1933 Act File No. 2-94560
1940 Act File No. 811-4154
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 38 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 38 X
FIRST UNION FUNDS
(Exact Name of Registrant as Specified in Charter)
Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
John W. McGonigle, Esquire,
Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
on _________________ pursuant to paragraph (b)
X 60 days after filing pursuant to paragraph (a) (i)
on pursuant to paragraph (a) (i).
75 days after filing pursuant to paragraph (a)(ii)
on _________________ pursuant to paragraph (a)(ii) of Rule 485.
If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has filed with the Securities and Exchange Commission a
declaration pursuant to Rule 24f-2 under the Investment Company Act of
1940, and:
X filed the Notice required by that Rule on February 15, 1994; or
intends to file the Notice required by that Rule on or about
____________; or
during the most recent fiscal year did not sell any securities pursuant
to Rule 24f-2 under the Investment Company Act of 1940, and, pursuant to
Rule 24f-2(b)(2), need not file the Notice.
Copies to:
Thomas J. Donnelly, Esquire John A. Dudley, Esquire
Houston, Houston & Donnelly Sullivan & Worcester
2510 Centre City Tower 1025 Connecticut Ave., N.W.
650 Smithfield Street Washington, D.C. 20036
Pittsburgh, Pennsylvania 15222
CROSS REFERENCE SHEET
This Amendment to the Registration Statement of FIRST UNION FUNDS,
which is comprised of seventeen portfolios: (1) First Union Value
Portfolio, (2) First Union Fixed Income Portfolio, (3) First Union High
Grade Tax Free Portfolio (formerly, First Union Insured Tax Free
Portfolio), (4) First Union Tax Free Money Market Portfolio, (5) First
Union Money Market Portfolio, (6) First Union Treasury Money Market
Portfolio, (7) First Union Balanced Portfolio, (8) First Union Managed
Bond Portfolio, (9) First Union North Carolina Municipal Bond Portfolio,
(10) First Union U.S. Government Portfolio, (11) First Union Florida
Municipal Bond Portfolio, (12) First Union Georgia Municipal Bond
Portfolio, (13) First Union Virginia Municipal Bond Portfolio, (14) First
Union Utility Portfolio, (15) First Union South Carolina Municipal Bond
Portfolio; (16) First Union Emerging Markets Growth Portfolio; and (17)
First Union International Equity Portfolio. Each of the portfolios consist
of four separate classes of shares: (a) Y Shares, (b) Class A Investment
Shares, (c) Class B Investment Shares, and (d) Class C Investment Shares,
with the following exceptions: First Union North Carolina Municipal Bond
Portfolio, First Union Florida Municipal Bond Portfolio, First Union
Georgia Municipal Bond Portfolio, First Union Virginia Municipal Bond
Portfolio, First Union South Carolina Municipal Bond Portfolio, which
consists of: (a) Y Shares, (b) Class A Investment Shares, and (c) Class B
Investment Shares; First Union Managed Bond Portfolio, which consists of:
(a) Y Shares; First Union High Grade Tax Free Portfolio, which consists of:
(a) Y Shares, (b) Class A Investment Shares, (c) Class B Investment Shares,
and (d) FFB Shares; First Union Tax Free Money Market Portfolio and First
Union Treasury Money Market Portfolio, which consist of: (a) Y Shares and
(b) Class A Investment Shares.
This Amendment to the Registration Statement of FIRST UNION FUNDS
relates to all classes of all portfolios of the Trust except for the FFB
Shares of First Union High Grade Tax Free Portfolio.
PART A. INFORMATION REQUIRED IN A PROSPECTUS.
Prospectus Heading
(Rule 404(c) Cross Reference)
Item 1. Cover Page Cover Page.
Item 2. Synopsis Summary of Fund Expenses.
Item 3. Condensed Financial
Information Financial Highlights.
Item 4. General Description of
Registrant Investment Objective and Policies;
Other Investment Policies; (16-17)
Types of Investments.
Item 5. Management of the Fund Management of First Union Funds;
Management of the Trust (3d); Fees and
Expenses.
Item 6. Capital Stock and Other
Securities Distributions and Taxes; Shareholder
Rights and Privileges; Tax
Information; Other Classes of Shares.
Item 7. Purchase of Securities Being
Offered Shareholder Guide; How to Buy Shares;
Purchase of Shares (3d).
Item 8. Redemption or Repurchase How to Redeem Shares; Redemption of
Shares (3d); How to Convert Your
Investment from One First Union Fund
to Another First Union Fund;
Additional Shareholder Services
[(1,2,3,5,7,9-15) b-c; (4,6)b; (16,
17) b,c and d].
Item 9. Pending Legal Proceedings None.
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION.
Item 10. Cover Page Cover Page.
Item 11. Table of Contents Table of Contents.
Item 12. General Information and
History General Information about the Fund.
Item 13. Investment Objectives and
Policies Investment Objective and Policies;
Investment Limitations.
Item 14. Management of the Fund Trust Management.
Item 15. Control Persons and Principal
Holders of Securities Fund Ownership.
Item 16. Investment Advisory and Other
Services Investment Advisory Services;
Administrative Services.
Item 17. Brokerage Allocation Brokerage Transactions.
Item 18. Capital Stock and Other
Securities Not Applicable.
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered Purchasing Shares; Determining Net
Asset Value; Redeeming Shares.
Item 20. Tax Status Tax Status.
Item 21. Underwriters Not Applicable.
Item 22. Calculation of Performance
Data Yield (1-17); Effective Yield (4-6);
Total Return (1-3, 7-17); Tax-
Equivalent Yield (3, 9, 11, 12, 13,
15); Performance Comparisons.
Item 23. Financial Statements. To be filed by Amendment
FIRST UNION
EQUITY AND INCOME
FUNDS
Portfolios of First Union Funds
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- --------------------- ---------------------
Y SHARES
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P R O S P E C T U S
February 28, 1995
First Union Funds (the "Trust") is a mutual fund with 17 portfolios, offering a
variety of investment opportunities. The Trust currently includes seven
diversified Equity and Income Funds, two diversified International 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.
International Funds
. First Union Emerging Markets Growth Portfolio; and
. First Union International Equity 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 Y Shares of First
Union Equity and Income Funds. It concisely describes the
information which you should know before investing in Y 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, 1995, 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.
For a description of the nature and limitations of municipal bond insurance,
see "First Union High Grade Tax Free Portfolio--Municipal Bond Insurance," page
20.
- --------------------------------------------------------------------------------
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
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- ------------------------- -------------------------
CONTENTS
Summary 2
- -------------------------------------- Shareholder Guide 35
--------------------------------------
Summary of Fund Expenses 4
- -------------------------------------- How to Buy Shares 36
--------------------------------------
Financial Highlights 6
- -------------------------------------- How to Convert Your Investment from
One First Union Fund to Another
First Union Fund 37
Investment Objectives and Policies 16 --------------------------------------
- --------------------------------------
First Union Balanced Portfolio 16 How to Redeem Shares 38
--------------------------------------
- --------------------------------------
First Union Fixed Income Portfolio 17 Management of First Union Funds 39
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--------------------------------------
First Union High Grade Tax Free
Portfolio 19 Fees and Expenses 41
--------------------------------------
- --------------------------------------
First Union Managed Bond Portfolio 21 Shareholder Rights and Privileges 42
- --------------------------------------
--------------------------------------
First Union U.S. Government
Portfolio 22 Distributions and Taxes 43
--------------------------------------
- --------------------------------------
First Union Utility Portfolio 24 Tax Information 44
--------------------------------------
- --------------------------------------
First Union Value Portfolio 26 Other Classes of Shares 45
--------------------------------------
- --------------------------------------
Addresses Inside Back Cover
--------------------------------------
Other Investment Policies 28
- --------------------------------------
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 17 portfolios, each representing a
different First Union Fund. Each Equity and Income Fund, except First Union
High Grade Tax Free Portfolio and First Union Managed Bond Portfolio, is
divided into four classes of shares: Class A Investment Shares ("Class A
Shares"), Class B Investment Shares ("Class B Shares"), Class D Investment
Shares ("Class D Shares") and Y Shares. Y Shares are designed primarily for
institutional investors (banks, corporations, and fiduciaries). Class A and
Class B Shares are sold to individuals and other customers of First Union (the
"Adviser"). First Union High Grade Tax Free Portfolio presently offers Class A
and Class B Shares and Y Shares, and First Union Managed Bond Portfolio
presently offers only Y Shares. This prospectus relates only to Y 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
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 Y Shares of any of the Funds, please refer to the
Shareholder Guide section entitled "How to Buy Shares." Redemption
information nay 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
entereing 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
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- ------------------------ ------------------------
FUND EXPENSES
FIRST UNION EQUITY AND INCOME FUNDS
Y SHARES
<TABLE>
<CAPTION>
Fixed High Grade Managed U.S.
Balanced Income Tax Free Bond Government Utility Value
Fund Fund Fund Fund Fund Fund Fund
-------- ------ ---------- ------- ---------- ------- -----
Y Shares--
Shareholder Transaction Expenses
<S> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Load Im-
posed on Purchases
(as a percentage of of-
fering price).......... None None None None None None None
Maximum Sales Load Im-
posed on Reinvested
Dividends
(as a percentage of of-
fering price).......... None None None None None None None
Contingent Deferred
Sales Charge (as a per-
centage 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 Y Shares
Operating Expenses
(As a percentage of
average net assets)
Management Fee (after
waiver) (1)............ % % % % % % %
12b-1 Fees.............. None None None None None None None
Total Other Expenses
(after waiver) (2)..... % % % % % % %
Total Y Shares Operat-
ing Expenses (3)....... % % % % % % %
</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 %, absent the
voluntary waiver by the administrator of certain of its fees. Total other
expenses for Utility Fund are estimated to be %, 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 Y Shares Operating Expenses for Managed Bond Fund would have
been %, absent the voluntary waiver described above in Note 2. >
Total Y Shares Operating Expenses for High Grade Tax Free and Utility Funds
are estimated to be % and %, respectively, absent the anticipated
voluntary waivers described in Notes 1 and 2.
Fixed Income, U.S. Government and Value Funds' Y Shares Annual Operating
Expenses were %, % and %, respectively, for the year ended December 31,
1994. Total Y Shares Operating Expenses for U.S. Government Fund, absent the
voluntary waiver of the management fee by the Adviser, were % for the year
ended December 31, 1994.
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 Y 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 Y
Shares.
Balanced Fund................................ $ $ $ $
Fixed Income Fund............................ $ $ $ $
High Grade Tax Free Fund..................... $ $ $ $
Managed Bond Fund............................ $ $ $ $
U.S. Government Fund......................... $ $ $ $
Utility Fund................................. $ $ $ $
Value 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 information set forth in the foregoing table and example relates only to Y
Shares of the Funds. The Funds (other than High Grade Tax Free and Managed
Bond Funds) also offer three additional classes of shares called Class A
Shares, Class B Shares and Class C Shares. In general, all expenses are
allocated based upon the daily net assets of each class. Class A Shares are
subject to a 12b-1 fee of 0.25 of 1%. Class B Shares are subject to a 12b-1
fee of 0.75 of 1% and a shareholder service 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%. In addition, Class A Shares bear a maximum front-end sales charge of
4.75%. Class B Shares bear a maximum contingent deferred sales charge of 5.00%
and Class C Shares bear a maximum contingent deferred sales charge of 1.00%.
See "Fees and Expenses" and "Other Classes of Shares." [/R]
FINANCIAL
- ------------------------- -------------------------
- ------------------------- -------------------------
HIGHLIGHTS
First Union Balanced Portfolio
FINANCIAL
- ------------------------- -------------------------
- ------------------------- -------------------------
HIGHLIGHTS
(continued)
First Union Balanced Portfolio
FINANCIAL
- ------------------------- -------------------------
- ------------------------- -------------------------
HIGHLIGHTS
First Union Fixed Income Portfolio
FINANCIAL
- ------------------------- -------------------------
- ------------------------- -------------------------
HIGHLIGHTS
(continued)
First Union Fixed Income Portfolio [/R]
FINANCIAL
- ------------------------- -------------------------
- ------------------------- -------------------------
HIGHLIGHTS
First Union High Grade Tax Free Portfolio [/R]
FINANCIAL
- ------------------------- -------------------------
- ------------------------- -------------------------
HIGHLIGHTS
First Union Managed Bond Portfolio
FINANCIAL
- ------------------------- -------------------------
- ------------------------- -------------------------
HIGHLIGHTS
First Union U.S. Government Portfolio
FINANCIAL
- ------------------------- -------------------------
- ------------------------- -------------------------
HIGHLIGHTS
First Union Value Portfolio
FINANCIAL
- ------------------------- -------------------------
- ------------------------- -------------------------
HIGHLIGHTS
First Union Value Portfolio
FINANCIAL
- ------------------------- -------------------------
- ------------------------- -------------------------
HIGHLIGHTS
(continued)
First Union Value Portfolio
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 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 (such as cash flow and low debt-to-equity ratio), 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 Ratings Group ("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
While the Fund may invest in securities rated BBB by S&P or Baa by Moody's, the
Adviser currently intends to limit the Fund's investments to 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, zero coupon, or stripped
securities, 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 10 years. The Fund intends to maintain a dollar-
weighted average maturity of 5 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
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- ------------------------ ------------------------
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 high grade
bonds. High grade bonds, as used in this section, mean: bonds insured by a
municipal bond insurance company which is rated AAA by S&P and/or Aaa by
Moody's; bonds rated A or better by Moody's or S&P or, if unrated, of
comparable quality as determined by the Adviser. 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
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
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PORTFOLIO
Objective: Total return.
Invests in: High 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 high 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 high 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
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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); or (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 issuer of a series of
CMOs may elect to be treated as a Real Estate Mortgage Investment Conduit
(a "REMIC"), which has certain special tax attributes. 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. The
Fund may invest up to 20% of its total assets in CMOs;
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
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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 utility companies that derive 50% of their revenues from utilities or
assets relating to utility industries. 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.") The Fund will not invest
more than 10% of its assets in foreign securities;
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, 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
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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;
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.");
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 rated at least BBB by S&P
or at least Baa by Moody's, or which, if not rated, determined to be of
comparable quality by the Adviser (up to 5% of its net assets);
zero coupon bonds issued or guaranteed by the U.S. government, its agencies
or instrumentalities (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
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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 securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which a Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause a Fund to miss a price or yield
considered to be advantageous. 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. Accordingly, a Fund may pay more
or less than the market value of the securities on the settlement date.
The Funds may dispose of a commitment prior to settlement if the Adviser deems
it appropriate to do so. In addition, the Funds may enter into transactions to
sell their purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at
later dates. The Funds may realize short-term profits or losses upon the sale
of such commitments.
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.
There is the risk that when lending portfolio securities, the securities may
not be available to a Fund on a timely basis and the Fund may, therefore, lose
the opportunity to sell the securities at a desirable price. In addition, in
the event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
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, and the Funds do not use these transactions for speculation or leverage.
The Funds may attempt to hedge all or a portion of their portfolios through the
purchase of put options on portfolio securities and listed put options on
financial futures contracts for portfolio securities. The Funds may also write
covered call options on their portfolio securities to attempt to increase their
current income. The Funds will maintain their 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 Funds 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.
The Funds may write (i.e., sell) covered call and put options. By writing a
call option, a 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, a 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 Funds also may write straddles (combinations of
covered puts and calls on the same underlying security).
The Funds may only write "covered" options. This means that so long as a 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. A
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 Funds receive a premium from writing a call or
put option which they retain whether or not the option is exercised. By writing
a call option, the Funds might lose the potential for gain on the underlying
security while the option is open, and by writing a put option, the Funds might
become obligated to purchase the underlying securities for more than their
current market price upon exercise.
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 a 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. A Fund would "go long" (agree to purchase securities in the future at a
predetermined price) to hedge against a decline in market interest rates.
The Funds may also enter into currency and other financial futures contracts
and write options on such contracts. The Funds intend to enter into such
contracts and related options for hedging purposes. The Funds 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 Funds do not make payment or
deliver securities upon entering into a futures contract. Instead, they put
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 Funds may sell or purchase currency and other financial futures contracts.
When a futures contract is sold by a 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
Funds sell futures contracts in order to offset a possible decline in the
profit on their securities or currencies. If a futures contract is purchased by
a 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 or
such securities or currencies declines.
The Funds 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 their options positions. The Funds' 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 Funds will be able to enter into an
offsetting transaction with respect to a particular contract at a particular
time. If the Funds are not able to enter into an offsetting transaction, the
Funds 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 the
Funds would continue to bear market risk on the transaction.
RISK CHARACTERISTICS OF OPTIONS AND FUTURES
Although options and futures transactions are intended to enable the Funds to
manage market, exchange, or interest rate risks, these investment devices can
be highly volatile, and the Fund's use of them can result in poorer performance
(i.e., the Fund's returns may be reduced). The Funds' attempt to use such
investment devices for hedging purposes may not be successful. Successful
futures strategies require the ability to predict
future movements in securities prices, interest rates and other economic
factors. When the Funds use financial futures contracts and options on
financial futures contracts as hedging devices, there is a risk that the prices
of the securities subject to the financial futures contracts and options on
financial futures contracts may not correlate perfectly with the prices of the
securities in the Funds' portfolios. This may cause the financial futures
contract and any related options to react to market changes differently than
the portfolio securities. In addition, the Adviser could be incorrect in its
expectations and forecasts about the direction or extent of market factors,
such as interest rates, securities price movements, and other economic factors.
Even if the Adviser correctly predicts interest rate movements, a hedge could
be unsuccessful if changes in the value of a Fund's futures position did not
correspond to changes in the value of its investments. In these events, the
Funds may lose money on the financial futures contracts or the options on
financial futures contracts. It is not certain that a secondary market for
positions in financial futures contracts or for options on financial futures
contracts will exist at all times. Although the Adviser will consider liquidity
before entering into financial futures contracts or options on financial
futures contracts transactions, there is no assurance that a liquid secondary
market on an exchange will exist for any particular financial futures contract
or option on a financial futures contract at any particular time. The Funds'
ability to establish and close out financial futures contracts and options on
financial futures contract positions depends on this secondary market. If a
Fund is unable to close out its position due to disruptions in the market or
lack of liquidity, the Fund may lose money on the futures contract or option,
and the losses to the Fund could be significant.
ZERO-COUPON AND STRIPPED SECURITIES
The Fixed Income Fund may invest in zero-coupon and stripped securities. Zero-
coupon securities in which the Fund may invest are debt obligations which are
generally issued at a discount and payable in full at maturity, and which do
not provide for current payments of interest prior to maturity. Zero-coupon
securities usually trade at a deep discount from their face or par value and
are subject to greater market value fluctuations from changing interest rates
than debt obligations of comparable maturities which make current distributions
of interest. As a result, the net asset value of shares of the Fixed Income
Fund may fluctuate over a greater range than shares of other mutual funds
investing in securities making current distributions of interest and having
similar maturities.
Zero-coupon securities may include U.S. Treasury bills issued directly by the
U.S. Treasury or other short-term debt obligations, and longer-term bonds or
notes and their unmatured interest coupons which have been separated by their
holder, typically a custodian bank or investment banking firm. A number of
securities firms and banks have stripped the interest coupons from the
underlying principal (the "corpus") of U.S. Treasury securities and resold them
in custodial receipt programs with a number of different names, including
Treasury Income Growth Receipts ("TIGRS") and Certificates of Accrual on
Treasuries ("CATS"). The underlying U.S. Treasury bonds and notes themselves
are held in book-entry form at the Federal Reserve Bank or, in the case of
bearer securities (i.e., unregistered securities which are owned ostensibly by
the bearer of holder thereof), in trust on behalf of the owners thereof.
In addition, the Treasury has facilitated transfers of ownership of zero-coupon
securities by accounting separately for the beneficial ownership of particular
interest coupons and corpus payments on Treasury securities through the Federal
Reserve book-entry record-keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate
Trading of Registered Interest and Principal of Securities." Under the STRIPS
program, the Fixed Income Fund will be able to have its beneficial ownership of
U.S. Treasury zero-coupon securities recorded directly in the book-entry
record-keeping system in lieu of having to hold certificates or other evidence
of ownership of the underlying U.S. Treasury securities.
When debt obligations have been stripped of their unmatured interest coupons by
the holder, the stripped coupons are sold separately. The principal or corpus
is sold at a deep discount because the buyer receives only the right to receive
a future fixed payment on the security and does not receive any rights to
periodic cash interest payments. Once stripped or separated, the corpus and
coupons may be sold separately. Typically, the coupons are sold separately or
grouped with other coupons with like maturity dates and sold in such bundled
form. Purchasers of stripped obligations acquire, in effect, discount
obligations that are economically identical to the zero-coupon securities
issued directly by the obligor.
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 Funds 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 and mortgage 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 a Fund receives from the reinvestment of such
prepayments, or any scheduled principal payments, may be lower than the yield
on the original mortgage security. As a consequence, mortgage 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 CMOs,
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 a 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 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.
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, Fixed Income, High Grade Tax Free, and Managed Bond Funds 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 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
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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 Y Shares of a Fund may differ slightly from that of
Class A Shares, Class B Shares and Class C 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 B Shares and Class C
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, 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 Y 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 Y 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 Y 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 (for High Grade Tax Free Fund)
will be calculated separately for Y Shares, Class A Shares, Class B Shares and
Class C Shares of a Fund. Because Class A Shares are subject to a 12b-1 fee,
and Class B Shares and Class C Shares are subject to a 12b-1 fee and a
shareholder services fee, the yield and tax equivalent yield will be lower than
that of Y Shares. The sales load applicable to Class A Shares also contributes
to a lower total return for Class A Shares. In addition, Class B Shares and
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 B Shares and Class C 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
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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 Y 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 Y 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
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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 First Union Fund, which may
produce a gain or loss for tax purposes.
You may exchange Y Shares of one First Union Fund for Y 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 shares of the other First Union Fund
will be purchased at their net asset value determined after the exchange
request is received. 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
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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
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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 $ billion in total
consolidated assets as of December 31, 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 its 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.
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 and Trust Company, 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 LLP, Pittsburgh,
Pennsylvania.
FEES AND EXPENSES
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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 Y 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
A Shares, Class B Shares and Class C Shares. In addition, the Fund's expenses
under the Shareholder Services Plan 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;
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
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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 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.
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 other financial
institutions may be required to register as dealers pursuant to state law.
DISTRIBUTIONS
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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
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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 four classes of shares: Y Shares for
institutional investors and Class A Shares, Class B Shares and Class C Shares
for individuals and other customers of First Union.
Class A Shares, 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 A Shares), or (ii) on a
contingent deferred basis (the Class B Shares and 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 A Shares, 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 0.25 of 1% for Class A Shares and 0.75 of 1% for Class B Shares
and Class C Shares of each Fund's average daily net asset value. In addition,
Class B Shares and Class C Shares pay a shareholder services fee of 0.25 of 1%
of the respective class's 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 A Shares, Class B Shares and Class C
Shares will be less than those payable to Y Shares by the difference between
class expenses and distribution and shareholder services expenses borne by the
shares of each respective class.
[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
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
[/R]
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
One Mellon Bank Center
KPMG Peat Marwick LLP Pittsburgh, Pennsylvania
15219
- --------------------------------------------------------------------------------
3031007A-I (2/95)
FIRST UNION
EQUITY AND INCOME
FUNDS
Portfolios of First Union Funds
- ------------------------ ------------------------
- ------------------------ ------------------------
CLASS A INVESTMENT SHARES CLASS B INVESTMENT SHARES CLASS C INVESTMENT SHARES
- --------------------------------------------------------------------------------
P R O S P E C T U S
February 28, 1995
First Union Funds (the "Trust") is a mutual fund with 17 portfolios, offering a
variety of investment opportunities. The Trust currently includes seven
diversified Equity and Income Funds, two diversified International 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.
International Funds
. First Union Emerging Markets Growth Portfolio; and
. First Union International Equity 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 A
Investment Shares ("Class A Shares"), 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 A Shares, 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, 1995, 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.
For a description of the nature and limitations of municipal bond insurance,
see "First Union High Grade Tax Free Portfolio--Municipal Bond Insurance," page
17.
- --------------------------------------------------------------------------------
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 Buy Shares 29
--------------------------------------
Summary of Fund Expenses 4
- -------------------------------------- How to Convert Your Investment from
One First Union Fund to Another First
Union Fund 31
Financial Highlights 8 --------------------------------------
- --------------------------------------
How to Redeem Shares 32
--------------------------------------
Investment Objectives and Policies 14
- --------------------------------------
Additional Shareholder Services 32
--------------------------------------
First Union Balanced Portfolio 14 [/R]
- --------------------------------------
Management of First Union Funds 33
--------------------------------------
First Union Fixed Income Portfolio 15
- -------------------------------------- Fees and Expenses 35
--------------------------------------
First Union High Grade Tax Free
Portfolio 16
Shareholder Rights and Privileges 36
- -------------------------------------- --------------------------------------
Distributions and Taxes 37
First Union U.S. Government --------------------------------------
Portfolio 18
- --------------------------------------
Tax Information 37
--------------------------------------
First Union Utility Portfolio 19
- --------------------------------------
Other Classes of Shares 38
--------------------------------------
First Union Value Portfolio 20
- --------------------------------------
Addresses 39
Other Investment Policies 21 [/R] --------------------------------------
- --------------------------------------
Shareholder Guide 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 17 portfolios, each representing a
different First Union Fund. Each Equity and Income Fund, except First Union
Managed Bond Portfolio and First Union High Grade Tax Free Portfolio, is
divided into four classes of shares: Class A Shares, Class B Shares, Class C
Shares and Y Shares. Class A 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 A Shares), or (ii)
on a contingent deferred basis (the Class B and Class C Shares). Y Shares are
designed primarily for institutional investors (banks, corporations, and
fiduciaries). First Union Managed Bond Portfolio presently offers only Y
Shares. In addition, First Union High Grade Tax Free Portfolio presently offers
Class A Shares, Class B Shares, and Y Shares. This prospectus relates to all
three 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 A, Class B Shares or Class C Shares
(where applicable) 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 A, 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 A SHARES
<TABLE>
<CAPTION>
Fixed High Grade U.S.
Balanced Income Tax Free Government Utility Value
Fund Fund Fund Fund Fund Fund
-------- ------ ---------- ---------- ------- -----
Class A Shares
Shareholder Transaction Expenses
<S> <C> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed
on Purchases
(as a percentage of offer-
ing price)................ 4.75% 4.75% 4.75% 4.75% 4.75% 4.75%
Maximum Sales Load Imposed
on Reinvested Dividends
(as a percentage of offer-
ing 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 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 A Shares Operating
Expenses
<S> <C> <C> <C> <C> <C> <C>
(As a percentage of average
net assets)
Management Fee (after waiv-
er) (1)................... % % % % % %
12b-1 Fees (2)............. % % % % % %
Total Other Expenses (after
waiver) (3)............... % % % % % %
Total Class A Shares Op-
erating Expenses (4)...... % % % % % %
</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 A 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 A Shares' 12b-1 payments to 0.10% of Class A Shares'
average daily net assets. All other Funds listed above plan to limit the Class
A Shares' 12b-1 payments to 0.25% of Class A Shares' average daily net assets.
(3) Total Other Expenses for Utility Fund are estimated to be %, absent
the anticipated voluntary waiver by the administrator. The administrator may
terminate this waiver at any time at its sole discretion.
(4) Total Class A Shares Operating Expenses for Utility Fund are estimated to
be %, 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 A Shares Annual Operating Expenses were %, %, % and %,
respectively, for the year ended December 31, 1994. Total Class A 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 % for
the year ended December 31, 1994. Total Class A 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 % for the year ended December 31, 1994.
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
A Shares.
Balanced Fund............................... $ $ $ $
Fixed Income Fund........................... $ $ $ $
High Grade Tax Free Fund.................... $ $ $ $
U.S. Government Fund........................ $ $ $ $
Utility Fund................................ $ $ $ $
Value 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. [/R]
The information set forth in the foregoing table and example relates only to
Class A Shares of the Funds. The Funds (other than High Grade Tax Free Fund)
also offer three additional classes of shares called Y Shares, Class B Shares
and Class C Shares. In general, all expenses are allocated based upon the
daily net assets of each class. Y Shares bear no sales load or 12b-1 fee.
Class B 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 load of 5.00%.
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
1.00%. Y Shares, Class B Shares and Class C Shares bear no front-end sales
charge. See "Other Classes of Shares." [/R]
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
Fund Fund Fund Fund 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). 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 5% during 5% during 5% during 5% during 5% during
of the first year, the first year, the first year, the first year, the first year,
original 4% during 4% during 4% during 4% during 4% during
purchase the second year, the second year, the second year, the second year, the second year,
price 3% during 3% during 3% during 3% during 3% during
or re- the third year, the third year, the third year, the third year, the third year,
demption 3% during 3% during 3% during 3% during 3% during
proceeds, the fourth year, the fourth year, the fourth year, the fourth year, the fourth year,
as ap- 2% during 2% during 2% during 2% during 2% during
plicable) the fifth year, the fifth year, the fifth year, the fifth year, the fifth year,
(1).... 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,
1% during 1% during 1% during 1% during 1% during
the seventh year, the seventh year, the seventh year, the seventh year, the seventh year,
and 0% after and 0% after and 0% after and 0% after and 0% after
the seventh year the seventh year the seventh year the seventh year the seventh year
Redemption
Fee (as
a per-
centage
of
amount
redeemed,
if ap-
plicable). None None None None None
Exchange
Fee.... None None None None None
<CAPTION>
Annual Class B Shares Operating Expenses
<S> <C> <C> <C> <C> <C>
(As a percentage of average net
assets)
Management
Fee
(after
waiver)
(2).... % % % % %
12b-1
Fees... % % % % %
Total
Other
Expenses
(after
waiver)
(3).... % % % % %
Shareholder
Service
Fee .... % % % % %
Total
Class B
Shares
Operating
Expenses
(4). % % % % %
<CAPTION>
Value Utility
Fund Fund
------------------ -------------------
Class B Shares
Shareholder Transaction Expenses
<S> <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 of-
fering
price). None None
Contingent
Deferred
Sales
Charge
(as a
percentage 5% during 5% during
of the first year, the first year,
original 4% during 4% during,
purchase the second year, the second year,
price 3% during 3% during,
or re- the third year, the third year,
demption 3% during 3% during,
proceeds, the fourth year, the fourth year,
as ap- 2% during 2% during
plicable) the fifth year, the fifth year,
(1).... 1% during and 2% year,
the sixth year, the sixth year
1% during 1% during,
the seventh year, the seventh year,
and 0% after 0% after
the seventh year the seventh year
Redemption
Fee (as
a per-
centage
of
amount
redeemed,
if ap-
plicable). None None
Exchange
Fee.... None None
<CAPTION>
Annual Class B Shares Operating Expenses
<S> <C>
(As a percentage of average net
assets)
Management
Fee
(after
waiver)
(2).... % %
12b-1
Fees... % %
Total
Other
Expenses
(after
waiver)
(3).... % %
Shareholder
Service
Fee
.... % %
Total
Class
B
Shares
Operating
Expenses
(4). % %
</TABLE>
(1) No contingent deferred sales charge is imposed on (a) Shares purchased
more than seven 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 %, 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 %, 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 B Shares Annual Operating Expenses were %, %, % and %,
respectively, for the year ended December 31, 1994. Total Class B 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 % for
the year ended December 31, 1994. 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 % for the year ended December 31, 1994.
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 information set forth in the foregoing table and example relates only to
Class B Shares of the Funds. The Funds (other than High Grade Tax Free Fund)
also offer three additional classes of shares called Y Shares, Class A Shares
and Class C Shares. In general, all expenses are allocated based upon the
daily net assets of each class. Y Shares bear no sales charge or 12b-1 fee.
Class A Shares are subject to a 12b-1 fee of 0.25 of 1% and bear a maximum
sales load 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% and bear a maximum contingent
deferred sales charge of 1.00%. See "Other Classes of Shares."
SUMMARY OF
- ------------------------ ------------------------
- ------------------------ ------------------------
FUND EXPENSES
FIRST UNION EQUITY AND INCOME FUNDS CLASS C SHARES
<TABLE>
<CAPTION>
Fixed U.S.
Balanced Income Government Utility Value
Fund Fund Fund Fund Fund
--------------- --------------- --------------- --------------- ---------------
Class C Shares
Shareholder Transaction Expenses
<S> <C> <C> <C> <C> <C>
Maximum Sales Load Im-
posed on Purchases
(as a percentage of of-
fering price).......... None None None None None
Maximum Sales Load Im-
posed on Reinvested
Dividends
(as a percentage of of-
fering price).......... None None None None None
Contingent Deferred
Sales Charge (as a per-
centage of
original purchase price 1% during 1% during 1% during 1% during 1% during
or redemption the first year, the first year, the first year, the first year, the first year,
proceeds, as applica- and 0% after and 0% after and 0% after and 0% after and 0% after
ble) (1)............... the first year the first year the first year the first year the first 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)............ % % % % %
12b-1 Fees.............. % % % % %
Total Other Expenses
(after waiver) (3)..... % % % % %
Shareholder Service
Fee.................... % % % % %
Total Class C 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 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 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 U.S. Government and Utility Funds
is 0.50%.
(3) Total Other Expenses for Utility Fund are estimated to be %, 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 U.S. Government and Utility
Funds are estimated to be % and %, respectively, absent the voluntary
waivers 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.
<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............................... $ $ $ $
Fixed Income Fund........................... $ $ $ $
U.S. Government Fund........................ $ $ $ $
Utility Fund................................ $ $ $ $
Value Fund.................................. $ $ $ $
You would pay the following expenses on the
same investment, assuming no redemptions:
Balanced Fund............................... $ $ $ $
Fixed Income Fund........................... $ $ $ $
U.S. Government Fund........................ $ $ $ $
Utility Fund................................ $ $ $ $
Value Funds................................. $ $ $ $
</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 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 Y Shares, Class A Shares and Class B Shares. In general, all
expenses are allocated based upon the daily net assets of each class. Y Shares
bear no sales load or 12b-1 fee. Class A Shares are subject to a 12b-1 fee of
0.25 of 1% and bear a maximum sales charge of 4.75%. Class B 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."
FINANCIAL
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- ------------------------- -------------------------
HIGHLIGHTS
First Union Balanced Portfolio
FINANCIAL
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- ------------------------- -------------------------
HIGHLIGHTS
First Union Fixed Income Portfolio
FINANCIAL
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- ------------------------- -------------------------
HIGHLIGHTS
First Union High Grade Tax Free Portfolio
FINANCIAL
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- ------------------------- -------------------------
HIGHLIGHTS
First Union U.S. Government Portfolio
FINANCIAL
- ------------------------- -------------------------
- ------------------------- -------------------------
HIGHLIGHTS
First Union Value Portfolio
FINANCIAL
- ------------------------- -------------------------
- ------------------------- -------------------------
HIGHLIGHTS
First Union Value Portfolio
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 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 (such as cash flow and low debt-to-equity ratio), 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 Ratings Group ("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
While the Fund may invest in securities rated BBB by S&P or Baa by Moody's, the
Adviser currently intends to limit the Fund's investments to 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, zero coupon, or stripped
securities, 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 10 years. The Fund intends to maintain a dollar-
weighted average maturity of 5 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
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 high grade
bonds. High grade bonds, as used in this section, mean: bonds insured by a
municipal bond insurance company which is rated AAA by S&P and/or Aaa by
Moody's; bonds rated A or better by Moody's or S&P; or, if unrated, of
comparable quality as determined by the Adviser. 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
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
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- ------------------------- -------------------------
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); or (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 issuer of a series of
CMOs may elect to be treated as a Real Estate Mortgage Investment Conduit
(a "REMIC"), which has certain special tax attributes.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. The Fund may invest up to 20% of
its total assets in CMOs;
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 utility companies that derive 50% of their revenues from utilities or
assets relating to utility industries. 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 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 will not invest
more than 10% of its assets in foreign securities;
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, 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;
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.");
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 rated at least BBB by S&P
or at least Baa by Moody's, or which, if not rated, determined to be of
comparable quality by the Adviser (up to 5% of its net assets);
zero coupon bonds issued or guaranteed by the U.S. government, its agencies
or instrumentalities (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
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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 securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which a Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause a Fund to miss a price or yield
considered to be advantageous. 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. Accordingly, a Fund may pay more
or less than the market value of the securities on the settlement date.
The Funds may dispose of a commitment prior to settlement if the Adviser deems
it appropriate to do so. In addition, the Funds may enter into transactions to
sell their purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at
later dates. The Funds may realize short-term profits or losses upon the sale
of such commitments.
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.
There is the risk that when lending portfolio securities, the securities may
not be available to a Fund on a timely basis and the Fund may, therefore, lose
the opportunity to sell the securities at a desirable price. In addition, in
the event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
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, and the Funds do not use these transactions for speculation or leverage.
The Funds may attempt to hedge all or a portion of their portfolios through the
purchase of put options on portfolio securities and listed put options on
financial futures contracts for portfolio securities. The Funds may also write
covered call options on their portfolio securities to attempt to increase their
current income. The Funds will maintain their 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 Funds 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.
The Funds may write (i.e., sell) covered call and put options. By writing a
call option, a 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, a 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 Funds also may write straddles (combinations of
covered puts and calls on the same underlying security).
The Funds may only write "covered" options. This means that so long as a 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. A
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 Funds receive a premium from writing a call or
put option which they retain whether or not the option is exercised. By writing
a call option, the Funds might lose the potential for gain on the underlying
security while the option is open, and by writing a put option, the Funds might
become obligated to purchase the underlying securities for more than their
current market price upon exercise.
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 a 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. A Fund would "go
long" (agree to purchase securities in the future at a predetermined price) to
hedge against a decline in market interest rates.
The Funds may also enter into currency and other financial futures contracts
and write options on such contracts. The Funds intend to enter into such
contracts and related options for hedging purposes. The Funds 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 Funds do not make payment or
deliver securities upon entering into a futures contract. Instead, they put
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 Funds may sell or purchase currency and other financial futures contracts.
When a futures contract is sold by a 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
Funds sell futures contracts in order to offset a possible decline in the
profit on their securities or currencies. If a futures contract is purchased by
a 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 Funds 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 their options positions. The Funds' 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 Funds will be able to enter into an
offsetting transaction with respect to a particular contract at a particular
time. If the Funds are not able to enter into an offsetting transaction, the
Funds 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 the
Funds would continue to bear market risk on the transaction.
RISK CHARACTERISTICS OF OPTIONS AND FUTURES
Although options and futures transactions are intended to enable the Funds to
manage market, exchange, or interest rate risks, these investment devices can
be highly volatile, and the Funds' use of them can result in poorer performance
(i.e., the Funds' return may be reduced). The Funds' attempt to use such
investment
devices for hedging purposes may not be successful. Successful futures
strategies require the ability to predict future movements in securities
prices, interest rates and other economic factors. When the Funds use financial
futures contracts and options on financial futures contracts as hedging
devices, there is a risk that the prices of the securities subject to the
financial futures contracts and options on financial futures contracts may not
correlate perfectly with the prices of the securities in the Funds' portfolios.
This may cause the financial futures contract and any related options to react
to market changes differently than the portfolio securities. In addition, the
Adviser could be incorrect in its expectations and forecasts about the
direction or extent of market factors, such as interest rates, securities price
movements, and other economic factors. Even if the Adviser correctly predicts
interest rate movements, a hedge could be unsuccessful if changes in the value
of a Fund's futures position did not correspond to changes in the value of its
investments. In these events, the Funds may lose money on the financial futures
contracts or the options on financial futures contracts. It is not certain that
a secondary market for positions in financial futures contracts or for options
on financial futures contracts will exist at all times. Although the Adviser
will consider liquidity before entering into financial futures contracts or
options on financial futures contracts transactions, there is no assurance that
a liquid secondary market on an exchange will exist for any particular
financial futures contract or option on a financial futures contract at any
particular time. The Funds' ability to establish and close out financial
futures contracts and options on financial futures contract positions depends
on this secondary market. If a Fund is unable to close out its position due to
disruptions in the market or lack of liquidity, the Fund may lose money on the
futures contract or option, and the losses to the Fund could be significant.
ZERO-COUPON AND STRIPPED SECURITIES
The Fixed Income Fund may invest in zero-coupon and stripped securities. Zero-
coupon securities in which the Fund may invest are debt obligations which are
generally issued at a discount and payable in full at maturity, and which do
not provide for current payments of interest prior to maturity. Zero-coupon
securities usually trade at a deep discount from their face or par value and
are subject to greater market value fluctuations from changing interest rates
then debt obligations of comparable maturities which make current distributions
of interest. As a result, the net asset value of shares of the Fixed Income
Fund may fluctuate over a greater range than shares of other mutual funds
investing in securities making current distributions of interest and having
similar maturities.
Zero-coupon securities may include U.S. Treasury bills issued directly by the
U.S. Treasury or other short-term debt obligations, and longer-term bonds or
notes and their unmatured interest coupons which have been separated by their
holder, typically a custodian bank or investment banking firm. A number of
securities firms and banks have stripped the interest coupons from the
underlying principal (the "corpus") of U.S. Treasury securities and resold them
in custodial receipt programs with a number of different names, including
Treasury Income Growth Receipts ("TIGRS") and Certificates of Accrual on
Treasuries ("CATS"). The underlying U.S. Treasury bonds and notes themselves
are hold in book-entry form at the Federal Reserve Bank or, in the case of
bearer securities (i.e., unregistered securities which are owned ostensibly by
the bearer of holder thereof), in trust on behalf of the owners thereof.
In addition, the Treasury has facilitated transfers of ownership of zero-coupon
securities by accounting separately for the beneficial ownership of particular
interest coupons and corpus payments on Treasury securities through the Federal
Reserve book-entry record-keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate
Trading of Registered Interest and Principal of Securities." Under the STRIPS
program, the Fixed Income Fund will be able to have its beneficial ownership of
U.S. Treasury zero-coupon securities recorded directly in the book-entry
record-keeping system in lieu of having to hold certificates or other evidence
of ownership of the underlying U.S. Treasury securities.
When debt obligations have been stripped of their unmatured interest coupons by
the holder, the stripped coupons are sold separately. The principal or corpus
is sold at a deep discount because the buyer receives only the right to receive
a future fixed payment on the security and does not receive any rights to
periodic cash interest payments. Once stripped or separated, the corpus and
coupons may be sold separately. Typically,
the coupons are sold separately or grouped with other coupons with like
maturity dates and sold in such bundled form. Purchasers of stripped
obligations acquire, in effect, discount obligations that are economically
identical to the zero-coupon securities issued directly by the obligor.
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 Funds 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 and mortgage 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 a Fund receives from the reinvestment of such
prepayments, or any scheduled principal payments, may be lower than the yield
on the original mortgage security. As a consequence, mortgage 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 CMOs,
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 a 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 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.
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, Fixed Income, and High Grade Tax Free Funds 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
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CLASSES OF INVESTMENT SHARES
You may select a method of purchasing Shares which is most beneficial to you by
choosing either Class A Shares, 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 (with the exception of the High Grade Tax Free Fund) offers three
types of Investment Shares: Class A Shares, Class B Shares and Class C Shares.
Each Share of a Fund represents an identical interest in the investment
portfolio of the Fund and has the same rights. The difference between Class A
Shares, Class B Shares, and Class C Shares is based on purchasing arrangements
and distribution and shareholder services expenses. Class A 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 A
Shares for the same initial investment than Class B Shares or Class C Shares
due to the initial sales charge, but will receive higher dividends per Share
due to the lower distribution expenses. Class B Shares impose a maximum
contingent deferred sales charge ("CDSC") of 5.00%. In addition, Class B Shares
impose a CDSC on most redemptions made within seven 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 B Shares may automatically convert to Class A Shares and thus be
subject to lower Rule 12b-1 distribution fees. Class C Shares impose a CDSC of
1.00% on most redemptions and are subject to lower Rule 12b-1 distribution
fees. Class C 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 B Shares or Class C Shares than Class A 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 Funds, the accumulated Rule 12b-1 fees, CDSC, and shareholder
services fee on either Class B Shares or Class C Shares would be less than the
initial sales charge and accumulated Rule 12b-1 fees on Class A Shares
purchased at the same time. Investors must also consider how each differential
would be offset by the higher yield of Class A 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 A Shares adds an applicable sales charge, and the
redemption proceeds of Class B Shares and 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 Y Shares of a Fund may differ slightly from that of
Class A Shares, Class B Shares and Class C 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 B Shares and Class C
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, 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 A Shares, 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 A Shares, 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 A Shares, 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 A Shares, 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 A Shares, Class B Shares, Class C Shares and Y Shares of a Fund. Because
Class A Shares are subject to 12b-1 fees, and Class B Shares and Class C Shares
are subject to a 12b-1 fee and a shareholder services fee, the yield and tax
equivalent yield will be lower than that of Y Shares. The sales load applicable
to Class A Shares also contributes to a lower total return for Class A Shares.
In addition, Class B Shares and Class C Shares are subject to similar non-
recurring charges, such as the CDSC, which, if excluded, would increase the
total return for Class B Shares and 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
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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 A Shares), or (ii) on a contingent deferred basis (in the
case of Class B Shares or 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 A 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% 4.99%
$ 100,000-$ 249,999 3.75% 3.90%
$ 250,000-$ 499,999 3.00% 3.10%
$ 500,000-$ 999,999 2.00% 2.04%
$1,000,000-$2,499,999 1.00% 1.01%
$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 families, 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. [/R]
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 B Shares are sold at net asset value per Share without the imposition of
a sales charge at the time of purchase. Shares redeemed within seven years of
their purchase will be subject to a CDSC according to the following schedule
applicable to purchases beginning September 1, 1994:
<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 1.0%
</TABLE>
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 one year of
their purchase will be subject to a CDSC of 1.00%.
With respect to Class B Shares and Class C 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 seven years (in the case of Class B Shares) or one year (in the
case of Class C 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 B 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 B Shares was accepted. At the end of this seven year period,
Class B Shares may automatically convert to Class A Shares, in which case the
Shares will no longer be subject to the higher Rule 12b-1 distribution fee
which is assessed on Class B 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 B 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 B Shares from most of the burden of
such distribution-related expenses.
For purposes of conversion to Class A Shares, Class B Shares purchased through
the reinvestment of dividends and distributions paid on Class B Shares in a
shareholder's Fund acount will be considered to be held in a separate sub-
account. Each time any Class B 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 B 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 A Shares, 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, 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 First Union Fund, which may produce a
gain or loss for tax purposes.
You may exchange Class A Shares of one First Union Fund for Class A Shares of
any other First Union Fund, 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 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 shares of the other First Union Fund
will be purchased at their net asset value determined after the exchange
request is received. 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 B Shares or Class C Shares will not be subject to a CDSC.
However, if the shareholder redeems Class B Shares within seven years of the
original purchase or Class C 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 B Shares or 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 B Shares or
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 and Trust Company, 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 CASH WITHDRAWAL PLAN
When an account of $10,000 or more is opened or when an existing account
reaches that size, you may participate in the Fund's Systematic Cash Withdrawal
Plan by filling out the appropriate part of the share purchase application.
Under this Plan, you may receive (or designate a third party to receive) a
monthly or quarterly check in a stated amount of not less than $25. Fund shares
will be redeemed as necessary to meet withdrawal payments. All participants
must elect to have their dividends and capital gain distributions reinvested
automatically. Any applicable Class B CDSC will be waived with respect to
redemptions occurring under a Systematic Cash Withdrawal Plan during a calendar
year to the extent that such redemptions do not exceed 10% of (i) the initial
value of the account, plus (ii) the value, at the time of purchase, of any
subsequent investments.
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 $ billion in total
consolidated assets as of December 31, 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 its 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.
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 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 0.10% for Class A Shares of the Fixed Income Fund, 0.25%
for Class A Shares of the Balanced, High Grade Tax Free, U.S. Government,
Utility, and Value Funds, and 0.75% for Class B Shares and 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 B Shares and 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 B Shares and Class C Shares. First Union Corporation
currently serves as principal lender in this financing program. Actual
distribution expenses for Class B Shares and 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 and Trust Company, Boston, Massachusetts, serves as custodian
for the securities and cash of the Funds.
The Funds may pay a shareholder servicing agent (the "Shareholder Servicing
Agent") a fee based on average daily net asset value for Class B Shares and
Class C Shares of the Funds for which the Shareholder Servicing Agent provides
shareholder services. As such, the Shareholder Servicing Agent 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 Class B Shares and
Class C Shares. The Funds may pay the Shareholder Servicing Agent a fee equal
to 0.25 of 1% of the average daily net asset value of Class B Shares and Class
C Shares for which the Shareholder Servicing Agent provides shareholder
services. The Shareholder Servicing Agent may voluntarily choose to waive all
or a portion of its fee at any time. First Union Brokerage Services, First
Union National Bank of North Carolina, and other financial institutions may
serve as Shareholder Servicing Agent.
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 LLP, 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 by the Class A
Shares, Class B Shares and Class C Shares. In addition, the Funds' expenses
under the Shareholder Services Plan are incurred 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; 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, 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 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.
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 other financial
institutions may be required to register as dealers pursuant to state law.
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 four classes of shares: Class A
Shares, Class B Shares, and Class C Shares for individuals and other customers
of First Union, and Y Shares for institutional investors.
Y 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 A Shares, Class B Shares, and Class C
Shares will be less than those payable to Y Shares by the difference between
class expenses and distribution and shareholder services expenses borne by the
shares of each respective class.
ADDRESSES
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- ------------------------- -------------------------
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First Union Funds Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
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Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
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Investment Adviser
First Union National Bank of North Carolina
One First Union Center
301 S. College Street
Charlotte, North Carolina
28288
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Custodian
State Street Bank and Trust Company P.O. Box 8609
Boston, Massachusetts
02266-8609
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Transfer Agent, and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
[/R]
Pittsburgh, Pennsylvania
15222-3779
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Legal Counsel to the Independent Trustees
Sullivan & Worcester 1025 Connecticut Ave., N.W.
Washington, D.C. 20036
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Legal Counsel to the Trust
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania
15222
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Independent Auditors
One Mellon Bank Center
KPMG Peat Marwick LLP Pittsburgh, Pennsylvania
15219
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3031007A-R (2/95)
FIRST UNION BALANCED PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
Y SHARES
CLASS A INVESTMENT 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 Y Shares, Class A Investment Shares,
Class B Investment Shares, or Class C Investment Shares for First
Union Balanced Portfolio, dated February 28, 1995. This Statement is
not a prospectus itself. To receive a copy of the Y 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 A Investment Shares', 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, 1995
[LOGO] FEDERATED SECURITIES CORP.
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Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
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GENERAL INFORMATION ABOUT THE FUND 1
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INVESTMENT OBJECTIVE AND POLICIES 1
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Types of Investments 1
Restricted and Illiquid Securities 1
Temporary Investments 1
When-Issued and Delayed Delivery
Transactions 1
Options and Futures Transactions 1
Futures Transactions 3
Lending of Portfolio Securities 3
Reverse Repurchase Agreements 3
Portfolio Turnover 3
Investment Limitations 3
FIRST UNION FUNDS MANAGEMENT 5
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Officers and Trustees 5
Fund Ownership 7
Trustee Liability 7
INVESTMENT ADVISORY SERVICES 7
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Adviser to the Fund 7
Advisory Fees 7
BROKERAGE TRANSACTIONS 7
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ADMINISTRATIVE SERVICES 8
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PURCHASING SHARES 8
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Distribution Plans (Class A, Class B and
Class C Investment Shares) 9
Shareholder Services Plan 10
DETERMINING NET ASSET VALUE 10
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Determining Market Value of Securities 10
REDEEMING SHARES 10
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Redemption in Kind 10
TAX STATUS 11
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The Fund's Tax Status 11
Shareholders' Tax Status 11
TOTAL RETURN 11
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YIELD 11
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PERFORMANCE COMPARISONS 12
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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 four classes: Y Shares, Class A Investment
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 other bonds (which are rated A or higher
by Moody's Investors Service, Inc. or Standard & Poor's Ratings Group or which,
if unrated, are considered to be of comparable quality by the Fund's investment
adviser) 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
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. 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 assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
OPTIONS AND FUTURES 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.
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 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 __% 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.
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 __% 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 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.
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, 1994 and 1993 were __% and 11% for the bond portion of
the Fund's portfolio and % and 8% for the stock portion of the Fund's
portfolio, 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.
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.
The Fund did not borrow money, sell securities short, or invest in reverse
repurchase agreements 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."
FIRST UNION FUNDS MANAGEMENT
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OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, present positions with
First Union Funds, and principal occupations.
- --------------------------------------------------------------------------------
James S. Howell
3125 Eastway Drive
Suite 114
Charlotte, NC
Chairman and Trustee
Retired Vice President of Lance Inc. (food manufacturing).
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Gerald M. McDonnell
821 Regency Drive
Charlotte, NC
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
4419 Parview Drive
Charlotte, NC
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*
Carillon Building
Suite 2170
227 West Trade Street
Charlotte, NC
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.
Primary PhysicianCare
1515 Mockingbird Lane
Park Seneca Building
Suite 312
Charlotte, NC
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
212 S. Tryon Street
Suite 980
Charlotte, NC
Trustee
Attorney; formerly, Partner with Wardlow, Knox, Knox, Freeman & Scofield
(attorneys) (1982-1986).
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Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA
President, Treasurer, and Trustee
Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; hairman, 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
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private 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
Federated Investors Tower
Pittsburgh, PA
Secretary
Corporate Counsel, Federated Investors.
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*These Trustees are each 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 __, 1995, the following shareholders of record owned 5% or more
of the outstanding Y Shares of the Fund:
As of February __, 1995, the following shareholders of record owned 5% or more
of the outstanding Class A Investment Shares of the Fund:
As of February __, 1995, the following shareholders of record owned 5% or more
of the outstanding Class B Investment Shares of the Fund:
As of February __, 1995, the following 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.
Because of the internal controls maintained by First Union to restrict the flow
of non-public information, the Fund's investments are typically made without any
knowledge of First Union's or its affiliates' lending relationships with an
issuer.
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, 1994, 1993, and 1992, the Adviser earned
advisory fees of $_______, $3,425,786, and $2,319,251, 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, 1994, 1993, and 1992, the Fund paid
$_______, $389,044, and $152,802, 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, 1994, 1993, and 1992, the Fund incurred
$_______, $597,752, and $427,255, 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 A 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 3.75% 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. 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 4.75% 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 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 A, CLASS B AND CLASS C INVESTMENT SHARES)
With respect to the Class A, 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 A, 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 A, Class B and Class C Investment Shares and (ii)
stimulate administrators to render administrative support services to the Fund
and holders of Class A, 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
A, 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 A, 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.
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, 1994, 1993, and 1992, the Fund incurred
$_______, $_______, and $_______, respectively, in distribution services fees on
behalf of Class A Investment Shares.
For the fiscal year ended December 31, 1994 and for the period from January __,
1993 (commencement of operations) to December 31, 1993, the Fund incurred
$ and $ , respectively, in distribution services fees on behalf of
Class B Investment Shares.
For the period from September , 1994 (commencement of operations) to December
31, 1994, the Fund incurred $ in distribution services fees on behalf of
Class C Investment Shares.
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.
SHAREHOLDER SERVICES PLAN
For the perid ended December 31, 1994, the Fund incurred a shareholder services
fee of $_______ and $_______ on behalf of Class B Investment Shares and Class C
Investment Shares, respectively.
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 Y Shares for the one-year period
ended December 31, 1994 and for the period from April __, 1991 (commencement of
operations) to December 31, 1994 were __% and __%, respectively.
The Fund's average annual total returns for Class A Investment Shares for the
one-year period ended December 31, 1994 and for the period from June __, 1991
(commencement of operations) to December 31, 1994 were __% and __%,
respectively.
The Fund's average annual total returns for Class B Investment Shares for the
one-year period ended December 31, 1994 and for the period from January __, 1993
(commencement of operations) to December 31, 1994 were % and %,
respectively.
The Fund's cumulative total return for Class C Investment Shares for the period
from September __, 1994 (commencement of operations) to December 31, 1994 was
__%.
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 __months of investment
activity since the start of performance.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for Y Shares for the thirty-day period ended December 31, 1994
was __%.
The Fund's yield for Class A Investment Shares for the thirty-day period ended
December 31, 1994 was __%.
The Fund's yield for Class B Investment Shares for the thirty-day period ended
December 31, 1994 was __%.
The Fund's yield for Class C Investment Shares for the thirty-day period ended
December 31, 1994 was __%.
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 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.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's Ratings
Group. 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 aa 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 (2/95)
FIRST UNION FIXED INCOME PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
Y SHARES
CLASS A INVESTMENT 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 Y Shares, Class A Investment Shares,
Class B Investment Shares, or Class C Investment Shares for First Union
Fixed Income Portfolio, dated February 28, 1995. This Statement is not
a prospectus itself. To receive a copy of the Y 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 A Investment Shares',
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, 1995
[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 and Futures Transactions 2
Futures Transactions 2
Lending of Portfolio Securities 2
Reverse Repurchase Agreements 2
Foreign Currency Transactions 3
Portfolio Turnover 3
Investment Limitations 3
FIRST UNION FUNDS MANAGEMENT 5
- ---------------------------------------------------------------
Officers and Trustees 5
]Fund Ownership 7
Trustee Liability 7
INVESTMENT ADVISORY SERVICES 7
- ---------------------------------------------------------------
Adviser to the Fund 7
Advisory Fees 7
BROKERAGE TRANSACTIONS 8
- ---------------------------------------------------------------
ADMINISTRATIVE SERVICES 8
- ---------------------------------------------------------------
PURCHASING SHARES 8
- ---------------------------------------------------------------
Distribution Plans (Class A, Class B and
Class C Investment Shares) 9
Shareholder Services Plan 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 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 four classes: Y Shares, Class A Investment
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 Ratings Group); 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
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. 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 assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
OPTIONS AND FUTURES 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
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 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 __% of its net
assets in options transactions.
FUTURES TRANSACTIONS
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 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
__% 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.
The Fund 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, but as consistent with its other investment policies, is not
otherwise limited in its ability to use this strategy.
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, 1994 and 1993 were ___% and 73%, 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.
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.
The Fund did not borrow money, sell securities short, or invest in reverse
repurchase agreements 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."
FIRST UNION FUNDS MANAGEMENT
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, present positions with
First Union Funds, and principal occupations.
- --------------------------------------------------------------------------------
James S. Howell
3125 Eastway Drive
Suite 114
Charlotte, NC
Chairman and Trustee
Retired Vice President of Lance Inc. (food manufacturing).
- --------------------------------------------------------------------------------
Gerald M. McDonnell
821 Regency Drive
Charlotte, NC
Trustee
Sales Representative with Nucor-Yamoto, Inc. (steel producer) (since 1988);
formerly with Northwestern Steel & Wire Company (1986-1988).
- --------------------------------------------------------------------------------
Thomas L. McVerry
4419 Parview Drive
Charlotte, NC
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*
Carillon Building
Suite 2170
227 West Trade Street
Charlotte, NC
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.
Primary PhysicianCare
1515 Mockingbird Lane
Park Seneca Building
Suite 312
Charlotte, NC
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
212 S. Tryon Street
Suite 980
Charlotte, NC
Trustee
Attorney; formerly, Partner with Wardlow, Knox, Knox, Freeman & Scofield
(attorneys) (1982-1986).
- --------------------------------------------------------------------------------
Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA
President, Treasurer, and Trustee
Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; 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
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private 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
Federated Investors Tower
Pittsburgh, PA
Secretary
Corporate Counsel, Federated Investors.
- --------------------------------------------------------------------------------
*These Trustees are each 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 _, 1995, the following shareholders of record owned 5% or more of
the outstanding Y shares of the Fund:
As of February _, 1995, the following shareholders of record owned 5% or more of
the outstanding Class A Investment Shares of the Fund:
As of February _, 1995, the following shareholders of record owned 5% or more of
the outstanding Class B Investment Shares of the Fund:
As of February , 1995, the following 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.
Because of the internal controls maintained by First Union to restrict the flow
of non-public information, the Funds' investments are typically made without any
knowledge of First Union's or its affiliates' lending relationship with an
issuer.
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, 1994, 1993, and 1992, the Adviser earned
advisory fees of $_______, $1,894,693, and $1,531,707 of which $_______, $0, and
$0, respectively, 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
- --------------------------------------------------------------------------------
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, 1994, 1993, and 1992, the Fund paid
$_______, $7,908, and $15,573 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 prospectuses.
For the fiscal years ended December 31, 1994, 1993, and 1992, the Fund incurred
$_______, $331,342, and $282,292, in administrative service costs, of which $__,
$0, and $0, respectively, 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 A 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 3.75%, 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. 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 4.75% 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 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 A, CLASS B AND CLASS C INVESTMENT SHARES)
With respect to the Class A, 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 A, 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 A, Class B and Class C Investment Shares and (ii)
stimulate administrators to render administrative support services to the Fund
and holders of Class A, 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 A, 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 A, 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.
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, 1994, 1993, and 1992, the Fund incurred
$_______, $_______, and $_______, respectively, in distribution services fees on
behalf of Class A Investment Shares.
For the fiscal year ended December 31, 1994 and for the period from January __,
1993 (commencement of operations) to December 31, 1993, the Fund incurred
$ and $ , respectively, in distribution services fees on behalf of
Class B Investment Shares.
For the period from September , 1994 (commencement of operations) to December
31, 1994, the Fund incurred $ in distribution services fees on behalf of
Class C Investment Shares.
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.
SHAREHOLDER SERVICES PLAN
For the period ended December 31, 1994, the Fund incurred a shareholder services
fee of $_______ and $_______ on behalf of Class B Investment Shares and Class C
Investment Shares, respectively.
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 Y Shares for the one-year period
ended December 31, 1994 and for the period from December __, 1990 (commencement
of operations) to December 31, 1994 were ___% and ___%, respectively.
The Fund's average annual total returns for Class A Investment Shares for the
one-year period ended
December 31, 1994 and for the period from January __, 1989 (commencement of
operations) to December 31, 1994 were ___% and ___%, respectively.
The Fund's average annual total returns for Class B Investment Shares for the
one-year period ended
December 31, 1994 and for the period from January __, 1993 (commencement of
operations) to December 31, 1994 was %.
The Fund's cumulative total return for Class C Investment Shares for the period
from September __, 1994 (commencement of operations) to December 31, 1994 was
___%.
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 _______months of
investment activity since the start of performance.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for Y Shares for the thirty-day period ended December 31, 1994
was __%. The Fund's yield for Class A Investment Shares for the thirty-day
period ended December 31, 1994 was ___%.
The Fund's yield for Class B Investment Shares for the thirty-day period ended
December 31, 1994 was ___%.
The Fund's yield for Class C Investment Shares for the thirty-day period ended
December 31, 1994 was ___%.
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 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 BROTHERS 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.
APPENDIX
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STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's Ratings
Group. 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 RATINGS GROUP 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 (2/95)
FIRST UNION HIGH GRADE TAX FREE PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
Y SHARES
CLASS A INVESTMENT SHARES
CLASS B INVESTMENT SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectus of
Y Shares, Class A Investment Shares or Class B Investment Shares for
First Union High Grade Tax Free Portfolio, dated February 28, 1995.
This Statement is not a prospectus itself. To receive a copy of the Y
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 A Investment Shares' or Class B 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, 1995
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
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GENERAL INFORMATION ABOUT THE FUND 1
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INVESTMENT OBJECTIVE AND POLICIES 1
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Acceptable Investments 1
When-Issued and Delayed Delivery
Transactions 1
Temporary Investments 1
Lending of Portfolio Securities 2
Portfolio Turnover 2
Municipal Bond Insurance 2
Municipal Bond Insurers 3
Investment Limitations 4
FIRST UNION FUNDS MANAGEMENT 6
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Officers and Trustees 6
Fund Ownership 8
Trustee Liability 8
INVESTMENT ADVISORY SERVICES 8
- ---------------------------------------------------------------
Adviser to the Fund 8
Advisory Fees 8
BROKERAGE TRANSACTIONS 9
- ---------------------------------------------------------------
ADMINISTRATIVE SERVICES 9
- ---------------------------------------------------------------
PURCHASING SHARES 9
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Distribution Plans (Class A and Class B
Investment Shares) 10
Shareholder Services Plan 11
DETERMINING NET ASSET VALUE 11
- ---------------------------------------------------------------
Determining Market Value of Securities 11
Valuing Municipal Bonds 11
REDEEMING SHARES 12
- ---------------------------------------------------------------
Redemption in Kind 12
TAX STATUS 12
- ---------------------------------------------------------------
The Fund's Tax Status 12
TOTAL RETURN 12
- ---------------------------------------------------------------
YIELD 13
- ---------------------------------------------------------------
TAX EQUIVALENT YIELD 13
- ---------------------------------------------------------------
Tax Equivalency Table 13
PERFORMANCE COMPARISONS 13
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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: Y Shares, Class A Investment
Shares, and Class B 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 Ratings Group ("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 respective prospectus.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. 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 assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of 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
years ended December 31, 1994 and 1993 were ___% and 14%, 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 a fundamental restriction or policy 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, invest in reverse repurchase agreements, or sell
securities short 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 intend to invest more than 25% of the value of its
assets in any issuer in a single state.
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."
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.
FIRST UNION FUNDS MANAGEMENT
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, present positions with
First Union Funds, and principal occupations.
- --------------------------------------------------------------------------------
James S. Howell
3125 Eastway Drive
Suite 114
Charlotte, NC
Chairman and Trustee
Retired Vice President of Lance Inc. (food manufacturing).
- --------------------------------------------------------------------------------
Gerald M. McDonnell
821 Regency Drive
Charlotte, NC
Trustee
Sales Representative with Nucor-Yamoto, Inc. (steel producer) (since 1988);
formerly with Northwestern Steel & Wire Company (1986-1988).
- --------------------------------------------------------------------------------
Thomas L. McVerry
4419 Parview Drive
Charlotte, NC
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*
Carillon Building
Suite 2170
227 West Trade Street
Charlotte, NC
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.
Primary PhysicianCare
1515 Mockingbird Lane
Park Seneca Building
Suite 312
Charlotte, NC
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
212 S. Tryon Street
Suite 980
Charlotte, NC
Trustee
Attorney; formerly, Partner with Wardlow, Knox, Knox, Freeman & Scofield
(attorneys) (1982-1986).
- --------------------------------------------------------------------------------
Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA
President, Treasurer, and Trustee
Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; 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
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private 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
Federated Investors Tower
Pittsburgh, PA
Secretary
Corporate Counsel, Federated Investors.
- --------------------------------------------------------------------------------
*These Trustees are each 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 , 1995, the following shareholders of record owned 5% or more
of the outstanding Y Shares of the Fund:
As of February , 1995, the following shareholders of record owned 5% or more
of the outstanding Class A Investment Shares of the Fund:
As of February , 1995, the following shareholders of record owned 5% or more
of the outstanding Class B 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.
Because of the internal controls maintained by First Union to restrict the flow
of non-public information, the Fund's investments are typically made without any
knowledge of First Union's or its affiliates' lending relationships with an
issuer.
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, 1994, 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, respectively, 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 fiscal years ended December 31, 1994, 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 A 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 3.75%, 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. 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 4.75% 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 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 A AND CLASS B INVESTMENT SHARES)
With respect to the Class A and Class B 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 A and Class B Investment Shares. The Plans
are designed to (i) stimulate brokers to provide distribution and administrative
support services to the Fund and holders of Class A and Class B Investment
Shares and (ii) stimulate administrators to render administrative support
services to the Fund and holders of Class A and Class B 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
A and Class B 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 A and Class B 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.
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, 1994 and 1993, and for the period from
February , 1992 (commencement of operations) to December 31, 1992, the Fund
incurred $ , $ , and $ , respectively, in distribution
services fees on behalf of Class A Investment Shares.
For the fiscal year ended December 31, 1994, and for the period from January __,
1993 (commencement of operations) to December 31, 1993, the Fund incurred
$ and $ , respectively, in distribution services fees on behalf of
Class B Investment Shares.
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.
SHAREHOLDER SERVICES PLAN
For the period ended December 31, 1994, the Fund incurred a shareholder services
fee of $_______ on behalf of Class B Investment Shares.
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 cumulative total return for Y Shares for the period from February __,
1994 (commencement of operations) to December 31, 1994 was %.
The Fund's average annual total returns for Class A Investment Shares for the
one-year period ended December 31, 1994, and for the period from February ,
1992 (commencement of operations) to December 31, 1994 were ___% and ___%,
respectively.
The Fund's average annual total returns for Class B Investment Shares for the
one-year period ended December 31, 1994, and for the period from January ,
1993 (commencement of operations) to December 31, 1994 were ___% and ___%,
respectively.
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 Y 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 Y Shares' total return is representative
of only ___ months of investment activity since the commencement of operations.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for Y Shares for the thirty-day period ended December 31, 1994
was ___%. The Fund's yield for Class A Investment Shares for the thirty-day
period ended December 31, 1994 was ___%. The Fund's yield for Class B Investment
Shares for the thirty-day period ended December 31, 1994 was ___%.
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 Y Shares for the thirty-day period ended
December 31, 1994 was ___%. The Fund's tax equivalent yield for Class A
Investment Shares for the thirty-day period ended December 31, 1994 was ___%.
The Fund's tax equivalent yield for Class B Investment Shares for the thirty-day
period ended December 31, 1994 was ___%.
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 1995
</TABLE>
TO BE INSERTED IN FEBRUARY, 1995
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 Brothers 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.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD & POOR'S RATINGS GROUP BOND RATING DEFINITIONS
AAA--Debt rated "AAA" has the highest rating assigned by Standard & Poor's
Ratings Group. 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 (2/95)
FIRST UNION MANAGED BOND PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
Y SHARES
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the
prospectus of Y Shares for First Union Managed Bond Portfolio, dated
February 28, 1995. This Statement is not a prospectus itself. To
receive a copy of the Y 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, 1995
[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 and Futures Transactions 2
Futures Transactions 3
Lending of Portfolio Securities 3
Reverse Repurchase Agreements 3
Portfolio Turnover 3
Investment Limitations 3
FIRST UNION FUNDS MANAGEMENT 5
- ---------------------------------------------------------------
Officers and Trustees 5
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 Plan (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 11
- ---------------------------------------------------------------
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: Y Shares ("Shares"), Class A
Investment Shares (not currently offered) and Class B Investment Shares (not
currently offered). This Statement of Additional Information relates only to the
Y 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 high grade bonds, which include domestic issues of
corporate debt obligations rated A or better by Moody's Investors Service, Inc.
or Standard & Poor's Ratings Group, 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
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. 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 assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
OPTIONS AND FUTURES 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.
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.
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 __% 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.
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 __% 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 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.
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, 1994 and 1993 were __% and 53%, 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.
The Fund has no present intention to borrow money, sell securities short, or
invest in reverse repurchase agreements 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."
FIRST UNION FUNDS MANAGEMENT
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OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, present positions with
First Union Funds, and principal occupations.
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James S. Howell
3125 Eastway Drive
Suite 114
Charlotte, NC
Chairman and Trustee
Retired Vice President of Lance Inc. (food manufacturing).
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Gerald M. McDonnell
821 Regency Drive
Charlotte, NC
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
4419 Parview Drive
Charlotte, NC
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*
Carillon Building
Suite 2170
227 West Trade Street
Charlotte, NC
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.
Primary PhysicianCare
1515 Mockingbird Lane
Park Seneca Building
Suite 312
Charlotte, NC
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
212 S. Tryon Street
Suite 980
Charlotte, NC
Trustee
Attorney; formerly, Partner with Wardlow, Knox, Knox, Freeman & Scofield
(attorneys) (1982-1986).
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Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA
President, Treasurer, and Trustee
Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research Corp.,
and Passport Research, Ltd.; Executive Vice President, Treasurer, and Director,
Federated Securities Corp.; Trustee, Federated Services Company and Federated
Shareholder Services; 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
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private 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
Federated Investors Tower
Pittsburgh, PA
Secretary
Corporate Counsel, Federated Investors.
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*These Trustees are each 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 __, 1995, the following shareholders of record owned 5% or more
of the outstanding Y Shares of the Fund:
As of February __, 1995, Class A and Class B 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
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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.
Because of the internal controls maintained by First Union to restrict the flow
of non-public information, the Fund's investments are typically made without any
knowledge of First Union's or its affiliates' lending relationships with an
issuer.
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, 1994, 1993, and 1992, the Adviser earned
advisory fees of $_______, $576,619, and $591,232, 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, 1994, 1993, and 1992, the Fund paid
$_______, $1,662, and $16,922, 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, 1994, 1993, and 1992, the Fund incurred
$_______, $101,082, and $109,032, in administrative service costs, of which
$_______, $36,701, and $52,759, 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 3.75%, 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. 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 4.75% 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 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 (CLASS A INVESTMENT SHARES)
With respect to the Class A 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 Class A Investment Shares. The
Plan is designed to (i) stimulate brokers to provide distribution and
administrative support services to the Fund and its holders of Class A
Investment Shares and (ii) stimulate administrators to render administrative
support services to the Fund and its holders of Class A 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
A 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 A 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.
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
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The Fund's average annual total returns for Y Shares for the one year period
ended December 31, 1994 and for the period from April , 1991 (commencement of
operations) to December 31, 1994 were __% and __%, respectively. Class A
Investment Shares were not being offered during the period ended December 31,
1994.
The average annual total return for Y 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 Y Shares for the thirty-day period ended December 31, 1994
was __%. Class A Investment Shares were not being offered during the period
ended December 31, 1994.
The yield for Y 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 BROTHERS 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.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's Ratings
Group. 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 RATINGS GROUP 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 (2/95)
FIRST UNION U.S. GOVERNMENT PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
Y SHARES
CLASS A INVESTMENT 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
Y Shares, Class A Investment Shares Class B Investment Shares, or
Class C Investment Shares for First Union U.S. Government Portfolio,
dated February 28, 1995 . This Statement is not a prospectus itself.
To receive a copy of the Y 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 A Investment Shares',
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, 1995
[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 4
Restricted Securities 4
Reverse Repurchase Agreements 4
Portfolio Turnover 4
Investment Limitations 4
FIRST UNION FUNDS MANAGEMENT 6
- ---------------------------------------------------------------
Officers and Trustees 6
Fund Ownership 8
Trustee Liability 8
INVESTMENT ADVISORY SERVICES 8
- ---------------------------------------------------------------
Adviser to the Fund 8
Advisory Fees 8
BROKERAGE TRANSACTIONS 9
- ---------------------------------------------------------------
ADMINISTRATIVE SERVICES 9
- ---------------------------------------------------------------
PURCHASING SHARES 9
- ---------------------------------------------------------------
Distribution Plans
(Class A, Class B and Class C
Investment Shares) 10
Shareholder Services Plan 11
DETERMINING NET ASSET VALUE 11
- ---------------------------------------------------------------
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 12
TOTAL RETURN 12
- ---------------------------------------------------------------
YIELD 12
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 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 four classes: Y Shares, Class A Investment
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
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. 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 assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
OPTIONS AND FUTURES 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.
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.
Alternately, 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.
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 % 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 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 fiscal year ended December 31, 1994 and for the period from
January 11, 1993 (commencement of operations) to December 31, 1993, the
portfolio turnover rate for the Fund was __% and 39%, 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 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 respective 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, or to invest in reverse
repurchase agreements 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."
