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. 36 X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 36 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)
X on June 30,1994, pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)
on pursuant to paragraph (a) of Rule 485.
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 Charles H. Morin, Esquire
Houston, Houston & Donnelly Dickstein, Shapiro & Morin,
L.L.P.
2510 Centre City Tower 2101 L Street, N.W.
650 Smithfield Street Washington, D.C. 20037
Pittsburgh, Pennsylvania 15222
CROSS REFERENCE SHEET
This Amendment to the Registration Statement of FIRST
UNION FUNDS, which is comprised of fifteen 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, and (15) First Union South Carolina
Municipal Bond Portfolio; Each of the portfolios consist of
three separate classes of shares: (a) Trust Shares, (b) Class
B Investment Shares, and (c) Class C Investment Shares, with
the following exceptions: First Union Managed Bond Portfolio,
which consists of: (a) Trust Shares and (b) Investment
Shares; First Union High Grade Tax Free Portfolio, which
consists of: (a) Trust Shares, (b) Class B Investment Shares,
(c) Class C Investment Shares, and (d) FFB Shares; First Union
Tax Free Money Market Portfolio and First Union Treasury Money
Market Portfolio, which consists of: (a) Trust Shares and (b)
Class B Investment Shares.
Although this Amendment to the Registration Statement of
FIRST UNION FUNDS relates only to First Union Utility
Portfolio-Trust Shares, Class B Investment Shares; and Class C
Investment Shares, and First Union South Carolina Municipal
Bond Portfolio-Trust Shares; Class B Investment Shares; and
Class C Investment Shares, the Cross-Reference Sheet contains
information pertaining to all fifteen of the Trust's
portfolios. This will facilitate the cross-reference process
to the other portfolios.
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.
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].
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; Effective Yield (4-6);
Total Return (1-3, 7-15); Tax-
Equivalent Yield (3,9, 11, 12,
13, 15); Performance
Comparisons.
Item 23. Financial Statements. (1-13) Incorporated into the
Statement of Additional
Information by reference to the
Trust's Annual Report; (14-15)
Filed in Part A Supplements to
the Prospectuses.
FIRST UNION
UTILITY
PORTFOLIO
Trust Shares
(A Portfolio of First Union Funds)
SUPPLEMENT TO PROSPECTUS
DATED FEBRUARY 28, 1994
June 30, 1994
FEDERATED SECURITIES CORP.
Distributor
G00176-03-A (6/94)
534510
FIRST UNION EQUITY AND INCOME FUNDS
(PORTFOLIOS OF FIRST UNION FUNDS)
TRUST SHARES
- --------------------------------------------------------------------------------
SUPPLEMENT TO PROSPECTUS DATED FEBRUARY 28, 1994
1) Please insert the following 'Financial Highlights' table for First Union
Utility Portfolio after page 12, following 'Financial Highlights for First
Union U.S. Government Portfolio' and before 'Financial Highlights for
First Union Value Portfolio.'
FIRST UNION UTILITY PORTFOLIO
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
CLASS B CLASS C
TRUST INVESTMENT INVESTMENT
SHARES SHARES SHARES
PERIOD ENDED PERIOD ENDED PERIOD ENDED
APRIL 30, 1994* APRIL 30, 1994** APRIL 30, 1994**
- -------------------------------------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.53 $ 10.00 $ 10.00
- --------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------
Net investment income 0.07 0.17 0.14
- --------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.16) (0.65) (0.65)
- -------------------------------------------------------------- ----------------- ----------------- -----------------
Total from investment operations (0.09) (0.48) (0.51)
- --------------------------------------------------------------
LESS DISTRIBUTIONS
- --------------------------------------------------------------
Dividends to shareholders from net investment income (0.08) (0.16) (0.13)
- -------------------------------------------------------------- ----------------- ----------------- -----------------
NET ASSET VALUE, END OF PERIOD $ 9.36 $ 9.36 $ 9.36
- -------------------------------------------------------------- ----------------- ----------------- -----------------
TOTAL RETURN*** (0.95)% (4.86)% (5.08)%
- --------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- --------------------------------------------------------------
Expenses 0.00%(b) 0.05%(b) 0.75%(b)
- --------------------------------------------------------------
Net investment income 5.34%(b) 6.03%(b) 5.12%(b)
- --------------------------------------------------------------
Expense waiver/reimbursement (a) 1.60%(b) 1.80%(b) 1.60%(b)
- --------------------------------------------------------------
SUPPLEMENTAL DATA
- --------------------------------------------------------------
Net assets, end of period (000 omitted) $5,073 $3,080 $23,264
- --------------------------------------------------------------
Portfolio turnover rate 7% 7% 7%
- --------------------------------------------------------------
</TABLE>
* Reflects operations for the period from March 8, 1994 (commencement of
operations) to April 30, 1994 (unaudited).
** Reflects operations for the period from January 6, 1994 (commencement of
operations) to April 30, 1994 (unaudited).
*** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above (Note 4).
(b) Computed on an annualized basis.
(See Notes which are an integral part of the Financial Statements)
2) Please replace the first sentence of the section entitled 'Shareholder
Accounts' on page 33 with the following:
"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."
3) Please replace the ninth paragraph of the section entitled 'Investment
Adviser' on page 36 with the following two paragraphs:
"H. Bradley Donovan is an Assistant Vice President of First Union National Bank
of North Carolina, N.A., and has been with First Union since 1992. Prior to
joining First Union, Mr. Donovan was a portfolio manager with both First
National Bank of Palm Beach (1992-1993) and the Bank of Boston (1990-1992), and
an account executive with Smith Barney (1987-1989). Mr. Donovan has served as
co-portfolio manager of Utility Fund since June 30, 1994.
Lewis M. Kayes, III is an Assistant Vice President of First Union National Bank
of North Carolina, N.A., and has been with First Union since 1992. Prior to
joining First Union, Mr. Kayes was a portfolio manager with Banc One
(1986-1989). Mr. Kayes has served as co-portfolio manager of Utility Fund since
June 30, 1994."
4) Please replace the third paragraph in the section entitled 'Fund
Administration' on page 36 with the following:
"State Street Bank and Trust Company of Boston, Massachusetts ("State Street
Bank") serves as custodian for the securities and cash of the Funds.
Federated Services Company serves as transfer agent and provides dividend
disbursement and other shareholder services for the Funds."
5) Please add the following as the final sentence of the first paragraph in
the section entitled 'Voting Rights' on page 38.
"As of June 4, 1994, First Union National Bank Trust Accounts of Charlotte,
North Carolina, acting in various capacities for numerous accounts, was the
owner of record of 541,485 Shares (95.98%) of the Utility Fund-Trust Shares, and
therefore may, for certain purposes, be deemed to control the Utility Fund and
be able to affect the outcome of certain matters presented for a vote of
shareholders."
6) Please insert the following financial statements at page 42 of the
prospectus. In addition, please add the heading 'Financial Statements' to
the Table of Contents on page 2, immediately before 'Addresses.'
FIRST UNION UTILITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
APRIL 30, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- ------------- ----------------------------------------------------------------------------------- --------------
COMMON STOCKS--89.2%
- --------------------------------------------------------------------------------------------------
UTILITIES--70.8%
-----------------------------------------------------------------------------------
25,100 Airtouch Communications, Inc. $ 618,088
-----------------------------------------------------------------------------------
17,100 American Electric Power Co., Inc. 555,750
-----------------------------------------------------------------------------------
8,400 American Water Works, Inc. 239,400
-----------------------------------------------------------------------------------
36,800 Ameritech Corp. 1,449,000
-----------------------------------------------------------------------------------
11,400 Atlanta Gas & Light Co. 408,975
-----------------------------------------------------------------------------------
28,800 Bell Atlantic Corp. 1,490,400
-----------------------------------------------------------------------------------
24,800 BellSouth Corp. 1,509,700
-----------------------------------------------------------------------------------
8,400 British Telecommunications, Inc. ADR 477,750
-----------------------------------------------------------------------------------
20,100 Carolina Power & Light Co. 535,163
-----------------------------------------------------------------------------------
7,200 Consolidated Natural Gas Co. 283,500
-----------------------------------------------------------------------------------
10,900 DQE, Inc. 348,800
-----------------------------------------------------------------------------------
10,200 Dominion Resources, Inc. 430,950
-----------------------------------------------------------------------------------
8,100 Duke Power Co. 296,663
-----------------------------------------------------------------------------------
24,200 Eastern Enterprises 635,250
-----------------------------------------------------------------------------------
7,600 Enron Corp. 225,150
-----------------------------------------------------------------------------------
12,400 FPL Group, Inc. 438,650
-----------------------------------------------------------------------------------
10,400 Florida Progress Corp. 314,600
-----------------------------------------------------------------------------------
46,700 GTE Corp. 1,476,888
-----------------------------------------------------------------------------------
10,900 General Public Utilities Corp. 332,450
-----------------------------------------------------------------------------------
15,600 NICOR, Inc. 415,350
-----------------------------------------------------------------------------------
8,000 North Carolina Natural Gas Corp. 194,000
-----------------------------------------------------------------------------------
</TABLE>
FIRST UNION UTILITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- ------------- ----------------------------------------------------------------------------------- --------------
COMMON STOCKS--CONTINUED
- --------------------------------------------------------------------------------------------------
UTILITIES--CONTINUED
-----------------------------------------------------------------------------------
42,900 NYNEX Corp. $ 1,560,488
-----------------------------------------------------------------------------------
9,000 Orange & Rockland Utilities, Inc. 315,000
-----------------------------------------------------------------------------------
7,000 PSI Resources, Inc. 156,625
-----------------------------------------------------------------------------------
47,600 Pacific Telesis Group 1,523,200
-----------------------------------------------------------------------------------
23,600 Pacificorp 421,850
-----------------------------------------------------------------------------------
12,500 Piedmont Natural Gas, Inc. 264,062
-----------------------------------------------------------------------------------
7,800 SCANA Corp. 357,825
-----------------------------------------------------------------------------------
29,600 Southern Co. 577,200
-----------------------------------------------------------------------------------
15,000 Southwest Gas Corp. 255,000
-----------------------------------------------------------------------------------
34,600 Southwestern Bell Corp. 1,435,900
-----------------------------------------------------------------------------------
4,200 Teco Energy, Inc. 84,000
-----------------------------------------------------------------------------------
10,300 Telefonos de Mexico ADR 606,412
-----------------------------------------------------------------------------------
15,200 Union Electric Co. 533,900
-----------------------------------------------------------------------------------
35,800 U.S. West, Inc. 1,458,850
----------------------------------------------------------------------------------- --------------
Total 22,226,789
----------------------------------------------------------------------------------- --------------
BASIC INDUSTRY--1.3%
-----------------------------------------------------------------------------------
20,200 Hanson PLC ADR 416,625
----------------------------------------------------------------------------------- --------------
CHEMICALS--5.3%
-----------------------------------------------------------------------------------
9,600 Dow Chemical Co. 602,400
-----------------------------------------------------------------------------------
9,100 Imperial Chemical Industries PLC ADR 452,725
-----------------------------------------------------------------------------------
7,400 Monsanto Co. 608,650
----------------------------------------------------------------------------------- --------------
Total 1,663,775
----------------------------------------------------------------------------------- --------------
COMMERCIAL SERVICES--1.3%
-----------------------------------------------------------------------------------
6,800 Dun & Bradstreet Corp. 399,500
----------------------------------------------------------------------------------- --------------
CONSUMER NON-DURABLES--1.9%
-----------------------------------------------------------------------------------
18,000 American Brands, Inc. 609,750
----------------------------------------------------------------------------------- --------------
</TABLE>
FIRST UNION UTILITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------- ----------------------------------------------------------------------------------- --------------
COMMON STOCKS--CONTINUED
- --------------------------------------------------------------------------------------------------
ENERGY--2.5%
-----------------------------------------------------------------------------------
4,100 Atlantic Richfield Co. $ 391,037
-----------------------------------------------------------------------------------
6,300 Exxon Corp. 396,113
----------------------------------------------------------------------------------- --------------
Total 787,150
----------------------------------------------------------------------------------- --------------
FINANCE--2.0%
-----------------------------------------------------------------------------------
23,200 National City Corp. 620,600
----------------------------------------------------------------------------------- --------------
HEALTH TECHNOLOGY--2.6%
-----------------------------------------------------------------------------------
7,000 American Home Products Corp. 404,250
-----------------------------------------------------------------------------------
7,400 Bristol-Myers Squibb Co. 398,675
----------------------------------------------------------------------------------- --------------
Total 802,925
----------------------------------------------------------------------------------- --------------
REAL ESTATE INVESTMENT TRUST--1.5%
-----------------------------------------------------------------------------------
11,600 Healthcare Realty Trust 240,700
-----------------------------------------------------------------------------------
10,500 JDN Realty Trust Corp. 240,187
----------------------------------------------------------------------------------- --------------
Total 480,887
----------------------------------------------------------------------------------- --------------
TOTAL COMMON STOCKS (IDENTIFIED COST $28,784,800) 28,008,001
----------------------------------------------------------------------------------- --------------
CORPORATE BONDS--6.3%
- --------------------------------------------------------------------------------------------------
UTILITIES--6.3%
-----------------------------------------------------------------------------------
$ 220,000 Carolina Power & Light Co., 9.14%, 4/1/95 227,194
-----------------------------------------------------------------------------------
175,000 Florida Power Corp., 8.625%, 11/1/2021 182,622
-----------------------------------------------------------------------------------
210,000 Madison Gas & Electric Co., 7.70%, 2/15/2028 197,959
-----------------------------------------------------------------------------------
25,000 New England Power Co., 8.00%, 8/1/2022 24,702
-----------------------------------------------------------------------------------
1,000,000 Norsk Hydro, 7.75%, 6/15/2023 932,599
-----------------------------------------------------------------------------------
55,000 Pacific Gas & Electric Co., 8.375%, 5/1/2025 55,320
-----------------------------------------------------------------------------------
350,000 Pennsylvania Power & Light Co., 9.25%, 10/1/2019 373,011
----------------------------------------------------------------------------------- --------------
Total 1,993,407
----------------------------------------------------------------------------------- --------------
TOTAL CORPORATE BONDS (IDENTIFIED COST $2,189,186) 1,993,407
----------------------------------------------------------------------------------- --------------
</TABLE>
FIRST UNION UTILITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------- ----------------------------------------------------------------------------------- --------------
U.S. TREASURY OBLIGATIONS--0.7%
- --------------------------------------------------------------------------------------------------
$ 210,000 United States Treasury Notes, 9.50%, 11/15/95 $ 222,403
----------------------------------------------------------------------------------- --------------
TOTAL U.S. TREASURY OBLIGATIONS (IDENTIFIED COST $230,475) 222,403
----------------------------------------------------------------------------------- --------------
*REPURCHASE AGREEMENT--0.9%
- --------------------------------------------------------------------------------------------------
288,000 Donaldson, Lufkin & Jenrette Securities Corp., 3.52%, dated
4/29/94, due 5/2/94 (at amortized cost) (Note 2B) 288,000
----------------------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (IDENTIFIED COST $31,492,461) $ 30,511,811\
----------------------------------------------------------------------------------- --------------
</TABLE>
* The repurchase agreement is fully collateralized by U.S. Treasury
obligations based on market prices at the date of the portfolio.
\ The cost of investments for federal tax purposes amounts to $31,492,461 at
April 30, 1994. The net unrealized depreciation on a federal tax cost basis
amounts to $980,650, which is comprised of $215,448 appreciation and
$1,196,098 depreciation at April 30, 1994.
Note: The categories of investments are shown as a percentage of net assets
($31,417,205) at April 30, 1994.
The following abbreviation is used in this portfolio:
ADR -- American Depository Receipts
(See Notes which are an integral part of the Financial Statements)
FIRST UNION UTILITY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- -----------------------------------------------------------------------------------------------------
Investments in securities, at value (Notes 2A and 2B) (identified and tax cost $31,492,461) $30,511,811
- -----------------------------------------------------------------------------------------------------
Cash 60,606
- -----------------------------------------------------------------------------------------------------
Receivable for Fund shares sold 751,708
- -----------------------------------------------------------------------------------------------------
Receivable for investments sold 554,113
- -----------------------------------------------------------------------------------------------------
Dividends and interest receivable 225,523
- -----------------------------------------------------------------------------------------------------
Receivable from Adviser 26,699
- ----------------------------------------------------------------------------------------------------- -----------
Total assets 32,130,460
- -----------------------------------------------------------------------------------------------------
LIABILITIES:
- -----------------------------------------------------------------------------------------------------
Payable for investments purchased $ 610,830
- ------------------------------------------------------------------------------------------
Payable for Fund shares redeemed 56,090
- ------------------------------------------------------------------------------------------
Payable to transfer and dividend disbursing agent (Note 4) 7,185
- ------------------------------------------------------------------------------------------
Dividends payable 10
- ------------------------------------------------------------------------------------------
Accrued expenses 39,140
- ------------------------------------------------------------------------------------------ ---------
Total liabilities 713,255
- ----------------------------------------------------------------------------------------------------- -----------
NET ASSETS for 3,356,298 shares of beneficial interest outstanding $31,417,205
- ----------------------------------------------------------------------------------------------------- -----------
NET ASSETS CONSIST OF:
- -----------------------------------------------------------------------------------------------------
Paid-in capital $32,478,692
- -----------------------------------------------------------------------------------------------------
Unrealized depreciation of investments (980,650)
- -----------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (110,044)
- -----------------------------------------------------------------------------------------------------
Undistributed net investment income 29,207
- ----------------------------------------------------------------------------------------------------- -----------
Total Net Assets $31,417,205
- ----------------------------------------------------------------------------------------------------- -----------
NET ASSET VALUE PER SHARE:
- -----------------------------------------------------------------------------------------------------
Trust Shares (net assets of $5,073,448 / 541,797 shares of beneficial interest outstanding) $9.36
- ----------------------------------------------------------------------------------------------------- -----------
Class B Investment Shares (net assets of $3,079,813 / 329,104 shares of beneficial interest
outstanding) $9.36
- ----------------------------------------------------------------------------------------------------- -----------
Class C Investment Shares (net assets of $23,263,944 / 2,485,397 shares of beneficial interest
outstanding) $9.36
- ----------------------------------------------------------------------------------------------------- -----------
OFFERING PRICE PER SHARE:
- -----------------------------------------------------------------------------------------------------
Trust Shares $9.36
- ----------------------------------------------------------------------------------------------------- -----------
Class B Investment Shares (100/96 of $9.36) $9.75*
- ----------------------------------------------------------------------------------------------------- -----------
Class C Investment Shares $9.36
- ----------------------------------------------------------------------------------------------------- -----------
REDEMPTION PROCEEDS PER SHARE:
- -----------------------------------------------------------------------------------------------------
Trust Shares $9.36
- ----------------------------------------------------------------------------------------------------- -----------
Class B Investment Shares $9.36
- ----------------------------------------------------------------------------------------------------- -----------
Class C Investment Shares (96/100 of $9.36) $8.99**
- ----------------------------------------------------------------------------------------------------- -----------
</TABLE>
* See "What Shares Cost" in the prospectus.
** See "How to Redeem Shares" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
FIRST UNION UTILITY PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 6, 1994 (COMMENCEMENT OF OPERATIONS)
TO APRIL 30, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ------------------------------------------------------------------------------------------------------
Dividends $ 290,526
- ------------------------------------------------------------------------------------------------------
Interest 70,729
- ------------------------------------------------------------------------------------------------------ -----------
Total income (Note 2C) 361,255
- ------------------------------------------------------------------------------------------------------
EXPENSES:
- ------------------------------------------------------------------------------------------------------
Investment advisory fee (Note 4) $ 30,864
- -------------------------------------------------------------------------------------------
Trustees' fees 73
- -------------------------------------------------------------------------------------------
Administrative personnel and services (Note 4) 30,548
- -------------------------------------------------------------------------------------------
Custodian and portfolio accounting fees 18,239
- -------------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses (Note 4) 8,290
- -------------------------------------------------------------------------------------------
Distribution services fee--Class B Investment Shares (Note 4) 3,161
- -------------------------------------------------------------------------------------------
Distribution services fee--Class C Investment Shares (Note 4) 31,442
- -------------------------------------------------------------------------------------------
Legal fees 951
- -------------------------------------------------------------------------------------------
Printing and postage 4,516
- -------------------------------------------------------------------------------------------
Taxes 5
- -------------------------------------------------------------------------------------------
Insurance premiums 2,580
- -------------------------------------------------------------------------------------------
Miscellaneous 2,594
- ------------------------------------------------------------------------------------------- ---------
Total expenses 133,263
- -------------------------------------------------------------------------------------------
Deduct--
- -------------------------------------------------------------------------------------------
Waiver of investment advisory fee (Note 4) $ 30,864
- --------------------------------------------------------------------------------
Waiver of administrative personnel and services (Note 4) 30,548
- --------------------------------------------------------------------------------
Reimbursement of other operating fees and expenses (Note 4) 37,248
- --------------------------------------------------------------------------------
Waiver of distribution services fee--Class B Investment Shares (Note 4) 2,573 101,233
- -------------------------------------------------------------------------------- --------- ---------
Net expenses 32,030
- ------------------------------------------------------------------------------------------------------ -----------
Net investment income 329,225
- ------------------------------------------------------------------------------------------------------ -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (110,044)
- ------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (980,650)
- ------------------------------------------------------------------------------------------------------ -----------
Net realized and unrealized gain (loss) on investments (1,090,694)
- ------------------------------------------------------------------------------------------------------ -----------
Change in net assets resulting from operations $ (761,469)
- ------------------------------------------------------------------------------------------------------ -----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FIRST UNION UTILITY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
APRIL 30, 1994*
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ----------------------------------------------------------------------------------------------
OPERATIONS--
- ----------------------------------------------------------------------------------------------
Net investment income $ 329,225
- ----------------------------------------------------------------------------------------------
Net realized gain (loss) on investments ($110,044 net loss as computed for federal income tax
purposes) (110,044)
- ----------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments (980,650)
- ---------------------------------------------------------------------------------------------- ------------------
Change in net assets from operations (761,469)
- ---------------------------------------------------------------------------------------------- ------------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 2C)--
- ----------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income
- ----------------------------------------------------------------------------------------------
Trust Shares (40,685)
- ----------------------------------------------------------------------------------------------
Class B Investment Shares (70,133)
- ----------------------------------------------------------------------------------------------
Class C Investment Shares (189,200)
- ---------------------------------------------------------------------------------------------- ------------------
Change in net assets from distributions to shareholders (300,018)
- ---------------------------------------------------------------------------------------------- ------------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 3)--
- ----------------------------------------------------------------------------------------------
Proceeds from sale of shares 37,836,172
- ----------------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of dividends declared 249,157
- ----------------------------------------------------------------------------------------------
Cost of shares redeemed (5,606,637)
- ---------------------------------------------------------------------------------------------- ------------------
Change in net assets from Fund share transactions 32,478,692
- ---------------------------------------------------------------------------------------------- ------------------
Change in net assets 31,417,205
- ----------------------------------------------------------------------------------------------
NET ASSETS:
- ----------------------------------------------------------------------------------------------
Beginning of period --
- ---------------------------------------------------------------------------------------------- ------------------
End of period (including undistributed net investment income of $29,207) $ 31,417,205
- ---------------------------------------------------------------------------------------------- ------------------
* For the period from January 6, 1994 (commencement of operations) to April 30, 1994 (unaudited).
(See Notes which are an integral part of the Financial Statements)
</TABLE>
FIRST UNION UTILITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
(1) ORGANIZATION
First Union Funds (the "Trust") is registered under the Investment Company Act
of 1940, as amended (the "Act"), as an open-end, management investment company.
The Trust consists of fifteen portfolios. The financial statements included
herein are only those of First Union Utility Portfolio (the "Fund"). The
financial statements of the other portfolios are presented separately. The
assets of each portfolio are segregated and a shareholder's interest is limited
to the portfolio in which shares are held.
The Fund offers three classes of shares (Trust Shares, Class B Investment
Shares, and Class C Investment Shares). Class B Investment Shares and Class C
Investment Shares are identical in all respects to Trust Shares, except that
Class B Investment Shares and Class C Investment Shares are sold pursuant to a
distribution plan ("Plan") adopted in accordance with the Act's Rule 12b-1.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Listed equity securities, corporate bonds and other
fixed income securities are valued at the last sales price reported on
national securities exchanges. Unlisted securities, bonds and short-term
obligations (and private placement securities) are generally valued at the
prices provided by an independent pricing service. Short-term securities
with remaining maturities of sixty days or less may be stated at amortized
cost, which approximates value.
B. REPURCHASE AGREEMENTS--It is the policy of the Trust to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System or to have segregated within the
custodian bank's vault, all securities held as collateral in support of
repurchase agreement investments. Additionally, procedures have been
established by the Trust to monitor, on a daily basis, the market value of
each repurchase agreement's underlying collateral to ensure the value at
least equals the principal amount of the repurchase agreement, including
accrued interest.
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 Board of Trustees ("Trustees"). Risks may arise from the potential
inability of counterparties to honor the terms of the repurchase agreement.
Accordingly, the Fund could receive less than the repurchase price on the
sale of collateral securities.
FIRST UNION UTILITY PORTFOLIO
- --------------------------------------------------------------------------------
C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
Interest income and expenses are accrued daily. Bond premium and discount,
if applicable, are amortized as required by the Internal Revenue Code, as
amended ("Code").
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its taxable income.
Accordingly, no provisions for federal tax are necessary.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
F. OTHER--Investment transactions are accounted for on the trade date.
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
TRUST SHARES
PERIOD ENDED
APRIL 30, 1994*
SHARES AMOUNT
- ---------------------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Shares sold 537,434 $ 5,109,323
- ----------------------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 4,363 40,671
- ----------------------------------------------------------------------------------------
Shares redeemed -- --
- ---------------------------------------------------------------------------------------- --------- -------------
Net change resulting from Fund share transactions 541,797 $ 5,149,994
- ---------------------------------------------------------------------------------------- --------- -------------
</TABLE>
* Reflects operations for the period from March 8, 1994 (commemcement of
operations) to April 30, 1994.
FIRST UNION UTILITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT SHARES
CLASS B CLASS C
PERIOD ENDED PERIOD ENDED
APRIL 30, 1994** APRIL 30, 1994**
SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------ ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Shares sold 861,631 $ 8,483,328 2,521,393 $ 24,243,521
- ------------------------------------------------------
Shares issued to shareholders in payment
of dividends declared 5,089 48,435 17,012 160,051
- ------------------------------------------------------
Shares redeemed (537,616) (5,107,981) (53,008) (498,656)
- ------------------------------------------------------ ----------- ------------- ------------ --------------
Net change resulting from Fund
share transactions 329,104 $ 3,423,782 2,485,397 $ 23,904,916
- ------------------------------------------------------ ----------- ------------- ------------ --------------
</TABLE>
** Reflects operations for the period from January 6, 1994 (commencement of
operations) to
April 30, 1994.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--First Union National Bank of North Carolina, the Fund's
adviser ("Adviser"), receives for its services an annual investment advisory fee
equal to 0.50 of 1% of the Fund's average daily net assets. Adviser may
voluntarily choose to waive a portion of its fee and reimburse certain operating
expenses of the Fund. Adviser can modify or terminate this voluntary waiver and
reimbursement at any time at its sole discretion.
ADMINISTRATION FEE--Federated Administrative Services ("FAS") provides the Fund
with certain administrative personnel and services. The FAS fee is based on the
level of average aggregate net assets of the Fund for the period. FAS may
voluntarily choose to waive a portion of its fee.
DISTRIBUTION PLAN--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's Investment Shares. The Plan provides that the Fund may incur
distribution expenses up to 0.75 of 1% of the average daily net assets of the
Class B Investment Shares and Class C Investment Shares, annually, to compensate
FSC. For the foreseeable future, FSC intends to limit its fees to 0.25 of 1% of
the Class B Investment Shares' average daily net assets. FSC may voluntarily
choose to waive a portion of its fee.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("FServ") serves as transfer and dividend disbursing agent for the Fund. The
FServ fee is based on the size, type and number of accounts and transactions
made by shareholders.
FIRST UNION UTILITY PORTFOLIO
- --------------------------------------------------------------------------------
ORGANIZATIONAL EXPENSES--Organizational expenses incurred by the Fund will be
borne intially by FAS and are estimated to be $45,000. The Fund has agreed to
reimburse FAS for the organizational expenses during the five year period
following January 1, 1994 (date the Fund first became effective).
Certain of the Officers and Trustees of the Trust are Officers and Trustees or
Directors of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term obligations, for the
period ended
April 30, 1994 were as follows:
<TABLE>
<S> <C>
PURCHASES $ 32,768,288
- -------------------------------------------------------------------------------------------------- --------------
SALES $ 1,453,782
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
7) Please replace the fourth caption in the section entitled 'Addresses' on
the inside back cover with the following:
<TABLE>
<S> <C> <C>
"Custodian
State Street Bank and Trust Company P.O. Box 8602
Boston, Massachusetts 02266-8609"
</TABLE>
8) Please insert the following as the fifth caption in the section entitled
'Addresses' on the inside back cover:
<TABLE>
<S> <C> <C>
"Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779"
</TABLE>
June 30, 1994
- --------------------- FIRST UNION ---------------------
- --------------------- EQUITY AND INCOME ---------------------
FUNDS
Portfolios of First Union Funds
TRUST SHARES
- --------------------------------------------------------------------------------
P R O S P E C T U S
February 28, 1994
First Union Funds (the "Trust") is a mutual fund with 15 portfolios, offering a
variety of investment opportunities. The Trust currently includes seven
diversified Equity and Income Funds, three diversified Money Market Funds, and
five non-diversified Single State Municipal Bond Funds. They are:
Equity and Income Funds
.First Union Balanced Portfolio;
.First Union Fixed Income Portfolio;
. First Union High Grade Tax Free Portfolio (formerly, First Union Insured Tax
Free Portfolio);
. First Union Managed Bond Portfolio;
. First Union U.S. Government Portfolio;
. First Union Utility Portfolio; and
. First Union Value Portfolio.
Money Market Funds
. First Union Money Market Portfolio;
. First Union Tax Free Money Market Portfolio; and
. First Union Treasury Money Market Portfolio.
Single State Municipal Bond Funds
. First Union Florida Municipal Bond Portfolio;
. First Union Georgia Municipal Bond Portfolio;
. First Union North Carolina Municipal Bond Portfolio;
. First Union South Carolina Municipal Bond Portfolio; and
. First Union Virginia Municipal Bond Portfolio.
This prospectus provides you with information specific to the Trust Shares of
First Union Equity and Income Funds. It concisely describes the
information which you should know before investing in Trust Shares of any of
the First Union Equity and Income Funds. Please read this prospectus carefully
and keep it for future reference.
You can find more detailed information about each First Union Equity and Income
Fund in its Statement of Additional Information dated February 28, 1994, filed
with the Securities and Exchange Commission and incorporated by reference into
this prospectus. The Statements are available free of charge by writing to
First Union Funds, Federated Investors Tower, Pittsburgh, PA 15222-3779 or by
calling 1-800-326-2584.
The Trust is sponsored and distributed by third parties independent of First
Union National Bank of North Carolina ("First Union"). The value of investment
company shares offered by this prospectus fluctuates daily.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF FIRST
UNION, ARE NOT ENDORSED OR GUARANTEED BY FIRST UNION, AND ARE NOT INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
FOR A DESCRIPTION OF THE NATURE AND LIMITATIONS OF MUNICIPAL BOND INSURANCE,
SEE "FIRST UNION HIGH GRADE TAX FREE PORTFOLIO--MUNICIPAL BOND INSURANCE," PAGE
19.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- ------------------------- TABLE OF -------------------------
- ------------------------- CONTENTS -------------------------
SUMMARY 2 SHAREHOLDER GUIDE 31
- -------------------------------------- --------------------------------------
SUMMARY OF FUND EXPENSES 4 HOW TO BUY SHARES 33
- -------------------------------------- --------------------------------------
FINANCIAL HIGHLIGHTS 6 HOW TO CONVERT YOUR INVESTMENT FROM
- -------------------------------------- ONE FIRST UNION FUND TO ANOTHER
FIRST UNION FUND 34
INVESTMENT OBJECTIVES AND POLICIES 16 --------------------------------------
- --------------------------------------
HOW TO REDEEM SHARES 35
FIRST UNION BALANCED PORTFOLIO 16 --------------------------------------
- --------------------------------------
MANAGEMENT OF FIRST UNION FUNDS 35
FIRST UNION FIXED INCOME PORTFOLIO 17 --------------------------------------
- --------------------------------------
FEES AND EXPENSES 37
FIRST UNION HIGH GRADE TAX FREE --------------------------------------
PORTFOLIO 19
- -------------------------------------- SHAREHOLDER RIGHTS AND PRIVILEGES 38
--------------------------------------
FIRST UNION MANAGED BOND PORTFOLIO 21
- -------------------------------------- DISTRIBUTIONS AND TAXES 39
--------------------------------------
FIRST UNION U.S. GOVERNMENT
PORTFOLIO 22
TAX INFORMATION 40
- -------------------------------------- --------------------------------------
FIRST UNION UTILITY PORTFOLIO 24 OTHER CLASSES OF SHARES 41
- -------------------------------------- --------------------------------------
FIRST UNION VALUE PORTFOLIO 26 ADDRESSES Inside Back Cover
- -------------------------------------- --------------------------------------
OTHER INVESTMENT POLICIES 27
- --------------------------------------
- ------------------------- SUMMARY -------------------------
- ------------------------- -------------------------
DESCRIPTION OF THE TRUST
First Union Funds is an open-end, management investment company, established as
a Massachusetts business trust under a Declaration of Trust dated August 30,
1984. The Trust currently consists of 15 portfolios, each representing a
different First Union Fund. Each Equity and Income Fund, except First Union
Managed Bond Portfolio, is divided into three classes of shares: Class B
Investment Shares ("Class B Shares"), Class C Investment Shares ("Class C
Shares"), and Trust Shares. Trust Shares are designed primarily for
institutional investors (banks, corporations, and fiduciaries). Class B and
Class C Shares are sold to individuals and other customers of First Union (the
"Adviser"). First Union Managed Bond Portfolio presently offers only Trust
Shares. This prospectus relates only to Trust Shares ("Shares") of First Union
Equity and Income Funds (collectively, the "Funds").
