------------------------
FINANCIAL HIGHLIGHTS 6 HOW TO CONVERT YOUR INVESTMENT FROM
- -------------------------------------- ONE FIRST UNION FUND TO ANOTHER
FIRST UNION FUND 34
--------------------------------------
INVESTMENT OBJECTIVES AND POLICIES 16 HOW TO REDEEM SHARES 35
- -------------------------------------- --------------------------------------
FIRST UNION BALANCED PORTFOLIO 16 MANAGEMENT OF FIRST UNION FUNDS 35
- -------------------------------------- --------------------------------------
FIRST UNION FIXED INCOME PORTFOLIO 17 FEES AND EXPENSES 37
- -------------------------------------- --------------------------------------
FIRST UNION HIGH GRADE TAX FREE
PORTFOLIO 19 SHAREHOLDER RIGHTS AND PRIVILEGES 38
- -------------------------------------- --------------------------------------
FIRST UNION MANAGED BOND PORTFOLIO 21 DISTRIBUTIONS AND TAXES 39
- -------------------------------------- --------------------------------------
FIRST UNION U.S. GOVERNMENT
PORTFOLIO 22 TAX INFORMATION 40
- -------------------------------------- --------------------------------------
FIRST UNION UTILITY PORTFOLIO 24 OTHER CLASSES OF SHARES 41
- -------------------------------------- --------------------------------------
FIRST UNION VALUE PORTFOLIO 26 ADDRESSES Inside Back Cover
- -------------------------------------- --------------------------------------
OTHER INVESTMENT POLICIES 27
- ------------------------- SUMMARY -------------------------
- ------------------------- -------------------------
DESCRIPTION OF THE TRUST
First Union Funds 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 First Union Fund. Each Equity and Income Fund, except First Union
Managed Bond Portfolio, is divided into three classes of shares: Class B
Investment Shares ("Class B Shares"), Class C Investment Shares ("Class C
Shares"), and Trust Shares. Trust Shares are designed primarily for
institutional investors (banks, corporations, and fiduciaries). Class B and
Class C Shares are sold to individuals and other customers of First Union (the
"Adviser"). First Union Managed Bond Portfolio presently offers only Trust
Shares. This prospectus relates only to Trust Shares ("Shares") of First Union
Equity and Income Funds (collectively, the "Funds").
THE FUNDS AND OBJECTIVES
As of the date of this prospectus, Shares are offered in the following seven
Funds:
. FIRST UNION BALANCED PORTFOLIO ("BALANCED FUND")--seeks to produce long-term
total return through capital appreciation, dividends, and interest income;
. FIRST UNION FIXED INCOME PORTFOLIO ("FIXED INCOME FUND")--seeks to provide a
high level of current income by investing in a broad range of investment
grade debt securities, with capital growth as a secondary objective;
. FIRST UNION HIGH GRADE TAX FREE PORTFOLIO ("HIGH GRADE TAX FREE FUND")--
seeks to provide a high level of federally tax-free income that is
consistent with preservation of capital;
. FIRST UNION MANAGED BOND PORTFOLIO ("MANAGED BOND FUND")--seeks to achieve
total return;
. FIRST UNION U.S. GOVERNMENT PORTFOLIO ("U.S. GOVERNMENT FUND")--seeks a high
level of current income consistent with stability of principal;
. FIRST UNION UTILITY PORTFOLIO ("UTILITY FUND")--seeks high current income
and moderate capital appreciation; and
. FIRST UNION VALUE PORTFOLIO ("VALUE FUND")--seeks long-term capital growth,
with current income as a secondary objective.
INVESTMENT MANAGEMENT
The Funds are advised by First Union, through its Capital Management Group.
First Union has responsibility for investment research and supervision of the
Funds, 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 Trust Shares of any of the Funds, please refer to
the Shareholder Guide section entitled "How to Buy Shares." Redemption
information may be found under "How to Redeem Shares."
RISK FACTORS
Investors should be aware of the following general observations: The market
value of fixed-income securities, which constitute a major part of the
investments of several of the Funds described in this prospectus, may vary
inversely in response to changes in prevailing interest rates. The foreign
securities in which several Funds may invest may be subject to certain risks in
addition to those inherent in U.S. investments. One or more Funds may make
certain investments and employ certain investment techniques that involve other
risks, including entering into repurchase agreements, lending portfolio
securities and entering into futures contracts and related options as hedges.
These risks and those associated with investing in mortgage-backed securities,
when-issued securities, options and variable rate securities are described
under "Investment Objectives and Policies" for each Fund and "Other Investment
Policies."
- ------------------------ SUMMARY OF ------------------------
- ------------------------ FUND EXPENSES ------------------------
FIRST UNION EQUITY AND INCOME FUNDS
TRUST SHARES
<TABLE>
<CAPTION>
Fixed High Grade Managed U.S.
Balanced Income Tax Free Bond Government Utility Value
Fund Fund Fund Fund Fund Fund Fund
-------- ------ ---------- ------- ---------- ------- -----
TRUST SHARES--
SHAREHOLDER
TRANSACTION
EXPENSES
<S> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales
Load Imposed
on Purchases
(as a
percentage
of offering
price).......... None None None None None None None
Maximum Sales
Load Imposed
on Reinvested
Dividends (as
a percentage of
offering price). None None None None None None None
Deferred Sales
Load (as a
percentage of
original
purchase price
or redemption
proceeds, as
applicable).... None None None None None None None
Redemption Fee
(as a per-
centagE of
amount redeemed,
if applicable). None None None None None None None
Exchange Fee.... None None None None None None None
ANNUAL TRUST
SHARES OPERATING
EXPENSES*
(As a percentage
of average net
assets)
Management
Fee (after
waiver) (1).... 0.50% 0.50% 0.49% 0.50% 0.49% 0.00% 0.50%
12b-1 Fees..... None None None None None None None
Total Other
Expenses
(after
waiver) (2)... 0.16% 0.16% 0.28% 0.20% 0.25% 0.92% 0.17%
Total Trust
Shares
Operating
Expenses (3). 0.66% 0.66% 0.77% 0.70% 0.74% 0.92% 0.67%
</TABLE>
(1) The management fees of High Grade Tax Free, U.S. Government and Utility
Funds have been reduced to reflect the voluntary waivers by the Adviser. The
Adviser may terminate these voluntary waivers at any time at its sole
discretion. The maximum management fee for High Grade Tax Free, U.S.
Government and Utility Funds is 0.50%.
(2) Total Other Expenses for Managed Bond Fund would have been 0.23%, absent
the voluntary waiver by the administrator of certain of its fees. Total other
expenses for Utility Fund are estimated to be 1.66% absent the anticipated
voluntary waiver by the administrator. The administrator may terminate these
voluntary waivers at any time at its sole discretion.
(3) The total Trust Shares Operating Expenses for Managed Bond Fund would have
been 0.73%, absent the voluntary waiver described above in note 2.
Total Trust Shares Operating Expenses for High Grade Tax Free and Utility
Funds are estimated to be 0.78% and 2.16%, respectively absent the anticipated
voluntary waivers described in notes 1 and 2.
Fixed Income, U.S. Government and Value Funds' Trust Shares Annual Operating
Expenses were 0.66%, 0.48% and 0.65%, respectively, for the year ended
December 31, 1993. Total Trust Shares Operating Expenses for U.S. Government
Fund, absent the voluntary waiver of the management fee by the Adviser, were
0.79% for the year ended December 31, 1993.
The Annual Trust Shares Operating Expenses, except for the Balanced, High
Grade Tax Free, Managed Bond, and Utility Funds, in the table above, are based
on expenses expected during the fiscal year ending December 31, 1994. Total
Trust Shares expected operating expenses for U.S. Government Fund would be
0.75%, absent the voluntary waiver described above in note 1.
Fixed Income and Value Funds are no longer allocating certain expenses as
incurred by each class.
* High Grade Tax Free, U.S. Government and Utility Funds' expenses in this
table are estimated based on average expenses expected to be incurred during
the fiscal year ending December 31, 1994. During the course of this period,
expenses may be more or less than the average amount shown.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUNDS 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.
- ------------------------ SUMMARY OF ------------------------
- ------------------------ FUND EXPENSES ------------------------
(CONTINUED)
FIRST UNION EQUITY AND INCOME FUNDS
TRUST SHARES
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
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.
The Funds charge no redemption fees for Trust
Shares.
Balanced Fund................................ $7 $21 $37 $82
Fixed Income Fund............................ $7 $21 $37 $82
High Grade Tax Free Fund..................... $8 $25 NA NA
Managed Bond Fund............................ $7 $22 $39 $87
U.S. Government Fund......................... $8 $24 NA NA
Utility Fund................................. $9 $29 NA NA
Value Fund................................... $7 $21 $37 $83
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE FOR TRUST SHARES OF HIGH GRADE TAX FREE, U.S. GOVERNMENT, AND UTILITY
FUNDS IS BASED ON ESTIMATED DATA FOR THE FISCAL YEAR ENDING DECEMBER 31, 1994.
The information set forth in the foregoing table and example relates only to
Trust Shares of the Funds. The Funds (other than Managed Bond Fund) also offer
two additional classes of shares called Class B Shares and Class C Shares. In
general, all expenses are allocated based upon daily net assets of each class.
Class B Shares are subject to a 12b-1 fee of .25 of 1% and Class C Shares are
subject to a 12b-1 fee of .75 of 1%. In addition, Class B Shares bear a
maximum front-end sales load of 4.00% while Class C Shares bear a maximum
contingent deferred sales load of 4.00%. See "Fees and Expenses" and "Other
Classes of Shares."
- ------------------------- FINANCIAL -------------------------
- ------------------------- HIGHLIGHTS -------------------------
FIRST UNION BALANCED PORTFOLIO
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.
<TABLE>
<CAPTION>
TRUST SHARES CLASS B INVESTMENT SHARES
---------------------------- -------------------------------
YEAR ENDED YEAR ENDED
---------------------------- -------------------------------
12/31/93 12/31/92 12/31/91** 12/31/93 12/31/92 12/31/91***
- ------------------ -------- -------- ---------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING
OF PERIOD $11.41 $11.02 $10.00 $11.41 $11.02 $10.00
- ------------------
INCOME FROM
INVESTMENT
OPERATIONS
- ------------------
Net investment
income 0.45 0.46 0.36 0.419 0.42 0.30
- ------------------
Net realized and
unrealized gain
(loss) on
investments 0.75 0.42 1.03 0.755 0.43 1.08
- ------------------ ------ ------ ------ ------- ------ ------
Total from
investment
operations 1.20 0.88 1.39 1.174 0.85 1.38
- ------------------ ------ ------ ------ ------- ------ ------
LESS DISTRIBUTIONS
- ------------------
Dividends to
shareholders from
net investment
income (0.45) (0.45) (0.36) (0.419) (0.42) (0.35)
- ------------------
Distributions to
shareholders from
net realized gain
on investment
transactions (0.09) (0.04) (0.01) (0.091) (0.04) (0.01)
- ------------------
Distributions in
excess of net
investment
income -- -- -- (0.004)(b) -- --
- ------------------ ------ ------ ------ ------- ------ ------
Total
distributions (0.54) (0.49) (0.37) (0.514) (0.46) (0.36)
- ------------------ ------ ------ ------ ------- ------ ------
NET ASSET VALUE,
END OF PERIOD $12.07 $11.41 $11.02 $12.07 $11.41 $11.02
- ------------------ ------ ------ ------ ------- ------ ------
TOTAL RETURN* 10.68% 8.21% 15.02% 10.41% 7.94% 11.75%
- ------------------
RATIOS TO AVERAGE
NET ASSETS
- ------------------
Expenses 0.66% 0.66% 0.68%(a) 0.91% 0.91% 0.92%(a)
- ------------------
Net investment
income 3.86% 4.20% 4.86%(a) 3.61% 3.93% 4.38%(a)
- ------------------
SUPPLEMENTAL DATA
- ------------------
Net assets, end
of period (000
omitted) $760,147 $520,232 $247,472 $35,032 $17,408 $334
- ------------------
Portfolio
turnover rate 19% 12% 19% 19% 12% 19%
- ------------------
</TABLE>
(See notes on page 7.) (CONTINUED)
- ------------------------- FINANCIAL -------------------------
- ------------------------- HIGHLIGHTS -------------------------
(CONTINUED)
FIRST UNION BALANCED PORTFOLIO
<TABLE>
<CAPTION>
CLASS C
INVESTMENT
SHARES
----------
YEAR ENDED
----------
12/31/93+
- ---------------------------------------- ----------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.54
- ----------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------
Net investment income 0.34
- ----------------------------------------
Net realized and unrealized gain (loss) 0.65
on investments ------
- ----------------------------------------
Total from investment operations 0.99
- ---------------------------------------- ------
LESS DISTRIBUTIONS
- ----------------------------------------
Dividends to shareholders from net
investment income (0.34)
- ----------------------------------------
Distributions to shareholders from net
realized gain on investment transac-
tions (0.09)
- ----------------------------------------
Distributions in excess of net
investment income (0.02)(b)
- ---------------------------------------- ------
Total distributions (0.45)
- ---------------------------------------- ------
NET ASSET VALUE, END OF PERIOD $12.08
- ---------------------------------------- ------
TOTAL RETURN* 8.72%
- ----------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------
Expenses 1.41%(a)
- ----------------------------------------
Net investment income 3.09%(a)
- ----------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------
Net assets, end of period (000 omitted) $65,475
- ----------------------------------------
Portfolio turnover rate 19%
- ----------------------------------------
</TABLE>
* Based on net asset value, which does not reflect the sales load or contin-
gent deferred sales charge, if applicable.
** Reflects operations for the period from April 1, 1991 (commencement of op-
erations) to December 31, 1991.
*** Reflects operations for the period from June 10, 1991 (commencement of op-
erations) to December 31, 1991.
+ Reflects operations for the period from January 26, 1993 (commencement of
operations) to December 31, 1993.
(a) Computed on an annualized basis.
(b) Distributions in excess of net investment income for the year ended Decem-
ber 31, 1993 were the result of certain book and tax timing differences.
These distributions do not represent a return of capital for federal in-
come tax purposes.
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 FIXED INCOME PORTFOLIO
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.
<TABLE>
<CAPTION>
TRUST SHARES
---------------------------
PERIOD ENDED
---------------------------
12/31/93 12/31/92 12/31/91*
- ------------------------ -------- -------- ---------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $10.41 $10.54 $10.06
- ------------------------
INCOME FROM INVESTMENT
OPERATIONS
- ------------------------
Net investment income 0.69 0.70 0.71
- ------------------------
Net realized and
unrealized gain (loss)
on investments 0.19 (0.02) 0.56
- ------------------------ ------ ------ ------
Total from investment
operations 0.88 0.68 1.27
- ------------------------ ------ ------ ------
LESS DISTRIBUTIONS
- ------------------------
Dividends to
shareholders from net
investment income (0.68) (0.70) (0.71)
- ------------------------
Distributions to share-
holders from net real-
ized gain on investment
transactions (0.18) (0.11) (0.07)
- ------------------------
Distributions in excess
of net investment in-
come -- -- (0.01)(a)
- ------------------------ ------ ------ ------
Total distributions (0.86) (0.81) (0.79)
- ------------------------ ------ ------ ------
NET ASSET VALUE,
END OF PERIOD $10.43 $10.41 $10.54
- ------------------------ ------ ------ ------
TOTAL RETURN** 8.67% 6.64% 13.80%
- ------------------------
RATIOS TO AVERAGE NET
ASSETS
- ------------------------
Expenses 0.66% 0.69% 0.69%(c)
- ------------------------
Net investment income 6.41% 6.67% 7.12%(c)
- ------------------------
Expense waiver/
reimbursement (b) -- -- 0.07%(c)
- ------------------------
SUPPLEMENTAL DATA
- ------------------------
Net assets, end of
period (000 omitted) $376,445 $324,068 $256,254
- ------------------------
Portfolio turnover rate 73% 66% 55%
- ------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B INVESTMENT SHARES
-------------------------------------------------------
PERIOD ENDED
-------------------------------------------------------
12/31/93 12/31/92 12/31/91 12/31/90+ /31/90 3/31/89++
- ------------------------ -------- -------- -------- --------- ------ ---------
<S> <C> <C> <C> <C> C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $10.41 $10.54 $ 9.99 $9.72 $9.50 $9.70
- ------------------------
INCOME FROM INVESTMENT
OPERATIONS
- ------------------------
Net investment income 0.65 0.71 0.73 0.55 0.79 0.10
- ------------------------
Net realized and
unrealized gain (loss)
on investments 0.19 (0.06) 0.60 0.24 0.20 (0.14)
- ------------------------ ------ ------ ------ ----- ----- -----
Total from investment
operations 0.84 0.65 1.33 0.79 0.99 (0.04)
- ------------------------ ------ ------ ------ ----- ----- -----
LESS DISTRIBUTIONS
- ------------------------
Dividends to
shareholders from net
investment income (0.65) (0.67) (0.70) (0.52) (0.77) (0.16)
- ------------------------
Distributions to share-
holders from net real-
ized gain on investment
transactions (0.18) (0.11) (0.07) -- -- --
- ------------------------
Distributions in excess
of net investment in-
come -- -- (0.01)(a) -- -- --
- ------------------------ ------ ------ ------ ----- ----- -----
Total distributions (0.83) (0.78) (0.78) (0.52) (0.77) (0.16)
- ------------------------ ------ ------ ------ ----- ----- -----
NET ASSET VALUE,
END OF PERIOD $10.42 $10.41 $10.54 $9.99 $9.72 $9.50
- ------------------------ ------ ------ ------ ----- ----- -----
TOTAL RETURN** 8.29% 6.39% 13.74% 8.31% 10.51% (0.31%)
- ------------------------
RATIOS TO AVERAGE NET
ASSETS
- ------------------------
Expenses 0.93% 0.90% 0.80% 1.01%(c) 1.00% 1.78%(c)
- ------------------------
Net investment income 6.15% 6.79% 7.30% 7.53%(c) 7.57% 6.10%(c)
- ------------------------
Expense waiver/
reimbursement (b) -- -- 0.09% 0.81%(c) 0.50% --
- ------------------------
SUPPLEMENTAL DATA
- ------------------------
Net assets, end of
period (000 omitted) $22,865 $21,488 $17,680 $11,765 $6,496 $11,580
- ------------------------
Portfolio turnover rate 73% 66% 55% 27% 32% 18%
- ------------------------
</TABLE>
(See notes on page 9.) (CONTINUED)
- ------------------------- FINANCIAL -------------------------
- ------------------------- HIGHLIGHTS -------------------------
(CONTINUED)
FIRST UNION FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
CLASS C
INVESTMENT
SHARES
-----------
PERIOD ENDED
-----------
12/31/93+++
- ------------------------------- -----------
<S> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $10.57
- -------------------------------
INCOME FROM INVESTMENT OPERA-
TIONS
- -------------------------------
Net investment income 0.58
- -------------------------------
Net realized and unrealized
gain (loss) on investments 0.05
- ------------------------------- ------
Total from investment
operations 0.63
- ------------------------------- ------
LESS DISTRIBUTIONS
- -------------------------------
Dividends to shareholders from
net investment income (0.58)
- -------------------------------
Distributions to shareholders
from net realized gain on in-
vestments (0.18)
- -------------------------------
Distributions in excess of net
investment income --
- ------------------------------- ------
Total distributions (0.76)
- ------------------------------- ------
NET ASSET VALUE, END OF PERIOD $10.44
- ------------------------------- ------
TOTAL RETURN** 6.08%
- -------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------
Expenses 1.57%(c)
- -------------------------------
Net investment income 5.42%(c)
- -------------------------------
Expense waiver/reimbursement
(b) --
- -------------------------------
SUPPLEMENTAL DATA
- -------------------------------
Net assets, end of period (000
omitted) $8,876
- -------------------------------
Portfolio turnover rate 73%
- -------------------------------
</TABLE>
* Reflects operations for the period from January 4, 1991 (commencement of
operations) to December 31, 1991.
** Based on net asset value, which does not reflect sales load or contingent
deferred sales charge, if applicable.
+ Nine months ended December 31, 1990.
++ Reflects operations for the period from January 28, 1989 (commencement of
operations) to March 31, 1989.
+++ Reflects operations for the period from January 26, 1993 (commencement of
operations) to December 31, 1993.
(a) Distributions in excess of net investment income for the year ended
December 31, 1991, were a result of certain book and tax timing
differences. These differences did not represent a return of capital for
federal income tax purposes for the year ended December 31, 1991.
(b) This voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
(c) Computed on an annualized basis.
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)
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.
<TABLE>
<CAPTION>
CLASS C INVESTMENT
CLASS B INVESTMENT SHARES (C) SHARES (C)
------------------------------------ -------------------
YEAR ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 31, 1993 DECEMBER 31, 1992* DECEMBER 31, 1993**
- ---------------------- ----------------- ------------------ -------------------
<S> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $10.42 $10.00 $10.42
- ----------------------
INCOME FROM
INVESTMENT OPERATIONS
- ----------------------
Net investment income 0.54 0.51 0.47
- ----------------------
Net realized and
unrealized gain on
investments 0.81 0.42 0.81
- ---------------------- ------ ------ ------
Total from investment
operations 1.35 0.93 1.28
- ----------------------
LESS DISTRIBUTIONS
- ----------------------
Dividends to share-
holders from net
investment income (0.54) (0.51) (0.47)
- ---------------------
Distributions to
shareHolders from
net realized gain on
investment
transactions (0.07) -- (0.07)
- --------------------- ------ ------ ------
Total distributions (0.61) (0.51) (0.54)
- --------------------- ------ ------ ------
NET ASSET VALUE, END
OF PERIOD $11.16 $10.42 $11.16
- --------------------- ------ ------ ------
TOTAL RETURN*** 13.25% 9.37% 12.41%
- ---------------------
RATIOS TO AVERAGE NET
ASSETS
- ---------------------
Expenses 0.85% 0.49%(a) 1.35%(a)
- ---------------------
Net investment income 4.99% 5.79%(a) 4.44%(a)
- ---------------------
Expense
waiver/reimbursement
(b) 0.22% 0.62%(a) 0.22%(a)
- ---------------------
SUPPLEMENTAL DATA
- ---------------------
Net assets, end of
period (000 omitted) $101,352 $90,738 $41,030
- ---------------------
Portfolio turnover
rate 14% 7% 14%
- ---------------------
</TABLE>
* Reflects operations for the period from February 21, 1992 (commencement of
operations) to December 31, 1992.
** 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 contin-
gent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expenses 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 High-
lights presented above are historical information for Class B and 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.
- ------------------------- FINANCIAL -------------------------
- ------------------------- HIGHLIGHTS ----------------------
FIRST UNION MANAGED BOND PORTFOLIO
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.
<TABLE>
<CAPTION>
TRUST SHARES(C)
--------------------------------
YEAR ENDED
DECEMBER 31 PERIOD ENDED
------------------ ------------
1993 1992 12/31/91*
- --------------------------------------------- -------- -------- ------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.34 $10.60 $10.00
- ---------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------
Net investment income 0.65 0.66 0.49
- ---------------------------------------------
Net realized and unrealized gain (loss) on
investments 0.43 (0.08) 0.63
- --------------------------------------------- ------ ------- ------
Total from investment operations 1.08 0.58 1.12
- --------------------------------------------- ------ ------ ------
LESS DISTRIBUTIONS
- ---------------------------------------------
Dividends to shareholders from net invest-
ment income (0.65) (0.66) (0.49)
- ---------------------------------------------
Distributions to shareholders from net real-
ized gains on investment transactions (0.31) (0.18) (0.03)
- --------------------------------------------- ------- ------- -------
Total distributions (0.96) (0.84) (0.52)
- --------------------------------------------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $10.46 $10.34 $10.60
- --------------------------------------------- ------ ------ ------
TOTAL RETURN** 10.59% 5.65% 11.63%
- ---------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------
Expenses 0.70% 0.70% 0.70%(a)
- ---------------------------------------------
Net investment income 6.02% 6.30% 6.57%(a)
- ---------------------------------------------
Expenses waiver/reimbursement (b) 0.03% 0.05% --
- ---------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------
Net assets, end of period (000 omitted) $109,067 $121,655 $65,638
- ---------------------------------------------
Portfolio turnover rate 53% 56% 17%
- ---------------------------------------------
</TABLE>
* Reflects operations for the period from April 1, 1991 (commencement of oper-
ations) to December 31, 1991.
** Based on net asset value, which does not reflect sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expenses and net investment
income ratios shown above.
(c) Class B and Class C Investment 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
Trust 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 U.S. GOVERNMENT PORTFOLIO
SUPPLEMENTARY INFORMATION
(FOR A SHARE OUTSTANDING THROUGHOUT THE 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.
<TABLE>
<CAPTION>
CLASS B CLASS C
TRUST INVESTMENT INVESTMENT
SHARES SHARES SHARES
------------ ------------ ------------
PERIOD ENDED PERIOD ENDED PERIOD ENDED
12/31/93* 12/31/93** 12/31/93**
- --------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PE-
RIOD $10.25 $10.00 $10.00
- ---------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net investment income .25 .68 .63
- ---------------------------------
Net realized and unrealized gain
(loss) on investments (.20) .05 .05
- --------------------------------- ------- ------ ------
Total from investment operations .05 .73 .68
- ---------------------------------
LESS DISTRIBUTIONS
- ---------------------------------
Dividends to shareholders from
net investment income (.25) (.68) (.63)
- --------------------------------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $10.05 $10.05 $10.05
- --------------------------------- ------ ------ ------
TOTAL RETURN*** 0.49% 7.43% 6.91%
- ---------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------
Expenses .48%(a) .69%(a) 1.19%(a)
- ---------------------------------
Net investment income 7.20%(a) 6.93%(a) 6.44%(a)
- ---------------------------------
Expense adjustment (b) .31%(a) .31%(a) .31%(a)
- ---------------------------------
SUPPLEMENTAL DATA
- ---------------------------------
Net assets, end of period (000
omitted) $14,486 $38,851 236,696
- ---------------------------------
Portfolio turnover rate 39% 39% 39%
- ---------------------------------
</TABLE>
* Reflects operations for the period from September 2, 1993 (commencement of
operations) to December 31, 1993.
** 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 contin-
gent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) The voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
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 VALUE PORTFOLIO
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.
<TABLE>
<CAPTION>
TRUST SHARES
----------------------------------
PERIOD ENDED
----------------------------------
12/31/93 12/31/92 12/31/91*
- ------------------------------------------- -------- -------- -----------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $17.11 $17.08 $14.28
- -------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------
Net investment income 0.52 0.49 0.47
- -------------------------------------------
Net realized and unrealized gain (loss) on
investments 1.12 0.90 3.53
- ------------------------------------------- ------ ------ ------
Total from investment operations 1.64 1.39 4.00
- ------------------------------------------- ------ ------ ------
LESS DISTRIBUTIONS
- -------------------------------------------
Dividends to shareholders from net invest-
ment income (0.52) (0.49) (0.47)
- -------------------------------------------
Distributions to shareholders form net re-
alized gain on investment transactions (0.58) (0.87) (0.73)
- -------------------------------------------
Distributions in excess of net investment
income (0.02)(c) -- --
- ------------------------------------------- ------- ------ ------
Total distributions (1.12) (1.36) (1.20)
- ------------------------------------------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $17.63 $17.11 $17.08
- ------------------------------------------- ------ ------ ------
TOTAL RETURN** 9.71% 8.31% 25.41%
- -------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------
Expenses 0.65% 0.68% 0.69%(b)
- -------------------------------------------
Net investment income 2.98% 2.90% 3.04%(b)
- -------------------------------------------
Expense waiver/reimbursement (a) -- 0.01% 0.08%(b)
- -------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------
Net assets, end of period (000 omitted) $463,087 $326,154 271,391
- -------------------------------------------
Portfolio turnover rate 46% 56% 69%
- -------------------------------------------
</TABLE>
* For the period from January 3, 1991 (commencement of operations) to Decem-
ber 31, 1991.
** Based on net asset value, which does not reflect the sales load or contin-
gent deferred sales charge, if applicable.
(a) This voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
(b) Computed on an annualized basis.
(c) Distributions in excess of net investment income for the period ended De-
cember 31, 1993, were the result of certain book and tax timing differ-
ences. These distributions do not represent a return of capital for fed-
eral income tax purposes.
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 VALUE PORTFOLIO
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.
<TABLE>
<CAPTION>
CLASS B INVESTMENT SHARES
-----------------------------------------------------------------------------------------------
PERIOD ENDED
-----------------------------------------------------------------------------------------------
12/31/93 12/31/92 12/31/91 12/31/90** 3/31/90 3/31/89 3/31/88 3/31/87 3/31/86 3/31/85***
- ------------------------ -------- -------- -------- ---------- ------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $17.11 $17.08 $14.61 $15.12 $14.45 $12.83 $14.66 $12.35 $10.04 $10.00
- ------------------------
INCOME FROM INVESTMENT
OPERATIONS
- ------------------------
Net investment income 0.47 0.44 0.46 0.36 0.54 0.36 0.26 0.15 0.19 0.04
- ------------------------
Net realized and
unrealized
gain/(loss) on invest-
ments 1.10 0.89 3.17 (0.44) 1.70 2.11 (1.30) 2.38 2.32 0.00
- ------------------------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------
Total from investment
operations 1.57 1.33 3.63 (0.08) 2.24 2.47 (1.04) 2.53 2.51 0.04
- ------------------------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------
LESS DISTRIBUTIONS
- ------------------------
Dividends to sharehold-
ers from net investment
income (0.47) (0.43) (0.43) (0.36) (0.57) (0.38) (0.26) (0.13) (0.20) (0.00)
- ------------------------
Distribution to share-
holders from net real-
ized gain on investments (0.58) (0.87) (0.73) (0.02) (1.00) (0.47) (0.53) (0.09) (0.00) (0.00)
- ------------------------
Distributions in excess
of
net investment income -- -- -- (0.05)(a) -- -- -- -- -- --
- ------------------------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------
Total distributions (1.05) (1.30) (1.16) (0.43) (1.57) (0.85) (0.79) (0.22) (0.20) (0.00)
- ------------------------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------
NET ASSET VALUE,
END OF PERIOD $17.63 $17.11 $17.08 $14.61 $15.12 $14.45 $12.83 $14.66 $12.35 $10.04
- ------------------------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------
TOTAL RETURN* 9.31% 7.96% 25.11% (0.51%) 15.54% 19.73% (7.14) 20.81% 25.29% (0.40%)
- ------------------------
RATIOS TO AVERAGE NET
ASSETS
- ------------------------
Expenses 0.99% 1.01% 0.96% 1.39%(b) 1.55% 1.71% 1.74% 1.97% 2.00% 2.00%(b)
- ------------------------
Net investment income 2.63% 2.57% 2.78% 3.28%(b) 3.42% 2.72% 1.92% 1.41% 2.34% 6.47%(b)
- ------------------------
Expense
waiver/reimbursement (d) -- 0.01% 0.09% -- -- -- -- -- -- --
- ------------------------
SUPPLEMENTAL DATA
- ------------------------
Net assets, end of pe-
riod (000 omitted) $189,983 $169,310 $135,565 $104,637 $95,995 $83,121 $21,914 $23,221 $5,595 $100
- ------------------------
Portfolio turnover
rate**** 46% 56% 69% 13% 11% 24% 16% 20% 20% 0%
- ------------------------
</TABLE>
(See notes on page 15.) (CONTINUED)
- ------------------------ FINANCIAL ------------------------
- ------------------------ HIGHLIGHTS ------------------------
(CONTINUED)
FIRST UNION VALUE PORTFOLIO
<TABLE>
<CAPTION>
CLASS C
INVESTMENT
SHARES
----------
PERIOD ENDED
----------
12/31/93+
- ------------------------------- ----------
<S> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $17.24
- -------------------------------
INCOME FROM INVESTMENT OPERA-
TIONS
- -------------------------------
Net investment income 0.35
- -------------------------------
Net realized and unrealized
gain/(loss) on investments 1.01
- ------------------------------- -------
Total from investment
operations 1.36
- ------------------------------- -------
LESS DISTRIBUTIONS
- -------------------------------
Dividends to shareholders from
net investment income (0.35)
- -------------------------------
Distribution to shareholders
from net realized gain on in-
vestments (0.58)
- -------------------------------
Distributions in excess of net
investment income (0.04)(c)
- ------------------------------- -------
Total distributions (0.97)
- ------------------------------- -------
NET ASSET VALUE, END OF PERIOD $17.63
- ------------------------------- -------
TOTAL RETURN* 7.98%
- -------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------
Expenses 1.48%(b)
- -------------------------------
Net investment income 2.09%(b)
- -------------------------------
Expense waiver/reimbursement
(d) --
- -------------------------------
SUPPLEMENTAL DATA
- -------------------------------
Net assets, end of period (000
omitted) $59,953
- -------------------------------
Portfolio turnover rate**** 46%
- -------------------------------
</TABLE>
* Based on net asset value, which does not reflect the sales load or con-
tingent deferred sales charge, if applicable.
** For the nine months ended December 31, 1990.
***Reflects operations for the period from August 30, 1984 (commencement of
operations) to March 31, 1985.
****Portfolio turnover rate for periods ending on or after March 31, 1986
include certain U.S. government obligations.
+ Reflects operations for the period from February 2, 1993 (commencement of
operations) to December 31, 1993.
(a) Distributions in excess of net investment income for the period ended
December 31, 1990, were a result of certain book and tax timing differ-
ences. These distributions did not represent a return of capital for
federal income tax purposes for the year ended December 31, 1990.
(b) Computed on an annualized basis.
(c) Distributions in excess of net investment income for the period ended
December 31, 1993, were the result of certain book and tax timing dif-
ferences. These distributions do not represent a return of capital for
federal income tax purposes.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
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 -------------------------
OBJECTIVES
- ------------------------- AND POLICIES -------------------------
First Union Equity and Income Funds provide a broad range of objectives and
policies, intended to offer investment alternatives to a large group of
investors with a wide range of investment objectives.
The investment objectives and policies of each Fund are stated below. Each
Fund's investment objective cannot be changed without shareholder approval.
While there is no assurance that each objective will be achieved, the Funds
will endeavor to do so by following the investment policies detailed below.
Unless otherwise indicated, the investment policies of a Fund 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.
- ------------------------- FIRST UNION -------------------------
BALANCED
- ------------------------- PORTFOLIO -------------------------
Objective: Long-term total return through capital appreciation, dividends, and
interest income.
Invests in: Common and preferred stocks for growth, bonds for stable income
flows.
Suitable for: Investors looking for long-term growth of income and capital from
a portfolio of investment grade equity and fixed income
investments.
Key Benefits: Diversity of investments takes advantage of shifts in market
conditions and relative attractiveness of different types of
securities.
DESCRIPTION OF THE FUND
The Balanced Fund seeks long-term total return through capital appreciation,
dividends, and interest income. The Fund invests primarily in a diversified
portfolio of common and preferred stocks, U.S. government securities, high
grade corporate bonds, and money market instruments. Common and preferred
stocks are utilized for growth while bonds provide stable income flows.
The portion of the Fund's total assets invested in common and preferred stocks
will vary according to the Adviser's assessment of market and economic
conditions and outlook. The asset mix of the Fund will normally range between
40-75% common and preferred stocks, 25-50% fixed income securities (including
some convertible securities), and 0-25% money market instruments. Moderate
shifts between types of assets are made in order to maximize returns or reduce
risk. Over the long-term it is anticipated that the Fund's asset mix will
average 60% in common and preferred stocks and 40% in bonds.
TYPES OF INVESTMENTS
The Fund invests in common, preferred and convertible preferred stocks and
bonds of U.S. companies with at least $100 million in equity, listed on major
stock exchanges or traded over-the-counter. The Fund looks at financial
strength, earnings growth and price in relation to current earnings, dividends,
and book value to identify growth opportunities.
The Fund may also invest in American Depositary Receipts ("ADRs") of foreign
companies traded on the New York or American Stock Exchanges or in the over-
the-counter market.
The Fund will only invest in those bonds, including convertible bonds, which
are rated A or higher by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P"), or which, if unrated, are considered to
be of comparable quality by the Adviser. Bonds are selected based on the
outlook for interest rates and their yield in relation to other bonds of
similar quality and maturity. Bond maturities in the portfolio average less
than twenty years.
The Fund also invests in securities which are either issued or guaranteed by
the U.S. government, its agencies, or instrumentalities. These types of
securities include: direct obligations of the U.S. Treasury such as U.S.
Treasury bills, notes and bonds; and notes, bonds, and discount notes of U.S.
government agencies or instrumentalities such as Federal Home Loan Banks,
Federal National Mortgage Association, Government National Mortgage
Association, Banks for Cooperatives, Federal Farm Credit Banks, Tennessee
Valley Authority, Export-Import Bank of the United States, Commodity Credit
Corporation, Federal Financing Bank, Student Loan Marketing Association,
Federal Home Loan Mortgage Corporation, or National Credit Union
Administration.
Some U.S. government agency obligations are backed by the full faith and credit
of the U.S. Treasury. Others in which the Fund may invest are supported by: the
issuer's right to borrow an amount limited to a specific line of credit from
the U.S. Treasury; discretionary authority of the U.S. government to purchase
certain obligations of an agency or instrumentality; or the credit of the
agency or instrumentality.
The Fund may invest short-term in money market instruments; securities issued
and/or guaranteed by the U.S. government, its agencies, or instrumentalities;
and repurchase agreements collateralized by eligible investments.
- ------------------------- FIRST UNION -------------------------
FIXED INCOME
- ------------------------- PORTFOLIO -------------------------
Objective: High level of current income with capital growth as a secondary
objective.
Invests in: A broad range of investment grade debt securities.
Suitable for: Conservative investors who want attractive income.
Key Benefit: Investors can participate in a broad portfolio of fixed income
securities rather than purchasing a single issue.
DESCRIPTION OF THE FUND
The Fixed Income Fund seeks to provide a high level of current income by
investing primarily in a broad range of investment grade debt securities.
Capital growth is a secondary objective. The Fund will normally invest at least
80% of its assets in debt securities. At least 65% of the value of the
portfolio will be invested in fixed income securities.
TYPES OF INVESTMENTS
The Fund will only invest its assets in securities rated A or higher by Moody's
or S&P, or which, if unrated, are considered to be of comparable quality by the
Adviser.
Debt securities may include fixed, adjustable rate or stripped bonds,
debentures, notes, U.S. government securities, and debt securities convertible
into, or exchangeable for, preferred or common stock. Stated final maturity for
these securities may range up to 30 years. The duration of the securities will
not exceed ten years. The Fund intends to maintain a dollar-weighted average
maturity of five years or less. Market-expected average life will be used for
certain types of issues in computing the average maturity.
In normal market conditions the Fund may invest up to 20% of its assets in
money market instruments consisting of: (1) high grade commercial paper,
including master demand notes; (2) obligations of banks or savings and loan
associations having at least $1 billion in deposits, including certificates of
deposit and bankers' acceptances; (3) A-rated or better corporate obligations;
(4) obligations issued or guaranteed by the U.S. government or by any agency or
instrumentality of the U.S., government as described under the caption "First
Union Balanced Portfolio--Types of Investments"; and (5) repurchase
agreements collateralized by any security listed above.
The Fund may also invest up to 20% of its assets in foreign securities (either
foreign or U.S. securities traded in foreign markets) in order to provide
further diversification. The Fund may also invest in preferred stock; units
which are debt securities with stock or warrants attached; and obligations
denominated in foreign currencies. In making these decisions, the Adviser will
consider such factors as the condition and growth potential of various
economies and securities markets, currency and taxation considerations and
other pertinent financial, social, national and political factors. (See "Other
Investment Policies" and "Foreign Investments".)
The Fund may elect to use options and financial futures for hedging purposes as
described in "Other Investment Policies--Options and Futures" and in the Fund's
Statement of Additional Information. The Fund may also elect to use currency
exchange contracts to manage exchange rate risk in order to stabilize the U.S.
dollar value of a security that it has agreed to buy or sell.
The Fund will not invest in securities judged to be speculative or of poor
quality.
TEMPORARY INVESTMENTS
For temporary defensive purposes, the Fund may invest up to 100% of its assets
in the money market instruments listed above.
- ------------------------ FIRST UNION ------------------------
- ------------------------ HIGH GRADE TAX FREE ------------------------
PORTFOLIO
(FORMERLY, FIRST UNION INSURED TAX FREE PORTFOLIO)
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 High Grade Tax Free 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 the following
quality standards: rated A or better by Moody's or 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.
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, depending 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.
- ------------------------- FIRST UNION -------------------------
MANAGED BOND
- ------------------------- PORTFOLIO -------------------------
Objective: Total return.
Invests in: Investment grade corporate bonds and U.S. government and agency
bonds.
Suitable for: Conservative investors looking for bond interest and
appreciation.
Key Benefits: Provides a diversified portfolio of investment grade bonds
featuring liquidity and security of capital.
DESCRIPTION OF THE FUND
The Managed Bond Fund is managed for total return which includes both changes
in principal value of the Fund's portfolio and interest income. The Fund seeks
to provide capital appreciation during periods of falling interest rates and
protection against capital depreciation during periods of rising rates.
To achieve total return, the Fund invests primarily in a professionally
managed, diversified portfolio of investment grade bonds with maturities up to
30 years. Under normal conditions, at least 65% of the value of the Fund's
total assets will be invested in investment grade corporate bonds and
government and agency bonds. Financial futures may also be used depending upon
the outlook for the economy.
TYPES OF INVESTMENTS
The Fund may invest in:
domestic issues of corporate debt obligations rated A or better by Moody's
or S&P;
securities which are either issued or guaranteed by the U.S. government,
its agencies, or instrumentalities, as more fully described under "First
Union Balanced Portfolio--Types of Investments";
commercial paper which matures in 270 days or less with at least two high
quality ratings by nationally recognized statistical rating organizations,
e.g. A-1 or A-2 by S&P, or Prime-1 or Prime-2 by Moody's;
time and savings deposits (including certificates of deposit) in commercial
or savings banks whose accounts are insured by the Bank Insurance Fund
("BIF") or the Savings Association Insurance Fund ("SAIF") (both of which
are administered by the Federal Deposit Insurance Corp. ("FDIC")),
including certificates of deposit and other time deposits in foreign
branches of banks insured by the BIF;
bankers' acceptances (maximum 0.25% of the bank's total deposits according
to the bank's last published statement of condition) issued by a bank
insured by the BIF, or issued by the bank's Edge Act subsidiary and
guaranteed by the bank, with remaining maturities of nine months or less;
and
repurchase agreements collateralized by eligible investments.
TEMPORARY INVESTMENTS
The Fund may also invest temporarily in cash and cash items during times of
unusual market conditions for defensive purposes. Cash items may include short-
term obligations such as: rated commercial paper, time and savings deposits
(including certificates of deposit), bankers' acceptances, obligations of the
U.S. government or its agencies or instrumentalities, and repurchase agreements
collateralized by eligible investments.
RISK FACTORS
Bond prices move inversely to interest rates, i.e. as interest rates decline,
the values of the bonds increase and vice versa. The longer the maturity of a
bond, the greater the exposure to market price fluctuations. The same market
factors are reflected in the share price or net asset value of bond funds which
will vary with interest rates.
- ------------------------- FIRST UNION -------------------------
U.S. GOVERNMENT
- ------------------------- PORTFOLIO -------------------------
Objective: High level of current income consistent with stability of
principal.
Invests in: Debt instruments issued or guaranteed by the U.S. government, its
agencies, or instrumentalities.
Suitable for: Conservative investors seeking high current yields plus relative
safety.
Key Benefit: Active management of a blend of securities and maturities to
maximize the opportunities and minimize the risks created by
changing interest rates.
DESCRIPTION OF THE FUND
The U.S. Government Fund seeks a high level of current income consistent with
stability of principal. The Fund seeks to achieve this objective by investing
primarily in debt instruments issued or guaranteed by the U.S. government, its
agencies or instrumentalities ("U.S. government securities"). As a matter of
policy, the Fund will invest at least 65% of the value of its total assets in
such U.S. government securities.
TYPES OF INVESTMENTS
The Fund may invest in:
U.S. government securities. These include: (1) securities which are backed
by the full faith and credit of the U.S. government (for example, U.S.
Treasury bills, notes, and bonds); (2) obligations issued or
guaranteed by U.S. government agencies and instrumentalities, which are
supported by any of the following: (a) the full faith and credit of the
U.S. government (such as participation certificates guaranteed by
Government National Mortgage Association or Federal Housing Administration
debentures), (b) the right of the issuer to borrow an amount limited to a
specific line of credit from the U.S. government (for example, obligations
of Federal Home Loan Banks); (c) discretionary authority of the U.S.
government to purchase the issuer's obligations (for example, obligations
of the Federal National Mortgage Association); (d) the credit of the
instrumentality or agency issuing the obligations (for example, obligations
of the Tennessee Valley Authority, the Bank for Cooperatives and the
Federal Home Loan Mortgage Corporation);
Securities representing ownership interest in mortgage pools ("mortgage-
backed securities"). The yield and maturity characteristics of these
securities correspond to those of the underlying mortgages, with interest
and principal payments (including prepayments, i.e. paying remaining
principal before the mortgage's scheduled maturity) passed through to the
holder of the mortgage-backed securities. The yield and price of mortgage-
backed securities will be affected by prepayments which substantially
shorten effective maturities. Thus, during periods of declining interest
rates, prepayments may be expected to increase, requiring the Fund to
reinvest the proceeds at lower interest rates, making it difficult to
effectively lock in high interest rates. Conversely, mortgage-backed
securities may experience less pronounced declines in value during periods
of rising interest rates;
Securities representing ownership interests in a pool of assets ("asset-
backed securities"), for which automobile and credit card receivables are
the most common collateral. Because much of the underlying collateral is
unsecured, asset-backed securities are structured to include additional
collateral and/or additional credit support to protect against default. The
Adviser evaluates the strength of each particular issue of asset-backed
security, taking into account the structure of the issue and its credit
support. (See "Risk Characteristics of Asset-Backed Securities");
Collateralized mortgage obligations ("CMOs") issued by single-purpose,
stand-alone entities. A CMO is a mortgage-backed security that manages the
risk of repayment by separating mortgage pools into short, medium and long
term portions. These portions are generally retired in sequence as the
underlying mortgage loans in the mortgage pool are repaid. Similarly, as
prepayments are made, the portion of CMO first to mature will be retired
prior to its maturity, thus having the same effect as the prepayment of
mortgages underlying a mortgage-backed security. The Fund will invest only
in CMOs which are rated AAA by a nationally recognized statistical rating
organization and which may be: (a) collateralized by pools of mortgages in
which each mortgage is guaranteed as to payment of principal and interest
by an agency or instrumentality of the U.S. government; (b) collateralized
by pools of mortgages in which
payment of principal and interest is guaranteed by the issuer and such
guarantee is collateralized by U.S. government securities; or (c)
securities in which the proceeds of the issuance are invested in mortgage
securities and payment of the principal and interest are supported by the
credit of an agency or instrumentality of the U.S. government;
Commercial paper which matures in 270 days or less so long as at least two
of its ratings are high quality ratings by nationally recognized
statistical rating organizations. Such ratings would include: A-1 or A-2 by
S&P, Prime-1 or Prime-2 by Moody's, or F-1 or F-2 by Fitch Investors
Service;
Bonds and other debt securities rated Baa or higher by Moody's or BBB or
higher by S&P, or which, if unrated, are considered to be comparable
quality by the Adviser;
Securities of other investment companies; and
Repurchase agreements collateralized by eligible investments.
Bonds rated Baa by Moody's or BBB by S&P have speculative characteristics.
Changes in economic conditions or other circumstances are more likely to
lead to weakened capacity to make principal and interest payments than
higher rated bonds.
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 cash and cash
items including such short-term obligations as: commercial paper; obligations
issued or guaranteed by the U.S. government, its agencies, or
instrumentalities; and repurchase agreements collateralized by eligible
investments.
- ------------------------- FIRST UNION -------------------------
UTILITY
- ------------------------- PORTFOLIO -------------------------
Objective: High current income and moderate capital appreciation.
Invests in: Equity and debt securities of utility companies.
Suitable for: Investors seeking current income and long-term growth of income
through equity and fixed income investments in utility companies.
Key Benefit: Diversity through historically reliable cash flows on securities
that typically hold their value through various market conditions.
DESCRIPTION OF THE FUND
The Utility Fund seeks high current income and moderate capital appreciation.
The Fund invests primarily in a diversified portfolio of equity and debt
securities of utility companies that produce, transmit or distribute gas or
electrical energy, as well as those companies that provide communications
facilities, such as telephone
and telegraph companies. As a matter of investment policy, the Fund will invest
at least 65% of the value of its total assets in securities of utility
companies. In addition, the Fund can invest up to 35% of its assets in common
stock of non utility companies.
TYPES OF INVESTMENTS
The Fund may invest in:
common and preferred stocks, bonds and convertible preferred stocks of
utility companies selected by the Adviser on the basis of traditional
research techniques, including assessment of earnings and dividend growth
prospects and of the risk and volatility of the individual company's
industry. However, other factors, such as product position, market share,
or profitability may also be considered by the Adviser. The Fund will only
invest its assets in debt securities rated Baa or higher by Moody's or BBB
or higher by S&P, or which, if unrated, are considered to be of comparable
quality by the Adviser;
securities either issued or guaranteed by the U.S. government, its
agencies, or instrumentalities. These types of securities include: direct
obligations of the U.S. Treasury, such as U.S. Treasury bills, notes and
bonds, and notes, bonds, and discount notes of U.S. government agencies or
instrumentalities;
commercial paper, including master demand notes;
ADRs of foreign companies traded on the New York or American Stock
Exchanges or in the over-the-counter market;
foreign securities (either foreign or U.S. securities traded in foreign
markets). The Fund may also invest in other obligations denominated in
foreign currencies. In making these decisions, the Adviser will consider
such factors as the condition and growth potential of various economies and
securities markets, currency and taxation considerations and other
pertinent financial, social, national and political factors. (See "Other
Investment Policies" and "Foreign Investments.");
obligations, including certificates of deposit and bankers' acceptances, of
banks or savings and loan associations having at least $1 billion in
deposits and insured by the BIF or the SAIF, including U.S. branches of
foreign banks and foreign branches of U.S. banks;
securities of other investment companies; and
repurchase agreements collateralized by government securities.
Bonds rated Baa by Moody's or BBB by S&P have speculative characteristics.
Changes in economic conditions or other circumstances are more likely to lead
to weakened capacity to make principal and interest payments than higher rated
bonds.
RISK FACTORS
In view of the Fund's investment concentration, investors should be aware of
certain risks associated with the utility industry in general. These include
difficulties in earning adequate returns on investments despite
frequent rate increases, restrictions on operations and increased costs and
delays due to governmental regulations, building or construction delays,
environmental regulations, difficulty of the capital markets in absorbing
utility debt and equity securities, and difficulties in obtaining fuel at
reasonable prices.
The Adviser believes that the risks of investing in utility securities can be
reduced. The professional portfolio management techniques used by the Adviser
to attempt to reduce these risks include credit research. The Adviser will
perform its own credit analysis, in addition to using recognized rating
agencies and other sources, including discussions with an issuer's management,
the judgment of other investment analysts, and its own informed judgment. The
Adviser's credit analysis will consider an issuer's financial soundness, its
responsiveness to changes in interest rates and business conditions, and its
anticipated cash flow, interest or dividend coverage, and earnings. In
evaluating an issuer, the Adviser places special emphasis on the estimated
current value of the issuer's assets rather than historical costs.
Bond prices move inversely to interest rates, i.e. as interest rates decline,
the values of the bonds increase and vice versa. The longer the maturity of a
bond, the greater the exposure to market price fluctuations. The same market
factors are reflected in the share price or net asset value of bond funds which
will vary with interest rates. There is no limit on the maturity of the fixed
income securities purchased by the Fund.
- ------------------------- FIRST UNION -------------------------
VALUE
- ------------------------- PORTFOLIO -------------------------
Objective: Long-term capital growth with current income as a secondary
objective.
Invests in: Equity securities of U.S. companies with prospects for growth in
earnings and dividends.
Suitable for: Long-term investors seeking capital appreciation with some
income.
Key Benefit: Allows accumulation of assets over the long-term through capital
appreciation of equity investments and reinvestment of dividends.
DESCRIPTION OF THE FUND
The Value Fund seeks long-term capital growth with current income as a
secondary objective. The Fund normally invests at least 75% of its assets in
equity securities of U.S. companies with prospects for growth in earnings and
dividends.
TYPES OF INVESTMENTS:
The Fund primarily invests in:
common and preferred stocks, bonds and convertible preferred stock of U.S.
companies with at least $100 million in equity, listed on the New York or
American Stock Exchanges or traded in over-the-counter markets. The Adviser
looks for industries and companies which have potential primarily for
capital growth and secondarily for income;
ADRs of foreign companies traded on the New York or American Stock
Exchanges or in the over-the-counter market;
convertible bonds rated at least BBB by S&P or at least Baa by Moody's, or,
if not rated, determined to be of comparable quality by the Adviser;
money market instruments;
fixed rate notes and bonds and adjustable and variable rate notes of
companies whose common stock the Fund may acquire (for up to 5% of its net
assets);
zero coupon bonds issued or guaranteed by the U.S. government, its agencies
or instrumentalities (for up to 5% of its net assets);
obligations, including certificates of deposit and bankers' acceptances, of
banks or savings and loan associations having at least $1 billion in
deposits and insured by the BIF or the SAIF, including U.S. branches of
foreign banks and foreign branches of U.S. banks;
prime commercial paper including master demand notes; and
repurchase agreements collateralized by eligible investments.
Bonds rated BBB by S&P or Baa by Moody's have speculative characteristics.
Changes in economic conditions or other circumstances are more likely to lead
to weakened capacity to make principal and interest payments than higher rated
bonds.
- ------------------------ OTHER ------------------------
INVESTMENT
- ------------------------ POLICIES ------------------------
The Funds have adopted the following practices for specific types of
investments.
DOWNGRADES
If any security invested in by any of the Funds 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 may consider doing so.
REPURCHASE AGREEMENTS
The Funds may invest in repurchase agreements. Repurchase agreements are
agreements by which a 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 the
creditworthiness of the firms with which the Funds enter into repurchase
agreements.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Funds may purchase portfolio securities on a when-issued or delayed
delivery basis. In such cases, a 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 the securities 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 Funds may lend portfolio
securities on a short-term or long-term basis to broker/dealers, banks, or
other institutional borrowers of securities. The Funds 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 investment policy
which cannot be changed without shareholder approval, the Funds will not lend
any of their assets except portfolio securities up to 5% (in the case of the
Balanced and Value Funds), 15% (in the case of the Fixed Income, High Grade
Tax Free, and Utility Funds) or one-third (in the case of the U.S. Government
Fund) of the value of their total assets.
FOREIGN INVESTMENTS
The Balanced, Fixed Income, Utility, and Value Funds may invest in foreign
securities or securities denominated in or indexed to foreign currencies. In
addition, the Fixed Income Fund may invest in foreign currencies. These may
involve additional risks. Specifically, they may be affected by the strength
of foreign currencies relative to the U.S. dollar, or by political or economic
developments in foreign countries. Accounting procedures and government
supervision may be less stringent than those applicable to U.S. companies.
There may be less publicly available information about a foreign company than
about a U.S. company. Foreign markets may be less liquid or more volatile than
U.S. markets and may offer less protection to investors. It may also be more
difficult to enforce contractual obligations abroad than would be the case in
the United States because of differences in the legal systems. Foreign
securities may be subject to foreign taxes, which may reduce yield, and may be
less marketable than comparable U.S. securities. All these factors are
considered by the Adviser before making any of these types of investments.
RISK CHARACTERISTICS OF ASSET-BACKED SECURITIES
The U.S. Government Fund may invest in asset-backed securities. Asset-backed
securities are created by the grouping of certain governmental, government
related and private loans, receivables and other lender assets into pools.
Interests in these pools are sold as individual securities. Payments from the
asset pools may be divided into several different tranches of debt securities,
with some tranches entitled to receive regular installments of principal and
interest, other tranches entitled to receive regular installments of interest,
with
principal payable at maturity or upon specified call dates, and other tranches
only entitled to receive payments of principal and accrued interest at maturity
or upon specified call dates. Different tranches of securities will bear
different interest rates, which may be fixed or floating.
Because the loans held in the asset pool often may be prepaid without penalty
or premium, asset-backed securities are generally subject to higher prepayment
risks than most other types of debt instruments. Prepayment risks on mortgage
securities tend to increase during periods of declining mortgage interest
rates, because many borrowers refinance their mortgages to take advantage of
the more favorable rates. Depending upon market conditions, the yield that the
U.S. Government Fund receives from the reinvestment of such prepayments, or any
scheduled principal payments, may be lower than the yield on the original
mortgage security. As a consequence, mortgage securities may be a less
effective means of "locking in" interest rates than other types of debt
securities having the same stated maturity and may also have less potential for
capital appreciation. For certain types of asset pools, such as collateralized
mortgage obligations, prepayments may be allocated to one tranche of securities
ahead of other tranches, in order to reduce the risk of prepayment for the
other tranches.
Prepayments may result in a capital loss to the U.S. Government Fund to the
extent that the prepaid mortgage securities were purchased at a market premium
over their stated amount. Conversely, the prepayment of mortgage securities
purchased at a market discount from their stated principal amount will
accelerate the recognition of interest income by the U.S. Government Fund which
would be taxed as ordinary income when distributed to the shareholders.
The credit characteristics of asset-backed securities also differ in a number
of respects from those of traditional debt securities. The credit quality of
most asset-backed securities depends primarily upon the credit quality of the
assets underlying such securities, how well the entity issuing the securities
is insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement to such
securities.
OPTIONS AND FUTURES
All of the Funds, with the exception of the High Grade Tax Free Fund, may
engage in options and futures transactions. Options and futures transactions
are intended to enable a Fund to manage market, interest rate or exchange rate
risk. The Funds do not use these transactions for speculation or leverage.
Options and futures may be volatile investments and involve certain risks which
might result in lowering the Funds' returns. The three principal areas of risk
include: (1) lack of a liquid secondary market for a futures or option contract
when the Fund wants to close out its position; (2) imperfect correlation of
changes in the prices of futures or options contracts with the prices of the
securities in the Fund's portfolio; and (3) incorrect forecasts by the Adviser
of interest rates, market values or other economic factors. In these events,
the Fund may lose money on the futures contract or option.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
Each 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) no Fund will own
more than 3% of the total outstanding voting stock of any one investment
company, (2) no Fund may invest more than 5% of its total assets in any one
investment company and (3) no Fund may 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 Funds will not borrow money directly or through reverse repurchase
agreements or pledge securities, except under certain circumstances, a Fund may
borrow up to one-third of the value of its total assets and pledge up to 10%
(in the case of Value Fund), 15% (in the case of the Balanced, Fixed Income,
High Grade Tax Free, Managed Bond, and Utility Funds), or one-third (in the
case of U.S. Government Fund) of the value of those assets to secure such
borrowings.
RESTRICTED AND ILLIQUID SECURITIES
The Funds may invest up to 10% of their net assets in securities which are
subject to restrictions on resale under federal securities law. In the case of
the Fixed Income and U.S. Government Funds, this restriction is not applicable
to commercial paper issued under Section 4(2) of the Securities Act of 1933.
Balanced, Fixed Income, High Grade Tax Free, Managed Bond, and Value Funds may
invest up to 10% of their net assets in illiquid securities. U.S. Government
and Utility Funds may invest up to 15% of their net assets in illiquid
securities. With respect to the Balanced, Fixed Income, Managed Bond, U.S.
Government, and Utility Funds, illiquid securities include certain restricted
securities not determined by the Trustees to be liquid, non-negotiable time
deposits, and repurchase agreements providing for settlement in more than seven
days after notice. With respect to the High Grade Tax Free and Value Funds,
illiquid securities include 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, no Fund may invest more
than 5% of its total assets in securities of one issuer (except cash or cash
items, repurchase agreements collateralized by U.S. government securities and
U.S. government obligations) or own more than 10% of the outstanding voting
securities of one issuer.
CONCENTRATION OF INVESTMENTS
The Utility Fund will not purchase any security of any issuer if, as a result,
more than 25% of its total assets would be invested in any one industry other
than the utilities industry, except that the Fund may invest more than 25% of
the value of its total assets in securities issued or guaranteed by the U.S.
government, its agencies, or instrumentalities.
SELLING SHORT
The Balanced Fund will not make short sales of securities, except in certain
limited circumstances.
Certain of the Funds have adopted the following investment limitations, which
may be changed by the Trustees without shareholder approval.
NEW ISSUERS
The Balanced and Managed Bond Funds will not invest more than 5% of the value
of their total assets in securities of issuers (or guarantors, where
applicable) which have records of less than three years of continuous
operations, including the operation of any predecessor.
"NON-ACTIVE" SECURITIES
The Fixed Income, High Grade Tax Free, and Value Funds will not invest more
than 10% of their 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 Balanced, Fixed Income, High Grade Tax Free, Managed Bond and Value Funds
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
In the case of no-load Funds, the net asset value (NAV), the market price and
the offering price of Shares are all the same.
Purchases, redemptions, and exchanges are made at net asset value. 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 a
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 a Fund may differ slightly from that of
Class B Shares and Class C Shares of the same Fund due to the variability in
daily net income resulting from different distribution charges for each class
of Shares. The net asset value for each Fund will fluctuate for all three
classes.
PERFORMANCE INFORMATION
A 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 Funds may make available certain information about the
performance of Trust Shares. It is generally reported using total return,
yield, and tax equivalent yield (for the High Grade Tax Free Fund).
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 yields of Trust Shares are 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 High Grade Tax Free 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 Trust Shares of the Funds and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
Total return, yield, and tax equivalent yield will be calculated separately for
Trust Shares, Class B Shares and Class C Shares of a Fund. Because 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 Class B Shares also contributes to a lower total return for Class
B Shares. In addition, Class C Shares are subject to similar non-recurring
charges, such as the contingent deferred sales charge ("CDSC"), which, if
excluded, would increase the total return for Class C Shares.
From time to time, a Fund may advertise its performance using certain rankings
published in financial publications and/or compare its performance to certain
indices.
- ------------------------- HOW TO -------------------------
- ------------------------- BUY SHARES -------------------------
Shares may be purchased at a price equal to their net asset value per Share
next determined after receipt of an order.
MINIMUM INVESTMENT
You may invest as often as you want in any of the Funds. There are no sales
charges imposed on Trust Shares of the Funds. However, there is a $1,000
minimum initial investment requirement which may be waived incertain
situations. For further information, please contact the Capital Management
Group of First Union at1-800-326-2584. Subsequent investments may be in any
amounts.
BY TELEPHONE
You may purchase Trust Shares by telephone from the Capital Management Group of
First Union at 1-800-326-2584. (Texas residents should directly contact the
Mutual Funds Group of First Union Brokerage Services, Inc. at 1-800-326-3241.)
Shares are sold on days on which the New York Stock Exchange and the Federal
Reserve Wire System are open for business.
METHOD OF PAYMENT
Payment may be made by check or federal funds or by debiting your account at
First Union. Purchase orders must be received by 4:00 p.m. (Eastern time).
Payment is required on the next business day.
SHAREHOLDER ACCOUNTS
As transfer agent for the Funds, State Street Bank and Trust Company of Boston,
Massachusetts ("State Street Bank") maintains a Share account for each
shareholder of record. Share certificates are not issued.
MINIMUM BALANCE
Due to the high cost of maintaining smaller holdings, each Fund reserves the
right to redeem a shareholder's Shares if, as a result of redemptions, their
aggregate value drops below $1,000. Reductions in value that result solely from
market activity will not trigger an involuntary redemption. The Funds will
notify shareholders in writing 30 days before taking such action to allow them
to increase their holdings to at least the minimum level.
HOW TO CONVERT
YOUR INVESTMENT
- ------------------------- FROM ONE -------------------------
- ------------------------- FIRST UNION -------------------------
FUND TO ANOTHER
FIRST UNION FUND
As a shareholder, you have the privilege of exchanging your Shares for shares
of another First Union Fund.
As long as the First Union Fund in which you are invested will not be adversely
affected, you may switch among the First Union Funds within the Trust. Before
the exchange, you must call First Union at 1-800-326-2584 to receive a
prospectus for the First Union Fund into which you want to exchange. Read the
prospectus carefully. Each exchange represents the sale of shares of one First
Union Fund and the purchase of shares in another, which may produce a gain or
loss for tax purposes.
You may exchange Trust Shares of one First Union Fund for Trust Shares of any
other First Union Fund by calling toll free 1-800-326-2584 or by writing to
First Union. Telephone exchange instructions may be recorded. Shares purchased
by check are eligible for exchange after the check clears, which could take up
to seven days after receipt of the check. Exchanges are subject to the $1,000
minimum initial purchase requirement for each First Union Fund.
An exchange order must comply with the requirements for a redemption and
purchase order and must specify the dollar value or number of shares to be
exchanged. Once the order is received, the Shares already owned will be
redeemed at current net asset value and, upon receipt of the proceeds by the
First Union Fund, shares of the other First Union Fund will be purchased at
their net asset value determined after the proceeds from such redemption become
available, which may be up to seven days after such redemption. Orders for
exchanges received by a First Union Fund prior to 4:00 p.m. (Eastern time) on
any day the First Union Funds are open for business will be executed as of the
close of business that day. Orders for exchanges received after 4:00 p.m.
(Eastern time) on any business day will be executed at the close of the next
business day.
When exchanging into and out of load and no-load shares of First Union Funds,
shareholders who have already paid a sales charge once at the time of purchase,
including shares obtained through the reinvestment of dividends, will not have
to pay an additional sales charge on an exchange.
If reasonable procedures are not followed by a Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
EXCHANGE RESTRICTIONS
Although the Trust has no intention of terminating or modifying the exchange
privilege, it reserves the right to do so at any time. Excessive trading can
impact the interests of shareholders. Therefore, the Trust reserves the right
to terminate the exchange privilege of any shareholder who makes more than five
exchanges of shares of the First Union Funds in a year or three exchanges in a
calendar quarter.
The exchange privilege is only available in states where shares of the First
Union Fund being acquired may legally be sold. Before the exchange, a
shareholder must receive a prospectus of the First Union Fund for which the
exchange is being made.
- ------------------------- HOW TO -------------------------
- ------------------------- REDEEM SHARES -------------------------
Shares are redeemed at their net asset value next determined after a proper
redemption request has been received, less any fees.
You may redeem Shares in person or by telephoning First Union at 1-800-326-2584
or by written request to First Union. There is no redemption fee charged.
Telephone redemption instructions may be recorded.
The Funds redeem Shares at their net asset value next determined after a Fund
receives the redemption request. Redemptions will be made on days on which a
Fund computes the net asset value of Shares. 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. Proceeds will be wired to the
shareholder's account at First Union or a check will be sent to the address of
record normally within five (but in no case longer than seven) days after a
proper request for redemption has been received.
If reasonable procedures are not followed by a Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
- ------------------------- MANAGEMENT -------------------------
OF FIRST
- ------------------------- UNION FUNDS -------------------------
Responsibility for the overall management of First Union Funds rests with its
Trustees and officers. Other service providers include the Funds' Distributor,
Investment Adviser, Custodian, Transfer Agent, Legal Counsel, and Independent
Auditors.
INVESTMENT ADVISER
Professional investment supervision for the Funds 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.
R. Dean Hawes is a Vice President of First Union National Bank of North
Carolina, N.A., and is the Director of Employee Benefit Portfolio Management.
Mr. Hawes joined First Union in 1981 after spending five years with Merrill
Lynch, Pierce, Fenner, & Smith and Townsend Investments. Mr. Hawes has served
as the portfolio manager of the Balanced Fund since its inception in January
1991.
Thomas L. Ellis is a Vice President of First Union National Bank of North
Carolina, N.A. Prior to joining First Union in 1985, Mr. Ellis had seventeen
years of investment management and sales experience, including eleven years
marketing short and medium-term obligations to institutional investors, plus
three years as head trader for First Boston Corporation. Mr. Ellis has managed
the Fixed Income Fund since its inception in July 1988.
Robert S. 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
High Grade Tax Free Fund since its inception in February 1992.
Glen T. Insley is a Senior Vice President and Director of Fixed Income
Portfolio Management for First Union National Bank of North Carolina, N.A. Mr.
Insley served as Director of Fixed Income Management at One Federal Asset
Management, a subsidiary of Shawmut Bank, for six years prior to joining First
Union. Mr. Insley has served as the portfolio manager for the Managed Bond Fund
since May 1993.
Rollin C. Williams is a Vice President of First Union National Bank of North
Carolina, N.A. and has over 24 years of investment management experience. Mr.
Williams was the Head of Fixed Income Investments at Dominion Trust Company
from 1988 until its acquisition by First Union Corporation. Mr. Williams has
served as the portfolio manager for the U.S. Government Fund since its
inception in December 1992.
Malcolm M. Trevillian is a Vice President of First Union National Bank of North
Carolina, N.A., and has been with First Union since 1986. During that time, he
has served as a portfolio manager for various pension and profit-sharing
accounts maintained with First Union. Mr. Trevillian has managed the Utility
Fund since its inception in January 1994.
William T. Davis, Jr. is a Vice President of First Union National Bank of North
Carolina, N.A., and has been with First Union since 1986. Prior to that, Mr.
Davis served as a securities analyst for Seibels Bruce (Insurance) Group. Mr.
Davis has served as the portfolio manager of the Value Fund since March 1991.
FUND ADMINISTRATION
Federated Securities Corp., a subsidiary of Federated Investors, is the
principal distributor for the Funds. It is a Pennsylvania corporation organized
on November 14, 1969, and is the principal distributor for a number of
investment companies.
Federated Administrative Services ("FAS"), another subsidiary of Federated
Investors, provides the Funds with administrative personnel and services
necessary to operate the Funds, such as legal and accounting services, for a
specified fee which is detailed below.
State Street Bank serves as custodian and transfer agent, providing dividend
disbursement and other shareholder services for the Funds.
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 -------------------------
- ------------------------- -------------------------
Each Fund pays annual advisory and administrative fees and certain expenses.
ADVISORY AND ADMINISTRATIVE FEES
For managing their investment and business affairs, the Funds pay an annual fee
to First Union. The Adviser receives an annual investment advisory fee equal to
.50 of 1% of each of the Equity and Income Fund's average daily net assets. The
Adviser may voluntarily choose to waive a portion of its fee or reimburse the
Funds for certain operating expenses.
The Trust also pays a fee for administrative services. FAS provides these at an
annual rate as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
------------------ -----------------------
<S> <C>
.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
</TABLE>
Unless waived, the administrative fee received during any fiscal year shall
aggregate at least $50,000 per First Union Fund.
EXPENSES OF THE FUNDS AND TRUST SHARES
Holders of Shares pay their allocable portion of Trust and respective 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.
Fund expenses for which holders of Shares pay their allocable portion based on
average daily net assets include, but are not limited to: registering a Fund
and Shares of that Fund; investment advisory services; taxes and commissions;
custodian fees; insurance premiums; auditors' fees; and such non-recurring and
extraordinary items as may arise.
The Funds' expenses under the Rule 12b-1 Plans are incurred solely by the Class
B Shares 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 of a
Fund.
- ------------------------- SHAREHOLDER -------------------------
RIGHTS AND
- ------------------------- PRIVILEGES ----------------------
VOTING RIGHTS
Each share of a Fund is entitled to one vote in Trustee elections and other
voting matters submitted to shareholders. All shares of all classes of each
First Union Fund in the Trust have equal voting rights, except that in matters
affecting only a particular First Union Fund or class, only shares of that
First Union Fund or class are entitled to vote. As of February 4, 1994, First
Union National Bank, Charlotte, North Carolina, acting in various capacities
for numerous accounts, was the owner of record of 63,510,816 shares (98.9%) of
the Balanced Fund-Trust Shares; 35,104,402 shares (95.1%) of Fixed Income Fund-
Trust Shares; 10,269,556 shares (98.7%) of Managed Bond Fund-Trust Shares;
25,746,543 shares (96.0%) of Value Fund-Trust Shares; 1,221,044 shares (81.5%)
of U.S. Government Fund-Trust Shares; and 501,994 shares (80.44%) of Utility
Fund-Class B Investment Shares, and therefore, may, for certain purposes, be
deemed to control such Funds and be able to affect the outcome of certain
matters presented for a vote of shareholders.
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 a 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 non-bank 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,
First Union, is subject to and in compliance with such banking laws and
regulations.
Sullivan & Cromwell has advised First Union that First Union may perform the
services for the Funds set forth in the investment advisory agreement, this
prospectus and the Statements 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 First Union from continuing to perform such services
for the Funds or from continuing to purchase Shares for the accounts of its
customers. If First Union were prohibited from acting as investment adviser to
the Funds, it is expected that the Trustees would recommend to the Funds'
shareholders that they approve a new investment adviser selected by the
Trustees. It is not expected that the Funds' shareholders would suffer any
adverse financial consequences (if another adviser with equivalent abilities to
First Union is found) as a result of any of these occurrences.
- ------------------------- DISTRIBUTIONS -------------------------
- ------------------------- AND TAXES -------------------------
Each 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 and paid quarterly for the Value and Balanced Funds;
dividends are declared and paid monthly for the Fixed Income, Managed Bond, and
Utility Funds; and dividends are declared daily and paid
monthly for the High Grade Tax Free and U.S. Government Funds. 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 First Union in writing.
CAPITAL GAINS
Any net long-term capital gains realized by the Funds 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 Funds pay no federal income tax if they meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and will
receive the special tax treatment afforded to such companies.
Each First Union Fund is treated as a single, separate entity for federal
income tax purposes so that income (including capital gains) and losses
realized by one First Union Fund will not be combined for tax purposes with
those realized by other First Union Funds.
Except as set forth under "High Grade Tax Free Fund Additional Tax
Information," all shareholders, unless otherwise exempt, are required to pay
federal income tax on any dividends and other distributions, whether in shares
or cash, for all the Funds. Detailed information concerning the status of
dividend and capital gains distributions for federal income tax purposes is
mailed to shareholders annually.
Shareholders are urged to consult their own tax advisers regarding the status
of their accounts under state and local tax laws.
HIGH GRADE TAX FREE FUND ADDITIONAL TAX INFORMATION
Shareholders of High Grade Tax Free 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 the Fund 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 -------------------------
First Union Equity and Income Funds offer three classes of shares: Trust Shares
for institutional investors and Class B Shares and Class C Shares for
individuals and other customers of First Union.
Class B Shares and Class C Shares of First Union Equity and Income Funds are
sold to customers of First Union and others at net asset value plus a sales
charge which, at the election of the purchaser, may be imposed either (i) at
the time of purchase (the Class B Shares), or (ii) on a contingent deferred
basis (the Class C Shares). Shareholders of record in any Fund at October 12,
1990, and the members of their immediate family, will be exempt from sales
charges on any future purchases in any of the First Union Funds. Employees of
First Union, Federated Securities Corp. and their affiliates, and certain trust
accounts for which First Union or its affiliates act in an administrative,
fiduciary, or custodial capacity, board members of First Union and the
above-mentioned entities and the members of the immediate families of any of
these persons, will also be exempt from sales charges. Class B Shares and Class
C Shares are distributed pursuant to Rule 12b-1 Plans adopted by the Trust,
whereby the distributor is paid a fee of .25 of 1% for Class B Shares and .75
of 1% for Class C Shares of each Fund's average daily net asset value.
The stated advisory fee is the same for all classes of the Funds. 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 same Fund.
The amount of dividends payable to 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.
<PAGE>
[This Page Intentionally Left Blank]
- ------------------------- ADDRESSES -------------------------
- ------------------------- -------------------------
- --------------------------------------------------------------------------------
First Union Funds 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
- --------------------------------------------------------------------------------
3031007A-I (4/93)
FIRST UNION EQUITY AND INCOME FUNDS
(Portfolios of First Union Funds)
Class B Investment Shares
Class C Investment Shares
- --------------------------------------------------------------------------------
Supplement to Prospectus dated February 28, 1994
Effective September 1, 1994, First Union Equity and Income Funds (the
"Funds"), with the exception of First Union Managed Bond Fund, will offer
Class D Investment Shares ("Class D Shares"). Class D Shares will be
similar to Class C Shares in all respects except: Class D Shares will have
a contingent deferred sales charge of 1.00%, which terminates after one
year, and the Class D Shares will not automatically convert into Class B
Shares after seven years.
Effective September 1, 1994, Class C Shares will assess a shareholder
service fee of 0.25% of the average daily net asset value, of which all or
a portion may be waived at any time.
A. Please delete the "Summary of Fund Expenses" table on pages 4 and 5 and
replace it with the following:
- -------------------------- SUMMARY OF --------------------------
- -------------------------- FUND EXPENSES --------------------------
FIRST UNION EQUITY AND INCOME FUNDS
CLASS B SHARES
<TABLE>
<CAPTION>
Fixed High Grade U.S.
Balanced Income Tax Free Government Utility Value
Fund Fund Fund Fund Fund Fund
Class B Shares -------- ------ ---------- ---------- ------- -----
Shareholder Transaction Expenses
<S> <C> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).... 4.75% 4.75% 4.75% 4.75% 4.75% 4.75%
Maximum Sales Load Imposed on Reinvested
Dividends (as a percentage of offering
price)................................. None None None None None None
Contingent Deferred Sales Charge (as a
percentage of original purchase price
or redemption proceeds, as applicable). None None None None None None
Redemption Fee (as a percentage of
amount redeemed,
if applicable)......................... None None None None None None
Exchange Fee............................ None None None None None None
Annual Class B Shares Operating Expenses
(As a percentage of average net assets)
Management Fee (after waiver) (1)....... 0.50% 0.50% 0.49% 0.49% 0.00% 0.50%
12b-1 Fees (2).......................... 0.25% 0.10% 0.25% 0.25% 0.25% 0.25%
Total Other Expenses (after waiver) (3). 0.16% 0.16% 0.32% 0.25% 0.92% 0.17%
Total Class B Shares Operating
Expenses (4)....................... 0.91% 0.76% 1.06% 0.99% 1.17% 0.92%
</TABLE>
(1)The management fees of High Grade Tax Free, U.S. Government and Utility
Funds have been reduced to reflect the voluntary waivers by the Adviser. The
Adviser may terminate these voluntary waivers at any time at its sole
discretion. The maximum management fee for High Grade Tax Free, U.S. Government
and Utility Funds is 0.50%.
(2)The Class B Shares can pay up to 0.75% of Class B Shares' average daily net
assets as a 12b-1 fee. For the foreseeable future, Fixed Income Fund plans to
limit the Class B Shares' 12b-1 payments to 0.10% of Class B Shares' average
daily net assets. All other Funds listed above plan to limit the Class B
Shares' 12b-1 payments to 0.25% of Class B Shares' average daily net assets.
(3)Total Other Expenses for Utility Fund are estimated to be 1.66%, absent the
anticipated voluntary waiver by the administrator. The administrator may
terminate this waiver at any time at its sole discretion.
(4)Total Class B Shares Operating Expenses for Utility Fund are estimated to be
2.41%, absent the voluntary waivers described above in notes 1 and 3.
Fixed Income, High Grade Tax Free, U.S. Government and Value Funds' Total Class
B Shares Annual Operating Expenses were 0.93%, 0.85%, 0.69% and 0.99%,
respectively, for the year ended December 31, 1993. Total Class B Shares
Operating Expenses for High Grade Tax Free Fund, absent the voluntary waiver of
the management fee by the Adviser and waiver of the 12b-1 fee, were 1.07% for
the year ended December 31, 1993. Total Class B Shares Operating Expenses for
U.S. Government Fund, absent the voluntary waiver of the management fee by the
Adviser and the voluntary waiver of the administrative fee by the
administrator, were 1.00% for the year ended December 31, 1993.
- -------------------------- SUMMARY OF --------------------------
- -------------------------- FUND EXPENSES --------------------------
(Continued)
FIRST UNION EQUITY AND INCOME FUNDS
CLASS B SHARES
The Annual Class B Shares Operating Expenses in the table above, except for the
Balanced and Utility Funds, are based on expenses expected during the fiscal
year ending December 31, 1994. The total Class B Shares expected operating
expenses for High Grade Tax Free and U.S. Government Funds would be 1.07% and
1.00%, respectively, absent the anticipated voluntary waivers described above
in note 1.
Fixed Income and Value Funds are no longer allocating certain expenses as
incurred by each class.
Utility Fund expenses in this table are estimated based on average expenses
expected to be incurred during the fiscal year ending December 31, 1994. During
the course of this period, expenses may be more or less than the average amount
shown.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Funds 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.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
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.
The Funds charge no redemption fees for Class
B Shares.
Balanced Fund............................... $56 $75 $ 96 $154
Fixed Income Fund........................... $55 $71 $ 88 $137
High Grade Tax Free Fund.................... $58 $80 $103 $171
U.S. Government Fund........................ $57 $78 $100 $163
Utility Fund................................ $59 $83 N/A N/A
Value Fund.................................. $56 $75 $ 96 $155
</TABLE>
The above example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown. The example
for Utility Fund Class B Shares is based on estimated data for the fiscal year
ending December 31, 1994.
The information set forth in the foregoing table and example relates only to
Class B Shares of the Funds. The Funds also offer three additional classes of
shares called Trust Shares, Class C Shares and Class D Shares. In general, all
expenses are allocated based upon the daily net assets of each class. Trust
Shares bear no sales charge or 12b-1 fee. Class C Shares are subject to a 12b-1
fee of 0.75 of 1%, a shareholder service fee of 0.25 of 1% and bear a maximum
contingent deferred sales charge of 5.00%. Class D Shares are subject to a 12b-
1 fee of 0.75 of 1%, a shareholder service fee of 0.25 of 1% and bear a maximum
contingent deferred sales charge of 1.00%. Trust Shares, Class C Shares and
Class D Shares bear no front-end sales charge. See "Other Classes of Shares."
B. Please delete the "Summary of Fund Expenses" table on pages 6 and 7 and
replace it with the following:
- -------------------------- SUMMARY OF --------------------------
- -------------------------- FUND EXPENSES --------------------------
FIRST UNION EQUITY AND INCOME FUNDS
CLASS C SHARES
<TABLE>
<CAPTION>
Fixed High Grade U.S.
Balanced Income Tax Free Government Utility
Fund Fund Fund Fund Fund
---------------- ---------------- ---------------- ---------------- ----------------
Class C Shares
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load
Imposed on Purchases (as a
percentage of offering price)...... None None None None None
Maximum Sales Load
Imposed on Reinvested
Dividends (as a percentage of
offering price).................... None None None None None
Contingent Deferred Sales Load (as a
percentage of original purchase
price or redemption proceeds,
as applicable) (1)................. 5% during 5% during 5% during 5% during 5% during
the first year, the first year, the first year, the first year, the first year,
4% during 4% during 4% during 4% during 4% during
the second year, the second year, the second year, the second year, the second year,
3% during 3% during 3% during 3% during 3% during
the third year, the third year, the third year, the third year, the third year,
3% during 3% during 3% during 3% during 3% during
the fourth year, the fourth year, the fourth year, the fourth year, the fourth year,
2% during 2% during 2% during 2% during 2% during
the fifth year, the fifth year, the fifth year, the fifth year, the fifth year,
1% during 1% during 1% during 1% during 1% during
the sixth year, the sixth year, the sixth year, the sixth year, the sixth year,
and 0% after and 0% after and 0% after and 0% after and 0% after
the sixth year the sixth year the sixth year the sixth year the sixth year
Redemption Fee (as a percentage of
amount redeemed, if applicable).... None None None None None
Exchange Fee......................... None None None None None
<CAPTION>
Annual Class C Shares Operating Expenses
<S> <C> <C> <C> <C> <C>
(As a percentage of average net assets)
Management Fee (after waiver) (2).... 0.50% 0.50% 0.49% 0.49% 0.00%
12b-1 Fees........................... 0.75% 0.75% 0.75% 0.75% 0.75%
Total Other Expenses
(after waiver) (3)................. 0.41% 0.41% 0.57% 0.50% 1.17%
Shareholder Service Fee......... 0.25%
Total Class C Shares
Operating Expenses (4).. 1.66% 1.66% 1.81% 1.74% 1.92%
<CAPTION>
Balanced
Fund
----------------
Class C Shares
<S> <C>
Shareholder Transaction Expenses
Maximum Sales Load
Imposed on Purchases (as a
percentage of offering price)...... None
Maximum Sales Load
Imposed on Reinvested
Dividends (as a percentage of
offering price).................... None
Contingent Deferred Sales Load (as a
percentage of original purchase
price or redemption proceeds,
as applicable) (1)................. 5% during
the first year,
4% during
the second year,
3% during
the third year,
3% during
the fourth year,
2% during
the fifth year,
1% during
the sixth year,
and 0% after
the sixth year
Redemption Fee (as a percentage of
amount redeemed, if applicable).... None
Exchange Fee......................... None
<CAPTION>
Annual Class C Shares Operating Expenses
<S> <C>
(As a percentage of average net assets)
Management Fee (after waiver) (2).... 0.50%
12b-1 Fees........................... 0.75%
Total Other Expenses
(after waiver) (3)................. 0.42%
Shareholder Service Fee.........
Total Class C Shares
Operating Expenses (4).. 1.67%
</TABLE>
(1)No contingent deferred sales charge is imposed on (a) Shares purchased more
than six years prior to redemption, (b) Shares acquired through the
reinvestment of dividends and distributions, and (c) the portion of redemption
proceeds attributable to increases in the value of an account above the net
cost of the investment due to increases in the net asset value per Share.
(2)The management fees of High Grade Tax Free, U.S. Government and Utility
Funds have been reduced to reflect the voluntary waivers by the Adviser. The
Adviser may terminate these voluntary waivers at any time at its sole
discretion. The maximum management fee for High Grade Tax Free, U.S. Government
and Utility Funds is 0.50%.
(3)Total Other Expenses for Utility Fund are estimated to be 1.91%, absent the
anticipated voluntary waiver by the administrator. The administrator may
terminate this waiver at any time at its sole discretion.
(4)Total Class C Shares Operating Expenses for Utility Fund are estimated to be
3.16%, absent the voluntary waivers described above in notes 2 and 3.
- -------------------------- SUMMARY OF --------------------------
- -------------------------- FUND EXPENSES --------------------------
(Continued)
FIRST UNION EQUITY AND INCOME FUNDS
CLASS C SHARES
Fixed Income, High Grade Tax Free, U.S. Government and Value Funds' Total Class
C Shares Annual Operating Expenses were 1.57%, 1.35%, 1.19% and 1.48%,
respectively, for the year ended December 31, 1993. Total Class C Shares
Operating Expenses for High Grade Tax Free Fund absent the voluntary waiver of
the management fee by the Adviser and the waiver of the 12b-1 fee were 1.57%
for the year ended December 31, 1993. Total Class C Shares Operating Expenses
for U.S. Government Fund, absent the voluntary waiver of the management fee by
the Adviser and the voluntary waiver of the administrative fee by the
administrator, were 1.50% for the year ended December 31, 1993.
The Annual Class C Shares Operating Expenses in the table above, except for
Balanced and Utility Funds, are based on expenses expected during the fiscal
year ending December 31, 1994. The total Class C Shares expected operating
expenses, for High Grade Tax Free and U.S. Government Funds, would be 1.82% and
1.75%, respectively, absent the voluntary waivers described above in note 2.
Fixed Income and Value Funds are no longer allocating certain expenses incurred
by each class.
Utility Fund expenses in this table are estimated based on average expenses
expected to be incurred during the fiscal year ending December 31, 1994. During
the course of this period, expenses may be more or less than the average amount
shown.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Funds 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.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
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.
Balanced Fund............................... $69 $85 $114 $197
Fixed Income Fund........................... $69 $85 $114 $197
High Grade Tax Free Fund.................... $70 $90 $121 $213
U.S. Government Fund........................ $69 $88 $118 $205
Utility Fund................................ $71 $93 N/A N/A
Value Fund.................................. $69 $86 $114 $198
You would pay the following expenses on the
same investment, assuming no
redemptions:
Balanced Fund............................... $17 $52 $90 $197
Fixed Income Fund........................... $17 $52 $90 $197
High Grade Tax Free Fund.................... $18 $57 $98 $213
U.S. Government Fund........................ $18 $55 $94 $205
Utility Fund................................ $20 $60 N/A N/A
Value Fund.................................. $17 $53 $91 $198
</TABLE>
The above example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown. The example
for Utility Fund Class C Shares is based on estimated data for the fiscal year
ending December 31, 1994.
The information set forth in the foregoing table and example relates only to
Class C Shares of the Funds. The Funds also offer three additional classes of
shares called Trust Shares, Class B Shares and Class D Shares. In general, all
expenses are allocated based upon the daily net assets of each class. Trust
Shares bear no sales charge or 12b-1 fee. Class B Shares are subject to a 12b-1
fee of 0.25 of 1% and bear a maximum sales charge of 4.75%. Class D Shares are
subject to a 12b-1 fee of 0.75 of 1%, a shareholder service fee of 0.25 of 1%,
and bear a maximum contingent deferred sales charge of 1.00%. See "Other
Classes of Shares."
C. Please insert the following "Summary of Fund Expenses" table on pages 8
and 9 for Class D Shares:
- -------------------------- SUMMARY OF --------------------------
- -------------------------- FUND EXPENSES --------------------------
FIRST UNION EQUITY AND INCOME FUNDS
CLASS D SHARES
<TABLE>
<CAPTION>
Fixed High Grade U.S.
Balanced Income Tax Free Government Utility Value
Fund Fund Fund Fund Fund Fund
Class D Shares --------------- --------------- --------------- --------------- --------------- ---------------
Shareholder Transaction Expenses
<S> <C> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed
on Purchases
(as a percentage of offering
price)...................... None None None None None None
Maximum Sales Load Imposed on
Reinvested Dividends
(as a percentage of offering
price)...................... None None None None None None
Contingent Deferred Sales
Charge (as a percentage of
original purchase price or
redemption proceeds, as
applicable) (1)............... 1% during 1% during 1% during 1% during 1% during 1% during
the first year, the first year, the first year, the first year, the first year, the first year,
and 0% after and 0% after and 0% after and 0% after and 0% after and 0% after
the first year the first year the first year the first year the first year the first year
Redemption Fees (as a percentage
of amount redeemed, if
applicable).................... None None None None None None
Exchange Fee.................... None None None None None None
<CAPTION>
Annual Class D Shares Operating Expenses*
<S> <C> <C> <C> <C> <C> <C>
(As a percentage of projected
average net assets)
Management Fee (after waiver)
(2)........................... 0.50% 0.50% 0.49% 0.49% 0.00% 0.50%
12b-1 Fees...................... 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%
Total Other Expenses (after
waiver) (3)................... 0.41% 0.41% 0.57% 0.50% 1.17% 0.42%
Shareholder Service Fee.... 0.25%
Total Class D Shares
Operating Expenses (4). 1.66% 1.66% 1.81% 1.74% 1.92% 1.67%
</TABLE>
(1)No contingent deferred sales charge is imposed on (a) Shares purchased more
than one year prior to redemption, (b) Shares acquired through the reinvestment
of dividends and distributions, and (c) the portion of redemption proceeds
attributable to increases in the value of an account above the net cost of the
investment due to increases in the net asset value per share.
(2)The estimated management fees of High Grade Tax Free, U.S. Government and
Utility Funds have been reduced to reflect the anticipated voluntary waiver by
the Adviser. The Adviser may terminate these voluntary waivers at any time at
its sole discretion. The maximum management fee for High Grade Tax Free, U.S.