FIRST UNION FUNDS MANAGEMENT
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, present positions with
First Union Funds, and principal occupations.
- --------------------------------------------------------------------------------
James S. Howell
3125 Eastway Drive
Suite 114
Charlotte, NC
Chairman and Trustee
Retired Vice President of Lance Inc. (food manufacturing).
- --------------------------------------------------------------------------------
Gerald M. McDonnell
821 Regency Drive
Charlotte, NC
Trustee
Sales Representative with Nucor-Yamoto, Inc. (steel producer) (since 1988);
formerly with Northwestern Steel & Wire Company (1986-1988).
- --------------------------------------------------------------------------------
Thomas L. McVerry
4419 Parview Drive
Charlotte, NC
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*
Carillon Building
Suite 2170
Charlotte, NC
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.
Primary PhysicianCare
1515 Mockingbird Lane
Park Seneca Building
Suite 321
Charlotte, NC
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
212 S. Tryon Street
Suite 980
Charlotte, NC
Trustee
Attorney; formerly, Partner with Wardlow, Knox, Knox, Freeman & Scofield
(attorneys) (1982-1986).
- --------------------------------------------------------------------------------
Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA
President, Treasurer, and Trustee
Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; 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
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private 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
Federated Investors Tower
Pittsburgh, PA
Secretary
Corporate Counsel, Federated Investors.
- --------------------------------------------------------------------------------
*These Trustees are each 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 , 1995, the following shareholders of record owned 5% or more
of the outstanding Y Shares of the Fund:
As of February __, 1995, the following shareholders of record owned 5% or more
of the outstanding Class A Investment Shares of the Fund:
As of February , 1995, the following shareholders of record owned 5% or more
of the outstanding Class B Investment Shares of the Fund:
As of February , 1995, the following 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
- --------------------------------------------------------------------------------
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.
Because of the internal controls maintained by First Union to restrict the flow
of non-public information, the Fund's investments are typically made without any
knowledge of First Union's or its affiliates' lending relationships with an
issuer.
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, 1994 and for the period from January 11,
1993 (commencement of operations) to December 31, 1993, the Adviser earned $__
and $802,441, of which $__ and $465,195, respectively, 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
- --------------------------------------------------------------------------------
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, 1994 and for the period from January 11,
1993 (commencement of operations) to December 31, 1993, the Fund incurred $__
and $139,691 in administrative service costs, of which $__ and $30,827 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 A 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 3.75%, 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. 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 4.75% 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 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 A, CLASS B AND CLASS C INVESTMENT SHARES)
With respect to the Class A, 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 A, 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 A, Class B and Class C Investment Shares and (ii)
stimulate administrators to render administrative support services to the Fund
and holders of Class A, 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
A, 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 A, 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.
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, 1994 and for the period from January __,
1993 (commencement of operations) to December 31, 1993, the Fund incurred $ and
$ , respectively, in distribution services fees on behalf of Class A Investment
Shares.
For the fiscal year ended December 31, 1994 and for the period from January ,
1993 (commencement of operations) to December 31, 1993, the Fund incurred $ and
$ , respectively, in distribution services fees on behalf of Class B Investment
Shares.
For the period from September , 1994 (commencement of operations) to December
31, 1994, the Fund incurred $ in distribution services fees on behalf of Class
C Investment Shares.
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.
SHAREHOLDER SERVICES PLAN
For the period ended December 31, 1994, the Fund incurred a shareholder services
fee of $__ and $__ on behalf of Class B Investment Shares and Class C Investment
Shares, respectively.
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 average annual total returns for Class A Investment Shares for the
one year period ended December 31, 1994, and for the period from January __,
1993 (commencement of operations) to December 31, 1994, were % and %,
respectively.
The Fund's average annual total returns for Class B Investment Shares for the
one year ended December 31, 1994, and for the period from January , 1993
(commencement of operations) to December 31, 1994, were % and %,
respectively.
The Fund's cumulative total returns for Class C Investment Shares for the period
from September , 1994 (commencement of operations) to December 31, 1994 was
%.
Cumulative total return reflects 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. Class C Shares total return is
representative of only ______ months of activity since the commencement of
operations.
The Fund's average annual total returns for Y Shares for the one year period
ended December 31, 1994 and for the period from August , 1993 (commencement of
operations) to December 31, 1994, were % and %, respectively.
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 monthly
reinvestment of all dividends and distributions.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for Class A Investment Shares for the thirty-day period ended
December 31, 1994 was __%. The Fund's yield for Class B Investment Shares for
the thirty-day period ended December 31, 1994 was %. The Fund's yield for
Class C Investment Shares for the thirty-day period ended December 31, 1994 was
%. The Fund's yield for Y Shares for the thirty-day period ended December 31,
1994 was %.
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 BROTHERS 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.
From time to time as it deems appropriate, the Fund may advertise the
performance of either class of Shares or the performance of the market using
charts, graphs, and descriptions, compared to federally insured bank products
including certificates of deposit and time deposits and to money market funds
using the Lipper Analytical Services money market instruments average.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
3031008B (2/94)
FIRST UNION UTILITY PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
Y SHARES
CLASS A INVESTMENT 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
Y Shares, Class A Investment Shares, Class B Investment Shares, or
Class C Investment Shares for First Union Utility Portfolio, dated
February 28, 1995. This Statement is not a prospectus itself. To
receive a copy of the Y 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 A Investment Shares', 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, 1995
FEDERATED SECURITIES CORP.
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Distributor
A subsidiary of FEDERATED INVESTORS
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
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GENERAL INFORMATION ABOUT THE FUND 1
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INVESTMENT OBJECTIVE AND POLICIES 1
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Restricted and Illiquid Securities 1
When-Issued and Delayed Delivery
Transactions 1
Lending of Portfolio Securities 2
Reverse Repurchase Agreements 2
Options and Futures Transactions 2
Futures Transactions 2
Portfolio Turnover 3
Investment Limitations 3
FIRST UNION FUNDS MANAGEMENT 5
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Officers and Trustees 5
Fund Ownership 7
Trustee Liability 7
INVESTMENT ADVISORY SERVICES 7
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Adviser to the Fund 7
Advisory Fees 7
BROKERAGE TRANSACTIONS 8
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ADMINISTRATIVE SERVICES 8
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PURCHASING SHARES 8
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Distribution Plans (Class A, Class B and Class C
Investment Shares) 9
Shareholder Services Plan 10
DETERMINING NET ASSET VALUE 10
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Determining Market Value of Securities 10
REDEEMING SHARES 10
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Redemption in Kind 11
TAX STATUS 11
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The Fund's Tax Status 11
Shareholders' Tax Status 11
TOTAL RETURN 11
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YIELD 11
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PERFORMANCE COMPARISONS 12
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APPENDIX 14
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GENERAL INFORMATION ABOUT THE FUND
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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 four classes: Y Shares, Class A Investment
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
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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
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. 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 assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of 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 AND FUTURES 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
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 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 __% of its net
assets in options transactions.
FUTURES TRANSACTIONS
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 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
__% 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%. For the period from January 6, 1994 (commencement of operations)
to December 31, 1994, the portfolio turnover rate for the Fund was __%.
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 or invest in reverse
repurchase agreements 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."
FIRST UNION FUNDS MANAGEMENT
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, present positions with
First Union Funds, and principal occupations.
James S. Howell
3125 Eastway Drive
Suite 114
Charlotte, NC
Chairman and Trustee
Retired Vice President of Lance Inc. (food manufacturing).
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Gerald M. McDonnell
821 Regency Drive
Charlotte, NC
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
4419 Parview Drive
Charlotte, NC
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*
Carillon Building
Suite 2170
227 West Trade Street
Charlotte, NC
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.
Primary PhysicianCare
1515 Mockingbird Lane
Park Seneca Building
Suite 321
Charlotte, NC
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
212 S. Tryon Street
Suite 980
Charlotte, NC
Trustee
Attorney; formerly, Partner with Wardlow, Knox, Knox, Freeman & Scofield
(attorneys) (1982-1986).
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Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA
President, Treasurer, and Trustee
Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; 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
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private 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
Federated Investors Tower
Pittsburgh, PA
Secretary
Corporate Counsel, Federated Investors.
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*These Trustees are each 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 , 1995, the following shareholders of record owned 5% or more
of the outstanding Y Shares of the Fund:
As of February __, 1995, the following shareholders of record owned 5% or more
of the outstanding Class A Investment Shares of the Fund:
As of February __, 1995, the following shareholders of record owned 5% or more
of the outstanding Class B Investment Shares of the Fund:
As of February , 1995, the following 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.
Because of the internal controls maintained by First Union to restrict the flow
of non-public information, the Fund's investments are typically made without any
knowledge of First Union's or its affiliates' lending relationships with an
issuer.
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 6, 1994 (commencement of operations) to December 31,
1994, the Adviser earned advisory fees of $__, of which $__ 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
- --------------------------------------------------------------------------------
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 period from January __, 1994, (commencement of operations) to December
31, 1994, the Fund paid $ 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 period from January 6, 1994 (commencement of operations) to December 31,
1994, the Fund incurred $__ in administrative service costs, of which $__ 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 A 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 3.75%, 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. 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 4.75% 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 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 A, CLASS B AND CLASS C INVESTMENT SHARES)
With respect to the Class A, 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 A, 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 A, Class B and Class C Investment Shares and (ii)
stimulate administrators to render administrative support services to the Fund
and holders of Class A, 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
A, 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 A, 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.
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 __, 1994 (commencement of operations) to December
31, 1994, the Fund incurred $ in distribution services fees on behalf of Class
A Investment Shares.
For the period from January __, 1994 (commencement of operations) to December
31, 1994, the Fund incurred $ in distribution services fees on behalf of Class
B Investment Shares.
For the period from September , 1994 (commencement of operations) to December
31, 1994, the Fund incurred $ in distribution services fees on behalf of Class
C Investment Shares.
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.
SHAREHOLDER SERVICES PLAN
For the period ended December 31, 1994, the Fund incurred shareholder services
fees of $__ and $__ on behalf of Class B Investment Shares and Class C
Investment Shares, respectively.
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 Fund's cumulative total return for Y Shares from February __, 1994
(commencement of operations) to December 31, 1994 was %.
The Fund's cumulative total return for Class A Investment Shares from January
__, 1994 (commencement of operations) to December 31, 1994 was %.
The Fund's cumulative total return for Class B Investment Shares from January
__, 1994 (commencement of operations) to December 31, 1994 was %.
The Fund's cumulative total return for Class C Investment Shares from September
, 1994 (commencement of operations) to December 31, 1994 was %.
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.
Y Shares' total return is representative of only months of Fund activity since
the start of performance. Class A Shares' and Class B Shares' total returns are
representative of only months of Fund activity since the start of performance.
Class C Shares' total return is representative of only months of Fund activity
since the start of performance.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for Y Shares for the thirty-day period ended December 31, 1994
was __%.
The Fund's yield for Class A Investment Shares for the thirty-day period ended
December 31, 1994 was __%.
The Fund's yield for Class B Investment Shares for the thirty-day period ended
December 31, 1994 was __%.
The Fund's yield for Class C Investment Shares for the thirty-day period ended
December 31, 1994 was __%.
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
- --------------------------------------------------------------------------------
STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's Ratings
Group. 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 RATINGS GROUP 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.
1 3092403B (2/95)
FIRST UNION VALUE PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
Y SHARES
CLASS A INVESTMENT 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
Y Shares, Class A Investment Shares', Class B Investment Shares, or
Class C Investment Shares for First Union Value Portfolio, dated
February 28, 1995. This Statement is not a prospectus itself. To
receive a copy of the Y 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 A Investment Shares', 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, 1995
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 2
Lending of Portfolio Securities 2
Reverse Repurchase Agreements 2
Options and Futures Transactions 2
Futures Transactions 3
Portfolio Turnover 3
Investment Limitations 3
FIRST UNION FUNDS MANAGEMENT 5
- ---------------------------------------------------------------
Officers and Trustees 5
Fund Ownership 6
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 A, Class B and Class C
Investment Shares) 9
Shareholder Services Plan 10
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
- ---------------------------------------------------------------
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 four classes: Y Shares, Class A Investment
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 Ratings Group, 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
These transactions are made to secure what is considered to be an advantageous
price or yield of for the Fund. 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 assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of 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 AND FUTURES 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
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 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 __% of its net
assets in options transactions.
FUTURES TRANSACTIONS
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 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
% 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, 1994 and 1993 were __% and 46%, 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 or invest in reverse repurchase agreements 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."
FIRST UNION FUNDS MANAGEMENT
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, present positions with
First Union Funds, and principal occupations.
- --------------------------------------------------------------------------------
James S. Howell
3125 Eastway Drive
Suite 114
Charlotte, NC
Chairman and Trustee
Retired Vice President of Lance Inc. (food manufacturing).
- --------------------------------------------------------------------------------
Gerald M. McDonnell821 Regency Drive
Charlotte, NC
Trustee
Sales Representative with Nucor-Yamoto, Inc. (steel producer) (since 1988);
formerly with Northwestern Steel & Wire Company (1986-1988).
- --------------------------------------------------------------------------------
Thomas L. McVerry
4419 Parview Drive
Charlotte, NC
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*
Carillon Building
Suite 2170
227 West Trade Street
Charlotte, NC
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.
Primary PhysicianCare
1515 Mockingbird Lane
Park Seneca Building
Suite 312
Charlotte, NC
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
212 S. Tryon Street
Suite 980
Charlotte, NC
Trustee
Attorney; formerly, Partner with Wardlow, Knox, Knox, Freeman & Scofield
(attorneys) (1982-1986).
- --------------------------------------------------------------------------------
Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA
President, Treasurer, and Trustee
Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; 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
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private 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
Federated Investors Tower
Pittsburgh, PA
Secretary
Corporate Counsel, Federated Investors.
- --------------------------------------------------------------------------------
*These Trustees are each 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 __, 1995, the following shareholders of record owned 5% or more
of the outstanding Y Shares of the Fund:
As of February __, 1995, the following shareholders of record owned 5% or more
of the outstanding Class A Investment Shares of the Fund:
As of February , 1995, the following shareholders of record owned 5% or more
of the outstanding Class B Investment Shares of the Fund:
As of February , 1995, the following 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.
Because of the internal controls maintained by First Union to restrict the flow
of non-public information, the Fund's investments are typically made without any
knowledge of First Union's or its affiliates' lending relationships with an
issuer.
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, 1994, 1993, and 1992, the Adviser earned
advisory fees of $ , $ , and $ , of which $__, $0, and $0,
was, respectively, 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.
For the fiscal years ended December 31, 1994, 1993, and 1992, the Fund paid
$________, $894,400, and $642,338, 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, 1994, 1993, and 1992, the Fund incurred
$________, $526,836, and $407,134 in administrative service costs, of which $__,
$0, and $17,263, respectively, 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 A 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 3.75%, 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. 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 4.75% 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 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 A, CLASS B AND CLASS C INVESTMENT SHARES)
With respect to the Class A, 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 A, 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 A, Class B and Class C Investment Shares and (ii) stimulate administrators
to render administrative support services to the Fund and holders of Class A,
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 A, 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 A, 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.
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, 1994, 1993, and 1992, the Fund incurred
$__, $__, and $__, respectively, in distribution services fees on behalf of
Class A Investment Shares.
For the fiscal year ended December 31, 1994, and for the period from January __,
1993 (commencement of operations) to December 31, 1993, the Fund incurred $ and
$ , respectively, in distribution services fees on behalf of Class B Investment
Shares.
For the period from September , 1994 (commencement of operations) to December
31, 1994, the Fund incurred $ in distribution services fees on behalf of Class
C Investment Shares.
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.
SHAREHOLDER SERVICES PLAN
For the period ended December 31, 1994, the Fund incurred a shareholder services
fee of $__ and $__ on behalf of Class B Investment Shares and Class C Investment
Shares, respectively.
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 Y Shares for the one-year period
ended December 31, 1994 and for the period from December __, 1990 (commencement
of operations) to December 31, 1994 were % and %, respectively.
The Fund's average annual total returns for Class A Investment Shares for the
one-year and five-year periods ended December 31, 1994 and for the period from
April __, 1985 (commencement of operations) to December 31, 1994 were %, %,
and %, respectively.
The Fund's average annual total returns for Class B Investment Shares for the
one-year period ended December 31, 1994 and for the period from January __, 1993
(commencement of operations) to December 31, 1994 were % and %,
respectively.
The Fund's cumulative total return for Class C Investment Shares for the period
from September __, 1994 (commencement of operations) to December 31, 1994 was
%.
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 months of
investment activity since the start of performance.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for Y Shares for the thirty-day period ended December 31, 1994
was __%.
The Fund's yield for Class A Investment Shares for the thirty-day period ended
December 31, 1994 was __.
The Fund's yield for Class B Investment Shares for the thirty-day period ended
December 31, 1994 was __%.
The Fund's yield for Class C Investment Shares for the thirty-day period ended
December 31, 1994 was __%.
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.
12 3031001B (2/95)
FIRST UNION
- ------------------------ SINGLE STATE ------------------------
- ------------------------ MUNICIPAL BOND ------------------------
FUNDS
Portfolios of First Union Funds
Y SHARES
- -------------------------------------------------------------------------------
P R O S P E C T U S
February 28, 1995
First Union Funds (the "Trust") is a mutual fund with 17 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, two diversified International 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.
International Funds
. First Union Emerging Markets Growth Portfolio; and
. First Union International Equity 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 Y Shares of
First Union Single State Municipal Bond Funds. It concisely describes the
information which you should know before investing in Y 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, 1995, 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 25
- -------------------------------------- --------------------------------------
Summary of Fund Expenses 4 Management of First Union Funds 25
- -------------------------------------- --------------------------------------
Financial Highlights 6 Fees and Expenses 27
- -------------------------------------- --------------------------------------
Investment Objectives and Policies 14 Shareholder Rights and Privileges 28
- -------------------------------------- --------------------------------------
Other Investment Policies 17 Distributions and Taxes 29
- -------------------------------------- --------------------------------------
Shareholder Guide 21 Tax Information 30
- -------------------------------------- --------------------------------------
How to Buy Shares 23 Other Classes of Shares 33
- -------------------------------------- --------------------------------------
How to Convert Your Investment from Addresses Inside Back Cover
One First Union Fund to Another --------------------------------------
First Union Fund 24
- --------------------------------------
- ------------------------- 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 Single State Municipal Bond Fund currently
offers three classes of shares: Class A Investment Shares ("Class A Shares"),
Class B Investment Shares ("Class B Shares"), and Y Shares. Class A Shares and
Class B Shares are sold to individuals and other customers of First Union (the
"Adviser"). Y Shares are designed primarily for institutional investors (banks,
corporations, and fiduciaries). This prospectus relates only to Y 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 Y 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
Y 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
--------- --------- --------- --------- ---------
Y 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 of-
fering price).................... None None None None None
Contingent Deferred Sales Charge
(as a percentage of original pur-
chase price or redemption pro-
ceeds, 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 Y SHARES OPERATING EXPENSES
(As a percentage of projected
average net assets)
Management Fee (after waiver) (1). % % % % %
12b-1 Fees........................ None None None None None
Total Other Expenses (after waiver
and
reimbursement) (2)............... % % % % %
Total Y Shares Operating Ex-
penses (3)....................... % % % % %
</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 %, %, %, and %,
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 Y Shares Operating Expenses for Florida, Georgia, North Carolina,
South Carolina, and Virginia Municipal Bond Funds are estimated to be
%, %, %, %, and %, respectively, absent the anticipated
voluntary waivers and reimbursements described above in notes 1 and 2.
- ------------------------- SUMMARY OF -------------------------
- ------------------------- FUND EXPENSES -------------------------
(CONTINUED)
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS
Y SHARES
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 Y Shares.
Florida Municipal Bond Fund.................................. $ $
Georgia Municipal Bond Fund.................................. $ $
North Carolina Municipal Bond Fund........................... $ $
South Carolina Municipal Bond Fund........................... $ $
Virginia Municipal Bond 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 information set forth in the foregoing table and example relates only to Y
Shares of the Funds. The Funds also offer two additional classes of shares
called Class A Shares and Class B Shares. In general, all expenses are
allocated based upon the daily net assets of each class. Class A Shares and
Class B Shares are subject to certain of the same expenses as Y Shares.
However, Class A Shares are subject to a 12b-1 fee of 0.25 of 1% and Class B
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 A Shares bear a maximum front-end sales
charge of 4.75% and Class B Shares bear a maximum contingent deferred sales
charge of 5.00%. See "Other Classes of Shares."
- ------------------------- FINANCIAL HIGHLIGHTS -------------------------
- ------------------------- -------------------------
FIRST UNION FLORIDA MUNICIPAL BOND PORTFOLIO
- ------------------------- FINANCIAL HIGHLIGHTS -------------------------
- ------------------------- -------------------------
FIRST UNION FLORIDA MUNICIPAL BOND PORTFOLIO
- ------------------------- FINANCIAL HIGHLIGHTS -------------------------
- ------------------------- -------------------------
FIRST UNION GEORGIA MUNICIPAL BOND PORTFOLIO
- ------------------------- FINANCIAL HIGHLIGHTS -------------------------
- ------------------------- -------------------------
FIRST UNION GEORGIA MUNICIPAL BOND PORTFOLIO
- ------------------------- FINANCIAL HIGHLIGHTS -------------------------
- ------------------------- -------------------------
FIRST UNION NORTH CAROLINA MUNICIPAL BOND PORTFOLIO
- ------------------------- FINANCIAL HIGHLIGHTS -------------------------
- ------------------------- -------------------------
FIRST UNION NORTH CAROLINA MUNICIPAL BOND PORTFOLIO
- ------------------------- FINANCIAL HIGHLIGHTS -------------------------
- ------------------------- -------------------------
FIRST UNION VIRGINIA MUNICIPAL BOND PORTFOLIO
- ------------------------- FINANCIAL HIGHLIGHTS -------------------------
- ------------------------- -------------------------
FIRST UNION VIRGINIA MUNICIPAL BOND PORTFOLIO
- ------------------------ 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 Ratings Group
("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. 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.
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. Although the Funds will not purchase securities rated below BBB by
S&P or Baa by Moody's (i.e., junk bonds), the Funds are not required to dispose
of securities that have been downgraded subsequent to their purchase. If the
municipal obligations held by a Fund (because of adverse economic conditions in
a particular state, for example) are downgraded, the Fund's concentration in
securities of that state may cause the Fund to be subject to the risks inherent
in holding material amounts of low-rated debt securities in its portfolio.
- ------------------------- 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 Funds' 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 Funds to sell the security in the
open market in the case of a default. In such a case, the Funds 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 securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Funds purchase securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause the Funds to miss a price or yield
considered to be advantageous. 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. Accordingly, the Funds may pay
more/less than the market value of the securities on the settlement date.
The Funds may dispose of a commitment prior to settlement if the Adviser deems
it appropriate to do so. In addition, the Funds may enter into transactions to
sell their purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at
later dates. The Funds may realize short-term profits or losses upon the sale
of such commitments.
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. There is the risk that when lending portfolio securities,
the securities may not be available to the Fund on a timely basis and the Fund
may, therefore, lose the opportunity to sell the securities at a desirable
price. In addition, in the event that a borrower of securities would file for
bankruptcy or become insolvent, disposition of the securities may be delayed
pending court action.
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, and the Funds do not use these transactions for speculation
or leverage.
The Funds may attempt to hedge all or a portion of their portfolios through the
purchase of put options on portfolio securities and listed put options on
financial futures contracts for portfolio securities. The Funds may also write
covered call options on their portfolio securities to attempt to increase their
current income. The Funds will maintain their 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 Funds 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.
The Funds may write (i.e., sell) covered call and put options. By writing a
call option, a 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, a 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 Funds also may write straddles (combinations of
covered puts and calls on the same underlying security).
The Funds may only write "covered" options. This means that so long as a 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. A
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 Funds receive a premium from writing a call or
put option which they retain whether or not the option is exercised. By writing
a call option, the Funds might lose the potential for gain on the underlying
security while the option is open, and by writing a put option, the Funds might
become obligated to purchase the underlying securities for more than their
current market price upon exercise.
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 a 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. A Fund would "go
long" (agree to purchase securities in the future at a predetermined price) to
hedge against a decline in market interest rates.
The Funds may also enter into financial futures contracts and write options on
such contracts. The Funds intend to enter into such contracts and related
options for hedging purposes. The Funds will enter into futures on securities
or index-based futures contracts in order to hedge against changes in interest
or exchange rates or securities prices. A futures contract on securities is an
agreement to buy or sell securities 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 Funds do not make
payment or deliver securities upon entering into a futures contract. Instead,
they put 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 Funds may sell or purchase other financial futures contracts. When a
futures contract is sold by a 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 increases. Thus, the Funds sell futures
contracts in order to offset a possible decline in the profit on their
securities. If a futures contract is purchased by a 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 declines.
The Funds 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 their options positions. The Funds' 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 Funds will be able to enter into an
offsetting transaction with respect to a particular contract at a particular
time. If the Funds are not able to enter into an offsetting transaction, the
Funds 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 the
Funds would continue to bear market risk on the transaction.
RISK CHARACTERISTICS OF OPTIONS AND FUTURES
Although options and futures transactions are intended to enable the Funds to
manage market, exchange, or interest rate risks, these investment devices can
be highly volatile, and the Funds' use of them can result in poorer performance
(i.e., the Funds' return may be reduced). The Funds' attempt to use such
investment devices for hedging purposes may not be successful. Successful
futures strategies require the ability to predict future movements in
securities prices, interest rates and other economic factors. When the Funds
use financial futures contracts and options on financial futures contracts as
hedging devices, there is a risk that the prices of the securities subject to
the financial futures contracts and options on financial futures contracts may
not correlate perfectly with the prices of the securities in the Funds'
portfolios. This may cause the financial futures contract and any related
options to react to market changes differently than the portfolio securities.
In addition, the Adviser could be incorrect in its expectations and forecasts
about the direction or extent of market factors, such as interest rates,
securities price movements, and other economic factors. Even if the Adviser
correctly predicts interest rate movements, a hedge could be unsuccessful if
changes in the value of a Fund's futures position did not correspond to changes
in the value of its investments. In these events, the Funds may lose money on
the financial futures contracts or the options on financial futures contracts.
It is not certain that a secondary market for positions in financial futures
contracts or for options on financial futures contracts will exist at all
times. Although the Adviser will consider liquidity before entering into
financial futures contracts or options on financial futures contracts
transactions, there is no assurance that a liquid secondary market on an
exchange will exist for any particular financial futures contract or option on
a financial futures contract at any particular time. The Funds' ability to
establish and close out financial futures contracts and options on financial
futures contract positions depends on this secondary market. If a Fund is
unable to close out its position due to disruptions in the market or lack of
liquidity, the Fund may lose money on the futures contract or option, and the
losses to the Fund could be significant.
RESTRICTED AND ILLIQUID SECURITIES
The Funds may not invest more than 15% of their net 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 Y Shares may differ slightly from that of Class A
Shares and Class B 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 Y 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 Y 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 Y 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 Y Shares, Class A Shares, and Class B Shares of a Fund. Because Class A
Shares and Class B Shares are subject to 12b-1 fees, the yield and tax
equivalent yield will be lower than that of Y Shares. The sales load
applicable to Class A Shares also contributes to a lower total return for
Class A Shares. In addition, Class B 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 B 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 Y 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 Y 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 Y Shares of one First Union Fund for Y 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, shares of the other First Union Fund
will be purchased at their net asset value determined after the exchange
request is received. 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.
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.
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 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.
First Union Brokerage Services, Charlotte, North Carolina, is the shareholder
servicing agent for Class B 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 Class B Shares.
The Funds may pay FUBS a fee equal to 0.25 of 1% of the average daily net asset
value of Class B Shares for which FUBS provides shareholder services. FUBS may
voluntarily choose to waive all of a portion of its fee at any time.
The independent auditors for the Trust are KPMG Peat Marwick LLP, 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 Y 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
A Shares and Class B 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, 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 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.
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 other financial
institutions may be required to register as dealers pursuant to state law.
- ------------------------- 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, as amended, 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: Y
Shares for institutional investors and Class A Shares and Class B Shares for
individuals and other customers of First Union.
Class A Shares and Class B 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 A Shares), or (ii) on a contingent deferred
basis (the Class B 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 A and Class
B 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 A Shares and .75 of 1% for Class B Shares of each Fund's average daily
net asset value. In addition, Class B Shares pay a shareholder services fee of
0.25 of 1% of Class B Shares' 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 A Shares and Class B Shares will be
less than those payable to Y Shares by the difference between distribution
expenses borne by the shares of each respective class.
<PAGE>
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<PAGE>
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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
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
One Mellon Bank Center
KPMG Peat Marwick LLP Pittsburgh, Pennsylvania 15219
- --------------------------------------------------------------------------------
3052402A-1 (2/95)
FIRST UNION
- ------------------------ SINGLE STATE ------------------------
- ------------------------ MUNICIPAL BOND ------------------------
FUNDS
Portfolios of First Union Funds
CLASS A INVESTMENT SHARES
CLASS B INVESTMENT SHARES
- --------------------------------------------------------------------------------
P R O S P E C T U S
February 28, 1995
First Union Funds (the "Trust") is a mutual fund with 17 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, two diversified International 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.
International Funds
. First Union Emerging Markets Growth Portfolio; and
. First Union International Equity 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 A
Investment Shares ("Class A Shares") and Class B Investment Shares ("Class B
Shares") of First Union Single State Municipal Bond Funds. It concisely
describes the information which you should know before investing in Class A
Shares or Class B 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, 1995, 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 How to Redeem Shares 22
- ------------------------------------- -------------------------------------
Summary of Fund Expenses 4 Additional Shareholder Services 23
- ------------------------------------- -------------------------------------
Financial Highlights 8 Management of First Union Funds 23
- ------------------------------------- -------------------------------------
Investment Objectives and Policies 12 Fees and Expenses 25
- ------------------------------------- -------------------------------------
Other Investment Policies 14 Shareholder Rights and Privileges 26
- ------------------------------------- -------------------------------------
Shareholder Guide 18 Distributions and Taxes 27
- ------------------------------------- -------------------------------------
How to Buy Shares 19 Tax Information 27
- ------------------------------------- -------------------------------------
How to Convert Your Investment Other Classes of Shares 30
from One First Union Fund to -------------------------------------
Another First Union Fund 21 Addresses 31
- ------------------------------------- -------------------------------------
- ------------------------ 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 Single State Municipal Bond Fund currently
offers three classes of shares: Class A Shares, Class B Shares, and Y Shares.
Class A Shares and Class B 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 A Shares), or (ii) on a contingent deferred
basis (the Class B Shares). Y 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 A and Class B 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 A 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 A 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 A SHARES OPERATING EXPENSES
(As a percentage of projected average
net assets)
Management Fee (after waiver) (1)....... % % % % %
12b-1 Fees (2).......................... % % % % %
Total Other Expenses (after waiver
and reimbursement) (3)................. % % % % %
Total Class A Shares Operating Ex-
penses (4)............................. % % % % %
</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 A Shares can pay up to 0.75% of Class A Shares' average daily
net assets as a 12b-1 fee. For the foreseeable future, the Funds plan to
limit the Class A Shares' 12b-1 payments to 0.25% of Class A Shares'
average daily net assets.
(3) Total Other Expenses for Florida, Georgia, South Carolina, and Virginia
Municipal Bond Funds are estimated to be %, %, %, and %,
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 A Shares operating expenses for Florida, Georgia, North
Carolina, and Virginia Municipal Bonds Funds were %, %, %, and
%, respectively, for the period ended December 31, 1994. Total Class A
Shares operating expenses for Florida, Georgia, North Carolina, and
Virginia Municipal Bond Funds, absent the voluntary waivers and
reimbursements of other operating expenses, were %, %, %, and
%, respectively, for the period ended December 31, 1994.
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
A Shares.
Florida Municipal Bond Fund................. $ $ $ $
Georgia Municipal Bond Fund................. $ $ $ $
North Carolina Municipal Bond Fund.......... $ $ $ $
South Carolina Municipal Bond Fund.......... $ $ $ $
Virginia Municipal Bond 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.
- -------------------------- SUMMARY OF --------------------------
- -------------------------- FUND EXPENSES --------------------------
(CONTINUED)
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS
CLASS A SHARES
The information set forth in the foregoing table and example relates only to
Class A Shares of the Funds. The Funds also offer two additional classes of
shares called Y Shares and Class B Shares. In general, all expenses are
allocated based upon the daily net assets of each class. Y Shares and Class B
Shares are subject to certain of the same expenses as Class A Shares. However,
Y Shares bear no sales load or 12b-1 fee. Class B 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 sharge.
See "Other Classes of Shares."
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS CLASS B SHARES
<TABLE>
<CAPTION>
Florida Georgia
Municipal Municipal North Carolina
Bond Fund Bond Fund Municipal Bond Fund
----------------------------- ----------------------------- -----------------------------
CLASS B 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
Contingent Deferred 5% during the first year, 5% during the first year, 5% during the first year,
Sales Charge (as a 4% during the second year, 4% during the second year, 4% during the second year,
percentage of original 3% during the third year, 3% during the third year, 3% during the third year,
purchase price or 3% during the fourth year, 3% during the fourth year, 3% during the fourth year,
redemption proceeds, as 2% during the fifth year, 2% during the fifth year, 2% during the fifth year,
applicable) (1)........ 1% during the sixth year, 1% during the sixth year, 1% during the sixth year,
1% during the seventh year, 1% during the seventh year 1% during the seventh year,
and 0% after the seventh year and 0% after the seventh year and 0% after the seventh year
Redemption Fee (as a
percentage of amount
redeemed, if
applicable)............ None None None
Exchange Fee............ None None None
ANNUAL CLASS B SHARES
(As a percentage of projected average net assets)
Management Fee (after
waiver) (2)............ % % %
12b-1 Fees.............. % % %
Total Other Expenses
(after waiver and
reimbursement) (3)..... % %
Shareholder Service
Fee.................... % % %
Total Class B Shares
Operating
Expenses (4).....
</TABLE>
- -------------------------- SUMMARY OF --------------------------
- -------------------------- FUND EXPENSES --------------------------
(CONTINUED)
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS
CLASS B SHARES
<TABLE>
<CAPTION>
South Carolina Virginia
Municipal Municipal
Bond Fund Bond Fund
----------------------------- -----------------------------
CLASS B 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
Imposed on Reinvested
Dividends (as a
percentage of offering
price)................. None None
Contingent Deferred 5% during the first year, 5% during the first year,
Sales Charge (as a 4% during the second year, 4% during the second year,
percentage of original 3% during the third year, 3% during the third year,
purchase price or 3% during the fourth year, 3% during the fourth year,
redemption proceeds, as 2% during the fifth year, 2% during the fifth year,
applicable) (1)........ 1% during the sixth year, 1% during the sixth year,
1% during the seventh year, 1% during the seventh year,
and 0% after the seventh year and 0% after the seventh year
Redemption Fee (as a
percentage of amount
redeemed, if
applicable)............ None None
Exchange Fee............ None None
<CAPTION>
ANNUAL CLASS B SHARES OPERATING EXPENSES
(As a percentage of projected average net assets)
<S> <C> <C>
Management Fee (after
waiver) (2)............ 0.08% 0.00%
12b-1 Fees.............. 0.75% 0.75%
Total Other Expenses
(after waiver and reim-
bursement) (3)......... % %
Shareholder Service
Fee.................... % %
Total Class B Shares
Operating Expenses
(4)................. % %
</TABLE>
(1) No contingent deferred sales charge is imposed on (a) Shares purchased
more than seven 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 %, %, % and %,
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 Bond Funds were %, %, %, and
%, respectively, for the period ended December 31, 1994. 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 2.33%, 7.32%, 1.74%, and
8.25%, respectively, for the period ended December 31, 1994.
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 B 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................. $ $ $ $
Georgia Municipal Bond Fund................. $ $ $ $
North Carolina Municipal Bond Fund.......... $ $ $ $
South Carolina Municipal Bond Fund.......... $ $ $ $
Virginia Municipal Bond Fund................ $ $ $ $
You would pay the following expenses on the
same investment, assuming no
redemptions:
Florida Municipal Bond Fund................. $ $ $ $
Georgia Municipal Bond Fund................. $ $ $ $
North Carolina Municipal Bond Fund.......... $ $ $ $
South Carolina Municipal Bond Fund.......... $ $ $ $
Virginia Municipal Bond 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 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 Y Shares and Class A Shares. In general, all expenses are
allocated based upon the daily net assets of each class. Y Shares and Class A
Shares are subject to certain of the same expenses as Class B Shares. However,
Y Shares bear no sales charge or 12b-1 fee, and Class A Shares are subject to
a 12b-1 fee of .25 of 1%, bear a maximum front-end sales charge of 4.75%, and
bear no contingent deferred sales charge. See "Other Classes of Shares."
- ------------------------ FINANCIAL HIGHLIGHTS ------------------------
- ------------------------ ------------------------
FIRST UNION FLORIDA MUNICIPAL BOND PORTFOLIO
- ------------------------ FINANCIAL HIGHLIGHTS ------------------------
- ------------------------ ------------------------
FIRST UNION GEORGIA MUNICIPAL BOND PORTFOLIO
- ------------------------ FINANCIAL HIGHLIGHTS ------------------------
- ------------------------ ------------------------
FIRST UNION NORTH CAROLINA MUNICIPAL BOND PORTFOLIO
- ------------------------ FINANCIAL HIGHLIGHTS ------------------------
- ------------------------ ------------------------
FIRST UNION VIRGINIA MUNICIPAL BOND PORTFOLIO
- ------------------------ 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 Ratings Group
("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. 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.
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. Although the Funds will not purchase securities rated below BBB by
S&P or Baa by Moody's (i.e., junk bonds), the Funds are not required to dispose
of securities that have been downgraded subsequent to their purchase. If the
municipal obligations held by a Fund (because of adverse economic conditions in
a particular state, for example) are downgraded, the Fund's concentration in
securities of that state may cause the Fund to be subject to the risks inherent
in holding material amounts of low-rated debt securities in its portfolio.
- ------------------------ 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 Funds' 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 Funds to sell the security in the
open market in the case of a default. In such a case, the Funds 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 securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Funds purchase securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause the Funds to miss a price or yield
considered to be advantageous. 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. Accordingly, the Funds may pay
more/less than the market value of the securities on the settlement date.
The Funds may dispose of a commitment prior to settlement if the Adviser deems
it appropriate to do so. In addition, the Funds may enter into transactions to
sell their purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at
later dates. The Funds may realize short-term profits or losses upon the sale
of such commitments.
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.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court
action.
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, and the Funds do not use these transactions for speculation
or leverage.
The Funds may attempt to hedge all or a portion of their portfolios through the
purchase of put options on portfolio securities and listed put options on
financial futures contracts for portfolio securities. The Funds may also write
covered call options on their portfolio securities to attempt to increase their
current income. The Funds will maintain their 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 Funds 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.
The Funds may write (i.e., sell) covered call and put options. By writing a
call option, a 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, a 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 Funds also may write straddles (combinations of
covered puts and calls on the same underlying security).
The Funds may only write "covered" options. This means that so long as a 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. A
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 Funds receive a premium from writing a call or
put option which they retain whether or not the option is exercised. By writing
a call option, the Funds might lose the potential for gain on the underlying
security while the option is open, and by writing a put option, the Funds might
become obligated to purchase the underlying securities for more than their
current market price upon exercise.
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 a 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. A Fund would "go
long" (agree to purchase securities in the future at a predetermined price) to
hedge against a decline in market interest rates
The Funds may also enter into financial futures contracts and write options on
such contracts. The Funds intend to enter into such contracts and related
options for hedging purposes. The Funds will enter into futures on securities
or index-based futures contracts in order to hedge against changes in interest
or exchange rates or securities prices. A futures contract on securities is an
agreement to buy or sell securities 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 Funds do not make
payment or deliver securities upon entering into a futures contract. Instead,
they put 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 Funds may sell or purchase other financial futures contracts. When a
futures contract is sold by a 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 increases. Thus, the Funds sell futures
contracts in order to offset a possible decline in the profit on their
securities. If a futures contract is purchased by a 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 declines.
The Funds 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 their options positions. The Funds' 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 Funds will be able to enter into an
offsetting transaction with respect to a particular contract at a particular
time. If the Funds are not able to enter into an offsetting transaction, the
Funds 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.
RISK CHARACTERISTICS OF OPTIONS AND FUTURES
Although options and futures transactions are intended to enable the Funds to
manage market, exchange, or interest rate risks, these investment devices can
be highly volatile, and the Funds' use of them can result in poorer performance
(i.e., the Funds' return may be reduced). The Funds' attempt to use such
investment devices for hedging purposes may not be successful. Successful
futures strategies require the ability to predict future movements in
securities prices, interest rates and other economic factors. When the Funds
use financial futures contracts and options on financial futures contracts as
hedging devices, there is a risk that the prices of the securities subject to
the financial futures contracts and options on financial futures contracts may
not correlate perfectly with the prices of the securities in the Funds'
portfolios. This may cause the financial futures contract and any related
options to react to market changes differently than the portfolio securities.
In addition, the Adviser could be incorrect in
its expectations and forecasts about the direction or extent of market factors,
such as interest rates, securities price movements, and other economic factors.
Even if the Adviser correctly predicts interest rate movements, a hedge could
be unsuccessful if changes in the value of a Fund's futures position did not
correspond to changes in the value of its investments. In these events, the
Funds may lose money on the financial futures contracts or the options on
financial futures contracts. It is not certain that a secondary market for
positions in financial futures contracts or for options on financial futures
contracts will exist at all times. Although the Adviser will consider liquidity
before entering into financial futures contracts or options on financial
futures contracts transactions, there is no assurance that a liquid secondary
market on an exchange will exist for any particular financial futures contract
or option on a financial futures contract at any particular time. The Funds'
ability to establish and close out financial futures contracts and options on
financial futures contract positions depends on this secondary market. If a
Fund is unable to close out its position due to disruptions in the market or
lack of liquidity, the Fund may lose money on the futures contract or option,
and the losses to the Fund could be significant.
RESTRICTED AND ILLIQUID SECURITIES
The Funds may not invest more than 15% of their net 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 A Shares or Class B 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 A Shares and Class B
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 A Shares and Class B Shares is based on purchasing arrangements
and distribution expenses. Class A 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 A Shares for the same initial
investment than Class B Shares due to the initial sales charge, but will
receive higher dividends per Share due to the lower distribution expenses.
Class B Shares impose a contingent deferred sales charge ("CDSC") on most
redemptions made within seven years of purchase and have higher distribution
costs resulting from greater Rule 12b-1 distribution fees. This means that
investors may purchase more Class B Shares than Class A 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 B
Shares would be less than the initial sales charge and accumulated Rule 12b-1
fee on Class A Shares purchased at the same time. Investors must also consider
how that differential would be offset by the higher yield of Class A 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 A Shares adds an applicable sales charge, and the
redemption proceeds of Class B 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 Y Shares may differ slightly from that of Class A Shares
and Class B 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 A Shares and Class B Shares. It is generally reported
using total return, yield, and tax equivalent yield.
Total return takes into account both income (dividends) and changes in the
Fund's Share price (appreciation or depreciation). It is based on the overall
dollar or percentage change in value of an investment assuming reinvestment of
all dividends and capital gains during a specified period. Total return is
measured by comparing the value of an investment at the beginning of a
specified period to the redemption value at the end of the same period,
assuming reinvestment of dividends or capital gains distributions.
Yield shows how much income an investment generates. It refers to the Fund's
income over a 30-day period expressed as a percentage of the Fund's Share
price. The yields of Class A Shares and Class B 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 A Shares and Class B Shares of the Funds and, therefore, may
not correlate to the dividends or other distributions paid to shareholders.
Performance information for the Class A Shares and Class B Shares reflects the
effect of a sales charge which, if excluded, would increase the total return,
yield, and tax equivalent yield.
Total return, yield, and tax equivalent yield will be calculated separately for
Class A Shares, Class B Shares, and Y Shares of a Fund. Because Class A Shares
and Class B Shares are subject to 12b-1 fees, the yield and tax equivalent
yield will be lower than that of Y Shares. The sales load applicable to Class A
Shares also contributes to a lower total return for Class A Shares. In
addition, Class B Shares are subject to similar non-recurring charges, such as
the CDSC, which, if excluded, would increase the total return for Class B
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 A Shares), or (ii) on a contingent deferred basis (in the
case of Class B 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 A 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% 4.99%
$ 100,000-$ 249,999 3.75% 3.90%
$ 250,000-$ 499,999 3.00% 3.10%
$ 500,000-$ 999,999 2.00% 2.04%
$1,000,000-$2,499,999 1.00% 1.01%
$2,500,000 and above 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 B Shares are sold at net asset value per Share without the imposition of
a sales charge at the time of purchase. Shares redeemed within seven years of
their purchase will be subject to a CDSC according to the following schedule
(applicable only to purchases beginning September 1, 1994):
<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 1.0%
</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 seven 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 B 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 B Shares was accepted. At the end of this seven year period,
Class B Shares may automatically convert to Class A Shares, in which case the
Shares will no longer be subject to the higher Rule 12b-1 distribution fee
which is assessed on Class B 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 B 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 B Shares from most of the burden of
such distribution-related expenses.
For purposes of conversion to Class A Shares, Class B Shares purchased through
the reinvestment of dividends and distributions paid on Class B Shares in a
shareholder's Fund account will be considered to be held in a separate sub-
account. Each time any Class B Shares in the shareholder's Fund account (other
than those in the sub-account) convert to Class A Shares, an equal pro rata
portion of the Class B Shares in the sub-account will also convert to Class A
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 A Shares and Class B 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, except with
respect to investors who invest $1,000,000 or more in Class A 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 A Shares of one First Union Fund for Class A Shares of
any other First Union Fund, or Class B Shares of one First Union Fund for Class
B 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, shares of the other First Union Fund
will be purchased at their net asset value determined after the exchange
request is received. 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 B Shares will not be subject to a CDSC. However, if the
shareholder redeems Class B Shares within seven 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 B 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 B 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.
SYSTEMATIC CASH WITHDRAWAL PLAN
When an account of $10,000 or more is opened or when an existing account
reaches that size, you may participate in the Fund's Systematic Cash Withdrawal
Plan by filling out the appropriate part of the share purchase application.
Under this Plan, you may receive (or designate a third party to receive) a
monthly or quarterly check in a stated amount of not less than $25. Fund shares
will be redeemed as necessary to meet withdrawal payments. All participants
must elect to have their dividends and capital gain distributions reinvested
automatically. Any applicable Class B CDSC will be waived with respect to
redemptions occurring under a Systematic Cash Withdrawal Plan during a calendar
year to the extent that such redemptions do not exceed 10% of (i) the initial
value of the account, plus (ii) the value, at the time of purchase, of any
subsequent investments.
- ------------------------ 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.
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.
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 A Shares and 0.75% for Class B 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 B 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 B Shares. First Union Corporation currently serves as
principal lender in this financing program. Actual distribution expenses for
Class B 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 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 Funds may pay a shareholder servicing agent (the "Shareholder Servicing
Agent") a fee based on average daily net asset value for Class B Shares of the
Funds for which the Shareholder Servicing Agent provides shareholder services.
As such, the Shareholder Servicing Agent 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 Class B Shares. The Funds may pay the
Shareholder Servicing Agent a fee equal to 0.25 of 1% of the average daily net
asset value of Class B Shares for which the Shareholder Servicing Agent
provides shareholder services. The Shareholder Servicing Agent may voluntarily
choose to waive all or portion of its fee at any time. First Union Brokerage
Services, First Union National Bank of North Carolina, and other financial
institutions may serve as Shareholder Servicing Agent.
The independent auditors for the Trust are KPMG Peat Marwick LLP, 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
A Shares and Class B 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, 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 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.
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 other financial
institutions may be required to register as dealers pursuant to state law.
- ------------------------ 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 A Shares and Class B Shares for individuals and other customers of First
Union and Y Shares for institutional investors.
Y 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. Y 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 A Shares and Class B Shares will be
less than those payable to Y 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
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
One Mellon Bank Center
KPMG Peat Marwick LLP Pittsburgh, Pennsylvania
15219
- --------------------------------------------------------------------------------
3052402A (2/95)
FIRST UNION FLORIDA MUNICIPAL BOND PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
Y SHARES
CLASS A INVESTMENT SHARES
CLASS B INVESTMENT SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectus of Y Shares, Class A Investment Shares, or
Class B Investment Shares for First Union Florida Municipal Bond
Portfolio, dated February 28, 1995. This Statement is not a prospectus
itself. To receive a copy of the Y 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 A Investment Shares' or
Class B 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, 1995
[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
Options and Futures Transactions 2
Repurchase Agreements 4
Reverse Repurchase Agreements 4
Lending of Portfolio Securities 4
Restricted Securities 4
Portfolio Turnover 5
Investment Limitations 5
Florida Investment Risks 6
FIRST UNION FUNDS MANAGEMENT 7
- ---------------------------------------------------------------
Officers and Trustees 7
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 A and Class B
Investment Shares) 11
Shareholder Services Plan 12
DETERMINING NET ASSET VALUE 12
- ---------------------------------------------------------------
Valuing Municipal Bonds 12
Use of Amortized Cost 12
Valuing Options 12
REDEEMING SHARES 12
- ---------------------------------------------------------------
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 17
- ---------------------------------------------------------------
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: Y Shares, Class A Investment
Shares and Class B 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
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
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. 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 assets are marked to market daily and are maintained until the
transaction has been settled. The Fund does not intend to engage in when-issued
and delayed delivery transactions to an extent that would cause the segregation
of more than 20% of the total value of its assets.
OPTIONS AND FUTURES 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. The Fund does not intend to invest more than __% of its assets in
options and futures.
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 % 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 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 net assets in restricted securities; however, certain restricted securities
which the Trustees deem to be liquid will be excluded from this % 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 fiscal year ended December 31, 1994, the portfolio
turnover rate for the Fund was %.
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 or invest in reverse
repurchase agreements 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.
FIRST UNION FUNDS MANAGEMENT
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, present positions with
First Union Funds, and principal occupations.
- --------------------------------------------------------------------------------
James S. Howell
3125 Eastway Drive
Suite 114
Charlotte, NC
Chairman and Trustee
Retired Vice President of Lance Inc. (food manufacturing).
- -------------------------------------------------------------------------------
Gerald M. McDonnell
821 Regency Drive
Charlotte, NC
Trustee
Sales Representative with Nucor-Yamoto, Inc. (steel producer) (since 1988);
formerly with Northwestern Steel & Wire Company (1986-1988).
- --------------------------------------------------------------------------------
Thomas L. McVerry
4419 Parview Drive
Charlotte, NC
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*
Carillon Building
Suite 2170
227 West Trade Street
Charlotte, NC
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.
Primary PhysicianCare
1515 Mockingbird Lane
Park Seneca Building
Suite 312
Charlotte, NC
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
212 S. Tryon Street
Suite 980
Charlotte, NC
Trustee
Attorney; formerly, Partner with Wardlow, Knox, Knox, Freeman & Scofield
(attorneys) (1982-1986).
- --------------------------------------------------------------------------------
Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA
President, Treasurer, and Trustee
Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; 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
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private 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
Federated Investors Tower
Pittsburgh, PA
Secretary
Corporate Counsel, Federated Investors.
- --------------------------------------------------------------------------------
*These Trustees are each 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 , 1995, the following shareholders of record owned 5% or more of
the outstanding Y Shares of the Fund:
As of February , 1995, the following shareholders of record owned 5% or more of
the outstanding Class A Investment Shares of the Fund:
As of February , 1995, the following shareholders of record owned 5% or more of
the outstanding Class B 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.
Because of the internal controls maintained by First Union to restrict the flow
of non-public information, the Fund's investments are typically made without any
knowledge of First Union's or its affiliates' lending relationships with an
issuer.
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, 1994, and for the period from July 2,
1993 (commencement of operations) to December 31, 1993, the Adviser earned
advisory fees of $__ and $31,835, respectively, $__ 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.
For the fiscal year ended December 31, 1994, and for the period from July 2,
1993 (commencement of operations) to December 31, 1993, the Fund paid
$____________ and $____________, respectively, in brokerage 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 year ended December 31, 1994, and for the period from July 2,
1993 (commencement of operations) to December 31, 1993, the Fund incurred $__
and $24,932, respectively, in administrative service costs, $__ 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 A 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 3.75%, 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. 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 4.75% 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 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 A AND CLASS B INVESTMENT SHARES)
With respect to the Class A and Class B 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 A and Class B Investment Shares. The Plans are designed to (i) stimulate
brokers to provide distribution and administrative support services to the Fund
and holders of Class A and Class B Investment Shares and (ii) stimulate
administrators to render administrative support services to the Fund and holders
of Class A and Class B 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 A and Class B 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 A and Class B 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.
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, 1994, and for the period from July 2,
1993 (commencement of operations) to December 31, 1993, the Fund incurred $__
and $__, respectively, in distribution services fees on behalf of Class A
Investment Shares.
For the fiscal year ended December 31, 1994, and for the period from July 2,
1993 (commencement of operations) to December 31, 1993, the Fund incurred $__
and $__ in distribution services fees on behalf of Class B Investment Shares.
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.
SHAREHOLDER SERVICES PLAN
For the period ended December 31, 1994, the Fund incurred a shareholder services
fee of $__ for Class B Investment Shares.
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 average annual total return for Class A Investment Shares for the
fiscal year ended December 31, 1994, and for the period from July __, 1993
(commencement of operations) to December 31, 1993, was % and 1.38%,
respectively.
The Fund's average annual total return for Class B Investment Shares for the
fiscal year ended December 31, 1994, and for the period from July , 1993
(commencement of operations) to December 31, 1993, was % and 1.34%,
respectively.
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 compounded 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.
The Fund's cumulative total return for Y Shares for the period from , 1994
(commencement of operations) to December 31, 1994, was %.
Cumulative total return reflects the Fund's total performance over a specific
period of time. This total return assumes and is reduced by the payment of the
maximum sales load. This total return is representative of only months of
activity since the Fund's effective date.
YIELD
- --------------------------------------------------------------------------------
The Fund's yields for Y Shares, Class A Investment Shares, and Class B
Investment Shares were __%, __%, and __%, respectively, for the thirty-day
period ended December 31, 1994.
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 Y Shares, Class A Investment Shares, and
Class B Investment Shares for the thirty-day period ended December 31, 1994,
were __%, __%, and __%, respectively, assuming a % federal tax rate.
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>
<S> <C> <C> <C> <C> <C>
TAX-EQUIVALENT YIELD TABLE FOR 1995 STATE OF FLORIDA
TO BE INSERTED IN FEBRUARY
</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 BROTHERS 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.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD & POOR'S RATINGS GROUP MUNICIPAL BOND RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's Ratings
Group. 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 (2/95)
FIRST UNION GEORGIA MUNICIPAL BOND PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
Y SHARES
CLASS A INVESTMENT SHARES
CLASS B INVESTMENT SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectus of
Y Shares, Class A Investment Shares, or Class B Investment Shares for
First Union Georgia Municipal Bond Portfolio, dated February 28, 1995.
This Statement is not a prospectus itself. To receive a copy of the Y
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 A Investment Shares' or Class B 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, 1995
[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
Options and Futures Transactions 2
Repurchase Agreements 4
Reverse Repurchase Agreements 4
Lending of Portfolio Securities 4
Restricted Securities 4
Portfolio Turnover 5
Investment Limitations 5
Georgia Investment Risks 6
FIRST UNION FUNDS MANAGEMENT 7
- ---------------------------------------------------------------
Officers and Trustees 7
Fund Ownership 9
Trustee Liability 9
INVESTMENT ADVISORY SERVICES 9
- ---------------------------------------------------------------
Adviser to the Fund 9
Advisory Fees 9
BROKERAGE TRANSACTIONS 9
- ---------------------------------------------------------------
ADMINISTRATIVE SERVICES 10
- ---------------------------------------------------------------
PURCHASING SHARES 10
- ---------------------------------------------------------------
Distribution Plans (Class A and Class B
Investment Shares) 11
Shareholder Services Plan 12
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 14
- ---------------------------------------------------------------
TAX EQUIVALENT YIELD 14
- ---------------------------------------------------------------
Tax Equivalency Table 14
PERFORMANCE COMPARISONS 15
- ---------------------------------------------------------------
APPENDIX 16
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
First Union Georgia 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: Y Shares, Class A Investment
Shares and Class B 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 Georgia 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 Georgia 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
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
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. 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 assets are marked to market daily and are maintained until the
transaction has been settled. The Fund does not intend to engage in when-issued
and delayed delivery transactions to an extent that would cause the segregation
of more than 20% of the total value of its assets.
OPTIONS AND FUTURES 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. The Fund does not intend to invest more than __% of its assets in
options and futures.
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 __% 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 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 net assets in restricted securities; however, certain restricted securities
which the Trustees deem to be liquid will be excluded from this 15% 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 fiscal year ended December 31, 1994, the portfolio
turnover rate for the Fund was %.
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 or invest in reverse
repurchase agreements, 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."
GEORGIA INVESTMENT RISKS
Because the Fund will ordinarily invest 80% or more of its net assets in Georgia
obligations, it is more susceptible to factors affecting Georgia issuers than is
a comparable municipal bond fund not concentrated in the obligations of issuers
located in a single state.
Georgia's economy is based on manufacturing (textiles, food products, paper
products, electronic equipment, and aircraft), trade and a growing service
sector. Atlanta, with a service-oriented economy, is a trade, service and
transportation center for the Southeast region and is the focus of economic
growth in the State. In most other cities in Georgia, manufacturing
predominates. The State's economy was only mildly affected by the early 1980's
recession and grew rapidly for most of the decade, with employment and personal
income growth in excess of comparable national rates. Despite continued
population growth, personal income per capita has steadily gained relative to
the nation.
Throughout the 1980's, the State's expanding economy fostered strong income and
sales tax growth. This enabled the State to record fairly strong fiscal
operations from fiscal years 1984-1989. Financial operations have
suffered since fiscal year 1990, recording operating deficits in each of the
fiscal years 1990-1992. Revenue projections were overly optimistic in fiscal
year 1992 and although the State reduced general fund expenditures, a minor
operating deficit was experienced.
With stronger than expected sales and personal income tax growth during 1993,
actual budget basis results show that the State ended fiscal 1993 with a
year-end surplus of $165 million. Revenue collections for the first quarter of
fiscal 1994 were up 8.8%, ahead of the annual projected growth rate. This
revenue growth has enabled the State to meet the needs of a growing population,
while continuing to maintain budgetary conservatism.
Except for the major building projects necessary for the 1996 Summer Olympics,
it appears unlikely that areas in and around metropolitan Atlanta will
experience the building construction rates of the mid to late 1980's. It further
appears that many of Georgia's other cities are poised to participate in the
recovery that inevitably will take place.
The classification of the Fund under the Investment Company Act of 1940 as a
"non-diversified" investment company allows the Fund to invest more than 5% of
its assets in the securities of any issuer, subject to satisfaction of certain
tax requirements. Because of the relatively small number of issues of Georgia
obligations, the Fund is likely to invest a greater percentage of its assets in
the securities of a single issuer than is an investment company which invests in
a broad range of municipal obligations. Therefore, the Fund would be more
susceptible than a diversified investment company to any single adverse economic
or political occurrence or development affecting Georgia issuers. The Fund will
also be subject to an increased risk of loss if the issuer is unable to make
interest or principal payments or if the market value of such securities
declines. It is also possible that there will not be sufficient availability of
suitable Georgia tax-exempt obligations for the Fund to achieve its objective of
providing income exempt from Georgia income tax.
FIRST UNION FUNDS MANAGEMENT
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OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, present positions with
First Union Funds, and principal occupations.
- --------------------------------------------------------------------------------
James S. Howell
3125 Eastway Drive
Suite 114
Charlotte, NC
Chairman and Trustee
Retired Vice President of Lance Inc. (food manufacturing).
- --------------------------------------------------------------------------------
Gerald M. McDonnell
821 Regency Drive
Charlotte, NC
Trustee
Sales Representative with Nucor-Yamoto, Inc. (steel producer) (since 1988);
formerly with Northwestern Steel & Wire Company (1986-1988).
- --------------------------------------------------------------------------------
Thomas L. McVerry
4419 Parview Drive
Charlotte, NC
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*
Carillon Building
Suite 2170
227 West Trade Street
Charlotte, NC
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.
Primary PhysicianCare
1515 Mockingbird Lane
Park Seneca Building
Suite 321
Charlotte, NC
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
212 S. Tryon Street
Suite 980
Charlotte, NC
Trustee
Attorney; formerly, Partner with Wardlow, Knox, Knox, Freeman & Scofield
(attorneys) (1982-1986).
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Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA
President, Treasurer, and Trustee
Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; 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
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private 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
Federated Investors Tower
Pittsburgh, PA
Secretary
Corporate Counsel, Federated Investors.
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*These Trustees are each 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 __, 1994, the following shareholders of record owned 5% or more
of the outstanding Y Shares of the Fund:
As of February , 1995, the following shareholders of record owned 5% or more
of the outstanding Class A Investment Shares of the Fund:
As of February , 1995, the following shareholders of record owned 5% or more
of the outstanding Class B 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.
Because of the internal controls maintained by First Union to restrict the flow
of non-public information, the Fund's investments are typically made without any
knowledge of First Union's or its affiliates' lending relationships with an
issuer.
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, 1994, and for the period from July 2,
1993 (commencement of operations) to December 31, 1993, the Adviser earned
advisory fees of $______ and $______, respectively, $______ 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.
For the fiscal year ended December 31, 1994, and for the period from July 2,
1993 (commencement of operations) to December 31, 1993, the Fund paid $______and
$______, respectively, in brokerage 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 year ended December 31, 1994, and for the period from July 2,
1993 (commencement of operations) to December 31, 1993, the Fund incurred
$______ and $24,931, respectively, in administrative service costs, $______ 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 A 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 3.75%, 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. 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 4.75% 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 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 A AND CLASS B INVESTMENT SHARES)
With respect to the Class A and Class B 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 A and Class B Investment Shares. The Plans are designed to (i) stimulate
brokers to provide distribution and administrative support services to the Fund
and holders of Class A and Class B Investment Shares and (ii) stimulate
administrators to render administrative support services to the Fund and holders
of Class A and Class B 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 A and Class B 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 A and Class B 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.
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, 1994, and for the period from July 2,
1993 (commencement of operations) to December 31, 1993, the Fund incurred $__
and $__ in distribution services fees on behalf of Class A Investment Shares.
For the fiscal year ended December 31, 1994, and for the period from July 2,
1993 (commencement of operations) to December 31, 1993, the Fund incurred $__
and $__ in distribution services fees on behalf of Class B Investment Shares.
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.
SHAREHOLDER SERVICES PLAN
For the period ended December 31, 1994, the Fund incurred a shareholder services
fee of $__ for Class B Investment Shares.
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 average annual total return for Class A Investment Shares for the
fiscal year ended December 31, 1994, and for the period from July __, 1993
(commencement of operations) to December 31, 1993, was % and (.23%),
respectively.
The Fund's average annual total return for Class B Investment Shares for the
fiscal year ended December 31, 1994, and for the period from July __, 1993
(commencement of operations) to December 31, 1993, was % and (.32%),
respectively.
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 compounded 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.
The Fund's cumulative total return for Y Shares for the period from , 1994
(commencement of operations) to December 31, 1994, was %.
Cumulative total return reflects the Fund's total performance over a specific
period of time. This total return assumes and is reduced by the payment of the
maximum sales load. This total return is representative of only months of
activity since the Fund's effective date.
YIELD
- --------------------------------------------------------------------------------
The Fund's yields for Y Shares, Class A Investment Shares, and Class B
Investment Shares were __%, __%, and __%, respectively, for the thirty-day
period ended December 31, 1994.
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 Y Shares, Class A Investment Shares, and
Class B Investment Shares for the thirty-day period ended December 31, 1994 ,
were __% ,__% and __%, respectively assuming a __% federal tax rate.
The tax equivalent yield for all classes of Shares is calculated similarly to
the yield, but is adjusted to reflect the taxable yield that any class would
have had to earn to equal its actual yield, assuming a 28% federal tax rate and
the 6.00% regular personal income tax rate imposed by Georgia, and assuming that
income earned by the Fund is 100% tax-exempt on a regular federal, state, and
local basis.
TAX EQUIVALENCY TABLE
Each class of Shares may also use a tax equivalency table in advertising and
sales literature. The interest earned by the municipal bonds in the portfolio
generally remains free from federal regular income tax,* and is often free from
state and local taxes as well. As the table below indicates, a "tax-free"
investment is an attractive choice for investors, particularly in times of
narrow spreads between tax-free and taxable yields.
TAXABLE YIELD EQUIVALENT FOR 1995 STATE OF GEORGIA
TO BE INSERTED IN FEBRUARY 1995
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 BROTHERS GEORGIA MUNICIPAL BOND INDEX is a total return performance
benchmark for the Georgia 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
- --------------------------------------------------------------------------------
STANDARD & POOR'S RATINGS GROUP MUNICIPAL BOND RATING DEFINITIONS
AAA-- Debt rated AAA has the highest rating assigned by Standard & Poor's
Ratings Group. 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.
3031212B (2/95)
FIRST UNION NORTH CAROLINA MUNICIPAL BOND PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
Y SHARES
CLASS A INVESTMENT SHARES
CLASS B INVESTMENT SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectus of Y Shares, Class A Investment Shares, or
Class B Investment Shares for First Union North Carolina Municipal
Bond Portfolio, dated February 28, 1995. This Statement is not a
prospectus itself. To receive a copy of the Y 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 A
Investment Shares' or Class B 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, 1995
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------------
Acceptable Investments 1
When-Issued and Delayed Delivery
Transactions 1
Futures and Options Transactions 2
Repurchase Agreements 4
Reverse Repurchase Agreements 4
Lending of Portfolio Securities 4
Restricted Securities 4
Portfolio Turnover 5
Investment Limitations 5
North Carolina Investment Risks 6
FIRST UNION FUNDS MANAGEMENT 7
- ---------------------------------------------------------------
Officers and Trustees 7
Fund Ownership 9
Trustee Liability 9
INVESTMENT ADVISORY SERVICES 9
- ---------------------------------------------------------------
Adviser to the Fund 9
Advisory Fees 9
BROKERAGE TRANSACTIONS 9
- ---------------------------------------------------------------
ADMINISTRATIVE SERVICES 10
- ---------------------------------------------------------------
PURCHASING SHARES 10
- ---------------------------------------------------------------
Distribution Plans (Class A and
Class B Investment Shares) 11
Shareholder Services Plan 12
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 14
- ---------------------------------------------------------------
TAX EQUIVALENT YIELD 14
- ---------------------------------------------------------------
Tax Equivalency Table 14
PERFORMANCE COMPARISONS 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 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: Y Shares, Class A Investment
Shares, and Class B 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
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
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. 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 assets are marked to market daily
and are maintained until the transaction has been settled. The Fund does not
intend to engage in when-issued and delayed delivery transactions to an extent
that would cause the segregation of more than 20% of the total value of 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. The Fund does not intend to invest more than __% of its assets in
options and futures.
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 __% 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 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 net assets in restricted securities; however, certain restricted securities
which the Trustees deem to be liquid will be excluded from this __% 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 fiscal year ended December 31, 1994, the portfolio
turnover rate for the Fund was __%.
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 or invest in reverse
repurchase agreements 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 Ratings Group ("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.
FIRST UNION FUNDS MANAGEMENT
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OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, present positions with
First Union Funds, and principal occupations.
James S. Howell
3125 Eastway Drive
Suite 114
Charlotte, NC
Chairman and Trustee
Retired Vice President of Lance Inc. (food manufacturing).
- --------------------------------------------------------------------------------
Gerald M. McDonnell
821 Regency Drive
Charlotte, NC
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
4419 Parview Drive
Charlotte, NC
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*
Carillon Building
Suite 2170
227 West Trade Street
Charlotte, NC
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.
Primary PhysicianCare
1515 Mockingbird Lane
Park Seneca Building
Suite 312
Charlotte, NC
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
212 S. Tryon Street
Suite 980
Charlotte, NC
Trustee
Attorney; formerly, Partner with Wardlow, Knox, Knox, Freeman & Scofield
(attorneys) (1982-1986).
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Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA
President, Treasurer, and Trustee
Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp. and Passport Research Ltd.; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; 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
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private 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
Federated Investors Tower
Pittsburgh, PA
Secretary
Corporate Counsel, Federated Investors.
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*These Trustees are each 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.
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FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of February __, 1995, the following shareholders of record owned 5% or more
of the outstanding Y Shares of the Fund:
As of February __, 1995, the following shareholders of record owned 5% or more
of the outstanding Class A Investment Shares of the Fund:
As of February __, 1995, the following shareholders of record owned 5% or more
of the outstanding Class B 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.
Because of the internal controls maintained by First Union to restrict the flow
of non-public information, the Fund's investments are typically made without any
knowledge of First Union's or its affiliates' lending relationships with an
issuer.
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, 1994, and for the period from January 11,
1993 (commencement of operations) to December 31, 1993, the Adviser earned
advisory fees of $_______ and $170,496, respectively, $_______ 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.
For the fiscal year ended December 31, 1994, and for the period from January 11,
1993 (commencement of operations) to December 31, 1993, the Fund paid $______
and $______, respectively, in brokerage 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 year ended December 31, 1994, and for the period from January 11,
1993 (commencement of operations) to December 31, 1993, the Fund incurred
$_______ and $48,493, respectively, in administrative service costs, $_______ 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 A 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 3.75%, 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. 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 4.75% 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 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 A AND CLASS B INVESTMENT SHARES)
With respect to the Class A and Class B 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 A and Class B Investment Shares. The Plans are designed to (i) stimulate
brokers to provide distribution and administrative support services to the Fund
and holders of Class A and Class B Investment Shares and (ii) stimulate
administrators to render administrative support services to the Fund and holders
of Class A and Class B 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 A and Class B 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 A and Class B 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.
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, 1994, and for the period from January 11,
1993 (commencement of operations) to December 31, 1993, the Fund incurred
$_______ and $_______, respectively, in distribution services fees on behalf of
Class A Investment Shares.
For the fiscal year ended December 31, 1994, and for the period from January 11,
1993 (commencement of operations) to December 31, 1993, the Fund incurred
$_______ and $_______, respectively, in distribution services fees on behalf of
Class B Investment Shares.
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.
SHAREHOLDER SERVICES PLAN
For the period ended December 31, 1994, the Fund incurred a shareholder services
fee of $_______ for Class B Investment Shares.
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 average annual total return for Class A Investment Shares for the
fiscal year ended December 31, 1994, and for the period from January __, 1993
(commencement of operations) to December 31, 1993, was % and 6.79%,
respectively.
The Fund's average annual total return for Class B Investment Shares for the
fiscal year ended December 31, 1994, and for the period from January , 1993
(commencement of operations) to December 31, 1993, was % and 6.63%,
respectively.
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 compounded 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.
The Fund's cumulative total return for Y Shares for the period from ,
1994 (commencement of operations) to December 31, 1994, was %.
Cumulative total return reflects the Fund's total performance over a specific
period of time. This total return assumes and is reduced by the payment of the
maximum sales load. This total return is representative of only months of
activity since the Fund's effective date.
YIELD
- --------------------------------------------------------------------------------
The Fund's yields for Y Shares, Class A Investment Shares, and Class B
Investment Shares were __%, __%, and __%, respectively, for the thirty-day
period ended December 31, 1994.
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 Y Shares, Class A Investment Shares, and
Class B Investment Shares for the thirty-day period ended December 31, 1994,
were __%, __%, and __%, respectively, assuming a combined federal and state tax
rate of __%.
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 1995 STATE OF NORTH CAROLINA
- ---------------------------------------------------------------------------------------
</TABLE>
TO BE INSERTED IN FEBRUARY
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 BROTHERS 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.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD & POOR'S RATING GROUP MUNICIPAL BOND RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's Rating
Group. 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.
133031004B (2/95)
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
Y SHARES
CLASS A INVESTMENT SHARES
CLASS B INVESTMENT SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectus of Y Shares, Class A Investment Shares, or
Class B Investment Shares for First Union South Carolina Municipal
Bond Portfolio, dated February 28, 1995. This Statement is not a
prospectus itself. To receive a copy of the Y 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 A
Investment Shares' or Class B 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, 1995.
[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
Options and Futures Transactions 2
Repurchase Agreements 4
Reverse Repurchase Agreements 4
Lending of Portfolio Securities 4
Restricted Securities 4
Portfolio Turnover 5
Investment Limitations 5
South Carolina Investment Risks 6
FIRST UNION FUNDS MANAGEMENT 7
- ---------------------------------------------------------------
Officers and Trustees 7
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 A and Class B
Investment Shares) 11
Shareholder Services Plan 12
DETERMINING NET ASSET VALUE 12
- ---------------------------------------------------------------
Valuing Municipal Bonds 12
Use of Amortized Cost 12
Valuing Options 12
REDEEMING SHARES 12
- ---------------------------------------------------------------
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: Y Shares, Class A Investment
Shares and Class B 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
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
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. 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 assets are marked to market daily
and are maintained until the transaction has been settled. The Fund does not
intend to engage in when-issued and delayed delivery transactions to an extent
that would cause the segregation of more than 20% of the total value of its
assets.
OPTIONS AND FUTURES 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. The Fund does not intend to invest more than __% of its assets in
options and futures.
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 __% 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 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 net assets in restricted securities; however, certain restricted securities
which the Trustees deem to be liquid will be excluded from this 15% 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 4, 1994 (commencement of operations)
to December 31, 1994, the portfolio turnover rate for the Fund was ___%.
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 or invest in reverse
repurchase agreements 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 Ratings Group ("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.
FIRST UNION FUNDS MANAGEMENT
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OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, present positions with
First Union Funds, and principal occupations.
- --------------------------------------------------------------------------------
James S. Howell
3125 Eastway Drive
Suite 114
Charlotte, NC
Chairman and Trustee
Retired Vice President of Lance Inc. (food manufacturing).
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Gerald M. McDonnell
821 Regency Drive
Charlotte, NC
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
4419 Parview Drive
Charlotte, NC
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*
Carillon Building
Suite 2170
227 West Trade Street
Charlotte, NC
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.
Primary PhysicianCare
1515 Mockingbird Lane
Park Seneca Building
Suite 312
Charlotte, NC
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
212 S. Tryon Street
Suite 980
Charlotte, NC
Trustee
Attorney; formerly, Partner with Wardlow, Knox, Knox, Freeman & Scofield
(attorneys) (1982-1986).
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Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA
President, Treasurer, and Trustee
Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research;
Federated Research Corp., and Passport Research, Ltd.; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; 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
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private 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
Federated Investors Tower
Pittsburgh, PA
Secretary
Corporate Counsel, Federated Investors.
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*These Trustees are each 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 , 1995, the following shareholders of record owned 5% or more
of the outstanding Y Shares of the Fund:
As of February , 1995, the following shareholders of record owned 5% or more
of the outstanding Class A Investment Shares of the Fund:
As of February , 1995, the following shareholders of record owned 5% or more
of the outstanding Class B 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.
Because of the internal controls maintained by First Union to restrict the flow
of non-public information, the Fund's investments are typically made without any
knowledge of First Union's or its affiliates' lending relationships with an
issuer.