THE FUNDS AND OBJECTIVES
As of the date of this prospectus, Shares are offered in the following seven
Funds:
. FIRST UNION BALANCED PORTFOLIO ("BALANCED FUND")--seeks to produce long-term
total return through capital appreciation, dividends, and interest income;
. FIRST UNION FIXED INCOME PORTFOLIO ("FIXED INCOME FUND")--seeks to provide a
high level of current income by investing in a broad range of investment
grade debt securities, with capital growth as a secondary objective;
. FIRST UNION HIGH GRADE TAX FREE PORTFOLIO ("HIGH GRADE TAX FREE FUND")--
seeks to provide a high level of federally tax-free income that is
consistent with preservation of capital;
. FIRST UNION MANAGED BOND PORTFOLIO ("MANAGED BOND FUND")--seeks to achieve
total return;
. FIRST UNION U.S. GOVERNMENT PORTFOLIO ("U.S. GOVERNMENT FUND")--seeks a high
level of current income consistent with stability of principal;
. FIRST UNION UTILITY PORTFOLIO ("UTILITY FUND")--seeks high current income
and moderate capital appreciation; and
. FIRST UNION VALUE PORTFOLIO ("VALUE FUND")--seeks long-term capital growth,
with current income as a secondary objective.
INVESTMENT MANAGEMENT
The Funds are advised by First Union, through its Capital Management Group.
First Union has responsibility for investment research and supervision of the
Funds, in addition to the purchase or sale of portfolio instruments, for which
it receives an annual fee.
PURCHASING AND REDEEMING SHARES
For information on purchasing Trust Shares of any of the Funds, please refer to
the Shareholder Guide section entitled "How to Buy Shares." Redemption
information may be found under "How to Redeem Shares."
RISK FACTORS
Investors should be aware of the following general observations: The market
value of fixed-income securities, which constitute a major part of the
investments of several of the Funds described in this prospectus, may vary
inversely in response to changes in prevailing interest rates. The foreign
securities in which several Funds may invest may be subject to certain risks in
addition to those inherent in U.S. investments. One or more Funds may make
certain investments and employ certain investment techniques that involve other
risks, including entering into repurchase agreements, lending portfolio
securities and entering into futures contracts and related options as hedges.
These risks and those associated with investing in mortgage-backed securities,
when-issued securities, options and variable rate securities are described
under "Investment Objectives and Policies" for each Fund and "Other Investment
Policies."
- ------------------------ SUMMARY OF ------------------------
- ------------------------ FUND EXPENSES ------------------------
FIRST UNION EQUITY AND INCOME FUNDS TRUST SHARES
<TABLE>
<CAPTION>
Fixed High Grade Managed U.S.
Balanced Income Tax Free Bond Government Utility Value
Fund Fund Fund Fund Fund Fund Fund
-------- ------ ---------- ------- ---------- ------- -----
TRUST SHARES--
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Load 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
Deferred Sales Load (as
a percentage of origi-
nal purchase price or
redemption proceeds, as
applicable)............ None None None None None None None
Redemption Fee (as a
percentage of amount
redeemed, if
applicable)............ None None None None None None None
Exchange Fee............ None None None None None None None
ANNUAL TRUST SHARES
OPERATING EXPENSES*
(As a percentage of
average net assets)
Management Fee (after
waiver) (1)............ 0.50% 0.50% 0.49% 0.50% 0.49% 0.00% 0.50%
12b-1 Fees.............. None None None None None None None
Total Other Expenses
(after waiver) (2)..... 0.16% 0.16% 0.28% 0.20% 0.25% 0.92% 0.17%
Total Trust Shares Op-
erating Expenses (3)... 0.66% 0.66% 0.77% 0.70% 0.74% 0.92% 0.67%
</TABLE>
(1) The management fees of High Grade Tax Free, U.S. Government and Utility
Funds have been reduced to reflect the voluntary waivers by the Adviser. The
Adviser may terminate these voluntary waivers at any time at its sole
discretion. The maximum management fee for High Grade Tax Free, U.S.
Government and Utility Funds is 0.50%.
(2) Total Other Expenses for Managed Bond Fund would have been 0.23%, absent
the voluntary waiver by the administrator of certain of its fees. Total other
expenses for Utility Fund are estimated to be 1.66% absent the anticipated
voluntary waiver by the administrator. The administrator may terminate these
voluntary waivers at any time at its sole discretion.
(3) The total Trust Shares Operating Expenses for Managed Bond Fund would have
been 0.73%, absent the voluntary waiver described above in note 2.
Total Trust Shares Operating Expenses for High Grade Tax Free and Utility
Funds are estimated to be 0.78% and 2.16%, respectively absent the anticipated
voluntary waivers described in notes 1 and 2.
Fixed Income, U.S. Government and Value Funds' Trust Shares Annual Operating
Expenses were 0.66%, 0.48% and 0.65%, respectively, for the year ended
December 31, 1993. Total Trust Shares Operating Expenses for U.S. Government
Fund, absent the voluntary waiver of the management fee by the Adviser, were
0.79% for the year ended December 31, 1993.
The Annual Trust Shares Operating Expenses, except for the Balanced, High
Grade Tax Free, Managed Bond, and Utility Funds, in the table above, are based
on expenses expected during the fiscal year ending December 31, 1994. Total
Trust Shares expected operating expenses for U.S. Government Fund would be
0.75%, absent the voluntary waiver described above in note 1.
Fixed Income and Value Funds are no longer allocating certain expenses as
incurred by each class.
* High Grade Tax Free, U.S. Government and Utility Funds' expenses in this
table are estimated based on average expenses expected to be incurred during
the fiscal year ending December 31, 1994. During the course of this period,
expenses may be more or less than the average amount shown.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUNDS WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS
AND EXPENSES, SEE "FEES AND EXPENSES." WIRE-TRANSFERRED REDEMPTIONS OF LESS
THAN $5,000 MAY BE SUBJECT TO ADDITIONAL FEES.
- ------------------------ SUMMARY OF ------------------------
- ------------------------ FUND EXPENSES ------------------------
(CONTINUED)
FIRST UNION EQUITY AND INCOME FUNDS TRUST SHARES
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming
(1) a 5% annual return and (2) redemption at
the end of each time period.
The Funds charge no redemption fees for Trust
Shares.
Balanced Fund................................ $7 $21 $37 $82
Fixed Income Fund............................ $7 $21 $37 $82
High Grade Tax Free Fund..................... $8 $25 NA NA
Managed Bond Fund............................ $7 $22 $39 $87
U.S. Government Fund......................... $8 $24 NA NA
Utility Fund................................. $9 $29 NA NA
Value Fund................................... $7 $21 $37 $83
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE FOR TRUST SHARES OF HIGH GRADE TAX FREE, U.S. GOVERNMENT, AND UTILITY
FUNDS IS BASED ON ESTIMATED DATA FOR THE FISCAL YEAR ENDING DECEMBER 31, 1994.
The information set forth in the foregoing table and example relates only to
Trust Shares of the Funds. The Funds (other than Managed Bond Fund) also offer
two additional classes of shares called Class B Shares and Class C Shares. In
general, all expenses are allocated based upon daily net assets of each class.
Class B Shares are subject to a 12b-1 fee of .25 of 1% and Class C Shares are
subject to a 12b-1 fee of .75 of 1%. In addition, Class B Shares bear a
maximum front-end sales load of 4.00% while Class C Shares bear a maximum
contingent deferred sales load of 4.00%. See "Fees and Expenses" and "Other
Classes of Shares."
- ------------------------- FINANCIAL -------------------------
- ------------------------- HIGHLIGHTS -------------------------
FIRST UNION BALANCED PORTFOLIO
SUPPLEMENTARY INFORMATION
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by KPMG Peat Marwick, the Fund's
independent auditors. Their report, dated February 11, 1994, on the Fund's
Financial Statements for the year ended December 31, 1993, and on the following
table for each of the periods presented, is included in the Trust's Annual
Report, which is incorporated herein by reference. This table should be read in
conjunction with the Fund's Financial Statements and notes thereto, contained
in the Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
TRUST SHARES CLASS B INVESTMENT SHARES
---------------------------- ---------------------------------
YEAR ENDED YEAR ENDED
---------------------------- ---------------------------------
12/31/93 12/31/92 12/31/91** 12/31/93 12/31/92 12/31/91***
- ------------------------ -------- -------- ---------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF PERIOD $11.41 $11.02 $10.00 $11.41 $11.02 $10.00
- ------------------------
INCOME FROM INVESTMENT
OPERATIONS
- ------------------------
Net investment income 0.45 0.46 0.36 0.419 0.42 0.30
- ------------------------
Net realized and
unrealized gain (loss) 0.75 0.42 1.03 0.755 0.43 1.08
on investments ------ ------ ------ ------- ------ ------
- ------------------------
Total from investment 1.20 0.88 1.39 1.174 0.85 1.38
operations ------ ------ ------ ------- ------ ------
- ------------------------
LESS DISTRIBUTIONS
- ------------------------
Dividends to
shareholders from net
investment income (0.45) (0.45) (0.36) (0.419) (0.42) (0.35)
- ------------------------
Distributions to share-
holders from net real-
ized gain on investment
transactions (0.09) (0.04) (0.01) (0.091) (0.04) (0.01)
- ------------------------
Distributions in excess
of net investment
income -- -- -- (0.004)(b) -- --
- ------------------------ ------ ------ ------ ------- ------ ------
Total distributions (0.54) (0.49) (0.37) (0.514) (0.46) (0.36)
- ------------------------ ------ ------ ------ ------- ------ ------
NET ASSET VALUE, END OF
PERIOD $12.07 $11.41 $11.02 $12.07 $11.41 $11.02
- ------------------------ ------ ------ ------ ------- ------ ------
TOTAL RETURN* 10.68% 8.21% 15.02% 10.41% 7.94% 11.75%
- ------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------
Expenses 0.66% 0.66% 0.68%(a) 0.91% 0.91% 0.92%(a)
- ------------------------
Net investment income 3.86% 4.20% 4.86%(a) 3.61% 3.93% 4.38%(a)
- ------------------------
SUPPLEMENTAL DATA
- ------------------------
Net assets, end of
period (000 omitted) $760,147 $520,232 $247,472 $35,032 $17,408 $334
- ------------------------
Portfolio turnover rate 19% 12% 19% 19% 12% 19%
- ------------------------
</TABLE>
(See notes on page 7.) (CONTINUED)
- ------------------------- FINANCIAL -------------------------
- ------------------------- HIGHLIGHTS -------------------------
(CONTINUED)
FIRST UNION BALANCED PORTFOLIO
<TABLE>
<CAPTION>
CLASS C
INVESTMENT
SHARES
----------
YEAR ENDED
----------
12/31/93+
- ---------------------------------------- ----------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.54
- ----------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------
Net investment income 0.34
- ----------------------------------------
Net realized and unrealized gain (loss) 0.65
on investments ------
- ----------------------------------------
Total from investment operations 0.99
- ---------------------------------------- ------
LESS DISTRIBUTIONS
- ----------------------------------------
Dividends to shareholders from net
investment income (0.34)
- ----------------------------------------
Distributions to shareholders from net
realized gain on investment transac-
tions (0.09)
- ----------------------------------------
Distributions in excess of net
investment income (0.02)(b)
- ---------------------------------------- ------
Total distributions (0.45)
- ---------------------------------------- ------
NET ASSET VALUE, END OF PERIOD $12.08
- ---------------------------------------- ------
TOTAL RETURN* 8.72%
- ----------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------
Expenses 1.41%(a)
- ----------------------------------------
Net investment income 3.09%(a)
- ----------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------
Net assets, end of period (000 omitted) $65,475
- ----------------------------------------
Portfolio turnover rate 19%
- ----------------------------------------
</TABLE>
* Based on net asset value, which does not reflect the sales load or contin-
gent deferred sales charge, if applicable.
** Reflects operations for the period from April 1, 1991 (commencement of op-
erations) to December 31, 1991.
*** Reflects operations for the period from June 10, 1991 (commencement of op-
erations) to December 31, 1991.
+ Reflects operations for the period from January 26, 1993 (commencement of
operations) to December 31, 1993.
(a) Computed on an annualized basis.
(b) Distributions in excess of net investment income for the year ended Decem-
ber 31, 1993 were the result of certain book and tax timing differences.
These distributions do not represent a return of capital for federal in-
come tax purposes.
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE TRUST'S
ANNUAL REPORT, DATED DECEMBER 31, 1993, WHICH CAN BE OBTAINED FREE OF CHARGE.
- ------------------------- FINANCIAL -------------------------
- ------------------------- HIGHLIGHTS -------------------------
FIRST UNION FIXED INCOME PORTFOLIO
SUPPLEMENTARY INFORMATION
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by KPMG Peat Marwick, the Fund's
independent auditors. Their report, dated February 11, 1994, on the Fund's
Financial Statements for the year ended December 31, 1993, and on the following
table for each of the periods presented, is included in the Trust's Annual
Report, which is incorporated herein by reference. This table should be read in
conjunction with the Fund's Financial Statements and notes thereto, contained
in the Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
TRUST SHARES CLASS B INVESTMENT SHARES
--------------------------- -----------------------------------------------------------
PERIOD ENDED PERIOD ENDED
--------------------------- -----------------------------------------------------------
12/31/93 12/31/92 12/31/91* 12/31/93 12/31/92 12/31/91 12/31/90+ 3/31/90 3/31/89++
- ------------------------ -------- -------- --------- -------- -------- -------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $10.41 $10.54 $10.06 $10.41 $10.54 $ 9.99 $9.72 $9.50 $9.70
- ------------------------
INCOME FROM INVESTMENT
OPERATIONS
- ------------------------
Net investment income 0.69 0.70 0.71 0.65 0.71 0.73 0.55 0.79 0.10
- ------------------------
Net realized and
unrealized gain (loss) 0.19 (0.02) 0.56 0.19 (0.06) 0.60 0.24 0.20 (0.14)
on investments ------ ------ ------ ------ ------ ------ ----- ----- -----
- ------------------------
Total from investment 0.88 0.68 1.27 0.84 0.65 1.33 0.79 0.99 (0.04)
operations ------ ------ ------ ------ ------ ------ ----- ----- -----
- ------------------------
LESS DISTRIBUTIONS
- ------------------------
Dividends to
shareholders from net
investment income (0.68) (0.70) (0.71) (0.65) (0.67) (0.70) (0.52) (0.77) (0.16)
- ------------------------
Distributions to share-
holders from net real-
ized gain on investment
transactions (0.18) (0.11) (0.07) (0.18) (0.11) (0.07) -- -- --
- ------------------------
Distributions in excess
of net investment in- -- -- (0.01)(a) -- -- (0.01)(a) -- -- --
come ------ ------ ------ ------ ------ ------ ----- ----- -----
- ------------------------
Total distributions (0.86) (0.81) (0.79) (0.83) (0.78) (0.78) (0.52) (0.77) (0.16)
- ------------------------ ------ ------ ------ ------ ------ ------ ----- ----- -----
NET ASSET VALUE, $10.43 $10.41 $10.54 $10.42 $10.41 $10.54 $9.99 $9.72 $9.50
END OF PERIOD ------ ------ ------ ------ ------ ------ ----- ----- -----
- ------------------------
TOTAL RETURN** 8.67% 6.64% 13.80% 8.29% 6.39% 13.74% 8.31% 10.51% (0.31%)
- ------------------------
RATIOS TO AVERAGE NET
ASSETS
- ------------------------
Expenses 0.66% 0.69% 0.69%(c) 0.93% 0.90% 0.80% 1.01%(c) 1.00% 1.78%(c)
- ------------------------
Net investment income 6.41% 6.67% 7.12%(c) 6.15% 6.79% 7.30% 7.53%(c) 7.57% 6.10%(c)
- ------------------------
Expense waiver/
reimbursement (b) -- -- 0.07%(c) -- -- 0.09% 0.81%(c) 0.50% --
- ------------------------
SUPPLEMENTAL DATA
- ------------------------
Net assets, end of
period (000 omitted) $376,445 $324,068 $256,254 $22,865 $21,488 $17,680 $11,765 $6,496 $11,580
- ------------------------
Portfolio turnover rate 73% 66% 55% 73% 66% 55% 27% 32% 18%
- ------------------------
</TABLE>
(See notes on page 9.) (CONTINUED)
- ------------------------- FINANCIAL -------------------------
- ------------------------- HIGHLIGHTS -------------------------
(CONTINUED)
FIRST UNION FIXED INCOME PORTFOLIO
<TABLE>
<CAPTION>
CLASS C
INVESTMENT
SHARES
-----------
PERIOD ENDED
------------
12/31/93+++
- ------------------------------- -----------
<S> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $10.57
- -------------------------------
INCOME FROM INVESTMENT OPERA-
TIONS
- -------------------------------
Net investment income 0.58
- -------------------------------
Net realized and unrealized 0.05
gain (loss) on investments ------
- -------------------------------
Total from investment 0.63
operations ------
- -------------------------------
LESS DISTRIBUTIONS
- -------------------------------
Dividends to shareholders from
net investment income (0.58)
- -------------------------------
Distributions to shareholders
from net realized gain on in-
vestments (0.18)
- -------------------------------
Distributions in excess of net --
investment income ------
- -------------------------------
Total distributions (0.76)
- ------------------------------- ------
NET ASSET VALUE, END OF PERIOD $10.44
- ------------------------------- ------
TOTAL RETURN** 6.08%
- -------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------
Expenses 1.57%(c)
- -------------------------------
Net investment income 5.42%(c)
- -------------------------------
Expense waiver/reimbursement
(b) --
- -------------------------------
SUPPLEMENTAL DATA
- -------------------------------
Net assets, end of period (000
omitted) $8,876
- -------------------------------
Portfolio turnover rate 73%
- -------------------------------
</TABLE>
* Reflects operations for the period from January 4, 1991 (commencement of
operations) to December 31, 1991.
** Based on net asset value, which does not reflect sales load or contingent
deferred sales charge, if applicable.
+ Nine months ended December 31, 1990.
++ Reflects operations for the period from January 28, 1989 (commencement of
operations) to March 31, 1989.
+++ Reflects operations for the period from January 26, 1993 (commencement of
operations) to December 31, 1993.
(a) Distributions in excess of net investment income for the year ended
December 31, 1991, were a result of certain book and tax timing
differences. These differences did not represent a return of capital for
federal income tax purposes for the year ended December 31, 1991.
(b) This voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
(c) Computed on an annualized basis.
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE TRUST'S
ANNUAL REPORT, DATED DECEMBER 31, 1993, WHICH CAN BE OBTAINED FREE OF CHARGE.
- ------------------------ FINANCIAL ------------------------
- ------------------------ HIGHLIGHTS ------------------------
FIRST UNION HIGH GRADE TAX FREE PORTFOLIO
(FORMERLY, FIRST UNION INSURED TAX FREE PORTFOLIO)
SUPPLEMENTARY INFORMATION
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by KPMG Peat Marwick, the Fund's
independent auditors. Their report, dated February 11, 1994, on the Fund's
Financial Statements for the year ended December 31, 1993, and on the
following table for each of the periods presented, is included in the Trust's
Annual Report, which is incorporated herein by reference. This table should be
read in conjunction with the Fund's Financial Statements and notes thereto,
contained in the Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
CLASS C INVESTMENT
CLASS B INVESTMENT SHARES (C) SHARES (C)
------------------------------------ -------------------
YEAR ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 31, 1993 DECEMBER 31, 1992* DECEMBER 31, 1993**
- ------------------------ ----------------- ------------------ -------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF PERIOD $10.42 $10.00 $10.42
- ------------------------
INCOME FROM INVESTMENT
OPERATIONS
- ------------------------
Net investment income 0.54 0.51 0.47
- ------------------------
Net realized and
unrealized gain on in- 0.81 0.42 0.81
vestments ------ ------ ------
- ------------------------
Total from investment
operations 1.35 0.93 1.28
- ------------------------
LESS DISTRIBUTIONS
- ------------------------
Dividends to sharehold-
ers from net investment
income (0.54) (0.51) (0.47)
- ------------------------
Distributions to share-
holders from net real-
ized gain on (0.07) -- (0.07)
investment transactions -------- ----- -------
- ------------------------
Total distributions (0.61) (0.51) (0.54)
- ------------------------ ------- ------- -------
NET ASSET VALUE, END OF $11.16 $10.42 $11.16
PERIOD ------ ------ ------
- ------------------------
TOTAL RETURN*** 13.25% 9.37% 12.41%
- ------------------------
RATIOS TO AVERAGE NET
ASSETS
- ------------------------
Expenses 0.85% 0.49%(a) 1.35%(a)
- ------------------------
Net investment income 4.99% 5.79%(a) 4.44%(a)
- ------------------------
Expense
waiver/reimbursement
(b) 0.22% 0.62%(a) 0.22%(a)
- ------------------------
SUPPLEMENTAL DATA
- ------------------------
Net assets, end of
period (000 omitted) $101,352 $90,738 $41,030
- ------------------------
Portfolio turnover rate 14% 7% 14%
- ------------------------
</TABLE>
* Reflects operations for the period from February 21, 1992 (commencement of
operations) to December 31, 1992.
** Reflects operations for the period from January 11, 1993 (commencement of
operations) to December 31, 1993.
*** Based on net asset value, which does not reflect the sales load or contin-
gent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
(c) Trust Shares were not being offered as of December 31, 1993. Accordingly,
there are no Financial Highlights for such shares. The Financial High-
lights presented above are historical information for Class B and Class C
Investment Shares of the Fund.
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE TRUST'S
ANNUAL REPORT, DATED DECEMBER 31, 1993, WHICH CAN BE OBTAINED FREE OF CHARGE.
- ------------------------ FINANCIAL ------------------------
- ------------------------ HIGHLIGHTS ------------------------
FIRST UNION MANAGED BOND PORTFOLIO
SUPPLEMENTARY INFORMATION
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by KPMG Peat Marwick, the Fund's
independent auditors. Their report, dated February 11, 1994, on the Fund's
Financial Statements for the year ended December 31, 1993, and on the following
table for each of the periods presented, is included in the Trust's Annual
Report, which is incorporated herein by reference. This table should be read in
conjunction with the Fund's Financial Statements and notes thereto, contained
in the Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
TRUST SHARES(C)
--------------------------------
YEAR ENDED
DECEMBER 31 PERIOD ENDED
------------------ ------------
1993 1992 12/31/91*
- --------------------------------------------- -------- -------- ------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.34 $10.60 $10.00
- ---------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------
Net investment income 0.65 0.66 0.49
- ---------------------------------------------
Net realized and unrealized gain (loss) on
investments 0.43 (0.08) 0.63
- --------------------------------------------- ------ ------- ------
Total from investment operations 1.08 0.58 1.12
- --------------------------------------------- ------ ------ ------
LESS DISTRIBUTIONS
- ---------------------------------------------
Dividends to shareholders from net invest-
ment income (0.65) (0.66) (0.49)
- ---------------------------------------------
Distributions to shareholders from net real-
ized gains on investment transactions (0.31) (0.18) (0.03)
- --------------------------------------------- ------- ------- -------
Total distributions (0.96) (0.84) (0.52)
- --------------------------------------------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $10.46 $10.34 $10.60
- --------------------------------------------- ------ ------ ------
TOTAL RETURN** 10.59% 5.65% 11.63%
- ---------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------
Expenses 0.70% 0.70% 0.70%(a)
- ---------------------------------------------
Net investment income 6.02% 6.30% 6.57%(a)
- ---------------------------------------------
Expenses waiver/reimbursement (b) 0.03% 0.05% --
- ---------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------
Net assets, end of period (000 omitted) $109,067 $121,655 $65,638
- ---------------------------------------------
Portfolio turnover rate 53% 56% 17%
- ---------------------------------------------
</TABLE>
* Reflects operations for the period from April 1, 1991 (commencement of oper-
ations) to December 31, 1991.
** Based on net asset value, which does not reflect sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This expense decrease is reflected in both the expenses and net investment
income ratios shown above.
(c) Class B and Class C Investment Shares were not being offered as of December
31, 1993. Accordingly, there are no Financial Highlights for such shares.
The Financial Highlights presented above are historical information for
Trust Shares of the Fund.
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE TRUST'S
ANNUAL REPORT, DATED DECEMBER 31, 1993, WHICH CAN BE OBTAINED FREE OF CHARGE.
- ------------------------ FINANCIAL ------------------------
- ------------------------ HIGHLIGHTS ------------------------
FIRST UNION U.S. GOVERNMENT PORTFOLIO
SUPPLEMENTARY INFORMATION
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by KPMG Peat Marwick, the Fund's
independent auditors. Their report, dated February 11, 1994, on the Fund's
Financial Statements for the year ended December 31, 1993, and on the following
table for each of the periods presented, is included in the Trust's Annual
Report, which is incorporated herein by reference. This table should be read in
conjunction with the Fund's Financial Statements and notes thereto, contained
in the Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
CLASS B CLASS C
TRUST INVESTMENT INVESTMENT
SHARES SHARES SHARES
------------ ------------ ------------
PERIOD ENDED PERIOD ENDED PERIOD ENDED
12/31/93* 12/31/93** 12/31/93**
- --------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PE-
RIOD $10.25 $10.00 $10.00
- ---------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net investment income .25 .68 .63
- ---------------------------------
Net realized and unrealized gain
(loss) on investments (.20) .05 .05
- --------------------------------- ------- ------ ------
Total from investment operations .05 .73 .68
- ---------------------------------
LESS DISTRIBUTIONS
- ---------------------------------
Dividends to shareholders from
net investment income (.25) (.68) (.63)
- --------------------------------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $10.05 $10.05 $10.05
- --------------------------------- ------ ------ ------
TOTAL RETURN*** 0.49% 7.43% 6.91%
- ---------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------
Expenses .48%(a) .69%(a) 1.19%(a)
- ---------------------------------
Net investment income 7.20%(a) 6.93%(a) 6.44%(a)
- ---------------------------------
Expense adjustment (b) .31%(a) .31%(a) .31%(a)
- ---------------------------------
SUPPLEMENTAL DATA
- ---------------------------------
Net assets, end of period (000
omitted) $14,486 $38,851 236,696
- ---------------------------------
Portfolio turnover rate 39% 39% 39%
- ---------------------------------
</TABLE>
* Reflects operations for the period from September 2, 1993 (commencement of
operations) to December 31, 1993.
** Reflects operations for the period from January 11, 1993 (commencement of
operations) to December 31, 1993.
*** Based on net asset value, which does not reflect the sales load or contin-
gent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) The voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE TRUST'S
ANNUAL REPORT DATED DECEMBER 31, 1993, WHICH CAN BE OBTAINED FREE OF CHARGE.
- ------------------------ FINANCIAL ------------------------
- ------------------------ HIGHLIGHTS ------------------------
FIRST UNION VALUE PORTFOLIO
SUPPLEMENTARY INFORMATION
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by KPMG Peat Marwick, the Fund's
independent auditors. Their report, dated February 11, 1994, on the Fund's
Financial Statements for the year ended December 31, 1993, and on the
following table for each of the periods presented, is included in the Trust's
Annual Report, which is incorporated herein by reference. This table should be
read in conjunction with the Fund's Financial Statements and notes thereto,
contained in the Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
TRUST SHARES
----------------------------------
PERIOD ENDED
----------------------------------
12/31/93 12/31/92 12/31/91*
- ------------------------------------------- -------- -------- -----------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $17.11 $17.08 $14.28
- -------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------
Net investment income 0.52 0.49 0.47
- -------------------------------------------
Net realized and unrealized gain (loss) on
investments 1.12 0.90 3.53
- ------------------------------------------- ------ ------ ------
Total from investment operations 1.64 1.39 4.00
- ------------------------------------------- ------ ------ ------
LESS DISTRIBUTIONS
- -------------------------------------------
Dividends to shareholders from net invest-
ment income (0.52) (0.49) (0.47)
- -------------------------------------------
Distributions to shareholders form net re-
alized gain on investment transactions (0.58) (0.87) (0.73)
- -------------------------------------------
Distributions in excess of net investment
income (0.02)(c) -- --
- ------------------------------------------- ------- ------ ------
Total distributions (1.12) (1.36) (1.20)
- ------------------------------------------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD $17.63 $17.11 $17.08
- ------------------------------------------- ------ ------ ------
TOTAL RETURN** 9.71% 8.31% 25.41%
- -------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------
Expenses 0.65% 0.68% 0.69%(b)
- -------------------------------------------
Net investment income 2.98% 2.90% 3.04%(b)
- -------------------------------------------
Expense waiver/reimbursement (a) -- 0.01% 0.08%(b)
- -------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------
Net assets, end of period (000 omitted) $463,087 $326,154 271,391
- -------------------------------------------
Portfolio turnover rate 46% 56% 69%
- -------------------------------------------
</TABLE>
* For the period from January 3, 1991 (commencement of operations) to Decem-
ber 31, 1991.
** Based on net asset value, which does not reflect the sales load or contin-
gent deferred sales charge, if applicable.
(a) This voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
(b) Computed on an annualized basis.
(c) Distributions in excess of net investment income for the period ended De-
cember 31, 1993, were the result of certain book and tax timing differ-
ences. These distributions do not represent a return of capital for fed-
eral income tax purposes.
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE TRUST'S
ANNUAL REPORT, DATED DECEMBER 31, 1993, WHICH CAN BE OBTAINED FREE OF CHARGE.
- ------------------------ FINANCIAL ------------------------
- ------------------------ HIGHLIGHTS ------------------------
FIRST UNION VALUE PORTFOLIO
SUPPLEMENTARY INFORMATION
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by KPMG Peat Marwick, the Fund's
independent auditors. Their report, dated February 11, 1994, on the Fund's
Financial Statements for the year ended December 31, 1993, and on the following
table for each of the periods presented, is included in the Trust's Annual
Report, which is incorporated herein by reference. This table should be read in
conjunction with the Fund's Financial Statements and notes thereto, contained
in the Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
CLASS B INVESTMENT SHARES
-----------------------------------------------------------------------------------------------
PERIOD ENDED
-----------------------------------------------------------------------------------------------
12/31/93 12/31/92 12/31/91 12/31/90** 3/31/90 3/31/89 3/31/88 3/31/87 3/31/86 3/31/85***
- ------------------------ -------- -------- -------- ---------- ------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $17.11 $17.08 $14.61 $15.12 $14.45 $12.83 $14.66 $12.35 $10.04 $10.00
- ------------------------
INCOME FROM INVESTMENT
OPERATIONS
- ------------------------
Net investment income 0.47 0.44 0.46 0.36 0.54 0.36 0.26 0.15 0.19 0.04
- ------------------------
Net realized and
unrealized
gain/(loss) on invest-
ments 1.10 0.89 3.17 (0.44) 1.70 2.11 (1.30) 2.38 2.32 0.00
- ------------------------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------
Total from investment
operations 1.57 1.33 3.63 (0.08) 2.24 2.47 (1.04) 2.53 2.51 0.04
- ------------------------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------
LESS DISTRIBUTIONS
- ------------------------
Dividends to sharehold-
ers from net investment
income (0.47) (0.43) (0.43) (0.36) (0.57) (0.38) (0.26) (0.13) (0.20) (0.00)
- ------------------------
Distribution to share-
holders from net real-
ized gain on investments (0.58) (0.87) (0.73) (0.02) (1.00) (0.47) (0.53) (0.09) (0.00) (0.00)
- ------------------------
Distributions in excess
of
net investment income -- -- -- (0.05)(a) -- -- -- -- -- --
- ------------------------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------
Total distributions (1.05) (1.30) (1.16) (0.43) (1.57) (0.85) (0.79) (0.22) (0.20) (0.00)
- ------------------------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------
NET ASSET VALUE,
END OF PERIOD $17.63 $17.11 $17.08 $14.61 $15.12 $14.45 $12.83 $14.66 $12.35 $10.04
- ------------------------ ------ ------ ------ ------ ------ ------ ------ ------- ------ ------
TOTAL RETURN* 9.31% 7.96% 25.11% (0.51%) 15.54% 19.73% (7.14) 20.81% 25.29% (0.40%)
- ------------------------
RATIOS TO AVERAGE NET
ASSETS
- ------------------------
Expenses 0.99% 1.01% 0.96% 1.39%(b) 1.55% 1.71% 1.74% 1.97% 2.00% 2.00%(b)
- ------------------------
Net investment income 2.63% 2.57% 2.78% 3.28%(b) 3.42% 2.72% 1.92% 1.41% 2.34% 6.47%(b)
- ------------------------
Expense
waiver/reimbursement (d) -- 0.01% 0.09% -- -- -- -- -- -- --
- ------------------------
SUPPLEMENTAL DATA
- ------------------------
Net assets, end of pe-
riod (000 omitted) $189,983 $169,310 $135,565 $104,637 $95,995 $83,121 $21,914 $23,221 $5,595 $100
- ------------------------
Portfolio turnover
rate**** 46% 56% 69% 13% 11% 24% 16% 20% 20% 0%
- ------------------------
</TABLE>
(See notes on page 15.) (CONTINUED)
- ------------------------ FINANCIAL ------------------------
- ------------------------ HIGHLIGHTS ------------------------
(CONTINUED)
FIRST UNION VALUE PORTFOLIO
<TABLE>
<CAPTION>
CLASS C
INVESTMENT
SHARES
----------
PERIOD ENDED
------------
12/31/93+
- ------------------------------- ----------
<S> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $17.24
- -------------------------------
INCOME FROM INVESTMENT OPERA-
TIONS
- -------------------------------
Net investment income 0.35
- -------------------------------
Net realized and unrealized
gain/(loss) on investments 1.01
- ------------------------------- -------
Total from investment
operations 1.36
- ------------------------------- -------
LESS DISTRIBUTIONS
- -------------------------------
Dividends to shareholders from
net investment income (0.35)
- -------------------------------
Distribution to shareholders
from net realized gain on in-
vestments (0.58)
- -------------------------------
Distributions in excess of net
investment income (0.04)(c)
- ------------------------------- -------
Total distributions (0.97)
- ------------------------------- -------
NET ASSET VALUE, END OF PERIOD $17.63
- ------------------------------- -------
TOTAL RETURN* 7.98%
- -------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------
Expenses 1.48%(b)
- -------------------------------
Net investment income 2.09%(b)
- -------------------------------
Expense waiver/reimbursement
(d) --
- -------------------------------
SUPPLEMENTAL DATA
- -------------------------------
Net assets, end of period (000
omitted) $59,953
- -------------------------------
Portfolio turnover rate**** 46%
- -------------------------------
</TABLE>
* Based on net asset value, which does not reflect the sales load or con-
tingent deferred sales charge, if applicable.