Government and Utility Funds is 0.50%.
(3)Total Other Expenses for Utility Fund are estimated to be 1.91%, absent the
anticipated voluntary waiver by the administrator. The administrator may
terminate this waiver at any time at its sole discretion.
(4)Total Class D Shares Operating Expenses for High Grade Tax Free, U.S.
Government and Utility Funds are estimated to be 1.82%, 1.75% and 3.16%,
respectively, absent the anticipated voluntary waivers described above in notes
2 and 3.
* Expenses in this table are estimated based on average expenses expected to be
incurred during the fiscal year ending December 31, 1994. During the course of
this period, expenses may be more or less than the average amount shown.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Funds 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.
- -------------------------- SUMMARY OF --------------------------
- -------------------------- FUND EXPENSES --------------------------
(Continued)
FIRST UNION EQUITY AND INCOME FUNDS
CLASS D SHARES
Because of the asset-based sales charge, long-term shareholders may pay more
than the economic equivalent of the maximum front-end sales charge permitted
under the rules of the National Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
- ------- ------ -------
<S> <C> <C>
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.
Balanced Fund................................................ $27 $52
Fixed Income Fund............................................ $27 $52
High Grade Tax Free Fund..................................... $29 $57
U.S. Government Fund......................................... $28 $55
Utility Fund................................................. $30 $60
Value Fund................................................... $27 $53
You would pay the following expenses on the same investment,
assuming no redemptions:
Balanced Fund................................................ $17 $52
Fixed Income Fund............................................ $17 $52
High Grade Tax Free Fund..................................... $18 $57
U.S. Government Fund......................................... $18 $55
Utility Fund................................................. $20 $60
Value Fund................................................... $17 $53
</TABLE>
The above example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown. This example
is based on estimated data for the fiscal year ending December 31, 1994.
The information set forth in the foregoing table and example relates only to
Class D Shares of the Funds. The Funds also offer three additional classes of
shares called Trust Shares, Class B Shares and Class C Shares. In general, all
expenses are allocated based upon the daily net assets of each class. Trust
Shares bear no sales charge or 12b-1 fee. Class B Shares are subject to a 12b-1
fee of 0.25 of 1% and bear a maximum sales charge of 4.75%. Class C Shares are
subject to a 12b-1 fee of 0.75 of 1%, a shareholder service fee of 0.25 of 1%,
bear a maximum contingent deferred sales charge of 5.00% and bear no front-end
sales charge. See "Other Classes of Shares."
D. Please delete the first table (for Class B Investment Shares) under the
section entitled "What Shares Cost" on page 28 and replace it with the
following:
<TABLE>
<CAPTION>
Sales Charge as
a Percentage of Sales Charge as a
Amount of Public Offering Percentage of Net
Transaction Price Amount Invested
----------- --------------- -----------------
<S> <C> <C>
$0-99,999 4.75% 4.25%
$100,000-249,999 3.75% 3.25%
$250,000-499,999 3.00% 2.50%
$500,000-1,000,000 2.00% 1.75%
$1,000,000-2,500,000 1.00% 1.00%
$2,500,000 and above 0.25% 0.25%
</TABLE>
E. Please delete the second table (for Class C Investment Shares) under
the section entitled "What Shares Cost" on page 28 and replace it with
the following:
<TABLE>
<CAPTION>
Year of Redemption Contingent Deferred
After Purchase Sales Charge
------------------ -------------------
<S> <C>
First 5.0%
Second 4.0%
Third 3.0%
Fourth 3.0%
Fifth 2.0%
Sixth 1.0%
</TABLE>
September 1, 1994
FEDERATED SECURITIES CORP.
- --------------------------------------------------------------------------------
Distributor
G00389-14-B (9/94)
P R O S P E C T U S
FIRST UNION
EQUITY AND
INCOME FUNDS
CLASS B AND C
INVESTMENT SHARES
FEBRUARY 28, 1994
[LOGO]
FIRST UNION
FUNDS
FORMERLY THE SALEM FUNDS
- ------------------------ FIRST UNION ------------------------
EQUITY AND INCOME
- ------------------------ FUNDS ------------------------
Portfolios of First Union Funds
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
- --------------------------------------------------------------------------------
P R O S P E C T U S
February 28, 1994
First Union Funds (the "Trust") is a mutual fund with 15 portfolios, offering a
variety of investment opportunities. The Trust currently includes seven
diversified Equity and Income Funds, three diversified Money Market Funds, and
five non-diversified Single State Municipal Bond Funds. They are:
Equity and Income Funds
.First Union Balanced Portfolio;
.First Union Fixed Income Portfolio;
. First Union High Grade Tax Free Portfolio (formerly, First Union Insured Tax
Free Portfolio);
. First Union Managed Bond Portfolio (Investment Shares not currently
offered);
. First Union U.S. Government Portfolio;
. First Union Utility Portfolio; and
.First Union Value Portfolio.
Money Market Funds
.First Union Money Market Portfolio;
. First Union Tax Free Money Market Portfolio; and
.First Union Treasury Money Market Portfolio.
Single State Municipal Bond Funds
. First Union Florida Municipal Bond Portfolio;
. First Union Georgia Municipal Bond Portfolio;
. First Union North Carolina Municipal Bond Portfolio;
. First Union South Carolina Municipal Bond Portfolio; and
. First Union Virginia Municipal Bond Portfolio.
This prospectus provides you with information specific to the Class B
Investment Shares ("Class B Shares") and Class C Investment Shares ("Class C
Shares") of First Union Equity and Income Funds. It concisely describes the
information which you should know before investing in Class B Shares or Class C
Shares of any of the First Union Equity and Income Funds. Please read this
prospectus carefully and keep it for future reference.
You can find more detailed information about each First Union Equity and Income
Fund in its Statement of Additional Information dated February 28, 1994, filed
with the Securities and Exchange Commission and incorporated by reference into
this prospectus. The Statements are available free of charge by writing to
First Union Funds, Federated Investors Tower, Pittsburgh, PA 15222-3779 or by
calling 1-800-326-3241.
The Trust is sponsored and distributed by third parties independent of First
Union National Bank of North Carolina ("First Union"). 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
UNION, ARE NOT ENDORSED OR GUARANTEED BY FIRST UNION, AND ARE NOT INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
FOR A DESCRIPTION OF THE NATURE AND LIMITATIONS OF MUNICIPAL BOND INSURANCE,
SEE "FIRST UNION HIGH GRADE TAX FREE PORTFOLIO--MUNICIPAL BOND INSURANCE," PAGE
19.
- --------------------------------------------------------------------------------
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.
- ------------------------- TABLE OF -------------------------
- ------------------------- CONTENTS -------------------------
SUMMARY 2
- --------------------------------------
SUMMARY OF FUND EXPENSES 4
- --------------------------------------
FINANCIAL HIGHLIGHTS 8
- --------------------------------------
INVESTMENT OBJECTIVES AND POLICIES 16
- --------------------------------------
FIRST UNION BALANCED PORTFOLIO 16
- --------------------------------------
FIRST UNION FIXED INCOME PORTFOLIO 17
- --------------------------------------
FIRST UNION HIGH GRADE TAX FREE
PORTFOLIO 18
- --------------------------------------
FIRST UNION U.S. GOVERNMENT
PORTFOLIO 20
- --------------------------------------
FIRST UNION UTILITY PORTFOLIO 21
- --------------------------------------
FIRST UNION VALUE PORTFOLIO 22
- --------------------------------------
OTHER INVESTMENT POLICIES 23
- --------------------------------------
SHAREHOLDER GUIDE 26
- --------------------------------------
HOW TO BUY SHARES 28
- --------------------------------------
HOW TO CONVERT YOUR INVESTMENT FROM
ONE FIRST UNION FUND TO ANOTHER FIRST
UNION FUND 30
- --------------------------------------
HOW TO REDEEM SHARES 30
- --------------------------------------
ADDITIONAL SHAREHOLDER SERVICES 31
- --------------------------------------
MANAGEMENT OF FIRST UNION FUNDS 31
- --------------------------------------
FEES AND EXPENSES 33
- --------------------------------------
SHAREHOLDER RIGHTS AND PRIVILEGES 34
- --------------------------------------
DISTRIBUTIONS AND TAXES 35
- --------------------------------------
TAX INFORMATION 35
- --------------------------------------
OTHER CLASSES OF SHARES 36
- --------------------------------------
ADDRESSES Inside Back Cover
- --------------------------------------
- ------------------------- SUMMARY -------------------------
- ------------------------- -------------------------
DESCRIPTION OF THE TRUST
First Union Funds 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 First Union Fund. Each Equity and Income Fund, except First Union
Managed Bond Portfolio, is divided into three classes of shares: Class B
Shares, Class C Shares, and Trust Shares. Class B and Class C Shares are sold
to individuals and other customers of First Union (the "Adviser") and are sold
at net asset value plus a sales charge which, at the election of the purchaser,
may be imposed either (i) at the time of purchase (the Class B Shares), or (ii)
on a contingent deferred basis (the Class C Shares). Trust Shares are designed
primarily for institutional investors (banks, corporations, and fiduciaries).
First Union Managed Bond Portfolio presently offers only Trust Shares. This
prospectus relates to both classes of Investment Shares ("Shares") of First
Union Equity and Income Funds (collectively, the "Funds").
THE FUNDS AND OBJECTIVES
As of the date of this prospectus, Class B and Class C Shares are offered in
the following six Funds:
. FIRST UNION BALANCED PORTFOLIO ("BALANCED FUND")--seeks to produce long-term
total return through capital appreciation, dividends, and interest income;
. FIRST UNION FIXED INCOME PORTFOLIO ("FIXED INCOME FUND")--seeks to provide a
high level of current income by investing in a broad range of investment
grade debt securities, with capital growth as a secondary objective;
. FIRST UNION HIGH GRADE TAX FREE PORTFOLIO ("HIGH GRADE TAX FREE FUND")--
seeks to provide a high level of federally tax-free income that is
consistent with preservation of capital;
. FIRST UNION U.S. GOVERNMENT PORTFOLIO ("U.S. GOVERNMENT FUND")--seeks a high
level of current income consistent with stability of principal;
. FIRST UNION UTILITY PORTFOLIO ("UTILITY FUND")--seeks high current income
and moderate capital appreciation; and
. FIRST UNION VALUE PORTFOLIO ("VALUE FUND")--seeks long-term capital growth,
with current income as a secondary objective.
INVESTMENT MANAGEMENT
The Funds are advised by First Union, through its Capital Management Group.
First Union has responsibility for investment research and supervision of the
Funds, 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 Class B and Class C Shares of any of the Funds,
please refer to the Shareholder Guide section entitled "How to Buy Shares."
Redemption information may be found under "How to Redeem Shares."
RISK FACTORS
Investors should be aware of the following general observations: The market
value of fixed-income securities, which constitute a major part of the
investments of several of the Funds described in this prospectus, may vary
inversely in response to changes in prevailing interest rates. The foreign
securities in which several Funds may invest may be subject to certain risks in
addition to those inherent in U.S. investments. One or more Funds may make
certain investments and employ certain investment techniques that involve other
risks, including entering into repurchase agreements, lending portfolio
securities and entering into futures contracts and related options as hedges.
These risks and those associated with investing in mortgage-backed securities,
when-issued securities, options and variable rate securities are described
under "Investment Objectives and Policies" for each Fund and "Other Investment
Policies."
- ------------------------ SUMMARY OF ------------------------
- ------------------------ FUND EXPENSES ------------------------
FIRST UNION EQUITY AND INCOME FUNDS CLASS B SHARES
<TABLE>
<CAPTION>
Fixed High Grade U.S.
Balanced Income Tax Free Government Utility Value
Fund Fund Fund Fund Fund Fund
-------- ------ ---------- ---------- ------- -----
CLASS B SHARES
SHAREHOLDER TRANSACTION
EXPENSES
<S> <C> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed
on Purchases
(as a percentage of offer-
ing price)................ 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Maximum Sales Load Imposed
on Reinvested Dividends
(as a percentage of offer-
ing price)................ None None None None None None
Deferred Sales Load (as a
percentage of original
purchase price or redemp-
tion proceeds, as applica-
ble)...................... None None None None None None
Redemption Fee (as a per-
centage of amount re-
deemed,
if applicable)............ None None None None None None
Exchange Fee............... None None None None None None
<CAPTION>
ANNUAL CLASS B SHARES
OPERATING EXPENSES
(As a percentage of
average net assets)
Management Fee (after
waiver) (1)............... 0.50% 0.50% 0.49% 0.49% 0.00% 0.50%
12b-1 Fees (2)............. 0.25% 0.10% 0.25% 0.25% 0.25% 0.25%
Total Other Expenses (after
waiver) (3)............... 0.16% 0.16% 0.32% 0.25% 0.92% 0.17%
Total Class B Shares Op-
erating Expenses (4)...... 0.91% 0.76% 1.06% 0.99% 1.17% 0.92%
</TABLE>
(1) The management fees of High Grade Tax Free, U.S. Government and Utility
Funds have been reduced to reflect the voluntary waivers by the Adviser. The
Adviser may terminate these voluntary waivers at any time at its sole
discretion. The maximum management fee for High Grade Tax Free, U.S.
Government and Utility Funds is 0.50%.
(2) The Class B Shares can pay up to 0.75% of Class B Shares' average daily
net assets as a 12b-1 fee. For the foreseeable future, Fixed Income Fund plans
to limit the Class B Shares' 12b-1 payments to 0.10% of Class B Shares'
average daily net assets. All other Funds listed above plan to limit the Class
B Shares' 12b-1 payments to 0.25% of Class B Shares' average daily net assets.
(3) Total Other Expenses for Utility Fund are estimated to be 1.66%, absent
the anticipated voluntary waiver by the administrator. The administrator may
terminate this waiver at any time at its sole discretion.
(4) Total Class B Shares Operating Expenses for Utility Fund are estimated to
be 2.41%, absent the voluntary waivers described above in notes 1 and 3.
Fixed Income, High Grade Tax Free, U.S. Government and Value Funds' Total
Class B Shares Annual Operating Expenses were 0.93%, 0.85%, 0.69% and 0.99%,
respectively, for the year ended December 31, 1993. Total Class B Shares
Operating Expenses for High Grade Tax Free Fund absent the voluntary waiver of
the management fee by the Adviser and waiver of the 12b-1 fee was 1.07% for
the year ended December 31, 1993. Total Class B Shares Operating Expenses for
U.S. Government Fund absent the voluntary waiver of the management fee by the
Adviser and the voluntary waiver of the administrative fee by the
administrator, was 1.00% for the year ended December 31, 1993.
The Annual Class B Shares Operating Expenses in the table above, except for
the Balanced and Utility Funds, are based on expenses expected during the
fiscal year ending December 31, 1994. The total Class B Shares expected
operating expenses for High Grade Tax Free and U.S. Government Funds would be
1.07% and 1.00%, respectively, absent the voluntary waivers described above in
note 1.
Fixed Income and Value Funds are no longer allocating certain expenses as
incurred by each class.
Utility Fund expenses in this table are estimated based on average expenses
expected to be incurred during the fiscal year ending December 31, 1994.
During the course of this period, expenses may be more or less than the
average amount shown.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUNDS 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.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
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.
The Funds charge no redemption fees for Class
B Shares.
Balanced Fund............................... $49 $68 $88 $147
Fixed Income Fund........................... $47 $63 $81 $130
High Grade Tax Free Fund.................... $50 $72 $96 $164
U.S. Government Fund........................ $50 $70 $93 $156
Utility Fund................................ $51 $76 NA NA
Value Fund.................................. $49 $68 $89 $149
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE FOR UTILITY FUND CLASS B SHARES IS BASED ON ESTIMATED DATA FOR THE
FISCAL YEAR ENDING DECEMBER 31, 1994.
The information set forth in the foregoing table and example relates only to
Class B Shares of the Funds. The Funds also offer two additional classes of
shares called Trust Shares and Class C Shares. In general, all expenses are
allocated based upon the daily net assets of each class. Trust Shares bear no
sales load or 12b-1 fee. Class C Shares are subject to a 12b-1 fee of 0.75 of
1% and bear a maximum contingent deferred sales load of 4.00%. Neither Trust
Shares nor Class C Shares bear a front-end sales load. See "Other Classes of
Shares."
- ------------------------ SUMMARY OF ------------------------
- ------------------------ FUND EXPENSES ------------------------
FIRST UNION EQUITY AND INCOME FUNDS
CLASS C SHARES
<TABLE>
<CAPTION>
Fixed High Grade U.S.
Balanced Income Tax Free Government Utility
Fund Fund Fund Fund Fund
---------------- ---------------- ---------------- ---------------- ----------------
CLASS C SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on Pur-
chases (as a percentage of
offering price). None None None None None
Maximum Sales Load Imposed on Re-
invested Dividends (as a percentage
of offering price). None None None None None
Deferred Sales Load (as a percentage
of original purchase price or
redemption proceeds, as applicable)
(1).... 4% during 4% during 4% during 4% during 4% during
the first year, the first year, the first year, the first year, the first year,
3% during 3% during 3% during 3% during 3% during
the second year, the second year, the second year, the second year, the second year,
2.5% during 2.5% during 2.5% during 2.5% during 2.5% during
the third year, the third year, the third year, the third year, the third year,
2% during 2% during 2% during 2% during 2% during
the fourth year, the fourth year, the fourth year, the fourth year, the fourth year,
1.5% during 1.5% during 1.5% during 1.5% during 1.5% during
the fifth year, the fifth year, the fifth year, the fifth year, the fifth year,
0.5% during 0.5% during 0.5% during 0.5% during 0.5% during
the sixth year, the sixth year, the sixth year, the sixth year, the sixth year,
and 0% after and 0% after and 0% after and 0% after and 0% after
the sixth year the sixth year the sixth year the sixth year the sixth year
Redemption Fee (as a per-
centage of amount redeemed,
if applicable). None None None None None
Exchange
Fee.... None None None None None
<CAPTION>
Value
Fund
-----------------
CLASS C SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Load Imposed
on Purchases (as a percentage
of offering price)... None
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)(1).... 4% during
the first year,
3% during
the second year,
2.5% during
the third year,
2% during
the fourth year,
1.5% during
the fifth year,
0.5% during
the sixth year,
and 0% after
the sixth year
Redemption Fee (as a per-
centage of amount redeemed,
if applicable). None
Exchange
Fee.... None
<CAPTION>
ANNUAL CLASS C SHARES OPERATING EXPENSES
<S> <C> <C> <C> <C> <C>
(As a percentage of average net
assets)
Management
Fee
(after
waiver)
(2).... 0.50% 0.50% 0.49% 0.49% 0.00%
12b-1
Fees... 0.75% 0.75% 0.75% 0.75% 0.75%
Total
Other
Expenses
(after
waiver)
(3).... 0.16% 0.16% 0.32% 0.25% 0.92%
Total
Class
C
Shares
Operating
Expenses
(4). 1.41% 1.41% 1.56% 1.49% 1.67%
<CAPTION>
ANNUAL CLASS C SHARES OPERATING EXPENSES
<S> <C> <C> <C>
(As a percentage of average net
assets)
Management
Fee
(after
waiver)
(2).... 0.50%
12b-1
Fees... 0.75%
Total
Other
Expenses
(after
waiver)
(3).... 0.17%
Total
Class
C
Shares
Operating
Expenses
(4). 1.42%
</TABLE>
(1) No contingent deferred sales charge is imposed on (a) Shares purchased
more than six years prior to redemption, (b) Shares acquired through the
reinvestment of dividends and distributions, and (c) the portion of redemption
proceeds attributable to increases in the value of an account above the net
cost of the investment due to increases in the net asset value per Share.
(2) The management fees of High Grade Tax Free, U.S. Government and Utility
Funds have been reduced to reflect the voluntary waivers by the Adviser. The
Adviser may terminate these voluntary waivers at any time at its sole
discretion. The maximum management fee for High Grade Tax Free, U.S.
Government and Utility Funds is 0.50%.
(3) Total Other Expenses for Utility Fund are estimated to be 1.66%, absent
the anticipated voluntary waiver by the administrator. The administrator may
terminate this waiver at any time at its sole discretion.
(4) Total Class C Shares Operating Expenses for Utility Fund are estimated to
be 2.91%, absent the voluntary waivers described above in notes 2 and 3.
Fixed Income, High Grade Tax Free, U.S. Government and Value Funds' Total
Class C Shares Annual Operating Expenses were 1.57%, 1.35%, 1.19% and 1.48%,
respectively, for the year ended December 31, 1993. Total Class C Shares
Operating Expenses for High Grade Tax Free absent the voluntary waiver of the
management fee by the Adviser and the waiver of the 12b-1 fee was 1.57% for
the year ended December 31, 1993. Total Class C Shares Operating Expenses for
U.S. Government Fund absent the voluntary waiver of the management fee by the
Adviser and the voluntary waiver of the administrative fee by the
administrator was 1.50% for the year ended December 31, 1993.
The Annual Class C Shares Operating Expenses in the table above, except for
Balanced and Utility Funds, are based on expenses expected during the fiscal
year ending December 31, 1994. The total Class C Shares expected operating
expenses, for High Grade Tax Free and U.S. Government Funds, would be 1.57%
and 1.50%, respectively, absent the voluntary waivers described above in note
2.
Fixed Income and Value Funds are no longer allocating certain expenses as
incurred by each class.
Utility Fund expenses in this table are estimated based on average expenses
expected to be incurred during the fiscal year ending December 31, 1994.
During the course of this period, expenses may be more or less than the
average amount shown.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUNDS 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.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
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:
Balanced Fund...................................................................... $56 $72 $95 $169
Fixed Income Fund.................................................................. $56 $72 $95 $169
High Grade Tax Free Fund........................................................... $57 $77 $103 $186
U.S. Government Fund............................................................... $57 $75 $99 $178
Utility Fund....................................................................... $58 $80 NA NA
Value Fund......................................................................... $56 $73 $96 $170
You would pay the following expenses on the same investment, assuming no redemptions:
Balanced Fund...................................................................... $14 $45 $77 $169
Fixed Income Fund.................................................................. $14 $45 $77 $169
High Grade Tax Free Fund........................................................... $16 $49 $85 $186
U.S. Government Fund............................................................... $15 $47 $81 $178
Utility Fund....................................................................... $17 $53 NA NA
Value Fund......................................................................... $14 $45 $78 $170
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE EXAMPLE
FOR UTILITY FUND CLASS C SHARES IS BASED ON ESTIMATED DATA FOR THE FISCAL YEAR
ENDING DECEMBER 31, 1994.
The information set forth in the foregoing table and example relates only to
Class C Shares of the Funds. The Funds also offer two additional classes of
shares called Trust Shares and Class B Shares. In general, all expenses are
allocated based upon the daily net assets of each class. Trust Shares bear no
sales load or 12b-1 fee. Class B Shares are subject to a 12b-1 fee of 0.25 of
1%and bear a maximum sales load of 4.00%. See "Other Classes of Shares."
- ------------------------ FINANCIAL ------------------------
- ------------------------ HIGHLIGHTS ------------------------
FIRST UNION BALANCED PORTFOLIO
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.
<TABLE>
<CAPTION>
CLASS C
TRUST SHARES CLASS B INVESTMENT SHARES INVESTMENT SHARES
-------------------------------- ---------------------------------- -----------------
YEAR ENDED YEAR ENDED YEAR ENDED
-------------------------------- ---------------------------------- -----------------
12/31/93 12/31/92 12/31/91** 12/31/93 12/31/92 12/31/91*** 12/31/93+
- ------------------------ --------- --------- ---------- -------- -------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING
OF PERIOD $ 11.41 $ 11.02 $ 10.00 $ 11.41 $ 11.02 $ 10.00 $ 11.54
- ------------------------
INCOME FROM INVESTMENT
OPERATIONS
- ------------------------
Net investment income 0.45 0.46 0.36 0.419 0.42 0.30 0.34
- ------------------------
Net realized and
unrealized gain
(loss) on investments 0.75 0.42 1.03 0.755 0.43 1.08 0.65
- ------------------------ ------ ------ ------ ------ ------ ------- ------
Total from investment
operations 1.20 0.88 1.39 1.174 0.85 1.38 0.99
- ------------------------ ------ ------ ------ ------ ------ ------- ------
LESS DISTRIBUTION
- ------------------------
Dividends to
shareholders from
net investment income (0.45) (0.45) (0.36) (0.419) (0.42) (0.35) (0.34)
- ------------------------
Distributions to
shareholders from net
realized gain on
investment transactions (0.09) (0.04) (0.01) (0.091) (0.04) (0.01) (0.09)
- ------------------------
Distributions in excess
of net investment
income -- -- -- (0.004)(b) -- -- (0.02)(b)
- ------------------------ ------ ------ ------ ------ ------ ------ -------
Total distributions (0.54) (0.49) (0.37) (0.514) (0.46) (0.36) (0.45)
- ------------------------ ------- ------- ------- -------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD $12.07 $11.41 $11.02 $12.07 $11.41 $11.02 $12.08
- ------------------------ ------ ------ ------ ------ ------ ------- ------
TOTAL RETURN* 10.68% 8.21% 15.02% 10.41% 7.94% 11.75% 8.72%
- ------------------------
RATIOS TO AVERAGE NET
ASSETS
- ------------------------
Expenses 0.66% 0.66% 0.68%(a) 0.91% 0.91% 0.92%(a) 1.41%(a)
- ------------------------
Net investment income 3.86% 4.20% 4.86%(a) 3.61% 3.93% 4.38%(a) 3.09%(a)
- ------------------------
SUPPLEMENTAL DATA
- ------------------------
Net assets, end of pe-
riod
(000 omitted) $760,147 $520,232 $247,472 $35,032 $17,408 $334 $65,475
- ------------------------
Portfolio turnover rate 19% 12% 19% 19% 12% 19% 19%
- ------------------------
</TABLE>
* Based on net asset value, which does not reflect the sales load or contin-
gent deferred sales charge, if applicable.
** Reflects operations for the period from April 1, 1991 (commencement of op-
erations) to December 31, 1991.
*** Reflects operations for the period from June 10, 1991 (commencement of op-
erations) to December 31, 1991.
+ Reflects operations for the period from January 26, 1993 (commencement of
operations) to December 31, 1993.
(a) Computed on an annualized basis.
(b) Distributions in excess of net investment income for the year ended De-
cember 31, 1993, were the result of certain book and tax timing differ-
ences. These distributions do not represent a return of capital for fed-
eral income tax purposes.
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 FIXED INCOME PORTFOLIO
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.
<TABLE>
<CAPTION>
TRUST SHARES CLASS B INVESTMENT SHARES
--------------------------- -----------------------------------------------------------
PERIOD ENDED PERIOD ENDED
--------------------------- -----------------------------------------------------------
12/31/93 12/31/92 12/31/91* 12/31/93 12/31/92 12/31/91 12/31/90+ 3/31/90 3/31/89++
- ---------------- -------- -------- --------- -------- -------- -------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD $10.41 $10.54 $10.06 $10.41 $10.54 $ 9.99 $9.72 $9.50 $9.70
- ----------------
INCOME FROM IN-
VESTMENT OPERA-
TIONS
- ----------------
Net investment
income 0.69 0.70 0.71 0.65 0.71 0.73 0.55 0.79 0.10
- ----------------
Net realized
and unrealized
gain (loss) on
investments 0.19 (0.02) 0.56 0.19 (0.06) 0.60 0.24 0.20 (0.14)
- ---------------- ------ ------ ------ ------ ------ ------ ----- ----- -----
Total from
investment
operations 0.88 0.68 1.27 0.84 0.65 1.33 0.79 0.99 (0.04)
- ---------------- ------ ------ ------ ------ ------ ------ ----- ----- -----
LESS DISTRIBU-
TIONS
- ----------------
Dividends to
shareholders
from net
investment
income (0.68) (0.70) (0.71) (0.65) (0.67) (0.70) (0.52) (0.77) (0.16)
- ----------------
Distributions
to shareholders
from net
realized gain
on investments (0.18) (0.11) (0.07) (0.18) (0.11) (0.07) -- -- --
- ----------------
Distributions
in excess of
net investment
income -- -- (0.01)(a) -- -- (0.01)(a) -- -- --
- ---------------- ------ ------ ------ ------ ------ ------ ----- ----- -----
Total distribu- (0.86) (0.81) (0.79) (0.83) (0.78) (0.78) (0.52) (0.77) (0.16)
tions ------ ------ ------ ------ ------ ------ ----- ----- -----
- ----------------
NET ASSET VALUE,
END OF PERIOD $10.43 $10.41 $10.54 $10.42 $10.41 $10.54 $9.99 $9.72 $9.50
- ---------------- ------ ------ ------ ------ ------ ------ ----- ----- -----
TOTAL RETURN** 8.67% 6.64% 13.80% 8.29% 6.39% 13.74% 8.31% 10.51% (0.31)%
- ----------------
RATIOS TO
AVERAGE NET
ASSETS
- ----------------
Expenses 0.66% 0.69% 0.69%(c) 0.93% 0.90% 0.80% 1.01%(c) 1.00% 1.78%(c)
- ----------------
Net investment
income 6.41% 6.67% 7.12%(c) 6.15% 6.79% 7.30% 7.53%(c) 7.52% 6.10%(c)
- ----------------
Expense waiver/
reimbursement
(b) -- -- 0.07%(c) -- -- 0.09% 0.81%(c) 0.50% -- (c)
- ----------------
SUPPLEMENTAL
DATA
- ----------------
Net assets, end
of period (000
omitted) $376,445 $324,068 $256,254 $22,865 $21,488 $17,680 $11,765 $6,496 $11,580
- ----------------
Portfolio
turnover rate 73% 66% 55% 73% 26% 66% 27% 32% 18%
- ----------------
<CAPTION>
CLASS C
INVESTMENT
SHARES
-------------
PERIOD ENDED
-------------
12/31/93+++
- ----------------- -------------
<S> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD $10.57
- -----------------
INCOME FROM IN-
VESTMENT OPERA-
TIONS
- -----------------
Net investment
income 0.58
- -----------------
Net realized
and unrealized
gain (loss) on
investments 0.05
- ----------------- -------------
Total from
investment
operations 0.63
- ----------------- -------------
LESS DISTRIBU-
TIONS
- -----------------
Dividends to
shareholders
from net
investment
income (0.58)
- -----------------
Distributions
to shareholders
from net
realized gain
on investments (0.18)
- -----------------
Distributions
in excess of
net investment
income --
- ----------------- -------------
Total distribu-
tions (0.76)
- ----------------- -------------
NET ASSET VALUE,
END OF PERIOD $10.44
- ----------------- -------------
TOTAL RETURN** 6.08%
- -----------------
RATIOS TO
AVERAGE NET
ASSETS
- -----------------
Expenses 1.57%(c)
- -----------------
Net investment
income 5.42%(c)
- -----------------
Expense waiver/
reimbursement
(b) -- (c)
- -----------------
SUPPLEMENTAL
DATA
- -----------------
Net assets, end
of period (000
omitted) $8,876
- -----------------
Portfolio
turnover rate 73%
- -----------------
</TABLE>
(Continued)
- ------------------------ FINANCIAL ------------------------
- ------------------------ HIGHLIGHTS ------------------------
(CONTINUED)
FIRST UNION FIXED INCOME PORTFOLIO
* Reflects operations for the period from January 4, 1991 (commencement of
operations) to December 31, 1991.
** Based on net asset value, which does not reflect sales load or contingent
deferred sales charge, if applicable.
+ Nine months ended December 31, 1990.
++ Reflects operations for the period from January 28, 1989 (commencement of
operations) to March 31, 1989.
+++ Reflects operations for the period from January 26, 1993 (commencement of
operations) to December 31, 1993.
(a) Distributions in excess of net investment income for the year ended
December 31, 1991, were a result of certain book and tax timing
differences. These differences did not represent a return of capital for
federal income tax purposes for the year ended December 31, 1991.
(b) This voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
(c) Computed on an annualized basis.
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)
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.
<TABLE>
<CAPTION>
CLASS C INVESTMENT
CLASS B INVESTMENT SHARES (C) SHARES (C)
------------------------------------ -------------------
YEAR ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 31, 1993 DECEMBER 31, 1992* DECEMBER 31, 1993**
- ------------------------ ----------------- ------------------ -------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF PERIOD $10.42 $10.00 $10.42
- ------------------------
INCOME FROM INVESTMENT
OPERATIONS
- ------------------------
Net investment income 0.54 0.51 0.47
- ------------------------
Net realized and
unrealized gain on in-
vestments 0.81 0.42 0.81
- ------------------------ ------ ------ ------
Total from investment
operations 1.35 0.93 1.28
- ------------------------
LESS DISTRIBUTIONS
- ------------------------
Dividends to sharehold-
ers from net
investment income (0.54) (0.51) (0.47)
- ------------------------
Distributions to share-
holders from net real-
ized
gain on investment
transactions (0.07) -- (0.07)
- ------------------------ ------ ------ ------
Total distributions (0.61) (0.51) (0.54)
- ------------------------ ------ ------ ------
NET ASSET VALUE, END OF $11.16 $10.42 $11.16
PERIOD ------ ------ ------
- ------------------------
TOTAL RETURN*** 13.25% 9.37% 12.41%
- ------------------------
RATIOS TO AVERAGE NET
ASSETS
- ------------------------
Expenses 0.85% 0.49%(a) 1.35%(a)
- ------------------------
Net investment income 4.99% 5.79%(a) 4.44%(a)
- ------------------------
Expense
waiver/reimbursement
(b) 0.22% 0.62%(a) 0.22%(a)
- ------------------------
SUPPLEMENTAL DATA
- ------------------------
Net assets, end of
period (000 omitted) $101,352 $90,738 $41,030
- ------------------------
Portfolio turnover rate 14% 7% 14%
- ------------------------
</TABLE>
* Reflects operations for the period from February 21, 1992 (commencement of
operations) to December 31, 1992.
** 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 contin-
gent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expenses 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 High-
lights presented above are historical information for Class B and 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.
- ------------------------- FINANCIAL -------------------------
- ------------------------- HIGHLIGHTS -------------------------
FIRST UNION U.S. GOVERNMENT PORTFOLIO
SUPPLEMENTARY INFORMATION
(FOR A SHARE OUTSTANDING THROUGHOUT THE 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
Fnancial 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.
<TABLE>
<CAPTION>
CLASS B CLASS C
TRUST INVESTMENT INVESTMENT
SHARES SHARES SHARES
--------- ---------- ----------
PERIOD PERIOD PERIOD
ENDED ENDED ENDED
12/31/93* 12/31/93** 12/31/93**
- ------------------------------------- --------- ---------- ----------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.25 $10.00 $10.00
- -------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------
Net investment income 0.25 0.68 0.63
- -------------------------------------
Net realized and unrealized gain
(loss) on investments (0.20) 0.05 0.05
- ------------------------------------- ----- ---- ----
Total from investment operations 0.05 0.73 0.68
- -------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------
Dividends to shareholders from net
investment income (0.25) (0.68) (0.63)
- ------------------------------------- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $10.05 $10.05 $10.05
- ------------------------------------- ------ ------ ------
TOTAL RETURN*** 0.49% 7.43% 6.91%
- -------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------
Expenses 0.48%(a) 0.69%(a) 1.19%(a)
- -------------------------------------
Net investment income 7.20%(a) 6.93%(a) 6.44%(a)
- -------------------------------------
Expense adjustment (b) 0.31%(a) 0.31%(a) 0.31%(a)
- -------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------
Net assets, end of period (000 omit-
ted) $14,486 $38,851 236,696
- -------------------------------------
Portfolio turnover rate 39% 39% 39%
- -------------------------------------
</TABLE>
* Reflects operations for the period from September 2, 1993 (commencement of
operations) to December 31, 1993.
** 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 contin-
gent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) The voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
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 VALUE PORTFOLIO
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.
<TABLE>
<CAPTION>
TRUST SHARES
--------------------------------
PERIOD ENDED
--------------------------------
12/31/93 12/31/92 12/31/91*
- ------------------------------------------ --------- -------- ---------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $17.11 $17.08 $14.28
- ------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------
Net investment income 0.52 0.49 0.47
- ------------------------------------------
Net realized and unrealized gain (loss)
on investments 1.12 0.90 3.53
- ------------------------------------------ ---- ---- ----
Total from investment operations 1.64 1.39 4.00
- ------------------------------------------ ---- ---- ----
LESS DISTRIBUTIONS
- ------------------------------------------
Dividends to shareholders from net in-
vestment income (0.52) (0.49) (0.47)
- ------------------------------------------
Distributions to shareholders form net
realized
gain on investment transactions (0.58) (0.87) (0.73)
- ------------------------------------------
Distributions in excess of net investment
income (0.02)(c) -- --
- ------------------------------------------ ------ ------- -------
Total distributions (1.12) (1.36) (1.20)
- ------------------------------------------ ------- ------- -------
NET ASSET VALUE, END OF PERIOD $17.63 $17.11 $17.08
- ------------------------------------------ ------ ------ ------
TOTAL RETURN** 9.71% 8.31% 25.41%
- ------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------
Expenses 0.65% 0.68% 0.69%(b)
- ------------------------------------------
Net investment income 2.98% 2.90% 3.04%(b)
- ------------------------------------------
Expense waiver/reimbursement (a) -- 0.01% 0.08%(b)
- ------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------
Net assets, end of period $463,087 $326,154 $271,391
- ------------------------------------------
Portfolio turnover rate 46% 56% 69%
- ------------------------------------------
</TABLE>
* For the period from January 3, 1991 (commencement of operations) to December
31, 1991.
** Based on net asset value, which does not reflect the sales load or contin-
gent deferred sales charge, if applicable.
(a) This voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
(b) Computed on an annualized basis.
(c) Distributions in excess of net investment income for the period ended De-
cember 31, 1993, were the result of certain book and tax filing differ-
ences. These distributions do not represent a return of capital for federal
income tax purposes.
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 VALUE PORTFOLIO
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.
<TABLE>
<CAPTION>
CLASS B INVESTMENT SHARES
----------------------------------------------------------------------------------------------------
PERIOD ENDED
----------------------------------------------------------------------------------------------------
12/31/93 12/31/92 12/31/91 12/31/90** 3/31/90 3/31/89 3/31/88 3/31/87 3/31/86 3/31/85***
- ------------------------ -------- -------- -------- ---------- ------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $17.11 $17.08 $14.61 $15.12 $14.45 $12.83 $14.66 $12.35 $10.04 $10.00
- ------------------------
INCOME FROM INVESTMENT
OPERATIONS
- ------------------------
Net investment income 0.47 0.44 0.46 0.36 0.54 0.36 0.26 0.15 0.19 0.04
- ------------------------
Net realized and
unrealized gain (loss)
on investments 1.10 0.89 3.17 (0.44) 1.70 2.11 (1.30) 2.38 2.32 0.00
- ------------------------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations 1.57 1.33 3.63 (0.08) 2.24 2.47 (1.04) 2.53 2.51 0.04
- ------------------------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
- ------------------------
Dividends to
shareholders from net
investment income (0.47) (0.43) (0.43) (0.36) (0.57) (0.38) (0.26) (0.13) (0.20) (0.00)
- ------------------------
Distribution to
shareholders from net
realized gain on
investments (0.58) (0.87) (0.73) (0.02) (1.00) (0.47) (0.53) (0.09) (0.00) (0.00)
- ------------------------
Distributions in excess
of net investment -- -- -- (0.05)(a) -- -- -- -- -- --
income ------ ------ ------ ------- ------ ------- ------ ------- ------ ------
- ------------------------
Total distributions (1.05) (1.30) (1.16) (0.43) (1.57) (0.85) (0.79) (0.22) (0.20) (0.00)
- ------------------------ ------ ------ ------ ------ ------ ------- ------- ------ ------ ------
NET ASSET VALUE, END OF
PERIOD $17.63 $17.11 $17.08 $14.61 $15.12 $14.45 $12.83 $14.66 $12.35 $10.04
- ------------------------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL RETURN* 9.31% 7.96% 25.11% (0.51)% 15.54% 19.73% (7.14)% 20.81% 25.29% (0.40%)
- ------------------------
RATIOS TO AVERAGE NET
ASSETS
- ------------------------
Expenses 0.99% 1.01% 0.96% 1.39%(b) 1.55% 1.71% 1.74% 1.97% 2.00% 2.00%(b)
- ------------------------
Net investment income 2.63% 2.57% 2.78% 3.28%(b) 3.42% 2.72% 1.92% 1.41% 2.34% 6.47%(b)
- ------------------------
Expense waiver/
adjustment (d) -- 0.01% 0.09% -- -- -- -- -- -- --
- ------------------------
SUPPLEMENTAL DATA
- ------------------------
Net assets, end of
period $189,983 $169,310 $135,565 $104,637 $95,995 $83,121 $21,914 $23,221 $5,595 $100
- ------------------------
Portfolio turnover
rate**** 46% 56% 69% 13% 11% 24% 16% 20% 20% 0%
- ------------------------
</TABLE>
(See notes on page 15.) (Continued)
- ------------------------- FINANCIAL -------------------------
- ------------------------- HIGHLIGHTS -------------------------
(CONTINUED)
FIRST UNION VALUE PORTFOLIO
<TABLE>
<CAPTION>
CLASS C
INVESTMENT
SHARES
----------
PERIOD
ENDED
----------
12/31/93+
- ------------------------------- ----------
<S> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $17.24
- -------------------------------
INCOME FROM INVESTMENT OPERA-
TIONS
- -------------------------------
Net investment income 0.35
- -------------------------------
Net realized and unrealized
gain (loss) on investments 1.01
- ------------------------------- ------
Total from investment
operations 1.36
- ------------------------------- ------
LESS DISTRIBUTIONS
- -------------------------------
Dividends to shareholders from
net investment income (0.35)
- -------------------------------
Distribution to shareholders
from net realized gain on in-
vestments (0.58)
- -------------------------------
Distributions in excess of net
investment income (0.04)(c)
- ------------------------------- -------
Total distributions (0.97)
- ------------------------------- ------
NET ASSET VALUE, END OF PERIOD $17.63
- ------------------------------- ------
TOTAL RETURN* 7.98%
- -------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------
Expenses 1.48%(b)
- -------------------------------
Net investment income 2.09%(b)
- -------------------------------
Expense waiver/reimbursement
(d) --
- -------------------------------
SUPPLEMENTAL DATA
- -------------------------------
Net assets, end of period $59,953
- -------------------------------
Portfolio turnover rate**** 46%
- -------------------------------
</TABLE>
* Based on net asset value, which does not reflect the sales load or contin-
gent deferred sales charge, if applicable.
**For the nine months ended December 31, 1990.
*** Reflects operations for the period from August 30, 1984 (commencement of
operations) to March 31, 1985.
**** Portfolio turnover rate for periods ending on or after March 31, 1986
include certain U.S. government obligations.
+ Reflects operations for the period from February 2, 1993 (commencement of
operations) to December 31, 1993.
(a) Distributions in excess of net investment income for the period ended De-
cember 31, 1990, were a result of certain book and tax timing differ-
ences. These distributions did not represent a return of capital for fed-
eral income tax purposes for the year ended December 31, 1990.
(b)Computed on an annualized basis.
(c) Distributions in excess of net investment income for the period ended De-
cember 31, 1993, were the result of certain book and tax timing differ-
ences. These distributions do not represent a return of capital for fed-
eral income tax purposes.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
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 -------------------------
OBJECTIVES
- ------------------------- AND POLICIES -------------------------
First Union Equity and Income Funds provide a broad range of objectives and
policies, intended to offer investment alternatives to a large group of
investors with a wide range of investment objectives.
The investment objectives and policies of each Fund are stated below. Each
Fund's investment objective cannot be changed without shareholder approval.
While there is no assurance that each objective will be achieved, the Funds
will endeavor to do so by following the investment policies detailed below.
Unless otherwise indicated, the investment policies of a Fund 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.
- ------------------------- FIRST UNION -------------------------
BALANCED
- ------------------------- PORTFOLIO -------------------------
Objective: Long-term total return through capital appreciation, dividends, and
interest income.
Invests In: Common and preferred stocks for growth, bonds for stable income
flows.
Suitable for: Investors looking for long-term growth of income and capital from
a portfolio of investment grade equity and fixed income
investments.
Key Benefit: Diversity of investments takes advantage of shifts in market
conditions and relative attractiveness of different types of
securities.
DESCRIPTION OF THE FUND
The Balanced Fund seeks long-term total return through capital appreciation,
dividends, and interest income. The Fund invests primarily in a diversified
portfolio of common and preferred stocks, U.S. government securities, high
grade corporate bonds, and money market instruments. Common and preferred
stocks are utilized for growth while bonds provide stable income flows.
The portion of the Fund's total assets invested in common and preferred stocks
will vary according to the Adviser's assessment of market and economic
conditions and outlook. The asset mix of the Fund will normally range between
40-75% common and preferred stocks, 25-50% fixed income securities (including
some convertible securities), and 0-25% money market instruments. Moderate
shifts between types of assets are made in order to maximize returns or reduce
risk. Over the long-term it is anticipated that the Fund's asset mix will
average 60% in common and preferred stocks and 40% in bonds.
TYPES OF INVESTMENTS
The Fund invests in common, preferred and convertible preferred stocks and
bonds of U.S. companies with at least $100 million in equity, listed on major
stock exchanges or traded over-the-counter. The Fund looks at financial
strength, earnings growth and price in relation to current earnings, dividends,
and book value to identify growth opportunities.
The Fund may also invest in American Depositary Receipts ("ADRs") of foreign
companies traded on the New York or American Stock Exchanges or in the over-
the-counter market.
The Fund will only invest in those bonds, including convertible bonds, which
are rated A or higher by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P"), or which, if unrated, are considered to
be of comparable quality by the Adviser. Bonds are selected based on the
outlook for interest rates and their yield in relation to other bonds of
similar quality and maturity. Bond maturities in the portfolio average less
than twenty years.
The Fund also invests in securities which are either issued or guaranteed by
the U.S. government, its agencies, or instrumentalities. These types of
securities include: direct obligations of the U.S. Treasury such as U.S.
Treasury bills, notes and bonds; and notes, bonds, and discount notes of U.S.
government agencies or instrumentalities such as Federal Home Loan Banks,
Federal National Mortgage Association, Government National Mortgage
Association, Banks for Cooperatives, Federal Farm Credit Banks, Tennessee
Valley Authority, Export-Import Bank of the United States, Commodity Credit
Corporation, Federal Financing Bank,
Student Loan Marketing Association, Federal Home Loan Mortgage Corporation, or
National Credit Union Administration.
Some U.S. government agency obligations are backed by the full faith and credit
of the U.S. Treasury. Others in which the Fund may invest are supported by: the
issuer's right to borrow an amount limited to a specific line of credit from
the U.S. Treasury; discretionary authority of the U.S. government to purchase
certain obligations of an agency or instrumentality; or the credit of the
agency or instrumentality.
The Fund may invest short-term in money market instruments; securities issued
and/or guaranteed by the U.S. government, its agencies, or instrumentalities;
and repurchase agreements collateralized by eligible investments.
- ------------------------- FIRST UNION -------------------------
FIXED INCOME
- ------------------------- PORTFOLIO -------------------------
Objective: High level of current income with capital growth as a secondary
objective.
Invests in: A broad range of investment grade debt securities.
Suitable for: Conservative investors who want attractive income.
Key Benefit: Investors can participate in a broad portfolio of fixed income
securities rather than purchasing a single issue.
DESCRIPTION OF THE FUND
The Fixed Income Fund seeks to provide a high level of current income by
investing primarily in a broad range of investment grade debt securities.
Capital growth is a secondary objective. The Fund will normally invest at least
80% of its assets in debt securities. At least 65% of the value of the
portfolio will be invested in fixed income securities.
TYPES OF INVESTMENTS
The Fund will only invest its assets in securities rated A or higher by Moody's
or S&P, or which, if unrated, are considered to be of comparable quality by the
Adviser.
Debt securities may include fixed, adjustable rate or stripped bonds,
debentures, notes, U.S. government securities, and debt securities convertible
into, or exchangeable for, preferred or common stock. Stated final maturity for
these securities may range up to 30 years. The duration of the securities will
not exceed ten years. The Fund intends to maintain a dollar-weighted average
maturity of five years or less. Market-expected average life will be used for
certain types of issues in computing the average maturity.
In normal market conditions the Fund may invest up to 20% of its assets in
money market instruments consisting of: (1) high grade commercial paper,
including master demand notes; (2) obligations of banks or savings and loan
associations having at least $1 billion in deposits, including certificates of
deposit and bankers' acceptances; (3) A-rated or better corporate obligations;
(4) obligations issued or guaranteed by the U.S. government or by any agency or
instrumentality of the U.S. government, as described under the caption "First
Union Balanced Portfolio--Types of Investments"; and (5) repurchase agreements
collateralized by any security listed above.
The Fund may also invest up to 20% of its assets in foreign securities (either
foreign or U.S. securities traded in foreign markets) in order to provide
further diversification. The Fund may also invest in preferred stock; units
which are debt securities with stock or warrants attached; and obligations
denominated in foreign currencies. In making these decisions, the Adviser will
consider such factors as the condition and growth potential of various
economies and securities markets, currency and taxation considerations and
other pertinent financial, social, national and political factors. (See "Other
Investment Policies" and "Foreign Investments".)
The Fund may elect to use options and financial futures for hedging purposes as
described in "Other Investment Policies--Options and Futures" and in the Fund's
Statement of Additional Information. The Fund
may also elect to use currency exchange contracts to manage exchange rate risk
in order to stabilize the U.S. dollar value of a security that it has agreed to
buy or sell.
The Fund will not invest in securities judged to be speculative or of poor
quality.
TEMPORARY INVESTMENTS
For temporary defensive purposes, the Fund may invest up to 100% of its assets
in the money market instruments listed above.
FIRST UNION
- ------------------------- HIGH GRADE TAX FREE -------------------------
- ------------------------- PORTFOLIO -------------------------
(FORMERLY, FIRST UNION INSURED TAX FREE PORTFOLIO)
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 High Grade Tax Free 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 the following
quality standards: rated A or better by Moody's or 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.
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, depending 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.
FIRST UNION
- ------------------------- U.S. GOVERNMENT -------------------------
- ------------------------- PORTFOLIO -------------------------
Objective: High level of current income consistent with stability of
principal.
Invests in: Debt instruments issued or guaranteed by the U.S. government, its
agencies, or instrumentalities.
Suitable for: Conservative investors seeking high current yields plus relative
safety.
Key Benefit: Active management of a blend of securities and maturities to
maximize the opportunities and minimize the risks created by
changing interest rates.
DESCRIPTION OF THE FUND
The U.S. Government Fund seeks a high level of current income consistent with
stability of principal. The Fund seeks to achieve this objective by investing
primarily in debt instruments issued or guaranteed by the U.S. government, its
agencies or instrumentalities ("U.S. government securities"). As a matter of
policy, the Fund will invest at least 65% of the value of its total assets in
such U.S. government securities.
TYPES OF INVESTMENTS
The Fund may invest in:
U.S. government securities. These include: (1) securities which are backed
by the full faith and credit of the U.S. government (for example, U.S.
Treasury bills, notes, and bonds); (2) obligations issued or guaranteed by
U.S. government agencies and instrumentalities, which are supported by any
of the following: (a) the full faith and credit of the U.S. government
(such as participation certificates guaranteed by Government National
Mortgage Association or Federal Housing Administration debentures), (b) the
right of the issuer to borrow an amount limited to a specific line of
credit from the U.S. government (for example, obligations of Federal Home
Loan Banks); (c) discretionary authority of the U.S. government to purchase
the issuer's obligations (for example, obligations of the Federal National
Mortgage Association); (d) the credit of the instrumentality or agency
issuing the obligations (for example, obligations of the Tennessee Valley
Authority, the Bank for Cooperatives and the Federal Home Loan Mortgage
Corporation);
Securities representing ownership interest in mortgage pools ("mortgage-
backed securities"). The yield and maturity characteristics of these
securities correspond to those of the underlying mortgages, with interest
and principal payments (including prepayments, i.e. paying remaining
principal before the mortgage's scheduled maturity) passed through to the
holder of the mortgage-backed securities. The yield and price of mortgage-
backed securities will be affected by prepayments which substantially
shorten effective maturities. Thus, during periods of declining interest
rates, prepayments may be expected to increase, requiring the Fund to
reinvest the proceeds at lower interest rates, making it difficult to
effectively lock in high interest rates. Conversely, mortgage-backed
securities may experience less pronounced declines in value during periods
of rising interest rates;
Securities representing ownership interests in a pool of assets ("asset-
backed securities"), for which automobile and credit card receivables are
the most common collateral. Because much of the underlying collateral is
unsecured, asset-backed securities are structured to include additional
collateral and/or additional credit support to protect against default. The
Adviser evaluates the strength of each particular issue of asset-backed
security, taking into account the structure of the issue and its credit
support. (See "Risk Characteristics of Asset-Backed Securities");
Collateralized mortgage obligations ("CMOs") issued by single-purpose,
stand-alone entities. A CMO is a mortgage-backed security that manages the
risk of repayment by separating mortgage pools into short, medium and long-
term portions. These portions are generally retired in sequence as the
underlying mortgage loans in the mortgage pool are repaid. Similarly, as
prepayments are made, the portion of CMO first to mature will be retired
prior to its maturity, thus having the same effect as the prepayment of
mortgages underlying a mortgage-backed security. The Fund will invest only
in CMOs which are rated AAA by a nationally recognized statistical rating
organization and which may be: (a) collateralized by pools of mortgages in
which each mortgage is guaranteed as to payment of principal and interest
by an agency or instrumentality of the U.S. government; (b) collateralized
by pools of mortgages in which payment of principal and interest is
guaranteed by the issuer and such guarantee is collateralized by U.S.
government securities; or (c) securities in which the proceeds of the
issuance are invested in mortgage securities and payment of the principal
and interest are supported by the credit of an agency or instrumentality of
the U.S. government;
Commercial paper which matures in 270 days or less so long as at least two
of its ratings are high quality ratings by nationally recognized
statistical rating organizations. Such ratings would include: A-1 or A-2 by
S&P, Prime-1 or Prime-2 by Moody's, or F-1 or F-2 by Fitch Investors
Service;
Bonds and other debt securities rated Baa or higher by Moody's or BBB or
higher by S&P, or which, if unrated, are considered to be of comparable
quality by the Adviser;
Securities of other investment companies; and
Repurchase agreements collateralized by eligible investments.
Bonds rated Baa by Moody's or BBB by S&P have speculative characteristics.
Changes in economic conditions or other circumstances are more likely to
lead to weakened capacity to make principal and interest payments than
higher rated bonds.
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 cash and cash
items including such short-term obligations as: commercial paper; obligations
issued or guaranteed by the U.S. government, its agencies, or
instrumentalities; and repurchase agreements collateralized by eligible
investments.
FIRST UNION
- ------------------------- UTILITY -------------------------
- ------------------------- PORTFOLIO -------------------------
Objective: High current income and moderate capital appreciation.
Invests in: Equity and debt securities of utility companies.
Suitable for: Investors seeking current income and long-term growth of income
through equity and fixed income investments in utility companies.
Key Benefit: Diversity through historically reliable cash flows on securities
that typically hold their value through various market conditions.
DESCRIPTION OF THE FUND
The Utility Fund seeks high current income and moderate capital appreciation.
The Fund invests primarily in a diversified portfolio of equity and debt
securities of utility companies that produce, transmit or distribute gas or
electrical energy, as well as those companies that provide communications
facilities, such as telephone and telegraph companies. As a matter of
investment policy, the Fund will invest at least 65% of the value of its total
assets in securities of utility companies. In addition, the Fund can invest up
to 35% of its assets in common stock of non utility companies.
TYPES OF INVESTMENTS
The Fund may invest in:
common and preferred stocks, bonds and convertible preferred stocks of
utility companies selected by the Adviser on the basis of traditional
research techniques, including assessment of earnings and dividend growth
prospects and of the risk and volatility of the individual company's
industry. However, other factors, such as product position, market share,
or profitability may also be considered by the Adviser. The Fund will only
invest its assets in debt securities rated Baa or higher by Moody's or BBB
or higher by S&P, or which, if unrated, are considered to be of comparable
quality by the Adviser;
securities either issued or guaranteed by the U.S. government, its
agencies, or instrumentalities. These types of securities include: direct
obligations of the U.S. Treasury, such as U.S. Treasury bills, notes and
bonds, and notes, bonds, and discount notes of U.S. government agencies or
instrumentalities;
commercial paper, including master demand notes;
foreign securities (either foreign or U.S. securities traded in foreign
markets). The Fund may also invest in obligations denominated in foreign
currencies. In making these decisions, the Adviser will consider such
factors as the condition and growth potential of various economies and
securities markets, currency and taxation considerations and other
pertinent financial, social, national and political factors. (See "Other
Investment Policies" and " Foreign Investments.");
ADRs of foreign companies traded on the New York or American Stock
Exchanges or in the over-the-counter market;
obligations, including certificates of deposit and bankers' acceptances, of
banks or savings and loan associations having at least $1 billion in
deposits and insured by the BIF or the SAIF, including U.S. branches of
foreign banks and foreign branches of U.S. banks;
securities of other investment companies, and
repurchase agreements collateralized by government securities.
Bonds rated Baa by Moody's or BBB by S&P have speculative characteristics.
Changes in economic conditions or other circumstances are more likely to lead
to weakened capacity to make principal and interest payments than higher rated
bonds.
RISK FACTORS
In view of the Fund's investment concentration, investors should be aware of
certain risks associated with the utility industry in general. These include
difficulties in earning adequate returns on investments despite frequent rate
increases, restrictions on operations and increased costs and delays due to
governmental regulations, building or construction delays, environmental
regulations, difficulty of the capital markets in absorbing utility debt and
equity securities, and difficulties in obtaining fuel at reasonable prices.
The Adviser believes that the risks of investing in utility securities can be
reduced. The professional portfolio management techniques used by the Adviser
to attempt to reduce these risks include credit research. The Adviser will
perform its own credit analysis, in addition to using recognized rating
agencies and other sources, including discussions with an issuer's management,
the judgment of other investment analysts, and its own informed judgment. The
Adviser's credit analysis will consider an issuer's financial soundness, its
responsiveness to changes in interest rates and business conditions, and its
anticipated cash flow, interest or dividend coverage, and earnings. In
evaluating an issuer, the Adviser places special emphasis on the estimated
current value of the issuer's assets rather than historical costs.
Bond prices move inversely to interest rates, i.e. as interest rates decline,
the values of the bonds increase and vice versa. The longer the maturity of a
bond, the greater the exposure to market price fluctuations. The same market
factors are reflected in the share price or net asset value of bond funds which
will vary with interest rates. There is no limit on the maturity of the fixed
income securities purchased by the Fund.
- ------------------------- FIRST UNION -------------------------
- ------------------------- VALUE PORTFOLIO -------------------------
Objective: Long-term capital growth with current income as a secondary
objective.
Invests in: Equity securities of U.S. companies with prospects for growth in
earnings and dividends.
Suitable for: Long-term investors seeking capital appreciation with some
income.
Key Benefit:Allows accumulation of assets over the long-term through capital
appreciation of equity investments and reinvestment of dividends.
DESCRIPTION OF THE FUND
The Value Fund seeks long-term capital growth with current income as a
secondary objective. The Fund normally invests at least 75% of its assets in
equity securities of U.S. companies with prospects for growth in earnings and
dividends.
TYPES OF INVESTMENTS
The Fund primarily invests in:
common and preferred stocks, bonds and convertible preferred stock of U.S.
companies with at least $100 million in equity, listed on the New York or
American Stock Exchanges or traded in over-the-counter markets. The Adviser
looks for industries and companies which have potential primarily for
capital growth and secondarily for income;
ADRs of foreign companies traded on the New York or American Stock
Exchanges or in the over-the-counter market;
convertible bonds rated at least BBB by S&P or at least Baa by Moody's, or,
if not rated, determined to be of comparable quality by the Adviser;
money market instruments;
fixed rate notes and bonds and adjustable and variable rate notes of
companies whose common stock the Fund may acquire (for up to 5% of its net
assets);
zero coupon bonds issued or guaranteed by the U.S. government, its agencies
or instrumentalities (for up to 5% of its net assets);
obligations, including certificates of deposit and bankers' acceptances, of
banks or savings and loan associations having at least $1 billion in
deposits and insured by the BIF or the SAIF, including U.S. branches of
foreign banks and foreign branches of U.S. banks;
prime commercial paper including master demand notes; and
repurchase agreements collateralized by eligible investments.
Bonds rated BBB by S&P or Baa by Moody's have speculative characteristics.
Changes in economic conditions or other circumstances are more likely to lead
to weakened capacity to make principal and interest payments than higher rated
bonds.
- ------------------------- OTHER INVESTMENT -------------------------
- ------------------------- POLICIES -------------------------
The Funds have adopted the following practices for specific types of
investments.
DOWNGRADES
If any security invested in by any of the Funds 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 may consider doing so.
REPURCHASE AGREEMENTS
The Funds may invest in repurchase agreements. Repurchase agreements are
agreements by which a 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 the creditworthiness of the firms with which the Funds enter into
repurchase agreements.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Funds may purchase portfolio securities on a when-issued or delayed
delivery basis. In such cases, a 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 the securities 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 Funds may lend portfolio securities
on a short-term or long-term basis to broker/dealers, banks, or other
institutional borrowers of securities. The Funds 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 investment policy which
cannot be changed without shareholder approval, the Funds will not lend any of
their assets except portfolio securities up to 5% (in the case of the Balanced
and Value Funds), 15% (in the case of the Fixed Income, High Grade Tax Free,
and Utility Funds) or one-third (in the case of the U.S. Government Fund) of
the value of their total assets.
FOREIGN INVESTMENTS
The Balanced, Fixed Income, Utility and Value Funds may invest in foreign
securities or securities denominated in or indexed to foreign currencies. In
addition, the Fixed Income Fund may invest in foreign currencies. These may
involve additional risks. Specifically, they may be affected by the strength of
foreign currencies relative to the U.S. dollar, or by political or economic
developments in foreign countries. Accounting procedures and government
supervision may be less stringent than those applicable to U.S. companies.
There may be less publicly available information about a foreign company than
about a U.S. company. Foreign markets may be less liquid or more volatile than
U.S. markets and may offer less protection to investors. It may also be more
difficult to enforce contractual obligations abroad than would be the case in
the United States because of differences in the legal systems. Foreign
securities may be subject to foreign taxes, which may reduce yield, and may be
less marketable than comparable U.S. securities. All these factors are
considered by the Adviser before making any of these types of investments.
RISK CHARACTERISTICS OF ASSET-BACKED SECURITIES
The U.S. Government Fund may invest in asset-backed securities. Asset-backed
securities are created by the grouping of certain governmental, government-
related and private loans, receivables and other lender assets into pools.
Interests in these pools are sold as individual securities. Payments from the
asset pools may be divided into several different tranches of debt securities,
with some tranches entitled to receive regular installments of principal and
interest, other tranches entitled to receive regular installments of interest,
with principal payable at maturity or upon specified call dates, and other
tranches only entitled to receive payments of principal and accrued interest at
maturity or upon specified call dates. Different tranches of securities will
bear different interest rates, which may be fixed or floating.
Because the loans held in the asset pool often may be prepaid without penalty
or premium, asset-backed securities are generally subject to higher prepayment
risks than most other types of debt instruments. Prepayment risks on mortgage
securities tend to increase during periods of declining mortgage interest
rates, because many borrowers refinance their mortgages to take advantage of
the more favorable rates. Depending upon market conditions, the yield that the
U.S. Government Fund receives from the reinvestment of such prepayments, or any
scheduled principal payments, may be lower than the yield on the original
mortgage security. As a consequence, mortgage securities may be a less
effective means of "locking in" interest rates than other types of debt
securities having the same stated maturity and may also have less potential for
capital appreciation. For certain types of asset pools, such as collateralized
mortgage obligations, prepayments may be allocated to one tranche of securities
ahead of other tranches, in order to reduce the risk of prepayment for the
other tranches.
Prepayments may result in a capital loss to the U.S. Government Fund to the
extent that the prepaid mortgage securities were purchased at a market premium
over their stated amount. Conversely, the prepayment of mortgage securities
purchased at a market discount from their stated principal amount will
accelerate the recognition of interest income by the U.S. Government Fund which
would be taxed as ordinary income when distributed to the shareholders.
The credit characteristics of asset-backed securities also differ in a number
of respects from those of traditional debt securities. The credit quality of
most asset-backed securities depends primarily upon the credit quality of the
assets underlying such securities, how well the entity issuing the securities
is insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement to such
securities.
OPTIONS AND FUTURES
All of the Funds, with the exception of the High Grade Tax Free Fund, may
engage in options and futures transactions. Options and futures transactions
are intended to enable a Fund to manage market, interest rate or exchange rate
risk. The Funds do not use these transactions for speculation or leverage.
Options and futures may be volatile investments and involve certain risks which
might result in lowering the Funds' returns. The three principal areas of risk
include: (1) lack of a liquid secondary market for a futures or option contract
when the Fund wants to close out its position; (2) imperfect correlation of
changes in the prices of futures or options contracts with the prices of the
securities in the Fund's portfolio; and (3) incorrect forecasts by the Adviser
of interest rates, market values or other economic factors. In these events,
the Fund may lose money on the futures contract or option.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
Each 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) no Fund will own
more than 3% of the total outstanding voting stock of any one investment
company, (2) no Fund may invest more than 5% of its total assets in any one
investment company and (3) no Fund may 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 Funds will not borrow money directly or through reverse repurchase
agreements or pledge securities, except under certain circumstances, a Fund may
borrow up to one-third of the value of its total assets and pledge up to 10%
(in the case of Value Fund), 15% (in the case of the Balanced, Fixed Income,
High Grade Tax Free, and Utility Funds), or one-third (in the case of U.S.
Government Fund) of the value of those assets to secure such borrowings.
RESTRICTED AND ILLIQUID SECURITIES
The Funds may invest up to 10% of their net assets in securities which are
subject to restrictions on resale under federal securities law. In the case of
the Fixed Income and U.S. Government Funds, this restriction is not applicable
to commercial paper issued under Section 4(2) of the Securities Act of 1933.
Balanced, Fixed Income, High Grade Tax Free, and Value Funds may invest up to
10% of their net assets in illiquid securities. U.S. Government and Utility
Funds may invest up to 15% of their net assets in illiquid securities. With
respect to the Balanced, Fixed Income, U.S. Government, and Utility Funds,
illiquid securities include certain restricted securities not determined by the
Trustees to be liquid, non-negotiable time deposits, and repurchase agreements
providing for settlement in more than seven days after notice. With respect to
the High Grade Tax Free and Value Funds, illiquid securities include 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, no Fund may invest more
than 5% of its total assets in securities of one issuer (except cash or cash
items, repurchase agreements collateralized by U.S. government securities and
U.S. government obligations) or own more than 10% of the outstanding voting
securities of one issuer.
CONCENTRATION OF INVESTMENTS
The Utility Fund will not purchase any security of any issuer if, as a result,
more than 25% of its total assets would be invested in any one industry other
than the utilities industry, except that the Fund may invest more than 25% of
the value of its total assets in securities issued or guaranteed by the U.S.
government, its agencies, or instrumentalities.
SELLING SHORT
The Balanced Fund will not make short sales of securities, except in certain
limited circumstances.
Certain of the Funds have adopted the following limitations, which may be
changed by the Trustees without shareholder approval.
NEW ISSUERS
The Balanced Fund will not invest more than 5% of the value of its total assets
in securities of issuers (or guarantors, where applicable) which have records
of less than three years of continuous operations, including the operation of
any predecessor.
"NON-ACTIVE" SECURITIES
The Fixed Income, High Grade Tax Free, and Value Funds will not invest more
than 10% of their 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 Balanced, Fixed Income, High Grade Tax Free, and Value Funds may not invest
more than 5% of their 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 -------------------------
- ------------------------- -------------------------
CLASSES OF INVESTMENT SHARES
You may select a method of purchasing Shares which is most beneficial to you by
choosing either Class B Shares or Class C Shares. Your decision will be based
on the amount of your intended purchase and how long you expect to hold the
Shares.
Each Fund offers two types of Investment Shares: Class B Shares and Class C
Shares. Each Share of the Fund represents an identical interest in the
investment portfolio of the Fund and has the same rights. The difference
between Class B Shares and Class C Shares is based on purchasing arrangements
and distribution expenses. Class B Shares have a sales charge included at the
time of purchase and are subject to a lower Rule 12b-1 distribution fee. This
means that investors can purchase fewer Class B Shares for the same initial
investment than Class C Shares due to the initial sales charge, but will
receive higher dividends per Share due to the lower distribution expenses.
Class C Shares impose a contingent deferred sales charge ("CDSC") on most
redemptions made within six years of purchase and have higher distribution
costs resulting from greater Rule 12b-1 distribution fees. This means that
investors may purchase more Class C Shares than Class B Shares for the same
initial investment, but will receive lower dividends per Share.
Investors should consider whether, during the anticipated life of their
investment in the Fund, the accumulated Rule 12b-1 fee and the CDSC on Class C
Shares would be less than the initial sales charge and accumulated Rule 12b-1
fee on Class B Shares purchased at the same time. Investors must also consider
how that differential would be offset by the higher yield of Class B Shares.
SHARE PRICE CALCULATION
The net asset value of a Fund Share equals the market value of all 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 Class B Shares adds an applicable sales charge, and the
redemption proceeds of Class C Shares deduct an applicable CDSC.)
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 a 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 a Fund may differ slightly from that of
Class B Shares and Class C Shares of the same Fund due to the variability in
daily net income resulting from different distribution charges for each class
of shares. The net asset value for each Fund will fluctuate for all three
classes.
PERFORMANCE INFORMATION
A 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 Funds may make available certain information about the
performance of Class B Shares and Class C Shares. It is generally reported
using total return, yield and tax equivalent yield (for the High Grade Tax Free
Fund).
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 yields of Class B Shares and Class C Shares are 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 High Grade Tax Free 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 Class B Shares and Class C Shares of the Funds and, therefore, may
not correlate to the dividends or other distributions paid to shareholders.
Performance information for the Class B Shares and Class C 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
Class B Shares, Class C Shares, and Trust Shares of a Fund. Because 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 Class B Shares also contributes to a lower total return for Class
B Shares. In addition, Class C Shares are subject to similar non-recurring
charges, such as the CDSC, which, if excluded, would increase the total return
for Class C Shares.
From time to time, a Fund may advertise its performance using certain rankings
published in financial publications and/or compare its performance to certain
indices.
- ------------------------- HOW TO BUY -------------------------
- ------------------------- SHARES -------------------------
Shares may be purchased at a price equal to their net asset value per Share
next determined after receipt of an order plus a sales charge which, at the
election of the purchaser, may be imposed either (i) at the time of purchase
(in the case of Class B Shares), or (ii) on a contingent deferred basis (in the
case of Class C Shares).
MINIMUM INVESTMENT
You may invest as often as you want in any of the Funds. There is a $1,000
minimum initial investment requirement which may be waived in certain
situations. For further information, please contact the Mutual Funds Group of
First Union Brokerage Services ("FUBS"), a subsidiary of First Union, at 1-800-
326-3241. Subsequent investments may be in any amounts.
WHAT SHARES COST
Class B Shares are sold at their net asset value plus a sales charge as
follows:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS A
A PERCENTAGE OF PERCENTAGE OF NET
AMOUNT OF TRANSACTION PUBLIC OFFERING PRICE AMOUNT INVESTED
--------------------- --------------------- -----------------
<S> <C> <C>
$ 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%
</TABLE>
Shareholders of record in any First Union Fund at October 12, 1990, and the
members of their immediate family, will be exempt from sales charges on any
future purchases in any of the First Union Funds. Employees of First Union,
Federated Securities Corp. (the "distributor" or "FSC") and their affiliates,
and certain trust accounts for which First Union or its affiliates act in an
administrative, fiduciary, or custodial capacity, board members of First Union
and the above-mentioned entities and the members of the immediate families of
any of these persons, will also be exempt from sales charges.
Sales charges may be reduced in some cases. You may be entitled to a reduction
if: (1) you make a single large purchase, (2) you, your spouse and/or children
(under 21 years) make Fund purchases on the same day, (3) you make an
additional purchase to add to an existing account, (4) you sign a letter of
intent indicating your intention to purchase at least $100,000 of Shares over
the next 13 months, (5) you reinvest in a Fund within 30 days of redemption, or
(6) you combine purchases of two or more First Union Funds which include front-
end sales charges. In all of these cases, you must notify the distributor of
your intentions in writing in order to qualify for a sales charge reduction.
For more information, consult the Funds' Statements of Additional Information
or the distributor.
Class C Shares are sold at net asset value per Share without the imposition of
a sales charge at the time of purchase. Shares redeemed within six years of
their purchase will be subject to a CDSC according to the following schedule:
<TABLE>
<CAPTION>
YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
------------------ -------------------
<S> <C>
First 4.0%
Second 3.0%
Third 2.5%
Fourth 2.0%
Fifth 1.5%
Sixth 0.5%
Seventh None
</TABLE>
No CDSC will be imposed on: (1) the portion of redemption proceeds attributable
to increases in the value of the account due to increases in the net asset
value per Share, (2) Shares acquired through reinvestment of dividends and
capital gains, (3) Shares held for more than six years after the end of the
calendar month of
acquisition, (4) accounts following the death or disability of a shareholder,
or (5) minimum required distributions to a shareholder over the age of 70 1/2
from an IRA or other retirement plan.
CONVERSION FEATURE
Class C Shares include all Shares purchased pursuant to the deferred sales
charge alternative which have been outstanding for less than the period ending
seven years after the end of the month in which the shareholder's order to
purchase Class C Shares was accepted. At the end of this seven year period,
Class C Shares may automatically convert to Class B Shares, in which case the
Shares will no longer be subject to the higher Rule 12b-1 distribution fee
which is assessed on Class C Shares. Such conversion will be on the basis of
the relative net asset values of the two classes, without the imposition of any
sales load, fee or other charge. The purpose of the conversion feature is to
relieve the holders of the Class C Shares that have been outstanding for a
period of time sufficient for the distributor to have been compensated for
distribution expenses related to the Class C Shares from most of the burden of
such distribution-related expenses.
For purposes of conversion to Class B Shares, Class C Shares purchased through
the reinvestment of dividends and distributions paid on Class C Shares in a
shareholder's Fund acount will be considered to be held in a separate sub-
account. Each time any Class C Shares in the shareholder's Fund account (other
than those in the sub-account) convert to Class B Shares, an equal pro rata
portion of the Class C Shares in the sub-account will also convert to Class B
Shares.
The availability of the conversion feature is subject to the granting of an
exemptive order (the "Order") by the Securities and Exchange Commission (the
"SEC") or the adoption of a rule permitting such conversion. In the event that
the Order or rule ultimately issued by the SEC requires any conditions
additional to those described in this prospectus, shareholders will be
notified.
BY TELEPHONE OR IN PERSON
You may purchase Class B Shares and Class C Shares by telephone from the Mutual
Funds Group of FUBS at 1-800-326-3241 or you may place the order in person at
any First Union branch location. Shares are sold on days on which the New York
Stock Exchange and the Federal Reserve Wire System are open for business.
METHOD OF PAYMENT
Payment may be made by check or federal funds or by debiting your account at
First Union. All purchase orders received prior to 4:00 p.m. (Eastern time) on
a regular business day are processed at that day's offering price. Payment is
required within five business days.
SHAREHOLDER ACCOUNTS
As transfer agent for the Funds, State Street Bank and Trust Company of Boston,
Massachusetts ("State Street Bank") maintains a Share account for each
shareholder of record. Share certificates are not issued.
MINIMUM BALANCE
Due to the high cost of maintaining smaller holdings, each Fund reserves the
right to redeem a shareholder's Shares if, as a result of redemptions, their
aggregate value drops below $1,000. Reductions in value that result solely from
market activity will not trigger an involuntary redemption. The Funds will
notify shareholders in writing 30 days before taking such action to allow them
to increase their holdings to at least the minimum level.
DEALER CONCESSION
For sales of Shares of the Funds, 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. However, the distributor, in
its sole discretion, may uniformly offer to pay to all dealers selling Shares
of the Funds, all or a portion of the sales charge it normally retains. If
accepted by the dealer, such additional payments will be predicated upon the
amount of Fund Shares sold. 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.
HOW TO CONVERT
YOUR INVESTMENT
- ------------------------- FROM ONE -------------------------
- ------------------------- FIRST UNION -------------------------
FUND TO ANOTHER
FIRST UNION FUND
As a shareholder, you have the privilege of exchanging your Shares for shares
of another First Union Fund.
As long as the First Union Fund in which you are invested will not be adversely
affected, you may switch among the First Union Funds within the Trust. Before
the exchange, you must call FUBS at 1-800-326-3241 to receive a prospectus for
the First Union Fund into which you want to exchange. Read the prospectus
carefully. Each exchange represents the sale of shares of one First Union Fund
and the purchase of shares in another, which may produce a gain or loss for tax
purposes.
You may exchange Class B Shares of one First Union Fund for Class B Shares of
any other First Union Fund, or Class C Shares of one First Union Fund for Class
C Shares of any other First Union Fund by calling toll free 1-800-326-3241 or
by writing to FUBS. Telephone exchange instructions may be recorded. Shares
purchased by check are eligible for exchange after the check clears, which
could take up to seven days after receipt of the check. Exchanges are subject
to the $1,000 minimum initial purchase requirement for each First Union Fund.
An exchange order must comply with the requirements for a redemption and
purchase order and must specify the dollar value or number of shares to be
exchanged. Once the order is received, the Shares already owned will be
redeemed at current net asset value and, upon receipt of the proceeds by the
First Union Fund, shares of the other First Union Fund will be purchased at
their offering price determined after the proceeds from such redemption become
available, which may be up to seven days after such redemption. Orders for
exchanges received by a First Union Fund prior to 4:00 p.m. (Eastern time) on
any day the First Union Funds are open for business will be executed as of the
close of business that day. Orders for exchanges received after 4:00 p.m.
(Eastern time) on any business day will be executed at the close of the next
business day.
When exchanging into and out of load and no-load shares of First Union Funds,
shareholders who have already paid a sales charge once at the time of purchase,
including shares obtained through the reinvestment of dividends, will not have
to pay an additional sales charge on an exchange.
The exchange of Class C Shares will not be subject to a CDSC. However, if the
shareholder redeems Class C Shares within six years of the original purchase, a
CDSC will be imposed. For purposes of computing the CDSC, the length of time
the shareholder has owned Class C Shares will be measured from the date of
original purchase and will not be affected by the exchange.
If reasonable procedures are not followed by a Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
EXCHANGE RESTRICTIONS
Although the Trust has no intention of terminating or modifying the exchange
privilege, it reserves the right to do so at any time. Excessive trading can
impact the interests of shareholders. Therefore, the Trust reserves the right
to terminate the exchange privilege of any shareholder who makes more than five
exchanges of shares of the First Union Funds in a year or three exchanges in a
calendar quarter.
The exchange privilege is only available in states where shares of the First
Union Fund being acquired may legally be sold. Before the exchange, a
shareholder must receive a prospectus of the First Union Fund for which the
exchange is being made.
- ------------------------- HOW TO -------------------------
- ------------------------- REDEEM SHARES -------------------------
Shares are redeemed at their net asset value next determined after a proper
redemption request has been received, less, in the case of Class C Shares, any
applicable CDSC.
You may redeem Shares in three ways: (1) by telephoning FUBS at 1-800-326-3241,
(2) by written request to FUBS or State Street Bank, or (3) in person at First
Union. Telephone redemption instructions may be recorded.
The Funds redeem Shares at their net asset value next determined after a Fund
receives the redemption request. Redemptions will be made on days on which a
Fund computes the net asset value of Shares. 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. Proceeds will be wired to the
shareholder's account at First Union or a check will be sent to the address of
record, normally within five (but in no case longer than seven) days after a
proper request for redemption has been received.
If reasonable procedures are not followed by a Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
ADDITIONAL
- ------------------------- SHAREHOLDER -------------------------
- ------------------------- SERVICES -------------------------
TELEPHONE SERVICES
You may authorize electronic transfers of money to purchase Shares in any
amount or to redeem any or all Shares in an account. The service may be used
like an "electronic check" to move money between a bank account and an account
in the Fund with a single telephone call.
SYSTEMATIC INVESTMENT PLAN
You may arrange for systematic monthly or quarterly investments in your account
in amounts of $25 or more by directly debiting your bank account.
TAX SHELTERED PLANS
You may open a pension and profit sharing account in any First Union Fund
(except those Funds having an objective of providing tax free income),
including Individual Retirement Accounts ("IRAs"), Rollover IRAs, Keogh Plans,
Corporate Profit-Sharing, Pension and Salary-Reduction Plans. For details,
including fees and application forms, call First Union toll free at 1-800-669-
2136 or write to First Union National Bank of North Carolina, Retirement
Services, 301 South College Street, Charlotte, NC 28288-1169.
SYSTEMATIC WITHDRAWAL PLAN
If you are a shareholder with an account valued at $10,000 or more, you may
have amounts of $100 or more sent from your account to you on a regular monthly
or quarterly basis.
MANAGEMENT
- ------------------------- OF -------------------------
- ------------------------- FIRST UNION FUNDS -------------------------
Responsibility for the overall management of First Union Funds rests with its
Trustees and officers. Other service providers include the Funds' Distributor,
Investment Adviser, Custodian, Transfer Agent, Legal Counsel, and Independent
Auditors.
INVESTMENT ADVISER
Professional investment supervision for the Funds 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.
R. Dean Hawes is a Vice President of First Union National Bank of North
Carolina, N.A., and is the Director of Employee Benefit Portfolio Management.
Mr. Hawes joined First Union in 1981 after spending five years with Merrill
Lynch, Pierce, Fenner, & Smith and Townsend Investments. Mr. Hawes has served
as the portfolio manager of the Balanced Fund since its inception in January
1991.
Thomas L. Ellis is a Vice President of First Union National Bank of North
Carolina, N.A. Prior to joining First Union in 1985, Mr. Ellis had seventeen
years of investment management and sales experience including eleven years
marketing short and medium-term obligations to institutional investors, plus
three years as head trader for First Boston Corporation. Mr. Ellis has managed
the Fixed Income Fund since its inception in July 1988.
Robert S. 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
High Grade Tax Free Fund since its inception in February 1992.
Rollin C. Williams is a Vice President of First Union National Bank of North
Carolina, N.A. and has over 24 years of investment management experience. Mr.
Williams was the Head of Fixed Income Investments at Dominion Trust Company
from 1988 until its acquisition by First Union Corporation. Mr. Williams has
served as the portfolio manager for the U.S. Government Fund since its
inception in December 1992.
Malcolm M. Trevillian is a Vice President of First Union National Bank of North
Carolina, N.A., and has been with First Union since 1986. During that time, he
has served as a portfolio manager for various pension and profit-sharing
accounts maintained with First Union. Mr. Trevillian has managed the Utility
Fund since its inception in January 1994.
William T. Davis, Jr. is a Vice President of First Union National Bank of North
Carolina, N.A., and has been with First Union since 1986. Prior to that, Mr.
Davis served as a securities analyst for Seibels Bruce (Insurance) Group. Mr.
Davis has served as the portfolio manager of the Value Fund since March 1991.
DISTRIBUTION OF INVESTMENT SHARES
FSC, a subsidiary of Federated Investors, is the principal distributor for the
Funds. It is a Pennsylvania corporation organized on November 14, 1969, and is
the principal distributor for a number of investment companies.
Each class of a Fund has adopted a separate plan for distribution of Shares
permitted by Rule 12b-1 under the Investment Company Act of 1940 (the "Plans"),
whereby each 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 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 0.10% for Class B Shares of the Fixed Income Fund, 0.25% for Class B
Shares of the Balanced, High Grade Tax Free, U.S. Government, Utility, and
Value Funds, and 0.75% for Class C Shares of a 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 Shares.
The Funds make no payments in connection with the sale of Shares other than the
Rule 12b-1 fees paid to its distributor. The distributor, however, may pay a
sales commission to brokers (including FUBS) in connection with the sale of
Class C Shares. Except as set forth in the next paragraph, the Funds do not pay
for unreimbursed expenses of the distributor. Since the Funds' Plans are
"compensation" type plans, however, future Rule 12b-1 fees may permit recovery
of such amounts or may result in a profit to the distributor.
The distributor may sell, assign or pledge its right to receive Rule 12b-1 fees
and CDSCs to finance payments made to brokers (including FUBS) in connection
with the sale of Class C Shares. First Union Corporation currently serves as
principal lender in this financing program. Actual distribution expenses for
Class C Shares at any given time may exceed the Rule 12b-1 fees and payments
received pursuant to CDSCs. These unrecovered amounts, plus interest thereon,
will be carried forward and paid from future Rule 12b-1 fees and payments
received through CDSCs. If a Plan were terminated or not continued, the Funds
would not be contractually obligated to pay for any expenses not previously
reimbursed by the Funds or recovered through CDSCs.
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 Plans and will not be an expense of
the Funds.
FUND ADMINISTRATION
Federated Administrative Services ("FAS"), a subsidiary of Federated Investors,
provides the Funds with administrative personnel and services necessary to
operate the Funds, such as legal and accounting services, for a specified fee
which is detailed below.
State Street Bank serves as custodian and transfer agent, providing dividend
disbursement and other shareholder services for the Funds.
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 -------------------------
- ------------------------- -------------------------
Each Fund pays annual advisory and administrative fees and certain expenses.
ADVISORY AND ADMINISTRATIVE FEES
For managing their investment and business affairs, the Funds pay an annual fee
to First Union. The Adviser receives an annual investment advisory fee equal to
.50 of 1% of each of the Equity and Income Funds' average daily net assets. The
Adviser may voluntarily choose to waive a portion of its fee or reimburse the
Funds for certain operating expenses.
The Trust also pays a fee for administrative services. FAS provides these at an
annual rate as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE TRUST
------------------- -----------------------------------
<S> <C>
.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
</TABLE>
Unless waived, the administrative fee received during any fiscal year shall
aggregate at least $50,000 per First Union Fund.
EXPENSES OF THE FUNDS AND INVESTMENT SHARES
Holders of Shares pay their allocable portion of Trust and respective 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.
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 Funds' expenses under the Rule 12b-1 Plans are incurred solely by the Class
B Shares 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 of a
Fund.
SHAREHOLDER
- ------------------------ RIGHTS AND -------------------------
- ------------------------ PRIVILEGES -------------------------
VOTING RIGHTS
Each share of a Fund is entitled to one vote in Trustee elections and other
voting matters submitted to shareholders. All shares of all classes of each
First Union Fund in the Trust have equal voting rights, except that in matters
affecting only a particular First Union Fund or class, only shares of that
First Union Fund or class are entitled to vote. As of February 4, 1994, First
Union National Bank, Charlotte, North Carolina, acting in various capacities
for numerous accounts, was the owner of record of 501,994 shares (80.44%) of
Utility Fund--Class B Investment Shares; 63,510,816 shares (98.9%) of Balanced
Fund--Trust Shares; 35,104,402 shares (95.1%) of Fixed Income Fund--Trust
Shares; 25,746,543 shares (96.0%) of Value Fund--Trust Shares; and 1,221,044
shares (81.5%) of U.S. Government Fund--Trust Shares, and therefore, may, for
certain purposes, be deemed to control such Funds and be able to affect the
outcome of certain matters presented for a vote of shareholders.
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 a 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 non-bank 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, First Union, is subject to and in compliance with such banking
laws and regulations.
Sullivan & Cromwell has advised First Union that First Union may perform the
services for the Funds set forth in the investment advisory agreement, this
prospectus, and the Statements 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 First Union from continuing to
perform such services for the Funds or from continuing to purchase Shares for
the accounts of its customers. If First Union were prohibited from acting as
investment adviser to the Funds, it is expected that the Trustees would
recommend to the Funds' shareholders that they approve a new investment
adviser selected by the Trustees. It is not expected that the Funds'
shareholders would suffer any adverse financial consequences (if another
adviser with equivalent abilities to First Union is found) as a result of any
of these occurrences.
- ------------------------- DISTRIBUTIONS -------------------------
- ------------------------- AND TAXES -------------------------
Each 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 and paid quarterly for the Value and Balanced Funds;
dividends are declared and paid monthly for the Fixed Income and Utility Funds;
and dividends are declared daily and paid monthly for the High Grade Tax Free
and U.S. Government Funds. 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 FUBS in writing.
CAPITAL GAINS
Any net long-term capital gains realized by the Funds 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 Funds pay no federal income tax if they meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and will
receive the special tax treatment afforded to such companies.
Each First Union Fund is treated as a single, separate entity for federal
income tax purposes so that income (including capital gains) and losses
realized by one First Union Fund will not be combined for tax purposes with
those realized by other First Union Funds.
Except as set forth under "High Grade Tax Free Fund Additional Tax
Information," all shareholders, unless otherwise exempt, are required to pay
federal income tax on any dividends and other distributions, whether in shares
or cash, for all the Funds. Detailed information concerning the status of
dividend and capital gains distributions for federal income tax purposes is
mailed to shareholders annually.
Shareholders are urged to consult their own tax advisers regarding the status
of their accounts under state and local tax laws.
HIGH GRADE TAX FREE FUND ADDITIONAL TAX INFORMATION
Shareholders of High Grade Tax Free 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 the Fund 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 ------------------------
First Union Equity and Income Funds offer three classes of shares: Class B
Shares and Class C Shares for individuals and other customers of First Union
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.
The stated advisory fee is the same for all classes of the Funds. 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 same Fund.
The amount of dividends payable to 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.
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- ------------------------- ADDRESSES -------------------------
- ------------------------- -------------------------
- --------------------------------------------------------------------------------
First Union Funds 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
- --------------------------------------------------------------------------------
Federated Securities Corp., Distributor
331968
3031007 A-R (2/94)
FIRST UNION VALUE PORTFOLIO
(A PORTFOLIO OF FIRST UNION FUNDS)
TRUST SHARES
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
Supplement to Combined Statement of Additional Information dated
February 28, 1994
Effective September 1, 1994, First Union Value
Portfolio (the "Fund") will offer Class D Investment
Shares ("Class D Shares"). Class D Shares will be
similar to Class C Shares in all respects except:
Class D Shares will have a contingent deferred sales
charge of 1.00%, which terminates after one year, and
the Class D Shares will not automatically convert into
Class B Shares after seven years.
Effective September 1, 1994, Class C Shares will assess
a shareholder service fee of 0.25% of the average daily
net asset value, of which all or a portion may be
waived at any time.
September 1, 1994
FEDERATED SECURITIES CORP.
Distributor
G00389-07 (9/94)
FIRST UNION VALUE PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
TRUST SHARES
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectus of Trust Shares, Class B Investment Shares,
or Class C Investment Shares for First Union Value Portfolio, dated
February 28, 1994. This Statement is not a prospectus itself. To
receive a copy of the Trust Shares' prospectus, write First Union
National Bank of North Carolina, Capital Management Group, 1200 Two
First Union Center, Charlotte, North Carolina 28288-1156 or call
1-800-326-2584. To receive a copy of the Class B Investment Shares' or
Class C Investment Shares' prospectus, write First Union Brokerage
Services,
Inc., One First Union Center, 301 S. College Street, Charlotte, North
Carolina 28288-1173 or call
1-800-326-3241.