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 4, 1994 (commencement of operations) to December 31,
1994, the Adviser earned advisory fees of $_____, $ 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.
For the period from January 4, 1993 (commencement of operations) to December 31,
1994, the Fund paid $______ in brokerage 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 period from January 4, 1994 (commencement of operations) to December 31,
1994, the Fund incurred $_______ in administrative service costs, _____of which
were 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 A 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 3.75%, 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. 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 4.75% 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 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 A AND CLASS B INVESTMENT SHARES)
With respect to the Class A and Class B 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 A and Class B Investment Shares. The Plans are designed to (i) stimulate
brokers to provide distribution and administrative support services to the Fund
and holders of Class A and Class B Investment Shares and (ii) stimulate
administrators to render administrative support services to the Fund and holders
of Class A and Class B 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 A and Class B 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 A and Class B 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.
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 4, 1994 (commencement of operations) to December 31,
1994, the Fund incurred $_______ and $_______ in distribution services fees for
Class A Investment Shares and Class B Investment Shares, 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.
SHAREHOLDER SERVICES PLAN
For the period ended December 31, 1994, the Fund incurred a shareholder services
fee of $_______ for Class B Investment Shares.
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 returns for Class A Investment Shares and Class B
Investment Shares from January __, 1994 (commencement of operations) to December
31, 1994, were ( %) and ( %), respectively. The Fund's cumulative total
return for Y Shares from February __, 1994 (commencement of operations) to
December 31, 1994, was ( )%. 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 for
Class A Investment Shares and Class B Investment Shares is representative of
only 11 months of investment activity since the Fund's effective date. The
Fund's total return for Y Shares is representative of only 10 months of Fund
activity since the Fund's effective date.
YIELD
- --------------------------------------------------------------------------------
The Fund's yields for Class A Investment Shares, Class B Investment Shares, and
Y Shares were ___%, ___%, and ___%, respectively, for the thirty-day period
ended December 31, 1994.
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 A Investment Shares, Class B
Investment Shares, and Y Shares for the thirty-day period ended December 31,
1994, were ___%, ___%, and ___%, respectively, assuming a combined state and
federal tax rate of __%.
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 1995 STATE OF SOUTH CAROLINA
- -------------------------------------------------------------------------------
TO BE INSERTED IN FEBRUARY
</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 BROTHERS 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
- --------------------------------------------------------------------------------
STANDARD & POOR'S RATINGS GROUP MUNICIPAL BOND RATING DEFINITIONS
AAA-- Debt rated AAA has the highest rating assigned by Standard & Poor's
Ratings Group. 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 (2/95)
FIRST UNION VIRGINIA MUNICIPAL BOND PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
Y SHARES
CLASS A INVESTMENT SHARES
CLASS B INVESTMENT SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectus of Y Shares, Class A Investment Shares, or
Class B Investment Shares for First Union Virginia Municipal Bond
Portfolio, dated February 28, 1995. This Statement is not a prospectus
itself. To receive a copy of the Y 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 A Investment Shares' or
Class B 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, 1995
[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
Options and Futures Transactions 2
Repurchase Agreements 4
Reverse Repurchase Agreements 4
Lending of Portfolio Securities 4
Restricted Securities 4
Portfolio Turnover 5
Investment Limitations 5
Virginia Investment Risks 6
FIRST UNION FUNDS MANAGEMENT 7
- ---------------------------------------------------------------
Officers and Trustees 7
Fund Ownership 9
Trustee Liability 9
INVESTMENT ADVISORY SERVICES 9
- ---------------------------------------------------------------
Adviser to the Fund 9
Advisory Fees 9
BROKERAGE TRANSACTIONS 9
- ---------------------------------------------------------------
ADMINISTRATIVE SERVICES 10
- ---------------------------------------------------------------
PURCHASING SHARES 10
- ---------------------------------------------------------------
Distribution Plans (Class A and Class B
Investment Shares) 11
Shareholder Services Plan 12
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 14
- ---------------------------------------------------------------
TAX EQUIVALENT YIELD 14
- ---------------------------------------------------------------
Tax Equivalency Table 14
PERFORMANCE COMPARISONS 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: Y Shares, Class A Investment
Shares, and Class B 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
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
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. 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 assets are marked to market daily and are maintained until the
transaction has been settled. The Fund does not intend to engage in when-issued
and delayed delivery transactions to an extent that would cause the segregation
of more than 20% of the total value of its assets.
OPTIONS AND FUTURES 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. The Fund does not intend to invest more than __% of its assets in
options and futures.
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 % 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 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 net assets in restricted securities; however, certain restricted securities
which the Trustees deem to be liquid will be excluded from this 15% 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 fiscal year ended December 31, 1994, the portfolio
turnover rate for the Fund was %.
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 or invest in reverse
repurchase agreements 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.
FIRST UNION FUNDS MANAGEMENT
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OFFICERS AND TRUSTEES
Officers and Trustees are listed with their address, present positions with
First Union Funds, and principal occupations.
- --------------------------------------------------------------------------------
James S. Howell
3125 Eastway Drive
Suite 114
Carlotte, NC
Chairman and Trustee
Retired Vice President of Lance Inc. (food manufacturing).
- --------------------------------------------------------------------------------
Gerald M. McDonnell
821 Regency Drive
Charlotte, NC
Trustee
Sales Representative with Nucor-Yamoto, Inc. (steel producer) (since 1988);
formerly with Northwestern Steel & Wire Company (1986-1988).
- --------------------------------------------------------------------------------
Thomas L. McVerry
4419 Parview Drive
Charlotte, NC
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*
Carillon Building
Suite 2170
227 West Trade Street
Charlotte, NC
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.
Primary PhysicianCare
1515 Mockingbird Lane
Park Seneca Building
Suite 321
Charlotte, NC
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
212 S. Tryon Street
Suite 980
Charlotte, NC
Trustee
Attorney; formerly, Partner with Wardlow, Knox, Knox, Freeman & Scofield
(attorneys) (1982-1986).
- --------------------------------------------------------------------------------
Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA
President, Treasurer, and Trustee
Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; 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
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private 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
Federated Investors Tower
Pittsburgh, PA
Secretary
Corporate Counsel, Federated Investors
- --------------------------------------------------------------------------------
*These Trustees are each 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.
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FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of February , 1995, the following shareholders of record owned 5% or more
of the outstanding Y Shares of the Fund:
As of February , 1995, the following shareholders of record owned 5% or more
of the outstanding Class A Investment Shares of the Fund:
As of February , 1995, the following shareholders of record owned 5% or more
of the outstanding Class B 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.
Because of the internal controls maintained by First Union to restrict the flow
of non-public information, the Fund's investments are typically made without any
knowledge of First Union's or its affiliates' lending relationships with an
issuer.
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, 1994, and for the period from July 2,
1993 (commencement of operations) to December 31, 1993, the Adviser earned
advisory fees of, $__ and $4,283, respectively, $__ 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.
For the fiscal year ended December 31, 1994, and for the period from July 2,
1993 (commencement of operations) to December 31, 1993, the Fund paid $_______
and $_______, respectively, in brokerage 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 year ended December 31, 1994, and for the period from July 2,
1993 (commencement of operations) to December 31, 1993, the Fund incurred $__
and $24,931, respectively, in administrative service costs, $__ 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 A 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 3.75%, 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. 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 4.75% 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 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 A AND CLASS B INVESTMENT SHARES)
With respect to the Class A and Class B 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 A and Class B Investment Shares. The Plans are designed to (i) stimulate
brokers to provide distribution and administrative support services to the Fund
and holders of Class A and Class B Investment Shares and (ii) stimulate
administrators to render administrative support services to the Fund and holders
of Class A and Class B 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 A and Class B 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 A and Class B 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.
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, 1994, and for the period from July 2,
1993 (commencement of operations) to December 31, 1993, the Fund incurred
$______ and ______, respectively, in distribution services fees on behalf of
Class A Investment Shares.
For the fiscal year ended December 31, 1994, and for the period from July 2,
1993 (commencement of operations) to December 31, 1993, the Fund incurred
$______ and $______, respectively, in distribution services fees on behalf of
Class B Investment Shares.
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.
SHAREHOLDERS SERVICES PLAN
For the period ended December 31, 1994, the Fund incurred a shareholder services
fee of $__ for Class B Investment Shares.
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 average annual total return for Class A Investment Shares for the
fiscal year ended December 31, 1994, and for the period from July __, 1993
(commencement of operations) to December 31, 1993, was % and (.30%),
respectively.
The Fund's average annual total return for Class B Investment Shares for the
fiscal year ended December 31, 1994, and for the period from July , 1993
(commencement of operations) to December 31, 1993, was % and (.39%),
respectively.
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 compounded 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.
The Fund's cumulative total return for Y Shares for the period from , 1994
(commencement of operations) to December 31, 1994, was %.
Cumulative total return reflects the Fund's total performance over a specific
period of time. This total return assumes and is reduced by the payment of the
maximum sales load. This total return is representative of only months of
activity since the Fund's effective date.
YIELD
- --------------------------------------------------------------------------------
The Fund's yields for Y Shares, Class A Investment Shares, and Class B
Investment Shares were __%, __%, and __%, respectively, for the thirty-day
period ended December 31, 1994.
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 Y Shares, Class A Investment Shares, and
Class B Investment Shares for the thirty-day period ended December 31, 1994,
were __%, __%, and __%, respectively, assuming a % federal tax rate and a %
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.
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 1995 STATE OF VIRGINIA
- -------------------------------------------------------------------------------
TO BE INSERTED IN FEBRUARY
</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 BROTHERS 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.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD & POOR'S RATINGS GROUP MUNICIPAL BOND RATING DEFINITIONS
AAA-- Debt rated AAA has the highest rating assigned by Standard & Poor's
Ratings Group. 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 (2/95)
FIRST UNION
MONEY MARKET
FUNDS
Portfolios of First Union Funds
- ------------------------ ------------------------
- ------------------------ ------------------------
Y SHARES
- -------------------------------------------------------------------------------
P R O S P E C T U S
February 28, 1995
First Union Funds (the "Trust") is a mutual fund with 17 portfolios, offering
a variety of investment opportunities. The Trust currently includes three
diversified Money Market Funds, seven diversified Equity and Income Funds, two
diversified International Funds, and five non-diversified Single State
Municipal Bond Funds. They are:
Money Market Funds
.First Union Money Market Portfolio;
.First Union Tax Free Money Market Portfolio; and
.First Union Treasury Money Market 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.
International Funds
.First Union Emerging Markets Growth Portfolio; and
.First Union International Equity Portfolio. [/R]
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 Y Shares of
First Union Money Market Funds. It concisely describes the information which
you should know before investing in Y Shares of any of the First Union Money
Market Funds. Please read this prospectus carefully and keep it for future
reference.
You can find more detailed information about each First Union Money Market
Fund in its Statement of Additional Information, dated February 28, 1995,
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. First Union Money Market Funds attempt to maintain a
stable net asset value of $1.00 per share; there can be no assurance that the
First Union Money Market Funds will be able to do so.
- -------------------------------------------------------------------------------
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 Convert Your Investment from
- -------------------------------------- One First Union Fund to Another
First Union Fund 18
Summary of Fund Expenses 4 --------------------------------------
- --------------------------------------
How to Redeem Shares 19
Financial Highlights 5 --------------------------------------
- --------------------------------------
Management of First Union Funds 19
Investment Objectives and Policies 8 --------------------------------------
- --------------------------------------
Fees and Expenses 20
First Union Money Market Portfolio 8 --------------------------------------
- --------------------------------------
Shareholder Rights and Privileges 21
First Union Tax Free Money Market --------------------------------------
Portfolio 10
- -------------------------------------- Distributions and Taxes 23
--------------------------------------
First Union Treasury Money Market
Portfolio 12 Tax Information 23
- -------------------------------------- --------------------------------------
Other Investment Policies 12
Other Classes of Shares 25
- -------------------------------------- --------------------------------------
Addresses Inside Back Cover
Shareholder Guide 16
- -------------------------------------- --------------------------------------
How to Buy Shares 17
- --------------------------------------
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. First Union Tax Free Money Market Portfolio and
First Union Treasury Money Market Portfolio are divided into two classes of
shares: Y Shares and Class A Investment Shares ("Class A Shares"). In addition,
First Union Money Market Portfolio offers three classes of shares: Y Shares,
Class A Shares, and Class B Investment Shares ("Class B Shares"). Y Shares are
designed primarily for institutional investors (banks, corporations and
fiduciaries). Class A and Class B Shares are sold to individuals and other
customers of First Union (the "Adviser"). This prospectus relates only to Y
Shares ("Shares") of First Union Money Market Funds (collectively, the
"Funds").
THE FUNDS AND OBJECTIVES
As of the date of this prospectus, Shares are offered in the following three
Money Market Funds:
. First Union Money Market Portfolio ("Money Market Fund")--seeks to provide
current income from short-term securities while preserving capital and
maintaining liquidity;
. First Union Tax Free Money Market Portfolio ("Tax Free Money Market Fund")--
seeks to provide current income exempt from federal regular income tax,
while preserving capital and maintaining liquidity; and
. First Union Treasury Money Market Portfolio ("Treasury Money Market Fund")--
seeks to achieve stability of principal and current income consistent with
stability of principal.
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 Y 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."
SUMMARY OF
- ------------------------ ------------------------
- ------------------------ ------------------------
FUND EXPENSES
FIRST UNION MONEY MARKET FUNDS Y SHARES
<TABLE>
<CAPTION>
Tax Free Treasury
Money Money Money
Market Market Market
Fund Fund Fund
------ -------- --------
Y 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 percentage of
original purchase price
or redemption proceeds, as applicable)............... None None None
Redemption Fee (as a percentage of amount redeemed, if
applicable).......................................... None None None
Exchange Fee.......................................... None None None
Annual Y Shares Operating Expenses
(As a percentage of average net assets)
Management Fee (after waiver) (1)..................... % % %
12b-1 Fees............................................ None None None
Total Other Expenses (after waiver) (2)............... % % %
Total Y Shares Operating Expenses (3)............. % % %
</TABLE>
(1) The management fees 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 is 0.35%.
(2) Total other expenses for Treasury Money Market Fund were % absent the
voluntary waiver by the administrator of certain of its fees. The
administrator may terminate this voluntary waiver at any time at its sole
discretion.
(3) The total Y Shares operating expenses for Money Market Fund, Tax Free
Money Market Fund and Treasury Money Market Fund would have been %, %
and %, respectively, absent the voluntary waivers described above in Notes
1 and 2.
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 Y Shares.
Money Market Fund........................... $ $ $ $
Tax Free Money Market Fund.................. $ $ $ $
Treasury Money Market 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 information set forth in the foregoing table and example relates only to Y
Shares of the Funds. The Money Market Fund also offers two additional classes
of shares called Class A Shares and Class B Shares. The Tax Free Money Market
Fund and the Treasury Money Market Fund also offer an additional class of
shares called Class A Shares. Class A Shares are subject to a 12b-1 fee of .35
of 1% and bear no sales load. Class B Shares are subject to a 12b-1 fee of .75
of 1%, a shareholder service fee of 0.25 of 1% and bear a maximum contingent
deferred sales load of 5.00%. See "Other Classes of Shares."
- ------------------------- FINANCIAL -------------------------
- ------------------------- HIGHLIGHTS -------------------------
First Union Money Market Portfolio
- ------------------------- FINANCIAL -------------------------
- ------------------------- HIGHLIGHTS -------------------------
First Union Tax Free Money Market Portfolio
- ------------------------- FINANCIAL -------------------------
- ------------------------- HIGHLIGHTS -------------------------
First Union Treasury Money Market Portfolio
INVESTMENT
- ------------------------- OBJECTIVES AND -------------------------
- ------------------------- POLICIES -------------------------
First Union Money Market Funds provide a range of objectives and policies
intended to provide current income while preserving capital and maintaining
liquidity.
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
MONEY MARKET
- ------------------------- -------------------------
- ------------------------- -------------------------
PORTFOLIO
Objective: Current income from short-term securities while preserving capital
and maintaining liquidity.
Invests in: High quality money market instruments.
Suitable for: Conservative investors looking for a cash-equivalent investment.
Key Benefit: Safety of principal with a generally better yield than passbook
savings accounts.
DESCRIPTION OF THE FUND
First Union Money Market Fund seeks to provide current income from short-term
securities while preserving capital and maintaining liquidity. The Fund invests
exclusively in a portfolio of high quality money market instruments maturing in
397 days or less, with an average dollar-weighted maturity of 90 days or less.
TYPES OF INVESTMENTS
The Fund invests in high quality money market instruments that are rated in the
highest short-term rating category by major rating organizations (referred to
as "NRSROs" or "nationally recognized statistical rating organizations"), such
as Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc.
("Moody's"), or are of comparable quality to securities having such ratings.
Examples of these instruments include, but are not limited to:
commercial paper;
variable amount demand master notes (a borrowing arrangement between a
commercial paper issuer (borrower) and an institutional lender such as the
Fund which is 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.);
instruments of domestic banks and foreign banks (such as certificates of
deposit, demand and time deposits, saving shares, and bankers' acceptances)
if they have capital, surplus, and undivided profits of
over $100,000,000 and/or if their deposits are insured by the Federal
Deposit Insurance Corporation ("FDIC"). These instruments may include
Eurodollar Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit
("Yankee CDs"), and Eurodollar Time Deposits ("ETDs"), all of which are
U.S. dollar denominated;
marketable obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities, including these obligations purchased on a
when-issued or delayed delivery basis;
corporate obligations; and
repurchase agreements and reverse repurchase agreements for securities
listed above and instruments secured by obligations described above.
CONCENTRATION OF INVESTMENTS
The Fund may invest more than 25% of its total assets in commercial paper
issued by commercial or consumer finance companies. The Fund may also invest
more than 25% of the value of its total 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,
i.e., repurchase agreements.
RISK FACTORS
ECDs, ETDs, and Yankee CDs are subject to different risks than domestic
obligations of domestic banks or corporations. Examples of these risks include
international, economic and political developments, foreign governmental
restrictions that may adversely affect the payment of principal or interest,
foreign withholdings or other taxes on interest income, difficulties in
obtaining or enforcing a judgment against the issuing entity, and the possible
impact of interruptions in the flow of international currency transactions.
Different risks may also exist for ECDs, ETDs, and Yankee CDs because the banks
issuing these instruments, or their domestic or foreign branches, are not
necessarily subject to the same regulatory requirements that apply to domestic
banks, such as reserve requirements, loan limitations, examinations,
accounting, auditing, and recordkeeping, and the public availability of
information. These factors will be carefully considered by the Adviser in
selecting investments for the Fund.
FIRST UNION TAX FREE
MONEY MARKET
- ------------------------- -------------------------
- ------------------------- -------------------------
PORTFOLIO
Objective: Current income exempt from federal regular income tax, while
preserving capital and maintaining liquidity.
Invests in: A diversified portfolio of short-term municipal securities.
Suitable for: Investors seeking tax free monthly income.
Key Benefit: Greater diversification and liquidity than can be achieved by
purchasing individual municipal securities.
DESCRIPTION OF THE FUND
First Union Tax Free Money Market Fund seeks to provide current income exempt
from federal regular income tax, while preserving capital and maintaining
liquidity. The Fund pursues this objective by investing at least 80% of its
assets in a diversified portfolio of municipal securities maturing in 397 days
or less, with an average dollar-weighted maturity of 90 days or less.
As a matter of investment policy which cannot be changed without the approval
of shareholders, the Fund will invest its assets so that at least 80% of its
annual interest income is exempt from federal income taxes (including the
alternative minimum tax). Interest income of the Fund which is exempt from
federal regular income tax 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 regular income tax.
In addition, the Fund may buy participation interests in municipal securities.
(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. The
securities which are subject to these participation interests are not limited
to maturities of one year or less as long as they include the right to demand
payment, typically within seven days, from the issuer.)
The municipal securities in which the Fund invests are:
bonds rated in the two highest categories by an NRSRO or, if unrated,
deemed by the Adviser to be of comparable quality;
securities guaranteed at the time of purchase by the U.S. government as to
the payment of principal and interest;
municipal leases; or
notes, tax-exempt commercial paper and variable rate demand obligations
rated in the highest category by an NRSRO or if unrated, determined by the
Adviser to be of comparable quality. (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. Variable rate municipal securities
without the demand feature may not be considered liquid by the Adviser, who
will limit investments in illiquid securities to no more than 10% of net
assets.)
TEMPORARY INVESTMENTS
Although the Fund is permitted to make taxable, temporary investments, there is
no current intention of generating income subject to federal income tax. 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 money
market instruments whose interest income may be taxable to shareholders as
ordinary income.
These temporary investments include:
obligations issued by or on behalf of municipal or corporate issuers having
the same quality characteristics as municipal securities purchased by the
Fund;
marketable obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities;
instruments issued by banks or savings and loans which have capital,
surplus, and undivided profits in excess of $100,000,000 at the time of
investment whose deposits are insured by the Bank Insurance Fund ("BIF") or
the Savings Association Insurance Fund ("SAIF") (administered by the FDIC),
foreign branches of U.S. banks and U.S. branches of foreign banks;
repurchase agreements collateralized by eligible investments;
prime commercial paper rated A-1 by S&P or P-1 by Moody's; and
variable amount demand master notes.
CONCENTRATION OF INVESTMENTS
The Fund may invest more than 25% of the value of its assets in industrial
development bonds, with no more than 25% of total assets in a single industry.
The Fund may also 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, or instruments secured by these instruments, i.e.,
repurchase agreements.
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 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.
FIRST UNION TREASURY
MONEY MARKET
- ------------------------- -------------------------
- ------------------------- -------------------------
PORTFOLIO
Objective: Stability of principal and current income consistent with stability
of principal.
Invests in: Short-term U.S. Treasury obligations.
Suitable for: Conservative investors seeking high current yields plus relative
safety.
Key Benefit: A reasonable means of maximizing opportunities and minimizing
risks resulting from changing interest rates.
DESCRIPTION OF THE FUND
First Union Treasury Money Market Fund seeks to provide stability of principal
and current income consistent with stability of principal by investing in a
portfolio consisting exclusively of short-term U.S. Treasury obligations with
an average dollar-weighted maturity of 90 days or less. As a matter of
investment strategy which can be changed without shareholder approval, the
Adviser intends to maintain a dollar- weighted average maturity for the Fund of
60 days or less.
TYPES OF INVESTMENTS
The short-term U.S. Treasury obligations in which the Fund invests are issued
by the U.S. government and are fully guaranteed as to principal and interest by
the United States. They mature in 397 days or less from the date of acquisition
unless they are purchased under an agreement that provides for repurchase by
the seller within 397 days from the date of acquisition. The Fund may also
retain Fund assets in cash.
OTHER
- ------------------------- -------------------------
- ------------------------- -------------------------
INVESTMENT POLICIES
The Funds have adopted the following practices for specific types of
investments.
REGULATORY COMPLIANCE
Money market mutual funds are subject to Rule 2a-7 (the "Rule") under the
Investment Company Act of 1940 which imposes certain risk limiting conditions
on the Funds, including:
Portfolio investments of each Fund must have a maturity of 397 days or less
from the time of acquisition, with the exception of repurchase agreement
securities and certain adjustable interest rate instruments. The dollar-
weighted average maturity of each Fund's portfolio must not exceed 90 days.
The Funds must limit their investments to "eligible securities," i.e.,
those which (i) have a short-term rating in one of the two highest
categories from an NRSRO, (ii) are comparable in priority and security to
other short-term debt of the same issuer which already has a short-term
rating in one of the two highest categories, or (iii) are unrated by an
NRSRO but of comparable quality.
The Funds may invest without limit in "first tier securities," i.e.
eligible securities which have (or are comparable to other short-term debt
of the same issuer having) the highest short-term rating by any two NRSROs
(or, if only one NRSRO has issued a rating with respect to such security,
it must be the highest short-term rating given by such NRSRO).
Each Fund (except the Tax Free Money Market Fund) must limit investments in
"second tier securities" (any eligible security which is not first tier) to
5% of total assets and 1% of total assets in the securities of a single
second tier issuer.
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 (usually within 397
days from the date of acquisition). 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 Money Market and Tax Free Money Market Funds currently invest in repurchase
agreements maturing in seven days or less. The Treasury Money Market Fund also
invests in repurchase agreements but will not invest in reverse repurchase
agreements. The Adviser will monitor creditworthiness of the firms with which
the Funds enter into repurchase agreements.
STANDBY COMMITMENTS
For liquidity purposes, the Tax Free Money Market Fund may purchase municipal
securities accompanied by commitments by the seller to repurchase such
securities for the amortized value of those securities. The cost of municipal
securities accompanied by these standby commitments could be greater than the
cost of municipal securities without such commitments.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Funds may purchase securities on a when-issued or delayed delivery
basis. These transactions are arrangements in which a Fund purchases securities
with payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause a Fund to miss a price or yield considered
to be advantageous. 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. Accordingly, a Fund may pay more/less than the market
value of the securities on the settlement date.
The Funds may dispose of a commitment prior to settlement if the Adviser deems
it appropriate to do so. In addition, the Funds may enter into transactions to
sell their purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at
later dates. The Funds may realize short-term profits or losses upon the sale
of such commitments.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Money Market and the Tax Free Money
Market Funds may lend portfolio securities on a short-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, neither the Money Market Fund nor the Tax Free Money Market Fund will
lend any of its assets except portfolio securities up to 15% of the value of
its total assets.
There is the risk that when lending portfolio securities, the securities may
not be available to a Fund on a timely basis and the Fund may, therefore, lose
the opportunity to sell the securities at a desirable price. In addition, in
the event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
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) the Funds will not
own more than 3% of the total outstanding voting stock of any one investment
company, (2) the Funds may not invest more than 5% of their total assets in any
one investment company and (3) the Funds may not invest more than 10% of their
total assets in investment companies in general.
The following investment limitations cannot be changed without shareholder
approval.
RESTRICTED AND ILLIQUID SECURITIES
The Money Market and Tax Free Money Market Funds may invest up to 10% of their
net assets in securities which are subject to restrictions on resale under
federal securities laws. With respect to the Money Market Fund, this
restriction is not applicable to commercial paper issued under Section 4(2) of
the Securities Act of 1933.
The Money Market and Tax Free Money Market Funds may invest up to 10% of their
net assets in illiquid securities, which include 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.
BORROWING MONEY
The Money Market and Tax Free Money Market Funds will not borrow money directly
or through reverse repurchase agreements, or pledge securities, except under
certain circumstances, such Funds may borrow up to one-third of the value of
their total assets and pledge up to 15% of the value of those assets to secure
such borrowings. The Treasury Money Market Fund will not borrow money directly
or pledge securities except, under certain circumstances, the Fund may borrow
money in amounts up to one-third of the value of its total assets and pledge up
to 10% of the value of its total assets to secure such borrowings.
DIVERSIFICATION
With respect to 75% of the value of their total assets, the Money Market and
Tax Free Money Market Funds will invest no more than 5% of their total assets
in securities of one issuer (except cash, 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. A Fund
will invest more than 5% of its assets in any one issuer only under
circumstances permitted by the Rule.
For the Treasury Money Market Fund, the following limitations can be changed by
the Trustees without shareholder approval. Shareholders will be notified before
any material change in these limitations becomes effective:
ILLIQUID OBLIGATIONS
The Treasury Money Market Fund will not commit more than 10% of its net assets
to illiquid obligations, including repurchase agreements providing for
settlement in more than seven days after notice.
REVERSE REPURCHASE AGREEMENTS
The Treasury Money Market Fund will not invest in reverse repurchase
agreements.
Although not a fundamental restriction or policy requiring a shareholders' vote
to change, the Money Market and the Tax Free Money Market Funds have undertaken
to a state securities authority that so long as the state authority requires
and shares of the Funds are registered for sale in that state, the Funds will
not invest in the following:
"NON-ACTIVE" SECURITIES
The Money Market and Tax Free Money Market 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 restricted securities, securities for
which market quotations are not readily available and repurchase agreements
maturing in more than seven days.
WARRANTS
The Money Market and Tax Free Money Market Funds will not invest more than 5%
of their net assets in warrants. No more than 2% of this 5% will be in warrants
which are not listed on the New York or American Stock Exchanges.
SHAREHOLDER GUIDE
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SHARE PRICE CALCULATION
The goal of the First Union Money Market Funds is to maintain a net asset value
of $1.00 per Share.
Purchases, redemptions, and exchanges are made at net asset value. There is no
sales charge for any of the First Union Money Market Funds. The Funds attempt
to stabilize the net asset value of Shares at $1.00 by valuing the portfolio
securities using the amortized cost method of valuation. The net asset value is
determined at 12:00 p.m. and 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 value of all securities owned, subtracting liabilities and dividing the
result by the number of outstanding Shares. 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 Y Shares of a Fund may differ slightly from that of
Class A Shares (and Class B Shares for the Money Market Fund) 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 the Class B
Shares for the Money Market Fund) for each class of shares.
PERFORMANCE INFORMATION
A Fund's performance may be quoted in terms of total return, effective 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 Y Shares. It is generally reported with one or more of the
following measures: total return, yield, effective yield or tax equivalent
yield (for the Tax Free Money Market 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 annualized dividend income an investment generates over a
seven-day stated period, expressed as a percentage of the investment. The
effective yield is calculated similarly to the yield, but the income earned is
compounded daily.
The Tax Free Money Market Fund may advertise the tax equivalent yield, which is
calculated like the yield described above, except that it is adjusted to
reflect the taxable yield that the Fund would have had to earn to equal its
actual yield, assuming a specific tax rate.
The yield and tax equivalent yield do not necessarily reflect income actually
earned by Y Shares of the Funds and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
Total return, yield, effective yield, and tax equivalent yield will be
calculated separately for Y Shares, Class A Shares, and Class B Shares (for the
Money Market Fund) of a Fund. Because Class A Shares are subject to a 12b-1
fee, and Class B Shares (for the Money Market Fund) are subject to a 12b-1 fee
and a shareholder services fee, the yield, effective yield, and tax equivalent
yield will be lower than that of Y Shares. Class B 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 B
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
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- ------------------------- -------------------------
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 Y 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 Y 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
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- ------------------------ ------------------------
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 Y Shares of one First Union Fund for Y 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 shares of the other First Union Fund
will be purchased at their net asset value determined after the exchange
request is received. 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
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- ------------------------- -------------------------
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
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- ------------------------- -------------------------
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 $ billion in total
consolidated assets as of December 31, 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.
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, 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 LLP, Pittsburgh,
Pennsylvania.
FEES AND EXPENSES
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- ------------------------- -------------------------
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
.35 of 1% of each of the Money Market 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
------------------ -----------------------------------
<C> <S>
.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 lest $50,000 per First Union Fund.
EXPENSES OF THE FUNDS AND Y 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
A Shares and Class B Shares (for the Money Market Fund). In addition, the
Fund's expenses under the Shareholder Services Plan are incurred by the Class B
Shares (for the Money Market Fund). The Trustees reserve the right to allocate
certain expense 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, are allocated based upon the
average daily net assets of each class of a Fund.
SHAREHOLDER
RIGHTS AND
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- ------------------------- -------------------------
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 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.
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 other financial institutions
may be required to register as dealers pursuant to state law.
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 for the First Union Money Market
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
If any of the Funds experience capital gains, it could result in an increase in
dividends for that Fund. Capital losses could result in a decrease in dividends
for that Fund. If, for some extraordinary reason, any of the Funds realize
long-term capital gains, the Fund will distribute them 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 "Tax Free Money Market 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.
TAX FREE MONEY MARKET FUND ADDITIONAL TAX INFORMATION
Shareholders of the Tax Free Money Market 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.
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
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- ------------------------- -------------------------
OF SHARES
Tax Free Money Market Fund and Treasury Money Market Fund offer two classes of
shares: Y Shares and Class A Shares. In addition, Money Market Fund offers
three classes of shares: Y Shares, Class A Shares, and Class B Shares. Y Shares
are designed for institutional investors and Class A Shares and Class B Shares
are sold to individuals and other customers of First Union.
Class A Shares of the Funds (and Class B Shares of the Money Market Fund) are
sold to customers of First Union and others at net asset value with a minimum
initial investment of $1,000. Class B Shares may impose a sales charge on a
contingent deferred basis. Class A and Class B Investment Shares are
distributed pursuant to Rule 12b-1 Plans adopted by the Trust, whereby the
distributor is paid a fee of .35 of 1% for Class A Shares and .75 of 1% for
Class B Shares of the Money Market Fund's average daily net asset value. In
addition, Class B Shares pay a shareholder services fee of 0.25 of 1% of the
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 A Shares and Class B Shares (for the
Money Market Fund) will be less than those payable to Y Shares by the
difference between class expenses and distribution and shareholder services
expenses borne by the shares of each respective class.
ADDRESSES
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- ------------------------- -------------------------
- --------------------------------------------------------------------------------
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
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
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Independent Auditors
One Mellon Bank Center
KPMG Peat Marwick LLP Pittsburgh, Pennsylvania
15219
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3031006A-I (2/95)
FIRST UNION
MONEY MARKET
FUNDS
Portfolios of First Union Funds
- ------------------------ ------------------------
- ------------------------ ------------------------
CLASS A INVESTMENT SHARES
- -------------------------------------------------------------------------------
P R O S P E C T U S
February 28, 1995
First Union Funds (the "Trust") is a mutual fund with 17 portfolios, offering
a variety of investment opportunities. The Trust currently includes three
diversified Money Market Funds, seven diversified Equity and Income Funds, two
diversified International Funds, and five non-diversified Single State
Municipal Bond Funds. They are:
Money Market Funds
.First Union Money Market Portfolio;
. First Union Tax Free Money Market Portfolio; and
.First Union Treasury Money Market 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.
International Funds
. First Union Emerging Markets Growth Portfolio; and
. First Union International Equity 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 A
Investment Shares ("Class A Shares") of First Union Money Market Funds. It
concisely describes the information which you should know before investing in
Class A Shares of any of the First Union Money Market Funds. Please read this
prospectus carefully and keep it for future reference.
You can find more detailed information about each First Union Money Market
Fund in its Statement of Additional Information, dated February 28, 1995,
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, Pitts- burgh, 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 Corpora- tion, the Federal Reserve Board, or any
other govern- ment agency. First Union Money Market Funds attempt to maintain
a stable net asset value of $1.00 per share; there can be no assurance that
the First Union Money Market Funds will be able to do so.
- -------------------------------------------------------------------------------
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 Convert Your Investment from
- -------------------------------------- One First Union Fund to Another
First Union Fund 14
Summary of Fund Expenses 3 --------------------------------------
- -------------------------------------- How to Redeem Shares 15
--------------------------------------
Financial Highlights 4
- -------------------------------------- Additional Shareholder Services 15
--------------------------------------
Investment Objectives and Policies 7
- --------------------------------------
Management of First Union Funds 16
First Union Money Market Portfolio 7 --------------------------------------
- --------------------------------------
First Union Tax Free Money Market Fees and Expenses 17
Portfolio 8 --------------------------------------
- --------------------------------------
Shareholder Rights and Privileges 18
First Union Treasury Money Market --------------------------------------
Portfolio 10
- --------------------------------------
Distributions and Taxes 19
--------------------------------------
Other Investment Policies 10
- -------------------------------------- Tax Information 19
--------------------------------------
Shareholder Guide 12
- -------------------------------------- Other Classes of Shares 20
--------------------------------------
How to Buy Shares 13
- --------------------------------------
Addresses 22
--------------------------------------
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. First Union Tax Free Money Market Portfolio and
First Union Treasury Money Market Portfolio are divided into two classes of
shares: Y Shares and Class A Shares. In addition, First Union Money Market
Portfolio offers three classes of shares: Class A Shares, Class B Investment
Shares ("Class B Shares"), and Y Shares. Class A and Class B Shares are sold to
individuals and other customers of First Union (the "Adviser") and are sold at
net asset value. Y Shares are designed primarily for institutional investors
(banks, corporations, and fiduciaries). This prospectus relates only to Class A
Investment Shares ("Shares") of First Union Money Market Funds (collectively,
the "Funds").
THE FUNDS AND OBJECTIVES
As of the date of this prospectus, Shares are offered in the following three
Money Market Funds:
. First Union Money Market Portfolio ("Money Market Fund")--seeks to provide
current income from short-term securities while preserving capital and
maintaining liquidity;
. First Union Tax Free Money Market Portfolio ("Tax Free Money Market Fund")--
seeks to provide current income exempt from federal regular income tax,
while preserving capital and maintaining liquidity; and
. First Union Treasury Money Market Portfolio ("Treasury Money Market Fund")--
seeks to achieve stability of principal and current income consistent with
stability of principal.
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 A 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."
SUMMARY OF
- ------------------------ ------------------------
- ------------------------ ------------------------
FUND EXPENSES
FIRST UNION MONEY MARKET FUNDS CLASS A SHARES
<TABLE>
<CAPTION>
Tax
Free Treasury
Money Money Money
Market Market Market
Fund Fund Fund
------ ------ --------
Class A 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 percentage of
original purchase price
or redemption proceeds, as applicable)................. None None None
Redemption Fee (as a percentage of amount redeemed, if
applicable)............................................ None None None
Exchange Fee............................................ None None None
Annual Class A Shares Operating Expenses
(As a percentage of average net assets)
Management Fee (after waiver) (1)....................... % % %
12b-1 Fees (after waiver) (2)........................... % % %
Total Other Expenses (after waiver) (3)................. % % %
Total Class A Shares Operating Expenses (4)......... % % %
</TABLE>
(1) The management fees 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 is 0.35%.
(2) The Funds can pay up to 0.35% of Class A Shares' average daily net assets
as a 12b-1 fee. For the foreseeable future, the Funds plan to limit 12b-1
payments to 0.30%. The distributor may terminate its voluntary waiver on Money
Market Fund at any time at its sole discretion.
(3) Total Other Expenses for Treasury Money Market Fund were %, absent the
voluntary waiver by the administrator of certain of its fees. The
administrator may terminate this voluntary waiver at any time at its sole
discretion.
(4) The Total Class A Shares Operating Expenses for Treasury Money Market Fund
would have been %, absent the voluntary waivers described above in Notes 1
and 3.
The Money Market and Tax Free Money Market Funds' Class A Shares Annual
Operating Expenses were % and %, respectively, for the year ended
December 31, 1994. Total Class A Shares Operating Expenses for Money Market
and Tax Free Money Market Funds, absent the voluntary waivers of the
management fee by the Adviser and waiver of the 12b-1 fee, were % and %,
respectively, for the year ended December 31, 1994.
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.
However, in order for a Fund investor to exceed the NASD's maximum front-end
sales charge of 6.25%, a continuous investment in either Tax Free Money Market
or Treasury Money Market Funds for years would be required.
<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 A Shares.
Money Market Fund........................... $ $ $ $
Tax Free Money Market Fund.................. $ $ $ $
Treasury Money Market 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 information set forth in the foregoing table and example relates only to
Class A Shares of the Funds. The Money Market Fund also offers two additional
classes of shares called Y Shares and Class B Shares. The Tax Free Money
Market Fund and the Treasury Money Market Fund also offer an additional class
of shares called Y Shares. Y Shares bear no sales load or 12b-1 fee. Class B
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 load of 5.00%. See
"Other Classes of Shares."
FINANCIAL HIGHLIGHTS
- ------------------------ ------------------------
- ------------------------ ------------------------
First Union Money Market Portfolio
FINANCIAL HIGHLIGHTS
- ------------------------ ------------------------
- ------------------------ ------------------------
First Union Tax Free Money Market Portfolio
FINANCIAL HIGHLIGHTS
- ------------------------ ------------------------
- ------------------------ ------------------------
First Union Treasury Money Market Portfolio
INVESTMENT
OBJECTIVES
- ------------------------- -------------------------
- ------------------------- -------------------------
AND POLICIES
First Union Money Market Funds provide a range of objectives and policies
intended to provide current income while preserving capital and maintaining
liquidity.
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
MONEY MARKET
- ------------------------- -------------------------
- ------------------------- -------------------------
PORTFOLIO
Objective: Current income from short-term securities while preserving capital
and maintaining liquidity.
Invests in: High quality money market instruments.
Suitable for: Conservative investors looking for a cash-equivalent investment.
Key Benefit: Safety of principal with a generally better yield than passbook
savings accounts.
DESCRIPTION OF THE FUND
First Union Money Market Fund seeks to provide current income from short-term
securities while preserving capital and maintaining liquidity. The Fund invests
exclusively in a portfolio of high quality money market instruments maturing in
397 days or less, with an average dollar-weighted maturity of 90 days or less.
TYPES OF INVESTMENTS
The Fund invests in high quality money market instruments that are rated in the
highest short-term rating category by major rating organizations (referred to
as "NRSROs" or "nationally recognized statistical rating organizations"), such
as Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc.
("Moody's"), or are of comparable quality to securities having such ratings.
Examples of these instruments include, but are not limited to:
commercial paper;
variable amount demand master notes (a borrowing arrangement between a
commercial paper issuer (borrower) and an institutional lender such as the
Fund which is 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.);
instruments of domestic banks and foreign banks (such as certificates of
deposit, demand and time deposits, saving shares, and bankers' acceptances)
if they have capital, surplus, and undivided profits of over $100,000,000
and/or if their deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC"). These instruments may include Eurodollar Certificates
of Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs"), and
Eurodollar Time Deposits ("ETDs"), all of which are U.S. dollar
denominated;
marketable obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities, including these obligations purchased on a
when-issued or delayed delivery basis;
corporate obligations; and
repurchase agreements and reverse repurchase agreements for securities
listed above and instruments secured by obligations described above.
CONCENTRATION OF INVESTMENTS
The Fund may invest more than 25% of its total assets in commercial paper
issued by commercial or consumer finance companies. The Fund may also invest
more than 25% of the value of its total 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,
i.e., repurchase agreements.
RISK FACTORS
ECDs, ETDs, and Yankee CDs are subject to different risks than domestic
obligations of domestic banks or corporations. Examples of these risks include
international, economic and political developments, foreign governmental
restrictions that may adversely affect the payment of principal or interest,
foreign withholdings or other taxes on interest income, difficulties in
obtaining or enforcing a judgment against the issuing entity, and the possible
impact of interruptions in the flow of international currency transactions.
Different risks may also exist for ECDs, ETDs, and Yankee CDs because the banks
issuing these instruments, or their domestic or foreign branches, are not
necessarily subject to the same regulatory requirements that apply to domestic
banks, such as reserve requirements, loan limitations, examinations,
accounting, auditing, and recordkeeping, and the public availability of
information. These factors will be carefully considered by the Adviser in
selecting investments for the Fund.
FIRST UNION
TAX FREE
- ------------------------- -------------------------
- ------------------------- -------------------------
MONEY MARKET
PORTFOLIO
Objective: Current income exempt from federal regular income tax, while
preserving capital and maintaining liquidity.
Invests in: A diversified portfolio of short-term municipal securities.
Suitable for: Investors seeking tax free monthly income.
Key Benefit: Greater diversification and liquidity than can be achieved by
purchasing individual municipal securities.
DESCRIPTION OF THE FUND
First Union Tax Free Money Market Fund seeks to provide current income exempt
from federal regular income tax, while preserving capital and maintaining
liquidity. The Fund pursues this objective by investing at least 80% of its
assets in a diversified portfolio of municipal securities maturing in 397 days
or less, with an average dollar-weighted maturity of 90 days or less.
As a matter of investment policy which cannot be changed without the approval
of shareholders, the Fund will invest its assets so that at least 80% of its
annual interest income is exempt from federal income taxes (including the
alternative minimum tax). Interest income of the Fund which is exempt from
federal regular income tax 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 regular income tax.
In addition, the Fund may buy participation interests in municipal securities.
(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. The
securities which are subject to these participation interests are not limited
to maturities of one year or less as long as they include the right to demand
payment, typically within seven days, from the issuer.)
The municipal securities in which the Fund invests are:
bonds rated in the two highest categories by an NRSRO or, if unrated,
deemed by the Adviser to be of comparable quality;
securities guaranteed at the time of purchase by the U.S. government as to
the payment of principal and interest;
municipal leases; or
notes, tax-exempt commercial paper and variable rate demand obligations
rated in the highest category by an NRSRO or if unrated, determined by the
Adviser to be of comparable quality. (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. Variable rate municipal
securities without the demand feature may not be considered liquid by the
Adviser, who will limit investments in illiquid securities to no more than
10% of net assets.)
TEMPORARY INVESTMENTS
Although the Fund is permitted to make taxable, temporary investments, there is
no current intention of generating income subject to federal income tax. 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 money
market instruments whose interest income may be taxable to shareholders as
ordinary income.
These temporary investments include:
obligations issued by or on behalf of municipal or corporate issuers having
the same quality characteristics as municipal securities purchased by the
Fund;
marketable obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities;
instruments issued by banks or savings and loans which have capital,
surplus, and undivided profits in excess of $100,000,000 at the time of
investment whose deposits are insured by the Bank Insurance Fund ("BIF") or
the Savings Association Insurance Fund ("SAIF") (administered by the FDIC),
foreign branches of U.S. banks and U.S. branches of foreign banks;
repurchase agreements collateralized by eligible investments;
prime commercial paper rated A-1 by S&P or P-1 by Moody's; and
variable amount demand master notes.
CONCENTRATION OF INVESTMENTS
The Fund may invest more than 25% of the value of its assets in industrial
development bonds, with no more than 25% of total assets in a single industry.
The Fund may also 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, or instruments secured by these instruments, i.e.,
repurchase agreements.
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 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.
FIRST UNION
TREASURY
- ------------------------- -------------------------
- ------------------------- -------------------------
MONEY MARKET
PORTFOLIO
Objective:Stability of principal and current income consistent with stability
of principal.
Invests in: Short-term U.S. Treasury obligations.
Suitable for: Conservative investors seeking high current yields plus relative
safety.
Key Benefit: A reasonable means of maximizing opportunities and minimizing
risks resulting from changing interest rates.
DESCRIPTION OF THE FUND
First Union Treasury Money Market Fund seeks to provide stability of principal
and current income consistent with stability of principal by investing in a
portfolio consisting exclusively of short-term U.S. Treasury obligations with
an average dollar-weighted maturity of 90 days or less. As a matter of
investment strategy which can be changed without shareholder approval, the
Adviser intends to maintain a dollar-weighted average maturity for the Fund of
60 days or less.
TYPES OF INVESTMENTS
The short-term U.S. Treasury obligations in which the Fund invests are issued
by the U.S. government and are fully guaranteed as to principal and interest by
the United States. They mature in 397 days or less from the date of acquisition
unless they are purchased under an agreement that provides for repurchase by
the seller within 397 days from the date of acquisition. The Fund may also
retain Fund assets in cash.
OTHER
- ------------------------- -------------------------
- ------------------------- -------------------------
INVESTMENT POLICIES
The Funds have adopted the following practices for specific types of
investments.
REGULATORY COMPLIANCE
Money market mutual funds are subject to Rule 2a-7 (the "Rule") under the
Investment Company Act of 1940 which imposes certain risk limiting conditions
on the Funds, including:
Portfolio investments of each Fund must have a maturity of 397 days or less
from the time of acquisition, with the exception of repurchase agreement
securities and certain adjustable interest rate instruments. The dollar-
weighted average maturity of each Fund's portfolio must not exceed 90 days.
The Funds must limit their investments to "eligible securities," i.e.,
those which (i) have a short-term rating in one of the two highest
categories from an NRSRO, (ii) are comparable in priority and security to
other short-term debt of the same issuer which already has a short-term
rating in one of the two highest categories, or (iii) are unrated by an
NRSRO but of comparable quality.
The Funds may invest without limit in "first tier securities," i.e.
eligible securities which have (or are comparable to other short-term debt
of the same issuer having) the highest short-term rating by any two NRSROs
(or, if only one NRSRO has issued a rating with respect to such security,
it must be the highest short-term rating given by such NRSRO).
Each Fund (except the Tax Free Money Market Fund) must limit investments in
"second tier securities" (any eligible security which is not first tier) to
5% of total assets and 1% of total assets in the securities of a single
second tier issuer.
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 (usually within 397
days from the date of acquisition). 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 Money Market and Tax Free Money Market Funds currently invest in repurchase
agreements maturing in seven days or less. The Treasury Money Market Fund also
invests in repurchase agreements but will not invest in reverse repurchase
agreements. The Adviser will monitor creditworthiness of the firms with which
the Funds enter into repurchase agreements.
STANDBY COMMITMENTS
For liquidity purposes, the Tax Free Money Market Fund may purchase municipal
securities accompanied by commitments by the seller to repurchase such
securities for the amortized value of those securities. The cost of municipal
securities accompanied by these standby commitments could be greater than the
cost of municipal securities without such commitments.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Funds may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which a Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause a Fund to miss a price or yield
considered to be advantageous. 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. Accordingly, a Fund may pay
more/less than the market value of the securities on the settlement date.
The Funds may dispose of a commitment prior to settlement if the Adviser deems
it appropriate to do so. In addition, a Fund may enter into transactions to
sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at
later dates. The Funds may realize short-term profits or losses upon the sale
of such commitments.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Money Market and the Tax Free Money
Market Funds may lend portfolio securities on a short-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, neither the Money Market Fund nor the Tax Free Money Market Fund will
lend any of its assets except portfolio securities up to 15% of the value of
its total assets.
There is the risk that when lending portfolio securities, the securities may
not be available to a Fund on a timely basis and the Fund may, therefore, lose
the opportunity to sell the securities at a desirable price. In addition, in
the event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
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) the Funds will not
own more than 3% of the total outstanding voting stock of any one investment
company, (2) the Funds may not invest more
than 5% of their total assets in any one investment company and (3) the Funds
may not invest more than 10% of their total assets in investment companies in
general.
The following investment limitations cannot be changed without shareholder
approval.
RESTRICTED AND ILLIQUID SECURITIES
The Money Market and Tax Free Money Market Funds may invest up to 10% of their
net assets in securities which are subject to restrictions on resale under
federal securities laws. With respect to the Money Market Fund, this
restriction is not applicable to commercial paper issued under Section 4(2) of
the Securities Act of 1933.
The Money Market and Tax Free Money Market Funds may invest up to 10% of their
net assets in illiquid securities, which include 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.
BORROWING MONEY
The Money Market and Tax Free Money Market Funds will not borrow money directly
or through reverse repurchase agreements, or pledge securities, except under
certain circumstances, such Funds may borrow up to one-third of the value of
their total assets and pledge up to 15% of the value of those assets to secure
such borrowings. The Treasury Money Market Fund will not borrow money directly
or pledge securities except, under certain circumstances, the Fund may borrow
money in amounts up to one-third of the value of its total assets and pledge up
to 10% of the value of its total assets to secure such borrowings.
DIVERSIFICATION
With respect to 75% of the value of their total assets, the Money Market and
Tax Free Money Market Funds will invest no more than 5% of their total assets
in securities of one issuer (except cash, 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. A Fund
will invest more than 5% of its assets in any one issuer only under
circumstances permitted by the Rule.
For the Treasury Money Market Fund, the following limitations can be changed by
the Trustees without shareholder approval. Shareholders will be notified before
any material change in these limitations becomes effective:
ILLIQUID OBLIGATIONS
The Treasury Money Market Fund will not commit more than 10% of its net assets
to illiquid obligations, including repurchase agreements providing for
settlement in more than seven days after notice.
REVERSE REPURCHASE AGREEMENTS
The Treasury Money Market Fund will not invest in reverse repurchase
agreements.
Although not a fundamental restriction or policy requiring a shareholders' vote
to change, the Money Market and the Tax Free Money Market Funds have undertaken
to a state securities authority that so long as the state authority requires
and shares of the Funds are registered for sale in that state, the Funds will
not invest in the following:
"NON-ACTIVE" SECURITIES
The Money Market and Tax Free Money Market 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 restricted securities, securities for
which market quotations are not readily available and repurchase agreements
maturing in more than seven days.
WARRANTS
The Money Market and Tax Free Money Market Funds will not invest more than 5%
of their net assets in warrants. No more than 2% of this 5% will be in warrants
which are not listed on the New York or American Stock Exchanges.
SHAREHOLDER
- ------------------------- -------------------------
- ------------------------- -------------------------
GUIDE
SHARE PRICE CALCULATION
The goal of the First Union Money Market Funds is to maintain a net asset value
of $1.00 per Share.
Purchases, redemptions, and exchanges are all based on net asset value. There
is no initial sales charge for any of the First Union Money Market Funds. The
Funds attempt to stabilize the net asset value of Shares at $1.00 by valuing
the portfolio securities using the amortized cost method of valuation. The net
asset value is determined at 12:00 p.m. and 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. 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 Y Shares of a Fund may differ slightly from that of
Class A Shares (and Class B Shares for the Money Market Fund) 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 the Class B
Shares for the Money Market Fund) for each class of shares.
PERFORMANCE INFORMATION
A Fund's performance may be quoted in terms of total return, yield, effective
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 A Shares. It is generally reported with one or more of the
following measures: total return, yield, effective yield or tax equivalent
yield (for the Tax Free Money Market 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 annualized dividend income an investment generates over a
seven-day period, expressed as a percentage of the investment. The effective
yield is calculated similarly to the yield, but the income earned is compounded
daily.
The Tax Free Money Market Fund may advertise the tax equivalent yield, which is
calculated like the yield described above, except that it is adjusted to
reflect the taxable yield that the Fund would have had to earn to equal its
actual yield, assuming a specific tax rate.
The yield and tax equivalent yield do not necessarily reflect income actually
earned by Class A Shares of the Funds and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
Total return, yield, effective yield, and tax equivalent yield will be
calculated separately for Y Shares, Class A Shares, and Class B Shares (for the
Money Market Fund) of a Fund. Because Class A Shares are subject to a 12b-1
fee, and Class B Shares (for the Money Market Fund) are subject to a 12b-1 fee
and a shareholder services fee, the yield, effective yield, and tax equivalent
yield will be lower than that of Y Shares. Class B 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 B
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 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.
BY TELEPHONE OR IN PERSON
You may purchase Class A 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 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 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 A Shares of one First Union Fund for Class A 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 shares of the other First Union Fund
will be purchased at their net asset value determined after the exchange
request is received. 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.
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 and Trust Company, 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
CHECKWRITING
You may establish a checking account through State Street Bank, the Funds'
custodian, for redeeming Class A Shares. There is a minimum redemption
requirement for each Fund account of $250.00 per check. A check may not be
written to close an account.
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 a 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 CASH WITHDRAWAL PLAN
When an account of $10,000 or more is opened or when an existing account
reaches that size, you may participate in the Fund's Systematic Cash Withdrawal
Plan by filling out the appropriate part of the share purchase application.
Under this Plan, you may receive (or designate a third party to receive) a
monthly or quarterly check in a stated amount of not less than $25. Fund shares
will be redeemed as necessary to meet withdrawal payments. All participants
must elect to have their dividends and capital gain distributions reinvested
automatically. Any applicable Class B CDSC will be waived with respect to
redemptions occurring under a Systematic Cash Withdrawal Plan during a calendar
year to the extent that such redemptions do not exceed 10% of (i) the initial
value of the account, plus (ii) the value, at the time of purchase, of any
subsequent investments.
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 $ billion in total
consolidated assets as of December 31, 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 $43.0 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.
DISTRIBUTION OF CLASS A INVESTMENT SHARES
Federated Securities Corp. ("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 Fund has adopted a plan for distribution of Class A Shares permitted by
Rule 12b-1 under the Investment Company Act of 1940 (the "Plan"), whereby each
Fund has authorized a daily expense ("Rule 12b-1 fee") at an annual rate of
0.35% of the average daily net asset value of the Fund to finance the sale of
Class A 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
0.30% for Class A 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. With respect to Class A Shares, the
Funds do not pay for unreimbursed expenses of the distributor. Since the Funds'
Plan is a "compensation" type plan, however, future Rule 12b-1 fees may permit
recovery of the distributor's expenses or may result in a profit to FSC.
The Money Market Fund has also adopted a plan for distribution of Class B
Investment Shares permitted by Rule 12b-1 under the Investment Company Act of
1940.
FSC, from time to time, may pay brokers additional sums of cash or promotional
incentives based upon the amount of Shares sold. Such payments, if made, will
be in addition to amounts paid under the Plan and will not be an expense of the
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, 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 LLP, 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
.35 of 1% of each of the Money Market 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 CLASS A 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
A Shares and Class B Shares (for the Money Market Fund). In addition, the
Fund's expenses under the Shareholder Services Plan are incurred by the Class B
Shares (for the Money Market Fund). 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, 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 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.
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 other financial
institutions may be required to register as dealers pursuant to state law.
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 for the First Union Money Market
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 Funds or FUBS in writing.
CAPITAL GAINS
If any of the Funds experience capital gains, it could result in an increase in
dividends for that Fund. Capital losses could result in a decrease in dividends
for that Fund. If, for some extraordinary reason, any of the Funds realize
long-term capital gains, the Fund will distribute them 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 "Tax Free Money Market 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 Money Market 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.
TAX FREE MONEY MARKET FUND ADDITIONAL TAX INFORMATION
Shareholders of the Tax Free Money Market 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.
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
Tax Free Money Market Fund and Treasury Money Market Fund offer two classes of
shares: Y Shares and Class A Shares. In addition, Money Market Fund offers
three classes of shares: Y Shares, Class A Shares, and Class B Shares. Y Shares
are designed for institutional investors and Class A Shares and Class B Shares
are sold to individuals and other customers of First Union.
Y 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. Y Shares are not sold
pursuant to a Rule 12b-1 plan.
Class B Shares (for the Money Market Fund) are sold to customers of First Union
and others at net asset value with a minimum initial investment of $1,000.
Class B Shares may impose a sales charge on a contingent deferred basis. Class
B Shares are distributed pursuant to a Rule 12b-1 Plan adopted by the Trust,
whereby the distributor is paid a fee of 0.75 of 1% for Class B Shares of the
Money Market Fund's average daily net asset value. In addition, Class B Shares
pay a shareholder services fee of 0.25 of 1% of the 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 A Shares and Class B Shares (for the
Money Market Fund) will be less than those payable to Y 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
- --------------------------------------------------------------------------------
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
One Mellon Bank Center
KPMG Peat Marwick LLP Pittsburgh, Pennsylvania
15219
- --------------------------------------------------------------------------------
3031006A-R (2/95)
FIRST UNION
MONEY MARKET
PORTFOLIO
A Portfolio of First Union Funds
- ------------------------ ------------------------
- ------------------------ ------------------------
CLASS B INVESTMENT SHARES
- -------------------------------------------------------------------------------
P R O S P E C T U S
February 28, 1995
The Class B Investment Shares ("Class B Shares") offered by this prospectus
represent interests in the First Union Money Market Portfolio (the "Fund"),
which is a diversified investment portfolio in First Union Funds (the
"Trust"), an open-end, management investment company (a mutual fund).
The Fund seeks current income from short-term securities while preserving
capital and maintaining liquidity.
This prospectus relates only to the Class B Shares of the Fund and contains
the information you should read and know before you invest in the Class B
Shares. Keep this prospectus for future reference.
The Fund has also filed a Statement of Additional Information with the
Securities and Exchange Commission, dated February 28, 1995. 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. The Fund attempts to maintain a stable net asset
value of $1.00 per share; there can be no assurance that the Fund will be able
to do so.
- -------------------------------------------------------------------------------
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 11
- ------------------------------------ ---------------------------------------
Summary of Fund Expenses 3
- ------------------------------------ Additional Shareholder Services 12
---------------------------------------
Financial Highlights 4 Management of First Union Funds 12
- ------------------------------------ ---------------------------------------
Investment Objective and Policies 5
- ------------------------------------ Fees and Expenses 14
---------------------------------------
Other Investment Policies 6
- ------------------------------------ Shareholder Rights and Privileges 14
---------------------------------------
Shareholder Guide 8
- ------------------------------------ Distributions and Taxes 15
---------------------------------------
How to Buy Shares 9
- ------------------------------------ Tax Information 16
How to Convert Your Investment ---------------------------------------
from One First Union Fund to
Another First Union Fund 10
Other Classes of Shares 16
- ------------------------------------ ---------------------------------------
Addresses 17
---------------------------------------
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. First Union Money Market Portfolio is divided into
three classes of shares: Class A Investment Shares ("Class A Shares"), Class B
Shares, and Y Shares. Class A Shares and Class B Shares are sold to individuals
and other customers of First Union (the "Adviser") and are sold at net asset
value. Class B Shares may impose a sales charge on a contingent deferred basis.
Y Shares are designed primarily for institutional investors (banks,
corporations, and fiduciaries). This prospectus relates only to Class B
Investment Shares ("Shares") of the Fund.
DESCRIPTION OF THE FUND
The Fund seeks current income from short-term securities while preserving
capital and maintaining liquidity. The Fund is designed as a convenient means
of participating in a professionally managed, diversified portfolio comprised
primarily of high quality money market instruments.
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 Class B Shares of the Fund, 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 MONEY MARKET PORTFOLIO CLASS B SHARES
<TABLE>
<CAPTION>
Class B 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 Divi-
dends
(as a percentage of offering price)............ None
Contingent Deferred Sales Charge (as a
percentage of original purchase price or 5% during the first year,
redemption proceeds, as applicable) (1)........ 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,
1% during the seventh year,
and 0% after the seventh year
Redemption Fees (as a percentage of amount re-
deemed, if applicable)......................... None
Exchange Fee.................................... None
Annual Class B Shares Operating Expenses
(As a percentage of projected average net as-
sets)
Management Fee (after waiver) (2)............... --%
12b-1 Fees...................................... --%
Total Other Expenses............................ --%
Shareholder Service Fee........................ --%
Total Class B Shares Operating Expenses (3). --%
</TABLE>
(1) No contingent deferred sales charge is imposed on (a) Shares purchased
more than seven 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 fee has been reduced to reflect the anticipated voluntary
waiver by the Adviser. The Adviser may terminate this voluntary waiver at any
time at its sole discretion. The maximum management fee is 0.35%.
(3) Total Class B Operating Expenses for the Fund are estimated to be %,
absent the voluntary waiver described above in Note 2.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the Fund will bear, either
directly or indirectly. For more complete descriptions of the various costs
and expenses, see "Fees and Expenses." Wire-transferred redemptions of less
than $5,000 may be subject to additional fees.
Because of the asset-based sales charge, long-term shareholders may pay more
than the economic equivalent of the maximum front-end sales charges permitted
under the rules of the National Association of Securities Dealers, Inc
("NASD"). However, in order for a Fund investor to exceed the NASD's maximum
front-end sales charge of 6.25%, a continuous investment in the Fund for
years would be required.
<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) 5% annual return and (2) redemption at the
end of each time period........................ $67 $80 $-- $--
You would pay the following expenses on the
same investment, assuming no redemptions....... $15 $46 $-- $--
</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 information set forth in the foregoing table and example relates only to
Class B Shares of the Fund. The Fund also offers two additional classes of
shares called Y Shares and Class A Shares. Y Shares bear no sales load, 12b-1
fee or shareholder service fee. Class A Shares are subject to a 12b-1 fee of
0.35 of 1% and bear no sales load or shareholder service fee. See "Other
Classes of Shares."
FINANCIAL HIGHLIGHTS
- ------------------------ ------------------------
- ------------------------ ------------------------
First Union Money Market Portfolio
INVESTMENT
OBJECTIVE
- ------------------------- -------------------------
- ------------------------- -------------------------
AND POLICIES
The Fund's investment objective cannot be changed without approval of
shareholders. While there is no assurance that the Fund will achieve its
investment objective, it endeavors to do so by following the investment
policies described in this prospectus. Unless otherwise indicated, the
investment policies may be changed by the Trust's Board of Trustees
("Trustees") without the approval of shareholders. Shareholders will be
notified before any material change in these policies becomes effective.
Objective: Current income from short-term securities while preserving capital
and maintaining liquidity.
Invests in: High quality money market instruments.
Suitable for: Conservative investors looking for a cash-equivalent investment.
Key Benefit: Safety of principal with a generally better yield than passbook
savings accounts.
DESCRIPTION OF THE FUND
First Union Money Market Fund seeks to provide current income from short-term
securities while preserving capital and maintaining liquidity. The Fund invests
exclusively in a portfolio of high quality money market instruments maturing in
397 days or less, with an average dollar-weighted maturity of 90 days or less.
TYPES OF INVESTMENTS
The Fund invests in high quality money market instruments that are rated in the
highest short-term rating category by major rating organizations (referred to
as "NRSROs" or "nationally recognized statistical rating organizations"), such
as Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc.
("Moody's"), or are of comparable quality to securities having such ratings.
Examples of these instruments include, but are not limited to:
commercial paper;
variable amount demand master notes (a borrowing arrangement between a
commercial paper issuer (borrower) and an institutional lender such as the
Fund (lender) which is 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.);
instruments of domestic banks and foreign banks (such as certificates of
deposit, demand and time deposits, saving shares, and bankers' acceptances)
if they have capital, surplus, and undivided profits of over $100,000,000
and/or if their deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC"). These instruments may include Eurodollar Certificates
of Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs"), and
Eurodollar Time Deposits ("ETDs"), all of which are U.S. dollar
denominated;
marketable obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities, including these obligations purchased on a
when-issued or delayed delivery basis;
corporate obligations; and
repurchase agreements and reverse repurchase agreements for securities
listed above and instruments secured by obligations described above.
CONCENTRATION OF INVESTMENTS
The Fund may invest more than 25% of its total assets in commercial paper
issued by commercial or consumer finance companies. The Fund may also invest
more than 25% of the value of its total 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,
i.e., repurchase agreements.
RISK FACTORS
ECDs, ETDs, and Yankee CDs are subject to different risks than domestic
obligations of domestic banks or corporations. Examples of these risks include
international, economic and political developments, foreign
governmental restrictions that may adversely affect the payment of principal or
interest, foreign withholdings or other taxes on interest income, difficulties
in obtaining or enforcing a judgment against the issuing entity, and the
possible impact of interruptions in the flow of international currency
transactions. Different risks may also exist for ECDs, ETDs, and Yankee CDs
because the banks issuing these instruments, or their domestic or foreign
branches, are not necessarily subject to the same regulatory requirements that
apply to domestic banks, such as reserve requirements, loan limitations,
examinations, accounting, auditing, and recordkeeping, and the public
availability of information. These factors will be carefully considered by the
Adviser in selecting investments for the Fund.
OTHER
- ------------------------- -------------------------
- ------------------------- -------------------------
INVESTMENT POLICIES
The Fund has adopted the following practices for specific types of investments.
REGULATORY COMPLIANCE
Money market mutual funds are subject to Rule 2a-7 (the "Rule") under the
Investment Company Act of 1940 which imposes certain risk limiting conditions
on the Fund, including:
Portfolio investments of the Fund must have a maturity of 397 days or less
from the time of acquisition, with the exception of repurchase agreement
securities and certain adjustable interest rate instruments. The dollar-
weighted average maturity of the Fund's portfolio must not exceed 90 days.
The Fund must limit its investments to "eligible securities," i.e., those
which (i) have a short-term rating in one of the two highest categories
from an NRSRO, (ii) are comparable in priority and security to other short-
term debt of the same issuer which already has a short-term rating in one
of the two highest categories, or (iii) are unrated by an NRSRO but of
comparable quality.
The Fund may invest without limit in "first tier securities," i.e. eligible
securities which have (or are comparable to other short-term debt of the
same issuer having) the highest short-term rating by any two NRSROs (or, if
only one NRSRO has issued a rating with respect to such security, it must
be the highest short-term rating given by such NRSRO).
The Fund must limit its investments in "second tier securities" (any
eligible security which is not first tier) to 5% of total assets and 1% of
total assets in the securities of a single second tier issuer.
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 (usually within 397
days from the date of acquisition). 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 Fund currently invests in repurchase agreements maturing in seven days or
less. The Fund may also invest in reverse repurchase agreements. 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 securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause the Fund to miss a price or yield
considered to be advantageous. 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.
Accordingly, the Fund may pay more/less than the market value of the securities
on the settlement date.
The Fund may dispose of a commitment prior to settlement if the Adviser deems
it appropriate to do so. In addition, the Fund may enter into transactions to
sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at
later dates. The Fund may realize short-term profits or losses upon the sale of
such commitments.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio securities
on a short-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 15% of the value of its total assets.
There is the risk that when lending portfolio securities, the securities may
not be available to the Fund on a timely basis and the Fund may, therefore,
lose the opportunity to sell the securities at a desirable price. In addition,
in the event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest in the securities of other investment companies that have
investment objectives and policies similar to its own. This is a short-term
measure to invest cash which has not yet been invested in other portfolio
instruments and is subject to the following limitations: (1) the Fund will not
own more than 3% of the total outstanding voting stock of any one investment
company, (2) the Fund may not invest more than 5% of its total assets in any
one investment company and (3) the Fund may not invest more than 10% of its
total assets in investment companies in general.
The following investment limitations cannot be changed without shareholder
approval.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest up to 10% of its net assets in securities which are subject
to restrictions on resale under federal securities laws. This restriction is
not applicable to commercial paper issued under Section 4(2) of the Securities
Act of 1933.
The Fund may invest up to 10% of its net assets in illiquid securities, which
include 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.
BORROWING MONEY
The Fund will not borrow money directly or through reverse repurchase
agreements, or pledge securities, except under certain circumstances, the Fund
may borrow up to one-third of the value of its total assets and pledge up to
15% of the value of those assets to secure such borrowings.
DIVERSIFICATION
With respect to 75% of the value of its total assets, the Fund will invest no
more than 5% of its total assets in securities of one issuer (except cash, 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. The Fund will invest more than 5% of its assets in
any one issuer only under circumstances permitted by the Rule.
Although not a fundamental restriction or policy requiring a shareholders' vote
to change, the Fund has undertaken to a state securities authority that so long
as the state authority requires and shares of the Fund are registered for sale
in that state, the Fund will not invest in the following:
"NON-ACTIVE" SECURITIES
The Fund will not invest more than 10% of its net assets in securities for
which an active and substantial market does not exist, along with investments
in restricted securities, securities for which market quotations are not
readily available and repurchase agreements maturing in more than seven days.
WARRANTS
The Fund will not invest more than 5% of its net assets in warrants. No more
than 2% of this 5% will be in warrants which are not listed on the New York or
American Stock Exchanges.
SHAREHOLDER
- ------------------------- -------------------------
- ------------------------- -------------------------
GUIDE
SHARE PRICE CALCULATION
The goal of the Fund is to maintain a net asset value of $1.00 per Share.
Purchases, redemptions, and exchanges are all based on net asset value. (The
redemption proceeds of Class B Shares deduct an applicable contingent deferred
sales charge ("CDSC").) There is no initial sales charge for the Fund. The Fund
attempts to stabilize the net asset value of Shares at $1.00 by valuing the
portfolio securities using the amortized cost method of valuation. The net
asset value is determined at 12:00 p.m. and 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. 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 Y Shares of the Fund may differ slightly from that of
Class A Shares and Class B Shares of the Fund due to the variability in daily
net income resulting from different distribution charges and shareholder
services fees (in the case of the Class B Shares) for each class of shares.
PERFORMANCE INFORMATION
The Fund's performance may be quoted in terms of total return, yield and
effective 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 Class B Shares. It is generally reported with one or more of the
following measures: total return, yield, and effective 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 annualized dividend income an investment generates over a
seven-day period, expressed as a percentage of the investment. The effective
yield is calculated similarly to the yield, but the income earned is compounded
daily.
The yield does not necessarily reflect income actually earned by Class B Shares
of the Fund and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
Total return, yield, and effective yield will be calculated separately for Y
Shares, Class A Shares, and Class B Shares of the Fund. Because Class A Shares
are subject to a 12b-1 fee, and Class B Shares are subject to a 12b-1 fee and a
shareholder services fee, the yield and effective yield will be lower than that
of Y Shares. Class B Shares are subject to similar non-recurring charges, such
as the CDSC, which, if excluded, would increase the total return for Class B
Shares.
From time to time, the Fund may advertise its performance using certain
rankings published in financial publications and/or compare its performance to
certain indices.
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. Shares may impose a sales charge on
a contingent deferred basis.
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 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
Shares are sold at net asset value per Share without the imposition of a sales
charge at the time of purchase. Shares redeemed within seven years of their
purchase will be subject to a CDSC according to the following schedule
(applicable only to purchases beginning September 1, 1994):
<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 1.0%
</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 seven 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 B 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 B Shares was accepted. At the end of this seven year period,
Class B Shares may automatically convert to Class A Shares, in which case the
Shares will no longer be subject to the higher Rule 12b-1 distribution fee
which is assessed on Class B 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 B 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 B Shares from most of the burden of
such distribution-related expenses.
For purposes of conversion to Class A Shares, Class B Shares purchased through
the reinvestment of dividends and distributions paid on Class B Shares in a
shareholder's Fund account will be considered to be held in a separate sub-
account. Each time any Class B Shares in the shareholder's Fund account (other
than those in the sub-account) convert to Class A Shares, an equal pro rata
portion of the Class B Shares in the sub-account will also convert to Class A
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 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 on the next business day.
SHAREHOLDER ACCOUNTS
As transfer agent for the Fund, 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, 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.
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 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 shares of the other First Union
Fund will be purchased at their net asset value determined after the exchange
request is received. 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 B Shares will not be subject to a CDSC. However, if the
shareholder redeems Class B Shares within seven 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 B 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 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 and Trust Company, 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 CASH WITHDRAWAL PLAN
When an account of $10,000 or more is opened or when an existing account
reaches that size, you may participate in the Fund's Systematic Cash Withdrawal
Plan by filling out the appropriate part of the share purchase application.
Under this Plan, you may receive (or designate a third party to receive) a
monthly or quarterly check in a stated amount of not less than $25. Fund shares
will be redeemed as necessary to meet withdrawal payments. All participants
must elect to have their dividends and capital gain distributions reinvested
automatically. Any applicable Class B CDSC will be waived with respect to
redemptions occurring under a Systematic Cash Withdrawal Plan during a calendar
year to the extent that such redemptions do not exceed 10% of (i) the initial
value of the account, plus (ii) the value, at the time of purchase, of any
subsequent investments.
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 $ billion in total
consolidated assets as of December 31, 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.
DISTRIBUTION OF CLASS B INVESTMENT SHARES
Federated Securities Corp. ("FSC"), a subsidiary of Federated Investors, is the
principal distributor for the Fund. 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 Class B Shares permitted by
Rule 12b-1 under the Investment Company Act of 1940 (the "Plan"), whereby the
Fund has authorized a daily expense ("Rule 12b-1 fee") at an annual rate of
0.75% of the average daily net asset value of the Fund to finance the sale of
Class B Shares.
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
Shares. Except as set forth in the next paragraph, the Fund does not pay for
unreimbursed expenses of the distributor. Since the Fund's Plan is a
"compensation" type plan, however, future Rule 12b-1 fees may permit recovery
of such amounts or may result in a profit to 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 Shares. First Union Corporation currently serves as
principal lender in this financing program. Actual distribution expenses for
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 and Trust Company, 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.
The Funds may pay a shareholder servicing agent (the "Shareholder Servicing
Agent") a fee based on average daily net asset value for Class B Shares of the
Fund for which the Shareholder Servicing Agent provides shareholder services.