** For the nine months ended December 31, 1990.
***Reflects operations for the period from August 30, 1984 (commencement of
operations) to March 31, 1985.
****Portfolio turnover rate for periods ending on or after March 31, 1986
include certain U.S. government obligations.
+ Reflects operations for the period from February 2, 1993 (commencement of
operations) to December 31, 1993.
(a) Distributions in excess of net investment income for the period ended
December 31, 1990, were a result of certain book and tax timing differ-
ences. These distributions did not represent a return of capital for
federal income tax purposes for the year ended December 31, 1990.
(b) Computed on an annualized basis.
(c) Distributions in excess of net investment income for the period ended
December 31, 1993, were the result of certain book and tax timing dif-
ferences. These distributions do not represent a return of capital for
federal income tax purposes.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE TRUST'S
ANNUAL REPORT, DATED DECEMBER 31, 1993, WHICH CAN BE OBTAINED FREE OF CHARGE.
- ------------------------- INVESTMENT -------------------------
- ------------------------- OBJECTIVES -------------------------
AND POLICIES
First Union Equity and Income Funds provide a broad range of objectives and
policies, intended to offer investment alternatives to a large group of
investors with a wide range of investment objectives.
The investment objectives and policies of each Fund are stated below. Each
Fund's investment objective cannot be changed without shareholder approval.
While there is no assurance that each objective will be achieved, the Funds
will endeavor to do so by following the investment policies detailed below.
Unless otherwise indicated, the investment policies of a Fund may be changed by
the Trust's Board of Trustees ("Trustees") without the approval of
shareholders. Shareholders will be notified before any material change in these
policies becomes effective.
- ------------------------- FIRST UNION -------------------------
- ------------------------- BALANCED -------------------------
PORTFOLIO
Objective: Long-term total return through capital appreciation, dividends, and
interest income.
Invests in: Common and preferred stocks for growth, bonds for stable income
flows.
Suitable for: Investors looking for long-term growth of income and capital from
a portfolio of investment grade equity and fixed income
investments.
Key Benefits: Diversity of investments takes advantage of shifts in market
conditions and relative attractiveness of different types of
securities.
DESCRIPTION OF THE FUND
The Balanced Fund seeks long-term total return through capital appreciation,
dividends, and interest income. The Fund invests primarily in a diversified
portfolio of common and preferred stocks, U.S. government securities, high
grade corporate bonds, and money market instruments. Common and preferred
stocks are utilized for growth while bonds provide stable income flows.
The portion of the Fund's total assets invested in common and preferred stocks
will vary according to the Adviser's assessment of market and economic
conditions and outlook. The asset mix of the Fund will normally range between
40-75% common and preferred stocks, 25-50% fixed income securities (including
some convertible securities), and 0-25% money market instruments. Moderate
shifts between types of assets are made in order to maximize returns or reduce
risk. Over the long-term it is anticipated that the Fund's asset mix will
average 60% in common and preferred stocks and 40% in bonds.
TYPES OF INVESTMENTS
The Fund invests in common, preferred and convertible preferred stocks and
bonds of U.S. companies with at least $100 million in equity, listed on major
stock exchanges or traded over-the-counter. The Fund looks at financial
strength, earnings growth and price in relation to current earnings, dividends,
and book value to identify growth opportunities.
The Fund may also invest in American Depositary Receipts ("ADRs") of foreign
companies traded on the New York or American Stock Exchanges or in the over-
the-counter market.
The Fund will only invest in those bonds, including convertible bonds, which
are rated A or higher by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P"), or which, if unrated, are considered to
be of comparable quality by the Adviser. Bonds are selected based on the
outlook for interest rates and their yield in relation to other bonds of
similar quality and maturity. Bond maturities in the portfolio average less
than twenty years.
The Fund also invests in securities which are either issued or guaranteed by
the U.S. government, its agencies, or instrumentalities. These types of
securities include: direct obligations of the U.S. Treasury such as U.S.
Treasury bills, notes and bonds; and notes, bonds, and discount notes of U.S.
government agencies or instrumentalities such as Federal Home Loan Banks,
Federal National Mortgage Association, Government National Mortgage
Association, Banks for Cooperatives, Federal Farm Credit Banks, Tennessee
Valley Authority, Export-Import Bank of the United States, Commodity Credit
Corporation, Federal Financing Bank, Student Loan Marketing Association,
Federal Home Loan Mortgage Corporation, or National Credit Union
Administration.
Some U.S. government agency obligations are backed by the full faith and credit
of the U.S. Treasury. Others in which the Fund may invest are supported by: the
issuer's right to borrow an amount limited to a specific line of credit from
the U.S. Treasury; discretionary authority of the U.S. government to purchase
certain obligations of an agency or instrumentality; or the credit of the
agency or instrumentality.
The Fund may invest short-term in money market instruments; securities issued
and/or guaranteed by the U.S. government, its agencies, or instrumentalities;
and repurchase agreements collateralized by eligible investments.
- ------------------------- FIRST UNION -------------------------
- ------------------------- FIXED INCOME -------------------------
PORTFOLIO
Objective: High level of current income with capital growth as a secondary
objective.
Invests in: A broad range of investment grade debt securities.
Suitable for: Conservative investors who want attractive income.
Key Benefit: Investors can participate in a broad portfolio of fixed income
securities rather than purchasing a single issue.
DESCRIPTION OF THE FUND
The Fixed Income Fund seeks to provide a high level of current income by
investing primarily in a broad range of investment grade debt securities.
Capital growth is a secondary objective. The Fund will normally invest at least
80% of its assets in debt securities. At least 65% of the value of the
portfolio will be invested in fixed income securities.
TYPES OF INVESTMENTS
The Fund will only invest its assets in securities rated A or higher by Moody's
or S&P, or which, if unrated, are considered to be of comparable quality by the
Adviser.
Debt securities may include fixed, adjustable rate or stripped bonds,
debentures, notes, U.S. government securities, and debt securities convertible
into, or exchangeable for, preferred or common stock. Stated final maturity for
these securities may range up to 30 years. The duration of the securities will
not exceed ten years. The Fund intends to maintain a dollar-weighted average
maturity of five years or less. Market-expected average life will be used for
certain types of issues in computing the average maturity.
In normal market conditions the Fund may invest up to 20% of its assets in
money market instruments consisting of: (1) high grade commercial paper,
including master demand notes; (2) obligations of banks or savings and loan
associations having at least $1 billion in deposits, including certificates of
deposit and bankers' acceptances; (3) A-rated or better corporate obligations;
(4) obligations issued or guaranteed by the U.S. government or by any agency or
instrumentality of the U.S., government as described under the caption "First
Union Balanced Portfolio -- Types of Investments"; and (5) repurchase
agreements collateralized by any security listed above.
The Fund may also invest up to 20% of its assets in foreign securities (either
foreign or U.S. securities traded in foreign markets) in order to provide
further diversification. The Fund may also invest in preferred stock; units
which are debt securities with stock or warrants attached; and obligations
denominated in foreign currencies. In making these decisions, the Adviser will
consider such factors as the condition and growth potential of various
economies and securities markets, currency and taxation considerations and
other pertinent financial, social, national and political factors. (See "Other
Investment Policies" and "Foreign Investments".)
The Fund may elect to use options and financial futures for hedging purposes as
described in "Other Investment Policies--Options and Futures" and in the Fund's
Statement of Additional Information. The Fund may also elect to use currency
exchange contracts to manage exchange rate risk in order to stabilize the U.S.
dollar value of a security that it has agreed to buy or sell.
The Fund will not invest in securities judged to be speculative or of poor
quality.
TEMPORARY INVESTMENTS
For temporary defensive purposes, the Fund may invest up to 100% of its assets
in the money market instruments listed above.
- ------------------------ FIRST UNION ------------------------
- ------------------------ HIGH GRADE TAX FREE ------------------------
PORTFOLIO
(FORMERLY, FIRST UNION INSURED TAX FREE PORTFOLIO)
Objective: High level of federally tax free income that is consistent with
preservation of capital.
Invests in: Insured municipal bonds.
Suitable for: Investors seeking high tax-free monthly income and greater
liquidity.
Key Benefit: Greater diversification and liquidity than purchasing municipal
bonds directly. Pays monthly dividends for those who need current
income.
DESCRIPTION OF THE FUND
The High Grade Tax Free Fund seeks a high level of federally tax free income
that is consistent with preservation of capital. The Fund pursues this
objective by investing primarily in a portfolio of insured municipal bonds. At
least 65% of the value of its total assets will be invested in insured
obligations. The insurance guarantees the timely payment of principal and
interest but not the value of the municipal bonds or shares of the Fund.
As a matter of investment policy, which cannot be changed without the approval
of shareholders, the Fund will normally invest its assets so that at least 80%
of its annual interest income is exempt from federal income taxes (including
the alternative minimum tax). The interest income retains its tax free status
when distributed to the Fund's shareholders.
TYPES OF INVESTMENTS
Municipal bonds are the primary investment of the Fund. Municipal bonds are
debt obligations issued by or on behalf of states, territories, and
possessions of the United States, including the District of Columbia, and
their political subdivisions, agencies, and instrumentalities, the interest
from which is exempt from federal income tax. It is likely that shareholders
who are subject to the alternative minimum tax will be required to include
interest from a portion of the municipal securities owned by the Fund in
calculating the federal individual alternative minimum tax or the federal
alternative minimum tax for corporations.
The municipal bonds in which the Fund may invest are subject to the following
quality standards: rated A or better by Moody's or S&P, or, if unrated,
determined by the Adviser to be of comparable quality to such rated bonds; or,
insured by a municipal bond insurance company which is rated Aaa by Moody's or
AAA by S&P. A description of the rating categories is contained in the
Appendix of the Fund's Statement of Additional Information.
TEMPORARY INVESTMENTS
During periods when, in the Adviser's opinion, a temporary defensive position
in the market is appropriate, the Fund may temporarily invest in short-term
tax exempt or taxable investments. These temporary investments include: notes
issued by or on behalf of municipal or corporate issuers; obligations issued
or guaranteed by the U.S. government, its agencies, or instrumentalities;
other debt securities; commercial paper; bank certificates of deposit; and
repurchase agreements. There are no rating requirements applicable to
temporary investments. However, the Adviser will limit temporary investments
to those it considers to be of comparable quality to the acceptable
investments of the Fund.
Although the Fund is permitted to make taxable, temporary investments, there is
no current intention of generating income subject to federal income tax.
The Fund may also purchase investments having variable rates of interest. One
example is variable amount demand master notes. These notes represent a
borrowing arrangement between a commercial paper issuer (borrower) and an
institutional lender such as the Fund (lender) and are payable upon demand. The
underlying amount of the loan may vary during the course of the contract, as
may the interest on the outstanding amount, depending on a stated short-term
interest rate index.
MUNICIPAL BONDS
Municipal bonds are debt obligations issued by a state or local entity. The
funds raised may support a government's general financial needs or special
projects, such as housing projects or sewer works.
The two principal classifications of municipal bonds are "general obligation"
and "revenue" bonds. General obligation bonds are secured by the issuer's
pledge of its full faith and credit and taxing power for the payment of
principal and interest. Revenue bonds are paid off only with the revenue
generated by the project financed by the bonds or other specified sources of
revenue. For example, in the case of a bridge project, proceeds from the tolls
would go directly to retiring the bond issue. Thus, unlike general obligation
bonds, revenue bonds do not represent a pledge of credit or create any debt of
or charge against the general revenues of a municipality or public authority.
The Fund may invest more than 25% of its total assets in industrial development
bonds as long as they are not from the same facility or similar types of
facilities.
RISK FACTORS
Bond yields are dependent on several factors, including market conditions, the
size of an offering, the maturity of the bond, ratings of the bond and the
ability of issuers to meet their obligations. The purpose of municipal bond
insurance is to guarantee the timely payment of principal at maturity and
interest.
MUNICIPAL BOND INSURANCE
At least 65% of the Fund's total assets will be invested in municipal
securities which are insured for timely payment of principal at maturity and
interest. The Fund will require insurance when purchasing municipal securities
which would not otherwise meet the Fund's quality standards. The Fund may also
require insurance when, in the opinion of the Adviser, such insurance would
benefit the Fund, for example, through improvement of portfolio quality or
increased liquidity of certain securities.
Securities in the portfolio may be insured in one of two ways: (1) by a policy
applicable to a specific security, obtained by the issuer of the security or by
a third party ("Issuer-Obtained Insurance") or (2) under master insurance
policies issued by municipal bond insurers, purchased by the Fund (the
"Policies"). If a security's coverage is Issuer-Obtained, then that security
does not need to be covered in the Policies.
The Fund may purchase Policies from Municipal Bond Investors Assurance Corp.,
AMBAC Indemnity Corporation, and Financial Guaranty Insurance Company, or any
other municipal bond insurer which is rated Aaa by Moody's or AAA by S&P. A
more detailed description of these insurers may be found in the Fund's
Statement of Additional Information.
Annual premiums for these Policies are paid by the Fund and are estimated to
range from 0.10% to 0.25% of the value of the municipal securities covered
under the Policies, with an average annual premium rate of approximately
0.175%. While the insurance feature reduces financial risk, the cost thereof
and the restrictions on investments imposed by the guidelines in the insurance
policies reduce the yield to shareholders.
- ------------------------- FIRST UNION -------------------------
- ------------------------- MANAGED BOND -------------------------
PORTFOLIO
Objective: Total return.
Invests in: Investment grade corporate bonds and U.S. government and agency
bonds.
Suitable for: Conservative investors looking for bond interest and
appreciation.
Key Benefits: Provides a diversified portfolio of investment grade bonds
featuring liquidity and security of capital.
DESCRIPTION OF THE FUND
The Managed Bond Fund is managed for total return which includes both changes
in principal value of the Fund's portfolio and interest income. The Fund seeks
to provide capital appreciation during periods of falling interest rates and
protection against capital depreciation during periods of rising rates.
To achieve total return, the Fund invests primarily in a professionally
managed, diversified portfolio of investment grade bonds with maturities up to
30 years. Under normal conditions, at least 65% of the value of the Fund's
total assets will be invested in investment grade corporate bonds and
government and agency bonds. Financial futures may also be used depending upon
the outlook for the economy.
TYPES OF INVESTMENTS
The Fund may invest in:
domestic issues of corporate debt obligations rated A or better by Moody's
or S&P;
securities which are either issued or guaranteed by the U.S. government,
its agencies, or instrumentalities, as more fully described under "First
Union Balanced Portfolio--Types of Investments";
commercial paper which matures in 270 days or less with at least two high
quality ratings by nationally recognized statistical rating organizations,
e.g. A-1 or A-2 by S&P, or Prime-1 or Prime-2 by Moody's;
time and savings deposits (including certificates of deposit) in commercial
or savings banks whose accounts are insured by the Bank Insurance Fund
("BIF") or the Savings Association Insurance Fund ("SAIF") (both of which
are administered by the Federal Deposit Insurance Corp. ("FDIC")),
including certificates of deposit and other time deposits in foreign
branches of banks insured by the BIF;
bankers' acceptances (maximum 0.25% of the bank's total deposits according
to the bank's last published statement of condition) issued by a bank
insured by the BIF, or issued by the bank's Edge Act subsidiary and
guaranteed by the bank, with remaining maturities of nine months or less;
and
repurchase agreements collateralized by eligible investments.
TEMPORARY INVESTMENTS
The Fund may also invest temporarily in cash and cash items during times of
unusual market conditions for defensive purposes. Cash items may include short-
term obligations such as: rated commercial paper, time and savings deposits
(including certificates of deposit), bankers' acceptances, obligations of the
U.S. government or its agencies or instrumentalities, and repurchase agreements
collateralized by eligible investments.
RISK FACTORS
Bond prices move inversely to interest rates, i.e. as interest rates decline,
the values of the bonds increase and vice versa. The longer the maturity of a
bond, the greater the exposure to market price fluctuations. The same market
factors are reflected in the share price or net asset value of bond funds which
will vary with interest rates.
- ------------------------- FIRST UNION -------------------------
- ------------------------- U.S. GOVERNMENT -------------------------
PORTFOLIO
Objective: High level of current income consistent with stability of
principal.
Invests in: Debt instruments issued or guaranteed by the U.S. government, its
agencies, or instrumentalities.
Suitable for: Conservative investors seeking high current yields plus relative
safety.
Key Benefit: Active management of a blend of securities and maturities to
maximize the opportunities and minimize the risks created by
changing interest rates.
DESCRIPTION OF THE FUND
The U.S. Government Fund seeks a high level of current income consistent with
stability of principal. The Fund seeks to achieve this objective by investing
primarily in debt instruments issued or guaranteed by the U.S. government, its
agencies or instrumentalities ("U.S. government securities"). As a matter of
policy, the Fund will invest at least 65% of the value of its total assets in
such U.S. government securities.
TYPES OF INVESTMENTS
The Fund may invest in:
U.S. government securities. These include: (1) securities which are backed
by the full faith and credit of the U.S. government (for example, U.S.
Treasury bills, notes, and bonds); (2) obligations issued or
guaranteed by U.S. government agencies and instrumentalities, which are
supported by any of the following: (a) the full faith and credit of the
U.S. government (such as participation certificates guaranteed by
Government National Mortgage Association or Federal Housing Administration
debentures), (b) the right of the issuer to borrow an amount limited to a
specific line of credit from the U.S. government (for example, obligations
of Federal Home Loan Banks); (c) discretionary authority of the U.S.
government to purchase the issuer's obligations (for example, obligations
of the Federal National Mortgage Association); (d) the credit of the
instrumentality or agency issuing the obligations (for example, obligations
of the Tennessee Valley Authority, the Bank for Cooperatives and the
Federal Home Loan Mortgage Corporation);
Securities representing ownership interest in mortgage pools ("mortgage-
backed securities"). The yield and maturity characteristics of these
securities correspond to those of the underlying mortgages, with interest
and principal payments (including prepayments, i.e. paying remaining
principal before the mortgage's scheduled maturity) passed through to the
holder of the mortgage-backed securities. The yield and price of mortgage-
backed securities will be affected by prepayments which substantially
shorten effective maturities. Thus, during periods of declining interest
rates, prepayments may be expected to increase, requiring the Fund to
reinvest the proceeds at lower interest rates, making it difficult to
effectively lock in high interest rates. Conversely, mortgage-backed
securities may experience less pronounced declines in value during periods
of rising interest rates;
Securities representing ownership interests in a pool of assets ("asset-
backed securities"), for which automobile and credit card receivables are
the most common collateral. Because much of the underlying collateral is
unsecured, asset-backed securities are structured to include additional
collateral and/or additional credit support to protect against default. The
Adviser evaluates the strength of each particular issue of asset-backed
security, taking into account the structure of the issue and its credit
support. (See "Risk Characteristics of Asset-Backed Securities");
Collateralized mortgage obligations ("CMOs") issued by single-purpose,
stand-alone entities. A CMO is a mortgage-backed security that manages the
risk of repayment by separating mortgage pools into short, medium and long
term portions. These portions are generally retired in sequence as the
underlying mortgage loans in the mortgage pool are repaid. Similarly, as
prepayments are made, the portion of CMO first to mature will be retired
prior to its maturity, thus having the same effect as the prepayment of
mortgages underlying a mortgage-backed security. The Fund will invest only
in CMOs which are rated AAA by a nationally recognized statistical rating
organization and which may be: (a) collateralized by pools of mortgages in
which each mortgage is guaranteed as to payment of principal and interest
by an agency or instrumentality of the U.S. government; (b) collateralized
by pools of mortgages in which
payment of principal and interest is guaranteed by the issuer and such
guarantee is collateralized by U.S. government securities; or (c)
securities in which the proceeds of the issuance are invested in mortgage
securities and payment of the principal and interest are supported by the
credit of an agency or instrumentality of the U.S. government;
Commercial paper which matures in 270 days or less so long as at least two
of its ratings are high quality ratings by nationally recognized
statistical rating organizations. Such ratings would include: A-1 or A-2 by
S&P, Prime-1 or Prime-2 by Moody's, or F-1 or F-2 by Fitch Investors
Service;
Bonds and other debt securities rated Baa or higher by Moody's or BBB or
higher by S&P, or which, if unrated, are considered to be comparable
quality by the Adviser;
Securities of other investment companies; and
Repurchase agreements collateralized by eligible investments.
Bonds rated Baa by Moody's or BBB by S&P have speculative characteristics.
Changes in economic conditions or other circumstances are more likely to
lead to weakened capacity to make principal and interest payments than
higher rated bonds.
TEMPORARY INVESTMENTS
During periods when, in the Adviser's opinion, a temporary defensive position
in the market is appropriate, the Fund may temporarily invest in cash and cash
items including such short-term obligations as: commercial paper; obligations
issued or guaranteed by the U.S. government, its agencies, or
instrumentalities; and repurchase agreements collateralized by eligible
investments.
- ------------------------- FIRST UNION -------------------------
- ------------------------- UTILITY -------------------------
PORTFOLIO
Objective: High current income and moderate capital appreciation.
Invests in: Equity and debt securities of utility companies.
Suitable for: Investors seeking current income and long-term growth of income
through equity and fixed income investments in utility companies.
Key Benefit: Diversity through historically reliable cash flows on securities
that typically hold their value through various market conditions.
DESCRIPTION OF THE FUND
The Utility Fund seeks high current income and moderate capital appreciation.
The Fund invests primarily in a diversified portfolio of equity and debt
securities of utility companies that produce, transmit or distribute gas or
electrical energy, as well as those companies that provide communications
facilities, such as telephone and telegraph companies. As a matter of investment
policy, the Fund will invest at least 65% of the value of its total assets in
securities of utility companies. In addition, the Fund can invest up to 35% of
its assets in common stock of non utility companies.
TYPES OF INVESTMENTS
The Fund may invest in:
common and preferred stocks, bonds and convertible preferred stocks of
utility companies selected by the Adviser on the basis of traditional
research techniques, including assessment of earnings and dividend growth
prospects and of the risk and volatility of the individual company's
industry. However, other factors, such as product position, market share,
or profitability may also be considered by the Adviser. The Fund will only
invest its assets in debt securities rated Baa or higher by Moody's or BBB
or higher by S&P, or which, if unrated, are considered to be of comparable
quality by the Adviser;
securities either issued or guaranteed by the U.S. government, its
agencies, or instrumentalities. These types of securities include: direct
obligations of the U.S. Treasury, such as U.S. Treasury bills, notes and
bonds, and notes, bonds, and discount notes of U.S. government agencies or
instrumentalities;
commercial paper, including master demand notes;
ADRs of foreign companies traded on the New York or American Stock
Exchanges or in the over-the-counter market;
foreign securities (either foreign or U.S. securities traded in foreign
markets). The Fund may also invest in other obligations denominated in
foreign currencies. In making these decisions, the Adviser will consider
such factors as the condition and growth potential of various economies and
securities markets, currency and taxation considerations and other
pertinent financial, social, national and political factors. (See "Other
Investment Policies" and "Foreign Investments.");
obligations, including certificates of deposit and bankers' acceptances, of
banks or savings and loan associations having at least $1 billion in
deposits and insured by the BIF or the SAIF, including U.S. branches of
foreign banks and foreign branches of U.S. banks;
securities of other investment companies; and
repurchase agreements collateralized by government securities.
Bonds rated Baa by Moody's or BBB by S&P have speculative characteristics.
Changes in economic conditions or other circumstances are more likely to lead
to weakened capacity to make principal and interest payments than higher rated
bonds.
RISK FACTORS
In view of the Fund's investment concentration, investors should be aware of
certain risks associated with the utility industry in general. These include
difficulties in earning adequate returns on investments despite frequent rate
increases, restrictions on operations and increased costs and delays due to
governmental regulations, building or construction delays, environmental
regulations, difficulty of the capital markets in absorbing utility debt and
equity securities, and difficulties in obtaining fuel at reasonable prices.
The Adviser believes that the risks of investing in utility securities can be
reduced. The professional portfolio management techniques used by the Adviser
to attempt to reduce these risks include credit research. The Adviser will
perform its own credit analysis, in addition to using recognized rating
agencies and other sources, including discussions with an issuer's management,
the judgment of other investment analysts, and its own informed judgment. The
Adviser's credit analysis will consider an issuer's financial soundness, its
responsiveness to changes in interest rates and business conditions, and its
anticipated cash flow, interest or dividend coverage, and earnings. In
evaluating an issuer, the Adviser places special emphasis on the estimated
current value of the issuer's assets rather than historical costs.
Bond prices move inversely to interest rates, i.e. as interest rates decline,
the values of the bonds increase and vice versa. The longer the maturity of a
bond, the greater the exposure to market price fluctuations. The same market
factors are reflected in the share price or net asset value of bond funds which
will vary with interest rates. There is no limit on the maturity of the fixed
income securities purchased by the Fund.
- ------------------------- FIRST UNION -------------------------
- ------------------------- VALUE -------------------------
PORTFOLIO
Objective: Long-term capital growth with current income as a secondary
objective.
Invests in: Equity securities of U.S. companies with prospects for growth in
earnings and dividends.
Suitable for: Long-term investors seeking capital appreciation with some
income.
Key Benefit: Allows accumulation of assets over the long-term through capital
appreciation of equity investments and reinvestment of dividends.
DESCRIPTION OF THE FUND
The Value Fund seeks long-term capital growth with current income as a
secondary objective. The Fund normally invests at least 75% of its assets in
equity securities of U.S. companies with prospects for growth in earnings and
dividends.
TYPES OF INVESTMENTS:
The Fund primarily invests in:
common and preferred stocks, bonds and convertible preferred stock of U.S.
companies with at least $100 million in equity, listed on the New York or
American Stock Exchanges or traded in over-the-counter markets. The Adviser
looks for industries and companies which have potential primarily for
capital growth and secondarily for income;
ADRs of foreign companies traded on the New York or American Stock
Exchanges or in the over-the-counter market;
convertible bonds rated at least BBB by S&P or at least Baa by Moody's, or,
if not rated, determined to be of comparable quality by the Adviser;
money market instruments;
fixed rate notes and bonds and adjustable and variable rate notes of
companies whose common stock the Fund may acquire (for up to 5% of its net
assets);
zero coupon bonds issued or guaranteed by the U.S. government, its agencies
or instrumentalities (for up to 5% of its net assets);
obligations, including certificates of deposit and bankers' acceptances, of
banks or savings and loan associations having at least $1 billion in
deposits and insured by the BIF or the SAIF, including U.S. branches of
foreign banks and foreign branches of U.S. banks;
prime commercial paper including master demand notes; and
repurchase agreements collateralized by eligible investments.
Bonds rated BBB by S&P or Baa by Moody's have speculative characteristics.
Changes in economic conditions or other circumstances are more likely to lead
to weakened capacity to make principal and interest payments than higher rated
bonds.
- ------------------------ OTHER ------------------------
- ------------------------ INVESTMENT ------------------------
POLICIES
The Funds have adopted the following practices for specific types of
investments.
DOWNGRADES
If any security invested in by any of the Funds loses its rating or has its
rating reduced after the Fund has purchased it, the Fund is not required to
sell or otherwise dispose of the security, but may consider doing so.
REPURCHASE AGREEMENTS
The Funds may invest in repurchase agreements. Repurchase agreements are
agreements by which a Fund purchases a security (usually U.S. government
securities) for cash and obtains a simultaneous commitment from the seller
(usually a bank or broker/dealer) to repurchase the security at an agreed-upon
price and specified future date. The repurchase price reflects an agreed-upon
interest rate for the time period of the agreement. The Fund's risk is the
inability of the seller to pay the agreed-upon price on delivery date. However,
this risk is tempered by the ability of the Fund to sell the security in the
open market in the case of a default. In such a case, the Fund may incur costs
in disposing of the security which would increase Fund expenses. The Adviser
will monitor the creditworthiness of the firms with which the Funds enter into
repurchase agreements.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Funds may purchase portfolio securities on a when-issued or delayed
delivery basis. In such cases, a Fund commits to purchase a security which
will be delivered and paid for at a future date. The Fund relies on the seller
to deliver the securities and risks missing an advantageous price or yield if
the seller does not deliver the security as promised.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Funds may lend portfolio
securities on a short-term or long-term basis to broker/dealers, banks, or
other institutional borrowers of securities. The Funds will only enter into
loan arrangements with creditworthy borrowers and will receive collateral in
the form of cash or U.S. government securities equal to at least 100% of the
value of the securities loaned. As a matter of fundamental investment policy
which cannot be changed without shareholder approval, the Funds will not lend
any of their assets except portfolio securities up to 5% (in the case of the
Balanced and Value Funds), 15% (in the case of the Fixed Income, High Grade
Tax Free, and Utility Funds) or one-third (in the case of the U.S. Government
Fund) of the value of their total assets.
FOREIGN INVESTMENTS
The Balanced, Fixed Income, Utility, and Value Funds may invest in foreign
securities or securities denominated in or indexed to foreign currencies. In
addition, the Fixed Income Fund may invest in foreign currencies. These may
involve additional risks. Specifically, they may be affected by the strength
of foreign currencies relative to the U.S. dollar, or by political or economic
developments in foreign countries. Accounting procedures and government
supervision may be less stringent than those applicable to U.S. companies.
There may be less publicly available information about a foreign company than
about a U.S. company. Foreign markets may be less liquid or more volatile than
U.S. markets and may offer less protection to investors. It may also be more
difficult to enforce contractual obligations abroad than would be the case in
the United States because of differences in the legal systems. Foreign
securities may be subject to foreign taxes, which may reduce yield, and may be
less marketable than comparable U.S. securities. All these factors are
considered by the Adviser before making any of these types of investments.
RISK CHARACTERISTICS OF ASSET-BACKED SECURITIES
The U.S. Government Fund may invest in asset-backed securities. Asset-backed
securities are created by the grouping of certain governmental, government
related and private loans, receivables and other lender assets into pools.
Interests in these pools are sold as individual securities. Payments from the
asset pools may be divided into several different tranches of debt securities,
with some tranches entitled to receive regular installments of principal and
interest, other tranches entitled to receive regular installments of interest,
with principal payable at maturity or upon specified call dates, and other
tranches only entitled to receive payments of principal and accrued interest at
maturity or upon specified call dates. Different tranches of securities will
bear different interest rates, which may be fixed or floating.
Because the loans held in the asset pool often may be prepaid without penalty
or premium, asset-backed securities are generally subject to higher prepayment
risks than most other types of debt instruments. Prepayment risks on mortgage
securities tend to increase during periods of declining mortgage interest
rates, because many borrowers refinance their mortgages to take advantage of
the more favorable rates. Depending upon market conditions, the yield that the
U.S. Government Fund receives from the reinvestment of such prepayments, or any
scheduled principal payments, may be lower than the yield on the original
mortgage security. As a consequence, mortgage securities may be a less
effective means of "locking in" interest rates than other types of debt
securities having the same stated maturity and may also have less potential for
capital appreciation. For certain types of asset pools, such as collateralized
mortgage obligations, prepayments may be allocated to one tranche of securities
ahead of other tranches, in order to reduce the risk of prepayment for the
other tranches.
Prepayments may result in a capital loss to the U.S. Government Fund to the
extent that the prepaid mortgage securities were purchased at a market premium
over their stated amount. Conversely, the prepayment of mortgage securities
purchased at a market discount from their stated principal amount will
accelerate the recognition of interest income by the U.S. Government Fund which
would be taxed as ordinary income when distributed to the shareholders.
The credit characteristics of asset-backed securities also differ in a number
of respects from those of traditional debt securities. The credit quality of
most asset-backed securities depends primarily upon the credit quality of the
assets underlying such securities, how well the entity issuing the securities
is insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement to such
securities.
OPTIONS AND FUTURES
All of the Funds, with the exception of the High Grade Tax Free Fund, may
engage in options and futures transactions. Options and futures transactions
are intended to enable a Fund to manage market, interest rate or exchange rate
risk. The Funds do not use these transactions for speculation or leverage.
Options and futures may be volatile investments and involve certain risks which
might result in lowering the Funds' returns. The three principal areas of risk
include: (1) lack of a liquid secondary market for a futures or option contract
when the Fund wants to close out its position; (2) imperfect correlation of
changes in the prices of futures or options contracts with the prices of the
securities in the Fund's portfolio; and (3) incorrect forecasts by the Adviser
of interest rates, market values or other economic factors. In these events,
the Fund may lose money on the futures contract or option.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
Each Fund may invest in the securities of other investment companies that have
investment objectives and policies similar to its own. This is a short-term
measure to invest cash which has not yet been invested in other portfolio
instruments and is subject to the following limitations: (1) no Fund will own
more than 3% of the total outstanding voting stock of any one investment
company, (2) no Fund may invest more than 5% of its total assets in any one
investment company and (3) no Fund may invest more than 10% of its total assets
in investment companies in general. The Adviser will waive its investment
advisory fee on assets invested in securities of other open end investment
companies.
