FIRST UNION
SOUTH CAROLINA
MUNICIPAL BOND
PORTFOLIO
A Portfolio of First Union Funds
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CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
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P R O S P E C T U S
January 1, 1994
The Class B Investment Shares ("Class B Shares") and Class C Investment Shares
("Class C Shares") offered by this prospectus represent interests in the First
Union South Carolina Municipal Bond Portfolio (the "Fund"), which is a non-
diversified investment portfolio in First Union Funds (the "Trust"), an open-
end, management investment company (a mutual fund).
The Fund seeks current income which is exempt from federal regular income tax
and South Carolina state income tax, consistent with preservation of capital.
This prospectus relates only to the Class B Shares and Class C Shares of the
Fund and contains the information you should read and know before you invest in
either class. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information for Class B
Shares and Class C Shares with the Securities and Exchange Commission, dated
January 1, 1994. The information contained in the Statement of Additional
Information is incorporated by reference into this prospectus. You may request
the Statement of Additional Information free of charge, obtain other
information, or make inquiries about the Fund by writing or calling the Mutual
Funds Group of First Union Brokerage Services, Inc. ("FUBS") at 1-800-326-3241.
The Fund 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.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- ------------------------ TABLE OF ------------------------
- ------------------------ CONTENTS ------------------------
SUMMARY 2 ADDITIONAL SHAREHOLDER SERVICES 12
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SUMMARY OF FUND EXPENSES 3 MANAGEMENT OF FIRST UNION FUNDS 12
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INVESTMENT OBJECTIVE AND POLICIES 4 FEES AND EXPENSES 14
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OTHER INVESTMENT POLICIES 6 SHAREHOLDER RIGHTS AND PRIVILEGES 15
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SHAREHOLDER GUIDE 7 DISTRIBUTIONS AND TAXES 16
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HOW TO BUY SHARES 9 TAX INFORMATION 16
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HOW TO CONVERT YOUR INVESTMENT FROM OTHER CLASSES OF SHARES 17
ONE FIRST UNION FUND TO ANOTHER -------------------------------------
FIRST UNION FUND 11
- ------------------------------------- ADDRESSES Inside Back Cover
HOW TO REDEEM SHARES 12
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- ------------------------ SUMMARY ------------------------
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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 First
Union Fund. The South Carolina Municipal Bond Portfolio is divided into three
classes of shares: Trust Shares, Class B Shares and Class C Shares. Trust
Shares are designed primarily for institutional investors (banks, corporations,
and fiduciaries). Class B Shares and Class C Shares are sold to customers of
First Union (the "Adviser") and others, 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). This prospectus relates to both classes of
Investment Shares ("Shares") of the Fund.
DESCRIPTION OF THE FUND
The Fund seeks current income exempt from federal regular income tax and South
Carolina state income tax, consistent with preservation of capital. The Fund is
designed as a convenient means of participating in a professionally managed,
non-diversified portfolio of South Carolina municipal bonds. The Fund is not
recommended for retirement plans since most of the Fund's investments are
already tax exempt.
INVESTMENT MANAGEMENT
The Fund is advised by First Union through its Capital Management Group. First
Union has responsibility for investment research and supervision of the Fund in
addition to the purchase or sale of portfolio instruments, for which it
receives an annual fee.
PURCHASING AND REDEEMING SHARES
For information on purchasing Shares, please refer to the Shareholder Guide
section entitled "How to Buy Shares." Redemption information may be found under
"How to Redeem Shares."
- ------------------------ SUMMARY OF ------------------------
- ------------------------ FUND EXPENSES ------------------------
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO
<TABLE>
<CAPTION>
Class B Class C
Shares Shares
SHAREHOLDER TRANSACTION EXPENSES ------- ---------------------------
<S> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)...... 4.00% None
Maximum Sales Load Imposed on Reinvested
Dividends
(as a percentage of offering price)...... None None
Deferred Sales Load (as a percentage of
original purchase price or redemption None 4% during the first year,
proceeds, as applicable)(1).............. 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 Fees (as a percentage of amount
redeemed,
if applicable)........................... None None
Exchange Fee.............................. None None
ANNUAL CLASS B AND CLASS C SHARES OPERAT-
ING EXPENSES*
(As a percentage of projected average net
assets)
Management Fee (after waiver) (2)......... 0.00% 0.00%
12b-1 Fees (3)............................ 0.25% 0.75%
Other Expenses............................ 2.71% 2.71%
Total Operating Expenses (4).......... 2.96% 3.46%
</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 fee has been reduced to reflect the anticipated
voluntary waiver by the Adviser. The Adviser can terminate this voluntary
waiver at any time at its sole discretion. The maximum management fee is
0.50%.