As such, the Shareholder Servicing Agent 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 Class B Shares. The Fund may pay the
Shareholder Servicing Agent a fee equal to 0.25 of 1% of the average daily net
asset value of Class B Shares for which the Shareholder Servicing Agent
provides shareholder services. The Shareholder Servicing Agent may voluntarily
choose to waive all or a portion of its fee at any time. First Union Brokerage
Services, First Union National Bank of North Carolina, and other financial
institutions may serve as Shareholder Servicing Agent.
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 LLP, Pittsburgh,
Pennsylvania.
FEES AND
- ------------------------- -------------------------
- ------------------------- -------------------------
EXPENSES
The Fund pays annual advisory and administrative fees and certain expenses.
ADVISORY AND ADMINISTRATIVE FEES
For managing their investment and business affairs, the Fund pays an annual fee
to First Union. The Adviser receives an annual investment advisory fee equal to
.35 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 CLASS B SHARES
Holders of Shares pay their allocable portion of Trust and Fund expenses. The
Trust expenses for which holders of Shares pay their allocable portion include,
but are not limited to: the cost of organizing the Trust and continuing its
existence; the cost of registering the Trust; Trustees' fees; auditors' fees;
the cost of meetings of Trustees; legal fees of the Trust; association
membership dues and such non-recurring and extraordinary items as may arise.
The Fund expenses for which holders of Shares pay their allocable portion based
on average daily net assets include, but are not limited to: registering the
Fund and Shares of the Fund; investment advisory services; taxes and
commissions; custodian fees; insurance premiums; auditors' fees; and such non-
recurring and extraordinary items as may arise.
The Fund's expenses under the Rule 12b-1 Plans are incurred solely by the Class
A Shares and Class B Shares. In addition, the Fund's expenses under the
Shareholder Services Plan are incurred by the Class B 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, are
allocated based upon the average daily net assets of each class of the Fund.
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.
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 Fund set forth in the investment advisory agreement, this
prospectus, and the Statement of Additional Information without violation of
the Glass-Steagall Act or other applicable federal banking laws or regulations.
Such counsel has pointed out, however, that changes in federal statutes and
regulations relating to the permissible activities of banks, as well as further
judicial or administrative decisions or interpretations of such statutes and
regulations, could prevent First Union from continuing to perform such services
for the Fund or from continuing to purchase Shares for the accounts of its
customers. If First Union were prohibited from acting as investment adviser to
the Fund, it is expected that the Trustees would recommend to the Fund's
shareholders that they approve a new investment adviser selected by the
Trustees. It is not expected that the Fund's shareholders would suffer any
adverse financial consequences (if another adviser with equivalent abilities to
First Union is found) as a result of any of these occurrences.
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 other financial
institutions may be required to register as dealers pursuant to state law.
DISTRIBUTIONS
- ------------------------- -------------------------
- ------------------------- -------------------------
AND TAXES
The Fund pays out as dividends substantially all of its net investment income
(dividends and interest on its investments) and net realized short-term gains.
DIVIDENDS
Dividends are declared daily and paid monthly for the Fund. Dividends are
declared just prior to determining net asset value. Any distributions will be
automatically reinvested in additional Shares on payment dates at the ex-
dividend date net asset value without a sales charge unless a shareholder
otherwise instructs the Fund or FUBS in writing.
CAPITAL GAINS
If the Fund experiences capital gains, it could result in an increase in
dividends for the Fund. Capital losses could result in a decrease in dividends
for the Fund. If, for some extraordinary reason, the Fund realizes long-term
capital gains, the Fund will distribute them at least once every 12 months.
TAX INFORMATION
- ------------------------- -------------------------
- ------------------------- -------------------------
Income dividends and capital gains distributions are taxable as described
below.
FEDERAL INCOME TAX
The Fund pays no federal income tax if it meets the requirements of the
Internal Revenue Code applicable to regulated investment companies and will
receive the special tax treatment afforded to such companies.
Each 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, unless otherwise exempt, are required to pay federal income tax
on any dividends and other distributions, whether in Shares or cash. 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.
OTHER CLASSES
- ------------------------- -------------------------
- ------------------------- -------------------------
OF SHARES
The Fund offers three classes of shares: Class A Shares and Class B Shares for
individuals and other customers of First Union and Y Shares for institutional
investors.
Y 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. Y Shares are not sold pursuant
to a Rule 12b-1 plan.
Class A Shares are sold to customers of First Union and others at net asset
value, with a minimum initial investment of $1,000. Class A Shares are
distributed pursuant to a Rule 12b-1 Plan adopted by the Trust, whereby the
distributor is paid a fee of .35 of 1% for Class A Shares of the Fund's average
daily net asset value.
The stated advisory fee is the same for all classes of the Fund. Financial
institutions and brokers providing sales and/or administrative services may
receive different compensation with respect to one class of shares than with
respect to another class of shares of the same Fund.
The amount of dividends payable to Class A Shares and Class B Shares will be
less than those payable to Y 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
- --------------------------------------------------------------------------------
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 [/R]
- --------------------------------------------------------------------------------
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
One Mellon Bank Center
KPMG Peat Marwick LLP Pittsburgh, Pennsylvania
15219
- --------------------------------------------------------------------------------
3031006A-C (2/95)
FIRST UNION TREASURY MONEY MARKET PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
Y SHARES
CLASS A INVESTMENT SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectus of Y Shares or Class A Investment Shares for
First Union Treasury Money Market Portfolio, dated February 28, 1995.
This Statement is not a prospectus itself. To receive a copy of the Y
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 A 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, 1995
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------------
When-Issued and Delayed Delivery
Transactions 1
Investment Limitations 1
FIRST UNION FUNDS MANAGEMENT 2
- ---------------------------------------------------------------
Officers and Trustees 2
Fund Ownership 3
Trustee Liability 3
INVESTMENT ADVISORY SERVICES 4
- ---------------------------------------------------------------
Adviser to the Fund 4
Advisory Fees 4
BROKERAGE TRANSACTIONS 4
- ---------------------------------------------------------------
ADMINISTRATIVE SERVICES 5
- ---------------------------------------------------------------
PURCHASING SHARES 5
- ---------------------------------------------------------------
Distribution Plan (Class A
Investment Shares) 5
[/R]
Conversion to Federal Funds 5
DETERMINING NET ASSET VALUE 5
- ---------------------------------------------------------------
Use of the Amortized Cost Method 6
REDEEMING SHARES 6
- ---------------------------------------------------------------
Redemption in Kind 6
TAX STATUS 7
- ---------------------------------------------------------------
The Fund's Tax Status 7
Shareholders' Tax Status 7
YIELD 7
- ---------------------------------------------------------------
EFFECTIVE YIELD 7
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 7
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
First Union Treasury Money Market 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 two classes: Y Shares and Class A 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 stability of principal and current income
consistent with stability of principal. The Fund pursues its objective by
investing in a portfolio consisting exclusively of short-term U.S. Treasury
obligations. The investment objective cannot be changed without approval of
shareholders.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. 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 assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
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.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money directly 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 total
value of its total assets are outstanding.
The Fund will not borrow money 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 pledge.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except that it may purchase or
hold U.S. Treasury obligations, including repurchase agreements.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trust's Board of
Trustees ("Trustees") without shareholder approval. Shareholders will be
notified before any material changes in these limitations becomes effective.
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.
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.
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 does not expect to borrow money, pledge securities, invest in reverse
repurchase agreements, or engage in when-issued and delayed delivery
transactions 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.
FIRST UNION FUNDS MANAGEMENT
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, present positions with
First Union Funds, and principal occupations.
- --------------------------------------------------------------------------------
James S. Howell
3125 Eastway Drive
Suite 114
Charlotte, NC
Chairman and Trustee
Retired Vice President of Lance Inc. (food manufacturing).
- --------------------------------------------------------------------------------
Gerald M. McDonnell
821 Regency Drive
Charlotte, NC
Trustee
Sales Representative with Nucor-Yamoto, Inc. (steel producer) (since 1988);
formerly with Northwestern Steel & Wire Company (1986-1988).
- --------------------------------------------------------------------------------
Thomas L. McVerry
4419 Parview Drive
Charlotte, NC
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*
Carillon Building
Suite 2170
227 West Trade Street
Charlotte, NC
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.
Primary PhysicianCare
1515 Mockingbird Lane
Park Seneca Building
Suite 312
Charlotte, NC
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
212 S. Tryon Street
Suite 980
Charlotte, NC
Trustee
Attorney; formerly, Partner with Wardlow, Knox, Knox, Freeman & Scofield
(attorneys) (1982-1986).
- --------------------------------------------------------------------------------
Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA
President, Treasurer, and Trustee
Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; 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
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private 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
Federated Investors Tower
Pittsburgh, PA
Secretary
Corporate Counsel, Federated Investors.
- --------------------------------------------------------------------------------
*These Trustees are each 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 __, 1995, the following shareholders of record owned 5% or more
of the outstanding Y Shares of the Fund:
As of February __, 1995, the following shareholders of record owned 5% or more
of the outstanding Class A 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.
Because of the internal controls maintained by First Union to restrict the flow
of non-public information, the Fund's investments are typically made without any
knowledge of First Union's or its affiliates' lending relationships with an
issuer.
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, 1994, 1993, and 1992, the Adviser earned
$_______, $1,977,645, and $1,723,873, of which $ , $1,712,975, and
$1,492,021, 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.
("FSC") 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, 1994, 1993, and 1992, the Fund paid
$________, $________, and $________, respectively, in brokerage 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, 1994, 1993, and 1992, the Fund incurred
$_______, $490,126, and $453,609, in administrative service costs, of which
$_______, $198,476, and $208,794, were waived, respectively.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Shares are sold at their net asset value without a sales charge 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."
DISTRIBUTION PLAN (CLASS A INVESTMENT SHARES)
With respect to the Class A Investment Shares class of the Fund, the Trust has
adopted a distribution plan (the "Plan") pursuant to Rule 12b-1 which was
promulgated by the Securities and Exchange Commission ("SEC") pursuant to the
Investment Company Act of 1940. The Plan permits the payment of fees to brokers
for distribution and administrative services and to administrators for
administrative services as to Class A Investment Shares. The Plan is designed to
(i) stimulate brokers to provide distribution and administrative support
services to the Fund and holders of Class A Investment Shares and (ii) stimulate
administrators to render administrative support services to the Fund and holders
of Class A 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 A 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 A 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.
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, 1994, 1993, and 1992, the Fund incurred
$_______, $_______, and $_______, respectively, in distribution services fees on
behalf of Class A Investment Shares.
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.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. First Union and the custodian
act as the shareholder's agent in depositing checks and converting them to
federal funds.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund attempts to stabilize the value of its Shares at $1.00. The days on
which the net asset values of Shares are calculated by the Fund are described in
the respective prospectus.
USE OF THE AMORTIZED COST METHOD
The Trustees have decided that the best method for determining the value of
portfolio instruments is amortized cost. Under this method, portfolio
instruments are valued at the acquisition cost as adjusted for amortization of
premium or accumulation of discount rather than at current market value.
The Fund's use of the amortized cost method of valuing portfolio instruments
depends on its compliance with certain conditions in Rule 2a-7 (the "Rule")
promulgated by the SEC under the Investment Company Act of 1940. Under the Rule,
the Trustees must establish procedures reasonably designed to stabilize the net
asset value per share, as computed for purposes of distribution and redemption,
at $1.00 per share, taking into account current market conditions and the Fund's
investment objective.
MONITORING PROCEDURES
The Trustees' procedures include monitoring the relationship between the
amortized cost value per Share and the net asset value per Share based
upon available indications of market value. The Trustees will decide
what, if any, steps should be taken if there is a difference of more than
.5 of 1% between the two values. The Trustees will take any steps they
consider appropriate (such as redemption in kind or shortening the
average portfolio maturity) to minimize any material dilution or other
unfair results arising from differences between the two methods of
determining net asset value.
INVESTMENT RESTRICTIONS
The Rule requires that the Fund limit its investments to instruments
that, in the opinion of the Trustees, present minimal credit risks and
have received the requisite rating from one or more nationally recognized
statistical rating organizations. If the instruments are not rated, the
Trustees must determine that they are of comparable quality. The Rule
also requires the Fund to maintain a dollar-weighted average portfolio
maturity (not more than 90 days) appropriate to the objective of
maintaining a stable net asset value of $1.00 per share. In addition, no
instruments with a remaining maturity of more than 397 days can be
purchased by the Fund.
Should the disposition of a portfolio security result in a
dollar-weighted average portfolio maturity of more than 90 days, the Fund
will invest its available cash to reduce the average maturity to 90 days
or less as soon as possible.
The Fund may attempt to increase yield by trading portfolio securities to take
advantage of short-term market variations. This policy may, from time to time,
result in high portfolio turnover. Under the amortized cost method of valuation,
neither the amount of daily income nor the net asset value is affected by any
unrealized appreciation or depreciation of the portfolio.
In periods of declining interest rates, the indicated daily yield on Shares
computed by dividing the annualized daily income on the Fund's portfolio by the
net asset value computed as above may tend to be higher than a similar
computation made by using a method of valuation based upon market prices and
estimates.
In periods of rising interest rates, the indicated daily yield on Shares
computed the same way may tend to be lower than a similar computation made by
using a method of calculation based upon market prices and estimates.
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 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 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 received as cash or
additional Shares. No portion of any income dividend paid by the Fund is
eligible for the dividends received deduction available to corporations. These
dividends and any short-term capital gains are taxable as ordinary income.
CAPITAL GAINS
Capital gains experienced by the Fund could result in an increase in
dividends. Capital losses could result in a decrease in dividends. If for
some extraordinary reason the Fund realizes net long-term capital gains,
it will distribute them at least once every 12 months.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for Y Shares for the seven-day period ended December 31, 1994
was __%. The Fund's yield for Class A Investment Shares for the seven-day period
ended December 31, 1994 was __%.
The Fund calculates its yield daily for both classes of Shares, based upon the
seven days ending on the day of the calculation, called the "base period." This
yield is computed by:
.determining the net change in the value of a hypothetical account with a
balance of one Share at the beginning of the base period, with the net change
excluding capital changes but including the value of any additional Shares
purchased with dividends earned from the original one Share and all dividends
declared on the original and any purchased Shares;
.dividing the net change in the account's value by the value of the account at
the beginning of the base period to determine the base period return; and
.multiplying the base period return by 365/7.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in either
class of Shares, the performance will be reduced for those shareholders paying
those fees.
EFFECTIVE YIELD
- --------------------------------------------------------------------------------
The Fund's effective yield for Y Shares for the seven-day period ended December
31, 1994 was __%. The Fund's effective yield for Class A Investment Shares for
the seven-day period ended December 31, 1994 was __%.
The Fund's effective yield for both classes of Shares is computed by compounding
the unannualized base period return by:
.adding 1 to the base period return;
.raising the sum to the (365/7)th power; and
.subtracting 1 from the result.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The performance of both 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 on money market instruments;
.changes in the Fund's or either class of Shares' expenses; and
.the relative amount of Fund cash flow.
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 "short-term
U.S. government funds" category in advertising and sales literature.
.BANK RATE MONITOR NATIONAL INDEX, Miami Beach, Florida, is a financial
reporting service which publishes weekly average rates of 50 leading bank and
thrift institution money market deposit accounts. The rates published in the
index are averages of the personal account rates offered on the Wednesday prior
to the date of publication by ten of the largest banks and thrifts in each of
the five largest Standard Metropolitan Statistical Areas. Account minimums
range upward from $2,500 in each institution, and compounding methods vary. If
more than one rate is offered, the lowest rate is used. Rates are subject to
change at any time specified by the institution.
.DONOGHUE'S MONEY FUND REPORT publishes annualized yields of hundreds of money
market funds on a weekly basis and through its Money Market Insight publication
reports monthly and 12-month-to-date investment results for the same money
funds.
Advertisements and other sales literature for both classes of Shares may refer
to total return. These total returns represent the historic change in the value
of an investment in either 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.
0091006B (2/95)
FIRST UNION TAX FREE MONEY MARKET PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
Y SHARES
CLASS A INVESTMENT SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectus of Y Shares or Class A Investment Shares for
First Union Tax Free Money Market Portfolio, dated February 28, 1995.
This Statement is not a prospectus itself. To receive a copy of the Y
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 A 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, 1995
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
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 3
Investing in Illiquid Securities 3
Temporary Investments 3
Lending of Portfolio Securities 4
Investment Risks 4
Investment Limitations 4
FIRST UNION FUNDS MANAGEMENT 6
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Officers and Trustees 6
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 Plan (Class A Investment Shares) 10
Conversion to Federal Funds 10
DETERMINING NET ASSET VALUE 10
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Use of the Amortized Cost Method 10
REDEEMING SHARES 11
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Redemption in Kind 11
TAX STATUS 11
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The Fund's Tax Status 11
YIELD 12
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TAX EQUIVALENT YIELD 12
- ---------------------------------------------------------------
Tax Equivalency Table 13
EFFECTIVE YIELD 13
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PERFORMANCE COMPARISONS 13
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APPENDIX 15
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
First Union Tax Free Money Market 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 two classes: Y Shares and Class A 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 exempt from federal
income tax while preserving capital and maintaining liquidity. The investment
objective cannot be changed without approval of shareholders.
TYPES OF INVESTMENTS
The Fund invests primarily in municipal securities maturing in 397 days or less.
CHARACTERISTICS
The municipal securities in which the Fund invests have the
characteristics set forth in the respective prospectus.
A municipal security will be determined by the Trust's Board of Trustees
("Trustees") to be of high quality if it is of comparable quality to
municipal securities within the Fund's rating requirements. When
determining whether a municipal security presents minimal credit risks,
the investment adviser considers the creditworthiness of 1) the issuer of
a municipal security, 2) the issuer of a demand feature if the Fund has
the unconditional right to demand payment for the municipal securities,
or 3) any guarantor of payment by either of those issuers.
The Fund is not required to sell a municipal security if the security's
rating is reduced below the required minimum subsequent to the Fund's
purchase of the security. The investment adviser considers this event,
however, in its determination of whether the Fund should continue to hold
the security in its portfolio. If ratings made by Moody's Investors
Service, Inc., Standard & Poor's Ratings Group or Fitch Investors
Service, Inc. 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
Fund's respective prospectus.
TYPES OF ACCEPTABLE INVESTMENTS
Examples of municipal securities are:
tax-exempt project notes issued by the Department of Housing and Urban
Development to provide financing for housing, redevelopment, and urban
renewal;
municipal notes and tax-exempt commercial paper;
serial bonds sold with a series of maturity dates;
tax anticipation notes sold to finance working capital needs of
municipalities in anticipation of receiving taxes at a later date;
bond anticipation notes sold in anticipation of the issuance of
longer-term bonds in the future;
revenue anticipation notes sold in expectation of receipt of federal
income available under the Federal Revenue Sharing Program;
construction loan notes insured by the Federal Housing Administration
and financed by the Federal or Government National Mortgage Association;
and
pre-refunded municipal bonds refundable at a later date.
PARTICIPATION INTERESTS
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). The
municipal securities subject to the participation interests are not
limited to maturities of one year or less, so long as the participation
interests include the right to demand payment from the issuers of those
interests. These financial institutions may charge certain fees in
connection with their repurchase commitments, including a fee equal to
the excess of the interest paid on the municipal securities over the
negotiated yield at which the participation interests were purchased by
the Fund. By purchasing participation interests having a seven day demand
feature, the Fund is buying a security meeting the maturity and quality
requirements of the Fund and also is receiving the tax-free benefits of
the underlying securities.
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. For purposes of determining the Fund's average
maturity, the maturities of these variable rate demand municipal
securities (including participation interests) are the longer of the
periods remaining until the next readjustment of their interest rates or
the periods remaining until their principal amounts can be recovered by
exercising the right to demand payment. The terms of these variable rate
demand instruments require payment of principal and accrued interest from
the issuer of the municipal obligations, the issuer of the participation
interests, or a guarantor of either issuer.
MUNICIPAL LEASES
The Fund may purchase municipal securities in the form of participation
interests which represent undivided proportional interests in lease
payments by a governmental or nonprofit 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 became
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. The municipal leases are not limited to
maturities of one year or less, so long as they include the right to
demand payment, typically within seven days, from the issuers of the
municipal leases. While some municipal leases without this demand feature
may not be considered liquid by the Fund's adviser, the Fund's investment
limitations provide that it will invest no more than 10% of its net
assets in illiquid securities. Municipal leases may be rated or unrated,
but unrated leases purchased by the Fund will have been determined by the
Fund's investment adviser to be of comparable quality at the time of the
purchase to rated instruments eligible for purchase by the Fund pursuant
to guidelines adopted by the Trustees. Where necessary to ensure that a
municipal lease is of "high quality," the Fund will require that the
issuer's obligation to pay the principal portion of the lease be backed
by an unconditional bank letter or line of credit, guarantee or
commitment to lend. While there may be no active secondary market with
respect to a particular municipal lease purchased by the Fund, the Fund
may, upon the notice specified in the municipal lease, demand payment at
any time or during specified periods not exceeding one year, depending
upon the instrument involved. The absence of such an active secondary
market, however, could make it difficult for the Fund to dispose of a
municipal lease if the issuer defaulted on its payment obligation or
during the periods that the Fund is not entitled to exercise its demand
rights. The Fund could, for this or other reasons, suffer a loss to the
extent of the default. The Fund invests in municipal leases only when the
Fund's investment adviser deems the investment to involve minimal credit
risk. All municipal leases will meet the quality standards for the Fund.
The investment adviser has been instructed by the Trustees to monitor the
pricing, quality, and liquidity of the municipal leases held by the Fund
and the continuing creditworthiness of issuers of such municipal leases
on the basis of published financial information and reports of the rating
agencies and other analytical services.
When determining whether municipal leases purchased by the Fund will be
classified as a liquid or illiquid security, the Trustees have directed
the 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.
STANDBY COMMITMENTS
The Fund enters into standby commitments only with those dealers that the
Fund's investment adviser believes are creditworthy. If a dealer were to
default under its standby commitment, the ability of the Fund to sell the
security could be reduced. If a dealer defaults under its standby
commitment, the liquidity of the security subject to the commitment may
be negatively affected.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. 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 assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
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, non-negotiable fixed time deposits with
maturities over seven days, and certain restricted securities not determined by
the Trustees to be liquid.
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 ("Rule 144A"). Rule 144A is a non-exclusive, safe-harbor for certain
secondary market transactions involving securities subject to restrictions on
resale under federal securities laws. Rule 144A provides an exemption from
registration for resales of otherwise restricted securities to qualified
institutional buyers. Rule 144A 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 high quality temporary investments from time to time
for temporary defensive purposes.
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. 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.
From time to time, such as when suitable municipal securities 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
securities 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 on the Fund's records 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.
INVESTMENT RISKS
Yields on municipal securities depend on a variety of factors, including: the
general conditions of the short-term municipal note market and of the municipal
bond market; the size of the particular offering; the maturity of the
obligations; and the rating of the issue. The ability of the Fund to achieve its
investment objective also depends on the continuing ability of the issuers of
municipal securities and participation interests, or the guarantors of either,
to meet their obligations for the payment of interest and principal when due.
Litigation or legislation could affect the validity of certain municipal
securities or their tax-free interest. For example, litigation challenging the
validity of systems of financing public education has been initiated or
adjudicated in a number of states. The Fund will not investigate such
legislation or litigation unless it deems it necessary to do so. To the extent
that litigation or legislation has an adverse effect on the ratings ascribed to
a particular municipal security, there is some protection to the Fund's
shareholders from the Fund's policy of buying only high-rated securities.
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.
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.
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 pledge.
RESTRICTED SECURITIES
The Fund will not invest more than 10% of its net assets in securities
subject to restrictions on resale under the federal securities laws.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities or commodity contracts.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, although it may invest in
the securities of issuers 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
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 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 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 issued by any one issuer (other than cash, cash items
or securities issued or guaranteed by the government of the United States
or its agencies or instrumentalities and repurchase agreements
collateralized by such securities) if as a result more than 5% of the
value of 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 user, are considered to be issued solely by that user. 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 the 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, non-negotiable fixed
time deposits with maturities over seven days, and certain restricted
securities not determined by the Trustees to be liquid.
The above limitations cannot be changed without shareholder approval. The
following investment limitation, however, may be changed by 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 0.5 of 1% of the issuer's securities, together own
more than 5% of the issuer's securities.
Although the following limitations are not fundamental restrictions or policies
requiring a shareholder vote, the Fund has also undertaken to comply with the
following limitations 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, although it may purchase the
securities of issuers which invest in or sponsor such programs.
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.
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 or invest in reverse repurchase agreements 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".
FIRST UNION FUNDS MANAGEMENT
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, present positions with
First Union Funds, and principal occupations.
- --------------------------------------------------------------------------------
James S. Howell
3125 Eastway Drive
Suite 114
Charlotte, NC
Chairman and Trustee
Retired Vice President of Lance Inc. (food manufacturing).
- --------------------------------------------------------------------------------
Gerald M. McDonnell
821 Regency Drive
Charlotte, NC
Trustee
Sales Representative with Nucor-Yamoto, Inc. (steel producer) (since 1988);
formerly with Northwestern Steel & Wire Company (1986-1988).
- --------------------------------------------------------------------------------
Thomas L. McVerry
4419 Parview Drive
Charlotte, NC
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*
Carillon Building
Suite 2170
227 West Trade Street
Charlotte, NC
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.
Primary PhysicianCare
1515 Mockingbird Lane
Park Seneca Building
Suite 312
Charlotte, NC
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
212 S. Tryon Street
Suite 980
Charlotte, NC
Trustee
Attorney; formerly, Partner with Wardlow, Knox, Knox, Freeman & Scofield
(attorneys) (1982-1986).
- --------------------------------------------------------------------------------
Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA
President, Treasurer, and Trustee
Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; 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
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private 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
Federated Investors Tower
Pittsburgh, PA
Secretary
Corporate Counsel, Federated Investors.
- --------------------------------------------------------------------------------
*These Trustees are each 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 __, 1995, the following shareholders of record owned 5% or more
of the outstanding Y Shares of the Fund:
As of February , 1995, the following shareholders of record owned 5% or more of
the outstanding Class A 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.
Because of the internal controls maintained by First Union to restrict the flow
of non-public information, the Fund's investments are typically made without any
knowledge of First Union's or its affiliates' lending relationships with an
issuer.
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, 1994, 1993, and 1992, the Adviser earned
$__________, $1,115,932 and $752,305, of which $___________, $750,857 and
$192,581, 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.
("FSC") 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, 1994, 1993, and 1992, the Fund paid
$________, $________, and $________, respectively, in brokerage 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, 1994, 1993, and 1992, the Fund incurred
$____________, $277,930 and $197,412, in administrative service costs, of which
$___________, $0 and $192,581, were waived, respectively.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Shares are sold at their net asset value without a sales charge 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."
DISTRIBUTION PLAN (CLASS A INVESTMENT SHARES)
With respect to the Class A 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 Class A Investment Shares. The
Plan is designed to (i) stimulate brokers to provide distribution and
administrative support services to the Fund and holders of Class A Investment
Shares and (ii) stimulate administrators to render administrative support
services to the Fund and holders of Class A 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
A 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 A 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.
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, 1994, 1993, and 1992, the Fund incurred
$____________, $____________, and $____________, respectively, in distribution
services fees on behalf of Class A Investment Shares.
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.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. First Union and the custodian
act as the shareholder's agent in depositing checks and converting them to
federal funds.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund attempts to stabilize the value of its Shares at $1.00. The days on
which the net asset values of Shares are calculated by the Fund are described in
the respective prospectus.
USE OF THE AMORTIZED COST METHOD
The Trustees have decided that the best method for determining the value of
portfolio instruments is amortized cost. Under this method, portfolio
instruments are valued at the acquisition cost as adjusted for amortization of
premium or accumulation of discount rather than at current market value.
The Fund's use of the amortized cost method of valuing portfolio instruments
depends on its compliance with certain conditions in Rule 2a-7 (the "Rule")
promulgated by the SEC under the Investment Company Act of 1940. Under the Rule,
the Trustees must establish procedures reasonably designed to stabilize the net
asset value per share, as computed for purposes of distribution and redemption,
at $1.00 per share, taking into account current market conditions and the Fund's
investment objective.
MONITORING PROCEDURES
The Trustees' procedures include monitoring the relationship between the
amortized cost value per Share and the net asset value per Share based
upon available indications of market value. The Trustees will decide
what, if any, steps should be taken if there is a difference of more than
.5 of 1% between the two values. The Trustees will take any steps they
consider appropriate (such as redemption in kind or shortening the
average portfolio maturity) to minimize any material dilution or other
unfair results arising from differences between the two methods of
determining net asset value.
INVESTMENT RESTRICTIONS
The Rule requires that the Fund limit its investments to instruments
that, in the opinion of the Trustees, present minimal credit risks and
have received the requisite rating from one or more nationally recognized
statistical rating organizations. If the instruments are not rated, the
Trustees must determine that they are of comparable quality. The Rule
also requires the Fund to maintain a dollar-weighted average portfolio
maturity (not more than 90 days) appropriate to the objective of
maintaining a stable net asset value of $1.00 per share. In addition, no
instruments with a remaining maturity of more than 397 days can be
purchased by the Fund.
Should the disposition of a portfolio security result in a
dollar-weighted average portfolio maturity of more than 90 days, the Fund
will invest its available cash to reduce the average maturity to 90 days
or less as soon as possible.
The Fund may attempt to increase yield by trading portfolio securities to take
advantage of short-term market variations. This policy may, from time to time,
result in high portfolio turnover. Under the amortized cost method of valuation,
neither the amount of daily income nor the net asset value is affected by any
unrealized appreciation or depreciation of the portfolio.
In periods of declining interest rates, the indicated daily yield on Shares
computed by dividing the annualized daily income on the Fund's portfolio by the
net asset value computed as above may tend to be higher than a similar
computation made by using a method of valuation based upon market prices and
estimates.
In periods of rising interest rates, the indicated daily yield on Shares
computed the same way may tend to be lower than a similar computation made by
using a method of calculation based upon market prices and estimates.
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 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.
CAPITAL GAINS
Because the Fund invests in short-term money market instruments primarily
for income, it is not expected to realize long-term capital gains.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for Y Shares for the seven-day period ended December 31, 1994
was %. The Fund's yield for Class A Investment Shares for the seven-day
period ended December 31, 1994 was %. The Fund calculates its yield daily for
both classes of Shares, based upon the seven days ending on the day of the
calculation, called the "base period." This yield is computed by:
.determining the net change in the value of a hypothetical account with a
balance of one Share at the beginning of the base period, with the net change
excluding capital changes but including the value of any additional Shares
purchased with dividends earned from the original one Share and all dividends
declared on the original and any purchased Shares;
.dividing the net change in the account's value by the value of the account at
the beginning of the base period to determine the base period return; and
.multiplying the base period return by 365/7.
To the extent that financial institutions and brokers/dealers charge fees in
connection with services provided in conjunction with an investment in either
class of Shares, the performance will be reduced for those shareholders paying
those fees.
TAX EQUIVALENT YIELD
- --------------------------------------------------------------------------------
The Fund's tax equivalent yield for Y Shares for the seven-day period ended
December 31, 1994 was %. The Fund's tax equivalent yield for Class A
Investment Shares for the seven-day period ended December 31, 1994 was %.
The Fund's tax equivalent yield for both classes of Shares is calculated
similarly to the yield, but is adjusted to reflect the taxable yield that either
class would have had to earn to equal its actual yield, assuming a 28% tax rate
(the maximum effective federal rate for individuals) and assuming that income is
100% tax-exempt.
TAX EQUIVALENCY TABLE
Both classes 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.
TO BE INSERTED IN FEBRUARY, 1995
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 either class of Shares.
*Some portion of each class' income may be subject to the federal alternative
minimum tax and state and local taxes.
EFFECTIVE YIELD
- --------------------------------------------------------------------------------
The Fund's effective yield for Y Shares for the seven-day period ended December
31, 1994 was %. The Fund's effective yield for Class A Investment Shares for
the seven-day period ended December 31, 1994 was %.
The Fund's effective yield for both classes of Shares is computed by compounding
the unannualized base period return by:
.adding 1 to the base period return;
.raising the sum to the (365/7)th power; and
.subtracting 1 from the result.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The performance of both 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 on money market instruments;
.changes in the Fund's or either class of Shares' expenses; and
.the relative amount of Fund cash flow.
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 "short-term
municipal bond funds" category in advertising and sales literature.
.DONOGHUE'S MONEY FUND REPORT publishes annualized yields of hundreds of money
market funds on a weekly basis and through its Money Market Insight publication
reports monthly and 12-month-to-date investment results for the same money
funds.
Advertisements and other sales literature for both classes of Shares may refer
to total return. These total returns represent the historic change in the value
of an investment in either 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.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD & POOR'S RATINGS GROUP MUNICIPAL BOND RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's Ratings
Group. 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.
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 likely 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.
STANDARD & POOR'S RATINGS GROUP SHORT-TERM MUNICIPAL OBLIGATION RATING
DEFINITIONS
SP1--Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a plus
sign (+) designation.
SP2--Satisfactory capacity to pay principal and interest.
MOODY'S INVESTORS SERVICE, INC. SHORT-TERM MUNICIPAL OBLIGATION RATING
DEFINITIONS
MIG1/VMIG1--This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support, or
demonstrated broad based access to the market for refinancing.
MIG2/VMIG2--This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
STANDARD & POOR'S RATINGS GROUP 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 ability for repayment of short-term debt 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 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 alternate liquidity is
maintained.
FITCH INVESTORS SERVICE, INC. SHORT-TERM RATINGS
F-1+--EXCEPTIONALLY STRONG CREDIT QUALITY. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--VERY STRONG CREDIT QUALITY. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2--GOOD CREDIT QUALITY. Issues carrying this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as for
issues assigned F-1+ and F-1 ratings.
0091004B (2/95)
FIRST UNION MONEY MARKET PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
Y SHARES
CLASS A INVESTMENT SHARES
CLASS B INVESTMENT SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectus of Y Shares, Class A Investment Shares, or
Class B Investment Shares for First Union Money Market Portfolio,
dated February 28, 1995. This Statement is not a prospectus itself. To
receive a copy of the Y 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 A Investment Shares' or Class B
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, 1995
[LOGO] FEDERATED SECURITIES CORP.
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Distributor
A subsidiary of FEDERATED INVESTORS
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
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GENERAL INFORMATION ABOUT THE FUND 1
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INVESTMENT OBJECTIVE AND POLICIES 1
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Types of Investments 1
When-Issued and Delayed Delivery
Transactions 1
Restricted and Illiquid Securities 1
Section 4(2) Commercial Paper 2
Concentration of Investments 2
Lending of Portfolio Securities 2
Reverse Repurchase Agreements 2
Investment Limitations 3
FIRST UNION FUNDS MANAGEMENT 4
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Officers and Trustees 4
Fund Ownership 6
Trustee Liability 6
INVESTMENT ADVISORY SERVICES 6
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Adviser to the Fund 6
Advisory Fees 7
BROKERAGE TRANSACTIONS 7
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ADMINISTRATIVE SERVICES 7
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PURCHASING SHARES 8
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Distribution Plans (Class A and Class B
Investment Shares) 8
Shareholder Services Plan 8
Conversion to Federal Funds 8
DETERMINING NET ASSET VALUE 8
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Use of the Amortized Cost Method 9
REDEEMING SHARES 9
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Redemption in Kind 9
TAX STATUS 10
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The Fund's Tax Status 10
Shareholders' Tax Status 10
YIELD 10
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EFFECTIVE YIELD 10
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PERFORMANCE COMPARISONS 11
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APPENDIX 12
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GENERAL INFORMATION ABOUT THE FUND
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First Union Money Market 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: Y Shares, Class A Investment
Shares, and Class B 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
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The Fund's investment objective is to seek current income from short-term
securities while preserving capital and maintaining liquidity. The investment
objective cannot be changed without the approval of shareholders.
TYPES OF INVESTMENTS
The Fund invests exclusively in high quality money market instruments which
mature in 397 days or less, and which include, but are not limited to,
commercial paper and variable amount demand master notes, bank instruments, U.S.
government obligations, and repurchase agreements.
The instruments of banks that are members of the Federal Deposit Insurance
Corporation such as certificates of deposit, demand and time deposits, and
bankers' acceptances, are not necessarily guaranteed by that organization.
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.
BANK INSTRUMENTS
In addition to domestic bank obligations, such as certificates of
deposit, demand and time deposits, and bankers' acceptances, the Fund may
invest in:
Eurodollar Certificates of Deposit issued by foreign branches of U.S. or
foreign banks;
Eurodollar Time Deposits, which are U.S. dollar-denominated deposits in
foreign branches of U.S. or foreign banks;
Canadian Time Deposits, which are U.S. dollar-denominated deposits
issued by branches of major Canadian banks located in the United States;
and
Yankee Certificates of Deposit, which are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks and
held in the United States.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. 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 assets are marked to market daily and are
maintained until the transaction has been settled. The Fund does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Trust's 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 ("Rule 144A"). Rule 144A is a
non-exclusive, safe-harbor for certain secondary market transactions involving
securities subject to restrictions on resale under federal securities laws.
Rule 144A provides an exemption from registration for resales of otherwise
restricted securities to qualified institutional buyers. Rule 144A 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.
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) paper is restricted as to disposition under federal securities laws 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) 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.
CONCENTRATION OF INVESTMENTS
The Fund may invest more than 25% of its total assets in commercial paper issued
by finance companies. The finance companies in which the Fund intends to invest
can be divided into two categories, commercial finance companies and consumer
finance companies. Commercial finance companies are principally engaged in
lending to corporations or other businesses. Consumer finance companies are
primarily engaged in lending to individuals. Captive finance companies or
finance subsidiaries which exist to facilitate the marketing and financial
activities of their parent will, for purposes of industry concentration, be
classified by the Fund in the industry of its parent corporation.
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. 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 on the Fund's records at the trade date. These securities are
marked to market daily and maintained until the transaction is settled.
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.
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.
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 pledge.
RESTRICTED SECURITIES
The Fund will not invest more than 10% of its net assets in securities
subject to restrictions on resale under the federal securities laws.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities or commodity contracts.
INVESTING IN REAL ESTATE
The Fund will not purchase or sell real estate, although it may invest in
the securities of issuers 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
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.
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 government of the United States or
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.
CONCENTRATION OF INVESTMENTS
The Fund will not invest more than 25% of the value of its total assets
in any one industry except commercial paper of finance companies.
In addition, the Fund may invest more than 25% 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 (i.e., repurchase agreements).
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 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, non-negotiable fixed
time deposits with maturities over seven days, and certain restricted
securities not determined by the Trustees to be liquid.
The above 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 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 0.5 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 the value 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
Exchanges to 2% of its net assets. 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 the following limitation is not a fundamental restriction or policy
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 or invest in reverse repurchase agreements 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."
FIRST UNION FUNDS MANAGEMENT
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OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses, present positions with
First Union Funds, and principal occupations.
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James S. Howell
3125 Eastway Drive
Suite 114
Charlotte, NC
Chairman and Trustee
Retired Vice President of Lance Inc. (food manufacturing).
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Gerald M. McDonnell
821 Regency Drive
Charlotte, NC
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
4419 Parview Drive
Charlotte, NC
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*
Carillon Building
Suite 2170
227 West Trade Street
Charlotte, NC
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.
Primary PhysicianCare
1515 Mockingbird Lane
Park Seneca Building
Suite 312
Charlotte, NC
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
212 S. Tryon Street
Suite 980
Charlotte, NC
Trustee
Attorney; formerly, Partner with Wardlow, Knox, Knox, Freeman & Scofield
(attorneys) (1982-1986).
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Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA
President, Treasurer, and Trustee
Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; 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
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services; Director, Private 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
Federated Investors Tower
Pittsburgh, PA
Secretary
Corporate Counsel, Federated Investors.
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*These Trustees are each 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 __, 1995, the following shareholders of record owned 5% or more
of the outstanding Y Shares of the Fund:
As of February __, 1995, the following shareholders of record owned 5% or more
of the outstanding Class A Investment Shares of the Fund:
As of February __, 1995, the following shareholders of record owned 5% or more
of the outstanding Class B 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.
Because of the internal controls maintained by First Union to restrict the flow
of non-public information, the Fund's investments are typically made without any
knowledge of First Union's or its affiliates' lending relationships with an
issuer.
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, 1994, 1993, and 1992, the Adviser earned
$_______, $332,305, and $293,516, of which $_______, $231,837, and $97,248, 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
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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.
("FSC"), 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;
.industry studies;
.economic 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, 1994, 1993, and 1992, the Fund paid
$________, $________, and $________, respectively, in brokerage 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, 1994, 1993, and 1992, the Fund incurred
$_______, $82,912, and $77,362, in administrative service costs, of which $__,
$0, and $0, were waived, respectively.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Shares are sold at their net asset value without a sales charge 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."
DISTRIBUTION PLANS (CLASS A AND CLASS B INVESTMENT SHARES)
With respect to the Class A and Class B 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 A and Class B Investment Shares. The Plans are designed to (i) stimulate
brokers to provide distribution and administrative support services to the Fund
and holders of Class A and Class B Investment Shares and (ii) stimulate
administrators to render administrative support services to the Fund and holders
of Class A and Class B 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 A and Class B 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 A and Class B 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.
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, 1994, 1993, and 1992, the Fund incurred
$_______, $_______, and $_______, respectively, in distribution services fees on
behalf of Class A Investment Shares.
For the period ended December 31, 1994, the Fund incurred $________ in
distribution services fees on behalf of Class B Investment Shares.
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.
SHAREHOLDER SERVICES PLAN
For the period ended December 31, 1994, the Fund incurred a shareholder services
fee of $_______ on behalf of Class B Investment Shares.
CONVERSION TO FEDERAL FUNDS
It is the Fund's policy to be as fully invested as possible so that maximum
interest may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds. First Union and the custodian
act as the shareholder's agent in depositing checks and converting them to
federal funds.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
The Fund attempts to stabilize the value of its Shares at $1.00. The days on
which the net asset values of Shares are calculated by the Fund are described in
the respective prospectus.
USE OF THE AMORTIZED COST METHOD
The Trustees have decided that the best method for determining the value of
portfolio instruments is amortized cost. Under this method, portfolio
instruments are valued at the acquisition cost as adjusted for amortization of
premium or accumulation of discount rather than at current market value.
The Fund's use of the amortized cost method of valuing portfolio instruments
depends on its compliance with certain conditions in Rule 2a-7 (the "Rule")
promulgated by the SEC under the Investment Company Act of 1940. Under the Rule,
the Trustees must establish procedures reasonably designed to stabilize the net
asset value per share, as computed for purposes of distribution and redemption,
at $1.00 per share, taking into account current market conditions and the Fund's
investment objective.
MONITORING PROCEDURES
The Trustees' procedures include monitoring the relationship between the
amortized cost value per Share and the net asset value per Share based
upon available indications of market value. The Trustees will decide
what, if any, steps should be taken if there is a difference of more than
.5 of 1% between the two values. The Trustees will take any steps they
consider appropriate (such as redemption in kind or shortening the
average portfolio maturity) to minimize any material dilution or other
unfair results arising from differences between the two methods of
determining net asset value.
INVESTMENT RESTRICTIONS
The Rule requires that the Fund limit its investments to instruments
that, in the opinion of the Trustees, present minimal credit risks and
have received the requisite rating from one or more nationally recognized
statistical rating organizations. If the instruments are not rated, the
Trustees must determine that they are of comparable quality. The Rule
also requires the Fund to maintain a dollar-weighted average portfolio
maturity (not more than 90 days) appropriate to the objective of
maintaining a stable net asset value of $1.00 per share. In addition, no
instruments with a remaining maturity of more than 397 days can be
purchased by the Fund.
Should the disposition of a portfolio security result in a
dollar-weighted average portfolio maturity of more than 90 days, the Fund
will invest its available cash to reduce the average maturity to 90 days
or less as soon as possible.
The Fund may attempt to increase yield by trading portfolio securities to take
advantage of short-term market variations. This policy may, from time to time,
result in high portfolio turnover. Under the amortized cost method of valuation,
neither the amount of daily income nor the net asset value is affected by any
unrealized appreciation or depreciation of the portfolio.
In periods of declining interest rates, the indicated daily yield on Shares
computed by dividing the annualized daily income on the Fund's portfolio by the
net asset value computed as above may tend to be higher than a similar
computation made by using a method of valuation based upon market prices and
estimates.
In periods of rising interest rates, the indicated daily yield on Shares
computed the same way may tend to be lower than a similar computation made by
using a method of calculation based upon market prices and estimates.
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 received as cash or
additional Shares. No portion of any income dividend paid by the Fund is
eligible for the dividends received deduction or exclusion available to
corporations and individuals. These dividends and any short-term capital gains
are taxable as ordinary income.
CAPITAL GAINS
Capital gains experienced by the Fund could result in an increase in
dividends. Capital losses could result in a decrease in dividends. If for
some extraordinary reason the Fund realizes net long-term capital gains,
it will distribute them at least once every 12 months.
YIELD
- --------------------------------------------------------------------------------
The Fund's yield for Y Shares for the seven-day period ended December 31, 1994
was __%. The Fund's yield for Class A Investment Shares for the seven-day period
ended December 31, 1994 was __%. The Fund's yield for Class B Investment Shares
for the seven-day period ended December 31, 1994 was __%.
The Fund calculates its yield daily, for all classes of Shares, based upon the
seven days ending on the day of the calculation, called the "base period." This
yield is computed by:
.determining the net change in the value of a hypothetical account with a
balance of one Share at the beginning of the base period, with the net change
excluding capital changes but including the value of any additional Shares
purchased with dividends earned from the original one Share and all dividends
declared on the original and any purchased Shares;
.dividing the net change in the account's value by the value of the account at
the beginning of the base period to determine the base period return; and
.multiplying the base period return by (365/7).
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.
EFFECTIVE YIELD
- --------------------------------------------------------------------------------
The Fund's effective yield for Y Shares for the seven-day period ended December
31, 1994 was __%. The Fund's effective yield for Class A Investment Shares for
the seven-day period ended December 31, 1994 was __%. The Fund's effective yield
for Class B Investment Shares for the seven-day period ended December 31, 1994
was __%.
The Fund's effective yield for all classes of Shares is computed by compounding
the unannualized base period return by:
.adding 1 to the base period return;
.raising the sum to the 365/7th power; and
.subtracting 1 from the result.
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 on money market instruments;
.changes in the Fund's or any class of Shares' expenses; and
.the relative amount of Fund cash flow.
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 money market
instruments category in advertising and sales literature.
.BANK RATE MONITOR NATIONAL INDEX, Miami Beach, Florida, is a financial
reporting service which publishes weekly average rates of 50 leading bank and
thrift institution money market deposit accounts. The rates published in the
index are averages of the personal account rates offered on the Wednesday prior
to the date of publication by ten of the largest banks and thrifts in each of
the five largest Standard Metropolitan Statistical Areas. Account minimums
range upward from $2,500 in each institution, and compounding methods vary. If
more than one rate is offered, the lowest rate is used. Rates are subject to
change at any time specified by the institution.
.DONOGHUE'S MONEY FUND REPORT publishes annualized yields of hundreds of money
market funds on a weekly basis and through its Money Market Insight publication
reports monthly and 12-month-to-date investment results for the same money
funds.
Advertisements and other sales literature for all classes of Shares may refer to
total return. 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.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's Ratings
Group. Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
MOODY'S INVESTORS SERVICE, INC. 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.
STANDARD & POOR'S RATINGS GROUP 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 structure 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 alternate liquidity is
maintained.
FITCH INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS
F-1+--EXCEPTIONALLY STRONG CREDIT QUALITY. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--VERY STRONG CREDIT QUALITY. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2--GOOD CREDIT QUALITY. Issues carrying this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as for
issues assinged F-1+ and F-1 ratings.
0091003B (2/95)
FIRST UNION
INTERNATIONAL
FUNDS
Portfolios of First Union Funds
- --------------------- ---------------------
- --------------------- ---------------------
Y SHARES
- --------------------------------------------------------------------------------
P R O S P E C T U S
February 28, 1995
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 Y Shares of First
Union International Funds. It concisely describes the information which you
should know before investing in Y Shares of either 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 February 28,,
1995, 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 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 Convert Your Investment from
- -------------------------------------- One First Union Fund to Another
First Union Fund 15
Summary of Fund Expenses 4 --------------------------------------
- --------------------------------------
Investment Objectives and Policies 5
- -------------------------------------- How to Redeem Shares 16
--------------------------------------
First Union Emerging Markets Growth
Portfolio 5 Management of First Union Funds 17
- -------------------------------------- --------------------------------------
Fees and Expenses 19
First Union International Equity --------------------------------------
Portfolio 6 Shareholder Rights and Privileges 21
- -------------------------------------- --------------------------------------
Distributions and Taxes 23
Types of Investments 6 --------------------------------------
- --------------------------------------
Other Investment Policies 7 Tax Information 23
- -------------------------------------- --------------------------------------
Shareholder Guide 13 Other Classes of Shares 24
- -------------------------------------- --------------------------------------
How to Buy Shares 14 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 17 portfolios, each representing a
different First Union Fund. Each International Fund is divided into four
classes of shares: Class A Investment Shares ("Class A Shares"), Class B
Investment Shares ("Class B Shares"), Class C Investment Shares ("Class C
Shares") and Y Shares. Y Shares are designed primarily for institutional
investors (banks, corporations, and fiduciaries). Class A Class B, and Class C
Shares are sold to individuals and other customers of First Union (the
"Adviser") or its affiliates. This prospectus relates only to Y Shares
("Shares") of First Union International Funds (collectively, the "Funds").
THE FUNDS AND OBJECTIVES
As of the date of this prospectus, Y Shares are offered in the following
two Funds:
. First Union Emerging Markets Growth Portfolio ("Emerging Markets Growth
Fund")--seeks to provide long-term capital appreciation. The Emerging
Markets Growth Fund invests in equity securities of issuers located in
countries with emerging markets; 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 Y 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 Y SHARES
<TABLE>
<CAPTION>
Emerging International
Markets Growth Equity
Fund Fund
-------------- -------------
Y 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 Y Shares Operating Expenses
(As a percentage of projected average net assets)
Management Fee (after waiver) (1)................. 0.90% 0.82%
12b-1 Fees........................................ None None
Total Other Expenses (after waiver) (2)........... 1.60% 0.84%
Total Trust Shares Operating Expenses (3)....... 2.50% 1.66%
</TABLE>
(1) The management fee of Emerging Markets Growth Fund has been reduced to
reflect the anticipated voluntary waiver by the Adviser. The Adviser may
terminate this voluntary waiver at any time at its sole discretion. The
maximum management fee for Emerging Markets Growth Fund is 1.50%.
(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 Y 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.
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 Y Shares.
Emerging Markets Growth Fund.................................. $25 $78
International Equity Fund..................................... $17 $52
</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 Y
Shares of the Funds. The Funds also offer three additional classes of shares
called Class A Shares, Class B Shares, and Class C Shares. In general, all
expenses are allocated based upon daily net assets of each class. Class A
Shares, Class B Shares, and Class C Shares are subject to certain of the same
expenses as Y Shares. However, Class A Shares are subject to a 12b-1 fee of
0.25 of 1%, and Class B Shares and 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%. In addition, Class
A Shares bear a maximum front-end sales charge of 4.75%, Class B Shares bear a
maximum contingent deferred sales charge of 5.00% and Class C 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. At the
present time, the Fund has no intention to 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. Marvin & Palmer, the Sub-
Adviser to the Fund, will make investment decisions regarding equity securities
based on its analysis of returns, price momentum, business and industry
considerations, and management quality.
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 Boston International, the Sub-Adviser to the
Fund, determines, 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. While the current intention of the Fund is to invest in 32
stock markets, the Fund may invest in more or less, depending upon market
conditions as determined by the Sub-Adviser. 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 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;
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 Ratings Group ("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. Although the Funds do not intend to invest significantly in debt
securities, it should be noted that the prices of fixed income securities
fluctuate inversely to the direction of interest rates;
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. (Although, of course, there can be no assurance that these
strategic investments will be successful in protecting the value of the
Funds' securities.);
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 Funds' 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 Funds to sell the security in the open market in the case of a
default. In such a case, the Funds 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 securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Funds purchase securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause the Funds to miss a price or yield
considered to be advantageous. 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. Accordingly, the Funds may pay
more/less than the market value of the securities on the settlement date.
The Funds may dispose of a commitment prior to settlement if the Adviser deems
it appropriate to do so. In addition, the Funds may enter into transactions to
sell their purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at
later dates. The Funds may realize short-term profits or losses upon the sale
of such commitments.
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 Funds' 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 Sub-Advisers will consider the likelihood of changes in
currency values when making investment decisions, 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 Funds' assets denominated in that currency, but as consistent
with their other investment policies and as not otherwise limited in their
ability to use this strategy.
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 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 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 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 below
under "Emerging Markets," 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 currencies.
To the extent that securities purchased by the Funds are denominated in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates will affect the Funds' net asset values; the value of interest earned;
gains and losses realized on the sale of securities; and net investment income
and capital gain, if any, to be distributed to shareholders by a Fund. If the
value of a foreign currency rises against the U.S. dollar, the value of a
Fund's assets denominated in that currency will increase; correspondingly, if
the value of a foreign currency declines against the U.S. dollar, the value of
a Fund's assets denominated in that currency will decrease.
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.
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.
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.
There is a risk that when lending portfolio securities, the securities may not
be available to the Funds on a timely basis and the Funds may, therefore, lose
the opportunity to sell the securities at a desirable price. In addition, in
the event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
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
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- ------------------------- -------------------------
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 Y Shares of a Fund may differ slightly from that of
Class A Shares, Class B Shares and Class C 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 B Shares and Class C
Shares) for each class of Shares. The net asset value for each Fund will
fluctuate for all four classes.
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- -------------------------------------- --------------------------------------
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 Y 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 Y 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 Y 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 Y Shares, Class A
Shares, Class B Shares and Class C Shares of a Fund. Because Class A Shares are
subject to 12b-1 fees, and Class B Shares and Class C Shares are subject to a
12b-1 fee and a shareholder services fee, the yield will be lower than that of
Y Shares. The sales load applicable to Class A Shares also contributes to a
lower total return for Class A Shares. In addition, Class B Shares and 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 B Shares and Class C 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
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- ------------------------- -------------------------
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 the Funds. There are no sales charges
imposed on Y 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 Y 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 Y Shares of one First Union Fund for Y 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, shares of the other First Union Fund
will be purchased at their net asset value determined after the exchange
request is received. 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
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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
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- ------------------------ ------------------------
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 $72.6 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 $44.3 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 portfolio 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 $2.5 billion in investments for 34 institutional investors
and 5 commingled funds and served as sub-adviser to another investment company
with total assets of $33 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, along with
Todd D. Marvin, 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 of and Portfolio Manager for the Sub-
Adviser. Before joining the Sub-Adviser in 1990, Mr. Mason was employed for 14
years by DuPont Corporation, the last five as an International Equity Analyst
and an 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, along
with Mr. Palmer, 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 $2.7 billion in assets and served as sub-adviser to one other investment
company with total assets of $148 million.
Maureen Ghublikian has been a Managing Director of the Sub-Adviser since the
firm's inception in 1986. Ms. Ghublikian has served as co-portfolio manager of
the Fund since its inception in September 1994.
David A. Umstead was a founder and has been a 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, 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 LLP, 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 investment objectives and policies.
For its services under its Sub-Advisory Contract with the Adviser, 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 Y 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 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 A
Shares, Class B Shares and Class C Shares. In addition, the Funds' expenses
under the Shareholder Services Plan are incurred 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; 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.
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 other financial
institutions may be required to register as dealers pursuant to state law.
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 annually 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: Y Shares for
institutional investors and, Class A Shares, Class B Shares and Class C Shares
for individuals and other customers of First Union.
Class A Shares, Class B Shares and Class C 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 A Shares), or (ii) on a contingent deferred
basis (the Class B Shares and Class C Shares). Shareholders of record in any
First Union Fund at October 12, 1990, and the members of their immediate
families, 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 A Shares, 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 0.25 of 1% for Class A Shares and 0.75 of 1% for Class B Shares
and Class C Shares of each Fund's average daily net asset value. In addition,
Class B Shares and Class C Shares pay a shareholder services fee of 0.25 of 1%
of the respective class's 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 A Shares, Class B Shares, and Class C
Shares will be less than those payable to Y 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 Growth Fund
Marvin & Palmer Associates, Inc. 1201 North Orange Street
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
One Mellon Bank Center
KPMG Peat Marwick LLP Pittsburgh, Pennsylvania
15219
- --------------------------------------------------------------------------------
G00396-02 (2/95)
FIRST UNION
INTERNATIONAL
FUNDS
Portfolios of First Union Funds
- ------------------------ ------------------------
- ------------------------ ------------------------
CLASS A INVESTMENT SHARES CLASS B INVESTMENT SHARES CLASS C INVESTMENT SHARES
- --------------------------------------------------------------------------------
P R O S P E C T U S
February 28, 1995
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 A
Investment Shares ("Class A Shares"), Class B Investment Shares ("Class B
Shares"), and Class C Investment Shares ("Class C Shares") of First Union
International Funds. It concisely describes the information which you should
know before investing in Class A Shares, Class B Shares or Class C Shares of
either 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 February 28,
1995, 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 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 18
- -------------------------------------- --------------------------------------
Summary of Fund Expenses 4 Additional Shareholder Services 18
- -------------------------------------- --------------------------------------
Investment Objectives and Policies 7 Management of First Union Funds 19
- -------------------------------------- --------------------------------------
First Union Emerging Markets Growth
Portfolio 7 Fees and Expenses 22
--------------------------------------
- --------------------------------------
Shareholder Rights and Privileges 23
First Union International Equity --------------------------------------
Portfolio 7
- -------------------------------------- Distributions and Taxes 24
--------------------------------------
Types of Investments 8
- -------------------------------------- Tax Information 24
--------------------------------------
Other Investment Policies 8
- -------------------------------------- Other Classes of Shares 25
--------------------------------------
Shareholder Guide 13
- -------------------------------------- Addresses Inside Back Cover
--------------------------------------
How to Buy Shares 14
- --------------------------------------
How to Convert Your Investment from
One First Union Fund to Another
First Union Fund 17
- --------------------------------------
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 A Shares, Class B Shares, Class C Shares and Y Shares.
Class A, Class B, and Class C Shares are sold to individuals and other
customers of First Union (the "Adviser") or its affiliates 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 A Shares), or (ii) on a
contingent deferred basis (the Class B and Class C Shares). Y 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 A, Class B, and Class C Shares are
offered in the following two Funds:
. First Union Emerging Markets Growth Portfolio ("Emerging Markets Growth
Fund")--seeks to provide long-term capital appreciation. The Emerging
Markets Growth Fund invests in equity securities of issuers located in
countries with emerging markets; 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 A, Class B, and Class C 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 A SHARES
<TABLE>
<CAPTION>
Emerging
Markets Growth International
Fund Equity Fund
-------------- -------------
<S> <C> <C>
Class A 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 A Shares Operating Expenses
<S> <C> <C>
(As a percentage of projected average net assets)
Management Fee (after waiver) (1)................. % %
12b-1 Fees (2).................................... % %
Total Other Expenses (after waiver) (3)........... % %
Total Class A Shares Operating Expenses (4)..... % %
</TABLE>
(1) The management fee of Emerging Markets Growth Fund has been reduced to
reflect the anticipated voluntary waiver by the Adviser. The Adviser may
terminate this voluntary waiver at any time at its sole discretion. The
maximum management fee for Emerging Markets Growth Fund is 1.50%.
(2) The Class A Shares can pay up to 0.75% of Class A Shares' average daily
net assets as a 12b-1 fee. For the foreseeable future, the Funds plan to limit
the Class A Shares' 12b-1 payments to 0.25% of Class A 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 A 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.
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 A 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.
The information set forth in the foregoing table and example relates only to
Class A Shares of the Funds. The Funds also offer three additional classes of
shares called Y Shares, Class B Shares and Class C Shares. In general, all
expenses are allocated based upon the daily net assets of each class. Y Shares
bear no sales charge, 12b-1 fee or shareholder service fee. Class B 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 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 1.00%. Y Shares,
Class B Shares and Class C Shares do not bear a front-end sales charge. See
"Other Classes of Shares."
SUMMARY OF
- ------------------------ ------------------------
- ------------------------ ------------------------
FUND EXPENSES
FIRST UNION INTERNATIONAL FUNDS CLASS B SHARES
<TABLE>
<CAPTION>
Emerging Markets Growth Fund International Equity Fund
----------------------------- -----------------------------
Class B 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,
1% during the seventh year, 1% during the seventh year,
and 0% after the seventh year and 0% after the seventh year
Redemption Fee (as a
percentage of amount
redeemed, if applica-
ble)................... 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) (2)............ % %
12b-1 Fees.............. % %
Total Other Expenses
(after waiver) (3)..... % %
Shareholder Services
Fee................. % %
Total Class B Shares Op-
erating Expenses
(4)................. % %
</TABLE>
(1) No contingent deferred sales charge is imposed on (a) Shares purchased
more than seven 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 fee of Emerging Markets Growth Fund has been reduced to
reflect the anticipated voluntary waiver by the Adviser. The Adviser may
terminate this voluntary waiver at any time at its sole discretion. The
maximum management fee for Emerging Markets Growth Fund is 1.50%.
(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 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.
<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 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 Y Shares, Class A Shares and Class C Shares. In general, all
expenses are allocated based upon the daily net assets of each class. Y Shares
bear no sales charge, 12b-1 fee or shareholder service fee. Class A 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% 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 C SHARES
<TABLE>
<CAPTION>
Emerging Markets Growth
Fund International Equity Fund
--------------------------- ---------------------------
Class C Shares
Shareholder Transaction Expenses
<?R>
<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 per-
centage of offering
price)................. None None
Contingent Deferred
Sales Charge (as a per-
centage of original
purchase price or re-
demption proceeds, 1% during the first year, 1% during the first year,
as applicable) (1)..... and 0% after the first year and 0% after the first 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.............. % %
Total Other Expenses
(after waiver) (3)..... % %
Shareholder Services
Fee.................... % %
Total Class C 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 fee of Emerging Markets Growth Fund has been reduced to
reflect the anticipated voluntary waiver by the Adviser. The Adviser may
terminate this voluntary waiver at any time at its sole discretion. The
maximum management fee for Emerging Markets Growth Fund is 1.50%.
(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 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.
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. This
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 Y Shares, Class A Shares, and Class B Shares. In general, all
expenses are allocated based upon the daily net assets of each class. Y Shares
bear no sales charge, 12b-1 fee or shareholder service fee. Class A Shares are
subject to a 12b-1 fee of 0.25 of 1% and bear a maximum sales charge of 4.75%.
Class B 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. At the
present time, the Fund has no intention to 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. Marvin & Palmer, the Sub-
Adviser to the Fund, will make investment decisions regarding equity securities
based on its analysis of returns, price momentum, business and industry
considerations, and management quality.
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 Boston International, the Sub-Adviser to the
Fund, determines, 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. While the current intention of the Fund is to invest in 32
stock markets, the Fund may invest in more or less, depending upon market
conditions as determined by the Sub-Adviser. 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 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;
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 Ratings Group ("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. Although the Funds do not intend to invest significantly in debt
securities, it should be noted that the prices of fixed income securities
fluctuate inversely to the direction of interest rates;
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. (Although, of course, there can be no assurance that these
strategic investments will be successful in protecting the value of the
Funds' securities.);
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 Funds' 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 Funds to sell the security in the open market in the case of
a default. In such a case, the Funds 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 securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which the Funds purchase securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause the Funds to miss a price or yield
considered to be advantageous. 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. Accordingly, the Funds may pay
more/less than the market value of the securities on the settlement date.
The Funds may dispose of a commitment prior to settlement if the Adviser deems
it appropriate to do so. In addition, the Funds may enter into transactions to
sell their purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at
later dates. The Funds may realize short-term profits or losses upon the sale
of such commitments.
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 Funds' 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 Sub-
Advisers will consider the likelihood of changes in currency values when making
investment decisions, 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 Funds' assets
denominated in that currency, but as consistent with their other investment
policies and as not otherwise limited in their ability to use this strategy.
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 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 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 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 below
under "Emerging Markets," 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 currencies.
To the extent that securities purchased by the Funds are denominated in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates will affect the Funds' net asset values; the value of interest earned;
gains and losses realized on the sale of securities; and net investment income
and capital gain, if any, to be distributed to shareholders by a Fund. If the
value of a foreign currency rises against the U.S. dollar, the value of a
Fund's assets denominated in that currency will increase; correspondingly, if
the value of a foreign currency declines against the U.S. dollar, the value of
a Fund's assets denominated in that currency will decrease.
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.
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 economics 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 ofthe U.S.
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.
There is the risk that when lending portfolio securities, the securities may
not be available to the Funds on a timely basis and the Funds may, therefore,
lose the opportunity to sell the securities at a desirable price. In addition,
in the event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
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 A Shares, 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 three types of Investment Shares: Class A 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 A Shares, Class B Shares, and Class C Shares is based
on purchasing arrangements and distribution and shareholder services expenses.
Class A 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 A Shares for the same initial investment than Class B
Shares or Class C Shares due to the initial sales charge, but will receive
higher dividends per Share due to the lower distribution expenses. Class B
Shares impose a maximum contingent deferred sales charge ("CDSC") of 5.00%. In
addition, Class B Shares impose a CDSC on most redemptions made within seven
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 B Shares may automatically
convert to Class A Shares and thus be subject to lower Rule 12b-1 distribution
fees. Class C 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 B Shares or Class C Shares than Class A 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 B Shares or Class C Shares would be less than the
initial sales charge and accumulated Rule 12b-1 fee on Class A Shares purchased
at the same time. Investors must also consider how each differential would be
offset by the higher yield of Class A 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 A Shares adds an applicable sales charge, and the
redemption proceeds of Class B Shares and 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 Y Shares of a Fund may differ slightly from that of
Class A Shares, Class B Shares, and Class C 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 B Shares and Class C
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 Class A Shares, Class B Shares, and Class C 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 A Shares, 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
yield does not necessarily reflect income actually earned by Class A Shares,
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 A Shares, Class B Shares and Class C
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 A Shares, Class
B Shares, Class C Shares and Y Shares of a Fund. Because Class A Shares are
subject to 12b-1 fees, and Class B Shares and Class C Shares are subject to a
12b-1 fee and a shareholder services fee, the yield will be lower than that of
Y Shares. The sales load applicable to Class A Shares also contributes to a
lower total return for Class A Shares. In addition, Class B Shares and Class C
Shares are subject to similar non-recurring charges, such as the CDSC, which,
if excluded, would increase the total return for Class B Shares and Class C
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 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 A Shares), or (ii) on a contingent deferred basis (in the
case of Class B Shares and Class C 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, Inc. ("FUBS"), a subsidiary of First Union, at 1-800-326-
3241. Subsequent investments may be in any amounts.
WHAT SHARES COST
Class A 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% 4.99%
$ 100,000-$ 249,999 3.75% 3.90%
$ 250,000-$ 499,999 3.00% 3.10%
$ 500,000-$ 999,999 2.00% 2.04%
$1,000,000-$2,499,999 1.00% 1.01%
$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 families, 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 B Shares are sold at net asset value per Share without the imposition of
a sales charge at the time of purchase. Shares redeemed within seven 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 1.0%
</TABLE>
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 one year of
their purchase will be subject to a CDSC of 1.00%.
With respect to Class B Shares and Class C 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 seven years (in the case of Class B Shares) or one year (in the case
of Class C 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 B 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 B Shares was accepted. At the end of this seven year period,
Class B Shares may automatically convert to Class A Shares, in which case the
Shares will no longer be subject to the higher Rule 12b-1 distribution fee
which is assessed on Class B 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 B 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 B Shares from most of the burden of
such distribution-related expenses.
For purposes of conversion to Class A Shares, Class B Shares purchased through
the reinvestment of dividends and distributions paid on Class B Shares in a
shareholder's Fund acount will be considered to be held in a separate sub-
account. Each time any Class B Shares in the shareholder's Fund account (other
than those in the sub-account) convert to Class A Shares, an equal pro rata
portion of the Class B Shares in the sub-account will also convert to Class A
Shares.
The availability of the conversion feature is subject to the granting of an
exemptive order (the "Order") by 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 A Shares, 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, 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 A Shares of one First Union Fund for Class A Shares of
any other First Union Fund, 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 net asset value determined after the exchange request is received. 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 B Shares or Class C Shares will not be subject to a CDSC.
However, if the shareholder redeems Class B Shares within seven years of the
original purchase or Class C 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 B Shares or 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 B Shares or
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 and Trust Company, 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 CASH WITHDRAWAL PLAN
When an account of $10,000 or more is opened or when an existing account
reaches that size, you may participate in the Fund's Systematic Cash Withdrawal
Plan by filling out the appropriate part of the share purchase application.
Under this Plan, you may receive (or designate a third party to receive) a
monthly or quarterly check in a stated amount of not less than $25. Fund shares
will be redeemed as necessary to meet withdrawal payments. All participants
must elect to have their dividends and capital gain distributions reinvested
automatically. Any applicable Class B CDSC will be waived with respect to
redemptions occurring under a Systematic Cash Withdrawal Plan during a calendar
year to the extent that such redemptions do not exceed 10% of (i) the initial
value of the account, plus (ii) the value, at the time of purchase, of any
subsequent investments.
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 $72.6 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 $44.3 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 portfolio 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 $2.5 billion in investments for 34 institutional
investors and 5 commingled funds and served as sub-adviser to another
investment company with total assets of $33 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, along with
Todd D. Marvin, 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 of and Portfolio Manager for the Sub-
Adviser. Before joining the Sub-Adviser in 1990, Mr. Mason was employed for 14
years by DuPont Corporation, the last five as an International Equity Analyst
and an 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, along
with Mr. Palmer, 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 $2.7 billion in assets and served as sub-adviser to one other investment
company with total assets of $148 million.
Maureen Ghublikian has been a Managing Director of the Sub-Adviser since the
firm's inception in 1986. Ms. Ghublikian has served as co-portfolio manager of
the Fund since its inception in September 1994.
David A. Umstead was a founder and has been a 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.
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 A
Shares of the Funds and 0.75% for Class B Shares and 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 B Shares and 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 B Shares and Class C Shares. First Union Corporation
currently serves as principal lender in this financing program. Actual
distribution expenses for Class B Shares and 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 and Trust Company, 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.
The Funds may pay a shareholder servicing agent (the "Shareholder Servicing
Agent") a fee based on average daily net asset value for Class B Shares and
Class C Shares of the Funds for which the Shareholder Servicing Agent provides
shareholder services. As such, the Shareholder Servicing Agent 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 Class B Shares and
Class C Shares. The Funds may pay the Shareholder Servicing Agent a fee equal
to 0.25 of 1% of the average daily net asset value of Class B Shares and Class
C Shares for which the Shareholder Servicing Agent provides shareholder
services. The Shareholder Servicing Agent may voluntarily choose to waive all
or a portion of its fee at any time. First Union Brokerage Services, First
Union National Bank of North Carolina, and other financial institutions may
serve as Shareholder Servicing Agent.
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 LLP, 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 investment objectives and policies.
For its services under its Sub-Advisory Contract with the Adviser, 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 A
Shares, Class B Shares and Class C Shares. In addition, the Funds' expenses
under the Shareholder Services Plan are incurred 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; 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.
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 other financial
institutions may be required to register as dealers pursuant to state law.
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 annually 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 A Shares,
Class B Shares and Class C Shares for individuals and other customers of First
Union, and Y Shares for institutional investors.
Y 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. Y 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 A Shares, Class B Shares and Class C
Shares will be less than those payable to Y Shares by the difference between
class expenses and distribution and shareholder services expenses borne by the
shares of each respective class.
ADDRESSES
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- ------------------------- -------------------------
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First Union Funds Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
- --------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
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Investment Adviser
First Union National Bank of North Carolina
One First Union Center
301 S. College Street
Charlotte, North Carolina
28288
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Sub-Adviser to Emerging Markets Growth Fund
Marvin & Palmer Associates, Inc. 1201 North Orange Street
Suite 1100
Wilmington, Delaware 19801
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Sub-Adviser to International Equity Fund
Boston International Advisors, Inc. 75 State Street
Boston, Massachusetts 02109
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Custodian
State Street Bank and Trust Company P.O. Box 8609
Boston, Massachusetts
02266-8609
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Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
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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
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Independent Auditors
One Mellon Bank Center
KPMG Peat Marwick LLP Pittsburgh, Pennsylvania
15219
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Federated Securities Corp., Distributor
G00396-01 (2/95)
FIRST UNION EMERGING MARKETS GROWTH PORTFOLIO
FIRST UNION INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIOS OF FIRST UNION FUNDS
Y SHARES
CLASS A INVESTMENT 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
Y Shares, Class A Investment Shares, Class B Investment Shares, or
Class C Investment Shares for First Union International Funds, dated
February 28, 1995. This Statement is not a prospectus itself. To
receive a copy of the Y 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 A Investment Shares, Class B
Investment Shares, and 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, 1995
FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
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
Restricted Securities 4
When-Issued and Delayed
Delivery Transactions 4
Lending of Portfolio Securities 4
Repurchase Agreements 4
Reverse Repurchase Agreements 5
Portfolio Turnover 5
Investment Limitations 5
FIRST UNION FUNDS MANAGEMENT 7
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Fund Ownership 9
Trustee Liability 9
INVESTMENT ADVISORY SERVICES 9
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Adviser to the Funds 9
Sub-Advisers 9
Advisory Fees 9
Sub-Advisory Fees 9
BROKERAGE TRANSACTIONS 10
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ADMINISTRATIVE SERVICES 11
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PURCHASING SHARES 11
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Distribution Plans (Class A, Class B and
Class C Investment Shares) 12
Shareholder Services Plan 12
DETERMINING NET ASSET VALUE 13
- ---------------------------------------------------------------
Determining Market Value of Securities 13
Trading in Foreign Securities 13
REDEEMING SHARES 13
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Redemption in Kind 13
TAX STATUS 14
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The Funds' Tax Status 14
Foreign Taxes 14
Shareholders' Tax Status 14
TOTAL RETURN 14
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YIELD 14
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 15
- ---------------------------------------------------------------
APPENDIX 16
- ---------------------------------------------------------------
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: Y Shares, Class A Investment
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 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 Marvin & Palmer
Associates, Inc. ("Marvin & Palmer"), the sub-adviser to the Emerging
Markets Growth Fund or Boston International Advisors, Inc. ("Boston
International"), the sub-adviser to the International Equity Fund, the
investment characteristics of the underlying common shares will assist a
Fund in achieving its investment objective. (Marvin & Palmer and Boston
International are individually referred to as a "Sub-Adviser," and
collectively referred to as the "Sub-Advisers" in this Combined Statement
of Additional Information.) A Fund may also elect to hold or trade
convertible securities. In selecting convertible securities, the
Sub-Advisers evaluate 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
Sub-Advisers consider 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.
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 Sub-Advisers believe
that it is important to have the flexibility to enter into forward
foreign currency exchange contracts whenever they determine 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 Sub-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
Sub-Advisers, 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 Sub-Advisers, 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.