The following investment limitations cannot be changed without shareholder
approval.
BORROWING MONEY
The Funds will not borrow money directly or through reverse repurchase
agreements or pledge securities, except under certain circumstances, a Fund may
borrow up to one-third of the value of its total assets and pledge up to 10%
(in the case of Value Fund), 15% (in the case of the Balanced, Fixed Income,
High Grade Tax Free, Managed Bond, and Utility Funds), or one-third (in the
case of U.S. Government Fund) of the value of those assets to secure such
borrowings.
RESTRICTED AND ILLIQUID SECURITIES
The Funds may invest up to 10% of their net assets in securities which are
subject to restrictions on resale under federal securities law. In the case of
the Fixed Income and U.S. Government Funds, this restriction is not applicable
to commercial paper issued under Section 4(2) of the Securities Act of 1933.
Balanced, Fixed Income, High Grade Tax Free, Managed Bond, and Value Funds may
invest up to 10% of their net assets in illiquid securities. U.S. Government
and Utility Funds may invest up to 15% of their net assets in illiquid
securities. With respect to the Balanced, Fixed Income, Managed Bond, U.S.
Government, and Utility Funds, illiquid securities include certain restricted
securities not determined by the Trustees to be liquid, non-negotiable time
deposits, and repurchase agreements providing for settlement in more than seven
days after notice. With respect to the High Grade Tax Free and Value Funds,
illiquid securities include repurchase agreements providing for settlement in
more than seven days after notice and certain restricted securities.
DIVERSIFICATION
With respect to 75% of the value of its total assets, no Fund may invest more
than 5% of its total assets in securities of one issuer (except cash or cash
items, repurchase agreements collateralized by U.S. government securities and
U.S. government obligations) or own more than 10% of the outstanding voting
securities of one issuer.
CONCENTRATION OF INVESTMENTS
The Utility Fund will not purchase any security of any issuer if, as a result,
more than 25% of its total assets would be invested in any one industry other
than the utilities industry, except that the Fund may invest more than 25% of
the value of its total assets in securities issued or guaranteed by the U.S.
government, its agencies, or instrumentalities.
SELLING SHORT
The Balanced Fund will not make short sales of securities, except in certain
limited circumstances.
Certain of the Funds have adopted the following investment limitations, which
may be changed by the Trustees without shareholder approval.
NEW ISSUERS
The Balanced and Managed Bond Funds will not invest more than 5% of the value
of their total assets in securities of issuers (or guarantors, where
applicable) which have records of less than three years of continuous
operations, including the operation of any predecessor.
"NON-ACTIVE" SECURITIES
The Fixed Income, High Grade Tax Free, and Value Funds will not invest more
than 10% of their net assets in securities for which an active and substantial
market does not exist, along with investments in illiquid securities,
restricted securities, securities for which market quotations are not readily
available, and repurchase agreements maturing in more than seven days.
WARRANTS
The Balanced, Fixed Income, High Grade Tax Free, Managed Bond and Value Funds
may not invest more than 5% of its net assets in warrants. No more than 2% of
this 5% may be in warrants which are not listed on the New York or American
Stock Exchanges.
- ------------------------- SHAREHOLDER -------------------------
- ------------------------- GUIDE -------------------------
SHARE PRICE CALCULATION
In the case of no-load Funds, the net asset value (NAV), the market price and
the offering price of Shares are all the same.
Purchases, redemptions, and exchanges are made at net asset value. The net
asset value is determined at 4:00 p.m. (Eastern time), Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of a
Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no Shares are tendered for redemption and no
orders to purchase Shares are received; and (iii) the following holidays: New
Year's Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving Day, and
Christmas Day. The net asset value is computed by adding cash and other assets
to the closing market value of all securities owned, subtracting liabilities
and dividing the result by the number of outstanding Shares. The net asset
value will vary each day depending on purchases and redemptions. Expenses and
fees, including the management fee, are accrued daily and taken into account
for the purpose of determining net asset value.
The net asset value of Trust Shares of a Fund may differ slightly from that of
Class B Shares and Class C Shares of the same Fund due to the variability in
daily net income resulting from different distribution charges for each class
of Shares. The net asset value for each Fund will fluctuate for all three
classes.
PERFORMANCE INFORMATION
A Fund's performance may be quoted in terms of total return, yield or tax
equivalent yield. Performance information is historical and is not intended to
indicate future results.
From time to time, the Funds may make available certain information about the
performance of Trust Shares. It is generally reported using total return,
yield, and tax equivalent yield (for the High Grade Tax Free Fund).
Total return takes into account both income (dividends) and changes in the
Fund's Share price (appreciation or depreciation). It is based on the overall
dollar or percentage change in value of an investment assuming reinvestment of
all dividends and capital gains during a specified period. Total return is
measured by comparing the value of an investment at the beginning of a
specified period to the redemption value at the end of the same period,
assuming reinvestment of dividends or capital gains distributions.
Yield shows how much income an investment generates. It refers to the Fund's
income over a 30-day period expressed as a percentage of the Fund's Share
price. The yields of Trust Shares are calculated by dividing the sum of all
interest and dividend income (less Fund expenses) over a 30-day period by the
offering price per Share on the last day of the period. The number is then
annualized using semi-annual compounding.
The High Grade Tax Free Fund may advertise the tax equivalent yield, which is
calculated like the yield described above, except that for any given tax
bracket, net investment income will be calculated as the sum of any taxable
income and the tax exempt income divided by the difference between 1 and the
federal tax rates for taxpayers in that tax bracket.
The yield and tax equivalent yield do not necessarily reflect income actually
earned by Trust Shares of the Funds and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
Total return, yield, and tax equivalent yield will be calculated separately for
Trust Shares, Class B Shares and Class C Shares of a Fund. Because Class B
Shares and Class C Shares are subject to 12b-1 fees, the yield and tax
equivalent yield will be lower than that of Trust Shares. The sales load
applicable to Class B Shares also contributes to a lower total return for Class
B Shares. In addition, Class C Shares are subject to similar non-recurring
charges, such as the contingent deferred sales charge ("CDSC"), which, if
excluded, would increase the total return for Class C Shares.
From time to time, a Fund may advertise its performance using certain rankings
published in financial publications and/or compare its performance to certain
indices.
- ------------------------- HOW TO -------------------------
- ------------------------- BUY SHARES -------------------------
Shares may be purchased at a price equal to their net asset value per Share
next determined after receipt of an order.
MINIMUM INVESTMENT
You may invest as often as you want in any of the Funds. There are no sales
charges imposed on Trust Shares of the Funds. However, there is a $1,000
minimum initial investment requirement which may be waived incertain
situations. For further information, please contact the Capital Management
Group of First Union at1-800-326-2584. Subsequent investments may be in any
amounts.
BY TELEPHONE
You may purchase Trust Shares by telephone from the Capital Management Group of
First Union at 1-800-326-2584. (Texas residents should directly contact the
Mutual Funds Group of First Union Brokerage Services, Inc. at 1-800-326-3241.)
Shares are sold on days on which the New York Stock Exchange and the Federal
Reserve Wire System are open for business.
METHOD OF PAYMENT
Payment may be made by check or federal funds or by debiting your account at
First Union. Purchase orders must be received by 4:00 p.m. (Eastern time).
Payment is required on the next business day.
SHAREHOLDER ACCOUNTS
As transfer agent for the Funds, State Street Bank and Trust Company of Boston,
Massachusetts ("State Street Bank") maintains a Share account for each
shareholder of record. Share certificates are not issued.
MINIMUM BALANCE
Due to the high cost of maintaining smaller holdings, each Fund reserves the
right to redeem a shareholder's Shares if, as a result of redemptions, their
aggregate value drops below $1,000. Reductions in value that result solely from
market activity will not trigger an involuntary redemption. The Funds will
notify shareholders in writing 30 days before taking such action to allow them
to increase their holdings to at least the minimum level.
HOW TO CONVERT
YOUR INVESTMENT
- ------------------------- FROM ONE -------------------------
- ------------------------- FIRST UNION -------------------------
FUND TO ANOTHER
FIRST UNION FUND
As a shareholder, you have the privilege of exchanging your Shares for shares
of another First Union Fund.
As long as the First Union Fund in which you are invested will not be adversely
affected, you may switch among the First Union Funds within the Trust. Before
the exchange, you must call First Union at 1-800-326-2584 to receive a
prospectus for the First Union Fund into which you want to exchange. Read the
prospectus carefully. Each exchange represents the sale of shares of one First
Union Fund and the purchase of shares in another, which may produce a gain or
loss for tax purposes.
You may exchange Trust Shares of one First Union Fund for Trust Shares of any
other First Union Fund by calling toll free 1-800-326-2584 or by writing to
First Union. Telephone exchange instructions may be recorded. Shares purchased
by check are eligible for exchange after the check clears, which could take up
to seven days after receipt of the check. Exchanges are subject to the $1,000
minimum initial purchase requirement for each First Union Fund.
An exchange order must comply with the requirements for a redemption and
purchase order and must specify the dollar value or number of shares to be
exchanged. Once the order is received, the Shares already owned will be
redeemed at current net asset value and, upon receipt of the proceeds by the
First Union Fund, shares of the other First Union Fund will be purchased at
their net asset value determined after the proceeds from such redemption become
available, which may be up to seven days after such redemption. Orders for
exchanges received by a First Union Fund prior to 4:00 p.m. (Eastern time) on
any day the First Union Funds are open for business will be executed as of the
close of business that day. Orders for exchanges received after 4:00 p.m.
(Eastern time) on any business day will be executed at the close of the next
business day.
When exchanging into and out of load and no-load shares of First Union Funds,
shareholders who have already paid a sales charge once at the time of purchase,
including shares obtained through the reinvestment of dividends, will not have
to pay an additional sales charge on an exchange.
If reasonable procedures are not followed by a Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
EXCHANGE RESTRICTIONS
Although the Trust has no intention of terminating or modifying the exchange
privilege, it reserves the right to do so at any time. Excessive trading can
impact the interests of shareholders. Therefore, the Trust reserves the right
to terminate the exchange privilege of any shareholder who makes more than five
exchanges of shares of the First Union Funds in a year or three exchanges in a
calendar quarter.
The exchange privilege is only available in states where shares of the First
Union Fund being acquired may legally be sold. Before the exchange, a
shareholder must receive a prospectus of the First Union Fund for which the
exchange is being made.
- ------------------------- HOW TO -------------------------
- ------------------------- REDEEM SHARES -------------------------
Shares are redeemed at their net asset value next determined after a proper
redemption request has been received, less any fees.
You may redeem Shares in person or by telephoning First Union at 1-800-326-2584
or by written request to First Union. There is no redemption fee charged.
Telephone redemption instructions may be recorded.
The Funds redeem Shares at their net asset value next determined after a Fund
receives the redemption request. Redemptions will be made on days on which a
Fund computes the net asset value of Shares. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed or on federal
holidays when wire transfers are restricted. Proceeds will be wired to the
shareholder's account at First Union or a check will be sent to the address of
record normally within five (but in no case longer than seven) days after a
proper request for redemption has been received.
If reasonable procedures are not followed by a Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
- ------------------------- MANAGEMENT -------------------------
- ------------------------- OF FIRST -------------------------
UNION FUNDS
Responsibility for the overall management of First Union Funds rests with its
Trustees and officers. Other service providers include the Funds' Distributor,
Investment Adviser, Custodian, Transfer Agent, Legal Counsel, and Independent
Auditors.
INVESTMENT ADVISER
Professional investment supervision for the Funds is provided by the investment
adviser, the Capital Management Group of First Union.
First Union is a subsidiary of First Union Corporation, a bank holding company
headquartered in Charlotte, North Carolina, with $70.8 billion in total
consolidated assets as of December 31, 1993. Through offices in 36 states and
one foreign country, First Union Corporation and its subsidiaries provide a
broad range of financial services to individuals and businesses.
First Union's Capital Management Group employs an experienced staff of
professional investment analysts, portfolio managers, and traders, and uses
several proprietary computer-based systems in conjunction with fundamental
analysis to identify investment opportunities. The Capital Management Group has
been managing trust assets for over 50 years and currently oversees assets of
more than $43.0 billion. In addition, the Capital Management Group has advised
the Trust since its inception in 1984.
R. Dean Hawes is a Vice President of First Union National Bank of North
Carolina, N.A., and is the Director of Employee Benefit Portfolio Management.
Mr. Hawes joined First Union in 1981 after spending five years with Merrill
Lynch, Pierce, Fenner, & Smith and Townsend Investments. Mr. Hawes has served
as the portfolio manager of the Balanced Fund since its inception in January
1991.
Thomas L. Ellis is a Vice President of First Union National Bank of North
Carolina, N.A. Prior to joining First Union in 1985, Mr. Ellis had seventeen
years of investment management and sales experience, including eleven years
marketing short and medium-term obligations to institutional investors, plus
three years as head trader for First Boston Corporation. Mr. Ellis has managed
the Fixed Income Fund since its inception in July 1988.
Robert S. Drye is a Vice President of First Union National Bank of North
Carolina, N.A., and has been with First Union since 1968. Since 1989, Mr. Drye
has served as a portfolio manager for several of the First Union Funds and for
certain common trust funds. Prior to 1989, Mr. Drye worked as a marketing
specialist with First Union Brokerage Services, Inc. Mr. Drye has managed the
High Grade Tax Free Fund since its inception in February 1992.
Glen T. Insley is a Senior Vice President and Director of Fixed Income
Portfolio Management for First Union National Bank of North Carolina, N.A. Mr.
Insley served as Director of Fixed Income Management at One Federal Asset
Management, a subsidiary of Shawmut Bank, for six years prior to joining First
Union. Mr. Insley has served as the portfolio manager for the Managed Bond Fund
since May 1993.
Rollin C. Williams is a Vice President of First Union National Bank of North
Carolina, N.A. and has over 24 years of investment management experience. Mr.
Williams was the Head of Fixed Income Investments at Dominion Trust Company
from 1988 until its acquisition by First Union Corporation. Mr. Williams has
served as the portfolio manager for the U.S. Government Fund since its
inception in December 1992.
Malcolm M. Trevillian is a Vice President of First Union National Bank of North
Carolina, N.A., and has been with First Union since 1986. During that time, he
has served as a portfolio manager for various pension and profit-sharing
accounts maintained with First Union. Mr. Trevillian has managed the Utility
Fund since its inception in January 1994.
William T. Davis, Jr. is a Vice President of First Union National Bank of North
Carolina, N.A., and has been with First Union since 1986. Prior to that, Mr.
Davis served as a securities analyst for Seibels Bruce (Insurance) Group. Mr.
Davis has served as the portfolio manager of the Value Fund since March 1991.
FUND ADMINISTRATION
Federated Securities Corp., a subsidiary of Federated Investors, is the
principal distributor for the Funds. It is a Pennsylvania corporation organized
on November 14, 1969, and is the principal distributor for a number of
investment companies.
Federated Administrative Services ("FAS"), another subsidiary of Federated
Investors, provides the Funds with administrative personnel and services
necessary to operate the Funds, such as legal and accounting services, for a
specified fee which is detailed below.
State Street Bank serves as custodian and transfer agent, providing dividend
disbursement and other shareholder services for the Funds.
Legal counsel to those Trustees who are not "interested persons" of the Trust,
as defined in the Investment Company Act of 1940, is provided by Sullivan &
Worcester, Washington, D.C., and legal counsel to the Trust is provided by
Houston, Houston & Donnelly, Pittsburgh, Pennsylvania.
The independent auditors for the Trust are KPMG Peat Marwick, Pittsburgh,
Pennsylvania.
- ------------------------- FEES AND EXPENSES -------------------------
- ------------------------- -------------------------
Each Fund pays annual advisory and administrative fees and certain expenses.
ADVISORY AND ADMINISTRATIVE FEES
For managing their investment and business affairs, the Funds pay an annual fee
to First Union. The Adviser receives an annual investment advisory fee equal to
.50 of 1% of each of the Equity and Income Fund's average daily net assets. The
Adviser may voluntarily choose to waive a portion of its fee or reimburse the
Funds for certain operating expenses.
The Trust also pays a fee for administrative services. FAS provides these at an
annual rate as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
------------------ -----------------------
<S> <C>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
Unless waived, the administrative fee received during any fiscal year shall
aggregate at least $50,000 per First Union Fund.
EXPENSES OF THE FUNDS AND TRUST SHARES
Holders of Shares pay their allocable portion of Trust and respective Fund
expenses. The Trust expenses for which holders of Shares pay their allocable
portion include, but are not limited to: the cost of organizing the Trust and
continuing its existence; the cost of registering the Trust; Trustees' fees;
auditors' fees; the cost of meetings of Trustees; legal fees of the Trust;
association membership dues and such non-recurring and extraordinary items as
may arise.
Fund expenses for which holders of Shares pay their allocable portion based on
average daily net assets include, but are not limited to: registering a Fund
and Shares of that Fund; investment advisory services; taxes and commissions;
custodian fees; insurance premiums; auditors' fees; and such non-recurring and
extraordinary items as may arise.
The Funds' expenses under the Rule 12b-1 Plans are incurred solely by the Class
B Shares and Class C Shares. The Trustees reserve the right to allocate certain
expenses to holders of Shares as they deem appropriate ("Class Expenses"). In
any case, Class Expenses would be limited to: Rule 12b-1 fees; transfer agent
fees; printing and postage expenses; registration fees; and administrative,
legal, and Trustees' fees. Presently, all Fund expenses, other than Rule 12b-1
fees, are allocated based upon the average daily net assets of each class of a
Fund.
- ------------------------- SHAREHOLDER -------------------------
- ------------------------- RIGHTS AND -------------------------
PRIVILEGES
VOTING RIGHTS
Each share of a Fund is entitled to one vote in Trustee elections and other
voting matters submitted to shareholders. All shares of all classes of each
First Union Fund in the Trust have equal voting rights, except that in matters
affecting only a particular First Union Fund or class, only shares of that
First Union Fund or class are entitled to vote. As of February 4, 1994, First
Union National Bank, Charlotte, North Carolina, acting in various capacities
for numerous accounts, was the owner of record of 63,510,816 shares (98.9%) of
the Balanced Fund-Trust Shares; 35,104,402 shares (95.1%) of Fixed Income Fund-
Trust Shares; 10,269,556 shares (98.7%) of Managed Bond Fund-Trust Shares;
25,746,543 shares (96.0%) of Value Fund-Trust Shares; 1,221,044 shares (81.5%)
of U.S. Government Fund-Trust Shares; and 501,994 shares (80.44%) of Utility
Fund-Class B Investment Shares, and therefore, may, for certain purposes, be
deemed to control such Funds and be able to affect the outcome of certain
matters presented for a vote of shareholders.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust or a Fund's operation and for the election of Trustees
under certain circumstances.
Trustees may be removed by a two-thirds vote of the number of Trustees prior to
such removal or by a two-thirds vote of the shareholders at a special meeting.
A special meeting of shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares of all series entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders for such acts or obligations
of the Trust. These documents require notice of this disclaimer to be given in
each agreement, obligation, or instrument the Trust or its Trustees enter into
or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required, by the Declaration of Trust, to use the
property of the Trust to protect or compensate the shareholder. On request, the
Trust will defend any claim made and pay any judgment against a shareholder for
any act or obligation of the Trust. Therefore, financial loss resulting from
liability as a shareholder will occur only if the Trust cannot meet its
obligations to indemnify shareholders and pay judgments against them from its
assets.
EFFECT OF BANKING LAWS
The Glass-Steagall Act and other banking laws and regulations presently
prohibit banks or non-bank affiliates of member banks of the Federal Reserve
System from sponsoring, organizing, controlling, or distributing the shares of
a registered, open-end investment company continuously engaged in the issuance
of its shares. Further, they prohibit banks from issuing, underwriting, or
distributing securities in general. Such laws and regulations do not prohibit
such a holding company or affiliate from acting as investment adviser, transfer
agent or custodian to such an investment company or from purchasing shares of
such a company as agent for and upon the order of their customer. The Adviser,
First Union, is subject to and in compliance with such banking laws and
regulations.
Sullivan & Cromwell has advised First Union that First Union may perform the
services for the Funds set forth in the investment advisory agreement, this
prospectus and the Statements of Additional Information without violation of
the Glass-Steagall Act or other applicable federal banking laws or regulations.
Such counsel has pointed out, however, that changes in federal statutes and
regulations relating to the permissible activities of banks, as well as further
judicial or administrative decisions or interpretations of such statutes and
regulations, could prevent First Union from continuing to perform such services
for the Funds or from continuing to purchase Shares for the accounts of its
customers. If First Union were prohibited from acting as investment adviser to
the Funds, it is expected that the Trustees would recommend to the Funds'
shareholders that they approve a new investment adviser selected by the
Trustees. It is not expected that the Funds' shareholders would suffer any
adverse financial consequences (if another adviser with equivalent abilities to
First Union is found) as a result of any of these occurrences.
- ------------------------- DISTRIBUTIONS -------------------------
- ------------------------- AND TAXES -------------------------
Each Fund pays out as dividends substantially all of its net investment income
(dividends and interest on its investments) and net realized short-term gains.
DIVIDENDS
Dividends are declared and paid quarterly for the Value and Balanced Funds;
dividends are declared and paid monthly for the Fixed Income, Managed Bond, and
Utility Funds; and dividends are declared daily and paid monthly for the High
Grade Tax Free and U.S. Government Funds. Dividends are declared just prior to
determining net asset value. Any distributions will be automatically reinvested
in additional Shares on payment dates at the ex- dividend date net asset value
without a sales charge unless a shareholder otherwise instructs the Fund or
First Union in writing.
CAPITAL GAINS
Any net long-term capital gains realized by the Funds will be distributed at
least once every 12 months.
- ------------------------- TAX -------------------------
- ------------------------- INFORMATION -------------------------
Income dividends and capital gains distributions are taxable as described
below.
FEDERAL INCOME TAX
The Funds pay no federal income tax if they meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and will
receive the special tax treatment afforded to such companies.
Each First Union Fund is treated as a single, separate entity for federal
income tax purposes so that income (including capital gains) and losses
realized by one First Union Fund will not be combined for tax purposes with
those realized by other First Union Funds.
Except as set forth under "High Grade Tax Free Fund Additional Tax
Information," all shareholders, unless otherwise exempt, are required to pay
federal income tax on any dividends and other distributions, whether in shares
or cash, for all the Funds. Detailed information concerning the status of
dividend and capital gains distributions for federal income tax purposes is
mailed to shareholders annually.
Shareholders are urged to consult their own tax advisers regarding the status
of their accounts under state and local tax laws.
HIGH GRADE TAX FREE FUND ADDITIONAL TAX INFORMATION
Shareholders of High Grade Tax Free Fund are not required to pay the federal
regular income tax on any dividends received from the Fund that represent net
interest on tax-exempt municipal bonds. However, under the Tax Reform Act of
1986, dividends representing net interest earned on some municipal bonds may be
included in calculating the federal individual alternative minimum tax or the
federal alternative minimum tax for corporations.
The alternative minimum tax, up to 28% of alternative minimum taxable income
for individuals and 20% for corporations, applies when it exceeds the regular
tax for the taxable year. Alternative minimum taxable income is equal to the
adjusted income of the taxpayer increased by certain "tax preference" items not
included in regular taxable income and reduced by only a portion of the
deductions allowed in the calculation of the regular tax.
The Tax Reform Act of 1986 treats interest on certain "private activity" bonds
issued after August 7, 1986, as a tax preference item. Unlike traditional
governmental purpose municipal bonds, which finance roads, schools, libraries,
prisons and other public facilities, private activity bonds provide benefits to
private parties. The Fund may purchase all types of municipal bonds, including
"private activity" bonds. Thus, should the Fund purchase any such bonds, a
portion of the Fund's dividends may be treated as a tax preference item.
In addition, in the case of a corporate shareholder, dividends of the Fund
which represent interest on municipal bonds may be subject to the 20% corporate
alternative minimum tax because the dividends are included in a corporation's
"adjusted current earnings." The corporate alternative minimum tax treats 75%
of the excess of a taxpayer's pre-tax "adjusted current earnings" over the
taxpayer's alternative minimum taxable income as a tax preference item.
"Adjusted current earnings" is based upon the concept of a corporation's
"earnings and profits." Since "earnings and profits" generally includes the
full amount of any Fund dividend, and alternative minimum taxable income does
not include the portion of the Fund's dividend attributable to municipal bonds
which are not private activity bonds, the difference will be included in the
calculation of the corporation's alternative minimum tax.
Shareholders are urged to consult their own tax advisers to determine whether
they are subject to alternative minimum tax or the corporate alternative
minimum tax and, if so, the tax treatment of dividends paid by the Fund.
Dividends of the Fund representing net interest income earned on some temporary
investments and any realized net short-term gains are taxed as ordinary income.
Distributions representing net long-term capital gains realized by the Fund, if
any, will be taxable as long-term capital gains regardless of the length of
time shareholders have held their Shares.
These tax consequences apply whether dividends are received in cash or as
additional Shares. Information on the tax status of dividends and distributions
is provided annually.
- ------------------------- OTHER CLASSES -------------------------
- ------------------------- OF SHARES -------------------------
First Union Equity and Income Funds offer three classes of shares: Trust Shares
for institutional investors and Class B Shares and Class C Shares for
individuals and other customers of First Union.
Class B Shares and Class C Shares of First Union Equity and Income Funds are
sold to customers of First Union and others at net asset value plus a sales
charge which, at the election of the purchaser, may be imposed either (i) at the
time of purchase (the Class B Shares), or (ii) on a contingent deferred basis
(the Class C Shares). Shareholders of record in any Fund at October 12, 1990,
and the members of their immediate family, will be exempt from sales charges on
any future purchases in any of the First Union Funds. Employees of First Union,
Federated Securities Corp. and their affiliates, and certain trust accounts for
which First Union or its affiliates act in an administrative, fiduciary, or
custodial capacity, board members of First Union and the above-mentioned
entities and the members of the immediate families of any of these persons, will
also be exempt from sales charges. Class B Shares and Class C Shares are
distributed pursuant to Rule 12b-1 Plans adopted by the Trust, whereby the
distributor is paid a fee of .25 of 1% for Class B Shares and .75 of 1% for
Class C Shares of each Fund's average daily net asset value.
The stated advisory fee is the same for all classes of the Funds. Financial
institutions and brokers providing sales and/or administrative services may
receive different compensation with respect to one class of shares than with
respect to another class of shares of the same Fund.
The amount of dividends payable to Class B Shares and Class C Shares will be
less than those payable to Trust Shares by the difference between distribution
expenses borne by the shares of each respective class.
<PAGE>
[This Page Intentionally Left Blank]
- ------------------------- ADDRESSES -------------------------
- ------------------------- -------------------------
- --------------------------------------------------------------------------------
First Union Funds Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
- --------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
- --------------------------------------------------------------------------------
Investment Adviser
First Union National Bank of North Carolina
One First Union Center
301 S. College Street
Charlotte, North Carolina
28288
- --------------------------------------------------------------------------------
Custodian, Transfer Agent, and Dividend Disbursing Agent
State Street Bank and Trust Company P.O. Box 8609
Boston, Massachusetts
02266-8609
- --------------------------------------------------------------------------------
Legal Counsel to the Independent Trustees
Sullivan & Worcester 1025 Connecticut Ave., N.W.
Washington, D.C. 20036
- --------------------------------------------------------------------------------
Legal Counsel to the Trust
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania
15222
- --------------------------------------------------------------------------------
Independent Auditors
KPMG Peat Marwick One Mellon Bank Center
Pittsburgh, Pennsylvania
15219
- --------------------------------------------------------------------------------
3031007A-I (4/93)
FIRST UNION
UTILITY
PORTFOLIO
Class B Investment Shares
Class C Investment Shares
(A Portfolio of First Union Funds)
SUPPLEMENT TO PROSPECTUS
DATED FEBRUARY 28, 1994
June 30, 1994
FEDERATED SECURITIES CORP.
Distributor
G00176-02-B (6/94)
534508
FIRST UNION EQUITY AND INCOME FUNDS
(PORTFOLIOS OF FIRST UNION FUNDS)
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
- --------------------------------------------------------------------------------
SUPPLEMENT TO PROSPECTUS DATED FEBRUARY 28, 1994
1) Please insert the following 'Financial Highlights' table for First Union
Utility Portfolio after page 12, following 'Financial Highlights for First
Union U.S. Government Portfolio' and before 'Financial Highlights for
First Union Value Portfolio.'
FIRST UNION UTILITY PORTFOLIO
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
CLASS B CLASS C
TRUST INVESTMENT INVESTMENT
SHARES SHARES SHARES
PERIOD ENDED PERIOD ENDED PERIOD ENDED
APRIL 30, 1994* APRIL 30, 1994** APRIL 30, 1994**
- --------------------------------------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.53 $ 10.00 $ 10.00
- ---------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------------
Net investment income 0.07 0.17 0.14
- ---------------------------------------------------
Net realized and unrealized gain (loss) on
investments (0.16) (0.65) (0.65)
- --------------------------------------------------- ------------------- ------------------- -------------------
Total from investment operations (0.09) (0.48) (0.51)
- ---------------------------------------------------
LESS DISTRIBUTIONS
- ---------------------------------------------------
Dividends to shareholders from net investment
income (0.08) (0.16) (0.13)
- --------------------------------------------------- ------------------- ------------------- -------------------
NET ASSET VALUE, END OF PERIOD $ 9.36 $ 9.36 $ 9.36
- --------------------------------------------------- ------------------- ------------------- -------------------
TOTAL RETURN*** (0.95)% (4.86)% (5.08)%
- ---------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------
Expenses %0.00(b) %0.05(b) %0.75(b)
- ---------------------------------------------------
Net investment income %5.34(b) %6.03(b) %5.12(b)
- ---------------------------------------------------
Expense waiver/reimbursement (a) %1.60(b) %1.80(b) %1.60(b)
- ---------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------
Net assets, end of period (000 omitted) $5,073 $3,080 $23,264
- ---------------------------------------------------
Portfolio turnover rate 7% 7% 7%
- ---------------------------------------------------
</TABLE>
* Reflects operations for the period from March 8, 1994 (commencement of
operations) to April 30, 1994 (unaudited).
** Reflects operations for the period from January 6, 1994 (commencement of
operations) to April 30, 1994 (unaudited).
*** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above (Note 4).
(b) Computed on an annualized basis.
(See Notes which are an integral part of the Financial Statements)
2) Please replace the first sentence of the section entitled 'Shareholder
Accounts' on page 29 with the following:
"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."
3) Please replace the reference to "State Street Bank" in paragraph 2, item
(2) in the section entitled 'How to Redeem Shares' on page 30, with
"Federated Services Company."
4) Please replace the eighth paragraph in section entitled 'Investment
Adviser' on page 32 with the following two paragraphs:
"H. Bradley Donovan is an Assistant Vice President of First Union National Bank
of North Carolina, N.A., and has been with First Union since 1992. Prior to
joining First Union, Mr. Donovan was a portfolio manager with both First
National Bank of Palm Beach (1992-1993) and the Bank of Boston (1990-1992), and
an account executive with Smith Barney (1987-1989). Mr. Donovan has served as
co-portfolio manager of Utility Fund since June 30, 1994.
Lewis M. Kayes, III is an Assistant Vice President of First Union National Bank
of North Carolina, N.A., and has been with First Union since 1992. Prior to
joining First Union, Mr. Kayes was a portfolio manager with Banc One
(1986-1989). Mr. Kayes has served as co-portfolio manager of Utility Fund since
June 30, 1994."
5) Please replace the second paragraph in the section entitled 'Fund
Administation' on page 33 with the following:
"State Street Bank and Trust Company of Boston, Massachusetts ("State Street
Bank") serves as custodian for the securities and cash of the Funds.
Federated Services Company serves as transfer agent and provides dividend
disbursement and other shareholder services for the Funds."
6) Please add the following as the final sentence of the first paragraph in
the section entitled 'Voting Rights' on page 34.
"As of June 4, 1994, First Union National Bank Trust Accounts of Charlotte,
North Carolina, acting in various capacities for numerous accounts, was the
owner of record of 541,485 Shares (95.98%) of the Utility Fund--Trust Shares,
and therefore may, for certain purposes, be deemed to control the Utility Fund
and be able to affect the outcome of certain matters presented for a vote of
shareholders."
7) Please insert the following financial statements at the end of the
prospectus beginning on page 37. In addition, please add the heading
'Financial Statements' to the Table of Contents on page 2, immediately
before 'Addresses.'