(3) 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 Fund plans to limit the
Class B Shares' 12b-1 payments to 0.25% of Class B Shares' average daily net
assets.
(4) Total Class B Shares and Class C Shares operating expenses are estimated to
be 3.46% and 3.96%, respectively, absent the anticipated voluntary waiver
described above in note 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 CLASS B AND CLASS C SHARES OF
THE FUND WILL BEAR, EITHER DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE
DESCRIPTIONS OF THE VARIOUS COSTS AND EXPENSES, SEE "HOW TO BUY SHARES." 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 Fund charges no redemption fees for
Class B Shares.
Class B Shares............................................... $69 $128
Class C Shares............................................... $75 $132
You would pay the following expenses on the same investment,
assuming no redemptions:
Class C Shares............................................... $35 $106
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE IS BASED ON ESTIMATED DATA FOR THE FUND'S FISCAL YEAR ENDING DECEMBER
31, 1994.
The information set forth in the foregoing table and example relates only to
Class B and Class C Shares of the Fund. The Fund also has the ability to offer
another class of shares called Trust Shares. Trust Shares are subject to
certain of the same expenses, except they bear no sales load or 12b-1 fees.
See "Other Classes of Shares."
INVESTMENT
- ------------------------ OBJECTIVE ------------------------
- ------------------------ AND POLICIES ------------------------
The Fund's investment objective cannot be changed without shareholder approval.
While there is no assurance that the Fund will achieve its investment
objective, it endeavors to do so by following the investment policies described
in this prospectus. Unless otherwise indicated, the investment policies may be
changed by the Trust's Board of Trustees ("Trustees") without the approval of
shareholders. Shareholders will be notified before any material change in these
policies becomes effective.
Objective: Current income exempt from federal regular income tax and South
Carolina state income tax, consistent with preservation of capital.
Invests in: South Carolina municipal bonds.
Suitable for: Investors seeking monthly income sheltered from both federal and
South Carolina income taxes.
Key Benefit: Greater diversification and liquidity than purchasing municipal
bonds directly. Pays monthly dividends for those who need current
income.
DESCRIPTION OF THE FUND
The Fund seeks current income which is exempt from federal regular income tax
and South Carolina state income tax, consistent with preservation of capital.
As a matter of fundamental investment policy, the 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 tax. The interest retains its tax-
free status when distributed to the Fund's shareholders. In addition, at least
65% of the value of its total assets will be invested in South Carolina
municipal bonds.
TYPES OF INVESTMENTS
South Carolina municipal obligations, including industrial development bonds,
constitute the primary investment of the Fund. In addition, the Fund 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 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 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 the Fund loses its rating or has its rating reduced after the
Fund has purchased it, the Fund is not required to sell or otherwise dispose of
the security, but 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
Fund will try to use comparable ratings as standards in accordance with the
Fund's investment objective. A description of the rating categories is
contained in the Appendix of the Statement of Additional Information.
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 the
Fund an undivided interest in particular municipal securities);
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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, 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; 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 Fund is 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 South Carolina taxes.
SOUTH CAROLINA MUNICIPAL BONDS
South Carolina municipal bonds are debt obligations issued by the State of
South Carolina or its local entities to support a government's general
financial needs or special projects, such as housing projects or sewer works.
South Carolina 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. The Fund's concentration in
securities issued by the State of South Carolina and its 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 South Carolina municipal bonds is contained in
the Statement of Additional Information.
OTHER
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- ------------------------ POLICIES ------------------------
The Fund has adopted the following practices for specific types of investments.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements. Repurchase agreements are
agreements by which the Fund purchases a security (usually U.S. government
securities) for cash and obtains a simultaneous commitment from the seller
(usually a bank or broker/dealer) to repurchase the security at an agreed-upon
price and specified future date. The repurchase price reflects an agreed-upon
interest rate for the time period of the agreement. The Fund's risk is the
inability of the seller to pay the agreed-upon price on delivery date. However,
this risk is tempered by the ability of the Fund to sell the security in the
open market in the case of a default. In such a case, the Fund may incur costs
in disposing of the security which would increase Fund expenses. The Adviser
will monitor creditworthiness of the firms with which the Fund enters into
repurchase agreements.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase portfolio securities on a when-issued or delayed delivery
basis. In such cases, the Fund commits to purchase a security which will be
delivered and paid for at a future date. The Fund relies on the seller to
deliver 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 Fund may lend its portfolio
securities on a short-term or long-term basis to broker/dealers, banks, or
other institutional borrowers of securities. The Fund will only enter into loan
arrangements with creditworthy borrowers and will receive collateral in the
form of cash or U.S. government securities equal to at least 100% of the value
of the securities loaned. As a matter of fundamental investment policy which
cannot be changed without shareholder approval, the Fund will not lend any of
its assets except portfolio securities up to one-third of the value of its
total assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest in the securities of other investment companies. This is a
short-term measure to invest cash which has not yet been invested in other
portfolio instruments and is subject to the following limitations: (1) the Fund
will not own more than 3% of the total outstanding voting stock of any one
investment company, (2) the Fund may not invest more than 5% of its total
assets in any one investment company and (3) the Fund may not invest more than
10% of its total assets in investment companies in general. While the Fund's
investment in shares of another investment company would be subject to
duplicate expenses, the Adviser will waive its investment advisory fee on
assets invested in securities of other open-end investment companies.