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
- ---------------------------------------------------------------
Types of Investments 1
When-Issued and Delayed Delivery
Transactions 1
Lending of Portfolio Securities 2
Reverse Repurchase Agreements 2
Options Transactions 2
Futures Transactions 3
Portfolio Turnover 4
Investment Limitations 4
TRUST MANAGEMENT 6
- ---------------------------------------------------------------
Officers and Trustees 6
Fund Ownership 7
Trustee Liability 7
INVESTMENT ADVISORY SERVICES 7
- ---------------------------------------------------------------
Adviser to the Fund 7
Advisory Fees 7
BROKERAGE TRANSACTIONS 7
- ---------------------------------------------------------------
ADMINISTRATIVE SERVICES 8
- ---------------------------------------------------------------
PURCHASING SHARES 8
- ---------------------------------------------------------------
Distribution Plans (Class B and Class C
Investment Shares) 9
DETERMINING NET ASSET VALUE 10
- ---------------------------------------------------------------
Determining Market Value of Securities 10
REDEEMING SHARES 10
- ---------------------------------------------------------------
Redemption in Kind 10
TAX STATUS 11
- ---------------------------------------------------------------
The Fund's Tax Status 11
Shareholders' Tax Status 11
TOTAL RETURN 11
- ---------------------------------------------------------------
YIELD 11
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 12
- ---------------------------------------------------------------
FINANCIAL STATEMENTS 12
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
First Union Value Portfolio (the "Fund") is a portfolio of First Union Funds
(the "Trust"). The Trust was established as a Massachusetts business trust under
a Declaration of Trust dated August 30, 1984. On January 4, 1993, the name of
the Trust was changed from "The Salem Funds" to "First Union Funds." In
addition, the name of the Fund was changed from "The Salem Growth Portfolio" to
"The Salem Value Portfolio" on December 19, 1991.
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"). This Combined Statement of Additional Information
relates to the above-mentioned Shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's primary investment objective is long-term capital growth. Current
income is a secondary objective. The Fund pursues these investment objectives by
investing primarily in equity securities of companies with prospects for growth
in earnings and dividends. The investment objectives cannot be changed without
approval of shareholders.
TYPES OF INVESTMENTS
The Fund may invest in common stocks, preferred stocks, corporate bonds,
debentures, notes, warrants, and put options on stocks.
CORPORATE DEBT SECURITIES
Corporate debt securities may bear fixed, fixed and contingent, or
variable rates of interest. They may involve equity features such as
conversion or exchange rights, warrants for the acquisition of common
stock of the same or a different issuer, participations based on
revenues, sales, or profits, or the purchase of common stock in a unit
transaction (where corporate debt securities and common stock are offered
as a unit).
RESTRICTED SECURITIES
The Fund expects that any restricted securities would be acquired either
from institutional investors who originally acquired the securities in
private placements or directly from the issuers of the securities in
private placements. Restricted securities and securities that are not
readily marketable may sell at a discount from the price they would bring
if freely marketable.
MONEY MARKET INSTRUMENTS
The Fund may invest in the following money market instruments:
instruments of domestic banks and savings and loans if they have
capital, surplus, and undivided profits of over $100,000,000, or if the
principal amount of the instrument is insured in full by the Bank
Insurance Fund ("BIF"), or the Savings Association Insurance Fund
("SAIF"), both of which are administered by the Federal Deposit
Insurance Corporation ("FDIC"); and
prime commercial paper (rated A-1 by Standard & Poor's Corporation, or
Prime-1 by Moody's Investors Service, Inc.).
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. government obligations in which the Fund may invest
generally include obligations issued or guaranteed by U.S. government
agencies or instrumentalities. These securities are backed by:
the discretionary authority of the U.S. government to purchase certain
obligations of agencies or
instrumentalities; or
the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
Federal Farm Credit Banks;
Federal Home Loan Banks;
Federal National Mortgage Association;
Student Loan Marketing Association; and
Federal Home Loan Mortgage Corporation.
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
objectives and policies, not for investment leverage.
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the securities
to be purchased are segregated on the Fund's records at the trade date. These
securities are marked to market daily and maintained until the transaction is
settled.
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.
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.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement, the Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate.
The use of reverse repurchase agreements may enable the Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not ensure that
the Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be repurchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of Shares of the
Fund, the Fund may attempt to hedge all or a portion of its portfolio through
the purchase of put options on portfolio securities and listed put options on
financial futures contracts for portfolio securities. The Fund may also write
covered call options on its portfolio securities to attempt to increase its
current income.
The Fund will maintain its positions in securities, option rights, and
segregated cash subject to puts and calls until the options are exercised,
closed, or have expired.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series.
The Fund currently does not intend to invest more than 5% of its net assets in
options transactions.
Options which the Fund will trade must be listed on national securities
exchanges. Exchanges on which such options currently are traded are the Chicago
Board Options Exchange and the New York, American, Pacific and Philadelphia
Stock Exchanges ("Exchanges").
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts.
These options will be used only to protect portfolio securities against
decreases in value resulting from market factors such as an anticipated
increase in interest rates.
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of instrument called for in
the contract ("going short") and the buyer who agrees to take delivery of
the instrument ("going long") at a certain time in the future. Financial
futures contracts call for the delivery of particular debt instruments
issued or guaranteed by the U.S. Treasury or by specified agencies or
instrumentalities of the U.S. government. If the Fund would enter into
financial futures contracts directly to hedge its holdings of fixed
income securities, it would enter into contracts to deliver securities at
an undetermined price (i.e., "go short") to protect itself against the
possibility that the prices of its fixed income securities may decline
during the Fund's anticipated holding period.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at an undetermined
price, the purchase of a put option on a futures contract entitles (but
does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price. Generally, if
the hedged portfolio securities decrease in value during the term of an
option, the related futures contracts will also decrease in value and the
put option will increase in value. In such an event, the Fund will
normally close out its option by selling an identical put option. If the
hedge is successful, the proceeds received by the Fund upon the sale of
the put option will be large enough to offset both the premium paid by
the Fund for the put option plus the realized decrease in value of the
hedged securities.
Alternately, the Fund may exercise its put option to close out the
position. To do so, it would enter into a futures contract of the type
underlying the option. If the Fund neither closes out nor exercises an
option, the option will expire on the date provided in the option
contract, and only the premium paid for the contract will be lost.
PURCHASING PUT OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A put
option gives the Fund, in return for a premium, the right to sell the
underlying security to the writer (seller) at a specified price during
the term of the option.
WRITING COVERED CALL OPTIONS
The Fund may also write covered call options to generate income. As
writer of a call option, the Fund has the obligation upon exercise of the
option during the option period to deliver the underlying security upon
payment of the exercise price.
The Fund may only sell listed call options either on securities held in
its portfolio or on securities which it has the right to obtain without
payment of further consideration (or has segregated cash in the amount of
any such additional consideration).
FUTURES TRANSACTIONS
The Fund may enter into currency and other financial futures contracts and write
options on such contracts. The Fund intends to enter into such contracts and
related options for hedging purposes. The Fund will enter into futures on
securities, currencies, or index-based futures contracts in order to hedge
against changes in interest or exchange rates or securities prices. A futures
contract on securities or currencies is an agreement to buy or sell securities
or currencies during a designated month at whatever price exists at that time. A
futures contract on a securities index does not involve the actual delivery of
securities, but merely requires the payment of a cash settlement based on
changes in the securities index. The Fund does not make payment or deliver
securities upon entering into a futures contract. Instead, it puts down a margin
deposit, which is adjusted to reflect changes in the value of the contract and
which remains in effect until the contract is terminated.
The Fund may sell or purchase currency and other financial futures contracts.
When a futures contract is sold by the Fund, the profit on the contract will
tend to rise when the value of the underlying securities or currencies declines
and to fall when the value of such securities or currencies increases. Thus, the
Fund sells futures contracts in order to offset a possible decline in the profit
on its securities or currencies. If a futures contract is purchased by the Fund,
the value of the contract will tend to rise when the value of the underlying
securities or currencies increases and to fall when the value of such securities
or currencies declines.
The Fund intends to purchase put and call options on currency and other
financial futures contracts for hedging purposes. A put option purchased by the
Fund would give it the right to assume a position as the seller of a futures
contract. A call option purchased by the Fund would give it the right to assume
a position as the purchaser of a futures contract. The purchase of an option on
a futures contract requires the Fund to pay a premium. In exchange for the
premium, the Fund becomes entitled to exercise the benefits, if any, provided by
the futures contract, but is not required to take any action under the contract.
If the option cannot be exercised profitably before it expires, the Fund's loss
will be limited to the amount of the premium and any transaction costs.
The Fund may enter into closing purchase and sale transactions in order to
terminate a futures contract and may buy or sell put and call options for the
purpose of closing out its options positions. The Fund's ability to enter into
closing transactions depends on the development and maintenance of a liquid
secondary market. There is no assurance that a liquid secondary market will
exist for any particular contract or at any particular time. As a result, there
can be no assurance that the Fund will be able to enter into an offsetting
transaction with respect to a
particular contract at a particular time. If the Fund is not able to enter into
an offsetting transaction, the Fund will continue to be required to maintain the
margin deposits on the contract and to complete the contract according to its
terms, in which case it would continue to bear market risk on the transaction.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and thereby insure
that the use of such futures contracts is unleveraged.
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 objectives. The portfolio turnover rates for the fiscal
years ended December 31, 1993 and 1992 were 46% and 56%, respectively.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of transactions.
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 and then only in amounts
not in excess of 10% of the value of its total assets; provided that
while borrowings exceed 5% of the Fund's total assets, any such
borrowings will be repaid before additional investments are made. 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.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase,
25% or more of the value of its total assets would be invested in any one
industry.
However, the Fund may at times invest 25% or more of the value of its
total assets in securities issued or guaranteed by the U.S. government,
its agencies, or instrumentalities.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities or commodity contracts.
However, the Fund may enter into futures contracts on financial
instruments or currency and sell or buy options on such contracts.
RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its net assets in
securities subject to restrictions on resale under federal securities
laws.
PURCHASING MORE THAN 10% OF ANY CLASS
The Fund will not purchase more than 10% of any class of outstanding
voting securities of any issuer.
INVESTING TO EXERCISE CONTROL
The Fund will not purchase securities for the purpose of exercising
control over the issuer of securities.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except that it may purchase or
hold corporate or government bonds, debentures, notes, certificates of
indebtedness or other debt securities of an issuer, repurchase
agreements, or other transactions which are permitted by the Fund's
investment objectives and policies or the Declaration of Trust, or lend
portfolio securities valued at not more than 5% of its total assets to
broker/dealers.
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
objectives, policies, and limitations.
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
10% 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, including limited partnership
interests in real estate, although it may invest in securities of
companies whose business involved the purchase or sale of real estate or
in securities which are secured by real estate or interests in real
estate.
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of its assets, the Fund will not
purchase the securities of any issuer (other than cash, cash items, or
securities issued or guaranteed by 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.
ACQUIRING SECURITIES
The Fund will not purchase more than 10% of the voting securities of any
one issuer.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, other mineral
exploration or development programs, or leases, although it may purchase
the publicly traded securities of companies engaging in such activities.
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.
The above investment limitations cannot be changed without shareholder approval.
The following limitation, however, may be changed by the Board of Trustees (the
"Trustees") without shareholder approval. Shareholders will be notified before
any material changes in these limitations become 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 securities
of unseasoned issuers, including their predecessors, that have been in
operation for less than three years.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of its net assets in warrants,
including those acquired in units or attached to other securities. To
comply with certain state restrictions, the Fund will limit its
investment in such warrants not listed on the New York or American Stock
Exchange to 2% of its net assets. (If state restrictions change, this
latter restriction may be revised without notice to shareholders.) For
purposes of this investment restriction, warrants acquired by the Fund in
units or attached to securities may be deemed to be without value.
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.
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.
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".
TRUST MANAGEMENT
- --------------------------------------------------------------------------------
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>
<S> <C> <C>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME THE TRUST DURING PAST FIVE YEARS
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, and President and Treasurer, Federated Advisers, Federated Management, 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 Vice President, Federated Administrative Services; Director, Private
and Assistant Label Management, Federated Investors; Vice President and Assistant
Treasurer 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, 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 shall 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
- --------------------------------------------------------------------------------
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 respective prospectus.
For the fiscal years ended December 31, 1993, 1992, and 1991, the Adviser earned
advisory fees of $3,016,457, $2,208,618, and $1,374,240, of which $0, $0, and
$213,100, was 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.
For the fiscal years ended December 31, 1993, 1992, and 1991, the Fund paid
$894,400, $642,338, and $536,139, respectively, in commissions on brokerage
transactions.
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
respective prospectus.
For the fiscal years ended December 31, 1993, 1992, and 1991, the Fund incurred
$526,836, $407,134 and $296,644 in administrative service costs, of which $0,
$17,263, and $0, was voluntarily waived, respectively.
PURCHASING SHARES
- --------------------------------------------------------------------------------
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 Shares is explained in the respective
prospectus under "How to Buy Shares."
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Class B Investment
Shares through:
quantity discounts and accumulated purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
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 puchases 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.
LETTER OF INTENT
If a shareholder intends to purchase at least $100,000 of Shares in the
Fund over the next 13 months, the sales charge may be reduced by signing
a letter of intent to that effect. This letter of intent includes a
provision for a sales charge adjustment depending on the amount actually
purchased within the 13-month period and a provision for the custodian to
hold up to 4.0% of the total amount intended to be purchased in escrow
(in Shares) until such purchase is completed.
The amount held in escrow will be applied to the shareholder's account at
the end of the 13-month period, unless the amount specified in the letter
of intent is not purchased. In this event, an appropriate number of
escrowed Shares may be redeemed in order to realize the difference in the
sales charge.
This letter of intent will not obligate the shareholder to purchase
Shares, but if the shareholder does, each purchase during the period will
be at the sales charge applicable to the total amount intended to be
purchased. This letter may be dated as of a prior date to include any
purchases made within the past 90 days.
REINVESTMENT PRIVILEGE
If Shares in the Fund have been redeemed, the shareholder has a one-time
right, within 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 First
Union 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 First Union Funds with a sales charge, and
$70,000 in Shares of the 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 PLANS (CLASS B AND CLASS C INVESTMENT SHARES)
With respect to the Class B and Class C Investment Shares classes of the Fund,
the Trust has adopted distribution plans (the "Plans") pursuant to Rule 12b-1
which was promulgated by the Securities and Exchange Commission ("SEC") pursuant
to the Investment Company Act of 1940. The Plans permit the payment of fees to
brokers for distribution and administrative services and to administrators for
administrative services as to Class B and Class C Investment Shares. The Plans
are designed to (i) stimulate brokers to provide distribution and administrative
support services to the Fund and holders of Class B and Class C Investment
Shares and (ii) stimulate administrators to render administrative support
services to the Fund and holders of Class B and Class C Investment 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 Class
B and Class C Investment Shares; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as the
Fund reasonably requests for its Class B and Class C Investment Shares.
By adopting the Plans, 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 Plans 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 years ended December 31, 1993, 1992, and 1991, brokers and
administrators (financial institutions) received fees in the amount of $694,708,
$372,419, and $295,340, respectively.
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 Plans for
administrative services, and if paid, will be reimbursed by the Adviser
and not the Fund.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value of Shares generally changes each day. The days on which net
asset values of Shares are calculated by the Fund are described in the
respective prospectus.
DETERMINING MARKET VALUE OF SECURITIES
The market values of the Fund's portfolio securities, other than options, 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 unlisted equity securities, the latest bid prices; or
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 60 days or less at the time of purchase, at
amortized cost 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.
Over-the-counter put options will be valued at the mean between the bid and the
asked prices.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request, plus a contingent deferred sales charge, if
applicable. 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 respective prospectus
under "How to Redeem 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
- --------------------------------------------------------------------------------
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.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional Shares.
CAPITAL GAINS
Shareholders will pay federal income tax at capital gains rates on
long-term capital gains distributed to them regardless of how long they
have held the Shares.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's average annual total returns for Trust Shares for the one-year period
ended December 31, 1993 and for the period from December 31, 1990 (start of
performance) to December 31, 1993 were 9.71% and 14.22%, respectively.
The Fund's average annual total returns for Class B Investment Shares for the
one-year and five-year periods ended December 31, 1993 and for the period from
April 12, 1985 (start of performance) to December 31, 1993 were 4.95%, 11.67%,
and 12.27%, respectively.
The Fund's cumulative total return for Class C Investment Shares for the period
from January 25, 1993 (start of performance) to December 31, 1993 was 4.97%.
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 a quarterly
reinvestment of all dividends and distributions.
Cumulative total returns 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 eleven months of
investment activity since the start of performance.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for Trust Shares was 2.97% for the thirty-day period ended
December 31, 1993. The Fund's yields for Class B Investment Shares and Class C
Investment Shares were 2.60% and 2.22%, respectively, for the thirty-day 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 any class of
Shares over a thirty-day period by the maximum offering price per share of any
class on the last day of the period. This value is then annualized using
semi-annual compounding. This means that the amount of income generated during
the thirty-day period is assumed to be generated each month over a twelve-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by any 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 broker/dealers charge fees in
connection with services provided in conjunction with an investment in any class
of Shares, the performance will be reduced for those shareholders paying those
fees.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
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. ("LIPPER"), an independent mutual fund rating
service, ranks funds in various fund categories by making comparative
calculations using total return. Total return assumes the reinvestment of all
capital gains distributions and income dividends and takes into account any
change in net asset value over a specified period of time. From time to time,
the Fund will quote its Lipper ranking in the "growth funds" category in
advertising and sales literature.
LIPPER GROWTH FUND AVERAGE is an average of the total returns for 251 growth
funds tracked by Lipper Analytical Services, Inc., an independent mutual fund
rating service.
LIPPER GROWTH FUND INDEX is an average of the net asset-valuated total returns
for the top 30 growth funds tracked by Lipper Analytical Services, Inc., an
independent mutual fund rating service.
DOW JONES INDUSTRIAL AVERAGE ("DJIA") is an unmanaged index representing share
prices of major industrial corporations, public utilities, and transportation
companies. Produced by the Dow Jones & Company, it is cited as a principal
indicator of market conditions.
_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.
STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a composite
index of common stocks in industry, transportation, financial, and public
utility companies, can be used to compare to the total returns of funds whose
portfolios are invested primarily in common stocks. In addition, the Standard &
Poor's index assumes reinvestments of all dividends paid by stocks listed on
its index. Taxes due on any of these distributions are not included, nor are
brokerage or other fees calculated in the Standard & Poor's figures.
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
- --------------------------------------------------------------------------------
The financial statements for First Union Value 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 inside back cover of the respective prospectus.
3031001B (1/94)
FIRST UNION FIXED INCOME PORTFOLIO
(A PORTFOLIO OF FIRST UNION FUNDS)
TRUST SHARES
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
Supplement to Combined Statement of Additional Information dated
February 28, 1994
Effective September 1, 1994, First Union Fixed Income
Portfolio (the "Fund") will offer Class D Investment
Shares ("Class D Shares"). Class D Shares will be
similar to Class C Shares in all respects except:
Class D Shares will have a contingent deferred sales
charge of 1.00%, which terminates after one year, and
the Class D Shares will not automatically convert into
Class B Shares after seven years.
Effective September 1, 1994, Class C Shares will assess
a shareholder service fee of 0.25% of the average daily
net asset value, of which all or a portion may be
waived at any time.
September 1, 1994
FEDERATED SECURITIES CORP.
Distributor
G00389-03 (9/94)
FIRST UNION FIXED INCOME PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
TRUST SHARES
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectus of Trust Shares, Class B Investment Shares,
or Class C Investment Shares for First Union Fixed Income Portfolio,
dated February 28, 1994. This Statement is not a prospectus itself. To
receive a copy of the Trust Shares' prospectus, write First Union
National Bank of North Carolina, Capital Management Group, 1200 Two
First Union Center, Charlotte, North Carolina 28288-1156 or call
1-800-326-2584. To receive a copy of the Class B Investment Shares' or
Class C Investment Shares' prospectus, write First Union Brokerage
Services,
Inc., One First Union Center, 301 S. College Street, Charlotte, North
Carolina 28288-1173 or call
1-800-326-3241.
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 OBJECTIVES AND POLICIES 1
- ---------------------------------------------------------------
Types of Investments 1
Restricted and Illiquid Securities 1
When-Issued and Delayed Delivery
Transactions 1
Options Transactions 2
Futures Transactions 3
Lending of Portfolio Securities 4
Reverse Repurchase Agreements 4
Foreign Currency Transactions 4
Portfolio Turnover 4
Investment Limitations 4
TRUST MANAGEMENT 7
- ---------------------------------------------------------------
Officers and Trustees 7
Fund Ownership 7
Trustee Liability 8
INVESTMENT ADVISORY SERVICES 8
- ---------------------------------------------------------------
Adviser to the Fund 8
Advisory Fees 8
BROKERAGE TRANSACTIONS 8
- ---------------------------------------------------------------
ADMINISTRATIVE SERVICES 9
- ---------------------------------------------------------------
PURCHASING SHARES 9
- ---------------------------------------------------------------
Distribution Plans (Class B and
Class C Investment Shares) 10
DETERMINING NET ASSET VALUE 10
- ---------------------------------------------------------------
Determining Market Value of Securities 11
REDEEMING SHARES 11
- ---------------------------------------------------------------
Redemption in Kind 11
TAX STATUS 11
- ---------------------------------------------------------------
The Fund's Tax Status 11
Shareholders' Tax Status 11
TOTAL RETURN 12
- ---------------------------------------------------------------
YIELD 12
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 12
- ---------------------------------------------------------------
FINANCIAL STATEMENTS 13
- ---------------------------------------------------------------
APPENDIX 14
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
First Union Fixed Income 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. On January 4, 1993, the name
of the Trust was changed from "The Salem Funds" to "First Union Funds."
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"). This Combined Statement of Additional Information
relates to the above-mentioned Shares of the Fund.
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
The primary investment objective of the Fund is to provide a high level of
current income. Capital growth is a secondary objective. The investment
objective cannot be changed without approval of shareholders.
TYPES OF INVESTMENTS
The Fund invests primarily in investment grade debt securities which include:
domestic issues of corporate debt obligations (rated A or higher by Moody's
Investors Service, Inc. or Standard & Poor's Corporation); and
obligations issued or guaranteed by the U.S. government, its agencies, or
instrumentalities.
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. government obligations in which the Fund may invest
generally include obligations issued or guaranteed by U.S. government
agencies or instrumentalities. These securities are backed by:
the discretionary authority of the U.S. government to purchase certain
obligations of agencies or
instrumentalities; or
the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S.
government are:
Federal Farm Credit Banks;
Federal Home Loan Banks;
Federal National Mortgage Association;
Student Loan Marketing Association; and
Federal Home Loan Mortgage Corporation.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Board of Trustees ("Trustees") to determine the liquidity of
certain restricted securities is permitted under a Securities and Exchange
Commission ("SEC") Staff position set forth in the adopting release for Rule
144A under the Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive,
safe-harbor for certain secondary market transactions involving securities
subject to restrictions on resale under federal securities laws. The Rule
provides an exemption from registration for resales of otherwise restricted
securities to qualified institutional buyers. The Rule was expected to further
enhance the liquidity of the secondary market for securities eligible for resale
under Rule 144A. The Fund believes that the Staff of the SEC has left the
question of determining the liquidity of all restricted securities (eligible for
resale under Rule 144A) for determination by the Trustees. The Trustees consider
the following criteria in determining the liquidity of certain restricted
securities:
the frequency of trades and quotes for the security;
the number of dealers willing to purchase or sell the security and the number of
other potential buyers;
dealer undertakings to make a market in the security; and
the nature of the security and the nature of the marketplace trades.
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 or yield for the Fund. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the securities
to be purchased are segregated on the Fund's records at the trade date. These
securities are marked to market daily and maintained until the transaction is
settled.
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.
OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of the
Fund, the Fund may attempt to hedge all or a portion of its portfolio through
the purchase of put options on portfolio securities and listed put options on
financial futures contracts for portfolio securities. The Fund may also write
covered call options on its portfolio securities to attempt to increase its
current income.
The Fund will maintain its positions in securities, option rights, and
segregated cash subject to puts and calls until the options are exercised,
closed, or have expired.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts.
These options will be used only to protect portfolio securities against
decreases in value resulting from market factors such as an anticipated
increase in interest rates.
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of instrument called for in
the contract ("going short") and the buyer who agrees to take delivery of
the instrument ("going long") at a certain time in the future. Financial
futures contracts call for the delivery of particular debt instruments
issued or guaranteed by the U.S. Treasury or by specified agencies or
instrumentalities of the U.S. government. If the Fund would enter into
financial futures contracts directly to hedge its holdings of fixed
income securities, it would enter into contracts to deliver securities at
an undetermined price (i.e., "go short") to protect itself against the
possibility that the prices of its fixed income securities may decline
during the Fund's anticipated holding period.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at an undetermined
price, the purchase of a put option on a futures contract entitles (but
does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price. Generally, if
the hedged portfolio securities decrease in value during the term of an
option, the related futures contracts will also decrease in value and the
put option will increase in value. In such an event, the Fund will
normally close out its option by selling an identical put option. If the
hedge is successful, the proceeds received by the Fund upon the sale of
the put option will be large enough to offset both the premium paid by
the Fund for the put option plus the realized decrease in value of the
hedged securities.
Alternately, the Fund may exercise its put option to close out the
position. To do so, it would enter into a futures contract of the type
underlying the option. If the Fund neither closes out nor exercises an
option, the option will expire on the date provided in the option
contract, and only the premium paid for the contract will be lost.
WRITING COVERED OPTIONS
The Fund may write (i.e., sell) covered call and put options. By writing
a call option, the Fund becomes obligated during the term of the option
to deliver the securities underlying the option upon payment of the
exercise price. By writing a put option, the Fund becomes obligated
during the term of the option to purchase the securities underlying the
option at the exercise price if the option is exercised. The Fund also
may write straddles (combinations of covered puts and calls on the same
underlying security).
The Fund may only write "covered" options. This means that so long as the
Fund is obligated as the writer of a call option, it will own the
underlying securities subject to the option or, in the case of call
options on U.S. Treasury bills, the Fund might own substantially similar
U.S. Treasury bills.
The Fund will be considered "covered" with respect to a put option it
writes if, so long as it is obligated as the writer of the put option, it
deposits and maintains with its custodian in a segregated account liquid
assets having a value equal to or greater than the exercise price of the
option.
The principal reason for writing call or put options is to obtain,
through a receipt of premiums, a greater current return than would be
realized on the underlying securities alone. The Fund receives a premium
from writing a call or put option which it retains whether or not the
option is exercised. By writing a call option, the Fund might lose the
potential for gain on the underlying security while the option is open,
and
by writing a put option, the Fund might become obligated to purchase the
underlying security for more than its current market price upon exercise.
PURCHASING OPTIONS
The Fund may purchase call and put options for the purpose of offsetting
previously written call and put options of the same series. If the Fund
is unable to effect a closing purchase transaction with respect to
covered option it has written, the Fund will not be able to sell the
underlying securities or dispose of assets held in a segregated account
until the options expire or are exercised.
The Fund currently does not intend to invest more than 5% of its net
assets in options transactions.
OPTIONS TRADING MARKETS
Options which the Fund will trade must be listed on national securities
exchanges. Exchanges on which such options currently are traded are the
Chicago Board Options Exchange and the New York, American, Pacific and
Philadelphia Stock Exchanges ("Exchanges").
FUTURES TRANSACTIONS
The Fund may enter into currency and other financial futures contracts and write
options on such contracts. The Fund intends to enter into such contracts and
related options for hedging purposes. The Fund will enter into futures on
securities, currencies, or index-based futures contracts in order to hedge
against changes in interest or exchange rates or securities prices. A futures
contract on securities or currencies is an agreement to buy or sell securities
or currencies during a designated month at whatever price exists at that time. A
futures contract on a securities index does not involve the actual delivery of
securities, but merely requires the payment of a cash settlement based on
changes in the securities index. The Fund does not make payment or deliver
securities upon entering into a futures contract. Instead, it puts down a margin
deposit, which is adjusted to reflect changes in the value of the contract and
which remains in effect until the contract is terminated.
The Fund may sell or purchase currency and other financial futures contracts.
When a futures contract is sold by the Fund, the profit on the contract will
tend to rise when the value of the underlying securities or currencies declines
and to fall when the value of such securities or currencies increases. Thus, the
Fund sells futures contracts in order to offset a possible decline in the profit
on its securities or currencies. If a futures contract is purchased by the Fund,
the value of the contract will tend to rise when the value of the underlying
securities or currencies increases and to fall when the value of such securities
or currencies declines.
The Fund intends to purchase put and call options on currency and other
financial futures contracts for hedging purposes. A put option purchased by the
Fund would give it the right to assume a position as the seller of a futures
contract. A call option purchased by the Fund would give it the right to assume
a position as the purchaser of a futures contract. The purchase of an option on
a futures contract requires the Fund to pay a premium. In exchange for the
premium, the Fund becomes entitled to exercise the benefits, if any, provided by
the futures contract, but is not required to take any action under the contract.
If the option cannot be exercised profitably before it expires, the Fund's loss
will be limited to the amount of the premium and any transaction costs.
The Fund may enter into closing purchase and sale transactions in order to
terminate a futures contract and may buy or sell put and call options for the
purpose of closing out its options positions. The Fund's ability to enter into
closing transactions depends on the development and maintenance of a liquid
secondary market. There is no assurance that a liquid secondary market will
exist for any particular contract or at any particular time. As a result, there
can be no assurance that the Fund will be able to enter into an offsetting
transaction with respect to a particular contract at a particular time. If the
Fund is not able to enter into an offsetting transaction, the Fund will continue
to be required to maintain the margin deposits on the contract and to complete
the contract according to its terms, in which case it would continue to bear
market risk on the transaction.
Although futures and options transactions are intended to enable the Fund to
manage market, interest rate or exchange rate risk, unanticipated changes in
interest rates, exchange rates or market prices could result in poorer
performance than if it had not entered into these transactions. Even if the
adviser correctly predicts interest or exchange rate movements, a hedge could be
unsuccessful if changes in the value of the Fund's futures position did not
correspond to changes in the value of its investments. This lack of correlation
between the Fund's futures and securities or currencies positions may be caused
by differences between the futures and securities or currencies markets or by
differences between the securities or currencies underlying the Fund's futures
position and the securities or currencies held by or to be purchased for the
Fund.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of
cash and cash equivalents, equal to the underlying commodity value of the
futures contracts (less any related margin deposits), will be deposited in a
segregated account with the Fund's custodian (or the broker, if legally
permitted) to collateralize the position and, thereby, insure that the use of
such futures contracts is unleveraged.
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.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement, the Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate.
The use of reverse repurchase agreements may enable the Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not ensure that
the Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
FOREIGN CURRENCY TRANSACTIONS
As one way of managing exchange rate risk, the Fund may enter into forward
currency exchange contracts (agreements to purchase or sell currencies at a
specified price and date). The exchange rate for the transaction (the amount of
currency a Fund will deliver and receive when the contract is completed) is
fixed when the Fund enters into the contract. The Fund usually will enter into
these contracts to stabilize the U.S. dollar value of a security it has agreed
to buy or sell. The Fund intends to use these contracts to hedge the U.S. dollar
value of a security it already owns, particularly if the Fund expects a decrease
in the value of the currency in which the foreign security is denominated.
Although the Fund will attempt to benefit from using forward contracts, the
success of its hedging strategy will depend on the Adviser's ability to predict
accurately the future exchange rates between foreign currencies and the U.S.
dollar. The value of the Fund's investments denominated in foreign currencies
will depend on the relative strengths of those currencies and the U.S. dollar,
and the Fund may be affected favorably or unfavorably by changes in the exchange
rates or exchange control regulations between foreign currencies and the dollar.
Changes in foreign currency exchange rates also may affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by the Fund. The Fund may also purchase and sell options related to
foreign currencies in connection with hedging strategies.
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
years ended December 31, 1993 and 1992 were 73% and 66%, respectively.
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 that 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 and then only in amounts
not in excess of 5% of the value of its total assets or 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. The Fund has no present intention to
borrow money in excess of 5% of the value of its net assets during the
coming fiscal year.
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.
However, the Fund may enter into futures contracts on financial
instruments or currency and sell or buy options on such contracts.
RESTRICTED SECURITIES
The Fund will not invest more than 10% of the value of its net assets in
securities subject to restrictions on resale under 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
objectives, policies, and limitations.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities in
accordance with its investment objectives, policies and limitations or
lend portfolio securities valued at more than 15% of its total assets to
broker/dealers.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more 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 U.S. government, its
agencies or instrumentalities.
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of its 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.
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 10% of the value 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 securities
of unseasoned issuers, including their predecessors, that have been in
operation for less than three years.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of its net assets in warrants,
including those acquired in units or attached to other securities. To
comply with certain state restrictions, the Fund will limit its
investment in such warrants not listed on the New York or American Stock
Exchange to 2% of its net assets. (If state restrictions change, this
latter restriction may be revised without notice to shareholders.) For
purposes of this investment restriction, warrants acquired by the Fund in
units or attached to securities may be deemed to be without value.
Although not fundamental restrictions or policies requiring a shareholder vote,
the Fund has also undertaken 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.
In order to comply with registration requirements of a certain state, the Fund
will not invest in real estate limited partnerships.
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.
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.
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".
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>
<S> <C> <C>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME THE TRUST DURING PAST FIVE YEARS
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, and President and Treasurer, Federated Advisers, Federated Management, 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 Vice President, Federated Administrative Services; Director, Private
and Assistant Label Management, Federated Investors; Vice President and Assistant
Treasurer 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, 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 shall 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 respective prospectus.
For the fiscal years ended December 31, 1993, 1992, and 1991, the Adviser earned
advisory fees of $1,894,693, $1,531,707, and $836,644, of which $0, $0, and
$109,677, was 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.
For the fiscal years ended December 31, 1993, 1992, and 1991, the Fund paid
$7,908, $15,573, and $8,504 in commissions on brokerage transactions.
ADMINISTRATIVE SERVICES
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Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
respective prospectus.
For the fiscal years ended December 31, 1993, 1992, and 1991, the Fund incurred
$331,342, $282,292, and $174,214 in administrative service costs, of which $0,
$0, and $750 was voluntarily waived, respectively.
PURCHASING SHARES
- --------------------------------------------------------------------------------
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 Shares is explained in the respective
prospectus under "How to Buy Shares."
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Class B Investment
Shares through:
quantity discounts and accumulated purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
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 puchases 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.
LETTER OF INTENT
If a shareholder intends to purchase at least $100,000 of Shares in the
Fund over the next 13 months, the sales charge may be reduced by signing
a letter of intent to that effect. This letter of intent includes a
provision for a sales charge adjustment depending on the amount actually
purchased within the 13-month period and a provision for the custodian to
hold up to 4.0% of the total amount intended to be purchased in escrow
(in Shares) until such purchase is completed.
The amount held in escrow will be applied to the shareholder's account at
the end of the 13-month period, unless the amount specified in the letter
of intent is not purchased. In this event, an appropriate number of
escrowed Shares may be redeemed in order to realize the difference in the
sales charge.
This letter of intent will not obligate the shareholder to purchase
Shares, but if the shareholder does, each purchase during the period will
be at the sales charge applicable to the total amount intended to be
purchased. This letter may be dated as of a prior date to include any
purchases made within the past 90 days.
REINVESTMENT PRIVILEGE
If Shares in the Fund have been redeemed, the shareholder has a one-time
right, within 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 First
Union 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 First Union Funds with a sales charge, and
$70,000 in Shares of the 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 PLANS (CLASS B AND CLASS C INVESTMENT SHARES)
With respect to the Class B and Class C Investment Shares classes of the Fund,
the Trust has adopted distribution plans (the "Plans") pursuant to Rule 12b-1
which was promulgated by the SEC pursuant to the Investment Company Act of 1940.
The Plans permit the payment of fees to brokers for distribution and
administrative services and to administrators for administrative services as to
Class B and Class C Investment Shares. The Plans are designed to (i) stimulate
brokers to provide distribution and administrative support services to the Fund
and holders of Class B and Class C Investment Shares and (ii) stimulate
administrators to render administrative support services to the Fund and holders
of Class B and Class C Investment 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 Class B and Class C Investment
Shares; assisting clients in changing dividend options, account designations,
and addresses; and providing such other services as the Fund reasonably requests
for its Class B and Class C Investment Shares.
By adopting the Plans, 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 Plans 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 years ended December 31, 1993, 1992, and 1991, brokers and
administrators (financial institutions) received fees in the amount of $51,539,
$19,643, and $14,456, of which $0, $0, and $3,491 was waived, respectively,
pursuant to the Plans.
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 Plans for
administrative services, and if paid, will be reimbursed by the Adviser
and not the Fund.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value of Shares generally changes each day. The days on which net
asset values of Shares are calculated by the Fund are described in the
respective prospectus.
DETERMINING MARKET VALUE OF SECURITIES
The market values of the Fund's portfolio securities, other than options, 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 determine 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.
Over-the-counter put options will be valued at the mean between the bid and the
asked prices.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request, plus a contingent deferred sales charge, if
applicable. 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 respective prospectus
under "How to Redeem 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
- --------------------------------------------------------------------------------
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.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional Shares.
CAPITAL GAINS
Shareholders will pay federal income tax at capital gains rates on
long-term capital gains distributed to them regardless of how long they
have held the Shares.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's average annual total returns for Trust Shares for the one-year period
ended December 31, 1993 and for the period from December 31, 1990 (start of
performance) to December 31, 1993 were 8.67% and 9.67%, respectively.
The Fund's average annual total returns for Class B Investment Shares for the
one-year period ended December 31, 1993 and for the period from January 31, 1989
(start of performance) to December 31, 1993 were 3.99% and 8.62%, respectively.
The Fund's cumulative total return for Class C Investment Shares for the period
from January 25, 1993 (start of performance) to December 31, 1993 was 1.81%.
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 a quarterly
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 eleven months of
investment activity since the start of performance.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for Trust Shares was 5.07% for the thirty-day period ended
December 31, 1993. The Fund's yields for Class B Investment Shares and Class C
Investment Shares were 4.98% and 4.31%, respectively, for the thirty-day 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 any class of
Shares over a thirty-day period by the maximum offering price per share of any
class on the last day of the period. This value is then annualized using
semi-annual compounding. This means that the amount of income generated during
the thirty-day period is assumed to be generated each month over a twelve-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by any 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 broker/dealers charge fees in
connection with services provided in conjunction with an investment in any class
of Shares, the performance will be reduced for those shareholders paying those
fees.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
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:
_LEHMAN GOVERNMENT/CORPORATE BOND INDEX is comprised of approximately 5,000
issues which include non-convertible bonds publicly issued by the U.S.
government or its agencies; corporate bonds guaranteed by the U.S. government
and quasi-federal corporations; and publicly issued, fixed rate,
non-convertible domestic bonds of companies in industry, public utilities, and
finance. The average maturity of these bonds approximates nine years. Tracked
by Lehman Brothers, Inc., the index calculates total returns for one-month,
three-month, twelve-month, and ten-year periods and year-to-date.
SALOMON BROTHERS AAA-AA CORPORATE index calculates total returns of
approximately 775 issues which include long-term, high grade domestic corporate
taxable bonds, rated AAA-AA with maturities of twelve years or more and
companies in industry, public utilities, and finance.
_LEHMAN INTERMEDIATE GOVERNMENT/CORPORATE BOND INDEX is comprised of issues
which include non-convertible bonds publicly issued by the U.S. government or
its agencies; corporate bonds guaranteed by the U.S. government and
quasi-federal corporations; and publicly issued, fixed rate, non-convertible
domestic bonds of companies in industry, public utilities, and finance. The
average maturity of these bonds is between 1 and 9.9 years.
_MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
Advertisements and other sales literature for 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
- --------------------------------------------------------------------------------
The financial statements for First Union Fixed Income 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 in the inside back cover of the respective
prospectus.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD & POOR'S CORPORATION CORPORATE 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.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING DEFINITIONS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
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.
Baa--Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured.) Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
STANDARD & POOR'S CORPORATION COMMERCIAL PAPER RATING DEFINITIONS
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS
PRIME-1--Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following characteristics:
Leading market positions in well established industries.
High rates of return on funds employed.
Conservative capitalization structure with moderate reliance on debt and ample
asset protection.
Broad margins in earning coverage of fixed financial charges and high internal
cash generation.
Well-established access to a range of financial markets and assured sources of
alternate liquidity.
3031005B (2/94)
FIRST UNION HIGH GRADE TAX FREE PORTFOLIO
(FORMERLY, FIRST UNION INSURED TAX FREE PORTFOLIO)
(A PORTFOLIO OF FIRST UNION FUNDS)
TRUST SHARES
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
Supplement to Combined Statement of Additional Information dated
February 28, 1994
Effective September 1, 1994, First Union High Grade Tax
Free Portfolio (the "Fund") will offer Class D
Investment Shares ("Class D Shares"). Class D Shares
will be similar to Class C Shares in all respects
except: Class D Shares will have a contingent deferred
sales charge of 1.00%, which terminates after one year,
and the Class D Shares will not automatically convert
into Class B Shares after seven years.
Effective September 1, 1994, Class C Shares will assess
a shareholder service fee of 0.25% of the average daily
net asset value, of which all or a portion may be
waived at any time.
September 1, 1994
FEDERATED SECURITIES CORP.
Distributor
G00389-02 (9/94)
FIRST UNION HIGH GRADE TAX FREE PORTFOLIO
(FORMERLY, FIRST UNION INSURED TAX FREE PORTFOLIO)
A PORTFOLIO OF FIRST UNION FUNDS
TRUST SHARES
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectus of Trust Shares, Class B Investment Shares,
or Class C Investment Shares for First Union High Grade Tax Free
Portfolio, dated February 28, 1994. This Statement is not a prospectus
itself. To receive a copy of the Trust Shares' prospectus, write First
Union National Bank of North Carolina, Capital Management Group, 1200
Two First Union Center, Charlotte, North Carolina 28288-1156 or call
1-800-326-2584. To receive a copy of the Class B Investment Shares' or
Class C Investment Shares' prospectus, write First Union Brokerage
Services, Inc., One First Union Center, 301 S. College Street,
Charlotte, North Carolina 28288-1173 or call 1-800-326-3241.
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 4
Investment Limitations 4
TRUST MANAGEMENT 6
- ---------------------------------------------------------------
Officers and Trustees 6
Fund Ownership 7
Trustee Liability 7
INVESTMENT ADVISORY SERVICES 8
- ---------------------------------------------------------------
Adviser to the Fund 8
Advisory Fees 8
BROKERAGE TRANSACTIONS 8
- ---------------------------------------------------------------
ADMINISTRATIVE SERVICES 9
- ---------------------------------------------------------------
PURCHASING SHARES 9
- ---------------------------------------------------------------
Distribution Plans (Class B and Class C
Investment Shares) 10
DETERMINING NET ASSET VALUE 10
- ---------------------------------------------------------------
Determining Market Value of Securities 10
Valuing Municipal Bonds 11
REDEEMING SHARES 11
- ---------------------------------------------------------------
Redemption in Kind 11
TAX STATUS 11
- ---------------------------------------------------------------
The Fund's Tax Status 11
TOTAL RETURN 11
- ---------------------------------------------------------------
YIELD 12
- ---------------------------------------------------------------
TAX EQUIVALENT YIELD 12
- ---------------------------------------------------------------
Tax Equivalency Table 13
PERFORMANCE COMPARISONS 13
- ---------------------------------------------------------------
FINANCIAL STATEMENTS 14
- ---------------------------------------------------------------
APPENDIX 15
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
First Union High Grade Tax Free Portfolio (the "Fund") is a portfolio of 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"). This Combined Statement of Additional Information
relates to the above-mentioned Shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
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 by 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
- --------------------------------------------------------------------------------
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 Vice President, Federated Administrative Services; Director, Private
and Assistant Label Management, Federated Investors; Vice President and Assistant
Treasurer 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 shall 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
- --------------------------------------------------------------------------------
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 respective 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
respective 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
- --------------------------------------------------------------------------------
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 Shares is explained in the respective
prospectus under "How to Buy Shares."
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Class B Investment
Shares through:
quantity discounts and accumulated purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
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.
LETTER OF INTENT
If a shareholder intends to purchase at least $100,000 of Shares in the
Fund over the next 13 months, the sales charge may be reduced by signing
a letter of intent to that effect. This letter of intent includes a
provision for a sales charge adjustment depending on the amount actually
purchased within the
13-month period and a provision for the custodian to hold up to 4.0% of
the total amount intended to be purchased in escrow (in Shares) until
such purchase is completed.
The amount held in escrow will be applied to the shareholder's account at
the end of the 13-month period, unless the amount specified in the letter
of intent is not purchased. In this event, an appropriate number of
escrowed Shares may be redeemed in order to realize the difference in the
sales charge.
This letter of intent will not obligate the shareholder to purchase
Shares, but if the shareholder does, each purchase during the period will
be at the sales charge applicable to the total amount intended to be
purchased. This letter may be dated as of a prior date to include any
purchases made within the past 90 days.
REINVESTMENT PRIVILEGE
If Shares in the Fund have been redeemed, the shareholder has a one-time
right, within 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 First
Union 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 First Union Funds with a sales charge, and
$70,000 in Shares of the 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 PLANS (CLASS B AND CLASS C INVESTMENT SHARES)
With respect to the Class B and Class C Investment Shares classes of the Fund,
the Trust has adopted distribution plans (the "Plans") pursuant to Rule 12b-1
which was promulgated by the Securities and Exchange Commission ("SEC") pursuant
to the Investment Company Act of 1940. The Plans permit the payment of fees to
brokers for distribution and administrative services and to administrators for
administrative services as to Class B and Class C Investment Shares. The Plans
are designed to (i) stimulate brokers to provide distribution and administrative
support services to the Fund and holders of Class B and Class C Investment
Shares and (ii) stimulate administrators to render administrative support
services to the Fund and holders of Class B and Class C Investment 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 Class
B and Class C Investment Shares; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as the
Fund reasonably requests for its Class B and Class C Investment Shares.
By adopting the Plans, 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 Plans 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, was waived, respectively, pursuant
to the Plans.
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 Plans for
administrative services, and if paid, will be reimbursed by the Adviser
and not the Fund.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value of Shares generally changes each day. The days on which the net
asset values of Shares are calculated by the Fund are described in the
respective 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
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request, plus a contingent deferred sales charge, if
applicable. 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 respective prospectus
under "How to Redeem 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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
The Fund's average annual total returns for Class B Investment 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
- --------------------------------------------------------------------------------
The Fund's yield for Class B Investment 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
- --------------------------------------------------------------------------------
The Fund's tax equivalent yield for Class B Investment 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 Decmeber 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 each 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 Fund's
portfolio generally remains free from federal regular income tax,* and are 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%
- -------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
The financial statements for 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 inside back cover of
the respective prospectus.
APPENDIX
- --------------------------------------------------------------------------------
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 effect 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 edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa--Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group, they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
A--Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
3031002B (2/94)
FIRST UNION BALANCED PORTFOLIO
(A PORTFOLIO OF FIRST UNION FUNDS)
TRUST SHARES
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
Supplement to Combined Statement of Additional Information dated
February 28, 1994
Effective September 1, 1994, First Union Balanced
Portfolio (the "Fund") will offer Class D Investment
Shares ("Class D Shares"). Class D Shares will be
similar to Class C Shares in all respects except:
Class D Shares will have a contingent deferred sales
charge of 1.00%, which terminates after one year, and
the Class D Shares will not automatically convert into
Class B Shares after seven years.
Effective September 1, 1994, Class C Shares will assess
a shareholder service fee of 0.25% of the average daily
net asset value, of which all or a portion may be
waived at any time.
September 1, 1994
FEDERATED SECURITIES CORP.
Distributor
G00389-01 (9/94)
FIRST UNION BALANCED PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
TRUST SHARES
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectus of Trust Shares, Class B Investment Shares,
or Class C Investment Shares for First Union Balanced Portfolio, dated
February 28, 1994. This Statement is not a prospectus itself. To
receive a copy of the Trust Shares' prospectus, write First Union
National Bank of North Carolina, Capital Management Group, 1200 Two
First Union Center, Charlotte, North Carolina 28288-1156 or call
1-800-326-2584. To receive a copy of the
Class B Investment Shares' or Class C Investment Shares' prospectus,
write First Union Brokerage Services,
Inc., One First Union Center, 301 S. College Street, Charlotte, North
Carolina 28288-1173 or call
1-800-326-3241.
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
- ---------------------------------------------------------------
Types of Investments 1
Restricted and Illiquid Securities 1
Temporary Investments 1
When-Issued and Delayed Delivery
Transactions 1
Options Transactions 1
Futures Transactions 3
Lending of Portfolio Securities 4
Reverse Repurchase Agreements 4
Portfolio Turnover 5
Investment Limitations 5
TRUST MANAGEMENT 6
- ---------------------------------------------------------------
Officers and Trustees 6
Fund Ownership 7
Trustee Liability 7
INVESTMENT ADVISORY SERVICES 8
- ---------------------------------------------------------------
Adviser to the Fund 8
Advisory Fees 8
BROKERAGE TRANSACTIONS 8
- ---------------------------------------------------------------
ADMINISTRATIVE SERVICES 9
- ---------------------------------------------------------------
PURCHASING SHARES 9
- ---------------------------------------------------------------
Distribution Plans (Class B and Class C
Investment Shares) 10
DETERMINING NET ASSET VALUE 10
- ---------------------------------------------------------------
Determining Market Value of Securities 10
REDEEMING SHARES 11
- ---------------------------------------------------------------
Redemption in Kind 11
TAX STATUS 11
- ---------------------------------------------------------------
The Fund's Tax Status 11
Shareholders' Tax Status 11
TOTAL RETURN 12
- ---------------------------------------------------------------
YIELD 12
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 12
- ---------------------------------------------------------------
FINANCIAL STATEMENTS 13
- ---------------------------------------------------------------
APPENDIX 14
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
First Union Balanced Portfolio (the "Fund") is a portfolio of First Union Funds
(the "Trust"). The Trust was established as a Massachusetts business trust under
a Declaration of Trust dated August 30, 1984. On January 4, 1993, the name of
the Trust was changed from "The Salem Funds" to "First Union Funds."
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"). This Combined Statement of Additional Information
relates to the above-mentioned Shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to produce long-term total return through
capital appreciation, dividends, and interest income. The Fund attempts to
achieve this objective by investing in a diversified portfolio of common and
preferred stocks, U.S. government and investment grade bonds (those rated A or
higher by Moody's Investors Service, Inc. or Standard & Poor's Corporation) and
money market instruments. The investment objective cannot be changed without
approval of shareholders.
TYPES OF INVESTMENTS
The Fund invests primarily in common and preferred stocks and other equity
securities, bonds, notes, U.S. government securities, repurchase agreements,
short-term obligations, and instruments secured by any of these obligations.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Board of Trustees ("Trustees") to determine the liquidity of
certain restricted securities is permitted under a Securities and Exchange
Commission ("SEC") Staff position set forth in the adopting release for Rule
144A under the Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive,
safe-harbor for certain secondary market transactions involving securities
subject to restrictions on resale under federal securities laws. The Rule
provides an exemption from registration for resales of otherwise restricted
securities to qualified institutional buyers. The Rule was expected to further
enhance the liquidity of the secondary market for securities eligible for resale
under Rule 144A. The Fund believes that the Staff of the SEC has left the
question of determining the liquidity of all restricted securities (eligible for
resale under Rule 144A) for determination by the Trustees. The Trustees consider
the following criteria in determining the liquidity of certain restricted
securities:
the frequency of trades and quotes for the security;
the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
dealer undertakings to make a market in the security; and
the nature of the security and the nature of the marketplace trades.
TEMPORARY INVESTMENTS
The Fund may also invest in temporary investments from time to time for
defensive purposes.
MONEY MARKET INSTRUMENTS
The Fund may invest in money market instruments such as:
instruments of domestic and foreign banks and savings and loans if they
have capital, surplus, and undivided profits of over $100,000,000, or if
the principal amount of the instrument is federally insured.
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 or yield for the Fund. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the securities
to be purchased are segregated on the Fund's records at the trade date. These
securities are marked to market daily and maintained until the transaction is
settled.
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.
OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of the
Fund, the Fund may attempt to hedge all or a portion of its portfolio through
the purchase of put options on portfolio securities and listed put options on
financial futures contracts for portfolio securities. The Fund may also write
covered call options on its portfolio
securities and covered put options to attempt to increase its current income.
The aggregate value of the obligations underlying the puts will not exceed 50%
of the Fund's net assets. This policy cannot be changed without shareholder
approval.
The Fund will maintain its positions in securities, option rights, and
segregated cash subject to puts and calls until the options are exercised,
closed, or have expired.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts.
These options will be used only to protect portfolio securities against
decreases in value resulting from market factors such as an anticipated
increase in interest rates.
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of instrument called for in
the contract ("going short") and the buyer who agrees to take delivery of
the instrument ("going long") at a certain time in the future. Financial
futures contracts call for the delivery of particular debt instruments
issued or guaranteed by the U.S. Treasury or by specified agencies or
instrumentalities of the U.S. government. If the Fund would enter into
financial futures contracts directly to hedge its holdings of fixed
income securities, it would enter into contracts to deliver securities at
a predetermined price (i.e., "go short") to protect itself against the
possibility that the prices of its fixed income securities may decline
during the Fund's anticipated holding period. The Fund would "go long" to
hedge against a decline in market interest rates.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a predetermined
price, the purchase of a put option on a futures contract entitles (but
does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price. Generally, if
the hedged portfolio securities decrease in value during the term of an
option, the related futures contracts will also decrease in value and the
put option will increase in value. In such an event, the Fund will
normally close out its option by selling an identical option. If the
hedge is successful, the proceeds received by the Fund upon the sale of
the put option will be large enough to offset both the premium paid by
the Fund for the put option plus the realized decrease in value of the
hedged securities.
Alternately, the Fund may exercise its put option to close out the
position. To do so, it would enter into a futures contract of the type
underlying the option. If the Fund neither closes out nor exercises an
option, the option will expire on the date provided in the option
contract, and only the premium paid for the contract will be lost.
WRITING COVERED OPTIONS
The Fund may write (i.e., sell) covered call and put options. By writing
a call option, the Fund becomes obligated during the term of the option
to deliver the securities underlying the option upon payment of the
exercise price. By writing a put option, the Fund becomes obligated
during the term of the option to purchase the securities underlying the
option at the exercise price if the option is exercised. The Fund also
may write straddles (combinations of covered puts and calls on the same
underlying security).
The Fund may only write "covered" options. This means that so long as the
Fund is obligated as the writer of a call option, it will own the
underlying securities subject to the option or, in the case of call
options on U.S. Treasury bills, the Fund might own substantially similar
U.S. Treasury bills.
The Fund will be considered "covered" with respect to a put option it
writes if, so long as it is obligated as the writer of the put option, it
deposits and maintains with its custodian in a segregated account liquid
assets having a value equal to or greater than the exercise price of the
option. The aggregate value of the obligations underlying the puts will
not exceed 50% of the Fund's net assets.
The principal reason for writing call or put options is to obtain,
through a receipt of premiums, a greater current return than would be
realized on the underlying securities alone. The Fund receives a premium
from writing a call or put option which it retains whether or not the
option is exercised. By writing a call option, the Fund might lose the
potential for gain on the underlying security while the option is open,
and by writing a put option, the Fund might become obligated to purchase
the underlying security for more than its current market price upon
exercise.
PURCHASING OPTIONS
The Fund may purchase both put and call options on its portfolio
securities. These options will be used as a hedge to attempt to protect
securities which the Fund holds or will be purchasing against decreases
or increases in value. The Fund may purchase call and put options for the
purpose of offsetting previously written call options of the same series.
If the Fund is unable to effect a closing purchase transaction with
respect to covered options it has written, the Fund will not be able to
sell the underlying securities or dispose of assets held in a segregated
account until the options expire or are exercised.
The Fund currently does not intend to invest more than 5% of its net
assets in options transactions.
OPTIONS TRADING MARKETS
Options which the Fund will trade must be listed on national securities
exchanges. Exchanges on which such options currently are traded are the
Chicago Board Options Exchange and the New York, American, Pacific and
Philadelphia Stock Exchanges ("Exchanges").
FUTURES TRANSACTIONS
The Fund may enter into currency and other financial futures contracts and write
options on such contracts. The Fund intends to enter into such contracts and
related options for hedging purposes. The Fund will enter into futures on
securities, currencies, or index-based futures contracts in order to hedge
against changes in interest or exchange rates or securities prices. A futures
contract on securities or currencies is an agreement to buy or sell securities
or currencies during a designated month at whatever price exists at that time. A
futures contract on a securities index does not involve the actual delivery of
securities, but merely requires the payment of a cash settlement based on
changes in the securities index. The Fund does not make payment or deliver
securities upon entering into a futures contract. Instead, it puts down a margin
deposit, which is adjusted to reflect changes in the value of the contract and
which remains in effect until the contract is terminated.
The Fund may sell or purchase currency and other financial futures contracts.
When a futures contract is sold by the Fund, the profit on the contract will
tend to rise when the value of the underlying securities or currencies declines
and to fall when the value of such securities or currencies increases. Thus, the
Fund sells futures contracts in order to offset a possible decline in the profit
on its securities or currencies. If a futures contract is purchased by the Fund,
the value of the contract will tend to rise when the value of the underlying
securities or currencies increases and to fall when the value of such securities
or currencies declines.
The Fund intends to purchase put and call options on currency and other
financial futures contracts for hedging purposes. A put option purchased by the
Fund would give it the right to assume a position as the seller of a futures
contract. A call option purchased by the Fund would give it the right to assume
a position as the purchaser of a futures contract. The purchase of an option on
a futures contract requires the Fund to pay a premium. In exchange for the
premium, the Fund becomes entitled to exercise the benefits, if any, provided by
the futures contract, but is not required to take any action under the contract.
If the option cannot be exercised profitably before it expires, the Fund's loss
will be limited to the amount of the premium and any transaction costs.
The Fund may enter into a closing purchase and sale transactions in order to
terminate a futures contract and may buy or sell put and call options for the
purpose of closing out its options positions. The Fund's ability to enter into
closing transactions depends on the development and maintenance of a liquid
secondary market. There is no assurance that a liquid secondary market will
exist for any particular contract or at any particular time. As a result, there
can be no assurance that the Fund will be able to enter into an offsetting
transaction with respect to a particular contract at a particular time. If the
Fund is not able to enter into an offsetting transaction, the Fund will continue
to be required to maintain the margin deposits on the contract and to complete
the contract according to its terms, in which case it would continue to bear
market risk on the transaction.
Although futures and options transactions are intended to enable the Fund to
manage market interest rate or exchange rate risk, unanticipated changes in
interest rates, exchange rates, or market prices could result in poorer
performance than if it had not entered into these transactions. Even if the
adviser correctly predicts interest or exchange rate movements, a hedge could be
unsuccessful if changes in the value of the Fund's futures position did not
correspond to changes in the value of its investments. This lack of correlation
between the Fund's futures and securities or currencies positions may be caused
by differences between the futures and securities or currencies markets or by
differences between the securities or currencies underlying the Fund's futures
position and the securities or currencies held by or to be purchased for the
Fund.
LIMITATION ON OPEN FUTURES POSITIONS
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds the
current market value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Fund will take
prompt action to close out a sufficient number of open contracts to bring
its open futures and options positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather,
the Fund is required to deposit an amount of "initial margin" in cash or
U.S. Treasury bills with its custodian (or the broker, if legally
permitted). The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that futures
contract initial margin does not involve the borrowing of funds by the
Fund to finance the transactions. Initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned
to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as
"marking to market." Variation margin does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund and the
broker of the amount one would owe the other if the futures contract
expired. In computing its daily net asset value, the Fund will
mark-to-market its open futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the
Fund's existing futures positions and premiums paid for related options
would exceed 5% of the market value of the Fund's total assets. When the
Fund purchases futures contracts, an amount of cash and cash equivalents,
equal to the underlying commodity value of the futures contracts (less
any related margin deposits), will be deposited in a segregated account
with the Fund's custodian (or the broker, if legally permitted) to
collateralize the position and thereby insure that the use of such
futures contracts is unleveraged.
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.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement, the Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate.
The use of reverse repurchase agreements may enable the Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not ensure that
the Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
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
years ended December 31, 1993 and 1992 were 19% and 12%, respectively.
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 that the
Fund receives the current income produced by such bonds for a longer
period than it might otherwise, the Fund's investment objective is
furthered.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may borrow
money and engage in reverse repurchase agreements in amounts up to
one-third of the value of its total assets, including the amounts
borrowed.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage, but rather as a temporary, extraordinary, or
emergency measure to facilitate management of the portfolio by enabling
the Fund to, for example, meet redemption requests when the liquidation
of portfolio securities is deemed to be inconvenient or disadvantageous.
The Fund will not purchase any securities while any borrowings are
outstanding. The Fund has no present intention to borrow money in excess
of 5% of the value of its net assets during the coming fiscal year.
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. Margin
deposits for the purchase and sale of financial futures contracts and
related options are not deemed to be a pledge.
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.
However, the Fund may enter into futures contracts on financial
instruments or currency and sell or buy options on such contracts.
RESTRICTED SECURITIES
The Fund will not invest more than 10% of its net assets in securities
subject to restrictions on resale under the Securities Act of 1933
(except for certain restricted securities which meet the criteria for
liquidity established by the Trustees).
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 portfolio securities in
accordance with its investment objective, policies and limitations.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more 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 U.S. government, its
agencies or instrumentalities.
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of its 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.
The above investment limitations cannot be changed without shareholder approval.
The following investment limitations, however, may be changed by Trustees
without shareholder approval. Shareholders will be notified before any material
change in these policies becomes effective.
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 10% of its net assets in securities
which are illiquid, including repurchase agreements providing for
settlement in more than seven days after notice, and certain restricted
securities determined by the Trustees not to be liquid.
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 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.
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.
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".
TRUST MANAGEMENT
- --------------------------------------------------------------------------------
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, and President and Treasurer, Federated Advisers, Federated Management, 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, 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 shall 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
- --------------------------------------------------------------------------------
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 respective prospectus.
For the fiscal years ended December 31, 1993, 1992, and 1991, the Adviser earned
advisory fees of $3,425,786, $2,319,251, and $1,181,762, 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.
For the fiscal years ended December 31, 1993, 1992, and 1991, the Fund paid
$389,044, $152,802, and $150,242, respectively, in commissions on brokerage
transactions.
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
respective prospectus.
For the fiscal years ended December 31, 1993, 1992, and 1991, the Fund incurred
$597,752, $427,255, and $243,962, in administrative service costs, respectively.
PURCHASING SHARES
- --------------------------------------------------------------------------------
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 Shares is explained in the respective
prospectus under "How to Buy Shares."
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Class B Investment
Shares through:
quantity discounts and accumulated purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
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.
LETTER OF INTENT
If a shareholder intends to purchase at least $100,000 of Shares in the
Fund over the next 13 months, the sales charge may be reduced by signing
a letter of intent to that effect. This letter of intent includes a
provision for a sales charge adjustment depending on the amount actually
purchased within the 13-month period and a provision for the custodian to
hold up to 4.0% of the total amount intended to be purchased in escrow
(in Shares) until such purchase is completed.
The amount held in escrow will be applied to the shareholder's account at
the end of the 13-month period, unless the amount specified in the letter
of intent is not purchased. In this event, an appropriate number of
escrowed Shares may be redeemed in order to realize the difference in the
sales charge.
This letter of intent will not obligate the shareholder to purchase
Shares, but if the shareholder does, each purchase during the period will
be at the sales charge applicable to the total amount intended to be
purchased. This letter may be dated as of a prior date to include any
purchases made within the past 90 days.
REINVESTMENT PRIVILEGE
If Shares in the Fund have been redeemed, the shareholder has a one-time
right, within 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 First
Union 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 First Union Funds with a sales charge, and
$70,000 in Shares of the 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 PLANS (CLASS B AND CLASS C INVESTMENT SHARES)
With respect to the Class B and Class C Investment Shares classes of the Fund,
the Trust has adopted distribution plans (the "Plans") pursuant to Rule 12b-1
which was promulgated by the SEC pursuant to the Investment Company Act of 1940.
The Plans permit the payment of fees to brokers for distribution and
administrative services and to administrators for administrative services as to
Class B and Class C Investment Shares. The Plans are designed to (i) stimulate
brokers to provide distribution and administrative support services to the Fund
and holders of Class B and Class C Investment Shares and (ii) stimulate
administrators to render administrative support services to the Fund and holders
of Class B and Class C Investment 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 Class B and Class C Investment
Shares; assisting clients in changing dividend options, account designations,
and addresses; and providing such other services as the Fund reasonably requests
for its Class B and Class C Investment Shares.
By adopting the Plans, 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 Plans 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 years ended December 31, 1993, 1992, and 1991, brokers and
administrators (financial institutions) received fees in the amount of $295,600,
$20,235, and $1,367, respectively, none of which was waived, pursuant to the
Plans.
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 Plans for
administrative services, and if paid, will be reimbursed by the Adviser
and not the Fund.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value of Shares generally changes each day. The days on which net
asset values of Shares are calculated by the Fund are described in the
respective prospectus.
DETERMINING MARKET VALUE OF SECURITIES
The market value of the Fund's portfolio securities, other than options, 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 determine 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.
Over-the-counter put options will be valued at the mean between the bid and the
asked prices.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request, plus a contingent deferred sales charge, if
applicable. 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 respective prospectus
under "How to Redeem 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
- --------------------------------------------------------------------------------
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.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional Shares.
CAPITAL GAINS
Shareholders will pay federal income tax at capital gains rates on
long-term capital gains distributed to them regardless of how long they
have held Shares.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's average annual total returns for Trust Shares for the one-year period
ended December 31, 1993 and for the period from April 1, 1991 (start of
performance) to December 31, 1993 were 10.68% and 12.37%, respectively.
The Fund's average annual total returns for Class B Investment Shares for the
one-year period ended December 31, 1993 and for the period from June 6, 1991
(start of performance) to December 31, 1993 were 5.94% and 10.02%, respectively.
The Fund's cumulative total return for Class C Investment Shares for the period
from January 25, 1993 (start of performance) to December 31, 1993 was 4.58%.
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 quarterly
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 start of performance.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for Trust Shares was 3.27% for the thirty-day period ended
December 31, 1993. The Fund's yields for Class B Investment Shares and Class C
Investment Shares were 2.89% and 2.51%, respectively, for the thirty-day 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 any class of
Shares over a thirty-day period by the maximum offering price per share of any
class on the last day of the period. This value is then annualized using
semi-annual compounding. This means that the amount of income generated during
the thirty-day period is assumed to be generated each month over a twelve-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by any 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 broker/dealers charge fees in
connection with services provided in conjunction with an investment in any class
of Shares, the performance will be reduced for those shareholders paying those
fees.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
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:
LEHMAN BROTHERS GOVERNMENT/CORPORATE (TOTAL) index is comprised of approximately
5,000 issues which include: non-convertible bonds publicly issued by the U.S.
government or its agencies; corporate bonds guaranteed by the U.S. government
and quasi-federal corporations; and publicly issued, fixed rate,
non-convertible domestic bonds of companies in industry, public utilities, and
finance. The average maturity of these bonds approximates nine years. Tracked
by Shearson Lehman Brothers, Inc., the index calculates total returns for one
month, three month, twelve month, and ten year periods and year-to-date.
_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.
SALOMON BROTHERS AAA-AA CORPORATE index calculates total returns of
approximately 775 issues which include long-term, high grade domestic corporate
taxable bonds, rated AAA-AA with maturities of twelve years or more and
companies in industry, public utilities, and finance.
LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CORPORATE BOND INDEX: An unmanaged index
comprised of all the bonds issued by the Lehman Brothers Government/Corporate
Bond Index with maturities between 1 and 9.99 years. Total return is based on
price appreciation/depreciation and income as a percentage of the original
investment. Indices are rebalanced monthly by market capitalization.
DOW JONES INDUSTRIAL AVERAGE (DJIA): An unmanaged index representing share
prices of major industrial corporations, public utilities, and transportation
companies. Produced by Dow Jones & Company, it is the oldest and most widely
quoted of all market indicators. The Dow represents about 25% of the NYSE
market capitalization and less than 2% of NYSE issues. It is a price-weighted
arithmetic average, with the divisor adjusted for stock splits. The index is
calculated on both a price change and total return basis.
_STANDARD AND POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a composite
index of common stocks in industry, transportation, financial, and public
utility companies, can be used to compare to the total returns of funds whose
portfolios are invested primarily in common stocks. In addition, the Standard &
Poor's index assumes reinvestments of all dividends paid by stocks listed on
its index. Taxes due on any of these distributions are not included, nor are
brokerage or other fees calculated in the Standard & Poor's figures.
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
- --------------------------------------------------------------------------------
The financial statements for First Union Balanced 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 inside back cover of the respective prospectus.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD & POOR'S CORPORTION CORPORATE 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.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING DEFINITIONS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
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.
Baa--Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
3031003B (2/94)
FIRST UNION U.S. GOVERNMENT PORTFOLIO
(A PORTFOLIO OF FIRST UNION FUNDS)
TRUST SHARES
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
Supplement to Combined Statement of Additional Information dated
February 28, 1994
Effective September 1, 1994, First Union U.S.
Government Portfolio (the "Fund") will offer Class D
Investment Shares ("Class D Shares"). Class D Shares
will be similar to Class C Shares in all respects
except: Class D Shares will have a contingent deferred
sales charge of 1.00%, which terminates after one year,
and the Class D Shares will not automatically convert
into Class B Shares after seven years.
Effective September 1, 1994, Class C Shares will assess
a shareholder service fee of 0.25% of the average daily
net asset value, of which all or a portion may be
waived at any time.
September 1, 1994
FEDERATED SECURITIES CORP.
Distributor
G00389-05 (9/94)
FIRST UNION U.S. GOVERNMENT PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
TRUST SHARES
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectus of Trust Shares, Class B Investment Shares,
or Class C Investment Shares for First Union U.S. Government
Portfolio, dated February 28, 1994. This Statement is not a prospectus
itself. To receive a copy of the Trust Shares' prospectus, write First
Union National Bank of North Carolina, Capital Management Group, 1200
Two First Union Center, Charlotte, North Carolina 28288-1156 or call
1-800-326-2584. To receive a copy of the Class B Investment Shares' or
Class C Investment Shares' prospectus, write First Union Brokerage
Services, Inc., One First Union Center, 301 S. College Street,
Charlotte, North Carolina 28288-1173 or call 1-800-326-3241.
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
- ---------------------------------------------------------------
Types of Investments 1
Asset-Backed Securities 1
Collateralized Mortgage Obligations (CMOs) 1
Section 4(2) Commercial Paper 1
Repurchase Agreements 2
When-Issued and Delayed Delivery
Transactions 2
Futures and Options Transactions 2
Lending of Portfolio Securities 5
Restricted Securities 5
Reverse Repurchase Agreements 5
Portfolio Turnover 5
Investment Limitations 5
TRUST MANAGEMENT 7
- ---------------------------------------------------------------
Officers and Trustees 7
Fund Ownership 8
Trustee Liability 8
INVESTMENT ADVISORY SERVICES 8
- ---------------------------------------------------------------
Adviser to the Fund 8
Advisory Fees 9
BROKERAGE TRANSACTIONS 9
- ---------------------------------------------------------------
ADMINISTRATIVE SERVICES 9
- ---------------------------------------------------------------
PURCHASING SHARES 10
- ---------------------------------------------------------------
Distribution Plans
(Class B and Class C Investment Shares) 10
DETERMINING NET ASSET VALUE 11
- ---------------------------------------------------------------
Determining Market Value of Securities 11
REDEEMING SHARES 12
- ---------------------------------------------------------------
Redemption in Kind 12
TAX STATUS 12
- ---------------------------------------------------------------
The Fund's Tax Status 12
Shareholders' Tax Status 12
TOTAL RETURN 12
- ---------------------------------------------------------------
YIELD 13
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 13
- ---------------------------------------------------------------
FINANCIAL STATEMENTS 13
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
First Union U.S. Government Portfolio (the "Fund") is a portfolio of First Union
Funds (the "Trust"). The Trust was established as a Massachusetts business trust
under a Declaration of Trust dated August 30, 1984. On January 4, 1993, the name
of the Trust was changed from "The Salem Funds" to "First Union Funds."
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"). This Combined Statement of Additional Information
relates to the above-mentioned Shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The investment objective of the Fund is to provide a high level of current
income consistent with stability of principal.
TYPES OF INVESTMENTS
The Fund invests primarily in securities that are obligations of the U.S.
government, its agencies and instrumentalities. Under normal market conditions,
at least 65% of the value of the Fund's total assets will be invested in U.S.
government securities. This investment policy and the investment objective
stated above cannot be changed without approval of shareholders.
ASSET-BACKED SECURITIES
Credit card receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, many of
which give such debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of asset-backed securities
backed by automobile receivables permit the servicers of such receivables to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related asset-backed
securities. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities.
In general, issues of asset-backed securities are structured to include
additional collateral and/or additional credit support to protect against the
risk that a portion of the collateral supporting the asset-backed securities may
default and/or may suffer from these defects. In evaluating the strength of
particular issues of asset-backed securities, the Fund's adviser considers the
financial strength of the guarantor or other provider of credit support, the
type and extent of credit enhancement provided as well as the documentation and
structure of the issue itself and the credit support.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS)
Privately issued CMOs generally represent an ownership interest in federal
agency mortgage pass-through securities such as those issued by Government
National Mortgage Association. The terms and characteristics of the mortgage
instruments may vary among pass-through mortgage loan pools.
Most of the CMOs in which the Fund would invest use the same basic structure:
Several classes of securities are issued against a pool of mortgage collateral.
The most common structure contains four classes of securities: the first three
(A, B, and C bonds) pay interest at their stated rates beginning with the issue
date; the final class (or Z bond) typically receives the residual income from
the underlying investment after payments are made to the other classes.
The cash flows from the underlying mortgages are applied first to pay interest
and then to retire securities.
The classes of securities are retired sequentially. All principal payments are
directed first to the shortest-maturity class (or A bonds). When those
securities are completely retired, all principal payments are then directed to
the next-shortest-maturity security (or B bond). This process continues until
all of the classes have been paid off.
The market for such CMOs has expanded considerably since its inception. The size
of the primary issuance market and the active participation in the secondary
market by securities dealers and other investors make government-related pools
highly liquid.
SECTION 4(2) COMMERCIAL PAPER
The Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under federal securities
law and is generally sold to institutional investors, such as the Fund, who
agree that they are
purchasing the paper for investment purposes and not with a view to public
distribution. Any resale by the purchaser must be in an exempt transaction.
Section 4(2) commercial paper is normally resold to other institutional
investors like the Fund through or with the assistance of the issuer or
investment dealers who make a market in Section 4(2) commercial paper, thus
providing liquidity. The Fund believes that Section 4(2) commercial paper and
possibly certain other restricted securities which meet the criteria for
liquidity established by the Trust's Board of Trustees (the "Trustees") are
quite liquid. The Fund intends, therefore, to treat the restricted securities
which meet the criteria for liquidity established by the Trustees, including
Section 4(2) commercial paper, as determined by the Fund's investment adviser,
as liquid and not subject to the investment limitation applicable to illiquid
securities. In addition, because Section 4(2) commercial paper is liquid, the
Fund does not intend to subject such paper to the limitation applicable to
restricted securities.
REPURCHASE AGREEMENTS
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund believes that under the regular procedures
normally in effect for custody of the Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Fund's adviser to
be creditworthy pursuant to guidelines established by the Trustees.
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 other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the securities
to be purchased are segregated 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.
FUTURES AND OPTIONS TRANSACTIONS
The Fund may attempt to hedge all or a portion of its portfolio by buying and
selling financial futures contracts and options on financial futures contacts.
Additionally, the Fund may buy and sell call and put options on U.S. government
securities.
FINANCIAL FUTURES CONTRACTS
A futures contract is a firm commitment by two parties, the seller who
agrees to make delivery of the specific type of security called for in
the contract ("going short") and the buyer, who agrees to take delivery
of the security ("going long") at a certain time in the future. Financial
futures contracts call for the delivery of particular debt securities
issued or guaranteed by the U.S. Treasury or by specified agencies or
instrumentalities of the U.S. government.
In the fixed income securities market, price moves inversely to interest
rates. A rise in rates means a drop in price. Conversely, a drop in rates
means a rise in price. In order to hedge its holdings of fixed income
securities against a rise in market interest rates, the Fund could enter
into contracts to deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the prices of its
fixed income securities may decline during the Fund's anticipated holding
period. The Fund would "go long" (agree to purchase securities in the
future at a predetermined price) to hedge against a decline in market
interest rates.
PURCHASING PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts
for U.S. government securities. Unlike entering directly into a futures
contract, which requires the purchaser to buy a financial instrument on a
set date at a specified price, the purchase of a put option on a futures
contract entitles (but does not obligate) its purchaser to decide on or
before a future date whether to assume a short position at the specified
price.
The Fund would purchase put options on futures to protect portfolio
securities against decreases in value resulting from an anticipated
increase in market interest rates. Generally, if the hedged portfolio
securities decrease in value during the term of an option, the related
futures contracts will also decrease in value and the option will
increase in value. In such an event, the Fund will normally close out its
option by selling an identical option. If the hedge is successful, the
proceeds received by the Fund upon the sale of the second option will be
large enough to offset both the premium paid by the Fund for the original
option plus the decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option. To do so, it would
simultaneously enter into a futures contract of the type underlying the
option (for a price less than the strike price of the option) and
exercise the option. The Fund would then deliver the futures contract in
return for payment of the strike price. If the Fund neither closes out
nor exercises an option, the option will expire on the date provided in
the option contract, and the premium paid for the contract will be lost.
WRITING CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write
listed call options on futures contracts for U.S. government securities
to hedge its portfolio against an increase in market interest rates. When
the Fund writes a call option on a futures contract, it is undertaking
the obligation of assuming a short futures position (selling a futures
contract) at the fixed strike price at any time during the life of the
option if the option is exercised. As market interest rates rise, causing
the prices of futures to go down, the Fund's obligation under a call
option on a future (to sell a futures contract) costs less to fulfill,
causing the value of the Fund's call option position to increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the call,
so that the Fund keeps the premium received for the option. This premium
can offset the drop in value of the Fund's fixed income portfolio which
is occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of it
by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will be
less than the premium received by the Fund for the initial option. The
net premium income of the Fund will then offset the decrease in value of
the hedged securities.
WRITING PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may write listed put options on financial futures contracts for
U.S. government securities to hedge its portfolio against a decrease in
market interest rates. When the Fund writes a put option on a futures
contract, it receives a premium for undertaking the obligation to assume
a long futures position (buying a futures contract) at a fixed price at
any time during the life of the option. As market interest rates
decrease, the market price of the underlying futures contract normally
increases.
As the market value of the underlying futures contract increases, the
buyer of the put option has less reason to exercise the put because the
buyer can sell the same futures contract at a higher price in the market.
The premium received by the Fund can then be used to offset the higher
prices of portfolio securities to be purchased in the future due to the
decrease in market interest rates.
Prior to the expiration of the put option, or its exercise by the buyer,
the Fund may close out the option by buying an identical option. If the
hedge is successful, the cost of buying the second option will be less
than the premium received by the Fund for the initial option.
PURCHASING CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
An additional way in which the Fund may hedge against decreases in market
interest rates is to buy a listed call option on a financial futures
contract for U.S. government securities. When the Fund purchases a call
option on a futures contract, it is purchasing the right (not the
obligation) to assume a long futures position (buy a futures contract) at
a fixed price at any time during the life of the option. As market
interest rates fall, the value of the underlying futures contract will
normally increase, resulting in an increase in value of the Fund's option
position. When the market price of the underlying futures
contract increases above the strike price plus premium paid, the Fund
could exercise its option and buy the futures contact below market price.
Prior to the exercise or expiration of the call option, the Fund could
sell an identical call option and close out its position. If the premium
received upon selling the offsetting call is greater than the premium
originally paid, the Fund has completed a successful hedge.
LIMITATION ON OPEN FUTURES POSITIONS
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds the
current market value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Fund will take
prompt action to close out a sufficient number of open contracts to bring
its open futures and options positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather,
the Fund is required to deposit an amount of "initial margin" in cash or
U.S. Treasury bills with its custodian (or the broker, if legally
permitted). The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that futures
contract initial margin does not involve the borrowing of funds by the
Fund to finance the transactions. Initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned
to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. The Fund may not purchase or
sell futures contracts or related options if immediately thereafter the
sum of the amount of margin deposits on the Fund's existing futures
positions and premiums paid for related options would exceed 5% of the
market value of the Fund's total assets.
A futures contract held by the Fund is valued daily at the official
settlement price on the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as
"marking to market." Variation margin does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund and the
broker of the amount one would owe the other if the futures contract
expired. In computing its daily net asset value, the Fund will
mark-to-market its open futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
PURCHASING AND WRITING PUT AND CALL OPTIONS ON U.S. GOVERNMENT SECURITIES
The Fund may purchase put and call options on U.S. government securities
to protect against price movements in particular securities. A put option
gives the Fund, in return for a premium, the right to sell the underlying
security to the writer (seller) at a specified price during the term of
the option. A call option gives the Fund, in return for a premium, the
right to buy the underlying security from the seller.
The Fund may write covered put and call options to generate income. As
writer of a call option, the Fund has the obligation upon exercise of the
option during the option period to deliver the underlying security upon
payment of the exercise price. As a writer of a put option, the Fund has
the obligation to purchase a security from the purchaser of the option
upon the exercise of the option.
The Fund may only write call options either on securities held in its
portfolio or on securities which it has the right to obtain without
payment of further consideration (or has segregated cash in the amount of
any additional consideration). In the case of put options, the Fund will
segregate cash or U.S. Treasury obligations with a value equal to or
greater than the exercise price of the underlying securities.
The Fund may generally purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the buyers or
writers of the options since options on the portfolio securities held by
the Fund are not traded on an exchange. The Fund purchases and writes
options only with investment dealers and other financial institutions
(such as commercial banks or savings and loan associations) deemed
creditworthy by the Fund's adviser.
Over-the-counter options are two party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded options
are third party contracts with standardized strike prices and expiration
dates and are purchased from a clearing corporation. Exchange-traded
options have a continuous liquid market while over-the-counter options
may not.
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.
RESTRICTED SECURITIES
The Fund may invest in restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to its investment
objective and policies but which are subject to restriction on resale under
federal securities laws. The Fund will not invest more than 10% of the value of
its total assets in restricted securities; however, certain restricted
securities which the Trustees deem to be liquid will be excluded from this 10%
limitation.
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission ("SEC") Staff
position set forth in the adopting release for Rule 144A under the Securities
Act of 1933 (the "Rule"). The Rule is a non-exclusive, safe-harbor for certain
secondary market transactions involving securities subject to restrictions or
resale under federal securities laws. The Rule provides an exemption from
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the liquidity of
the secondary market for securities eligible for resale under Rule 144A. The
Fund believes that the Staff of the SEC has left the question of determining the
liquidity of all restricted securities for determination by the Trustees. The
Trustees consider the following criteria in determining the liquidity of certain
restricted securities:
the frequency of trades and quotes for the security;
the number of dealers willing to purchase or sell the security and the number of
other potential buyers;
dealer undertakings to make a market in the security; and
the nature of the security and the nature of the marketplace trades.
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.
PORTFOLIO TURNOVER
The Fund may trade or dispose of portfolio securities as considered necessary to
meet its investment objective. It is not anticipated that the portfolio trading
engaged in by the Fund will result in its annual rate of turnover exceeding
100%. For the period from January 11, 1993 (commencement of operations) to
December 31, 1993, the portfolio turnover rate for the Fund was 39%.
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 transactions.
A deposit or payment by the Fund of initial or variation margin in
connection with financial futures contracts or related options
transactions is not considered the purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money 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 amounts
borrowed, in order to meet redemption requests without immediately
selling portfolio instruments; and except to the extent that the Fund
will enter into futures contracts. Any such borrowings need not be
collateralized. The Fund will not purchase any securities while
borrowings in excess of 5% 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. For purposes of this limitation, the
following are not deemed to be pledges: margin deposits for the purchase
and sale of financial futures contracts and related options; and
segregation of collateral arrangements made in connection with options
activities or the purchase of securities on a when-issued basis.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, including limited partnership
interests, although it may invest in the securities of companies whose
business involves the purchase or sale of real estate or in securities
which are secured by real estate or interests in real estate.
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
objectives, policies, and limitations.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities in
accordance with that section of the prospectus entitled "Lending of
Portfolio Securities."
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more of the value of its total assets in
any one industry. However, investing in U.S. government obligations shall
not be considered investments in any one industry.
SELLING SHORT
The Fund will not sell securities short.
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of the Fund's total assets, the Fund
will not invest more than 5% of the value of its total assets in any one
issuer (except cash and cash items, repurchase agreements, and U.S.
government obligations). The Fund will not acquire more than 10% of the
outstanding voting securities of any one issuer.
Except as noted, the above investment limitations cannot be changed without
shareholder approval. The following restrictions, however, may be changed by the
Trustees without shareholder approval. Shareholders will be notified before any
material change in these limitations becomes effective.
RESTRICTED SECURITIES
The Fund may invest up to 10% of its total assets in restricted
securities. Certain restricted securities which the Trustees deem to be
liquid will be excluded from this limitation. The restriction is not
applicable to commercial paper issued under Section 4(2) of the
Securities Act of 1933.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
portfolio instruments of unseasoned issuers, including their
predecessors, that have been in operation for less than three years.
INVESTING IN 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.
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 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 ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in securities
which are illiquid, including repurchase agreements providing for
settlement in more than seven days after notice and certain restricted
securities.
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 has no present intention to borrow money in excess of 5% of the value
of its net assets during the coming fiscal year.
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.
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".
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, and President and Treasurer, Federated Advisers, Federated Management, 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 Vice President, Federated Administrative Services; Director, Private
and Assistant Label Management, Federated Investors; Vice President and Assistant
Treasurer 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, the following shareholders of record owned 5% or more of
the outstanding Trust Shares of the Fund: First Union National Bank, Trust
Accounts, Charlotte, North Carolina, owned 277,887 shares (18.5%).
As of February 4, 1994, the following shareholders of record owned 5% or more of
the outstanding Class B Investment Shares of the Fund: FUBS & Co., Alexandria,
Virginia, owned 196,581 shares (5.1%).
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 shall be liable for his
own wilful defaults, but shall not be liable for errors of judgement 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 respective prospectus.
For the period from January 11, 1993 (commencement of operations) to December
31, 1993, the Adviser earned $802,441, of which $465,195 was voluntarily waived.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1-1/2% per
year of the remaining average net assets, the Adviser will 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
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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
respective prospectus.
For the period from January 11, 1993 (commencement of operations) to December
31, 1993, the Fund incurred $139,691 in administrative service costs, of which
$30,827 was voluntarily waived.
PURCHASING SHARES
- --------------------------------------------------------------------------------
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 Shares is explained in the respective
prospectus under "How to Buy Shares."
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Class B Investment
Shares through:
quantity discounts and accumulated purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
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.
LETTER OF INTENT
If a shareholder intends to purchase at least $100,000 of Shares in the
Fund over the next 13 months, the sales charge may be reduced by signing
a letter of intent to that effect. This letter of intent includes a
provision for a sales charge adjustment depending on the amount actually
purchased within the 13-month period and a provision for the custodian to
hold up to 4.0% of the total amount intended to be purchased in escrow
(in Shares) until such purchase is completed.
The amount held in escrow will be applied to the shareholder's account at
the end of the 13-month period unless the amount specified in the letter
of intent is not purchased. In this event, an appropriate number of
escrowed Shares may be redeemed in order to realize the difference in the
sales charge.
This letter of intent will not obligate the shareholder to purchase
Shares, but if the shareholder does, each purchase during the period will
be at the sales charge applicable to the total amount intended to be
purchased. This letter may be dated as of a prior date to include any
purchases made within the past 90 days.
REINVESTMENT PRIVILEGE
If Shares in the Fund have been redeemed, the shareholder has a one-time
right, within 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 First
Union 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 First Union Funds with a sales charge, and
$70,000 in Shares of the 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 PLANS (CLASS B AND CLASS C INVESTMENT SHARES)
With respect to the Class B and Class C Investment Shares classes of the Fund,
the Trust has adopted distribution plans (the "Plans") pursuant to Rule 12b-1
which was promulgated by the SEC pursuant to the Investment Company Act of 1940.
The Plans permit the payment of fees to brokers for distribution and
administrative services and to administrators for administrative services as to
Class B and Class C Investment Shares. The Plans are designed to (i) stimulate
brokers to provide distribution and administrative support services to the
Fund and holders of Class B and Class C Investment Shares and (ii) stimulate
administrators to render administrative support services to the Fund and holders
of Class B and Class C Investment 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 Class B and Class C Investment
Shares; assisting clients in changing dividend options, account designations,
and addresses; and providing such other services as the Fund reasonably requests
for its Class B and Class C Investment Shares.
By adopting the Plans, 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 Plans 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 period from January 11, 1993 (commencement of operations) to December
31, 1993, brokers and administrators (financial institutions) received fees in
the amount of $1,068,084, pursuant to the Plans.
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 Plans for
administrative services, and if paid, will be reimbursed by the Adviser
and not the Fund.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value of Shares generally changes each day. The days on which the net
asset values of Shares are calculated by the Fund are described in the
respective prospectus.
DETERMINING MARKET VALUE OF SECURITIES
The market values of the Fund's portfolio securities are determined as follows:
according to prices provided by independent pricing services, which may be
determined without exclusive reliance on quoted prices from dealers but which
use market prices when most representative, and which may take into account
appropriate factors such as yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data employed in determining
valuations for such securities; 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 that
particular circumstances of the security indicate otherwise.
Over-the-counter put options will be valued at the mean between the bid and the
asked prices. Covered call options will be valued at the last sale price on the
national exchange on which such option is traded. Unlisted call options will be
valued at the latest bid price as provided by brokers.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request, plus a contingent deferred sales charge, if
applicable. 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 respective prospectus
under "How to Redeem 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
- --------------------------------------------------------------------------------
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.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional Shares.
CAPITAL GAINS
Shareholders will pay federal income tax at capital gains rates on
long-term capital gains distributed to them regardless of how long they
have held Shares.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's cumulative total return for Class B Investment Shares for the period
from January 12, 1993 (start of performance) to December 31, 1993 was 3.10%.
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 2.68%.
The Fund's cumulative total return for Trust Shares for the period from August
25, 1993 (start of performance) to December 31, 1993 was .49%.
Cumulative total return reflects each class's 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.
Class B Shares' total return is representative of only 11.5 months of Fund
activity since the commencement of operations. Class C Shares' total return is
representative of only 11.5 months of Fund activity since the commencement of
operations. Trust Shares' total return is representative of only four months of
Fund activity since the commencement of operations.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for Class B Investment Shares for the thirty-day period ended
December 31, 1993 was 3.93%. The Fund's yield for Class C Investment Shares for
the thirty-day period ended December 31, 1993 was 3.60%. The Fund's yield for
Trust Shares for the thirty-day period ended December 31, 1993 was 4.35%.