FIRST UNION UTILITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
APRIL 30, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
- ------------- ----------------------------------------------------------------------------------- --------------
COMMON STOCKS--89.2%
- --------------------------------------------------------------------------------------------------
UTILITIES--70.8%
-----------------------------------------------------------------------------------
25,100 Airtouch Communications, Inc. $ 618,088
-----------------------------------------------------------------------------------
17,100 American Electric Power Co., Inc. 555,750
-----------------------------------------------------------------------------------
8,400 American Water Works, Inc. 239,400
-----------------------------------------------------------------------------------
36,800 Ameritech Corp. 1,449,000
-----------------------------------------------------------------------------------
11,400 Atlanta Gas & Light Co. 408,975
-----------------------------------------------------------------------------------
28,800 Bell Atlantic Corp. 1,490,400
-----------------------------------------------------------------------------------
24,800 BellSouth Corp. 1,509,700
-----------------------------------------------------------------------------------
8,400 British Telecommunications, Inc. ADR 477,750
-----------------------------------------------------------------------------------
20,100 Carolina Power & Light Co. 535,163
-----------------------------------------------------------------------------------
7,200 Consolidated Natural Gas Co. 283,500
-----------------------------------------------------------------------------------
10,900 DQE, Inc. 348,800
-----------------------------------------------------------------------------------
10,200 Dominion Resources, Inc. 430,950
-----------------------------------------------------------------------------------
8,100 Duke Power Co. 296,663
-----------------------------------------------------------------------------------
24,200 Eastern Enterprises 635,250
-----------------------------------------------------------------------------------
7,600 Enron Corp. 225,150
-----------------------------------------------------------------------------------
12,400 FPL Group, Inc. 438,650
-----------------------------------------------------------------------------------
10,400 Florida Progress Corp. 314,600
-----------------------------------------------------------------------------------
46,700 GTE Corp. 1,476,888
-----------------------------------------------------------------------------------
10,900 General Public Utilities Corp. 332,450
-----------------------------------------------------------------------------------
15,600 NICOR, Inc. 415,350
-----------------------------------------------------------------------------------
8,000 North Carolina Natural Gas Corp. 194,000
-----------------------------------------------------------------------------------
42,900 NYNEX Corp. 1,560,488
-----------------------------------------------------------------------------------
9,000 Orange & Rockland Utilities, Inc. 315,000
-----------------------------------------------------------------------------------
7,000 PSI Resources, Inc. 156,625
-----------------------------------------------------------------------------------
47,600 Pacific Telesis Group 1,523,200
-----------------------------------------------------------------------------------
23,600 Pacificorp 421,850
-----------------------------------------------------------------------------------
12,500 Piedmont Natural Gas, Inc. 264,062
-----------------------------------------------------------------------------------
7,800 SCANA Corp. 357,825
-----------------------------------------------------------------------------------
29,600 Southern Co. 577,200
-----------------------------------------------------------------------------------
15,000 Southwest Gas Corp. 255,000
-----------------------------------------------------------------------------------
34,600 Southwestern Bell Corp. 1,435,900
-----------------------------------------------------------------------------------
</TABLE>
FIRST UNION UTILITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------- ----------------------------------------------------------------------------------- --------------
COMMON STOCKS--CONTINUED
- --------------------------------------------------------------------------------------------------
UTILITIES--CONTINUED
-----------------------------------------------------------------------------------
PAGE 62
4,200 Teco Energy, Inc. $ 84,000
-----------------------------------------------------------------------------------
10,300 Telefonos de Mexico ADR 606,412
-----------------------------------------------------------------------------------
15,200 Union Electric Co. 533,900
-----------------------------------------------------------------------------------
35,800 U.S. West, Inc. 1,458,850
----------------------------------------------------------------------------------- --------------
Total 22,226,789
----------------------------------------------------------------------------------- --------------
BASIC INDUSTRY--1.3%
-----------------------------------------------------------------------------------
20,200 Hanson PLC ADR 416,625
----------------------------------------------------------------------------------- --------------
CHEMICALS--5.3%
-----------------------------------------------------------------------------------
9,600 Dow Chemical Co. 602,400
-----------------------------------------------------------------------------------
9,100 Imperial Chemical Industries PLC ADR 452,725
-----------------------------------------------------------------------------------
7,400 Monsanto Co. 608,650
----------------------------------------------------------------------------------- --------------
Total 1,663,775
----------------------------------------------------------------------------------- --------------
COMMERCIAL SERVICES--1.3%
-----------------------------------------------------------------------------------
6,800 Dun & Bradstreet Corp. 399,500
----------------------------------------------------------------------------------- --------------
CONSUMER NON-DURABLES--1.9%
-----------------------------------------------------------------------------------
18,000 American Brands, Inc. 609,750
----------------------------------------------------------------------------------- --------------
ENERGY--2.5%
-----------------------------------------------------------------------------------
4,100 Atlantic Richfield Co. 391,037
-----------------------------------------------------------------------------------
6,300 Exxon Corp. 396,113
----------------------------------------------------------------------------------- --------------
Total 787,150
----------------------------------------------------------------------------------- --------------
FINANCE--2.0%
-----------------------------------------------------------------------------------
23,200 National City Corp. 620,600
----------------------------------------------------------------------------------- --------------
HEALTH TECHNOLOGY--2.6%
-----------------------------------------------------------------------------------
7,000 American Home Products Corp. 404,250
-----------------------------------------------------------------------------------
7,400 Bristol-Myers Squibb Co. 398,675
----------------------------------------------------------------------------------- --------------
Total 802,925
----------------------------------------------------------------------------------- --------------
REAL ESTATE INVESTMENT TRUST--1.5%
-----------------------------------------------------------------------------------
11,600 Healthcare Realty Trust 240,700
-----------------------------------------------------------------------------------
10,500 JDN Realty Trust Corp. 240,187
----------------------------------------------------------------------------------- --------------
Total 480,887
----------------------------------------------------------------------------------- --------------
TOTAL COMMON STOCKS (IDENTIFIED COST $28,784,800) 28,008,001
----------------------------------------------------------------------------------- --------------
CORPORATE BONDS--6.3%
- --------------------------------------------------------------------------------------------------
UTILITIES--6.3%
-----------------------------------------------------------------------------------
$ 220,000 Carolina Power & Light Co., 9.14%, 4/1/95 227,194
-----------------------------------------------------------------------------------
175,000 Florida Power Corp., 8.625%, 11/1/2021 182,622
-----------------------------------------------------------------------------------
</TABLE>
FIRST UNION UTILITY PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- ------------- ----------------------------------------------------------------------------------- --------------
CORPORATE BONDS--CONTINUED
- --------------------------------------------------------------------------------------------------
UTILITIES--CONTINUED
-----------------------------------------------------------------------------------
210,000 Madison Gas & Electric Co., 7.70%, 2/15/2028 197,959
-----------------------------------------------------------------------------------
25,000 New England Power Co., 8.00%, 8/1/2022 24,702
-----------------------------------------------------------------------------------
$ 1,000,000 Norsk Hydro, 7.75%, 6/15/2023 $ 932,599
-----------------------------------------------------------------------------------
55,000 Pacific Gas & Electric Co., 8.375%, 5/1/2025 55,320
-----------------------------------------------------------------------------------
350,000 Pennsylvania Power & Light Co., 9.25%, 10/1/2019 373,011
----------------------------------------------------------------------------------- --------------
Total 1,993,407
----------------------------------------------------------------------------------- --------------
TOTAL CORPORATE BONDS (IDENTIFIED COST $2,189,186) 1,993,407
----------------------------------------------------------------------------------- --------------
U.S. TREASURY OBLIGATIONS--0.7%
- --------------------------------------------------------------------------------------------------
210,000 United States Treasury Notes, 9.50%, 11/15/95 222,403
----------------------------------------------------------------------------------- --------------
TOTAL U.S. TREASURY OBLIGATIONS (IDENTIFIED COST $230,475) 222,403
----------------------------------------------------------------------------------- --------------
*REPURCHASE AGREEMENT--0.9%
- --------------------------------------------------------------------------------------------------
288,000 Donaldson, Lufkin & Jenrette Securities Corp., 3.52%, dated
4/29/94, due 5/2/94 (at amortized cost) (Note 2B) 288,000
----------------------------------------------------------------------------------- --------------
TOTAL INVESTMENTS (IDENTIFIED COST $31,492,461) $ 30,511,811\
----------------------------------------------------------------------------------- --------------
</TABLE>
* The repurchase agreement is fully collateralized by U.S. Treasury
obligations based on market prices at the date of the portfolio.
\ The cost of investments for federal tax purposes amounts to $31,492,461 at
April 30, 1994. The net unrealized depreciation on a federal tax cost basis
amounts to $980,650, which is comprised of $215,448 appreciation and
$1,196,098 depreciation at April 30, 1994.
Note: The categories of investments are shown as a percentage of net assets
($31,417,205) at April 30, 1994.
The following abbreviation is used in this portfolio:
ADR -- American Depository Receipts
(See Notes which are an integral part of the Financial Statements)
FIRST UNION UTILITY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ---------------------------------------------------------------------------------------------------
Investments in securities, at value (Notes 2A and 2B) (identified and tax cost $31,492,461) $ 30,511,811
- ---------------------------------------------------------------------------------------------------
Cash 60,606
- ---------------------------------------------------------------------------------------------------
Receivable for Fund shares sold 751,708
- ---------------------------------------------------------------------------------------------------
Receivable for investments sold 554,113
- ---------------------------------------------------------------------------------------------------
Dividends and interest receivable 225,523
- ---------------------------------------------------------------------------------------------------
Receivable from Adviser 26,699
- --------------------------------------------------------------------------------------------------- -------------
Total assets 32,130,460
- ---------------------------------------------------------------------------------------------------
LIABILITIES:
- ---------------------------------------------------------------------------------------------------
Payable for investments purchased $ 610,830
- ---------------------------------------------------------------------------------------
Payable for Fund shares redeemed 56,090
- ---------------------------------------------------------------------------------------
Payable to transfer and dividend disbursing agent (Note 4) 7,185
- ---------------------------------------------------------------------------------------
Dividends payable 10
- ---------------------------------------------------------------------------------------
Accrued expenses 39,140
- --------------------------------------------------------------------------------------- ----------
Total liabilities 713,255
- --------------------------------------------------------------------------------------------------- -------------
NET ASSETS for 3,356,298 shares of beneficial interest outstanding $ 31,417,205
- --------------------------------------------------------------------------------------------------- -------------
NET ASSETS CONSIST OF:
- ---------------------------------------------------------------------------------------------------
Paid-in capital $ 32,478,692
- ---------------------------------------------------------------------------------------------------
Unrealized depreciation of investments (980,650)
- ---------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (110,044)
- ---------------------------------------------------------------------------------------------------
Undistributed net investment income 29,207
- --------------------------------------------------------------------------------------------------- -------------
Total Net Assets $ 31,417,205
- --------------------------------------------------------------------------------------------------- -------------
NET ASSET VALUE PER SHARE:
- ---------------------------------------------------------------------------------------------------
Trust Shares (net assets of $5,073,448 / 541,797 shares of beneficial interest outstanding) $9.36
- --------------------------------------------------------------------------------------------------- -------------
Class B Investment Shares (net assets of $3,079,813 / 329,104 shares of beneficial interest
outstanding) $9.36
- --------------------------------------------------------------------------------------------------- -------------
Class C Investment Shares (net assets of $23,263,944 / 2,485,397 shares of beneficial interest
outstanding) $9.36
- --------------------------------------------------------------------------------------------------- -------------
OFFERING PRICE PER SHARE:
- ---------------------------------------------------------------------------------------------------
Trust Shares $9.36
- --------------------------------------------------------------------------------------------------- -------------
Class B Investment Shares (100/96 of $9.36) $9.75*
- --------------------------------------------------------------------------------------------------- -------------
Class C Investment Shares $9.36
- --------------------------------------------------------------------------------------------------- -------------
REDEMPTION PROCEEDS PER SHARE:
- ---------------------------------------------------------------------------------------------------
Trust Shares $9.36
- --------------------------------------------------------------------------------------------------- -------------
Class B Investment Shares $9.36
- --------------------------------------------------------------------------------------------------- -------------
Class C Investment Shares (96/100 of $9.36) $8.99**
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
* See "What Shares Cost" in the prospectus.
** See "How to Redeem Shares" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
FIRST UNION UTILITY PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 6, 1994 (COMMENCEMENT OF OPERATIONS)
TO APRIL 30, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- --------------------------------------------------------------------------------------------------
Dividends $ 290,526
- --------------------------------------------------------------------------------------------------
Interest 70,729
- -------------------------------------------------------------------------------------------------- -------------
Total income (Note 2C) 361,255
- --------------------------------------------------------------------------------------------------
EXPENSES:
- --------------------------------------------------------------------------------------------------
Investment advisory fee (Note 4) $ 30,864
- -------------------------------------------------------------------------------------
Trustees' fees 73
- -------------------------------------------------------------------------------------
Administrative personnel and services (Note 4) 30,548
- -------------------------------------------------------------------------------------
Custodian and portfolio accounting fees 18,239
- -------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses (Note 4) 8,290
- -------------------------------------------------------------------------------------
Distribution services fee--Class B Investment Shares (Note 4) 3,161
- -------------------------------------------------------------------------------------
Distribution services fee--Class C Investment Shares (Note 4) 31,442
- -------------------------------------------------------------------------------------
Legal fees 951
- -------------------------------------------------------------------------------------
Printing and postage 4,516
- -------------------------------------------------------------------------------------
Taxes 5
- -------------------------------------------------------------------------------------
Insurance premiums 2,580
- -------------------------------------------------------------------------------------
Miscellaneous 2,594
- ------------------------------------------------------------------------------------- -----------
Total expenses 133,263
- -------------------------------------------------------------------------------------
Deduct--
- -------------------------------------------------------------------------------------
Waiver of investment advisory fee (Note 4) $ 30,864
- --------------------------------------------------------------------------
Waiver of administrative personnel and services (Note 4) 30,548
- --------------------------------------------------------------------------
Reimbursement of other operating fees and expenses (Note 4) 37,248
- --------------------------------------------------------------------------
Waiver of distribution services fee--Class B Investment Shares (Note 4) 2,573 101,233
- -------------------------------------------------------------------------- --------- -----------
Net expenses 32,030
- -------------------------------------------------------------------------------------------------- -------------
Net investment income 329,225
- -------------------------------------------------------------------------------------------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- --------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (110,044)
- --------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (980,650)
- -------------------------------------------------------------------------------------------------- -------------
Net realized and unrealized gain (loss) on investments (1,090,694)
- -------------------------------------------------------------------------------------------------- -------------
Change in net assets resulting from operations $ (761,469)
- -------------------------------------------------------------------------------------------------- -------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FIRST UNION UTILITY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
APRIL 30, 1994*
- ---------------------------------------------------------------------------------------------- ------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ----------------------------------------------------------------------------------------------
OPERATIONS--
- ----------------------------------------------------------------------------------------------
Net investment income $ 329,225
- ----------------------------------------------------------------------------------------------
Net realized gain (loss) on investments ($110,044 net loss as computed for federal income tax
purposes) (110,044)
- ----------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments (980,650)
- ---------------------------------------------------------------------------------------------- ------------------
Change in net assets from operations (761,469)
- ---------------------------------------------------------------------------------------------- ------------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 2C)--
- ----------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income
- ----------------------------------------------------------------------------------------------
Trust Shares (40,685)
- ----------------------------------------------------------------------------------------------
Class B Investment Shares (70,133)
- ----------------------------------------------------------------------------------------------
Class C Investment Shares (189,200)
- ---------------------------------------------------------------------------------------------- ------------------
Change in net assets from distributions to shareholders (300,018)
- ---------------------------------------------------------------------------------------------- ------------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 3)--
- ----------------------------------------------------------------------------------------------
Proceeds from sale of shares 37,836,172
- ----------------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of dividends declared 249,157
- ----------------------------------------------------------------------------------------------
Cost of shares redeemed (5,606,637)
- ---------------------------------------------------------------------------------------------- ------------------
Change in net assets from Fund share transactions 32,478,692
- ---------------------------------------------------------------------------------------------- ------------------
Change in net assets 31,417,205
- ----------------------------------------------------------------------------------------------
NET ASSETS:
- ----------------------------------------------------------------------------------------------
Beginning of period --
- ---------------------------------------------------------------------------------------------- ------------------
End of period (including undistributed net investment income of $29,207) $ 31,417,205
- ---------------------------------------------------------------------------------------------- ------------------
* For the period from January 6, 1994 (commencement of operations) to April 30, 1994 (unaudited).
(See Notes which are an integral part of the Financial Statements)
</TABLE>
FIRST UNION UTILITY PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
(1) ORGANIZATION
First Union Funds (the "Trust") is registered under the Investment Company Act
of 1940, as amended (the "Act"), as an open-end, management investment company.
The Trust consists of fifteen portfolios. The financial statements included
herein are only those of First Union Utility Portfolio (the "Fund"). The
financial statements of the other portfolios are presented separately. The
assets of each portfolio are segregated and a shareholder's interest is limited
to the portfolio in which shares are held.
The Fund offers three classes of shares (Trust Shares, Class B Investment
Shares, and Class C Investment Shares). Class B Investment Shares and Class C
Investment Shares are identical in all respects to Trust Shares, except that
Class B Investment Shares and Class C Investment Shares are sold pursuant to a
distribution plan ("Plan") adopted in accordance with the Act's Rule 12b-1.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Listed equity securities, corporate bonds and other
fixed income securities are valued at the last sales price reported on
national securities exchanges. Unlisted securities, bonds and short-term
obligations (and private placement securities) are generally valued at the
prices provided by an independent pricing service. Short-term securities
with remaining maturities of sixty days or less may be stated at amortized
cost, which approximates value.
B. REPURCHASE AGREEMENTS--It is the policy of the Trust to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System or to have segregated within the
custodian bank's vault, all securities held as collateral in support of
repurchase agreement investments. Additionally, procedures have been
established by the Trust to monitor, on a daily basis, the market value of
each repurchase agreement's underlying collateral to ensure the value at
least equals the principal amount of the repurchase agreement, including
accrued interest.
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 Board of Trustees ("Trustees"). Risks may arise from the potential
inability of counterparties to honor the terms of the repurchase agreement.
Accordingly, the Fund could receive less than the repurchase price on the
sale of collateral securities.
C. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
Interest income and expenses are accrued daily. Bond premium and discount,
if applicable, are amortized as required by the Internal Revenue Code, as
amended ("Code").
D. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its taxable income.
Accordingly, no provision for federal tax is necessary.
E. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
F. OTHER--Investment transactions are accounted for on the trade date.
FIRST UNION UTILITY PORTFOLIO
- --------------------------------------------------------------------------------
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
TRUST SHARES
PERIOD ENDED
APRIL 30, 1994*
SHARES AMOUNT
- ---------------------------------------------------------------------------------------- --------- -------------
<S> <C> <C>
Shares sold 537,434 $ 5,109,323
- ----------------------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 4,363 40,671
- ----------------------------------------------------------------------------------------
Shares redeemed -- --
- ---------------------------------------------------------------------------------------- --------- -------------
Net change resulting from Fund share transactions 541,797 $ 5,149,994
- ---------------------------------------------------------------------------------------- --------- -------------
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT SHARES
CLASS B CLASS C
PERIOD ENDED PERIOD ENDED
APRIL 30, 1994** APRIL 30, 1994**
SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------ ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Shares sold 861,631 $ 8,483,328 2,521,393 $ 24,243,521
- ------------------------------------------------------
Shares issued to shareholders in payment
of dividends declared 5,089 48,435 17,012 160,051
- ------------------------------------------------------
Shares redeemed (537,616) (5,107,981) (53,008) (498,656)
- ------------------------------------------------------ ----------- ------------- ------------ --------------
Net change resulting from Fund share transactions 329,104 $ 3,423,782 2,485,397 $ 23,904,916
- ------------------------------------------------------ ----------- ------------- ------------ --------------
</TABLE>
* Reflects operations for the period from March 8, 1994 (commencement of
operations) to April 30, 1994.
** Reflects operations for the period from January 6, 1994 (commencement of
operations) to April 30, 1994.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--First Union National Bank of North Carolina, the Fund's
adviser ("Adviser"), receives for its services an annual investment advisory fee
equal to 0.50 of 1% of the Fund's average daily net assets. Adviser may
voluntarily choose to waive a portion of its fee and reimburse certain operating
expenses of the Fund. Adviser can modify or terminate this voluntary waiver and
reimbursement at any time at its sole discretion.
ADMINISTRATION FEE--Federated Administrative Services ("FAS") provides the Fund
with certain administrative personnel and services. The FAS fee is based on the
level of average aggregate net assets of the Fund for the period. FAS may
voluntarily choose to waive a portion of its fee.
DISTRIBUTION PLAN--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's Investment Shares. The Plan provides that the Fund may incur
distribution expenses up to 0.75 of 1% of the average daily net assets of the
Class B Investment Shares and Class C Investment Shares, annually, to compensate
FSC. For the foreseeable future, FSC intends to limit its fees to 0.25 of 1% of
the Class B Investment Shares' average daily net assets. FSC may voluntarily
choose to waive a portion of its fee.
FIRST UNION UTILITY PORTFOLIO
- --------------------------------------------------------------------------------
TRANSFER AND DIVIDEND DISBURSING AGENT FEES--Federated Services Company
("FServ") serves as transfer and dividend disbursing agent for the Fund. The
FServ fee is based on the size, type and number of accounts and transactions
made by shareholders.
ORGANIZATIONAL EXPENSES--Organizational expenses incurred by the Fund will be
borne intially by FAS and are estimated to be $45,000. The Fund has agreed to
reimburse FAS for the organizational expenses during the five year period
following January 1, 1994 (date the Fund first became effective).
Certain of the Officers and Trustees of the Trust are Officers and Trustees or
Directors of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term obligations, for the
period ended
April 30, 1994 were as follows:
<TABLE>
<S> <C>
PURCHASES $ 32,768,288
- -------------------------------------------------------------------------------------------------- --------------
SALES $ 1,453,782
- -------------------------------------------------------------------------------------------------- --------------
</TABLE>
8) Please replace the fourth caption in the section entitled 'Addresses' on
the inside back cover with the following:
<TABLE>
<S> <C> <C>
"Custodian
State Street Bank and Trust Company P.O. Box 8602
Boston, Massachusetts 02266-8609"
</TABLE>
9) Please insert the following as the fifth caption in the section entitled
'Addresses' on the inside back cover:
<TABLE>
<S> <C> <C>
"Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779"
</TABLE>
June 30, 1994
- ------------------------ FIRST UNION ------------------------
- ------------------------ EQUITY AND INCOME ------------------------
FUNDS
Portfolios of First Union Funds
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
- --------------------------------------------------------------------------------
P R O S P E C T U S
February 28, 1994
First Union Funds (the "Trust") is a mutual fund with 15 portfolios, offering a
variety of investment opportunities. The Trust currently includes seven
diversified Equity and Income Funds, three diversified Money Market Funds, and
five non-diversified Single State Municipal Bond Funds. They are:
Equity and Income Funds
.First Union Balanced Portfolio;
.First Union Fixed Income Portfolio;
. First Union High Grade Tax Free Portfolio (formerly, First Union Insured Tax
Free Portfolio);
. First Union Managed Bond Portfolio (Investment Shares not currently
offered);
. First Union U.S. Government Portfolio;
. First Union Utility Portfolio; and
.First Union Value Portfolio.
Money Market Funds
.First Union Money Market Portfolio;
. First Union Tax Free Money Market Portfolio; and
.First Union Treasury Money Market Portfolio.
Single State Municipal Bond Funds
. First Union Florida Municipal Bond Portfolio;
. First Union Georgia Municipal Bond Portfolio;
. First Union North Carolina Municipal Bond Portfolio;
. First Union South Carolina Municipal Bond Portfolio; and
. First Union Virginia Municipal Bond Portfolio.
This prospectus provides you with information specific to the Class B
Investment Shares ("Class B Shares") and Class C Investment Shares ("Class C
Shares") of First Union Equity and Income Funds. It concisely describes the
information which you should know before investing in Class B Shares or Class C
Shares of any of the First Union Equity and Income Funds. Please read this
prospectus carefully and keep it for future reference.
You can find more detailed information about each First Union Equity and Income
Fund in its Statement of Additional Information dated February 28, 1994, filed
with the Securities and Exchange Commission and incorporated by reference into
this prospectus. The Statements are available free of charge by writing to
First Union Funds, Federated Investors Tower, Pittsburgh, PA 15222-3779 or by
calling 1-800-326-3241.
The Trust is sponsored and distributed by third parties independent of First
Union National Bank of North Carolina ("First Union"). The value of investment
company shares offered by this prospectus fluctuates daily.
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF FIRST
UNION, ARE NOT ENDORSED OR GUARANTEED BY FIRST UNION, AND ARE NOT INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
FOR A DESCRIPTION OF THE NATURE AND LIMITATIONS OF MUNICIPAL BOND INSURANCE,
SEE "FIRST UNION HIGH GRADE TAX FREE PORTFOLIO--MUNICIPAL BOND INSURANCE," PAGE
19.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- ------------------------- TABLE OF -------------------------
- ------------------------- CONTENTS -------------------------
SUMMARY 2 HOW TO BUY SHARES 28
- -------------------------------------- --------------------------------------
SUMMARY OF FUND EXPENSES 4 HOW TO CONVERT YOUR INVESTMENT FROM
- -------------------------------------- ONE FIRST UNION FUND TO ANOTHER FIRST
UNION FUND 30
FINANCIAL HIGHLIGHTS 8 --------------------------------------
- --------------------------------------
HOW TO REDEEM SHARES 30
INVESTMENT OBJECTIVES AND POLICIES 16 --------------------------------------
- --------------------------------------
ADDITIONAL SHAREHOLDER SERVICES 31
FIRST UNION BALANCED PORTFOLIO 16 --------------------------------------
- --------------------------------------
MANAGEMENT OF FIRST UNION FUNDS 31
FIRST UNION FIXED INCOME PORTFOLIO 17 --------------------------------------
- --------------------------------------
FEES AND EXPENSES 33
FIRST UNION HIGH GRADE TAX FREE --------------------------------------
PORTFOLIO 18
- -------------------------------------- SHAREHOLDER RIGHTS AND PRIVILEGES 34
--------------------------------------
FIRST UNION U.S. GOVERNMENT
PORTFOLIO 20
DISTRIBUTIONS AND TAXES 35
- -------------------------------------- --------------------------------------
FIRST UNION UTILITY PORTFOLIO 21 TAX INFORMATION 35
- -------------------------------------- --------------------------------------
FIRST UNION VALUE PORTFOLIO 22 OTHER CLASSES OF SHARES 36
- -------------------------------------- --------------------------------------
OTHER INVESTMENT POLICIES 23 ADDRESSES 36
- -------------------------------------- --------------------------------------
SHAREHOLDER GUIDE 26
- --------------------------------------
SUMMARY
- ------------------------- -------------------------
- ------------------------- -------------------------
DESCRIPTION OF THE TRUST
First Union Funds is an open-end, management investment company, established as
a Massachusetts business trust under a Declaration of Trust dated August 30,
1984. The Trust currently consists of 15 portfolios, each representing a
different First Union Fund. Each Equity and Income Fund, except First Union
Managed Bond Portfolio, is divided into three classes of shares: Class B
Shares, Class C Shares, and Trust Shares. Class B and Class C Shares are sold
to individuals and other customers of First Union (the "Adviser") and are sold
at net asset value plus a sales charge which, at the election of the purchaser,
may be imposed either (i) at the time of purchase (the Class B Shares), or (ii)
on a contingent deferred basis (the Class C Shares). Trust Shares are designed
primarily for institutional investors (banks, corporations, and fiduciaries).
First Union Managed Bond Portfolio presently offers only Trust Shares. This
prospectus relates to both classes of Investment Shares ("Shares") of First
Union Equity and Income Funds (collectively, the "Funds").
THE FUNDS AND OBJECTIVES
As of the date of this prospectus, Class B and Class C Shares are offered in
the following six Funds:
. FIRST UNION BALANCED PORTFOLIO ("BALANCED FUND")--seeks to produce long-term
total return through capital appreciation, dividends, and interest income;
. FIRST UNION FIXED INCOME PORTFOLIO ("FIXED INCOME FUND")--seeks to provide a
high level of current income by investing in a broad range of investment
grade debt securities, with capital growth as a secondary objective;
. FIRST UNION HIGH GRADE TAX FREE PORTFOLIO ("HIGH GRADE TAX FREE FUND")--
seeks to provide a high level of federally tax-free income that is
consistent with preservation of capital;
. FIRST UNION U.S. GOVERNMENT PORTFOLIO ("U.S. GOVERNMENT FUND")--seeks a high
level of current income consistent with stability of principal;
. FIRST UNION UTILITY PORTFOLIO ("UTILITY FUND")--seeks high current income
and moderate capital appreciation; and
. FIRST UNION VALUE PORTFOLIO ("VALUE FUND")--seeks long-term capital growth,
with current income as a secondary objective.
INVESTMENT MANAGEMENT
The Funds are advised by First Union, through its Capital Management Group.
First Union has responsibility for investment research and supervision of the
Funds, in addition to the purchase or sale of portfolio instruments, for which
it receives an annual fee.
PURCHASING AND REDEEMING SHARES
For information on purchasing Class B and Class C Shares of any of the Funds,
please refer to the Shareholder Guide section entitled "How to Buy Shares."
Redemption information may be found under "How to Redeem Shares."
RISK FACTORS
Investors should be aware of the following general observations: The market
value of fixed-income securities, which constitute a major part of the
investments of several of the Funds described in this prospectus, may vary
inversely in response to changes in prevailing interest rates. The foreign
securities in which several Funds may invest may be subject to certain risks in
addition to those inherent in U.S. investments. One or more Funds may make
certain investments and employ certain investment techniques that involve other
risks, including entering into repurchase agreements, lending portfolio
securities and entering into futures contracts and related options as hedges.
These risks and those associated with investing in mortgage-backed securities,
when-issued securities, options and variable rate securities are described
under "Investment Objectives and Policies" for each Fund and "Other Investment
Policies."
- ------------------------ SUMMARY OF ------------------------
- ------------------------ FUND EXPENSES ------------------------
FIRST UNION EQUITY AND INCOME FUNDS
CLASS B SHARES
<TABLE>
<CAPTION>
Fixed High Grade U.S.
Balanced Income Tax Free Government Utility Value
Fund Fund Fund Fund Fund Fund
-------- ------ ---------- ---------- ------- -----
CLASS B SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed
on Purchases
(as a percentage of offer-
ing price)................ 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Maximum Sales Load Imposed
on Reinvested Dividends
(as a percentage of offer-
ing price)................ None None None None None None
Deferred Sales Load (as a
percentage of original
purchase price or redemp-
tion proceeds, as applica-
ble)...................... None None None None None None
Redemption Fee (as a per-
centage of amount re-
deemed,
if applicable)............ None None None None None None
Exchange Fee............... None None None None None None
<CAPTION>
ANNUAL CLASS B SHARES OPERATING
EXPENSES
<S> <C> <C> <C> <C> <C> <C>
(As a percentage of average
net assets)
Management Fee (after waiv-
er) (1)................... 0.50% 0.50% 0.49% 0.49% 0.00% 0.50%
12b-1 Fees (2)............. 0.25% 0.10% 0.25% 0.25% 0.25% 0.25%
Total Other Expenses (after
waiver) (3)............... 0.16% 0.16% 0.32% 0.25% 0.92% 0.17%
Total Class B Shares Op-
erating Expenses (4)...... 0.91% 0.76% 1.06% 0.99% 1.17% 0.92%
</TABLE>
(1) The management fees of High Grade Tax Free, U.S. Government and Utility
Funds have been reduced to reflect the voluntary waivers by the Adviser. The
Adviser may terminate these voluntary waivers at any time at its sole
discretion. The maximum management fee for High Grade Tax Free, U.S.
Government and Utility Funds is 0.50%.
(2) The Class B Shares can pay up to 0.75% of Class B Shares' average daily
net assets as a 12b-1 fee. For the foreseeable future, Fixed Income Fund plans
to limit the Class B Shares' 12b-1 payments to 0.10% of Class B Shares'
average daily net assets. All other Funds listed above plan to limit the Class
B Shares' 12b-1 payments to 0.25% of Class B Shares' average daily net assets.
(3) Total Other Expenses for Utility Fund are estimated to be 1.66%, absent
the anticipated voluntary waiver by the administrator. The administrator may
terminate this waiver at any time at its sole discretion.
(4) Total Class B Shares Operating Expenses for Utility Fund are estimated to
be 2.41%, absent the voluntary waivers described above in notes 1 and 3.
Fixed Income, High Grade Tax Free, U.S. Government and Value Funds' Total
Class B Shares Annual Operating Expenses were 0.93%, 0.85%, 0.69% and 0.99%,
respectively, for the year ended December 31, 1993. Total Class B Shares
Operating Expenses for High Grade Tax Free Fund absent the voluntary waiver of
the management fee by the Adviser and waiver of the 12b-1 fee was 1.07% for
the year ended December 31, 1993. Total Class B Shares Operating Expenses for
U.S. Government Fund absent the voluntary waiver of the management fee by the
Adviser and the voluntary waiver of the administrative fee by the
administrator, was 1.00% for the year ended December 31, 1993.
The Annual Class B Shares Operating Expenses in the table above, except for
the Balanced and Utility Funds, are based on expenses expected during the
fiscal year ending December 31, 1994. The total Class B Shares expected
operating expenses for High Grade Tax Free and U.S. Government Funds would be
1.07% and 1.00%, respectively, absent the voluntary waivers described above in
note 1.
Fixed Income and Value Funds are no longer allocating certain expenses as
incurred by each class.
Utility Fund expenses in this table are estimated based on average expenses
expected to be incurred during the fiscal year ending December 31, 1994.
During the course of this period, expenses may be more or less than the
average amount shown.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUNDS WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS
AND EXPENSES, SEE "FEES AND EXPENSES." WIRE-TRANSFERRED REDEMPTIONS OF LESS
THAN $5,000 MAY BE SUBJECT TO ADDITIONAL FEES.
Because of the asset-based sales charge, long-term shareholders may pay more
than the economic equivalent of the maximum front-end sales charges permitted
under the rules of the National Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming
(1) a 5% annual return and (2) redemption at
the end of each time period.
The Funds charge no redemption fees for Class
B Shares.
Balanced Fund............................... $49 $68 $88 $147
Fixed Income Fund........................... $47 $63 $81 $130
High Grade Tax Free Fund.................... $50 $72 $96 $164
U.S. Government Fund........................ $50 $70 $93 $156
Utility Fund................................ $51 $76 NA NA
Value Fund.................................. $49 $68 $89 $149
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS
EXAMPLE FOR UTILITY FUND CLASS B SHARES IS BASED ON ESTIMATED DATA FOR THE
FISCAL YEAR ENDING DECEMBER 31, 1994.