OPTIONS AND FUTURES
The Fund may engage in options and futures transactions. Options and futures
transactions are intended to enable the Fund to manage market, interest rate or
exchange rate risk. The Fund does 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 Fund's 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.
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BORROWING MONEY
As a matter of fundamental investment policy which cannot be changed without
shareholder approval, the Fund will not borrow money or pledge securities,
except under certain circumstances the Fund may borrow up to one-third of the
value of its total assets and pledge assets to secure such borrowings.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may not invest more than 10% of its total assets in securities which
are subject to restrictions on resale under federal securities law. Certain
restricted securities which the Trustees deem to be liquid will be excluded
from this limitation.
The Fund 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.
NON-DIVERSIFICATION
The 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 the 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.
The 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 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.
- ------------------------ SHAREHOLDE ------------------------
- ------------------------ GUIDE ------------------------
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.
CLASSES OF INVESTMENT SHARES
The 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.
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Investors must 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 the Fund equals the market value of one Share of the
Fund. 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 the
Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no Shares are tendered for redemption and no
orders to purchase Shares are received; and (iii) the following holidays: New
Year's Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving Day, and
Christmas Day. The net asset value is computed by adding cash and other assets
to the closing market value of all securities owned, subtracting liabilities
and dividing the result by the number of outstanding Shares. The net asset
value will vary each day depending on purchases and redemptions. Expenses and
fees, including the management fee, are accrued daily and taken into account
for the purpose of determining net asset value.
The net asset value of Trust Shares of the Fund may differ from that of Class B
Shares and Class C Shares due to the variability in daily net income resulting
from different distribution charges for each class of shares. The net asset
value for the Fund will fluctuate for all three classes.
PERFORMANCE INFORMATION
The Fund's performance may be quoted in terms of total return, yield, or tax
equivalent yield. Performance information is historical and is not intended to
indicate future results.
From time to time, the Fund may make available certain information about the
performance of the 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 Fund and, therefore, may not
correlate to the dividends or other distributions paid to shareholders.
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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 the Fund. Because Class B
Shares and Class C Shares are subject to 12b-1 fees, the yield will be lower
than that of Trust Shares. See "Expenses of the Fund and Investment 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, the Fund may advertise its performance using certain
reporting services 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 the Fund. 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 FUBS 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 Investors 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 the Fund within 30 days of redemption,
or (6) you combine purchases of two or more First Union Funds which include
sales charges. In all of these cases, you must notify Federated Securities
Corp. (the "distributor" or "FSC") of your intentions in writing in order to
qualify for a sales charge reduction. For more information, consult the
Statement of Additional Information or the distributor.
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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.
BY TELEPHONE OR IN PERSON
You may purchase Class B Shares and Class C Shares by telephone from the Mutual
Funds Group of FUBS, a subsidiary of First Union, 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 Fund, 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, the 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 Fund 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 Fund, a dealer will normally receive up to 85% of
the applicable sales charge. Any portion of the sales charge which is not paid
to a dealer will be retained by the distributor. However, the distributor, in
its sole discretion, may uniformly offer to pay to all dealers selling Shares
of the Fund, 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 10 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 the 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 Fund redeems Shares at their net asset value next determined after the Fund
receives the redemption request. Redemptions will be made on days on which the
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 the 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 Fund's Distributor,
Investment Adviser, Custodian, Transfer Agent, Legal Counsel, and Independent
Auditors.
INVESTMENT ADVISER
Professional investment supervision for the Fund is provided by the investment
adviser, the Capital Management Group of First Union.
- --------------------------------------------------------------------------------
First Union is a subsidiary of First Union Corporation, a bank holding company
headquartered in Charlotte, North Carolina, with $51 billion in total
consolidated assets as of December 31, 1992. 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 $37 billion. In addition, the Capital Management Group has advised
the Trust since its inception in 1984.