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
These transactions are made to secure what is considered to be an advantageous
price or yield for the Funds. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of the Funds sufficient
to make payment for the securities to be purchased are segregated on the Funds'
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Funds does not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of their 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 50% and 50%,
respectively. For the period from _______________, 1994 (commencement of
operations) to December 31, 1994, the Emerging Markets Growth Fund's and
International Equity Fund's portfolio turnover rates were _____% 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 the
Sub-Advisers, 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 of 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 or enter into reverse
repurchase agreements 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."
FIRST UNION FUNDS MANAGEMENT
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Officers and Trustees are listed with their addresses, principal occupations,
and present positions.
- --------------------------------------------------------------------------------
James S. Howell
3125 Eastway Drive
Suite 114
Charlotte, NC
Chairman and Trustee of the Trust
Retired Vice President of Lance Inc. (food manufacturing).
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Gerald M. McDonnell
821 Regency Drive
Charlotte, NC
Trustee of the Trust
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
4419 Parview Drive
Charlotte, NC
Trustee of the Trust
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*
Carillon Building
Suite 2170
227 West Trade Street
Charlotte, NC
Trustee of the Trust
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.
Primary PhysicianCare
1515 Mockingbird Lane
Park Seneca Building
Suite 312
Charlotte, NC
Trustee of the Trust
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
212 S. Tryon Street
Suite 980
Charlotte, NC
Trustee of the Trust
Attorney; formerly, Partner with Wardlow, Knox, Knox, Freeman & Scofield
(attorneys) (1982-1986).
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Edward C. Gonzales*
Federated Investors Tower
Pittsburgh, PA
President, Treasurer, and Trustee of the Trust
Vice President, Treasurer, and Trustee, Federated Investors; Vice President and
Treasurer, Federated Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.; Executive Vice President,
Treasurer, and Director, Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; 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
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer of the Trust
Vice President, Federated Administrative Services; Director, Private 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
Federated Investors Tower
Pittsburgh, PA
Secretary of the Trust
Corporate Counsel, Federated Investors.
- --------------------------------------------------------------------------------
*These Trustees are each 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 Funds' outstanding Shares.
As of February __, 1995, the following shareholders of record owned 5% or more
of the outstanding Y Shares of the Emerging Markets Growth Fund:
As of February __, 1995, the following shareholders of record owned 5% or more
of the outstanding Class A Investment Shares of the Emerging Markets Growth
Fund:
As of February __, 1995, the following shareholders of record owned 5% or more
of the outstanding Class B Investment Shares of the Emerging Markets Growth
Fund:
As of February __, 1995, the following shareholders of record owned 5% or more
of the outstanding Class C Investment Shares of the Emerging Markets Growth
Fund:
As of February __, 1995, the following shareholders of record owned 5% or more
of the outstanding Y Shares of the International Equity Fund:
As of February __, 1995, the following shareholders of record owned 5% or more
of the outstanding Class A Investment Shares of the International Equity Fund:
As of February __, 1995, the following shareholders of record owned 5% or more
of the outstanding Class B Investment Shares of the International Equity Fund:
As of February __, 1995, the following shareholders of record owned 5% or more
of the outstanding Class C Investment Shares of the International Equity 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 FUNDS
The Funds' investment adviser is First Union National Bank of North Carolina
(the "Adviser" or "First Union"). 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, the Funds' 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 its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectuses. For the period from _______________, 1994
(commencement of operations) to December 31, 1994, the Adviser earned advisory
fees as follows: from the Emerging Markets Growth Fund, $_______ of which
$_______ was voluntarily waived; and from the International Equity Fund,
$ , of which $ was voluntarily waived.
SUB-ADVISORY FEES
For their sub-advisory services, Marvin & Palmer and Boston International
receive an annual sub-advisory fee as described in the prospectuses. For the
period from _______________, 1994 (commencement of operations) to
December 31, 1994, the sub-advisers earned sub-advisory fees as follows: from
the Emerging Markets Growth Fund, Marvin & Palmer earned $ , of which
$ was voluntarily waived; from the International Equity Fund, Boston
International earned $ , of which $ was voluntarily waived.
STATE EXPENSE LIMITATIONS
The Adviser may be required to undertake to comply with the expense
limitations established by certain states for investment companies whose
shares are registered for sale in those states. In addition, the Funds
may seek a waiver from the states imposing these limitations or such
amount as may be agreed upon pursuant to the terms of any waiver granted
by such states. Should the Funds undertake to meet the limitations
imposed by these states, the Adviser would have to agree to reimburse the
Funds to the extent that 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, or such amount as may be established pursuant to the
terms of any waiver granted by such states.
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 will
be limited, in any single fiscal year, by the amount of their advisory
fees.
Pursuant to the Sub-Advisory Agreements between the Adviser and the
Sub-Advisers, in the event that the Adviser's fee is reduced in order to
meet the expense limitations established by certain states, the
sub-advisory fee for the Sub-Adviser to the effected Fund shall be
reduced in accordance with the mutual agreement of the Adviser and the
Sub-Adviser.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Sub-Advisers look for prompt execution of the order at a
favorable price. In working with dealers, the Sub-Advisers 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 Sub-Advisers may, from time to time, use brokers affiliated with the Trust,
Federated Securities Corp., or their affiliates. The Sub-Advisers make decisions
on portfolio transactions and select brokers and dealers subject to review by
the Trustees.
The Sub-Advisers may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Funds or to the
Sub-Advisers 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 Sub-Advisers 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
Sub-Advisers in advising the Funds and other accounts. To the extent that
receipt of these services may supplant services for which the Sub-Advisers or
their 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 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 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 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.
- --------------------------------------------------------------------------------
For the period from _______________, 1994 (commencement of operations to
December 31, 1994, the Emerging Markets Growth Fund and the International Equity
Fund paid $_______ and $_______, respectively, in commissions on brokerage
transactions.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
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. For the period from _______, 1994 (commencement of
operations) to December 31, 1994, the Emerging Markets Growth Fund and the
International Equity Fund incurred $_______ and $_______, respectively, in
administrative service costs, of which $_______ and $_______, respectively, were
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 A 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 A, CLASS B, AND CLASS C INVESTMENT SHARES)
With respect to the Class A, Class B, and Class C 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 A, Class B, and Class C Investment Shares. The Plans are designed to
(i) stimulate brokers to provide distribution and administrative support
services to the Funds and holders of Class A, Class B, and Class C Investment
Shares and (ii) stimulate administrators to render administrative support
services to the Funds and holders of Class A, 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 A, Class B, and Class C 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 A, Class B,
and Class C 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.
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 _______, 1994 (commencement of operations) to December 31,
1994, the Emerging Market Growth Fund incurred $_______, $_______, and $_______
for Class A Investment Shares, Class B Investment Shares, and Class C Investment
Shares, respectively, pursuant to the Plans.
For the period from _______, 1994 (commencement of operations) to December 31,
1994, the International Equity Fund incurred $_______, $_______, and $_______for
Class A Investment Shares, Class B Investment Shares, and Class C Investment
Shares, 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 Funds.
SHAREHOLDER SERVICES PLAN
For the period from _______, 1994 (commencement of operations) to December 31,
1994, the Emerging Markets Growth Fund incurred $_______ and $_______ for Class
B Investment Shares and Class C Investment Shares, respectively, as a
shareholder services fee.
For the period from _______, 1994 (commencement of operations) to December 31,
1994, the International Equity Fund incurred $_______ and $_______for Class B
Investment Shares and Class C Shares, respectively, as a shareholder services
fee.
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 Funds are described in the
prospectuses.
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 60 days or less at the time of purchase 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
- --------------------------------------------------------------------------------
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 prospectuses 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's 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
- --------------------------------------------------------------------------------
THE FUNDS' TAX STATUS
The Funds will pay no federal income tax because they expect 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 their gross income from dividends, interest, and gains
from the sale of securities;
.derive less than 30% of their gross income from the sale of securities held
less than three months;
.invest in securities within certain statutory limits; and
.distribute to their shareholders at least 90% of their 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
- --------------------------------------------------------------------------------
The Emerging Markets Growth Fund's cumulative total return for Y Shares, Class A
Investment Shares, Class B Investment Shares, and Class C Investment Shares for
the period from , 1994 (commencement of operations) to December 31, 1994,
was __%, %, %, and %, respectively.
The International Equity Fund's cumulative total return for Y Shares, Class A
Investment Shares, Class B Investment Shares, and Class C Investment Shares for
the period from _______________, 1994 (commencement of operations) to December
31, 1994, was __%, __%, __%, and __%, respectively.
Cumulative total return reflects the Funds' total performance over a specific
period of time. This total return assumes and is reduced by the payment of the
maximum sales load. This total return is representative of only months of
activity since the Funds' effective date.
YIELD
- --------------------------------------------------------------------------------
The Funds' yields for Y Shares, Class A Investment Shares, Class B Investment
Shares, and Class C Investment Shares were ___%, ___%, ___%, and ___%,
respectively, for the thirty-day period ended December 31, 1994.
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
- --------------------------------------------------------------------------------
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 the Funds use 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 annual 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. Advertising and sales literature for the Funds can
include statistics pertaining to the size of U.S. and foreign markets.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD & POOR'S RATINGS GROUP LONG-TERM BOND RATINGS DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's Rating
Group. 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 to be 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 RATINGS GROUP 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 (2/95) 1
PART C. OTHER INFORMATION.
Item 24. Financial Statements and Exhibits:
(a) Financial Statements: To be filed by Amendment.
(b) Exhibits:
(1) Copy of Declaration of Trust of the Registrant (1);
(i) Copy of Amendment to Declaration of Trust (14);
(2) Copy of By-Laws of the Registrant (1);
(i) Copy of amendment to the By-Laws of the
Registrant (3);
(3) Not applicable;
(4) Copy of Specimen Certificate for Shares of Beneficial Interest
of the Registrant (19);
(5) Conformed copy of Investment Advisory Contract of the
Registrant; +
(i) Conformed copy of Sub-Advisory Agreement between First
Union
National Bank and Marvin & Palmer Associates, Inc.; +
(ii) Conformed copy of Sub-Advisory Agreement between First
Union
National Bank and Boston International Advisors, Inc.; +
(6) Conformed copy of Distributor's Contract of the Registrant; +
(i) Conformed copy of the previous Distributors Contract
of the Registrant; +
(7) Conformed copy of Administrative Agreement of the Registrant; +
(8) Conformed copy of Custodian Contract of the Registrant; +
+ All exhibits have been filed electronically.
(1) Response is incorporated by reference to Registrant's Initial Registration
Statement
on Form N-1A. (File Nos. 2-94560 and 811-4154).
(2) Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1 on
Form N-1A (File Nos. 2-94560 and 811-4154).
(3) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 3 on
Form N-1A (File Nos. 2-94560 and 811-4154).
(4) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 4 on
Form N-1A (File Nos. 2-94560 and 811-4154).
(5) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 11
filed on July 30, 1990 on Form N-1A (File Nos. 2-94560 and 811-4154).
(6) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 12
filed on September 7, 1990 on Form N-1A (File Nos. 2-94560 and 811-4154).
(7) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 13
filed on October 4, 1990 on Form N-1A (File Nos. 2-94560 and 811-4154).
(8) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 14
filed on November 6, 1990 on Form N-1A (File Nos. 2-94560 and 811-4154).
(9) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 16
filed on July 18, 1991 on Form N-1A (File Nos. 2-94560 and 811-4154).
(10) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 19
filed on February 28, 1992 on Form N-1A (File Nos. 2-94560 and 811-4154).
(11) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 20
filed on August 26, 1992 on Form N-1A (File Nos. 2-94560 and 811-4154).
(12) Response is incorporated by reference to Registrant's Post-Effective
Amendment to No.
21 filed on October 30, 1992 on Form N-1A (File Nos. 2-94560 and 811-4154).
(13) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 22
filed on November 23, 1992 on Form N-1A (File Nos. 2-94560 and 811-4154).
(14) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 28
filed on April 15, 1993 on Form N-1A (File Nos. 2-94560 and 811-4154).
(17) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 32
filed on November 2, 1993 on Form N-1A (File Nos. 2-94560 and 811-4154).
(18) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 33
filed on December 29, 1993 on Form N-1A (File Nos. 2-94560 and 811-4154).
(19) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 35
filed on February 25, 1994 on Form N-1A (File Nos. 2-94560 and 811-4154).
(20) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 36
filed on June 28, 1994 on Form N-1A (File Nos. 2-94560 and 811-4154).
(9) Conformed copy of the Fund Accounting and
Shareholder Recordkeeping
Agreement of the Registrant (20);
(i) Conformed copy of the previous Transfer Agency
and Service
Agreement of the Registrant; +
(ii) Conformed copy of Shareholder Services Plan; +
(iii)Conformed copy of Shareholder Services Agreement; +
(10) Copy of Opinion and Consent of Counsel as to legality of
shares
being registered (8);
(11) To be filed by Amendment;
(12) Not applicable;
(13) Copy of Initial Capital Understanding (1);
(14) Model Plans used in establishment of Retirement Plans (2);
(15) (i) Distribution Plan;
(a)Copy of First Union Emerging Markets Growth
Portfolio
and First Union International Equity Portfolio -
Class B Investment Shares; +
(i) Copy of First Union South Carolina Municipal
Bond Portfolio - Class B Investment
Shares; +
(ii) Copy of First Union Virginia Municipal Bond
Portfolio, First Union Georgia Municipal
Bond
Portfolio, First Union Florida Municipal
Bond
Portfolio - Class B Investment Shares; +
(iii) Copy of First Union Utility Portfolio -
Class
B Investment Shares; +
(b)First Union Funds - Class C Investment Shares (17);
(i) Conformed copy of Exhibit to Class C
Investment Shares; +
(c)Conformed copy of First Union Funds - Class D
Investment Shares; +
(ii) Rule 12b-1 Agreement (14);
(iii) Copy of Amendment Number 5 to 12b-1 Agreement; +
(16) Copy of Schedules for Computation of Fund Performance Data
(20.);
(17) Copy of Financial Data Schedules; +
(18) Not applicable;
(19) Conformed copy of the Power of Attorney (19).
+ All exhibits have been filed electronically.
(1) Response is incorporated by reference to Registrant's Initial Registration
Statement
on Form N-1A. (File Nos. 2-94560 and 811-4154).
(2) Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 1
on Form N-1A (File Nos. 2-94560 and 811-4154).
(5) Response is incorporated by reference to Registrant's Post-Effective
Amendment No.
11 filed on July 30, 1990 on Form N-1A (File Nos. 2-94560 and 811-4154).
(11) Response is incorporated by reference to Registrant's Post-Effective
Amendment No.
20 filed on August 26, 1992 on Form N-1A (File Nos. 2-94560 and 811-4154).
(14) Response is incorporated by reference to Registrant's Post-Effective
Amendment No.
28 filed on April 15, 1993 on Form N-1A (File Nos. 2-94560 and 811-4154).
(15) Response is incorporated by reference to Registrant's Post-Effective
Amendment No.
29 filed on April 30, 1993 on Form N-1A (File Nos. 2-94560 and 811-4154).
(16) Response is incorporated by reference to Registrant's Post-Effective
Amendment No.
31 filed on June 14, 1993 on Form N-1A (File Nos. 2-94560 and 811-4154).
(17) Response is incorporated by reference to Registrant's Post-Effective
Amendment No.
32 filed on November 2, 1993 on Form N-1A (File Nos. 2-94560 and 811-4154).
(18) Response is incorporated by reference to Registrant's Post-Effective
Amendment No.
33 filed on December 29, 1993 on Form N-1A (File Nos. 2-94560 and
811-4154).
(19) Response is incorporated by reference to Registrant's Post-Effective
Amendment
No. 35 filed on February 25, 1994 on Form N-1A (File Nos. 2-94560 and
811-4154).
(20) Response is incorporated by reference to Registrant's Post-Effective
Amendment No.
36 filed on June 28, 1994 on Form N-1A (File Nos. 2-94560 and 811-4154).
Item 25. Persons Controlled by or Under Common Control with Registrant:
None
Item 26. Number of Holders of Securities:
Number of Record Holders
Title of Class as of December 9, 1994
Shares of beneficial interest
(no par value)
First Union Value Portfolio
a) Trust Shares 79
b) Class B Investment Shares 16,634
c) Class C Investment Shares 10,930
d) Class D Investment Shares 52
First Union Fixed Income Portfolio
a) Trust Shares 5
b) Class B Investment Shares 1,585
c) Class C Investment Shares 1,075
d) Class D Investment Shares 20
First Union High Grade Tax Free Portfolio
(formerly, First Union Insured Tax Free Portfolio)
a) Trust Shares 12
b) Class B Investment Shares 1,863
c) Class C Investment Shares 1,013
First Union Tax Free Money Market Portfolio
a) Trust Shares 4
b) Class B Investment Shares 1,392
First Union Money Market Portfolio
a) Trust Shares 5
b) Class B Investment Shares 5,990
c) Class C Investment Shares 296
First Union Treasury Money Market Portfolio
a) Trust Shares 4
b) Class B Investment Shares 1,813
First Union Balanced Portfolio
a) Trust Shares 5
b) Class B Investment Shares 3,397
c) Class C Investment Shares 8,516
d) Class D Investment Shares 21
First Union Managed Bond Portfolio
a) Trust Shares 53
b) Investment Shares 0
First Union North Carolina Municipal Bond Portfolio
a) Trust Shares 16
b) Class B Investment Shares 330
c) Class C Investment Shares 1,693
First Union U.S. Government Portfolio
a) Trust Shares 4
b) Class B Investment Shares 1,169
c) Class C Investment Shares 8,841
d) Class D Investment Shares 11
First Union Florida Municipal Bond Portfolio
a) Trust Shares 17
b) Class B Investment Shares 257
c) Class C Investment Shares 755
First Union Georgia Municipal Bond Portfolio
a) Trust Shares 5
b) Class B Investment Shares 78
c) Class C Investment Shares 345
First Union Virginia Municipal Bond Portfolio
a) Trust Shares 8
b) Class B Investment Shares 67
c) Class C Investment Shares 166
First Union Utility Portfolio
a) Trust Shares 6
b) Class B Investment Shares 597
c) Class C Investment Shares 2,688
d) Class D Investment Shares 13
First Union South Carolina Municipal Bond Portfolio
a) Trust Shares 5
b) Class B Investment Shares 15
c) Class C Investment Shares 101
First Union Emerging Markets Growth Portfolio
a) Trust Shares 5
b) Class B Investment Shares 215
c) Class C Investment Shares 292
d) Class D Investment Shares 11
First Union International Equity Portfolio
a) Trust Shares 5
b) Class B Investment Shares 618
c) Class C Investment Shares 996
d) Class D Investment Shares 35
Item 27. Indemnification: (1.)
(1.) Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 35 filed on February 25, 1994 on Form N-1A (File Nos. 2-94560 and
811-4154).
Item 28. Business and Other Connections of Investment Adviser:
(a) For a description of the other business of the investment adviser,
see
the section entitled "Management of First Union Funds-Investment
Adviser" in Part A.
The Trustees and principal executive officers of the Fund's
Investment
Adviser, and the Directors of the Fund's Manager, are set forth
in the
following tables:
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
BOARD OF DIRECTORS
Ben Mayo Boddie Raymond A. Bryan, Jr.
Chairman & CEO Chairman & CEO
Boddie-Noell Enterprises, Inc. T.A. Loving Company
P.O. Box 1908 P.O. Drawer 919
Rocky Mount, NC 27802 Goldsboro, NC 27530
John F.A.V. Cecil John W. Copeland
President President
Biltmore Dairy Farms, Inc. American & Efird
P.O. Box 5355 P.O. Box 507
Asheville, NC 28813 Mount Holly, NC 28120
John Crosland, Jr. J. William Disher
Chairman and CEO Chairman & President
The Crosland Group, Inc. Lance Incorporated
135 Scaleybark Road P.O. Box 32368
Charlotte, NC 28209 Charlotte, NC 28232
Frank H. Dunn Malcolm E. Everett, III
Chairman and CEO President
First Union National Bank First Union National Bank
of North Carolina of North Carolina
One First Union Center 310 S. Tryon Street
Charlotte, NC 28288-0006 Charlotte, NC 28288-0156
James F. Goodmon Shelton Gorelick
President & Chief President
Executive Officer SGIC, Inc.
Capitol Broadcasting 741 Kenilworth Ave., Suite 200
Company, Inc. Charlotte, NC 28204
2619 Western Blvd.
Raleigh, NC 27605
Charles L. Grace James E. S. Hynes
President Chairman
Cummins Atlantic, Inc. Hynes Sales Company, Inc.
P.O. Box 240729 P.O. Box 220948
Charlotte, NC 28224-0729 Charlotte, NC 28222
Daniel W. Mathis Earl N. Phillips, Jr.
Vice Chairman President
First Union National Bank First Factors Corporation
of North Carolina P.O. Box 2730
One First Union Center High Point, NC 27261
Charlotte, NC 28288-0009
J. Gregory Poole, Jr. John P. Rostan, III
Chairman & CEO Senior Vice President
Gregory Poole Equipment Company Waldensian Bakeries, Inc.
P.O. Box 469 P.O. Box 220
Raleigh, NC 27602 Valdese, NC 28690
Nelson Schwab, III Charles M. Shelton, Sr.
Chairman & CEO Chairman & CEO
Paramount Parks The Shelton Companies, Inc
8720 Red Oak Boulevard, Suite 315 3600 One First Union Center
Charlotte, NC 28217 Charlotte, NC 28202
George Shinn Harley F. Shuford, Jr.
Owner and Chairman President
Shinn Enterprises, Inc. Shuford Industries
One Hive Drive P.O. Box 608
Charlotte, NC 28217 Hickory, NC 28603
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
EXECUTIVE OFFICERS
James Abbott, President, First Union Corporation; Austin A. Adams,
Executive
Vice President; Howard L. Arthur, Senior Vice President; Robert T.
Atwood,
Executive Vice President and Chief Financial Officer; Marion A.
Cowell,
Jr.,
Executive Vice President, Secretary and General Counsel; Edward E.
Crutchfield,
Jr., Chairman, CEO, First Union Corporation; Frank H. Dunn, Jr.,
Chairman and
CEO; Malcolm E. Everett, III, President; John R. Georgius, President,
First
Union Corporation; James Hutch, Senior Vice President and Corporate
Controller;
Don R. Johnson, Senior Vice President; Mark Mahoney, Senior Vice
President;
Barbara K. Massa, Senior Vice President; Daniel W. Mathis, Vice
Chairman; H.
Burt Melton, Executive Vice President; Malcolm T. Murray, Jr.,
Executive Vice
President; Alvin T. Sale, Executive Vice President; Louis A.
Schmitt, Jr.,
Executive Vice President; Ken Stancliff, Senior Vice President and
Corporate
Treasurer; Richard K. Wagoner, Executive Vice President and
General Trust Officer.
All of the Executive Officers are located at the following address:
First Union
National Bank of North Carolina, One First Union Center, Charlotte, NC
28288.
(b) For a description of the other business of the sub-adviser to First
Union
Emerging Markets Growth Portfolio ("Emerging Makrets Growth
Fund"), see
the section entitled "Management of First Union Funds-Sub-Advisers-
Emerging
Markets Growth Fund" in Part A.
The Principals and principal executive officers of the Emerging
Markets Growth
Fund's Sub-Adviser, and the Members of the Advisory Board of the
Sub-Adviser,
are set forth in the following tables. Unless otherwise noted, the
position
listed under Other Stubstantial Business, Profession, Vocation or
Employment
is with Marvin & Palmer Associates, Inc.:
MARVIN & PALMER ASSOCIATES, INC.
Other Substantial
Position With Business, Profession,
Name the Sub-Adviser Vocation or Employment
David F. Marvin, CFA Chairman Portfolio Manager-
Americas & Currency
Stanley Palmer, CFA President Portfolio Manager-
Non-U.S.
Karen T. Buckley Senior Vice President and
Chief Financial Officer
Jon A. Stiklorius Senior Vice President
Eugene J. Mulvaney Senior Vice President
Terry B. Mason Vice President Portfolio Manager-
Non-U.S.
Jay F. Middleton Vice President Portfolio Manager-
Americas
Todd D. Marvin Vice President Portfolio Manager-
Non-U.S.
William Nord Vice President
Robert P. Sanna Vice President
David L. Schaen Vice President
Raymond J. Deschenes Vice President
ADVISORY BOARD MEMBERS
Irving S. Shapiro Paul Craig Roberts
William C. Lickle The Hon. Charles J. Pilliod, Jr.
Charles L. Brown Dr.-Ing. Klaus G. Lederer
Alexander F. Giacco The Rt. Hon. Lord Moore, P.C.
(c) For a description of the other business of the sub-adviser to First
Union
International Equity Portfolio ("International Equity Fund"),
see the
section entitled "Management of First Union Funds-Sub-Advisers-
International
Equity Fund" in Part A.
The Trustees and principal executive officers of the International
Equity
Fund's Sub-Adviser, and the Directors and officers of the Fund's
Sub-Adviser,
are set forth in the following tables. Unless otherwise noted, the
position
listed under Other Substantial Business, Profession, Vocation or
Employment
is with Boston International Advisors, Inc.:
BOSTON INTERNATIONAL ADVISORS, INC.
Other Substantial
Position With Business, Profession,
Name the Sub-Adviser Vocation or Employment
Lyle H. Davis President and
Managing Director
Robert E. Denneen, Jr. Vice President Portfolio Manager
Dennis J. Fogarty Vice President Research Associate
Maureen A. Ghublikian Managing Director
Norman H. Meltz Vice President &
Managing Director
Patricia A. Thompson Vice President &
Treasurer
David A. Umstead Managing Director
BOARD OF DIRECTORS
George A. Chamberlain, III Philip A. Cooper
Lyle H. Davis Norman H. Meltz
David A. Umstead
Item 29. Principal Underwriters:
(a)Federated Securities Corp., the Distributor for shares of the
Registrant,
also acts as principal underwriter for the following open-end
investment
companies: Alexander Hamilton Funds; American Leaders Fund, Inc.;
Annuity
Management Series; Arrow Funds; Automated Cash Management Trust;
Automated
Government Money Trust; BayFunds; The Biltmore Funds; The Biltmore
Municipal Funds; California Municipal Cash Trust; Cash Trust
Series,
Inc.;
Cash Trust Series II; DG Investor Series; Edward D. Jones & Co.
Daily
Passport Cash Trust; Federated ARMs Fund; Federated Exchange Fund,
Ltd.;
Federated GNMA Trust; Federated Government Trust; Federated Growth
Trust;
Federated High Yield Trust; Federated Income Securities Trust;
Federated
Income Trust; Federated Index Trust; Federated Institutional Trust;
Federated Intermediate Government Trust; Federated Master Trust;
Federated
Municipal Trust; Federated Short-Intermediate Government Trust;
Federated
Short-Term U.S. Government Trust; Federated Stock Trust;
Federated Tax-
Free
Trust; Federated U.S. Government Bond Fund; First Priority
Funds; First
Union Funds; Fixed Income Securities, Inc.; Fortress Adjustable
Rate
U.S.
Government Fund, Inc.; Fortress Municipal Income Fund, Inc.;
Fortress
Utility
Fund, Inc.; Fountain Square Funds; Fund for U.S. Government
Securities,
Inc.;
Government Income Securities, Inc.; High Yield Cash Trust;
Independence
One
Mutual Funds; Insight Institutional Series, Inc.; Insurance
Management
Series; Intermediate Municipal Trust; International Series Inc.;
Investment
Series Funds, Inc.; Investment Series Trust; Liberty Equity Income
Fund,
Inc.; Liberty High Income Bond Fund, Inc.; Liberty Municipal
Securities
Fund,
Inc.; Liberty U.S. Government Money Market Trust; Liberty
Utility Fund,
Inc.;
Liquid Cash Trust; Managed Series Trust; Marshall Funds, Inc.;
Money
Market
Management, Inc.; The Medalist Funds; Money Market Obligations
Trust;
Money
Market Trust; The Monitor Funds; Municipal Securities Income
Trust; New
York
Municipal Cash Trust; 111 Corcoran Funds; Peachtree Funds; The
Planters
Funds; Portage Funds; RIMCO Monument Funds; The Shawmut Funds;
Short-
Term
Municipal Trust; SouthTrust Vulcan Funds; Star Funds; The Starburst
Funds;
The Starburst Funds II; Stock and Bond Fund, Inc.; Sunburst Funds;
Targeted
Duration Trust; Tax-Free Instruments Trust; Tower Mutual Funds;
Trademark
Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves;
Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury
Obligations; Vision Fiduciary Funds, Inc.; Vision Group of
Funds, Inc.;
and World Investment Series, Inc.
Federated Securities Corp. also acts as principal underwriter
for the
following closed-end investment company: Liberty Term Trust, Inc.-
1999.
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Underwriter With Registrant
Richard B. Fisher Director, Chairman, Chief --
Federated Investors Tower Executive Officer, Chief
Pittsburgh, PA 15222-3779 Operating Officer, and
Asst. Treasurer, Federated
Securities Corp.
Edward C. Gonzales Director, Executive Vice President,
Federated Investors Tower President, and Treasurer, Treasurer, and
Pittsburgh, PA 15222-3779 Federated Securities Trustee
Corp.
John W. McGonigle Director, Executive Vice --
Federated Investors Tower President, and Assistant
Pittsburgh, PA 15222-3779 Secretary, Federated
Securities Corp.
John B. Fisher President-Institutional Sales, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James F. Getz President-Broker/Dealer, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark R. Gensheimer Executive Vice President of --
Federated Investors Tower Bank/Trust
Pittsburgh, PA 15222-3779 Federated Securities Corp.
Mark W. Bloss Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Theodore Fadool, Jr. Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Bryant R. Fisher Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Christopher T. Fives Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James S. Hamilton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
James M. Heaton Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
H. Joseph Kennedy Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Keith Nixon Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Timothy C. Pillion Senior Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard W. Boyd Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jane E. Broeren-Lambesis Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mary J. Combs Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Edmond Connell, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Laura M. Deger Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jill Ehrenfeld Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark D. Fisher Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael D. Fitzgerald Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Joseph D. Gibbons Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David C. Glabicki Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Gonzales Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Scott A. Hutton Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William J. Kerns Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William E. Kugler Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Dennis M. Laffey Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Francis J. Matten, Jr. Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Mark J. Miehl Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard C. Mihm Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
J. Michael Miller Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
R. Jeffrey Niss Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Michael P. O'Brien Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert D. Oehlschlager Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Solon A. Person, IV Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Robert F. Phillips Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Eugene B. Reed Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Paul V. Riordan Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Charles A. Robison Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
David W. Spears Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jeffrey A. Stewart Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Thomas E. Territ Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Jamie M. Teschner Vice President,
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
William C. Tustin Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Richard B. Watts Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Philip C. Hetzel Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
Ernest L. Linane Assistant Vice President, --
Federated Investors Tower Federated Securities Corp.
Pittsburgh, PA 15222-3779
S. Elliott Cohan Secretary, Federated Assistant
Federated Investors Tower Securities Corp. Secretary
Pittsburgh, PA 15222-3779
(c) Not applicable.
Item 30. Location of Accounts and Records:
All accounts and records required to be maintained by Section 31(a) of the
Investment
Company Act of 1940 and Rules 31a-1 through 31a-3 promulgated thereunder are
maintained
at one of the following locations:
Registrant Federated Investors Tower
Federated Services Company Pittsburgh, PA 15222-3779
("Transfer Agent and Dividend Disbursing
Agent")
Federated Administrative Services
("Administrator")
First Union National Bank of North Carolina One First Union Center
("Adviser") 301 S. College Street
Charlotte, North Carolina 28288
State Street Bank and Trust Company P.O. Box 8609
("Custodian") Boston, MA 02266-8609
Item 31. Management Services: Not applicable.
Item 32. Undertakings:
Registrant hereby undertakes to comply with the provisions of
Section 16(c) of
the 1940 Act with respect to the removal of Trustees and the
calling of
special
shareholder meetings by shareholders.
Registrant hereby undertakes to furnish each person to whom a
prospectus
is
delivered with a copy of the Registrant's latest annual report to
shareholders,
upon request and without charge.
Registrant undertakes to file a post-effective amendment on behalf of
First
Union Emerging Markets Growth Portfolio and First Union International
Equity
Portfolio, using financial statements which need not be certified,
within four
to six months from the effective date of Post-Effective Amendment
No. 37.
____________________
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company
Act of 1940, the Registrant, FIRST UNION FUNDS, has duly caused this Amendment
to its
Registration Statement to be signed on its behalf by the undersigned, thereto
duly
authorized, in the City of Pittsburgh and Commonwealth of Pennsylvania, on the
30th
day of December, 1994
FIRST UNION FUNDS
BY: /s/Mark A. Sheehan
Mark A. Sheehan, Assistant Secretary
Attorney in Fact for John F. Donahue
December 30, 1994
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
its
Registration Statement has been signed below by the following person in the
capacity
and on the date indicated:
NAME TITLE DATE
By: /s/Mark A. Sheehan
Mark A. Sheehan Attorney In Fact December 30, 1994
ASSISTANT SECRETARY For the Persons
Listed Below
NAME TITLE
James S. Howell* Chairman and Trustee
(Chief Executive Officer)
Edward C. Gonzales* President, Treasurer
and Trustee
(Principal Financial and
Accounting Officer)
Gerald M. McDonnell* Trustee
Thomas L. McVerry* Trustee
William Walt Pettit* Trustee
Russell A. Salton, III, M.D.* Trustee
Michael S. Scofield* Trustee
* By Power of Attorney
Exhibit 6 under Form N-1A
Exhibit 1 under Item 601/Reg. S-K
FIRST UNION FUNDS
DISTRIBUTOR'S CONTRACT
AGREEMENT made this 29th day of November, 1993, by and between FIRST
UNION FUNDS (the "Trust"), a Massachusetts business trust, and FEDERATED
SECURITIES CORP. ("FSC"), a Pennsylvania corporation.
In consideration of the mutual covenants hereinafter contained, it is
hereby agreed by and between the parties hereto as follows:
1. The Trust hereby appoints FSC as its agent to sell and distribute
shares of the Trust which may be offered in one or more series (the "Funds")
or classes (the "Classes") of shares (the "Shares") as described and set
forth on one or more exhibits to this Agreement at the current offering price
thereof as described and set forth in the current prospectuses of the Trust.
FSC hereby accepts such appointment and agrees to provide such other services
for the Trust, if any, and accept such compensation from the Trust, if any,
as set forth in the applicable exhibit to this Agreement. The Trust further
agrees that FSC shall be entitled to retain as a sales charge the difference
between the current offering price, as set forth in the current prospectus,
and net asset value. FSC shall further be entitled to receive any contingent
deferred sales charges ("CDSCs") as set forth in the current prospectus. The
Trust, through its agents, will make best efforts to collect and pay over to
FSC any sales charges or CDSCs to which FSC may be entitled.
2. The sale of any Shares may be suspended without prior notice
whenever in the judgment of the Trust it is in its best interest to do so.
3. Neither FSC nor any other person is authorized by the Trust to
give any information or to make any representation relative to any Shares
other than those contained in the Registration Statement, Prospectuses or
Statements of Additional Information ("SAI's") filed with the Securities and
Exchange Commission, as the same may be amended from time to time, or in any
supplemental information to said Prospectuses or SAI's approved by the Trust.
FSC agrees that any other information or representations other than those
specified above which it or any dealer or other person who purchases Shares
through FSC may make in connection with the offer or sale of Shares, shall be
made entirely without liability on the part of the Trust. No person or
dealer, other than FSC, is authorized to act as agent for the Trust for any
purpose. FSC agrees that in offering or selling Shares as agent of the
Trust, it will, in all respects, duly conform to all applicable state and
federal laws and the rules and regulations of the National Association of
Securities Dealers, Inc., including its Rules of Fair Practice. FSC will
submit to the Trust copies of all sales literature before using the same and
will not use such sales literature if disapproved by the Trust.
4. This Agreement shall continue in effect for one year from the
date of its execution (or in the case of a Fund or Class that is added to the
Trust following the date of such execution, the date that the applicable
exhibit with respect to such Fund or Class is added hereto) and thereafter
for successive periods of one year if such continuance is approved at least
annually by the Trustees of the Trust including a majority of the members of
the Board of Trustees of the Trust who are not interested persons of the
Trust and have no direct or indirect financial interest in the operation of
any Distribution Plan relating to the Trust or in any related documents to
such Plan ("Disinterested Trustees") cast in person at a meeting called for
that purpose.
5. This Agreement may be terminated with regard to a particular Fund
or Class at any time, without the payment of any penalty, by the vote of a
majority of the Disinterested Trustees or by a majority of the outstanding
voting securities of the particular Fund or Class on not more than sixty (60)
days' written notice to any other party to this Agreement. This Agreement
may be terminated with regard to a particular Fund or Class by FSC on sixty
(60) days' written notice to the Trust.
6. This Agreement may not be assigned by FSC and shall automatically
terminate in the event of an assignment by FSC as defined in the Investment
Company Act of 1940, provided, however, that FSC may employ such other
person, persons, corporation or corporations as it shall determine in order
to assist it in carrying out its duties under this Agreement.
7. FSC shall not be liable to the Trust 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 by this
Agreement. The Trust hereby agrees to indemnify and hold FSC and all
employees of FSC harmless for any acts, omissions, or statements made by the
Trust or any of its officers, directors, or agents prior to July 17, 1990,
provided, however, that the Trust will not indemnify FSC for any loss or
claim against FSC resulting from the negligence of FSC.
8. This Agreement may be amended at any time by mutual agreement in
writing of all the parties hereto, provided that such amendment is approved
by the Trustees of the Trust including a majority of the Disinterested
Trustees of the Trust cast in person at a meeting called for that purpose.
9. This Agreement shall be construed in accordance with and governed
by the laws of the Commonwealth of Pennsylvania.
10. (a) Subject to Section 7 above and the conditions set forth
below, the Trust agrees to indemnify and hold harmless FSC and each person,
if any, who controls FSC within the meaning of Section 15 of the Securities
Act of 1933 and Section 20 of the Securities Act of 1934, as amended, against
any and all loss, liability, claim, damage and expense whatsoever (including
but not limited to any and all expenses whatsoever reasonably incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever) arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, Prospectuses or SAI's (as from time to time amended
and supplemented) or the omission or alleged omission therefrom of a material
fact required to be stated therein or necessary to make the statements
therein not misleading, unless such statement or omission was made in
reliance upon and in conformity with written information furnished to the
Trust about FSC by or on behalf of FSC expressly for use in the Registration
Statement, any Prospectuses, SAI's, or any amendment or supplement thereof.
If any action is brought against FSC or any controlling person thereof
with respect to which indemnity may be sought against the Trust pursuant to
the foregoing paragraph, FSC shall promptly notify the Trust in writing of
the institution of such action and the Trust shall assume the defense of such
action, including the employment of counsel selected by the Trust and payment
of expenses. FSC or any such controlling person thereof shall have the right
to employ separate counsel in any such case, but the fees and expenses of
such counsel shall be at the expense of FSC or such controlling person unless
the employment of such counsel shall have been authorized in writing by the
Trust in connection with the defense of such action or the Trust shall not
have employed counsel to have charge of the defense of such action, in any of
which events such fees and expenses shall be borne by the Trust. Anything in
this paragraph to the contrary notwithstanding, the Trust shall not be liable
for any settlement of any such claim of action effected without its written
consent. The Trust agrees promptly to notify FSC of the commencement of any
litigation or proceedings against the Trust or any of its officers or
Trustees or controlling persons in connection with the issue and sale of
Shares or in connection with the Registration Statement, Prospectuses, or
SAI's.
(b) FSC or any of its affiliates agrees to indemnify and hold
harmless the Trust, each of its Trustees, each of its officers who have
signed the Registration Statement and each other person, if any, who controls
the Trust within the meaning of Section 15 of the Securities Act of 1933, but
only with respect to statements or omissions, if any, made in the
Registration Statement or any Prospectus, or SAI or any amendment or
supplement thereof in reliance upon, and in conformity with, information
furnished to the Trust about FSC by or on behalf of FSC expressly for use in
the Registration Statement or any Prospectus, SAI or any amendment or
supplement thereof. In case any action shall be brought against the Trust or
any other person so indemnified based on the Registration Statement or any
Prospectus, SAI, or any amendment or supplement thereof, and with respect to
which indemnity may be sought against FSC, FSC shall have the rights and
duties given to the Trust, and the Trust and each other person so indemnified
shall have the rights and duties given to FSC by the provisions of subsection
(a) above.
(c) Nothing herein contained shall be deemed to protect any person
against liability to the Trust or its shareholders to which such person would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of the duties of such person or by reason of
the reckless disregard by such person of the obligations and duties of such
person under this Agreement.
11. FSC is hereby expressly put on notice of the limitation of
liability as set forth in Article XI of the Declaration of Trust and agrees
that the obligations assumed by the Trust pursuant to this agreement shall be
limited in any case to the Trust and its assets and FSC shall not seek
satisfaction of any such obligation from the shareholders of the Trust, the
Trustees, officers, employees or agents of the Trust, or any of them.
12. FSC agrees to adopt compliance standards as to when each Class of
Shares may be sold to particular investors.
13. This Agreement will become binding on the parties hereto upon the
execution of the attached exhibits to the Agreement.
Exhibit A
THE FIRST UNION FUNDS
First Union Balanced Portfolio
Trust Shares
First Union Fixed Income Portfolio
Trust Shares
First Union Florida Municipal Bond Portfolio
Trust Shares
First Union Georgia Municipal Bond Portfolio
Trust Shares
First Union Insured Tax-Free Portfolio
Trust Shares
First Union Managed Bond Portfolio
Trust Shares
First Union Money Market Portfolio
Trust Shares
First Union North Carolina Municipal Bond Portfolio
Trust Shares
First Union South Carolina Municipal Bond Portfolio
Trust Shares
First Union Tax-Free Money Market Portfolio
Trust Shares
First Union Treasury Money Market Portfolio
Trust Shares
First Union U.S. Government Portfolio
Trust Shares
First Union Utility Portfolio
Trust Shares
First Union Value Portfolio
Trust Shares
First Union Virginia Municipal Bond Portfolio
Trust Shares
In consideration of the mutual covenants set forth in the Distributor's
Contract dated November 29, 1993, between First Union Funds and Federated
Securities Corp., First Union Funds executes and delivers this Exhibit on
behalf of the Funds with respect to the separate Classes of shares thereof
first set forth in this Exhibit.
Witness the due execution hereof this 29th day of November, 1993.
ATTEST: FIRST UNION FUNDS
/s/Peter J. Germain By:/s/Joseph S. Machi
Secretary Vice President
(SEAL)
ATTEST: FEDERATED SECURITIES CORP.
/s/Richard B. Fisher By:/s/Joseph S. Machi
Assistant Secretary Vice President
(SEAL)
Exhibit B
FIRST UNION FUNDS
First Union Balanced Portfolio
Class B Investment Shares
First Union Fixed Income Portfolio
Class B Investment Shares
First Union Florida Municipal Bond Portfolio
Class B Investment Shares
First Union Georgia Municipal Bond Portfolio
Class B Investment Shares
First Union Insured Tax-Free Portfolio
Class B Investment Shares
First Union Managed Bond Portfolio
Class B Investment Shares
First Union Money Market Portfolio
Class B Investment Shares
First Union North Carolina Municipal Bond Portfolio
Class B Investment Shares
First Union South Carolina Municipal Bond Portfolio
Class B Investment Shares
First Union Tax-Free Money Market Portfolio
Class B Investment Shares
First Union Treasury Money Market Portfolio
Class B Investment Shares
First Union U.S. Government Portfolio
Class B Investment Shares
First Union Utility Portfolio
Class B Investment Shares
First Union Value Portfolio
Class B Investment Shares
First Union Virginia Municipal Bond Portfolio
Class B Investment Shares
The following provisions are hereby incorporated and made part of the
Distributor's Contract dated the 29th day of November, 1993, between First
Union Funds and Federated Securities Corp., with respect to the Classes of
the Funds set forth above:
1. The Trust hereby appoints FSC to engage in activities principally
intended to result in the sale of shares of the Classes. Pursuant to this
appointment, FSC is authorized to select a group of brokers ("Brokers") to
sell shares of the above-listed Classes ("Shares"), at the current offering
price thereof as described and set forth in the prospectuses of the Trust,
and to render administrative support services to the Trust and its
shareholders. In addition, FSC is authorized to select a group of
administrators ("Administrators") to render administrative support services
to the Trust and its shareholders.
2. Administrative support services may include, but are not limited
to, the following eleven functions: (1) account openings: the Broker or
Administrator communicates account openings via computer terminals located on
the Broker or Administrator's premises; (2) account closings: the Broker or
Administrator communicates account closings via computer terminals; (3) enter
purchase transactions: purchase transactions are entered through the Broker
or Administrator's own personal computer or through the use of a toll-free
telephone number; (4) enter redemption transactions: Broker or Administrator
enters redemption transactions in the same manner as purchases; (5) account
maintenance: Broker or Administrator provides or arranges to provide
accounting support for all transactions. Broker or Administrator also wires
funds and receives funds for Trust Share purchases and redemptions, confirms
and reconciles all transactions, reviews the activity in the Trust's
accounts, and provides training and supervision of its personnel; (6)
interest posting: Broker or Administrator posts and reinvests dividends to
the Trust's accounts; (7) prospectus and shareholder reports: Broker or
Administrator maintains and distributes current copies of prospectuses and
shareholder reports; (8) advertisements: the Broker or Administrator
continuously advertises the availability of its services and products; (9)
customer lists: the Broker or Administrator continuously provides names of
potential customers; (10) design services: the Broker or Administrator
continuously designs material to send to customers and develops methods of
making such materials accessible to customers; and (11) consultation
services: the Broker or Administrator continuously provides information
about the product needs of customers.
3. During the term of this Agreement, the Trust will pay FSC for
services rendered pursuant to this Agreement, a maximum monthly fee computed
at the annual rate of .75 of 1% of the average aggregate net asset value of
the Class B Investment Shares of the Balanced, Fixed Income, Florida
Municipal Bond, Georgia Municipal Bond, Insured Tax-Free, Managed Bond, North
Carolina Municipal Bond, South Carolina Municipal Bond, U.S. Government,
Utilty, Value, and Virginia Municipal Bond portfolios. During the term of
this Agreement, the Trust will pay FSC for services pursuant to this
Agreement, a maximum monthly fee computed at the annual rate of .35 of 1% of
the average aggregate net asset value of the Class B Investment Shares of the
Money Market, Tax-Free Money Market, and Treasury Money Market portfolios.
For the month in which this Agreement becomes effective or terminates, there
shall be an appropriate proration of any fee payable on the basis of the
number of days that the Agreement is in effect during the month.
4. FSC will enter into a separate written agreement with various
firms to provide certain of the services in Paragraph One, herein. FSC, in
its sole discretion, may pay Brokers and Administrators a periodic fee in
respect of Shares owned from time to time by their clients or customers. The
schedules of such fees and the basis upon which such fees will be paid shall
be determined from time to time by FSC in its sole discretion.
5. FSC may sell, assign, pledge or hypothecate its rights to receive
fees hereunder in order to finance payments of commissions for the sale of
the Trust's Class B Investment Shares. It is understood that an assignee may
not further sell, assign, pledge, or hypothecate such fees unless such sale,
assignment, pledge or hypothecation has been approved by the vote of a
majority of the Board of Trustees of the Trust, including a majority of the
Disinterested Trustees, cast in person at a meeting called for the purpose of
voting on such approval.
6. FSC will prepare reports to the Board of Trustees of the Trust on
a quarterly basis showing amounts paid to the various Brokers and
Administrators and the purpose for such payments.
In consideration of the mutual covenants set forth in the Distributor's
Contract dated November 29, 1993, between First Union Funds and Federated
Securities Corp., First Union Funds executes and delivers this Exhibit on
behalf of the Funds and Classes first set forth in this Exhibit.
Witness the due execution hereof this 29th day of November, 1993.
ATTEST: FIRST UNION FUNDS
/s/Peter J. Germain By:/s/Joseph S. Machi
Secretary Vice President
(SEAL)
ATTEST: FEDERATED SECURITIES CORP.
/s/Richard B. Fisher By:/s/Joseph S. Machi
Assistant Secretary Vice President
(SEAL)
Exhibit C
FIRST UNION FUNDS
First Union Balanced Portfolio
Class C Investment Shares
First Union Fixed Income Portfolio
Class C Investment Shares
First Union Florida Municipal Bond Portfolio
Class C Investment Shares
First Union Georgia Municipal Bond Portfolio
Class C Investment Shares
First Union Insured Tax-Free Portfolio
Class C Investment Shares
First Union Managed Bond Portfolio
Class C Investment Shares
First Union Money Market Portfolio
Class C Investment Shares
First Union North Carolina Municipal Bond Portfolio
Class C Investment Shares
First Union South Carolina Municipal Bond Portfolio
Class C Investment Shares
First Union Tax-Free Money Market Portfolio
Class C Investment Shares
First Union Treasury Money Market Portfolio
Class C Investment Shares
First Union U.S. Government Portfolio
Class C Investment Shares
First Union Utility Portfolio
Class C Investment Shares
First Union Value Portfolio
Class C Investment Shares
First Union Virginia Municipal Bond Portfolio
Class C Investment Shares
The following provisions are hereby incorporated and made part of the
Distributor's Contract dated the 29th day of November, 1993, between First
Union Funds and Federated Securities Corp. with respect to the Classes of the
Funds set forth above:
1. The Trust hereby appoints FSC to engage in activities principally
intended to result in the sale of shares of the Classes. Pursuant to this
appointment, FSC is authorized to select a group of brokers ("Brokers") to
sell shares of the above-listed Classes ("Shares"), at the current offering
price thereof as described and set forth in the prospectuses of the Trust,
and to render administrative support services to the Trust and its
shareholders. In addition, FSC is authorized to select a group of
administrators ("Administrators") to render administrative support services
to the Trust and its shareholders.
2. Administrative support services may include, but are not limited
to, the following eleven functions: (1) account openings: the Broker or
Administrator communicates account openings via computer terminals located on
the Broker or Administrator's premises; (2) account closings: the Broker or
Administrator communicates account closings via computer terminals; (3) enter
purchase transactions: purchase transactions are entered through the Broker
or Administrator's own personal computer or through the use of a toll-free
telephone number; (4) enter redemption transactions: Broker or Administrator
enters redemption transactions in the same manner as purchases; (5) account
maintenance: Broker or Administrator provides or arranges to provide
accounting support for all transactions. Broker or Administrator also wires
funds and receives funds for Trust Share purchases and redemptions, confirms
and reconciles all transactions, reviews the activity in the Trust's
accounts, and provides training and supervision of its personnel; (6)
interest posting: Broker or Administrator posts and reinvests dividends to
the Trust's accounts; (7) prospectus and shareholder reports: Broker or
Administrator maintains and distributes current copies of prospectuses and
shareholder reports; (8) advertisements: the Broker or Administrator
continuously advertises the availability of its services and products; (9)
customer lists: the Broker or Administrator continuously provides names of
potential customers; (10) design services: the Broker or Administrator
continuously designs material to send to customers and develops methods of
making such materials accessible to customers; and (11) consultation
services: the Broker or Administrator continuously provides information
about the product needs of customers.
3. During the term of this Agreement, the Trust will pay FSC for
services rendered pursuant to this Agreement, a maximum monthly fee computed
at the annual rate of .75 of 1% of the average aggregate net asset value of
the Class C Investment Shares of the Balanced, Fixed Income, Florida
Municipal Bond, Georgia Municipal Bond, Insured Tax-Free, Managed Bond, Money
Market, North Carolina Municipal Bond, South Carolina Municipal Bond, Tax-
Free Treasury Money Market, Treasury Money Market, U.S. Government, Utilty,
Value, and Virginia Municipal Bond portfolios.
4. FSC will enter into a separate written agreement with various
Brokers and Administrators to provide certain of the services in Paragraph
One, herein. FSC, in its sole discretion, may pay Brokers and Administrators
a periodic fee in respect of Shares owned from time to time by their clients
or customers. The schedules of such fees and the basis upon which such fees
will be paid shall be determined from time to time by FSC in its sole
discretion.
5. FSC may sell, assign, pledge or hypothecate its rights to receive
fees hereunder in order to finance payments of commissions for the sale of
the Trust's Class C Investment Shares. It is understood that an assignee may
not further sell, assign, pledge, or hypothecate such fees unless such sale,
assignment, pledge or hypothecation has been approved by the vote of a
majority of the Board of Trustees of the Trust, including a majority of the
Disinterested Trustees, cast in person at a meeting called for the purpose of
voting on such approval.
6. FSC will prepare reports to the Board of Trustees of the Trust on
a quarterly basis showing amounts paid to the various firms and the purpose
for such payments.
In consideration of the mutual covenants set forth in the Distributor's
Contract dated November 29, 1993, between First Union Funds and Federated
Securities Corp., First Union Funds executes and delivers this Exhibit on
behalf of the Funds and Classes first set forth in this Exhibit.
Witness the due execution hereof this 29th day of November, 1993.
ATTEST: FIRST UNION FUNDS
/s/Peter J. Germain By:/s/Joseph S. Machi
Secretary Vice President
(SEAL)
ATTEST: FEDERATED SECURITIES CORP.
/s/Richard B. Fisher By:/s/Joseph S. Machi
Assistant Secretary Vice President
(SEAL)
Exhibit D
THE FIRST UNION FUNDS
First Union Emerging Markets Growth Portfolio
Trust Shares
First Union International Equity Portfolio
Trust Shares
In consideration of the mutual covenants set forth in the Distributor's
Contract dated November 29, 1993, between First Union Funds and Federated
Securities Corp., First Union Funds executes and delivers this Exhibit on
behalf of the Funds with respect to the separate Classes of shares thereof
first set forth in this Exhibit.
Witness the due execution hereof this 28th day of July, 1994.
ATTEST: FIRST UNION FUNDS
/s/Peter J. Germain By:/s/Joseph S. Machi
Secretary Vice President
(SEAL)
ATTEST: FEDERATED SECURITIES CORP.
/s/S. Elliott Cohan By:/s/Mark W. Bloss
Assistant Secretary Senior Vice President
(SEAL)
Exhibit E
FIRST UNION FUNDS
First Union Emerging Markets Growth Portfolio
Class B Investment Shares
First Union International Equity Portfolio
Class B Investment Shares
The following provisions are hereby incorporated and made part of the
Distributor's Contract dated the 29th day of November, 1993, between First
Union Funds and Federated Securities Corp., with respect to the Classes of
the Funds set forth above:
1. The Trust hereby appoints FSC to engage in activities principally
intended to result in the sale of shares of the Classes. Pursuant to this
appointment, FSC is authorized to select a group of brokers ("Brokers") to
sell shares of the above-listed Classes ("Shares"), at the current offering
price thereof as described and set forth in the prospectuses of the Trust,
and to render administrative support services to the Trust and its
shareholders. In addition, FSC is authorized to select a group of
administrators ("Administrators") to render administrative support services
to the Trust and its shareholders.
2. Administrative support services may include, but are not limited
to, the following eleven functions: (1) account openings: the Broker or
Administrator communicates account openings via computer terminals located on
the Broker or Administrator's premises; (2) account closings: the Broker or
Administrator communicates account closings via computer terminals; (3) enter
purchase transactions: purchase transactions are entered through the Broker
or Administrator's own personal computer or through the use of a toll-free
telephone number; (4) enter redemption transactions: Broker or Administrator
enters redemption transactions in the same manner as purchases; (5) account
maintenance: Broker or Administrator provides or arranges to provide
accounting support for all transactions. Broker or Administrator also wires
funds and receives funds for Trust Share purchases and redemptions, confirms
and reconciles all transactions, reviews the activity in the Trust's
accounts, and provides training and supervision of its personnel; (6)
interest posting: Broker or Administrator posts and reinvests dividends to
the Trust's accounts; (7) prospectus and shareholder reports: Broker or
Administrator maintains and distributes current copies of prospectuses and
shareholder reports; (8) advertisements: the Broker or Administrator
continuously advertises the availability of its services and products; (9)
customer lists: the Broker or Administrator continuously provides names of
potential customers; (10) design services: the Broker or Administrator
continuously designs material to send to customers and develops methods of
making such materials accessible to customers; and (11) consultation
services: the Broker or Administrator continuously provides information
about the product needs of customers.
3. During the term of this Agreement, the Trust will pay FSC for
services rendered pursuant to this Agreement, a maximum monthly fee computed
at the annual rate of .75 of 1% of the average aggregate net asset value of
the Class B Investment Shares of the Emerging Markets Growth and
International Equity portfolios. For the month in which this Agreement
becomes effective or terminates, there shall be an appropriate proration of
any fee payable on the basis of the number of days that the Agreement is in
effect during the month.
4. FSC will enter into a separate written agreement with various
firms to provide certain of the services in Paragraph One, herein. FSC, in
its sole discretion, may pay Brokers and Administrators a periodic fee in
respect of Shares owned from time to time by their clients or customers. The
schedules of such fees and the basis upon which such fees will be paid shall
be determined from time to time by FSC in its sole discretion.
5. FSC may sell, assign, pledge or hypothecate its rights to receive
fees hereunder in order to finance payments of commissions for the sale of
the Trust's Class B Investment Shares. It is understood that an assignee may
not further sell, assign, pledge, or hypothecate such fees unless such sale,
assignment, pledge or hypothecation has been approved by the vote of a
majority of the Board of Trustees of the Trust, including a majority of the
Disinterested Trustees, cast in person at a meeting called for the purpose of
voting on such approval.
6. FSC will prepare reports to the Board of Trustees of the Trust on
a quarterly basis showing amounts paid to the various Brokers and
Administrators and the purpose for such payments.
In consideration of the mutual covenants set forth in the Distributor's
Contract dated November 29, 1993, between First Union Funds and Federated
Securities Corp., First Union Funds executes and delivers this Exhibit on
behalf of the Funds and Classes first set forth in this Exhibit.
Witness the due execution hereof this 28th day of July, 1994.
ATTEST: FIRST UNION FUNDS
/s/Peter J. Germain By:/s/Joseph S. Machi
Secretary Vice President
(SEAL)
ATTEST: FEDERATED SECURITIES CORP.
/s/S. Elliott Cohan By:/s/Mark W. Bloss
Assistant Secretary Senior Vice President
(SEAL)
Exhibit F
FIRST UNION FUNDS
First Union Emerging Markets Growth Portfolio
Class C Investment Shares
First Union International Equity Portfolio
Class C Investment Shares
The following provisions are hereby incorporated and made part of the
Distributor's Contract dated the 29th day of November, 1993, between First
Union Funds and Federated Securities Corp. with respect to the Classes of the
Funds set forth above:
1. The Trust hereby appoints FSC to engage in activities principally
intended to result in the sale of shares of the Classes. Pursuant to this
appointment, FSC is authorized to select a group of brokers ("Brokers") to
sell shares of the above-listed Classes ("Shares"), at the current offering
price thereof as described and set forth in the prospectuses of the Trust,
and to render administrative support services to the Trust and its
shareholders. In addition, FSC is authorized to select a group of
administrators ("Administrators") to render administrative support services
to the Trust and its shareholders.
2. Administrative support services may include, but are not limited
to, the following eleven functions: (1) account openings: the Broker or
Administrator communicates account openings via computer terminals located on
the Broker or Administrator's premises; (2) account closings: the Broker or
Administrator communicates account closings via computer terminals; (3) enter
purchase transactions: purchase transactions are entered through the Broker
or Administrator's own personal computer or through the use of a toll-free
telephone number; (4) enter redemption transactions: Broker or Administrator
enters redemption transactions in the same manner as purchases; (5) account
maintenance: Broker or Administrator provides or arranges to provide
accounting support for all transactions. Broker or Administrator also wires
funds and receives funds for Trust Share purchases and redemptions, confirms
and reconciles all transactions, reviews the activity in the Trust's
accounts, and provides training and supervision of its personnel; (6)
interest posting: Broker or Administrator posts and reinvests dividends to
the Trust's accounts; (7) prospectus and shareholder reports: Broker or
Administrator maintains and distributes current copies of prospectuses and
shareholder reports; (8) advertisements: the Broker or Administrator
continuously advertises the availability of its services and products; (9)
customer lists: the Broker or Administrator continuously provides names of
potential customers; (10) design services: the Broker or Administrator
continuously designs material to send to customers and develops methods of
making such materials accessible to customers; and (11) consultation
services: the Broker or Administrator continuously provides information
about the product needs of customers.
3. During the term of this Agreement, the Trust will pay FSC for
services rendered pursuant to this Agreement, a maximum monthly fee computed
at the annual rate of .75 of 1% of the average aggregate net asset value of
the Class C Investment Shares of the Emerging Markets Growth and
International Equity portfolios.
4. FSC will enter into a separate written agreement with various
Brokers and Administrators to provide certain of the services in Paragraph
One, herein. FSC, in its sole discretion, may pay Brokers and Administrators
a periodic fee in respect of Shares owned from time to time by their clients
or customers. The schedules of such fees and the basis upon which such fees
will be paid shall be determined from time to time by FSC in its sole
discretion.
5. FSC may sell, assign, pledge or hypothecate its rights to receive
fees hereunder in order to finance payments of commissions for the sale of
the Trust's Class C Investment Shares. It is understood that an assignee may
not further sell, assign, pledge, or hypothecate such fees unless such sale,
assignment, pledge or hypothecation has been approved by the vote of a
majority of the Board of Trustees of the Trust, including a majority of the
Disinterested Trustees, cast in person at a meeting called for the purpose of
voting on such approval.
6. FSC will prepare reports to the Board of Trustees of the Trust on
a quarterly basis showing amounts paid to the various firms and the purpose
for such payments.
In consideration of the mutual covenants set forth in the Distributor's
Contract dated November 29, 1993, between First Union Funds and Federated
Securities Corp., First Union Funds executes and delivers this Exhibit on
behalf of the Funds and Classes first set forth in this Exhibit.
Witness the due execution hereof this 28th day of July, 1994.
ATTEST: FIRST UNION FUNDS
/s/Peter J. Germain By:/s/Joseph S. Machi
Secretary Vice President
(SEAL)
ATTEST: FEDERATED SECURITIES CORP.
/s/S. Elliott Cohan By:/s/Mark W. Bloss
Assistant Secretary Senior Vice President
(SEAL)
Exhibit G
FIRST UNION FUNDS
First Union Balanced Portfolio
Class D Investment Shares
First Union Emerging Markets Growth Portfolio
Class D Investment Shares
First Union Fixed Income Portfolio
Class D Investment Shares
First Union International Equity Portfolio
Class D Investment Shares
First Union U.S. Government Portfolio
Class D Investment Shares
First Union Utility Portfolio
Class D Investment Shares
First Union Value Portfolio
Class D Investment Shares
The following provisions are hereby incorporated and made part of the
Distributor's Contract dated the 29th day of November, 1993, between First
Union Funds and Federated Securities Corp. with respect to the Classes of the
Funds set forth above:
1. The Trust hereby appoints FSC to engage in activities principally
intended to result in the sale of shares of the Classes. Pursuant to this
appointment, FSC is authorized to select a group of brokers ("Brokers") to
sell shares of the above-listed Classes ("Shares"), at the current offering
price thereof as described and set forth in the prospectuses of the Trust,
and to render administrative support services to the Trust and its
shareholders. In addition, FSC is authorized to select a group of
administrators ("Administrators") to render administrative support services
to the Trust and its shareholders.
2. Administrative support services may include, but are not limited
to, the following eleven functions: (1) account openings: the Broker or
Administrator communicates account openings via computer terminals located on
the Broker or Administrator's premises; (2) account closings: the Broker or
Administrator communicates account closings via computer terminals; (3) enter
purchase transactions: purchase transactions are entered through the Broker
or Administrator's own personal computer or through the use of a toll-free
telephone number; (4) enter redemption transactions: Broker or Administrator
enters redemption transactions in the same manner as purchases; (5) account
maintenance: Broker or Administrator provides or arranges to provide
accounting support for all transactions. Broker or Administrator also wires
funds and receives funds for Trust Share purchases and redemptions, confirms
and reconciles all transactions, reviews the activity in the Trust's
accounts, and provides training and supervision of its personnel; (6)
interest posting: Broker or Administrator posts and reinvests dividends to
the Trust's accounts; (7) prospectus and shareholder reports: Broker or
Administrator maintains and distributes current copies of prospectuses and
shareholder reports; (8) advertisements: the Broker or Administrator
continuously advertises the availability of its services and products; (9)
customer lists: the Broker or Administrator continuously provides names of
potential customers; (10) design services: the Broker or Administrator
continuously designs material to send to customers and develops methods of
making such materials accessible to customers; and (11) consultation
services: the Broker or Administrator continuously provides information
about the product needs of customers.
3. During the term of this Agreement, the Trust will pay FSC for
services rendered pursuant to this Agreement, a maximum monthly fee computed
at the annual rate of .75 of 1% of the average aggregate net asset value of
the Class D Investment Shares of the Balanced, Emerging Markets Growth, Fixed
Income, International Equity, U.S. Government, Utilty, and Value portfolios.
4. FSC will enter into a separate written agreement with various
Brokers and Administrators to provide certain of the services in Paragraph
One, herein. FSC, in its sole discretion, may pay Brokers and Administrators
a periodic fee in respect of Shares owned from time to time by their clients
or customers. The schedules of such fees and the basis upon which such fees
will be paid shall be determined from time to time by FSC in its sole
discretion.
5. FSC may sell, assign, pledge or hypothecate its rights to receive
fees hereunder in order to finance payments of commissions for the sale of
the Trust's Class D Investment Shares. It is understood that an assignee may
not further sell, assign, pledge, or hypothecate such fees unless such sale,
assignment, pledge or hypothecation has been approved by the vote of a
majority of the Board of Trustees of the Trust, including a majority of the
Disinterested Trustees, cast in person at a meeting called for the purpose of
voting on such approval.
6. FSC will prepare reports to the Board of Trustees of the Trust on
a quarterly basis showing amounts paid to the various firms and the purpose
for such payments.
In consideration of the mutual covenants set forth in the Distributor's
Contract dated November 29, 1993, between First Union Funds and Federated
Securities Corp., First Union Funds executes and delivers this Exhibit on
behalf of the Funds and Classes first set forth in this Exhibit.
Witness the due execution hereof this 28th day of July, 1994.
ATTEST: FIRST UNION FUNDS
/s/Peter J. Germain By:/s/Joseph S. Machi
Secretary Vice President
(SEAL)
ATTEST: FEDERATED SECURITIES CORP.
/s/S. Elliott Cohan By:/s/Mark W. Bloss
Assistant Secretary Senior Vice President
(SEAL)
Exhibit 6(i) under Form N-1A
Exhibit 1 under Item 601/Reg. S-K
THE SALEM FUNDS
DISTRIBUTOR'S CONTRACT
AGREEMENT made this 19th day of October, 1990, by and between THE SALEM
FUNDS (the "Trust"), a Massachusetts business trust, and FEDERATED SECURITIES
CORP. ("FSC"), a Pennsylvania Corporation.
In consideration of the mutual covenants hereinafter contained, it is
hereby agreed by and between the parties hereto as follows:
1. The Trust hereby appoints FSC as its agent to sell and distribute
shares of the Trust which may be offered in one or more series (the "Funds")
or classes (the "Classes") of shares (the "Shares") as described and set
forth on one or more exhibits to this Agreement at the current offering price
thereof as described and set forth in the current prospectuses of the Trust.
FSC hereby accepts such appointment and agrees to provide such other services
for the Trust, if any, and accept such compensation from the Trust, if any,
as set forth in the applicable exhibit to this Agreement.
2. The sale of any Shares may be suspended without prior notice
whenever in the judgment of the Trust it is in its best interest to do so.
3. Neither FSC nor any other person is authorized by the Trust to
give any information or to make any representation relative to any Shares
other than those contained in the Registration Statement, Prospectuses or
Statements of Additional Information ("SAI's") filed with the Securities and
Exchange Commission, as the same may be amended from time to time, or in any
supplemental information to said Prospectuses or SAI's approved by the Trust.
FSC agrees that any other information or representations other than those
specified above which it or any dealer or other person who purchases Shares
through FSC may make in connection with the offer or sale of Shares, shall be
made entirely without liability on the part of the Trust. No person or
dealer, other than FSC, is authorized to act as agent for the Trust for any
purpose. FSC agrees that in offering or selling Shares as agent of the
Trust, it will, in all respects, duly conform to all applicable state and
federal laws and the rules and regulations of the National Association of
Securities Dealers, Inc., including its Rules of Fair Practice. FSC will
submit to the Trust copies of all sales literature before using the same and
will not use such sales literature if disapproved by the Trust.
4. This Agreement shall continue in effect for one year from the
date of its execution (or in the case of a Fund or Class that is added to the
Trust following the date of such execution, the date that the applicable
exhibit with respect to such Fund or Class is added hereto) and thereafter
for successive periods of one year if such continuance is approved at least
annually by the Trustees of the Trust including a majority of the members of
the Board of Trustees of the Trust who are not interested persons of the
Trust and have no direct or indirect financial interest in the operation of
any Distribution Plan relating to the Trust or in any related documents to
such Plan ("Disinterested Trustees") cast in person at a meeting for that
purpose.
5. This Agreement may be terminated with regard to a particular Fund
or Class at any time, without the payment of any penalty, by the vote of a
majority of the Disinterested Trustees or by a majority of the outstanding
voting securities of the particular Fund or Class on not more than sixty (60)
days' written notice to any other party to this Agreement. This Agreement
may be terminated with regard to a particular Fund or Class by FSC on sixty
(60) days' written notice to the Trust.
6. This Agreement may not be assigned by FSC and shall automatically
terminate in the event of an assignment by FSC as defined in the Investment
Company Act of 1940, provided, however, that FSC may employ such other
person, persons, corporation or corporations as it shall determine in order
to assist it in carrying out its duties under this Agreement.
7. FSC shall not be liable to the Trust 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 by this
Agreement. The Trust hereby agrees to indemnify and hold FSC and all
employees of FSC harmless for any acts, ommissions, or statements made by the
Trust or any of its officers, directors, or agents prior to July 17, 1990,
provided, however, that the Trust will not indemnify FSC for any loss or
claim against FSC resulting from the negligence of FSC.
8. This Agreement may be amended at any time by mutual agreement in
writing of all the parties hereto, provided that such amendment is approved
by the Trustees of the Trust including a majority of the Disinterested
Trustees of the Trust cast in person at a meeting called for that purpose.
9. This Agreement shall be construed in accordance with and governed
by the laws of the Commonwealth of Pennsylvania.
10. (a) Subject to the conditions set forth below, the Trust agrees
to indemnify and hold harmless FSC and each person, if any, who controls FSC
within the meaning of Section 15 of the Securities Act of 1933 and Section 20
of the Securities Act of 1934, as amended, against any and all loss,
liability, claim, damage and expense whatsoever (including but not limited to
any and all expenses whatsoever reasonably incurred in investigating,
preparing or defending against any litigation, commenced or threatened, or
any claim whatsoever) arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement, Prospectuses or SAI's (as from time to time amended and
supplemented) or the omission or alleged omission therefrom of a material
fact required to be stated therein or necessary to make the statements
therein not misleading, unless such statement or omission was made in
reliance upon and in conformity with written information furnished to the
Trust about FSC by or on behalf of FSC expressly for use in the Registration
Statement, any Prospectuses, SAI's, or any amendment or supplement thereof.
If any action is brought against FSC or any controlling person thereof
with respect to which indemnity may be sought against the Trust pursuant to
the foregoing paragraph, FSC shall promptly notify the Trust in writing of
the institution of such action and the Trust shall assume the defense of such
action, including the employment of counsel selected by the Trust and payment
of expenses. FSC or any such controlling person thereof shall have the right
to employ separate counsel in any such case, but the fees and expenses of
such counsel shall be at the expense of FSC or such controlling person unless
the employment of such counsel shall have been authorized in writing by the
Trust in connection with the defense of such action or the Trust shall not
have employed counsel to have charge of the defense of such action, in any of
which events such fees and expenses shall be borne by the Trust. Anything in
this paragraph to the contrary notwithstanding, the Trust shall not be liable
for any settlement of any such claim of action effected without its written
consent. The Trust agrees promptly to notify FSC of the commencement of any
litigation or proceedings against the Trust or any of its officers or
Trustees or controlling persons in connection with the issue and sale of
Shares or in connection with the Registration Statement, Prospectuses, or
SAI's.
(b) FSC or any of its affiliates agrees to indemnify and hold
harmless the Trust, each of its Trustees, each of its officers who have
signed the Registration Statement and each other person, if any, who controls
the Trust within the meaning of Section 15 of the Securities Act of 1933, but
only with respect to statements or omissions, if any, made in the
Registration Statement or any Prospectus, or SAI or any amendment or
supplement thereof in reliance upon, and in conformity with, information
furnished to the Trust about FSC by or on behalf of FSC expressly for use in
the Registration Statement or any Prospectus, SAI or any amendment or
supplement thereof. In case any action shall be brought against the Trust or
any other person so indemnified based on the Registration Statement or any
Prospectus, SAI, or any amendment or supplement thereof, and with respect to
which indemnity may be sought against FSC, FSC shall have the rights and
duties given to the Trust, and the Trust and each other person so indemnified
shall have the rights and duties given to FSC by the provisions of subsection
(a) above.
(c) Nothing herein contained shall be deemed to protect any person
against liability to the Trust or its shareholders to which such person would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of the duties of such person or by reason of
the reckless disregard by such person of the obligations and duties of such
person under this Agreement.
11. FSC is hereby expressly put on notice of the limitation of
liability as set forth in Article XI of the Declaration of Trust and agrees
that the obligations assumed by the Trust pursuant to this agreement shall be
limited in any case to the Trust and its assets and FSC shall not seek
satisfaction of any such obligation from the shareholders of the Trust, the
Trustees, officers, employees or agents of the Trust, or any of them.
12. FSC agrees to adopt compliance standards as to when each Class of
Shares may be sold to particular investors.
13. This Agreement will become binding on the parties hereto upon the
execution of the attached exhibits to the Agreement.
Exhibit A
THE SALEM FUNDS
The Salem Growth Portfolio
Trust Shares
The Salem Fixed Income Portfolio
Trust Shares
Investment Shares
The Salem Tax Free Portfolio
Trust Shares
The Salem Tax Free Money Market Portfolio
Trust Shares
The Salem Money Market Portfolio
Trust Shares
The Salem Treasury Money Market Portfolio
Trust Shares
The Salem Managed Bond Portfolio
Trust Shares
The Salem Balanced Portfolio
Trust Shares
In consideration of the mutual covenants set forth in the Distributor's
Contract dated October 19, 1990 between The Salem Funds and Federated
Securities Corp., The Salem Funds executes and delivers this Exhibit on
behalf of the Funds with respect to the separate classes of shares thereof
first set forth in this Exhibit.
Witness the due execution hereof this 19th day of October, 1990
ATTEST: THE SALEM FUNDS
/s/ S. Elliott Cohan By:/s/ E. C. Gonzales
Assistant Secretary President
(SEAL)
ATTEST: FEDERATED SECURITIES CORP.