The information set forth in the foregoing table and example relates only to
Class B Shares of the Funds. The Funds also offer two additional classes of
shares called Trust Shares and Class C Shares. In general, all expenses are
allocated based upon the daily net assets of each class. Trust Shares bear no
sales load or 12b-1 fee. Class C Shares are subject to a 12b-1 fee of 0.75 of
1% and bear a maximum contingent deferred sales load of 4.00%. Neither Trust
Shares nor Class C Shares bear a front-end sales load. See "Other Classes of
Shares."
- ------------------------ SUMMARY OF ------------------------
- ------------------------ FUND EXPENSES ------------------------
FIRST UNION EQUITY AND INCOME FUNDS
CLASS C SHARES
<TABLE>
<CAPTION>
Fixed High Grade U.S.
Balanced Income Tax Free Government Utility
Fund Fund Fund Fund Fund
---------------- ---------------- ---------------- ---------------- ----------------
CLASS C SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C> <C> <C> <C>
Maximum Sales Load
Imposed on Purchases
(as a percentage of
offering price). None None None None None
Maximum Sales Load
Imposedon Reinvested
Dividends (as a percentage of
offering price). None None None None None
Deferred Sales Load (as a percentage
of original purchase price or
redemption proceeds, as
applicable)(1).............. 4% during 4% during 4% during 4% during 4% during
the first year, the first year, the first year, the first year, the first year,
3% during 3% during 3% during 3% during 3% during
the second year, the second year, the second year, the second year, the second year,
2.5% during 2.5% during 2.5% during 2.5% during 2.5% during
the third year, the third year, the third year, the third year, the third year,
2% during 2% during 2% during 2% during 2% during
the fourth year, the fourth year, the fourth year, the fourth year, the fourth year,
1.5% during 1.5% during 1.5% during 1.5% during 1.5% during
the fifth year, the fifth year, the fifth year, the fifth year, the fifth year,
0.5% during 0.5% during 0.5% during 0.5% during 0.5% during
the sixth year, the sixth year, the sixth year, the sixth year, the sixth year,
and 0% after and 0% after and 0% after and 0% after and 0% after
the sixth year the sixth year the sixth year the sixth year the sixth year
Redemption Fee (as a
percentage of amount
redeemed, if applicable). None None None None None
Exchange Fee.... None None None None None
<CAPTION>
ANNUAL CLASS C SHARES OPERATING EXPENSES
<S> <C> <C> <C> <C> <C>
(As a percentage of average net
assets)
Management Fee
(after waiver)(2).... 0.50% 0.50% 0.49% 0.49% 0.00%
12b-1 Fees... 0.75% 0.75% 0.75% 0.75% 0.75%
Total Other Expenses
(after waiver)(3).... 0.16% 0.16% 0.32% 0.25% 0.92%
Total Class C Shares
Operating Expenses(4). 1.41% 1.41% 1.56% 1.49% 1.67%
<CAPTION>
Value
Fund
-----------------
CLASS C SHARES
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Load
Imposed on Purchases
(as a percentage of
offering price). None
Maximum Sales Load
Imposed on Reinvested
Dividends (as a percentage
of offering price). None
Deferred Sales Load (as a
percentage or original
purchase price or
redemption proceeds, as
applicable)(1)... 4% during
the first year,
3% during
the second year,
2.5% during
the third year,
2% during
the fourth year,
1.5% during
the fifth year,
0.5% during
the sixth year,
and 0% after
the sixth year
Redemption Fee (as
a percentage of
amount redeemed,
if applicable). None
Exchange Fee... None
<CAPTION>
ANNUAL CLASS C SHARES OPERATING EXPENSES
<S> <C>
(As a percentage of average net
assets)
Management Fee (after
waiver)(2).... 0.50%
12b-1 Fees... 0.75%
Total Other Expenses
(after waiver)(3).... 0.17%
Total Class C Shares
Operating Expenses (4). 1.42%
</TABLE>
(1) No contingent deferred sales charge is imposed on (a) Shares purchased
more than six years prior to redemption, (b) Shares acquired through the
reinvestment of dividends and distributions, and (c) the portion of redemption
proceeds attributable to increases in the value of an account above the net
cost of the investment due to increases in the net asset value per Share.
(2) The management fees of High Grade Tax Free, U.S. Government and Utility
Funds have been reduced to reflect the voluntary waivers by the Adviser. The
Adviser may terminate these voluntary waivers at any time at its sole
discretion. The maximum management fee for High Grade Tax Free, U.S.
Government and Utility Funds is 0.50%.
(3) Total Other Expenses for Utility Fund are estimated to be 1.66%, absent
the anticipated voluntary waiver by the administrator. The administrator may
terminate this waiver at any time at its sole discretion.
(4) Total Class C Shares Operating Expenses for Utility Fund are estimated to
be 2.91%, absent the voluntary waivers described above in notes 2 and 3.
Fixed Income, High Grade Tax Free, U.S. Government and Value Funds' Total
Class C Shares Annual Operating Expenses were 1.57%, 1.35%, 1.19% and 1.48%,
respectively, for the year ended December 31, 1993. Total Class C Shares
Operating Expenses for High Grade Tax Free absent the voluntary waiver of the
management fee by the Adviser and the waiver of the 12b-1 fee was 1.57% for
the year ended December 31, 1993. Total Class C Shares Operating Expenses for
U.S. Government Fund absent the voluntary waiver of the management fee by the
Adviser and the voluntary waiver of the administrative fee by the
administrator was 1.50% for the year ended December 31, 1993.
The Annual Class C Shares Operating Expenses in the table above, except for
Balanced and Utility Funds, are based on expenses expected during the fiscal
year ending December 31, 1994. The total Class C Shares expected operating
expenses, for High Grade Tax Free and U.S. Government Funds, would be 1.57%
and 1.50%, respectively, absent the voluntary waivers described above in note
2.
Fixed Income and Value Funds are no longer allocating certain expenses as
incurred by each class.
Utility Fund expenses in this table are estimated based on average expenses
expected to be incurred during the fiscal year ending December 31, 1994.
During the course of this period, expenses may be more or less than the
average amount shown.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUNDS WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS
AND EXPENSES, SEE "FEES AND EXPENSES." WIRE-TRANSFERRED REDEMPTIONS OF LESS
THAN $5,000 MAY BE SUBJECT TO ADDITIONAL FEES.
Because of the asset-based sales charge, long-term shareholders may pay more
than the economic equivalent of the maximum front-end sales charges permitted
under the rules of the National Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) redemption at the end of each time period:
Balanced Fund...................................................................... $56 $72 $95 $169
Fixed Income Fund.................................................................. $56 $72 $95 $169
High Grade Tax Free Fund........................................................... $57 $77 $103 $186
U.S. Government Fund............................................................... $57 $75 $99 $178
Utility Fund....................................................................... $58 $80 NA NA
Value Fund......................................................................... $56 $73 $96 $170
You would pay the following expenses on the same investment, assuming no redemptions:
Balanced Fund...................................................................... $14 $45 $77 $169
Fixed Income Fund.................................................................. $14 $45 $77 $169
High Grade Tax Free Fund........................................................... $16 $49 $85 $186
U.S. Government Fund............................................................... $15 $47 $81 $178
Utility Fund....................................................................... $17 $53 NA NA
Value Fund......................................................................... $14 $45 $78 $170
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE EXAMPLE
FOR UTILITY FUND CLASS C SHARES IS BASED ON ESTIMATED DATA FOR THE FISCAL YEAR
ENDING DECEMBER 31, 1994.
The information set forth in the foregoing table and example relates only to
Class C Shares of the Funds. The Funds also offer two additional classes of
shares called Trust Shares and Class B Shares. In general, all expenses are
allocated based upon the daily net assets of each class. Trust Shares bear no
sales load or 12b-1 fee. Class B Shares are subject to a 12b-1 fee of 0.25 of
1%and bear a maximum sales load of 4.00%. See "Other Classes of Shares."
- ------------------------ FINANCIAL ------------------------
- ------------------------ HIGHLIGHTS ------------------------
FIRST UNION BALANCED PORTFOLIO
SUPPLEMENTARY INFORMATION
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by KPMG Peat Marwick, the Fund's
independent auditors. Their report, dated February 11, 1994, on the Fund's
Financial Statements for the year ended December 31, 1993, and on the
following table for each of the periods presented, is included in the Trust's
Annual Report, which is incorporated herein by reference. This table should be
read in conjunction with the Fund's Financial Statements and notes thereto,
contained in the Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
CLASS C
TRUST SHARES CLASS B INVESTMENT SHARES INVESTMENT SHARES
-------------------------------- ---------------------------------- -----------------
YEAR ENDED YEAR ENDED YEAR ENDED
-------------------------------- ---------------------------------- -----------------
12/31/93 12/31/92 12/31/91** 12/31/93 12/31/92 12/31/91*** 12/31/93+
- ------------------------ --------- --------- ---------- -------- -------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING
OF PERIOD $ 11.41 $ 11.02 $ 10.00 $ 11.41 $ 11.02 $ 10.00 $ 11.54
- ------------------------
INCOME FROM INVESTMENT
OPERATIONS
- ------------------------
Net investment income 0.45 0.46 0.36 0.419 0.42 0.30 0.34
- ------------------------
Net realized and
unrealized gain
(loss) on investments 0.75 0.42 1.03 0.755 0.43 1.08 0.65
- ------------------------ ------ ------ ------ ------ ------ ------- ------
Total from investment
operations 1.20 0.88 1.39 1.174 0.85 1.38 0.99
- ------------------------ ------ ------ ------ ------ ------ ------- ------
LESS DISTRIBUTION
- ------------------------
Dividends to
shareholders from
net investment income (0.45) (0.45) (0.36) (0.419) (0.42) (0.35) (0.34)
- ------------------------
Distributions to
shareholders from net
realized gain on
investment transactions (0.09) (0.04) (0.01) (0.091) (0.04) (0.01) (0.09)
- ------------------------
Distributions in excess
of net investment
income -- -- -- (0.004)(b) -- -- (0.02)(b)
- ------------------------ ------ ------ ------ ------ ------ ------ -------
Total distributions (0.54) (0.49) (0.37) (0.514) (0.46) (0.36) (0.45)
- ------------------------ ------- ------- ------- -------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD $12.07 $11.41 $11.02 $12.07 $11.41 $11.02 $12.08
- ------------------------ ------ ------ ------ ------ ------ ------- ------
TOTAL RETURN* 10.68% 8.21% 15.02% 10.41% 7.94% 11.75% 8.72%
- ------------------------
RATIOS TO AVERAGE NET
ASSETS
- ------------------------
Expenses 0.66% 0.66% 0.68%(a) 0.91% 0.91% 0.92%(a) 1.41%(a)
- ------------------------
Net investment income 3.86% 4.20% 4.86%(a) 3.61% 3.93% 4.38%(a) 3.09%(a)
- ------------------------
SUPPLEMENTAL DATA
- ------------------------
Net assets, end of pe-
riod
(000 omitted) $760,147 $520,232 $247,472 $35,032 $17,408 $334 $65,475
- ------------------------
Portfolio turnover rate 19% 12% 19% 19% 12% 19% 19%
- ------------------------
</TABLE>
* Based on net asset value, which does not reflect the sales load or contin-
gent deferred sales charge, if applicable.
** Reflects operations for the period from April 1, 1991 (commencement of op-
erations) to December 31, 1991.
*** Reflects operations for the period from June 10, 1991 (commencement of op-
erations) to December 31, 1991.
+ Reflects operations for the period from January 26, 1993 (commencement of
operations) to December 31, 1993.
(a) Computed on an annualized basis.
(b) Distributions in excess of net investment income for the year ended De-
cember 31, 1993, were the result of certain book and tax timing differ-
ences. These distributions do not represent a return of capital for fed-
eral income tax purposes.
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE TRUST'S
ANNUAL REPORT, DATED DECEMBER 31, 1993, WHICH CAN BE OBTAINED FREE OF CHARGE.
- ------------------------ FINANCIAL ------------------------
- ------------------------ HIGHLIGHTS ------------------------
FIRST UNION FIXED INCOME PORTFOLIO
SUPPLEMENTARY INFORMATION
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by KPMG Peat Marwick, the Fund's
independent auditors. Their report, dated February 11, 1994, on the Fund's
Financial Statements for the year ended December 31, 1993, and on the
following table for each of the periods presented, is included in the Trust's
Annual Report, which is incorporated herein by reference. This table should be
read in conjunction with the Fund's Financial Statements and notes thereto,
contained in the Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
TRUST SHARES CLASS B INVESTMENT SHARES
--------------------------- -----------------------------------------------------------
PERIOD ENDED PERIOD ENDED
--------------------------- -----------------------------------------------------------
12/31/93 12/31/92 12/31/91* 12/31/93 12/31/92 12/31/91 12/31/90+ 3/31/90 3/31/89++
- ---------------- -------- -------- --------- -------- -------- -------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD $10.41 $10.54 $10.06 $10.41 $10.54 $ 9.99 $9.72 $9.50 $9.70
- ----------------
INCOME FROM IN-
VESTMENT OPERA-
TIONS
- ----------------
Net investment
income 0.69 0.70 0.71 0.65 0.71 0.73 0.55 0.79 0.10
- ----------------
Net realized
and unrealized
gain (loss) on
investments 0.19 (0.02) 0.56 0.19 (0.06) 0.60 0.24 0.20 (0.14)
- ---------------- ------ ------ ------ ------ ------ ------ ----- ----- -----
Total from
investment
operations 0.88 0.68 1.27 0.84 0.65 1.33 0.79 0.99 (0.04)
- ---------------- ------ ------ ------ ------ ------ ------ ----- ----- -----
LESS DISTRIBU-
TIONS
- ----------------
Dividends to
shareholders
from net
investment
income (0.68) (0.70) (0.71) (0.65) (0.67) (0.70) (0.52) (0.77) (0.16)
- ----------------
Distributions
to shareholders
from net
realized gain
on investments (0.18) (0.11) (0.07) (0.18) (0.11) (0.07) -- -- --
- ----------------
Distributions
in excess of
net investment
income -- -- (0.01)(a) -- -- (0.01)(a) -- -- --
- ---------------- ------ ------ ------ ------ ------ ------ ----- ----- -----
Total distribu-
tions (0.86) (0.81) (0.79) (0.83) (0.78) (0.78) (0.52) (0.77) (0.16)
- ---------------- ------ ------ ------ ------ ------ ------ ----- ----- -----
NET ASSET VALUE,
END OF PERIOD $10.43 $10.41 $10.54 $10.42 $10.41 $10.54 $9.99 $9.72 $9.50
- ---------------- ------ ------ ------ ------ ------ ------ ----- ----- -----
TOTAL RETURN** 8.67% 6.64% 13.80% 8.29% 6.39% 13.74% 8.31% 10.51% (0.31)%
- ----------------
RATIOS TO
AVERAGE NET
ASSETS
- ----------------
Expenses 0.66% 0.69% 0.69%(c) 0.93% 0.90% 0.80% 1.01%(c) 1.00% 1.78%(c)
- ----------------
Net investment
income 6.41% 6.67% 7.12%(c) 6.15% 6.79% 7.30% 7.53%(c) 7.52% 6.10%(c)
- ----------------
Expense waiver/
reimbursement
(b) -- -- 0.07%(c) -- -- 0.09% 0.81%(c) 0.50% -- (c)
- ----------------
SUPPLEMENTAL
DATA
- ----------------
Net assets, end
of period (000
omitted) $376,445 $324,068 $256,254 $22,865 $21,488 $17,680 $11,765 $6,496 $11,580
- ----------------
Portfolio
turnover rate 73% 66% 55% 73% 26% 66% 27% 32% 18%
- ----------------
<CAPTION>
CLASS C
INVESTMENT
SHARES
-------------
PERIOD ENDED
-------------
12/31/93+++
- ----------------- -------------
<S> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD $10.57
- -----------------
INCOME FROM IN-
VESTMENT OPERA-
TIONS
- -----------------
Net investment
income 0.58
- -----------------
Net realized
and unrealized
gain (loss) on
investments 0.05
- ----------------- -------------
Total from
investment
operations 0.63
- ----------------- -------------
LESS DISTRIBU-
TIONS
- -----------------
Dividends to
shareholders
from net
investment
income (0.58)
- -----------------
Distributions
to shareholders
from net
realized gain
on investments (0.18)
- -----------------
Distributions
in excess of
net investment
income --
- ----------------- -------------
Total distribu-
tions (0.76)
- ----------------- -------------
NET ASSET VALUE,
END OF PERIOD $10.44
- ----------------- -------------
TOTAL RETURN** 6.08%
- -----------------
RATIOS TO
AVERAGE NET
ASSETS
- -----------------
Expenses 1.57%(c)
- -----------------
Net investment
income 5.42%(c)
- -----------------
Expense waiver/
reimbursement
(b) -- (c)
- -----------------
SUPPLEMENTAL
DATA
- -----------------
Net assets, end
of period (000
omitted) $8,876
- -----------------
Portfolio
turnover rate 73%
- -----------------
</TABLE>
(Continued)
- ------------------------ FINANCIAL ------------------------
- ------------------------ HIGHLIGHTS ------------------------
(CONTINUED)
FIRST UNION FIXED INCOME PORTFOLIO
* Reflects operations for the period from January 4, 1991 (commencement of
operations) to December 31, 1991.
** Based on net asset value, which does not reflect sales load or contingent
deferred sales charge, if applicable.
+ Nine months ended December 31, 1990.
++ Reflects operations for the period from January 28, 1989 (commencement of
operations) to March 31, 1989.
+++ Reflects operations for the period from January 26, 1993 (commencement of
operations) to December 31, 1993.
(a) Distributions in excess of net investment income for the year ended
December 31, 1991, were a result of certain book and tax timing
differences. These differences did not represent a return of capital for
federal income tax purposes for the year ended December 31, 1991.
(b) This voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
(c) Computed on an annualized basis.
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE TRUST'S
ANNUAL REPORT, DATED DECEMBER 31, 1993, WHICH CAN BE OBTAINED FREE OF CHARGE.
- ------------------------ FINANCIAL ------------------------
- ------------------------ HIGHLIGHTS ------------------------
FIRST UNION HIGH GRADE TAX FREE PORTFOLIO
(FORMERLY, FIRST UNION INSURED TAX FREE PORTFOLIO)
SUPPLEMENTARY INFORMATION
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by KPMG Peat Marwick, the Fund's
independent auditors. Their report, dated February 11, 1994, on the Fund's
Financial Statements for the year ended December 31, 1993, and on the following
table for each of the periods presented, is included in the Trust's Annual
Report, which is incorporated herein by reference. This table should be read in
conjunction with the Fund's Financial Statements and notes thereto, contained
in the Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
CLASS C INVESTMENT
CLASS B INVESTMENT SHARES (C) SHARES (C)
------------------------------------ -------------------
YEAR ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 31, 1993 DECEMBER 31, 1992* DECEMBER 31, 1993**
- ------------------------ ----------------- ------------------ -------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF PERIOD $10.42 $10.00 $10.42
- ------------------------
INCOME FROM INVESTMENT
OPERATIONS
- ------------------------
Net investment income 0.54 0.51 0.47
- ------------------------
Net realized and
unrealized gain on in-
vestments 0.81 0.42 0.81
- ------------------------ ------ ------ ------
Total from investment
operations 1.35 0.93 1.28
- ------------------------
LESS DISTRIBUTIONS
- ------------------------
Dividends to sharehold-
ers from net
investment income (0.54) (0.51) (0.47)
- ------------------------
Distributions to share-
holders from net real-
ized
gain on investment
transactions (0.07) -- (0.07)
- ------------------------ ------ ------ ------
Total distributions (0.61) (0.51) (0.54)
- ------------------------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD $11.16 $10.42 $11.16
- ------------------------ ------ ------ ------
TOTAL RETURN*** 13.25% 9.37% 12.41%
- ------------------------
RATIOS TO AVERAGE NET
ASSETS
- ------------------------
Expenses 0.85% 0.49%(a) 1.35%(a)
- ------------------------
Net investment income 4.99% 5.79%(a) 4.44%(a)
- ------------------------
Expense
waiver/reimbursement
(b) 0.22% 0.62%(a) 0.22%(a)
- ------------------------
SUPPLEMENTAL DATA
- ------------------------
Net assets, end of
period (000 omitted) $101,352 $90,738 $41,030
- ------------------------
Portfolio turnover rate 14% 7% 14%
- ------------------------
</TABLE>
* Reflects operations for the period from February 21, 1992 (commencement of
operations) to December 31, 1992.
** Reflects operations for the period from January 11, 1993 (commencement of
operations) to December 31, 1993.
*** Based on net asset value, which does not reflect the sales load or contin-
gent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
(c) Trust Shares were not being offered as of December 31, 1993. Accordingly,
there are no Financial Highlights for such shares. The Financial High-
lights presented above are historical information for Class B and Class C
Investment Shares of the Fund.
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE TRUST'S
ANNUAL REPORT, DATED DECEMBER 31, 1993, WHICH CAN BE OBTAINED FREE OF CHARGE.
- ------------------------ FINANCIAL ------------------------
- ------------------------ HIGHLIGHTS ------------------------
FIRST UNION U.S. GOVERNMENT PORTFOLIO
SUPPLEMENTARY INFORMATION
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by KPMG Peat Marwick, the Fund's
independent auditors. Their report, dated February 11, 1994, on the Fund's
Fnancial Statements for the year ended December 31, 1993, and on the following
table for each of the periods presented, is included in the Trust's Annual
Report, which is incorporated herein by reference. This table should be read in
conjunction with the Fund's Financial Statements and notes thereto, contained
in the Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
CLASS B CLASS C
TRUST INVESTMENT INVESTMENT
SHARES SHARES SHARES
--------- ---------- ----------
PERIOD PERIOD PERIOD
ENDED ENDED ENDED
12/31/93* 12/31/93** 12/31/93**
- ------------------------------------- --------- ---------- ----------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.25 $10.00 $10.00
- -------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------
Net investment income 0.25 0.68 0.63
- -------------------------------------
Net realized and unrealized gain
(loss) on investments (0.20) 0.05 0.05
- ------------------------------------- ----- ---- ----
Total from investment operations 0.05 0.73 0.68
- -------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------
Dividends to shareholders from net
investment income (0.25) (0.68) (0.63)
- ------------------------------------- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $10.05 $10.05 $10.05
- ------------------------------------- ------ ------ ------
TOTAL RETURN*** 0.49% 7.43% 6.91%
- -------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------
Expenses 0.48%(a) 0.69%(a) 1.19%(a)
- -------------------------------------
Net investment income 7.20%(a) 6.93%(a) 6.44%(a)
- -------------------------------------
Expense adjustment (b) 0.31%(a) 0.31%(a) 0.31%(a)
- -------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------
Net assets, end of period (000 omit-
ted) $14,486 $38,851 236,696
- -------------------------------------
Portfolio turnover rate 39% 39% 39%
- -------------------------------------
</TABLE>
* Reflects operations for the period from September 2, 1993 (commencement of
operations) to December 31, 1993.
** Reflects operations for the period from January 11, 1993 (commencement of
operations) to December 31, 1993.
*** Based on net asset value, which does not reflect the sales load or contin-
gent deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) The voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE TRUST'S
ANNUAL REPORT, DATED DECEMBER 31, 1993, WHICH CAN BE OBTAINED FREE OF CHARGE.
- ------------------------ FINANCIAL ------------------------
- ------------------------ HIGHLIGHTS ------------------------
FIRST UNION VALUE PORTFOLIO
SUPPLEMENTARY INFORMATION
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by KPMG Peat Marwick, the Fund's
independent auditors. Their report, dated February 11, 1994, on the Fund's
Financial Statements for the year ended December 31, 1993, and on the following
table for each of the periods presented, is included in the Trust's Annual
Report, which is incorporated herein by reference. This table should be read in
conjunction with the Fund's Financial Statements and notes thereto, contained
in the Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
TRUST SHARES
--------------------------------
PERIOD ENDED
--------------------------------
12/31/93 12/31/92 12/31/91*
- ------------------------------------------ --------- -------- ---------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $17.11 $17.08 $14.28
- ------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------
Net investment income 0.52 0.49 0.47
- ------------------------------------------
Net realized and unrealized gain (loss)
on investments 1.12 0.90 3.53
- ------------------------------------------ ---- ---- ----
Total from investment operations 1.64 1.39 4.00
- ------------------------------------------ ---- ---- ----
LESS DISTRIBUTIONS
- ------------------------------------------
Dividends to shareholders from net in-
vestment income (0.52) (0.49) (0.47)
- ------------------------------------------
Distributions to shareholders form net
realized
gain on investment transactions (0.58) (0.87) (0.73)
- ------------------------------------------
Distributions in excess of net investment
income (0.02)(c) -- --
- ------------------------------------------ ------ ------- -------
Total distributions (1.12) (1.36) (1.20)
- ------------------------------------------ ------- ------- -------
NET ASSET VALUE, END OF PERIOD $17.63 $17.11 $17.08
- ------------------------------------------ ------ ------ ------
TOTAL RETURN** 9.71% 8.31% 25.41%
- ------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------
Expenses 0.65% 0.68% 0.69%(b)
- ------------------------------------------
Net investment income 2.98% 2.90% 3.04%(b)
- ------------------------------------------
Expense waiver/reimbursement (a) -- 0.01% 0.08%(b)
- ------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------
Net assets, end of period $463,087 $326,154 $271,391
- ------------------------------------------
Portfolio turnover rate 46% 56% 69%
- ------------------------------------------
</TABLE>
* For the period from January 3, 1991 (commencement of operations) to December
31, 1991.
** Based on net asset value, which does not reflect the sales load or contin-
gent deferred sales charge, if applicable.
(a) This voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
(b) Computed on an annualized basis.
(c) Distributions in excess of net investment income for the period ended De-
cember 31, 1993, were the result of certain book and tax filing differ-
ences. These distributions do not represent a return of capital for federal
income tax purposes.
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE TRUST'S
ANNUAL REPORT, DATED DECEMBER 31, 1993, WHICH CAN BE OBTAINED FREE OF CHARGE.
- ------------------------ FINANCIAL ------------------------
- ------------------------ HIGHLIGHTS ------------------------
FIRST UNION VALUE PORTFOLIO
SUPPLEMENTARY INFORMATION
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by KPMG Peat Marwick, the Fund's
independent auditors. Their report, dated February 11, 1994, on the Fund's
Financial Statements for the year ended December 31, 1993, and on the following
table for each of the periods presented, is included in the Trust's Annual
Report, which is incorporated herein by reference. This table should be read in
conjunction with the Fund's Financial Statements and notes thereto, contained
in the Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
CLASS B INVESTMENT SHARES
----------------------------------------------------------------------------------------------------
PERIOD ENDED
----------------------------------------------------------------------------------------------------
12/31/93 12/31/92 12/31/91 12/31/90** 3/31/90 3/31/89 3/31/88 3/31/87 3/31/86 3/31/85***
- ------------------------ -------- -------- -------- ---------- ------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $17.11 $17.08 $14.61 $15.12 $14.45 $12.83 $14.66 $12.35 $10.04 $10.00
- ------------------------
INCOME FROM INVESTMENT
OPERATIONS
- ------------------------
Net investment income 0.47 0.44 0.46 0.36 0.54 0.36 0.26 0.15 0.19 0.04
- ------------------------
Net realized and
unrealized gain (loss)
on investments 1.10 0.89 3.17 (0.44) 1.70 2.11 (1.30) 2.38 2.32 0.00
- ------------------------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations 1.57 1.33 3.63 (0.08) 2.24 2.47 (1.04) 2.53 2.51 0.04
- ------------------------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
- ------------------------
Dividends to
shareholders from net
investment income (0.47) (0.43) (0.43) (0.36) (0.57) (0.38) (0.26) (0.13) (0.20) (0.00)
- ------------------------
Distribution to
shareholders from net
realized gain on
investments (0.58) (0.87) (0.73) (0.02) (1.00) (0.47) (0.53) (0.09) (0.00) (0.00)
- ------------------------
Distributions in excess
of net investment
income -- -- -- (0.05)(a) -- -- -- -- -- --
- ------------------------ ------ ------ ------ ------- ------ ------- ------ ------- ------ ------
Total distributions (1.05) (1.30) (1.16) (0.43) (1.57) (0.85) (0.79) (0.22) (0.20) (0.00)
- ------------------------ ------ ------ ------ ------ ------ ------- ------- ------ ------ ------
NET ASSET VALUE, END OF
PERIOD $17.63 $17.11 $17.08 $14.61 $15.12 $14.45 $12.83 $14.66 $12.35 $10.04
- ------------------------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL RETURN* 9.31% 7.96% 25.11% (0.51)% 15.54% 19.73% (7.14)% 20.81% 25.29% (0.40%)
- ------------------------
RATIOS TO AVERAGE NET
ASSETS
- ------------------------
Expenses 0.99% 1.01% 0.96% 1.39%(b) 1.55% 1.71% 1.74% 1.97% 2.00% 2.00%(b)
- ------------------------
Net investment income 2.63% 2.57% 2.78% 3.28%(b) 3.42% 2.72% 1.92% 1.41% 2.34% 6.47%(b)
- ------------------------
Expense waiver/
adjustment (d) -- 0.01% 0.09% -- -- -- -- -- -- --
- ------------------------
SUPPLEMENTAL DATA
- ------------------------
Net assets, end of
period $189,983 $169,310 $135,565 $104,637 $95,995 $83,121 $21,914 $23,221 $5,595 $100
- ------------------------
Portfolio turnover
rate**** 46% 56% 69% 13% 11% 24% 16% 20% 20% 0%
- ------------------------
</TABLE>
(See notes on page 15.)
(Continued)
- ------------------------ FINANCIAL ------------------------
- ------------------------ HIGHLIGHTS ------------------------
(CONTINUED)
FIRST UNION VALUE PORTFOLIO
<TABLE>
<CAPTION>
CLASS C
INVESTMENT
SHARES
----------
PERIOD
ENDED
----------
12/31/93+
- ------------------------------- ----------
<S> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $17.24
- -------------------------------
INCOME FROM INVESTMENT OPERA-
TIONS
- -------------------------------
Net investment income 0.35
- -------------------------------
Net realized and unrealized
gain (loss) on investments 1.01
- ------------------------------- ------
Total from investment
operations 1.36
- ------------------------------- ------
LESS DISTRIBUTIONS
- -------------------------------
Dividends to shareholders from
net investment income (0.35)
- -------------------------------
Distribution to shareholders
from net realized gain on in-
vestments (0.58)
- -------------------------------
Distributions in excess of net
investment income (0.04)(c)
- ------------------------------- -------
Total distributions (0.97)
- ------------------------------- ------
NET ASSET VALUE, END OF PERIOD $17.63
- ------------------------------- ------
TOTAL RETURN* 7.98%
- -------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------
Expenses 1.48%(b)
- -------------------------------
Net investment income 2.09%(b)
- -------------------------------
Expense waiver/reimbursement
(d) --
- -------------------------------
SUPPLEMENTAL DATA
- -------------------------------
Net assets, end of period $59,953
- -------------------------------
Portfolio turnover rate**** 46%
- -------------------------------
</TABLE>
* Based on net asset value, which does not reflect the sales load or contin-
gent deferred sales charge, if applicable.
**For the nine months ended December 31, 1990.
*** Reflects operations for the period from August 30, 1984 (commencement of
operations) to March 31, 1985.
**** Portfolio turnover rate for periods ending on or after March 31, 1986
include certain U.S. government obligations.
+ Reflects operations for the period from February 2, 1993 (commencement of
operations) to December 31, 1993.
(a) Distributions in excess of net investment income for the period ended De-
cember 31, 1990, were a result of certain book and tax timing differ-
ences. These distributions did not represent a return of capital for fed-
eral income tax purposes for the year ended December 31, 1990.
(b)Computed on an annualized basis.
(c) Distributions in excess of net investment income for the period ended De-
cember 31, 1993, were the result of certain book and tax timing differ-
ences. These distributions do not represent a return of capital for fed-
eral income tax purposes.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
FURTHER INFORMATION ABOUT THE FUND'S PERFORMANCE IS CONTAINED IN THE TRUST'S
ANNUAL REPORT, DATED DECEMBER 31, 1993, WHICH CAN BE OBTAINED FREE OF CHARGE.
- ------------------------- INVESTMENT -------------------------
- ------------------------- OBJECTIVES -------------------------
AND POLICIES
First Union Equity and Income Funds provide a broad range of objectives and
policies, intended to offer investment alternatives to a large group of
investors with a wide range of investment objectives.
The investment objectives and policies of each Fund are stated below. Each
Fund's investment objective cannot be changed without shareholder approval.
While there is no assurance that each objective will be achieved, the Funds
will endeavor to do so by following the investment policies detailed below.
Unless otherwise indicated, the investment policies of a Fund may be changed by
the Trust's Board of Trustees ("Trustees") without the approval of
shareholders. Shareholders will be notified before any material change in these
policies becomes effective.
- ------------------------- FIRST UNION -------------------------
- ------------------------- BALANCED -------------------------
PORTFOLIO
Objective: Long-term total return through capital appreciation, dividends, and
interest income.
Invests In: Common and preferred stocks for growth, bonds for stable income
flows.
Suitable for: Investors looking for long-term growth of income and capital from
a portfolio of investment grade equity and fixed income
investments.
Key Benefit: Diversity of investments takes advantage of shifts in market
conditions and relative attractiveness of different types of
securities.
DESCRIPTION OF THE FUND
The Balanced Fund seeks long-term total return through capital appreciation,
dividends, and interest income. The Fund invests primarily in a diversified
portfolio of common and preferred stocks, U.S. government securities, high
grade corporate bonds, and money market instruments. Common and preferred
stocks are utilized for growth while bonds provide stable income flows.