The Fund's portfolio's manager is Robert S. Drye. Mr. Drye is a Vice President
of First Union National Bank of North Carolina, N.A., and has been with First
Union since 1968. Since 1989, Mr. Drye has served as a portfolio manager for
both several of the First Union Funds and for certain common trust funds. Prior
to 1989, Mr. Drye worked as a marketing specialist with First Union Brokerage
Services, Inc. Mr. Drye has managed the Fund since its inception.
From time to time, to the extent consistent with the objectives, policies and
restrictions of the Fund, the Fund 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
Trust. It is a Pennsylvania corporation organized on November 14, 1969, and is
the principal distributor for a number of investment companies.
The Fund has adopted a plan for distribution of Shares permitted by Rule 12b-1
under the Investment Company Act of 1940 (the "Plan"), whereby the Fund has
authorized a daily expense ("Rule 12b-1 fee") at an annual rate of 0.75% of the
average daily net asset value of the Fund to finance the sale of 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 the Fund's average daily net asset
value.
The distributor may pay all or a portion of the Rule 12b-1 fee to compensate
selected brokers and financial institutions for selling Shares or for
administrative services rendered in connection with the Shares.
The Fund makes 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 Fund does not
pay for unreimbursed expenses of its distributor. Since the Fund's Plan is a
"compensation" type plan, however, future Rule 12b-1 fees may permit recovery
of such amounts or may result in a profit to 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 the Plan were terminated or not continued, the Fund
would not be contractually obligated to pay for any expenses not previously
reimbursed by the Fund 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 Plan and will not be an expense of the
Fund.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------------------------- -------------------------------------
- ------------------------------------- -------------------------------------
FUND ADMINISTRATION
Federated Administrative Services ("FAS"), a subsidiary of Federated Investors,
provides the Fund with administrative personnel and services necessary to
operate the Fund, such as legal and accounting services, for a specified fee
which is detailed below.
State Street Bank serves as custodian and transfer agent, providing dividend
disbursement and other shareholder services for the Trust.
Legal counsel to those Trustees who are not "interested persons" of the Trust
as defined in the Investment Company Act of 1940, is provided by Sullivan &
Worcester, Washington, D.C., and legal counsel to the Trust is provided by
Houston, Houston & Donnelly, Pittsburgh, Pennsylvania.
The independent auditors for the Trust are KPMG Peat Marwick, Pittsburgh,
Pennsylvania.
FEES AND EXPENSES
- ------------------------ ------------------------
- ------------------------ ------------------------
The Fund pays annual advisory and administrative fees and certain expenses.
ADVISORY AND ADMINISTRATIVE FEES
For managing its investment and business affairs, the Fund pays an annual fee
to First Union. The Adviser receives an annual investment advisory fee equal to
.50 of 1% of the Fund's average daily net assets. The Adviser may voluntarily
choose to waive a portion of its fee or reimburse the Fund for certain
operating expenses.
The Trust also pays a fee for administrative services. FAS provides these at an
annual rate as specified below:
<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 FUND AND INVESTMENT SHARES
Holders of Shares pay their allocable portion of Trust and Fund expenses. The
Trust expenses for which holders of Shares pay their allocable portion include,
but are not limited to: the cost of organizing the Trust and continuing its
existence; the cost of registering the Trust; Trustees' fees; auditors' fees;
the cost of meetings of Trustees; legal fees of the Trust; association
membership dues and such non-recurring and extraordinary items as may arise.
The Fund expenses for which holders of Shares pay their allocable portion based
on average daily net assets include, but are not limited to: registering the
Fund and Shares of the Fund; investment advisory services; taxes and
commissions; custodian fees; insurance premiums; auditors' fees; and such non-
recurring and extraordinary items as may arise.
At present, the only expenses allocated to Class B Shares and Class C Shares
are those under the Fund's Rule 12b-1 Plan. However, the Trustees reserve the
right to allocate certain expenses to holders of Shares as they deem
appropriate ("Class Expenses"). In any case, Class Expenses would be limited
to: Rule 12b-1 fees; transfer agent fees; printing and postage expenses;
registration fees; and administrative, legal and Trustees' fees. Presently, all
Fund expenses other than Rule 12b-1 fees are allocated based upon the average
daily net assets of each class.
- ------------------------------------- -------------------------------------
- ------------------------------------- -------------------------------------
SHAREHOLDER
RIGHTS AND
- ------------------------ ------------------------
- ------------------------ ------------------------
PRIVILEGES
VOTING RIGHTS
Each Share of the Fund is entitled to one vote in Trustee elections and other
voting matters submitted to shareholders. All shares of all classes of each
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 the Fund's operation and for the election of Trustees
under certain circumstances.
Trustees may be removed by a two-thirds vote of the number of Trustees prior to
such removal or by a two-thirds vote of the shareholders at a special meeting.
A special meeting of shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares of all series entitled to vote.