/s/ John W. McGonigle By:/s/ Richard B. Fisher
Assistant Secretary President
(SEAL)
Exhibit B
THE SALEM FUNDS
The Salem Growth Portfolio
Investment Shares
The Salem Tax Free Portfolio
Investment Shares
The Salem Tax Free Money Market Portfolio
Investment Shares
The Salem Money Market Portfolio
Investment Shares
The Salem Treasury Money Market Portfolio
Investment Shares
The Salem Managed Bond Portfolio
Investment Shares
The Salem Balanced Portfolio
Investment Shares
The following provisions are hereby incorporated and made part of the
Distributor's Contract dated the 19th day of October, 1990, between The
Salem Funds and Federated Securities Corp. with respect to the Classes of the
Funds set forth above:
1. The Trust hereby appoints FSC to engage in activities principally
intended to result in the sale of shares of the Classes. Pursuant to this
appointment FSC is authorized to select a group of brokers ("Brokers") to
sell shares of the above-listed Classes ("Shares"), at the current offering
price thereof as described and set forth in the prospectuses of the Trust,
and to render administrative support services to the Trust and its
shareholders. In addition, FSC is authorized to select a group of
Administrators ("Administrators") to render administrative support services
to the Trust and its shareholders.
2. Administrative support services may include, but are not limited
to, the following eleven functions: (1) account openings: the Broker or
Administrator communicates account openings via computer terminals located on
the Broker or Administrator's premises; 2) account closings: the Broker or
Administrator communicates account closings via computer terminals; 3) enter
purchase transactions: purchase transactions are entered through the Broker
or Administrator's own personal computer or through the use of a toll-free
telephone number; 4) enter redemption transactions: Broker or Administrator
enters redemption transactions in the same manner as purchases; 5) account
maintenance: Broker or Administrator provides or arranges to provide
accounting support for all transactions. Broker or Administrator also wires
funds and receives funds for Trust share purchases and redemptions, confirms
and reconciles all transactions, reviews the activity in the Trust's
accounts, and provides training and supervision of its personnel; 6) interest
posting: Broker or Administrator posts and reinvests dividends to the
Trust's accounts; 7) prospectus and shareholder reports: Broker or
Administrator maintains and distributes current copies of prospectuses and
shareholder reports; 8) advertisements: the Broker or Administrator
continuously advertises the availability of its services and products; 9)
customer lists: the Broker or Administrator continuously provides names of
potential customers; 10) design services: the Broker or Administrator
continuously designs material to send to customers and develops methods of
making such materials accessible to customers; and 11) consultation services:
the Broker or Administrator continuously provides information about the
product needs of customers.
3. During the term of this Agreement, the Trust will pay FSC for
services pursuant to this Agreement, a monthly fee computed at the annual
rate of .25% of the average aggregate net asset value of the Investment
Shares of the Managed Bond, Balanced, Growth, and Tax Free portfolios and
.30% of the average aggregate net asset value of the Tax Free Money Market,
Money Market, and Treasury Money Market portfolios, held during the month.
For the month in which this Agreement becomes effective or terminates, there
shall be an appropriate proration of any fee payable on the basis of the
number of days that the Agreement is in effect during the month.
4. FSC will enter into a separate written agreement with various
firms to provide certain of the services in Paragraph One, herein. FSC, in
its sole discretion, may pay Brokers and Administrators a periodic fee in
respect of Shares owned from time to time by their clients or customers. The
schedules of such fees and the basis upon which such fees will be paid shall
be determined from time to time by FSC in its sole discretion.
5. FSC will prepare reports to the Board of Trustees of the Trust on
a quarterly basis showing amounts paid to the various firms and the purpose
for such payments.
In consideration of the mutual covenants set forth in the Distributor's
Contract dated October 19, 1990 between The Salem Funds and Federated
Securities Corp., The Salem Funds executes and delivers this Exhibit on
behalf of the Funds and Classes first set forth in this Exhibit.
Witness the due execution hereof this 19th day of October, 1990
ATTEST: THE SALEM FUNDS
/s/ S. Elliott Cohan By:/s/ E. C. Gonzales
Assistant Secretary President
(SEAL)
ATTEST: FEDERATED SECURITIES CORP.
/s/ John W. McGonigle By:/s/ Richard B. Fisher
Assistant Secretary President
(SEAL)
Exhibit C
THE SALEM FUNDS
The Salem Insured Tax-Free Portfolio
Trust Shares
In consideration of the mutual covenants set forth in the Distributor's
Contract dated October 19, 1990 between The Salem Funds and Federated
Securities Corp., The Salem Funds executes and delivers this Exhibit on
behalf of the Funds with respect to the separate classes of shares thereof
first set forth in this Exhibit.
Witness the due execution hereof this 9th day of January, 1992.
ATTEST: THE SALEM FUNDS
/s/ C. Grant Anderson By:/s/ E. C. Gonzales
Secretary President
(SEAL)
ATTEST: FEDERATED SECURITIES CORP.
/s/ S. Elliott Cohan By:/s/ Richard B. Fisher
Secretary President
(SEAL)
Exhibit D
THE SALEM FUNDS
The Salem Insured Tax-Free Portfolio
Investment Shares
The following provisions are hereby incorporated and made part of the
Distributor's Contract dated the 19th day of October, 1990, between The
Salem Funds and Federated Securities Corp. with respect to the Classes of the
Funds set forth above:
1. The Trust hereby appoints FSC to engage in activities principally
intended to result in the sale of shares of the Classes. Pursuant to this
appointment FSC is authorized to select a group of brokers ("Brokers") to
sell shares of the above-listed Classes ("Shares"), at the current offering
price thereof as described and set forth in the prospectuses of the Trust,
and to render administrative support services to the Trust and its
shareholders. In addition, FSC is authorized to select a group of
Administrators ("Administrators") to render administrative support services
to the Trust and its shareholders.
2. Administrative support services may include, but are not limited
to, the following eleven functions: (1) account openings: the Broker or
Administrator communicates account openings via computer terminals located on
the Broker or Administrator's premises; 2) account closings: the Broker or
Administrator communicates account closings via computer terminals; 3) enter
purchase transactions: purchase transactions are entered through the Broker
or Administrator's own personal computer or through the use of a toll-free
telephone number; 4) enter redemption transactions: Broker or Administrator
enters redemption transactions in the same manner as purchases; 5) account
maintenance: Broker or Administrator provides or arranges to provide
accounting support for all transactions. Broker or Administrator also wires
funds and receives funds for Trust share purchases and redemptions, confirms
and reconciles all transactions, reviews the activity in the Trust's
accounts, and provides training and supervision of its personnel; 6) interest
posting: Broker or Administrator posts and reinvests dividends to the
Trust's accounts; 7) prospectus and shareholder reports: Broker or
Administrator maintains and distributes current copies of prospectuses and
shareholder reports; 8) advertisements: the Broker or Administrator
continuously advertises the availability of its services and products; 9)
customer lists: the Broker or Administrator continuously provides names of
potential customers; 10) design services: the Broker or Administrator
continuously designs material to send to customers and develops methods of
making such materials accessible to customers; and 11) consultation services:
the Broker or Administrator continuously provides information about the
product needs of customers.
3. During the term of this Agreement, the Trust will pay FSC for
services pursuant to this Agreement, a monthly fee computed at the annual
rate of .25% of the average aggregate net asset value of the Investment
Shares of the Managed Bond, Balanced, Growth, and Tax-Free portfolios and
.30% of the average aggregate net asset value of the Tax-Free Money Market,
Money Market, and Treasury Money Market portfolios, held during the month.
For the month in which this Agreement becomes effective or terminates, there
shall be an appropriate proration of any fee payable on the basis of the
number of days that the Agreement is in effect during the month.
4. FSC will enter into a separate written agreement with various
firms to provide certain of the services in Paragraph One, herein. FSC, in
its sole discretion, may pay Brokers and Administrators a periodic fee in
respect of Shares owned from time to time by their clients or customers. The
schedules of such fees and the basis upon which such fees will be paid shall
be determined from time to time by FSC in its sole discretion.
5. FSC will prepare reports to the Board of Trustees of the Trust on
a quarterly basis showing amounts paid to the various firms and the purpose
for such payments.
In consideration of the mutual covenants set forth in the Distributor's
Contract dated October 19, 1990 between The Salem Funds and Federated
Securities Corp., The Salem Funds executes and delivers this Exhibit on
behalf of the Funds and Classes first set forth in this Exhibit.
Witness the due execution hereof this 9th day of January, 1992.
ATTEST: THE SALEM FUNDS
/s/ C. Grant Anderson By:/s/ E. C. Gonzales
Secretary President
(SEAL)
ATTEST: FEDERATED SECURITIES CORP.
/s/ S. Elliott Cohan By:/s/ Richard B. Fisher
Secretary President
(SEAL)
Exhibit #6 under Form N-1A
Exhibit #1 under 601/Reg S-K
Exhibit E
THE SALEM FUNDS
The Salem U.S. Government Portfolio
Trust Shares
The Salem North Carolina Municipal Bond Portfolio
Trust Shares
In consideration of the mutual covenants set forth in the Distributor's
Contract dated October 19, 1990 between The Salem Funds and Federated
Securities Corp., The Salem Funds executes and delivers this Exhibit on
behalf of the Funds with respect to the separate classes of shares thereof
first set forth in this Exhibit.
Witness the due execution hereof this 28th day of December, 1992.
ATTEST: THE SALEM FUNDS
/s/ C. Grant Anderson By:/s/ E. C. Gonzales
Secretary President
(SEAL)
ATTEST: FEDERATED SECURITIES CORP.
/s/ S. Elliott Cohan By:/s/ Richard B. Fisher
Secretary President
(SEAL)
Exhibit F
THE SALEM FUNDS
The Salem U.S. Government Portfolio
Class B Investment Shares
The Salem North Carolina Municipal Bond Portfolio
Class B Investment Shares
The following provisions are hereby incorporated and made part of the
Distributor's Contract dated the 19th day of October, 1990, between The Salem
Funds and Federated Securities Corp. with respect to the Classes of the Funds
set forth above:
1. The Trust hereby appoints FSC to engage in activities principally
intended to result in the sale of shares of the Classes. Pursuant to this
appointment FSC is authorized to select a group of brokers ("Brokers") to
sell shares of the above-listed Classes ("Shares"), at the current offering
price thereof as described and set forth in the prospectuses of the Trust,
and to render administrative support services to the Trust and its
shareholders. In addition, FSC is authorized to select a group of
Administrators ("Administrators") to render administrative support services
to the Trust and its shareholders.
2. Administrative support services may include, but are not limited
to, the following eleven functions: (1) account openings: the Broker or
Administrator communicates account openings via computer terminals located on
the Broker or Administrator's premises; 2) account closings: the Broker or
Administrator communicates account closings via computer terminals; 3) enter
purchase transactions: purchase transactions are entered through the Broker
or Administrator's own personal computer or through the use of a toll-free
telephone number; 4) enter redemption transactions: Broker or Administrator
enters redemption transactions in the same manner as purchases; 5) account
maintenance: Broker or Administrator provides or arranges to provide
accounting support for all transactions. Broker or Administrator also wires
funds and receives funds for Trust share purchases and redemptions, confirms
and reconciles all transactions, reviews the activity in the Trust's
accounts, and provides training and supervision of its personnel; 6) interest
posting: Broker or Administrator posts and reinvests dividends to the
Trust's accounts; 7) prospectus and shareholder reports: Broker or
Administrator maintains and distributes current copies of prospectuses and
shareholder reports; 8) advertisements: the Broker or Administrator
continuously advertises the availability of its services and products; 9)
customer lists: the Broker or Administrator continuously provides names of
potential customers; 10) design services: the Broker or Administrator
continuously designs material to send to customers and develops methods of
making such materials accessible to customers; and 11) consultation services:
the Broker or Administrator continuously provides information about the
product needs of customers.
3. During the term of this Agreement, the Trust will pay FSC for
services pursuant to this Agreement, a monthly fee computed at the annual
rate of .25% of the average aggregate net asset value of the Class B
Investment Shares of the Managed Bond, Balanced, Value, Insured Tax-Free,
Fixed Income, U.S. Government and North Carolina Municipal Bond portfolios
and .30% of the average aggregate net asset value of the Tax-Free Money
Market, Money Market, and Treasury Money Market portfolios, held during the
month. For the month in which this Agreement becomes effective or
terminates, there shall be an appropriate proration of any fee payable on the
basis of the number of days that the Agreement is in effect during the month.
4. FSC will enter into a separate written agreement with various
firms to provide certain of the services in Paragraph One, herein. FSC, in
its sole discretion, may pay Brokers and Administrators a periodic fee in
respect of Shares owned from time to time by their clients or customers. The
schedules of such fees and the basis upon which such fees will be paid shall
be determined from time to time by FSC in its sole discretion.
5. FSC will prepare reports to the Board of Trustees of the Trust on
a quarterly basis showing amounts paid to the various firms and the purpose
for such payments.
In consideration of the mutual covenants set forth in the Distributor's
Contract dated October 19, 1990 between The Salem Funds and Federated
Securities Corp., The Salem Funds executes and delivers this Exhibit on
behalf of the Funds and Classes first set forth in this Exhibit.
Witness the due execution hereof this 28th day of December, 1992.
ATTEST: THE SALEM FUNDS
/s/ C. Grant Anderson By:/s/ E. C. Gonzales
Secretary President
(SEAL)
ATTEST: FEDERATED SECURITIES CORP.
/s/ S. Elliott Cohan By:/s/ Richard B. Fisher
Secretary President
(SEAL)
Exhibit G
THE SALEM FUNDS
The Salem Balanced Portfolio
Class C Investment Shares
The Salem Fixed Income Portfolio
Class C Investment Shares
The Salem Managed Bond Portfolio
Class C Investment Shares
The Salem Insured Tax Free Portfolio
Class C Investment Shares
The Salem Value Portfolio
Class C Investment Shares
The Salem U.S. Government Portfolio
Class C Investment Shares
The Salem North Carolina Municipal Bond Portfolio
Class C Investment Shares
The following provisions are hereby incorporated and made part of the
Distributor's Contract dated the 19th day of October, 1990, between The
Salem Funds and Federated Securities Corp. with respect to the Classes of the
Funds set forth above:
1. The Trust hereby appoints FSC to engage in activities principally
intended to result in the sale of shares of the Classes. Pursuant to this
appointment FSC is authorized to select a group of brokers ("Brokers") to
sell shares of the above-listed Classes ("Shares"), at the current offering
price thereof as described and set forth in the prospectuses of the Trust,
and to render administrative support services to the Trust and its
shareholders. In addition, FSC is authorized to select a group of
Administrators ("Administrators") to render administrative support services
to the Trust and its shareholders.
2. Administrative support services may include, but are not limited
to, the following eleven functions: (1) account openings: the Broker or
Administrator communicates account openings via computer terminals located on
the Broker or Administrator's premises; 2) account closings: the Broker or
Administrator communicates account closings via computer terminals; 3) enter
purchase transactions: purchase transactions are entered through the Broker
or Administrator's own personal computer or through the use of a toll-free
telephone number; 4) enter redemption transactions: Broker or Administrator
enters redemption transactions in the same manner as purchases; 5) account
maintenance: Broker or Administrator provides or arranges to provide
accounting support for all transactions. Broker or Administrator also wires
funds and receives funds for Trust share purchases and redemptions, confirms
and reconciles all transactions, reviews the activity in the Trust's
accounts, and provides training and supervision of its personnel; 6) interest
posting: Broker or Administrator posts and reinvests dividends to the
Trust's accounts; 7) prospectus and shareholder reports: Broker or
Administrator maintains and distributes current copies of prospectuses and
shareholder reports; 8) advertisements: the Broker or Administrator
continuously advertises the availability of its services and products; 9)
customer lists: the Broker or Administrator continuously provides names of
potential customers; 10) design services: the Broker or Administrator
continuously designs material to send to customers and develops methods of
making such materials accessible to customers; and 11) consultation services:
the Broker or Administrator continuously provides information about the
product needs of customers.
3. During the term of this Agreement, the Trust will pay FSC for
services pursuant to this Agreement, a monthly fee computed at the annual
rate of .75% of the average aggregate net asset value of the Class C
Investment Shares of the Balanced, Value, Insured Tax-Free, Fixed Income,
U.S. Government and North Carolina Municipal Bond, portfolios, held during
the month. For the month in which this Agreement becomes effective or
terminates, there shall be an appropriate proration of any fee payable on the
basis of the number of days that the Agreement is in effect during the month.
4. FSC will enter into a separate written agreement with various
firms to provide certain of the services in Paragraph One, herein. FSC, in
its sole discretion, may pay Brokers and Administrators a periodic fee in
respect of Shares owned from time to time by their clients or customers. The
schedules of such fees and the basis upon which such fees will be paid shall
be determined from time to time by FSC in its sole discretion.
5. FSC will prepare reports to the Board of Trustees of the Trust on
a quarterly basis showing amounts paid to the various firms and the purpose
for such payments.
In consideration of the mutual covenants set forth in the Distributor's
Contract dated October 19, 1990 between The Salem Funds and Federated
Securities Corp., The Salem Funds executes and delivers this Exhibit on
behalf of the Funds and Classes first set forth in this Exhibit.
Witness the due execution hereof this 28th day of December, 1992.
ATTEST: THE SALEM FUNDS
/s/ C. Grant Anderson By:/s/ E. C. Gonzales
Secretary President
(SEAL)
ATTEST: FEDERATED SECURITIES CORP.
/s/ S. Elliott Cohan By:/s/ Richard B. Fisher
Secretary President
(SEAL)
Exhibit H
FIRST UNION FUNDS
First Union Virginia Municipal Bond Portfolio
Trust Shares
First Union Georgia Municipal Bond Portfolio
Trust Shares
First Union Florida Municipal Bond Portfolio
Trust Shares
In consideration of the mutual covenants set forth in the Distributor's
Contract dated October 19, 1990 between First Union Funds and Federated
Securities Corp., First Union Funds executes and delivers this Exhibit on
behalf of the Funds with respect to the separate classes of shares thereof
first set forth in this Exhibit.
Witness the due execution hereof this 22nd day of April, 1993.
ATTEST: THE SALEM FUNDS
/s/ C. Grant Anderson By:/s/ E. C. Gonzales
Secretary President
(SEAL)
ATTEST: FEDERATED SECURITIES CORP.
/s/ S. Elliott Cohan By:/s/ Richard B. Fisher
Secretary President
(SEAL)
Exhibit I
First Union Funds
First Union Virginia Municipal Bond Portfolio
Class B Investment Shares
First Union Georgia Municipal Bond Portfolio
Class B Investment Shares
First Union Florida Municipal Bond Portfolio
Class B Investment Shares
The following provisions are hereby incorporated and made part of the
Distributor's Contract dated the 19th day of October, 1990, between First
Union Funds and Federated Securities Corp. with respect to the Classes of the
Funds set forth above:
1. The Trust hereby appoints FSC to engage in activities principally
intended to result in the sale of shares of the Classes. Pursuant to this
appointment FSC is authorized to select a group of brokers ("Brokers") to
sell shares of the above-listed Classes ("Shares"), at the current offering
price thereof as described and set forth in the prospectuses of the Trust,
and to render administrative support services to the Trust and its
shareholders. In addition, FSC is authorized to select a group of
Administrators ("Administrators") to render administrative support services
to the Trust and its shareholders.
2. Administrative support services may include, but are not limited
to, the following eleven functions: (1) account openings: the Broker or
Administrator communicates account openings via computer terminals located on
the Broker or Administrator's premises; 2) account closings: the Broker or
Administrator communicates account closings via computer terminals; 3) enter
purchase transactions: purchase transactions are entered through the Broker
or Administrator's own personal computer or through the use of a toll-free
telephone number; 4) enter redemption transactions: Broker or Administrator
enters redemption transactions in the same manner as purchases; 5) account
maintenance: Broker or Administrator provides or arranges to provide
accounting support for all transactions. Broker or Administrator also wires
funds and receives funds for Trust share purchases and redemptions, confirms
and reconciles all transactions, reviews the activity in the Trust's
accounts, and provides training and supervision of its personnel; 6) interest
posting: Broker or Administrator posts and reinvests dividends to the
Trust's accounts; 7) prospectus and shareholder reports: Broker or
Administrator maintains and distributes current copies of prospectuses and
shareholder reports; 8) advertisements: the Broker or Administrator
continuously advertises the availability of its services and products; 9)
customer lists: the Broker or Administrator continuously provides names of
potential customers; 10) design services: the Broker or Administrator
continuously designs material to send to customers and develops methods of
making such materials accessible to customers; and 11) consultation services:
the Broker or Administrator continuously provides information about the
product needs of customers.
3. During the term of this Agreement, the Trust will pay FSC for
services pursuant to this Agreement, a monthly fee computed at the annual
rate of .25% of the average aggregate net asset value of the Class B
Investment Shares of the Managed Bond, Balanced, Value, Insured Tax-Free,
Fixed Income, U.S. Government, North Carolina Municipal Bond, Virginia
Municipal Bond, Georgia Municipal Bond and Florida Municipal Bond portfolios
and .30% of the average aggregate net asset value of the Tax-Free Money
Market, Money Market, and Treasury Money Market portfolios, held during the
month. For the month in which this Agreement becomes effective or
terminates, there shall be an appropriate proration of any fee payable on the
basis of the number of days that the Agreement is in effect during the month.
4. FSC will enter into a separate written agreement with various
firms to provide certain of the services in Paragraph One, herein. FSC, in
its sole discretion, may pay Brokers and Administrators a periodic fee in
respect of Shares owned from time to time by their clients or customers. The
schedules of such fees and the basis upon which such fees will be paid shall
be determined from time to time by FSC in its sole discretion.
5. FSC will prepare reports to the Board of Trustees of the Trust on
a quarterly basis showing amounts paid to the various firms and the purpose
for such payments.
In consideration of the mutual covenants set forth in the Distributor's
Contract dated October 19, 1990 between First Union Funds and Federated
Securities Corp., First Union Funds executes and delivers this Exhibit on
behalf of the Funds and Classes first set forth in this Exhibit.
Witness the due execution hereof this 22nd day of April, 1993.
ATTEST: THE SALEM FUNDS
/s/ C. Grant Anderson By:/s/ E. C. Gonzales
Secretary President
(SEAL)
ATTEST: FEDERATED SECURITIES CORP.
/s/ S. Elliott Cohan By:/s/ John A. Staley
Secretary Executive Vice President
(SEAL)
Exhibit J
First Union Funds
First Union Virginia Municipal Bond Portfolio
Class C Investment Shares
First Union Georgia Municipal Bond Portfolio
Class C Investment Shares
First Union Florida Municipal Bond Portfolio
Class C Investment Shares
The following provisions are hereby incorporated and made part of the
Distributor's Contract dated the 19th day of October, 1990, between First
Union Funds and Federated Securities Corp. with respect to the Classes of the
Funds set forth above:
1. The Trust hereby appoints FSC to engage in activities principally
intended to result in the sale of shares of the Classes. Pursuant to this
appointment FSC is authorized to select a group of brokers ("Brokers") to
sell shares of the above-listed Classes ("Shares"), at the current offering
price thereof as described and set forth in the prospectuses of the Trust,
and to render administrative support services to the Trust and its
shareholders. In addition, FSC is authorized to select a group of
Administrators ("Administrators") to render administrative support services
to the Trust and its shareholders.
2. Administrative support services may include, but are not limited
to, the following eleven functions: (1) account openings: the Broker or
Administrator communicates account openings via computer terminals located on
the Broker or Administrator's premises; 2) account closings: the Broker or
Administrator communicates account closings via computer terminals; 3) enter
purchase transactions: purchase transactions are entered through the Broker
or Administrator's own personal computer or through the use of a toll-free
telephone number; 4) enter redemption transactions: Broker or Administrator
enters redemption transactions in the same manner as purchases; 5) account
maintenance: Broker or Administrator provides or arranges to provide
accounting support for all transactions. Broker or Administrator also wires
funds and receives funds for Trust share purchases and redemptions, confirms
and reconciles all transactions, reviews the activity in the Trust's
accounts, and provides training and supervision of its personnel; 6) interest
posting: Broker or Administrator posts and reinvests dividends to the
Trust's accounts; 7) prospectus and shareholder reports: Broker or
Administrator maintains and distributes current copies of prospectuses and
shareholder reports; 8) advertisements: the Broker or Administrator
continuously advertises the availability of its services and products; 9)
customer lists: the Broker or Administrator continuously provides names of
potential customers; 10) design services: the Broker or Administrator
continuously designs material to send to customers and develops methods of
making such materials accessible to customers; and 11) consultation services:
the Broker or Administrator continuously provides information about the
product needs of customers.
3. During the term of this Agreement, the Trust will pay FSC for
services pursuant to this Agreement, a monthly fee computed at the annual
rate of .75% of the average aggregate net asset value of the Class C
Investment Shares of the Balanced, Value, Insured Tax-Free, Fixed Income,
U.S. Government, North Carolina Municipal Bond, Virginia Municipal Bond,
Georgia Municipal Bond and Florida Municipal Bond portfolios, held during the
month. For the month in which this Agreement becomes effective or
terminates, there shall be an appropriate proration of any fee payable on the
basis of the number of days that the Agreement is in effect during the month.
4. FSC will enter into a separate written agreement with various
firms to provide certain of the services in Paragraph One, herein. FSC, in
its sole discretion, may pay Brokers and Administrators a periodic fee in
respect of Shares owned from time to time by their clients or customers. The
schedules of such fees and the basis upon which such fees will be paid shall
be determined from time to time by FSC in its sole discretion.
5. FSC will prepare reports to the Board of Trustees of the Trust on
a quarterly basis showing amounts paid to the various firms and the purpose
for such payments.
In consideration of the mutual covenants set forth in the Distributor's
Contract dated October 19, 1990 between First Union Funds and Federated
Securities Corp., First Union Funds executes and delivers this Exhibit on
behalf of the Funds and Classes first set forth in this Exhibit.
Witness the due execution hereof this 22nd day of April, 1993.
ATTEST: THE SALEM FUNDS
/s/ C. Grant Anderson By:/s/ E. C. Gonzales
Secretary President
(SEAL)
ATTEST: FEDERATED SECURITIES CORP.
/s/ S. Elliott Cohan By:/s/ John A. Staley
Secretary Executive Vice President
(SEAL)
Exhibit K
FIRST UNION FUNDS
First Union Utility Portfolio
Trust Shares
In consideration of the mutual covenants set forth in the Distributor's
Contract dated October 19, 1990 between The Salem Funds and Federated
Securities Corp., First Union Funds (formerly The Salem Funds) executes and
delivers this Exhibit on behalf of the Funds with respect to the separate
classes of shares thereof first set forth in this Exhibit.
Witness the due execution here of 9th day of October, 1993.
ATTEST: FIRST UNION FUNDS
/s/Peter J. Germain By:/s/E. C. Gonzales
Secretary President
(SEAL)
ATTEST: FEDERATED SECURITIES CORP.
/s/S. Elliott Cohan By:/s/John A. Staley
Secretary Executive Vice President
(SEAL)
Exhibit L
FIRST UNION FUNDS
First Union Money Market Portfolio
Class C Investment Shares
First Union Treasury Money Market Portfolio
Class C Investment Shares
First Union Tax-Free Money Market Portfolio
Class C Investment Shares
First Union Utility Portfolio
Class C Investment Shares
The following provisions are hereby incorporated and made part of the
Distributor's Contract dated the 19th day of October, 1990, between The Salem
Funds and Federated Securities Corp. with respect to the Classes of the Funds
set forth above:
1. The Trust hereby appoints FSC to engage in activities principally
intended to result in the sale of shares of the Classes. Pursuant to this
appointment FSC is authorized to select a group of brokers ("Brokers") to
sell shares of the above-listed Classes ("Shares"), at the current offering
price thereof as described and set forth in the prospectuses of the Trust,
and to render administrative support services to the Trust and its
shareholders. In addition, FSC is authorized to select a group of
Administrators ("Administrators") to render administrative support services
to the Trust and its shareholders.
2. Administrative support services may include, but are not limited
to, the following eleven functions: (1) account openings: the Broker or
Administrator communicates account openings via computer terminals located on
the Broker or Administrator's premises; (2) account closings: the Broker or
Administrator communicates account closings via computer terminals; (3) enter
purchase transactions: purchase transactions are entered through the Broker
or Administrator's own personal computer or through the use of a toll-free
telephone number; (4) enter redemption transactions: Broker or Administrator
enters redemption transactions in the same manner as purchases; (5) account
maintenance: Broker or Administrator provides or arranges to provide
accounting support for all transactions. Broker or Administrator also wires
funds and receives funds for Trust Share purchases and redemptions, confirms
and reconciles all transactions, reviews the activity in the Trust's
accounts, and provides training and supervision of its personnel; (6)
interest posting: Broker or Administrator posts and reinvests dividends to
the Trust's accounts; (7) prospectus and shareholder reports: Broker or
Administrator maintains and distributes current copies of prospectuses and
shareholder reports; (8) advertisements: the Broker or Administrator
continuously advertises the availability of its services and products; (9)
customer lists: the Broker or Administrator continuously provides names of
potential customers; (10) design services: the Broker or Administrator
continuously designs material to send to customers and develops methods of
making such materials accessible to customers; and (11) consultation
services: the Broker or Administrator continuously provides information
about the product needs of customers.
3. During the term of this Agreement, the Trust will pay FSC for
services rendered pursuant to this Agreement, a monthly fee computed at the
annual rate of .75% of the average aggregate net asset value of the Class C
Investment Shares of the Money Market, Treasury Money Market, Tax-Free Money
Market, Utility, portfolios, held during the month. For the month in which
this Agreement becomes effective or terminates, there shall be an appropriate
proration of any fee payable on the basis of the number of days that the
Agreement is in effect during the month.
4. FSC will enter into a separate written agreement with various
firms to provide certain of the services in Paragraph One, herein. FSC, in
its sole discretion, may pay Brokers and Administrators a periodic fee in
respect of Shares owned from time to time by their clients or customers. The
schedules of such fees and the basis upon which such fees will be paid shall
be determined from time to time by FSC in its sole discretion.
5. FSC may sell, assign, pledge or hypothecate its rights to receive
fees hereunder in order to finance payments of commissions for the sale of
the Trust's Class C Investment Shares. It is understood that an assignee may
not further sell, assign, pledge, or hypothecate such fees unless such sale,
assignment, pledge or hypothecation has been approved by the vote of a
majority of the Board of Trustees of the Trust, including a majority of the
disinterested Trustees, cast in person at a meeting called for the purpose of
voting on such approval.
6. FSC will prepare reports to the Board of Trustees of the Trust on
a quarterly basis showing amounts paid to the various Brokers and
Administrators and the purpose for such payments.
In consideration of the mutual covenants set forth in the Distributor's
Contract dated October 19, 1990, between The Salem Funds and Federated
Securities Corp., First Union Funds (formerly The Salem Funds) executes and
delivers this Exhibit on behalf of the Funds and Classes first set forth in
this Exhibit.
Witness the due execution hereof this 9th day of October, 1993.
ATTEST: FIRST UNION FUNDS
/s/Mark A. Sheehan By:/s/E. C. Gonzales
Assistant Secretary President
(SEAL)
ATTEST: FEDERATED SECURITIES CORP.
/s/John W. McGonigle By:/s/John A. Staley
Assistant Secretary Executive Vice President
(SEAL)
Exhibit M
First Union Funds
First Union Utility Portfolio
Class B Investment Shares
The following provisions are hereby incorporated and made part of the
Distributor's Contract dated the 19th day of October, 1990, between The Salem
Funds and Federated Securities Corp. with respect to the Classes of the Funds
set forth above:
1. The Trust hereby appoints FSC to engage in activities principally
intended to result in the sale of shares of the Classes. Pursuant to this
appointment FSC is authorized to select a group of brokers ("Brokers") to
sell shares of the above-listed Classes ("Shares"), at the current offering
price thereof as described and set forth in the prospectuses of the Trust,
and to render administrative support services to the Trust and its
shareholders. In addition, FSC is authorized to select a group of
administrators ("Administrators") to render administrative support services
to the Trust and its shareholders.
2. Administrative support services may include, but are not limited
to, the following eleven functions: (1) account openings: the Broker or
Administrator communicates account openings via computer terminals located on
the Broker or Administrator's premises; (2) account closings: the Broker or
Administrator communicates account closings via computer terminals; (3) enter
purchase transactions: purchase transactions are entered through the Broker
or Administrator's own personal computer or through the use of a toll-free
telephone number; (4) enter redemption transactions: Broker or Administrator
enters redemption transactions in the same manner as purchases; (5) account
maintenance: Broker or Administrator provides or arranges to provide
accounting support for all transactions. Broker or Administrator also wires
funds and receives funds for Trust Share purchases and redemptions, confirms
and reconciles all transactions, reviews the activity in the Trust's
accounts, and provides training and supervision of its personnel; (6)
interest posting: Broker or Administrator posts and reinvests dividends to
the Trust's accounts; (7) prospectus and shareholder reports: Broker or
Administrator maintains and distributes current copies of prospectuses and
shareholder reports; (8) advertisements: the Broker or Administrator
continuously advertises the availability of its services and products; (9)
customer lists: the Broker or Administrator continuously provides names of
potential customers; (10) design services: the Broker or Administrator
continuously designs material to send to customers and develops methods of
making such materials accessible to customers; and (11) consultation
services: the Broker or Administrator continuously provides information
about the product needs of customers.
3. During the term of this Agreement, the Trust will pay FSC for
services rendered pursuant to this Agreement, a monthly fee computed at the
annual rate of .25% of the average aggregate net asset value of the Class B
Investment Shares of the Utility portfolio, held during the month. For the
month in which this Agreement becomes effective or terminates, there shall be
an appropriate proration of any fee payable on the basis of the number of
days that the Agreement is in effect during the month.
4. FSC will enter into a separate written agreement with various
firms to provide certain of the services in Paragraph One, herein. FSC, in
its sole discretion, may pay Brokers and Administrators a periodic fee in
respect of Shares owned from time to time by their clients or customers. The
schedules of such fees and the basis upon which such fees will be paid shall
be determined from time to time by FSC in its sole discretion.
5. FSC may sell, assign, pledge or hypothecate its rights to receive
fees hereunder in order to finance payments of commissions for the sale of
the Trust's Class B Investment Shares. It is understood that an assignee may
not further sell, assign, pledge, or hypothecate such fees unless such sale,
assignment, pledge or hypothecation has been approved by the vote of a
majority of the Board of Trustees of the Trust, including a majority of the
Disinterested Trustees, cast in person at a meeting called for the purpose of
voting on such approval.
6. FSC will prepare reports to the Board of Trustees of the Trust on
a quarterly basis showing amounts paid to the various Brokers and
Administrators and the purpose for such payments.
In consideration of the mutual covenants set forth in the Distributor's
Contract dated October 19, 1990, between The Salem Funds and Federated
Securities Corp., First Union Funds (formerly The Salem Funds) executes and
delivers this Exhibit on behalf of the Funds and Classes first set forth in
this Exhibit.
Witness the due execution hereof this 9th day of October, 1993.
ATTEST: FIRST UNION FUNDS
/s/Mark A. Sheehan By:/s/E. C. Gonzales
Assistant Secretary President
(SEAL)
ATTEST: FEDERATED SECURITIES CORP.
/s/John W. McGonigle By:/s/John A. Staley
Assistant Secretary Executive Vice President
(SEAL)
Exhibit 8 under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
CUSTODIAN CONTRACT
Between
THE SALEM FUNDS
and
STATE STREET BANK AND TRUST COMPANY
TABLE OF CONTENTS
Page
1. Employment of Custodian and Property to be Held by It 1
2. Duties of the Custodian With Respect to Property
of the Funds Held by the Custodian 1
2.1 Holding Securities 1
2.2 Delivery of Securities 2
2.3 Registration of Securities 4
2.4 Bank Accounts 4
2.5 Payments for Shares 4
2.6 Availability of Federal Funds 4
2.7 Collection of Income 5
2.8 Payment of Fund Moneys 5
2.9 Liability for Payment in Advance of
Receipt of Securities Purchased 6
2.10 Payments for Repurchases or Redemptions
of Shares of a Fund 6
2.11 Appointment of Agents 6
2.12 Deposit of Fund Assets in Securities System 7
2.13 Segregated Account 8
2.14 Joint Repurchase Agreements 8
2.15 Ownership Certificates for Tax Purposes 8
2.16 Proxies 9
2.17 Communications Relating to Fund Portfolio Securities 9
2.18 Proper Instructions 9
2.19 Actions Permitted Without Express Authority 9
2.20 Evidence of Authority 10
3. Duties of Custodian With Respect to the Books of Account and
Calculation of Net Asset Value and Net Income 10
4. Records 10
5. Opinion of Funds' Independent Accountants 11
6. Reports to Trust by Independent Public Accountants 11
7. Compensation of Custodian 11
8. Responsibility of Custodian 11
9. Effective Period, Termination and Amendment 13
10. Successor Custodian 13
11. Interpretive and Additional Provisions 14
12. Massachusetts Law to Apply 14
13. Notices 14
14. Counterparts 14
15. Limitations of Liability 15
CUSTODIAN CONTRACT
This Contract between The Salem Funds, a Massachusetts business trust
organized and existing under the laws of the Commonwealth of Massachusetts,
having its principal place of business at Federated Investors Tower,
Pittsburgh, Pennsylvania, 15222-3779 hereinafter called the "Trust", and
STATE STREET BANK AND TRUST COMPANY, a Massachusetts corporation, having
its principal place of business at 225 Franklin Street, Boston,
Massachusetts, 02110, hereinafter called the "Custodian",
WITNESSETH: That in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Trust hereby employs the Custodian as the custodian of the assets
of each of its portfolios (hereinafter collectively called the "Funds" and
individually referred to as a "Fund") of the Trust listed in Exhibit A
hereto. Except as otherwise expressly provided herein, the securities and
other assets of each of the Funds shall be segregated from the assets of
each of the other Funds and from all other persons and entities. The Trust
will deliver to the Custodian all securities and cash owned by the Funds
and all payments of income, payments of principal or capital distributions
received by them with respect to all securities owned by the Funds from
time to time, and the cash consideration received by them for shares
("Shares") of beneficial interest of the Funds as may be issued or sold
from time to time. The Custodian shall not be responsible for any property
of the Funds held or received by the Funds and not delivered to the
Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Section
2.18), the Custodian shall from time to time employ one or more sub-
custodians upon the terms specified in the Proper Instructions, provided
that the Custodian shall have no more or less responsibility or liability
to the Trust or any of the Funds on account of any actions or omissions of
any sub-custodian so employed than any such sub-custodian has to the
Custodian.
2. Duties of the Custodian With Respect to Property of the Funds Held
by the Custodian
2.1 Holding Securities. The Custodian shall hold and physically
segregate for the account of each Fund all non-cash property,
including all securities owned by each Fund, other than securities
which are maintained pursuant to Section 2.12 in a clearing agency
which acts as a securities depository or in a book-entry system
authorized by the U.S. Department of the Treasury, collectively
referred to herein as "Securities System", or securities which are
subject to a joint repurchase agreement with affiliated funds
pursuant to Section 2.14. The Custodian shall maintain records of
all receipts, deliveries and locations of such securities, together
with a current inventory thereof, and shall conduct periodic physical
inspections of certificates representing stocks, bonds and other
securities held by it under this Contract in such manner as the
Custodian shall determine from time to time to be advisable in order
to verify the accuracy of such inventory. With respect to securities
held by any agent appointed pursuant to Section 2.11 hereof, and with
respect to securities held by any sub-custodian appointed pursuant to
Section 1 hereof, the Custodian may rely upon certificates from such
agent as to the holdings of such agent and from such sub-custodian as
to the holdings of such sub-custodian, it being understood that such
reliance in no way relieves the Custodian of its responsibilities
under this Contract. The Custodian will promptly report to the Trust
the results of such inspections, indicating any shortages or
discrepancies uncovered thereby, and take appropriate action to
remedy any such shortages or discrepancies.
2.2 Delivery of Securities. The Custodian shall release and deliver
securities owned by a Fund held by the Custodian or in a Securities
System account of the Custodian only upon receipt of Proper
Instructions, which may be continuing instructions when deemed
appropriate by the parties, and only in the following cases:
(1) Upon sale of such securities for the account of a Fund and
receipt of payment therefor;
(2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Trust;
(3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.12 hereof;
(4) To the depository agent in connection with tender or other
similar offers for portfolio securities of a Fund, in accordance
with the provisions of Section 2.17 hereof;
(5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable; provided
that, in any such case, the cash or other consideration is to be
delivered to the Custodian;
(6) To the issuer thereof, or its agent, for transfer into the name
of a Fund or into the name of any nominee or nominees of the
Custodian or into the name or nominee name of any agent
appointed pursuant to Section 2.11 or into the name or nominee
name of any sub-custodian appointed pursuant to Section 1; or
for exchange for a different number of bonds, certificates or
other evidence representing the same aggregate face amount or
number of units; provided that, in any such case, the new
securities are to be delivered to the Custodian;
(7) Upon the sale of such securities for the account of a Fund, to
the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery custom";
provided that in any such case, the Custodian shall have no
responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for such
securities except as may arise from the Custodian's own failure
to act in accordance with the standard of reasonable care or any
higher standard of care imposed upon the Custodian by any
applicable law or regulation if such above-stated standard of
reasonable care were not part of this Contract;
(8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment
of the securities of the issuer of such securities, or pursuant
to provisions for conversion contained in such securities, or
pursuant to any deposit agreement; provided that, in any such
case, the new securities and cash, if any, are to be delivered
to the Custodian;
(9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to be
delivered to the Custodian;
(10) For delivery in connection with any loans of portfolio
securities of a Fund, but only against receipt of adequate
collateral in the form of (a) cash, in an amount specified by
the Trust, (b) certificated securities of a description
specified by the Trust, registered in the name of the Fund or in
the name of a nominee of the Custodian referred to in Section
2.3 hereof or in proper form for transfer, or (c) securities of
a description specified by the Trust, transferred through a
Securities System in accordance with Section 2.12 hereof;
(11) For delivery as security in connection with any borrowings
requiring a pledge of assets by a Fund, but only against receipt
of amounts borrowed, except that in cases where additional
collateral is required to secure a borrowing already made,
further securities may be released for the purpose;
(12) For delivery in accordance with the provisions of any agreement
among the Trust, the Custodian and a broker-dealer registered
under the Securities Exchange Act of 1934 (the "Exchange Act")
and a member of The National Association of Securities Dealers,
Inc. ("NASD"), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national
securities exchange, or of any similar organization or
organizations, regarding escrow or other arrangements in
connection with transactions for a Fund;
(13) For delivery in accordance with the provisions of any agreement
among the Trust, the Custodian, and a Futures Commission
Merchant registered under the Commodity Exchange Act, relating
to compliance with the rules of the Commodity Futures Trading
Commission and/or any Contract Market, or any similar
organization or organizations, regarding account deposits in
connection with transaction for a Fund;
(14) Upon receipt of instructions from the transfer agent ("Transfer
Agent") for a Fund, for delivery to such Transfer Agent or to
the holders of shares in connection with distributions in kind,
in satisfaction of requests by holders of Shares for repurchase
or redemption; and
(15) For any other proper corporate purpose, but only upon receipt
of, in addition to Proper Instructions, a certified copy of a
resolution of the Executive Committee of the Trust on behalf of
a Fund signed by an officer of the Trust and certified by its
Secretary or an Assistant Secretary, specifying the securities
to be delivered, setting forth the purpose for which such
delivery is to be made, declaring such purpose to be a proper
corporate purpose, and naming the person or persons to whom
delivery of such securities shall be made.
2.3 Registration of Securities. Securities held by the Custodian (other
than bearer securities) shall be registered in the name of a
particular Fund or in the name of any nominee of the Fund or of any
nominee of the Custodian which nominee shall be assigned exclusively
to the Fund, unless the Trust has authorized in writing the
appointment of a nominee to be used in common with other registered
investment companies affiliated with the Fund, or in the name or
nominee name of any agent appointed pursuant to Section 2.11 or in
the name or nominee name of any sub-custodian appointed pursuant to
Section 1. All securities accepted by the Custodian on behalf of a
Fund under the terms of this Contract shall be in "street name" or
other good delivery form.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the name of each Fund, subject only to draft
or order by the Custodian acting pursuant to the terms of this
Contract, and shall hold in such account or accounts, subject to the
provisions hereof, all cash received by it from or for the account of
each Fund, other than cash maintained in a joint repurchase account
with other affiliated funds pursuant to Section 2.14 of this Contract
or by a particular Fund in a bank account established and used in
accordance with Rule 17f-3 under the Investment Company Act of 1940.
Funds held by the Custodian for a Fund may be deposited by it to its
credit as Custodian in the Banking Department of the Custodian or in
such other banks or trust companies as it may in its discretion deem
necessary or desirable; provided, however, that every such bank or
trust company shall be qualified to act as a custodian under the
Investment Company Act of 1940 and that each such bank or trust
company and the funds to be deposited with each such bank or trust
company shall be approved by vote of a majority of the Board of
Trustees of the Trust. Such funds shall be deposited by the
Custodian in its capacity as Custodian for the Fund and shall be
withdrawable by the Custodian only in that capacity. If requested by
the Trust, the Custodian shall furnish the Trust, not later than
twenty (20) days after the last business day of each month, an
internal reconciliation of the closing balance as of that day in all
accounts described in this section to the balance shown on the daily
cash report for that day rendered to the Trust.
2.5 Payments for Shares. The Custodian shall make such arrangements with
the Transfer Agent of each Fund, as will enable the Custodian to
receive the cash consideration due to each Fund and will deposit into
each Fund's account such payments as are received from the Transfer
Agent. The Custodian will provide timely notification to the Trust
and the Transfer Agent of any receipt by it of payments for Shares of
the respective Fund.
2.6 Availability of Federal Funds. Upon mutual agreement between the
Trust and the Custodian, the Custodian shall make federal funds
available to the Funds as of specified times agreed upon from time to
time by the Trust and the Custodian in the amount of checks, clearing
house funds, and other non-federal funds received in payment for
Shares of the Funds which are deposited into the Funds' accounts.
2.7 Collection of Income.
(1) The Custodian shall collect on a timely basis all income and
other payments with respect to registered securities held
hereunder to which each Fund shall be entitled either by law or
pursuant to custom in the securities business, and shall collect
on a timely basis all income and other payments with respect to
bearer securities if, on the date of payment by the issuer, such
securities are held by the Custodian or its agent thereof and
shall credit such income, as collected, to each Fund's custodian
account. Without limiting the generality of the foregoing, the
Custodian shall detach and present for payment all coupons and
other income items requiring presentation as and when they
become due and shall collect interest when due on securities
held hereunder. The collection of income due the Funds on
securities loaned pursuant to the provisions of Section 2.2 (10)
shall be the responsibility of the Trust. The Custodian will
have no duty or responsibility in connection therewith, other
than to provide the Trust with such information or data as may
be necessary to assist the Trust in arranging for the timely
delivery to the Custodian of the income to which each Fund is
properly entitled.
(2) The Custodian shall promptly notify the Trust whenever income
due on securities is not collected in due course and will
provide the Trust with monthly reports of the status of past due
income.
2.8 Payment of Fund Moneys. Upon receipt of Proper Instructions, which
may be continuing instructions when deemed appropriate by the
parties, the Custodian shall pay out moneys of each Fund in the
following cases only:
(1) Upon the purchase of securities, futures contracts or options on
futures contracts for the account of a Fund but only (a) against
the delivery of such securities, or evidence of title to futures
contracts, to the Custodian (or any bank, banking firm or trust
company doing business in the United States or abroad which is
qualified under the Investment Company Act of 1940, as amended,
to act as a custodian and has been designated by the Custodian
as its agent for this purpose) registered in the name of the
Fund or in the name of a nominee of the Custodian referred to in
Section 2.3 hereof or in proper form for transfer, (b) in the
case of a purchase effected through a Securities System, in
accordance with the conditions set forth in Section 2.12 hereof
or (c) in the case of repurchase agreements entered into between
the Trust and any other party, (i) against delivery of the
securities either in certificate form or through an entry
crediting the Custodian's account at the Federal Reserve Bank
with such securities or (ii) against delivery of the receipt
evidencing purchase for the account of the Fund of securities
owned by the Custodian along with written evidence of the
agreement by the Custodian to repurchase such securities from
the Fund;
(2) In connection with conversion, exchange or surrender of
securities owned by a Fund as set forth in Section 2.2 hereof;
(3) For the redemption or repurchase of Shares of a Fund issued by
the Trust as set forth in Section 2.10 hereof;
(4) For the payment of any expense or liability incurred by a Fund,
including but not limited to the following payments for the
account of the Fund: interest; taxes; management, accounting,
transfer agent and legal fees; and operating expenses of the
Fund, whether or not such expenses are to be in whole or part
capitalized or treated as deferred expenses;
(5) For the payment of any dividends on Shares of a Fund declared
pursuant to the governing documents of the Trust;
(6) For payment of the amount of dividends received in respect of
securities sold short;
(7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a
resolution of the Executive Committee of the Trust on behalf of
a Fund signed by an officer of the Trust and certified by its
Secretary or an Assistant Secretary, specifying the amount of
such payment, setting forth the purpose for which such payment
is to be made, declaring such purpose to be a proper purpose,
and naming the person or persons to whom such payment is to be
made.
2.9 Liability for Payment in Advance of Receipt of Securities Purchased.
In any and every case where payment for purchase of securities for
the account of a Fund is made by the Custodian in advance of receipt
of the securities purchased, in the absence of specific written
instructions from the Trust to so pay in advance, the Custodian shall
be absolutely liable to the Fund for such securities to the same
extent as if the securities had been received by the Custodian.
2.10 Payments for Repurchases or Redemptions of Shares of a Fund. From
such funds as may be available for the purpose of repurchasing or
redeeming Shares of a Fund, but subject to the limitations of the
Declaration of Trust and any applicable votes of the Board of
Trustees of the Trust pursuant thereto, the Custodian shall, upon
receipt of instructions from the Transfer Agent, make funds available
for payment to holders of shares of such Fund who have delivered to
the Transfer Agent a request for redemption or repurchase of their
shares including without limitation through bank drafts, automated
clearinghouse facilities, or by other means. In connection with the
redemption or repurchase of Shares of the Funds, the Custodian is
authorized upon receipt of instructions from the Transfer Agent to
wire funds to or through a commercial bank designated by the
redeeming shareholders.
2.11 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or
trust company which is itself qualified under the Investment Company
Act of 1940, as amended, and any applicable state law or regulation,
to act as a custodian, as its agent to carry out such of the
provisions of this Section 2 as the Custodian may from time to time
direct; provided, however, that the appointment of any agent shall
not relieve the Custodian of its responsibilities or liabilities
hereunder.
2.12 Deposit of Fund Assets in Securities System. The Custodian may
deposit and/or maintain securities owned by the Funds in a clearing
agency registered with the Securities and Exchange Commission under
Section 17A of the Securities Exchange Act of 1934, which acts as a
securities depository, or in the book-entry system authorized by the
U.S. Department of the Treasury and certain federal agencies,
collectively referred to herein as "Securities System" in accordance
with applicable Federal Reserve Board and Securities and Exchange
Commission rules and regulations, if any, and subject to the
following provisions:
(1) The Custodian may keep securities of each Fund in a Securities
System provided that such securities are represented in an
account ("Account") of the Custodian in the Securities System
which shall not include any assets of the Custodian other than
assets held as a fiduciary, custodian or otherwise for
customers;
(2) The records of the Custodian with respect to securities of the
Funds which are maintained in a Securities System shall identify
by book-entry those securities belonging to each Fund;
(3) The Custodian shall pay for securities purchased for the account
of each Fund upon (i) receipt of advice from the Securities
System that such securities have been transferred to the
Account, and (ii) the making of an entry on the records of the
Custodian to reflect such payment and transfer for the account
of the Fund. The Custodian shall transfer securities sold for
the account of a Fund upon (i) receipt of advice from the
Securities System that payment for such securities has been
transferred to the Account, and (ii) the making of an entry on
the records of the Custodian to reflect such transfer and
payment for the account of the Fund. Copies of all advices from
the Securities System of transfers of securities for the account
of a Fund shall identify the Fund, be maintained for the Fund by
the Custodian and be provided to the Trust at its request. Upon
request, the Custodian shall furnish the Trust confirmation of
each transfer to or from the account of a Fund in the form of a
written advice or notice and shall furnish to the Trust copies
of daily transaction sheets reflecting each day's transactions
in the Securities System for the account of a Fund.
(4) The Custodian shall provide the Trust with any report obtained
by the Custodian on the Securities System's accounting system,
internal accounting control and procedures for safeguarding
securities deposited in the Securities System;
(5) The Custodian shall have received the initial certificate,
required by Section 9 hereof;
(6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Trust for any loss or damage to
a Fund resulting from use of the Securities System by reason of
any negligence, misfeasance or misconduct of the Custodian or
any of its agents or of any of its or their employees or from
failure of the Custodian or any such agent to enforce
effectively such rights as it may have against the Securities
System; at the election of the Trust, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any
claim against the Securities System or any other person which
the Custodian may have as a consequence of any such loss or
damage if and to the extent that a Fund has not been made whole
for any such loss or damage.
(7) The authorization contained in this Section 2.12 shall not
relieve the Custodian from using reasonable care and diligence
in making use of any Securities System.
2.13 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts
for and on behalf of each Fund, into which account or accounts may be
transferred cash and/or securities, including securities maintained
in an account by the Custodian pursuant to Section 2.12 hereof, (i)
in accordance with the provisions of any agreement among the Trust,
the Custodian and a broker-dealer registered under the Exchange Act
and a member of the NASD (or any futures commission merchant
registered under the Commodity Exchange Act), relating to compliance
with the rules of The Options Clearing Corporation and of any
registered national securities exchange (or the Commodity Futures
Trading Commission or any registered contract market), or of any
similar organization or organizations, regarding escrow or other
arrangements in connection with transactions for a Fund, (ii) for
purpose of segregating cash or government securities in connection
with options purchased, sold or written for a Fund or commodity
futures contracts or options thereon purchased or sold for a Fund,
(iii) for the purpose of compliance by the Trust or a Fund with the
procedures required by any release or releases of the Securities and
Exchange Commission relating to the maintenance of segregated
accounts by registered investment companies and (iv) for other proper
corporate purposes, but only, in the case of clause (iv), upon
receipt of, in addition to Proper Instructions, a certified copy of a
resolution of the Board of Trustees or of the Executive Committee
signed by an officer of the Trust and certified by the Secretary or
an Assistant Secretary, setting forth the purpose or purposes of such
segregated account and declaring such purposes to be proper corporate
purposes.
2.14 Joint Repurchase Agreements. Upon the receipt of Proper
Instructions, the Custodian shall deposit and/or maintain any assets
of a Fund and any affiliated funds which are subject to joint
repurchase transactions in an account established solely for such
transactions for the Fund and its affiliated funds. For purposes of
this Section 2.14, "affiliated funds" shall include all investment
companies and their portfolios for which subsidiaries or affiliates
of Federated Investors, Inc. serve as investment advisers. The
requirements of segregation set forth in Section 2.1 shall be deemed
to be waived with respect to such assets.
2.15 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other
payments with respect to securities of a Fund held by it and in
connection with transfers of securities.
2.16 Proxies. The Custodian shall, with respect to the securities held
hereunder, cause to be promptly executed by the registered holder of
such securities, if the securities are registered otherwise than in
the name of a Fund or a nominee of a Fund, all proxies, without
indication of the manner in which such proxies are to be voted, and
shall promptly deliver to the Trust such proxies, all proxy
soliciting materials and all notices relating to such securities.
2.17 Communications Relating to Fund Portfolio Securities. The Custodian
shall transmit promptly to the Trust all written information
(including, without limitation, pendency of calls and maturities of
securities and expirations of rights in connection therewith and
notices of exercise of call and put options written by the Fund and
the maturity of futures contracts purchased or sold by the Fund)
received by the Custodian from issuers of the securities being held
for the Fund. With respect to tender or exchange offers, the
Custodian shall transmit promptly to the Trust all written
information received by the Custodian from issuers of the securities
whose tender or exchange is sought and from the party (or his agents)
making the tender or exchange offer. If the Trust desires to take
action with respect to any tender offer, exchange offer or any other
similar transaction, the Trust shall notify the Custodian at least
three business days prior to the date on which the Custodian is to
take such action. However, the Custodian shall nevertheless exercise
its best efforts to take such action in the event that notification
is received three business days or less prior to the date on which
action is required.
2.18 Proper Instructions. Proper Instructions as used throughout this
Section 2 means a writing signed or initialled by one or more person
or persons as the Board of Trustees shall have from time to time
authorized. Each such writing shall set forth the specific
transaction or type of transaction involved. Oral instructions will
be considered Proper Instructions if the Custodian reasonably
believes them to have been given by a person previously authorized in
Proper Instructions to give such instructions with respect to the
transaction involved. The Trust shall cause all oral instructions to
be confirmed in writing. Upon receipt of a certificate of the
Secretary or an Assistant Secretary as to the authorization by the
Board of Trustees of the Trust accompanied by a detailed description
of procedures approved by the Board of Trustees, Proper Instructions
may include communications effected directly between electro-
mechanical or electronic devices provided that the Board of Trustees
and the Custodian are satisfied that such procedures afford adequate
safeguards for a Fund's assets.
2.19 Actions Permitted Without Express Authority. The Custodian may in
its discretion, without express authority from the Trust:
(1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under
this Contract, provided that all such payments shall be
accounted for to the Trust in such form that it may be allocated
to the affected Fund;
(2) surrender securities in temporary form for securities in
definitive form;
(3) endorse for collection, in the name of a Fund, checks, drafts
and other negotiable instruments; and
(4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property of
each Fund except as otherwise directed by the Trust.
2.20 Evidence of Authority. The Custodian shall be protected in acting
upon any instructions, notice, request, consent, certificate or other
instrument or paper reasonably believed by it to be genuine and to
have been properly executed on behalf of a Fund. The Custodian may
receive and accept a certified copy of a vote of the Board of
Trustees of the Trust as conclusive evidence (a) of the authority of
any person to act in accordance with such vote or (b) of any
determination of or any action by the Board of Trustees pursuant to
the Declaration of Trust as described in such vote, and such vote may
be considered as in full force and effect until receipt by the
Custodian of written notice to the contrary.
3. Duties of Custodian With Respect to the Books of Account
and Calculation of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information
to the entity or entities appointed by the Board of Trustees of the Trust
to keep the books of account of each Fund and/or compute the net asset
value per share of the outstanding Shares of each Fund or, if directed in
writing to do so by the Trust, shall itself keep such books of account
and/or compute such net asset value per share. If so directed, the
Custodian shall also calculate daily the net income of a Fund as described
in the Fund's currently effective prospectus and shall advise the Trust and
the Transfer Agent daily of the total amounts of such net income and, if
instructed in writing by an officer of the Trust to do so, shall advise the
Transfer Agent periodically of the division of such net income among its
various components. The calculations of the net asset value per share and
the daily income of a Fund shall be made at the time or times described
from time to time in the Fund's currently effective prospectus.
4. Records
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet
the obligations of the Trust and the Funds under the Investment Company Act
of 1940, with particular attention to Section 31 thereof and Rules 31a-1
and 31a-2 thereunder, applicable federal and state tax laws and any other
law or administrative rules or procedures which may be applicable. All
such records shall be the property of the Trust and shall at all times
during the regular business hours of the Custodian be open for inspection
by duly authorized officers, employees or agents of the Trust and employees
and agents of the Securities and Exchange Commission. In the event of
termination of this Contract, the Custodian will deliver all such records
to the Trust, to a successor Custodian, or to such other person as the
Trust may direct. The Custodian shall, at the Trust's request, supply the
Trust with a tabulation of securities owned by a Fund and held by the
Custodian and shall, when requested to do so by the Trust and for such
compensation as shall be agreed upon between the Trust and the Custodian,
include certificate numbers in such tabulations.
5. Opinion of Funds' Independent Accountants
The Custodian shall take all reasonable action, as the Trust may from
time to time request, to obtain from year to year favorable opinions from
each Fund's independent accountants with respect to its activities
hereunder in connection with the preparation of the Fund's registration
statement, periodic reports, or any other reports to the Securities and
Exchange Commission and with respect to any other requirements of such
Commission.
6. Reports to Trust by Independent Public Accountants
The Custodian shall provide the Trust, at such times as the Trust may
reasonably require, with reports by independent public accountants for each
Fund on the accounting system, internal accounting control and procedures
for safeguarding securities, futures contracts and options on futures
contracts, including securities deposited and/or maintained in a Securities
System, relating to the services provided by the Custodian for the Fund
under this Contract; such reports, shall be of sufficient scope and in
sufficient detail, as may reasonably be required by the Trust, to provide
reasonable assurance that any material inadequacies would be disclosed by
such examination, and, if there are no such inadequacies, the reports shall
so state.
7. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time
between the Trust and the Custodian.
8. Responsibility of Custodian
The Custodian shall be held to a standard of reasonable care in
carrying out the provisions of this Contract; provided, however, that the
Custodian shall be held to any higher standard of care which would be
imposed upon the Custodian by any applicable law or regulation if such
above stated standard of reasonable care was not part of this Contract.
The Custodian shall be entitled to rely on and may act upon advice of
counsel (who may be counsel for the Trust) on all matters, and shall be
without liability for any action reasonably taken or omitted pursuant to
such advice, provided that such action is not in violation of applicable
federal or state laws or regulations, and is in good faith and without
negligence. Subject to the limitations set forth in Section 15 hereof, the
Custodian shall be kept indemnified by the Trust and be without liability
for any action taken or thing done by it in carrying out the terms and
provisions of this Contract in accordance with the above standards.
In order that the indemnification provisions contained in this
Section 8 shall apply, however, it is understood that if in any case the
Trust may be asked to indemnify or save the Custodian harmless, the Trust
shall be fully and promptly advised of all pertinent facts concerning the
situation in question, and it is further understood that the Custodian will
use all reasonable care to identify and notify the Trust promptly
concerning any situation which presents or appears likely to present the
probability of such a claim for indemnification. The Trust shall have the
option to defend the Custodian against any claim which may be the subject
of this indemnification, and in the event that the Trust so elects it will
so notify the Custodian and thereupon the Trust shall take over complete
defense of the claim, and the Custodian shall in such situation initiate no
further legal or other expenses for which it shall seek indemnification
under this Section. The Custodian shall in no case confess any claim or
make any compromise in any case in which the Trust will be asked to
indemnify the Custodian except with the Trust's prior written consent.
Notwithstanding the foregoing, the responsibility of the Custodian
with respect to redemptions effected by check shall be in accordance with a
separate Agreement entered into between the Custodian and the Trust.
If the Trust requires the Custodian to take any action with respect
to securities, which action involves the payment of money or which action
may, in the reasonable opinion of the Custodian, result in the Custodian or
its nominee assigned to a Fund being liable for the payment of money or
incurring liability of some other form, the Custodian may request the
Trust, as a prerequisite to requiring the Custodian to take such action, to
provide indemnity to the Custodian in an amount and form satisfactory to
the Custodian.
Subject to the limitations set forth in Section 15 hereof, the Trust
agrees to indemnify and hold harmless the Custodian and its nominee from
and against all taxes, charges, expenses, assessments, claims and
liabilities (including counsel fees) (referred to herein as authorized
charges) incurred or assessed against it or its nominee in connection with
the performance of this Contract, except such as may arise from it or its
nominee's own failure to act in accordance with the standard of reasonable
care or any higher standard of care which would be imposed upon the
Custodian by any applicable law or regulation if such above-stated standard
of reasonable care were not part of this Contract. To secure any
authorized charges and any advances of cash or securities made by the
Custodian to or for the benefit of a Fund for any purpose which results in
the Fund incurring an overdraft at the end of any business day or for
extraordinary or emergency purposes during any business day, the Trust
hereby grants to the Custodian a security interest in and pledges to the
Custodian securities held for the Fund by the Custodian, in an amount not
to exceed 10 percent of the Fund's gross assets, the specific securities to
be designated in writing from time to time by the Trust or the Fund's
investment adviser. Should the Trust fail to make such designation, or
should it instruct the Custodian to make advances exceeding the percentage
amount set forth above and should the Custodian do so, the Trust hereby
agrees that the Custodian shall have a security interest in all securities
or other property purchased for a Fund with the advances by the Custodian,
which securities or property shall be deemed to be pledged to the
Custodian, and the written instructions of the Trust instructing their
purchase shall be considered the requisite description and designation of
the property so pledged for purposes of the requirements of the Uniform
Commercial Code. Should the Trust fail to cause a Fund to repay promptly
any authorized charges or advances of cash or securities, subject to the
provision of the second paragraph of this Section 8 regarding
indemnification, the Custodian shall be entitled to use available cash and
to dispose of pledged securities and property as is necessary to repay any
such advances.
9. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided,
may be amended at any time by mutual agreement of the parties hereto and
may be terminated by either party by an instrument in writing delivered or
mailed, postage prepaid to the other party, such termination to take effect
not sooner than sixty (60) days after the date of such delivery or mailing;
provided, however that the Custodian shall not act under Section 2.12
hereof in the absence of receipt of an initial certificate of the Secretary
or an Assistant Secretary that the Board of Trustees of the Trusthas
approved the initial use of a particular Securities System as required in
each case by Rule 17f-4 under the Investment Company Act of 1940, as
amended; provided further, however, that the Trust shall not amend or
terminate this Contract in contravention of any applicable federal or state
regulations, or any provision of the Declaration of Trust, and further
provided, that the Trust may at any time by action of its Board of Trustees
(i) substitute another bank or trust company for the Custodian by giving
notice as described above to the Custodian, or (ii) immediately terminate
this Contract in the event of the appointment of a conservator or receiver
for the Custodian by the Comptroller of the Currency or upon the happening
of a like event at the direction of an appropriate regulatory agency or
court of competent jurisdiction.
Upon termination of the Contract, the Trust shall pay to the
Custodian such compensation as may be due as of the date of such
termination and shall likewise reimburse the Custodian for its costs,
expenses and disbursements.
10. Successor Custodian
If a successor custodian shall be appointed by the Board of Trustees
of the Trust, the Custodian shall, upon termination, deliver to such
successor custodian at the office of the Custodian, duly endorsed and in
the form for transfer, all securities then held by it hereunder for each
Fund and shall transfer to separate accounts of the successor custodian all
of each Fund's securities held in a Securities System.
If no such successor custodian shall be appointed, the Custodian
shall, in like manner, upon receipt of a certified copy of a vote of the
Board of Trustees of the Trust, deliver at the office of the Custodian and
transfer such securities, funds and other properties in accordance with
such vote.
In the event that no written order designating a successor custodian
or certified copy of a vote of the Board of Trustees shall have been
delivered to the Custodian on or before the date when such termination
shall become effective, then the Custodian shall have the right to deliver
to a bank or trust company, which is a "bank" as defined in the Investment
Company Act of 1940, doing business in Boston, Massachusetts, of its own
selection, having an aggregate capital, surplus, and undivided profits, as
shown by its last published report, of not less than $100,000,000, all
securities, funds and other properties held by the Custodian and all
instruments held by the Custodian relative thereto and all other property
held by it under this Contract for each Fund and to transfer to separate
accounts of such successor custodian all of each Fund's securities held in
any Securities System. Thereafter, such bank or trust company shall be the
successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in
the possession of the Custodian after the date of termination hereof owing
to failure of the Trust to procure the certified copy of the vote referred
to or of the Board of Trustees to appoint a successor custodian, the
Custodian shall be entitled to fair compensation for its services during
such period as the Custodian retains possession of such securities, funds
and other properties and the provisions of this Contract relating to the
duties and obligations of the Custodian shall remain in full force and
effect.
11. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and
the Trust may from time to time agree on such provisions interpretive of or
in addition to the provisions of this Contract as may in their joint
opinion be consistent with the general tenor of this Contract. Any such
interpretive or additional provisions shall be in a writing signed by both
parties and shall be annexed hereto, provided that no such interpretive or
additional provisions shall contravene any applicable federal or state
regulations or any provision of the Declaration of Trust. No interpretive
or additional provisions made as provided in the preceding sentence shall
be deemed to be an amendment of this Contract.
12. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof
interpreted under and in accordance with laws of The Commonwealth of
Massachusetts.
13. Notices
Except as otherwise specifically provided herein, Notices and other
writings delivered or mailed postage prepaid to the Trust at Federated
Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, or to the Custodian
at 225 Franklin Street, Boston, Massachusetts, 02110, or to such other
address as the Trust or the Custodian may hereafter specify, shall be
deemed to have been properly delivered or given hereunder to the respective
address.
14. Counterparts
This Contract may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original.
15. Limitations of Liability
The Custodian is expressly put on notice of the limitation of
liability as set forth in Article XI of the Declaration of Trust and agrees
that the obligations and liabilities assumed by the Trust and any Fund
pursuant to this Contract, including, without limitation, any obligation or
liability to indemnify the Custodian pursuant to Section 8 hereof, shall be
limited in any case to the relevant Fund and its assets and that the
Custodian shall not seek satisfaction of any such obligation from the
shareholders of the relevant Fund, from any other Fund or its shareholders
or from the Trustees, Officers, employees or agents of the Trust, or any of
them. In addition, in connection with the discharge and satisfaction of
any claim made by the Custodian against the Trust, for whatever reasons,
involving more than one Fund, the Trust shall have the exclusive right to
determine the appropriate allocations of liability for any such claim
between or among the Funds.
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative
and its seal to be hereunder affixed as of the 17th day of July, 1990.
ATTEST: THE SALEM FUNDS
/s/ Byron F. Bowman By /s/ E. C. Gonzales
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ Ronald E. Logue By /s/ Frank Sidoti, Jr.
Assistant Secretary Vice President
Exhibit A
TRANSFER AGENCY AND SERVICES AGREEMENT
PORTFOLIOS OF THE SALEM FUNDS
THE SALEM FUNDS (the "Trust) consists of the following portfolios
(the "Funds) and classes of shares (the "Classes"):
The Salem Fixed Income Portfolio
Investment Shares
Trust Shares
The Salem Growth Portfolio
Investment Shares
Trust Shares
The Salem Money Market Portfolio
Investment Shares
Trust Shares
The Salem Tax Free Money Market Portfolio
Investment Shares
Trust Shares
The Salem Tax Free Portfolio
Investment Shares
Trust Shares
Amendment No. 1 to
Exhibit A
CUSTODIAN CONTRACT
PORTFOLIOS OF THE SALEM FUNDS
This Exhibit A is hereby amended to include the following portfolios
(the "Funds") and classes of shares thereof (the "Classes") which are part
of The Salem Funds (the "Trust") effective as of the date set forth below:
Name
The Salem Treasury Money Market Portfolio
Investment Shares
Trust Shares
THE SALEM FUNDS
Name:/s/ Jeffrey W. Sterling
Date: October 15, 1990
STATE STREET BANK AND TRUST COMPANY
Name:/s/ Frank Sidoti, Jr.
Date: October 15, 1990
Amendment No. 2 to
Exhibit A
CUSTODIAN CONTRACT
PORTFOLIOS OF THE SALEM FUNDS
This Exhibit A is hereby amended to include the following portfolio
(the "Fund") and Class of shares thereof (the "Class) which are part of The
Salem Funds (the "Trust") effective as of the date set forth below:
Name
The Salem Balanced Portfolio
Investment Shares
Trust Shares
The Salem Managed Bond Fund Portfolio
Investment Shares
Trust Shares
THE SALEM FUNDS
Name:/s/ Jeffrey W. Sterling
Date: January 2, 1991
STATE STREET BANK AND TRUST COMPANY
Name:/s/ Frank Sidoti, Jr.
Date: January 2, 1991
Amendment No. 3 to
Exhibit A
CUSTODIAN CONTRACT
PORTFOLIOS OF THE SALEM FUNDS
This Exhibit A is hereby amended to include the following portfolio
(the "Fund") and Class of shares thereof (the "Class) which are part of The
Salem Funds (the "Trust") effective as of the date set forth below:
Name
The Salem Insured Tax-Free Portfolio
Investment Shares
Trust Shares
THE SALEM FUNDS
Name:/s/ Jeffrey W. Sterling
Date: January 9, 1992
STATE STREET BANK AND TRUST COMPANY
Name:/s/ Frank Sidoti, Jr.
Date: March 19, 1992
Amendment No. 4 to
Exhibit A
CUSTODIAN CONTRACT
PORTFOLIOS OF THE SALEM FUNDS
This Exhibit A is hereby amended to include the following portfolio
(the "Fund") and Class of shares thereof (the "Class) which are part of The
Salem Funds (the "Trust") effective as of the date set forth below:
Name
The Salem U.S. Government Portfolio
Class B Investment Shares
Trust Shares
The Salem North Carolina Municipal Bond Portfolio
Class B Investment Shares
Trust Shares
THE SALEM FUNDS
Name:/s/ Jeffrey W. Sterling
Date: December 28, 1992
STATE STREET BANK AND TRUST COMPANY
Name:/s/ Michael E. Hagerty
Vice President
Date: December 28, 1992
Amendment No. 5 to
Exhibit A
CUSTODIAN CONTRACT
PORTFOLIOS OF THE SALEM FUNDS
This Exhibit A is hereby amended to include the following portfolio
(the "Fund") and Class of shares thereof (the "Class) which are part of The
Salem Funds (the "Trust") effective as of the date set forth below:
Name
The Salem Balanced Portfolio
Class C Investment Shares
The Salem Fixed Income Portfolio
Class C Investment Shares
The Salem Managed Bond Portfolio
Class C Investment Shares
The Salem Insured Tax Free Portfolio
Class C Investment Shares
The Salem Value Portfolio
Class C Investment Shares
The Salem U.S. Government Portfolio
Class C Investment Shares
The Salem North Carolina Municipal Bond Portfolio
Class C Investment Shares
THE SALEM FUNDS
Name:/s/ Jeffrey W. Sterling
Date: December 28, 1992
STATE STREET BANK AND TRUST COMPANY
Name:/s/ Michael E. Hagerty
Vice President
Date: December 28, 1992
Amendment No. 6 to
Exhibit A
CUSTODIAN CONTRACT
PORTFOLIOS OF FIRST UNION FUNDS
This Exhibit A is hereby amended to include the following portfolio
(the "Fund") and Class of shares thereof (the "Class) which are part of
First Union Funds (the "Trust") effective as of the date set forth below:
Name
First Union Virginia Municipal Bond Portfolio
Class B Investment Shares
Class C Investment Shares
Trust Shares
First Union Georgia Municipal Bond Portfolio
Class B Investment Shares
Class C Investment Shares
Trust Shares
First Union Florida Municipal Bond Portfolio
Class B Investment Shares
Class C Investment Shares
Trust Shares
FIRST UNION FUNDS
Name:/s/E. C. Gonzales
President
Date: April 22, 1993
STATE STREET BANK AND TRUST COMPANY
Name:/s/Ronald E. Logue
Executive Vice President
Date: April 22, 1993
Amendment No. 7 to
Exhibit A
CUSTODIAN CONTRACT
PORTFOLIOS OF FIRST UNION FUNDS
This Exhibit A is hereby amended to include the following portfolio
(the "Fund") and Classes of shares thereof (the "Classes") which are part
of First Union Funds (the "Trust"), effective as of the date set forth
below:
Name
First Union South Carolina Municipal Bond Portfolio
Trust Shares
Class B Investment Shares
Class C Investment Shares
FIRST UNION FUNDS
Name:/s/E. C. Gonzales
Date: April 22, 1993
STATE STREET BANK AND TRUST COMPANY
Name:/s/Ronald E. Logue
Date: April 22, 1993
Amendment No. 8 to
Exhibit A
CUSTODIAN CONTRACT
PORTFOLIOS OF FIRST UNION FUNDS
This Exhibit A is hereby amended to include the following portfolios
(the "Funds") and Classes of shares thereof (the "Classes") which are part
of First Union Funds (the "Trust"), effective as of the date set forth
below:
Name
First Union Utility Portfolio
Trust Shares
Class B Investment Shares
Class C Investment Shares
First Union Money Market Portfolio
Class C Investment Shares
First Union Treasury Money Market Portfolio
Class C Investment Shares
First Union Tax-Free Money Market Portfolio
Class C Investment Shares
FIRST UNION FUNDS
Name:/s/E. C. Gonzales
Date: October 9, 1993
STATE STREET BANK AND TRUST COMPANY
Name:/s/Ronald E. Logue
Date: October 9, 1993
Amendment No. 9 to
Exhibit A
CUSTODIAN CONTRACT
PORTFOLIOS OF FIRST UNION FUNDS
This Exhibit A is hereby amended to include the following portfolios
(the "Funds") and Classes of shares thereof (the "Classes") which are part
of First Union Funds (the "Trust"), effective as of the date set forth
below:
Name
First Union Balanced Portfolio
Class D Investment Shares
Trust Shares
First Union Emerging Markets Portfolio
Class B Investment Shares
Class C Investment Shares
Class D Investment Shares
Trust Shares
First Union Fixed Income Portfolio
Class D Investment Shares
First Union International Equity Portfolio
Class B Investment Shares
Class C Investment Shares
Class D Investment Shares
Trust Shares
First Union U.S. Government Portfolio
Class D Investment Shares
First Union Utility Portfolio
Class D Investment Shares
First Union Value Portfolio
Class D Investment Shares
FIRST UNION FUNDS
Name: /s/ Joseph S. Machi_________
Date:_July 28,1994________________
STATE STREET BANK AND TRUST COMPANY
Name:/s/ Michael E. Hagerty_______
Date:_July 28, 1994_______________
Exhibit 9(i) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 17th day of July, 1990, by and between THE
SALEM FUNDS, a Massachusetts business trust, having its principal office and
place of business at Federated Investors Tower, Pittsburgh, PA 15222-3779
(the "Fund") on behalf of the portfolios of the Fund set forth in Exhibit A
hereto, and STATE STREET BANK AND TRUST COMPANY, a Massachusetts corporation
having its principal office and place of business at 225 Franklin Street,
Boston, Massachusetts 02110 (the "Bank").