The portion of the Fund's total assets invested in common and preferred stocks
will vary according to the Adviser's assessment of market and economic
conditions and outlook. The asset mix of the Fund will normally range between
40-75% common and preferred stocks, 25-50% fixed income securities (including
some convertible securities), and 0-25% money market instruments. Moderate
shifts between types of assets are made in order to maximize returns or reduce
risk. Over the long-term it is anticipated that the Fund's asset mix will
average 60% in common and preferred stocks and 40% in bonds.
TYPES OF INVESTMENTS
The Fund invests in common, preferred and convertible preferred stocks and
bonds of U.S. companies with at least $100 million in equity, listed on major
stock exchanges or traded over-the-counter. The Fund looks at financial
strength, earnings growth and price in relation to current earnings, dividends,
and book value to identify growth opportunities.
The Fund may also invest in American Depositary Receipts ("ADRs") of foreign
companies traded on the New York or American Stock Exchanges or in the over-
the-counter market.
The Fund will only invest in those bonds, including convertible bonds, which
are rated A or higher by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P"), or which, if unrated, are considered to
be of comparable quality by the Adviser. Bonds are selected based on the
outlook for interest rates and their yield in relation to other bonds of
similar quality and maturity. Bond maturities in the portfolio average less
than twenty years.
The Fund also invests in securities which are either issued or guaranteed by the
U.S. government, its agencies, or instrumentalities. These types of securities
include: direct obligations of the U.S. Treasury such as U.S. Treasury bills,
notes and bonds; and notes, bonds, and discount notes of U.S. government
agencies or instrumentalities such as Federal Home Loan Banks, Federal National
Mortgage Association, Government National Mortgage Association, Banks for
Cooperatives, Federal Farm Credit Banks, Tennessee Valley Authority,
Export-Import Bank of the United States, Commodity Credit Corporation, Federal
Financing Bank, Student Loan Marketing Association, Federal Home Loan Mortgage
Corporation, or National Credit Union Administration.
Some U.S. government agency obligations are backed by the full faith and credit
of the U.S. Treasury. Others in which the Fund may invest are supported by: the
issuer's right to borrow an amount limited to a specific line of credit from
the U.S. Treasury; discretionary authority of the U.S. government to purchase
certain obligations of an agency or instrumentality; or the credit of the
agency or instrumentality.
The Fund may invest short-term in money market instruments; securities issued
and/or guaranteed by the U.S. government, its agencies, or instrumentalities;
and repurchase agreements collateralized by eligible investments.
- ------------------------- FIRST UNION -------------------------
- ------------------------- FIXED INCOME -------------------------
PORTFOLIO
Objective: High level of current income with capital growth as a secondary
objective.
Invests in: A broad range of investment grade debt securities.
Suitable for: Conservative investors who want attractive income.
Key Benefit: Investors can participate in a broad portfolio of fixed income
securities rather than purchasing a single issue.
DESCRIPTION OF THE FUND
The Fixed Income Fund seeks to provide a high level of current income by
investing primarily in a broad range of investment grade debt securities.
Capital growth is a secondary objective. The Fund will normally invest at least
80% of its assets in debt securities. At least 65% of the value of the
portfolio will be invested in fixed income securities.
TYPES OF INVESTMENTS
The Fund will only invest its assets in securities rated A or higher by Moody's
or S&P, or which, if unrated, are considered to be of comparable quality by the
Adviser.
Debt securities may include fixed, adjustable rate or stripped bonds,
debentures, notes, U.S. government securities, and debt securities convertible
into, or exchangeable for, preferred or common stock. Stated final maturity for
these securities may range up to 30 years. The duration of the securities will
not exceed ten years. The Fund intends to maintain a dollar-weighted average
maturity of five years or less. Market-expected average life will be used for
certain types of issues in computing the average maturity.
In normal market conditions the Fund may invest up to 20% of its assets in
money market instruments consisting of: (1) high grade commercial paper,
including master demand notes; (2) obligations of banks or savings and loan
associations having at least $1 billion in deposits, including certificates of
deposit and bankers' acceptances; (3) A-rated or better corporate obligations;
(4) obligations issued or guaranteed by the U.S. government or by any agency or
instrumentality of the U.S. government, as described under the caption "First
Union Balanced Portfolio--Types of Investments"; and (5) repurchase agreements
collateralized by any security listed above.
The Fund may also invest up to 20% of its assets in foreign securities (either
foreign or U.S. securities traded in foreign markets) in order to provide
further diversification. The Fund may also invest in preferred stock; units
which are debt securities with stock or warrants attached; and obligations
denominated in foreign currencies. In making these decisions, the Adviser will
consider such factors as the condition and growth potential of various
economies and securities markets, currency and taxation considerations and
other pertinent financial, social, national and political factors. (See "Other
Investment Policies" and "Foreign Investments".)
The Fund may elect to use options and financial futures for hedging purposes as
described in "Other Investment Policies--Options and Futures" and in the Fund's
Statement of Additional Information. The Fund may also elect to use currency
exchange contracts to manage exchange rate risk in order to stabilize the U.S.
dollar value of a security that it has agreed to buy or sell.
The Fund will not invest in securities judged to be speculative or of poor
quality.
TEMPORARY INVESTMENTS
For temporary defensive purposes, the Fund may invest up to 100% of its assets
in the money market instruments listed above.
- ------------------------- FIRST UNION -------------------------
- ------------------------- HIGH GRADE TAX FREE -------------------------
PORTFOLIO
(FORMERLY, FIRST UNION INSURED TAX FREE PORTFOLIO)
Objective: High level of federally tax free income that is consistent with
preservation of capital.
Invests in: Insured municipal bonds.
Suitable for: Investors seeking high tax-free monthly income and greater
liquidity.
Key Benefit: Greater diversification and liquidity than purchasing municipal
bonds directly. Pays monthly dividends for those who need current
income.
DESCRIPTION OF THE FUND
The High Grade Tax Free Fund seeks a high level of federally tax free income
that is consistent with preservation of capital. The Fund pursues this
objective by investing primarily in a portfolio of insured municipal bonds. At
least 65% of the value of its total assets will be invested in insured
obligations. The insurance guarantees the timely payment of principal and
interest but not the value of the municipal bonds or shares of the Fund.
As a matter of investment policy, which cannot be changed without the approval
of shareholders, the Fund will normally invest its assets so that at least 80%
of its annual interest income is exempt from federal income taxes (including
the alternative minimum tax). The interest income retains its tax free status
when distributed to the Fund's shareholders.
TYPES OF INVESTMENTS
Municipal bonds are the primary investment of the Fund. Municipal bonds are
debt obligations issued by or on behalf of states, territories, and possessions
of the United States, including the District of Columbia, and their political
subdivisions, agencies, and instrumentalities, the interest from which is
exempt from federal income tax. It is likely that shareholders who are subject
to the alternative minimum tax will be required to include interest from a
portion of the municipal securities owned by the Fund in calculating the
federal individual alternative minimum tax or the federal alternative minimum
tax for corporations.
The municipal bonds in which the Fund may invest are subject to the following
quality standards: rated A or better by Moody's or S&P, or, if unrated,
determined by the Adviser to be of comparable quality to such rated bonds; or,
insured by a municipal bond insurance company which is rated Aaa by Moody's or
AAA by S&P. A description of the rating categories is contained in the Appendix
of the Fund's Statement of Additional Information.
TEMPORARY INVESTMENTS
During periods when, in the Adviser's opinion, a temporary defensive position
in the market is appropriate, the Fund may temporarily invest in short-term tax
exempt or taxable investments. These temporary investments include: notes
issued by or on behalf of municipal or corporate issuers; obligations issued or
guaranteed by the U.S. government, its agencies, or instrumentalities; other
debt securities; commercial paper; bank certificates of deposit; and repurchase
agreements. There are no rating requirements applicable to temporary
investments. However, the Adviser will limit temporary investments to those it
considers to be of comparable quality to the acceptable investments of the
Fund.
Although the Fund is permitted to make taxable, temporary investments, there is
no current intention of generating income subject to federal income tax.
The Fund may also purchase investments having variable rates of interest. One
example is variable amount demand master notes. These notes represent a
borrowing arrangement between a commercial paper issuer (borrower) and an
institutional lender such as the Fund (lender) and are payable upon demand. The
underlying amount of the loan may vary during the course of the contract, as
may the interest on the outstanding amount, depending on a stated short-term
interest rate index.
MUNICIPAL BONDS
Municipal bonds are debt obligations issued by a state or local entity. The
funds raised may support a government's general financial needs or special
projects, such as housing projects or sewer works.
The two principal classifications of municipal bonds are "general obligation"
and "revenue" bonds. General obligation bonds are secured by the issuer's
pledge of its full faith and credit and taxing power for the payment of
principal and interest. Revenue bonds are paid off only with the revenue
generated by the project financed by the bonds or other specified sources of
revenue. For example, in the case of a bridge project, proceeds from the tolls
would go directly to retiring the bond issue. Thus, unlike general obligation
bonds, revenue bonds do not represent a pledge of credit or create any debt of
or charge against the general revenues of a municipality or public authority.
The Fund may invest more than 25% of its total assets in industrial development
bonds as long as they are not from the same facility or similar types of
facilities.
RISK FACTORS
Bond yields are dependent on several factors, including market conditions, the
size of an offering, the maturity of the bond, ratings of the bond and the
ability of issuers to meet their obligations. The purpose of municipal bond
insurance is to guarantee the timely payment of principal at maturity and
interest.
MUNICIPAL BOND INSURANCE
At least 65% of the Fund's total assets will be invested in municipal
securities which are insured for timely payment of principal at maturity and
interest. The Fund will require insurance when purchasing municipal securities
which would not otherwise meet the Fund's quality standards. The Fund may also
require insurance when, in the opinion of the Adviser, such insurance would
benefit the Fund, for example, through improvement of portfolio quality or
increased liquidity of certain securities.
Securities in the portfolio may be insured in one of two ways: (1) by a policy
applicable to a specific security, obtained by the issuer of the security or by
a third party ("Issuer-Obtained Insurance") or (2) under master insurance
policies issued by municipal bond insurers, purchased by the Fund (the
"Policies"). If a security's coverage is Issuer-Obtained, then that security
does not need to be covered in the Policies.
The Fund may purchase Policies from Municipal Bond Investors Assurance Corp.,
AMBAC Indemnity Corporation, and Financial Guaranty Insurance Company, or any
other municipal bond insurer which is rated Aaa by Moody's or AAA by S&P. A
more detailed description of these insurers may be found in the Fund's
Statement of Additional Information.
Annual premiums for these Policies are paid by the Fund and are estimated to
range from 0.10% to 0.25% of the value of the municipal securities covered
under the Policies, with an average annual premium rate of approximately
0.175%. While the insurance feature reduces financial risk, the cost thereof
and the restrictions on investments imposed by the guidelines in the insurance
policies reduce the yield to shareholders.
- ------------------------- FIRST UNION -------------------------
- ------------------------- U.S. GOVERNMENT -------------------------
PORTFOLIO
Objective: High level of current income consistent with stability of
principal.
Invests in: Debt instruments issued or guaranteed by the U.S. government, its
agencies, or instrumentalities.
Suitable for: Conservative investors seeking high current yields plus relative
safety.
Key Benefit: Active management of a blend of securities and maturities to
maximize the opportunities and minimize the risks created by
changing interest rates.
DESCRIPTION OF THE FUND
The U.S. Government Fund seeks a high level of current income consistent with
stability of principal. The Fund seeks to achieve this objective by investing
primarily in debt instruments issued or guaranteed by the U.S. government, its
agencies or instrumentalities ("U.S. government securities"). As a matter of
policy, the Fund will invest at least 65% of the value of its total assets in
such U.S. government securities.
TYPES OF INVESTMENTS
The Fund may invest in:
U.S. government securities. These include: (1) securities which are backed
by the full faith and credit of the U.S. government (for example, U.S.
Treasury bills, notes, and bonds); (2) obligations issued or guaranteed by
U.S. government agencies and instrumentalities, which are supported by any
of the following: (a) the full faith and credit of the U.S. government
(such as participation certificates guaranteed by Government National
Mortgage Association or Federal Housing Administration debentures), (b) the
right of the issuer to borrow an amount limited to a specific line of
credit from the U.S. government (for example, obligations of Federal Home
Loan Banks); (c) discretionary authority of the U.S. government to purchase
the issuer's obligations (for example, obligations of the Federal National
Mortgage Association); (d) the credit of the instrumentality or agency
issuing the obligations (for example, obligations of the Tennessee Valley
Authority, the Bank for Cooperatives and the Federal Home Loan Mortgage
Corporation);
Securities representing ownership interest in mortgage pools ("mortgage-
backed securities"). The yield and maturity characteristics of these
securities correspond to those of the underlying mortgages, with interest
and principal payments (including prepayments, i.e. paying remaining
principal before the mortgage's scheduled maturity) passed through to the
holder of the mortgage-backed securities. The yield and price of mortgage-
backed securities will be affected by prepayments which substantially
shorten effective maturities. Thus, during periods of declining interest
rates, prepayments may be expected to increase, requiring the Fund to
reinvest the proceeds at lower interest rates, making it difficult to
effectively lock in high interest rates. Conversely, mortgage-backed
securities may experience less pronounced declines in value during periods
of rising interest rates;
Securities representing ownership interests in a pool of assets ("asset-
backed securities"), for which automobile and credit card receivables are
the most common collateral. Because much of the underlying collateral is
unsecured, asset-backed securities are structured to include additional
collateral and/or additional credit support to protect against default. The
Adviser evaluates the strength of each particular issue of asset-backed
security, taking into account the structure of the issue and its credit
support. (See "Risk Characteristics of Asset-Backed Securities");
Collateralized mortgage obligations ("CMOs") issued by single-purpose,
stand-alone entities. A CMO is a mortgage-backed security that manages the
risk of repayment by separating mortgage pools into short, medium and long-
term portions. These portions are generally retired in sequence as the
underlying mortgage loans in the mortgage pool are repaid. Similarly, as
prepayments are made, the portion of CMO first to mature will be retired
prior to its maturity, thus having the same effect as the prepayment of
mortgages underlying a mortgage-backed security. The Fund will invest only
in CMOs which are rated AAA by a nationally recognized statistical rating
organization and which may be: (a) collateralized by pools of mortgages in
which each mortgage is guaranteed as to payment of principal and interest
by an agency or instrumentality of the U.S. government; (b) collateralized
by pools of mortgages in which payment of principal and interest is
guaranteed by the issuer and such guarantee is collateralized by U.S.
government securities; or (c) securities in which the proceeds of the
issuance are invested in mortgage securities and payment of the principal
and interest are supported by the credit of an agency or instrumentality of
the U.S. government;
Commercial paper which matures in 270 days or less so long as at least two
of its ratings are high quality ratings by nationally recognized
statistical rating organizations. Such ratings would include: A-1 or A-2 by
S&P, Prime-1 or Prime-2 by Moody's, or F-1 or F-2 by Fitch Investors
Service;
Bonds and other debt securities rated Baa or higher by Moody's or BBB or
higher by S&P, or which, if unrated, are considered to be of comparable
quality by the Adviser;
Securities of other investment companies; and
Repurchase agreements collateralized by eligible investments.
Bonds rated Baa by Moody's or BBB by S&P have speculative characteristics.
Changes in economic conditions or other circumstances are more likely to
lead to weakened capacity to make principal and interest payments than
higher rated bonds.
TEMPORARY INVESTMENTS
During periods when, in the Adviser's opinion, a temporary defensive position
in the market is appropriate, the Fund may temporarily invest in cash and cash
items including such short-term obligations as: commercial paper; obligations
issued or guaranteed by the U.S. government, its agencies, or
instrumentalities; and repurchase agreements collateralized by eligible
investments.
- ------------------------- FIRST UNION -------------------------
- ------------------------- UTILITY -------------------------
PORTFOLIO
Objective: High current income and moderate capital appreciation.
Invests in: Equity and debt securities of utility companies.
Suitable for: Investors seeking current income and long-term growth of income
through equity and fixed income investments in utility companies.
Key Benefit: Diversity through historically reliable cash flows on securities
that typically hold their value through various market conditions.
DESCRIPTION OF THE FUND
The Utility Fund seeks high current income and moderate capital appreciation.
The Fund invests primarily in a diversified portfolio of equity and debt
securities of utility companies that produce, transmit or distribute gas or
electrical energy, as well as those companies that provide communications
facilities, such as telephone and telegraph companies. As a matter of
investment policy, the Fund will invest at least 65% of the value of its total
assets in securities of utility companies. In addition, the Fund can invest up
to 35% of its assets in common stock of non utility companies.
TYPES OF INVESTMENTS
The Fund may invest in:
common and preferred stocks, bonds and convertible preferred stocks of
utility companies selected by the Adviser on the basis of traditional
research techniques, including assessment of earnings and dividend growth
prospects and of the risk and volatility of the individual company's
industry. However, other factors, such as product position, market share,
or profitability may also be considered by the Adviser. The Fund will only
invest its assets in debt securities rated Baa or higher by Moody's or BBB
or higher by S&P, or which, if unrated, are considered to be of comparable
quality by the Adviser;
securities either issued or guaranteed by the U.S. government, its
agencies, or instrumentalities. These types of securities include: direct
obligations of the U.S. Treasury, such as U.S. Treasury bills, notes and
bonds, and notes, bonds, and discount notes of U.S. government agencies or
instrumentalities;
commercial paper, including master demand notes;
foreign securities (either foreign or U.S. securities traded in foreign
markets). The Fund may also invest in obligations denominated in foreign
currencies. In making these decisions, the Adviser will consider such
factors as the condition and growth potential of various economies and
securities markets, currency and taxation considerations and other
pertinent financial, social, national and political factors. (See "Other
Investment Policies" and " Foreign Investments.");
ADRs of foreign companies traded on the New York or American Stock
Exchanges or in the over-the-counter market;
obligations, including certificates of deposit and bankers' acceptances, of
banks or savings and loan associations having at least $1 billion in
deposits and insured by the BIF or the SAIF, including U.S. branches of
foreign banks and foreign branches of U.S. banks;
securities of other investment companies, and
repurchase agreements collateralized by government securities.
Bonds rated Baa by Moody's or BBB by S&P have speculative characteristics.
Changes in economic conditions or other circumstances are more likely to lead
to weakened capacity to make principal and interest payments than higher rated
bonds.
RISK FACTORS
In view of the Fund's investment concentration, investors should be aware of
certain risks associated with the utility industry in general. These include
difficulties in earning adequate returns on investments despite frequent rate
increases, restrictions on operations and increased costs and delays due to
governmental regulations, building or construction delays, environmental
regulations, difficulty of the capital markets in absorbing utility debt and
equity securities, and difficulties in obtaining fuel at reasonable prices.
The Adviser believes that the risks of investing in utility securities can be
reduced. The professional portfolio management techniques used by the Adviser
to attempt to reduce these risks include credit research. The Adviser will
perform its own credit analysis, in addition to using recognized rating
agencies and other sources, including discussions with an issuer's management,
the judgment of other investment analysts, and its own informed judgment. The
Adviser's credit analysis will consider an issuer's financial soundness, its
responsiveness to changes in interest rates and business conditions, and its
anticipated cash flow, interest or dividend coverage, and earnings. In
evaluating an issuer, the Adviser places special emphasis on the estimated
current value of the issuer's assets rather than historical costs.
Bond prices move inversely to interest rates, i.e. as interest rates decline,
the values of the bonds increase and vice versa. The longer the maturity of a
bond, the greater the exposure to market price fluctuations. The same market
factors are reflected in the share price or net asset value of bond funds which
will vary with interest rates. There is no limit on the maturity of the fixed
income securities purchased by the Fund.
- ------------------------- FIRST UNION -------------------------
- ------------------------- VALUE PORTFOLIO -------------------------
Objective: Long-term capital growth with current income as a secondary
objective.
Invests in: Equity securities of U.S. companies with prospects for growth in
earnings and dividends.
Suitable for: Long-term investors seeking capital appreciation with some
income.
Key Benefit:Allows accumulation of assets over the long-term through capital
appreciation of equity investments and reinvestment of dividends.
DESCRIPTION OF THE FUND
The Value Fund seeks long-term capital growth with current income as a
secondary objective. The Fund normally invests at least 75% of its assets in
equity securities of U.S. companies with prospects for growth in earnings and
dividends.
TYPES OF INVESTMENTS
The Fund primarily invests in:
common and preferred stocks, bonds and convertible preferred stock of U.S.
companies with at least $100 million in equity, listed on the New York or
American Stock Exchanges or traded in over-the-counter markets. The Adviser
looks for industries and companies which have potential primarily for
capital growth and secondarily for income;
ADRs of foreign companies traded on the New York or American Stock
Exchanges or in the over-the-counter market;
convertible bonds rated at least BBB by S&P or at least Baa by Moody's, or,
if not rated, determined to be of comparable quality by the Adviser;
money market instruments;
fixed rate notes and bonds and adjustable and variable rate notes of
companies whose common stock the Fund may acquire (for up to 5% of its net
assets);
zero coupon bonds issued or guaranteed by the U.S. government, its agencies
or instrumentalities (for up to 5% of its net assets);
obligations, including certificates of deposit and bankers' acceptances, of
banks or savings and loan associations having at least $1 billion in
deposits and insured by the BIF or the SAIF, including U.S. branches of
foreign banks and foreign branches of U.S. banks;
prime commercial paper including master demand notes; and
repurchase agreements collateralized by eligible investments.
Bonds rated BBB by S&P or Baa by Moody's have speculative characteristics.
Changes in economic conditions or other circumstances are more likely to lead
to weakened capacity to make principal and interest payments than higher rated
bonds.
- ------------------------- OTHER INVESTMENT -------------------------
- ------------------------- POLICIES -------------------------
The Funds have adopted the following practices for specific types of
investments.
DOWNGRADES
If any security invested in by any of the Funds loses its rating or has its
rating reduced after the Fund has purchased it, the Fund is not required to
sell or otherwise dispose of the security, but may consider doing so.
REPURCHASE AGREEMENTS
The Funds may invest in repurchase agreements. Repurchase agreements are
agreements by which a Fund purchases a security (usually U.S. government
securities) for cash and obtains a simultaneous commitment from the seller
(usually a bank or broker/dealer) to repurchase the security at an agreed-upon
price and specified future date. The repurchase price reflects an agreed-upon
interest rate for the time period of the agreement. The Fund's risk is the
inability of the seller to pay the agreed-upon price on delivery date. However,
this risk is tempered by the ability of the Fund to sell the security in the
open market in the case of a default. In such a case, the Fund may incur costs
in disposing of the security which would increase Fund expenses. The Adviser
will monitor the creditworthiness of the firms with which the Funds enter into
repurchase agreements.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Funds may purchase portfolio securities on a when-issued or delayed
delivery basis. In such cases, a Fund commits to purchase a security which will
be delivered and paid for at a future date. The Fund relies on the
seller to deliver the securities and risks missing an advantageous price or
yield if the seller does not deliver the security as promised.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Funds may lend portfolio securities
on a short-term or long-term basis to broker/dealers, banks, or other
institutional borrowers of securities. The Funds will only enter into loan
arrangements with creditworthy borrowers and will receive collateral in the
form of cash or U.S. government securities equal to at least 100% of the value
of the securities loaned. As a matter of fundamental investment policy which
cannot be changed without shareholder approval, the Funds will not lend any of
their assets except portfolio securities up to 5% (in the case of the Balanced
and Value Funds), 15% (in the case of the Fixed Income, High Grade Tax Free,
and Utility Funds) or one-third (in the case of the U.S. Government Fund) of
the value of their total assets.
FOREIGN INVESTMENTS
The Balanced, Fixed Income, Utility and Value Funds may invest in foreign
securities or securities denominated in or indexed to foreign currencies. In
addition, the Fixed Income Fund may invest in foreign currencies. These may
involve additional risks. Specifically, they may be affected by the strength of
foreign currencies relative to the U.S. dollar, or by political or economic
developments in foreign countries. Accounting procedures and government
supervision may be less stringent than those applicable to U.S. companies.
There may be less publicly available information about a foreign company than
about a U.S. company. Foreign markets may be less liquid or more volatile than
U.S. markets and may offer less protection to investors. It may also be more
difficult to enforce contractual obligations abroad than would be the case in
the United States because of differences in the legal systems. Foreign
securities may be subject to foreign taxes, which may reduce yield, and may be
less marketable than comparable U.S. securities. All these factors are
considered by the Adviser before making any of these types of investments.
RISK CHARACTERISTICS OF ASSET-BACKED SECURITIES
The U.S. Government Fund may invest in asset-backed securities. Asset-backed
securities are created by the grouping of certain governmental, government-
related and private loans, receivables and other lender assets into pools.
Interests in these pools are sold as individual securities. Payments from the
asset pools may be divided into several different tranches of debt securities,
with some tranches entitled to receive regular installments of principal and
interest, other tranches entitled to receive regular installments of interest,
with principal payable at maturity or upon specified call dates, and other
tranches only entitled to receive payments of principal and accrued interest at
maturity or upon specified call dates. Different tranches of securities will
bear different interest rates, which may be fixed or floating.
Because the loans held in the asset pool often may be prepaid without penalty
or premium, asset-backed securities are generally subject to higher prepayment
risks than most other types of debt instruments. Prepayment risks on mortgage
securities tend to increase during periods of declining mortgage interest
rates, because many borrowers refinance their mortgages to take advantage of
the more favorable rates. Depending upon market conditions, the yield that the
U.S. Government Fund receives from the reinvestment of such prepayments, or any
scheduled principal payments, may be lower than the yield on the original
mortgage security. As a consequence, mortgage securities may be a less
effective means of "locking in" interest rates than other types of debt
securities having the same stated maturity and may also have less potential for
capital appreciation. For certain types of asset pools, such as collateralized
mortgage obligations, prepayments may be allocated to one tranche of securities
ahead of other tranches, in order to reduce the risk of prepayment for the
other tranches.
Prepayments may result in a capital loss to the U.S. Government Fund to the
extent that the prepaid mortgage securities were purchased at a market premium
over their stated amount. Conversely, the prepayment of mortgage securities
purchased at a market discount from their stated principal amount will
accelerate the recognition of interest income by the U.S. Government Fund which
would be taxed as ordinary income when distributed to the shareholders.
The credit characteristics of asset-backed securities also differ in a number
of respects from those of traditional debt securities. The credit quality of
most asset-backed securities depends primarily upon the credit quality of the
assets underlying such securities, how well the entity issuing the securities
is insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement to such
securities.
OPTIONS AND FUTURES
All of the Funds, with the exception of the High Grade Tax Free Fund, may
engage in options and futures transactions. Options and futures transactions
are intended to enable a Fund to manage market, interest rate or exchange rate
risk. The Funds do not use these transactions for speculation or leverage.
Options and futures may be volatile investments and involve certain risks which
might result in lowering the Funds' returns. The three principal areas of risk
include: (1) lack of a liquid secondary market for a futures or option contract
when the Fund wants to close out its position; (2) imperfect correlation of
changes in the prices of futures or options contracts with the prices of the
securities in the Fund's portfolio; and (3) incorrect forecasts by the Adviser
of interest rates, market values or other economic factors. In these events,
the Fund may lose money on the futures contract or option.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
Each Fund may invest in the securities of other investment companies that have
investment objectives and policies similar to its own. This is a short-term
measure to invest cash which has not yet been invested in other portfolio
instruments and is subject to the following limitations: (1) no Fund will own
more than 3% of the total outstanding voting stock of any one investment
company, (2) no Fund may invest more than 5% of its total assets in any one
investment company and (3) no Fund may invest more than 10% of its total assets
in investment companies in general. The Adviser will waive its investment
advisory fee on assets invested in securities of other open end investment
companies.
The following investment limitations cannot be changed without shareholder
approval.
BORROWING MONEY
The Funds will not borrow money directly or through reverse repurchase
agreements or pledge securities, except under certain circumstances, a Fund may
borrow up to one-third of the value of its total assets and pledge up to 10%
(in the case of Value Fund), 15% (in the case of the Balanced, Fixed Income,
High Grade Tax Free, and Utility Funds), or one-third (in the case of U.S.
Government Fund) of the value of those assets to secure such borrowings.
RESTRICTED AND ILLIQUID SECURITIES
The Funds may invest up to 10% of their net assets in securities which are
subject to restrictions on resale under federal securities law. In the case of
the Fixed Income and U.S. Government Funds, this restriction is not applicable
to commercial paper issued under Section 4(2) of the Securities Act of 1933.
Balanced, Fixed Income, High Grade Tax Free, and Value Funds may invest up to
10% of their net assets in illiquid securities. U.S. Government and Utility
Funds may invest up to 15% of their net assets in illiquid securities. With
respect to the Balanced, Fixed Income, U.S. Government, and Utility Funds,
illiquid securities include certain restricted securities not determined by the
Trustees to be liquid, non-negotiable time deposits, and repurchase agreements
providing for settlement in more than seven days after notice. With respect to
the High Grade Tax Free and Value Funds, illiquid securities include repurchase
agreements providing for settlement in more than seven days after notice and
certain restricted securities.
DIVERSIFICATION
With respect to 75% of the value of its total assets, no Fund may invest more
than 5% of its total assets in securities of one issuer (except cash or cash
items, repurchase agreements collateralized by U.S. government securities and
U.S. government obligations) or own more than 10% of the outstanding voting
securities of one issuer.
CONCENTRATION OF INVESTMENTS
The Utility Fund will not purchase any security of any issuer if, as a result,
more than 25% of its total assets would be invested in any one industry other
than the utilities industry, except that the Fund may invest more than 25% of
the value of its total assets in securities issued or guaranteed by the U.S.
government, its agencies, or instrumentalities.
SELLING SHORT
The Balanced Fund will not make short sales of securities, except in certain
limited circumstances.
Certain of the Funds have adopted the following limitations, which may be
changed by the Trustees without shareholder approval.
NEW ISSUERS
The Balanced Fund will not invest more than 5% of the value of its total assets
in securities of issuers (or guarantors, where applicable) which have records
of less than three years of continuous operations, including the operation of
any predecessor.
"NON-ACTIVE" SECURITIES
The Fixed Income, High Grade Tax Free, and Value Funds will not invest more
than 10% of their net assets in securities for which an active and substantial
market does not exist, along with investments in illiquid securities,
restricted securities, securities for which market quotations are not readily
available, and repurchase agreements maturing in more than seven days.
WARRANTS
The Balanced, Fixed Income, High Grade Tax Free, and Value Funds may not invest
more than 5% of their net assets in warrants. No more than 2% of this 5% may be
in warrants which are not listed on the New York or American Stock Exchanges.
- ------------------------- SHAREHOLDER GUIDE -------------------------
- ------------------------- -------------------------
CLASSES OF INVESTMENT SHARES
You may select a method of purchasing Shares which is most beneficial to you by
choosing either Class B Shares or Class C Shares. Your decision will be based
on the amount of your intended purchase and how long you expect to hold the
Shares.
Each Fund offers two types of Investment Shares: Class B Shares and Class C
Shares. Each Share of the Fund represents an identical interest in the
investment portfolio of the Fund and has the same rights. The difference
between Class B Shares and Class C Shares is based on purchasing arrangements
and distribution expenses. Class B Shares have a sales charge included at the
time of purchase and are subject to a lower Rule 12b-1 distribution fee. This
means that investors can purchase fewer Class B Shares for the same initial
investment than Class C Shares due to the initial sales charge, but will
receive higher dividends per Share due to the lower distribution expenses.
Class C Shares impose a contingent deferred sales charge ("CDSC") on most
redemptions made within six years of purchase and have higher distribution
costs resulting from greater Rule 12b-1 distribution fees. This means that
investors may purchase more Class C Shares than Class B Shares for the same
initial investment, but will receive lower dividends per Share.
Investors should consider whether, during the anticipated life of their
investment in the Fund, the accumulated Rule 12b-1 fee and the CDSC on Class C
Shares would be less than the initial sales charge and accumulated Rule 12b-1
fee on Class B Shares purchased at the same time. Investors must also consider
how that differential would be offset by the higher yield of Class B Shares.
SHARE PRICE CALCULATION
The net asset value of a Fund Share equals the market value of all the Fund's
portfolio securities divided by the total Shares outstanding. It is also the
bid price. The offering price is quoted after adding a sales charge to the net
asset value.
Purchases, redemptions, and exchanges are all based on net asset value. (The
purchase price of Class B Shares adds an applicable sales charge, and the
redemption proceeds of Class C Shares deduct an applicable CDSC.)
The net asset value is determined at 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) days on which there are not sufficient changes in the
value of a Fund's portfolio securities that its net asset value might be
materially affected; (ii) days during which no Shares are tendered for
redemption and no orders to purchase Shares are received; and (iii) the
following holidays: New Year's Day, Martin Luther King Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans'
Day, Thanksgiving Day, and Christmas Day. The net asset value is computed by
adding cash and other assets to the closing market value of all securities
owned, subtracting liabilities and dividing the result by the number of
outstanding Shares. The net asset value will vary each day depending on
purchases and redemptions. Expenses and fees, including the management fee, are
accrued daily and taken into account for the purpose of determining net asset
value.
The net asset value of Trust Shares of a Fund may differ slightly from that of
Class B Shares and Class C Shares of the same Fund due to the variability in
daily net income resulting from different distribution charges for each class
of shares. The net asset value for each Fund will fluctuate for all three
classes.
PERFORMANCE INFORMATION
A Fund's performance may be quoted in terms of total return, yield or tax
equivalent yield. Performance information is historical and is not intended to
indicate future results.
From time to time, the Funds may make available certain information about the
performance of Class B Shares and Class C Shares. It is generally reported
using total return, yield and tax equivalent yield (for the High Grade Tax Free
Fund).
Total return takes into account both income (dividends) and changes in the
Fund's Share price (appreciation or depreciation). It is based on the overall
dollar or percentage change in value of an investment assuming reinvestment of
all dividends and capital gains during a specified period. Total return is
measured by comparing the value of an investment at the beginning of a
specified period to the redemption value at the end of the same period,
assuming reinvestment of dividends or capital gains distributions.