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 any class of
Shares over a thirty-day period by the maximum offering price per share of any
class on the last day of the period. This value is then annualized using
semi-annual compounding. This means that the amount of income generated during
the thirty-day period is assumed to be generated each month over a 12-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by any 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 broker/dealers charge fees in
connection with services provided in conjunction with an investment in any class
of Shares, the performance will be reduced for those shareholders paying those
fees.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
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 capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the "U.S. government
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 INTERMEDIATE GOVERNMENT BOND INDEX is an unmanaged index comprised of
all publicly issued, non-convertible domestic debt of the U.S. government or
any agency thereof, or any quasi-federal corporation, and of corporate debt
guaranteed by the U.S. government. Only notes and bonds with a minimum
outstanding principal of $1 million and minimum maturity of one year and
maximum maturity of ten years are included.
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
- --------------------------------------------------------------------------------
The financial statements for First Union U.S. Government 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 inside back cover of the
respective prospectus.
3031008B (2/94)
FIRST UNION UTILITY PORTFOLIO
(A PORTFOLIO OF FIRST UNION FUNDS)
TRUST SHARES
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
Supplement to Combined Statement of Additional Information dated
February 28, 1994
Effective September 1, 1994, First Union Utility
Portfolio (the "Fund") will offer Class D Investment
Shares ("Class D Shares"). Class D Shares will be
similar to Class C Shares in all respects except:
Class D Shares will have a contingent deferred sales
charge of 1.00%, which terminates after one year, and
the Class D Shares will not automatically convert into
Class B Shares after seven years.
Effective September 1, 1994, Class C Shares will assess
a shareholder service fee of 0.25% of the average daily
net asset value, of which all or a portion may be
waived at any time.
September 1, 1994
FEDERATED SECURITIES CORP.
Distributor
G00389-06 (9/94)
FIRST UNION UTILITY PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
TRUST SHARES
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectus of Trust Shares, Class B Investment Shares,
or Class C Investment Shares for First Union Utility Portfolio, dated
February 28, 1994. This Statement is not a prospectus itself. To
receive a copy of the Trust Shares' prospectus, write First Union
National Bank of North Carolina, Capital Management Group, 1200 Two
First Union Center, Charlotte, North Carolina 28288-1156 or call
1-800-326-2584. To receive a copy of the Class B Investment Shares' or
Class C Investment Shares' prospectus, write First Union Brokerage
Services, Inc., One First Union Center, 301 S. College Street,
Charlotte, North Carolina 28288-1173 or call 1-800-326-3241.
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
- ---------------------------------------------------------------
Restricted and Illiquid Securities 1
When-Issued and Delayed Delivery
Transactions 1
Lending of Portfolio Securities 2
Reverse Repurchase Agreements 2
Options Transactions 2
Futures Transactions 3
Portfolio Turnover 4
Investment Limitations 4
TRUST MANAGEMENT 6
- ---------------------------------------------------------------
Officers and Trustees 6
Fund Ownership 7
Trustee Liability 7
INVESTMENT ADVISORY SERVICES 8
- ---------------------------------------------------------------
Adviser to the Fund 8
Advisory Fees 8
BROKERAGE TRANSACTIONS 8
- ---------------------------------------------------------------
ADMINISTRATIVE SERVICES 9
- ---------------------------------------------------------------
PURCHASING SHARES 9
- ---------------------------------------------------------------
Distribution Plans (Class B and Class C
Investment Shares) 10
DETERMINING NET ASSET VALUE 10
- ---------------------------------------------------------------
Determining Market Value of Securities 10
REDEEMING SHARES 11
- ---------------------------------------------------------------
Redemption in Kind 11
TAX STATUS 11
- ---------------------------------------------------------------
The Fund's Tax Status 11
Shareholders' Tax Status 11
TOTAL RETURN 11
- ---------------------------------------------------------------
YIELD 12
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 12
- ---------------------------------------------------------------
APPENDIX 14
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
First Union Utility Portfolio (the "Fund") is a portfolio of First Union Funds
(the "Trust"). The Trust was established as a Massachusetts business trust under
a Declaration of Trust dated August 30, 1984. On January 4, 1993, the name of
the Trust was changed from "The Salem Funds" to "First Union Funds."
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"). This Combined Statement of Additional Information
relates to the above-mentioned Shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is high current income and moderate capital
appreciation. The Fund invests primarily in a diversified portfolio of equity
and debt securities issued by utility companies. The investment objective cannot
be changed without approval of shareholders.
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. government obligations in which the Fund may invest
generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations issued or guaranteed by
U.S. government agencies or instrumentalities. These securities are
backed by:
the full faith and credit of the U.S. Treasury;
the issuer's right to borrow from the U.S. Treasury;
the discretionary authority of the U.S. government to purchase certain
obligations of agencies or
instrumentalities; or
the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
Federal Farm Credit Banks;
Federal Home Loan Banks;
Federal National Mortgage Association;
Student Loan Marketing Association; and
Federal Home Loan Mortgage Corporation.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Board of Trustees ("Trustees") to determine the liquidity of
certain restricted securities is permitted under a Securities and Exchange
Commission ("SEC") Staff position set forth in the adopting release for Rule
144A under the Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive,
safe-harbor for certain secondary market transactions involving securities
subject to restrictions on resale under federal securities laws. The Rule
provides an exemption from registration for resales of otherwise restricted
securities to qualified institutional buyers. The Rule was expected to further
enhance the liquidity of the secondary market for securities eligible for resale
under the Rule. The Fund believes that the Staff of the SEC has left the
question of determining the liquidity of all restricted securities to the
Trustees. The Trustees consider the following criteria in determining the
liquidity of certain restricted securities:
the frequency of trades and quotes for the security;
the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
dealer undertakings to make a market in the security; and
the nature of the security and the nature of marketplace trades.
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 or yield for the Fund. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the securities
to be purchased are segregated 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.
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.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement, the Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be repurchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of Shares of the
Fund, the Fund may attempt to hedge all or a portion of its portfolio through
the purchase of put options on portfolio securities and listed put options on
financial futures contracts for portfolio securities. The Fund may also write
covered call options on its portfolio securities to attempt to increase its
current income.
The Fund will maintain its positions in securities, option rights, and
segregated cash subject to puts and calls until the options are exercised,
closed, or have expired.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts.
These options will be used only to protect portfolio securities against
decreases in value resulting from market factors such as an anticipated
increase in interest rates.
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of instrument called for in
the contract ("going short") and the buyer who agrees to take delivery of
the instrument ("going long") at a certain time in the future. Financial
futures contracts call for the delivery of particular debt instruments
issued or guaranteed by the U.S. Treasury or by specified agencies or
instrumentalities of the U.S. government. If the Fund would enter into
financial futures contracts directly to hedge its holdings of fixed
income securities, it would enter into contracts to deliver securities at
an undetermined price (i.e., "go short") to protect itself against the
possibility that the prices of its fixed income securities may decline
during the Fund's anticipated holding period.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at an undetermined
price, the purchase of a put option on a futures contract entitles (but
does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price. Generally, if
the hedged portfolio securities decrease in value during the term of an
option, the related futures contracts will also decrease in value and the
put option will increase in value. In such an event, the Fund will
normally close out its option by selling an identical put option. If the
hedge is successful, the proceeds received by the Fund upon the sale of
the put option will be large enough to offset both the premium paid by
the Fund for the put option plus the realized decrease in value of the
hedged securities.
Alternately, the Fund may exercise its put option to close out the
position. To do so, it would enter into a futures contract of the type
underlying the option. If the Fund neither closes out nor exercises an
option, the option will expire on the date provided in the option
contract, and only the premium paid for the contract will be lost.
WRITING COVERED OPTIONS
The Fund may write (i.e., sell) covered call and put options. By writing
a call option, the Fund becomes obligated during the term of the option
to deliver the securities underlying the option upon payment of the
exercise price. By writing a put option, the Fund becomes obligated
during the term of the option to purchase the securities underlying the
option at the exercise price if the option is exercised. The Fund also
may write straddles (combinations of covered puts and calls on the same
underlying security).
The Fund may only write "covered" options. This means that so long as the
Fund is obligated as the writer of a call option, it will own the
underlying securities subject to the option or, in the case of call
options on U.S. Treasury bills, the Fund might own substantially similar
U.S. Treasury bills.
The Fund will be considered "covered" with respect to a put option it
writes if, so long as it is obligated as the writer of the put option, it
deposits and maintains with its custodian in a segregated account liquid
assets having a value equal to or greater than the exercise price of the
option.
The principal reason for writing call or put options is to obtain,
through a receipt of premiums, a greater current return than would be
realized on the underlying securities alone. The Fund receives a premium
from writing a call or put option which it retains whether or not the
option is exercised. By writing a call option, the Fund might lose the
potential for gain on the underlying security while the option is open,
and by writing a put option, the Fund might become obligated to purchase
the underlying security for more than its current market price upon
exercise.
PURCHASING OPTIONS
The Fund may purchase both put and call options on its portfolio
securities. These options will be used as a hedge to attempt to protect
securities which the Fund holds or will be purchasing against decreases
or increases in value. The Fund may purchase call and put options for the
purpose of offsetting previously written call and put options of the same
series. If the Fund is unable to effect a closing purchase transaction
with respect to covered options it has written, the Fund will not be able
to sell the underlying securities or dispose of assets held in a
segregated account until the options expire or are exercised.
The Fund currently does not intend to invest more than 5% of its net
assets in options transactions.
OPTIONS TRADING MARKETS
Options which the Fund will trade must be listed on national securities
exchanges. Exchanges on which such options currently are traded are the
Chicago Board Options Exchange and the New York, American, Pacific and
Philadelphia Stock Exchanges ("Exchanges").
FUTURES TRANSACTIONS
The Fund may enter into currency and other financial futures contracts and write
options on such contracts. The Fund intends to enter into such contracts and
related options for hedging purposes. The Fund will enter into futures on
securities, currencies or index-based futures contracts in order to hedge
against changes in interest or exchange rates or securities prices. A futures
contract on securities or currencies is an agreement to buy or sell securities
or currencies during a designated month at whatever price exists at that time. A
futures contract on a securities index does not involve the actual delivery of
securities, but merely requires the payment of a cash settlement based on
changes in the securities index. The Fund does not make payment or deliver
securities upon entering into a futures contract. Instead, it puts down a margin
deposit, which is adjusted to reflect changes in the value of the contract and
which remains in effect until the contract is terminated.
The Fund may sell or purchase currency and other financial futures contracts.
When a futures contract is sold by the Fund, the profit on the contract will
tend to rise when the value of the underlying securities or currencies declines
and to fall when the value of such securities or currencies increases. Thus, the
Fund sells futures contracts in order to offset a possible decline in the profit
on its securities or currencies. If a futures contract is purchased by the Fund,
the value of the contract will tend to rise when the value of the underlying
securities or currencies increases and to fall when the value of such securities
or currencies declines.
The Fund intends to purchase put and call options on currency and other
financial futures contracts for hedging purposes. A put option purchased by the
Fund would give it the right to assume a position as the seller of a futures
contract. A call option purchased by the Fund would give it the right to assume
a position as the
purchaser of a futures contract. The purchase of an option on a futures contract
requires the Fund to pay a premium. In exchange for the premium, the Fund
becomes entitled to exercise the benefits, if any, provided by the futures
contract, but is not required to take any action under the contract. If the
option cannot be exercised profitably before it expires, the Fund's loss will be
limited to the amount of the premium and any transaction costs.
The Fund may enter into closing purchase and sale transactions in order to
terminate a futures contract and may buy or sell put and call options for the
purpose of closing out its options positions. The Fund's ability to enter into
closing transactions depends on the development and maintenance of a liquid
secondary market. There is no assurance that a liquid secondary market will
exist for any particular contract or at any particular time. As a result, there
can be no assurance that the Fund will be able to enter into an offsetting
transaction with respect to a particular contract at a particular time. If the
Fund is not able to enter into an offsetting transaction, the Fund will continue
to be required to maintain the margin deposits on the contract and to complete
the contract according to its terms, in which case it would continue to bear
market risk on the transaction.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and thereby insure
that the use of such futures contracts is unleveraged.
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 objectives. It is not anticipated that the portfolio
trading engaged in by the Fund will result in its annual rate of turnover
exceeding 85%.
INVESTMENT LIMITATIONS
CONCENTRATION OF INVESTMENTS
The Fund will not invest more than 25% of its total assets (valued at the
time of investment) in securities of companies engaged principally in any
one industry other than the utilities industry, except that this
restriction does not apply to cash or cash items and securities issued or
guaranteed by the United States government or its agencies or
instrumentalities.
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of transactions. A deposit or payment by the Fund of initial or
variation margin in connection with financial futures contracts or
related options transactions is not considered the purchase of a security
on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may borrow
money directly or through reverse repurchase agreements in amounts up to
one-third of the value of its total assets, including the amount borrowed
and except to the extent that the Fund may enter into futures contracts.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage, but rather as a temporary, extraordinary, or
emergency measure to facilitate management of the portfolio by enabling
the Fund to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Fund will
not purchase any securities while borrowings in excess of 5% of its total
assets are outstanding.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities or commodity contracts.
However, the Fund may enter into futures contracts on financial
instruments or currency and sell or buy options on such contracts.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities up
to 15% of the value of its total assets. This shall not prevent the Fund
from purchasing or holding corporate or government bonds,
debentures, notes, certificates of indebtedness or other debt securities
of an issuer, repurchase agreements, or other transactions which are
permitted by the Fund's investment objectives and policies or the Trust's
Declaration of Trust.
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
objectives, policies, and limitations.
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. For
purposes of this limitation, the following are not deemed to be pledges:
margin deposits for the purchase and sale of financial futures contracts
and related options and segregation or collateral arrangements made in
connection with options activities.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, including limited partnership
interests in real estate, although it may invest in 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.
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of its assets, the Fund will not
purchase the securities of any issuer (other than cash, cash items, or
securities issued or guaranteed by the U.S. government, its agencies, or
instrumentalities and repurchase agreements collateralized by such
securities) if, as a result, more than 5% of the value of its total
assets would be invested in the securities of that issuer. The Fund will
not acquire more than 10% of the outstanding voting securities of any one
issuer.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material changes
in these limitations become effective.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of its total assets in securities
subject to restrictions on resale under the Securities Act of 1933,
except for commercial paper issued under Section 4(2) of the Securities
Act of 1933 and certain other restricted securities which meet the
criteria for liquidity as established by the Trustees. To comply with
certain state restrictions, the Fund will limit these transactions to 5%
of its total assets. (If state restrictions change, this latter
restriction may be revised without shareholder approval or notification.)
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 more
than seven days after notice, non-negotiable time deposits, and certain
restricted securities not determined by the Trustees to be liquid.
INVESTING TO EXERCISE CONTROL
The Fund will not purchase securities of an issuer for the purpose of
exercising control or management.
INVESTING IN PUT OPTIONS
The Fund will not purchase put options on securities, unless the
securities are held in the Fund's portfolio and not more than 5% of the
Fund's total assets would be invested in premiums on open put option
positions.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them
in deliverable form without further payment or after segregating cash in
the amount of any further payment.
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 securities
of issuers which have records of less than three years of continuous
operations, including their predecessors.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of its net assets in warrants,
including those acquired in units or attached to other securities. To
comply with certain state restrictions, the Fund will limit its
investment in such warrants not listed on the New York or American Stock
Exchanges to 2% of its net assets. (If state restrictions change, this
latter restriction may be revised without notice to shareholders.) For
purposes of this investment restriction, warrants acquired by the Fund in
units or attached to securities may be deemed to be without value.
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.
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 the Fund in shares of
another investment company would be subject to such duplicate expenses.
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.
To comply with registration requirements in certain states, the Fund (a) will
limit the aggregate value of the assets underlying covered call options or put
options written by the Fund to not more than 25% of its net assets, (b) will
limit the premiums paid for options purchased by the Fund to 20% of its net
assets, and (c) will limit the margin deposits on futures contracts entered into
by the Fund to 5% of its net assets. (If state requirements change, these
restrictions may be revised without shareholder notification.)
The Fund has no present intention to borrow money in excess of 5% of the value
of its net assets during the coming fiscal year. 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.
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".
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, and President and Treasurer, Federated Advisers, Federated Management, 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 effective.
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 shall 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 respective prospectus.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1-1/2% per
year of the remaining average net assets, the Adviser will 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
respective prospectus.
PURCHASING SHARES
- --------------------------------------------------------------------------------
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 Shares is explained in the respective
prospectus under "How to Buy Shares."
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Class B Investment
Shares through:
quantity discounts and accumulated purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
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.
LETTER OF INTENT
If a shareholder intends to purchase at least $100,000 of Shares in the
Fund over the next 13 months, the sales charge may be reduced by signing
a letter of intent to that effect. This letter of intent includes a
provision for a sales charge adjustment depending on the amount actually
purchased within the 13-month period and a provision for the custodian to
hold up to 4.0% of the total amount intended to be purchased in escrow
(in Shares) until such purchase is completed.
The amount held in escrow will be applied to the shareholder's account at
the end of the 13-month period, unless the amount specified in the letter
of intent is not purchased. In this event, an appropriate number of
escrowed Shares may be redeemed in order to realize the difference in the
sales charge.
This letter of intent will not obligate the shareholder to purchase
Shares, but if the shareholder does, each purchase during the period will
be at the sales charge applicable to the total amount intended to be
purchased. This letter may be dated as of a prior date to include any
purchases made within the past 90 days.
REINVESTMENT PRIVILEGE
If Shares in the Fund have been redeemed, the shareholder has a one-time
right, within 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 First
Union 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 First Union Funds with a sales charge, and
$70,000 in Shares of the 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 PLANS (CLASS B AND CLASS C INVESTMENT SHARES)
With respect to the Class B and Class C Investment Shares classes of the Fund,
the Trust has adopted distribution plans (the "Plans") pursuant to Rule 12b-1
which was promulgated by the SEC pursuant to the Investment Company Act of 1940.
The Plans permit the payment of fees to brokers for distribution and
administrative services and to administrators for administrative services as to
Class B and Class C Investment Shares. The Plans are designed to (i) stimulate
brokers to provide distribution and administrative support services to the Fund
and holders of Class B and Class C Investment Shares and (ii) stimulate
administrators to render administrative support services to the Fund and holders
of Class B and Class C Investment 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 Class B and Class C Investment
Shares; assisting clients in changing dividend options, account designations,
and addresses; and providing such other services as the Fund reasonably requests
for its Class B and Class C Investment Shares.
By adopting the Plans, 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 Plans 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.
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 Plans for
administrative services, and if paid, will be reimbursed by the Adviser
and not the Fund.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value of Shares generally changes each day. The days on which the net
asset values of Shares are calculated by the Fund are described in the
respective prospectus.
DETERMINING MARKET VALUE OF SECURITIES
The market values of the Fund's portfolio securities, other than options, 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 last closing bid and asked prices, and for bonds and other fixed
income securities, as determined by an independent pricing service;
for unlisted equity securities, the latest bid prices; or
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 60 days or less at the time of purchase, at
amortized cost 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.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request, plus a contingent deferred sales charge, if
applicable. 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 respective prospectus
under "How to Redeem 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
- --------------------------------------------------------------------------------
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.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional Shares.
CAPITAL GAINS
Shareholders will pay federal income tax at capital gains rates on
long-term capital gains distributed to them regardless of how long they
have held the Shares.
TOTAL RETURN
- --------------------------------------------------------------------------------
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 a quarterly
reinvestment of all dividends and distributions.
YIELD
- --------------------------------------------------------------------------------
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 any class of
shares over a thirty-day period by the offering price per Share of any class on
the last day of the period. This value is then annualized using semi-annual
compounding. This means that the amount of income generated during the
thirty-day period is assumed to be generated each month over a twelve-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by any 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 broker/dealers charge fees in
connection with services provided in conjunction with an investment in any class
of shares, the performance will be reduced for those shareholders paying those
fees.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
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. ("LIPPER"), an independent mutual fund rating
service, ranks funds in various fund categories by making comparative
calculations using total return. Total return assumes the reinvestment of all
capital gains distributions and income dividends and takes into account any
change in net asset value over a specified period of time. From time to time,
the Fund will quote its Lipper ranking in the "utility funds" category in
advertising and sales literature.
DOW JONES INDUSTRIAL AVERAGE ("DJIA") represents share prices of selected blue
chip industrial corporations as well as public utility and transportation
companies. The DJIA indicates daily changes in the average price of stocks in
any of its categories. It also reports total sales for each group of
industries. Because it represents the top corporations of America, the DJIA is
a leading economic indicator for the stock market as a whole.
STANDARD & POOR'S UTILITY INDEX is an unmanaged index of common stocks from
forty different utilities. This index indicates daily changes in the price of
the stocks. The index also provides figures for changes in price from the
beginning of the year to date, and for a twelve month period.
DOW JONES UTILITY INDEX is an unmanaged index comprised of fifteen utility
stocks that tracks changes in price daily and over a six month period. The index
also provides the highs and lows for each of the past five years.
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.
STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a composite
index of common stocks in industry, transportation, and financial and public
utility companies, can be used to compare to the total returns of funds whose
portfolios are invested primarily in common stocks. In addition, the Standard &
Poor's index assumes reinvestments of all dividends paid by stocks listed on
its index. Taxes due on any of these distributions are not included, nor are
brokerage or other fees calculated in the Standard & Poor's figures.
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.
APPENDIX
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STANDARD & POOR'S CORPORATION CORPORATE 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 effect of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING DEFINITIONS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
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.
Baa--Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
STANDARD & POOR'S CORPORATION COMMERCIAL PAPER RATING DEFINITIONS
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS
PRIME-1--Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following characteristics:
_Leading market positions in well established industries.
_High rates of return on funds employed.
_Conservative capitalization structures with moderate reliance on debt and ample
asset protection.
_Broad margins in earnings coverage of fixed financial markets and assured
sources of alternate liquidity.
_Well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2--Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
3092403B (2/93)
FIRST UNION MANAGED BOND PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
TRUST SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of Trust Shares for First Union Managed Bond Portfolio,
dated February 28, 1994. This Statement is not a prospectus itself. To
receive a copy of the Trust Shares' prospectus, write First Union
National Bank of North Carolina, Capital Management Group, 1200 Two
First Union Center, Charlotte, North Carolina 28288-1156 or call
1-800-326-2584.
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 OBJECTIVES AND POLICIES 1
- ---------------------------------------------------------------
Types of Investments 1
Restricted and Illiquid Securities 1
When-Issued and Delayed
Delivery Transactions 1
Options Transactions 2
Lending of Portfolio Securities 3
Reverse Repurchase Agreements 3
Portfolio Turnover 3
Investment Limitations 3
TRUST MANAGEMENT 5
- ---------------------------------------------------------------
Officers and Trustees 5
Fund Ownership 6
Trustee Liability 6
INVESTMENT ADVISORY SERVICES 7
- ---------------------------------------------------------------
Adviser to the Fund 7
Advisory Fees 7
BROKERAGE TRANSACTIONS 7
- ---------------------------------------------------------------
ADMINISTRATIVE SERVICES 8
- ---------------------------------------------------------------
PURCHASING SHARES 8
- ---------------------------------------------------------------
Distribution Plan (Investment Shares) 9
DETERMINING NET ASSET VALUE 9
- ---------------------------------------------------------------
Determining Market Value of Securities 9
REDEEMING SHARES 10
- ---------------------------------------------------------------
Redemption in Kind 10
TAX STATUS 10
- ---------------------------------------------------------------
The Fund's Tax Status 10
Shareholders' Tax Status 10
TOTAL RETURN 10
- ---------------------------------------------------------------
YIELD 11
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 11
- ---------------------------------------------------------------
FINANCIAL STATEMENTS 12
- ---------------------------------------------------------------
APPENDIX 13
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
First Union Managed Bond Portfolio (the "Fund") is a portfolio of First Union
Funds (the "Trust"). The Trust was established as a Massachusetts business trust
under a Declaration of Trust dated August 30, 1984. On January 4, 1993, the name
of the Trust was changed from "The Salem Funds" to "First Union Funds."
The Trust has established three classes of shares: Trust Shares ("Shares"),
Class B Investment Shares (not currently offered) and Class C Investment Shares
(not currently offered). This Statement of Additional Information relates to the
Trust Shares of the Fund.
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------
The investment objective of the Fund is to achieve total return. The investment
objective cannot be changed without approval of shareholders.
TYPES OF INVESTMENTS
The Fund invests primarily in investment grade bonds which include domestic
issues of corporate debt obligations rated A or better by Moody's Investors
Service, Inc. or Standard & Poor's Corporation; and obligations issued or
guaranteed by the U.S. government, its agencies, or instrumentalities.
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. government obligations in which the Fund may invest
generally include obligations issued or guaranteed by U.S. government
agencies or instrumentalities. These securities are backed by:
the discretionary authority of the U.S. government to purchase certain
obligations of agencies or instrumentalities; or
the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
Federal Farm Credit Banks;
Federal Home Loan Banks;
Federal National Mortgage Association;
Student Loan Marketing Association; and
Federal Home Loan Mortgage Corporation.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Board of Trustees ("Trustees") to determine the liquidity of
certain restricted securities is permitted under a Securities and Exchange
Commission ("SEC") Staff position set forth in the adopting release for Rule
144A under the Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive,
safe-harbor for certain secondary market transactions involving securities
subject to restrictions on resale under federal securities laws. The Rule
provides an exemption from registration for resales of otherwise restricted
securities to qualified institutional buyers. The Rule was expected to further
enhance the liquidity of the secondary market for securities eligible for resale
under Rule 144A. The Fund believes that the Staff of the SEC has left the
question of determining the liquidity of all restricted securities (eligible for
resale under Rule 144A) for determination by the Trustees. The Trustees consider
the following criteria in determining the liquidity of certain restricted
securities:
the frequency of trades and quotes for the security;
the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
dealer undertakings to make a market in the security; and
the nature of the security and the nature of the marketplace trades.
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 or yield for the Fund. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the securities
to be purchased are segregated on the Fund's records at the trade date. These
securities are marked to market daily and maintained until the transaction is
settled.
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.
OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of shares of the
Fund, the Fund may attempt to hedge all or a portion of its portfolio through
the purchase of put options on portfolio securities and listed put options on
financial futures contracts for portfolio securities. The Fund may also write
covered call options on its portfolio securities and covered put options to
attempt to increase its current income. The aggregate value of the obligations
underlying the puts will not exceed 50% of the Fund's net assets. This policy
cannot be changed without shareholder approval.
The Fund will maintain its positions in securities, option rights, and
segregated cash subject to puts and calls until the options are exercised,
closed, or have expired.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts.
These options will be used only to protect portfolio securities against
decreases in value resulting from market factors such as an anticipated
increase in interest rates.
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of instrument called for in
the contract ("going short") and the buyer who agrees to take delivery of
the instrument ("going long") at a certain time in the future. Financial
futures contracts call for the delivery of particular debt instruments
issued or guaranteed by the U.S. Treasury or by specified agencies or
instrumentalities of the U.S. government. If the Fund would enter into
financial futures contracts directly to hedge its holdings of fixed
income securities, it would enter into contracts to deliver securities at
a predetermined price (i.e., "go short") to protect itself against the
possibility that the prices of its fixed income securities may decline
during the Fund's anticipated holding period. The Fund would "go long" to
hedge against a decline in market interest rates.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a predetermined
price, the purchase of a put option on a futures contract entitles (but
does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price. Generally, if
the hedged portfolio securities decrease in value during the term of an
option, the related futures contracts will also decrease in value and the
put option will increase in value. In such an event, the Fund will
normally close out its option by selling an identical option. If the
hedge is successful, the proceeds received by the Fund upon the sale of
the put option will be large enough to offset both the premium paid by
the Fund for the put option plus the realized decrease in value of the
hedged securities.
Alternately, the Fund may exercise its put option to close out the
position. To do so, it would enter into a futures contract of the type
underlying the option. If the Fund neither closes out nor exercises an
option, the option will expire on the date provided in the option
contract, and only the premium paid for the contract will be lost.
LIMITATION ON OPEN FUTURES POSITION
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds the
current market value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Fund will take
prompt action to close out a sufficient number of open contracts to bring
its open futures and options positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather,
the Fund is required to deposit an amount of "initial margin" in cash or
U.S. Treasury bills with its custodian (or the broker, if legally
permitted). The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that futures
contract initial margin does not involve the borrowing of funds by the
Fund to finance the transactions. Initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned
to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as
"marking to market." Variation margin does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund and the
broker of the amount one would owe the other if the futures contract
expired. In computing its daily net asset value, the Fund will
mark-to-market its open futures position.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
PURCHASING PUT AND CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put and call options on portfolio securities to
protect against price movements in particular securities in its
portfolio. A put option gives the Fund, in return for a premium, the
right to sell the underlying security to the writer (seller) at a
specified price during the term of the option. A call option gives the
Fund, in return for a premium, the right to buy the underlying securities
from the seller.
WRITING COVERED PUT AND CALL OPTIONS
The Fund may also write covered put and call options to generate income.
As the writer of a call option, the Fund has the obligation upon exercise
of the option during the option period to deliver the underlying security
upon payment of the exercise price. As the writer of a put option, the
Fund has the obligation to purchase a security from the purchaser of the
option upon the exercise of the option. The Fund may only write call
options either on securities held in its portfolio or on securities which
it has the right to obtain without payment of further consideration (or
has segregated cash in the amount of any such additional consideration).
In the case of put options, the Fund will segregate cash or U.S. Treasury
obligations with a value equal to or greater than the exercise price of
the underlying securities.
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.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement, the Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate.
The use of reverse repurchase agreements may enable the Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not ensure that
the Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
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
years ended December 31, 1993 and 1992 were 53% and 56%, respectively.
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 that 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 and engage in reverse repurchase agreements in amounts up to
one-third of the value of its total assets, including the amounts
borrowed.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage, but rather as a temporary, extraordinary, or
emergency measure or to facilitate management of the portfolio by
enabling the Fund to meet redemption requests when the liquidation of
portfolio securities is deemed to be inconvenient or disadvantageous. The
Fund will not purchase any securities while any borrowings are
outstanding. During the period any reverse repurchase agreements are
outstanding, but only to the extent necessary to assure completion of the
reverse repurchase agreements, the Fund will restrict the purchase of
portfolio instruments to money market instruments maturing on or before
the expiration date of the reverse repurchase agreements.
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. Margin
deposits for the purchase and sale of financial futures contracts and
related options are not deemed to be a pledge.
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.
However, the Fund may enter into futures contracts on financial
instruments or currency and sell or buy options on such contracts.
RESTRICTED SECURITIES
The Fund will not invest more than 10% of its net assets in securities
subject to restrictions on resale under the Securities Act of 1933
(except for certain restricted securities which meet the criteria for
liquidity established by the Trustees).
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 portfolio securities in
accordance with its investment objective, policies and limitations.
CONCENTRATION OF INVESTMENTS
The Fund will not invest 25% or more 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 U.S. government, its
agencies or instrumentalities.
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of its 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.
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 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 10% of its net assets in securities
which are illiquid, including repurchase agreements providing for
settlement in more than seven days after notice, and certain restricted
securities determined by the Trustees not to be liquid.
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 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.
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.
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".
TRUST MANAGEMENT
- --------------------------------------------------------------------------------
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>
<S> <C> <C>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME THE TRUST DURING PAST FIVE YEARS
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, and President and Treasurer, Federated Advisers, Federated Management, 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 Vice President, Federated Administrative Services; Director, Private
and Assistant Label Management, Federated Investors; Vice
Treasurer 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, Class B and Class C Investment Shares of the Fund were
not being offered.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that a Trustee shall 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
- --------------------------------------------------------------------------------
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 years ended December 31, 1993, 1992, and 1991, the Adviser earned
advisory fees of $576,619, $591,232 and $351,933, 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.
For the fiscal years ended December 31, 1993, 1992, and 1991, the Fund paid
$1,662, $16,922, and $3,375 in commissions on brokerage transactions,
respectively.
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 years ended December 31, 1993, 1992, and 1991, the Fund incurred
$101,082, $109,032, and $72,661, in administrative service costs, of which
$36,701, $52,759, and $0 was voluntarily waived, respectively.
PURCHASING SHARES
- --------------------------------------------------------------------------------
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 Shares is explained in the prospectus
under "How to Buy Shares."
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Investment Shares
through:
quantity discounts and accumulated purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
Larger purchases reduce the sales charge paid. The First Union Funds 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 a 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.
LETTER OF INTENT
If a shareholder intends to purchase at least $100,000 of Shares in any
First Union Funds over the next 13 months, the sales charge may be
reduced by signing a letter of intent to that effect. This letter of
intent includes a provision for a sales charge adjustment depending on
the amount actually purchased within the 13-month period and a provision
for the custodian to hold up to 4.0% of the total amount intended to be
purchased in escrow (in Shares) until such purchase is completed.
The amount held in escrow will be applied to the shareholder's account at
the end of the 13-month period, unless the amount specified in the letter
of intent is not purchased. In this event, an appropriate number of
escrowed Shares may be redeemed in order to realize the difference in the
sales charge.
This letter of intent will not obligate the shareholder to purchases
Shares, but if the shareholder does, each purchase during the period will
be at the sales charge applicable to the total amount intended to be
purchased. This letter may be dated as of a prior date to include any
purchases made within the past 90 days.
REINVESTMENT PRIVILEGE
If Shares in a 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 a 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 First
Union 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 First Union Funds with a sales charge, and $70,000
in Shares of another Fund with a sales charge, 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 (INVESTMENT SHARES)
With respect to the Investment Shares of the Fund, the Trust has adopted a
distribution plan (the "Plan") pursuant to Rule 12b-1 which was promulgated by
the 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 Investment Shares. The Plan is
designed to (i) stimulate brokers to provide distribution and administrative
support services to the Fund and its holders of Investment Shares and (ii)
stimulate administrators to render administrative support services to the Fund
and its holders of Investment 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 Investment Shares; assisting
clients in changing dividend options, account designations, and addresses; and
providing such other services as the Fund reasonably requests for its Investment
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.
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
- --------------------------------------------------------------------------------
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
The market value of the Fund's portfolio securities, other than options, 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 determine 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.
Over-the-counter put options will be valued at the mean between the bid and the
asked prices.
REDEEMING SHARES
- --------------------------------------------------------------------------------
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 value. 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 "How to Redeem 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
- --------------------------------------------------------------------------------
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.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional Shares.
CAPITAL GAINS
Shareholders will pay federal income tax at capital gains rates on
long-term capital gains distributed to them regardless of how long they
have held Shares.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's average annual total returns for Trust Shares for the one year period
ended December 31, 1993 and for the period from April 1, 1991 (start of
performance) to December 31, 1993 were 10.59% and 10.15%, respectively.
Investment Shares were not being offered during the period ended December 31,
1993.
The average annual total return for Trust 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, adjusted over the period
by any additional shares, assuming the monthly reinvestment of all dividends and
distributions.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for Trust Shares for the thirty-day period ended December 31,
1993 was 5.26%. Investment Shares were not being offered during the period ended
December 31, 1993.
The yield for Trust Shares of the Fund is determined by dividing the net
investment income per share (as defined by the SEC) earned over a thirty-day
period by the maximum offering price per share on the last day of the period.
This value is then annualized using semi-annual compounding. This means that the
amount of income generated during the thirty-day period is assumed to be
generated each month over a twelve-month period and is reinvested every six
months. The yield does not necessarily reflect income actually earned because of
certain adjustments required by the SEC and therefore, may not correlate to the
dividends or other distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment the
performance will be reduced for those shareholders paying those fees.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The performance 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 expenses; and
various other factors;
The 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:
LEHMAN GOVERNMENT/CORPORATE BOND INDEX is comprised of approximately 5,000
issues which include non-convertible bonds publicly issued by the U.S.
government or its agencies; corporate bonds guaranteed by the U.S. government
and quasi-federal corporations; and publicly issued, fixed rate,
non-convertible domestic bonds of companies in industry, public utilities, and
finance. The average maturity of these bonds approximates nine years. Tracked
by Lehman Brothers, Inc., the index calculates total returns for one-month,
three-month, twelve-month, and ten-year periods and year-to-date.
_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.
SALOMON BROTHERS AAA-AA CORPORATE index calculates total returns of
approximately 775 issues which include long-term, high grade domestic corporate
taxable bonds, rated AAA-AA with maturities of twelve years or more and
companies in industry, public utilities, and finance.
SALOMON BROTHERS BROAD INVESTMENT-GRADE (BIG) BOND INDEX is a market
capitalization-weighted index that covers an all-inclusive universe of
institutionally traded U.S. Treasury, agency, mortgage, and corporate
securities. The index includes all fixed-rate bonds with a maturity of one year
or longer. Only issues with at least a $50-million amount outstanding ($200
million for mortgage coupons) can be added to the index, and they remain until
their amount outstanding falls below $25 million.
Advertisements and other sales literature may quote total returns which are
calculated on non-standardized base periods. The total returns represent the
historic change in the value of an investment 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
- --------------------------------------------------------------------------------
The financial statements for First Union Managed Bond 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 inside back cover of the prospectus.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD & POOR'S CORPORATION CORPORATE BOND RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING DEFINITIONS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
STANDARD & POOR'S CORPORATION COMMERCIAL PAPER RATING DEFINITIONS
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS
PRIME-1--Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following characteristics:
Leading market positions in well established industries.
High rates of return on funds employed.
Conservative capitalization structures with moderate reliance on debt and ample
asset protection.
Broad margins in earnings coverage of fixed financial charges and high internal
cash generation.
_Well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2--Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
2120212B (2/94)
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS
(Portfolios of First Union Funds)
Trust Shares
- --------------------------------------------------------------------------------
Supplement to Prospectus dated February 28, 1994
Effective September 1, 1994, First Union Single State Municipal Bond Funds
(the "Funds") will offer Class D Investment Shares ("Class D Shares").
Class D Shares will be similar to Class C Shares in all respects
except: Class D Shares will have a contingent deferred sales charge of
1.00%, which terminates after one year, and the Class D Shares will not
automatically convert into Class B Shares after seven years.
Effective September 1, 1994, Class C Shares will assess a shareholder
service fee of 0.25% of the average daily net asset value, of which all or
a portion may be waived at any time.
A. Please delete the "Summary of Fund Expenses" table on pages 4 and 5 and
replace it with the following:
- ------------------------- SUMMARY OF -------------------------
- ------------------------- FUND EXPENSES -------------------------
First Union Single State Municipal Bond Funds Trust Shares
<TABLE>
<CAPTION>
North South
Florida Georgia Carolina Carolina Virginia
Municipal Municipal Municipal Municipal Municipal
Bond Fund Bond Fund Bond Fund Bond Fund Bond Fund
--------- --------- --------- --------- ---------
Trust Shares--
Shareholder Transaction Expenses
<S> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)... None None None None None
Maximum Sales Load Imposed on
Reinvested Dividends (as a percentage
of offering price).................... None None None None None
Contingent Deferred Sales Charge (as a
percentage of original purchase price
or redemption proceeds,
as applicable)........................ None None None None None
Redemption Fee (as a percentage of
amount redeemed, if applicable)....... None None None None None
Exchange Fee........................... None None None None None
Annual Trust Shares Operating Expenses*
(As a percentage of projected average
net assets)
Management Fee (after waiver) (1)...... 0.00% 0.00% 0.16% 0.00% 0.00%
12b-1 Fees............................. None None None None None
Total Other Expenses (after waiver and
reimbursement) (2).................... 0.37% 0.37% 0.38% 0.00% 0.37%
Total Trust Shares Operating
Expenses (3)..................... 0.37% 0.37% 0.54% 0.00% 0.37%
</TABLE>
(1) The estimated management fees have been reduced to reflect the anticipated
voluntary waivers by the Adviser. The Adviser may terminate these voluntary
waivers at any time at its sole discretion. The maximum management fee for
each Fund is 0.50%.
- ------------------------- SUMMARY OF -------------------------
- ------------------------- FUND EXPENSES -------------------------
(Continued) First Union Single State Municipal Bond Funds
Trust Shares
(2) Total Other Expenses for Florida, Georgia, South Carolina, and Virginia
Municipal Bond Funds are estimated to be 0.73%, 2.17%, 2.71%, and 2.41%,
respectively, absent the anticipated voluntary waivers by the administrator
and reimbursement of other operating expenses by the Adviser. The
administrator and Adviser may terminate these waivers and reimbursements at
any time at their sole discretion.
(3) Total Trust Shares Operating Expenses for Florida, Georgia, North Carolina,
South Carolina, and Virginia Municipal Bond Funds are estimated to be
1.23%, 2.67%, 0.88%, 3.21%, and 2.91%, respectively, absent the anticipated
voluntary waivers and reimbursements described above in notes 1 and 2.
* Expenses in this table are estimated based on average expenses expected to be
incurred during the fiscal year ending December 31, 1994. During the course
of this period, expenses may be more or less than the average amount shown.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Funds 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.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
- ------- ------ -------
<S> <C> <C>
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.
The Funds charge no redemption fees for Trust Shares.
Florida Municipal Bond Fund.................................. $4 $12
Georgia Municipal Bond Fund.................................. $4 $12
North Carolina Municipal Bond Fund........................... $6 $17
South Carolina Municipal Bond Fund........................... $0 $ 0
Virginia Municipal Bond Fund................................. $4 $12
</TABLE>
The above example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown. The example
is based on estimated data for the fiscal year ending December 31, 1994.
The information set forth in the foregoing table and example relates only to
Trust Shares of the Funds. The Funds also offer three additional classes of
shares called Class B Shares, Class C Shares and Class D Shares. In general,
all expenses are allocated based upon the daily net assets of each class. Class
B Shares, Class C Shares and Class D Shares are subject to certain of the same
expenses as Trust Shares. However, Class B Shares are subject to a 12b-1 fee of
0.25 of 1%, Class C Shares and Class D Shares are subject to a 12b-1 fee of
0.75 of 1% and a shareholder service fee of 0.25 of 1%. In addition, Class B
Shares bear a maximum front-end sales charge of 4.75%, Class C Shares bear a
maximum contingent deferred sales charge of 5.00% and Class D Shares bear a
maximum contingent deferred sales charge of 1.00%. See "Other Classes of
Shares".
September 1, 1994
FEDERATED SECURITIES CORP.
- --------------------------------------------------------------------------------
Distributor
G00389-15-A (9/94)
FIRST UNION
SINGLE STATE
- ------------------------ MUNICIPAL BOND ------------------------
- ------------------------ ------------------------
FUNDS
Portfolios of First Union Funds
TRUST SHARES
- --------------------------------------------------------------------------------
P R O S P E C T U S
February 28, 1994
First Union Funds (the "Trust") is a mutual fund with 15 portfolios, offering a
variety of investment opportunities. The Trust currently includes five non-
diversified Single State Municipal Bond Funds, seven diversified Equity and
Income Funds and three diversified Money Market Funds. They are:
Single State Municipal Bond Funds
. First Union Florida Municipal Bond Portfolio;
. First Union Georgia Municipal Bond Portfolio;
. First Union North Carolina Municipal Bond Portfolio;
. First Union South Carolina Municipal Bond Portfolio; and
. First Union Virginia Municipal Bond Portfolio.
Equity and Income Funds
.First Union Balanced Portfolio;
.First Union Fixed Income Portfolio;
. First Union High Grade Tax Free Portfolio (formerly, First Union Insured Tax
Free Portfolio);
. First Union Managed Bond Portfolio (Investment Shares not currently
offered);
. First Union U.S. Government Portfolio;
. First Union Utility Portfolio; and
.First Union Value Portfolio.
Money Market Funds
.First Union Money Market Portfolio;
. First Union Tax Free Money Market Portfolio; and
. First Union Treasury Money Market Portfolio.
This prospectus provides you with information specific to the Trust Shares of
First Union Single State Municipal Bond Funds. It concisely describes the
information which you should know before investing in Trust Shares of any of
the First Union Single State Municipal Bond Funds. Please read this prospectus
carefully and keep it for future reference.
You can find more detailed information about each First Union Single State
Municipal Bond Fund in its Statement of Additional Information dated February
28, 1994, filed with the Securities and Exchange Commission and incorporated by
reference into this prospectus. The Statements are available free of charge by
writing to First Union Funds, Federated Investors Tower, Pittsburgh, PA 15222-
3779 or by calling 1-800-326-2584.
The Trust is sponsored and distributed by third parties independent of First
Union National Bank of North Carolina ("First Union").
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF FIRST
UNION, ARE NOT ENDORSED OR GUARANTEED BY FIRST UNION, AND ARE NOT INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- --------------------------------------------------------------------------------
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.
- ------------------------ TABLE OF ------------------------
- ------------------------ CONTENTS ------------------------
SUMMARY 2 HOW TO REDEEM SHARES 15
- ------------------------------------- -------------------------------------
SUMMARY OF FUND EXPENSES 4 MANAGEMENT OF FIRST UNION FUNDS 15
- ------------------------------------- -------------------------------------
FEES AND EXPENSES 16
FINANCIAL HIGHLIGHTS 5
- ------------------------------------- -------------------------------------
INVESTMENT OBJECTIVES AND POLICIES 9
- ------------------------------------- SHAREHOLDER RIGHTS AND PRIVILEGES 17
-------------------------------------
OTHER INVESTMENT POLICIES 11
- -------------------------------------
DISTRIBUTIONS AND TAXES 18
-------------------------------------
SHAREHOLDER GUIDE 12
- ------------------------------------- TAX INFORMATION 19
-------------------------------------
HOW TO BUY SHARES 13
- -------------------------------------
OTHER CLASSES OF SHARES 21
-------------------------------------
HOW TO CONVERT YOUR INVESTMENT FROM
ONE FIRST UNION FUND TO ANOTHER ADDRESSES Inside Back Cover
FIRST UNION FUND 14 -------------------------------------
- -------------------------------------
- ------------------------ SUMMARY ------------------------
- ------------------------ ------------------------
DESCRIPTION OF THE TRUST
First Union Funds 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 First Union Fund. Each Single State Municipal Bond Fund currently
offers three classes of shares: Class B Investment Shares ("Class B Shares"),
Class C Investment Shares ("Class C Shares"), and Trust Shares. Class B Shares
and Class C Shares are sold to individuals and other customers of First Union
(the "Adviser"). Trust Shares are designed primarily for institutional
investors (banks, corporations, and fiduciaries). This prospectus relates only
to Trust Shares ("Shares") of the First Union Single State Municipal Bond Funds
(collectively, the "Funds").
THE FUNDS AND OBJECTIVES
As of the date of this prospectus, Shares are offered in the following five
Single State Municipal Bond Funds:
. FIRST UNION FLORIDA MUNICIPAL BOND PORTFOLIO ("FLORIDA MUNICIPAL BOND
FUND")--seeks current income exempt from federal regular income tax
consistent with preservation of capital. In addition, the Fund intends to
qualify as an investment exempt from the Florida state intangibles tax;
. FIRST UNION GEORGIA MUNICIPAL BOND PORTFOLIO ("GEORGIA MUNICIPAL BOND
FUND")--seeks current income exempt from federal regular income tax and
Georgia state income tax, consistent with preservation of capital;
. FIRST UNION NORTH CAROLINA MUNICIPAL BOND PORTFOLIO ("NORTH CAROLINA
MUNICIPAL BOND FUND")-- seeks current income exempt from federal regular
income tax and North Carolina state income tax, consistent with preservation
of capital. In addition, the Fund intends to qualify as an investment
substantially exempt from the North Carolina intangible personal property
tax;
. FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO ("SOUTH CAROLINA
MUNICIPAL BOND FUND")-- seeks current income exempt from federal regular
income tax and South Carolina State income tax; and
. FIRST UNION VIRGINIA MUNICIPAL BOND PORTFOLIO ("VIRGINIA MUNICIPAL BOND
FUND")--seeks current income exempt from federal regular income tax and
Virginia state income tax, consistent with preservation of capital.
INVESTMENT MANAGEMENT
The Funds are advised by First Union, through its Capital Management Group.
First Union has responsibility for investment research and supervision of the
Funds, 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 Trust Shares of any of the Single State Municipal
Bond Funds, please refer to the Shareholder Guide section entitled "How to Buy
Shares." Redemption information may be found under "How to Redeem Shares."
- -------------------------- SUMMARY OF --------------------------
- -------------------------- FUND EXPENSES --------------------------
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS
TRUST SHARES
<TABLE>
<CAPTION>
North South
Florida Georgia Carolina Carolina Virginia
Municipal Municipal Municipal Municipal Municipal
Bond Fund Bond Fund Bond Fund Bond Fund Bond Fund
--------- --------- --------- --------- ---------
TRUST SHARES--
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)... None None None None None
Maximum Sales Load Imposed on Rein-
vested
Dividends (as a percentage of offering
price)................................ None None None None None
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, as applicable).............. None None None None None
Redemption Fee (as a percentage of
amount redeemed,
if applicable)........................ None None None None None
Exchange Fee........................... None None None None None
ANNUAL TRUST SHARES OPERATING EXPENSES*
(As a percentage of projected average
net assets)
Management Fee (after waiver) (1)...... 0.00% 0.00% 0.16% 0.00% 0.00%
12b-1 Fees............................. None None None None None
Total Other Expenses (after waiver and
reimbursement) (2).................... 0.37% 0.37% 0.38% 0.00% 0.37%
Total Trust Shares Operating Ex-
penses (3)............................ 0.37% 0.37% 0.54% 0.00% 0.37%
</TABLE>
(1) The estimated management fees have been reduced to reflect the anticipated
voluntary waivers by the Adviser. The Adviser may terminate these
voluntary waivers at any time at its sole discretion. The maximum
management fee for each Fund is 0.50%.
(2) Total Other Expenses for Florida, Georgia, South Carolina, and Virginia
Municipal Bond Funds are estimated to be 0.73%, 2.17%, 2.71%, and 2.41%,
respectively, absent the anticipated voluntary waivers by the
administrator and reimbursement of other operating expenses by the
Adviser. The administrator and Adviser may terminate these waivers and
reimbursements at any time at their sole discretion.
(3) Total Trust Shares operating expenses for Florida, Georgia, North
Carolina, South Carolina, and Virginia Municipal Bond Funds are estimated
to be 1.23%, 2.67%, 0.88%, 3.21%, and 2.91%, respectively, absent the
anticipated voluntary waivers and reimbursements described above in notes
1 and 2.
* Expenses in this table are estimated based on average expenses expected to
be incurred during the fiscal year ending December 31, 1994. During the
course of this period, expenses may be more or less than the average amount
shown.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUNDS 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.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
- ------- ------ -------
<S> <C> <C>
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.
The Funds charge no redemption fees for Trust Shares.
Florida Municipal Bond Fund.................................. $4 $12
Georgia Municipal Bond Fund.................................. $4 $12
North Carolina Municipal Bond Fund........................... $6 $17
South Carolina Municipal Bond Fund........................... $0 $ 0
Virginia Municipal Bond Fund................................. $4 $12
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE EXAMPLE
IS BASED ON ESTIMATED DATA FOR THE FISCAL YEAR ENDING DECEMBER 31, 1994.
The information set forth in the foregoing table and example relates only to
Trust Shares of the Funds. The Funds also offer two additional classes of
shares called Class B Shares and Class C Shares. Class B Shares and Class C
Shares are subject to certain of the same expenses as Trust Shares. However,
Class B Shares are subject to a 12b-1 fee of .25 of 1%, and Class C Shares are
subject to a 12b-1 fee of .75 of 1%. In addition, Class B Shares bear a
maximum front-end sales load of 4.00%, while Class C Shares bear a maximum
contingent deferred sales load of 4.00%. See "Other Classes of Shares."
- ------------------------ FINANCIAL HIGHLIGHTS ------------------------
- ------------------------ ------------------------
FIRST UNION FLORIDA MUNICIPAL BOND PORTFOLIO
SUPPLEMENTARY INFORMATION (FOR A SHARE OUTSTANDING THROUGHOUT THE 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.
<TABLE>
<CAPTION>
CLASS B CLASS C
INVESTMENT INVESTMENT
SHARES (A) SHARES (A)
------------------ -------------------
PERIOD ENDED PERIOD ENDED
DECEMBER 31, 1993* DECEMBER 31, 1993**
- --------------------------------------- ------------------ -------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00
- ---------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------
Net investment income 0.22 0.20
- ---------------------------------------
Net realized and unrealized gain 0.34 0.34
(loss) on investments ------ ------
- ---------------------------------------
Total from investment operations 0.56 0.54
- ---------------------------------------
LESS DISTRIBUTIONS
- ---------------------------------------
Dividends to shareholders from net in- (0.22) (0.20)
vestment income ------ ------
- ---------------------------------------
NET ASSET VALUE, END OF PERIOD $10.34 $10.34
- --------------------------------------- ------ ------
TOTAL RETURN*** 5.63% 5.40%
- ---------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------
Expenses 0.25%(c) 0.75%(c)
- ---------------------------------------
Net investment income 4.92%(c) 4.46%(c)
- ---------------------------------------
Expense waiver/reimbursement (b) 1.58%(c) 1.58%(c)
- ---------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------
Net assets, end of period (000 omit-
ted) $8,110 $18,383
- ---------------------------------------
Portfolio turnover rate 3% 3%
- ---------------------------------------
</TABLE>
* Reflects operations for the period from July 6, 1993 (commencement of
operations) to December 31, 1993.
** Reflects operations for the period from July 2, 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) 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 and
Class C Investment Shares.
(b) This voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
(c) Computed on an annualized basis.
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 GEORGIA MUNICIPAL BOND PORTFOLIO
SUPPLEMENTARY INFORMATION (FOR A SHARE OUTSTANDING THROUGHOUT THE 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.
<TABLE>
<CAPTION>
CLASS B CLASS C
INVESTMENT INVESTMENT
SHARES (A) SHARES (A)
------------------ ------------------
PERIOD ENDED PERIOD ENDED
DECEMBER 31, 1993* DECEMBER 31, 1993*
- ---------------------------------------- ------------------ ------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00
- ----------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------
Net investment income 0.201 0.179
- ----------------------------------------
Net realized and unrealized gain (loss) 0.193 0.193
on investments ------- -------
- ----------------------------------------
Total from investment operations 0.394 0.372
- ----------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------
Dividends to shareholders from net in-
vestment income (0.201) (0.179)
- ----------------------------------------
Distributions to shareholders from net
realized gain on investment transac- (0.003) (0.003)
tions ------- -------
- ----------------------------------------
TOTAL DISTRIBUTIONS (0.204) (0.182)
- ---------------------------------------- ------- -------
NET ASSET VALUE, END OF PERIOD $10.19 $10.19
- ---------------------------------------- ------ ------
TOTAL RETURN** 3.96% 3.74%
- ----------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------
Expenses 0.25%(c) 0.75%(c)
- ----------------------------------------
Net investment income 4.71%(c) 4.15%(c)
- ----------------------------------------
Expense waiver/reimbursement (b) 6.57%(c) 6.57%(c)
- ----------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------
Net assets, end of period (000 omitted) $817 $3,692
- ----------------------------------------
Portfolio turnover rate 15% 15%
- ----------------------------------------
</TABLE>
* Reflects operations for the period from July 2, 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) 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 and Class C
Investment Shares.
(b) This voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
(c) Computed on an annualized basis.
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 NORTH CAROLINA MUNICIPAL BOND PORTFOLIO
SUPPLEMENTARY INFORMATION (FOR A SHARE OUTSTANDING THROUGHOUT THE 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.
<TABLE>
<CAPTION>
CLASS B CLASS C
INVESTMENT INVESTMENT
SHARES (B) SHARES (B)
------------------- -------------------
PERIOD ENDED PERIOD ENDED
DECEMBER 31, 1993** DECEMBER 31, 1993**
- ------------------------------------- ------------------- -------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00
- -------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------
Net investment income 0.46 0.42
- -------------------------------------
Net realized and unrealized gain
(loss) on 0.64 0.64
investments ------ ------
- -------------------------------------
Total from investment operations 1.10 1.06
- -------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------
Dividends to shareholders from net
investment income (0.46) (0.42)
- -------------------------------------
Distributions to shareholders from
net realized gains on investment (0.03) (0.03)
transactions ------ ------
- -------------------------------------
Total distributions (0.49) (0.45)
- ------------------------------------- ------ ------
NET ASSET VALUE, END OF PERIOD $10.61 $10.61
- ------------------------------------- ------ ------
TOTAL RETURN* 11.28% 10.80%
- -------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------
Expenses 0.32%(a) 0.79%(a)
- -------------------------------------
Net investment income 4.91%(a) 4.47%(a)
- -------------------------------------
Expense waiver/reimbursement(c) 0.93%(a) 0.95%(a)
- -------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------
Net assets, end of period (000 omit-
ted) $12,739 $45,168
- -------------------------------------
Portfolio turnover rate 57% 57%
- -------------------------------------
</TABLE>
* Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
** Reflects operations for the period from January 11, 1993 (commencement of
operations) to December 31, 1993.
(a) Computed on an annualized basis.
(b) 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 and Class C
Investment Shares.
(c) This voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
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 VIRGINIA MUNICIPAL BOND PORTFOLIO
SUPPLEMENTARY INFORMATION
(FOR A SHARE OUTSTANDING THROUGHOUT THE 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.
<TABLE>
<CAPTION>
CLASS B CLASS C
INVESTMENT INVESTMENT
SHARES (A) SHARES (A)
------------------ ------------------
PERIOD ENDED PERIOD ENDED
DECEMBER 31, 1993* DECEMBER 31, 1993*
- ---------------------------------------- ------------------ ------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00
- ----------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------
Net investment income 0.20 0.17
- ----------------------------------------
Net realized and unrealized gain (loss) 0.19 0.19
on investments ------ ------
- ----------------------------------------
Total from investment operations 0.39 0.36
- ----------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------
Dividends to shareholders from net in- (0.20) (0.17)
vestment income ------ ------
- ----------------------------------------
NET ASSET VALUE, END OF PERIOD $10.19 $10.19
- ---------------------------------------- ------ ------
TOTAL RETURN** 3.89% 3.66%
- ----------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------
Expenses 0.25%(b) 0.75%(b)
- ----------------------------------------
Net investment income 4.64%(b) 4.25%(b)
- ----------------------------------------
Expense waiver/reimbursement (c) 7.50%(b) 7.50%(b)
- ----------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------
Net assets, end of period (000 omitted) $1,306 $2,235
- ----------------------------------------
Portfolio turnover rate 0% 0%
- ----------------------------------------
</TABLE>
* Reflects operations for the period from July 2, 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) 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 and
Class C Investment Shares.
(b) Computed on an annualized basis.
(c) The voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
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
- ------------------------ OBJECTIVES ------------------------
- ------------------------ AND POLICIES ------------------------
First Union Single State Municipal Bond Funds seek current income exempt from
federal regular income tax and, where applicable, state income taxes,
consistent with preservation of capital. In addition, the Florida Municipal
Bond Fund intends to qualify as an investment exempt from the Florida state
intangibles tax, and the North Carolina Municipal Bond Fund intends to qualify
as an investment substantially exempt from the North Carolina intangible
personal property tax.
Each Fund's investment objective cannot be changed without shareholder
approval. While there is no assurance that each objective will be achieved,
the Funds will endeavor to do so by following the investment policies detailed
below. Unless otherwise indicated, the investment policies of a Fund 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.
DESCRIPTION OF THE FUNDS
Each Fund seeks current income which is exempt from federal regular income tax
and (where applicable) the designated state income tax consistent with
preservation of capital. In addition, the Florida Municipal Bond Fund intends
to qualify as an investment exempt from the Florida state intangibles tax, and
the North Carolina Municipal Bond Fund intends to qualify as an investment
substantially exempt from the North Carolina intangible personal property tax.
As a matter of fundamental investment policy, each Fund will normally invest
its assets so that at least 80% of its annual interest income is, or at least
80% of its net assets are invested in, obligations which provide interest
income which is exempt from federal regular income taxes. The interest retains
its tax-free status when distributed to the Fund's shareholders. In addition,
at least 65% of the value of each Fund's total assets will be invested in
municipal bonds of the particular state after which the Fund is named. To
qualify as an investment exempt from the Florida state intangibles tax, the
Florida Municipal Bond Fund's portfolio must consist entirely of investments
exempt from the Florida state intangibles tax on the last business day of the
calendar year.
TYPES OF INVESTMENTS
Each Fund seeks to achieve its investment objective by investing principally
in municipal obligations, including industrial development bonds, of its
designated state. In addition, the Funds may invest in obligations issued by
or on behalf of any state, territory, or possession of the United States,
including the District of Columbia, or their political subdivisions or
agencies and instrumentalities, the interest from which is exempt from federal
regular 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 a Fund in calculating the federal individual
alternative minimum tax or the federal alternative minimum tax for
corporations.
The municipal bonds in which the Funds will invest are subject to one or more
of the following quality standards: rated Baa or better by Moody's Investors
Service, Inc. ("Moody's") or BBB or better by Standard & Poor's Corporation
("S&P") or, if unrated, determined by the Adviser to be of comparable quality
to such ratings; insured by a municipal bond insurance company which is rated
Aaa by Moody's or AAA by S&P; guaranteed at the time of purchase by the U.S.
government as to the payment of principal and interest; or fully
collateralized by an escrow of U.S. government securities. Bonds rated BBB by
S&P or Baa by Moody's have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to weakened capacity
to make principal and interest payments than higher rated bonds. If any
security owned by a 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 may consider doing so. If ratings made by Moody's or S&P
change because of changes in those organizations or their ratings systems, the
Funds will try to use comparable ratings as standards in accordance with the
Funds' investment objectives. A description of the rating categories is
contained in the Appendix of the Statement of Additional Information for each
Fund.
Other types of investments include:
participation interests in any of the above obligations. (Participation
interests may be purchased from financial institutions such as commercial
banks, savings and loan associations and insurance companies, and give a
Fund an undivided interest in particular municipal securities);
variable rate municipal securities. (Variable rate securities offer
interest rates which are tied to a money market rate, usually a published
interest rate or interest rate index or the 91-day U.S. Treasury bill rate.
Many of these securities are subject to prepayment of principal on demand
by the Fund, usually in seven days or less); and
municipal leases issued by state and local governments or authorities to
finance the acquisition of equipment and facilities.
TEMPORARY INVESTMENTS
During periods when, in the Adviser's opinion, a temporary defensive position
in the market is appropriate, a 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; shares of
other investment companies; 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 Fund's primary investments.
Although the Funds are permitted to make taxable, temporary investments, there
is no current intention of generating income subject to federal regular income
tax. However, certain temporary investments will generate income which is
subject to state taxes.
MUNICIPAL BONDS
Municipal bonds are debt obligations issued by the state or local entities to
support a government's general financial needs or special projects, such as
housing projects or sewer works. Municipal bonds include industrial development
bonds issued by or on behalf of public authorities to provide financing aid to
acquire sites or construct or equip facilities for privately or publicly owned
corporations.
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 bond 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.
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. There is no limit on the maturity
of the bonds purchased by the Funds. Because the prices of bonds fluctuate
inversely in relation to the direction of interest rates, the prices of longer
term bonds fluctuate more widely in response to market interest rate changes. A
Fund's concentration in securities issued by its designated state and that
state's political subdivisions provides a greater level of risk than a fund
which is diversified across numerous states and municipal entities. An expanded
discussion of the risks associated with the purchase of the designated state's
municipal bonds is contained in the respective Statements of Additional
Information.
- ------------------------ OTHER INVESTMENT ------------------------
- ------------------------ POLICIES ------------------------
The Funds have adopted the following practices for specific types of
investments.
REPURCHASE AGREEMENTS
The Funds may invest in repurchase agreements. Repurchase agreements are
agreements by which a 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 the creditworthiness of the firms with which the Funds enter into
repurchase agreements.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Funds may purchase portfolio securities on a when-issued or delayed
delivery basis. In such cases, a 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 the securities 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 Funds may lend their portfolio
securities on a short-term or long-term basis to broker/dealers, banks, or
other institutional borrowers of securities. The Funds 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 investment policy
which cannot be changed without shareholder approval, the Funds will not lend
any of their assets except portfolio securities up to one-third of the value of
their total assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
Each Fund may invest in the securities of other investment companies. 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) no Fund
will own more than 3% of the total outstanding voting stock of any one
investment company, (2) no Fund may invest more than 5% of its total assets in
any one investment company and (3) no Fund may 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.
OPTIONS AND FUTURES
The Funds may engage in options and futures transactions. Options and futures
transactions are intended to enable a Fund to manage market, interest rate or
exchange rate risk. The Funds do not use these transactions for speculation or
leverage.
Options and futures may be volatile investments and involve certain risks which
might result in lowering the Funds' returns. The three principal areas of risk
include: (1) lack of a liquid secondary market for a futures or option contract
when the Fund wants to close out its position; (2) imperfect correlation of
changes in the prices of futures or options contracts with the prices of the
securities in the Fund's portfolio; and (3) incorrect forecasts by the Adviser
of interest rates, market values or other economic factors. In these events,
the Funds may lose money on the futures contract or option.
RESTRICTED AND ILLIQUID SECURITIES
The Funds may not invest more than 15% of their total assets in securities
which are subject to restrictions on resale under federal securities law.
Certain restricted securities which the Trustees deem to be liquid will be
excluded from this limitation.
The Funds will limit investments in illiquid securities, including certain
restricted securities or municipal leases not determined by the Trustees to be
liquid, non-negotiable time deposits, and repurchase agreements providing for
settlement in more than seven days after notice, to 15% of its net assets.
The following investment limitations cannot be changed without shareholder
approval.
BORROWING MONEY
The Funds will not borrow money or pledge securities, except under certain
circumstances a Fund may borrow up to one-third of the value of its total
assets and pledge assets to secure such borrowings.
NON-DIVERSIFICATION
Each Fund is a non-diversified portfolio of an investment company and as such,
there is no limit on the percentage of assets which can be invested in any
single issuer. An investment in a Fund, therefore, will entail greater risk
than would exist in a diversified investment company because the higher
percentage of investments among fewer issuers may result in greater fluctuation
in the total market value of the Fund's portfolio.
Each Fund intends to comply with Subchapter M of the Internal Revenue Code
which requires that at the end of each quarter of each taxable year, with
regard to at least 50% of the Fund's total assets, no more than 5% of the total
assets may be invested in the securities of a single issuer and that with
respect to the remainder of the Fund's total assets, no more than 25% of its
total assets are invested in the securities of a single issuer.
NEW ISSUERS
The Funds will not invest more than 5% of the value of their total assets in
securities of issuers (or guarantors, where applicable) which have records of
less than three years of continuous operations, including the operation of any
predecessor.
- ------------------------ SHAREHOLDER GUIDE ------------------------
- ------------------------ ------------------------
SHARE PRICE CALCULATION
In the case of no-load Funds, the net asset value (NAV), the market price and
the offering price of Shares are all the same.
Purchases, redemptions, and exchanges are made at net asset value. 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 a
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 may differ slightly from that of Class B
Shares and Class C Shares of the same Fund due to the variability in daily net
income resulting from different distribution charges for each class of shares.
The net asset value for each Fund will fluctuate for all three classes.
PERFORMANCE INFORMATION
A 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 Funds may make available certain information about the
performance of Trust 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 yields of Trust Shares are 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.
Tax equivalent yield 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 Trust Shares of the Funds and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
Total return, yield, and tax equivalent yield will be calculated separately
for Trust Shares, Class B Shares, and Class C Shares of a Fund. Because 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 Class B Shares also contributes to a lower total return for
Class B Shares. In addition, Class C Shares are subject to similar non-
recurring charges, such as the contingent deferred sales charge ("CDSC"),
which, if excluded, would increase the total return for Class C Shares.
From time to time, a Fund may advertise its performance using certain rankings
published in financial publications and/or compare its performance to certain
indices.
- ------------------------ HOW TO BUY ------------------------
- ------------------------ SHARES ------------------------
Shares may be purchased at a price equal to their net asset value per Share
next determined after receipt of an order.
MINIMUM INVESTMENT
You may invest as often as you want in any of the Funds. There are no sales
charges imposed on Trust Shares of the Funds. However, there is a $1,000
minimum initial investment requirement which may be waived in certain
situations. For further information, please contact the Capital Management
Group of First Union at 1-800-326-2584. Subsequent investments may be in any
amounts.
BY TELEPHONE
You may purchase Trust Shares by telephone from the Capital Management Group
of First Union at 1-800-326-2584. (Texas residents should directly contact the
Mutual Funds Group of First Union Brokerage Services, Inc. at 1-800-326-3241.)
Shares are sold on days on which the New York Stock Exchange and the Federal
Reserve Wire System are open for business.
METHOD OF PAYMENT
Payment may be made by check or federal funds or by debiting your account at
First Union. Purchase orders must be received by 4:00 p.m. (Eastern time).
Payment is required on the next business day.
SHAREHOLDER ACCOUNTS
As transfer agent for the Funds, State Street Bank and Trust Company of Boston,
Massachusetts ("State Street Bank") maintains a Share account for each
shareholder of record. Share certificates are not issued.
MINIMUM BALANCE
Due to the high cost of maintaining smaller holdings, each Fund reserves the
right to redeem a shareholder's Shares if, as a result of redemptions, their
aggregate value drops below $1,000. Reductions in value that result solely from
market activity will not trigger an involuntary redemption. The Funds will
notify shareholders in writing 30 days before taking such action to allow them
to increase their holdings to at least the minimum level.
HOW TO CONVERT
- ------------------------ YOUR INVESTMENT ------------------------
- ------------------------ FROM ONE ------------------------
FIRST UNION
FUND TO ANOTHER
FIRST UNION FUND
As a shareholder, you have the privilege of exchanging your Shares for shares
of another First Union Fund.
As long as the First Union Fund in which you are invested will not be adversely
affected, you may switch among the First Union Funds within the Trust. Before
the exchange, you must call First Union at 1-800-326-2584 to receive a
prospectus for the First Union Fund into which you want to exchange. Read the
prospectus carefully. Each exchange represents the sale of shares of one First
Union Fund and the purchase of shares in another, which may produce a gain or
loss for tax purposes.
You may exchange Trust Shares of one First Union Fund for Trust Shares of any
other First Union Fund by calling toll free 1-800-326-2584 or by writing to
First Union. Telephone exchange instructions may be recorded. Shares purchased
by check are eligible for exchange after the check clears, which could take up
to seven days after receipt of the check. Exchanges are subject to the $1,000
minimum initial purchase requirement for each First Union Fund.
An exchange order must comply with the requirements for a redemption and
purchase order and must specify the dollar value or number of shares to be
exchanged. Once the order is received, the Shares already owned will be
redeemed at current net asset value and, upon receipt of the proceeds by the
First Union Fund, shares of the other First Union Fund will be purchased at
their net asset value determined after the proceeds from such redemption become
available, which may be up to seven days after such redemption. Orders for
exchanges received by a First Union Fund prior to 4:00 p.m. (Eastern time) on
any day the First Union Funds are open for business will be executed as of the
close of business that day. Orders for exchanges received after 4:00 p.m.
(Eastern time) on any business day will be executed at the close of the next
business day.
When exchanging into and out of load and no-load shares of First Union Funds,
shareholders who have already paid a sales charge once at the time of purchase,
including shares obtained through the reinvestment of dividends, will not have
to pay an additional sales charge on an exchange.
If reasonable procedures are not followed by a Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
EXCHANGE RESTRICTIONS
Although the Trust has no intention of terminating or modifying the exchange
privilege, it reserves the right to do so at any time. Excessive trading can
impact the interests of shareholders. Therefore, the Trust reserves the right
to terminate the exchange privilege of any shareholder who makes more than five
exchanges of shares of the First Union Funds in a year or three exchanges in a
calendar quarter.
The exchange privilege is only available in states where shares of the First
Union Fund being acquired may legally be sold. Before the exchange, a
shareholder must receive a prospectus of the First Union Fund for which the
exchange is being made.
- ------------------------ HOW TO ------------------------
- ------------------------ REDEEM SHARES ------------------------
Shares are redeemed at their net asset value next determined after a proper
redemption request has been received, less any fees.
You may redeem Shares in person or by telephoning First Union at 1-800-326-2584
or by written request to First Union. There is no redemption fee charged.
Telephone redemption instructions may be recorded.
The Funds redeem Shares at their net asset value next determined after a Fund
receives the redemption request. Redemptions will be made on days on which a
Fund computes the net asset value of Shares. 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. Proceeds will be wired to the
shareholder's account at First Union or a check will be sent to the address of
record normally within five (but in no case longer than seven) days after a
proper request for redemption has been received.
If reasonable procedures are not followed by a Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
MANAGEMENT
- ------------------------ OF FIRST ------------------------
- ------------------------ UNION FUNDS ------------------------
Responsibility for the overall management of First Union Funds rests with its
Trustees and officers. Other service providers include the Funds' Distributor,
Investment Adviser, Custodian, Transfer Agent, Legal Counsel, and Independent
Auditors.
INVESTMENT ADVISER
Professional investment supervision for the Funds 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.
Robert S. 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
South Carolina Municipal Bond Fund since its inception in January 1994. In
addition, Mr. Drye has been the portfolio manager for the Florida Municipal
Bond Fund since its inception in July 1993.
Richard K. Marrone is a Vice President of First Union National Bank of North
Carolina, N.A. Mr. Marrone joined First Union in May 1993 with eleven years of
experience managing fixed income assets at Woodbridge Capital Management, a
subsidiary of Comerica Bank, N.A. Mr. Marrone is responsible for the portfolio
management of several First Union Funds and certain common trust funds. Mr.
Marrone has served as portfolio manager of the North Carolina Municipal Bond
Fund since May 1993, and portfolio manager of the Georgia Municipal Bond Fund
since its inception in July 1993.
Charles E. Jeanne joined First Union National Bank of North Carolina, N.A., in
July 1993. Prior to joining First Union, Mr. Jeanne served as a
trader/portfolio manager for First American Bank where he was responsible for
individual accounts and common trust funds. Mr. Jeanne has been the portfolio
manager for the Virginia Municipal Bond Fund since its inception in July 1993.
From time to time, to the extent consistent with the objectives, policies, and
restrictions of the Funds, the Funds may invest in securities of issuers with
which the Adviser has a lending relationship.
FUND ADMINISTRATION
Federated Securities Corp., a subsidiary of Federated Investors, is the
principal distributor for the Funds. It is a Pennsylvania corporation organized
on November 14, 1969, and is the principal distributor for a number of
investment companies.
Federated Administrative Services ("FAS"), another subsidiary of Federated
Investors,.provides the Funds with administrative personnel and services
necessary to operate the Funds, such as legal and accounting services, for a
specified fee which is detailed below.
State Street Bank serves as custodian and transfer agent, and provides dividend
disbursement and other shareholder services for the Funds.
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 ------------------------
- ------------------------ ------------------------
Each Fund pays annual advisory and administrative fees and certain expenses.
ADVISORY AND ADMINISTRATIVE FEES
For managing their investment and business affairs, the Funds pay an annual fee
to First Union. The Adviser receives an annual investment advisory fee equal to
.50 of 1% of each of the Single State Municipal Bond Fund's average daily net
assets. The Adviser may voluntarily choose to waive a portion of its fee or
reimburse the Funds for certain operating expenses.
The Trust also pays a fee for administrative services. FAS provides these at an
annual rate as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE TRUST
------------------- -----------------------------------
<S> <C>
.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
</TABLE>
Unless waived, the administrative fee received during any fiscal year shall
aggregate at least $50,000 per First Union Fund.
EXPENSES OF THE FUNDS AND TRUST SHARES
Holders of Shares pay their allocable portion of Trust and respective 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.
Fund expenses for which holders of Shares pay their allocable portion based on
average daily net assets include, but are not limited to: registering a Fund
and Shares of that Fund; investment advisory services; taxes and commissions;
custodian fees; insurance premiums; auditors' fees; and such non-recurring and
extraordinary items as may arise.
The Funds' expenses under the Rule 12b-1 Plans are incurred solely by the Class
B Shares 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 of a
Fund.
- ------------------------ SHAREHOLDER ------------------------
- ------------------------ RIGHTS AND ------------------------
PRIVILEGES
VOTING RIGHTS
Each share of a Fund is entitled to one vote in Trustee elections and other
voting matters submitted to shareholders. All shares of all classes of each
First Union Fund in the Trust have equal voting rights, except that in matters
affecting only a particular First Union Fund or class, only shares of that
First Union Fund or class are entitled to vote. As of February 4, 1994, First
Union Brokerage Services & Co., for the exclusive benefit of Robert Allen Jones
and Larry Allen Jones of Florence, South Carolina, and for the exclusive
benefit of Doris G. Foster and John H. Foster of Greenville, South Carolina,
and acting in various capacities for numerous accounts, was the owner of record
of 2,402 Shares (60.49%) and 1,493 Shares (37.59%), respectively, of the South
Carolina Municipal Bond Fund--Class B Investment Shares, and therefore, may,
for certain purposes, be deemed to control the South Carolina Municipal Bond
Fund and be able to affect the outcome of certain matters presented for a vote
of shareholders.
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 a 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 non-bank 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,
First Union, is subject to and in compliance with such banking laws and
regulations.
Sullivan & Cromwell has advised First Union that First Union may perform the
services for the Funds set forth in the investment advisory agreement, this
prospectus, and the Statements 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 First Union from continuing to perform such services
for the Funds or from continuing to purchase Shares for the accounts of its
customers. If First Union were prohibited from acting as investment adviser to
the Funds, it is expected that the Trustees would recommend to the Funds'
shareholders that they approve a new investment adviser selected by the
Trustees. It is not expected that the Funds' shareholders would suffer any
adverse financial consequences (if another adviser with equivalent abilities to
First Union is found) as a result of any of these occurrences.
- ------------------------ DISTRIBUTIONS ------------------------
- ------------------------ AND TAXES ------------------------
Each 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. 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
Funds or First Union in writing.
CAPITAL GAINS
Any net long-term capital gains realized by the Funds 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 Funds pay no federal income tax if they meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and will
receive the special tax treatment afforded to such companies.
Each First Union Fund is treated as a single, separate entity for federal
income tax purposes so that income (including capital gains) and losses
realized by one First Union Fund will not be combined for tax purposes with
those realized by other First Union Funds.
Shareholders of the Funds are not required to pay the federal regular income
tax on any dividends received from a 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 Funds may purchase all types of municipal bonds,
including "private activity" bonds. Thus, should a Fund 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 a 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 Funds.
Dividends of a Fund representing net interest income earned on some temporary
investments, income earned on options transactions, and any realized net short-
term gains are taxed as ordinary income. Distributions representing net long-
term capital gains realized by the Funds, 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.
Set forth below are brief descriptions of the personal income tax status of an
investment in each of the Funds under, respectively, Florida, Georgia, North
Carolina, South Carolina, and Virginia tax laws currently in effect. Income
from a Fund is not necessarily free from state income taxes in states other
than its designated state. State laws differ on this issue, and shareholders
are urged to consult their own tax advisers regarding the status of their
accounts under state and local laws. A statement setting forth the state
income tax status of all distributions made during each calendar year will be
sent to shareholders annually.
ADDITIONAL TAX INFORMATION FOR SHAREHOLDERS OF THE FLORIDA MUNICIPAL BOND FUND
Florida does not currently impose an income tax on individuals. Thus,
individual shareholders of the Florida Municipal Bond Fund will not be subject
to any Florida state income tax on distributions received from the Florida
Municipal Bond Fund. However, certain distributions will be taxable to
corporate shareholders which are subject to Florida corporate income tax.
Florida currently imposes an intangibles tax at the annual rate of 0.20% on
certain securities and other intangible assets owned by Florida residents.
Certain types of tax exempt securities of Florida issuers, U.S. government
securities and tax exempt securities issued by certain U.S. territories and
possessions are exempt from this intangibles tax. Shares of the Florida
Municipal Bond Fund will also be exempt from the Florida intangibles tax if
the portfolio consists exclusively of securities exempt from the intangibles
tax on the last business day of the calendar year. If the portfolio consists
of any assets which are not so exempt on the last business day of the calendar
year, however, only the portion of the Shares of the Florida Municipal Bond
Fund which relate to securities issued by the United States and its
possessions and territories will be exempt from the Florida intangibles tax,
and the remaining portion of such Shares will be fully subject to the
intangibles tax, even if they partly relate to Florida tax exempt securities.
ADDITIONAL TAX INFORMATION FOR SHAREHOLDERS OF THE GEORGIA MUNICIPAL BOND FUND
Under existing Georgia law, shareholders of the Georgia Municipal Bond Fund
will not be subject to individual or corporate Georgia income taxes on
distributions from the Georgia Municipal Bond Fund to the extent that such
distributions represent exempt-interest dividends for federal income tax
purposes that are attributable to (1) interest-bearing obligations issued by
or on behalf of the State of Georgia or its political subdivisions, or (2)
interest on obligations of the United States or of any other issuer whose
obligations are exempt from state income taxes under federal law.
Distributions, if any, derived from capital gains or other sources generally
will be taxable for Georgia income tax purposes to shareholders of the Georgia
Municipal Bond Fund who are subject to the Georgia income tax. For purposes of
the Georgia intangibles tax, Shares of the Georgia Municipal Bond Fund likely
are taxable (at the rate of 10 cents per $1,000 in value of the Shares held on
January 1 of each year) to shareholders who are otherwise subject to such tax.
ADDITIONAL TAX INFORMATION FOR SHAREHOLDERS OF THE NORTH CAROLINA MUNICIPAL
BOND FUND
Under existing North Carolina law, shareholders of the North Carolina
Municipal Bond Fund will not be subject to individual or corporate North
Carolina income taxes on distributions from the North Carolina Municipal Bond
Fund to the extent that such distributions represent exempt-interest dividends
for federal income tax purposes that are attributable to (1) interest on
obligations issued by North Carolina and political subdivisions thereof, or
(2) interest on obligations of the United States or its territories or
possessions. Distributions, if any, derived from capital gains or other
sources generally will
be taxable for North Carolina income tax purposes to shareholders of the North
Carolina Municipal Bond Fund who are subject to the North Carolina income tax.
North Carolina currently imposes an intangibles tax (at the rate of 25 cents
per $100 in value of the shares held on December 31 of each year) on all shares
of stock, including mutual funds. However, shareholders of the North Carolina
Municipal Bond Fund may exclude from share value that proportion of the total
share value which is attributable to direct obligations of the State of North
Carolina, its subdivisions, and the United States held in the North Carolina
Municipal Bond Fund as of December 31 of the taxable year. The North Carolina
Municipal Bond Fund will annually furnish to its shareholders a statement
supporting the proper allocation.
ADDITIONAL TAX INFORMATION FOR SHAREHOLDERS OF THE SOUTH CAROLINA MUNICIPAL
BOND FUND
Under existing South Carolina law, shareholders of the South Carolina Municipal
Bond Fund will not be subject to individual or corporate South Carolina income
taxes on South Carolina Municipal Bond Fund dividends to the extent that such
dividends represent exempt-interest dividends for federal income tax purposes
that are attributable to (1) interest on obligations of the State of South
Carolina, or any of its political subdivisions; (2) interest on obligations of
the United States; or (3) interest on obligations of any agency or
instrumentality of the United States that is prohibited by federal law from
being taxed by a state or any political subdivision of a state. To the extent
that distributions from the Fund are attributable to capital gains or other
sources, such distributions will not be exempt from South Carolina income
taxation.
ADDITIONAL TAX INFORMATION FOR SHAREHOLDERS OF THE VIRGINIA MUNICIPAL BOND FUND
Under existing Virginia law, shareholders of the Virginia Municipal Bond Fund
will not be subject to individual or corporate Virginia income taxes on
distributions received from the Virginia Municipal Bond Fund to the extent that
such distributions are attributable to interest earned on (1) obligations
issued by or on behalf of the Commonwealth of Virginia or any political
subdivision thereof or (2) obligations issued by a territory or possession of
the United States or any subdivision thereof, which federal law exempts from
state income taxes. Distributions, if any, derived from capital gains or other
sources generally will be taxable for Virginia income tax purposes to
shareholders of the Virginia Municipal Bond Fund who are subject to Virginia
income tax.
- ------------------------ OTHER CLASSES ------------------------
- ------------------------ OF SHARES ------------------------
First Union Single State Municipal Bond Funds offer three classes of shares:
Trust Shares for institutional investors and Class B Shares and Class C Shares
for individuals and other customers of First Union.
Class B Shares and Class C Shares of First Union Single State Municipal Bond
Funds are sold to customers of First Union and others at net asset value plus a
sales charge which, at the election of the purchaser, may be imposed either (i)
at the time of purchase (the Class B Shares), or (ii) on a contingent deferred
basis (the Class C Shares). Shareholders of record in any First Union Fund at
October 12, 1990, and the members of their immediate family, will be exempt
from sales charges on any future purchases in any of the First Union Funds.
Employees of First Union, Federated Securities Corp. and their affiliates, and
certain trust accounts for which First Union or its affiliates act in an
administrative, fiduciary, or custodial capacity, board members of First Union
and the above-mentioned entities and the members of the immediate families of
any of these persons, will also be exempt from sales charges. Class B and
Class C Investment Shares are distributed pursuant to Rule 12b-1 Plans adopted
by the Trust, whereby the distributor is paid a fee of .25 of 1% for Class B
Shares and .75 of 1% for Class C Shares of each Fund's average daily net asset
value.
The stated advisory fee is the same for all classes of the Funds. 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 same Fund.
The amount of dividends payable to 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.
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
[This Page Intentionally Left Blank]
<PAGE>
- ------------------------ ADDRESSES ------------------------
- ------------------------ ------------------------
- --------------------------------------------------------------------------------
First Union Funds 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
- --------------------------------------------------------------------------------
Federated Securities Corp. Distributor
3052402A-1 (2/94)
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS
(Portfolios of First Union Funds)
Class B Investment Shares
Class C Investment Shares
- --------------------------------------------------------------------------------
Supplement to Prospectus dated February 28, 1994
Effective September 1, 1994, First Union Single State Municipal Bond Funds
(the "Funds") will offer Class D Investment Shares ("Class D Shares").
Class D Shares will be similar to Class C Shares in all respects except:
Class D Shares will have a contingent deferred sales charge of 1.00%,
which terminates after one year, and the Class D Shares will not
automatically convert into Class B Shares after seven years.
Effective September 1, 1994, Class C Shares will assess a shareholder
service fee of 0.25% of the average daily net asset value, of which all or
a portion may be waived at any time.
A. Please delete the "Summary of Fund Expenses" table on pages 4 and 5 and
replace it with the following:
- -------------------------- SUMMARY OF --------------------------
- -------------------------- FUND EXPENSES --------------------------
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS
CLASS B SHARES
<TABLE>
<CAPTION>
North South
Florida Georgia Carolina Carolina Virginia
Municipal Municipal Municipal Municipal Municipal
Bond Fund Bond Fund Bond Fund Bond Fund Bond Fund
Class B Shares-- --------- --------- --------- --------- ---------
Shareholder Transaction Expenses
<S> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).... 4.75% 4.75% 4.75% 4.75% 4.75%
Maximum Sales Load Imposed on Reinvested
Dividends (as a percentage of offering
price)................................. None None None None None
Contingent Deferred Sales Charge (as a
percentage of original purchase price
or redemption proceeds, as applicable). None None None None None
Redemption Fee (as a percentage of
amount redeemed, if applicable)........ None None None None None
Exchange Fee............................ None None None None None
Annual Class B Shares Operating Expenses
(As a percentage of projected average
net assets)
Management Fee (after waiver) (1)....... 0.00% 0.00% 0.16% 0.00% 0.00%
12b-1 Fees (2).......................... 0.25% 0.25% 0.25% 0.25% 0.25%
Total Other Expenses (after waiver
and reimbursement) (3)................. 0.37% 0.37% 0.38% 0.00% 0.37%
Total Class B Shares Operating
Expenses (4)...................... 0.62% 0.62% 0.79% 0.25% 0.62%
</TABLE>
(1) The estimated management fees have been reduced to reflect the anticipated
voluntary waivers by the Adviser. However, the North Carolina Municipal
Bond Fund's management fee has been reduced to reflect the expected
voluntary waiver by the Adviser. The Adviser may terminate these voluntary
waivers at any time at its sole discretion. The maximum management fee for
each Fund is 0.50%.
(2) The Class B Shares can pay up to 0.75% of Class B Shares' average daily net
assets as a 12b-1 fee. For the foreseeable future, the Funds plan to limit
the Class B Shares' 12b-1 payments to 0.25% of Class B Shares' average
daily net assets.
(3) Total Other Expenses for Florida, Georgia, South Carolina, and Virginia
Municipal Bond Funds are estimated to be 0.73%, 2.17%, 2.71%, and 2.41%,
respectively, absent the anticipated voluntary waiver by the administrator
and reimbursement of other operating expenses by the Adviser. The
administrator and Adviser may terminate these waivers and reimbursements at
any time at their sole discretion.
(4) The annual Class B Shares Operating Expenses for Florida, Georgia, North
Carolina, and Virginia Municipal Bonds Funds were 0.25%, 0.25%, 0.32%, and
0.25%, respectively, for the period ended December 31, 1993. Total Class B
Shares operating expenses for Florida, Georgia, North Carolina, and
Virginia Municipal Bond Funds, absent the voluntary waivers and
reimbursements of other operating expenses, were 1.83%, 6.82%, 1.25%, and
7.75%, respectively, for the period ended December 31, 1993.
- -------------------------- SUMMARY OF --------------------------
- -------------------------- FUND EXPENSES --------------------------
(Continued)
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS
CLASS B SHARES
The annual Class B Shares operating expenses in the table above are based on
estimated expenses expected during the fiscal year ending December 31, 1994.
Total Class B Shares operating expenses for Florida, Georgia, North
Carolina, South Carolina, and Virginia Municipal Bond Funds are estimated to
be 1.48%, 2.92%, 1.13%, 3.46%, and 3.16%, respectively, absent the
anticipated voluntary waivers and reimbursements described above in notes 1
and 3.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Funds 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.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
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.
The Funds charge no redemption fees for Class
B Shares.
Florida Municipal Bond Fund................. $54 $66 $80 $121
Georgia Municipal Bond Fund................. $54 $66 $80 $121
North Carolina Municipal Bond Fund.......... $55 $72 $89 $141
South Carolina Municipal Bond Fund.......... $50 $55 N/A N/A
Virginia Municipal Bond Fund................ $54 $66 $80 $121
</TABLE>
The above example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown. The example
is based on estimated data for the fiscal year ending December 31, 1994.
The information set forth in the foregoing table and example relates only to
Class B Shares of the Funds. The Funds also offer three additional classes of
shares called Trust Shares, Class C Shares and Class D Shares. In general, all
expenses are allocated based upon the daily net assets of each class. Trust
Shares, Class C Shares and Class D Shares are subject to certain of the same
expenses as Class B Shares. However, Trust Shares bear no sales load or 12b-1
fee. Class C Shares are subject to a 12b-1 fee of 0.75 of 1%, a shareholder
service fee of 0.25 of 1%, bear a maximum contingent deferred sales charge of
5.00% and bear no front-end sales charge. Class D Shares are subject to a 12b-1
fee of 0.75 of 1%, a shareholder service fee of 0.25 of 1%, bear a maximum
contingent deferred sales charge of 1.00% and bear no front-end sales charge.
See "Other Classes of Shares."