WHEREAS, the Fund desires to appoint the Bank as its transfer agent,
dividend disbursing agent, and agent in connection with certain other
activities, and the Bank desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
Article 1. Terms of Appointment
Subject to the terms and conditions set forth in this Agreement, the
Fund hereby employs and appoints the Bank to act as, and the Bank agrees to
act as, transfer agent for the Fund's authorized and issued shares of
beneficial interest ("Shares"), dividend disbursing agent, and agent in
connection with any accumulation, open-account or similar plans provided to
the shareholders of the Fund ("Shareholders"), including without limitation
any periodic investment plan or periodic withdrawal program.
Proper Instructions as used throughout this Agreement means a writing
signed or initially by one or more person or persons as the Board of Trustees
shall have from time to time authorized. Each such writing shall set forth
the specific transaction or type of transaction involved. Oral instructions
will be considered Proper Instructions if the Bank reasonably believes them
to have been given by a person previously authorized in Proper Instructions
to give such instructions with respect to the transaction involved. The Fund
and the Bank shall cause all oral instructions to be confirmed in writing.
Proper Instructions may include communications effected directly between
electro-mechanical or electronic devices provided that the Fund and the Bank
are satisfied that such procedures afford adequate safeguards for a Fund's
assets. Proper Instructions may only be amended in writing.
Article 2. Duties of the Bank
The Bank agrees that it will perform the following services in
accordance with Proper Instructions as may be provided from time to time by
the Fund:
A. Purchases
(1) The Bank shall receive orders and payment for the purchase of
shares and promptly deliver payment and appropriate
documentation therefore to the custodian of the Fund, which may
be the Bank (the "Custodian"). The Bank shall notify the Fund
and the Custodian on a daily basis of the total amount of
orders and payments so delivered.
(2) Pursuant to purchase orders and in accordance with the Funds
current prospectus, the Bank shall compute and issue the
appropriate number of shares and hold such shares in the
appropriate Shareholder accounts.
(3) If a Shareholder or its agent requests a certificate, the Bank,
as Transfer Agent, shall countersign and mail by first class
mail, a certificate to the Shareholder at his address as set
forth on the transfer books of the Fund, subject to any Proper
Instructions regarding the delivery of certificates.
(4) In the event that any check or other order for the purchase of
Shares of the Fund is returned unpaid for any reason, the Bank
shall debit the Share account of the Shareholder by the number
of Shares that had been credited to his account upon receipt of
the check or other order, promptly mail a debit advice to the
Shareholder, and notify the Fund of its action. In the event
that the amount paid for such Shares exceeds proceeds of the
redemption of such Shares plus the amount of any dividends paid
with respect to such Shares, the Bank will receive
reimbursement of such excess from the Fund or its distributor.
B. Distribution
(1) Upon notification by the Fund of the declaration of any
distribution to shareholders, the Bank shall act as Dividend
Disbursing Agent for the Fund in accordance with the provisions
of its governing document and the then current Prospectus of
the Fund and as such shall prepare and mail or credit income,
capital gain, or any other payments to Shareholders. As the
Dividend Disbursing Agent, the Bank shall, on or before the
payment date of any such distribution, notify the Custodian of
the estimated amount required to pay any portion of said
distribution which is payable in cash and request the Custodian
to make available sufficient funds for the cash amount to be
paid out. The Bank shall reconcile the amounts so requested
and the amounts actually received with the Custodian on a daily
basis. If a Shareholder is entitled to receive additional
Shares by virtue of any such distribution or dividend,
appropriate credits shall be made to the Shareholder's account
and certificates delivered where requested; and
(2) The Bank shall maintain records of account for and advise the
Fund and its Shareholders as to the foregoing.
C. Redemptions and Transfers
(1) The Bank shall receive redemption requests and redemption
directions and, if such redemption requests comply with the
procedures as may be described in the Fund prospectus or set
forth in Proper Instructions, deliver the appropriate
instructions therefore to the Custodian.
(2) At the appropriate time as and when it receives monies paid to
it by the Custodian with respect to any redemption, the Bank
shall pay over or cause to be paid over in the appropriate
manner such monies as instructed by the redeeming Shareholders,
pursuant to procedures described in the then current prospectus
of the Fund.
(3) If any such certificate or request for redemption does not
comply with the procedures for redemption approved by the Fund,
the Bank shall promptly notify the Shareholder and the Fund of
such fact, together with the reason therefor, and shall effect
such redemption at the price applicable to the date and time of
receipt of documents complying with said procedures.
(4) The Bank shall effect transfers of Shares by the registered
owners thereof.
(5) The Bank shall identify and process abandoned accounts and
uncashed checks for state escheat requirements on an annual
basis and report such actions to the Fund.
D. Recordkeeping
(1) The Bank shall record the issuance of shares of the Fund and
maintain pursuant to applicable Rules of the Securities and
Exchange Commission a record of the total number of shares of
the Fund which are authorized, based upon data provided to it
by the Fund, and issued and outstanding. The Bank shall also
provide the Fund on a regular basis or upon reasonable request
with the total number of Shares which are authorized and issued
and outstanding, but shall have no obligation when recording
the issuance of Shares, except as otherwise set forth herein,
to monitor the issuance of such shares or to take cognizance of
any laws relating to the issue or sale of such Shares, which
functions shall be the sole responsibility of the Fund.
(2) The Bank shall establish and maintain records pursuant to
applicable Rules of the Securities and Exchange Commission
relating to the services to be performed hereunder in the form
and manner as agreed to by the Fund to include a record for
each Shareholder's account of the following:
(a) Name, address and tax identifying number (and whether such
number has been certified);
(b) Number of Shares held;
(c) Historical information regarding the account, including
dividends paid and date and price for all transactions;
(d) Any stop or restraining order placed against the account;
(e) Information with respect to withholdings in the case of a
foreign account or an account for which withholding is
required by the Internal Revenue Code;
(f) Any dividend reinvestment order, plan application,
dividend address and correspondence relating to the
current maintenance of the account;
(g) Certificate numbers and denominations for any Shareholder
holding certificates;
(h) Any information required in order for the Bank to perform
the calculations contemplated or required by this
Agreement.
(3) The Bank shall preserve any such records required to be
maintained pursuant to the rules of the Securities and Exchange
Commission for the periods prescribed in said Rules as
specifically noted below. Such record retention shall be at
the expense of the Fund, and such records may be inspected by
the Fund at reasonable times. The Bank may, at its option at
any time, and shall forthwith upon the Fund's demand, turn over
to the Fund and cease to retain in the the Bank's files,
records and documents created and maintained by the Bank
pursuant to this Agreement, which are no longer needed by the
Bank in performance of its services or for its protection. If
not so turned over to the Fund, such records and documents will
be retained by the Bank for six years from the year of
creation, during the first two of which such documents will be
in readily accessible form. At the end of the six year period,
such records and documents will either be turned over to the
Fund or destroyed in accordance with Proper Instructions.
E. Confirmations/Reports
(1) The Bank shall furnish to the Fund periodically the following
information:
(a) A copy of the transaction register;
(b) Dividend and reinvestment blotters;
(c) The total number of Shares issued and outstanding in each
state for "blue sky" purposes as determined according to
Proper Instructions delivered from time to time by the
Fund to the Bank;
(d) Shareholder lists and statistical information;
(e) Payments to third parties relating to distribution
agreements, allocations of sales loads, redemption fees,
or other transaction- or sales-related payments;
(f) Such other information as may be agreed upon from time to
time.
(2) The Bank shall prepare in the appropriate form, file with the
Internal Revenue Service and appropriate state agencies, and,
if required, mail to Shareholders, such notices for reporting
dividends and distributions paid as are required to be so filed
and mailed and shall withhold such sums as are required to be
withheld under applicable federal and state income tax laws,
rules and regulations.
(3) In addition to and not in lieu of the services set forth above,
the Bank shall:
(a) Perform all of the customary services of a transfer agent,
dividend disbursing agent and, as relevant, agent in
connection with accumulation, open-account or similar
plans (including without limitation any periodic
investment plan or periodic withdrawal program), including
but not limited to: maintaining all Shareholder accounts,
preparing Shareholder meeting lists, mailing proxies,
receiving and tabulating proxies, mailing Shareholder
reports and prospectuses to current Shareholders,
withholding taxes on accounts subject to back-up or other
withholding (including non-resident alien accounts),
preparing and filing reports on U.S. Treasury Department
Form 1099 and other appropriate forms required with
respect to dividends and distributions by federal
authorities for all Shareholders, preparing and mailing
confirmation forms and statements of account to
Shareholders for all purchases and redemptions of Shares
and other confirmable transactions in Shareholder
accounts, preparing and mailing activity statements for
Shareholders, and providing Shareholder account
information; and
(b) provide a system which will enable the Fund to monitor the
total number of Shares sold in each state ("blue sky
reporting"). The Fund shall by Proper Instructions
(i) identify to the Bank those transactions and assets to
be treated as exempt from the blue sky reporting for each
state and (ii) verify the classification of transactions
for each state on the system prior to activation and
thereafter monitor the daily activity for each state. The
responsibility of the Bank for the Fund's blue sky state
registration status is solely limited to the recording of
the initial classification of transactions or accounts
with regard to blue sky compliance and the reporting of
such transactions and accounts to the Fund as provided
above.
F. Other Duties
(1) The Bank shall answer correspondence from Shareholders relating
to their Share accounts and such other correspondence as may
from time to time be addressed to the Bank;
(2) The Bank shall mail proxy cards and other material supplied to
it by the Fund in connection with Shareholder Meetings of the
Fund; receive, examine and tabulate returned proxies; and
certify the vote of the Shareholders;
(3) The Bank shall establish and maintain facilities and procedures
for safekeeping of stock certificates, check forms and
facsimile signature imprinting devices, if any; and for the
preparation or use, and for keeping account of, such
certificates, forms and devices.
Article 3. Duties of the Fund
A. Compliance
The Fund assumes full responsibility for the preparation, contents
and distribution of each Prospectus of the Fund and for complying
with all applicable requirements of the Securities Act of 1933, as
amended, the Investment Company act of 1940, as amended, and any
laws, rules and regulations of government authorities having
jurisdiction.
B. Share Certificates
The Fund shall supply the Bank with a sufficient supply of blank
Share certificates and from time to time shall renew such supply
upon request of the Bank. Such blank Share certificates shall be
properly signed, manually or by facsimile, if authorized by the Fund
and shall bear the seal of the Fund or facsimile thereof; and
notwithstanding the death, resignation or removal of any officer of
the Fund authorized to sign certificates, the Bank may continue to
countersign certificates which bear the manual or facsimile
signature of such officer until otherwise directed by the Fund.
C. Distributions
The Fund shall promptly inform the Bank of the declaration of any
dividend or distribution on account of its shares.
D. Documents
(1) In connection with the appointment of the Bank as Transfer
Agent, the Fund shall file with the Bank the following
documents:
(a) A copy of the Declaration of Trust and By-Laws of the Fund
and all amendments thereto;
(b) A copy of the resolution of the Board of Trustees of the
Fund authorizing this Agreement;
(c) Specimens of all forms of outstanding Share certificates
of the Fund in the forms approved by the Board of the Fund
with a certificate of the Secretary of the Fund as to such
approval;
(d) All account application forms and other documents relating
to Shareholders accounts;
(e) A copy of the current prospectus.
(2) The Fund will also furnish from time to time the following
documents:
(a) Each resolution of the Board of Trustees of the Fund
authorizing the original issuance of its Shares;
(b) Each Registration Statement filed with the Securities and
Exchange Commission and amendments thereof and orders
relating thereto in effect with respect to the sale of
Shares of the Fund;
(c) A certified copy of each amendment to the governing
document and the By-Laws of the Fund;
(d) Certified copies of each vote of the Board authorizing
officers to give Proper Instructions to the Transfer
Agent;
(e) Specimens of all new Share certificates representing
Shares of the Fund, accompanied by Board resolutions
approving such forms;
(f) Such other certificates, documents or opinions which the
Bank may, in its discretion, deem necessary or appropriate
in the proper performance of its duties;
(g) Revisions to the prospectus of the Fund;
Article 4. Representations and Warranties
A. Representations and Warranties of the Bank
The Bank represents and warrants to the Fund that:
(1) It is a corporation duly organized and existing and in good
standing under the laws of the Commonwealth of Massachusetts.
(2) It is duly qualified to carry on its business in the
Commonwealth of Massachusetts.
(3) It is empowered under applicable laws and by its charter and by-
laws to enter into and perform this Agreement.
(4) All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
(5) It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and
obligations under this Agreement.
(6) It is in compliance with federal securities law requirements
and in good standing as a transfer agent.
B. Representations and Warranties of the Fund
The Fund represents and warrants to the Bank that:
(1) It is a business trust duly organized and existing and in good
standing under the laws of Massachusetts.
(2) It is empowered under applicable laws and by its Declaration of
Trust and By-Laws to enter into and perform this Agreement.
(3) All corporate proceedings required by said Declaration of Trust
and By-Laws have been taken to authorize it to enter into and
perform this Agreement.
(4) It is an open-end investment company registered under the
Investment Company act of 1940.
(5) A registration statement under the Securities Act of 1933 will
be effective, and appropriate state securities law filings have
been made and will continue to be made, with respect to all
Shares of the Fund being offered for sale.
Article 5. Fees and Expenses
A. Annual Fee
For performance by the Bank pursuant to this Agreement, the Fund
agrees to pay the Bank an annual maintenance fee for each
Shareholder account as set out in the fee schedule attached hereto.
Such fees may be changed from time to time subject to mutual written
agreement between the Fund and the Bank.
B. Reimbursements
In addition to the fee paid under Article 5 A above, the Fund agrees
to reimburse the Bank for out-of-pocket expenses or advances
incurred by the Bank for the items set out in the fee schedule
attached hereto. In addition, any other expenses incurred by the
Bank at the request or with the consent of the Fund, will be
reimbursed by the Fund.
C. Payment
The Bank shall issue billing notices with respect to fees and
reimbursable expenses on a timely basis, generally within 15 days
following the end of the month in which the fees and expenses have
been incurred. The Fund agrees to pay all fees and reimbursable
expenses within 30 days following the receipt of the respective
billing notices.
Article 6. Standard of Care/Indemnification
A. Standard of Care
The Bank shall be held to a standard of reasonable care in carrying
out the provisions of this contract; provided, however that the Bank
shall be held to any higher standard of care which would be imposed
upon the Bank by any applicable law or regulation even though such
stated standard of care was not part of the contract.
B. Indemnification by Fund
The Bank shall not be responsible for and the Fund shall indemnify
and hold the Bank harmless against any and all losses, damages,
costs, charges, counsel fees, payments, expenses and liability
arising out of or attributable to:
(1) The Fund's refusal or failure to comply with the terms of this
Agreement, or which arise out of the Fund's lack of good faith,
negligence or willful misconduct or which arise out of the
breach of any representation or warranty of the Fund hereunder.
(2) The reliance on or use by the Bank or its agents or
subcontractors of information, records and documents in proper
form which
(a) are received by the Bank or its agents or subcontractors
and furnished to it by or on behalf of the Fund, its
shareholders or investors regarding the purchase,
redemption or transfer of shares and shareholder account
information, or
(b) have been prepared and/or maintained by the Fund or its
affiliates or any other person or firm on behalf of the
Fund.
(3) The reliance on, or the carrying out by the Bank or its agents
or subcontractors of Proper Instructions of the Fund.
(4) The offer or sale of Shares in violation of any requirement
under the federal securities laws or regulations or the
securities laws or regulations of any state that such Shares be
registered in such state or in violation of any stop order or
other determination or ruling by any federal agency or any
state with respect to the offer or sale of such Shares in such
state.
Provided, however, that the Bank shall not be protected by this
Article 6.B. from liability for any act or omission resulting from
the Bank's lack of good faith, negligence, willful misconduct, or
failure to meet the standard of care set forth in Article 6.A.,
above.
C. Indemnification by Bank
The Bank shall indemnify and hold the Fund harmless from and against
any and all losses, damages, costs, charges, counsel fees, payments,
expenses and liability arising out of or attributed to any action or
failure or omission to act by the Bank as a result of the Bank's
lack of good faith, negligence, willful misconduct, or failure to
meet the standard of care set forth in Article 6A above.
D. Reliance
At any time the Bank may apply to any officer of the Fund for
instructions, and may consult with legal counsel with respect to any
matter arising in connection with the services to be performed by
the Bank under this Agreement, and the Bank and its agents or
subcontractors shall not be liable and shall be indemnified by the
Fund for any action reasonably taken or omitted by it in reliance
upon such instructions or upon the opinion of such counsel provided
such action is not in violation of applicable Federal or state laws
or regulations. The Bank, its agents and subcontractors shall be
protected and indemnified in recognizing stock certificates which
are reasonably believed to bear the proper manual or facsimile
signatures of the officer of the Fund, and the proper
countersignature of any former transfer agent or registrar, or of a
co-transfer agent or co-registrar.
E. Notification
In order that the indemnification provisions contained in this
Article 6 shall apply, upon the assertion of a claim for which
either party may be required to indemnify the other, the party
seeking indemnification shall promptly notify the other party of
such assertion, and shall keep the other party advised with respect
to all developments concerning such claim. The party who may be
required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The
party seeking indemnification shall in no case confess any claim or
make any compromise in any case in which the other party may be
required to indemnify it except with the other party's prior written
consent.
Article 7. Terms of the Agreement
A. Termination of Agreement
This Agreement may be terminated by either party upon one hundred
twenty (120) days written notice to the other.
B. Expenses
Should the Fund exercise its rights to terminate all out-of-pocket
expenses associated with the movement of records and materials will
be bourne by the Fund. Additionally, the Bank reserves the right to
charge for any other reasonable expenses associated with such
termination.
C. Assignment
Except as provided below, neither this Agreement nor any rights or
obligations hereunder may be assigned by either party without the
written consent of the other party.
(1) This Agreement shall inure to the benefit of and be binding
upon the parties and their respective permitted successors and
assigns.
(2) The Bank may without further consent on the part of the Fund
subcontract for the performance hereof with (A) Boston
Financial Data Services, Inc., a Massachusetts corporation
("BFDS"), which is duly registered as a transfer agent pursuant
to Section 17A(c)(1) of the Securities Exchange Act of 1934, or
any succeeding statute ("Section 17A(c)(1)"), or (B) a BFDS
subsidiary duly registered as a transfer agent pursuant to
Section 17A(c)(1), or (C) a BFDS affiliate; provided, however,
that the Bank shall be as fully responsible to the Fund for the
acts and omissions of any subcontractor as it is for its own
acts and omissions.
D. Amendment
This Agreement may be amended or modified by a written agreement
executed by both parties and authorized or approved by a resolution
of the Trustees of the Fund.
Article 8. Miscellaneous
A. Massachusetts Law to Apply
This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of The
Commonwealth of Massachusetts.
B. Merger of Agreement
This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the
subject hereof whether oral or written.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.
ATTEST: THE SALEM FUNDS
/s/ Byron F. Bowman By:/s/ E. C. Gonzales
Secretary Vice President
ATTEST: STATE STREET BANK AND TRUST COMPANY
/s/ Linda M. Murphy By:/s/ Frank Sidoti, Jr.
Assistant Secretary Vice President
Exhibit A
TRANSFER AGENCY AND SERVICE AGREEMENT
PORTFOLIOS OF THE SALEM FUNDS
The Salem Funds (the "Trust") consists of the following portfolios (the
"Funds") effective as of the dates set forth below:
Name Date
The Salem Fixed Income Portfolio August 31, 1984
The Salem Growth Portfolio August 31, 1984
The Salem Money Market Portfolio August 31, 1984
The Salem Tax Free Money Market Portfolio August 31, 1984
The Salem Tax Free Portfolio August 31, 1984
Amendment No. 1 to
Exhibit A
TRANSFER AGENCY AND SERVICES AGREEMENT
PORTFOLIOS OF THE SALEM FUNDS
Exhibit A is hereby amended to include the following portfolios (the
"Funds") and classes of shares thereof (the "Classes") which are part of The
Salem Funds (the "Trust") effective as of the date set forth below:
The Salem Fixed Income Portfolio
Investment Shares
Trust Shares
The Salem Growth Portfolio
Investment Shares
Trust Shares
The Salem Money Market Portfolio
Investment Shares
Trust Shares
The Salem Tax Free Money Market Portfolio
Investment Shares
Trust Shares
The Salem Tax Free Portfolio
Investment Shares
Trust Shares
The Salem Treasury Money Market Portfolio
Investment Shares
Trust Shares
THE SALEM FUNDS
Name:/s/ Jeffrey W. Sterling
Date: October 15, 1990
STATE STREET BANK AND TRUST COMPANY
Name:/s/ Frank Sidoti, Jr.
Date: October 15, 1990
Amendment No. 2 to
Exhibit A
TRANSFER AGENCY AND SERVICES AGREEMENT
PORTFOLIOS OF THE SALEM FUNDS
This Exhibit A is hereby amended to include the following portfolio (the
"Fund") and Class of shares thereof (the "Class) which are part ofThe Salem
Funds (the "Trust") effective as of the date set forth below:
Name
The Salem Balanced Portfolio
Investment Shares
Trust Shares
The Salem Managed Bond Fund Portfolio
Investment Shares
Trust Shares
THE SALEM FUNDS
Name:/s/ Jeffrey W. Sterling
Date: January 2, 1991
STATE STREET BANK AND TRUST COMPANY
Name:/s/ Frank Sidoti, Jr.
Date: January 2, 1991
Amendment No. 3 to
Exhibit A
TRANSFER AGENCY AND SERVICES AGREEMENT
PORTFOLIOS OF THE SALEM FUNDS
This Exhibit A is hereby amended to include the following portfolio (the
"Fund") and Class of shares thereof (the "Class) which are part of The Salem
Funds (the "Trust") effective as of the date set forth below:
Name
The Salem Insured Tax-Free Portfolio
Investment Shares
Trust Shares
THE SALEM FUNDS
Name:/s/ E. C. Gonzales
Date: January 9, 1992
STATE STREET BANK AND TRUST COMPANY
Name:/s/ Frank Sidoti, Jr.
Date: March 19, 1992
Amendment No. 4 to
Exhibit A
TRANSFER AGENCY AND SERVICES AGREEMENT
PORTFOLIOS OF THE SALEM FUNDS
This Exhibit A is hereby amended to include the following portfolio (the
"Fund") and Class of shares thereof (the "Class) which are part of The Salem
Funds (the "Trust") effective as of the date set forth below:
Name
The Salem U.S. Government Portfolio
Class B Investment Shares
Trust Shares
The Salem North Carolina Municipal Bond Portfolio
Class B Investment Shares
Trust Shares
THE SALEM FUNDS
Name:/s/ Jeffrey W. Sterling
Date: December 28, 1992
STATE STREET BANK AND TRUST COMPANY
Name:/s/ Michael E. Hagerty
Vice President
Date: December 28, 1992
Amendment No. 5 to
Exhibit A
TRANSFER AGENCY AND SERVICES AGREEMENT
PORTFOLIOS OF THE SALEM FUNDS
This Exhibit A is hereby amended to include the following portfolio (the
"Fund") and Class of shares thereof (the "Class) which are part of The Salem
Funds (the "Trust") effective as of the date set forth below:
Name
The Salem Balanced Portfolio
Class C Investment Shares
The Salem Fixed Income Portfolio
Class C Investment Shares
The Salem Managed Bond Portfolio
Class C Investment Shares
The Salem Insured Tax Free Portfolio
Class C Investment Shares
The Salem Value Portfolio
Class C Investment Shares
The Salem U.S. Government Portfolio
Class C Investment Shares
The Salem North Carolina Municipal Bond Portfolio
Class C Investment Shares
THE SALEM FUNDS
Name:/s/ Jeffrey W. Sterling
Date: December 28, 1992
STATE STREET BANK AND TRUST COMPANY
Name:/s/ Michael E. Hagerty
Date: December 28, 1992
Amendment No. 6 to
Exhibit A
TRANSFER AGENCY AND SERVICES AGREEMENT
PORTFOLIOS OF FIRST UNION FUNDS
This Exhibit A is hereby amended to include the following portfolio (the
"Fund") and Class of shares thereof (the "Class) which are part of First
Union Funds (the "Trust") effective as of the date set forth below:
Name
First Union Virginia Municipal Bond Portfolio
Class B Investment Shares
Class C Investment Shares
Trust Shares
First Union Georgia Municipal Bond Portfolio
Class B Investment Shares
Class C Investment Shares
Trust Shares
First Union Florida Municipal Bond Portfolio
Class B Investment Shares
Class C Investment Shares
Trust Shares
FIRST UNION FUNDS
Name:/s/E. C. Gonzales
President
Date: April 22, 1993
STATE STREET BANK AND TRUST COMPANY
Name:/s/Ronald E. Logue
Executive Vice President
Date: April 22, 1993
Amendment No. 7 to
Exhibit A
TRANSFER AGENCY AND SERVICES AGREEMENT
PORTFOLIOS OF FIRST UNION FUNDS
This Exhibit A is hereby amended to include the following portfolio (the
"Fund") and Classes of shares thereof (the "Classes") which are part of First
Union Funds (the "Trust"), effective as of the date set forth below:
Name
First Union South Carolina Municipal Bond Portfolio
Trust Shares
Class B Investment Shares
Class C Investment Shares
FIRST UNION FUNDS
Name:/s/E. C. Gonzales
Date: April 22, 1993
STATE STREET BANK AND TRUST COMPANY
Name:/s/Ronald E. Logue
Date: April 22, 1993
Amendment No. 8 to
Exhibit A
TRANSFER AGENCY AND SERVICES AGREEMENT
PORTFOLIOS OF FIRST UNION FUNDS
This Exhibit A is hereby amended to include the following portfolios (the
"Funds") and Classes of shares thereof (the "Classes") which are part of
First Union Funds (the "Trust"), effective as of the date set forth below:
Name
First Union Utility Portfolio
Trust Shares
Class B Investment Shares
Class C Investment Shares
First Union Money Market Portfolio
Class C Investment Shares
First Union Treasury Money Market Portfolio
Class C Investment Shares
First Union Tax-Free Money Market Portfolio
Class C Investment Shares
FIRST UNION FUNDS
Name:/s/E. C. Gonzales
Date: October 9, 1993
STATE STREET BANK AND TRUST COMPANY
Name:/s/Ronald E. Logue
Date: October 9, 1993
Exhibit 9(ii) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
FIRST UNION FUNDS
SHAREHOLDER SERVICES PLAN
This Shareholder Services Plan ("Plan") is adopted as of this 28th
day of July, 1994, by the Board of Trustees of First Union Funds (the
"Trust"), a Massachusetts business trust with respect to certain classes
of shares ("Classes") of the portfolios of the Trust (the "Funds") set
forth in exhibits hereto.
1. This Plan is adopted to allow the Classes to make payments
as contemplated herein to obtain certain personal services for
shareholders and/or the maintenance of shareholder accounts
("Services").
2. This Plan is designed to compensate broker/dealers and other
participating financial institutions and other persons ("Providers") for
providing services to the Classes and their shareholders. In
compensation for the services provided pursuant to this Plan, Providers
will be paid a monthly fee computed at the annual rate not to exceed .25
of 1% of the average aggregate net asset value of the shares of each
Class held during the month.
3. Any payments made by the Funds to any Provider pursuant to
this Plan will be made pursuant to the "Shareholder Services Agreement"
entered into by the Trust on behalf of the Funds or Classes and the
Provider.
4. The Trust has the right (i) to select, in its sole
discretion, the Providers to participate in the Plan and (ii) to
terminate without cause and in its sole discretion any Shareholder
Services Agreement.
5. Quarterly in each year that this Plan remains in effect,
Provider shall prepare and furnish to the Board of Trustees of the
Trust, and the Board of Trustees shall review, a written report of the
amounts expended under the Plan.
6. This Plan shall become effective (i) after approval by
majority votes of: (a) the Trust's Board of Trustees; and (b) the
members of the Board of the Trust who are not interested persons of the
Trust and have no direct or indirect financial interest in the operation
of the Trust's Plan or in any related documents to the Plan
("Disinterested Trustees"), cast in person at a meeting called for the
purpose of voting on the Plan; and (ii) upon execution of an exhibit
adopting this Plan.
7. This Plan shall remain in effect with respect to each Class
presently set forth on an exhibit and any subsequent Classes added
pursuant to an exhibit during the initial year of this Plan for the
period of one year from the date set forth above and may be continued
thereafter if this Plan is approved with respect to each Class at least
annually by a majority of the Trust's Board of Trustees and a majority
of the Disinterested Trustees, cast in person at a meeting called for
the purpose of voting on such Plan. If this Plan is adopted with
respect to a class after the first annual approval by the Trustees as
described above, this Plan will be effective as to that Class upon
execution of the applicable exhibit pursuant to the provisions of
paragraph 6(ii) above and will continue in effect until the next annual
approval of this Plan by the Trustees and thereafter for successive
periods of one year subject to approval as described above.
8. All material amendments to this Plan must be approved by a
vote of the Board of Trustees of the Trust and of the Disinterested
Trustees, cast in person at a meeting called for the purpose of voting
on it.
9. This Plan may be terminated at any time by: (a) a majority
vote of the Disinterested Trustees; or (b) a vote of a majority of the
outstanding voting securities of the Trust as defined in Section
2(a)(42) of the Investment Company Act of 1940, as amended.
10. While this Plan shall be in effect, the selection and
nomination of Disinterested Trustees of the Trust shall be committed to
the discretion of the Disinterested Trustees then in office.
11. All agreements with any person relating to the
implementation of this Plan shall be in writing and any agreement
related to this Plan shall be subject to termination, without penalty,
pursuant to the provisions of Paragraph 9 herein.
12. This Plan shall be construed in accordance with and governed
by the laws of the Commonwealth of Pennsylvania.
Witness the due execution hereof this 28th day of July, 1994.
FIRST UNION FUNDS
By:/s/ E. C. Gonzales
President
EXHIBIT A
to the
Plan
FIRST UNION FUNDS
First Union Balanced Portfolio
Class C Investment Shares
Class D Investment Shares
First Union Emerging Markets Growth Portfolio
Class C Investment Shares
Class D Investment Shares
First Union Fixed Income Portfolio
Class C Investment Shares
Class D Investment Shares
First Union Florida Municipal Bond Portfolio
Class C Investment Shares
First Union Georgia Municipal Bond Portfolio
Class C Investment Shares
First Union High Grade Tax Free Portfolio
Class C Investment Shares
First Union International Equity Portfolio
Class C Investment Shares
Class D Investment Shares
First Union Money Market Portfolio
Class C Investment Shares
First Union North Carolina Municipal Bond Portfolio
Class C Investment Shares
First Union South Carolina Municipal Bond Portfolio
Class C Investment Shares
First Union U.S. Government Portfolio
Class C Investment Shares
Class D Investment Shares
First Union Utility Portfolio
Class C Investment Shares
Class D Investment Shares
First Union Value Portfolio
Class C Investment Shares
Class D Investment Shares
First Union Virginia Municipal Bond Portfolio
Class C Investment Shares
This Plan is adopted by First Union Funds with respect to the
Classes of Shares of the Funds of the Trust set forth above.
In compensation for the services provided pursuant to this Plan,
Providers will be paid a monthly fee computed at the annual rate of .25
of 1% of the average aggregate net asset value of the Class C or Class D
Investment Shares of the relevant portfolios held during the month.
Witness the due execution hereof this 28th day of July, 1994.
FIRST UNION FUNDS
By: /s/ E. C. Gonzales
President
Exhibit 9(iii) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
SHAREHOLDER SERVICES AGREEMENT
This Agreement is made between the Financial Institution executing
this Agreement ("Provider") and the First Union Funds (the "Trust") on
behalf of the classes or portfolios listed in Exhibit A hereto (the
"Funds"). In consideration of the mutual covenants hereinafter
contained, it is hereby agreed by and between the parties hereto as
follows:
1. The Trust hereby appoints Provider to render or cause to be
rendered personal services to shareholders of the Funds and/or the
maintenance of accounts of shareholders of the Funds ("Services").
Provider agrees to provide Services which, in its best judgment, are
necessary or desirable for its customers who are investors in the Funds.
Provider further agrees to provide the Trust, upon request, a written
description of the Services which Provider is providing hereunder.
2. During the term of this Agreement, the Funds will pay the
Provider fees as set forth in a written schedule delivered to the
Provider pursuant to this Agreement. The fee schedule for Provider may
be changed by the Trust sending a new fee schedule to Provider pursuant
to Paragraph 9 of this Agreement. For the payment period in which this
Agreement becomes effective or terminates, there shall be an appropriate
proration of the fee on the basis of the number of days that this
Agreement is in effect during the quarter. To enable the Funds to
comply with an applicable exemptive order, Provider represents that the
fees received pursuant to this Agreement will be disclosed to its
customers, will be authorized by its customers, and will not result in
an excessive fee to the Provider.
3. The Provider understands that the Department of Labor views
ERISA as prohibiting fiduciaries of discretionary ERISA assets from
receiving shareholder service fees or other compensation from funds in
which the fiduciary's discretionary ERISA assets are invested. To date,
the Department of Labor has not issued any exemptive order or advisory
opinion that would exempt fiduciaries from this interpretation. Without
specific authorization from the Department of Labor, fiduciaries should
carefully avoid investing discretionary assets in any fund pursuant to
an arrangement where the fiduciary is to be compensated by the fund for
such investment. Receipt of such compensation could violate ERISA
provisions against fiduciary self-dealing and conflict of interest and
could subject the fiduciary to substantial penalties.
4. The Provider agrees not to solicit or cause to be solicited
directly, or indirectly at any time in the future, any proxies from the
shareholders of a Fund in opposition to proxies solicited by management
of the Trust, unless a court of competent jurisdiction shall have
determined that the conduct of a majority of the Board of Trustees of
the Trust constitutes willful misfeasance, bad faith, gross negligence
or reckless disregard of their duties. This paragraph 4 will survive
the term of this Agreement.
5. This Agreement shall continue in effect for one year from
the date of its execution, and thereafter for successive periods of one
year if the form of this Agreement is approved at least annually by the
Board of the Trust, including a majority of the members of the Board of
the Trust who are not interested persons of the Trust and have no direct
or indirect financial interest in the operation of the Trust's Plan or
in any related documents to the Plan ("Disinterested Board Members")
cast in person at a meeting called for that purpose.
6. Notwithstanding paragraph 5, this Agreement may be
terminated as follows:
(a) at any time, without the payment of any penalty, by
the vote of a majority of the Disinterested Board Members of the
Trust or by a vote of a majority of the outstanding voting
securities of the Trust as defined in the Investment Company Act
of 1940 on not more than sixty (60) days' written notice to the
parties to this Agreement;
(b) automatically in the event of the Agreement's
assignment as defined in the Investment Company Act of 1940; and
(c) by either party to the Agreement without cause by
giving the other party at least sixty (60) days' written notice
of its intention to terminate.
7. The Provider agrees to obtain any taxpayer identification
number certification from its customers required under Section 3406 of
the Internal Revenue Code, and any applicable Treasury regulations, and
to provide the Fund or its designee with timely written notice of any
failure to obtain such taxpayer identification number certification in
order to enable the implementation of any required backup withholding.
8. The execution and delivery of this Agreement have been
authorized by the Trustees of the Trust and signed by an authorized
officer of the Trust, acting as such, and neither such authorization by
such Trustees nor such execution and delivery by such officer shall be
deemed to have been made by any of them individually or to impose any
liability on any of them personally, and the obligations of this
Agreement are not binding upon any of the Trustees or shareholders of
the Trust.
9. Notices of any kind to be given hereunder shall be in
writing (including facsimile communication) and shall be duly given if
delivered to Provider at the address set forth below and if delivered to
the Trust at Federated Investors Tower, Pittsburgh, PA 15222-3779,
Attention: President.
10. This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the
subject hereof whether oral or written. If any provision of this
Agreement shall be held or made invalid by a court or regulatory agency
decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby. Subject to the provisions of Sections 5
and 6, hereof, this Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective successors and
shall be governed by Pennsylvania law; provided, however, that nothing
herein shall be construed in a manner inconsistent with the Investment
Company Act of 1940 or any rule or regulation promulgated by the
Securities and Exchange Commission thereunder.
11. This Agreement may be executed by different parties on
separate counterparts, each of which, when so executed and delivered,
shall be an original, and all such counterparts shall together
constitute one and the same instrument.
12. This Agreement shall not be assigned by any party without
the prior written consent of the Trust in the case of assignment by
Provider, or of Provider in the case of assignment by the Trust, except
that any party may assign to a successor all of or a substantial portion
of its business to a party controlling, controlled by, or under common
control with such party.
13. This Agreement may be amended by the Trust from time to time
by the following procedure. The Trust will mail a copy of the amendment
to the Provider's address, as shown below. If the Provider does not
object to the amendment within thirty (30) days after its receipt, the
amendment will become part of the Agreement. The Provider's objection
must be in writing and be received by the Trust within such thirty days.
14. This Agreement may be terminated with regard to a
particular Portfolio or Class at any time, without the payment of any
penalty, by the Trust or by the vote of a majority of the Disinterested
Trustees, or by a majority of the outstanding voting securities of the
particular Portfolio or Class on not more than sixty (60) days' written
notice to the Provider. This Agreement may be terminated by Provider
on sixty (60) days' written notice to the Trust.
[Provider]
Address
City State Zip Code
Dated: By:
Authorized Signature
Title
Print Name of Authorized Signature
FIRST UNION FUNDS
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
By: /s/ Joseph S. Machi
Vice President
EXHIBIT A to Shareholder Services Agreement with
FIRST UNION FUNDS
Funds covered by this Agreement:
First Union Balanced Portfolio
Class C Investment Shares
Class D Investment Shares
First Union Emerging Markets Growth Portfolio
Class C Investment Shares
Class D Investment Shares
First Union Fixed Income Portfolio
Class C Investment Shares
Class D Investment Shares
First Union Florida Municipal Bond Portfolio
Class C Investment Shares
First Union Georgia Municipal Bond Portfolio
Class C Investment Shares
First Union High Grade Tax Free Portfolio
Class C Investment Shares
First Union International Equity Portfolio
Class C Investment Shares
Class D Investment Shares
First Union Money Market Portfolio
Class C Investment Shares
First Union North Carolina Municipal Bond Portfolio
Class C Investment Shares
First Union South Carolina Municipal Bond Portfolio
Class C Investment Shares
First Union U.S. Government Portfolio
Class C Investment Shares
Class D Investment Shares
First Union Utility Portfolio
Class C Investment Shares
Class D Investment Shares
First Union Value Portfolio
Class C Investment Shares
Class D Investment Shares
First Union Virginia Municipal Bond Portfolio
Class C Investment Shares
Shareholder Service Fees
1. During the term of this Agreement, the Portfolios or Classes
listed above will pay Provider a quarterly fee. This fee will be
computed at the annual rate of .25 of 1% of the average net asset value
of shares of the Portfolio or Class held during the quarter in accounts
for which the Provider provides Services under this Agreement.
2. For the quarterly period in which the Agreement becomes
effective or terminates, there shall be an appropriate proration of any
fee payable on the basis of the number of days that the Agreement is in
effect during the quarter.
Exhibit 5(i) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
SUBADVISORY CONTRACT
AGREEMENT made as of the 28th day of July, 1994, between
First Union National Bank of North Carolina, a national banking
association, having its principal place of business in Charlotte, NC
(the "Adviser"), and Marvin & Palmer Associates, Inc., a Delaware
corporation (the "Subadviser").
W I T N E S S T H
WHEREAS, First Union Funds (the "Trust") is an open-and,
management investment company, registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), the Trust has multiple
portfolios, including the Emerging Markets Growth Portfolio (the "Fund")
and the Subadviser is an investment adviser registered under the
Investment Advisers Act of 1940 (the "Advisers Act"), and
WHEREAS, pursuant to authority granted the Adviser by the
Trust's Board of Trustees (the "Trustees") and pursuant to the
provisions of the Investment Advisory Contract dated February 28, 1985,
and as subsequently amended, between the Adviser and the Trust with
respect to the Fund (the "Advisory Contract"), the Adviser has selected
the Subadviser to act as a sub-investment adviser of the Fund and to
provide certain other services, as more fully set forth below, and to
perform such services under the terms and conditions hereinafter set
forth,
NOW, THEREFORE, in consideration of the mutual agreements
herein contained, it is agreed as follows:
1. The Subadviser's Services.
(a) Subject to the supervision and review of the Adviser and of
the Trustees of the Trust, the Subadviser shall manage the
investment operations of that portion or all of the Fund's
portfolio as designated by the Adviser (the "Portfolio"),
including the purchase, retention and disposition of
securities, in accordance with the Fund's investment
objectives, policies and restrictions as stated in the
Trust's Registration Statement, including the Prospectus and
Statement of Additional Information (such Registration
Statement, as currently in effect and as amended or
supplemented from time to time, collectively called the
"Prospectus") and subject to the following understandings:
(i) The Subadviser shall supervise the Portfolio's
investments and determine from time to time what
securities will be purchased, retained, sold or
loaned by the Portfolio, and what portion of the
assets will be invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under
this Contract, the Subadviser shall act in conformity
with any Trust's Declaration of Trust and By-Laws and
the Fund's Prospectus and with any instructions and
directions received in writing from the Trustees of the
Trust. In the event the Subadviser undertakes any
actions or refrains from undertaking any actions
pursuant to specific written instructions and
directions from the Adviser, the Adviser shall
indemnify the Subadviser and each of the Subadviser's
partners, officers, employees and agents thereof
(collectively, the "Indemnitees") against any
liabilities and expenses, reasonably incurred in
connection with the defense or disposition of any
action, suit or other proceeding, whether civil or
criminal, before any court or administrative or
investigative body in which such Indemnitees may be or
may have been involved as a party or otherwise or with
which such Indemnitees may or may have been threatened
as a result of actions taken pursuant to such written
instructions and directions, provided that the
Subadviser shall not have been found to have acted with
Malfeasance (as such term is defined in Section 11
hereof). The Subadviser will conform to and comply
with the requirements of the 1940 Act, the Internal
Revenue Code of 1986, as amended (including the
requirements for qualification as a regulated
investment company) and all other applicable federal
and state laws and regulations.
(b) The Subadviser shall not be responsible for the provision of
administrative, bookkeeping or accounting services to the
Fund, except as otherwise provided herein or as may be
necessary for the Subadviser to supply to the Adviser, the
Trust or its Trustees the information required to be supplied
under this Contract.
The Subadviser shall maintain separate books and detailed
records of all matters pertaining to the Fund and the
Portfolio (the "Fund's Books and Records"), including,
without limitation, a daily ledger of such assets and
liabilities relating thereto and brokerage and other records
of all securities transactions. The Subadviser shall also
require that its Access Persons (as defined in the Trust's
Code of Ethics) provide the Subadviser with monthly reports
of their personal securities transactions. The Fund's Books
and Records shall be available to the Adviser at any time
upon request and shall be available for telecopying without
delay to the Adviser during any day that the Fund is open for
business.
(c) The Subadviser shall determine the securities to be
purchased or sold by the Fund in respect of the Portfolio
and will place orders with or through such persons, brokers
or dealers to carry out the policy with respect to brokerage
as set forth in the Fund's Prospectus or as the Trustees may
direct from time to time. In addition, the Subadviser will
place orders for the purchase and sale of Portfolio
securities as directed by the Adviser and, subject to the
provisions of the following paragraph, will take reasonable
steps to assure that Portfolio transactions are effected at
the best price and execution available, as such phrase is
used in the Fund's Prospectus, as in effect from time to
time.
In using its best efforts to obtain for the Fund the most
favorable price and execution available, the Subadviser,
bearing in mind the Fund's best interests at all times, shall
consider all factors it deems relevant, including, by way of
illustration, price, the size of the transaction, the nature of
the market for the security, the amount of the commission, the
timing of the transaction taking into account market prices and
trends, the reputation, experience and financial stability of
the broker or dealer involved and the quality of service
rendered by the broker or dealer in other transactions.
Subject to such policies as the Trustees of the Trust may
determine, the Subadviser shall not be deemed to have acted
unlawfully or to have breached any duty created by this
Contract or otherwise solely by reason of its having caused the
Fund to pay a broker or dealer that provides brokerage and
research services to the Subadviser or the Adviser an amount of
commission for effecting a Portfolio investment transaction
that is greater than the amount of commission that another
broker or dealer would have charged for effecting that
transaction.
It is understood that the Subadviser may have advisory,
management, service or other contracts with other
individuals or entities, and may have other interests and
businesses. When a security proposed to be purchased or
sold for the Fund is also to be purchased or sold for other
accounts managed by the Subadviser at the same time, the
Subadviser shall make such purchases or sales on a pro-rata,
rotating or other equitable basis so as to avoid any one
account being preferred over any other account.
The Subadviser will advise the Adviser and, if instructed by
the Adviser, the Fund's custodian or sub-custodians on a
prompt basis each day by electronic telecommunication of
each confirmed purchase and sale of a Portfolio security
specifying the name of the issuer, the full description of
the security including its class, and amount or number of
shares of the security purchased or sold, the market price,
commission, government charges and gross or net price, trade
date, settlement date and identity of the effecting broker
or dealer and, if different, the identity of the clearing
broker. Under no circumstances may the Subadviser or any
affiliates of the Subadviser act as a principal in a
securities transaction with the Fund or any other investment
company managed by the Adviser unless permitted by an
exemptive provision, rule or order under the 1940 Act.
(d) From time to time as the Adviser or the Trustees of the
Trust may reasonably request, the Subadviser shall furnish
the Adviser and to each of the Trust's Trustees reports of
Portfolio transactions and reports on securities held in the
Portfolio, all in such detail as the Adviser or the Trustees
may reasonably request. The Subadviser will also inform the
Adviser and the Trust's Trustees on a current basis of
changes in investment strategy or tactics or in key
personnel. The Subadviser will make its officers and
employees available to meet with the Trust's Trustees at
least quarterly on due notice to review the investments of
the Fund in the light of current and prospective economic and
market conditions.
It shall be the duty of the Subadviser to furnish to the
Trust's Trustees such information as may reasonably be
necessary in order for such Trustees to evaluate this
Contract or any proposed amendments thereto for the purpose
of casting a vote pursuant to Section 8 or 9 hereof.
2. Allocation of Charges and Expenses. The Subadviser will
bear its own costs of providing services hereunder. Other than as
specifically indicated herein, the Subadviser shall not be responsible
for the Trust's or the Adviser's expenses, including, without
limitation, the expenses of organizing the Trust and continuing its
existence; fees and expenses of Trustees and officers of the Trust; fees
for investment advisory services and administrative personnel and
services, expenses incurred in the distribution of its shares
("Shares"), including expenses of administrative support services, fees
and expenses of preparing and printing its Registration Statements under
the Securities Act of 1933 and the 1940 Act, and any amendments thereto,
expenses of registering and qualifying the Trust, the Fund and Shares of
the Fund under federal and state laws and regulation; expenses of
preparing, printing and distributing prospectuses (and any amendments
thereto) to shareholders, interest expense, taxes, fees and commissions
of every kind, expenses of issue (including cost of Share certificates),
purchase, repurchase and redemption of Shares, including expenses
attributable to a program of periodic issue, charges and expenses of
custodians, transfer agents, dividend disbursing agents, shareholder
servicing agents and registrars, printing and mailing costs, auditing,
accounting and legal expenses; reports to shareholders and governmental
officers and commissions; expenses of meetings of Trustees and
shareholders and proxy solicitations therefor; insurance expenses;
association membership dues and such nonrecurring items as may arise,
including all losses and liabilities incurred in administering the Trust
and the Fund. The Trust or the Adviser, as the case may be, shall
reimburse the Subadviser for any such expenses or other expenses of the
Fund or the Adviser, as may be reasonably incurred by such Subadviser on
behalf of the Fund or the Adviser. The Subadviser shall keep and supply
to the Trust and the Adviser adequate records of all such expenses.
3. Information Supplied by the Adviser. The Adviser shall
provide the Subadviser with the Trust's Declaration of Trust and By-
Laws, the Fund's Prospectus and Statement of Additional Information, and
copies of any written instructions as in effect from time to time.
Subject to the provisions of Section 11 of this Contract, the Subadviser
shall have no responsibility for actions taken in reliance on any such
documents.
4. Registration as an Adviser. The Subadviser represents and
warrants to each of the Trust and the Adviser that it is registered as
an "investment adviser" under the Advisers Act and covenants that it
will remain so registered for the duration of this Contract.
5. Subadviser's Compensation. The Adviser shall pay to the
Subadviser, as compensation for the Subadviser's services, pursuant to
the following schedule:
Average Aggregate Daily Net
Sub-Advisory Fee Assets of the Fund_____
1.00% on the first $100 million
0.95% on the next $100 million
0.90% on the next $100 million
0.85% on assets in excess of $300 million
("Sub-Advisory Fee"). Such fee shall be computed daily and paid
monthly. In the event that the fee due from the Trust to the Adviser on
behalf of the Fund is reduced in order to meet expense limitations
imposed on the Fund by state securities laws or regulations, the Sub-
Advisory Fee shall be reduced in accordance with the mutual agreement of
the Adviser and the Subadviser.
The method of determining net assets of the Fund for
purposes hereof shall be the same as the method of determining net
assets for purposes of establishing the offering and redemption price of
Fund Shares as described in the Fund's Prospectus. If this Contract
shall be effective for only a portion of a month, the aforesaid fee
shall be prorated for the portion of such month during which this
Contract is in effect.
Notwithstanding any other provision of the Contract, the
Subadviser may from time to time agree not to impose all or a portion of
its fee otherwise payable hereunder (in advance of the time such fee or
portion thereof would otherwise accrue). Any such fee reduction may be
discontinued or modified by the Subadviser at any time.
6. Independent Contractor. In the performance of its duties
hereunder, the Subadviser is and shall be an independent contractor and
unless otherwise expressly provided herein or otherwise authorized in
writing, shall have no authority to act for or represent the Trust in
any way or otherwise be deemed to be an agent of the Trust or of the
Adviser.
7. Sales Literature. The Subadviser acknowledges that all
sales literature for investment companies (such as the Trust) are
subject to strict regulatory oversight. The Subadviser agrees to submit
any proposed sales literature for the Trust (or any Fund) or for itself
or its affiliates which mentions the Trust (or any Fund) to the Trust's
distributor for review and filing with the appropriate regulatory
authorities prior to the public release of any such sales literature,
provided, however, that nothing herein shall be construed so as to
create any obligation or duty on the part of the Subadviser to produce
sales literature for the Trust (or the Fund).
8. Assignment and Amendments. This Contract may not be
assigned by the Subadviser and shall automatically terminate, without
the payment of any penalty, in the event of (i) its assignment,
including any change of control of the Adviser or the Subadviser, or
(ii) in the event of the termination of the Advisory Contract, provided
that such termination shall not relieve the Adviser or the Subadviser of
any liability incurred hereunder.
The terms of this Contract shall not be changed unless such
change is approved at a meeting by the affirmative vote of a majority of
the outstanding voting securities of the Fund and unless also approved
by the affirmative vote of a majority of Trustees of the Trust voting in
person, including a majority of the Trustees who are not interested
persons of the Trust, the Adviser or the Subadviser, at a meeting called
for the purpose on voting on such change.
9. Duration and Termination.
(a) This Contract shall become effective as of the date first
above written, and shall continue in effect for two years
from such initial date and thereafter for successive periods
of one year, subject to the provisions for termination
(contained in Section 8 hereof and as provided below) and
all of the other terms and conditions hereof, if: (i) such
continuation shall be specifically approved at least
annually by the vote of the majority of the Trustees of the
Trust, including a majority of the Trustees who are not
parties to this Contract or interested persons of any such
party, cast in person at a meeting called for the purpose of
voting on such approval; and (ii) the Adviser shall not have
notified the Subadviser in writing as provided in Subsection
(b) below that it desires to terminate the Contract with
respect to the Fund. This Contract may also be approved by
the affirmative vote of a majority of the outstanding voting
securities of the Fund, provided, however, that if the
continuance of this Contract is submitted to the
shareholders of the Fund for their approval, and should
shareholders fail to approve such continuance of this
Contract as provided herein, the Subadviser may continue to
serve hereunder as to the Fund in a manner consistent with
the 1940 Act and the rules and regulations thereunder.
(b) The Adviser may at any time terminate this Contract, without
payment of any penalty, by not more than sixty (60) days'
nor less than thirty (30) days' written notice delivered or
mailed by registered mail, postage prepaid, to the
Subadviser. Action of the Trust under this Subsection may
be taken either (i) by vote of its Trustees or (ii) by the
affirmative vote of a majority of the outstanding voting
securities of the Fund.
(c) The Subadviser may at any time terminate this Contract by
not less than one hundred twenty (120) days' written notice
delivered or mailed by registered mail, postage prepaid, to
the Adviser.
(d) Termination of this Contract pursuant to this Section shall
be without payment of any penalty.
In the event of termination of this Contract for any reason,
the Subadviser shall, immediately upon notice of termination
or on such later date as may be specified in such notice,
cease all activity on behalf of the Portfolio and with
respect to any of its assets, except as expressly directed
by the Adviser. In addition, the Subadviser shall deliver
the Fund's Books and Records to the Adviser by such means
and in accordance with such schedule as the Adviser shall
direct and shall otherwise cooperate, as reasonably directed
by the Adviser, in the transition of portfolio assets
management to any successors of the Subadviser, including
the Adviser.
10. Certain Definitions. For the purposes of this Contract:
(a) "Affirmative vote of a majority of the outstanding voting
securities of the Fund" means the affirmative vote, at an
annual or special meeting of shareholders of the Fund, duly
called and held, (a) of 67% or more of the shares of the
Fund present (in person or by proxy) and entitled to vote at
such meeting, if the holders of more than 50% of the
outstanding shares of the Fund entitled to vote at such
meeting are present (in person or by proxy), or (b) of more
than 50% of the outstanding shares of the Fund entitled to
vote at such meeting, whichever is less.
(b) "Interested persons" and "assignment" shall have their
respective meanings as set forth in the 1940 Act, subject,
however, to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
11. Liability and Indemnification. In the absence of willful
misfeasance, bad faith or gross negligence on the part of the
Subadviser, or of reckless disregard of its obligations and duties
hereunder (collectively, "Malfeasance"), the Subadviser shall not be
subject to any liability to the Adviser or the Trust, to any shareholder
of the Fund, or to any person, firm or organization, for any act or
omission in the course of, or connected with, rendering services
hereunder. In the absence of a determination by a court of competent
jurisdiction, by an arbitrator or mediator having jurisdiction over the
matter, or by the mutual agreement of the Adviser and the Subadviser
that the Subadviser has acted with Malfeasance, the Subadviser and each
of the Indemnitees (as such term is defined in Section 2 hereof) shall
be indemnified by the Adviser against any liabilities and expenses,
reasonably incurred in connection with the defense or disposition of any
action, suit or other proceeding, whether civil or criminal, before any
court or administrative or investigative body in which such Indemnitees
may be or may have been involved as a party or otherwise or with which
such Indemnitees may or may be or may have been threatened. In the
event that there is a determination (as described above) that the
Subadviser has acted with Malfeasance, the Subadviser shall indemnify
the Adviser against any liabilities and expenses, reasonably incurred in
connection with the defense of any action, suit or other proceeding,
whether civil or criminal, before any court or administrative or
investigative body in which the Adviser may be or may have been involved
as a party or otherwise or with which the Adviser may or may be or may
have been threatened, as a result of any act or omission in the course
of, or connected with, the Subadviser's rendering services hereunder.
Nothing herein, however, shall derogate from the Subadviser's
obligations under federal and state securities laws.
12. Jurisdiction. This Contract shall be governed by and
construed to be consistent with the Advisory Contract and in accordance
with substantive laws of the Commonwealth of Pennsylvania without
reference to choice of law principles thereof and in accordance with the
1940 Act. In the case of any conflict, the 1940 Act shall control.
13. Counterparts. This Contract may be executed simultaneously
in two or more counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same instrument.
14. Notices. Notices of any kind to be given to the Fund and
the Adviser hereunder by the Subadviser shall be in writing and shall be
duly given if delivered to the Fund and the Adviser at the following
address: First Union National Bank of North Carolina, One First Union
Center, Charlotte, NC 28288, ATTN: First Union Funds Group, FAX 704-
374-6061, with a copy to Federated Administrative Services, Federated
Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779, FAX
412-288-8141, ATTN: Secretary, First Union Funds. Notices of any kind
to be given if delivered to the Subadviser hereunder by the Fund shall
be in writing and shall be duly given if delivered to Subadviser at 1201
N. Orange Street, Suite 1100, Wilmington, DE 19801-1119, FAX 302-573-
2545, ATTN: David F. Marvin.
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be signed on their behalf by their duly authorized
officers as the date first above written.
FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
/s/ Barbara J. Colvin By:/s/ Wm. R. Hackney
ATTEST: Asst. Secretary Senior Vice President
MARVIN & PALMER ASSOCIATES, INC.
/s/Karen T. Buckley By/s/ Stanley Palmer
ATTEST: Secretary President
Exhibit 5(ii) under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
SUBADVISORY CONTRACT
AGREEMENT made as of the 28th day of July, 1994, between
First Union National Bank of North Carolina, a national banking
association, having its principal place of business in Charlotte, NC
(the "Adviser"), and Boston International Advisors, Inc., a
Massachusetts corporation (the "Subadviser").
W I T N E S S T H
WHEREAS, First Union Funds (the "Trust") is an open-and,
management investment company, registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), the Trust has multiple
portfolios, including the International Equity Portfolio (the "Fund")
and the Subadviser is an investment adviser registered under the
Investment Advisers Act of 1940 (the "Advisers Act"), and
WHEREAS, pursuant to authority granted the Adviser by the
Trust's Board of Trustees (the "Trustees") and pursuant to the
provisions of the Investment Advisory Contract dated February 28, 1985,
and as subsequently amended, between the Adviser and the Trust with
respect to the Fund (the "Advisory Contract"), the Adviser has selected
the Subadviser to act as a sub-investment adviser of the Fund and to
provide certain other services, as more fully set forth below, and to
perform such services under the terms and conditions hereinafter set
forth,
NOW, THEREFORE, in consideration of the mutual agreements
herein contained, it is agreed as follows:
1. The Subadviser's Services.
(a) Subject to the supervision and review of the Adviser and of
the Trustees of the Trust, the Subadviser shall manage the
investment operations of that portion or all of the Fund's
portfolio as designated by the Adviser (the "Portfolio"),
including the purchase, retention and disposition of
securities, in accordance with the Fund's investment
objectives, policies and restrictions as stated in the
Trust's Registration Statement, including the Prospectus and
Statement of Additional Information (such Registration
Statement, as currently in effect and as amended or
supplemented from time to time, collectively called the
"Prospectus") and subject to the following understandings:
(i) The Subadviser shall supervise the Portfolio's
investments and determine from time to time what
securities will be purchased, retained, sold or
loaned by the Portfolio, and what portion of the
assets will be invested or held uninvested as cash.
(ii) In the performance of its duties and obligations under
this Contract, the Subadviser shall act in conformity
with the Trust's Declaration of Trust and By-Laws and
the Fund's Prospectus and with the instructions and
directions received in writing from the Adviser or the
Trustees of the Trust and will conform to and comply
with the requirements of the 1940 Act, the Internal
Revenue Code of 1986, as amended (including the
requirements for qualification as a regulated
investment company) and all other applicable federal
and state laws and regulations.
(iii)In the event that the Fund's investment objectives,
policies and restrictions as stated in the Prospectus
change, the Subadviser shall, in the performance of its
duties and obligations under this Contract, manage the
investment operations of the Portfolio consistent with
such changes, provided the Subadviser has received
notice of such changes. For purposes of this
subsection, receipt of a modified Prospectus by the
Subadviser shall constitute notice. The Adviser
acknowledges and agrees that it, the Trust, and the
distributor shall be solely responsible for compliance
with all disclosure requirements under all applicable
federal and state laws and regulations relating to the
Trust or the Fund, including, without limitation, the
1940 Act, and the rules and regulations thereunder, and
that the Subadviser shall have no liability in
connection therewith, except as to material and
information furnished by the Subadviser to the Fund or
the Adviser. The Subadviser hereby agrees to review and
modify (if necessary) disclosure contained in the
Prospectus as requested by the Adviser, on a periodic
basis. The Subadviser shall have the power to vote,
either in person or by proxy, all securities in which
assets of the Fund may be invested from time to time,
and shall not be required to seek or take instructions
from, the Adviser or the Fund or to take any action with
respect thereto.
(b) The Subadviser shall not be responsible for the provision of
administrative, bookkeeping or accounting services to the
Fund, except as otherwise provided herein or as may be
necessary for the Subadviser to supply to the Adviser, the
Trust or its Trustees the services required to be performed
under this Contract.
The Subadviser shall maintain separate books and detailed
records of all matters pertaining to the Fund and the
Portfolio (the "Fund's Books and Records"), including,
without limitation, a daily ledger of such assets and
liabilities relating thereto and brokerage and other records
of all securities transactions. The Subadviser shall also
require that its Access Persons (as defined in subsection (e)
of Rule 17j-1 under the 1940 Act) provide the Subadviser with
monthly reports of their personal securities transactions.
The Fund's Books and Records shall be available to the
Adviser at any time upon request and shall be available for
telecopying without delay to the Adviser during any day that
the Fund is open for business.
(c) The Subadviser shall determine the securities to be
purchased or sold by the Fund in respect of the Portfolio
and will place orders with or through such persons, brokers
or dealers to carry out the policy with respect to brokerage
as set forth in the Fund's Prospectus or as the Trustees may
direct from time to time, subject to the provisions of the
following paragraph. In addition, the Subadviser will place
orders for the purchase and sale of Portfolio securities as
directed by the Adviser and, subject to the provisions of
the following paragraph, will take reasonable steps to cause
Portfolio transactions to be effected at the best price and
execution available.
The Subadviser shall place all orders for the purchase and sale
of portfolio investments for the Fund's account with brokers or
dealers selected by the Subadviser. In the selection of such
brokers or dealers and the placing of such orders, the
Subadviser shall seek to obtain for the Fund the most favorable
price and execution available, except to the extent it may be
permitted to pay higher brokerage commissions for brokerage and
research services, as provided below. In using its reasonable
efforts to obtain for the Fund the most favorable price and
execution available, the Subadviser, bearing in mind the Fund's
best interests at all times, shall consider all factors it
deems relevant, including, by way of illustration, price, the
size of the transaction, the nature of the market for the
security, the amount of the commission, if any, the timing of
the transaction taking into account market prices and trends,
the reputation, experience and financial stability of the
broker or dealer involved and the quality of service rendered
by the broker or dealer in other transactions. Subject to such
policies as the Trustees of the Trust may determine, or as may
be mutually agreed to by the Adviser and the Subadviser, the
Subadviser shall not be deemed to have acted unlawfully or to
have breached any duty created by this Contract or otherwise
solely by reason of its having caused the Fund to pay a broker
or dealer that provides brokerage and research services to the
Subadviser an amount of commission for effecting a Portfolio
investment transaction that is in excess of the amount of
commission that another broker or dealer would have charged for
effecting that transaction.
It is understood that the Subadviser may have advisory,
management, service or other contracts with other
individuals or entities, and may have other interests and
businesses. When a security proposed to be purchased or
sold for the Fund is also to be purchased or sold for other
accounts managed by the Subadviser at the same time, the
Subadviser shall make such purchases or sales on a pro-rata,
rotating or other equitable basis so as to avoid any one
account being preferred over any other account. The Adviser
acknowledges and agrees that the Subadviser and its
affiliates may give advice and take action in the
performance of duties with respect to any other client which
may differ from advice given, or the timing or nature of
action taken, with respect to the Fund.
The Subadviser will advise the Adviser and, if instructed by
the Adviser, the Fund's custodian or sub-custodians on a
prompt basis each day by electronic telecommunication (as
hereinafter defined) of each confirmed purchase and sale of
a Portfolio security specifying the name of the issuer, the
full description of the security including its class, and
amount or number of shares of the security purchased or
sold, the market price, commission, government charges and
gross or net price, trade date, settlement date and identity
of the effecting broker or dealer and, if different, the
identity of the clearing broker. Under no circumstances may
the Subadviser or any affiliates of the Subadviser, acting
as a principal, sell any security to or purchase any
security from (other than securities of which the Fund is
the issuer) the Fund or any other investment company managed
by the Adviser unless permitted by an exemptive provision,
rule or order under the 1940 Act.
(d) From time to time as the Adviser or the Trustees of the
Trust may reasonably request, the Subadviser shall furnish
the Adviser and to each of the Trust's Trustees reports of
Portfolio transactions and reports on securities held in the
Portfolio, all in such detail as the Adviser or the Trustees
may reasonably request. The Subadviser will also inform the
Adviser and the Trust's Trustees on a current basis of
material changes in investment strategy or tactics or in key
personnel. The Subadviser will make its officers and
employees available to meet with the Trust's Trustees at
least quarterly on due notice to review the investments of
the Fund in the light of current and prospective economic and
market conditions.
It shall be the duty of the Subadviser to furnish to the
Trust's Trustees such information as may reasonably be
necessary in order for such Trustees to evaluate this
Contract or any proposed amendments thereto for the purpose
of casting a vote pursuant to Section 8 or 9 hereof.
2. Allocation of Charges and Expenses. The Subadviser will
bear its own costs of providing services hereunder. The Subadviser
shall not be responsible for the Trust's or the Adviser's expenses,
including, without limitation, the expenses of organizing the Trust and
continuing its existence; fees and expenses of Trustees and officers of
the Trust; fees for investment advisory services and administrative
personnel and services, expenses incurred in the distribution of its
shares ("Shares"), including expenses of administrative support
services, fees and expenses of preparing and printing its Registration
Statements under the Securities Act of 1933 and the 1940 Act, and any
amendments thereto, expenses of registering and qualifying the Trust,
the Fund and Shares of the Fund under federal and state laws and
regulation; expenses of preparing, printing and distributing
prospectuses (and any amendments thereto) to shareholders, interest
expense, taxes, fees and commissions of every kind, expenses of issue
(including cost of Share certificates), purchase, repurchase and
redemption of Shares, including expenses attributable to a program of
periodic issue, charges and expenses of custodians, transfer agents,
dividend disbursing agents, shareholder servicing agents and registrars,
printing and mailing costs, auditing, accounting and legal expenses;
reports to shareholders and governmental officers and commissions;
expenses of meetings of Trustees and shareholders and proxy
solicitations therefor; insurance expenses; association membership dues
and such nonrecurring items as may arise, including all losses and
liabilities incurred in administering the Trust and the Fund. The Trust
or the Adviser, as the case may be, shall reimburse the Subadviser for
any such expenses or other expenses of the Fund or the Adviser, as may
be reasonably incurred by such Subadviser on behalf of the Fund or the
Adviser. The Subadviser shall keep and supply to the Trust and the
Adviser reasonable records of all such expenses.
3. Information Supplied by the Adviser. The Adviser shall
provide the Subadviser with the Trust's Declaration of Trust and By-
Laws, the Fund's Prospectus and Statement of Additional Information, and
instructions as in effect from time to time; and the Subadviser shall
have no responsibility for actions properly taken in reliance on and in
accordance with any such documents so received.
4. Information Supplied by the Subadviser. The Adviser
acknowledges that the Subadviser has provided a copy of the Subadviser's
Form ADV Part II.
5. Registration as an Adviser. The Subadviser represents and
warrants to each of the Trust and the Adviser that it is registered as
an "investment adviser" under the Advisers Act and covenants that it
will remain so registered for the duration of this Contract.
6. Subadviser's Compensation. The Adviser shall pay to the
Subadviser, as compensation for the Subadviser's services, pursuant to
the following schedule:
Average Aggregate Daily Net
Sub-Advisory Fee Assets of the Fund_____
0.32% on the first $20 million
0.29% on the next $30 million
0.26% on the next $50 million
0.23% on assets in excess of $100 million
("Sub-Advisory Fee"). Such fee shall be computed daily and paid
monthly. In the event that the fee due from the Trust to the Adviser on
behalf of the Fund is reduced in order to meet expense limitations
imposed on the Fund by state securities laws or regulations, the Sub-
Advisory Fee shall be reduced in accordance with the mutual agreement of
the Adviser and the Subadviser.
The method of determining net assets of the Fund for
purposes hereof shall be the same as the method of determining net
assets for purposes of establishing the offering and redemption price of
Fund Shares as described in the Fund's Prospectus. If this Contract
shall be effective for only a portion of a month, the aforesaid fee
shall be prorated for the portion of such month during which this
Contract is in effect.
Notwithstanding any other provision of the Contract, the
Subadviser may from time to time agree not to impose all or a portion of
its fee otherwise payable hereunder (in advance of the time such fee or
portion thereof would otherwise accrue). Any such fee reduction may be
discontinued or modified by the Subadviser at any time.
7. Independent Contractor. In the performance of its duties
hereunder, the Subadviser is and shall be an independent contractor and
unless otherwise expressly provided herein or otherwise authorized in
writing, shall have no authority to act for or represent the Trust in
any way or otherwise be deemed to be an agent of the Trust or of the
Adviser.
8. Sales Literature. The Subadviser acknowledges that all
mutual fund sales literature for investment companies (such as the
Trust) are subject to strict regulatory oversight. The Subadviser
agrees to submit any proposed mutual fund sales literature for the Trust
(or the Fund) which mentions the Trust (or the Fund) to the Trust's
distributor for review and filing with the appropriate regulatory
authorities prior to the public release of any such mutual fund sales
literature, provided, however, that nothing herein shall be construed so
as to create any obligation or duty on the part of the Subadviser to
produce mutual fund sales literature for the Trust (or the Fund).
9. Assignment and Amendments. This Contract may not be
assigned by the Subadviser and shall automatically terminate, without
the payment of any penalty, in the event of (i) its assignment,
including any change of control of the Adviser or the Subadviser, or
(ii) in the event of the termination of the Advisory Contract, provided
that such termination shall not relieve the Adviser or the Subadviser of
any liability incurred hereunder.
The terms of this Contract shall not be changed unless such
change is approved at a meeting by the affirmative vote of a majority of
the outstanding voting securities of the Fund and unless also approved
by the affirmative vote of a majority of Trustees of the Trust voting in
person, including a majority of the Trustees who are not interested
persons of the Trust, the Adviser or the Subadviser, at a meeting called
for the purpose of voting on such change.
10. Duration and Termination.
(a) This Contract shall become effective as of the date first
above written, and shall continue in effect for two years
from such initial date and thereafter for successive periods
of one year, subject to the provisions for termination
(contained in Section 8 hereof and as provided below) and
all of the other terms and conditions hereof, if: (i) such
continuation shall be specifically approved at least
annually by the vote of the majority of the Trustees of the
Trust, including a majority of the Trustees who are not
parties to this Contract or interested persons of any such
party, cast in person at a meeting called for the purpose of
voting on such approval; and (ii) the Adviser shall not have
notified the Subadviser in writing as provided in Subsection
(b) below that it does not desire such continuation with
respect to the Fund. This Contract may also be approved by
the affirmative vote of a majority of the outstanding voting
securities of the Fund, provided, however, that if the
continuance of this Contract is submitted to the
shareholders of the Fund for their approval, and should
shareholders fail to approve such continuance of this
Contract as provided herein, the Subadviser may continue to
serve hereunder as to the Fund in a manner consistent with
the 1940 Act and the rules and regulations thereunder.
(b) The Trust or the Adviser may at any time terminate this
Contract, without payment of any penalty, by not more than
sixty (60) days' nor less than thirty (30) days' written
notice delivered or mailed by registered mail, postage
prepaid, to the Subadviser. Action of the Trust under this
Subsection may be taken either (i) by vote of its Trustees
or (ii) by the affirmative vote of a majority of the
outstanding voting securities of the Fund.
(c) The Subadviser may at any time terminate this Contract by
not less than one hundred twenty (120) days' written notice
delivered or mailed by registered mail, postage prepaid, to
the Adviser.
(d) Termination of this Contract pursuant to this Section shall
be without payment of any penalty.
In the event of termination of this Contract for any reason,
the Subadviser shall, promptly after notice of termination
or on such later date as may be specified in such notice,
cease all activity on behalf of the Portfolio and with
respect to any of its assets, except as expressly directed
by the Adviser. In addition, the Subadviser shall deliver
the Fund's Books and Records to the Adviser by such means
and in accordance with such schedule as the Adviser shall
direct and shall otherwise cooperate, as reasonably directed
by the Adviser, in the transition of portfolio assets
management to any successors of the Subadviser, including
the Adviser. In complying with this subsection, the
Subadviser shall be permitted to retain copies of those
portions of the Fund's Books and Records which the
Subadviser is required to maintain for regulatory purposes
or pursuant to applicable federal and state laws and
regulations. In the event that such laws and regulations
require the Subadviser to retain any original versions of
the Fund's Books and Records, the Subadviser shall furnish
copies of the applicable Fund's Book and Records to the
Adviser, and shall notify the Adviser, in writing, of those
Fund's Books and Records which have been retained by the
Subadviser, detailing the legal requirements for their
retention by the Subadviser.
11. Certain Definitions. For the purposes of this Contract:
(a) "Affirmative vote of a majority of the outstanding voting
securities of the Fund" means the affirmative vote, at an
annual or special meeting of shareholders of the Fund, duly
called and held, (a) of 67% or more of the shares of the
Fund present (in person or by proxy) and entitled to vote at
such meeting, if the holders of more than 50% of the
outstanding shares of the Fund entitled to vote at such
meeting are present (in person or by proxy), or (b) of more
than 50% of the outstanding shares of the Fund entitled to
vote at such meeting, whichever is less.
(b) "Interested persons" and "assignment" shall have their
respective meanings as set forth in the 1940 Act, subject,
however, to such exemptions as may be granted by the
Securities and Exchange Commission under said Act.
12. Liability and Indemnification. In the absence of willful
misfeasance, bad faith or gross negligence on the part of the
Subadviser, or of reckless disregard of its obligations and duties
hereunder (collectively, "Malfeasance"), the Subadviser shall not be
subject to any liability to the Adviser or the Trust, to any shareholder
of the Fund, or to any person, firm or organization, for any act or
omission in the course of, or connected with, rendering services
hereunder. In the absence of a determination by a court of competent
jurisdiction, by an arbitrator or mediator having jurisdiction over the
matter, or by the mutual agreement of the Adviser and the Subadviser
that the Subadviser has acted with Malfeasance, the Subadviser and each
of the Subadviser's partners, officers, employees and agents thereof
(collectively, the "Subadviser Indemnitees") shall be indemnified by the
Adviser against any liabilities and expenses, reasonably incurred in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or
administrative or investigative body in which such Subadviser
Indemnitees may be or may be involved as a party or otherwise or with
which such Subadviser Indemnitees may or may be or may have been
threatened. In the event that there is a determination (as described
above) that the Subadviser has acted with Malfeasance, the Subadviser
shall indemnify the Adviser and each of the Adviser's directors,
officers, employees and agents (collectively, "Adviser Indemnitees")
against any liabilities and expenses, reasonably incurred in connection
with the defense or disposition of any action, suit, or other
proceeding, whether civil or criminal, before any court or
administrative or investigative body in which such Adviser Indemnitees
may or may be or may have been threatened, as a result of such
Malfeasance. Nothing herein, however, shall derogate from the
Subadviser's obligations under federal and state securities laws.
13. Jurisdiction. This Contract shall be governed by and
construed to be consistent with the Advisory Contract and in accordance
with substantive laws of the Commonwealth of Pennsylvania without
reference to choice of law principles thereof and in accordance with the
1940 Act. In the case of any conflict, the 1940 Act shall control.
14. Counterparts. This Contract may be executed simultaneously
in two or more counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same instrument.
15. Notices. Notices of any kind to be given to the Fund and
the Adviser hereunder by the Subadviser shall be in writing and shall be
duly given if delivered to the Fund and to the Adviser at the following
address: First Union National Bank of North Carolina, One First Union
Center, Charlotte, NC 28288, ATTN: First Union Funds Group, FAX 704-
374-6061, with a copy to Federated Administrative Services, Federated
Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779, FAX
412-288-8141, ATTN: Secretary, First Union Funds. Notices of any kind
to be given if delivered to the Subadviser hereunder by the Fund shall
be in writing and shall be duly given if delivered to Subadviser at 75
State Street, Boston, MA 02109, FAX 617-345-0665, ATTN: President.
For purposes of this Contract, "electronic telecommunication" shall
include communication via FAX, computer hook-up, teletype, telecopy, or
any other communication medium mutually agreed to by the Adviser and the
Subadviser.
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be signed on their behalf by their duly authorized
officers as the date first above written.
FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
/s/ Barbara J. Colvin By /s/ W. R. Hackney
ATTEST: Asst. Secretary Senior Vice President
BOSTON INTERNATIONAL ADVISORS,
INC.
/s/ Peter M. Rosenblum By/s/Lyle H. Davis
ATTEST: Clerk President
-1-
Exhibit 7 under Form N-1A
Exhibit 10 under Item
601/Reg. S-K
ADMINISTRATIVE SERVICES AGREEMENT
This Administrative Services Agreement is made as of this 17th day of
July, 1990, between the The Salem Funds, a Massachusetts business trust
(herein called the "Fund"), and Federated Administrative Services, Inc., a
Pennsylvania corporation (herein called ("FAS").
WHEREAS, the Fund is a Massachusetts business trust, consisting of
one or more portfolios, which operates as an open-end management investment
company and is so registered under the Investment Company Act of 1940; and
WHEREAS, the Fund desires to retain FAS as its Administrator to
provide it with administrative services, and FAS is willing to render such
services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
set forth herein, the parties hereto agree as follows:
1. Appointment of Administrator. The Fund hereby appoints FAS as
Administrator of the Fund on the terms and conditions set forth in this
agreement; and FAS hereby accepts such appointment and agrees to perform
the services and duties set forth in Section 2 of this Agreement in
consideration of the compensation provided for in Section 4 hereof.
2. Services and Duties. As Administrator, and subject to the
supervision and control of the Fund's Board of Directors, FAS will
hereafter provide facilities, equipment, and personnel to carry out the
following administrative services for operation of the business and affairs
of the Fund and each of its portfolios:
(a) prepare, file, and maintain the Fund's governing documents,
including the Articles of Incorporation (which have
previously been prepared and filed), the By-laws, minutes
of meetings of Directors and shareholders, and proxy
statements for meetings of shareholders;
(b) prepare and file with the Securities and Exchange
Commission and the appropriate state securities authorities
the registration statements for the Fund and the Fund's
shares and all amendments thereto, reports to regulatory
authorities and shareholders, prospectuses, proxy
statements, and such other documents as may be necessary or
convenient to enable the Fund to make a continuous offering
of its shares;
(c) prepare, negotiate, and administer contracts on behalf of
the Fund with, among others, the Fund's investment adviser,
distributor, custodian, and transfer agent;
(d) supervise the Fund's custodian in the maintenance of the
Fund's general ledger and in the preparation of the Fund's
financial statements, including oversight of expense
accruals and payments, of the determination of the net
asset value of the Fund's assets and of the Fund's shares,
and of the declaration and payment of dividends and other
distributions to shareholders;
(e) calculate performance data of the Fund for dissemination to
information services covering the investment company
industry;
(f) prepare and file the Fund's tax returns;
(g) examine and review the operations of the Fund's custodian
and transfer agent;
(h) coordinate the layout and printing of publicly disseminated
prospectuses and reports;
(i) perform internal audit examinations in accordance with a
charter to be adopted by FAS and the Fund;
(j) assist with the design, development, and operation of the
Fund;
(k) provide individuals reasonably acceptable to the Fund's
Board of Directors for nomination, appointment, or election
as officers of the Fund, who will be responsible for the
management of certain of the Fund's affairs as determined
by the Fund's Board of Directors; and
(l) advise the Fund and its Board of Directors on matters
concerning the Fund and its affairs.
The foregoing, along with any additional services that FAS shall
agree in writing to perform for the Fund hereunder, shall hereafter be
referred to as "Administrative Services." Administrative Services shall
not include any duties, functions, or services to be performed for the Fund
by the Fund's investment adviser, distributor, custodian, or transfer agent
pursuant to their agreements with the Fund.
3. Expenses. FAS shall be responsible for expenses incurred in
providing office space, equipment, and personnel as may be necessary or
convenient to provide the Administrative Services to the Fund, including
the compensation of FAS employees who serve as Directors or Officers of the
Fund. The Fund shall be responsible for all other expenses incurred by FAS
on behalf of the Fund, including without limitation postage and courier
expenses, printing expenses, travel expenses, registration fees, filing
fees, fees of outside counsel and independent auditors, insurance premiums,
fees payable to directors who are not FAS employees, and trade association
dues.
4. Compensation. For the Administrative Services provided, the Fund
hereby agrees to pay and FAS hereby agrees to accept as full compensation
for its services rendered hereunder an administrative fee at an annual rate
per portfolio of the Fund's shares, payable daily, as specified below:
Maximum Administrative Aggregate Daily Net Assets
Fee of the Fund
.l5% on the first $250 million
.125% on the next $250 million
.100% on the next $250 million
.075% on assets in excess of
$750 million
However, in no event shall the administrative fee received during
any year of this contract be less than, or be paid at a rate less than
would aggregate, $50,000, per portfolio. FAS agrees to waive this minimum
portfolio fee during the first contract year with respect to existing
portfolios and for a period of one year following the initiation of the
public offering of shares for any portfolio which is hereafter created.
5. Responsibility of Administrator.
(a) FAS shall not be liable for any error of judgment or mistake
of law or for any loss suffered by the Fund in connection
with the matters to which this Agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or
from reckless disregard by it of its obligations and duties
under this Agreement. FAS shall be entitled to rely on and
may act upon advice of counsel (who may be counsel for the
Fund) on all matters, and shall be without liability for any
action reasonably taken or omitted pursuant to such advice.
Any person, even though also an officer, director, partner,
employee or agent of FAS, who may be or become an officer,
director, employee or agent of the Fund, shall be deemed,
when rendering services to the Fund or acting on any
business of the Fund (other than services or business in
connection with the duties of FAS hereunder) to be rendering
such services to or acting solely for the Fund and not as an
officer, director, partner, employee or agent or one under
the control or direction of FAS even though paid by FAS.
(b) FAS shall be kept indemnified by the Fund and be without
liability for any action taken or thing done by it in
performing the Administrative Services in accordance with
the above standards; provided, however, that the Fund will
not indemnify FAS for any loss or claim against FAS
resulting from the negligence of FAS. In order that the
indemnification provisions contained in this Section 5 shall
apply, however, it is understood that if in any case the
Fund may be asked to indemnify or save FAS harmless, the
Fund shall be fully and promptly advised of all pertinent
facts concerning the situation in questions, and it is
further understood that FAS will use all reasonable care to
identify and notify the Fund promptly concerning any
situation which presents or appears likely to present the
probability of such a claim for indemnification against the
Fund. The Fund shall have the option to defend FAS against
any claim which may be the subject of this indemnification.
In the event that the Fund so elects it will so notify FAS
and thereupon the Fund shall take over complete defense of
the claim, and FAS shall in such situation initiate no
further legal or other expenses for which it shall seek
indemnification under this Section. FAS shall in no case
confess any claim or make any compromise in any case in
which the Fund will be asked to indemnify FAS except with
the Fund's written consent.
(c) The Fund hereby agrees to indemnify and hold FAS and all
employees of FAS harmless for any acts, omissions, or
statements made, by the Fund or any of its officers,
directors, or agents prior to the date hereof.
6. Duration and Termination.
(a) The initial term of this Agreement shall commence on the
date hereof, and extend for a period of five years.
(b) Thereafter, this Agreement shall be automatically renewed
each year for an additional term of one year, unless notice
of termination has been delivered by either party to the
other no less than one year before the beginning of any such
additional term.
(c) The Fund may terminate this Agreement immediately upon the
issuance of a final judgment by a court of competent
jurisdiction or a final order by the Securities and Exchange
Commission, from which judgment or order no appeal may be
taken or from which the period for the filing of an appeal
has elapsed, which judgment or order holds that FAS or
Federated Secruities Corp. has committed a felony or a
misdemeanor (i) involving the purchase or sale of any
security, or (ii) arising out of its conduct as an
administrator, a distributor, or an affiliate of an
investment company; or which judgment holds that FAS has
committed a material breach of this Agreement or of a
fiduciary duty to the Fund.
7. Amendment. No provision of this Agreement may be changed,
waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which an enforcement of the change,
waiver, discharge or termination is sought.
8. Notices. Notices of any kind to be given to the Fund hereunder
by FAS shall be in writing and shall be duly given if delivered to the Fund
and to its investment adviser at the following address: First Union
National Bank of North Carolina, One First Union Center, Charlotte, NC
28288. Notices of any kind to be given to FAS hereunder by the Fund shall
be in writing and shall be duly given if delivered to FAS at Federated
Investors Tower, Pittsburgh, PA 15222-3779, Attention: President.
9. Limitation of Liability. FAS is hereby expressly put on notice
of the limitation of liability as set forth in Article XI of the
Declaration of Trust and agrees that the obligations pursuant to this
Agreement of a particular Fund and of the Trust with respect to that
particular Fund be limited solely to the assets of that particular Fund,
and FAS shall not seek satisfaction of any such obligation from the assets
of any other Fund, the shareholders of any Fund, the Trustees, officers,
employees or agents of the Trust, or any of them.
10. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court or
regulatory agency decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby. Subject to the provisions of
Section 5, hereof, this Agreement shall be binding upon and shall inure to
the benefit of the parties hereto and their respective successors and shall
be governed by Pennsylvania law; provided, however, that nothing herein
shall be construed in a manner inconsistent with the Investment Company Act
of 1940 or any rule or regulation promulgated by the Securities and
Exchange Commission thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
The Salem Funds
By/s/ Edward C. Gonzales
Its: President
Attest:/s/ Byron F. Bowman
Its: Secretary
FEDERATED ADMINISTRATIVE SERVICES, INC.
By/s/ J. Christopher Donahue
President
Attest:/s/ John W. McGonigle
Secretary
Exhibit 5 under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made the 28th day of February 1985, by and between THE
SALEM FUNDS, a Massachusetts business trust (the "Fund"), and First
Union National Bank, (the "Adviser").
WHEREAS, The Fund and the Adviser wish to enter into an Agreement
setting forth the terms on which the Adviser will perform certain
services for the Growth Portfolio of the Fund (the "Initial Portfolio").
THEREFORE, in consideration of the promises and the mutual
agreements hereinafter contained, the Fund and the Adviser agree as
follows:
1. (a) The Fund hereby employs the Adviser to manage the
investment and reinvestment of the assets of the Initial Portfolio of
the Fund in conformity with the Portfolio's investment objectives,
fundamental policies and restrictions as set forth from time to time in
the Fund's then current prospectus and statement of additional
information thereto, and other governing documents, subject to the
supervision and control of the Board of Trustees of the Fund, for the
period and on the terms set forth in this Agreement. The Adviser hereby
accepts such employment and agrees during such period to render the
services and to assume the obligations set forth herein, for the
compensation provided herein. The Adviser shall for all purposes herein
be deemed to be an independent contractor and shall, unless otherwise
expressly provided or authorized, have no authority to act for or
represent the Fund in any way or otherwise be deemed an agent of the
Fund.
(b) In the event that the Fund establishes one or more
Portfolios, other than the Initial Portfolio, for which it wishes the
Adviser to perform services hereunder, it shall notify the Adviser in
writing. If the Adviser is willing to render such services, it shall
notify the Fund in writing and such Portfolio shall become a Portfolio
hereunder and the compensation payable to the Adviser by the new
Portfolio will be as agreed in writing at the time.
2. The Adviser shall place all orders for the purchase and sale
of portfolio securities for the account of the Initial Portfolio with
broker-dealers selected by the Adviser. In executing portfolio
transactions and selecting broker-dealers, the Adviser will use its best
efforts to seek best execution on behalf of the Initial Portfolio. In
assessing the best execution available for any transaction, the Adviser
shall consider all factors it deems relevant, including the breadth of
the market in the security, the price of the security, the financial
condition and execution capability of the broker-dealer, and the
reasonableness of the commission, if any (for the specific transaction
and on a continuing basis). In evaluating the best execution available,
and in selecting the broker-dealer to execute a particular transaction,
the Adviser may also consider the brokerage and research services (as
those terms are defined in Section 28(e) of the Securities Exchange Act
of 1934 [the "1934 Act"]) provided to the Initial Portfolio and or other
accounts over which the Adviser or an affiliate of the Adviser exercises
investment discretion. The Adviser is authorized to pay a broker-dealer
who provides such brokerage and research services a commission for
executing a portfolio transaction for the Portfolio which is in excess
of the amount of commission another broker-dealer would have charged for
effecting that transaction if, but only if, the Adviser determines in
good faith that such commission was reasonable in relation to the value
of the brokerage and research services provided by such broker-dealer
viewed in terms of that particular transaction or in terms of all of the
accounts over which investment discretion is so exercised.
3. The Adviser assumes and shall pay for all expenses of the
Adviser incurred for the management of the investment and reinvestment
of the assets of the Initial Portfolio of the Fund. The Fund assumes
and shall pay all other costs and expenses of the Fund, including,
without limitation: (1) all charges and expenses of a manager; (2) all
charges and expenses of any custodian or depository appointed by the
Fund for the safekeeping of its cash, securities and other property; (3)
all charges and expenses for bookkeeping and auditors; (4) all charges
and expenses of any transfer agents and registrars appointed by the
Fund; (5) all fees of all Trustees of the Fund; (6) the cost of all
securities and other property purchased by the Fund and all broker's
fees, expenses and commissions, issue and transfer taxes and other
expenses chargeable to the Fund in connection with transactions
involving securities and other property to which the Fund is a party;
(7) all taxes and corporate fees payable by the Fund to federal, state
or other governmental agencies; (8) all fees and expenses involved in
registering and maintaining registrations of the Fund and of its shares
with the Securities and Exchange Commission (the "Commission") and
registering or qualifying its shares under state or other securities
laws, including the preparation and printing of prospectuses for filing
with the Commission and other authorities; (9) the costs of sales
literature and advertising, including expenses of preparing, printing
and mailing prospectuses and reports to shareholders of the Fund; (10)
all expenses of shareholders' and Trustees' meetings and of preparing,
printing and mailing notices, reports and proxy materials to
shareholders of the Fund; (11) all charges and expenses of legal counsel
for the Fund and for the Trustees of the Fund who are not interested
persons of the Fund within the meaning of the Investment Company Act of
1940 (the "1940 Act") in connection with legal matters relating to the
Fund, including without limitation legal services rendered in connection
with the Fund's existence, trust and financial structure and relations
with its shareholders, registrations and qualifications of securities
under federal, state and other laws, issues of securities, expenses
which the Fund has herein assumed and extraordinary matters; (12) all
charges and expenses of filing annual and other reports with the
Commission; and (13) all extraordinary expenses and charges of the Fund.
In the event that the Adviser provides any of these services or pays any
of these expenses, the Fund will promptly reimburse the Adviser therefor
on a cost basis. No agreement is made hereby with respect to the
provision of any other of such services by the Adviser or any of its
affiliates, or payment therefor.
The services of the Adviser to the Initial Portfolio of the Fund
hereunder are not to be deemed exclusive, and the Adviser shall be free
to render similar services to others.
4. As compensation for the Adviser's services to the Growth
Portfolio during the period of this Agreement, the Fund will pay to the
Adviser a fee at the annual rate of .5 of 1% of the average daily net
asset value of the Growth Portfolio computed in the manner provided in
the Fund's then current prospectus and supplement thereto as of the
close of business on each business day.
A pro rata portion of the fee shall be payable in arrears at the
end of each calendar month. If this Agreement terminates other than at
the end of a fiscal year of the Fund, any compensation payable hereunder
for the period ending with the date of such termination shall be payable
upon such termination. Amounts payable hereunder shall be paid promptly
when due.
5. The Adviser shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Fund in connection with
the performance of this Agreement, except a loss resulting from a breach
of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or
gross negligence on the part of Adviser in the performance of its duties
or from reckless disregard by it of its obligations and duties under
this Agreement. Any person, even though also an officer, Director,
partner, employee, or agent of the Adviser, who may be or become an
officer, Trustee, employee or agent of the Fund, shall be deemed, when
rendering services to the Fund or acting on any business of the Fund
(other than services or business in connection with the Adviser's duties
hereunder), to be rendering such services to or acting solely for the
Fund and not as an officer, Director, partner, employee, or agent or one
under the control or direction of the Adviser even though paid by it.
The Fund agrees to indemnify and hold the Adviser harmless from all
taxes, charges, expenses, assessments, claims and liabilities
(including, without limitation, liabilities arising under the Securities
Act of 1933, the 1934 Act, the 1940 Act, and any state and foreign
securities and blue sky laws, as amended from time to time) and
expenses, including (without limitation) attorneys' fees and
disbursements, arising directly or indirectly from any action or thing
which the Adviser takes or does or omits to take or do hereunder
provided that the Adviser shall not be indemnified against any liability
to the Fund or to its shareholders (or any expenses incident to such
liability) arising out of a breach of fiduciary duty with respect to the
receipt of compensation for services, willful misfeasance, bad faith or
gross negligence on the part of the Adviser in the performance of its
duties or from reckless disregard by it of its obligations and duties
under this Agreement.
6. This Agreement shall continue in effect for the Initial
Portfolio for a period more than two years from the date of its
execution only so long as (1) such continuance is specifically approved
at least annually by the Board of Trustees of the Fund or by a vote of a
majority of the outstanding voting securities of the Portfolio, and (2)
such renewal has been approved by the vote of a majority of Trustees of
the Fund who are not interested persons, as that term is defined in the
1940 Act of the Adviser, a manager of the Fund, or the Fund, cast in
person at a meeting called for the purpose of voting on such approval.
7. On sixty days' written notice to the Adviser, this Agreement
may be terminated at any time with respect to the Initial Portfolio,
without the payment of any penalty, by the Board of Trustees of the Fund
or by vote of the holders of a majority of the outstanding voting
securities of the Portfolio; and on sixty days' written notice to the
Fund this Agreement may be terminated at any time with respect to the
Initial Portfolio, without the payment of any penalty, by the Adviser.
This Agreement shall automatically terminate upon its assignment (as
that term is defined in the 1940 Act). Any notice under this Agreement
shall be given in writing, addressed and delivered, or mailed postage
prepaid, to the other party at the main office of such party.
8. This Agreement may be amended at any time by an instrument
in writing executed by both parties hereto or their respective
successors, provided that such execution by the Fund shall have been
first approved by vote of the holders of a majority of the outstanding
voting securities of the affected Portfolio of the Fund and by the vote
of a majority of Trustees of the Fund who are not interested persons (as
that term is defined in the 1940 Act) of the Adviser, or any predecessor
of the Adviser, a manager of the Fund, or the Fund, cast in person at a
meeting called for the purpose of voting on such approval. A "majority
of the outstanding voting securites of the Fund" shall have, for all
purposes of this Agreement, the meaning provided therefor in the 1940
Act.
9. Any compensation payable to the Adviser hereunder for any
period other than a full year shall be proportionately adjusted.
10. The Fund is a Massachusetts business trust established under
a Declaration of Trust dated August 30, 1984, as it may be amended from
time to time. The obligations of the Fund are not personally binding
upon, nor shall recourse be had against the private property of any of
the Trustees, shareholders, officers, employees or agents of the Fund,
but the property of the Fund only shall be bound.
11. The provisions of this Agreement shall be governed,
construed and enforced in accordance with the laws of The Commonwealth
of Massachusetts.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the day and year first above written.
THE SALEM FUNDS FIRST UNION NATIONAL BANK
By: /s/ Mary L. Hidden By:/s/ Robert D. Flowers, Jr.
Office: President Office: Vice President
THE SALEM FUNDS
FIRST AMENDMENT TO
INVESTMENT ADVISORY AGREEMENT
FIRST AMENDMENT dated as of March 18, 1988 to AGREEMENT
("Agreement") made February 28, 1985 by and between THE SALEM FUNDS, a
Massachusetts business trust ("Fund"), and First Union National Bank of
North Carolina, formerly First Union National Bank ("Adviser").
WHEREAS, the Fund and the Adviser have previously entered into an
Agreement setting forth the terms on which the Adviser will perform
certain services for the Fund's Growth Portfolio ("Portfolio I"); and
WHEREAS, The Fund and the Adviser wish to amend such Agreement to
set forth the terms on which the Adviser will perform, certain services
for the Fund's Fixed Income Portfolio ("Portfolio II"), Tax Free
Portfolio ("Portfolio III"), Tax Free Money Market Portfolio ("Portfolio
IV") and Money Market Portfolio ("Portfolio V"), and each Portfolio of
the Fund subsequently established.
THEREFORE, in consideration of the promises and the mutual
agreements hereinafter contained, the Fund and the Adviser agree to
amend their Agreement in full as follows:
1. (a) The Fund hereby employs the Adviser to manage the
investment and reinvestment of the assets of the Portfolios of the Fund
in conformity with each Portfolio's investment objectives, fundamental
policies and restrictions as set forth from time to time in the Fund's
then current prospectus and statement of additional information thereto,
and other governing documents, subject to the supervision and control of
the Board of Trustees of the Fund, for the period and on the terms set
forth in this Agreement. The Adviser hereby accepts such employment and
agrees during such period to render the services and to assume the
obligations set forth herein, for the compensation provided herein. The
Adviser shall for all purposes herein be deemed to be an independent
contractor and shall, unless otherwise expressly provided or authorized,
have no authority to act for or represent the Fund in any way or
otherwise be deemed an agent of the Fund.
(b) In the event that the Fund establishes one or more
Portfolios, in addition to Portfolios I, II, III, IV and V, for which it
wishes the Adviser to perform services hereunder, it shall notify the
Adviser in writing. If the Adviser is willing to render such services,
it shall notify the Fund in writing and such Portfolio shall become a
Portfolio hereunder and the compensation payable to the Adviser by the
new Portfolio will be as agreed in writing at the time.
2. The Adviser shall place all orders for the purchase and sale
of portfolio securities for the account of each Portfolio with broker-
dealers selected by the Adviser. In executing portfolio transactions
and selecting broker-dealers, the Adviser will use its best efforts to
seek best execution on behalf of each Portfolio. In assessing the best
execution available for any transaction, the Adviser shall consider all
factors it deems relevant, including the breadth of the market in the
security, the price of the security, the financial condition and
execution capability of the broker-dealer, and the reasonableness of the
commission, if any (for the specific transaction and on a continuing
basis). In evaluating the best execution available, and in selecting
the broker-dealer to execute a particular transaction, the Adviser may
also consider the brokerage and research services (as those terms are
defined in Section 28(e) of the Securities Exchange Act of 1934 ["1934
Act"]) provided to each Portfolio and or other accounts over which the
Adviser or an affiliate of the Adviser exercises investment discretion.
The Adviser is authorized to pay a broker-dealer who provides such
brokerage and research services a commission for executing a portfolio
transaction for a Portfolio which is in excess of the amount of
commission another broker-dealer would have charged for effecting that
transaction if, but only if, the Adviser determines in good faith that
such commission was reasonable in relation to the value of the brokerage
and research services provided by such broker-dealer viewed in terms of
that particular transaction or in terms of all of the accounts over
which investment discretion is so exercised.
3. The Adviser assumes and shall pay for all expenses of the
Adviser incurred for the management of the investment and reinvestment
of the assets of each Portfolio of the Fund. The Fund assumes and shall
pay all other costs and expenses of the Fund and its Portfolios,
including, without limitation: (1) all charges and expenses of a
manager; (2) all charges and expenses of any custodian or depository
appointed by the Fund for the safekeeping of its cash, securities and
other property; (3) all charges and expenses for bookkeeping and
auditors; (4) all charges and expenses of any transfer agents and
registrars appointed by the Fund; (5) all fees of all Trustees of the
Fund; (6) the cost of all securities and other property purchased by the
Fund and all broker's fees, expenses and commissions, issue and transfer
taxes and other expenses chargeable to the Fund in connection with
transactions involving securities and other property to which the Fund
is a party; (7) all taxes and corporate fees payable by the Fund to
federal, state or other governmental agencies; (8) al fees and expenses
involved in registering and maintaining registrations of the Fund and of
its shares with the Securities and Exchange Commission ("Commission")
and registering or qualifying its shares under state or other securities
laws, including the preparation and printing of prospectuses for filing
with the Commission and other authorities; (9) the costs of sales
literature and advertising, including expenses of preparing, printing
and mailing prospectuses and reports to shareholders of the Fund; (10)
all expenses of shareholders' and Trustees' meetings and of preparing,
printing and mailing notices, reports and proxy materials to
shareholders of the Fund; (11) all charges and expenses of legal counsel
for the Fund, its officers, and Trustees in connection with legal
matters relating to the Fund, including without limitation legal
services rendered in connection with the Fund's existence, trust and
financial structure and relations with its shareholders, registrations
and qualifications of securities under federal, state and other laws,
issues of securities, expenses which the Fund has herein assumed and
extraordinary matters; (12) all charges and expenses of filing annual
and other reports with the Commission; and (13) all extraordinary
expenses and charges of the Fund. In the event that the Adviser
provides any of these services or pays any of these expenses, the Fund
will promptly reimburse the Adviser therefor on a cost basis. No
agreement is made hereby with respect to the provision of any other of
such services by the Adviser or any of its affiliates, or payment
therefor.
The services of the Adviser to the Fund's Portfolios hereunder are
not to be deemed exclusive, and the Adviser shall be free to render
similar services to others.
4. As compensation for the Adviser's services to the Portfolios
I, II, and III during the period of this Agreement, the Fund will pay to
the Adviser a fee at the annual rate of .5 of 1% of the average daily
net asset value of each Portfolio computed in the manner provided in the
Fund's then current prospectus and statement of additional information
thereto as of the close of business on each business day.
A pro rata portion of the fee shall be payable in arrears at the
end of each calendar month. If this Agreement terminates other than at
the end of a fiscal year of the Fund, any compensation payable hereunder
for the period ending with the date of such termination shall be payable
upon such termination. Amounts payable hereunder shall be paid promptly
when due.
5. As compensation for the Adviser's services to the Portfolios
IV and V during the period of this Agreement, the Fund will pay to the
Adviser a fee at the annual rate of .35 of 1% of the average daily net
asset value of each Portfolio computed in the manner provided in the
Fund's then current prospectus and statement of additional information
thereto as of the close of business on each business day.
A pro rata portion of the fee shall be payable in arrears at the
end of each calendar month. If this Agreement terminates other than at
the end of a fiscal year of the Fund, any compensation payable hereunder
for the period ending with the date of such termination shall be payable
upon such termination. Amounts payable hereunder shall be paid promptly
when due.
6. The Adviser shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Fund in connection with
the performance of this Agreement, except a loss resulting from a breach
of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith or
gross negligence on the part of Adviser in the performance of its duties
or from reckless disregard by it of its obligations and duties under
this Agreement. Any person, even though also an officer, Director,
partner, employee, or agent of the Adviser, who may be or become an
officer, Trustee, employee or agent of the Fund, shall be deemed, when
rendering services to the Fund or acting on any business of the Fund
(other than services or business in connection with the Adviser's duties
hereunder), to be rendering such services to or acting solely for the
Fund and not as an officer, Director, partner, employee, or agent or one
under the control or direction of the Adviser even though paid by it.
The Fund agrees to indemnify and hold the Adviser harmless from all
taxes, charges, expenses, assessments, claims and liabilities
(including, without limitation, liabilities arising under the Securities
Act of 1933, the 1934 Act, the Investment Company Act of 1940 (1940
Act), and any state and foreign securities and blue sky laws, as amended
from time to time) and expenses, including (without limitation)
attorneys' fees and disbursements, arising directly or indirectly from
any action or thing which the Adviser takes or does or omits to take or
do hereunder provided that the Adviser shall not be indemnified against
any liability to the Fund or to its shareholders (or any expenses
incident to such liability) arising out of a breach of fiduciary duty
with respect to the receipt of compensation for services, willful
misfeasance, bad faith or gross negligence on the part of the Adviser in
the performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement.
7. This Agreement shall continue in effect for each Portfolio
for a period more than two years from the date of its execution only so
long as (1) such continuance is specifically approved at least annually
by the Board of Trustees of the Fund or by a vote of a majority of the
outstanding voting securities of such Portfolio, and (2) such renewal
has been approved by the vote of a majority of Trustees of the Fund who
are not interested persons, as that term is defined in the 1940 Act of
the Adviser, a manager of the Fund, or the Fund, cast in person at a
meeting called for the purpose of voting on such approval.
8. On sixty days' written notice to the Adviser, this Agreement
may be terminated at any time with respect to a Portfolio, without the
payment of any penalty, by the Board of Trustees of the Fund or by vote
of the holders of a majority of the outstanding voting securities of
such Portfolio; and on sixty days' written notice to the Fund this
Agreement may be terminated at any time with respect to a Portfolio,
without the payment of any penalty, by the Adviser. This Agreement
shall automatically terminate upon its assignment (as that term is
defined in the 1940 Act). Any notice under this Agreement shall be
given in writing, addressed and delivered, or mailed postage prepaid, to
the other party at the main office of such party.
8. This Agreement may be amended at any time by an instrument
in writing executed by both parties hereto or their respective
successors, provided that such execution by the Fund shall have been
first approved by vote of the holders of a majority of the outstanding
voting securities of the affected Portfolio of the Fund and by the vote
of a majority of Trustees of the Fund who are not interested persons (as
that term is defined in the 1940 Act) of the Adviser, or any predecessor
of the Adviser, a manager of the Fund, or the Fund, cast in person at a
meeting called for the purpose of voting on such approval. A "majority
of the outstanding voting securites of the Fund" shall have, for all
purposes of this Agreement, the meaning provided therefor in the 1940
Act.
9. Any compensation payable to the Adviser hereunder for any
period other than a full year shall be proportionately adjusted.
10. The Fund is a Massachusetts business trust established under
a Declaration of Trust dated August 30, 1984, as it may be amended from
time to time. The obligations of the Fund are not personally binding
upon, nor shall recourse be had against the private property of any of
the Trustees, shareholders, officers, employees or agents of the Fund,
but the property of the Fund only shall be bound.
11. The provisions of this Agreement shall be governed,
construed and enforced in accordance with the laws of The Commonwealth
of Massachusetts.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the day and year first above written.
THE SALEM FUNDS FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
BY:/s/ Mary L. Hidden By:/s/ R. K. Wagoner
Office: President Office: Executive Vice
President
EXHIBIT A
TO THE INVESTMENT ADVISORY AGREEMENT
BETWEEN THE SALEM FUNDS AND
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
Pursuant to the Investment Advisory Agreement, as amended,
("Agreement") between The Salem Funds (the "Trust") and First Union
National Bank of North Carolina ("Adviser"), the parties hereby agree as
follows:
WHEREAS, the Trust has established The Salem Treasury Money Market
Portfolio ("TSTMMP") and wishesthe Adviser to perform services as set
forth in the Agreement, on behalf of TSTMMP; and
WHEREAS, the Adviser is willing to render such services;
NOW, THEREFORE, the Trust and the Adviser agree as follows:
1. Adviser will perform services, as described in the
Agreement, on behalf of TSTMMP.
2. As consideration for advisory services to TSTMMP, during the
period of this Agreement, the Trust will pay to the Adviser a fee at an
annual rate of .35 of 1% of the average daily net asset value of each
TSTMMP, computed in the manner provided in the Trust's then current
prospectus and statement of additional information thereto as of the
close of business on each business day.
3. The Agreement shall begin for TSTMMP on the date of the
execution of this Exhibit.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the date and year below written.
THE SALEM FUNDS FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
By:/s/ Jeffrey W. Sterling By:/s/ Barbara J. Colvin
Office: Vice President Office: Vice President
Dated: October 15, 1990
EXHIBIT B
TO THE INVESTMENT ADVISORY AGREEMENT
BETWEEN THE SALEM FUNDS AND
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
Pursuant to the Investment Advisory Agreement, as amended,
("Agreement") between The Salem Funds (the "Trust") and First Union
National Bank of North Carolina ("Adviser"), the parties hereby agree as
follows:
WHEREAS, the Trust has established The Salem Managed Bond
Portfolio ("TSMBP") and The Salem Balanced Portfolio ("TSBP") and wishes
the Adviser to perform services as set forth in the Agreement, on behalf
of TSMBP and TSBP; and
WHEREAS, the Adviser is willing to render such services;
NOW, THEREFORE, the Trust and the Adviser agree as follows:
1. Adviser will perform services, as described in the
Agreement, on behalf of TSMBP and TSBP.
2. As consideration for advisory services to TSMBP and TSBP,
during the period of this Agreement, the Trust will pay to the Adviser a
fee at an annual rate of .5 of 1% of the average daily net asset value
of each TSMBP and TSBP, computed in the manner provided in the Trust's
then current prospectus and statement of additional information thereto
as of the close of business on each business day.
3. The Agreement shall begin for TSMBP and TSBP on the date of
the execution of this Exhibit.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the date and year below written.
THE SALEM FUNDS FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
By:/s/ Jeffrey W. Sterling By:/s/ Barbara J. Colvin
Office: Vice President Office: Vice President
Dated: January 2, 1991
Exhibit 5(i) under Form
N-1A
Exhibit 10 under
601/Reg. S-K
EXHIBIT C
TO THE INVESTMENT ADVISORY AGREEMENT
BETWEEN THE SALEM FUNDS AND
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
Pursuant to the Investment Advisory Agreement, as amended,
("Agreement") between The Salem Funds (the "Trust") and First Union
National Bank of North Carolina ("Adviser"), the parties hereby agree as
follows:
WHEREAS, the Trust has established The Salem U.S. Government
Portfolio ("SUSGBP") and The Salem North Carolina Municipal Bond
Portfolio ("SNCMBP") and wishes the Adviser to perform services as set
forth in the Agreement, on behalf of SUSGBP and SNCMBP; and
WHEREAS, the Adviser is willing to render such services;
NOW, THEREFORE, the Trust and the Adviser agree as follows:
1. Adviser will perform services, as described in the Agreement,
on behalf of SUSGBP and SNCMBP.
2. As consideration for advisory services to SUSGBP and SNCMBP,
during the period fo this Agreement, the Trust will pay to the Adviser a
fee at an annual rate of .5 of 1% of the average daily net asset value
of each SUSGBP and SNCMBP, computed in the manner provided in the
Trust's then current prospectus and statement of additional information
thereto as of the close of business on each business day.
3. The Agreement shall begin for SUSGBP and SNCMBP on the date of
the execution of this Exhibit.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the date and year below written.
The Salem Funds FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
By:/s/Jeffrey W. Sterling By:/s/Marc R. Lieberman
Office: Vice President Office: Vice President
Dated: December 28, 1992
EXHIBIT D
TO THE INVESTMENT ADVISORY AGREEMENT
BETWEEN FIRST UNION FUNDS AND
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
Pursuant to the Investment Advisory Agreement, as amended,
("Agreement") between First Union Funds (the "Trust") and First Union
National Bank of North Carolina ("Adviser"), the parties hereby agree as
follows:
WHEREAS, the Trust has established First Union Virginia Municipal
Bond Portfolio ("UNVAMB"), First Union Georgia Municipal Bond Portfolio
("UNGAMB") and First Union Florida Municipal Bond Portfolio ("UNFLMB")
and wishes the Adviser to perform services as set forth in the
Agreement, on behalf of UNVAMB, UNGAMB and UNFLMB; and
WHEREAS, the Adviser is willing to render such services;
NOW, THEREFORE, the Trust and the Adviser agree as follows:
1. Adviser will perform services, as described in the Agreement,
on behalf of UNVAMB, UNGAMB and UNFLMB.
2. As consideration for advisory services to UNVAMB, UNGAMB and
UNFLMB, during the period of this Agreement, the Trust will pay to the
Adviser a fee at an annual rate of .5 of 1% of the average daily net
asset value of each UNVAMB, UNGAMB and UNFLMB, computed in the manner
provided in the Trust's then current prospectus and statement of
additional information thereto as of the close of business on each
business day.
3. The Agreement shall begin for UNVAMB, UNGAMB and UNFLMB on the
date of the execution of this Exhibit.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the date and year below written.
First Union Funds FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
By:/s/Jeffrey W. Sterling By:Marc R. Lieberman
Office: Vice President Office: Vice President
Dated: April 22, 1993
EXHIBIT E
TO THE INVESTMENT ADVISORY AGREEMENT
BETWEEN FIRST UNION FUNDS AND
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
Pursuant to the Investment Advisory Agreement, as amended
("Agreement") between First Union Funds (the "Trust") and First Union
National Bank of North Carolina ("Adviser"), the parties hereby agree as
follows:
WHEREAS, the Trust has established First Union South Carolina
Municipal Bond Portfolio and wishes the Adviser to perform services as
set forth in the Agreement, on behalf of First Union South Carolina
Municipal Bond Portfolio; and
WHEREAS, the Adviser is willing to render such services;
NOW, THEREFORE, the Trust and the Adviser agree as follows:
1. Adviser will perform services, as described in the Agreement,
on behalf of First Union South Carolina Municipal Bond Portfolio.
2. As consideration for advisory services to First Union South
Carolina Municipal Bond Portfolio, during the period of this Agreement,
the Trust will pay to the Adviser a fee at an annual rate of .50 of 1%
of the average daily net asset value of First Union South Carolina
Municipal Bond Portfolio, computed in the manner provided in the Trust's
then current prospectus and statement of additional information thereto
as of the close of business on each business day.
3. The Agreement shall begin for First Union South Carolina
Municipal Bond Portfolio on the date of the execution of this Exhibit.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the date and year below written.
First Union Funds FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
By:/s/Jeffrey W. Sterling By:/s/Marc R. Lieberman
Office: Vice President Office: Vice President
Dated: April 22, 1993
EXHIBIT F
TO THE INVESTMENT ADVISORY AGREEMENT
BETWEEN FIRST UNION FUNDS AND
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
Pursuant to the Investment Advisory Agreement, as amended
("Agreement") between First Union Funds (the "Trust") and First Union
National Bank of North Carolina ("Adviser"), the parties hereby agree as
follows:
WHEREAS, the Trust has established First Union Utility Portfolio
and wishes the Adviser to perform services as set forth in the
Agreement, on behalf of First Union Utility Portfolio; and
WHEREAS, the Adviser is willing to render such services;
NOW, THEREFORE, the Trust and the Adviser agree as follows:
1. Adviser will perform services, as described in the Agreement,
on behalf of First Union Utility Portfolio.
2. As consideration for advisory services to First Union Utility
Portfolio, during the period of this Agreement, the Trust will pay to
the Adviser a fee at an annual rate of .50 of 1% of the average daily
net asset value of First Union Utility Portfolio, computed in the manner
provided in the Trust's then current prospectus and statement of
additional information thereto as of the close of business on each
business day.
3. The Agreement shall begin for First Union Utility Portfolio on
the date of the execution of this Exhibit.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the date and year below written.
First Union Funds FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
By:/s/Joseph S. Machi By:/s/Marc R. Lieberman
Office: Vice President Office: Vice President
Dated: October 9, 1993
EXHIBIT G
TO THE INVESTMENT ADVISORY AGREEMENT
BETWEEN FIRST UNION FUNDS AND
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
Pursuant to the Investment Advisory Agreement, as amended
("Agreement") between First Union Funds (the "Trust") and First Union
National Bank of North Carolina ("Adviser"), the parties hereby agree as
follows:
WHEREAS, the Trust has established First Union International Equity
Portfolio and wishes the Adviser to perform services as set forth in the
Agreement, on behalf of First Union International Equity Portfolio; and
WHEREAS, the Adviser is willing to render such services;
NOW, THEREFORE, the Trust and the Adviser agree as follows:
1. Adviser will perform services, as described in the Agreement,
on behalf of First Union International Equity Portfolio.
2. As consideration for advisory services to First Union
International Equity Portfolio, during the period of this Agreement, the
Trust will pay to the Adviser a fee at an annual rate of .82 of 1% of
the average daily net assets up to $20 million, .79 of 1% of the average
daily net assets on the next $30 million, .76 of 1% of the average daily
net assets on the next $50 million, and .73 of 1% of the average daily
net assets over $100 million of First Union International Equity
Portfolio, computed in the manner provided in the Trust's then current
prospectus and statement of additional information thereto as of the
close of business on each business day.
3. The Agreement shall begin for First Union International Equity
Portfolio on the date of the execution of this Exhibit.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the date and year below written.
FIRST UNION FUNDS FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
By:/s/ Joseph S. Machi By:/s/ W. Douglas Munn
Office: Vice President Office: Vice President
Dated: July 28, 1994
EXHIBIT H
TO THE INVESTMENT ADVISORY AGREEMENT
BETWEEN FIRST UNION FUNDS AND
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
Pursuant to the Investment Advisory Agreement, as amended
("Agreement") between First Union Funds (the "Trust") and First Union
National Bank of North Carolina ("Adviser"), the parties hereby agree as
follows:
WHEREAS, the Trust has established First Union Emerging Markets
Growth Portfolio and wishes the Adviser to perform services as set forth
in the Agreement, on behalf of First Union Emerging Markets Growth
Portfolio; and
WHEREAS, the Adviser is willing to render such services;
NOW, THEREFORE, the Trust and the Adviser agree as follows:
1. Adviser will perform services, as described in the Agreement,
on behalf of First Union Emerging Markets Growth Portfolio.
2. As consideration for advisory services to First Union Emerging
Markets Growth Portfolio, during the period of this Agreement, the Trust
will pay to the Adviser a fee at an annual rate of 1.50 of 1% of the
average daily net assets up to $100 million, 1.45 of 1% of the average
daily net assets on the next $100 million, 1.40 of 1% of the average
daily net assets on the next $100 million and 1.35 of 1% of the average
daily net assets over $300 million of First Union Emerging Markets
Growth Portfolio, computed in the manner provided in the Trust's then
current prospectus and statement of additional information thereto as of
the close of business on each business day.
3. The Agreement shall begin for First Union Emerging Markets
Growth Portfolio on the date of the execution of this Exhibit.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement on the date and year below written.
FIRST UNION FUNDS FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
By:/s/ Joseph S. Machi By:/s/ W. Douglas Munn
Office: Vice President Office: Vice President
Dated: July 28, 1994
-1-
Exhibit 15(i)(a) under Form N-1A
Exhibit 1 under Item 601/Reg S-K
DISTRIBUTION PLAN OF
FIRST UNION FUNDS
FIRST UNION EMERGING MARKETS GROWTH PORTFOLIO
FIRST UNION INTERNATIONAL EQUITY PORTFOLIO
CLASS B INVESTMENT SHARES
Section 1. First Union Funds (Fund) may act as the distributor of
securities of which it is the issuer, pursuant to Rule 12b-1 under the
Investment Company Act of 1940 (1940 Act) according to the terms of this
Distribution Plan (Plan).
Section 2. The Fund may expend daily amounts at an annual rate of
0.75% of the average daily net asset value of each of its Emerging Markets
Growth and International Equity portfolios to finance any activity which is
principally intended to result in the sale of shares of such Portfolio,
including, without limitation, expenditures consisting of payments to a
principal underwriter of the Fund (Principal Underwriter) in order (i) to
enable the Principal Underwriter to pay or to have paid to others who sell
Portfolio shares a maintenance or other fee, at such intervals as the
Principal Underwriter may determine, in respect of Portfolio shares
previously sold by any such others and remaining outstanding during the
period in respect of which such fee is or has been paid; and/or (ii) to
compensate the Principal Underwriter for its efforts in respect of sales of
shares of the Portfolio since inception of the Plan.
Section 3. This Plan shall not take effect with respect to a
Portfolio until it has been approved together with any related agreements
of the Fund by votes of a majority of both (a) the Board of Trustees of the
Fund and (b) those Trustees of the Fund who are not "interested persons" of
the Fund (as defined in the 1940 Act) and who have no direct or indirect
financial interest in the operation of this Plan (Rule 12b-1 Trustees),
cast in person at a meeting called for the purpose of voting on this Plan
or such agreements.
Section 4. Unless sooner terminated pursuant to Section 6, this Plan
shall continue in effect with respect to each Portfolio for a period of one
year from the date it takes effect and thereafter shall continue in effect
so long as such continuance is specifically approved at least annually in
the manner provided for approval of this Plan in Section 3.
Section 5. Any person authorized to direct the disposition of monies
paid or payable by a Portfolio pursuant to this Plan or any related
agreement shall provide to the Fund's Board and the Board shall review at
least quarterly a written report of the amounts so expended and the
purposes for which such expenditures were made.
Section 6. This Plan may be terminated with respect to a Portfolio
at any time by vote of a majority of the Rule 12b-1 Trustees, or by vote of
a majority of the Portfolio's outstanding shares.
Section 7. Any agreement of the Fund related to this Plan shall be
in writing, and shall provide:
A. That such agreement may be terminated with respect to a Portfolio
at any time without payment of any penalty, by vote of a majority
of the Rule 12b-1 Trustees or by a vote of a majority of the
Portfolio's outstanding shares on not more than sixty days written
notice to any other party to the agreement; and
B. That such agreement shall terminate automatically in the event of
its assignment.
Section 8. This Plan may not be amended to increase materially the
amount of distribution expenses provided for in Section 2 hereof unless
such amendment is approved by a vote of at least a majority (as defined in
the 1940 Act) of the outstanding shares of each portfolio affected and no
material amendment to this Plan shall be made unless approved in the manner
provided for in Section 3 hereof.
July 28, 1994
-1-
Exhibit 15(i)(a)(i) under Form N-1A
Exhibit 1 under Item 601/Reg S-K
DISTRIBUTION PLAN OF
FIRST UNION FUNDS
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO
CLASS B INVESTMENT SHARES
Section 1. First Union Funds (Fund) may act as the distributor of
securities of which it is the issuer, pursuant to Rule 12b-1 under the
Investment Company Act of 1940 (1940 Act) according to the terms of this
Distribution Plan (Plan).
Section 2. The Fund may expend daily amounts at an annual rate of
0.75% of the average daily net asset value of its South Carolina Municipal
Bond Portfolio to finance any activity which is principally intended to
result in the sale of shares of such Portfolio, including, without
limitation, expenditures consisting of payments to a principal underwriter
of the Fund (Principal Underwriter) in order (i) to enable the Principal
Underwriter to pay or to have paid to others who sell Portfolio shares a
maintenance or other fee, at such intervals as the Principal Underwriter
may determine, in respect of Portfolio shares previously sold by any such
others and remaining outstanding during the period in respect of which such
fee is or has been paid; and/or (ii) to compensate the Principal
Underwriter for its efforts in respect of sales of shares of the Portfolio
since inception of the Plan.
Section 3. This Plan shall not take effect with respect to a Portfolio
until it has been approved together with any related agreements of the Fund
by votes of a majority of both (a) the Board of Trustees of the Fund and
(b) those Trustees of the Fund who are not "interested persons" of the Fund
(as defined in the 1940 Act) and who have no direct or indirect financial
interest in the operation of this Plan (Rule 12b-1 Trustees), cast in
person at a meeting called for the purpose of voting on this Plan or such
agreements.
Section 4. Unless sooner terminated pursuant to Section 5, this Plan
shall continue in effect with respect to each Portfolio for a period of one
year from the date it takes effect and thereafter shall continue in effect
so long as such continuance is specifically approved at least annually in
the manner provided for approval of this Plan in Section 3.
Section 5. Any person authorized to direct the disposition of monies
paid or payable by a Portfolio pursuant to this Plan or any related
agreement shall provide to the Fund's Board and the Board shall review at
least quarterly a written report of the amounts so expended and the
purposes for which such expenditures were made.
Section 6. This Plan may be terminated with respect to a Portfolio at
any time by vote of a majority of the Rule 12b-1 Trustees, or by vote of a
majority of the Portfolio's outstanding shares.
Section 7. Any agreement of the Fund related to this Plan shall be in
writing, and shall provide:
A. That such agreement may be terminated with respect to a Portfolio
at any time without payment of any penalty, by vote of a majority
of the Rule 12b-1 Trustees or by a vote of a majority of the
Portfolio's outstanding shares on not more than sixty days written
notice to any other party to the agreement; and
B. That such agreement shall terminate automatically in the event of
its assignment.
Section 8. This Plan may not be amended to increase materially the
amount of distribution expenses provided for in Section 2 hereof unless
such amendment is approved by a vote of at least a majority (as defined in
the 1940 Act) of the outstanding shares of each portfolio affected and no
material amendment to this Plan shall be made unless approved in the manner
provided for in Section 3 hereof.
April 22, 1993
-1-
Exhibit 15(i)(a)(ii)under Form N-1A
Exhibit 1 under 601/Reg S-K
DISTRIBUTION PLAN OF
FIRST UNION FUNDS
FIRST UNION VIRGINIA MUNICIPAL BOND PORTFOLIO
FIRST UNION GEORGIA MUNICIPAL BOND PORTFOLIO
FIRST UNION FLORIDA MUNICIPAL BOND PORTFOLIO
CLASS B INVESTMENT SHARES
Section 1. First Union Funds (Fund) may act as the distributor of
securities of which it is the issuer, pursuant to Rule 12b-1 under the
Investment Company Act of 1940 (1940 Act) according to the terms of this
Distribution Plan (Plan).
Section 2. The Fund may expend daily amounts at an annual rate of
0.75% of the average daily net asset value of each of its Virginia
Municipal Income Portfolio, Georgia Municipal Income Portfolio and Florida
Municipal Income Portfolios to finance any activity which is principally
intended to result in the sale of shares of such Portfolio, including,
without limitation, expenditures consisting of payments to a principal
underwriter of the Fund (Principal Underwriter) in order (i) to enable the
Principal Underwriter to pay or to have paid to others who sell Portfolio
shares a maintenance or other fee, at such intervals as the Principal
Underwriter may determine, in respect of Portfolio shares previously sold
by any such others and remaining outstanding during the period in respect
of which such fee is or has been paid; and/or (ii) to compensate the
Principal Underwriter for its efforts in respect of sales of shares of the
Portfolio since inception of the Plan.
Section 3. This Plan shall not take effect with respect to a Portfolio
until it has been approved together with any related agreements of the Fund
by votes of a majority of both (a) the Board of Trustees of the Fund and
(b) those Trustees of the Fund who are not "interested persons" of the Fund
(as defined in the 1940 Act) and who have no direct or indirect financial
interest in the operation of this Plan (Rule 12b-1 Trustees), cast in
person at a meeting called for the purpose of voting on this Plan or such
agreements.
Section 4. Unless sooner terminated pursuant to Section 5, this Plan
shall continue in effect with respect to each Portfolio for a period of one
year from the date it takes effect and thereafter shall continue in effect
so long as such continuance is specifically approved at least annually in
the manner provided for approval of this Plan in Section 3.
Section 5. Any person authorized to direct the disposition of monies
paid or payable by a Portfolio pursuant to this Plan or any related
agreement shall provide to the Fund's Board and the Board shall review at
least quarterly a written report of the amounts so expended and the
purposes for which such expenditures were made.
Section 6. This Plan may be terminated with respect to a Portfolio at
any time by vote of a majority of the Rule 12b-1 Trustees, or by vote of a
majority of the Portfolio's outstanding shares.
Section 7. Any agreement of the Fund related to this Plan shall be in
writing, and shall provide:
A. That such agreement may be terminated with respect to a Portfolio
at any time without payment of any penalty, by vote of a majority
of the Rule 12b-1 Trustees or by a vote of a majority of the
Portfolio's outstanding shares on not more than sixty days written
notice to any other party to the agreement; and
B. That such agreement shall terminate automatically in the event of
its assignment.
Section 8. This Plan may not be amended to increase materially the
amount of distribution expenses provided for in Section 2 hereof unless
such amendment is approved by a vote of at least a majority (as defined in
the 1940 Act) of the outstanding shares of each portfolio affected and no
material amendment to this Plan shall be made unless approved in the manner
provided for in Section 3 hereof.
April 22, 1993
-1-
Exhibit 15(i)(a)(iii)under Form N-1A
Exhibit 1 under 601/Reg S-K
DISTRIBUTION PLAN OF
FIRST UNION FUNDS
FIRST UNION UTILITY PORTFOLIO
CLASS B INVESTMENT SHARES
Section 1. First Union Funds (Fund) may act as the distributor of
securities of which it is the issuer, pursuant to Rule 12b-1 under the
Investment Company Act of 1940 (1940 Act) according to the terms of this
Distribution Plan (Plan).
Section 2. The Fund may expend daily amounts at an annual rate of
0.75% of the average daily net asset value of its Utility Portfolio to
finance any activity which is principally intended to result in the sale of
shares of such Portfolio, including, without limitation, expenditures
consisting of payments to a principal underwriter of the Fund (Principal
Underwriter) in order (i) to enable the Principal Underwriter to pay or to
have paid to others who sell Portfolio shares a maintenance or other fee,
at such intervals as the Principal Underwriter may determine, in respect of
Portfolio shares previously sold by any such others and remaining
outstanding during the period in respect of which such fee is or has been
paid; and/or (ii) to compensate the Principal Underwriter for its efforts
in respect of sales of shares of the Portfolio since inception of the Plan.
Section 3. This Plan shall not take effect with respect to a Portfolio
until it has been approved together with any related agreements of the Fund
by votes of a majority of both (a) the Board of Trustees of the Fund and
(b) those Trustees of the Fund who are not "interested persons" of the Fund
(as defined in the 1940 Act) and who have no direct or indirect financial
interest in the operation of this Plan (Rule 12b-1 Trustees), cast in
person at a meeting called for the purpose of voting on this Plan or such
agreements.
Section 4. Unless sooner terminated pursuant to Section 5, this Plan
shall continue in effect with respect to each Portfolio for a period of one
year from the date it takes effect and thereafter shall continue in effect
so long as such continuance is specifically approved at least annually in
the manner provided for approval of this Plan in Section 3.
Section 5. Any person authorized to direct the disposition of monies
paid or payable by a Portfolio pursuant to this Plan or any related
agreement shall provide to the Fund's Board and the Board shall review at
least quarterly a written report of the amounts so expended and the
purposes for which such expenditures were made.
Section 6. This Plan may be terminated with respect to a Portfolio at
any time by vote of a majority of the Rule 12b-1 Trustees, or by vote of a
majority of the Portfolio's outstanding shares.
Section 7. Any agreement of the Fund related to this Plan shall be in
writing, and shall provide:
A. That such agreement may be terminated with respect to a Portfolio
at any time without payment of any penalty, by vote of a majority
of the Rule 12b-1 Trustees or by a vote of a majority of the
Portfolio's outstanding shares on not more than sixty days written
notice to any other party to the agreement; and
B. That such agreement shall terminate automatically in the event of
its assignment.
Section 8. This Plan may not be amended to increase materially the
amount of distribution expenses provided for in Section 2 hereof unless
such amendment is approved by a vote of at least a majority (as defined in
the 1940 Act) of the outstanding shares of each portfolio affected and no
material amendment to this Plan shall be made unless approved in the manner
provided for in Section 3 hereof.
October 9, 1993
-1-
Exhibit 5(i)(b)(i) under Form N-1A
Exhibit 1 under Item 601/Reg S-K
EXHIBIT E
to the Class C Investment Shares
Distribution Plan
First Union Funds
First Union Emerging Markets Growth Portfolio
Class C Investment Shares
First Union International Equity Portfolio
Class C Investment Shares
This Plan is adopted by First Union Funds with respect to the Class
of Shares of the portfolio(s) of the Trust set forth above.
In compensation for the services provided pursuant to this Plan, FSC
will be paid a monthly fee computed at the annual rate of .75 of 1% of the
average aggregate net asset value of the Class C Investment Shares of the
First Union Emerging Markets Growth Portfolio and First Union International
Equity Portfolio held during the month.
Witness the due execution hereof this 28th day of July, 1994.
First Union Funds
By:/s/ Joseph S. Machi
President
-1-
Exhibt 15(i)(c) under Form N-1A
Exhibit 1 under Item 601/Reg S-K
DISTRIBUTION PLAN OF CLASS D INVESTMENT SHARES
FIRST UNION FUNDS
Section 1. First Union Funds (Fund) may act as the distributor of
securities of which it is the issuer, pursuant to Rule 12b-1 under the
Investment Company Act of 1940 (1940 Act) according to the terms of this
Distribution Plan (Plan).
Section 2. The Fund may expend daily amounts at an annual rate of
0.75% of the average daily net asset value of Class D Investment Shares of
each of its Balanced, Fixed Income, U.S. Government, Utility, Value,
Emerging Markets Growth and International Equity portfolios to finance any
activity which is principally intended to result in the sale of shares of
such Portfolios, including, without limitation, expenditures consisting of
payments to a principal underwriter of the Fund (Principal Underwriter) in
order (i) to enable the Principal Underwriter to pay for any activity
primarily intended to result in the sale of Portfolio shares, including,
without limitation, (a) compensation to public relations consultants or
other persons assisting in distribution of shares of the Portfolios, (b)
advertising, (c) printing and mailing of prospectuses and reports for
distribution to persons other than existing shareholders, (d) preparation
and distribution of advertising material and sales literature and (e)
conducting public relations efforts such as seminars; (ii) to enable the
Principal Underwriter to pay or to have paid to others who sell Portfolio
shares a maintenance or other fee, at such intervals as the Principal
Underwriter may determine, in respect of Portfolio shares previously sold
by any such others and remaining outstanding during the period in respect
of which such fee is or has been paid; and/or (iii) to compensate the
Principal Underwriter for its efforts in respect of sales of shares of the
Portfolio since inception of the Plan.
Section 3. This Plan shall not take effect with respect to a
Portfolio until it has been approved together with any related agreements
of the Fund by votes of a majority of both (a) the Board of Trustees of the
Fund and (b) those Trustees of the Fund who are not "interested persons" of
the Fund (as defined in the 1940 Act) and who have no direct or indirect
financial interest in the operation of this Plan (Rule 12b-1 Trustees),
cast in person at a meeting called for the purpose of voting on this Plan
or such agreements.
Section 4. Unless sooner terminated pursuant to Section 6, this Plan
shall continue in effect with respect to each Portfolio for a period of one
year from the date it takes effect and thereafter shall continue in effect
so long as such continuance is specifically approved at least annually in
the manner provided for approval of this Plan in Section 3.
Section 5. Any person authorized to direct the disposition of monies
paid or payable by a Portfolio pursuant to this Plan or any related
agreement shall provide to the Fund's Board and the Board shall review at
least quarterly a written report of the amounts so expended and the
purposes for which such expenditures were made.
Section 6. This Plan may be terminated with respect to a Portfolio
at any time by vote of a majority of the Rule 12b-1 Trustees, or by vote of
a majority of the Portfolio's outstanding shares.
Section 7. Any agreement of the Fund related to this Plan shall be
in writing, and shall provide:
A. That such agreement may be terminated with respect to a Portfolio
at any time without payment of any penalty, by vote of a majority
of the Rule 12b-1 Trustees or by a vote of a majority of the
Portfolio's outstanding shares on not more than sixty days written
notice to any other party to the agreement; and
B. That such agreement shall terminate automatically in the event of
its assignment.
Section 8. This Plan may not be amended to increase materially the
amount of distribution expenses provided for in Section 2 hereof unless
such amendment is approved by a vote of at least a majority (as defined in
the 1940 Act) of the outstanding shares of each portfolio affected and no
material amendment to this Plan shall be made unless approved in the manner
provided for in Section 3 hereof.
July 28, 1994
EXHIBIT A
to the
Plan
First Union Funds
First Union Balanced Portfolio
Class D Investment Shares
First Union Fixed Income Portfolio
Class D Investment Shares
First Union U.S. Government Portfolio
Class D Investment Shares
First Union Utility Portfolio
Class D Investment Shares
First Union Value Portfolio
Class D Investment Shares
First Union Emerging Markets Growth Portfolio
Class D Investment Shares
First Union International Equity Portfolio
Class D Investment Shares
This Plan is adopted by First Union Funds with respect to the Class of
Shares of the portfolio(s) of the Fund set forth above.
In compensation for the services provided pursuant to this Plan, FSC
will be paid a monthly fee computed at the annual rate of 0.75 of 1% of the
average aggregate net asset value of the Class D Investment Shares of the
Balanced, Fixed Income, U.S. Government, Utility, Value, Emerging Markets
Growth, and International Equity Portfolios held during the month.
Witness the due execution hereof this 28th day of July, 1994.
First Union Funds
By: /s/ Joseph S. Machi
Vice President
Exhibit 15 (iii) under Form N-1A
Exhibit 1 under Item 601/Reg. S-K
AMENDMENT NO. 5 TO
FEE SCHEDULE FOR RULE 12b-1 AGREEMENT WITH
FEDERATED SECURITIES CORP.
July 28, 1994
FSC may from time to time pay the Administrator a periodic fee for the
following Classes of the Funds set forth below, computed at an annual rate
of the average net asset value of Shares held in each of these Funds during
the period in accounts for which the Administrator provides services under
Rule 12b-1 Agreement, so long as the average net asset value of the Shares
in a Class of the Funds during the period is at least $100,000. Class C
Investment Shares are not eligible for payments under this agreement as
long as FSC continues to sell or assign Rule 12b-1 fees pertaining to the
Class C Investment Shares to finance front-end payments to First Union
Brokerage Services, Inc. ("FUBS") or other Administrators with which FSC
has entered into a Sales Agreement for the sale of shares of the First
Union Funds or its successor in interest. Class D Investment Shares will
be eligible for payments under this agreement beginning on the first day
after the 18th full calendar month following the sale of such shares,
including shares acquired by dividend reinvestment, exchange or merger,
provided the Administrator provides the services contemplated hereunder
Funds Fee Rate Period
First Union Value Portfolio
Class B Investment Shares .25 of 1% Monthly
Class C Investment Shares .75 of 1% Monthly
Class D Investment Shares .75 of 1% Monthly
First Union Fixed Income Portfolio
Class B Investment Shares .10 of 1% Monthly
Class C Investment Shares .75 of 1% Monthly
Class D Investment Shares .75 of 1% Monthly
First Union Balanced Portfolio
Class B Investment Shares .25 of 1% Monthly
Class C Investment Shares .75 of 1% Monthly
Class D Investment Shares .75 of 1% Monthly
First Union High Grade Tax Free Portfolio
Class B Investment Shares .25 of 1% Monthly
Class C Investment Shares .75 of 1% Monthly
AMENDMENT NO. 5 TO
FEE SCHEDULE FOR RULE 12b-1 AGREEMENT WITH
FEDERATED SECURITIES CORP.
July 28, 1994
("CONTINUED")
First Union U.S. Government Portfolio
Class B Investment Shares .25 of 1% Monthly
Class C Investment Shares .75 of 1% Monthly
Class D Investment Shares .75 of 1% Monthly
First Union North Carolina Municipal
Bond Portfolio
Class B Investment Shares .25 of 1% Monthly
Class C Investment Shares .75 of 1% Monthly
First Union Tax Free Money Market Portfolio
Class B Investment Shares .30 of 1% Monthly
Class C Investment Shares .75 of 1% Monthly
First Union Money Market Portfolio
Class B Investment Shares .30 of 1% Monthly
Class C Investment Shares .75 of 1% Monthly
First Union Treasury Money Market Portfolio
Class B Investment Shares .30 of 1% Monthly
Class C Investment Shares .75 of 1% Monthly
First Union Virginia Municipal
Bond Portfolio
Class B Investment Shares .25 of 1% Monthly
Class C Investment Shares .75 of 1% Monthly
First Union South Carolina
Municipal Bond Portfolio
Class B Investment Shares .25 of 1% Monthly
Class C Investment Shares .75 of 1% Monthly
First Union Georgia Municipal
Bond Portfolio
Class B Investment Shares .25 of 1% Monthly
Class C Investment Shares .75 of 1% Monthly
First Union Florida Municipal
Bond Portfolio
Class B Investment Shares .25 of 1% Monthly
Class C Investment Shares .75 of 1% Monthly
AMENDMENT NO. 5 TO
FEE SCHEDULE FOR RULE 12b-1 AGREEMENT WITH
FEDERATED SECURITIES CORP.
July 28, 1994
("CONTINUED")
First Union Utility Portfolio
Class B Investment Shares .25 of 1% Monthly
Class C Investment Shares .75 of 1% Monthly
Class D Investment Shares .75 of 1% Monthly
First Union Emerging Markets
Growth Portfolio
Class B Investment Shares .25 of 1% Monthly
Class C Investment Shares .75 of 1% Monthly
Class D Investment Shares .75 of 1% Monthly
First Union International Equity Portfolio
Class B Investment Shares .25 of 1% Monthly
Class C Investment Shares .75 of 1% Monthly
Class D Investment Shares .75 of 1% Monthly
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
TABLE>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> FIRST UNION BALANCED PORT CLASS B INVMNT SHARES
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<TABLE> <S> <C>
<S> <C>
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<SERIES>
<NUMBER> 3
<NAME> FIRST UNION BALANCED PORT CLASS C INVMNT SHARES
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<PERIOD-END> JUN-30-1994
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<EXPENSES-NET> 3,243,339
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</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> FIRST UNION BALANCED PORTFOLIO TRUST SHARES
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> JUN-30-1994
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<NET-INVESTMENT-INCOME> 16,776,308
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> FIRST UNION FIXED INC PORT CLASS B INVMNT SHARES
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> JUN-30-1994
<INVESTMENTS-AT-COST> 408,121,721
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<ACCUM-APPREC-OR-DEPREC> (18,252,196)
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<EXPENSES-NET> 1,393,772
<NET-INVESTMENT-INCOME> 13,119,099
<REALIZED-GAINS-CURRENT> (969,660)
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> FIRST UNION FIXED INC PORT CLASS C INVMNT SHARES
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<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> JUN-30-1994
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<ACCUM-APPREC-OR-DEPREC> (18,252,196)
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</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> FIRST UNION FIXED INCOME PORTFOLIO TRUST SHARES
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> JUN-30-1994
<INVESTMENTS-AT-COST> 408,121,721
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<ACCUMULATED-NET-GAINS> (923,414)
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<ACCUM-APPREC-OR-DEPREC> (18,252,196)
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<NET-CHANGE-IN-ASSETS> (11,413,185)
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<PER-SHARE-NII> .330
<PER-SHARE-GAIN-APPREC> (.640)
<PER-SHARE-DIVIDEND> .330
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<PER-SHARE-NAV-END> 9.7900
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<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 8
<NAME> FIRST UNION FLORIDA MUNI BOND PORT CLASS B INVMNT SHS
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> JUN-30-1994
<INVESTMENTS-AT-COST> 39,203,963
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<ACCUMULATED-NET-GAINS> (624,649)
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<ACCUM-APPREC-OR-DEPREC> (2,716,735)
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<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 880,890
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<EXPENSES-NET> 145,574
<NET-INVESTMENT-INCOME> 735,316
<REALIZED-GAINS-CURRENT> (616,967)
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<SHARES-REINVESTED> 12,667
<NET-CHANGE-IN-ASSETS> 8,987,972
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<PER-SHARE-NII> .240
<PER-SHARE-GAIN-APPREC> (1.100)
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<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 9
<NAME> FIRST UNION FLORIDA MUNI BOND PORT CLASS C INVMNT SHS
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> JUN-30-1994
<INVESTMENTS-AT-COST> 39,203,963
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<TOTAL-LIABILITIES> 4,859,698
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<PAID-IN-CAPITAL-COMMON> 38,822,838
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<EXPENSES-NET> 145,574
<NET-INVESTMENT-INCOME> 735,316
<REALIZED-GAINS-CURRENT> (616,967)
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<NUMBER-OF-SHARES-SOLD> 1,031,835
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<NET-CHANGE-IN-ASSETS> 8,987,972
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<AVG-DEBT-PER-SHARE> .000
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> FIRST UNION FLORIDA MUNI BOND PORT TRUST SHARES
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> JUN-30-1994
<INVESTMENTS-AT-COST> 39,203,963
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<TOTAL-LIABILITIES> 4,859,698
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 38,822,838
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<ACCUMULATED-NET-GAINS> (624,649)
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<ACCUM-APPREC-OR-DEPREC> (2,716,735)
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<NUMBER> 11
<NAME> FIRST UNION GEORGIA MUNI BOND PORT CLASS B INVMNT SHS
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<NUMBER> 12
<NAME> FIRST UNION GEORGIA MUNI BOND PORT CLASS C INVMNT SHS
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<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> JUN-30-1994
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<TABLE> <S> <C>
<S> <C>
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<SERIES>
<NUMBER> 10
<NAME> FIRST UNION GEORGIA MUNI BOND PORT TRUST SHARES
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<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> JUN-30-1994
<INVESTMENTS-AT-COST> 8,341,786
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<TABLE> <S> <C>
<S> <C>
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<SERIES>
<NUMBER> 14
<NAME> FIRST UN HIGH GRADE TAX FREE PORT CLASS B INVMNT SHS
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> JUN-30-1994
<INVESTMENTS-AT-COST> 113,966,797
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</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 15
<NAME> FIRST UN HIGH GRADE TAX FREE PORT CLASS C INVMNT SHS
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> JUN-30-1994
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<TABLE> <S> <C>
<S> <C>
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<SERIES>
<NUMBER> 13
<NAME> FIRST UNION HIGH GRADE TAX FREE PORT TRUST SHARES
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<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> JUN-30-1994
<INVESTMENTS-AT-COST> 113,966,797
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</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> 6
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<NUMBER> 16
<NAME> FIRST UNION MANAGED BOND PORTFOLIO TRUST SHARES
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<PERIOD-END> JUN-30-1994
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<NUMBER> 18
<NAME> FIRST UNION MONEY MARKET PORT CLASS B INVMNT SHS
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<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> JUN-30-1994
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<S> <C>
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<NUMBER> 19
<NAME> FIRST UNION MONEY MARKET PORT CLASS C INVMNT SHS
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<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> JUN-30-1994
<INVESTMENTS-AT-COST> 101,925,887
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<NAME> FIRST UN NORTH CAROL MUNI BD PORT CLASS B INVMNT SHS
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<NAME> FIRST UN SOUTH CAROL MUNI BD PORT CLASS B INVMNT SHS
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<NAME> FIRST UNION SOUTH CAROLINA MUNI BOND PORT TRUST SHS
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<NAME> FIRST UN TAX-FREE MONEY MARK PORT CLASS B INVMNT SHS
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<NAME> FIRST UNION TAX-FREE MONEY MARKET PORT TRUST SHS
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<NAME> FIRST UN TREASURY MONEY MARK PORT CLASS B INVMNT SHS
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<NAME> FIRST UNION TREASURY MONEY MARKET PORT TRUST SHS
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<NAME> FIRST UNION UTILITY PORTFOLIO CLASS B INVMNT SHARES
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<NAME> FIRST UNION U.S. GOVERNMENT PORT CLASS B INVMNT SHS
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<NAME> FIRST UNION U.S. GOVERNMENT PORT CLASS C INVMNT SHS
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<NAME> FIRST UNION U.S. GOVERNMENT PORTFOLIO TRUST SHARES
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<NAME> FIRST UNION VIRGINIA MUNI BOND PORT CLASS B INVMNT SHS
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<SERIES>
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<NAME> FIRST UNION VIRGINIA MUNI BOND PORT CLASS C INVMNT SHS
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<INVESTMENTS-AT-COST> 5,182,114
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</TABLE>
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<S> <C>
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<NUMBER> 39
<NAME>FIRST UNION VIRGINIA MUNI BOND PORT TRUST SHARES
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<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> JUN-30-1994
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<TABLE> <S> <C>
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<ARTICLE> 6
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<NUMBER> 37
<NAME> FIRST UNION VALUE PORTFOLIO CLASS B INVMNT SHARES
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<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> JUN-30-1994
<INVESTMENTS-AT-COST> 747,938,724
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<S> <C>
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<NUMBER> 38
<NAME> FIRST UNION VALUE PORTFOLIO CLASS C INVMNT SHARES
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<PERIOD-END> JUN-30-1994
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<NAME> FIRST UNION VALUE PORTFOLIO TRUST SHARES
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