B. Please delete the "Summary of Fund Expenses" table on pages 6 and 7 and
replace it with the following:
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS CLASS C SHARES
<TABLE>
<CAPTION>
Florida Georgia
Municipal Municipal North Carolina
Bond Fund Bond Fund Municipal Bond Fund
----------------------------- --------------------------- ---------------------------
Class C Shares--
Shareholder Transaction Expenses
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)...... None None None
Maximum Sales Load Imposed on Reinvested
Dividends (as a percentage of offering
price)................................... None None None
Contingent Deferred Sales Charge (as a 5% during the first year, 5% during the first year, 5% during the first year,
percentage of original purchase price or 4% during the second year, 4% during the second year, 4% during the second year,
redemption proceeds, as applicable) (1).. 3% during the third year, 3% during the third year, 3% during the third year,
3% during the fourth year, 3% during the fourth year, 3% during the fourth year,
2% during the fifth year, 2% during the fifth year, 2% during the fifth year,
1% during the sixth year, 1% during the sixth year, 1% during the sixth year,
and 0% after the sixth year and 0% after the sixth year and 0% after the sixth year
Redemption Fee (as a percentage of amount
redeemed, if applicable)................. None None None
Exchange Fee.............................. None None None
Annual Class C Shares
(As a percentage of projected average net
assets)
Management Fee (after waiver) (2)......... 0.00% 0.00% 0.16%
12b-1 Fees................................ 0.75% 0.75% 0.75%
Total Other Expenses (after waiver and
reimbursement) (3)...................... 0.62% 0.62% 0.63%
Shareholder Service Fee............... 0.25%
Total Class C Shares Operating
Expenses (4)....................... 1.37% 1.37% 1.54%
</TABLE>
- -------------------------- SUMMARY OF --------------------------
- -------------------------- FUND EXPENSES --------------------------
(Continued)
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS
CLASS C SHARES
<TABLE>
<CAPTION>
South Carolina Virginia
Municipal Municipal
Bond Fund Bond Fund
--------------------------- ---------------------------
Class C Shares--Shareholder Transaction Expenses
<S> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)........................................... None None
Maximum Sales Load Imposed on Reinvested Dividends (as a
percentage of offering price)............................. None None
Contingent Deferred Sales Charge (as a percentage of 5% during the first year, 5% during the first year,
original purchase price or redemption proceeds, as 4% during the second year, 4% during the second year,
applicable) (1)........................................... 3% during the third year, 3% during the third year,
3% during the fourth year, 3% during the fourth year,
2% during the fifth year, 2% during the fifth year,
1% during the sixth year, 1% during the sixth year,
and 0% after the sixth year and 0% after the sixth year
Redemption Fee (as a percentage of amount redeemed, if
applicable)............................................... None None
Exchange Fee............................................... None None
Annual Class C Shares Operating Expenses
(As a percentage of projected average net assets)
Management Fee (after waiver) (2).......................... 0.00% 0.00%
12b-1 Fees................................................. 0.75% 0.75%
Total Other Expenses (after waiver and reimbursement) (3).. 0.25% 0.62%
Shareholder Service Fee................................. 0.25%
Total Class C Shares Operating Expenses (4)........... 1.00% 1.37%
</TABLE>
(1) No contingent deferred sales charge is imposed on (a) Shares purchased more
than six years prior to redemption, (b) Shares acquired through the
reinvestment of dividends and distributions, and (c) the portion of
redemption proceeds attributable to increases in the value of an account
above the net cost of the investment due to increases in the net asset
value per share.
(2) The estimated management fees have been reduced to reflect the anticipated
voluntary waivers by the Adviser. However, the North Carolina Municipal
Bond Fund's management fee has been reduced to reflect the expected
voluntary waiver by the Adviser. The Adviser may terminate these voluntary
waivers at any time at its sole discretion. The maximum management fee for
each Fund is 0.50%.
(3) Total Other Expenses for Florida, Georgia, South Carolina, and Virginia
Municipal Bond Funds are estimated to be 0.98%, 2.42%, 2.96% and 2.66%,
respectively, absent the anticipated voluntary waiver by the administrator
and reimbursement of other operating expenses by the Adviser. The
administrator and Adviser may terminate these waivers and reimbursements at
any time at their sole discretion.
(4) The annual Class C Shares Operating Expenses for Florida, Georgia, North
Carolina, and Virginia Municipal Bond Funds were 0.75%, 0.75%, 0.79%, and
0.75%, respectively, for the period ended December 31, 1993. Total Class C
Shares operating expenses for Florida, Georgia, North Carolina, and
Virginia Municipal Bond Funds, absent the voluntary waivers and
reimbursements of other operating expenses, were 2.33%, 7.32%, 1.74%, and
8.25%, respectively, for the period ended December 31, 1993.
The annual Class C Shares Operating Expenses in the table above are based on
estimated expenses expected during the fiscal year ending December 31, 1994.
Total Class C Shares operating expenses for Florida, Georgia, North Carolina,
South Carolina, and Virginia Municipal Bond Funds are estimated to be 2.23%,
3.67%, 1.88%, 4.21%, and 3.91%, respectively, absent the anticipated
voluntary waivers and reimbursements described above in notes 2 and 3.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Funds 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.
- -------------------------- SUMMARY OF --------------------------
- -------------------------- FUND EXPENSES --------------------------
(Continued)
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS
CLASS C SHARES
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
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.
Florida Municipal Bond Fund................. $66 $77 $99 $165
Georgia Municipal Bond Fund................. $66 $77 $99 $165
North Carolina Municipal Bond Fund.......... $67 $82 $108 $183
South Carolina Municipal Bond Fund.......... $62 $66 N/A N/A
Virginia Municipal Bond Fund................ $66 $77 $99 $165
You would pay the following expenses on the
same investment, assuming no redemptions:
Florida Municipal Bond Fund................. $14 $43 $75 $165
Georgia Municipal Bond Fund................. $14 $43 $75 $165
North Carolina Municipal Bond Fund.......... $16 $49 $84 $183
South Carolina Municipal Bond Fund.......... $10 $32 N/A N/A
Virginia Municipal Bond Fund................ $14 $43 $75 $165
</TABLE>
The above example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown. The example
is based on estimated data for the fiscal year ending December 31, 1994.
The information set forth in the foregoing table and example relates only to
Class C Shares of the Funds. The Funds also offer three additional classes of
shares called Trust Shares, Class B Shares and Class D Shares. In general, all
expenses are allocated based upon the daily net assets of each class. Trust
Shares, Class B Shares and Class D Shares are subject to certain of the same
expenses as Class C Shares. However, Trust Shares bear no sales charge or 12b-1
fee. Class B Shares are subject to a 12b-1 fee of 0.25 of 1%, bear a maximum
front-end sales charge of 4.75%, and bear no contingent deferred sales charge.
Class D Shares are subject to a 12b-1 fee of 0.75 of 1%, a shareholder service
fee of 0.25 of 1%, bear a maximum contingent deferred sales charge of 1.00% and
bear no front-end sales charge. See "Other Classes of Shares."
C. Please insert the following "Summary of Fund Expenses" table on pages 8
and 9 for Class D Shares:
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS
CLASS D SHARES
<TABLE>
<CAPTION>
North South
Florida Georgia Carolina Carolina Virginia
Municipal Municipal Municipal Municipal Municipal
Bond Fund Bond Fund Bond Fund Bond Fund Bond Fund
Class D Shares-- --------------- --------------- --------------- --------------- ---------------
Shareholder Transaction Expenses
<S> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)..... None None None None None
Maximum Sales Load Imposed on Reinvested
Dividends (as a percentage of offering
price).................................. None None None None None
Contingent Deferred Sales Charge (as a 1% during first 1% during first 1% during first 1% during first 1% during first
percentage of original purchase price or year, and 0% year, and 0% year, and 0% year, and 0% year, and 0%
redemption proceeds, as applicable) (1). after the after the after the after the after the
first year first year first year first year first year
Redemption Fees (as a percentage of
amount redeemed, if applicable) None None None None None
Exchange Fee............................. None None None None None
Annual Class D Shares Operating Expenses*
(As a percentage of projected average net
assets)
Management Fee (after waiver) (2)........ 0.00% 0.00% 0.16% 0.00% 0.00%
12b-1 Fees............................... 0.75% 0.75% 0.75% 0.75% 0.75%
Total Other Expenses (after waiver ) (3). 0.62% 0.62% 0.63% 0.25% 0.62%
Shareholder Service Fee................ 0.25%
Total Class D Shares Operating
Expenses (4)........................ 1.37% 1.37% 1.54% 1.00% 1.37%
</TABLE>
(1) No contingent deferred sales charge is imposed on (a) Shares purchased more
than one year prior to redemption, (b) Shares acquired through the
reinvestment of dividends and distributions, and (c) the portion of
redemption proceeds attributable to increases in the value of an account
above the net cost of the investment due to increases in the net asset
value per share.
- -------------------------- SUMMARY OF --------------------------
- -------------------------- FUND EXPENSES --------------------------
(Continued)
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS
CLASS D SHARES
(2) The estimated management fees have been reduced to reflect the anticipated
voluntary waiver by the Adviser. The Adviser may terminate these voluntary
waivers at any time at its sole discretion. The maximum management fee for
each fund is 0.50%.
(3) Total Other Expenses for Florida, Georgia, South Carolina, and Virginia
Municipal Bond Funds are estimated to be 0.98%, 2.42%, 2.96% and 2.66%,
respectively, absent the anticipated voluntary waiver by the administrator
and reimbursement of other operating expenses by the Adviser. The
administrator and Adviser may terminate these waivers and reimbursements at
any time at their sole discretion.
(4) Total Class D Shares operating expenses for Florida, Georgia, North
Carolina, South Carolina and Virginia Municipal Bond Funds are estimated to
be 2.23%, 3.67%, 1.88%, 4.21% and 3.91%, respectively, absent the
anticipated voluntary waivers and reimbursements described above in notes 2
and 3.
* Expenses in this table are estimated based on average expenses expected to be
incurred during the fiscal year ending December 31, 1994. During the course of
this period, expenses may be more or less than the average amount shown.
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Funds 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 charge permitted
under the rules of the National Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
- ------- ------ -------
<S> <C> <C>
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:
Florida Municipal Bond Fund.................................. $24 $43
Georgia Municipal Bond Fund.................................. $24 $43
North Carolina Municipal Bond Fund........................... $26 $49
South Carolina Municipal Bond Fund........................... $21 $32
Virginia Municipal Bond Fund................................. $24 $43
You would pay the following expenses on the same investment,
assuming no redemptions:
Florida Municipal Bond Fund.................................. $14 $43
Georgia Municipal Bond Fund.................................. $14 $43
North Carolina Municipal Bond Fund........................... $16 $49
South Carolina Municipal Bond Fund........................... $10 $32
Virginia Municipal Bond Fund................................. $14 $43
</TABLE>
The above example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown. This example
is based on estimated data for the fiscal year ending December 31, 1994.
The information set forth in the foregoing table and example relates only to
Class D Shares of the Funds. The Funds also offer three additional classes of
shares called Trust Shares, Class B Shares and Class C Shares. In general, all
expenses are allocated based upon the daily net assets of each class. Trust
Shares bear no sales load or 12b-1 fee. Class B Shares are subject to a 12b-1
fee of 0.25 of 1% and bear a maximum sales charge of 4.75%. Class C Shares are
subject to a 12b-1 fee of 0.75 of 1%, a shareholder service fee of 0.25 of 1%,
bear a maximum contingent deferred sales charge of 5.00% and bear no front-end
sales charge. See "Other Classes of Shares."
D. Please delete the table (for Class B Investment Shares) under the
section entitled "What Shares Cost" on page 17 and replace it with the
following:
<TABLE>
<CAPTION>
Sales Charge as
a Percentage of Sales Charge as a
Amount of Public Offering Percentage of Net
Transaction Price Amount Invested
----------- --------------- -----------------
<S> <C> <C>
$0-99,999 4.75% 4.25%
$100,000-249,999 3.75% 3.25%
$250,000-499,999 3.00% 2.50%
$500,000-1,000,000 2.00% 1.75%
$1,000,000-2,500,000 1.00% 1.00%
$2,500,000 and above 0.25% 0.25%
</TABLE>
E. Please delete the table (for Class C Investment Shares) under
the section entitled "What Shares Cost" on page 18 and replace it with
the following:
<TABLE>
<CAPTION>
Year of Redemption Contingent Deferred
After Purchase Sales Charge
------------------ -------------------
<S> <C>
First 5.0%
Second 4.0%
Third 3.0%
Fourth 3.0%
Fifth 2.0%
Sixth 1.0%
</TABLE>
September 1, 1994
FEDERATED SECURITIES CORP.
- --------------------------------------------------------------------------------
Distributor
G00389-16-B (9/94)
P R O S P E C T U S
FIRST UNION
SINGLE STATE
MUNICIPAL BOND
PORTFOLIOS
CLASS B AND C
INVESTMENT SHARES
FEBRUARY 28, 1994
LOGO OF
FIRST UNION FUNDS
FORMERLY THE SALEM FUNDS
FIRST UNION
SINGLE STATED
- ------------------------ MUNICIPAL BOND ------------------------
- ------------------------ ------------------------
FUNDS
Portfolios of First Union Funds
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
- --------------------------------------------------------------------------------
P R O S P E C T U S
February 28, 1994
First Union Funds (the "Trust") is a mutual fund with 15 portfolios, offering a
variety of investment opportunities. The Trust currently includes five non-
diversified Single State Municipal Bond Funds, seven diversified Equity and
Income Funds and three diversified Money Market Funds. They are:
Single State Municipal Bond Funds
. First Union Florida Municipal Bond Portfolio;
. First Union Georgia Municipal Bond Portfolio;
. First Union North Carolina Municipal Bond Portfolio;
. First Union South Carolina Municipal Bond Portfolio; and
. First Union Virginia Municipal Bond Portfolio.
Equity and Income Funds
.First Union Balanced Portfolio;
.First Union Fixed Income Portfolio;
. First Union High Grade Tax Free Portfolio (formerly, First Union Insured Tax
Free Portfolio);
. First Union Managed Bond Portfolio (Investment Shares not currently
offered);
. First Union U.S. Government Portfolio;
. First Union Utility Portfolio; and
.First Union Value Portfolio.
Money Market Funds
.First Union Money Market Portfolio;
. First Union Tax Free Money Market Portfolio; and
. First Union Treasury Money Market Portfolio.
This prospectus provides you with information specific to the Class B
Investment Shares ("Class B Shares") and Class C Investment Shares ("Class C
Shares") of First Union Single State Municipal Bond Funds. It concisely
describes the information which you should know before investing in Class B
Shares or Class C Shares of any of the First Union Single State Municipal Bond
Funds. Please read this prospectus carefully and keep it for future reference.
You can find more detailed information about each First Union Single State
Municipal Bond Fund in its Statement of Additional Information dated February
28, 1994, filed with the Securities and Exchange Commission and incorporated by
reference into this prospectus. The Statements are available free of charge by
writing to First Union Funds, Federated Investors Tower, Pittsburgh, PA 15222-
3779 or by calling 1-800-326-3241.
The Trust is sponsored and distributed by third parties independent of First
Union National Bank of North Carolina ("First Union").
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF FIRST
UNION, ARE NOT ENDORSED OR GUARANTEED BY FIRST UNION, AND ARE NOT INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- --------------------------------------------------------------------------------
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.
- ------------------------ TABLE OF ------------------------
- ------------------------ CONTENTS ------------------------
SUMMARY 2
- -------------------------------------
SUMMARY OF FUND EXPENSES 4
- -------------------------------------
FINANCIAL HIGHLIGHTS 7
- -------------------------------------
INVESTMENT OBJECTIVES AND POLICIES 12
- -------------------------------------
OTHER INVESTMENT POLICIES 14
- -------------------------------------
SHAREHOLDER GUIDE 15
- -------------------------------------
HOW TO BUY SHARES 17
- -------------------------------------
HOW TO REDEEM SHARES 20
- -------------------------------------
ADDITIONAL SHAREHOLDER SERVICES 20
- -------------------------------------
MANAGEMENT OF FIRST UNION FUNDS 21
- -------------------------------------
FEES AND EXPENSES 23
- -------------------------------------
SHAREHOLDER RIGHTS AND PRIVILEGES 23
- -------------------------------------
DISTRIBUTIONS AND TAXES 24
- -------------------------------------
TAX INFORMATION 25
- -------------------------------------
HOW TO CONVERT YOUR INVESTMENT FROM
ONE FIRST UNION FUND TO ANOTHER
FIRST UNION FUND 19
- -------------------------------------
OTHER CLASSES OF SHARES 28
- -------------------------------------
ADDRESSES Inside Back Cover
- -------------------------------------
- ------------------------ SUMMARY ------------------------
- ------------------------ ------------------------
DESCRIPTION OF THE TRUST
First Union Funds 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 First Union Fund. Each Single State Municipal Bond Fund currently
offers three classes of shares: Class B Shares, Class C Shares, and Trust
Shares. Class B Shares and Class C Shares are sold to individuals and other
customers of First Union (the "Adviser"), and are sold at net asset value plus
a sales charge which, at the election of the purchaser, may be imposed either
(i) at the time of purchase (the Class B Shares), or (ii) on a contingent
deferred basis (the Class C Shares). Trust Shares are designed primarily for
institutional investors (banks, corporations, and fiduciaries). This prospectus
relates to both classes of Investment Shares ("Shares") of the First Union
Single State Municipal Bond Funds (collectively, the "Funds").
THE FUNDS AND OBJECTIVES
As of the date of this prospectus, Shares are offered in the following five
Single State Municipal Bond Funds:
. FIRST UNION FLORIDA MUNICIPAL BOND PORTFOLIO ("FLORIDA MUNICIPAL BOND
FUND")--seeks current income exempt from federal regular income tax
consistent with preservation of capital. In addition, the Fund intends to
qualify as an investment exempt from the Florida state intangibles tax;
. FIRST UNION GEORGIA MUNICIPAL BOND PORTFOLIO ("GEORGIA MUNICIPAL BOND
FUND")--seeks current income exempt from federal regular income tax and
Georgia state income tax, consistent with preservation of capital;
. FIRST UNION NORTH CAROLINA MUNICIPAL BOND PORTFOLIO ("NORTH CAROLINA
MUNICIPAL BOND FUND")--seeks current income exempt from federal regular
income tax and North Carolina state income tax, consistent with preservation
of capital. In addition, the Fund intends to qualify as an investment
substantially exempt from the North Carolina intangible personal property
tax;
. FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO ("SOUTH CAROLINA
MUNICIPAL BOND FUND")--seeks current income exempt from federal regular
income tax and South Carolina state income tax; and
. FIRST UNION VIRGINIA MUNICIPAL BOND PORTFOLIO ("VIRGINIA MUNICIPAL BOND
FUND")--seeks current income exempt from federal regular income tax and
Virginia state income tax, consistent with preservation of capital.
INVESTMENT MANAGEMENT
The Funds are advised by First Union, through its Capital Management Group.
First Union has responsibility for investment research and supervision of the
Funds, 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 Class B and Class C Shares of any of the Single
State Municipal Bond Funds, please refer to the Shareholder Guide section
entitled "How to Buy Shares." Redemption information may be found under "How to
Redeem Shares."
- -------------------------- SUMMARY OF --------------------------
- -------------------------- FUND EXPENSES --------------------------
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS
CLASS B SHARES
<TABLE>
<CAPTION>
North South
Florida Georgia Carolina Carolina Virginia
Municipal Municipal Municipal Municipal Municipal
Bond Fund Bond Fund Bond Fund Bond Fund Bond Fund
CLASS B SHARES-- --------- --------- --------- --------- ---------
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).... 4.00% 4.00% 4.00% 4.00% 4.00%
Maximum Sales Load Imposed on Reinvested
Dividends (as a percentage of offering
price)................................. None None None None None
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, as applicable)............... None None None None None
Redemption Fee (as a percentage of
amount redeemed,
if applicable)......................... None None None None None
Exchange Fee............................ None None None None None
ANNUAL CLASS B SHARES OPERATING EXPENSES
(As a percentage of projected average
net assets)
Management Fee (after waiver) (1)....... 0.00% 0.00% 0.16% 0.00% 0.00%
12b-1 Fees (2).......................... 0.25% 0.25% 0.25% 0.25% 0.25%
Total Other Expenses (after waiver
and reimbursement) (3)................. 0.37% 0.37% 0.38% 0.00% 0.37%
Total Class B Shares Operating Ex-
penses (4)............................. 0.62% 0.62% 0.79% 0.25% 0.62%
</TABLE>
(1) The estimated management fees have been reduced to reflect the anticipated
voluntary waivers by the Adviser. However, the North Carolina Municipal
Bond Fund's management fee has been reduced to reflect the expected
voluntary waiver by the Adviser. The Adviser may terminate these voluntary
waivers at any time at its sole discretion. The maximum management fee for
each Fund is 0.50%.
(2) The Class B Shares can pay up to 0.75% of Class B Shares' average daily
net assets as a 12b-1 fee. For the foreseeable future, the Funds plan to
limit the Class B Shares' 12b-1 payments to 0.25% of Class B Shares'
average daily net assets.
(3) Total Other Expenses for Florida, Georgia, South Carolina, and Virginia
Municipal Bond Funds are estimated to be 0.73%, 2.17%, 2.71%, and 2.41%,
respectively, absent the anticipated voluntary waiver by the administrator
and reimbursement of other operating expenses by the Adviser. The
administrator and Adviser may terminate these waivers and reimbursements
at any time at their sole discretion.
(4) The annual Class B Shares operating expenses for Florida, Georgia, North
Carolina, and Virginia Municipal Bonds Funds were 0.25%, 0.25%, 0.32%, and
0.25%, respectively, for the period ended December 31, 1993. Total Class B
Shares operating expenses for Florida, Georgia, North Carolina, and
Virginia Municipal Bond Funds, absent the voluntary waivers and
reimbursements of other operating expenses, were 1.83%, 6.82%, 1.25%, and
7.75%, respectively, for the period ended December 31, 1993.
The annual Class B Shares operating expenses in the table above are based on
estimated expenses expected during the fiscal year ending December 31, 1994.
Total Class B Shares operating expenses for Florida, Georgia, North
Carolina, South Carolina, and Virginia Municipal Bond Funds are estimated to
be 1.48%, 2.92%, 1.13%, 3.46%, and 3.16%, respectively, absent the
anticipated voluntary waivers and reimbursements described above in notes 1
and 3.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUNDS 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.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
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.
The Funds charge no redemption fees for Class
B Shares.
Florida Municipal Bond Fund................. $46 $59 N/A N/A
Georgia Municipal Bond Fund................. $46 $59 N/A N/A
North Carolina Municipal Bond Fund.......... $48 $64 $82 $134
South Carolina Municipal Bond Fund.......... $42 $48 N/A N/A
Virginia Municipal Bond Fund................ $46 $59 N/A N/A
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE EXAMPLE
IS BASED ON ESTIMATED DATA FOR THE FISCAL YEAR ENDING DECEMBER 31, 1994.
- -------------------------- SUMMARY OF --------------------------
- -------------------------- FUND EXPENSES --------------------------
(CONTINUED)
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS
CLASS B SHARES
The information set forth in the foregoing table and example relates only to
Class B Shares of the Funds. The Funds also offer two additional classes of
shares called Trust Shares and Class C Shares. Trust Shares and Class C Shares
are subject to certain of the same expenses as Class B Shares. However, Trust
Shares bear no sales load or 12b-1 fee, and Class C Shares are subject to a
12b-1 fee of .75 of 1%, bear a maximum contingent deferred sales load of 4.00%
and bear no front-end sales load. See "Other Classes of Shares."
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS CLASS C SHARES
<TABLE>
<CAPTION>
Florida Georgia
Municipal Municipal North Carolina
Bond Fund Bond Fund Municipal Bond Fund
----------------------------- --------------------------- ---------------------------
CLASS C SHARES--
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C> <C> <C>
Maximum Sales Load Im-
posed on Purchases
(as a percentage of of-
fering price).......... None None None
Maximum Sales Load
Imposed on Reinvested
Dividends (as a
percentage of offering
price)................. None None None
Deferred Sales Load (as 4% during the first year, 4% during the first year, 4% during the first year,
a percentage of 3% during the second year, 3% during the second year, 3% during the second year,
original purchase price 2.5% during the third year, 2.5% during the third year, 2.5% during the third year,
or redemption proceeds, 2% during the fourth year, 2% during the fourth year, 2% during the fourth year,
as applicable) (1)..... 1.5% during the fifth year, 1.5% during the fifth year, 1.5% during the fifth year,
0.5% during the sixth year, 0.5% during the sixth year, 0.5% during the sixth year,
and 0% after the sixth year and 0% after the sixth year and 0% after the sixth year
Redemption Fee (as a
percentage of amount
redeemed, if
applicable)............ None None None
Exchange Fee............ None None None
ANNUAL CLASS C SHARES
(As a percentage of projected average net assets)
Management Fee (after
waiver) (2)............ 0.00% 0.00% 0.16%
12b-1 Fees.............. 0.75% 0.75% 0.75%
Total Other Expenses
(after waiver and
reimbursement) (3)..... 0.37% 0.37% 0.38%
Total Class C Shares Operating Expenses (4)...1.12% 1.12% 1.29%
</TABLE>
- -------------------------- SUMMARY OF --------------------------
- -------------------------- FUND EXPENSES --------------------------
(CONTINUED)
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS
CLASS C SHARES
<TABLE>
<CAPTION>
South Carolina Virginia
Municipal Municipal
Bond Fund Bond Fund
--------------------------- ---------------------------
CLASS C SHARES--SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C> <C> <C>
Maximum Sales Load Im-
posed on Purchases (as
a percentage of offer-
ing price)............. None None
Maximum Sales Load
Imposed on Reinvested
Dividends (as a
percentage of
offering price)........ None None
Deferred Sales Load (as 4% during the first year, 4% during the first year,
a percentage of 3% during the second year, 3% during the second year,
original purchase price 2.5% during the third year, 2.5% during the third year,
or redemption proceeds, 2% during the fourth year, 2% during the fourth year,
as applicable) (1)..... 1.5% during the fifth year, 1.5% during the fifth year,
0.5% during the sixth year, 0.5% during the sixth year,
and 0% after the sixth year and 0% after the sixth year
Redemption Fee (as a
percentage of amount
redeemed, if
applicable)............ None None
Exchange Fee............ None None
ANNUAL CLASS C SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)
Management Fee (after
waiver) (2)............ 0.00% 0.00%
12b-1 Fees.............. 0.75% 0.75%
Total Other Expenses
(after waiver and reim-
bursement) (3)......... 0.00% 0.37%
Total Class C Shares
Operating Expenses
(4)................. 0.75% 1.12%
</TABLE>
(1) No contingent deferred sales charge is imposed on (a) Shares purchased
more than six years prior to redemption, (b) Shares acquired through the
reinvestment of dividends and distributions, and (c) the portion of
redemption proceeds attributable to increases in the value of an account
above the net cost of the investment due to increases in the net asset
value per share.
(2) The estimated management fees have been reduced to reflect the anticipated
voluntary waivers by the Adviser. However, the North Carolina Municipal
Bond Fund's management fee has been reduced to reflect the expected
voluntary waiver by the Adviser. The Adviser may terminate these voluntary
waivers at any time at its sole discretion. The maximum management fee for
each Fund is 0.50%.
(3) Total Other Expenses for Florida, Georgia, South Carolina, and Virginia
Municipal Bond Funds are estimated to be 0.73%, 2.17%, 2.71% and 2.41%,
respectively, absent the anticipated voluntary waiver by the administrator
and reimbursement of other operating expenses by the Adviser. The
administrator and Adviser may terminate these waivers and reimbursements
at any time at their sole discretion.
(4) The annual Class C Shares operating expenses for Florida, Georgia, North
Carolina, and Virginia Municipal Bond Funds were 0.75%, 0.75%, 0.79%, and
0.75%, respectively, for the period ended December 31, 1993. Total Class C
Shares operating expenses for Florida, Georgia, North Carolina, and
Virginia Municipal Bond Funds, absent the voluntary waivers and
reimbursements of other operating expenses, were 2.33%, 7.32%, 1.74%, and
8.25%, respectively, for the period ended December 31, 1993.
The annual Class C Shares operating expenses in the table above are based on
estimated expenses expected during the fiscal year ending December 31, 1994.
Total Class C Shares operating expenses for Florida, Georgia, North
Carolina, South Carolina, and Virginia Municipal Bond Funds are estimated to
be 1.98%, 3.42%, 1.63%, 3.96%, and 3.66%, respectively, absent the
anticipated voluntary waivers and reimbursements described above in notes 2
and 3.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUNDS 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.
- -------------------------- SUMMARY OF --------------------------
- -------------------------- FUND EXPENSES --------------------------
(CONTINUED)
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS
CLASS C SHARES
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.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
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.
Florida Municipal Bond Fund................. $53 $64 N/A N/A
Georgia Municipal Bond Fund................. $53 $64 N/A N/A
North Carolina Municipal Bond Fund.......... $55 $69 $89 $156
South Carolina Municipal Bond Fund.......... $49 $52 N/A N/A
Virginia Municipal Bond Fund................ $53 $64 N/A N/A
You would pay the following expenses on the
same investment, assuming no
redemptions:
Florida Municipal Bond Fund................. $11 $36 N/A N/A
Georgia Municipal Bond Fund................. $11 $36 N/A N/A
North Carolina Municipal Bond Fund.......... $13 $41 $71 $156
South Carolina Municipal Bond Fund.......... $ 8 $24 N/A N/A
Virginia Municipal Bond Fund................ $11 $36 N/A N/A
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE EXAMPLE
IS BASED ON ESTIMATED DATA FOR THE FISCAL YEAR ENDING DECEMBER 31, 1994.
The information set forth in the foregoing table and example relates only to
Class C Shares of the Funds. The Funds also offer two additional classes of
shares called Trust Shares and Class B Shares. Trust Shares and Class B Shares
are subject to certain of the same expenses as Class C Shares. However, Trust
Shares bear no sales load or 12b-1 fee, and Class B Shares are subject to a
12b-1 fee of .25 of 1%, bear a maximum front-end sales load of 4.00%, and bear
no contingent deferred sales load. See "Other Classes of Shares."
- ------------------------ FINANCIAL HIGHLIGHTS ------------------------
- ------------------------ ------------------------
FIRST UNION FLORIDA MUNICIPAL BOND PORTFOLIO
SUPPLEMENTARY INFORMATION (FOR A SHARE OUTSTANDING THROUGHOUT THE 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.
<TABLE>
<CAPTION>
CLASS B CLASS C
INVESTMENT INVESTMENT
SHARES(A) SHARES(A)
------------------ -------------------
PERIOD ENDED PERIOD ENDED
DECEMBER 31, 1993* DECEMBER 31, 1993**
- ------------------------------------- ------------------ -------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00
- -------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------
Net investment income 0.22 0.20
- -------------------------------------
Net realized and unrealized gain 0.34 0.34
(loss) on investments ------ ------
- -------------------------------------
Total from investment operations 0.56 0.54
- -------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------
Dividends to shareholders from (0.22) (0.20)
net investment income ------ ------
- -------------------------------------
NET ASSET VALUE, END OF PERIOD $10.34 $10.34
- ------------------------------------- ------ ------
TOTAL RETURN*** 5.63% 5.40%
- -------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------
Expenses 0.25%(c) 0.75%(c)
- -------------------------------------
Net investment income 4.92%(c) 4.46%(c)
- -------------------------------------
Expense waiver/reimbursement (b) 1.58%(c) 1.58%(c)
- -------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------
Net assets, end of period (000 omit-
ted) $8,110 $18,383
- -------------------------------------
Portfolio turnover rate 3% 3%
- -------------------------------------
</TABLE>
* Reflects operations for the period from July 6, 1993 (commencement of
operations) to December 31, 1993.
** Reflects operations for the period from July 2, 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) 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 and Class C
Investment Shares.
(b) This voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
(c) Computed on an annualized basis.
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 GEORGIA MUNICIPAL BOND PORTFOLIO
SUPPLEMENTARY INFORMATION (FOR A SHARE OUTSTANDING THROUGHOUT THE 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.
<TABLE>
<CAPTION>
CLASS B CLASS C
INVESTMENT INVESTMENT
SHARES(A) SHARES(A)
------------------ ------------------
PERIOD ENDED PERIOD ENDED
DECEMBER 31, 1993* DECEMBER 31, 1993*
- ---------------------------------------- ------------------ ------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00
- ----------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------
Net investment income 0.201 0.179
- ----------------------------------------
Net realized and unrealized gain (loss) 0.193 0.193
on investments ------- -------
- ----------------------------------------
Total from investment operations 0.394 0.372
- ----------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------
Dividends to shareholders from net in-
vestment income (0.201) (0.179)
- ----------------------------------------
Distributions to shareholders from net
realized gain (0.003) (0.003)
on investment transactions ------- -------
- ----------------------------------------
TOTAL DISTRIBUTIONS (0.204) (0.182)
- ---------------------------------------- ------- -------
NET ASSET VALUE, END OF PERIOD $10.19 $10.19
- ---------------------------------------- ------ ------
TOTAL RETURN** 3.96% 3.74%
- ----------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------
Expenses 0.25%(c) 0.75%(c)
- ----------------------------------------
Net investment income 4.71%(c) 4.15%(c)
- ----------------------------------------
Expense waiver/reimbursement (b) 6.57%(c) 6.57%(c)
- ----------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------
Net assets, end of period (000 omitted) $817 $3,692
- ----------------------------------------
Portfolio turnover rate 15% 15%
- ----------------------------------------
</TABLE>
* Reflects operations for the period from July 2, 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) 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 and
Class C Investment Shares.
(b) This voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
(c) Computed on an annualized basis.
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 NORTH CAROLINA MUNICIPAL BOND PORTFOLIO
SUPPLEMENTARY INFORMATION (FOR A SHARE OUTSTANDING THROUGHOUT THE 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.
<TABLE>
<CAPTION>
CLASS B CLASS C
INVESTMENT INVESTMENT
SHARES(B) SHARES(B)
------------------- -------------------
PERIOD ENDED PERIOD ENDED
DECEMBER 31, 1993** DECEMBER 31, 1993**
- ------------------------------------- ------------------- -------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00
- -------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------
Net investment income 0.46 0.42
- -------------------------------------
Net realized and unrealized gain 0.64 0.64
(loss) on investments ------ ------
- -------------------------------------
Total from investment operations 1.10 1.06
- ------------------------------------- ------ ------
LESS DISTRIBUTIONS
- -------------------------------------
Dividends to shareholders from net
investment
income (0.46) (0.42)
- -------------------------------------
Distributions to shareholders from
net realized gains (0.03) (0.03)
on investment transactions ------ ------
- -------------------------------------
Total distributions (0.49) (0.45)
- ------------------------------------- ------ ------
NET ASSET VALUE, END OF PERIOD $10.61 $10.61
- ------------------------------------- ------ ------
TOTAL RETURN* 11.28% 10.80%
- -------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------
Expenses 0.32%(a) 0.79%(a)
- -------------------------------------
Net investment income 4.91%(a) 4.47%(a)
- -------------------------------------
Expense waiver/reimbursement (c) 0.93%(a) 0.95%(a)
- -------------------------------------
SUPPLEMENTARY DATA
- -------------------------------------
Net assets, end of period (000 omit-
ted) $12,739 $45,168
- -------------------------------------
Portfolio turnover rate 57% 57%
- -------------------------------------
</TABLE>
* Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
** Reflects operations for the period from January 11, 1993 (commencement of
operations) to December 31, 1993.
(a) Computed on an annualized basis.
(b) 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 and
Class C Investment Shares.
(c) This voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
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 VIRGINIA MUNICIPAL BOND PORTFOLIO
SUPPLEMENTARY INFORMATION (FOR A SHARE OUTSTANDING THROUGHOUT THE 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.
<TABLE>
<CAPTION>
CLASS B CLASS C
INVESTMENT INVESTMENT
SHARES(A) SHARES(A)
------------------ ------------------
PERIOD ENDED PERIOD ENDED
DECEMBER 31, 1993* DECEMBER 31, 1993*
- ---------------------------------------- ------------------ ------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00
- ----------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------
Net investment income 0.20 0.17
- ----------------------------------------
Net realized and unrealized gain (loss)
on 0.19 0.19
investments ------ ------
- ----------------------------------------
Total from investment operations 0.39 0.36
- ----------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------
Dividends to shareholders from net in-
vestment (0.20) (0.17)
income ------ ------
- ----------------------------------------
NET ASSET VALUE, END OF PERIOD $10.19 $10.19
- ---------------------------------------- ------ ------
TOTAL RETURN** 3.89% 3.66%
- ----------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------
Expenses 0.25%(b) 0.75%(b)
- ----------------------------------------
Net investment income 4.64%(b) 4.25%(b)
- ----------------------------------------
Expense waiver/reimbursement (c) 7.50%(b) 7.50%(b)
- ----------------------------------------
SUPPLEMENTARY DATA
- ----------------------------------------
Net assets, end of period (000 omitted) $1,306 $2,235
- ----------------------------------------
Portfolio turnover rate 0% 0%
- ----------------------------------------
</TABLE>
* Reflects operations for the period from July 2, 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) 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 and Class C
Investment Shares.
(b) Computed on an annualized basis.
(c) The voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
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
- ------------------------ OBJECTIVES ------------------------
- ------------------------ AND POLICIES ------------------------
First Union Single State Municipal Bond Funds seek current income exempt from
federal regular income tax and, where applicable, state income taxes,
consistent with preservation of capital. In addition, the Florida Municipal
Bond Fund intends to qualify as an investment exempt from the Florida state
intangibles tax, and the North Carolina Municipal Bond Fund intends to qualify
as an investment substantially exempt from the North Carolina intangible
personal property tax.
Each Fund's investment objective cannot be changed without shareholder
approval. While there is no assurance that each objective will be achieved, the
Funds will endeavor to do so by following the investment policies detailed
below. Unless otherwise indicated, the investment policies of a Fund 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.
DESCRIPTION OF THE FUNDS
Each Fund seeks current income which is exempt from federal regular income tax
and (where applicable) the designated state income tax consistent with
preservation of capital. In addition, the Florida Municipal Bond Fund intends
to qualify as an investment exempt from the Florida state intangibles tax, and
the North Carolina Municipal Bond Fund intends to qualify as an investment
substantially exempt from the North Carolina intangible personal property tax.
As a matter of fundamental investment policy, each Fund will normally invest
its assets so that at least 80% of its annual interest income is, or at least
80% of its net assets are invested in, obligations which provide interest
income which is exempt from federal regular income taxes. The interest retains
its tax-free status when distributed to the Fund's shareholders. In addition,
at least 65% of the value of each Fund's total assets will be invested in
municipal bonds of the particular state after which the Fund is named. To
qualify as an investment exempt from the Florida state intangibles tax, the
Florida Municipal Bond Fund's portfolio must consist entirely of investments
exempt from the Florida state intangibles tax on the last business day of the
calendar year.
TYPES OF INVESTMENTS
Each Fund seeks to achieve its investment objective by investing principally in
municipal obligations, including industrial development bonds, of its
designated state. In addition, the Funds may invest in obligations issued by or
on behalf of any state, territory, or possession of the United States,
including the District of Columbia, or their political subdivisions or agencies
and instrumentalities, the interest from which is exempt from federal regular
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 a Fund in calculating the federal individual
alternative minimum tax or the federal alternative minimum tax for
corporations.
The municipal bonds in which the Funds will invest are subject to one or more
of the following quality standards: rated Baa or better by Moody's Investors
Service, Inc. ("Moody's") or BBB or better by Standard & Poor's Corporation
("S&P") or, if unrated, are determined by the Adviser to be of comparable
quality to such ratings; insured by a municipal bond insurance company which is
rated Aaa by Moody's or AAA by S&P; guaranteed at the time of purchase by the
U.S. government as to the payment of principal and interest; or fully
collateralized by an escrow of U.S. government securities. Bonds rated BBB by
S&P or Baa by Moody's have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to weakened capacity
to make principal and interest payments than higher rated bonds. If any
security owned by a 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 may consider doing so. If ratings made by Moody's or S&P
change because of changes in those organizations or their ratings systems, the
Funds will try to use comparable ratings as standards in accordance with the
Funds' investment objectives. A description of the rating categories is
contained in the Appendix of the Statement of Additional Information for each
Fund.
Other types of investments include:
participation interests in any of the above obligations. (Participation
interests may be purchased from financial institutions such as commercial
banks, savings and loan associations and insurance companies, and give a
Fund an undivided interest in particular municipal securities);
variable rate municipal securities. (Variable rate securities offer
interest rates which are tied to a money market rate, usually a published
interest rate or interest rate index or the 91-day U.S. Treasury bill rate.
Many of these securities are subject to prepayment of principal on demand
by the Fund, usually in seven days or less); and
municipal leases issued by state and local governments or authorities to
finance the acquisition of equipment and facilities.
TEMPORARY INVESTMENTS
During periods when, in the Adviser's opinion, a temporary defensive position
in the market is appropriate, a 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; shares of
other investment companies; 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 Fund's primary investments.
Although the Funds are permitted to make taxable, temporary investments, there
is no current intention of generating income subject to federal regular income
tax. However, certain temporary investments will generate income which is
subject to state taxes.
MUNICIPAL BONDS
Municipal bonds are debt obligations issued by the state or local entities to
support a government's general financial needs or special projects, such as
housing projects or sewer works. Municipal bonds include industrial development
bonds issued by or on behalf of public authorities to provide financing aid to
acquire sites or construct or equip facilities for privately or publicly owned
corporations.
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 bond 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.
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. There is no limit on the maturity
of the bonds purchased by the Funds. Because the prices of bonds fluctuate
inversely in relation to the direction of interest rates, the prices of longer
term bonds fluctuate more widely in response to market interest rate changes. A
Fund's concentration in securities issued by its designated state and that
state's political subdivisions provides a greater level of risk than a fund
which is diversified across numerous states and municipal entities. An expanded
discussion of the risks associated with the purchase of the designated state's
municipal bonds is contained in the respective Statements of Additional
Information.
- ------------------------ OTHER INVESTMENT ------------------------
- ------------------------ POLICIES ------------------------
The Funds have adopted the following practices for specific types of
investments.
REPURCHASE AGREEMENTS
The Funds may invest in repurchase agreements. Repurchase agreements are
agreements by which a 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 the creditworthiness of the firms with which the Funds enter into
repurchase agreements.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Funds may purchase portfolio securities on a when-issued or delayed
delivery basis. In such cases, a 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 the securities 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 Funds may lend their portfolio
securities on a short-term or long-term basis to broker/dealers, banks, or
other institutional borrowers of securities. The Funds 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 investment policy
which cannot be changed without shareholder approval, the Funds will not lend
any of their assets except portfolio securities up to one-third of the value of
their total assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
Each Fund may invest in the securities of other investment companies. 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) no Fund
will own more than 3% of the total outstanding voting stock of any one
investment company, (2) no Fund may invest more than 5% of its total assets in
any one investment company and (3) no Fund may 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.
OPTIONS AND FUTURES
The Funds may engage in options and futures transactions. Options and futures
transactions are intended to enable a Fund to manage market, interest rate or
exchange rate risk. The Funds do not use these transactions for speculation or
leverage.
Options and futures may be volatile investments and involve certain risks which
might result in lowering the Funds' returns. The three principal areas of risk
include: (1) lack of a liquid secondary market for a futures or option contract
when the Fund wants to close out its position; (2) imperfect correlation of
changes in the prices of futures or options contracts with the prices of the
securities in the Fund's portfolio; and (3) incorrect forecasts by the Adviser
of interest rates, market values or other economic factors. In these events,
the Funds may lose money on the futures contract or option.
RESTRICTED AND ILLIQUID SECURITIES
The Funds may not invest more than 15% of their total assets in securities
which are subject to restrictions on resale under federal securities law.
Certain restricted securities which the Trustees deem to be liquid will be
excluded from this limitation.
The Funds will limit investments in illiquid securities, including certain
restricted securities or municipal leases not determined by the Trustees to be
liquid, non-negotiable time deposits, and repurchase agreements providing for
settlement in more than seven days after notice, to 15% of its net assets.
The following investment limitations cannot be changed without shareholder
approval.
BORROWING MONEY
The Funds will not borrow money or pledge securities, except under certain
circumstances a Fund may borrow up to one-third of the value of its total
assets and pledge assets to secure such borrowings.
NON-DIVERSIFICATION
Each Fund is a non-diversified portfolio of an investment company and as such,
there is no limit on the percentage of assets which can be invested in any
single issuer. An investment in a Fund, therefore, will entail greater risk
than would exist in a diversified investment company because the higher
percentage of investments among fewer issuers may result in greater fluctuation
in the total market value of the Fund's portfolio.
Each Fund intends to comply with Subchapter M of the Internal Revenue Code
which requires that at the end of each quarter of each taxable year, with
regard to at least 50% of the Fund's total assets, no more than 5% of the total
assets may be invested in the securities of a single issuer and that with
respect to the remainder of the Fund's total assets, no more than 25% of its
total assets are invested in the securities of a single issuer.
NEW ISSUERS
The Funds will not invest more than 5% of the value of their total assets in
securities of issuers (or guarantors, where applicable) which have records of
less than three years of continuous operations, including the operation of any
predecessor.
- ------------------------ SHAREHOLDER GUIDE ------------------------
- ------------------------ ------------------------
CLASSES OF INVESTMENT SHARES
You may select a method of purchasing Shares which is most beneficial to you by
choosing either Class B Shares or Class C Shares. Your decision will be based
on the amount of your intended purchase and how long you expect to hold the
Shares.
Each Fund offers two types of Investment Shares: Class B Shares and Class C
Shares. Each Share of the Fund represents an identical interest in the
investment portfolio of the Fund and has the same rights. The difference
between Class B Shares and Class C Shares is based on purchasing arrangements
and distribution expenses. Class B Shares have a sales charge included at the
time of purchase and are subject to a lower Rule 12b-1 distribution fee. This
means that investors can purchase fewer Class B Shares for the same initial
investment than Class C Shares due to the initial sales charge, but will
receive higher dividends per Share due to the lower distribution expenses.
Class C Shares impose a contingent deferred sales charge ("CDSC") on most
redemptions made within six years of purchase and have higher distribution
costs resulting from greater Rule 12b-1 distribution fees. This means that
investors may purchase more Class C Shares than Class B Shares for the same
initial investment, but will receive lower dividends per Share.
Investors should consider whether, during the anticipated life of their
investment in the Fund, the accumulated Rule 12b-1 fee and the CDSC on Class C
Shares would be less than the initial sales charge and accumulated Rule 12b-1
fee on Class B Shares purchased at the same time. Investors must also consider
how that differential would be offset by the higher yield of Class B Shares.
SHARE PRICE CALCULATION
The net asset value of a Fund Share equals the market value of all 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 Class B Shares adds an applicable sales charge, and the
redemption proceeds of Class C Shares deduct an applicable CDSC.) 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 a 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 may differ slightly from that of Class B
Shares and Class C Shares of the same Fund due to the variability in daily net
income resulting from different distribution charges for each class of shares.
The net asset value for each Fund will fluctuate for all three classes.
PERFORMANCE INFORMATION
A 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 Funds may make available certain information about the
performance of Class B Shares and Class C 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 yields of Class B Shares and Class C Shares are 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.
Tax equivalent yield 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 Class B Shares and Class C Shares of the Funds and, therefore, may
not correlate to the dividends or other distributions paid to shareholders.
Performance information for the Class B Shares and Class C 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
Class B Shares, Class C Shares, and Trust Shares of a Fund. Because 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 Class B Shares also contributes to a lower
total return for Class B Shares. In addition, Class C Shares are subject to
similar non-recurring charges, such as the CDSC, which, if excluded, would
increase the total return for Class C Shares.
From time to time, a Fund may advertise its performance using certain rankings
published in financial publications and/or compare its performance to certain
indices.
- ------------------------ HOW TO BUY ------------------------
- ------------------------ SHARES ------------------------
Shares may be purchased at a price equal to their net asset value per Share
next determined after receipt of an order plus a sales charge which, at the
election of the purchaser, may be imposed either (i) at the time of purchase
(in the case of Class B Shares), or (ii) on a contingent deferred basis (in the
case of Class C Shares).
MINIMUM INVESTMENT
You may invest as often as you want in any of the Funds. There is a $1,000
minimum initial investment requirement which may be waived in certain
situations. For further information, please contact the Mutual Funds Group of
First Union Brokerage Services ("FUBS"), a subsidiary of First Union, at 1-800-
326-3241. Subsequent investments may be in any amounts.
WHAT SHARES COST
Class B Shares are sold at their net asset value plus a sales charge as
follows:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS A
A PERCENTAGE OF PERCENTAGE OF NET
AMOUNT OF TRANSACTION PUBLIC OFFERING PRICE AMOUNT INVESTED
--------------------- --------------------- -----------------
<S> <C> <C>
$ 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%
</TABLE>
Shareholders of record in any First Union Fund at October 12, 1990, and the
members of their immediate family, will be exempt from sales charges on any
future purchases in any of the First Union Funds. Employees of First Union,
Federated Securities Corp. (the "distributor" or "FSC") and their affiliates,
and certain trust accounts for which First Union or its affiliates act in an
administrative, fiduciary, or custodial capacity, board members of First Union
and the above-mentioned entities and the members of the immediate families of
any of these persons, will also be exempt from sales charges.
Sales charges may be reduced in some cases. You may be entitled to a reduction
if: (1) you make a single large purchase, (2) you, your spouse and/or children
(under 21 years) make Fund purchases on the same day, (3) you make an
additional purchase to add to an existing account, (4) you sign a letter of
intent indicating your intention to purchase at least $100,000 of Shares over
the next 13 months, (5) you reinvest in a Fund within 30 days of redemption, or
(6) you combine purchases of two or more First Union Funds which include front-
end sales charges. In all of these cases, you must notify the distributor of
your intentions in writing in order to qualify for a sales charge reduction.
For more information, consult the Funds' Statements of Additional Information
or the distributor.
Class C Shares are sold at net asset value per Share without the imposition of
a sales charge at the time of purchase. Shares redeemed within six years of
their purchase will be subject to a CDSC according to the following schedule:
<TABLE>
<CAPTION>
YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
------------------ -------------------
<S> <C>
First 4.0%
Second 3.0%
Third 2.5%
Fourth 2.0%
Fifth 1.5%
Sixth 0.5%
Seventh None
</TABLE>
No CDSC will be imposed on: (1) the portion of redemption proceeds
attributable to increases in the value of the account due to increases in the
net asset value per Share, (2) Shares acquired through reinvestment of
dividends and capital gains, (3) Shares held for more than six years after the
end of the calendar month of acquisition, (4) accounts following the death or
disability of a shareholder, or (5) minimum required distributions to a
shareholder over the age of 70 1/2 from an IRA or other retirement plan.
CONVERSION FEATURE
Class C Shares include all Shares purchased pursuant to the deferred sales
charge alternative which have been outstanding for less than the period ending
seven years after the end of the month in which the shareholder's order to
purchase Class C Shares was accepted. At the end of this seven year period,
Class C Shares may automatically convert to Class B Shares, in which case the
Shares will no longer be subject to the higher Rule 12b-1 distribution fee
which is assessed on Class C Shares. Such conversion will be on the basis of
the relative net asset values of the two classes, without the imposition of
any sales load, fee, or other charge. The purpose of the conversion feature is
to relieve the holders of the Class C Shares that have been outstanding for a
period of time sufficient for the distributor to have been compensated for
distribution expenses related to the Class C Shares from most of the burden of
such distribution-related expenses.
For purposes of conversion to Class B Shares, Class C Shares purchased through
the reinvestment of dividends and distributions paid on Class C Shares in a
shareholder's Fund account will be considered to be held in a separate sub-
account. Each time any Class C Shares in the shareholder's Fund account (other
than those in the sub-account) convert to Class B Shares, an equal pro rata
portion of the Class C Shares in the sub-account will also convert to Class B
Shares.
The availability of the conversion feature is subject to the granting of an
exemptive order (the "Order") by the Securities and Exchange Commission (the
"SEC") or the adoption of a rule permitting such conversion. In the event that
the Order or rule ultimately issued by the SEC requires any conditions
additional to those described in this prospectus, shareholders will be
notified.
BY TELEPHONE OR IN PERSON
You may purchase Class B Shares and Class C Shares by telephone from the
Mutual Funds Group of FUBS at 1-800-326-3241 or you may place the order in
person at any First Union branch location. Shares are sold on days on which
the New York Stock Exchange and the Federal Reserve Wire System are open for
business.
METHOD OF PAYMENT
Payment may be made by check or federal funds or by debiting your account at
First Union. All purchase orders received prior to 4:00 p.m. (Eastern time) on
a regular business day are processed at that day's offering price. Payment is
required within five business days.
SHAREHOLDER ACCOUNTS
As transfer agent for the Funds, State Street Bank and Trust Company of
Boston, Massachusetts ("State Street Bank") maintains a Share account for each
shareholder of record. Share certificates are not issued, except with respect
to investors who invest $1,000,000 or more in Class B Shares of the Florida
Municipal Bond Fund. In such case, share certificates may be issued upon
request by contacting the Fund.
MINIMUM BALANCE
Due to the high cost of maintaining smaller holdings, each Fund reserves the
right to redeem a shareholder's Shares if, as a result of redemptions, their
aggregate value drops below $1,000. Reductions in value that result solely
from market activity will not trigger an involuntary redemption. The Funds
will notify shareholders in writing 30 days before taking such action to allow
them to increase their holdings to at least the minimum level.
DEALER CONCESSION
For sales of Shares of the Funds, 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. However, the distributor, in
its sole discretion, may uniformly offer to pay to all dealers selling Shares
of the Funds, all or a portion of the sales charge it normally retains. If
accepted by the dealer, such additional payments will be predicated upon the
amount of Fund Shares sold. 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.
HOW TO CONVERT
- ------------------------ YOUR INVESTMENT ------------------------
- ------------------------ FROM ONE FIRST ------------------------
UNION FUND TO
ANOTHER FIRST UNION FUND
As a shareholder, you have the privilege of exchanging your Shares for shares
of another First Union Fund.
As long as the First Union Fund in which you are invested will not be
adversely affected, you may switch among the First Union Funds within the
Trust. Before the exchange, you must call FUBS at 1-800-326-3241 to receive a
prospectus for the First Union Fund into which you want to exchange. Read the
prospectus carefully. Each exchange represents the sale of shares of one First
Union Fund and the purchase of shares in another, which may produce a gain or
loss for tax purposes.
You may exchange Class B Shares of one First Union Fund for Class B Shares of
any other First Union Fund, or Class C Shares of one First Union Fund for
Class C Shares of any other First Union Fund by calling toll free 1-800-326-
3241 or by writing to FUBS. Telephone exchange instructions may be recorded.
Shares purchased by check are eligible for exchange after the check clears,
which could take up to seven days after receipt of the check. Exchanges are
subject to the $1,000 minimum initial purchase requirement for each First
Union Fund.
An exchange order must comply with the requirements for a redemption and
purchase order and must specify the dollar value or number of shares to be
exchanged. Once the order is received, the Shares already owned will be
redeemed at current net asset value and, upon receipt of the proceeds by the
First Union Fund, shares of the other First Union Fund will be purchased at
their offering price determined after the proceeds from such redemption become
available, which may be up to seven days after such redemption. Orders for
exchanges received by a First Union Fund prior to 4:00 p.m. (Eastern time) on
any day the First Union Funds are open for business will be executed as of the
close of business that day. Orders for exchanges received after 4:00 p.m.
(Eastern time) on any business day will be executed at the lose of the next
business day.
When exchanging into and out of load and no-load shares of First Union Funds,
shareholders who have already paid a sales charge once at the time of purchase,
including shares obtained through the reinvestment of dividends, will not have
to pay an additional sales charge on an exchange.
The exchange of Class C Shares will not be subject to a CDSC. However, if the
shareholder redeems Class C Shares within six years of the original purchase, a
CDSC will be imposed. For purposes of computing the CDSC, the length of time
the shareholder has owned Class C Shares will be measured from the date of
original purchase and will not be affected by the exchange.
If reasonable procedures are not followed by a Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
EXCHANGE RESTRICTIONS
Although the Trust has no intention of terminating or modifying the exchange
privilege, it reserves the right to do so at any time. Excessive trading can
impact the interests of shareholders. Therefore, the Trust reserves the right
to terminate the exchange privilege of any shareholder who makes more than five
exchanges of shares of the First Union Funds in a year or three exchanges in a
calendar quarter.
The exchange privilege is only available in states where shares of the First
Union Fund being acquired may legally be sold. Before the exchange, a
shareholder must receive a prospectus of the First Union Fund for which the
exchange is being made.
- ------------------------ HOW TO ------------------------
- ------------------------ REDEEM SHARES ------------------------
Shares are redeemed at their net asset value next determined after a proper
redemption request has been received, less, in the case of Class C Shares, any
applicable CDSC.
You may redeem Shares in three ways: (1) by telephoning FUBS at 1-800-326-3241,
(2) by written request to FUBS or State Street Bank, or (3) in person at First
Union. Telephone redemption instructions may be recorded.
The Funds redeem Shares at their net asset value next determined after a Fund
receives the redemption request. Redemptions will be made on days on which a
Fund computes the net asset value of Shares. 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. Proceeds will be wired to the
shareholder's account at First Union or a check will be sent to the address of
record, normally within five (but in no case longer than seven) days after a
proper request for redemption has been received.
If reasonable procedures are not followed by a Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
ADDITIONAL
- ------------------------ SHAREHOLDER ------------------------
- ------------------------ SERVICES ------------------------
TELEPHONE SERVICES
You may authorize electronic transfers of money to purchase Shares in any
amount or to redeem any or all Shares in an account. The service may be used
like an "electronic check" to move money between a bank account and an account
in the Fund with a single telephone call.
SYSTEMATIC INVESTMENT PLAN
You may arrange for systematic monthly or quarterly investments in your account
in amounts of $25 or more by directly debiting your bank account.
TAX SHELTERED PLANS
You may open a pension and profit sharing account in any First Union Fund
(except those First Union Funds having an objective of providing tax free
income) including Individual Retirement Accounts (IRAs), Rollover IRAs, Keogh
Plans, Corporate Profit-Sharing, Pension and Salary-Reduction Plans. For
details, including fees and application forms, call First Union toll free at 1-
800-669-2136 or write to First Union National Bank of North Carolina,
Retirement Services, 301 South College Street, Charlotte, NC 28288-1169.
SYSTEMATIC WITHDRAWAL PLAN
If you are a shareholder with an account valued at $10,000 or more, you may
have amounts of $100 or more sent from your account to you on a regular monthly
or quarterly basis.
MANAGEMENT
- ------------------------ OF FIRST ------------------------
- ------------------------ UNION FUNDS ------------------------
Responsibility for the overall management of First Union Funds rests with its
Trustees and officers. Other service providers include the Funds' Distributor,
Investment Adviser, Custodian, Transfer Agent, Legal Counsel, and Independent
Auditors.
INVESTMENT ADVISER
Professional investment supervision for the Funds 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.
Robert S. 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 FUBS. Mr. Drye has managed the South Carolina Municipal Bond
Fund since its inception in January 1994. In addition, Mr. Drye has been the
portfolio manager for the Florida Municipal Bond Fund since its inception in
July 1993.
Richard K. Marrone is a Vice President of First Union National Bank of North
Carolina, N.A. Mr. Marrone joined First Union in May 1993 with eleven years of
experience managing fixed income assets at Woodbridge Capital Management, a
subsidiary of Comerica Bank, N.A. Mr. Marrone is responsible for the portfolio
management of several First Union Funds and certain common trust funds. Mr.
Marrone has served as portfolio manager of the North Carolina Municipal Bond
Fund since May 1993, and portfolio manager of the Georgia Municipal Bond Fund
since its inception in July 1993.
Charles E. Jeanne joined First Union National Bank of North Carolina, N.A. in
July 1993. Prior to joining First Union, Mr. Jeanne served as a
trader/portfolio manager for First American Bank where he was responsible for
individual accounts and common trust funds. Mr. Jeanne has been the portfolio
manager for the Virginia Municipal Bond Fund since its inception in July 1993.
From time to time, to the extent consistent with the objectives, policies and
restrictions of the Funds, the Funds may invest in securities of issuers with
which the Adviser has a lending relationship.
DISTRIBUTION OF INVESTMENT SHARES
FSC, a subsidiary of Federated Investors, is the principal distributor for the
Funds. It is a Pennsylvania corporation organized on November 14, 1969, and is
the principal distributor for a number of investment companies.
Each class of Investment Shares of a Fund has adopted a separate plan for
distribution of Shares permitted by Rule 12b-1 under the Investment Company Act
of 1940 (the "Plans"), whereby each 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 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 0.75% for Class C Shares of a
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 Shares.
The Funds make no payments in connection with the sale of Shares other than the
Rule 12b-1 fees paid to its distributor. The distributor, however, may pay a
sales commission to brokers (including FUBS) in connection with the sale of
Class C Shares. Except as set forth in the next paragraph, the Funds do not pay
for unreimbursed expenses of the distributor. Since the Funds' Plans are
"compensation" type plans, however, future Rule 12b-1 fees may permit recovery
of such amounts or may result in a profit to the distributor.
The distributor may sell, assign, or pledge its right to receive Rule 12b-1
fees and CDSCs to finance payments made to brokers (including FUBS) in
connection with the sale of Class C Shares. First Union Corporation currently
serves as principal lender in this financing program. Actual distribution
expenses for Class C Shares at any given time may exceed the Rule 12b-1 fees
and payments received pursuant to CDSCs. These unrecovered amounts, plus
interest thereon, will be carried forward and paid from future Rule 12b-1 fees
and payments received through CDSCs. If a Plan were terminated or not
continued, the Funds would not be contractually obligated to pay for any
expenses not previously reimbursed by the Funds or recovered through CDSCs.
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 Plans and will not be an expense of
the Funds.
FUND ADMINISTRATION
Federated Administrative Services ("FAS"), a subsidiary of Federated Investors,
provides the Funds with administrative personnel and services necessary to
operate the Funds, such as legal and accounting services, for a specified fee
which is detailed below.
State Street Bank serves as custodian and transfer agent, and provides dividend
disbursement and other shareholder services for the Funds.
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 ------------------------
- ------------------------ ------------------------
Each Fund pays annual advisory and administrative fees and certain expenses.
ADVISORY AND ADMINISTRATIVE FEES
For managing their investment and business affairs, the Funds pay an annual fee
to First Union. The Adviser receives an annual investment advisory fee equal to
.50 of 1% of each of the Single State Municipal Bond Fund's average daily net
assets. The Adviser may voluntarily choose to waive a portion of its fee or
reimburse the Funds for certain operating expenses.
The Trust also pays a fee for administrative services. FAS provides these at an
annual rate as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE TRUST
------------------- -----------------------------------
<S> <C>
.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
</TABLE>
Unless waived, the administrative fee received during any fiscal year shall
aggregate at least $50,000 per First Union Fund.
EXPENSES OF THE FUNDS AND INVESTMENT SHARES
Holders of Shares pay their allocable portion of Trust and respective 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.
Fund expenses for which holders of Shares pay their allocable portion based on
average daily net assets include, but are not limited to: registering a Fund
and Shares of that Fund; investment advisory services; taxes and commissions;
custodian fees; insurance premiums; auditors' fees; and such non-recurring and
extraordinary items as may arise.
The Funds' expenses under the Rule 12b-1 Plans are incurred solely by the Class
B Shares 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 of a
Fund.
SHAREHOLDER
- ------------------------ RIGHTS AND ------------------------
- ------------------------ PRIVILEGES ------------------------
VOTING RIGHTS
Each Share of a Fund is entitled to one vote in Trustee elections and other
voting matters submitted to shareholders. All shares of all classes of each
First Union Fund in the Trust have equal voting rights, except that in matters
affecting only a particular First Union Fund or class, only shares of that
First Union Fund or class are entitled to vote. As of February 3, 1994, FUBS,
for the exclusive benefit of Robert Allen Jones and Larry Allen Jones of
Florence, South Carolina, and for the exclusive benefit of Doris G. Foster and
John H. Foster of Greenville, South Carolina, and acting in various capacities
for numerous accounts, was the owner of record of 2,402 Shares (60.49%) and
1,493 Shares (37.59%), respectively, of the South Carolina Municipal Bond
Fund--Class B Investment Shares, and therefore, may, for certain purposes, be
deemed to control the South Carolina Municipal Bond Fund and be able to affect
the outcome of certain matters presented for a vote of shareholders.
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 a 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 non-bank 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,
First Union, is subject to and in compliance with such banking laws and
regulations.
Sullivan & Cromwell has advised First Union that First Union may perform the
services for the Funds set forth in the investment advisory agreement, this
prospectus, and the Statements 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 First Union from continuing to perform such services
for the Funds or from continuing to purchase Shares for the accounts of its
customers. If First Union were prohibited from acting as investment adviser to
the Funds, it is expected that the Trustees would recommend to the Funds'
shareholders that they approve a new investment adviser selected by the
Trustees. It is not expected that the Funds' shareholders would suffer any
adverse financial consequences (if another adviser with equivalent abilities to
First Union is found) as a result of any of these occurrences.
- ------------------------ DISTRIBUTIONS ------------------------
- ------------------------ AND TAXES ------------------------
Each 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. 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
Funds or FUBS in writing.
CAPITAL GAINS
Any net long-term capital gains realized by the Funds 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 Funds pay no federal income tax if they meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and will
receive the special tax treatment afforded to such companies.
Each First Union Fund is treated as a single, separate entity for federal
income tax purposes so that income (including capital gains) and losses
realized by one First Union Fund will not be combined for tax purposes with
those realized by other First Union Funds.
Shareholders of the Funds are not required to pay the federal regular income
tax on any dividends received from a 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 Funds may purchase all types of municipal bonds,
including "private activity" bonds. Thus, should a Fund 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 a 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 Funds.
Dividends of a Fund representing net interest income earned on some temporary
investments, income earned on options transactions, and any realized net short-
term gains are taxed as ordinary income. Distributions representing net long-
term capital gains realized by the Funds, 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.
Set forth below are brief descriptions of the personal income tax status of an
investment in each of the Funds under, respectively, Florida, Georgia, North
Carolina, South Carolina, and Virginia tax laws currently in effect. Income
from a Fund is not necessarily free from state income taxes in states other
than its designated state. State laws differ on this issue, and shareholders
are urged to consult their own tax advisers regarding the status of their
accounts under state and local laws. A statement setting forth the state income
tax status of all distributions made during each calendar year will be sent to
shareholders annually.
ADDITIONAL TAX INFORMATION FOR SHAREHOLDERS OF THE FLORIDA MUNICIPAL BOND FUND
Florida does not currently impose an income tax on individuals. Thus,
individual shareholders of the Florida Municipal Bond Fund will not be subject
to any Florida state income tax on distributions received from the Florida
Municipal Bond Fund. However, certain distributions will be taxable to
corporate shareholders which are subject to Florida corporate income tax.
Florida currently imposes an intangibles tax at the annual rate of 0.20% on
certain securities and other intangible assets owned by Florida residents.
Certain types of tax exempt securities of Florida issuers, U.S. government
securities and tax exempt securities issued by certain U.S. territories and
possessions are exempt from this intangibles tax. Shares of the Florida
Municipal Bond Fund will also be exempt from the Florida intangibles tax if the
portfolio consists exclusively of securities exempt from the intangibles tax on
the last business day of the calendar year. If the portfolio consists of any
assets which are not so exempt on the last business day of the calendar year,
however, only the portion of the Shares of the Florida Municipal Bond Fund
which relate to securities issued by the United States and its possessions and
territories will be exempt from the Florida intangibles tax, and the remaining
portion of such Shares will be fully subject to the intangibles tax, even if
they partly relate to Florida tax exempt securities.
ADDITIONAL TAX INFORMATION FOR SHAREHOLDERS OF THE GEORGIA MUNICIPAL BOND FUND
Under existing Georgia law, shareholders of the Georgia Municipal Bond Fund
will not be subject to individual or corporate Georgia income taxes on
distributions from the Georgia Municipal Bond Fund to the extent that such
distributions represent exempt-interest dividends for federal income tax
purposes that are attributable to (1) interest-bearing obligations issued by or
on behalf of the State of Georgia or its political subdivisions, or (2)
interest on obligations of the United States or of any other issuer whose
obligations are exempt from state income taxes under federal law.
Distributions, if any, derived from capital gains or other sources generally
will be taxable for Georgia income tax purposes to shareholders of the Georgia
Municipal Bond Fund who are subject to the Georgia income tax. For purposes of
the Georgia intangibles tax, Shares of the Georgia Municipal Bond Fund likely
are taxable (at the rate of 10 cents per $1,000 in value of the Shares held on
January 1 of each year) to shareholders who are otherwise subject to such tax.
ADDITIONAL TAX INFORMATION FOR SHAREHOLDERS OF THE NORTH CAROLINA MUNICIPAL
BOND FUND
Under existing North Carolina law, shareholders of the North Carolina Municipal
Bond Fund will not be subject to individual or corporate North Carolina income
taxes on distributions from the North Carolina Municipal Bond Fund to the
extent that such distributions represent exempt-interest dividends for federal
income tax purposes that are attributable to (1) interest on obligations issued
by North Carolina and political subdivisions thereof or (2) interest on
obligations of the United States or its territories or possessions.
Distributions, if any, derived from capital gains or other sources generally
will be taxable for North Carolina income tax purposes to shareholders of the
North Carolina Municipal Bond Fund who are subject to the North Carolina income
tax.
North Carolina currently imposes an intangibles tax (at the rate of 25 cents
per $100 in value of the shares held on December 31 of each year) on all shares
of stock, including mutual funds. However, shareholders of North Carolina
Municipal Bond Fund may exclude from share value that proportion of the total
share value which is attributable to direct obligations of the State of North
Carolina, its subdivisions, and the United States held in the North Carolina
Municipal Bond Fund as of December 31 of the taxable year. The North Carolina
Municipal Bond Fund will annually furnish to its shareholders a statement
supporting the proper allocation.
ADDITIONAL TAX INFORMATION FOR SHAREHOLDERS OF THE SOUTH CAROLINA MUNICIPAL
BOND FUND
Under existing South Carolina law, shareholders of the South Carolina Municipal
Bond Fund will not be subject to individual or corporate South Carolina income
taxes on South Carolina Municipal Bond Fund dividends to the extent that such
dividends represent exempt-interest dividends for federal income tax purposes
that are attributable to (1) interest on obligations of the State of South
Carolina, or any of its political subdivisions; (2) interest on obligations of
the United States; or (3) interest on obligations of any agency or
instrumentality of the United States that is prohibited by federal law from
being taxed by a state or any political subdivision of a state. To the extent
that distributions from the Fund are attributable to capital gains or other
sources, such distributions will not be exempt from South Carolina income
taxation.
ADDITIONAL TAX INFORMATION FOR SHAREHOLDERS OF THE VIRGINIA MUNICIPAL BOND FUND
Under existing Virginia law, shareholders of the Virginia Municipal Bond Fund
will not be subject to individual or corporate Virginia income taxes on
distributions received from the Virginia Municipal Bond Fund to the extent that
such distributions are attributable to interest earned on (1) obligations
issued by or on behalf of the Commonwealth of Virginia or any political
subdivision thereof, or (2) obligations issued by a territory or possession of
the United States or any subdivision thereof which federal law exempts from
state income taxes. Distributions, if any, derived from capital gains or other
sources generally will be taxable for Virginia income tax purposes to
shareholders of the Virginia Municipal Bond Fund who are subject to Virginia
income tax.
- ------------------------ OTHER CLASSES ------------------------
- ------------------------ OF SHARES ------------------------
First Union Single State Municipal Bond Funds offer three classes of shares:
Class B Shares and Class C Shares for individuals and other customers of First
Union 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.
The stated advisory fee is the same for all classes of the Funds. 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 same Fund.
The amount of dividends payable to 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.
- ------------------------ ADDRESSES ------------------------
- ------------------------ ------------------------
- --------------------------------------------------------------------------------
First Union Funds 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
- --------------------------------------------------------------------------------
Federated Securities Corp., Distributor
3052402A (6/93)
533107
FIRST UNION NORTH CAROLINA MUNICIPAL BOND PORTFOLIO
(A PORTFOLIO OF FIRST UNION FUNDS)
TRUST SHARES
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
Supplement to Combined Statement of Additional Information dated
February 28, 1994
Effective September 1, 1994, First Union North Carolina
Municipal Bond Portfolio (the "Fund") will offer Class
D Investment Shares ("Class D Shares"). Class D Shares
will be similar to Class C Shares in all respects
except: Class D Shares will have a contingent deferred
sales charge of 1.00%, which terminates after one year,
and the Class D Shares will not automatically convert
into Class B Shares after seven years.
Effective September 1, 1994, Class C Shares will assess
a shareholder service fee of 0.25% of the average daily
net asset value, of which all or a portion may be
waived at any time.
September 1, 1994
FEDERATED SECURITIES CORP.
Distributor
G00389-10 (9/94)
FIRST UNION NORTH CAROLINA MUNICIPAL BOND PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
TRUST SHARES
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectus of Trust Shares, Class B Investment Shares,
or Class C Investment Shares for First Union North Carolina Municipal
Bond Portfolio, dated February 28, 1994. This Statement is not a
prospectus itself. To receive a copy of the Trust Shares' prospectus,
write First Union National Bank of North Carolina, Capital Management
Group, 1200 Two First Union Center, Charlotte, North Carolina
28288-1156 or call 1-800-326-2584. To receive a copy of the Class B
Investment Shares' or Class C Investment Shares' prospectus, write
First Union Brokerage Services, Inc., One First Union Center, 301 S.
College Street, Charlotte, North Carolina 28288-1173 or call
1-800-326-3241.
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 2
Futures and Options Transactions 2
Repurchase Agreements 4
Reverse Repurchase Agreements 4
Lending of Portfolio Securities 5
Restricted Securities 5
Portfolio Turnover 5
Investment Limitations 5
North Carolina Investment Risks 7
TRUST MANAGEMENT 8
- ---------------------------------------------------------------
Officers and Trustees 8
Fund Ownership 9
Trustee Liability 9
INVESTMENT ADVISORY SERVICES 9
- ---------------------------------------------------------------
Adviser to the Fund 9
Advisory Fees 9
BROKERAGE TRANSACTIONS 10
- ---------------------------------------------------------------
ADMINISTRATIVE SERVICES 10
- ---------------------------------------------------------------
PURCHASING SHARES 10
- ---------------------------------------------------------------
Distribution Plans (Class B and
Class C Investment Shares) 11
DETERMINING NET ASSET VALUE 12
- ---------------------------------------------------------------
Valuing Municipal Bonds 12
Use of Amortized Cost 12
Valuing Options 12
REDEEMING SHARES 12
- ---------------------------------------------------------------
Redemption in Kind 12
TAX STATUS 13
- ---------------------------------------------------------------
The Fund's Tax Status 13
Shareholders' Tax Status 13
TOTAL RETURN 13
- ---------------------------------------------------------------
YIELD 13
- ---------------------------------------------------------------
TAX EQUIVALENT YIELD 14
- ---------------------------------------------------------------
Tax Equivalency Table 14
PERFORMANCE COMPARISONS 15
- ---------------------------------------------------------------
FINANCIAL STATEMENTS 15
- ---------------------------------------------------------------
APPENDIX 16
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
First Union North Carolina Municipal Bond Portfolio (the "Fund") is a portfolio
of First Union Funds (the "Trust"). The Trust was established as a Massachusetts
business trust under a Declaration of Trust dated August 30, 1984. On January 4,
1993, the name of the Trust was changed from "The Salem Funds" to "First Union
Funds."
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"). This Combined Statement of Additional Information
relates to the above-mentioned Shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide current income which is exempt
from federal regular income tax and North Carolina state income tax consistent
with preservation of capital. In addition, the Fund intends to qualify as an
investment substantially exempt from the North Carolina intangible personal
property tax. The objective cannot be changed without approval of shareholders.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in a non-diversified portfolio of North Carolina
municipal securities.
PARTICIPATION INTERESTS
Participation interests may take the form of participations, beneficial
interests, in a trust, partnership interests, or any other form of
indirect ownership that allows the Fund to treat the income from the
investment as exempt from federal and state tax. The financial
institutions from which the Fund purchases participation interests
frequently provide or secure from another financial institution
irrevocable letters of credit or guarantees and give the Fund the right
to demand payment of the principal amounts of the participation interests
plus accrued interest on short notice (usually within seven days).
VARIABLE RATE MUNICIPAL SECURITIES
Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital
appreciation or depreciation is less for variable rate municipal
securities than for fixed income obligations.
Many municipal securities with variable interest rates purchased by the
Fund are subject to repayment of principal (usually within seven days) on
the Fund's demand. The terms of these variable rate demand instruments
require payment of principal obligations by the issuer of the
participation interests or a guarantor of either issuer. All variable
rate municipal securities will meet the quality standards for the Fund.
The Fund's adviser has been instructed by the Trust's Board of Trustees
(the "Trustees") to monitor the pricing, quality, and liquidity of the
variable rate municipal securities, including participation interests
held by the Fund, on the basis of published financial information and
reports of the rating agencies and other analytical services.
MUNICIPAL LEASES
The Fund may purchase municipal securities in the form of participation
interests which represent undivided proportional interests in lease
payments by a governmental or non-profit entity. The lease payments and
other rights under the lease provide for and secure the payments on the
certificates. Lease obligations may be limited by municipal charter or
the nature of the appropriation for the lease. In particular, lease
obligations may be subject to periodic appropriation. If the entity does
not appropriate funds for future lease payments, the entity cannot be
compelled to make such payments. Furthermore, a lease may provide that
the certificate trustee cannot accelerate lease obligations upon default.
The trustee would only be able to enforce lease payments as they become
due. In the event of a default or failure of appropriation, it is
unlikely that the trustee would be able to obtain an acceptable
substitute source of payment or that the substitute source of payment
would generate tax-exempt income.
When determining whether municipal leases purchased by the Fund will be
classified as a liquid or illiquid security, the Trustees have directed
the Fund's adviser to consider certain factors, such as: the frequency of
trades and quotes for the security; the volatility of quotations and
trade prices for the security, the number of dealers willing to purchase
or sell the security and the number of potential purchasers; dealer
undertaking to make a market in the security; the nature of the security
and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers, and the
mechanics of transfer); the rating of the security and the financial
condition and prospects of the issuer of the security; whether the lease
can be terminated by the lessee; the potential
recovery, if any, from a sale of the leased property upon termination of
the lease; the lessee's general credit strength (e.g., its debt,
administrative, economic and financial characteristics and prospects);
the likelihood that the lessee will discontinue appropriating funding for
the lease property because the property is no longer deemed essential to
its operations (e.g., the potential for an "event of nonappropriation");
any credit enhancement or legal recourse provided upon an event of
nonappropriation or other termination of the lease; and such other
factors as may be relevant to the Fund's ability to dispose of the
security.
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.
FUTURES AND OPTIONS TRANSACTIONS
The Fund may attempt to hedge all or a portion of its portfolio by buying and
selling financial futures contracts and options on financial futures contracts.
Additionally, the Fund may buy and sell call and put options on portfolio
securities.
FINANCIAL FUTURES CONTRACTS
A futures contract is a firm commitment by two parties, the seller who
agrees to make delivery of the specific type of security called for in
the contract ("going short") and the buyer who agrees to take delivery of
the security ("going long") at a certain time in the future. Financial
futures contracts call for the delivery of particular debt securities
issued or guaranteed by the U.S. Treasury or by specified agencies or
instrumentalities of the U.S. government.
In the fixed income securities market, price moves inversely to interest
rates. A rise in rates means a drop in price. Conversely, a drop in rates
means a rise in price. In order to hedge its holdings of fixed income
securities against a rise in market interest rates, the Fund could enter
into contracts to deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the prices of its
fixed income securities may decline during the Fund's anticipated holding
period. The Fund would "go long" (agree to purchase securities in the
future at a predetermined price) to hedge against a decline in market
interest rates.
PURCHASING PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts
for U.S. government securities. Unlike entering directly into a futures
contract, which requires the purchaser to buy a financial instrument on a
set date at a specified price, the purchase of a put option on a futures
contract entitles (but does not obligate) its purchaser to decide on or
before a future date whether to assume a short position at the specified
price.
The Fund would purchase put options on futures to protect portfolio
securities against decreases in value resulting from an anticipated
increase in market interest rates. Generally, if the hedged portfolio
securities decrease in value during the term of an option, the related
futures contracts will also decrease in value and the option will
increase in value. In such an event, the Fund will normally close out its
option by selling an identical option. If the hedge is successful, the
proceeds received by the Fund upon the sale of the second option will be
large enough to offset both the premium paid by the Fund for the original
option plus the realized decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option. To do so, it would
simultaneously enter into a futures contract of the type underlying the
option (for a price less than the strike price of the option) and
exercise the option. The Fund would then deliver the futures contract in
return for payment of the strike price. If the Fund neither closes out
nor exercises an option, the option will expire on the date provided in
the option contract, and the premium paid for the contract will be lost.
WRITING CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write
listed call options on futures contracts for U.S. government securities
to hedge its portfolio against an increase in market interest rates. When
the Fund writes a call option on a futures contract, it is undertaking
the obligation of assuming a short futures position (selling a futures
contract) at the fixed strike price at any time during the life of the
option if the option is exercised. As market interest rates rise, causing
the prices of futures to go down, the Fund's obligation under a call
option on a future (to sell a futures contract) costs less to fulfill,
causing the value of the Fund's call option position to increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the call,
so that the Fund keeps the premium received for the option. This premium
can offset the drop in value of the Fund's fixed income portfolio which
is occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of it
by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will be
less than the premium received by the Fund for the initial option. The
net premium income of the Fund will then offset the decrease in value of
the hedged securities.
WRITING PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may write listed put options on financial futures contracts for
U.S. government securities to hedge its portfolio against a decrease in
market interest rates. When the Fund writes a put option on a futures
contract, it receives a premium for undertaking the obligation to assume
a long futures position (buying a futures contract) at a fixed price at
any time during the life of the option. As market interest rates
decrease, the market price of the underlying futures contract normally
increases.
As the market value of the underlying futures contract increases, the
buyer of the put option has less reason to exercise the put because the
buyer can sell the same futures contract at a higher price in the market.
The premium received by the Fund can then be used to offset the higher
prices of portfolio securities to be purchased in the future due to the
decrease in market interest rates.
Prior to the expiration of the put option, or its exercise by the buyer,
the Fund may close out the option by buying an identical option. If the
hedge is successful, the cost of buying the second option will be less
than the premium received by the Fund for the initial option.
PURCHASING CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
An additional way in which the Fund may hedge against decreases in market
interest rates is to buy a listed call option on a financial futures
contract for U.S. government securities. When the Fund purchases a call
option on a futures contract, it is purchasing the right (not the
obligation) to assume a long futures position (buy a futures contract) at
a fixed price at any time during the life of the option. As market
interest rates fall, the value of the underlying futures contract will
normally increase, resulting in an increase in value of the Fund's option
position. When the market price of the underlying futures contract
increases above the strike price plus premium paid, the Fund could
exercise its option and buy the futures contract below market price.
Prior to the exercise or expiration of the call option the Fund could
sell an identical call option and close out its position. If the premium
received upon selling the offsetting call is greater than the premium
originally paid, the Fund has completed a successful hedge.
LIMITATION ON OPEN FUTURES POSITIONS
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds the
current market value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Fund will take
prompt action to close out a sufficient number of open contracts to bring
its open futures and options positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather,
the Fund is required to deposit an amount of "initial margin" in cash or
U.S. Treasury bills with its custodian (or the broker, if legally
permitted). The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that futures
contract
initial margin does not involve the borrowing of funds by the Fund to
finance the transactions. Initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned
to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. The Fund may not purchase or
sell futures contracts or related options if immediately thereafter the
sum of the amount of margin deposits on the Fund's existing futures
positions and premiums paid for related options would exceed 5% of the
market value of the Fund's total assets.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as
"marking to market." Variation margin does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund and the
broker of the amount one would owe the other if the futures contract
expired. In computing its daily net asset value, the Fund will
mark-to-market its open futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
PURCHASING AND WRITING PUT AND CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put and call options on portfolio securities to
protect against price movements in particular securities. A put option
gives the Fund, in return for a premium, the right to sell the underlying
security to the writer (seller) at a specified price during the term of
the option. A call option gives the Fund, in return for a premium, the
right to buy the underlying security from the seller.
The Fund may write covered put and call options to generate income. As
writer of a call option, the Fund has the obligation upon exercise of the
option during the option period to deliver the underlying security upon
payment of the exercise price. As a writer of a put option, the Fund has
the obligation to purchase a security from the purchaser of the option
upon the exercise of the option.
The Fund may only write call options either on securities held in its
portfolio or on securities which it has the right to obtain without
payment of further consideration (or has segregated cash in the amount of
any additional consideration). In the case of put options, the Fund will
segregate cash or U.S. Treasury obligations with a value equal to or
greater than the exercise price of the underlying securities.
The Fund may generally purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the writers or
buyers of the options since options on the portfolio securities held by
the Fund are not traded on an exchange. The Fund purchases and writes
options only with investment dealers and other financial institutions
(such as commercial banks or savings and loan associations) deemed
creditworthy by the Fund's adviser.
Over-the-counter options are two party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded options
are third party contracts with standardized strike prices and expiration
dates and are purchased from a clearing corporation. Exchange-traded
options have a continuous liquid market while over-the-counter options
may not.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price 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 Trustees.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements. These transactions are
similar to borrowing cash. In a reverse repurchase agreement, the Fund transfers
possession of a portfolio instrument to another person, such as a financial
institution, broker, or dealer, in return for a percentage of the instrument's
market value in cash,
and agrees that on a stipulated date in the future the Fund will repurchase the
portfolio instrument by remitting the original consideration plus interest at an
agreed upon rate.
The use of reverse repurchase agreements may enable the Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadantageous,
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 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.
RESTRICTED SECURITIES
The Fund may invest in restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to its investment
objective and policies but which are subject to restrictions on resale under
federal securities laws. The Fund will not invest more than 15% of the value of
its total assets in restricted securities; however, certain restricted
securities which the Trustees deem to be liquid will be excluded from this 10%
limitation.
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission ("SEC") Staff
position set forth in the adopting release for Rule 144A under the Securities
Act of 1933 (the "Rule"). The Rule is a non-exclusive, safe-harbor for certain
secondary market transactions involving securities subject to restrictions on
resale under federal securities laws. The Rule provides an exemption from
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the liquidity of
the secondary market for securities eligible for resale under Rule 144A. The
Fund believes that the Staff of the SEC has left the question of determining the
liquidity of all restricted securities (eligible for resale under Rule 144A) for
determination by the Trustees. The Trustees consider the following criteria in
determining the liquidity of certain restricted securities:
the frequency of trades and quotes for the security;
the number of dealers willing to purchase or sell the security and the number of
other potential buyers;
dealer undertakings to make a market in the security; and
the nature of the security and the nature of the marketplace trades.
PORTFOLIO TURNOVER
The Fund may trade or dispose of portfolio securities as considered necessary to
meet its investment objective. It is not anticipated that the portfolio trading
engaged in by the Fund will result in its annual rate of portfolio turnover
exceeding 100%. For the period from January 11, 1993 (commencement of
operations) to December 31, 1993, the portfolio turnover rate for the Fund was
57%.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of securities. A deposit or payment by
the Fund of initial or variation margin in connection with financial
futures contracts or related options transactions is not considered the
purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money 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 amounts
borrowed, in order to meet
redemption requests without immediately selling portfolio instruments;
and except to the extent that the Fund will enter into futures contracts.
Any such borrowings need not be collateralized. The Fund will not
purchase any securities while borrowings in excess of 5% of its total
assets are outstanding.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage purposes.
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.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, including limited partnership
interests, although it may invest in municipal bonds secured by real
estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities. However, the Fund may
purchase put and call options on portfolio securities and on financial
futures contracts. In addition, the Fund reserves the right to hedge the
portfolio by entering into financial futures contracts and to sell puts
and calls on financial futures contracts.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities up
to one-third of the value of its total assets. The Fund may, however,
acquire publicly or non-publicly issued municipal bonds or temporary
investments or enter into repurchase agreements in accordance with its
investment objective, policies, and limitations or the Declaration of
Trust.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase,
25% or more of the value of its total assets would be invested in any one
industry, or in industrial development bonds or other securities, the
interest upon which is paid from revenues of similar types of projects.
However, the Fund may invest as temporary investments more than 25% of
the value of its assets in cash or cash items, securities issued or
guaranteed by the U.S. government, its agencies, or instrumentalities, or
instruments secured by these money market instruments, such as repurchase
agreements.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate its assets except to
secure permitted borrowings. For purposes of this limitation, the
following are not deemed to be pledges: margin deposits for the purchase
and sale of financial futures contracts and related options; and
segregation of collateral arrangements made in connection with options
activities or the purchase of securities on a when-issued basis.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
obligations, including repurchase agreements providing for settlement in
more than seven days after notice, and certain restricted securities and
municipal leases not determined by the Trustees to be liquid.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
industrial development bonds 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.
INVESTING IN MINERALS
The Fund will not purchase interests in or sell, 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.
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 the Fund in shares of
another investment company would be subject to such duplicate expenses.
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.
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 has no present intention to borrow money in excess of 5% of the value
of its net assets during the coming fiscal year. 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.
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."
NORTH CAROLINA INVESTMENT RISKS
Because the Fund will ordinarily invest 80% or more of its net assets in North
Carolina obligations, it is more susceptible to factors affecting North Carolina
(or the "State") issuers than is a comparable municipal bond fund not
concentrated in the obligations of issuers located in a single state.
North Carolina has an economy largely dependent on manufacturing and
agriculture. In each area, the focus is narrow, with textiles and furniture
dominating industry lines and eggs, poultry, and tobacco constituting the
principal commodities. Manufacturing (particularly the textile industry), which
continues to be far more important in North Carolina than in the nation, has
been adversely affected by international competition. Tobacco farming continues
to be affected by major federal legislation and regulatory measures, and by
international competition. North Carolina ranks among the top ten states in
terms of economic growth as measured by job and personal income growth.
Diversification into financial services, research and high technology
manufacturing is reducing the State's historical dependence on agriculture,
textiles, and furniture manufacturing.
North Carolina is characterized by moderate debt levels (albeit with growing
capital needs), favorable economic performance, and financial strengths
exhibited over the past several years. North Carolina is one of only several
states expected to sustain favorable economic expansion throughout the 1990's,
according to the U.S. Bureau of Economic Analysis indicators. Economic growth in
the State is bolstered by a lower-than-average cost of living, income levels at
about 90% of U.S. averages--though it is much higher in the metropolitan
centers--and a highly respected public and private higher education system,
including the University of North Carolina at Chapel Hill and Duke University in
Durham.
The North Carolina State Constitution requires that the total expenditures of
the State for a fiscal period shall not exceed the total of receipts during the
fiscal period and the surplus remaining in the State Treasury at the beginning
of the period. In certain of the past several years, the State has had to
restrict expenditures to comply with the State Constitution. The State has a
long record of sound financial operations, and while the revenue system is
narrow, the budget balancing law is strong and appropriate curbs are made when
necessary.
Financial operations for the State have been restored to their
historically-healthy position after a period of strain between fiscal years 1990
and 1992. Available unreserved balances and budget stabilization reserves
totaled $440 million at the end of fiscal 1993--equivalent to 6.1% of annual
expenditures. Conservative revenue assumptions and sound budgeting practices
should result in similar balances throughout the current biennium. The
restoration of adequate reserve levels confirms the State's longstanding
commitment to a sound financial position.
As of December 31, 1993, general obligations of the State of North Carolina were
rated Aaa/AAA/AAA by Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Corporation ("S&P") and Fitch Investors Service ("Fitch"), respectively.
Both S&P and Fitch view the State's credit trend as "Stable." There can be no
assurance that the economic conditions on which these ratings are based will
continue or that particular bond issues may not be adversely affected by changes
in economic, political or other conditions.
North Carolina obligations also include obligations of the governments of Puerto
Rico, the Virgin Islands and Guam to the extent these obligations are exempt
from North Carolina State personal income taxes. The Fund will not invest more
than 5% of its net assets in the obligations of each of the Virgin Islands and
Guam, but may invest without limitation in the obligations of Puerto Rico.
Accordingly, the Fund may be adversely affected by local political and economic
conditions and developments within Puerto Rico affecting the issuers of such
obligations.
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, the following shareholders of record owned 5% or more of
the outstanding Class B Investment Shares of the Fund: First Union Brokerage
Services & Co. ("FUBS"), for the exclusive benefit of Thomas H. Wright III of
Wilmington, North Carolina, owned approximately 89,475 Shares (6.98%); and FUBS,
for the exclusive benefit of Wright Chemical Corporation of Wilmington, North
Carolina, owned approximately 155,821 Shares (12.16%).
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 shall 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 willful 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 willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Trust.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the respective prospectus.
For the period from January 11, 1993 (commencement of operations) to December
31, 1993, the Adviser earned advisory fees of $170,496, all of which were
voluntarily waived.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets,
2% per year of the next $70 million of average net assets, and 1-1/2% per
year of the remaining average net assets, the Adviser will 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
respective prospectus.
For the period from January 11, 1993 (commencement of operations) to December
31, 1993, the Fund incurred $48,493 in administrative service costs, all of
which were voluntarily waived.
PURCHASING SHARES
- --------------------------------------------------------------------------------
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 Shares is explained in the respective
prospectus under "How to Buy Shares."
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Class B Investment
Shares through:
quantity discounts and accumulated purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
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.
LETTER OF INTENT
If a shareholder intends to purchase at least $100,000 of Shares in the
Fund over the next 13 months, the sales charge may be reduced by signing
a letter of intent to that effect. This letter of intent includes a
provision for a sales charge adjustment depending on the amount actually
purchased within the 13-month period and a provision for the custodian to
hold up to 4.0% of the total amount intended to be purchased in escrow
(in Shares) until such purchase is completed.
The amount held in escrow will be applied to the shareholder's account at
the end of the 13-month period, unless the amount specified in the letter
of intent is not purchased. In this event, an appropriate number of
escrowed Shares may be redeemed in order to realize the difference in the
sales charge.
This letter of intent will not obligate the shareholder to purchase
Shares, but if the shareholder does, each purchase during the period will
be at the sales charge applicable to the total amount intended to be
purchased. This letter may be dated as of a prior date to include any
purchases made within the past 90 days.
REINVESTMENT PRIVILEGE
If Shares in the Fund have been redeemed, the shareholder has a one-time
right, within 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 First
Union 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 First Union Funds with a sales charge, and
$70,000 in Shares of the 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 PLANS (CLASS B AND CLASS C INVESTMENT SHARES)
With respect to the Class B and Class C Investment Shares classes of the Fund,
the Trust has adopted distribution plans (the "Plans") pursuant to Rule 12b-1
which was promulgated by the SEC pursuant to the Investment Company Act of 1940.
The Plans permit the payment of fees to brokers for distribution and
administrative services and to administrators for administrative services as to
Class B and Class C Investment Shares. The Plans are designed to (i) stimulate
brokers to provide distribution and administrative support services to the Fund
and holders of Class B and Class C Investment Shares and (ii) stimulate
administrators to render administrative support services to the Fund and holders
of Class B and Class C Investment 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 Class B and Class C Investment
Shares; assisting clients in changing dividend options, account designations,
and addresses; and providing such other services as the Fund reasonably requests
for its Class B and Class C Investment Shares.
By adopting the Plans, 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 Plans 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 period from January 11, 1993 (commencement of operations) to December
31, 1993, brokers and administrators (financial institutions) did not receive
any fees pursuant to the Plans.
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 Plans for
administrative services, and if paid, will be reimbursed by the Adviser
and not the Fund.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value of Shares generally changes each day. The days on which the net
asset values of Shares are calculated by the Fund are described in the
respective prospectus.
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.
USE OF AMORTIZED COST
The Trustees have decided that the fair value of debt securities authorized to
be purchased by the Fund with remaining maturities of 60 days or less at the
time of purchase shall be their amortized cost value, unless the particular
circumstances of the security indicate otherwise. Under this method, portfolio
instruments and assets are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at current
market value. The Trustees periodically assess this method of valuation and
recommend changes where necessary to assure that the Fund's portfolio
instruments are valued at their fair value as determined in good faith by the
Trustees.
VALUING OPTIONS
Over-the-counter put options will be valued at the mean between the bid and the
asked prices. Covered call options will be valued at the last sale price on the
national exchange on which such option is traded. Unlisted call options will be
valued at the latest bid price as provided by brokers.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request, plus a contingent deferred sales charge, if
applicable. 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 respective prospectus
under "How to Redeem 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
- --------------------------------------------------------------------------------
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.
SHAREHOLDERS' TAX STATUS
No portion of any income dividend paid by the Fund is eligible for the dividends
received deductions available to corporations.
CAPITAL GAINS
Capital gains or losses may be realized by the Fund on the sale of
portfolio securities and as a result of discounts from par value on
securities held to maturity. Sales would generally be made because of:
the availability of higher relative yields;
differentials in market values;
new investment opportunities;
changes in creditworthiness of an issuer; or
an attempt to preserve gains or limit losses.
Distribution of long-term capital gains are taxed as such, whether they
are taken in cash or reinvested, and regardless of the length of time the
shareholder has owned the Shares.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's cumulative total return for Class B Investment Shares and Class C
Investment Shares from January 12, 1993 (start of performance) to December 31,
1993, were 6.79% and 6.63%, respectively. Trust Shares were not being offered
during the period ended December 31, 1993. Cumulative total return reflects the
Fund's total performance over a specified period of time. This total return
assumes and is reduced by the payment of the maximum sales load. The Fund's
total return is representative of only eleven months of investment activity
since the Fund's effective date.
YIELD
- --------------------------------------------------------------------------------
The Fund's yields for Class B Investment Shares and Class C Investment Shares
were 4.89% and 4.61%, respectively, for the thirty-day period ended December 31,
1993. 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 any class of
Shares over a thirty-day period by the maximum offering price per share of any
class on the last day of the period. This value is then annualized using
semi-annual compounding. This means that the amount of income generated during
the thirty-day period is assumed to be generated each month over a twelve-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by any 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 broker/dealers charge fees in
connection with services provided in conjunction with an investment in any class
of Shares, the performance will be reduced for those shareholders paying those
fees.
TAX EQUIVALENT YIELD
- --------------------------------------------------------------------------------
The Fund's tax equivalent yields for Class B Investment Shares and Class C
Investment Shares for the thirty-day period ended December 31, 1993, were 6.79%
and 6.40%, respectively, assuming a 28% tax rate and 7.09% and 6.68%,
respectively, assuming a 31% tax rate. 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 that income is 100% tax-
exempt.
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> <C>
TAXABLE YIELD EQUIVALENT FOR 1994 STATE OF NORTH CAROLINA
- ------------------------------------------------------------------------------------------
TAX BRACKET:
FEDERAL 15.00% 28.00% 31.00% 31.00% 36.00% 39.60%
COMBINED FEDERAL AND
STATE 22.00% 35.00% 38.00% 38.75% 43.75% 47.35%
- ------------------------------------------------------------------------------------------
JOINT $1- $38,001- $91,851- $100,001- $140,001- Over
RETURN: 36,900 91,850 100,000 140,000 250,000 $ 250,000
SINGLE $1- $22,751- $55,101- $60,001- $140,001- Over
RETURN: 22,750 55,100 60,000 140,000 250,000 $ 250,000
- ------------------------------------------------------------------------------------------
TAX-EXEMPT YIELD
TAXABLE YIELD EQUIVALENT
- ------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
3.50% 4.49% 5.38% 5.65% 5.71% 6.22% 6.65%
4.00 5.13 6.15 6.45 6.53 7.11 7.60
4.50 5.77 6.92 7.26 7.35 8.00 8.55
5.00 6.41 7.69 8.06 8.16 8.89 9.50
5.50 7.05 8.46 8.87 8.98 9.78 10.45
6.00 7.69 9.23 9.68 9.80 10.67 11.40
6.50 8.33 10.00 10.48 10.61 11.56 12.35
7.00 8.97 10.77 11.29 11.43 12.44 13.30
7.50 9.62 11.54 12.10 12.24 13.33 14.25
8.00 10.26 12.31 12.90 13.06 14.22 15.19
</TABLE>
Note: The maximum marginal tax rate for each bracket was used in calculating the
taxable yield equivalent. Furthermore, additional state and local taxes
paid on comparable taxable investments were not used to increase federal
deductions. North Carolina residents and North Carolina corporations may
exclude from the share value of the North Carolina Municipal Bond Fund for
the purposes of the North Carolina intangible personal property tax that
proportion of the total share value which is attributable to the value of
the direct obligations of the State of North Carolina, of the United
States, and of their political subdivisions held in the Fund as of
December 31 of the taxable year. The North Carolina Municipal Bond Fund
will annually furnish to its shareholders a statement supporting the
proper allocation.
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's income may be subject to the federal alternative
minimum tax and state and local taxes.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
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 capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time. 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 GENERAL OBLIGATION MUNICIPAL BOND INDEX is comprised of state general
obligation debt issues. These bonds are rated A or better and represent a
variety of coupon ranges. Index figures are total returns calculated for one,
three, and twelve month periods as well as year-to-date.
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
- --------------------------------------------------------------------------------
The financial statements for First Union North Carolina Municipal Bond 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 inside back cover of
the respective prospectus.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD & POOR'S CORPORATION MUNICIPAL 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 effect of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
MOODY'S INVESTORS SERVICE, INC. MUNICIPAL 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 some time in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
3031004B (2/94)
FIRST UNION FLORIDA MUNICIPAL BOND PORTFOLIO
(A PORTFOLIO OF FIRST UNION FUNDS)
TRUST SHARES
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
Supplement to Combined Statement of Additional Information dated
February 28, 1994
Effective September 1, 1994, First Union Florida
Municipal Bond Portfolio (the "Fund") will offer Class
D Investment Shares ("Class D Shares"). Class D Shares
will be similar to Class C Shares in all respects
except: Class D Shares will have a contingent deferred
sales charge of 1.00%, which terminates after one year,
and the Class D Shares will not automatically convert
into Class B Shares after seven years.
Effective September 1, 1994, Class C Shares will assess
a shareholder service fee of 0.25% of the average daily
net asset value, of which all or a portion may be
waived at any time.
September 1, 1994
FEDERATED SECURITIES CORP.
Distributor
G00389-08 (9/94)
FIRST UNION FLORIDA MUNICIPAL BOND PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
TRUST SHARES
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectus of Trust Shares, Class B Investment Shares,
or Class C Investment Shares for First Union Florida Municipal Bond
Portfolio, dated February 28, 1994. This Statement is not a prospectus
itself. To receive a copy of the Trust Shares' prospectus, write First
Union National Bank of North Carolina, Capital Management Group, 1200
Two First Union Center, Charlotte, North Carolina 28288-1156 or call
1-800-326-2584. To receive a copy of the Class B Investment Shares' or
Class C Investment Shares' prospectus, write First Union Brokerage
Services, Inc., One First Union Center, 301 S. College Street,
Charlotte, North Carolina 28288-1173 or call 1-800-326-3241.
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 2
Futures and Options Transactions 2
Repurchase Agreements 4
Reverse Repurchase Agreements 4
Lending of Portfolio Securities 5
Restricted Securities 5
Portfolio Turnover 5
Investment Limitations 5
Florida Investment Risks 7
TRUST MANAGEMENT 8
- ---------------------------------------------------------------
Officers and Trustees 8
Fund Ownership 9
Trustee Liability 9
INVESTMENT ADVISORY SERVICES 9
- ---------------------------------------------------------------
Adviser to the Fund 9
Advisory Fees 9
BROKERAGE TRANSACTIONS 10
- ---------------------------------------------------------------
ADMINISTRATIVE SERVICES 10
- ---------------------------------------------------------------
PURCHASING SHARES 10
- ---------------------------------------------------------------
Distribution Plans (Class B and Class C
Investment Shares) 11
DETERMINING NET ASSET VALUE 12
- ---------------------------------------------------------------
Valuing Municipal Bonds 12
Use of Amortized Cost 12
Valuing Options 12
REDEEMING SHARES 12
- ---------------------------------------------------------------
Redemption in Kind 12
TAX STATUS 13
- ---------------------------------------------------------------
The Fund's Tax Status 13
Shareholders' Tax Status 13
TOTAL RETURN 13
- ---------------------------------------------------------------
YIELD 13
- ---------------------------------------------------------------
TAX EQUIVALENT YIELD 14
- ---------------------------------------------------------------
Tax Equivalency Table 14
PERFORMANCE COMPARISONS 16
- ---------------------------------------------------------------
FINANCIAL STATEMENTS 17
- ---------------------------------------------------------------
APPENDIX 18
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
First Union Florida Municipal Bond Portfolio (the "Fund") is a portfolio of
First Union Funds (the "Trust"). The Trust was established as a Massachusetts
business trust under a Declaration of Trust dated August 30, 1984. On January 4,
1993, the name of the Trust was changed from "The Salem Funds" to "First Union
Funds."
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"). This Combined Statement of Additional Information
relates to the above-mentioned Shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide current income which is exempt
from federal regular income tax consistent with the preservation of capital. In
addition, the Fund intends to qualify as an investment exempt from Florida state
intangibles tax. The objective cannot be changed without approval of
shareholders.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in a non-diversified portfolio of Florida municipal
securities.
PARTICIPATION INTERESTS
Participation interests may take the form of participations, beneficial
interests in a trust, partnership interests, or any other form of
indirect ownership that allows the Fund to treat the income from the
investment as exempt from federal and state tax. The financial
institutions from which the Fund purchases participation interests
frequently provide or secure from another financial institution
irrevocable letters of credit or guarantees and give the Fund the right
to demand payment of the principal amounts of the participation interests
plus accrued interest on short notice (usually within seven days).
VARIABLE RATE MUNICIPAL SECURITIES
Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital
appreciation or depreciation is less for variable rate municipal
securities than for fixed income obligations.
Many municipal securities with variable interest rates purchased by the
Fund are subject to repayment of principal (usually within seven days) on
the Fund's demand. The terms of these variable rate demand instruments
require payment of principal obligations by the issuer of the
participation interests or a guarantor of either issuer. All variable
rate municipal securities will meet the quality standards for the Fund.
The Fund's adviser has been instructed by the Trust's Board of Trustees
(the "Trustees") to monitor the pricing, quality, and liquidity of the
variable rate municipal securities, including participation interests
held by the Fund, on the basis of published financial information and
reports of the rating agencies and other analytical services.
MUNICIPAL LEASES
The Fund may purchase municipal securities in the form of participation
interests which represent undivided proportional interests in lease
payments by a governmental or non-profit entity. The lease payments and
other rights under the lease provide for and secure the payments on the
certificates. Lease obligations may be limited by municipal charter or
the nature of the appropriation for the lease. In particular, lease
obligations may be subject to periodic appropriation. If the entity does
not appropriate funds for future lease payments, the entity cannot be
compelled to make such payments. Furthermore, a lease may provide that
the certificate trustee cannot accelerate lease obligations upon default.
The trustee would only be able to enforce lease payments as they become
due. In the event of a default or failure of appropriation, it is
unlikely that the trustee would be able to obtain an acceptable
substitute source of payment or that the substitute source of payment
would generate tax-exempt income.
When determining whether municipal leases purchased by the Fund will be
classified as a liquid or illiquid security, the Trustees have directed
the Fund's adviser to consider certain factors, such as: the frequency of
trades and quotes for the security; the volatility of quotations and
trade prices for the security, the number of dealers willing to purchase
or sell the security and the number of potential purchasers; dealer
undertakings to make a market in the security; the nature of the security
and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers, and the
mechanics of transfer); the rating of the security and the financial
condition and prospects of the issuer of the security; whether the lease
can be terminated by the lessee; the potential recovery, if any, from a
sale of the leased property upon termination of the lease; the lessee's
general credit strength (e.g., its debt, administrative, economic and
financial characteristics and prospects); the
likelihood that the lessee will discontinue appropriating funding for the
lease property because the property is no longer deemed essential to its
operations (e.g., the potential for an "event of nonappropriation"); any
credit enhancement or legal recourse provided upon an event of
nonappropriation or other termination of the lease; and such other
factors as may be relevant to the Fund's ability to dispose of the
security.
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.
FUTURES AND OPTIONS TRANSACTIONS
The Fund may attempt to hedge all or a portion of its portfolio by buying and
selling financial futures contracts and options on financial futures contracts.
Additionally, the Fund may buy and sell call and put options on portfolio
securities.
FINANCIAL FUTURES CONTRACTS
A futures contract is a firm commitment by two parties, the seller who
agrees to make delivery of the specific type of security called for in
the contract ("going short") and the buyer who agrees to take delivery of
the security ("going long") at a certain time in the future. Financial
futures contracts call for the delivery of particular debt securities
issued or guaranteed by the U.S. Treasury or by specified agencies or
instrumentalities of the U.S. government.
In the fixed income securities market, price moves inversely to interest
rates. A rise in rates means a drop in price. Conversely, a drop in rates
means a rise in price. In order to hedge its holdings of fixed income
securities against a rise in market interest rates, the Fund could enter
into contracts to deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the prices of its
fixed income securities may decline during the Fund's anticipated holding
period. The Fund would "go long" (agree to purchase securities in the
future at a predetermined price) to hedge against a decline in market
interest rates.
PURCHASING PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts
for U.S. government securities. Unlike entering directly into a futures
contract, which requires the purchaser to buy a financial instrument on a
set date at a specified price, the purchase of a put option on a futures
contract entitles (but does not obligate) its purchaser to decide on or
before a future date whether to assume a short position at the specified
price.
The Fund would purchase put options on futures to protect portfolio
securities against decreases in value resulting from an anticipated
increase in market interest rates. Generally, if the hedged portfolio
securities decrease in value during the term of an option, the related
futures contracts will also decrease in value and the option will
increase in value. In such an event, the Fund will normally close out its
option by selling an identical option. If the hedge is successful, the
proceeds received by the Fund upon the sale of the second option will be
large enough to offset both the premium paid by the Fund for the original
option plus the realized decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option. To do so, it would
simultaneously enter into a futures contract of the type underlying the
option (for a price less than the strike price of the option) and
exercise the option. The Fund would then deliver the futures contract in
return for payment of the strike price. If the Fund neither closes out
nor exercises an option, the option will expire on the date provided in
the option contract, and the premium paid for the contract will be lost.
WRITING CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write
listed call options on futures contracts for U.S. government securities
to hedge its portfolio against an increase in market interest rates. When
the Fund writes a call option on a futures contract, it is undertaking
the obligation of assuming a short futures position (selling a futures
contract) at the fixed strike price at any time during the life of the
option if the option is exercised. As market interest rates rise, causing
the prices of futures to go down, the Fund's obligation under a call
option on a future (to sell a futures contract) costs less to fulfill,
causing the value of the Fund's call option position to increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the call,
so that the Fund keeps the premium received for the option. This premium
can offset the drop in value of the Fund's fixed income portfolio which
is occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of it
by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will be
less than the premium received by the Fund for the initial option. The
net premium income of the Fund will then offset the decrease in value of
the hedged securities.
WRITING PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may write listed put options on financial futures contracts for
U.S. government securities to hedge its portfolio against a decrease in
market interest rates. When the Fund writes a put option on a futures
contract, it receives a premium for undertaking the obligation to assume
a long futures position (buying a futures contract) at a fixed price at
any time during the life of the option. As market interest rates
decrease, the market price of the underlying futures contract normally
increases.
As the market value of the underlying futures contract increases, the
buyer of the put option has less reason to exercise the put because the
buyer can sell the same futures contract at a higher price in the market.
The premium received by the Fund can then be used to offset the higher
prices of portfolio securities to be purchased in the future due to the
decrease in market interest rates.
Prior to the expiration of the put option, or its exercise by the buyer,
the Fund may close out the option by buying an identical option. If the
hedge is successful, the cost of buying the second option will be less
than the premium received by the Fund for the initial option.
PURCHASING CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
An additional way in which the Fund may hedge against decreases in market
interest rates is to buy a listed call option on a financial futures
contract for U.S. government securities. When the Fund purchases a call
option on a futures contract, it is purchasing the right (not the
obligation) to assume a long futures position (buy a futures contract) at
a fixed price at any time during the life of the option. As market
interest rates fall, the value of the underlying futures contract will
normally increase, resulting in an increase in value of the Fund's option
position. When the market price of the underlying futures contract
increases above the strike price plus premium paid, the Fund could
exercise its option and buy the futures contract below market price.
Prior to the exercise or expiration of the call option the Fund could
sell an identical call option and close out its position. If the premium
received upon selling the offsetting call is greater than the premium
originally paid, the Fund has completed a successful hedge.
LIMITATION ON OPEN FUTURES POSITIONS
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds the
current market value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Fund will take
prompt action to close out a sufficient number of open contracts to bring
its open futures and options positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather,
the Fund is required to deposit an amount of "initial margin" in cash or
U.S. Treasury bills with its custodian (or the broker, if legally
permitted). The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that futures
contract
initial margin does not involve the borrowing of funds by the Fund to
finance the transactions. Initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned
to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. The Fund may not purchase or
sell futures contracts or related options if immediately thereafter the
sum of the amount of margin deposits on the Fund's existing futures
positions and premiums paid for related options would exceed 5% of the
market value of the Fund's total assets.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as
"marking to market." Variation margin does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund and the
broker of the amount one would owe the other if the futures contract
expired. In computing its daily net asset value, the Fund will
mark-to-market its open futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
PURCHASING AND WRITING PUT AND CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put and call options on portfolio securities to
protect against price movements in particular securities. A put option
gives the Fund, in return for a premium, the right to sell the underlying
security to the writer (seller) at a specified price during the term of
the option. A call option gives the Fund, in return for a premium, the
right to buy the underlying security from the seller.
The Fund may write covered put and call options to generate income. As
writer of a call option, the Fund has the obligation upon exercise of the
option during the option period to deliver the underlying security upon
payment of the exercise price. As a writer of a put option, the Fund has
the obligation to purchase a security from the purchaser of the option
upon the exercise of the option.
The Fund may only write call options either on securities held in its
portfolio or on securities which it has the right to obtain without
payment of further consideration (or has segregated cash in the amount of
any additional consideration). In the case of put options, the Fund will
segregate cash or U.S. Treasury obligations with a value equal to or
greater than the exercise price of the underlying securities.
The Fund may generally purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the writers or
buyers of the options since options on the portfolio securities held by
the Fund are not traded on an exchange. The Fund purchases and writes
options only with investment dealers and other financial institutions
(such as commercial banks or savings and loan associations) deemed
creditworthy by the Fund's adviser.
Over-the-counter options are two party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded options
are third party contracts with standardized strike prices and expiration
dates and are purchased from a clearing corporation. Exchange-traded
options have a continuous liquid market while over-the-counter options
may not.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price 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 Trustees.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements. These transactions are
similar to borrowing cash. In a reverse repurchase agreement, the Fund transfers
possession of a portfolio instrument to another person, such as a financial
institution, broker, or dealer, in return for a percentage of the instrument's
market value in cash,
and agrees that on a stipulated date in the future the Fund will repurchase the
portfolio instrument by remitting the original consideration plus interest at an
agreed upon rate.
The use of reverse repurchase agreements may enable the Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not ensure that
the Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for 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.
RESTRICTED SECURITIES
The Fund may invest in restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to its investment
objective and policies but which are subject to restrictions on resale under
federal securities laws. The Fund will not invest more than 15% of the value of
its total assets in restricted securities; however, certain restricted
securities which the Trustees deem to be liquid will be excluded from this 10%
limitation.
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission ("SEC") Staff
position set forth in the adopting release for Rule 144A under the Securities
Act of 1933 (the "Rule"). The Rule is a non-exclusive, safe-harbor for certain
secondary market transactions involving securities subject to restrictions on
resale under federal securities laws. The Rule provides an exemption from
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the liquidity of
the secondary market for securities eligible for resale under Rule 144A. The
Fund believes that the Staff of the SEC has left the question of determining the
liquidity of all restricted securities (eligible for resale under Rule 144A) for
determination by the Trustees. The Trustees consider the following criteria in
determining the liquidity of certain restricted securities:
the frequency of trades and quotes for the security;
the number of dealers willing to purchase or sell the security and the number of
other potential buyers;
dealer undertakings to make a market in the security; and
the nature of the security and the nature of the marketplace trades.
PORTFOLIO TURNOVER
The Fund may trade or dispose of portfolio securities as considered necessary to
meet its investment objective. It is not anticipated that the portfolio trading
engaged in by the Fund will result in its annual rate of portfolio turnover
exceeding 100%. For the period from July 2, 1993 (commencement of operations) to
December 31, 1993, the portfolio turnover rate for the Fund was 3%.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of securities. A deposit or payment by
the Fund of initial or variation margin in connection with financial
futures contracts or related options transactions is not considered the
purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money 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 amounts
borrowed, in order to meet
redemption requests without immediately selling portfolio instruments;
and except to the extent that the Fund will enter into futures contracts.
Any such borrowings need not be collateralized. The Fund will not
purchase any securities while borrowings in excess of 5% of its total
assets are outstanding.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage purposes.
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.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, including limited partnership
interests, although it may invest in municipal bonds secured by real
estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities. However, the Fund may
purchase put and call options on portfolio securities and on financial
futures contracts. In addition, the Fund reserves the right to hedge the
portfolio by entering into financial futures contracts and to sell puts
and calls on financial futures contracts.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities up
to one-third of the value of its total assets. The Fund may, however,
acquire publicly or non-publicly issued municipal bonds or temporary
investments or enter into repurchase agreements in accordance with its
investment objective, policies, and limitations or the Declaration of
Trust.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase,
25% or more of the value of its total assets would be invested in any one
industry, or in industrial development bonds or other securities, the
interest upon which is paid from revenues of similar types of projects.
However, the Fund may invest as temporary investments more than 25% of
the value of its assets in cash or cash items, securities issued or
guaranteed by the U.S. government, its agencies, or instrumentalities, or
instruments secured by these money market instruments, such as repurchase
agreements.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate its assets except to
secure permitted borrowings. For purposes of this limitation, the
following are not deemed to be pledges: margin deposits for the purchase
and sale of financial futures contracts and related options; and
segregation of collateral arrangements made in connection with options
activities or the purchase of securities on a when-issued basis.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
obligations, including repurchase agreements providing for settlement in
more than seven days after notice, and certain restricted securities and
municipal leases not determined by the Trustees to be liquid.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
industrial development bonds 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.
INVESTING IN MINERALS
The Fund will not purchase interests in or sell, 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.
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 the Fund in shares of
another investment company would be subject to such duplicate expenses.
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.
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 has no present intention to borrow money in excess of 5% of the value
of its net assets during the coming fiscal year. 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.
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."
FLORIDA INVESTMENT RISKS
The Fund invests in obligations of Florida issuers, which results in the Fund's
performance being subject to risks associated with the overall conditions
present within the state. The following information is a brief summary of the
recent prevailing economic conditions and a general summary of the state's
financial status. This information is based on official statements relating to
securities that have been offered by Florida issuers and from other sources
believed to be reliable, but should not be relied upon as a complete description
of all relevant information.
Florida is the twenty-second largest state, with an area of 54,136 square miles
and a water area of 4,424 square miles. The state is 447 miles long and 361
miles wide with a tidal shoreline of almost 2,300 miles. According to the U.S.
Census Bureau, Florida moved past Illinois in 1986 to become the fourth most
populous state, and as of 1990, had an estimated population of 13.2 million.
Services and trade continue to be the largest components of the Florida economy,
reflecting the importance of tourism as well as the need to serve Florida's
rapidly growing population. Agriculture is also an important part of the
economy, particularly citrus fruits. Oranges have been the principal crop,
accounting for 70% of the nation's output. Manufacturing, although of less
significance, is a rapidly growing component of the economy. The economy also
has substantial insurance, banking, and export participation. Unemployment rates
have historically been below national averages, but have recently risen above
the national rate.
Section 215.32 of the Florida Statutes provides that financial operations of the
State of Florida covering all receipts and expenditures be maintained through
the use of three funds--the General Revenue Fund, the Trust Fund and the Working
Capital Fund. The General Revenue Fund receives the majority of state tax
revenues. The Working Capital Fund receives revenues in excess of appropriations
and its balances are freely transferred to the General Revenue Fund as
necessary. In November, 1992, Florida voters approved a constitutional amendment
requiring the state to fund a Budget Stabilization Fund to 5% of general
revenues, with funding to be phased in over five years beginning in fiscal 1995.
The Working Capital Fund will become the Budget Stabilization Fund. Major
sources of tax revenues to the General Revenue Fund are the sales and use tax,
corporate income tax and beverage tax. The over-dependence on the sensitive
sales tax creates vulnerability to recession. Accordingly, financial operations
have been strained during the past few years, but the state has responded in a
timely manner to maintain budgetary control.
The state is highly vulnerable to hurricane damage. Hurricane Andrew devastated
portions of southern Florida in August, 1992, costing billions of dollars in
emergency relief, damage, and repair costs. However, the overall financial
condition of the major issuers of municipal bond debt in the state were
relatively unaffected by Hurricane Andrew, due to federal disaster assistance
payments and the overall level of private insurance. However, it is possible
that single revenue-based local bond issues could be severely impacted by storm
damage in certain circumstances.
Florida's debt structure is complex. Most state debt is payable from specified
taxes and additionally secured by the full faith and credit of the state. Under
the general obligation pledge, to the extent specified taxes are insufficient,
the state is unconditionally required to make payment on bonds from all
non-dedicated taxes.
The Fund's concentration in securities issued by the state and its political
subdivisions provides a greater level of risk than a fund which is diversified
across numerous states and municipal entities. The ability of the state or its
municipalities to meet their obligations will depend on the availability of tax
and other revenues; economic, political, and demographic conditions within the
state; and the underlying condition of the state, and its municipalities.
TRUST MANAGEMENT
- --------------------------------------------------------------------------------
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 effective.
As of February 4, 1994, the following shareholders of record owned 5% or more of
the outstanding Class B Investment Shares of the Fund: First Union Brokerage
Services & Co. ("FUBS"), for the exclusive benefit of Enrique Lavernia and Nidia
Lavernia of Boca Raton, Florida, owned approximately 73,611 Shares (8.21%);
FUBS, for the exclusive benefit of Ivan Lavernia and Nadina Lavernia of
Lighthouse Point, Florida, owned approximately 53,782 Shares (6.00%); FUBS, for
the exclusive benefit of Lisa L. Speer Trust, Richard W. Baker, Trustee, of
Holiday, Florida, owned approximately 65,000 Shares (7.25%); and FUBS, for the
exclusive benefit of Frank M. Patti of Pensacola, Florida, owned approximately
51,895 Shares (5.79%).
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 shall 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
- --------------------------------------------------------------------------------
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 respective prospectus.
For the period from July 2, 1993 (commencement of operations) to December 31,
1993, the Adviser earned advisory fees of $31,835, all of which were voluntarily
waived.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1-1/2% per
year of the remaining average net assets, the Adviser will 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
respective prospectus. For the period from July 2, 1993 (commencement of
operations) to December 31, 1993, the Fund incurred $24,932 in administrative
service costs, all of which were voluntarily waived.
PURCHASING SHARES
- --------------------------------------------------------------------------------
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 Shares is explained in the respective
prospectus under "How to Buy Shares."
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Class B Investment
Shares through:
quantity discounts and accumulated purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
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.
LETTER OF INTENT
If a shareholder intends to purchase at least $100,000 of Shares in the
Fund over the next 13 months, the sales charge may be reduced by signing
a letter of intent to that effect. This letter of intent includes a
provision for a sales charge adjustment depending on the amount actually
purchased within the 13-
month period and a provision for the custodian to hold up to 4.0% of the
total amount intended to be purchased in escrow (in Shares) until such
purchase is completed.
The amount held in escrow will be applied to the shareholder's account at
the end of the 13-month period, unless the amount specified in the letter
of intent is not purchased. In this event, an appropriate number of
escrowed Shares may be redeemed in order to realize the difference in the
sales charge.
This letter of intent will not obligate the shareholder to purchase
Shares, but if the shareholder does, each purchase during the period will
be at the sales charge applicable to the total amount intended to be
purchased. This letter may be dated as of a prior date to include any
purchases made within the past 90 days.
REINVESTMENT PRIVILEGE
If Shares in the Fund have been redeemed, the shareholder has a one-time
right, within 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 First
Union 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 First Union Funds with a sales charge, and
$70,000 in Shares of the 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 PLANS (CLASS B AND CLASS C INVESTMENT SHARES)
With respect to the Class B and Class C Investment Shares classes of the Fund,
the Trust has adopted distribution plans (the "Plans ") pursuant to Rule 12b-1
which was promulgated by the SEC pursuant to the Investment Company Act of 1940.
The Plans permit the payment of fees to brokers for distribution and
administrative services and to administrators for administrative services as to
Class B and Class C Investment Shares. The Plans are designed to (i) stimulate
brokers to provide distribution and administrative support services to the Fund
and holders of Class B and Class C Investment Shares and (ii) stimulate
administrators to render administrative support services to the Fund and holders
of Class B and Class C Investment 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 Class B and Class C Investment
Shares; assisting clients in changing dividend options, account designations,
and addresses; and providing such other services as the Fund reasonably requests
for its Class B and Class C Investment Shares.
By adopting the Plans, 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 Plans 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 period from July 2, 1993 (commencement of operations) to December 31,
1993, brokers and administrators (financial institutions) received fees in the
amount of $39,925 pursuant to the Plans.
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 Plans for
administrative services, and if paid, will be reimbursed by the Adviser
and not the Fund.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value of Shares generally changes each day. The days on which the net
asset values of Shares are calculated by the Fund are described in the
respective prospectus.
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.
USE OF AMORTIZED COST
The Trustees have decided that the fair value of debt securities authorized to
be purchased by the Fund with remaining maturities of 60 days or less at the
time of purchase shall be their amortized cost value, unless the particular
circumstances of the security indicate otherwise. Under this method, portfolio
instruments and assets are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at current
market value. The Trustees periodically assess this method of valuation and
recommend changes where necessary to assure that the Fund's portfolio
instruments are valued at their fair value as determined in good faith by the
Trustees.
VALUING OPTIONS
Over-the-counter put options will be valued at the mean between the bid and the
asked prices. Covered call options will be valued at the last sale price on the
national exchange on which such option is traded. Unlisted call options will be
valued at the latest bid price as provided by brokers.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request, plus a contingent deferred sales charge, if
applicable. 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 respective prospectus
under "How to Redeem 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
- --------------------------------------------------------------------------------
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.
SHAREHOLDERS' TAX STATUS
No portion of any income dividend paid by the Fund is eligible for the dividends
received deductions available to corporations.
CAPITAL GAINS
Capital gains or losses may be realized by the Fund on the sale of
portfolio securities and as a result of discounts from par value on
securities held to maturity. Sales would generally be made because of:
the availability of higher relative yields;
differentials in market values;
new investment opportunities;
changes in creditworthiness of an issuer; or
an attempt to preserve gains or limit losses.
Distribution of long-term capital gains are taxed as such, whether they
are taken in cash or reinvested, and regardless of the length of time the
shareholder has owned the Shares.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's cumulative total return for Class B Investment Shares from July 5,
1993 (start of performance) to December 31, 1993, was 1.38%. The Fund's
cumulative total return for Class C Investment Shares from July 1, 1993 (start
of performance) to December 31, 1993, was 1.34%. Trust Shares were not effective
during the period ended December 31, 1993. Cumulative total return reflects the
Fund's total performance over a specified period of time. This total return
assumes and is reduced by the payment of the maximum sales load. The Fund's
total return is representative of only six months of investment activity since
the Fund's effective date.
YIELD
- --------------------------------------------------------------------------------
The Fund's yields for Class B Investment Shares and Class C Investment Shares
were 4.85% and 4.57%, respectively, for the thirty-day period ended December 31,
1993. Trust Shares were not effective 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 any class of
shares over a thirty-day period by the maximum offering price per share of any
class on the last day of the period. This value is then annualized using
semi-annual compounding. This means that the amount of income generated during
the thirty-day period is assumed to be generated each month over a twelve-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by any 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 broker/dealers charge fees in
connection with services provided in conjunction with an investment in any class
of Shares, the performance will be reduced for those shareholders paying those
fees.
TAX EQUIVALENT YIELD
- --------------------------------------------------------------------------------
The Fund's tax equivalent yields for Class B Investment Shares and Class C
Investment Shares for the thirty-day period ended December 31, 1993, were 6.74%
and 6.35%, respectively, assuming a 28% tax rate and 7.03% and 6.62%,
respectively, assuming a 31% tax rate. Trust Shares were not effective 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 that both the income and
value of the investment are 100% taxable.
TAX EQUIVALENCY TABLE
<TABLE>
<CAPTION>
TAX-EQUIVALENT YIELD TABLE FOR 1994 STATE OF FLORIDA
- --------------------------------------------------------------------------------
TAX-FREE YIELD--4.00%
- --------------------------------------------------------------------------------
FEDERAL FEDERAL
AND AND
FEDERAL FEDERAL INTANGIBLES INTANGIBLES
TAX TAXABLE COMBINED TAXABLE
BRACKET OF EQUIVALENT TAX RATE* EQUIVALENT
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
15.00% 4.71% 19.25% 4.95%
28.00 5.56 31.60 5.85
31.00 5.80 34.45 6.10
36.00 6.25 39.20 6.58
39.60 6.62 42.62 6.97
- --------------------------------------------------------------------------------
<CAPTION>
TAX-FREE YIELD--4.50%
- --------------------------------------------------------------------------------
FEDERAL FEDERAL
AND AND
FEDERAL FEDERAL INTANGIBLES INTANGIBLES
TAX TAXABLE COMBINED TAXABLE
BRACKET OF EQUIVALENT TAX RATE* EQUIVALENT
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
15.00% 5.29% 18.78% 5.54%
28.00 6.25 31.20 6.54
31.00 6.52 34.07 6.83
36.00 7.03 38.84 7.36
39.60 7.45 42.28 7.80
- --------------------------------------------------------------------------------
<CAPTION>
TAX-FREE YIELD--5.00%
- --------------------------------------------------------------------------------
FEDERAL FEDERAL
AND AND
FEDERAL FEDERAL INTANGIBLES INTANGIBLES
TAX TAXABLE COMBINED TAXABLE
BRACKET OF EQUIVALENT TAX RATE* EQUIVALENT
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
15.00% 5.88% 18.40% 6.13%
28.00 6.94 30.88 7.23
31.00 7.25 33.76 7.55
36.00 7.81 38.56 8.14
39.60 8.28 42.02 8.62
- --------------------------------------------------------------------------------
<CAPTION>
TAX-FREE YIELD--5.50%
- --------------------------------------------------------------------------------
FEDERAL FEDERAL
AND AND
FEDERAL FEDERAL INTANGIBLES INTANGIBLES
TAX TAXABLE COMBINED TAXABLE
BRACKET OF EQUIVALENT TAX RATE* EQUIVALENT
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
15.00% 6.47% 18.09% 6.71%
28.00 7.64 30.62 7.93
31.00 7.97 33.51 8.27
36.00 8.59 38.33 8.92
39.60 9.11 41.80 9.45
- --------------------------------------------------------------------------------
<CAPTION>
TAX-FREE YIELD--6.00%
- --------------------------------------------------------------------------------
FEDERAL FEDERAL
AND AND
FEDERAL FEDERAL INTANGIBLES INTANGIBLES
TAX TAXABLE COMBINED TAXABLE
BRACKET OF EQUIVALENT TAX RATE* EQUIVALENT
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
15.00% 7.06% 17.83% 7.30%
28.00 8.33 30.40 8.62
31.00 8.70 33.30 9.00
36.00 9.38 38.13 9.70
39.60 9.93 41.61 10.28
- --------------------------------------------------------------------------------
<CAPTION>
TAX-FREE YIELD--6.50%
- --------------------------------------------------------------------------------
FEDERAL FEDERAL
AND AND
FEDERAL FEDERAL INTANGIBLES INTANGIBLES
TAX TAXABLE COMBINED TAXABLE
BRACKET OF EQUIVALENT TAX RATE* EQUIVALENT
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
15.00% 7.65% 17.62% 7.89%
28.00 9.03 30.22 9.31
31.00 9.42 33.12 9.72
36.00 10.16 37.97 10.48
39.60 10.76 41.46 11.10
- --------------------------------------------------------------------------------
<CAPTION>
TAX-FREE YIELD--7.00%
- --------------------------------------------------------------------------------
FEDERAL FEDERAL
AND AND
FEDERAL FEDERAL INTANGIBLES INTANGIBLES
TAX TAXABLE COMBINED TAXABLE
BRACKET OF EQUIVALENT TAX RATE* EQUIVALENT
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
15.00% 8.24% 17.43% 8.48%
28.00 9.72 30.06 10.01
31.00 10.14 32.97 10.44
36.00 10.94 37.83 11.26
39.60 11.59 41.33 11.93
- --------------------------------------------------------------------------------
<CAPTION>
TAX-FREE YIELD--7.50%
- --------------------------------------------------------------------------------
FEDERAL FEDERAL
AND AND
FEDERAL FEDERAL INTANGIBLES INTANGIBLES
TAX TAXABLE COMBINED TAXABLE
BRACKET OF EQUIVALENT TAX RATE* EQUIVALENT
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
15.00% 8.82% 17.27% 9.07%
28.00 10.42 29.92 10.70
31.00 10.87 32.84 11.17
36.00 11.72 37.71 12.04
39.60 12.42 41.21 12.76
</TABLE>
Yields shown are for illustration purposes only and are not meant to represent
the Fund's actual yield.
*_ A Florida state intangibles tax on personal property after exemptions of $2.0
per $1,000 is generally imposed on the value of stocks, bonds, and other
evidences of indebtedness. An example of the effect of the Florida
intangibles tax on the tax brackets of Florida taxpayers is as follows. A
$10,000 investment subject to the intangibles tax would require payment of
$20 annually in intangibles taxes. If the investment yielded 6.5% annually or
$650, the intangibles tax as a percentage of income would be $20/$650 or
3.08%. If a taxpayer were in the 31% federal income tax bracket, assuming the
intangibles taxes were deducted as an itemized deduction on the shareholder's
federal return, the taxpayer would be in a combined federal and Florida state
tax bracket of 33.12% 31% + (1--.31) x 3.08% with respect to such investment.
In order to meet its investment objective of qualifying as an investment
exempt from the Florida intangibles tax, the Fund's portfolio must consist
entirely of exempt securities on the last business day of the calendar year.
There is no assurance that the Fund will meet this objective. If the Fund
fails to meet this objective, then a shareholder should refer to the federal
taxable yield equivalent column. A Florida taxpayer whose other intangible
personal property is exempt or partially exempt from tax due to the
availability of exemptions will have a lower taxable equivalent yield than
indicated above.
The above-indicated federal income tax brackets do not take into account the
effect of a reduction in the deductibility of itemized deductions for
taxpayers with adjusted gross income in excess of $108,450, nor the effects
of phaseout of personal exemptions for single and joint filers with adjusted
gross incomes in excess of $108,450 and $162,700, respectively. The effective
tax brackets and equivalent taxable yields of such taxpayers will be higher
than those indicated above.
While it is expected that a substantial portion of the interest income
distributed to the Fund's shareholders will be exempt from the regular federal
income tax, portions of such distributions, from time to time, may be subject to
such tax. This table does not take into account the Florida intangibles tax,
state or local taxes, if any, payable on Fund distributions to individuals who
are not Florida residents, or intangibles taxes, if any, imposed under the laws
of other states. It should also be noted that the interest earned on certain
"private activity bonds" issued after August 7, 1986, while exempt from the
regular federal income tax, is treated as a tax preference item which could
subject the recipient to the federal alternative minimum tax. The illustrations
assume that the federal alternative minimum tax is not applicable.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
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 capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time. 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 FLORIDA MUNICIPAL BOND INDEX is a total return performance benchmark for
the Florida long-term, investment grade, tax-exempt bond market. Returns and
attributes for this index are calculated semi-monthly using municipal bonds
classified as General Obligation Bonds (state and local), Revenue Bonds
(excluding insured revenue bonds), Insured Bonds (includes all bond insurers
with Aaa/AAA ratings), and Prerefunded Bonds.
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
- --------------------------------------------------------------------------------
The financial statements for First Union Florida Municipal Bond 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 inside back cover of
the respective prospectus.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD & POOR'S CORPORATION MUNICIPAL 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 effect of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
MOODY'S INVESTORS SERVICE, INC. MUNICIPAL 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 some time in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
3031209B (2/94)
FIRST UNION GEORGIA MUNICIPAL BOND PORTFOLIO
(A PORTFOLIO OF FIRST UNION FUNDS)
TRUST SHARES
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
Supplement to Combined Statement of Additional Information dated
February 28, 1994
Effective September 1, 1994, First Union Georgia
Municipal Bond Portfolio (the "Fund") will offer Class
D Investment Shares ("Class D Shares"). Class D Shares
will be similar to Class C Shares in all respects
except: Class D Shares will have a contingent deferred
sales charge of 1.00%, which terminates after one year,
and the Class D Shares will not automatically convert
into Class B Shares after seven years.
Effective September 1, 1994, Class C Shares will assess
a shareholder service fee of 0.25% of the average daily
net asset value, of which all or a portion may be
waived at any time.
September 1, 1994
FEDERATED SECURITIES CORP.
Distributor
G00389-09 (9/94)
FIRST UNION NORTH CAROLINA MUNICIPAL BOND PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
TRUST SHARES
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectus of Trust Shares, Class B Investment Shares,
or Class C Investment Shares for First Union North Carolina Municipal
Bond Portfolio, dated February 28, 1994. This Statement is not a
prospectus itself. To receive a copy of the Trust Shares' prospectus,
write First Union National Bank of North Carolina, Capital Management
Group, 1200 Two First Union Center, Charlotte, North Carolina
28288-1156 or call 1-800-326-2584. To receive a copy of the Class B
Investment Shares' or Class C Investment Shares' prospectus, write
First Union Brokerage Services, Inc., One First Union Center, 301 S.
College Street, Charlotte, North Carolina 28288-1173 or call
1-800-326-3241.
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 2
Futures and Options Transactions 2
Repurchase Agreements 4
Reverse Repurchase Agreements 4
Lending of Portfolio Securities 5
Restricted Securities 5
Portfolio Turnover 5
Investment Limitations 5
North Carolina Investment Risks 7
TRUST MANAGEMENT 8
- ---------------------------------------------------------------
Officers and Trustees 8
Fund Ownership 9
Trustee Liability 9
INVESTMENT ADVISORY SERVICES 9
- ---------------------------------------------------------------
Adviser to the Fund 9
Advisory Fees 9
BROKERAGE TRANSACTIONS 10
- ---------------------------------------------------------------
ADMINISTRATIVE SERVICES 10
- ---------------------------------------------------------------
PURCHASING SHARES 10
- ---------------------------------------------------------------
Distribution Plans (Class B and
Class C Investment Shares) 11
DETERMINING NET ASSET VALUE 12
- ---------------------------------------------------------------
Valuing Municipal Bonds 12
Use of Amortized Cost 12
Valuing Options 12
REDEEMING SHARES 12
- ---------------------------------------------------------------
Redemption in Kind 12
TAX STATUS 13
- ---------------------------------------------------------------
The Fund's Tax Status 13
Shareholders' Tax Status 13
TOTAL RETURN 13
- ---------------------------------------------------------------
YIELD 13
- ---------------------------------------------------------------
TAX EQUIVALENT YIELD 14
- ---------------------------------------------------------------
Tax Equivalency Table 14
PERFORMANCE COMPARISONS 15
- ---------------------------------------------------------------
FINANCIAL STATEMENTS 15
- ---------------------------------------------------------------
APPENDIX 16
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
First Union North Carolina Municipal Bond Portfolio (the "Fund") is a portfolio
of First Union Funds (the "Trust"). The Trust was established as a Massachusetts
business trust under a Declaration of Trust dated August 30, 1984. On January 4,
1993, the name of the Trust was changed from "The Salem Funds" to "First Union
Funds."
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"). This Combined Statement of Additional Information
relates to the above-mentioned Shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide current income which is exempt
from federal regular income tax and North Carolina state income tax consistent
with preservation of capital. In addition, the Fund intends to qualify as an
investment substantially exempt from the North Carolina intangible personal
property tax. The objective cannot be changed without approval of shareholders.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in a non-diversified portfolio of North Carolina
municipal securities.
PARTICIPATION INTERESTS
Participation interests may take the form of participations, beneficial
interests, in a trust, partnership interests, or any other form of
indirect ownership that allows the Fund to treat the income from the
investment as exempt from federal and state tax. The financial
institutions from which the Fund purchases participation interests
frequently provide or secure from another financial institution
irrevocable letters of credit or guarantees and give the Fund the right
to demand payment of the principal amounts of the participation interests
plus accrued interest on short notice (usually within seven days).
VARIABLE RATE MUNICIPAL SECURITIES
Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital
appreciation or depreciation is less for variable rate municipal
securities than for fixed income obligations.
Many municipal securities with variable interest rates purchased by the
Fund are subject to repayment of principal (usually within seven days) on
the Fund's demand. The terms of these variable rate demand instruments
require payment of principal obligations by the issuer of the
participation interests or a guarantor of either issuer. All variable
rate municipal securities will meet the quality standards for the Fund.
The Fund's adviser has been instructed by the Trust's Board of Trustees
(the "Trustees") to monitor the pricing, quality, and liquidity of the
variable rate municipal securities, including participation interests
held by the Fund, on the basis of published financial information and
reports of the rating agencies and other analytical services.
MUNICIPAL LEASES
The Fund may purchase municipal securities in the form of participation
interests which represent undivided proportional interests in lease
payments by a governmental or non-profit entity. The lease payments and
other rights under the lease provide for and secure the payments on the
certificates. Lease obligations may be limited by municipal charter or
the nature of the appropriation for the lease. In particular, lease
obligations may be subject to periodic appropriation. If the entity does
not appropriate funds for future lease payments, the entity cannot be
compelled to make such payments. Furthermore, a lease may provide that
the certificate trustee cannot accelerate lease obligations upon default.
The trustee would only be able to enforce lease payments as they become
due. In the event of a default or failure of appropriation, it is
unlikely that the trustee would be able to obtain an acceptable
substitute source of payment or that the substitute source of payment
would generate tax-exempt income.
When determining whether municipal leases purchased by the Fund will be
classified as a liquid or illiquid security, the Trustees have directed
the Fund's adviser to consider certain factors, such as: the frequency of
trades and quotes for the security; the volatility of quotations and
trade prices for the security, the number of dealers willing to purchase
or sell the security and the number of potential purchasers; dealer
undertaking to make a market in the security; the nature of the security
and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers, and the
mechanics of transfer); the rating of the security and the financial
condition and prospects of the issuer of the security; whether the lease
can be terminated by the lessee; the potential
recovery, if any, from a sale of the leased property upon termination of
the lease; the lessee's general credit strength (e.g., its debt,
administrative, economic and financial characteristics and prospects);
the likelihood that the lessee will discontinue appropriating funding for
the lease property because the property is no longer deemed essential to
its operations (e.g., the potential for an "event of nonappropriation");
any credit enhancement or legal recourse provided upon an event of
nonappropriation or other termination of the lease; and such other
factors as may be relevant to the Fund's ability to dispose of the
security.
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.
FUTURES AND OPTIONS TRANSACTIONS
The Fund may attempt to hedge all or a portion of its portfolio by buying and
selling financial futures contracts and options on financial futures contracts.
Additionally, the Fund may buy and sell call and put options on portfolio
securities.
FINANCIAL FUTURES CONTRACTS
A futures contract is a firm commitment by two parties, the seller who
agrees to make delivery of the specific type of security called for in
the contract ("going short") and the buyer who agrees to take delivery of
the security ("going long") at a certain time in the future. Financial
futures contracts call for the delivery of particular debt securities
issued or guaranteed by the U.S. Treasury or by specified agencies or
instrumentalities of the U.S. government.
In the fixed income securities market, price moves inversely to interest
rates. A rise in rates means a drop in price. Conversely, a drop in rates
means a rise in price. In order to hedge its holdings of fixed income
securities against a rise in market interest rates, the Fund could enter
into contracts to deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the prices of its
fixed income securities may decline during the Fund's anticipated holding
period. The Fund would "go long" (agree to purchase securities in the
future at a predetermined price) to hedge against a decline in market
interest rates.
PURCHASING PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts
for U.S. government securities. Unlike entering directly into a futures
contract, which requires the purchaser to buy a financial instrument on a
set date at a specified price, the purchase of a put option on a futures
contract entitles (but does not obligate) its purchaser to decide on or
before a future date whether to assume a short position at the specified
price.
The Fund would purchase put options on futures to protect portfolio
securities against decreases in value resulting from an anticipated
increase in market interest rates. Generally, if the hedged portfolio
securities decrease in value during the term of an option, the related
futures contracts will also decrease in value and the option will
increase in value. In such an event, the Fund will normally close out its
option by selling an identical option. If the hedge is successful, the
proceeds received by the Fund upon the sale of the second option will be
large enough to offset both the premium paid by the Fund for the original
option plus the realized decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option. To do so, it would
simultaneously enter into a futures contract of the type underlying the
option (for a price less than the strike price of the option) and
exercise the option. The Fund would then deliver the futures contract in
return for payment of the strike price. If the Fund neither closes out
nor exercises an option, the option will expire on the date provided in
the option contract, and the premium paid for the contract will be lost.
WRITING CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write
listed call options on futures contracts for U.S. government securities
to hedge its portfolio against an increase in market interest rates. When
the Fund writes a call option on a futures contract, it is undertaking
the obligation of assuming a short futures position (selling a futures
contract) at the fixed strike price at any time during the life of the
option if the option is exercised. As market interest rates rise, causing
the prices of futures to go down, the Fund's obligation under a call
option on a future (to sell a futures contract) costs less to fulfill,
causing the value of the Fund's call option position to increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the call,
so that the Fund keeps the premium received for the option. This premium
can offset the drop in value of the Fund's fixed income portfolio which
is occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of it
by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will be
less than the premium received by the Fund for the initial option. The
net premium income of the Fund will then offset the decrease in value of
the hedged securities.
WRITING PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may write listed put options on financial futures contracts for
U.S. government securities to hedge its portfolio against a decrease in
market interest rates. When the Fund writes a put option on a futures
contract, it receives a premium for undertaking the obligation to assume
a long futures position (buying a futures contract) at a fixed price at
any time during the life of the option. As market interest rates
decrease, the market price of the underlying futures contract normally
increases.
As the market value of the underlying futures contract increases, the
buyer of the put option has less reason to exercise the put because the
buyer can sell the same futures contract at a higher price in the market.
The premium received by the Fund can then be used to offset the higher
prices of portfolio securities to be purchased in the future due to the
decrease in market interest rates.
Prior to the expiration of the put option, or its exercise by the buyer,
the Fund may close out the option by buying an identical option. If the
hedge is successful, the cost of buying the second option will be less
than the premium received by the Fund for the initial option.
PURCHASING CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
An additional way in which the Fund may hedge against decreases in market
interest rates is to buy a listed call option on a financial futures
contract for U.S. government securities. When the Fund purchases a call
option on a futures contract, it is purchasing the right (not the
obligation) to assume a long futures position (buy a futures contract) at
a fixed price at any time during the life of the option. As market
interest rates fall, the value of the underlying futures contract will
normally increase, resulting in an increase in value of the Fund's option
position. When the market price of the underlying futures contract
increases above the strike price plus premium paid, the Fund could
exercise its option and buy the futures contract below market price.
Prior to the exercise or expiration of the call option the Fund could
sell an identical call option and close out its position. If the premium
received upon selling the offsetting call is greater than the premium
originally paid, the Fund has completed a successful hedge.
LIMITATION ON OPEN FUTURES POSITIONS
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds the
current market value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Fund will take
prompt action to close out a sufficient number of open contracts to bring
its open futures and options positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather,
the Fund is required to deposit an amount of "initial margin" in cash or
U.S. Treasury bills with its custodian (or the broker, if legally
permitted). The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that futures
contract
initial margin does not involve the borrowing of funds by the Fund to
finance the transactions. Initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned
to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. The Fund may not purchase or
sell futures contracts or related options if immediately thereafter the
sum of the amount of margin deposits on the Fund's existing futures
positions and premiums paid for related options would exceed 5% of the
market value of the Fund's total assets.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as
"marking to market." Variation margin does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund and the
broker of the amount one would owe the other if the futures contract
expired. In computing its daily net asset value, the Fund will
mark-to-market its open futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
PURCHASING AND WRITING PUT AND CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put and call options on portfolio securities to
protect against price movements in particular securities. A put option
gives the Fund, in return for a premium, the right to sell the underlying
security to the writer (seller) at a specified price during the term of
the option. A call option gives the Fund, in return for a premium, the
right to buy the underlying security from the seller.
The Fund may write covered put and call options to generate income. As
writer of a call option, the Fund has the obligation upon exercise of the
option during the option period to deliver the underlying security upon
payment of the exercise price. As a writer of a put option, the Fund has
the obligation to purchase a security from the purchaser of the option
upon the exercise of the option.
The Fund may only write call options either on securities held in its
portfolio or on securities which it has the right to obtain without
payment of further consideration (or has segregated cash in the amount of
any additional consideration). In the case of put options, the Fund will
segregate cash or U.S. Treasury obligations with a value equal to or
greater than the exercise price of the underlying securities.
The Fund may generally purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the writers or
buyers of the options since options on the portfolio securities held by
the Fund are not traded on an exchange. The Fund purchases and writes
options only with investment dealers and other financial institutions
(such as commercial banks or savings and loan associations) deemed
creditworthy by the Fund's adviser.
Over-the-counter options are two party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded options
are third party contracts with standardized strike prices and expiration
dates and are purchased from a clearing corporation. Exchange-traded
options have a continuous liquid market while over-the-counter options
may not.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price 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 Trustees.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements. These transactions are
similar to borrowing cash. In a reverse repurchase agreement, the Fund transfers
possession of a portfolio instrument to another person, such as a financial
institution, broker, or dealer, in return for a percentage of the instrument's
market value in cash,
and agrees that on a stipulated date in the future the Fund will repurchase the
portfolio instrument by remitting the original consideration plus interest at an
agreed upon rate.
The use of reverse repurchase agreements may enable the Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadantageous,
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 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.
RESTRICTED SECURITIES
The Fund may invest in restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to its investment
objective and policies but which are subject to restrictions on resale under
federal securities laws. The Fund will not invest more than 15% of the value of
its total assets in restricted securities; however, certain restricted
securities which the Trustees deem to be liquid will be excluded from this 10%
limitation.
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission ("SEC") Staff
position set forth in the adopting release for Rule 144A under the Securities
Act of 1933 (the "Rule"). The Rule is a non-exclusive, safe-harbor for certain
secondary market transactions involving securities subject to restrictions on
resale under federal securities laws. The Rule provides an exemption from
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the liquidity of
the secondary market for securities eligible for resale under Rule 144A. The
Fund believes that the Staff of the SEC has left the question of determining the
liquidity of all restricted securities (eligible for resale under Rule 144A) for
determination by the Trustees. The Trustees consider the following criteria in
determining the liquidity of certain restricted securities:
the frequency of trades and quotes for the security;
the number of dealers willing to purchase or sell the security and the number of
other potential buyers;
dealer undertakings to make a market in the security; and
the nature of the security and the nature of the marketplace trades.
PORTFOLIO TURNOVER
The Fund may trade or dispose of portfolio securities as considered necessary to
meet its investment objective. It is not anticipated that the portfolio trading
engaged in by the Fund will result in its annual rate of portfolio turnover
exceeding 100%. For the period from January 11, 1993 (commencement of
operations) to December 31, 1993, the portfolio turnover rate for the Fund was
57%.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of securities. A deposit or payment by
the Fund of initial or variation margin in connection with financial
futures contracts or related options transactions is not considered the
purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money 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 amounts
borrowed, in order to meet
redemption requests without immediately selling portfolio instruments;
and except to the extent that the Fund will enter into futures contracts.
Any such borrowings need not be collateralized. The Fund will not
purchase any securities while borrowings in excess of 5% of its total
assets are outstanding.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage purposes.
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.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, including limited partnership
interests, although it may invest in municipal bonds secured by real
estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities. However, the Fund may
purchase put and call options on portfolio securities and on financial
futures contracts. In addition, the Fund reserves the right to hedge the
portfolio by entering into financial futures contracts and to sell puts
and calls on financial futures contracts.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities up
to one-third of the value of its total assets. The Fund may, however,
acquire publicly or non-publicly issued municipal bonds or temporary
investments or enter into repurchase agreements in accordance with its
investment objective, policies, and limitations or the Declaration of
Trust.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase,
25% or more of the value of its total assets would be invested in any one
industry, or in industrial development bonds or other securities, the
interest upon which is paid from revenues of similar types of projects.
However, the Fund may invest as temporary investments more than 25% of
the value of its assets in cash or cash items, securities issued or
guaranteed by the U.S. government, its agencies, or instrumentalities, or
instruments secured by these money market instruments, such as repurchase
agreements.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate its assets except to
secure permitted borrowings. For purposes of this limitation, the
following are not deemed to be pledges: margin deposits for the purchase
and sale of financial futures contracts and related options; and
segregation of collateral arrangements made in connection with options
activities or the purchase of securities on a when-issued basis.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
obligations, including repurchase agreements providing for settlement in
more than seven days after notice, and certain restricted securities and
municipal leases not determined by the Trustees to be liquid.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
industrial development bonds 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.
INVESTING IN MINERALS
The Fund will not purchase interests in or sell, 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.
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 the Fund in shares of
another investment company would be subject to such duplicate expenses.
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.
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 has no present intention to borrow money in excess of 5% of the value
of its net assets during the coming fiscal year. 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.
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."
NORTH CAROLINA INVESTMENT RISKS
Because the Fund will ordinarily invest 80% or more of its net assets in North
Carolina obligations, it is more susceptible to factors affecting North Carolina
(or the "State") issuers than is a comparable municipal bond fund not
concentrated in the obligations of issuers located in a single state.
North Carolina has an economy largely dependent on manufacturing and
agriculture. In each area, the focus is narrow, with textiles and furniture
dominating industry lines and eggs, poultry, and tobacco constituting the
principal commodities. Manufacturing (particularly the textile industry), which
continues to be far more important in North Carolina than in the nation, has
been adversely affected by international competition. Tobacco farming continues
to be affected by major federal legislation and regulatory measures, and by
international competition. North Carolina ranks among the top ten states in
terms of economic growth as measured by job and personal income growth.
Diversification into financial services, research and high technology
manufacturing is reducing the State's historical dependence on agriculture,
textiles, and furniture manufacturing.
North Carolina is characterized by moderate debt levels (albeit with growing
capital needs), favorable economic performance, and financial strengths
exhibited over the past several years. North Carolina is one of only several
states expected to sustain favorable economic expansion throughout the 1990's,
according to the U.S. Bureau of Economic Analysis indicators. Economic growth in
the State is bolstered by a lower-than-average cost of living, income levels at
about 90% of U.S. averages--though it is much higher in the metropolitan
centers--and a highly respected public and private higher education system,
including the University of North Carolina at Chapel Hill and Duke University in
Durham.
The North Carolina State Constitution requires that the total expenditures of
the State for a fiscal period shall not exceed the total of receipts during the
fiscal period and the surplus remaining in the State Treasury at the beginning
of the period. In certain of the past several years, the State has had to
restrict expenditures to comply with the State Constitution. The State has a
long record of sound financial operations, and while the revenue system is
narrow, the budget balancing law is strong and appropriate curbs are made when
necessary.
Financial operations for the State have been restored to their
historically-healthy position after a period of strain between fiscal years 1990
and 1992. Available unreserved balances and budget stabilization reserves
totaled $440 million at the end of fiscal 1993--equivalent to 6.1% of annual
expenditures. Conservative revenue assumptions and sound budgeting practices
should result in similar balances throughout the current biennium. The
restoration of adequate reserve levels confirms the State's longstanding
commitment to a sound financial position.
As of December 31, 1993, general obligations of the State of North Carolina were
rated Aaa/AAA/AAA by Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Corporation ("S&P") and Fitch Investors Service ("Fitch"), respectively.
Both S&P and Fitch view the State's credit trend as "Stable." There can be no
assurance that the economic conditions on which these ratings are based will
continue or that particular bond issues may not be adversely affected by changes
in economic, political or other conditions.
North Carolina obligations also include obligations of the governments of Puerto
Rico, the Virgin Islands and Guam to the extent these obligations are exempt
from North Carolina State personal income taxes. The Fund will not invest more
than 5% of its net assets in the obligations of each of the Virgin Islands and
Guam, but may invest without limitation in the obligations of Puerto Rico.
Accordingly, the Fund may be adversely affected by local political and economic
conditions and developments within Puerto Rico affecting the issuers of such
obligations.
TRUST MANAGEMENT
- --------------------------------------------------------------------------------
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, the following shareholders of record owned 5% or more of
the outstanding Class B Investment Shares of the Fund: First Union Brokerage
Services & Co. ("FUBS"), for the exclusive benefit of Thomas H. Wright III of
Wilmington, North Carolina, owned approximately 89,475 Shares (6.98%); and FUBS,
for the exclusive benefit of Wright Chemical Corporation of Wilmington, North
Carolina, owned approximately 155,821 Shares (12.16%).
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 shall 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 willful 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 willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Trust.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the respective prospectus.
For the period from January 11, 1993 (commencement of operations) to December
31, 1993, the Adviser earned advisory fees of $170,496, all of which were
voluntarily waived.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets,
2% per year of the next $70 million of average net assets, and 1-1/2% per
year of the remaining average net assets, the Adviser will 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
respective prospectus.
For the period from January 11, 1993 (commencement of operations) to December
31, 1993, the Fund incurred $48,493 in administrative service costs, all of
which were voluntarily waived.
PURCHASING SHARES
- --------------------------------------------------------------------------------
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 Shares is explained in the respective
prospectus under "How to Buy Shares."
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Class B Investment
Shares through:
quantity discounts and accumulated purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
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.
LETTER OF INTENT
If a shareholder intends to purchase at least $100,000 of Shares in the
Fund over the next 13 months, the sales charge may be reduced by signing
a letter of intent to that effect. This letter of intent includes a
provision for a sales charge adjustment depending on the amount actually
purchased within the 13-month period and a provision for the custodian to
hold up to 4.0% of the total amount intended to be purchased in escrow
(in Shares) until such purchase is completed.
The amount held in escrow will be applied to the shareholder's account at
the end of the 13-month period, unless the amount specified in the letter
of intent is not purchased. In this event, an appropriate number of
escrowed Shares may be redeemed in order to realize the difference in the
sales charge.
This letter of intent will not obligate the shareholder to purchase
Shares, but if the shareholder does, each purchase during the period will
be at the sales charge applicable to the total amount intended to be
purchased. This letter may be dated as of a prior date to include any
purchases made within the past 90 days.
REINVESTMENT PRIVILEGE
If Shares in the Fund have been redeemed, the shareholder has a one-time
right, within 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 First
Union 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 First Union Funds with a sales charge, and
$70,000 in Shares of the 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 PLANS (CLASS B AND CLASS C INVESTMENT SHARES)
With respect to the Class B and Class C Investment Shares classes of the Fund,
the Trust has adopted distribution plans (the "Plans") pursuant to Rule 12b-1
which was promulgated by the SEC pursuant to the Investment Company Act of 1940.
The Plans permit the payment of fees to brokers for distribution and
administrative services and to administrators for administrative services as to
Class B and Class C Investment Shares. The Plans are designed to (i) stimulate
brokers to provide distribution and administrative support services to the Fund
and holders of Class B and Class C Investment Shares and (ii) stimulate
administrators to render administrative support services to the Fund and holders
of Class B and Class C Investment 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 Class B and Class C Investment
Shares; assisting clients in changing dividend options, account designations,
and addresses; and providing such other services as the Fund reasonably requests
for its Class B and Class C Investment Shares.
By adopting the Plans, 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 Plans 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 period from January 11, 1993 (commencement of operations) to December
31, 1993, brokers and administrators (financial institutions) did not receive
any fees pursuant to the Plans.
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 Plans for
administrative services, and if paid, will be reimbursed by the Adviser
and not the Fund.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value of Shares generally changes each day. The days on which the net
asset values of Shares are calculated by the Fund are described in the
respective prospectus.
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.
USE OF AMORTIZED COST
The Trustees have decided that the fair value of debt securities authorized to
be purchased by the Fund with remaining maturities of 60 days or less at the
time of purchase shall be their amortized cost value, unless the particular
circumstances of the security indicate otherwise. Under this method, portfolio
instruments and assets are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at current
market value. The Trustees periodically assess this method of valuation and
recommend changes where necessary to assure that the Fund's portfolio
instruments are valued at their fair value as determined in good faith by the
Trustees.
VALUING OPTIONS
Over-the-counter put options will be valued at the mean between the bid and the
asked prices. Covered call options will be valued at the last sale price on the
national exchange on which such option is traded. Unlisted call options will be
valued at the latest bid price as provided by brokers.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request, plus a contingent deferred sales charge, if
applicable. 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 respective prospectus
under "How to Redeem 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
- --------------------------------------------------------------------------------
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.
SHAREHOLDERS' TAX STATUS
No portion of any income dividend paid by the Fund is eligible for the dividends
received deductions available to corporations.
CAPITAL GAINS
Capital gains or losses may be realized by the Fund on the sale of
portfolio securities and as a result of discounts from par value on
securities held to maturity. Sales would generally be made because of:
the availability of higher relative yields;
differentials in market values;
new investment opportunities;
changes in creditworthiness of an issuer; or
an attempt to preserve gains or limit losses.
Distribution of long-term capital gains are taxed as such, whether they
are taken in cash or reinvested, and regardless of the length of time the
shareholder has owned the Shares.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's cumulative total return for Class B Investment Shares and Class C
Investment Shares from January 12, 1993 (start of performance) to December 31,
1993, were 6.79% and 6.63%, respectively. Trust Shares were not being offered
during the period ended December 31, 1993. Cumulative total return reflects the
Fund's total performance over a specified period of time. This total return
assumes and is reduced by the payment of the maximum sales load. The Fund's
total return is representative of only eleven months of investment activity
since the Fund's effective date.
YIELD
- --------------------------------------------------------------------------------
The Fund's yields for Class B Investment Shares and Class C Investment Shares
were 4.89% and 4.61%, respectively, for the thirty-day period ended December 31,
1993. 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 any class of
Shares over a thirty-day period by the maximum offering price per share of any
class on the last day of the period. This value is then annualized using
semi-annual compounding. This means that the amount of income generated during
the thirty-day period is assumed to be generated each month over a twelve-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by any 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 broker/dealers charge fees in
connection with services provided in conjunction with an investment in any class
of Shares, the performance will be reduced for those shareholders paying those
fees.
TAX EQUIVALENT YIELD
- --------------------------------------------------------------------------------
The Fund's tax equivalent yields for Class B Investment Shares and Class C
Investment Shares for the thirty-day period ended December 31, 1993, were 6.79%
and 6.40%, respectively, assuming a 28% tax rate and 7.09% and 6.68%,
respectively, assuming a 31% tax rate. 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 that income is 100% tax-
exempt.
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> <C>
TAXABLE YIELD EQUIVALENT FOR 1994 STATE OF NORTH CAROLINA
- ------------------------------------------------------------------------------------------
TAX BRACKET:
FEDERAL 15.00% 28.00% 31.00% 31.00% 36.00% 39.60%
COMBINED FEDERAL AND
STATE 22.00% 35.00% 38.00% 38.75% 43.75% 47.35%
- ------------------------------------------------------------------------------------------
JOINT $1- $38,001- $91,851- $100,001- $140,001- Over
RETURN: 36,900 91,850 100,000 140,000 250,000 $ 250,000
SINGLE $1- $22,751- $55,101- $60,001- $140,001- Over
RETURN: 22,750 55,100 60,000 140,000 250,000 $ 250,000
- ------------------------------------------------------------------------------------------
TAX-EXEMPT YIELD
TAXABLE YIELD EQUIVALENT
- ------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
3.50% 4.49% 5.38% 5.65% 5.71% 6.22% 6.65%
4.00 5.13 6.15 6.45 6.53 7.11 7.60
4.50 5.77 6.92 7.26 7.35 8.00 8.55
5.00 6.41 7.69 8.06 8.16 8.89 9.50
5.50 7.05 8.46 8.87 8.98 9.78 10.45
6.00 7.69 9.23 9.68 9.80 10.67 11.40
6.50 8.33 10.00 10.48 10.61 11.56 12.35
7.00 8.97 10.77 11.29 11.43 12.44 13.30
7.50 9.62 11.54 12.10 12.24 13.33 14.25
8.00 10.26 12.31 12.90 13.06 14.22 15.19
</TABLE>
Note: The maximum marginal tax rate for each bracket was used in calculating the
taxable yield equivalent. Furthermore, additional state and local taxes
paid on comparable taxable investments were not used to increase federal
deductions. North Carolina residents and North Carolina corporations may
exclude from the share value of the North Carolina Municipal Bond Fund for
the purposes of the North Carolina intangible personal property tax that
proportion of the total share value which is attributable to the value of
the direct obligations of the State of North Carolina, of the United
States, and of their political subdivisions held in the Fund as of
December 31 of the taxable year. The North Carolina Municipal Bond Fund
will annually furnish to its shareholders a statement supporting the
proper allocation.
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's income may be subject to the federal alternative
minimum tax and state and local taxes.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
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 capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time. 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 GENERAL OBLIGATION MUNICIPAL BOND INDEX is comprised of state general
obligation debt issues. These bonds are rated A or better and represent a
variety of coupon ranges. Index figures are total returns calculated for one,
three, and twelve month periods as well as year-to-date.
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
- --------------------------------------------------------------------------------
The financial statements for First Union North Carolina Municipal Bond 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 inside back cover of
the respective prospectus.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD & POOR'S CORPORATION MUNICIPAL 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 effect of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
MOODY'S INVESTORS SERVICE, INC. MUNICIPAL 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 some time in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
3031004B (2/94)
FIRST UNION VIRGINIA MUNICIPAL BOND PORTFOLIO
(A PORTFOLIO OF FIRST UNION FUNDS)
TRUST SHARES
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
Supplement to Combined Statement of Additional Information dated
February 28, 1994
Effective September 1, 1994, First Union Virginia
Municipal Bond Portfolio (the "Fund") will offer Class
D Investment Shares ("Class D Shares"). Class D Shares
will be similar to Class C Shares in all respects
except: Class D Shares will have a contingent deferred
sales charge of 1.00%, which terminates after one year,
and the Class D Shares will not automatically convert
into Class B Shares after seven years.
Effective September 1, 1994, Class C Shares will assess
a shareholder service fee of 0.25% of the average daily
net asset value, of which all or a portion may be
waived at any time.
September 1, 1994
FEDERATED SECURITIES CORP.
Distributor
G00389-12 (9/94)
FIRST UNION VIRGINIA MUNICIPAL BOND PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
TRUST SHARES
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectus of Trust Shares, Class B Investment Shares,
or Class C Investment Shares for First Union Virginia Municipal Bond
Portfolio, dated February 28, 1994. This Statement is not a prospectus
itself. To receive a copy of the Trust Shares' prospectus, write First
Union National Bank of North Carolina, Capital Management Group, 1200
Two First Union Center, Charlotte, North Carolina 28288-1156 or call
1-800-326-2584. To receive a copy of the Class B Investment Shares' or
Class C Investment Shares' prospectus, write First Union Brokerage
Services, Inc., One First Union Center, 301 S. College Street,
Charlotte, North Carolina 28288-1173 or call 1-800-326-3241.
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 2
Futures and Options Transactions 2
Repurchase Agreements 4
Reverse Repurchase Agreements 4
Lending of Portfolio Securities 5
Restricted Securities 5
Portfolio Turnover 5
Investment Limitations 5
Virginia Investment Risks 7
TRUST MANAGEMENT 8
- ---------------------------------------------------------------
Officers and Trustees 8
Fund Ownership 9
Trustee Liability 9
INVESTMENT ADVISORY SERVICES 9
- ---------------------------------------------------------------
Adviser to the Fund 9
Advisory Fees 9
BROKERAGE TRANSACTIONS 10
- ---------------------------------------------------------------
ADMINISTRATIVE SERVICES 10
- ---------------------------------------------------------------
PURCHASING SHARES 10
- ---------------------------------------------------------------
Distribution Plans (Class B and Class C
Investment Shares) 11
DETERMINING NET ASSET VALUE 12
- ---------------------------------------------------------------
Valuing Municipal Bonds 12
Use of Amortized Cost 12
Valuing Options 12
REDEEMING SHARES 12
- ---------------------------------------------------------------
Redemption in Kind 12
TAX STATUS 13
- ---------------------------------------------------------------
The Fund's Tax Status 13
Shareholders' Tax Status 13
TOTAL RETURN 13
- ---------------------------------------------------------------
YIELD 13
- ---------------------------------------------------------------
TAX EQUIVALENT YIELD 14
- ---------------------------------------------------------------
Tax Equivalency Table 14
PERFORMANCE COMPARISONS 14
- ---------------------------------------------------------------
FINANCIAL STATEMENTS 15
- ---------------------------------------------------------------
APPENDIX 16
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
First Union Virginia Municipal Bond Portfolio (the "Fund") is a portfolio of
First Union Funds (the "Trust"). The Trust was established as a Massachusetts
business trust under a Declaration of Trust dated August 30, 1984. On January 4,
1993, the name of the Trust was changed from "The Salem Funds" to "First Union
Funds."
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"). This Combined Statement of Additional Information
relates to the above-mentioned Shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide current income which is exempt
from federal regular income tax and Virginia state income tax consistent with
preservation of capital. The objective cannot be changed without approval of
shareholders.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in a non-diversified portfolio of Virginia municipal
securities.
PARTICIPATION INTERESTS
Participation interests may take the form of participations, beneficial
interests in a trust, partnership interests, or any other form of
indirect ownership that allows the Fund to treat the income from the
investment as exempt from federal and state tax. The financial
institutions from which the Fund purchases participation interests
frequently provide or secure from another financial institution
irrevocable letters of credit or guarantees and give the Fund the right
to demand payment of the principal amounts of the participation interests
plus accrued interest on short notice (usually within seven days).
VARIABLE RATE MUNICIPAL SECURITIES
Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital
appreciation or depreciation is less for variable rate municipal
securities than for fixed income obligations.
Many municipal securities with variable interest rates purchased by the
Fund are subject to repayment of principal (usually within seven days) on
the Fund's demand. The terms of these variable rate demand instruments
require payment of principal obligations by the issuer of the
participation interests or a guarantor of either issuer. All variable
rate municipal securities will meet the quality standards for the Fund.
The Fund's adviser has been instructed by the Trust's Board of Trustees
(the "Trustees") to monitor the pricing, quality, and liquidity of the
variable rate municipal securities, including participation interests
held by the Fund, on the basis of published financial information and
reports of the rating agencies and other analytical services.
MUNICIPAL LEASES
The Fund may purchase municipal securities in the form of participation
interests which represent undivided proportional interests in lease
payments by a governmental or non-profit entity. The lease payments and
other rights under the lease provide for and secure the payments on the
certificates. Lease obligations may be limited by municipal charter or
the nature of the appropriation for the lease. In particular, lease
obligations may be subject to periodic appropriation. If the entity does
not appropriate funds for future lease payments, the entity cannot be
compelled to make such payments. Furthermore, a lease may provide that
the certificate trustee cannot accelerate lease obligations upon default.
The trustee would only be able to enforce lease payments as they become
due. In the event of a default or failure of appropriation, it is
unlikely that the trustee would be able to obtain an acceptable
substitute source of payment or that the substitute source of payment
would generate tax-exempt income.
When determining whether municipal leases purchased by the Fund will be
classified as a liquid or illiquid security, the Trustees have directed
the Fund's adviser to consider certain factors, such as: the frequency of
trades and quotes for the security; the volatility of quotations and
trade prices for the security, the number of dealers willing to purchase
or sell the security and the number of potential purchasers; dealer
undertakings to make a market in the security; the nature of the security
and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers, and the
mechanics of transfer); the rating of the security and the financial
condition and prospects of the issuer of the security; whether the lease
can be terminated by the lessee; the potential recovery, if any, from a
sale of the leased property upon termination of the lease; the lessee's
general credit strength (e.g., its debt, administrative, economic and
financial characteristics and prospects); the
likelihood that the lessee will discontinue appropriating funding for the
lease property because the property is no longer deemed essential to its
operations (e.g., the potential for an "event of nonappropriation"); any
credit enhancement or legal recourse provided upon an event of
nonappropriation or other termination of the lease; and such other
factors as may be relevant to the Fund's ability to dispose of the
security.
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.
FUTURES AND OPTIONS TRANSACTIONS
The Fund may attempt to hedge all or a portion of its portfolio by buying and
selling financial futures contracts and options on financial futures contracts.
Additionally, the Fund may buy and sell call and put options on portfolio
securities.
FINANCIAL FUTURES CONTRACTS
A futures contract is a firm commitment by two parties, the seller who
agrees to make delivery of the specific type of security called for in
the contract ("going short") and the buyer who agrees to take delivery of
the security ("going long") at a certain time in the future. Financial
futures contracts call for the delivery of particular debt securities
issued or guaranteed by the U.S. Treasury or by specified agencies or
instrumentalities of the U.S. government.
In the fixed income securities market, price moves inversely to interest
rates. A rise in rates means a drop in price. Conversely, a drop in rates
means a rise in price. In order to hedge its holdings of fixed income
securities against a rise in market interest rates, the Fund could enter
into contracts to deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the prices of its
fixed income securities may decline during the Fund's anticipated holding
period. The Fund would "go long" (agree to purchase securities in the
future at a predetermined price) to hedge against a decline in market
interest rates.
PURCHASING PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts
for U.S. government securities. Unlike entering directly into a futures
contract, which requires the purchaser to buy a financial instrument on a
set date at a specified price, the purchase of a put option on a futures
contract entitles (but does not obligate) its purchaser to decide on or
before a future date whether to assume a short position at the specified
price.
The Fund would purchase put options on futures to protect portfolio
securities against decreases in value resulting from an anticipated
increase in market interest rates. Generally, if the hedged portfolio
securities decrease in value during the term of an option, the related
futures contracts will also decrease in value and the option will
increase in value. In such an event, the Fund will normally close out its
option by selling an identical option. If the hedge is successful, the
proceeds received by the Fund upon the sale of the second option will be
large enough to offset both the premium paid by the Fund for the original
option plus the realized decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option. To do so, it would
simultaneously enter into a futures contract of the type underlying the
option (for a price less than the strike price of the option) and
exercise the option. The Fund would then deliver the futures contract in
return for payment of the strike price. If the Fund neither closes out
nor exercises an option, the option will expire on the date provided in
the option contract, and the premium paid for the contract will be lost.
WRITING CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write
listed call options on futures contracts for U.S. government securities
to hedge its portfolio against an increase in market interest rates. When
the Fund writes a call option on a futures contract, it is undertaking
the obligation of assuming a short futures position (selling a futures
contract) at the fixed strike price at any time during the life of the
option if the option is exercised. As market interest rates rise, causing
the prices of futures to go down, the Fund's obligation under a call
option on a future (to sell a futures contract) costs less to fulfill,
causing the value of the Fund's call option position to increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the call,
so that the Fund keeps the premium received for the option. This premium
can offset the drop in value of the Fund's fixed income portfolio which
is occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of it
by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will be
less than the premium received by the Fund for the initial option. The
net premium income of the Fund will then offset the decrease in value of
the hedged securities.
WRITING PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may write listed put options on financial futures contracts for
U.S. government securities to hedge its portfolio against a decrease in
market interest rates. When the Fund writes a put option on a futures
contract, it receives a premium for undertaking the obligation to assume
a long futures position (buying a futures contract) at a fixed price at
any time during the life of the option. As market interest rates
decrease, the market price of the underlying futures contract normally
increases.
As the market value of the underlying futures contract increases, the
buyer of the put option has less reason to exercise the put because the
buyer can sell the same futures contract at a higher price in the market.
The premium received by the Fund can then be used to offset the higher
prices of portfolio securities to be purchased in the future due to the
decrease in market interest rates.
Prior to the expiration of the put option, or its exercise by the buyer,
the Fund may close out the option by buying an identical option. If the
hedge is successful, the cost of buying the second option will be less
than the premium received by the Fund for the initial option.
PURCHASING CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
An additional way in which the Fund may hedge against decreases in market
interest rates is to buy a listed call option on a financial futures
contract for U.S. government securities. When the Fund purchases a call
option on a futures contract, it is purchasing the right (not the
obligation) to assume a long futures position (buy a futures contract) at
a fixed price at any time during the life of the option. As market
interest rates fall, the value of the underlying futures contract will
normally increase, resulting in an increase in value of the Fund's option
position. When the market price of the underlying futures contract
increases above the strike price plus premium paid, the Fund could
exercise its option and buy the futures contract below market price.
Prior to the exercise or expiration of the call option the Fund could
sell an identical call option and close out its position. If the premium
received upon selling the offsetting call is greater than the premium
originally paid, the Fund has completed a successful hedge.
LIMITATION ON OPEN FUTURES POSITIONS
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds the
current market value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Fund will take
prompt action to close out a sufficient number of open contracts to bring
its open futures and options positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather,
the Fund is required to deposit an amount of "initial margin" in cash or
U.S. Treasury bills with its custodian (or the broker, if legally
permitted). The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that futures
contract
initial margin does not involve the borrowing of funds by the Fund to
finance the transactions. Initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned
to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. The Fund may not purchase or
sell futures contracts or related options if immediately thereafter the
sum of the amount of margin deposits on the Fund's existing futures
positions and premiums paid for related options would exceed 5% of the
market value of the Fund's total assets.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as
"marking to market." Variation margin does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund and the
broker of the amount one would owe the other if the futures contract
expired. In computing its daily net asset value, the Fund will
mark-to-market its open futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
PURCHASING AND WRITING PUT AND CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put and call options on portfolio securities to
protect against price movements in particular securities. A put option
gives the Fund, in return for a premium, the right to sell the underlying
security to the writer (seller) at a specified price during the term of
the option. A call option gives the Fund, in return for a premium, the
right to buy the underlying security from the seller.
The Fund may write covered put and call options to generate income. As
writer of a call option, the Fund has the obligation upon exercise of the
option during the option period to deliver the underlying security upon
payment of the exercise price. As a writer of a put option, the Fund has
the obligation to purchase a security from the purchaser of the option
upon the exercise of the option.
The Fund may only write call options either on securities held in its
portfolio or on securities which it has the right to obtain without
payment of further consideration (or has segregated cash in the amount of
any additional consideration). In the case of put options, the Fund will
segregate cash or U.S. Treasury obligations with a value equal to or
greater than the exercise price of the underlying securities.
The Fund may generally purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the writers or
buyers of the options since options on the portfolio securities held by
the Fund are not traded on an exchange. The Fund purchases and writes
options only with investment dealers and other financial institutions
(such as commercial banks or savings and loan associations) deemed
creditworthy by the Fund's adviser.
Over-the-counter options are two party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded options
are third party contracts with standardized strike prices and expiration
dates and are purchased from a clearing corporation. Exchange-traded
options have a continuous liquid market while over-the-counter options
may not.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price 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 Trustees.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements. These transactions are
similar to borrowing cash. In a reverse repurchase agreement, the Fund transfers
possession of a portfolio instrument to another person, such as a financial
institution, broker, or dealer, in return for a percentage of the instrument's
market value in cash,
and agrees that on a stipulated date in the future the Fund will repurchase the
portfolio instrument by remitting the original consideration plus interest at an
agreed upon rate.
The use of reverse repurchase agreements may enable the Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not ensure that
the Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for 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.
RESTRICTED SECURITIES
The Fund may invest in restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to its investment
objective and policies but which are subject to restrictions on resale under
federal securities laws. The Fund will not invest more than 15% of the value of
its total assets in restricted securities; however, certain restricted
securities which the Trustees deem to be liquid will be excluded from this 10%
limitation.
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission ("SEC") Staff
position set forth in the adopting release for Rule 144A under the Securities
Act of 1933 (the "Rule"). The Rule is a non-exclusive, safe-harbor for certain
secondary market transactions involving securities subject to restrictions on
resale under federal securities laws. The Rule provides an exemption from
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the liquidity of
the secondary market for securities eligible for resale under Rule 144A. The
Fund believes that the Staff of the SEC has left the question of determining the
liquidity of all restricted securities (eligible for resale under Rule 144A) for
determination by the Trustees. The Trustees consider the following criteria in
determining the liquidity of certain restricted securities:
the frequency of trades and quotes for the security;
the number of dealers willing to purchase or sell the security and the number of
other potential buyers;
dealer undertakings to make a market in the security; and
the nature of the security and the nature of the marketplace trades.
PORTFOLIO TURNOVER
The Fund may trade or dispose of portfolio securities as considered necessary to
meet its investment objective. It is not anticipated that the portfolio trading
engaged in by the Fund will result in its annual rate of portfolio turnover
exceeding 100%. For the period from July 2, 1993 (commencement of operations) to
December 31, 1993, the portfolio turnover rate for the Fund was 0%.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of securities. A deposit or payment by
the Fund of initial or variation margin in connection with financial
futures contracts or related options transactions is not considered the
purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money 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 amounts
borrowed, in order to meet
redemption requests without immediately selling portfolio instruments;
and except to the extent that the Fund will enter into futures contracts.
Any such borrowings need not be collateralized. The Fund will not
purchase any securities while borrowings in excess of 5% of its total
assets are outstanding.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage purposes.
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.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, including limited partnership
interests, although it may invest in municipal bonds secured by real
estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities. However, the Fund may
purchase put and call options on portfolio securities and on financial
futures contracts. In addition, the Fund reserves the right to hedge the
portfolio by entering into financial futures contracts and to sell puts
and calls on financial futures contracts.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities up
to one-third of the value of its total assets. The Fund may, however,
acquire publicly or non-publicly issued municipal bonds or temporary
investments or enter into repurchase agreements in accordance with its
investment objective, policies, and limitations or the Declaration of
Trust.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase,
25% or more of the value of its total assets would be invested in any one
industry, or in industrial development bonds or other securities, the
interest upon which is paid from revenues of similar types of projects.
However, the Fund may invest as temporary investments more than 25% of
the value of its assets in cash or cash items, securities issued or
guaranteed by the U.S. government, its agencies, or instrumentalities, or
instruments secured by these money market instruments, such as repurchase
agreements.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate its assets except to
secure permitted borrowings. For purposes of this limitation, the
following are not deemed to be pledges: margin deposits for the purchase
and sale of financial futures contracts and related options; and
segregation of collateral arrangements made in connection with options
activities or the purchase of securities on a when-issued basis.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
obligations, including repurchase agreements providing for settlement in
more than seven days after notice, and certain restricted securities and
municipal leases not determined by the Trustees to be liquid.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
industrial development bonds 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.
INVESTING IN MINERALS
The Fund will not purchase interests in or sell, 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.
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 the Fund in shares of
another investment company would be subject to such duplicate expenses.
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.
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 has no present intention to borrow money in excess of 5% of the value
of its net assets during the coming fiscal year. 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.
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."
VIRGINIA INVESTMENT RISKS
The Fund invests in obligations of Virginia issuers, which results in the Fund's
performance being subject to risks associated with the overall conditions
present within the State. The following information is a brief summary of the
recent prevailing economic conditions and a general summary of the State's
financial status. This information is based on official statements relating to
securities that have been offered by Virginia issuers and from other sources
believed to be reliable, but should not be relied upon as a complete description
of all relevant information.
Virginia's credit strength is derived from a diversified economy, relatively low
unemployment rates, strong financial management, and low debt burden. The
State's economy benefits significantly from its proximity to Washington D.C.
Government is the State's third-largest employment sector, comprising 21% of
total employment. Other important sectors of the economy include shipbuilding,
tourism, construction, and agriculture.
Virginia is a very conservative debt issuer and has maintained debt levels that
are low in relation to its substantial resources. Conservative policies also
dominate the State's financial operations, and the State administration
continually demonstrates its ability and willingness to adjust financial
planning and budgeting to preserve financial balance. For example, economic
weakness in the State and the region caused personal income and sales and
corporate tax collections to fall below projected forecasts and placed the State
under budgetary strain. The State reacted by reducing its revenue expectations
for the 1990-92 biennium and preserved financial balance through a series of
transfers, appropriation reductions, and other budgetary revisions. Management's
actions resulted in a modest budget surplus for fiscal 1992, and another modest
surplus was reported for fiscal 1993, which ended June 30th. The 1994 Virginia
budget is based on improving economic forecasts with projected job growth of
1.9%/year overall, and 3.8% in service-related sectors. Overall, Virginia has a
stable credit outlook due mainly to its diverse economy and resource base, as
well as a conservative approach to financial operations. A State budget surplus
in 1993 has left funds available for reserves and appropriations. Revenue growth
for 1993-1994 is expected to be 4%.
The Fund's concentration in securities issued by the State and its political
subdivisions provides a greater level of risk than a fund which is diversified
across numerous states and municipal entities. The ability of the State or its
municipalities to meet their obligations will depend on the availability of tax
and other revenues; economic, political, and demographic conditions within the
State; and the underlying fiscal condition of the State, its counties, and its
municipalities.
Virginia faces some economic uncertainties with respect to defense-related
cutbacks. Although Virginia's unemployment rate of 5.1% (as of August, 1993) is
well below the national rate of 6.7%, the State has been able to make some gains
in the services, government, and construction sectors when manufacturing and
trade were down slightly.
The effects of the most recent base-closing legislation were muted because of
consolidation from out-of-state bases to Virginia installations. While military
operations at the Pentagon are unlikely to be threatened, another round of
base-closings scheduled for 1995 may jeopardize a number of Virginia
installations.
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 effective.
As of February 4, 1994, the following shareholders of record owned 5% or more of
the outstanding Class B Investment Shares of the Fund: First Union Brokerage
Services & Co. ("FUBS"), for the exclusive benefit of Duff M. Green of
Fredericksburg, Virginia, owned approximately 19,757 Shares (14.46%); FUBS, for
the exclusive benefit of Sookja Lee and Jungha Lee of Fairfax, Virginia, owned
approximately 7,805 Shares (5.71%); FUBS, for the exclusive benefit of Theresa
C. Watson and Catharine M. O'Hara of Alexandria, Virginia, owned approximately
7,729 Shares (5.66%); FUBS, for the exclusive benefit of Drahomira Dosoudil of
Alexandria, Virginia, owned approximately 8,811 Shares (6.45%); FUBS, for the
exclusive benefit of Carroll J. Austin and Teresa M. Austin of Singapore, owned
approximately 8,137 Shares (5.96%); FUBS, for the exclusive benefit of Louis F.
Herrmann and Vicki R. Herrmann of McLean, Virginia, owned approximately 8,452
Shares (6.19%); and FUBS, for the exclusive benefit of Judith Z. Watson of
Spring Fall, Virginia, owned approximately 11,382 Shares (8.33%).
As of February 4, 1994, the following shareholders of record owned 5% or more of
the outstanding Class C Investment Shares of the Fund: FUBS, for the exclusive
benefit of Harry S. Williams and Patsy Williams of Marion, Virginia, owned
approximately 19,892 Shares (7.35%); and FUBS, for the exclusive benefit of John
L. Zepp and Mary Lou Zepp of Vienna, Virginia, owned approximately 22,579 Shares
(8.34%).
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that a Trustee shall 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
- --------------------------------------------------------------------------------
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 respective prospectus.
For the period from July 2, 1993 (commencement of operations) to December 31,
1993, the Adviser earned advisory fees of $4,283, all of which were voluntarily
waived.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1-1/2% per
year of the remaining average net assets, the Adviser will 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
respective prospectus.
For the period from July 2, 1993 (commencement of operations) to December 31,
1993, the Fund incurred $24,931 in administrative service costs, all of which
were voluntarily waived.
PURCHASING SHARES
- --------------------------------------------------------------------------------
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 Shares is explained in the respective
prospectus under "How to Buy Shares."
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Class B Investment
Shares through:
quantity discounts and accumulated purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
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.
LETTER OF INTENT
If a shareholder intends to purchase at least $100,000 of Shares in the
Fund over the next 13 months, the sales charge may be reduced by signing
a letter of intent to that effect. This letter of intent includes a
provision for a sales charge adjustment depending on the amount actually
purchased within the 13-month period and a provision for the custodian to
hold up to 4.0% of the total amount intended to be purchased in escrow
(in Shares) until such purchase is completed.
The amount held in escrow will be applied to the shareholder's account at
the end of the 13-month period, unless the amount specified in the letter
of intent is not purchased. In this event, an appropriate number of
escrowed Shares may be redeemed in order to realize the difference in the
sales charge.
This letter of intent will not obligate the shareholder to purchase
Shares, but if the shareholder does, each purchase during the period will
be at the sales charge applicable to the total amount intended to be
purchased. This letter may be dated as of a prior date to include any
purchases made within the past 90 days.
REINVESTMENT PRIVILEGE
If Shares in the Fund have been redeemed, the shareholder has a one-time
right, within 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 First
Union 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 First Union Funds with a sales charge, and
$70,000 in Shares of the 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 PLANS (CLASS B AND CLASS C INVESTMENT SHARES)
With respect to the Class B and Class C Investment Shares classes of the Fund,
the Trust has adopted distribution plans (the "Plans") pursuant to Rule 12b-1
which was promulgated by the SEC pursuant to the Investment Company Act of 1940.
The Plans permit the payment of fees to brokers for distribution and
administrative services and to administrators for administrative services as to
Class B and Class C Investment Shares. The Plans are designed to (i) stimulate
brokers to provide distribution and administrative support services to the Fund
and holders of Class B and Class C Investment Shares and (ii) stimulate
administrators to render administrative support services to the Fund and holders
of Class B and Class C Investment 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 Class B and Class C Investment
Shares; assisting clients in changing dividend options, account designations,
and addresses; and providing such other services as the Fund reasonably requests
for its Class B and Class C Investment Shares.
By adopting the Plans, 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 Plans 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 period from July 2, 1993 (commencement of operations) to December 31,
1993, brokers and administrators (financial institutions) received fees in the
amount of $4,593 pursuant to the Plans.
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 Plans for
administrative services, and if paid, will be reimbursed by the Adviser
and not the Fund.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value of Shares generally changes each day. The days on which the net
asset values of Shares are calculated by the Fund are described in the
respective prospectus.
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.
USE OF AMORTIZED COST
The Trustees have decided that the fair value of debt securities authorized to
be purchased by the Fund with remaining maturities of 60 days or less at the
time of purchase shall be their amortized cost value, unless the particular
circumstances of the security indicate otherwise. Under this method, portfolio
instruments and assets are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at current
market value. The Trustees periodically assess this method of valuation and
recommend changes where necessary to assure that the Fund's portfolio
instruments are valued at their fair value as determined in good faith by the
Trustees.
VALUING OPTIONS
Over-the-counter put options will be valued at the mean between the bid and the
asked prices. Covered call options will be valued at the last sale price on the
national exchange on which such option is traded. Unlisted call options will be
valued at the latest bid price as provided by brokers.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request, plus a contingent deferred sales charge, if
applicable. 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 respective prospectus
under "How to Redeem 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
- --------------------------------------------------------------------------------
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.
SHAREHOLDERS' TAX STATUS
No portion of any income dividend paid by the Fund is eligible for the dividends
received deductions available to corporations.
CAPITAL GAINS
Capital gains or losses may be realized by the Fund on the sale of
portfolio securities and as a result of discounts from par value on
securities held to maturity. Sales would generally be made because of:
the availability of higher relative yields;
differentials in market values;
new investment opportunities;
changes in creditworthiness of an issuer; or
an attempt to preserve gains or limit losses.
Distribution of long-term capital gains are taxed as such, whether they
are taken in cash or reinvested, and regardless of the length of time the
shareholder has owned the Shares.
TOTAL RETURN
- --------------------------------------------------------------------------------
The Fund's cumulative total return for Class B Investment Shares from July 7,
1993 (start of performance) to December 31, 1993, was (.30%). The Fund's
cumulative total return for Class C Investment Shares from July 1, 1993 (start
of performance) to December 31, 1993, was (.39%). Trust Shares were not
effective during the period ended December 31, 1993.
Cumulative total return reflects the Fund's total performance over a specified
period of time. This total return assumes and is reduced by the payment of the
maximum sales load. The Fund's total return is representative of only six months
of investment activity since the Fund's effective date.
YIELD
- --------------------------------------------------------------------------------
The Fund's yields for Class B Investment Shares and Class C Investment Shares
were 4.77% and 4.47%, respectively, for the thirty-day period ended December 31,
1993. Trust Shares were not effective 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 any class of
shares over a thirty-day period by the maximum offering price per share of any
class on the last day of the period. This value is then annualized using
semi-annual compounding. This means that the amount of income generated during
the thirty-day period is assumed to be generated each month over a twelve-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by any 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 broker/dealers charge fees in
connection with services provided in conjunction with an investment in any class
of Shares, the performance will be reduced for those shareholders paying those
fees.
TAX EQUIVALENT YIELD
- --------------------------------------------------------------------------------
The Fund's tax equivalent yields for Class B Investment Shares and Class C
Investment Shares for the thirty-day period ended December 31, 1993, were 7.20%
and 6.75%, respectively, assuming a 28% federal tax rate and a 5.75% regular
personal income tax rate imposed by Virginia, and assuming that income earned by
the Fund is 100% tax-exempt on a regular federal, state and local basis. Trust
Shares were not effective 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 that income is 100% tax-
exempt.
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 STATE OF VIRGINIA
- -------------------------------------------------------------------------------
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
20.75% 33.75% 36.75% 41.75% 45.35%
- -------------------------------------------------------------------------------
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- $140,001- Over
RETURN: 22,750 55,100 140,000 250,000 $ 250,000
- -------------------------------------------------------------------------------
<CAPTION>
TAX-EXEMPT YIELD
TAXABLE YIELD EQUIVALENT
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3.50% 4.42% 5.28% 5.53% 6.01% 6.40%
4.00 5.05 6.04 6.32 6.87 7.32
4.50 5.68 6.79 7.11 7.73 8.23
5.00 6.31 7.55 7.91 8.58 9.15
5.50 6.94 8.30 8.70 9.44 10.06
6.00 7.57 9.06 9.49 10.30 10.98
6.50 8.20 9.81 10.28 11.16 11.89
7.00 8.83 10.57 11.07 12.02 12.81
7.50 9.46 11.32 11.86 12.88 13.72
8.00 10.09 12.08 12.65 13.73 14.64
</TABLE>
Note: The maximum marginal tax rate for each bracket was used in calculating the
taxable yield equivalent. Furthermore, additional state and local taxes
paid on comparable taxable investments were not used to increase federal
deductions.
The 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's income may be subject to the federal alternative
minimum tax and state and local taxes.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
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 capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time. 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 VIRGINIA MUNICIPAL BOND INDEX is a total return performance benchmark
for the Virginia long-term, investment grade, tax-exempt bond market. Returns
and attributes for this index are calculated semi-monthly using municipal bonds
classified as General Obligation Bonds (state and local), Revenue Bonds
(excluding insured revenue bonds), Insured Bonds (includes all bond insurers
with Aaa/AAA ratings), and Prerefunded Bonds.
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
- --------------------------------------------------------------------------------
The financial statements for First Union Virginia Municipal Bond 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 inside back cover of the
respective prospectus.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD & POOR'S CORPORATION MUNICIPAL 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 effect of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
MOODY'S INVESTORS SERVICE, INC. MUNICIPAL 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 some time in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
3031208B (2/94)
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO
(A PORTFOLIO OF FIRST UNION FUNDS)
TRUST SHARES
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
Supplement to Combined Statement of Additional Information dated
February 28, 1994
Effective September 1, 1994, First Union South Carolina
Municipal Bond Portfolio (the "Fund") will offer Class
D Investment Shares ("Class D Shares"). Class D Shares
will be similar to Class C Shares in all respects
except: Class D Shares will have a contingent deferred
sales charge of 1.00%, which terminates after one year,
and the Class D Shares will not automatically convert
into Class B Shares after seven years.
Effective September 1, 1994, Class C Shares will assess
a shareholder service fee of 0.25% of the average daily
net asset value, of which all or a portion may be
waived at any time.
September 1, 1994
FEDERATED SECURITIES CORP.
Distributor
G00389-11 (9/94)
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
TRUST SHARES
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectus of Trust Shares, Class B Investment Shares,
or Class C Investment Shares for First Union South Carolina Municipal
Bond Portfolio, dated February 28, 1994. This Statement is not a
prospectus itself. To receive a copy of the Trust Shares' prospectus,
write First Union National Bank of North Carolina, Capital Management
Group, 1200 Two First Union Center, Charlotte, North Carolina
28288-1156 or call 1-800-326-2584. To receive a copy of the Class B
Investment Shares' or Class C Investment Shares' prospectus, write
First Union Brokerage Services, Inc., One First Union Center, 301 S.
College Street, Charlotte, North Carolina 28288-1173 or call
1-800-326-3241.
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 2
Futures and Options Transactions 2
Repurchase Agreements 4
Reverse Repurchase Agreements 4
Lending of Portfolio Securities 5
Restricted Securities 5
Portfolio Turnover 5
Investment Limitations 5
South Carolina Investment Risks 7
TRUST MANAGEMENT 8
- ---------------------------------------------------------------
Officers and Trustees 8
Fund Ownership 9
Trustee Liability 9
INVESTMENT ADVISORY SERVICES 10
- ---------------------------------------------------------------
Adviser to the Fund 10
Advisory Fees 10
BROKERAGE TRANSACTIONS 10
- ---------------------------------------------------------------
ADMINISTRATIVE SERVICES 10
- ---------------------------------------------------------------
PURCHASING SHARES 11
- ---------------------------------------------------------------
Distribution Plans (Class B and Class C
Investment Shares) 11
DETERMINING NET ASSET VALUE 12
- ---------------------------------------------------------------
Valuing Municipal Bonds 12
Use of Amortized Cost 12
Valuing Options 12
REDEEMING SHARES 13
- ---------------------------------------------------------------
Redemption in Kind 13
TAX STATUS 13
- ---------------------------------------------------------------
The Fund's Tax Status 13
Shareholders' Tax Status 13
TOTAL RETURN 13
- ---------------------------------------------------------------
YIELD 14
- ---------------------------------------------------------------
TAX EQUIVALENT YIELD 14
- ---------------------------------------------------------------
Tax Equivalency Table 14
PERFORMANCE COMPARISONS 15
- ---------------------------------------------------------------
APPENDIX 16
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
First Union South Carolina Municipal Bond Portfolio (the "Fund") is a portfolio
of First Union Funds (the "Trust"). The Trust was established as a Massachusetts
business trust under a Declaration of Trust dated August 30, 1984. On January 4,
1993, the name of the Trust was changed from "The Salem Funds" to "First Union
Funds."
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"). This Combined Statement of Additional Information
relates to the above-mentioned Shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide current income which is exempt
from federal regular income tax and South Carolina state income tax consistent
with the preservation of capital. The objective cannot be changed without
approval of shareholders.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in a non-diversified portfolio of South Carolina
municipal securities.
PARTICIPATION INTERESTS
Participation interests may take the form of participations, beneficial
interests in a trust, partnership interests, or any other form of
indirect ownership that allows the Fund to treat the income from the
investment as exempt from federal and state tax. The financial
institutions from which the Fund purchases participation interests
frequently provide or secure from another financial institution
irrevocable letters of credit or guarantees and give the Fund the right
to demand payment of the principal amounts of the participation interests
plus accrued interest on short notice (usually within seven days).
VARIABLE RATE MUNICIPAL SECURITIES
Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital
appreciation or depreciation is less for variable rate municipal
securities than for fixed income obligations.
Many municipal securities with variable interest rates purchased by the
Fund are subject to repayment of principal (usually within seven days) on
the Fund's demand. The terms of these variable rate demand instruments
require payment of principal obligations by the issuer of the
participation interests or a guarantor of either issuer. All variable
rate municipal securities will meet the quality standards for the Fund.
The Fund's adviser has been instructed by the Trust's Board of Trustees
(the "Trustees") to monitor the pricing, quality, and liquidity of the
variable rate municipal securities, including participation interests
held by the Fund, on the basis of published financial information and
reports of the rating agencies and other analytical services.
MUNICIPAL LEASES
The Fund may purchase municipal securities in the form of participation
interests which represent undivided proportional interests in lease
payments by a governmental or non-profit entity. The lease payments and
other rights under the lease provide for and secure the payments on the
certificates. Lease obligations may be limited by municipal charter or
the nature of the appropriation for the lease. In particular, lease
obligations may be subject to periodic appropriation. If the entity does
not appropriate funds for future lease payments, the entity cannot be
compelled to make such payments. Furthermore, a lease may provide that
the certificate trustee cannot accelerate lease obligations upon default.
The trustee would only be able to enforce lease payments as they become
due. In the event of a default or failure of appropriation, it is
unlikely that the trustee would be able to obtain an acceptable
substitute source of payment or that the substitute source of payment
would generate tax-exempt income.
When determining whether municipal leases purchased by the Fund will be
classified as a liquid or illiquid security, the Trustees have directed
the Fund's adviser to consider certain factors, such as: the frequency of
trades and quotes for the security; the volatility of quotations and
trade prices for the security, the number of dealers willing to purchase
or sell the security and the number of potential purchasers; dealer
undertakings to make a market in the security; the nature of the security
and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers, and the
mechanics of transfer); the rating of the security and the financial
condition and prospects of the issuer of the security; whether the lease
can be terminated by the lessee; the potential recovery, if any, from a
sale of the leased property upon termination of the lease; the lessee's
general
credit strength (e.g., its debt, administrative, economic and financial
characteristics and prospects); the likelihood that the lessee will
discontinue appropriating funding for the lease property because the
property is no longer deemed essential to its operations (e.g., the
potential for an "event of nonappropriation"); any credit enhancement or
legal recourse provided upon an event of nonappropriation or other
termination of the lease; and such other factors as may be relevant to
the Fund's ability to dispose of the security.
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.
FUTURES AND OPTIONS TRANSACTIONS
The Fund may attempt to hedge all or a portion of its portfolio by buying and
selling financial futures contracts and options on financial futures contracts.
Additionally, the Fund may buy and sell call and put options on portfolio
securities.
FINANCIAL FUTURES CONTRACTS
A futures contract is a firm commitment by two parties, the seller who
agrees to make delivery of the specific type of security called for in
the contract ("going short") and the buyer who agrees to take delivery of
the security ("going long") at a certain time in the future. Financial
futures contracts call for the delivery of particular debt securities
issued or guaranteed by the U.S. Treasury or by specified agencies or
instrumentalities of the U.S. government.
In the fixed income securities market, price moves inversely to interest
rates. A rise in rates means a drop in price. Conversely, a drop in rates
means a rise in price. In order to hedge its holdings of fixed income
securities against a rise in market interest rates, the Fund could enter
into contracts to deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the prices of its
fixed income securities may decline during the Fund's anticipated holding
period. The Fund would "go long" (agree to purchase securities in the
future at a predetermined price) to hedge against a decline in market
interest rates.
PURCHASING PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts
for U.S. government securities. Unlike entering directly into a futures
contract, which requires the purchaser to buy a financial instrument on a
set date at a specified price, the purchase of a put option on a futures
contract entitles (but does not obligate) its purchaser to decide on or
before a future date whether to assume a short position at the specified
price.
The Fund would purchase put options on futures to protect portfolio
securities against decreases in value resulting from an anticipated
increase in market interest rates. Generally, if the hedged portfolio
securities decrease in value during the term of an option, the related
futures contracts will also decrease in value and the option will
increase in value. In such an event, the Fund will normally close out its
option by selling an identical option. If the hedge is successful, the
proceeds received by the Fund upon the sale of the second option will be
large enough to offset both the premium paid by the Fund for the original
option plus the realized decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option. To do so, it would
simultaneously enter into a futures contract of the type underlying the
option (for a price less than the strike price of the option) and
exercise the option. The Fund would then deliver the futures contract in
return for payment of the strike price. If the Fund neither closes out
nor exercises an option, the option will expire on the date provided in
the option contract, and the premium paid for the contract will be lost.
WRITING CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write
listed call options on futures contracts for U.S. government securities
to hedge its portfolio against an increase in market interest rates. When
the Fund writes a call option on a futures contract, it is undertaking
the obligation of assuming a short futures position (selling a futures
contract) at the fixed strike price at any time during the life of the
option if the option is exercised. As market interest rates rise, causing
the prices of futures to go down, the Fund's obligation under a call
option on a future (to sell a futures contract) costs less to fulfill,
causing the value of the Fund's call option position to increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the call,
so that the Fund keeps the premium received for the option. This premium
can offset the drop in value of the Fund's fixed income portfolio which
is occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of it
by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will be
less than the premium received by the Fund for the initial option. The
net premium income of the Fund will then offset the decrease in value of
the hedged securities.
WRITING PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may write listed put options on financial futures contracts for
U.S. government securities to hedge its portfolio against a decrease in
market interest rates. When the Fund writes a put option on a futures
contract, it receives a premium for undertaking the obligation to assume
a long futures position (buying a futures contract) at a fixed price at
any time during the life of the option. As market interest rates
decrease, the market price of the underlying futures contract normally
increases.
As the market value of the underlying futures contract increases, the
buyer of the put option has less reason to exercise the put because the
buyer can sell the same futures contract at a higher price in the market.
The premium received by the Fund can then be used to offset the higher
prices of portfolio securities to be purchased in the future due to the
decrease in market interest rates.
Prior to the expiration of the put option, or its exercise by the buyer,
the Fund may close out the option by buying an identical option. If the
hedge is successful, the cost of buying the second option will be less
than the premium received by the Fund for the initial option.
PURCHASING CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
An additional way in which the Fund may hedge against decreases in market
interest rates is to buy a listed call option on a financial futures
contract for U.S. government securities. When the Fund purchases a call
option on a futures contract, it is purchasing the right (not the
obligation) to assume a long futures position (buy a futures contract) at
a fixed price at any time during the life of the option. As market
interest rates fall, the value of the underlying futures contract will
normally increase, resulting in an increase in value of the Fund's option
position. When the market price of the underlying futures contract
increases above the strike price plus premium paid, the Fund could
exercise its option and buy the futures contract below market price.
Prior to the exercise or expiration of the call option the Fund could
sell an identical call option and close out its position. If the premium
received upon selling the offsetting call is greater than the premium
originally paid, the Fund has completed a successful hedge.
LIMITATION ON OPEN FUTURES POSITIONS
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds the
current market value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Fund will take
prompt action to close out a sufficient number of open contracts to bring
its open futures and options positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather,
the Fund is required to deposit an amount of "initial margin" in cash or
U.S. Treasury bills with its custodian (or the broker, if legally
permitted). The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that futures
contract
initial margin does not involve the borrowing of funds by the Fund to
finance the transactions. Initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned
to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. The Fund may not purchase or
sell futures contracts or related options if immediately thereafter the
sum of the amount of margin deposits on the Fund's existing futures
positions and premiums paid for related options would exceed 5% of the
market value of the Fund's total assets.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as
"marking to market." Variation margin does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund and the
broker of the amount one would owe the other if the futures contract
expired. In computing its daily net asset value, the Fund will
mark-to-market its open futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
PURCHASING AND WRITING PUT AND CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put and call options on portfolio securities to
protect against price movements in particular securities. A put option
gives the Fund, in return for a premium, the right to sell the underlying
security to the writer (seller) at a specified price during the term of
the option. A call option gives the Fund, in return for a premium, the
right to buy the underlying security from the seller.
The Fund may write covered put and call options to generate income. As
writer of a call option, the Fund has the obligation upon exercise of the
option during the option period to deliver the underlying security upon
payment of the exercise price. As a writer of a put option, the Fund has
the obligation to purchase a security from the purchaser of the option
upon the exercise of the option.
The Fund may only write call options either on securities held in its
portfolio or on securities which it has the right to obtain without
payment of further consideration (or has segregated cash in the amount of
any additional consideration). In the case of put options, the Fund will
segregate cash or U.S. Treasury obligations with a value equal to or
greater than the exercise price of the underlying securities.
The Fund may generally purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the writers or
buyers of the options since options on the portfolio securities held by
the Fund are not traded on an exchange. The Fund purchases and writes
options only with investment dealers and other financial institutions
(such as commercial banks or savings and loan associations) deemed
creditworthy by the Fund's adviser.
Over-the-counter options are two party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded options
are third party contracts with standardized strike prices and expiration
dates and are purchased from a clearing corporation. Exchange-traded
options have a continuous liquid market while over-the-counter options
may not.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price 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 Trustees.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements. These transactions are
similar to borrowing cash. In a reverse repurchase agreement, the Fund transfers
possession of a portfolio instrument to another person, such as a financial
institution, broker, or dealer, in return for a percentage of the instrument's
market value in cash,
and agrees that on a stipulated date in the future the Fund will repurchase the
portfolio instrument by remitting the original consideration plus interest at an
agreed upon rate.
The use of reverse repurchase agreements may enable the Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not ensure that
the Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for 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.
RESTRICTED SECURITIES
The Fund may invest in restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to its investment
objective and policies but which are subject to restrictions on resale under
federal securities laws. The Fund will not invest more than 15% of the value of
its total assets in restricted securities; however, certain restricted
securities which the Trustees deem to be liquid will be excluded from this 10%
limitation.
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission ("SEC") Staff
position set forth in the adopting release for Rule 144A under the Securities
Act of 1933 (the "Rule"). The Rule is a non-exclusive, safe-harbor for certain
secondary market transactions involving securities subject to restrictions on
resale under federal securities laws. The Rule provides an exemption from
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the liquidity of
the secondary market for securities eligible for resale under Rule 144A. The
Fund believes that the Staff of the SEC has left the question of determining the
liquidity of all restricted securities (eligible for resale under Rule 144A) for
determination by the Trustees. The Trustees consider the following criteria in
determining the liquidity of certain restricted securities:
the frequency of trades and quotes for the security;
the number of dealers willing to purchase or sell the security and the number of
other potential buyers;
dealer undertakings to make a market in the security; and
the nature of the security and the nature of the marketplace trades.
PORTFOLIO TURNOVER
The Fund may trade or dispose of portfolio securities as considered necessary to
meet its investment objective. It is not anticipated that the portfolio trading
engaged in by the Fund will result in its annual rate of portfolio turnover
exceeding 100%.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of securities. A deposit or payment by
the Fund of initial or variation margin in connection with financial
futures contracts or related options transactions is not considered the
purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money 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 amounts
borrowed, in order to meet redemption requests without immediately
selling portfolio instruments; and except to the extent that the
Fund will enter into futures contracts. Any such borrowings need not be
collateralized. The Fund will not purchase any securities while
borrowings in excess of 5% of its total assets are outstanding.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage purposes.
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.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate its assets except to
secure permitted borrowings. For purposes of this limitation, the
following are not deemed to be pledges: margin deposits for the purchase
and sale of financial futures contracts and related options and
segregation of collateral arrangements made in connection with options
activities or the purchase of securities on a when-issued basis.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, including limited partnership
interests, although it may invest in municipal bonds secured by real
estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities. However, the Fund may
purchase put and call options on portfolio securities and on financial
futures contracts. In addition, the Fund reserves the right to hedge the
portfolio by entering into financial futures contracts and to sell puts
and calls on financial futures contracts.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities up
to one-third of the value of its total assets. The Fund may, however,
acquire publicly or non-publicly issued municipal bonds or temporary
investments or enter into repurchase agreements in accordance with its
investment objective, policies, and limitations or the Declaration of
Trust.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase,
25% or more of the value of its total assets would be invested in any one
industry, or in industrial development bonds or other securities, the
interest upon which is paid from revenues of similar types of projects.
However, the Fund may invest as temporary investments more than 25% of
the value of its assets in cash or cash items, securities issued or
guaranteed by the U.S. government, its agencies, or instrumentalities, or
instruments secured by these money market instruments, such as repurchase
agreements.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
obligations, including repurchase agreements providing for settlement in
more than seven days after notice, and certain restricted securities and
municipal leases not determined by the Trustees to be liquid.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
industrial development bonds 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.
INVESTING IN MINERALS
The Fund will not purchase interests in or sell, 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.
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 the Fund in shares of
another investment company would be subject to such duplicate expenses.
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.
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 has no present intention to borrow money in excess of 5% of the value
of its net assets during the coming fiscal year. 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.
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".
SOUTH CAROLINA INVESTMENT RISKS
The State of South Carolina has an economy dominated from the early 1920's to
the present by the textile industry, with over one of every three manufacturing
workers directly or indirectly related to the textile industry. However, since
1950 the economic bases of the State have become more diversified, as the trade
and service sectors and durable goods manufacturing industries have developed.
Currently, Moody's Investors Service, Inc. ("Moody's") rates South Carolina
general obligation bonds "Aaa" and Standard & Poor's Corporation ("S&P") rates
such bonds "AA+." There can be no assurance that the economic conditions on
which those ratings are based will continue or that particular bond issues may
not be adversely affected by changes in economic or political conditions.
The South Carolina State Constitution mandates a balanced budget. If a deficit
occurs, the General Assembly must account for it in the succeeding fiscal year.
In addition, if a deficit appears likely, the State Budget and Control Board
(the "State Board") may reduce appropriations during the current fiscal year as
necessary to prevent the deficit. The State Constitution limits annual increases
in State appropriations to the average growth rate of the economy of the State
and annual increases in the number of State employees to the average growth of
the population of the State.
The State Constitution requires a General Reserve Fund ("General Fund") that
equals three percent of General Fund revenue for the latest fiscal year. When
deficits have occurred, the State has funded them out of the General Fund. The
State Constitution also requires a Capital Reserve Fund ("Capital Fund") equal
to two percent of General Fund revenue. Before March 1st of each year, the
Capital Fund must be used to offset mid-year budget reductions before mandating
cuts in operating appropriations, and after March 1st, the Capital Fund may be
appropriated by a special vote of the General Assembly to finance previously
authorized capital improvement bond projects, to retire bond principal or pay
interest on bonds previously issued, and to pay for capital improvements or
other nonrecurring purposes. Monies in the Capital Fund not appropriated or any
appropriation for a particular project or item that has been reduced due to
application of the monies to a year-end deficit must go back to the General
Fund.
Several lawsuits have been filed against the State, asserting that the decision
in Davis v. Michigan Department of Treasury, 489 U.S. 803 (1989), invalidates
the State's tax treatment of federal retirement benefits for years before 1989.
Under the State's applicable statute of limitation, the State estimates that its
maximum potential liability under those suits is approximately $200 million. The
plaintiffs in those suits, however, may request funds for periods that the State
believes are closed under the applicable statute of limitation, and those refund
requests, if ultimately granted, could result in liability for the State in
excess of the amounts indicated above. Any such liability would be predicated on
a holding by a State court or the United States Supreme Court that the Davis
decision is applicable to the State's prior method of taxing federal retirement
benefits and that the Davis decision is to be given retroactive effect.
The effects of the most recent military base-closing and consolidation
legislation will be pronounced for several sections of South Carolina, most
particularly in the Charleston area, where the cutbacks were large and
represented a not insignificant percentage of total economic activity. Another
round of military base-closings is scheduled for 1995, which may further impact
South Carolina.
The Fund's concentration in securities issued by the State or its subdivisions
provides a greater level of risk than an investment company which is diversified
across a larger geographic area. For example, the passage of the North American
Free Trade Agreement could result in increased competition for the State's
textile industry due to the availability of less-expensive foreign labor.
Presently, South Carolina subjects bonds issued by other states to its income
tax. If this tax was declared unconstitutional, the value of bonds in the Fund
could decline a small but measurable amount. Also, the Fund could become
slightly less attractive to potential future investors.
The Fund's investment adviser believes that the information summarized above
describes some of the more significant matters relating to the Fund. The sources
of the information are the official statements of issuers located in South
Carolina, other publicly available documents, and oral statements from various
State agencies. The Fund's investment adviser has not independently verified any
of the information contained in the official statement, other publicly available
documents, or oral statements from various State agencies.
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 Vice President, Federated Administrative Services; Director, Private
and Assistant Label Management, Federated Investors; Vice President and Assistant
Treasurer 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 effective.
As of February 4, 1994, the following shareholders of record owned 5% or more of
the outstanding Class B Investment Shares of the Fund: First Union Brokerage
Services & Co. ("FUBS"), for the exclusive benefit of Robert Allen Jones and
Larry Allen Jones of Florence, South Carolina, owned approximately 2,402 Shares
(60.49%); and FUBS, for the exclusive benefit of Doris G. Foster and John H.
Foster of Greenville, South Carolina, owned approximately 1,493 Shares (37.59%).
As of February 4, 1994, the following shareholders of record owned 5% or more of
the outstanding Class C Investment Shares of the Fund: FUBS, for the exclusive
benefit of Patricia B. Stokes of Florence, South Carolina, owned approximately
3,003 Shares (5.79%); FUBS, for the exclusive benefit of James M. Inabinette and
Lena C. Inabinette of West Columbia, South Carolina, owned approximately 7,200
Shares (13.88%); FUBS, for the exclusive benefit of Mollie L. Fogle of
Orangeburg, South Carolina, owned approximately 6,199 Shares (11.95%); FUBS, for
the exclusive benefit of Jimmie D. Evans of Cayce, South Carolina, owned
approximately 3,999 Shares (7.71%); FUBS, for the exclusive benefit of Betty C.
Gonzalez of Columbia, South Carolina, owned approximately 2,650 Shares (5.11%);
FUBS, for the exclusive benefit of Dorothy H. Campbell of Greenville, South
Carolina, owned approximately 2,784 Shares (5.37%); FUBS, for the exclusive
benefit of James R. Lingle and Elizabeth W. Lingle of Florence, South Carolina,
owned approximately 4,972 Shares (9.58%); and FUBS, for the exclusive benefit of
John Edgar Lockman Senior Trust, Dianne Lockman Price, Trustee, of Liberty,
South Carolina, owned approximately 4,469 Shares (8.61%).
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that a Trustee shall 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 respective prospectus.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1-1/2% per
year of the remaining average net assets, the Adviser will 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
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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
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Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
respective prospectus.
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 Shares is explained in the respective
prospectus under "How to Buy Shares."
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Class B Investment
Shares through:
quantity discounts and accumulated purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
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.
LETTER OF INTENT
If a shareholder intends to purchase at least $100,000 of Shares in the
Fund over the next 13 months, the sales charge may be reduced by signing
a letter of intent to that effect. This letter of intent includes a
provision for a sales charge adjustment depending on the amount actually
purchased within the 13-month period and a provision for the custodian to
hold up to 4.0% of the total amount intended to be purchased in escrow
(in Shares) until such purchase is completed.
The amount held in escrow will be applied to the shareholder's account at
the end of the 13-month period, unless the amount specified in the letter
of intent is not purchased. In this event, an appropriate number of
escrowed Shares may be redeemed in order to realize the difference in the
sales charge.
This letter of intent will not obligate the shareholder to purchase
Shares, but if the shareholder does, each purchase during the period will
be at the sales charge applicable to the total amount intended to be
purchased. This letter may be dated as of a prior date to include any
purchases made within the past 90 days.
REINVESTMENT PRIVILEGE
If Shares in the Fund have been redeemed, the shareholder has a one-time
right, within 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 First
Union 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 First Union Funds with a sales charge, and
$70,000 in Shares of the 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 PLANS (CLASS B AND CLASS C INVESTMENT SHARES)
With respect to the Class B and Class C Investment Shares classes of the Fund,
the Trust has adopted distribution plans (the "Plans") pursuant to Rule 12b-1
which was promulgated by the SEC pursuant to the Investment Company Act of 1940.
The Plans permit the payment of fees to brokers for distribution and
administrative services and to administrators for administrative services as to
Class B and Class C Investment Shares. The
Plans are designed to (i) stimulate brokers to provide distribution and
administrative support services to the Fund and holders of Class B and Class C
Investment Shares and (ii) stimulate administrators to render administrative
support services to the Fund and holders of Class B and Class C Investment
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 Class B and Class C Investment Shares; assisting clients in changing
dividend options, account designations, and addresses; and providing such other
services as the Fund reasonably requests for its Class B and Class C Investment
Shares.
By adopting the Plans, 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 Plans 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.
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 Plans 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 the net
asset values of Shares are calculated by the Fund are described in the
respective prospectus.
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.
USE OF AMORTIZED COST
The Trustees have decided that the fair value of debt securities authorized to
be purchased by the Fund with remaining maturities of 60 days or less at the
time of purchase shall be their amortized cost value, unless the particular
circumstances of the security indicate otherwise. Under this method, portfolio
instruments and assets are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at current
market value. The Trustees periodically assess this method of valuation and
recommend changes where necessary to assure that the Fund's portfolio
instruments are valued at their fair value as determined in good faith by the
Trustees.
VALUING OPTIONS
Over-the-counter put options will be valued at the mean between the bid and the
asked prices. Covered call options will be valued at the last sale price on the
national exchange on which such option is traded. Unlisted call options will be
valued at the latest bid price as provided by brokers.
REDEEMING SHARES
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The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request, plus a contingent deferred sales charge, if
applicable. 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 respective prospectus
under "How to Redeem 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.
SHAREHOLDERS' TAX STATUS
No portion of any income dividend paid by the Fund is eligible for the dividends
received deductions available to corporations.
CAPITAL GAINS
Capital gains or losses may be realized by the Fund on the sale of
portfolio securities and as a result of discounts from par value on
securities held to maturity. Sales would generally be made because of:
the availability of higher relative yields;
differentials in market values;
new investment opportunities;
changes in creditworthiness of an issuer; or
an attempt to preserve gains or limit losses.
Distribution of long-term capital gains are taxed as such, whether they
are taken in cash or reinvested, and regardless of the length of time the
shareholder has owned the Shares.
TOTAL RETURN
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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.
YIELD
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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 any class of
shares over a thirty-day period by the maximum offering price per share of any
class on the last day of the period. This value is then annualized using
semi-annual compounding. This means that the amount of income generated during
the thirty-day period is assumed to be generated each month over a twelve-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by any 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 broker/dealers charge fees in
connection with services provided in conjunction with an investment in any class
of Shares, the performance will be reduced for those shareholders paying those
fees.
TAX EQUIVALENT YIELD
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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 that income is 100% tax-
exempt.
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 STATE OF SOUTH CAROLINA
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<CAPTION>
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
<S> <C> <C> <C> <C> <C>
22.00% 35.00% 38.00% 43.00% 46.60%
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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
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<CAPTION>
TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT
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<S> <C> <C> <C> <C> <C>
2.50% 3.21% 3.85% 4.03% 4.39% 4.68%
3.00 3.85 4.62 4.84 5.26 5.62
3.50 4.49 5.38 5.65 6.14 6.55
4.00 5.13 6.15 6.45 7.02 7.49
4.50 5.77 6.92 7.26 7.89 8.43
5.00 6.41 7.69 8.06 8.77 9.36
5.50 7.05 8.46 8.87 9.65 10.30
6.00 7.69 9.23 9.68 10.53 11.24
6.50 8.33 10.00 10.48 11.40 12.17
7.00 8.97 10.77 11.29 12.28 13.11
</TABLE>
Note: The maximum marginal tax rate for each bracket was used in calculating the
taxable yield equivalent. Furthermore, additional state and local taxes
paid on comparable taxable investments were not used to increase federal
deductions.
The 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's 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 capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time. 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 SOUTH CAROLINA MUNICIPAL BOND INDEX is a total return performance
benchmark for the South Carolina long-term, investment grade, tax-exempt bond
market. Returns and attributes for this index are calculated semi-monthly using
municipal bonds classified as General Obligation Bonds (state and local),
Revenue Bonds (excluding insured revenue bonds), Insured Bonds (includes all
bond insurers with Aaa/AAA ratings), and Prerefunded Bonds.
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.
APPENDIX
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STANDARD & POOR'S CORPORATION MUNICIPAL 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 effect of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
MOODY'S INVESTORS SERVICE, INC. MUNICIPAL 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 some time in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
3092402B (2/94)
- --------------------- FIRST UNION ---------------------
- --------------------- INTERNATIONAL ---------------------
FUNDS
Portfolios of First Union Funds
TRUST SHARES
- --------------------------------------------------------------------------------
P R O S P E C T U S
September , 1994
First Union Funds (the "Trust") is a mutual fund with 17 portfolios, offering a
variety of investment opportunities. The Trust currently includes two
diversified International Funds, seven diversified Equity and Income Funds,
three diversified Money Market Funds, and five non-diversified Single State
Municipal Bond Funds. They are:
International Funds
. First Union Emerging Markets Growth Portfolio; and
. First Union International Equity Portfolio.
Equity and Income Funds
. First Union Balanced Portfolio;
. First Union Fixed Income Portfolio;
. First Union High Grade Tax Free Portfolio (formerly, First Union Insured Tax
Free Portfolio);
. First Union Managed Bond Portfolio;
. First Union U.S. Government Portfolio;
. First Union Utility Portfolio; and
. First Union Value Portfolio.
Money Market Funds
. First Union Money Market Portfolio;
. First Union Tax Free Money Market Portfolio; and
. First Union Treasury Money Market Portfolio.
Single State Municipal Bond Funds
. First Union Florida Municipal Bond Portfolio;
. First Union Georgia Municipal Bond Portfolio;
. First Union North Carolina Municipal Bond Portfolio;
. First Union South Carolina Municipal Bond Portfolio; and
. First Union Virginia Municipal Bond Portfolio.
This prospectus provides you with information specific to the Trust Shares of
First Union International Funds. It concisely describes the information which
you should know before investing in Trust Shares of any of the First Union
International Funds. Please read this prospectus carefully and keep it for
future reference.
You can find more detailed information about each First Union International
Fund in the Combined Statement of Additional Information, dated September ,
1994, filed with the Securities and Exchange Commission and incorporated by
reference into this prospectus. The Statement is available free of charge by
writing to First Union Funds, Federated Investors Tower, Pittsburgh, PA 15222-
3779 or by calling 1-800-326-2584.
The Trust is sponsored and distributed by third parties independent of First
Union National Bank of North Carolina ("First Union"). 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
Union, are not endorsed or guaranteed by First Union, and are not insured by
the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other government agency. Investment in these shares involves investment risks,
including the possible loss of principal.
- --------------------------------------------------------------------------------
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.
- ---------------------------------- TABLE OF ---------------------------------
- ---------------------------------- CONTENTS ---------------------------------
Summary 2 How to Redeem Shares 15
- ------------------------------------- -------------------------------------
Summary of Fund Expenses 4 Management of First Union Funds 16
- ------------------------------------- -------------------------------------
Investment Objectives and Policies 5 Fees and Expenses 18
- ------------------------------------- -------------------------------------
First Union Emerging Markets Growth Shareholder Rights and Privileges 20
Portfolio 5 -------------------------------------
- -------------------------------------
Distributions and Taxes 22
First Union International Equity -------------------------------------
Portfolio 6
- ------------------------------------- Tax Information 22
-------------------------------------
Types of Investments 6
- ------------------------------------- Other Classes of Shares 23
-------------------------------------
Other Investment Policies 7
- ------------------------------------- Addresses Inside Back Cover
-------------------------------------
Shareholder Guide 12
- -------------------------------------
How to Buy Shares 13
- -------------------------------------
How to Convert Your Investment from
One First Union Fund to Another
First Union Fund 14
- -------------------------------------
- ------------------------ SUMMARY ------------------------
- ------------------------ ------------------------
DESCRIPTION OF THE TRUST
First Union Funds 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 17 portfolios, each representing a
different First Union Fund. Each International Fund is divided into four
classes of shares: Class B Investment Shares ("Class B Shares"), Class C
Investment Shares ("Class C Shares"), Class D Investment Shares ("Class D
Shares") and Trust Shares. Trust Shares are designed primarily for
institutional investors (banks, corporations, and fiduciaries). Class B, Class
C, and Class D Shares are sold to individuals and other customers of First
Union (the "Adviser"). This prospectus relates only to Trust Shares ("Shares")
of First Union International Funds (collectively, the "Funds").
THE FUNDS AND OBJECTIVES
As of the date of this prospectus, Shares are offered in the following two
Funds:
. First Union Emerging Markets Growth Portfolio ("Emerging Markets Growth
Fund")--seeks to produce long-term capital appreciation The Emerging Markets
Growth Fund invests in equity securities of emerging Market issuers; and
. First Union International Equity Portfolio ("International Equity Fund")--
seeks to provide long-term capital appreciation. The International Equity
Fund invests in equity securities of Non-U.S. issuers.
INVESTMENT MANAGEMENT
The Funds are advised by First Union, through its Capital Management Group.
First Union has responsibility for investment research and supervision of the
Funds, in addition to the purchase or sale of portfolio instruments, for which
it receives an annual fee. The Emerging Markets Growth Fund and the
International Equity Fund are sub-advised by Marvin & Palmer Associates, Inc.
("Marvin & Palmer") and Boston International Advisors, Inc. ("Boston
International"), respectively.
PURCHASING AND REDEEMING SHARES
For information on purchasing Trust Shares of the Funds, please refer to the
Shareholder Guide section entitled "How to Buy Shares." Redemption information
may be found under "How to Redeem Shares."
RISK FACTORS
Investors should be aware of the following general observations: The foreign
securities in which the Funds may invest may be subject to certain risks in
addition to those inherent in U.S. investments. The Funds may make certain
investments and employ certain investment techniques that involve other risks,
including entering into repurchase agreements, investing in when-issued
securities, lending portfolio securities and entering into futures contracts
and related options as hedges. These risks are described under "Investment
Objectives and Policies" for each Fund and "Other Investment Policies."
- ------------------------ SUMMARY OF ------------------------
- ------------------------ FUND EXPENSES ------------------------
FIRST UNION INTERNATIONAL FUNDS TRUST SHARES
<TABLE>
<CAPTION>
Emerging International
Markets Growth Equity
Fund Fund
-------------- -------------
Trust Shares--Shareholder Transaction Expenses
<S> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).............. None None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price).............. None None
Contingent Deferred Sales Charge (as a percentage
of original purchase price or
redemption proceeds, as applicable).............. None None
Redemption Fee (as a percentage of amount
redeemed, if applicable)......................... None None
Exchange Fee...................................... None None
Annual Trust Shares Operating Expenses*
(As a percentage of projected average net assets)
Management Fee (after waiver) (1)................. % %
12b-1 Fees........................................ None None
Total Other Expenses (after waiver) (2)........... % %
Total Trust Shares Operating Expenses (3)....... % %
</TABLE>
(1) The management fees of Emerging Markets Growth and International Equity
Funds have been reduced to reflect the voluntary waivers by the Adviser. The
Adviser may terminate these voluntary waivers at any time at its sole
discretion. The maximum management fees for Emerging Markets Growth and
International Equity Funds are 1.50% and 0.82%, respectively.
(2) Total Other Expenses for Emerging Markets Growth and International Equity
Funds are estimated to be % and %, respectively, absent the anticipated
voluntary waiver by the administrator. The administrator may terminate these
voluntary waivers at any time at its sole discretion.
(3) Total Trust Shares Operating Expenses for Emerging Markets Growth and
International Equity Funds are estimated to be % and %, respectively,
absent the voluntary waivers described above in notes 1 and 2.
* Expenses in this table are estimated based on average expenses expected to
be incurred during the fiscal year ending December 31, 1994. During the course
of this period, expenses may be more or less than the average amount shown.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the Funds 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.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
- ------- ------ -------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, as-
suming
(1) a 5% annual return and (2) redemption at the end of each
time period.
The Funds charge no redemption fees for Trust Shares.
Emerging Markets Growth Fund.................................. $-- $--
International Equity Fund..................................... $-- $--
</TABLE>
The above example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown. This
example is based on estimated data for the fiscal year ending December 31,
1994.
The information set forth in the foregoing table and example relates only to
Trust Shares of the Funds. The Funds also offer three additional classes of
shares called Class B Shares, Class C Shares, and Class D Shares. In general,
all expenses are allocated based upon daily net assets of each class Class B
Shares, Class C Shares, and Class D Shares are subject to certain of the same
expenses as Trust Shares. However, Class B Shares are subject to a 12b-1 fee
of 0.25 of 1% and Class C Shares and Class D Shares are subject to a 12b-1 fee
of 0.75 of 1% and a shareholder service fee of 0.25 of 1%. In addition, Class
B Shares bear a maximum front-end sales charge of 4.75%, Class C Shares bear a
maximum contingent deferred sales charge of 5.00% and Class D Shares bear a
maximum contingent deferred sales charge of 1.00%. See "Other Classes of
Shares."
- ------------------------- INVESTMENT -------------------------
- ------------------------- OBJECTIVES -------------------------
AND POLICIES
First Union International Funds offer investors the opportunity to invest in
international equity securities of developed and emerging market issuers.
The investment objectives and policies of both Funds are stated below. Each
Fund's investment objective cannot be changed without shareholder approval.
While there is no assurance that each objective will be achieved, the Funds
will endeavor to do so by following the investment policies detailed below.
Unless otherwise indicated, the investment policies of a Fund 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.
- ------------------------- FIRST UNION -------------------------
- ------------------------- EMERGING MARKETS -------------------------
GROWTH PORTFOLIO
Objective: Long-term capital appreciation.
Invests in: Equity securities of emerging market issuers.
Suitable for: Aggressive investors interested in the investment opportunities
offered by securities in emerging markets.
Key Benefit: Provides potential for growth opportunities by investing in
emerging markets experiencing political change, economic
deregulation and liberalized trade policies.
DESCRIPTION OF THE FUND
The Fund seeks long-term capital appreciation. The Fund invests primarily in a
diversified portfolio of equity securities of issuers located in countries with
emerging markets. As a matter of policy, the Fund will invest at least 65% of
the value of its total assets in securities of emerging market issuers.
A country will be considered to have an "emerging market" if it has relatively
low gross national product per capita compared to the world's major economies
and the potential for rapid economic growth. Countries with emerging markets
include those that have an emerging stock market (as defined by the
International Finance Corporation), those with low- to middle-income economies
(according to the World Bank), and those listed in World Bank publications as
"developing". The Fund will normally invest in at least six different
countries, although it may invest all of its assets in a single country. The
Fund focuses on equity securities, but may also invest in other types of
instruments, including debt securities.
- ------------------------- FIRST UNION -------------------------
- ------------------------- INTERNATIONAL -------------------------
EQUITY PORTFOLIO
Objective: Long-term capital appreciation.
Invests in: Equity securities of non-U.S. issuers.
Suitable for: Investors who want to pursue their investment goals in markets
outside the United States.
Key Benefit: Provides potential for investment opportunities in countries
outside the U.S. due to differing economic and political cycles.
DESCRIPTION OF THE FUND
The Fund seeks long-term capital appreciation. The Fund invests primarily in
foreign equity securities that the Adviser and Boston International, the Sub-
Adviser to the Fund, determine, through both fundamental and technical
analysis, to be undervalued compared to other securities in their industries
and countries. In most market conditions, the stocks comprising the Fund's
assets will exhibit traditional value characteristics, such as higher than
average dividend yields, lower than average price to book value, and will
include stocks of companies with unrecognized or undervalued assets. As a
matter of policy, the Fund will invest at least 65% of the value of its total
assets in equity securities of issuers located in at least three countries
outside of the United States.
The Fund will emphasize value stocks, primarily of companies which are listed
on one or more of thirty-two stock markets: twenty developed markets and twelve
emerging markets. The Fund will invest substantially in industrialized
companies throughout the world that comprise the Morgan Stanley Capital
International EAFE (Europe, Australia and the Far East) Index. In addition, the
Fund intends to invest up to 10% of its assets in emerging country equity
securities, as described above under "First Union Emerging Markets Growth
Portfolio--Description of the Fund."
- ------------------------- TYPES -------------------------
- ------------------------- OF -------------------------
INVESTMENTS
The Funds primarily invest in:
common and preferred stocks, convertible securities and warrants of foreign
corporations. Common stocks represent an equity interest in a corporation.
This ownership interest often gives the Funds the right to vote on measures
affecting the company's organization and operations. Although common stocks
have a history of long-term growth in value, their prices tend to fluctuate
in the short term, particularly those of smaller companies;
obligations of foreign governments and supranational organizations;
corporate and foreign government fixed income securities denominated in
currencies other than U.S. dollars, rated, at the time of purchase, Baa or
higher by Moody's Investors Service, Inc. ("Moody's") or BBB or higher by
Standard & Poor's Corporation ("S&P"), or which, if unrated, are considered
to be of comparable quality by the Sub-Advisers. Bonds rated Baa by Moody's
or BBB by S&P have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to weakened
capacity to make principal and interest payments than higher rated bonds;
strategic investments, such as options and futures contracts on currency
transactions, securities index futures contracts, and forward foreign
currency exchange contracts. The Funds can use these techniques
to increase or decrease their exposure to changing security prices,
interest rates, currency exchange rates, or other factors that affect
security values;
securities of closed-end investment companies; and
repurchase agreements collateralized by eligible investments.
- ------------------------- OTHER -------------------------
- ------------------------- INVESTMENT -------------------------
POLICIES
The Funds have adopted the following practices for specific types of
investments.
REPURCHASE AGREEMENTS
The Funds may invest in repurchase agreements. Repurchase agreements are
agreements by which a Fund purchases a security 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 or Sub-Advisers will monitor
the creditworthiness of the firms with which the Funds enter into repurchase
agreements.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Funds may purchase portfolio securities on a when-issued or delayed
delivery basis. In such cases, a 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 the securities and risks missing an advantageous price or yield if the
seller does not deliver the security as promised.
FOREIGN CURRENCY TRANSACTIONS
The Funds will enter into foreign currency transactions to obtain the necessary
currencies to settle securities transactions. Currency transactions may be
conducted either on a spot or cash basis at prevailing rates or through forward
foreign currency exchange contracts.
The Funds may also enter into foreign currency transactions to protect Fund
assets against adverse changes in foreign currency exchange rates or exchange
control regulations. Such changes could unfavorably affect the value of Fund
assets which are denominated in foreign currencies, such as foreign securities
or funds deposited in foreign banks, as measured in U.S. dollars. Although
foreign currency exchanges may be used by a Fund to protect against a decline
in the value of one or more currencies, such efforts may also limit any
potential gain that might result from a relative increase in the value of such
currencies and might, in certain cases, result in losses to the Fund.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A forward foreign currency exchange contract ("forward contract") is an
obligation to purchase or sell an amount of a particular currency at a specific
price and on a future date agreed upon by the parties.
Generally, no commission charges or deposits are involved. At the time a Fund
enters into a forward contract, Fund assets with a value equal to the Fund's
obligation under the forward contract are segregated and are maintained until
the contract has been settled. The Funds will not enter into a forward contract
with a term of more than one year. The Funds will generally enter into a
forward contract to provide the proper currency to settle a securities
transaction at the time the transaction occurs ("trade date"). The period
between trade date and settlement date will vary between 24 hours and 60 days,
depending upon local custom.
The Funds may also protect against the decline of a particular foreign currency
by entering into a forward contract to sell an amount of that currency
approximating the value of all or a portion of the Fund's assets denominated in
that currency ("hedging"). The success of this type of short-term hedging
strategy is highly uncertain due to the difficulties of predicting short-term
currency market movements and of precisely matching forward contract amounts
and the constantly changing value of the securities involved. Although the
Adviser or each Sub-Adviser will consider the likelihood of changes in currency
values when making investment decisions, the Adviser or each Sub-Adviser
believes that it is important to be able to enter into forward contracts when
it believes the interests of a Fund will be served. The Funds will not enter
into forward contracts for hedging purposes in a particular currency in an
amount in excess of the Fund's assets denominated in that currency.
OPTIONS AND FUTURES
The Funds may deal in options on foreign currencies, and securities indices,
which options may be listed for trading on an international securities
exchange. The Funds will use these options to manage interest rate and currency
risks. The Funds also may write covered call options and secured put options to
generate income or to lock in gains. Each Fund may write covered call options
and secured put options on up to 25% of its net assets and may purchase put and
call options provided that no more than 5% of the fair market value of its net
assets may be invested in premiums on such options.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying asset at the exercise price during the
option period. A put option gives the purchaser the right to sell, and the
writer the obligation to buy, the underlying asset at the exercise price during
the option period. The writer of a covered call owns assets that are acceptable
for escrow and the writer of a secured put invests an amount not less than the
exercise price in eligible assets to the extent that it is obligated as a
writer. If a call written by a Fund is exercised, the Fund forgoes any possible
profit from an increase in the market price of the underlying asset over the
exercise price plus the premium received. In writing puts, there is a risk that
a Fund may be required to take delivery of the underlying asset at a
disadvantageous price.
The Funds may enter into futures contracts involving foreign currency and
securities indices, or options on currency, for bona fide hedging purposes. The
Funds may also enter into such futures contracts or related options for
purposes other than bona fide hedging if the aggregate amount of initial margin
deposits on a Fund's futures and related options positions would not exceed 5%
of the net liquidation value of the Fund's assets, provided further that in the
case of an option that is in-the-money at the time of the purchase, the in-the-
money amount may be excluded in calculating the 5% limitation. In addition, a
Fund may not sell futures contracts if the value of such futures contracts
exceeds the total market value of the Fund's portfolio securities. Futures
contracts sold by a Fund are generally subject to segregation and coverage
requirements established by either the Commodity Futures Trading Commission
("CFTC") or the Securities and Exchange Commission ("SEC"), with the result
that, if a Fund does not hold the instrument underlying the futures contract or
option, the Fund will be required to segregate, on an ongoing basis with its
custodian, cash, U.S. government securities, or other liquid high grade debt
obligations in an amount at least equal to the Fund's obligations with respect
to such instruments.
The Funds may enter into securities index futures contracts and purchase and
write put and call options on securities index futures contracts that are
traded on regulated exchanges, including non-U.S. exchanges to the extent
permitted by the CFTC. Securities index futures contracts are based on indices
that reflect the market value of securities of the firms included in the
indices. An index futures contract is an agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to the
differences between the value of the index at the close of the last trading day
of the contract and the price at which the index contract was originally
written.
The Funds may enter into securities index futures contracts to sell a
securities index in anticipation of or during a market decline to attempt to
offset the decrease in market value of securities in its portfolio that might
otherwise result. When a Fund is not fully invested and anticipates a
significant market advance, it may enter into futures contracts to purchase the
index in order to gain rapid market exposure that may in part or entirely
offset increases in the cost of securities that it intends to purchase. In many
of these transactions, a Fund will purchase such securities upon termination of
the futures position but, depending on market conditions, a futures position
may be terminated without the corresponding purchases of common stock. A Fund
may also invest in securities index futures contracts when its Adviser or Sub-
Adviser believes such investment is more efficient, liquid or cost-effective
than investing directly in the securities underlying the index.
The use of futures and related options involves special considerations and
risks, including: (1) the ability of a Fund to utilize futures successfully
will depend on its Adviser's or Sub-Adviser's ability to predict pertinent
market movements; and (2) there might be an imperfect correlation (or
conceivably no correlation) between the change in the market value of the
securities held by a Fund and the prices of the futures relating to the
securities purchased or sold by the Fund. The use of futures and related
options may reduce risk of loss by wholly or partially offsetting the negative
effect of unfavorable price movements, but these instruments can also reduce
the opportunity for gain by offsetting the positive effect of favorable price
movements in positions. No assurance can be given that a Sub-Adviser's judgment
in this respect will be correct.
It is not certain that a secondary market for positions in futures contracts or
for options will exist at all times. Although the Adviser or each Sub-Adviser
will consider liquidity before entering into these transactions, there is no
assurance that a liquid secondary market on an exchange or otherwise will exist
for any particular futures contract or option at any particular time. A Fund's
ability to establish and close out futures and options positions depends on
this secondary market.
RISK CHARACTERISTICS OF FOREIGN SECURITIES
Investing in non-U.S. securities carries substantial risks in addition to those
associated with domestic investments. In an attempt to reduce some of these
risks, the Funds diversify their investments broadly among foreign countries
which may include both developed and developing countries. With respect to the
International Equity Fund, at least three different countries will always be
represented.
The Funds may take advantage of the unusual opportunities for higher returns
available from investing in developing countries. As discussed in detail in the
Statement of Additional Information, however, these investments carry
considerably more volatility and risk because they generally are associated
with less mature economies and less stable political systems.
Foreign securities are denominated in foreign currencies. Therefore, the value
in U.S. dollars of a Fund's assets and income may be affected by changes in
exchange rates and regulations. Although the Funds value their assets daily in
U.S. dollars, they will not convert their holdings of foreign currencies to
U.S. dollars daily. When a Fund converts its holdings to another currency, it
may incur conversion costs. Foreign exchange dealers realize a profit on the
difference between the prices at which such dealers buy and sell securities.
Other differences between investing in foreign and U.S. companies include: less
publicly available information about foreign companies; the lack of uniform
financial accounting standards applicable to foreign companies; less readily
available market quotations on foreign companies; differences in government
regulation and supervision of foreign stock exchanges, brokers, listed
companies, and banks; differences in legal systems which may affect the ability
to enforce contractual obligations or obtain court judgments; generally lower
foreign stock market volume; the likelihood that foreign securities may be less
liquid or more volatile; foreign brokerage commissions may be higher;
unreliable mail service between countries; and political or financial changes
which adversely affect investments in some countries.
In the past, U.S. government policies have discouraged or restricted certain
investments abroad by investors such as the Funds. Although the Funds are
unaware of any current restrictions, investors are advised that these policies
could be reinstituted.
TEMPORARY INVESTMENTS
The Funds may invest in U.S. and foreign short-term money market instruments
[denominated in U.S. and/or foreign currencies], including interest-bearing
call deposits with banks, government obligations, certificates of deposit,
bankers' acceptances, commercial paper, short-term corporate debt securities,
and repurchase agreements. These investments may be used to temporarily invest
cash received from the sale of Fund shares, to establish and maintain reserves
for temporary defensive purposes, or to take advantage of market opportunities.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Funds may invest up to 10% of their total assets in the securities of
closed-end investment companies, including regional or single-country funds. To
the extent that the Funds invest in securities issued by other investment
companies, the Funds will indirectly bear their proportionate share of any fees
and expenses paid by such companies, in addition to the fees and expenses
payable directly by the Funds.
RESTRICTED AND ILLIQUID SECURITIES
The Funds may not invest more than 5% of their total assets in securities which
are subject to restrictions on resale under federal securities law, except for
restricted securities which meet the criteria for liquidity as established by
the Trustees.
The Funds may invest up to 15% of their net assets in illiquid securities.
Illiquid securities include certain restricted securities not determined by the
Trustees to be liquid, non-negotiable time deposits, and repurchase agreements
providing for settlement in more than seven days after notice.
The following investment limitations cannot be changed without shareholder
approval.
BORROWING MONEY
The Funds will not borrow money directly or through reverse repurchase
agreements or pledge securities, except under certain circumstances, a 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.
DIVERSIFICATION
With respect to 75% of the value of its total assets, neither Fund may invest
more than 5% of its total assets in the securities of one issuer (except cash
or cash items, repurchase agreements collateralized by U.S. government
securities and U.S. government obligations) or own more than 10% of the
outstanding voting securities of one issuer.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Funds may lend portfolio securities
on a short-term or long-term basis to broker/dealers, banks, or other
institutional borrowers of securities. The Funds 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. Each Fund will not lend any of its assets
except portfolio securities up to one-third of the value of its total assets.
DOWNGRADES
If any security purchased by either of the Funds 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 may consider doing so.
- ------------------------- SHAREHOLDER -------------------------
- ------------------------- GUIDE -------------------------
SHARE PRICE CALCULATION
In the case of no-load Funds, the net asset value (NAV), the market price and
the offering price of Shares are all the same.
Purchases, redemptions, and exchanges are made at net asset value. 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 a
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 a Fund may differ slightly from that of
Class B Shares, Class C Shares and Class D Shares of the same Fund due to the
variability in daily net income resulting from different distribution charges
and shareholder services fees (in the case of Class C Shares and Class D
Shares) for each class of Shares. The net asset value for each Fund will
fluctuate for all four classes.
PERFORMANCE INFORMATION
A Fund's performance may be quoted in terms of total return or yield.
Performance information is historical and is not intended to indicate future
results.
From time to time, the Funds may make available certain information about the
performance of Trust Shares. It is generally reported using total return and
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 yields of Trust Shares are 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 yield does not necessarily
reflect income actually earned by Trust Shares of the Funds and, therefore, may
not correlate to the dividends or other distributions paid to shareholders.
Total return and yield will be calculated separately for Trust Shares, Class B
Shares, Class C Shares and Class D Shares of a Fund. Because Class B Shares are
subject to 12b-1 fees, and Class C Shares and Class D Shares are subject to a
12b-1 fee and a shareholder services fee, the yield will be lower than that of
Trust Shares. The sales load applicable to Class B Shares also contributes to a
lower total return for Class B Shares. In addition, Class C Shares and Class D
Shares are subject to similar non-recurring charges, such as the contingent
deferred sales charge ("CDSC"), which, if excluded, would increase the total
return for Class C Shares and Class D Shares, respectively.
From time to time, a Fund may advertise its performance using certain rankings
published in financial publications and/or compare its performance to certain
indices.
- ------------------------- HOW TO -------------------------
- ------------------------- BUY SHARES -------------------------
Shares may be purchased at a price equal to their net asset value per Share
next determined after receipt of an order.
MINIMUM INVESTMENT
You may invest as often as you want in any of the Funds. There are no sales
charges imposed on Trust Shares of the Funds. However, there is a $1,000
minimum initial investment requirement which may be waived incertain
situations. For further information, please contact the Capital Management
Group of First Union at1-800-326-2584. Subsequent investments may be in any
amounts.
BY TELEPHONE
You may purchase Trust Shares by telephone from the Capital Management Group of
First Union at 1-800-326-2584. (Texas residents should directly contact the
Mutual Funds Group of First Union Brokerage Services, Inc. at 1-800-326-3241.)
Shares are sold on days on which the New York Stock Exchange and the Federal
Reserve Wire System are open for business.
METHOD OF PAYMENT
Payment may be made by check or federal funds or by debiting your account at
First Union. Purchase orders must be received by 4:00 p.m. (Eastern time).
Payment is required on the next business day.
SHAREHOLDER ACCOUNTS
As transfer agent for the Funds, Federated Services Company of Pittsburgh,
Pennsylvania, with offices in Boston, Massachusetts maintains a Share account
for each shareholder of record. Share certificates are not issued.
MINIMUM BALANCE
Due to the high cost of maintaining smaller holdings, each Fund reserves the
right to redeem a shareholder's Shares if, as a result of redemptions, their
aggregate value drops below $1,000. Reductions in value that result solely from
market activity will not trigger an involuntary redemption. The Funds will
notify shareholders in writing 30 days before taking such action to allow them
to increase their holdings to at least the minimum level.
HOW TO CONVERT
YOUR INVESTMENT
- ------------------------- FROM ONE -------------------------
- ------------------------- FIRST UNION -------------------------
FUND TO ANOTHER
FIRST UNION FUND
As a shareholder, you have the privilege of exchanging your Shares for shares
of another First Union Fund.
As long as the First Union Fund in which you are invested will not be adversely
affected, you may switch among the First Union Funds within the Trust. Before
the exchange, you must call First Union at 1-800-326-2584 to receive a
prospectus for the First Union Fund into which you want to exchange. Read the
prospectus carefully. Each exchange represents the sale of shares of one First
Union Fund and the purchase of shares in another, which may produce a gain or
loss for tax purposes.
You may exchange Trust Shares of one First Union Fund for Trust Shares of any
other First Union Fund by calling toll free 1-800-326-2584 or by writing to
First Union. Telephone exchange instructions may be recorded. Shares purchased
by check are eligible for exchange after the check clears, which could take up
to seven days after receipt of the check. Exchanges are subject to the $1,000
minimum initial purchase requirement for each First Union Fund.
An exchange order must comply with the requirements for a redemption and
purchase order and must specify the dollar value or number of shares to be
exchanged. Once the order is received, the Shares already owned will be
redeemed at current net asset value and, upon receipt of the proceeds by the
First Union Fund, shares of the other First Union Fund will be purchased at
their net asset value determined after the proceeds from such redemption become
available, which may be up to seven days after such redemption. Orders for
exchanges received by a First Union Fund prior to 4:00 p.m. (Eastern time) on
any day the First Union Funds are open for business will be executed as of the
close of business that day. Orders for exchanges received after 4:00 p.m.
(Eastern time) on any business day will be executed at the close of the next
business day.
When exchanging into and out of load and no-load shares of First Union Funds,
shareholders who have already paid a sales charge once at the time of purchase,
including shares obtained through the reinvestment of dividends, will not have
to pay an additional sales charge on an exchange.
If reasonable procedures are not followed by a Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
EXCHANGE RESTRICTIONS
Although the Trust has no intention of terminating or modifying the exchange
privilege, it reserves the right to do so at any time. Excessive trading can
impact the interests of shareholders. Therefore, the Trust reserves the right
to terminate the exchange privilege of any shareholder who makes more than five
exchanges of shares of the First Union Funds in a year or three exchanges in a
calendar quarter.
The exchange privilege is only available in states where shares of the First
Union Fund being acquired may legally be sold. Before the exchange, a
shareholder must receive a prospectus of the First Union Fund for which the
exchange is being made.
- ------------------------- HOW TO -------------------------
- ------------------------- REDEEM SHARES -------------------------
Shares are redeemed at their net asset value next determined after a proper
redemption request has been received, less any fees.
You may redeem Shares in person or by telephoning First Union at 1-800-326-2584
or by written request to First Union. There is no redemption fee charged.
Telephone redemption instructions may be recorded.
The Funds redeem Shares at their net asset value next determined after a Fund
receives the redemption request. Redemptions will be made on days on which a
Fund computes the net asset value of Shares. 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. Proceeds will be wired to the
shareholder's account at First Union or a check will be sent to the address of
record normally within five (but in no case longer than seven) days after a
proper request for redemption has been received.
If reasonable procedures are not followed by a Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
- ------------------------ MANAGEMENT ------------------------
- ------------------------ OF FIRST ------------------------
UNION FUNDS
Responsibility for the overall management of First Union Funds rests with its
Trustees and officers. Other service providers include the Funds' Distributor,
Investment Adviser, Sub-Advisers, Custodian, Transfer Agent, Legal Counsel,
and Independent Auditors.
INVESTMENT ADVISER
Professional investment supervision for the Funds 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 $ billion in total
consolidated assets as of June 30, 1994. 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 $ billion. In addition, the Capital Management Group has
advised the Trust since its inception in 1984.
As part of their regular banking operations, First Union may make loans to
public companies. Thus, it may be possible, from time to time, for the Funds
to hold or acquire the securities of issuers which are also lending clients of
First Union. The leading relationship will not be a factor in the selection of
securities.
William R. Hackney, III, is Senior Vice President and Chief Investment Officer
of the Capital Management Group of First Union National Bank of North
Carolina, N.A. Prior to assuming his current position with First Union, Mr.
Hackney served as Regional Research Director for E.F. Hutton & Company's
Southeast Region. Mr. Hackney has managed the Funds since their inception in
September 1994.
SUB-ADVISERS
Under the terms of the Sub-Advisory Agreements between First Union National
Bank and the respective Sub-Advisers, the Sub-Advisers will be responsible for
managing that portion or all of each Fund's portfolio as designated by the
Adviser, selecting investments for purchase or sale, along with the countries
in which each Fund will invest, and the dealers in these securities in
accordance with each Fund's investment objectives, policies and limitations as
stated herein.
EMERGING MARKETS GROWTH FUND
Marvin & Palmer Associates, Inc. is Sub-Adviser for the Emerging Markets Fund.
Marvin & Palmer, a privately-held company, was founded in 1986 by David F.
Marvin and Stanley Palmer. The stock of Marvin & Palmer is owned by Mr.
Marvin, Mr. Palmer and seventeen other holders. Marvin & Palmer is engaged in
the management of global, non-United States and emerging markets equity
portfolios for institutional accounts. At June 30, 1994, Marvin & Palmer
managed a total of $ billion in investments for 32 institutional investors.
As of June 30, 1994, Marvin & Palmer served as investment Adviser or Sub-
Adviser to other investment company with total assets of $32.6 million.
David F. Marvin is Chairman of the Sub-Adviser and founded the firm together
with Mr. Palmer in 1986. With respect to the Emerging Markets Growth Fund, Mr.
Marvin is primarily responsible for Latin America and currency management, and
has served as co-portfolio manager of the Fund since its inception in September
1994.
Stanley Palmer is President of the Sub-Adviser and a co-founder of the firm.
With respect to the Emerging Markets Growth Fund, Mr. Palmer is primarily
responsible for Southeast Asia and the India subcontinent, and has served as
co-portfolio manager of the Fund since its inception in September 1994.
Terry B. Mason is a Vice President and Portfolio Manager of the Sub-Adviser.
Before joining the Sub-Adviser in 1990, Mr. Mason was employed for 14 years by
DuPont Corporation, the last five as International Equity Analyst and
International Trader. With respect to the Emerging Markets Growth Fund, Mr.
Mason is primarily responsible for Eastern Europe and Africa, and has served as
co-portfolio manager of the Fund since its inception in September 1994.
Jay F. Middleton is a Portfolio Manager for the Sub-Adviser and joined the firm
in 1989. With respect to the Emerging Markets Growth Fund, Mr. Middleton is
primarily responsible for Latin America and the Middle East and has served as
co-portfolio manager of the Fund since its inception in September 1994.
Todd D. Marvin is a Portfolio Manager for the Sub-Adviser and joined the firm
in 1991. Before joining the Sub-Adviser, Mr. Marvin was employed by Oppenheimer
& Company as an Analyst in its investment banking department from 1989 until
1991. With respect to the Emerging Markets Growth Fund, Mr. Marvin is primarily
responsible for Southeast Asia and the India subcontinent, and has served as
co-portfolio manager of the Fund since its inception in September 1994.
INTERNATIONAL EQUITY FUND
Boston International Advisors, Inc. is Sub-Adviser for the International Equity
Fund. Boston International commenced operations in 1986 and specializes in the
management of international equity portfolios. Boston International manages
twenty international portfolios, including five group trust funds, for pensions
and endowment plans throughout the world. Messrs. Lyle H. Davis, Norman H.
Meltz and David A. Umstead, the principal executive officers of Boston
International, each owns more than 25% of the outstanding voting securities of
Boston International. As of June 30, 1994, Boston International managed a total
of $ billion in assets under management. In addition, as of June 30, 1994,
Boston International served as investment adviser or sub-adviser to one other
investment company with total assets of $146.4 million.
Maureen Ghublikian has been a Managing Director of the Sub-Adviser since the
firm's inception in 1986. In 1986, she was promoted to Vice President. Ms.
Ghublikian has served as co-portfolio manager of the Fund since its inception
in September 1994.
David A. Umstead has been a founder and Managing Director of the Sub-Adviser
since the firm's inception in 1986. Mr. Umstead has served as co-portfolio
manager of the Fund since its inception in September 1994.
FUND ADMINISTRATION
Federated Securities Corp., a subsidiary of Federated Investors, is the
principal distributor for the Funds. It is a Pennsylvania corporation organized
on November 14, 1969, and is the principal distributor for a number of
investment companies.
Federated Administrative Services ("FAS"), another subsidiary of Federated
Investors, provides the Funds with administrative personnel and services
necessary to operate the Funds, such as legal and accounting services, for a
specified fee which is detailed below.
State Street Bank and Trust Company ("State Street Bank"), Boston,
Massachusetts, serves as custodian for the securities and cash of the Funds.
Federated Services Company, a subsidiary of Federated Investors, serves as
transfer agent and provides dividend disbursement and other shareholder
services for the Funds.
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 -------------------------
- ------------------------- -------------------------
Each Fund pays annual advisory and administrative fees and certain expenses.
ADVISORY, SUB-ADVISORY, AND ADMINISTRATIVE FEES
For managing their investment and business affairs, the Funds pay an annual fee
to First Union. The Adviser may voluntarily choose to waive a portion of its
fee or reimburse the Funds for certain operating expenses. The Adviser receives
an annual investment advisory fee with respect to the Emerging Markets Growth
Fund and the International Equity Fund, respectively:
Emerging Markets Growth Fund
<TABLE>
<CAPTION>
Average Aggregate
Advisory Fee Daily Net Assets
------------ -----------------
<S> <C>
1.50% on the first $100 million
1.45% on the next $100 million
1.40% on the next $100 million
1.35% on assets in excess of $300 million
</TABLE>
International Equity Fund
<TABLE>
<CAPTION>
Average Aggregate
Advisory Fee Daily Net Assets
------------ -----------------
<S> <C>
.82% on the first $20 million
.79% on the next $30 million
.76% on the next $50 million
.73% on assets in excess of $100 million
</TABLE>
The fees paid by the Emerging Markets Growth Fund and the International Equity
Fund are higher than the advisory fees paid by other mutual funds in general;
however, the fees paid by the International Equity Fund are comparable to fees
paid by many mutual funds with similar objectives and policies.
For its services under the Sub-Advisory Contract, each Sub-Adviser receives a
monthly fee calculated on an annual basis, payable by the Adviser, for its
services and expenses incurred with respect to the Emerging Markets Growth Fund
and the International Equity Fund, respectively:
Emerging Markets Growth Fund--Marvin & Palmer
<TABLE>
<CAPTION>
Average Aggregate
Sub-Advisory Fee Daily Net Assets
---------------- -----------------
<S> <C>
1.00% on the first $100 million
.95% on the next $100 million
.90% on the next $100 million
.85% on assets in excess of $300 million
International Equity Fund--Boston International
<CAPTION>
Average Aggregate
Sub-Advisory Fee Daily Net Assets
---------------- -----------------
<S> <C>
.32% on the first $20 million
.29% on the next $30 million
.26% on the next $50 million
.23% on assets in excess of $100 million
</TABLE>
The Trust also pays a fee for administrative services. FAS provides these at an
annual rate as specified below:
<TABLE>
<CAPTION>
Maximum Average Aggregate Daily
Administrative Fee Net Assets of the Trust
------------------ -----------------------
<S> <C>
.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
</TABLE>
Unless waived, the administrative fee received during any fiscal year shall
aggregate at least $50,000 per First Union Fund.
EXPENSES OF THE FUNDS AND TRUST SHARES
Holders of Shares pay their allocable portion of Trust and respective 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.
Fund expenses for which holders of Shares pay their allocable portion based on
average daily net assets include, but are not limited to: registering a Fund
and Shares of that Fund; investment advisory services; taxes and commissions;
custodian fees; insurance premiums; auditors' fees; and such non-recurring and
extraordinary items as may arise.
The Funds' expenses under the Rule 12b-1 Plans are incurred by the Class B
Shares, Class C Shares and Class D Shares. In addition, the Funds' expenses
under the Shareholder Services Plan are incurred by the Class C Shares and
Class D 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; shareholder services 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 and shareholder services fees, are allocated based upon
the average daily net assets of each class of a Fund.
SHAREHOLDER
- ------------------------- RIGHTS AND -------------------------
- ------------------------- PRIVILEGES -------------------------
VOTING RIGHTS
Each share of a Fund is entitled to one vote in Trustee elections and other
voting matters submitted to shareholders. All shares of all classes of each
First Union Fund in the Trust have equal voting rights, except that in matters
affecting only a particular First Union Fund or class, only shares of that
First Union Fund 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 a 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 non-bank 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,
First Union, is subject to and in compliance with such banking laws and
regulations.
Sullivan & Cromwell has advised First Union that First Union may perform the
services for the Funds 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 First Union from continuing to perform such services
for the Funds or from continuing to purchase Shares for the accounts of its
customers. If First Union were prohibited from acting as investment adviser to
the Funds, it is expected that the Trustees would recommend to the Funds'
shareholders that they approve a new investment adviser selected by the
Trustees. It is not expected that the Funds' shareholders would suffer any
adverse financial consequences (if another adviser with equivalent abilities to
First Union is found) as a result of any of these occurrences.
- ------------------------- DISTRIBUTIONS -------------------------
- ------------------------- AND TAXES -------------------------
Each 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 and paid quarterly for both Funds. 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 First Union in writing.
CAPITAL GAINS
Any net long-term capital gains realized by the Funds 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 Funds pay no federal income tax if they meet the requirements of the
Internal Revenue Code, as amended (the "Code") applicable to regulated
investment companies and will receive the special tax treatment afforded to
such companies. However, the Funds may invest in the stock of certain foreign
corporations which would constitute a Passive Foreign Investment Company
("PFIC"). Federal income taxes may be imposed on a Fund upon disposition of
PFIC investments.
Each First Union Fund is treated as a single, separate entity for federal
income tax purposes so that income (including capital gains) and losses
realized by one First Union Fund will not be combined for tax purposes with
those realized by other First Union Funds.
Investment income received by the Funds from sources within foreign countries
may be subject to foreign taxes withheld at the source. The United States has
entered into tax treaties with many foreign countries that entitle the Funds to
reduced tax rates or exemptions on this income. The effective rate of foreign
tax cannot be predicted since the amount of Fund assets to be invested within
various countries will vary. However, the Funds intend to operate so as to
qualify for treaty-reduced tax rates, where applicable.
Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, whether in shares or cash, for all the
Funds. Detailed information concerning the status of dividend and capital gains
distributions for federal income tax purposes is mailed to shareholders
annually. Distributions representing net long-term capital gains realized by a
Fund, if any, will be taxable as long-term capital gains regardless of the
length of time shareholders have held their Shares.
If more than 50%of the value of a Fund's assets at the end of the tax year is
represented by stock or securities of foreign corporations, the Fund intends to
qualify for certain Code stipulations that would allow shareholders to claim a
foreign tax credit or deduction on their U.S. income tax returns. The Code may
limit a shareholder's ability to claim a foreign tax credit. Furthermore,
shareholders who elect to deduct their portion of a Fund's foreign taxes rather
than take the foreign tax credit must itemize deductions on their income tax
returns.
Shareholders are urged to consult their own tax advisers regarding the status
of their accounts under state and local tax laws.
- ------------------------- OTHER CLASSES -------------------------
- ------------------------- OF SHARES -------------------------
First Union International Funds offer four classes of shares: Trust Shares for
institutional investors and Class B Shares, Class C Shares and Class D Shares
for individuals and other customers of First Union.
Class B Shares, Class C Shares and Class D Shares of First Union International
Funds are sold to customers of First Union and others at net asset value plus a
sales charge which, at the election of the purchaser, may be imposed either (i)
at the time of purchase (the Class B Shares), or (ii) on a contingent deferred
basis (the Class C Shares and Class D Shares). Shareholders of record in any
Fund at October 12, 1990, and the members of their immediate family, will be
exempt from sales charges on any future purchases in any of the First Union
Funds. Employees of First Union, Federated Securities Corp. and their
affiliates, and certain trust accounts for which First Union or its affiliates
act in an administrative, fiduciary, or custodial capacity, board members of
First Union and the above-mentioned entities and the members of the immediate
families of any of these persons, will also be exempt from sales charges. Class
B Shares, Class C Shares and Class D Shares are distributed pursuant to Rule
12b-1 Plans adopted by the Trust, whereby the distributor is paid a fee of .25
of 1% for Class B Shares and .75 of 1% for Class C Shares and Class D Shares of
each Fund's average daily net asset value. In addition, Class C Shares and
Class D Shares pay a shareholder services fee of .25 of 1% of the respective
class' average daily net assets.
The stated advisory fee is the same for all classes of the Funds. 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 same Fund.
The amount of dividends payable to Class B Shares, Class C Shares, and Class D
Shares will be less than those payable to Trust Shares by the difference
between class expenses and distribution and shareholder service expenses borne
by the shares of each respective class.
- ------------------------- ADDRESSES -------------------------
- ------------------------- -------------------------
- --------------------------------------------------------------------------------
First Union Funds 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
- --------------------------------------------------------------------------------
Sub-Adviser to Emerging Markets Fund
Marvin & Palmer Associates, Inc. One Commerce Center
Suite 1100
Wilmington, Delaware 19801
- --------------------------------------------------------------------------------
Sub-Adviser to International Equity Fund
Boston International Advisors, Inc. 75 State Street
Boston, Massachusetts 02109
- --------------------------------------------------------------------------------
Custodian
State Street Bank and Trust Company P.O. Box 8609
Boston, Massachusetts
02266-8609
- --------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
- ------------------------ FIRST UNION ------------------------
- ------------------------ INTERNATIONAL ------------------------
FUNDS
Portfolios of First Union Funds
CLASS B INVESTMENT SHARES CLASS C INVESTMENT SHARES CLASS D INVESTMENT SHARES
- --------------------------------------------------------------------------------
P R O S P E C T U S
September , 1994
First Union Funds (the "Trust") is a mutual fund with 17 portfolios, offering a
variety of investment opportunities. The Trust currently includes two
diversified International Funds, seven diversified Equity and Income Funds,
three diversified Money Market Funds, and five non-diversified Single State
Municipal Bond Funds. They are:
International Funds
. First Union Emerging Markets Growth Portfolio; and
. First Union International Equity Portfolio.
Equity and Income Funds
.First Union Balanced Portfolio;
.First Union Fixed Income Portfolio;
. First Union High Grade Tax Free Portfolio (formerly, First Union Insured Tax
Free Portfolio);
. First Union Managed Bond Portfolio (Investment Shares not currently
offered);
. First Union U.S. Government Portfolio;
. First Union Utility Portfolio; and
.First Union Value Portfolio.
Money Market Funds
.First Union Money Market Portfolio;
. First Union Tax Free Money Market Portfolio; and
.First Union Treasury Money Market Portfolio.
Single State Municipal Bond Funds
. First Union Florida Municipal Bond Portfolio;
. First Union Georgia Municipal Bond Portfolio;
. First Union North Carolina Municipal Bond Portfolio;
. First Union South Carolina Municipal Bond Portfolio; and
. First Union Virginia Municipal Bond Portfolio.
This prospectus provides you with information specific to the Class B
Investment Shares ("Class B Shares"), Class C Investment Shares ("Class C
Shares"), and Class D Investment Shares ("Class D Shares") of First Union
International Funds. It concisely describes the information which you should
know before investing in Class B Shares, Class C Shares or Class D Shares of
any of the First Union International Funds. Please read this prospectus
carefully and keep it for future reference.
You can find more detailed information about each First Union International
Fund in the Combined Statement of Additional Information, dated September ,
1994, filed with the Securities and Exchange Commission and incorporated by
reference into this prospectus. The Statement is available free of charge by
writing to First Union Funds, Federated Investors Tower, Pittsburgh, PA 15222-
3779 or by calling 1-800-326-3241.
The Trust is sponsored and distributed by third parties independent of First
Union National Bank of North Carolina ("First Union"). 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
Union, are not endorsed or guaranteed by First Union, and are not insured by
the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other government agency. Investment in these shares involves investment risks,
including the possible loss of principal.
- --------------------------------------------------------------------------------
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.
- ------------------------- TABLE OF -------------------------
- ------------------------- CONTENTS -------------------------
Summary 2 How to Redeem Shares 17
- -------------------------------------- --------------------------------------
Summary of Fund Expenses 4 Additional Shareholder Services 17
- -------------------------------------- --------------------------------------
Investment Objectives and Policies 7 Management of First Union Funds 18
- -------------------------------------- --------------------------------------
First Union Emerging Markets Growth Fees and Expenses 20
Portfolio 7 --------------------------------------
- --------------------------------------
Shareholder Rights and Privileges 22
First Union International Equity --------------------------------------
Portfolio 7
- -------------------------------------- Distributions and Taxes 23
--------------------------------------
Types of Investments 8
- -------------------------------------- Tax Information 23
--------------------------------------
Other Investment Policies 8
- -------------------------------------- Other Classes of Shares 24
--------------------------------------
Shareholder Guide 12
- -------------------------------------- Addresses Inside Back Cover
--------------------------------------
How to Buy Shares 14
- --------------------------------------
How to Convert Your Investment from
One First Union Fund to Another
First Union Fund 16
- --------------------------------------
- ------------------------- SUMMARY -------------------------
- ------------------------- -------------------------
DESCRIPTION OF THE TRUST
First Union Funds 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 17 portfolios, each representing a
different First Union Fund. Each International Fund is divided into four
classes of shares: Class B Shares, Class C Shares, Class D Shares and Trust
Shares. Class B, Class C, and Class D Shares are sold to individuals and other
customers of First Union (the "Adviser") and are sold at net asset value plus a
sales charge which, at the election of the purchaser, may be imposed either (i)
at the time of purchase (the Class B Shares), or (ii) on a contingent deferred
basis (the Class C and Class D Shares). Trust Shares are designed primarily for
institutional investors (banks, corporations, and fiduciaries). This prospectus
relates to all three classes of Investment Shares ("Shares") of First Union
International Funds (collectively, the "Funds").
THE FUNDS AND OBJECTIVES
As of the date of this prospectus, Class B, Class C, and Class D Shares are
offered in the following two Funds:
. First Union Emerging Markets Growth Portfolio ("Emerging Markets Growth
Fund")--seeks to produce long-term capital appreciation. The Emerging
Markets Growth Fund invests in equity securities of emerging market issuers;
and
. First Union International Equity Portfolio ("International Equity Fund")--
seeks to provide long-term capital appreciation. The International Equity
Fund invests in equity securities of non-U.S. issuers.
INVESTMENT MANAGEMENT
The Funds are advised by First Union, through its Capital Management Group.
First Union has responsibility for investment research and supervision of the
Funds, in addition to the purchase or sale of portfolio instruments, for which
it receives an annual fee. The Emerging Markets Growth Fund and the
International Equity Fund are sub-advised by Marvin & Palmer Associates, Inc.
("Marvin & Palmer") and Boston International Advisors, Inc. ("Boston
International"), respectively.
PURCHASING AND REDEEMING SHARES
For information on purchasing Class B, Class C, and Class D Shares of the
Funds, please refer to the Shareholder Guide section entitled "How to Buy
Shares." Redemption information may be found under "How to Redeem Shares."
RISK FACTORS
Investors should be aware of the following general observations: The foreign
securities in which the Funds may invest may be subject to certain risks in
addition to those inherent in U.S. investments. The Funds may make certain
investments and employ certain investment techniques that involve other risks,
including entering into repurchase agreements, investing in when-issued
securities, lending portfolio securities and entering into futures contracts
and related options as hedges. These risks are described under "Investment
Objectives and Policies" for each Fund and "Other Investment Policies."
- ------------------------ SUMMARY OF ------------------------
- ------------------------ FUND EXPENSES ------------------------
FIRST UNION INTERNATIONAL FUNDS
CLASS B SHARES
<TABLE>
<CAPTION>
Emerging
Markets Growth International
Fund Equity Fund
-------------- -------------
<S> <C> <C>
Class B Shares
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).............. 4.75% 4.75%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price).............. None None
Contingent Deferred Sales Charge (as a percentage
of original purchase price or redemption pro-
ceeds, as applicable)............................ None None
Redemption Fee (as a percentage of amount re-
deemed, if applicable)........................... None None
Exchange Fee...................................... None None
<CAPTION>
Annual Class B Shares Operating Expenses
<S> <C> <C>
(As a percentage of projected average net assets)
Management Fee (after waiver) (1)................. % %
12b-1 Fees (2).................................... 0.25% 0.25%
Total Other Expenses (after waiver) (3)........... % %
Total Class B Shares Operating Expenses (4)..... % %
</TABLE>
(1) The management fees of Emerging Markets Growth and International Equity
Funds have been reduced to reflect the voluntary waivers by the Adviser. The
Adviser may terminate these voluntary waivers at any time at its sole
discretion. The maximum management fees for Emerging Markets Growth and
International Equity Funds are 1.50% and 0.82%, respectively.
(2) The Class B Shares can pay up to 0.75% of Class B Shares' average daily
net assets as a 12b-1 fee. The Funds plan to limit the Class B Shares' 12b-1
payments to 0.25% of Class B Shares' average daily net assets.
(3) Total Other Expenses for Emerging Markets Growth and International Equity
Funds are estimated to be % and %, respectively, absent the anticipated
voluntary waivers by the administrator. The administrator may terminate these
waivers at any time at its sole discretion.
(4) Total Class B Shares Operating Expenses for Emerging Markets Growth and
International Equity Funds are estimated to be % and %, respectively,
absent the voluntary waivers described above in notes 1 and 3.
Expenses in this table are estimated based on average expenses expected to be
incurred during the fiscal year ending December 31, 1994. During the course of
this period, expenses may be more or less than the average amount shown.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the Funds 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.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
- ------- ------ -------
<S> <C> <C>
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. The Funds charge no redemption fees for
Class B Shares.
Emerging Markets Growth Fund................................. $-- $--
International Equity Fund.................................... $-- $--
</TABLE>
The above example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown. This
example is based on estimated data for the fiscal year ending December 31,
1994.
The information set forth in the foregoing table and example relates only to
Class B Shares of the Funds. The Funds also offer three additional classes of
shares called Trust Shares, Class C Shares and Class D Shares. In general, all
expenses are allocated based upon the daily net assets of each class. Trust
Shares bear no sales charge or 12b-1 fee. Class C Shares are subject to a 12b-
1 fee of 0.75 of 1%, a shareholder service fee of 0.25 of 1%, and bear a
maximum contingent deferred sales charge of 5.00%. Class D Shares are subject
to a 12b-1 fee of 0.75 of 1%, a shareholder service fee of 0.25 of 1%, and
bear a maximum contingent deferred sales charge of 1.00%. Trust Shares, Class
C Shares nor Class D Shares bear a front-end sales charge. See "Other Classes
of Shares."
- ------------------------ SUMMARY OF ------------------------
- ------------------------ FUND EXPENSES ------------------------
FIRST UNION INTERNATIONAL FUNDS
CLASS C SHARES
<TABLE>
<CAPTION>
Emerging Markets Growth
Fund International Equity Fund
--------------------------- ---------------------------
Class C Shares
Shareholder Transaction Expenses
<S> <C> <C>
Maximum Sales Load Im-
posed on Purchases (as
a percentage of offer-
ing price)............. None None
Maximum Sales Load Im-
posed on Reinvested
Dividends
(as a percentage of of-
fering price).......... None None
Contingent Deferred
Sales Charge (as a
percentage of original 5% during the first year, 5% during the first year,
purchase price or 4% during the second year, 4% during the second year,
redemption proceeds, as 3% during the third year, 3% during the third year,
applicable) (1)........ 3% during the fourth year, 3% during the fourth year,
2% during the fifth year, 2% during the fifth year,
1% during the sixth year, 1% during the sixth year,
and 0% after the sixth year and 0% after the sixth year
Redemption Fee (as a
percentage of amount
redeemed, if applica-
ble)................... None None
Exchange Fee............ None None
<CAPTION>
Annual Class C Shares Operating
Expenses
<S> <C> <C>
(As a percentage of
projected average net
assets)
Management Fee (after
waiver) (2)............ % %
12b-1 Fees.............. 0.75% 0.75%
Total Other Expenses
(after waiver) (3)..... % %
Shareholder Services
Plan Fee............ 0.25% 0.25%
Total Class C Shares Op-
erating Expenses
(4)................. % %
</TABLE>
(1) No contingent deferred sales charge is imposed on (a) Shares purchased
more than six years prior to redemption, (b) Shares acquired through the
reinvestment of dividends and distributions, and (c) the portion of redemption
proceeds attributable to increases in the value of an account above the net
cost of the investment due to increases in the net asset value per Share.
(2) The management fees of Emerging Markets Growth and International Equity
Funds have been reduced to reflect the voluntary waivers by the Adviser. The
Adviser may terminate these voluntary waivers at any time at its sole
discretion. The maximum management fees for Emerging Markets Growth and
International Equity Funds are 1.50% and 0.82%, respectively.
(3) Total Other Expenses for Emerging Markets Growth and International Equity
Funds are estimated to be % and %, respectively, absent the anticipated
voluntary waivers by the administrator. The administrator may terminate this
waiver at any time at its sole discretion.
(4) Total Class C Shares Operating Expenses for Emerging Markets Growth and
International Equity Funds are estimated to be % and %, respectively,
absent the voluntary waivers described above in notes 2 and 3.
Expenses in this table are estimated based on average expenses expected to be
incurred during the fiscal year ending December 31, 1994. During the course of
this period, expenses may be more or less than the average amount shown.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the Funds 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.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
- ------- ------ -------
<S> <C> <C>
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:
Emerging Markets Growth Fund....................................................... $-- $--
International Equity Fund.......................................................... $-- $--
You would pay the following expenses on the same investment, assuming no redemptions:
Emerging Markets Growth Fund....................................................... $-- $--
International Equity Fund.......................................................... $-- $--
</TABLE>
The above example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown. The example
for Class C Shares is based on estimated data for the fiscal year ending
December 31, 1994.
The information set forth in the foregoing table and example relates only to
Class C Shares of the Funds. The Funds also offer three additional classes of
shares called Trust Shares, Class B Shares and Class D Shares. In general, all
expenses are allocated based upon the daily net assets of each class. Trust
Shares bear no sales charge or 12b-1 fee. Class B Shares are subject to a 12b-
1 fee of 0.25 of 1%and bear a maximum sales charge of 4.75%. Class D Shares
are subject to a 12b-1 fee of 0.75 of 1%, a shareholder service fee of 0.25 of
1%, and bear a maximum contingent deferred sales charge of 1.00%. See "Other
Classes of Shares."
- ------------------------ SUMMARY OF ------------------------
- ------------------------ FUND EXPENSES ------------------------
FIRST UNION INTERNATIONAL FUNDS
CLASS D SHARES
<TABLE>
<CAPTION>
Emerging
Markets
Growth International
Fund Equity Fund
-------- -------------
Class D Shares
Shareholder Transaction Expenses
<S> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage
of offering price)..................................... None None
Maximum Sales Load Imposed on Reinvested Dividends (as a
percentage of offering price).......................... None None
Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds,
as applicable) (1)..................................... 1.00% 1.00%
Redemption Fee (as a percentage of amount redeemed, if
applicable)............................................ None None
Exchange Fee............................................ None None
<CAPTION>
Annual Class D Shares Operating Expenses
<S> <C> <C>
(As a percentage of projected average net assets)
Management Fee (after waiver) (2)....................... % %
12b-1 Fees.............................................. 0.75% 0.75%
Total Other Expenses (after waiver) (3)................. % %
Shareholder Services Plan Fee......................... 0.25% 0.25%
Total Class D Shares Operating Expenses (4)......... % %
</TABLE>
(1) No contingent deferred sales charge is imposed on (a) Shares purchased
more than one year prior to redemption, (b) Shares acquired through the
reinvestment of dividends and distributions, and (c) the portion of redemption
proceeds attributable to increases in the value of an account above the net
cost of the investment due to increases in the net asset value per Share.
(2) The management fees of Emerging Markets Growth and International Equity
Funds have been reduced to reflect the voluntary waivers by the Adviser. The
Adviser may terminate these voluntary waivers at any time at its sole
discretion. The maximum management fees for Emerging Markets Growth and
International Equity Funds are 1.50% and 0.82%, respectively.
(3) Total Other Expenses for Emerging Markets Growth and International Equity
Funds are estimated to be % and %, respectively, absent the anticipated
voluntary waivers by the administrator. The administrator may terminate these
waivers at any time at its sole discretion.
(4) Total Class D Shares Operating Expenses for Emerging Markets Growth and
International Equity Funds are estimated to be % and %, respectively,
absent the voluntary waivers described above in notes 1 and 3.
Expenses in this table are estimated based on average expenses expected to be
incurred during the fiscal year ending December 31, 1994. During the course of
this period, expenses may be more or less than the average amount shown.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the Funds 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.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years
- ------- ------ -------
<S> <C> <C>
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:
Emerging Markets Growth Fund................................. $-- $--
International Equity Fund.................................... $-- $--
</TABLE>
The above example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown. This
example for Class D Shares is based on estimated data for the fiscal year
ending December 31, 1994.
The information set forth in the foregoing table and example relates only to
Class D Shares of the Funds. The Funds also offer three additional classes of
shares called Trust Shares, Class B Shares, and Class C Shares. In general,
all expenses are allocated based upon the daily net assets of each class.
Trust Shares bear no sales charge or 12b-1 fee. Class B Shares are subject to
a 12b-1 fee of 0.25 of 1% and bear a maximum sales charge of 4.75%. Class C
Shares are subject to a 12b-1 fee of 0.75 of 1%, a shareholder service fee of
0.25 of 1%, bear a maximum contingent deferred sales charge of 5.00%, and bear
no front-end sales charge. See "Other Classes of Shares."
- ------------------------- INVESTMENT -------------------------
- ------------------------- OBJECTIVES -------------------------
AND POLICIES
First Union International Funds offer investors the opportunity to invest in
international equity securities of developed and emerging market issuers.
The investment objectives and policies of both Funds are stated below. Each
Fund's investment objective cannot be changed without shareholder approval.
While there is no assurance that each objective will be achieved, the Funds
will endeavor to do so by following the investment policies detailed below.
Unless otherwise indicated, the investment policies of a Fund 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.
- ------------------------- FIRST UNION -------------------------
- ------------------------- EMERGING MARKETS -------------------------
GROWTH PORTFOLIO
Objective: Long-term capital appreciation.
Invests in: Equity securities of emerging market issuers.
Suitable for: Aggressive investors interested in the investment opportunities
offered by securities in emerging markets.
Key Benefit: Provides potential for growth opportunities by investing in
emerging markets experiencing political change, economic
deregulation and liberalized trade policies.
DESCRIPTION OF THE FUND
The Fund seeks long-term capital appreciation. The Fund invests primarily in a
diversified portfolio of equity securities of issuers located in countries with
emerging markets. As a matter of policy, the Fund will invest at least 65% of
the value of its total assets in securities of emerging market issuers.
A country will be considered to have an "emerging market" if it has relatively
low gross national product per capita compared to the world's major economies
and the potential for rapid economic growth. Countries with emerging markets
include those that have an emerging stock market (as defined by the
International Finance Corporation), those with low- to middle-income economies
(according to the World Bank), and those listed in World Bank publications as
"developing". The Fund will normally invest in at least six different
countries, although it may invest all of its assets in a single country. The
Fund focuses on equity securities, but may also invest in other types of
instruments, including debt securities.
- ------------------------- FIRST UNION -------------------------
- ------------------------- INTERNATIONAL -------------------------
EQUITY PORTFOLIO
Objective: Long-term capital appreciation.
Invests in: Equity securities of non-U.S. issuers.
Suitable for: Investors who want to pursue their investment goals in markets
outside the United States.
Key Benefit: Provides potential for investment opportunities in countries
outside the U.S. due to differing economic and political cycles.
DESCRIPTION OF THE FUND
The Fund seeks long-term capital appreciation. The Fund invests primarily in
foreign equity securities that the Adviser and Boston International, the Sub-
Adviser to the Fund, determine, through both fundamental and technical
analysis, to be undervalued compared to other securities in their industries
and countries. In most market conditions, the stocks comprising the Fund's
assets will exhibit traditional value characteristics, such as higher than
average dividend yields, lower than average price to book value, and stocks of
companies with unrecognized or undervalued assets. As a matter of policy, the
Fund will invest at least 65% of the value of its total assets in equity
securities of issuers located in at least three countries outside of the United
States.
The Fund will emphasize value stocks, primarily of companies which are listed
on one or more of thirty-two stock markets: twenty developed markets and twelve
emerging markets. The Fund will invest substantially in industrialized
companies throughout the world that comprise the Morgan Stanley Capital
International EAFE (Europe, Australia and the Far East) Index. In addition, the
Fund intends to invest up to 10% of its assets in emerging country equity
securities, as described above under "First Union Emerging Markets Growth
Portfolio--Description of the Fund."
- ------------------------- TYPES OF -------------------------
- ------------------------- INVESTMENTS -------------------------
The Funds primarily invest in:
common and preferred stocks, convertible securities and warrants of foreign
corporations. Common stocks represent an equity interest in a corporation.
This ownership interest often gives the Funds the right to vote on measures
affecting the company's organization and operations. Although common stocks
have a history of long-term growth in value, their prices tend to fluctuate
in the short term, particularly those of smaller companies;
obligations of foreign governments and supranational organizations;
corporate and foreign government fixed income securities denominated in
currencies other than U.S. dollars, rated, at the time of purchase, Baa or
higher by Moody's Investors Service, Inc. ("Moody's") or BBB or higher by
Standard & Poor's Corporation ("S&P"), or which, if unrated, are considered
to be of comparable quality by the Sub-Advisers. Bonds rated Baa by Moody's
or BBB by S&P have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to weakened
capacity to make principal and interest payments than higher rated bonds;
strategic investments, such as options and futures contracts on currency
transactions, securities index futures contracts, and forward foreign
currency exchange contracts. The Funds can use these techniques
to increase or decrease their exposure to changing security prices,
interest rates, currency exchange rates, or other factors that affect
security values;
securities of closed-end investment companies; and
repurchase agreements collateralized by eligible investments.
- ------------------------- OTHER -------------------------
- ------------------------- INVESTMENT -------------------------
POLICIES
The Funds have adopted the following practices for specific types of
investments.
REPURCHASE AGREEMENTS
The Funds may invest in repurchase agreements. Repurchase agreements are
agreements by which a Fund purchases a security 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 or Sub-Advisers will monitor
the creditworthiness of the firms with which the Funds enter into repurchase
agreements.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Funds may purchase portfolio securities on a when-issued or delayed
delivery basis. In such cases, a 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 the securities and risks missing an advantageous price or yield if the
seller does not deliver the security as promised.
FOREIGN CURRENCY TRANSACTIONS
The Funds will enter into foreign currency transactions to obtain the necessary
currencies to settle securities transactions. Currency transactions may be
conducted either on a spot or cash basis at prevailing rates or through forward
foreign currency exchange contracts.
The Funds may also enter into foreign currency transactions to protect Fund
assets against adverse changes in foreign currency exchange rates or exchange
control regulations. Such changes could unfavorably affect the value of Fund
assets which are denominated in foreign currencies, such as foreign securities
or funds deposited in foreign banks, as measured in U.S. dollars. Although
foreign currency exchanges may be used by a Fund to protect against a decline
in the value of one or more currencies, such efforts may also limit any
potential gain that might result from a relative increase in the value of such
currencies and might, in certain cases, result in losses to the Fund.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A forward foreign currency exchange contract ("forward contract") is an
obligation to purchase or sell an amount of a particular currency at a specific
price and on a future date agreed upon by the parties.
Generally, no commission charges or deposits are involved. At the time a Fund
enters into a forward contract, Fund assets with a value equal to the Fund's
obligation under the forward contract are segregated and are maintained until
the contract has been settled. The Funds will not enter into a forward contract
with a term of more than one year. The Funds will generally enter into a
forward contract to provide the proper currency to settle a securities
transaction at the time the transaction occurs ("trade date"). The period
between trade date and settlement date will vary between 24 hours and 60 days,
depending upon local custom.
The Funds may also protect against the decline of a particular foreign currency
by entering into a forward contract to sell an amount of that currency
approximating the value of all or a portion of the Fund's assets denominated in
that currency ("hedging"). The success of this type of short-term hedging
strategy is highly uncertain due to the difficulties of predicting short-term
currency market movements and of precisely matching forward contract amounts
and the constantly changing value of the securities involved. Although the
Adviser or each Sub-Adviser will consider the likelihood of changes in currency
values when making investment decisions, the Adviser or each Sub-Adviser
believes that it is important to be able to enter into forward contracts when
it believes the interests of a Fund will be served. The Funds will not enter
into forward contracts for hedging purposes in a particular currency in an
amount in excess of the Fund's assets denominated in that currency.
OPTIONS AND FUTURES
The Funds may deal in options on foreign currencies, and securities indices,
which options may be listed for trading on an international securities
exchange. The Funds will use these options to manage interest rate and currency
risks. The Funds also may write covered call options and secured put options to
generate income or to lock in gains. Each Fund may write covered call options
and secured put options on up to 25% of its net assets and may purchase put and
call options provided that no more than 5% of the fair market value of its net
assets may be invested in premiums on such options.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying asset at the exercise price during the
option period. A put option gives the purchaser the right to sell, and the
writer the obligation to buy, the underlying asset at the exercise price during
the option period. The writer of a covered call owns assets that are acceptable
for escrow and the writer of a secured put invests an amount not less than the
exercise price in eligible assets to the extent that it is obligated as a
writer. If a call written by a Fund is exercised, the Fund forgoes any possible
profit from an increase in the market price of the underlying asset over the
exercise price plus the premium received. In writing puts, there is a risk that
a Fund may be required to take delivery of the underlying asset at a
disadvantageous price.
The Funds may enter into futures contracts involving foreign currency and
securities indices, or options on currency, for bona fide hedging purposes. The
Funds may also enter into such futures contracts or related options for
purposes other than bona fide hedging if the aggregate amount of initial margin
deposits on a Fund's futures and related options positions would not exceed 5%
of the net liquidation value of the Fund's assets, provided further that in the
case of an option that is in-the-money at the time of the purchase, the in-the-
money amount may be excluded in calculating the 5% limitation. In addition, a
Fund may not sell futures contracts if the value of such futures contracts
exceeds the total market value of the Fund's portfolio securities. Futures
contracts sold by a Fund are generally subject to segregation and coverage
requirements established by either the Commodity Futures Trading Commission
("CFTC") or the Securities and Exchange Commission ("SEC"), with the result
that, if a Fund does not hold the instrument underlying the futures contract or
option, the Fund will be required to segregate, on an ongoing basis with its
custodian, cash, U.S. government securities, or other liquid high grade debt
obligations in an amount at least equal to the Fund's obligations with respect
to such instruments.
The Funds may enter into securities index futures contracts and purchase and
write put and call options on securities index futures contracts that are
traded on regulated exchanges, including non-U.S. exchanges to the extent
permitted by the CFTC. Securities index futures contracts are based on indices
that reflect the market value of securities of the firms included in the
indices. An index futures contract is an agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to the
differences between the value of the index at the close of the last trading day
of the contract and the price at which the index contract was originally
written.
The Funds may enter into securities index futures contracts to sell a
securities index in anticipation of or during a market decline to attempt to
offset the decrease in market value of securities in its portfolio that might
otherwise result. When a Fund is not fully invested and anticipates a
significant market advance, it may enter into futures contracts to purchase the
index in order to gain rapid market exposure that may in part or entirely
offset increases in the cost of securities that it intends to purchase. In many
of these transactions, a Fund will purchase such securities upon termination of
the futures position but, depending on market conditions, a futures position
may be terminated without the corresponding purchases of common stock. A Fund
may also invest in securities index futures contracts when its Adviser or Sub-
Adviser believes such investment is more efficient, liquid or cost-effective
than investing directly in the securities underlying the index.
The use of futures and related options involves special considerations and
risks, including: (1) the ability of a Fund to utilize futures successfully
will depend on its Sub-Adviser's ability to predict pertinent market movements;
and (2) there might be an imperfect correlation (or conceivably no correlation)
between the change in the market value of the securities held by a Fund and the
prices of the futures relating to the securities purchased or sold by a Fund.
The use of futures and related options may reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements, but
these instruments can also reduce the opportunity for gain by offsetting the
positive effect of favorable price movements in positions. No assurance can be
given that a Sub-Adviser's judgment in this respect will be correct.
It is not certain that a secondary market for positions in futures contracts or
for options will exist at all times. Although the Adviser or each Sub-Adviser
will consider liquidity before entering into these transactions, there is no
assurance that a liquid secondary market on an exchange or otherwise will exist
for any particular futures contract or option at any particular time. A Fund's
ability to establish and close out futures and options positions depends on
this secondary market.
RISK CHARACTERISTICS OF FOREIGN SECURITIES
Investing in non-U.S. securities carries substantial risks in addition to those
associated with domestic investments. In an attempt to reduce some of these
risks, the Funds diversify their investments broadly among foreign countries
which may include both developed and developing countries. With respect to the
International Equity Fund, at least three different countries will always be
represented.
The Funds may take advantage of the unusual opportunities for higher returns
available from investing in developing countries. As discussed in detail in the
Statement of Additional Information, however, these investments carry
considerably more volatility and risk because they generally are associated
with less mature economies and less stable political systems.
Foreign securities are denominated in foreign currencies. Therefore, the value
in U.S. dollars of a Fund's assets and income may be affected by changes in
exchange rates and regulations. Although the Funds value their assets daily in
U.S. dollars, they will not convert their holdings of foreign currencies to
U.S. dollars daily. When a Fund converts its holdings to another currency, it
may incur conversion costs. Foreign exchange dealers realize a profit on the
difference between the prices at which such dealers buy and sell securities.
Other differences between investing in foreign and U.S. companies include: less
publicly available information about foreign companies; the lack of uniform
financial accounting standards applicable to foreign companies; less readily
available market quotations on foreign companies; differences in government
regulation and supervision of foreign stock exchanges, brokers, listed
companies, and banks; differences in legal systems which may affect the ability
to enforce contractual obligations or obtain court judgments; generally lower
foreign stock market volume; the likelihood that foreign securities may be less
liquid or more volatile; foreign brokerage commissions may be higher;
unreliable mail service between countries; and political or financial changes
which adversely affect investments in some countries.
In the past, U.S. government policies have discouraged or restricted certain
investments abroad by investors such as the Funds. Although the Funds are
unaware of any current restrictions, investors are advised that these policies
could be reinstituted.
TEMPORARY INVESTMENTS
The Funds may invest in U.S. and foreign short-term money market instruments
[denominated in U.S. and/or foreign currencies], including interest-bearing
call deposits with banks, government obligations, certificates of deposit,
bankers' acceptances, commercial paper, short-term corporate debt securities,
and repurchase agreements. These investments may be used to temporarily invest
cash received from the sale of Fund shares, to establish and maintain reserves
for temporary defensive purposes, or to take advantage of market opportunities.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Funds may invest up to 10% of their total assets in the securities of
closed-end investment companies, including regional or single-country funds. To
the extent that the Funds invest in securities issued by other investment
companies, the Funds will indirectly bear their proportionate share of any fees
and expenses paid by such companies, in addition to the fees and expenses
payable directly by the Funds.
RESTRICTED AND ILLIQUID SECURITIES
The Funds may not invest more than 5% of their total assets in securities which
are subject to restrictions on resale under federal securities law, except for
restricted securities which meet the criteria for liquidity as established by
the Trustees.
The Funds may invest up to 15% of their net assets in illiquid securities.
Illiquid securities include certain restricted securities not determined by the
Trustees to be liquid, non-negotiable time deposits, and repurchase agreements
providing for settlement in more than seven days after notice.
The following investment limitations cannot be changed without shareholder
approval.
BORROWING MONEY
The Funds will not borrow money directly or through reverse repurchase
agreements or pledge securities, except under certain circumstances, a 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.
DIVERSIFICATION
With respect to 75% of the value of its total assets, neither Fund may invest
more than 5% of its total assets in the securities of one issuer (except cash
or cash items, repurchase agreements collateralized by U.S. government
securities and U.S. government obligations) or own more than 10% of the
outstanding voting securities of one issuer.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Funds may lend portfolio securities
on a short-term or long-term basis to broker/dealers, banks, or other
institutional borrowers of securities. The Funds 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. Each Fund will not lend any of its assets except
portfolio securities up to one-third of the value of its total assets.
DOWNGRADES
If any security purchased by either of the Funds 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 may consider doing so.
- ------------------------- SHAREHOLDER GUIDE -------------------------
- ------------------------- -------------------------
CLASSES OF INVESTMENT SHARES
You may select a method of purchasing Shares which is most beneficial to you by
choosing Class B Shares, Class C Shares or Class D Shares. Your decision will
be based on the amount of your intended purchase and how long you expect to
hold the Shares.
Each Fund offers three types of Investment Shares: Class B Shares, Class C
Shares and Class D Shares. Each Share of the Fund represents an identical
interest in the investment portfolio of the Fund and has the same rights. The
difference between Class B Shares, Class C Shares, and Class D Shares is based
on purchasing arrangements and distribution and shareholder services expenses.
Class B Shares have a sales charge included at the time of purchase and are
subject to a Rule 12b-1 distribution fee of 0.25%. This means that investors
can purchase fewer Class B Shares for the same initial investment than Class C
Shares or Class D Shares due to the initial sales charge, but will receive
higher dividends per Share due to the lower distribution expenses. Class C
Shares impose a maximum contingent deferred sales charge ("CDSC") of 5.00% on
most redemptions made within six years of purchase, have distribution costs
resulting from Rule 12b-1 distribution fees of 0.75% and a shareholder services
fee of 0.25%. In addition, at the end of the seven year period, Class C Shares
may automatically convert to Class B Shares and thus be subject to lower Rule
12b-1 distribution fees. Class D Shares impose a CDSC of 1.00% on most
redemptions made within the first 12 months of purchase, have a Rule 12b-1
distribution fee of 0.75%, and a shareholder services fee of 0.25% This means
that investors may purchase more Class C Shares or Class D Shares than Class B
Shares for the same initial investment, but will receive lower dividends per
Share.
Investors should consider whether, during the anticipated life of their
investment in the Fund, the accumulated Rule 12b-1 fee, CDSC, and shareholder
services fee on either Class C Shares or Class D Shares would be less than the
initial sales charge and accumulated Rule 12b-1 fee on Class B Shares purchased
at the same time. Investors must also consider how each differential would be
offset by the higher yield of Class B Shares.
SHARE PRICE CALCULATION
The net asset value of a Fund Share equals the market value of all 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 Class B Shares adds an applicable sales charge, and the
redemption proceeds of Class C Shares and Class D Shares deduct an applicable
CDSC.) 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 a 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 a Fund may differ slightly from that of
Class B Shares, Class C Shares, and Class D Shares of the same Fund due to the
variability in daily net income resulting from different distribution charges
and shareholder services fees (in the case of Class C Shares and Class D
Shares) for each class of shares. The net asset value for each Fund will
fluctuate for all four classes.
PERFORMANCE INFORMATION
A Fund's performance may be quoted in terms of total return and yield.
Performance information is historical and is not intended to indicate future
results.
From time to time, the Funds may make available certain information about the
performance of Class B Shares, Class C Shares, and Class D Shares. It is
generally reported using total return and 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 yields of Class B Shares, Class C Shares and Class D Shares are
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
yield does not necessarily reflect income actually earned by Class B Shares,
Class C Shares and Class D Shares of the Funds and, therefore, may not
correlate to the dividends or other distributions paid to shareholders.
Performance information for the Class B Shares, Class C Shares and Class D
Shares reflects the effect of a sales charge which, if excluded, would increase
the total return and yield.
Total return and yield will be calculated separately for Class B Shares, Class
C Shares, Class D Shares and Trust Shares of a Fund. Because Class B Shares are
subject to 12b-1 fees, and Class C Shares and Class D Shares are subject to a
12b-1 fee and a shareholder services fee, the yield will be lower than that of
Trust Shares. The sales load applicable to Class B Shares also contributes to a
lower total return for Class B Shares. In addition, Class C Shares and Class D
Shares are subject to similar non-recurring charges, such as the CDSC, which,
if excluded, would increase the total return for Class C Shares and Class D
Shares.
From time to time, a Fund may advertise its performance using certain rankings
published in financial publications and/or compare its performance to certain
indices.
- ------------------------- HOW TO BUY -------------------------
- ------------------------- SHARES -------------------------
Shares may be purchased at a price equal to their net asset value per Share
next determined after receipt of an order plus a sales charge which, at the
election of the purchaser, may be imposed either (i) at the time of purchase
(in the case of Class B Shares), or (ii) on a contingent deferred basis (in the
case of Class C Shares and Class D Shares).
MINIMUM INVESTMENT
You may invest as often as you want in the Funds. There is a $1,000 minimum
initial investment requirement which may be waived in certain situations. For
further information, please contact the Mutual Funds Group of First Union
Brokerage Services ("FUBS"), a subsidiary of First Union, at 1-800-326-3241.
Subsequent investments may be in any amounts.
WHAT SHARES COST
Class B Shares are sold at their net asset value plus a sales charge as
follows:
<TABLE>
<CAPTION>
Sales Charge as Sales Charge as a
a Percentage of Percentage of Net
Amount of Transaction Public Offering Price Amount Invested
--------------------- --------------------- -----------------
<S> <C> <C>
$ 0-$ 99,999 4.75% 4.25%
$ 100,000-$ 249,999 3.75% 3.25%
$ 250,000-$ 499,999 3.00% 2.50%
$ 500,000-$ 999,999 2.00% 1.75%
$1,000,000-$2,499,999 1.00% 1.00%
$2,500,000+ 0.25% 0.25%
</TABLE>
Shareholders of record in any First Union Fund at October 12, 1990, and the
members of their immediate family, will be exempt from sales charges on any
future purchases in any of the First Union Funds. Employees of First Union,
Federated Securities Corp. (the "distributor" or "FSC") and their affiliates,
and certain trust accounts for which First Union or its affiliates act in an
administrative, fiduciary, or custodial capacity, board members of First Union
and the above-mentioned entities and the members of the immediate families of
any of these persons, will also be exempt from sales charges.
Sales charges may be reduced in some cases. You may be entitled to a reduction
if: (1) you make a single large purchase, (2) you, your spouse and/or children
(under 21 years) make Fund purchases on the same day, (3) you make an
additional purchase to add to an existing account, (4) you sign a letter of
intent indicating your intention to purchase at least $100,000 of Shares over
the next 13 months, (5) you reinvest in a Fund within 30 days of redemption, or
(6) you combine purchases of two or more First Union Funds which include front-
end sales charges. In all of these cases, you must notify the distributor of
your intentions in writing in order to qualify for a sales charge reduction.
For more information, consult the Funds' Statement of Additional Information or
the distributor.
Class C Shares are sold at net asset value per Share without the imposition of
a sales charge at the time of purchase. Shares redeemed within six years of
their purchase will be subject to a CDSC according to the following schedule:
<TABLE>
<CAPTION>
Year of Redemption Contingent Deferred
After Purchase Sales Charge
------------------ -------------------
<S> <C>
First 5.0%
Second 4.0%
Third 3.0%
Fourth 3.0%
Fifth 2.0%
Sixth 1.0%
Seventh None
</TABLE>
Class D Shares are sold at net asset value per Share without the imposition of
a sales charge at the time of purchase. Shares redeemed within one year of
their purchase will be subject to a CDSC of 1.00%.
With respect to Class C Shares and Class D Shares, no CDSC will be imposed on:
(1) the portion of redemption proceeds attributable to increases in the value
of the account due to increases in the net asset value per Share, (2) Shares
acquired through reinvestment of dividends and capital gains, (3) Shares held
for more than six years (in the case of Class C Shares) or one year (in the
case of Class D Shares) after the end of the calendar month of acquisition, (4)
accounts following the death or disability of a shareholder, or (5) minimum
required distributions to a shareholder over the age of 70 1/2 from an IRA or
other retirement plan.
CONVERSION FEATURE
Class C Shares include all Shares purchased pursuant to the deferred sales
charge alternative which have been outstanding for less than the period ending
seven years after the end of the month in which the shareholder's order to
purchase Class C Shares was accepted. At the end of this seven year period,
Class C Shares may automatically convert to Class B Shares, in which case the
Shares will no longer be subject to the higher Rule 12b-1 distribution fee
which is assessed on Class C Shares. Such conversion will be on the basis of
the relative net asset values of the two classes, without the imposition of any
sales load, fee or other charge. The purpose of the conversion feature is to
relieve the holders of the Class C Shares that have been outstanding for a
period of time sufficient for the distributor to have been compensated for
distribution expenses related to the Class C Shares from most of the burden of
such distribution-related expenses.
For purposes of conversion to Class B Shares, Class C Shares purchased through
the reinvestment of dividends and distributions paid on Class C Shares in a
shareholder's Fund acount will be considered to be held in a separate sub-
account. Each time any Class C Shares in the shareholder's Fund account (other
than those in the sub-account) convert to Class B Shares, an equal pro rata
portion of the Class C Shares in the sub-account will also convert to Class B
Shares.
The availability of the conversion feature is subject to the granting of an
exemptive order (the "Order") by the Securities and Exchange Commission (the
"SEC") or the adoption of a rule permitting such conversion. In the event that
the Order or rule ultimately issued by the SEC requires any conditions
additional to those described in this prospectus, shareholders will be
notified.
BY TELEPHONE OR IN PERSON
You may purchase Class B Shares, Class C Shares and Class D Shares by telephone
from the Mutual Funds Group of FUBS at 1-800-326-3241 or you may place the
order in person at any First Union branch location. Shares are sold on days on
which the New York Stock Exchange and the Federal Reserve Wire System are open
for business.
METHOD OF PAYMENT
Payment may be made by check or federal funds or by debiting your account at
First Union. All purchase orders received prior to 4:00 p.m. (Eastern time) on
a regular business day are processed at that day's offering price. Payment is
required within five business days.
SHAREHOLDER ACCOUNTS
As transfer agent for the Funds, Federated Services Company of Pittsburgh,
Pennsylvania, with offices in Boston, Massachusetts maintains a Share account
for each shareholder of record. Share certificates are not issued.
MINIMUM BALANCE
Due to the high cost of maintaining smaller holdings, each Fund reserves the
right to redeem a shareholder's Shares if, as a result of redemptions, their
aggregate value drops below $1,000. Reductions in value that result solely from
market activity will not trigger an involuntary redemption. The Funds will
notify shareholders in writing 30 days before taking such action to allow them
to increase their holdings to at least the minimum level.
DEALER CONCESSION
For sales of Shares of the Funds, 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. However, the distributor, in
its sole discretion, may uniformly offer to pay to all dealers selling Shares
of the Funds, all or a portion of the sales charge it normally retains. If
accepted by the dealer, such additional payments will be predicated upon the
amount of Fund Shares sold. 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. From time to time, the
distributor will conduct sales programs or contests that compensate brokers
with cash or non-cash items, such as merchandise and attendance at sales
seminars in resort locations. The cost of such compensation is borne by the
distributor and is not a Fund expense.
HOW TO CONVERT
- ------------------------- YOUR INVESTMENT -------------------------
- ------------------------- FROM ONE -------------------------
FIRST UNION
FUND TO ANOTHER
FIRST UNION FUND
As a shareholder, you have the privilege of exchanging your Shares for shares
of another First Union Fund.
As long as the First Union Fund in which you are invested will not be adversely
affected, you may switch among the First Union Funds within the Trust. Before
the exchange, you must call FUBS at 1-800-326-3241 to receive a prospectus for
the First Union Fund into which you want to exchange. Read the prospectus
carefully. Each exchange represents the sale of shares of one First Union Fund
and the purchase of shares in another, which may produce a gain or loss for tax
purposes.
You may exchange Class B Shares of one First Union Fund for Class B Shares of
any other First Union Fund, Class C Shares of one First Union Fund for Class C
Shares of any other First Union Fund, or Class D Shares of one First Union Fund
for Class D Shares of any other First Union Fund by calling toll free 1-800-
326-3241 or by writing to FUBS. Telephone exchange instructions may be
recorded. Shares purchased by check are eligible for exchange after the check
clears, which could take up to seven days after receipt of the check. Exchanges
are subject to the $1,000 minimum initial purchase requirement for each First
Union Fund.
An exchange order must comply with the requirements for a redemption and
purchase order and must specify the dollar value or number of shares to be
exchanged. Once the order is received, the Shares already owned will be
redeemed at current net asset value and, upon receipt of the proceeds by the
First Union Fund, shares of the other First Union Fund will be purchased at
their offering price determined after the proceeds from such redemption become
available, which may be up to seven days after such redemption. Orders for
exchanges received by a First Union Fund prior to 4:00 p.m. (Eastern time) on
any day the First Union Funds are open for business will be executed as of the
close of business that day. Orders for exchanges received after 4:00 p.m.
(Eastern time) on any business day will be executed at the close of the next
business day.
When exchanging into and out of load and no-load shares of First Union Funds,
shareholders who have already paid a sales charge once at the time of purchase,
including shares obtained through the reinvestment of dividends, will not have
to pay an additional sales charge on an exchange.
The exchange of Class C Shares or Class D Shares will not be subject to a CDSC.
However, if the shareholder redeems Class C Shares within six years of the
original purchase or Class D Shares within one year of the original purchase, a
CDSC will be imposed. For purposes of computing the CDSC, the length of time
the shareholder has owned Class C Shares or Class D Shares will be measured
from the date of original purchase and will not be affected by the exchange.
If reasonable procedures are not followed by a Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
EXCHANGE RESTRICTIONS
Although the Trust has no intention of terminating or modifying the exchange
privilege, it reserves the right to do so at any time. Excessive trading can
impact the interests of shareholders. Therefore, the Trust reserves the right
to terminate the exchange privilege of any shareholder who makes more than five
exchanges of shares of the First Union Funds in a year or three exchanges in a
calendar quarter.
The exchange privilege is only available in states where shares of the First
Union Fund being acquired may legally be sold. Before the exchange, a
shareholder must receive a prospectus of the First Union Fund for which the
exchange is being made.
- ------------------------- HOW TO -------------------------
- ------------------------- REDEEM SHARES -------------------------
Shares are redeemed at their net asset value next determined after a proper
redemption request has been received, less, in the case of Class C Shares or
Class D Shares, any applicable CDSC.
You may redeem Shares in three ways: (1) by telephoning FUBS at 1-800-326-3241,
(2) by written request to FUBS or State Street Bank, or (3) in person at First
Union. Telephone redemption instructions may be recorded.
The Funds redeem Shares at their net asset value next determined after a Fund
receives the redemption request. Redemptions will be made on days on which a
Fund computes the net asset value of Shares. 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. Proceeds will be wired to the
shareholder's account at First Union or a check will be sent to the address of
record, normally within five (but in no case longer than seven) days after a
proper request for redemption has been received.
If reasonable procedures are not followed by a Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
ADDITIONAL
- ------------------------- SHAREHOLDER -------------------------
- ------------------------- SERVICES -------------------------
TELEPHONE SERVICES
You may authorize electronic transfers of money to purchase Shares in any
amount or to redeem any or all Shares in an account. The service may be used
like an "electronic check" to move money between a bank account and an account
in the Fund with a single telephone call.
SYSTEMATIC INVESTMENT PLAN
You may arrange for systematic monthly or quarterly investments in your account
in amounts of $25 or more by directly debiting your bank account.
TAX SHELTERED PLANS
You may open a pension and profit sharing account in any First Union Fund
(except those First Union Funds having an objective of providing tax free
income), including Individual Retirement Accounts ("IRAs"), Rollover IRAs,
Keogh Plans, Corporate Profit-Sharing, Pension and Salary-Reduction Plans. For
details, including fees and application forms, call First Union toll free at 1-
800-669-2136 or write to First Union National Bank of North Carolina,
Retirement Services, 301 South College Street, Charlotte, NC 28288-1169.
SYSTEMATIC WITHDRAWAL PLAN
If you are a shareholder with an account valued at $10,000 or more, you may
have amounts of $100 or more sent from your account to you on a regular monthly
or quarterly basis.
MANAGEMENT
- ------------------------- OF -------------------------
- ------------------------- FIRST UNION FUNDS -------------------------
Responsibility for the overall management of First Union Funds rests with its
Trustees and officers. Other service providers include the Funds' Distributor,
Investment Adviser, Sub-Advisers, Custodian, Transfer Agent, Legal Counsel, and
Independent Auditors.
INVESTMENT ADVISER
Professional investment supervision for the Funds 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 $ billion in total
consolidated assets as of June 30, 1994. 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 $ billion. In addition, the Capital Management Group has advised
the Trust since its inception in 1984.
As part of their regular banking operations, First Union may make loans to
public companies. Thus, it may be possible, from time to time, for the Funds to
hold or acquire the securities of issuers which are also lending clients of
First Union. The lending relationship will not be a factor in the selection of
securities.
William R. Hackney, III, is Senior Vice President and Chief Investment Officer
of the Capital Management Group of First Union National Bank of North Carolina,
N.A. Prior to assuming his current position with First Union, Mr. Hackney
served as Regional Research Director for E.F. Hutton & Company's Southeast
Region. Mr. Hackney has managed the Funds since their inception in September
1994.
SUB-ADVISERS
Under the terms of the Sub-Advisory Agreements between First Union National
Bank and the respective Sub-Advisers, the Sub-Advisers will be responsible for
managing that portion or all of each Fund's portfolio as designated by the
Adviser, selecting investments for purchase or sale, along with the countries
in which each Fund will invest, and the dealers in these securities in
accordance with each Fund's investment objectives, policies and limitations as
stated herein.
EMERGING MARKETS GROWTH FUND
Marvin & Palmer Associates, Inc. is Sub-Adviser for the Emerging Markets Growth
Fund. Marvin & Palmer, a privately-held company, was founded in 1986 by David
F. Marvin and Stanley Palmer. The stock of Marvin & Palmer is owned by Mr.
Marvin, Mr. Palmer and seventeen other holders. Marvin & Palmer is engaged in
the management of global, non-United States and emerging markets equity
portfolios for institutional accounts. At June 30, 1994, Marvin & Palmer
managed a total of $ billion in investments for 32 institutional investors.
As of June 30, 1994, Marvin & Palmer served as investment adviser or sub-
adviser to one other investment company with total assets of $32.6 million.
David F. Marvin is Chairman of the Sub-Adviser and founded the firm together
with Mr. Palmer in 1986. With respect to the Emerging Markets Growth Fund, Mr.
Marvin is primarily responsible for Latin America and currency management, and
has served as co-portfolio manager of the Fund since its inception in September
1994.
Stanley Palmer is President of the Sub-Adviser and a co-founder of the firm.
With respect to the Emerging Markets Growth Fund, Mr. Palmer is primarily
responsible for Southeast Asia and the India subcontinent, and has served as
co-portfolio manager of the Fund since its inception in September 1994.
Terry B. Mason is a Vice President and Portfolio Manager of the Sub-Adviser.
Before joining the Sub-Adviser in 1990, Mr. Mason was employed for 14 years by
DuPont Corporation, the last five as International Equity Analyst and
International Trader. With respect to the Emerging Markets Growth Fund, Mr.
Mason is primarily responsible for Eastern Europe and Africa, and has served as
co-portfolio manager of the Fund since its inception in September 1994.
Jay F. Middleton is a portfolio manager for the Sub-Adviser and joined the firm
in 1989. With respect to the Emerging Markets Growth Fund, Mr. Middleton is
primarily responsible for Latin America and the Middle East and has served as
co-portfolio manager of the Fund since its inception in September 1994.
Todd D. Marvin is a Portfolio Manager for the Sub-Adviser and joined the firm
in 1991. Before joining the Sub-Adviser, Mr. Marvin was employed by Oppenheimer
& Company as an Analyst in its investment banking department from 1989 until
1991. With respect to the Emerging Markets Growth Fund, Mr. Marvin is primarily
responsible for Southeast Asia and the India subcontinent, and has served as
co-portfolio manager of the Fund since its inception in September 1994.
INTERNATIONAL EQUITY FUND
Boston International Advisors, Inc. is Sub-Adviser for the International Equity
Fund. Boston International commenced operations in 1986 and specializes in the
management of international equity portfolios. Boston International manages
twenty international portfolios, including five group trust funds, for pensions
and endowment plans throughout the world. Messrs. Lyle H. Davis, Norman H.
Meltz and David A. Umstead, the principal executive officers of Boston
International, each owns more than 25% of the outstanding voting securities of
Boston International. As of June 30, 1994, Boston International managed a total
of $ billion in assets under management. In addition, as of June 30, 1994,
Boston International served as investment adviser or sub-adviser to one other
investment company with total assets of $146.4 million.
Maureen Ghublikian has been a Managing Director of the Sub-Adviser since the
firm's inception in 1986. In 1986, she was promoted to Vice President. Ms.
Ghublikian has managed the Fund since its inception in September 1994.
David A. Umstead has been a founder and Managing Director of the Sub-Adviser
since the firm's inception in 1986. Mr. Umstead has managed the Fund since its
inception in September 1994.
DISTRIBUTION OF INVESTMENT SHARES
FSC, a subsidiary of Federated Investors, is the principal distributor for the
Funds. It is a Pennsylvania corporation organized on November 14, 1969, and is
the principal distributor for a number of investment companies.
Each Investment Shares class of a Fund has adopted a separate plan for
distribution of Shares permitted by Rule 12b-1 under the Investment Company Act
of 1940 (the "Plans"), whereby each 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 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 of the Funds and 0.75% for Class
C Shares and Class D Shares of a 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 Shares.
The Funds make no payments in connection with the sale of Shares other than the
Rule 12b-1 fees paid to its distributor. The distributor, however, may pay a
sales commission to brokers (including FUBS) in connection with the sale of
Class C Shares and Class D Shares. Except as set forth in the next paragraph,
the Funds do not pay for unreimbursed expenses of the distributor. Since the
Funds' Plans are "compensation" type plans, however, future Rule 12b-1 fees may
permit recovery of such amounts or may result in a profit to the distributor.
The distributor may sell, assign or pledge its right to receive Rule 12b-1 fees
and CDSCs to finance payments made to brokers (including FUBS) in connection
with the sale of Class C Shares and Class D Shares. First Union Corporation
currently serves as principal lender in this financing program. Actual
distribution expenses for Class C Shares and Class D Shares at any given time
may exceed the Rule 12b-1 fees and payments received pursuant to CDSCs. These
unrecovered amounts, plus interest thereon, will be carried forward and paid
from future Rule 12b-1 fees and payments received through CDSCs. If a Plan were
terminated or not continued, the Funds would not be contractually obligated to
pay for any expenses not previously reimbursed by the Funds or recovered
through CDSCs.
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 Plans and will not be an expense of
the Funds.
FUND ADMINISTRATION
Federated Administrative Services ("FAS"), a subsidiary of Federated Investors,
provides the Funds with administrative personnel and services necessary to
operate the Funds, such as legal and accounting services, for a specified fee
which is detailed below.
State Street Bank and Trust Company ("State Street Bank"), Boston,
Massachusetts, serves as custodian for the securities and cash of the Funds.
Federated Services Company, a subsidiary of Federated Investors, serves as
transfer agent and provides dividend disbursement and other shareholder
services for the Funds.
First Union Brokerage Services, Charlotte, North Carolina, is the shareholder
servicing agent for Class C Shares and Class D Shares of the Funds. As such,
FUBS provides shareholder services which include, but are not limited to,
distributing prospectuses and other information, providing shareholder
assistance, and communicating or facilitating purchases and redemptions of
shares. The Funds may pay FUBS a fee equal to 0.25 of 1% of the average daily
net asset value of Class C Shares and Class D Shares for which FUBS provides
shareholder services. FUBS may voluntarily choose to waive all or a portion of
its fee at any time.
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
- ------------------------- -------------------------
- ------------------------- -------------------------
Each Fund pays annual advisory and administrative fees and certain expenses.
ADVISORY, SUB-ADVISORY, AND ADMINISTRATIVE FEES
For managing their investment and business affairs, the Funds pay an annual fee
to First Union. The Adviser may voluntarily choose to waive a portion of its
fee or reimburse the Funds for certain operating expenses. The Adviser receives
an annual investment advisory fee with respect to the Emerging Markets Growth
Fund and the International Equity Fund, respectively:
Emerging Markets Growth Fund
<TABLE>
<CAPTION>
Average Aggregate
Advisory Fee Daily Net Assets
------------ -----------------------------------
<S> <C>
1.50% on the first $100 million
1.45% on the next $100 million
1.40% on the next $100 million
1.35% on assets in excess of $300 million
</TABLE>
International Equity Fund
<TABLE>
<CAPTION>
Average Aggregate
Advisory Fee Daily Net Assets
------------ -----------------------------------
<S> <C>
.82% on the first $20 million
.79% on the next $30 million
.76% on the next $50 million
.73% on assets in excess of $100 million
</TABLE>
The fees paid by the Emerging Markets Growth Fund and the International Equity
Fund are higher than the advisory fees paid by other mutual funds in general;
however, the fees paid by the International Equity Fund are comparable to fees
paid by many mutual funds with similar objectives and policies.
For its services under the Sub-Advisory Contract, each Sub-Adviser receives a
monthly fee calculated on an annual basis, payable by the Adviser, for its
services and expenses incurred with respect to the Emerging Markets Growth Fund
and the International Equity Fund, respectively:
Emerging Markets Growth Fund--Marvin & Palmer
<TABLE>
<CAPTION>
Average Aggregate
Sub-Advisory Fee Daily Net Assets
---------------- -----------------------------------
<S> <C>
1.00% on the first $100 million
.95% on the next $100 million
.90% on the next $100 million
.85% on assets in excess of $300 million
</TABLE>
International Equity Fund--Boston International
<TABLE>
<CAPTION>
Average Aggregate
Sub-Advisory Fee Daily Net Assets
---------------- -----------------------------------
<S> <C>
.32% on the first $20 million
.29% on the next $30 million
.26% on the next $50 million
.23% on assets in excess of $100 million
</TABLE>
The Trust also pays a fee for administrative services. FAS provides these at an
annual rate as specified below:
<TABLE>
<CAPTION>
Maximum Average Aggregate Daily Net
Administrative Fee Assets of the Trust
------------------- -----------------------------------
<S> <C>
.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
</TABLE>
Unless waived, the administrative fee received during any fiscal year shall
aggregate at least $50,000 per First Union Fund.
EXPENSES OF THE FUNDS AND INVESTMENT SHARES
Holders of Shares pay their allocable portion of Trust and respective 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.
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 Funds' expenses under the Rule 12b-1 Plans are incurred by the Class B
Shares, Class C Shares and Class D Shares. In addition, the Funds' expenses
under the Shareholder Services Plan are incurred by the Class C Shares and
Class D 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; shareholder services 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 and shareholder services fees, are allocated based upon
the average daily net assets of each class of a Fund.
- ------------------------- SHAREHOLDER -------------------------
- ------------------------- RIGHTS AND -------------------------
PRIVILEGES
VOTING RIGHTS
Each share of a Fund is entitled to one vote in Trustee elections and other
voting matters submitted to shareholders. All shares of all classes of each
First Union Fund in the Trust have equal voting rights, except that in matters
affecting only a particular First Union Fund or class, only shares of that
First Union Fund 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 a 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 non-bank 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, First Union, is subject to and in compliance with such banking
laws and regulations.
Sullivan & Cromwell has advised First Union that First Union may perform the
services for the Funds 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 First Union from continuing to
perform such services for the Funds or from continuing to purchase Shares for
the accounts of its customers. If First Union were prohibited from acting as
investment adviser to the Funds, it is expected that the Trustees would
recommend to the Funds' shareholders that they approve a new investment
adviser selected by the Trustees. It is not expected that the Funds'
shareholders would suffer any adverse financial consequences (if another
adviser with equivalent abilities to First Union is found) as a result of any
of these occurrences.
- ------------------------ DISTRIBUTIONS ------------------------
- ------------------------ AND TAXES ------------------------
Each 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 and paid quarterly for both Funds. 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 FUBS in writing.
CAPITAL GAINS
Any net long-term capital gains realized by the Funds 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 Funds pay no federal income tax if they meet the requirements of the
Internal Revenue Code, as amended (the "Code") applicable to regulated
investment companies and will receive the special tax treatment afforded to
such companies. However, the Funds may invest in the stock of certain foreign
corporations which would constitute a Passive Foreign Investment Company
("PFIC"). Federal income taxes may be imposed on a Fund upon disposition of
PFIC investments.
Each First Union Fund is treated as a single, separate entity for federal
income tax purposes so that income (including capital gains) and losses
realized by one First Union Fund will not be combined for tax purposes with
those realized by other First Union Funds.
Investment income received by the Funds from sources within foreign countries
may be subject to foreign taxes withheld at the source. The United States has
entered into tax treaties with many foreign countries that entitle the Funds to
reduced tax rates or exemptions on this income. The effective rate of foreign
tax cannot be predicted since the amount of Fund assets to be invested within
various countries will vary. However, the Funds intend to operate so as to
qualify for treaty-reduced tax rates, where applicable.
Unless otherwise exempt, shareholders are required to pay federal income tax
on any dividends and other distributions, whether in shares or cash, for all
the Funds. Detailed information concerning the status of dividend and capital
gains distributions for federal income tax purposes is mailed to shareholders
annually. Distributions representing net long-term capital gains realized by a
Fund, if any, will be taxable as long-term capital gains regardless of the
length of time shareholders have held their Shares.
If more than 50% of the value of a Fund's assets at the end of the tax year is
represented by stock or securities of foreign corporations, the Fund intends
to qualify for certain Code stipulations that would allow shareholders to
claim a foreign tax credit or deduction on their U.S. income tax returns. The
Code may limit a shareholder's ability to claim a foreign tax credit.
Furthermore, shareholders who elect to deduct their portion of a Fund's
foreign taxes rather than take the foreign tax credit must itemize deductions
on their income tax returns.
Shareholders are urged to consult their own tax advisers regarding the status
of their accounts under state and local tax laws.
- ------------------------ OTHER CLASSES ------------------------
- ------------------------ OF SHARES ------------------------
First Union International Funds offer four classes of shares: Class B Shares,
Class C Shares and Class D Shares for individuals and other customers of First
Union 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.
The stated advisory fee is the same for all classes of the Funds. 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 same Fund.
The amount of dividends payable to Class B Shares, Class C Shares and Class D
Shares will be less than those payable to Trust Shares by the difference
between class expenses and distribution and shareholder services expenses
borne by the shares of each respective class.
- ------------------------- ADDRESSES -------------------------
- ------------------------- -------------------------
- --------------------------------------------------------------------------------
First Union Funds 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
- --------------------------------------------------------------------------------
Sub-Adviser to Emerging Markets Fund
Marvin & Palmer Associates, Inc. One Commerce Center
Suite 1100
Wilmington, Delaware 19801
- --------------------------------------------------------------------------------
Sub-Adviser to International Equity Fund
Boston International Advisors, Inc. 75 State Street
Boston, Massachusetts 02109
- --------------------------------------------------------------------------------
Custodian
State Street Bank and Trust Company P.O. Box 8609
Boston, Massachusetts
02266-8609
- --------------------------------------------------------------------------------
Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
FIRST UNION EMERGING MARKETS GROWTH PORTFOLIO
FIRST UNION INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIOS OF FIRST UNION FUNDS
TRUST SHARES
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
CLASS D INVESTMENT SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectus of Trust Shares, Class B Investment Shares,
Class C Investment Shares, or Class D Investment Shares for First
Union International Funds, dated September , 1994. This Statement is
not a prospectus itself. To receive a copy of the Trust Shares'
prospectus, write First Union National Bank of North Carolina, Capital
Management Group, 1200 Two First Union Center, Charlotte, North
Carolina 28288-1156 or call 1-800-326-2584. To receive a copy of the
combined Class B Investment Shares', Class C Investment Shares', and
Class D Investment Shares' prospectus, write First Union Brokerage
Services, Inc., One First Union Center, 301 S. College Street,
Charlotte, North Carolina 28288-1173 or call 1-800-326-3241.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated September , 1994
LOGO FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUNDS 1
- -----------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- -----------------------------------------------------------------
Types of Investments 1
Strategic Investments 2
Foreign Currency Transactions 2
Emerging Markets 4
Restricted Securities 4
When-Issued and Delayed
Delivery Transactions 5
Lending of Portfolio Securities 5
Repurchase Agreements 5
Reverse Repurchase Agreements 5
Portfolio Turnover 5
Investment Limitations 6
TRUST MANAGEMENT 8
- -----------------------------------------------------------------
Officers and Trustees 8
Fund Ownership 9
Trustee Liability 9
INVESTMENT ADVISORY SERVICES 9
- -----------------------------------------------------------------
Adviser to the Funds 9
Sub-Advisers 9
Advisory Fees 9
Sub-Advisory Fees 9
BROKERAGE TRANSACTIONS 10
- -----------------------------------------------------------------
ADMINISTRATIVE SERVICES 10
- -----------------------------------------------------------------
PURCHASING SHARES 10
- -----------------------------------------------------------------
Distribution Plans (Class B, Class C and
Class D Investment Shares) 11
DETERMINING NET ASSET VALUE 12
- -----------------------------------------------------------------
Determining Market Value of Securities 12
Trading in Foreign Securities 12
REDEEMING SHARES 12
- -----------------------------------------------------------------
Redemption in Kind 13
TAX STATUS 13
- ---------------------------------------------------------------
The Fund's Tax Status 13
Foreign Taxes 13
Shareholders' Tax Status 13
TOTAL RETURN 13
- -----------------------------------------------------------------
YIELD 13
- -----------------------------------------------------------------
PERFORMANCE COMPARISONS 14
- -----------------------------------------------------------------
APPENDIX 15
- -----------------------------------------------------------------
I
GENERAL INFORMATION ABOUT THE FUNDS
- --------------------------------------------------------------------------------
First Union Emerging Markets Growth Portfolio ("Emerging Markets Growth Fund")
and First Union International Equity Portfolio ("International Equity Fund")
(collectively, the "Funds") are portfolios of First Union Funds (the "Trust").
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated August 30, 1984. On January 4, 1993, the name of the Trust was
changed from "The Salem Funds" to "First Union Funds."
Shares of the Funds are offered in four classes: Trust Shares, Class B
Investment Shares, Class C Investment Shares, and Class D Investment Shares
(individually and collectively referred to as "Shares"). This Combined Statement
of Additional Information relates to the above-mentioned Shares of the Funds.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The combined prospectuses for the Funds discusses each Fund's investment
objective and the policies that each Fund employs to achieve its objective. The
following discussion supplements the description of each Fund's investment
policies in the combined prospectuses. The investment objective of each Fund
cannot be changed without approval of shareholders.
TYPES OF INVESTMENTS
CONVERTIBLE SECURITIES
Each Fund may invest in convertible securities. Convertible securities
include fixed-income securities that may be exchanged or converted into a
predetermined number of shares of the issuer's underlying common stock at
the option of the holder during a specified period. Convertible
securities may take the form of convertible preferred stock, convertible
bonds or debentures, units consisting of "usable" bonds and warrants or a
combination of the features of several of these securities. The
investment characteristics of each convertible security vary widely,
which allow convertible securities to be employed for a variety of
investment strategies.
Each Fund will exchange or convert convertible securities into shares of
underlying common stock when, in the opinion of First Union National
Bank, the Funds' investment adviser, or Marvin & Palmer Associates, Inc.,
the sub-adviser to the Emerging Markets Growth Fund or Boston
International Advisors, Inc., the sub-adviser to the International Equity
Fund ("Sub-Adviser") (collectively referred to as "Adviser"), the
investment characteristics of the underlying common shares will assist a
Fund in achieving its investment objective. A Fund may also elect to hold
or trade convertible securities. In selecting convertible securities, the
Adviser evaluates the investment characteristics of the convertible
security as a fixed-income instrument, and the investment potential of
the underlying equity security for capital appreciation. In evaluating
these matters with respect to a particular convertible security, the
Adviser considers numerous factors, including the economic and political
outlook, the value of the security relative to other investment
alternatives, trends in the determinants of the issuer's profits, and the
issuer's management capability and practices.
WARRANTS
Each Fund may invest in warrants. Warrants are options to purchase common
stock at a specific price (usually at a premium above the market value of
the optioned common stock at issuance) valid for a specific period of
time. Warrants may have a life ranging from less than one year to twenty
years, or they may be perpetual. However, most warrants have expiration
dates after which they are worthless. In addition, a warrant is worthless
if the market price of the common stock does not exceed the warrant's
exercise price during the life of the warrant. Warrants have no voting
rights, pay no dividends, and have no rights with respect to the assets
of the corporation issuing them. The percentage increase or decrease in
the market price of the warrant may tend to be greater than the
percentage increase or decrease in the market price of the optioned
common stock. Each Fund will not invest more than 5% of the value of its
total assets in warrants. No more than 2% of this 5% may be warrants
which are not listed on the New York or American Stock Exchanges.
Warrants acquired in units or attached to other securities may be deemed
to be without value for purposes of this policy.
SOVEREIGN DEBT OBLIGATIONS
Each Fund may purchase sovereign debt instruments issued or guaranteed by
foreign governments or their agencies, including debt of Latin American
nations or other developing countries. Sovereign debt may be in the form
of conventional securities or other types of debt instruments such as
loans or loan participations. Sovereign debt of developing countries may
involve a high degree of risk, and may be in default or present the risk
of default. Governmental entities responsible for repayment of the debt
may be unable or unwilling to repay principal and interest when due, and
may require renegotiation or rescheduling of debt payments. In addition,
prospects for repayment of principal and interest may depend on
political as well as economic factors.
SECURITIES OF SMALL CAPITALIZATION COMPANIES
Smaller capitalization companies may have limited product lines, markets,
or financial resources. These conditions may make them more susceptible
to setbacks and reversals. Therefore, their securities may have limited
marketability and may be subject to more abrupt or erratic market
movements than securities of larger companies.
CLOSED-END INVESTMENT COMPANIES
Each Fund may purchase the equity securities of closed-end investment
companies to facilitate investment in certain countries. Equity
securities of closed-end investment companies generally trade at a
discount to their net asset value.
STRATEGIC INVESTMENTS
FOREIGN CURRENCY TRANSACTIONS
CURRENCY RISKS
The exchange rates between the U.S. dollar and foreign currencies are a
function of such factors as supply and demand in the currency exchange
markets, international balances of payments, governmental intervention,
speculation and other economic and political conditions. Although a Fund
values its assets daily in U.S. dollars, the Fund may not convert its
holdings of foreign currencies to U.S. dollars daily. A Fund may incur
conversion costs when it converts its holdings to another currency.
Foreign exchange dealers may realize a profit on the difference between
the price at which the Fund buys and sells currencies.
Each Fund will engage in foreign currency exchange transactions in
connection with its portfolio investments. A Fund will conduct its
foreign currency exchange transactions either on a spot (i.e., cash)
basis at the spot rate prevailing in the foreign currency exchange market
or through forward contracts to purchase or sell foreign currencies.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Each Fund may enter into forward foreign currency exchange contracts in
order to protect against a possible loss resulting from an adverse change
in the relationship between the U.S. dollar and a foreign currency
involved in an underlying transaction. However, forward foreign currency
exchange contracts may limit potential gains which could result from a
positive change in such currency relationships. The Adviser believes that
it is important to have the flexibility to enter into forward foreign
currency exchange contracts whenever it determines that it is in a Fund's
best interest to do so. A Fund will not speculate in foreign currency
exchange.
A Fund will not enter into forward foreign currency exchange contracts or
maintain a net exposure in such contracts when it would be obligated to
deliver an amount of foreign currency in excess of the value of its
portfolio securities or other assets denominated in that currency or, in
the case of a "cross-hedge" denominated in a currency or currencies that
the Adviser believes will tend to be closely correlated with that
currency with regard to price movements. Generally, a Fund will not enter
into a forward foreign currency exchange contract with a term longer than
one year.
FOREIGN CURRENCY OPTIONS
A foreign currency option provides the option buyer with the right to buy
or sell a stated amount of foreign currency at the exercise price on a
specified date or during the option period. The owner of a call option
has the right, but not the obligation, to buy the currency. Conversely,
the owner of a put option has the right, but not the obligation, to sell
the currency.
When the option is exercised, the seller (i.e., writer) of the option is
obligated to fulfill the terms of the sold option. However, either the
seller or the buyer may, in the secondary market, close its position
during the option period at any time prior to expiration.
A call option on a foreign currency generally rises in value if the
underlying currency appreciates in value, and a put option on a foreign
currency generally falls in value if the underlying currency depreciates
in value. Although purchasing a foreign currency option can protect the
Fund against an adverse movement in the value of a foreign currency, the
option will not limit the movement in the value of such currency. For
example, if a Fund was holding securities denominated in a foreign
currency that was appreciating and had purchased a foreign currency put
to hedge against a decline in the value of the currency, the Fund would
not have to exercise its put option. Likewise, if a Fund were to enter
into a contract to purchase a security denominated in foreign currency
and, in conjunction with that purchase, were to purchase a foreign
currency call option to hedge against a rise in value of the currency,
and if the value of the currency instead depreciated between the date of
purchase and the settlement date, the Fund would not have to exercise
its call. Instead, the Fund could acquire in the spot market the amount
of foreign currency needed for settlement.
SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY OPTIONS
Buyers and sellers of foreign currency options are subject to the same
risks that apply to options generally. In addition, there are certain
additional risks associated with foreign currency options. The markets in
foreign currency options are relatively new, and the Funds' ability to
establish and close out positions on such options is subject to the
maintenance of a liquid secondary market. Although the Funds will not
purchase or write such options unless and until, in the opinion of the
Adviser, the market for them has developed sufficiently to ensure that
the risks in connection with such options are not greater than the risks
in connection with the underlying currency, there can be no assurance
that a liquid secondary market will exist for a particular option at any
specific time.
In addition, options on foreign currencies are affected by all of those
factors that influence foreign exchange rates and investments generally.
The value of a foreign currency option depends upon the value of the
underlying currency relative to the U.S. dollar. As a result, the price
of the option position may vary with changes in the value of either or
both currencies and may have no relationship to the investment merits of
a foreign security. Because foreign currency transactions occurring in
the interbank market involve substantially larger amounts than those that
may be involved in the use of foreign currency options, investors may be
disadvantaged by having to deal in an odd lot market (generally
consisting of transactions of less than $1 million) for the underlying
foreign currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely
basis. Available quotation information is generally representative of
very large transactions in the interbank market and thus may not reflect
relatively smaller transactions (i.e., less than $1 million) where rates
may be less favorable. The interbank market in foreign currencies is a
global, around-the-clock market. To the extent that the U.S. option
markets are closed while the markets for the underlying currencies remain
open, significant price and rate movements may take place in the
underlying markets that cannot be reflected in the options markets until
they reopen.
FOREIGN CURRENCY FUTURES TRANSACTIONS
By using foreign currency futures contracts and options on such
contracts, a Fund may be able to achieve many of the same objectives as
it would through the use of forward foreign currency exchange contracts.
The Funds may be able to achieve these objectives possibly more
effectively and at a lower cost by using futures transactions instead of
forward foreign currency exchange contracts.
SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY FUTURES CONTRACTS AND
RELATED OPTIONS
Buyers and sellers of foreign currency futures contracts are subject to
the same risks that apply to the use of futures generally. In addition,
there are risks associated with foreign currency futures contracts and
their use as a hedging device similar to those associated with options on
futures currencies, as described above.
Options on foreign currency futures contracts may involve certain
additional risks. Trading options on foreign currency futures contracts
is relatively new. The ability to establish and close out positions on
such options is subject to the maintenance of a liquid secondary market.
To reduce this risk, the Funds will not purchase or write options on
foreign currency futures contracts unless and until, in the opinion of
the Adviser, the market for such options has developed sufficiently that
the risks in connection with such options are not greater than the risks
in connection with transactions in the underlying foreign currency
futures contracts. Compared to the purchase or sale of foreign currency
futures contracts, the purchase of call or put options on futures
contracts involves less potential risk to the Funds because the maximum
amount at risk is the premium paid for the option (plus transaction
costs). However, there may be circumstances when the purchase of a call
or put option on a futures contract would result in a loss, such as when
there is no movement in the price of the underlying currency or futures
contract.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Funds do not pay or
receive money upon the purchase or sale of a futures contract. Rather, a
Fund is required to deposit an amount of "initial margin" in cash or U.S.
Treasury bills with the custodian (or the broker, if legally permitted).
The nature of initial margin in futures transactions is different from
that of margin in securities transactions, in that futures contracts'
initial margin does not involve a borrowing by a Fund to finance the
transactions. Initial margin is in the nature of a performance bond or
good faith deposit on the contract which is returned to a Fund upon
termination of the futures contract, assuming all contractual obligations
have been satisfied.
A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the
Funds pay or receive cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as
"marking to market." Variation margin does not represent a borrowing or
loan by a Fund but is instead settlement between the Fund and the broker
of an amount one would owe the other if the futures contract expired. In
computing its daily net asset value, the Funds will mark to market their
open futures positions.
EMERGING MARKETS
The economies of individual emerging countries may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, the
economies of developing countries generally are heavily dependent on
international trade and, accordingly, have been, and may continue to be,
adversely affected by trade barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by the countries with which they trade. These economies also have been, and may
continue to be, adversely affected by economic conditions in the countries with
which they trade.
Prior governmental approval for foreign investments may be required under
certain circumstances in some emerging countries, and the extent of foreign
investment in certain debt securities and domestic companies may be subject to
limitation in other emerging countries. Foreign ownership limitations also may
be imposed by the charters of individual companies in emerging countries to
prevent, among other concerns, violation of foreign investment limitations.
Repatriation of investment income, capital and the proceeds of sales by foreign
investors may require governmental registration and/or approval in some emerging
countries. A Fund could be adversely affected by delays in, or a refusal to
grant, any required governmental registration or approval for such repatriation.
Any investment subject to such repatriation controls will be considered illiquid
if it appears reasonably likely that this process will take more than seven
days.
With respect to any emerging country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
governmental regulation, social instability or diplomatic developments
(including war) which could affect adversely the economies of such countries or
the value of the Funds' investments in those countries. In addition, it may be
difficult to obtain and enforce a judgment in a court outside of the U.S.
RESTRICTED SECURITIES
The ability of the Board of Trustees (the "Trustees") to determine the liquidity
of certain restricted securities is permitted under a Securities and Exchange
Commission ("SEC") Staff position set forth in the adopting release for Rule
144A under the Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive,
safe-harbor for certain secondary market transactions involving securities
subject to restrictions on resale under federal securities laws. The Rule
provides an exemption from registration for resales of otherwise restricted
securities to qualified institutional buyers. The Rule was expected to further
enhance the liquidity of the secondary market for securities eligible for resale
under the Rule. The Funds believe that the Staff of the SEC has left the
question of determining the liquidity of all restricted securities to the
Trustees. The Trustees consider the following criteria in determining the
liquidity of certain restricted securities:
. the frequency of trades and quotes for the security;
. the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
. dealer undertakings to make a market in the security; and
. the nature of the security and the nature of marketplace trades.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Funds engage in when-issued and delayed delivery transactions only for the
purpose of acquiring portfolio securities consistent with a Fund's investment
objective and policies, not for investment leverage.
These transactions are made to secure what is considered to be an advantageous
price or yield for the Funds. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of a Fund sufficient to make payment for the securities
to be purchased are segregated at the trade date. These securities are marked to
market daily and maintained until the transaction is settled.
Each 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.
LENDING OF PORTFOLIO SECURITIES
The collateral received when a Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Funds any dividends or
interest paid on such securities. Loans are subject to termination at the option
of a Fund or the borrower. The Funds may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. The Funds do not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
REPURCHASE AGREEMENTS
The Funds or their custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from the
Funds, the Funds 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 Funds might be
delayed pending court action. The Funds believe that under the regular
procedures normally in effect for custody of a Fund's portfolio securities
subject to repurchase agreements, a court of competent jurisdiction would rule
in favor of the Fund and allow retention or disposition of such securities. The
Funds will only enter into repurchase agreements with banks and other recognized
financial institutions, such as broker/dealers, which are deemed by the Adviser
to be creditworthy pursuant to guidelines established by the Trustees.
REVERSE REPURCHASE AGREEMENTS
The Funds may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement, the Funds
transfer 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 agree that on a stipulated date in the
future the Funds 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 Funds 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
Funds will be able to avoid selling portfolio instruments at a disadvantageous
time.
When effecting reverse repurchase agreements, liquid assets of a Fund, in a
dollar amount sufficient to make payment for the obligations to be repurchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
PORTFOLIO TURNOVER
The Funds 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 Funds' investment objectives. It is not anticipated that the portfolio
trading engaged in by the Emerging Markets Growth Fund and the International
Equity Fund will result in its annual rate of turnover exceeding % and %,
respectively.
INVESTMENT LIMITATIONS
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of its assets, each Fund will not
purchase the securities of any issuer (other than cash, cash items, or
securities issued or guaranteed by the U.S. government, its agencies, or
instrumentalities and repurchase agreements collateralized by such
securities) if, as a result, more than 5% of the value of its total
assets would be invested in the securities of that issuer, or if it would
own more than 10% of the outstanding voting securities of any one issuer.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
Each Fund will not issue senior securities, except that a Fund may borrow
money directly or through reverse repurchase agreements in amounts up to
one-third of the value of its total assets, including the amount borrowed
and except to the extent that a Fund may enter into futures contracts. A
Fund will not borrow money or engage in reverse repurchase agreements for
investment leverage, but rather as a temporary, extraordinary, or
emergency measure to facilitate management of the portfolio by enabling
the Fund to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. A Fund will
not purchase any securities while borrowings in excess of 5% of its total
assets are outstanding.
SELLING SHORT AND BUYING ON MARGIN
Each Fund will not sell any securities short or purchase any securities
on margin, but may obtain such short-term credits as may be necessary for
the clearance of purchases and sales of securities. A deposit or payment
by a Fund of initial or variation margin in connection with financial
futures contacts or related options transactions is not considered the
purchase of a security on margin.
UNDERWRITING
Each 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.
CONCENTRATION OF INVESTMENTS
Each Fund will not invest 25% or more 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.
INVESTING IN REAL ESTATE
Each Fund will not purchase or sell real estate, including limited
partnership interests in real estate, although it may invest in
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
Each Fund will not invest in commodities, except that each Fund reserves
the right to engage in transactions involving futures contracts options,
and forward contracts with respect to securities, securities indexes or
currencies.
PLEDGING ASSETS
Each 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. For
purposes of this limitation, the following are not deemed to be pledges:
margin deposits for the purchase and sale of financial futures contracts
and related options; and segregation or collateral arrangements made in
connection with options activities or the purchase of securities on a
when-issued basis.
LENDING CASH OR SECURITIES
Each Fund will not lend any of its assets, except portfolio securities up
to one-third of the value of its total assets. This shall not prevent the
Fund from purchasing or holding corporate or government bonds,
debentures, notes, certificates of indebtedness or other debt securities
of an issuer, repurchase agreements, or other transactions which are
permitted by a Fund's investment objective and policies or the Trust's
Declaration of Trust.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material changes
in these limitations become effective.
INVESTING IN RESTRICTED SECURITIES
Each Fund will not invest more than 5% of its total assets in securities
subject to restrictions on resale under the Securities Act of 1933,
except for restricted securities which meet the criteria for liquidity as
established by the Trustees.
INVESTING IN ILLIQUID SECURITIES
Each Fund will not invest more than 15% of its net assets in illiquid
securities, including repurchase agreements providing for settlement more
than seven days after notice, non-negotiable time deposits, and certain
restricted securities not determined by the Trustees to be liquid.
INVESTING IN NEW ISSUERS
Each Fund will not invest more than 5% of its total assets in securities
of issuers which have records of less than three years of continuous
operations, including their predecessors.
INVESTING IN WARRANTS
Each Fund will not invest more than 5% of its net assets in warrants,
including those acquired in units or attached to other securities. To
comply with certain state restrictions, a Fund will limit its investment
in such warrants not listed on the New York or American Stock Exchanges
to 2% of its net assets. (If state restrictions change, this latter
restriction may be revised without notice to shareholders.) For purposes
of this investment restriction, warrants will be valued at the lower of
cost or market, except that warrants acquired by a Fund in units with or
attached to securities may be deemed to be without value.
INVESTING IN OPTIONS
Each Fund may write covered call options and secured put options on up to
25% of its net assets and may purchase put and call options provided that
no more than 5% of the fair market value of its net assets may be
invested in premiums on such options.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
Each Fund will limit its investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, will invest no more than 5% of its total assets in any one
investment company, and will invest no more than 10% of its total assets
in investment companies in general. A Fund will purchase securities of
closed-end 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 MINERALS
Each 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.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
Each Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust, its investment adviser, or a
sub-adviser, owning individually more than 1/2 of 1% of the issuer's
securities, together own more than 5% of the issuer's securities.
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.
To comply with registration requirements in certain states, each Fund will limit
the margin deposits on futures contracts entered into by a Fund to 5% of its net
assets. (If state requirements change, these restrictions may be revised without
shareholder notification.)
Each Fund has no present intention to borrow money in excess of 5% of the value
of its net assets during the coming fiscal year.
For purposes of its policies and limitations, the Funds consider certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items."
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"), Boston International Advisors,
Inc. ("Boston International"), Marvin & Palmer Associates, Inc. ("Marvin &
Palmer"),Federated Investors, Federated Securities Corp., Federated Services
Company, or Federated Administrative Services.
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME THE TRUST DURING PAST FIVE YEARS
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<S> <C> <C>
James S. Howell Chairman of Retired Vice President of Lance Inc. (food manufacturing).
the Board and
Trustee
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Gerald M. McDonnell Trustee Sales Representative with Nucor-Yamoto, Inc. (steel producer) (since
1988); formerly with Northwestern Steel & Wire Company (1986-1988).
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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).
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William Walt Pettit* Trustee Principal in the law firm Holcomb and Pettit, P.A. (since 1988);
formerly with Clontz and Clontz (1980-1988).
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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).
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Michael S. Scofield Trustee Attorney; formerly, Partner with Wardlow, Knox, Knox,
Freeman & Scofield (attorneys) (1982-1986).
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Edward C. Gonzales* President, Vice President, Treasurer, and Trustee, Federated Investors; Vice
Treasurer, and President and Treasurer, Federated Advisers, Federated Management, and
Trustee Federated Research; Executive Vice President, Treasurer, and Director,
Federated Securities Corp.; Trustee, Federated Services Company;
Chairman, Treasurer, and Trustee, Federated Administrative Services;
Vice President, Treasurer, and Trustee of certain investment companies
advised or distributed by affiliates of Federated Investors.
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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.
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Peter J. Germain Secretary Corporate Counsel, Federated Investors.
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</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.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that a Trustee shall 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 FUNDS
The Funds' 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 Funds or any shareholder of
the Funds for any losses that may be sustained in the purchase, holding, or sale
of any security, or for anything done or omitted by it, except acts or omissions
involving wilful misfeasance, bad faith, gross negligence, or reckless disregard
of the duties imposed upon it by its contract with the Trust.
Because of the internal controls maintained by First Union to restrict the flow
of non-public information, Fund investments are typically made without any
knowledge of First Union's or its affiliates' lending relationships with an
issuer.
SUB-ADVISERS
Marvin & Palmer and Boston International are the sub-advisers to the Emerging
Markets Growth Fund and the International Equity Fund, respectively, under the
terms of Sub-Advisory Agreements between First Union and the respective
Sub-Adviser.
ADVISORY FEES
For their advisory services, the Adviser receives an annual investment advisory
fee as described in the respective prospectus.
SUB-ADVISORY FEES
For their sub-advisory services, Marvin & Palmer and Boston International
receive an annual sub-advisory fee as described in the respective prospectus.
STATE EXPENSE LIMITATIONS
The Adviser and Sub-Advisers have undertaken to comply with the expense
limitations established by certain states for investment companies whose
shares are registered for sale in those states. If a 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 and
Sub-Adviser will reimburse the Funds for its expenses over the
limitation.
If the Funds' 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 and
Sub-Adviser will be limited, in any single fiscal year, by the amount of
their advisory fees.
This arrangement is not part of the advisory contract or sub-advisory
agreement and may be amended or rescinded in the future.
BROKERAGE TRANSACTIONS
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When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser and Sub-Adviser look for prompt execution of the order
at a favorable price. In working with dealers, the Adviser and Sub-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 and Sub-Adviser may, from time to time, use
brokers affiliated with the Trust, Federated Securities Corp., or their
affiliates. The Adviser and Sub-Adviser make decisions on portfolio transactions
and select brokers and dealers subject to review by the Trustees.
The Adviser and Sub-Adviser may select brokers and dealers who offer brokerage
and research services. These services may be furnished directly to the Funds or
to the Adviser and Sub-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 Sub-Adviser and their 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 and
Sub-Adviser in advising the Funds and other accounts. To the extent that receipt
of these services may supplant services for which the Adviser and Sub-Adviser or
its affiliates might otherwise have paid, it would tend to reduce their
expenses.
Although investment decisions for the Funds are made independently from those of
the other accounts managed by the Adviser and Sub-Advisers, investments of the
type the Funds may make may also be made by those other accounts. When the Funds
and one or more other accounts managed by the Adviser and/or Sub-Advisers are
prepared to invest in, or desire to dispose of, the same security, available
investments or opportunities for sales will be allocated in a manner believed by
the Adviser and Sub-Advisers to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by the Funds or the
size of the position obtained or disposed of by the Funds. In other cases,
however, it is believed that coordination and the ability to participate in
volume transactions will be to the benefit of the Funds.
ADMINISTRATIVE SERVICES
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Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to each Fund for a fee as described in the
respective prospectus.
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 Shares is explained in the respective
prospectus under "How to Buy Shares."
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Class B Investment
Shares through:
. quantity discounts and accumulated purchases;
. signing a 13-month letter of intent;
. using the reinvestment privilege; or
. concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
Larger purchases reduce the sales charge paid. A 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, a 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 3.75%, not 4.75%.
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. A Fund will reduce the sales charge after it confirms the
purchases.
LETTER OF INTENT
If a shareholder intends to purchase at least $100,000 of Shares in a
Fund over the next 13 months, the sales charge may be reduced by signing
a letter of intent to that effect. This letter of intent includes a
provision for a sales charge adjustment depending on the amount actually
purchased within the 13-month period and a provision for the custodian to
hold up to 4.75% of the total amount intended to be purchased in escrow
(in Shares) until such purchase is completed.
The amount held in escrow will be applied to the shareholder's account at
the end of the 13-month period, unless the amount specified in the letter
of intent is not purchased. In this event, an appropriate number of
escrowed Shares may be redeemed in order to realize the difference in the
sales charge.
This letter of intent will not obligate the shareholder to purchase
Shares, but if the shareholder does, each purchase during the period will
be at the sales charge applicable to the total amount intended to be
purchased. This letter may be dated as of a prior date to include any
purchases made within the past 90 days.
REINVESTMENT PRIVILEGE
If Shares in a 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 a 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 First
Union 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 First Union Funds with a sales charge, and
$70,000 in Shares of another 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. A Fund will reduce the sales charge after
it confirms the purchases.
DISTRIBUTION PLANS (CLASS B, CLASS C, AND CLASS D INVESTMENT SHARES)
With respect to the Class B, Class C, and Class D Investment Shares classes of
the Funds, the Trust has adopted distribution plans (the "Plans") pursuant to
Rule 12b-1 which was promulgated by the SEC pursuant to the Investment Company
Act of 1940. The Plans permit the payment of fees to brokers for distribution
and administrative services and to administrators for administrative services as
to Class B, Class C, and Class D Investment Shares. The Plans are designed to
(i) stimulate brokers to provide distribution and administrative support
services to the Funds and holders of Class B, Class C, and Class D Investment
Shares and (ii) stimulate administrators to render administrative support
services to the Funds and holders of Class B, Class C, and Class D Investment
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 Class B, Class C, and Class D Investment Shares; assisting clients in
changing dividend options, account designations, and addresses; and providing
such other services as the Funds reasonably request for their Class B, Class C,
and Class D Investment Shares.
By adopting the Plans, the Trustees expect that the Funds will be able to
achieve a more predictable flow of cash for investment purposes and to meet
redemptions. This will facilitate more efficient portfolio management and assist
the Funds in seeking to achieve their investment objectives. By identifying
potential investors whose needs are served by the Funds' objectives, and
properly servicing these accounts, the Funds may be able to curb sharp
fluctuations in rates of redemptions and sales.
Other benefits which the Trust hopes to achieve through the Plans 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 Funds, 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.
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 Plans for
administrative services, and if paid, will be reimbursed by the Adviser
and not the Funds.
DETERMINING NET ASSET VALUE
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Net asset value of Shares generally changes each day. The days on which the net
asset values of Shares are calculated by the Funds are described in the
respective prospectus.
DETERMINING MARKET VALUE OF SECURITIES
The market values of each Fund's portfolio securities, other than options, are
determined as follows:
. for equity securities, according to the last sale price in the market in which
they are primarily traded, if available;
. in the absence of recorded sales for equity securities, according to the mean
between the last closing bid and asked prices;
. for bonds and other fixed-income securities, as determined by an independent
pricing service;
. for short-term obligations, according to the prices as furnished by an
independent pricing service, except that short-term obligations with
maturities of less than 60 days may be valued at amortized cost; and
. for all other securities, at fair value as determined in good faith by the
Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may consider yield, quality, coupon
rate, maturity, type of issue, trading characteristics, and other market data.
The Funds will value futures contracts and options at their market values
established by the exchanges on which they are traded at the close of trading on
such exchanges unless the Trustees determine in good faith that another method
of valuing such investments is necessary.
TRADING IN FOREIGN SECURITIES
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange. In computing the net asset values, the
Funds value foreign securities at the latest closing price on the exchange on
which they are traded immediately prior to the closing of the New York Stock
Exchange. Certain foreign currency exchange rates may also be determined at the
latest rate prior to the closing of the New York Stock Exchange. Foreign
securities quoted in foreign currencies are translated into U.S. dollars at
current rates. Occasionally, events that affect these values and exchange rates
may occur between the times at which they are determined and the closing of the
New York Stock Exchange. If such events materially affect the value of portfolio
securities, these securities may be valued at their fair value as determined in
good faith by the Trustees, although the actual calculation may be done by
others.
REDEEMING SHARES
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The Funds redeem Shares at the next computed net asset value after the Fund
receives the redemption request, plus a contingent deferred sales charge, if
applicable. Redemptions will be made on days on which a 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 respective prospectus
under "How to Redeem Shares."
REDEMPTION IN KIND
The Trust has elected to be governed by Rule 18f-1 of the Investment Company Act
of 1940, under which a 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, a 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 Funds 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 Funds
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.
However, the Funds may invest in the stock of certain foreign corporations which
would constitute a Passive Foreign Investment Company ("PFIC"). Federal income
taxes may be imposed on the Funds upon disposition of PFIC investments.
FOREIGN TAXES
Investment income on certain foreign securities in which the Funds may invest
may be subject to foreign withholding or other taxes that could reduce the
return on these securities. Tax treaties between the United States and foreign
countries, however, may reduce or eliminate the amount of foreign taxes to which
the Funds would be subject.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional shares. The Funds' dividends, and any short-term
capital gains, are taxable as ordinary income.
CAPITAL GAINS
Shareholders will pay federal income tax at capital gains rates on
long-term capital gains distributed to them regardless of how long they
have held the Shares.
TOTAL RETURN
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The average annual total return for all classes of Shares of a 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 a quarterly
reinvestment of all dividends and distributions.
YIELD
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The yield for all classes of Shares of a Fund is determined by dividing the net
investment income per Share (as defined by the SEC) earned by any class of
shares over a thirty-day period by the offering price per Share of any class on
the last day of the period. This value is then annualized using semi-annual
compounding. This means that the amount of income generated during the
thirty-day period is assumed to be generated each month over a twelve-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by any 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 broker/dealers charge fees in
connection with services provided in conjunction with an investment in any class
of shares, the performance will be reduced for those shareholders paying those
fees.
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 a 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 a Fund's performance. When comparing performance, investors
should consider all relevant factors, such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which a Fund uses in advertising may include:
. LIPPER ANALYTICAL SERVICES, INC. ("LIPPER"), an independent mutual fund rating
service, ranks funds in various fund categories by making comparative
calculations using total return. Total return assumes the reinvestment of all
capital gains distributions and income dividends and takes into account any
change in net asset value over a specified period of time. From time to time, a
Fund will quote its Lipper ranking in the appropriate category in advertising
and sales literature.
. EUROPE, AUSTRALIA, AND FAR EAST ("EAFE") is a market capitalization weighted
foreign securities index, which is widely used to measure the performance of
European, Australian, New Zealand and Far Eastern stock markets. The index
covers approximately 1,020 companies drawn from 18 countries in the above
regions. The index values its securities daily in both U.S. dollars and local
currency and calculates total returns monthly. EAFE U.S. dollar total return is
a net dividend figure less Luxembourg withholding tax. The EAFE is monitored by
Capital International, S.A., Geneva, Switzerland.
. MORGAN STANLEY CAPITAL INTERNATIONAL ("MSCI") EMERGING MARKETS FREE ("EMF")
INDEX is a market capitalization weighted foreign securities index, which is
used to measure the performance of developing or emerging markets (as defined
by World Bank) in Europe, Asia, Latin America, and the Middle East. MSCI
calculates a "Free" and a "Global" version of its EMF Index. The "Free" version
excludes those companies and share classes as well as markets, which are closed
to foreigners. The "Global" version includes all share classes as well as open
and closed markets. The EMF Index covers approximately 1,100 companies from 20
emerging markets described in the regions above. The MSCI EMF Index is
currently calculated in local currency and in U.S. dollars, without dividends
and with gross dividends reinvested (e.g., before withholding taxes).
. MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
Advertisements and other sales literature for 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 a 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.
APPENDIX
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STANDARD & POOR'S CORPORATION LONG-TERM 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 effect of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
MOODY'S INVESTORS SERVICE, INC. LONG-TERM 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.
Baa--Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
STANDARD & POOR'S CORPORATION COMMERCIAL PAPER RATING DEFINITIONS
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS
PRIME-1--Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following characteristics:
. Leading market positions in well established industries.
. High rates of return on funds employed.
. Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
. Broad margins in earnings coverage of fixed financial markets and assured
sources of alternate liquidity.
. Well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2--Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
3092403B (6/94)