Yield shows how much income an investment generates. It refers to the Fund's
income over a 30-day period expressed as a percentage of the Fund's Share
price. The yields of Class B Shares and Class C Shares are calculated by
dividing the sum of all interest and dividend income (less Fund expenses) over
a 30-day period by the offering price per Share on the last day of the period.
The number is then annualized using semi-annual compounding.
The High Grade Tax Free Fund may advertise the tax equivalent yield, which is
calculated like the yield described above, except that for any given tax
bracket, net investment income will be calculated as the sum of any taxable
income and the tax exempt income divided by the difference between 1 and the
federal tax rates for taxpayers in that tax bracket.
The yield and tax equivalent yield do not necessarily reflect income actually
earned by Class B Shares and Class C Shares of the Funds and, therefore, may
not correlate to the dividends or other distributions paid to shareholders.
Performance information for the Class B Shares and Class C Shares reflects the
effect of a sales charge which, if excluded, would increase the total return,
yield, and tax equivalent yield.
Total return, yield, and tax equivalent yield will be calculated separately for
Class B Shares, Class C Shares, and Trust Shares of a Fund. Because Class B
Shares and Class C Shares are subject to 12b-1 fees, the yield and tax
equivalent yield will be lower than that of Trust Shares. The sales load
applicable to Class B Shares also contributes to a lower total return for Class
B Shares. In addition, Class C Shares are subject to similar non-recurring
charges, such as the CDSC, which, if excluded, would increase the total return
for Class C Shares.
From time to time, a Fund may advertise its performance using certain rankings
published in financial publications and/or compare its performance to certain
indices.
- ------------------------- HOW TO BUY -------------------------
- ------------------------- SHARES -------------------------
Shares may be purchased at a price equal to their net asset value per Share
next determined after receipt of an order plus a sales charge which, at the
election of the purchaser, may be imposed either (i) at the time of purchase
(in the case of Class B Shares), or (ii) on a contingent deferred basis (in the
case of Class C Shares).
MINIMUM INVESTMENT
You may invest as often as you want in any of the Funds. There is a $1,000
minimum initial investment requirement which may be waived in certain
situations. For further information, please contact the Mutual Funds Group of
First Union Brokerage Services ("FUBS"), a subsidiary of First Union, at 1-800-
326-3241. Subsequent investments may be in any amounts.
WHAT SHARES COST
Class B Shares are sold at their net asset value plus a sales charge as
follows:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS A
A PERCENTAGE OF PERCENTAGE OF NET
AMOUNT OF TRANSACTION PUBLIC OFFERING PRICE AMOUNT INVESTED
--------------------- --------------------- -----------------
<S> <C> <C>
$ 0-$ 99,999 4.00% 4.17%
$ 100,000-$ 249,999 3.50% 3.63%
$ 250,000-$ 499,999 2.50% 2.56%
$ 500,000-$ 749,999 1.50% 1.52%
$ 750,000-$ 999,999 1.00% 1.01%
$1,000,000-$2,499,999 0.50% 0.50%
$2,500,000+ 0.25% 0.25%
</TABLE>
Shareholders of record in any First Union Fund at October 12, 1990, and the
members of their immediate family, will be exempt from sales charges on any
future purchases in any of the First Union Funds. Employees of First Union,
Federated Securities Corp. (the "distributor" or "FSC") and their affiliates,
and certain trust accounts for which First Union or its affiliates act in an
administrative, fiduciary, or custodial capacity, board members of First Union
and the above-mentioned entities and the members of the immediate families of
any of these persons, will also be exempt from sales charges.
Sales charges may be reduced in some cases. You may be entitled to a reduction
if: (1) you make a single large purchase, (2) you, your spouse and/or children
(under 21 years) make Fund purchases on the same day, (3) you make an
additional purchase to add to an existing account, (4) you sign a letter of
intent indicating your intention to purchase at least $100,000 of Shares over
the next 13 months, (5) you reinvest in a Fund within 30 days of redemption, or
(6) you combine purchases of two or more First Union Funds which include front-
end sales charges. In all of these cases, you must notify the distributor of
your intentions in writing in order to qualify for a sales charge reduction.
For more information, consult the Funds' Statements of Additional Information
or the distributor.
Class C Shares are sold at net asset value per Share without the imposition of
a sales charge at the time of purchase. Shares redeemed within six years of
their purchase will be subject to a CDSC according to the following schedule:
<TABLE>
<CAPTION>
YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
------------------ -------------------
<S> <C>
First 4.0%
Second 3.0%
Third 2.5%
Fourth 2.0%
Fifth 1.5%
Sixth 0.5%
Seventh None
</TABLE>
No CDSC will be imposed on: (1) the portion of redemption proceeds attributable
to increases in the value of the account due to increases in the net asset
value per Share, (2) Shares acquired through reinvestment of dividends and
capital gains, (3) Shares held for more than six years after the end of the
calendar month of acquisition, (4) accounts following the death or disability
of a shareholder, or (5) minimum required distributions to a shareholder over
the age of 70 1/2 from an IRA or other retirement plan.
CONVERSION FEATURE
Class C Shares include all Shares purchased pursuant to the deferred sales
charge alternative which have been outstanding for less than the period ending
seven years after the end of the month in which the shareholder's order to
purchase Class C Shares was accepted. At the end of this seven year period,
Class C Shares may automatically convert to Class B Shares, in which case the
Shares will no longer be subject to the higher Rule 12b-1 distribution fee
which is assessed on Class C Shares. Such conversion will be on the basis of
the relative net asset values of the two classes, without the imposition of any
sales load, fee or other charge. The purpose of the conversion feature is to
relieve the holders of the Class C Shares that have been outstanding for a
period of time sufficient for the distributor to have been compensated for
distribution expenses related to the Class C Shares from most of the burden of
such distribution-related expenses.
For purposes of conversion to Class B Shares, Class C Shares purchased through
the reinvestment of dividends and distributions paid on Class C Shares in a
shareholder's Fund acount will be considered to be held in a separate sub-
account. Each time any Class C Shares in the shareholder's Fund account (other
than those in the sub-account) convert to Class B Shares, an equal pro rata
portion of the Class C Shares in the sub-account will also convert to Class B
Shares.
The availability of the conversion feature is subject to the granting of an
exemptive order (the "Order") by the Securities and Exchange Commission (the
"SEC") or the adoption of a rule permitting such conversion. In the event that
the Order or rule ultimately issued by the SEC requires any conditions
additional to those described in this prospectus, shareholders will be
notified.
BY TELEPHONE OR IN PERSON
You may purchase Class B Shares and Class C Shares by telephone from the Mutual
Funds Group of FUBS at 1-800-326-3241 or you may place the order in person at
any First Union branch location. Shares are sold on days on which the New York
Stock Exchange and the Federal Reserve Wire System are open for business.
METHOD OF PAYMENT
Payment may be made by check or federal funds or by debiting your account at
First Union. All purchase orders received prior to 4:00 p.m. (Eastern time) on
a regular business day are processed at that day's offering price. Payment is
required within five business days.
SHAREHOLDER ACCOUNTS
As transfer agent for the Funds, State Street Bank and Trust Company of Boston,
Massachusetts ("State Street Bank") maintains a Share account for each
shareholder of record. Share certificates are not issued.
MINIMUM BALANCE
Due to the high cost of maintaining smaller holdings, each Fund reserves the
right to redeem a shareholder's Shares if, as a result of redemptions, their
aggregate value drops below $1,000. Reductions in value that result solely from
market activity will not trigger an involuntary redemption. The Funds will
notify shareholders in writing 30 days before taking such action to allow them
to increase their holdings to at least the minimum level.
DEALER CONCESSION
For sales of Shares of the Funds, a dealer will normally receive up to 85% of
the applicable sales charge. Any portion of the sales charge which is not paid
to a dealer will be retained by the distributor. However, the distributor, in
its sole discretion, may uniformly offer to pay to all dealers selling Shares
of the Funds, all or a portion of the sales charge it normally retains. If
accepted by the dealer, such additional payments will be predicated upon the
amount of Fund Shares sold. The sales charge for Shares sold other than through
registered broker/dealers will be retained by FSC. FSC may pay fees to banks
out of the sales charge in exchange for sales and/or administrative services
performed on behalf of the bank's customers in connection with the initiation
of customer accounts and purchases of Shares.
HOW TO CONVERT
YOUR INVESTMENT
- ------------------------- FROM ONE -------------------------
- ------------------------- FIRST UNION -------------------------
FUND TO ANOTHER
FIRST UNION FUND
As a shareholder, you have the privilege of exchanging your Shares for shares
of another First Union Fund.
As long as the First Union Fund in which you are invested will not be adversely
affected, you may switch among the First Union Funds within the Trust. Before
the exchange, you must call FUBS at 1-800-326-3241 to receive a prospectus for
the First Union Fund into which you want to exchange. Read the prospectus
carefully. Each exchange represents the sale of shares of one First Union Fund
and the purchase of shares in another, which may produce a gain or loss for tax
purposes.
You may exchange Class B Shares of one First Union Fund for Class B Shares of
any other First Union Fund, or Class C Shares of one First Union Fund for Class
C Shares of any other First Union Fund by calling toll free 1-800-326-3241 or
by writing to FUBS. Telephone exchange instructions may be recorded. Shares
purchased by check are eligible for exchange after the check clears, which
could take up to seven days after receipt of the check. Exchanges are subject
to the $1,000 minimum initial purchase requirement for each First Union Fund.
An exchange order must comply with the requirements for a redemption and
purchase order and must specify the dollar value or number of shares to be
exchanged. Once the order is received, the Shares already owned will be
redeemed at current net asset value and, upon receipt of the proceeds by the
First Union Fund, shares of the other First Union Fund will be purchased at
their offering price determined after the proceeds from such redemption become
available, which may be up to seven days after such redemption. Orders for
exchanges received by a First Union Fund prior to 4:00 p.m. (Eastern time) on
any day the First Union Funds are open for business will be executed as of the
close of business that day. Orders for exchanges received after 4:00 p.m.
(Eastern time) on any business day will be executed at the close of the next
business day.
When exchanging into and out of load and no-load shares of First Union Funds,
shareholders who have already paid a sales charge once at the time of purchase,
including shares obtained through the reinvestment of dividends, will not have
to pay an additional sales charge on an exchange.
The exchange of Class C Shares will not be subject to a CDSC. However, if the
shareholder redeems Class C Shares within six years of the original purchase, a
CDSC will be imposed. For purposes of computing the CDSC, the length of time
the shareholder has owned Class C Shares will be measured from the date of
original purchase and will not be affected by the exchange.
If reasonable procedures are not followed by a Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
EXCHANGE RESTRICTIONS
Although the Trust has no intention of terminating or modifying the exchange
privilege, it reserves the right to do so at any time. Excessive trading can
impact the interests of shareholders. Therefore, the Trust reserves the right
to terminate the exchange privilege of any shareholder who makes more than five
exchanges of shares of the First Union Funds in a year or three exchanges in a
calendar quarter.
The exchange privilege is only available in states where shares of the First
Union Fund being acquired may legally be sold. Before the exchange, a
shareholder must receive a prospectus of the First Union Fund for which the
exchange is being made.
- ------------------------- HOW TO -------------------------
- ------------------------- REDEEM SHARES -------------------------
Shares are redeemed at their net asset value next determined after a proper
redemption request has been received, less, in the case of Class C Shares, any
applicable CDSC.
You may redeem Shares in three ways: (1) by telephoning FUBS at 1-800-326-3241,
(2) by written request to FUBS or State Street Bank, or (3) in person at First
Union. Telephone redemption instructions may be recorded.
The Funds redeem Shares at their net asset value next determined after a Fund
receives the redemption request. Redemptions will be made on days on which a
Fund computes the net asset value of Shares. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed or on federal
holidays when wire transfers are restricted. Proceeds will be wired to the
shareholder's account at First Union or a check will be sent to the address of
record, normally within five (but in no case longer than seven) days after a
proper request for redemption has been received.
If reasonable procedures are not followed by a Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
- ------------------------- ADDITIONAL -------------------------
- ------------------------- SHAREHOLDER -------------------------
SERVICES
TELEPHONE SERVICES
You may authorize electronic transfers of money to purchase Shares in any
amount or to redeem any or all Shares in an account. The service may be used
like an "electronic check" to move money between a bank account and an account
in the Fund with a single telephone call.
SYSTEMATIC INVESTMENT PLAN
You may arrange for systematic monthly or quarterly investments in your account
in amounts of $25 or more by directly debiting your bank account.
TAX SHELTERED PLANS
You may open a pension and profit sharing account in any First Union Fund
(except those Funds having an objective of providing tax free income),
including Individual Retirement Accounts ("IRAs"), Rollover IRAs, Keogh Plans,
Corporate Profit-Sharing, Pension and Salary-Reduction Plans. For details,
including fees and application forms, call First Union toll free at 1-800-669-
2136 or write to First Union National Bank of North Carolina, Retirement
Services, 301 South College Street, Charlotte, NC 28288-1169.
SYSTEMATIC WITHDRAWAL PLAN
If you are a shareholder with an account valued at $10,000 or more, you may
have amounts of $100 or more sent from your account to you on a regular monthly
or quarterly basis.
- ------------------------- MANAGEMENT -------------------------
- ------------------------- OF -------------------------
FIRST UNION FUNDS
Responsibility for the overall management of First Union Funds rests with its
Trustees and officers. Other service providers include the Funds' Distributor,
Investment Adviser, Custodian, Transfer Agent, Legal Counsel, and Independent
Auditors.
INVESTMENT ADVISER
Professional investment supervision for the Funds is provided by the investment
adviser, the Capital Management Group of First Union.
First Union is a subsidiary of First Union Corporation, a bank holding company
headquartered in Charlotte, North Carolina, with $70.8 billion in total
consolidated assets as of December 31, 1993. Through offices in 36 states and
one foreign country, First Union Corporation and its subsidiaries provide a
broad range of financial services to individuals and businesses.
First Union's Capital Management Group employs an experienced staff of
professional investment analysts, portfolio managers, and traders, and uses
several proprietary computer-based systems in conjunction with fundamental
analysis to identify investment opportunities. The Capital Management Group has
been managing trust assets for over 50 years and currently oversees assets of
more than $43.0 billion. In addition, the Capital Management Group has advised
the Trust since its inception in 1984.
R. Dean Hawes is a Vice President of First Union National Bank of North
Carolina, N.A., and is the Director of Employee Benefit Portfolio Management.
Mr. Hawes joined First Union in 1981 after spending five years with Merrill
Lynch, Pierce, Fenner, & Smith and Townsend Investments. Mr. Hawes has served
as the portfolio manager of the Balanced Fund since its inception in January
1991.
Thomas L. Ellis is a Vice President of First Union National Bank of North
Carolina, N.A. Prior to joining First Union in 1985, Mr. Ellis had seventeen
years of investment management and sales experience including eleven years
marketing short and medium-term obligations to institutional investors, plus
three years as head trader for First Boston Corporation. Mr. Ellis has managed
the Fixed Income Fund since its inception in July 1988.
Robert S. Drye is a Vice President of First Union National Bank of North
Carolina, N.A., and has been with First Union since 1968. Since 1989, Mr. Drye
has served as a portfolio manager for several of the First Union Funds and for
certain common trust funds. Prior to 1989, Mr. Drye worked as a marketing
specialist with First Union Brokerage Services, Inc. Mr. Drye has managed the
High Grade Tax Free Fund since its inception in February 1992.
Rollin C. Williams is a Vice President of First Union National Bank of North
Carolina, N.A. and has over 24 years of investment management experience. Mr.
Williams was the Head of Fixed Income Investments at Dominion Trust Company
from 1988 until its acquisition by First Union Corporation. Mr. Williams has
served as the portfolio manager for the U.S. Government Fund since its
inception in December 1992.
Malcolm M. Trevillian is a Vice President of First Union National Bank of North
Carolina, N.A., and has been with First Union since 1986. During that time, he
has served as a portfolio manager for various pension and profit-sharing
accounts maintained with First Union. Mr. Trevillian has managed the Utility
Fund since its inception in January 1994.
William T. Davis, Jr. is a Vice President of First Union National Bank of North
Carolina, N.A., and has been with First Union since 1986. Prior to that, Mr.
Davis served as a securities analyst for Seibels Bruce (Insurance) Group. Mr.
Davis has served as the portfolio manager of the Value Fund since March 1991.
DISTRIBUTION OF INVESTMENT SHARES
FSC, a subsidiary of Federated Investors, is the principal distributor for the
Funds. It is a Pennsylvania corporation organized on November 14, 1969, and is
the principal distributor for a number of investment companies.
Each class of a Fund has adopted a separate plan for distribution of Shares
permitted by Rule 12b-1 under the Investment Company Act of 1940 (the "Plans"),
whereby each Fund has authorized a daily expense ("Rule 12b-1 fee") at an
annual rate of 0.75% of the average daily net asset value of the Fund to
finance the sale of Shares. It is currently intended that annual Rule 12b-1
fees will be limited for the foreseeable future to payments to the distributor
equal to 0.10% for Class B Shares of the Fixed Income Fund, 0.25% for Class B
Shares of the Balanced, High Grade Tax Free, U.S. Government, Utility, and
Value Funds, and 0.75% for Class C Shares of a Fund's average daily net asset
value.
The distributor may pay all or a portion of the Rule 12b-1 fee to compensate
selected brokers and financial institutions for selling Shares or for
administrative services rendered in connection with the Shares.
The Funds make no payments in connection with the sale of Shares other than the
Rule 12b-1 fees paid to its distributor. The distributor, however, may pay a
sales commission to brokers (including FUBS) in connection with the sale of
Class C Shares. Except as set forth in the next paragraph, the Funds do not pay
for unreimbursed expenses of the distributor. Since the Funds' Plans are
"compensation" type plans, however, future Rule 12b-1 fees may permit recovery
of such amounts or may result in a profit to the distributor.
The distributor may sell, assign or pledge its right to receive Rule 12b-1 fees
and CDSCs to finance payments made to brokers (including FUBS) in connection
with the sale of Class C Shares. First Union Corporation currently serves as
principal lender in this financing program. Actual distribution expenses for
Class C Shares at any given time may exceed the Rule 12b-1 fees and payments
received pursuant to CDSCs. These unrecovered amounts, plus interest thereon,
will be carried forward and paid from future Rule 12b-1 fees and payments
received through CDSCs. If a Plan were terminated or not continued, the Funds
would not be contractually obligated to pay for any expenses not previously
reimbursed by the Funds or recovered through CDSCs.
FSC, from time to time, may pay brokers additional sums of cash or promotional
incentives based upon the amount of Shares sold. Such payments, if made, will
be in addition to amounts paid under the Plans and will not be an expense of
the Funds.
FUND ADMINISTRATION
Federated Administrative Services ("FAS"), a subsidiary of Federated Investors,
provides the Funds with administrative personnel and services necessary to
operate the Funds, such as legal and accounting services, for a specified fee
which is detailed below.
State Street Bank serves as custodian and transfer agent, providing dividend
disbursement and other shareholder services for the Funds.
Legal counsel to those Trustees who are not "interested persons" of the Trust,
as defined in the Investment Company Act of 1940, is provided by Sullivan &
Worcester, Washington, D.C., and legal counsel to the Trust is provided by
Houston, Houston & Donnelly, Pittsburgh, Pennsylvania.
The independent auditors for the Trust are KPMG Peat Marwick, Pittsburgh,
Pennsylvania.
- ------------------------- FEES AND EXPENSES -------------------------
- ------------------------- -------------------------
Each Fund pays annual advisory and administrative fees and certain expenses.
ADVISORY AND ADMINISTRATIVE FEES
For managing their investment and business affairs, the Funds pay an annual fee
to First Union. The Adviser receives an annual investment advisory fee equal to
.50 of 1% of each of the Equity and Income Funds' average daily net assets. The
Adviser may voluntarily choose to waive a portion of its fee or reimburse the
Funds for certain operating expenses.
The Trust also pays a fee for administrative services. FAS provides these at an
annual rate as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE TRUST
------------------- -----------------------------------
<S> <C>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
Unless waived, the administrative fee received during any fiscal year shall
aggregate at least $50,000 per First Union Fund.
EXPENSES OF THE FUNDS AND INVESTMENT SHARES
Holders of Shares pay their allocable portion of Trust and respective Fund
expenses. The Trust expenses for which holders of Shares pay their allocable
portion include, but are not limited to: the cost of organizing the Trust and
continuing its existence; the cost of registering the Trust; Trustees' fees;
auditors' fees; the cost of meetings of Trustees; legal fees of the Trust;
association membership dues and such non-recurring and extraordinary items as
may arise.
Fund expenses for which holders of Shares pay their allocable portion based on
average daily net assets include, but are not limited to: registering the Fund
and Shares of the Fund; investment advisory services; taxes and commissions;
custodian fees; insurance premiums; auditors' fees; and such non-recurring and
extraordinary items as may arise.
The Funds' expenses under the Rule 12b-1 Plans are incurred solely by the Class
B Shares and Class C Shares. The Trustees reserve the right to allocate certain
expenses to holders of Shares as they deem appropriate ("Class Expenses"). In
any case, Class Expenses would be limited to: Rule 12b-1 fees; transfer agent
fees; printing and postage expenses; registration fees; and administrative,
legal and Trustees' fees. Presently, all Fund expenses, other than Rule 12b-1
fees, are allocated based upon the average daily net assets of each class of a
Fund.
- ------------------------ SHAREHOLDER ------------------------
- ------------------------ RIGHTS AND ------------------------
PRIVILEGES
VOTING RIGHTS
Each share of a Fund is entitled to one vote in Trustee elections and other
voting matters submitted to shareholders. All shares of all classes of each
First Union Fund in the Trust have equal voting rights, except that in matters
affecting only a particular First Union Fund or class, only shares of that
First Union Fund or class are entitled to vote. As of February 4, 1994, First
Union National Bank, Charlotte, North Carolina, acting in various capacities
for numerous accounts, was the owner of record of 501,994 shares (80.44%) of
Utility Fund--Class B Investment Shares; 63,510,816 shares (98.9%) of Balanced
Fund--Trust Shares; 35,104,402 shares (95.1%) of Fixed Income Fund--Trust
Shares; 25,746,543 shares (96.0%) of Value Fund--Trust Shares; and 1,221,044
shares (81.5%) of U.S. Government Fund--Trust Shares, and therefore, may, for
certain purposes, be deemed to control such Funds and be able to affect the
outcome of certain matters presented for a vote of shareholders.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust or a Fund's operation and for the election of Trustees
under certain circumstances.
Trustees may be removed by a two-thirds vote of the number of Trustees prior
to such removal or by a two-thirds vote of the shareholders at a special
meeting. A special meeting of shareholders shall be called by the Trustees
upon the written request of shareholders owning at least 10% of the Trust's
outstanding shares of all series entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders for such acts or obligations
of the Trust. These documents require notice of this disclaimer to be given in
each agreement, obligation, or instrument the Trust or its Trustees enter into
or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required, by the Declaration of Trust, to use the
property of the Trust to protect or compensate the shareholder. On request,
the Trust will defend any claim made and pay any judgment against a
shareholder for any act or obligation of the Trust. Therefore, financial loss
resulting from liability as a shareholder will occur only if the Trust cannot
meet its obligations to indemnify shareholders and pay judgments against them
from its assets.
EFFECT OF BANKING LAWS
The Glass-Steagall Act and other banking laws and regulations presently
prohibit banks or non-bank affiliates of member banks of the Federal Reserve
System from sponsoring, organizing, controlling, or distributing the shares of
a registered, open-end investment company continuously engaged in the issuance
of its shares. Further, they prohibit banks from issuing, underwriting, or
distributing securities in general. Such laws and regulations do not prohibit
such a holding company or affiliate from acting as investment adviser,
transfer agent, or custodian to such an investment company or from purchasing
shares of such a company as agent for and upon the order of their customer.
The Adviser, First Union, is subject to and in compliance with such banking
laws and regulations.
Sullivan & Cromwell has advised First Union that First Union may perform the
services for the Funds set forth in the investment advisory agreement, this
prospectus, and the Statements of Additional Information without violation of
the Glass-Steagall Act or other applicable federal banking laws or
regulations. Such counsel has pointed out, however, that changes in federal
statutes and regulations relating to the permissible activities of banks, as
well as further judicial or administrative decisions or interpretations of
such statutes and regulations, could prevent First Union from continuing to
perform such services for the Funds or from continuing to purchase Shares for
the accounts of its customers. If First Union were prohibited from acting as
investment adviser to the Funds, it is expected that the Trustees would
recommend to the Funds' shareholders that they approve a new investment
adviser selected by the Trustees. It is not expected that the Funds'
shareholders would suffer any adverse financial consequences (if another
adviser with equivalent abilities to First Union is found) as a result of any
of these occurrences.
- ------------------------- DISTRIBUTIONS -------------------------
- ------------------------- AND TAXES -------------------------
Each Fund pays out as dividends substantially all of its net investment income
(dividends and interest on its investments) and net realized short-term gains.
DIVIDENDS
Dividends are declared and paid quarterly for the Value and Balanced Funds;
dividends are declared and paid monthly for the Fixed Income and Utility Funds;
and dividends are declared daily and paid monthly for the High Grade Tax Free
and U.S. Government Funds. Dividends are declared just prior to determining net
asset value. Any distributions will be automatically reinvested in additional
Shares on payment dates at the ex-dividend date net asset value without a sales
charge unless a shareholder otherwise instructs the Fund or FUBS in writing.
CAPITAL GAINS
Any net long-term capital gains realized by the Funds will be distributed at
least once every 12 months.
- ------------------------- TAX INFORMATION -------------------------
- ------------------------- -------------------------
Income dividends and capital gains distributions are taxable as described
below.
FEDERAL INCOME TAX
The Funds pay no federal income tax if they meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and will
receive the special tax treatment afforded to such companies.
Each First Union Fund is treated as a single, separate entity for federal
income tax purposes so that income (including capital gains) and losses
realized by one First Union Fund will not be combined for tax purposes with
those realized by other First Union Funds.
Except as set forth under "High Grade Tax Free Fund Additional Tax
Information," all shareholders, unless otherwise exempt, are required to pay
federal income tax on any dividends and other distributions, whether in shares
or cash, for all the Funds. Detailed information concerning the status of
dividend and capital gains distributions for federal income tax purposes is
mailed to shareholders annually.
Shareholders are urged to consult their own tax advisers regarding the status
of their accounts under state and local tax laws.
HIGH GRADE TAX FREE FUND ADDITIONAL TAX INFORMATION
Shareholders of High Grade Tax Free Fund are not required to pay the federal
regular income tax on any dividends received from the Fund that represent net
interest on tax-exempt municipal bonds. However, under the Tax Reform Act of
1986, dividends representing net interest earned on some municipal bonds may be
included in calculating the federal individual alternative minimum tax or the
federal alternative minimum tax for corporations.
The alternative minimum tax, up to 28% of alternative minimum taxable income
for individuals and 20% for corporations, applies when it exceeds the regular
tax for the taxable year. Alternative minimum taxable income is equal to the
adjusted income of the taxpayer increased by certain "tax preference" items not
included in regular taxable income and reduced by only a portion of the
deductions allowed in the calculation of the regular tax.
The Tax Reform Act of 1986 treats interest on certain "private activity" bonds
issued after August 7, 1986, as a tax preference item. Unlike traditional
governmental purpose municipal bonds, which finance roads, schools, libraries,
prisons, and other public facilities, private activity bonds provide benefits
to private parties. The Fund may purchase all types of municipal bonds,
including "private activity" bonds. Thus, should the Fund purchase any such
bonds, a portion of the Fund's dividends may be treated as a tax preference
item.
In addition, in the case of a corporate shareholder, dividends of the Fund
which represent interest on municipal bonds may be subject to the 20% corporate
alternative minimum tax because the dividends are included in a corporation's
"adjusted current earnings." The corporate alternative minimum tax treats 75%
of the excess of a taxpayer's pre-tax "adjusted current earnings" over the
taxpayer's alternative minimum taxable income as a tax preference item.
"Adjusted current earnings" is based upon the concept of a corporation's
"earnings and profits." Since "earnings and profits" generally includes the
full amount of any Fund dividend, and alternative minimum taxable income does
not include the portion of the Fund's dividend attributable to municipal bonds
which are not private activity bonds, the difference will be included in the
calculation of the corporation's alternative minimum tax.
Shareholders are urged to consult their own tax advisers to determine whether
they are subject to alternative minimum tax or the corporate alternative
minimum tax and, if so, the tax treatment of dividends paid by the Fund.
Dividends of the Fund representing net interest income earned on some
temporary investments and any realized net short-term gains are taxed as
ordinary income. Distributions representing net long-term capital gains
realized by the Fund, if any, will be taxable as long-term capital gains
regardless of the length of time shareholders have held their Shares.
These tax consequences apply whether dividends are received in cash or as
additional Shares. Information on the tax status of dividends and
distributions is provided annually.
- ------------------------ OTHER CLASSES ------------------------
- ------------------------ OF SHARES ------------------------
First Union Equity and Income Funds offer three classes of shares: Class B
Shares and Class C Shares for individuals and other customers of First Union
and Trust Shares for institutional investors.
Trust Shares are sold to accounts for which First Union or other financial
institutions act in a fiduciary or agency capacity at net asset value without
a sales charge at a minimum investment of $1,000. Trust Shares are not sold
pursuant to a Rule 12b-1 plan.
The stated advisory fee is the same for all classes of the Funds. Financial
institutions and brokers providing sales and/or administrative services may
receive different compensation with respect to one class of shares than with
respect to another class of shares of the same Fund.
The amount of dividends payable to Class B Shares and Class C Shares will be
less than those payable to Trust Shares by the difference between distribution
expenses borne by the shares of each respective class.
- ------------------------ ADDRESSES ------------------------
- ------------------------ ------------------------
- -------------------------------------------------------------------------------
First Union Funds Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
- -------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
- -------------------------------------------------------------------------------
Investment Adviser
First Union National Bank of North Carolina
One First Union Center
301 S. College Street
Charlotte, North Carolina
28288
- -------------------------------------------------------------------------------
Custodian, Transfer Agent, and Dividend Disbursing Agent
State Street Bank and Trust Company P.O. Box 8609
Boston, Massachusetts
02266-8609
- -------------------------------------------------------------------------------
Legal Counsel to the Independent Trustees
Sullivan & Worcester 1025 Connecticut Ave.,
N.W.
Washington, D.C. 20036
- -------------------------------------------------------------------------------
Legal Counsel to the Trust
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania
15222
- -------------------------------------------------------------------------------
Independent Auditors
KPMG Peat Marwick One Mellon Bank Center
Pittsburgh, Pennsylvania
15219
- -------------------------------------------------------------------------------
FIRST UNION UTILITY PORTFOLIO
(A Portfolio of First Union Funds)
Trust Shares
Class B Investment Shares
Class C Investment Shares
- --------------------------------------------------------------------------------
SUPPLEMENT TO COMBINED STATEMENT OF ADDITIONAL INFORMATION DATED FEBRUARY
28, 1994
1) Please insert the following as the last sentence in the section entitled
'Portfolio Turnover' on age 4:
"For the period from January 6, 1994 (commencement of operations) to April
30, 1994, the portfolio turnover rate for the Fund was 7%."
2) Please delete the second and third paragraphs in the section entitled
'Fund Ownership' on page 7 and replace with the following:
"As of June 4, 1994, the following shareholders of record owned 5% or more
of the outstanding Trust Shares of the Fund: First Union National Bank
Trust Accounts of Charlotte, North Carolina, owned approximately 541,485
Shares (95.98%).
As of June 4, 1994, the following shareholders of record owned 5% or more
of the outstanding Class B Investment Shares of the Fund: First Union
Brokerage Services & Co., for the exclusive benefit of Helen W. Frazier
Trust, Earle J. Robinson and Donald Warren, Trustees, of West Palm Beach,
Florida, owned approximately 20,561 Shares (5.71%).
As of June 4, 1994, no shareholders of record owned 5% or more of the
outstanding Class C Investment Shares of the Fund."
3) Please insert the following as the second sentence of the first paragraph
in the sub-section entitled 'Advisory Fees' in the main section entitled
'Investment Advisory Services' on page 8:
"For the period from Janaury 6, 1994 (commencement of operations) to April
30, 1994, the Adviser earned advisory fees of $30,864, all of which were
voluntarily waived."
4) Please insert the following information as the second sentence in the
section entitled 'Administrative Services' on page 9:
"For the period from January 6, 1994 (commencement of operations) to April
30, 1994, the Fund incurred $30,548 in administrative service costs, all
of which were voluntarily waived."
5) Please insert the following information as a final paragraph in the
sub-section entitled 'Distribution Plans (Class B and Class C Investment
Shares)' on page 10:
"For the period from January 6, 1994 (commencement of operations) to April
30, 1994, the Fund incurred $34,603 in distribution services fees (Class B
Investment Shares and Class C Investment Shares only), of which $2,573
were voluntarily waived."
6) Please insert the following information as the first paragraph in the
section entitled 'Total Return' on page 11:
"The Fund's cumulative total returns for Class B Investment Shares and
Class C Investment Shares from January 4, 1994 (start of performance) to
April 30, 1994, were (8.70)% and (8.84)%, respectively. The Fund's
cumulative total return for Trust Shares from February 28, 1994 (start of
performance) to April 30, 1994, was (0.95)%. 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 B Investment Shares and
Class C Investment Shares is representative of only 4 months of Fund
activity since the Fund's effective date. The Fund's total return for
Trust Shares is representative of only two months of Fund activity since
the Fund's effective date."
7) Please insert the following information as the first paragraph in the
section entitled 'Yield' on page 12:
"The Fund's yields for Class B Investment Shares, Class C Investment
Shares, and Trust Shares were 4.66%, 4.37%, and 5.12%, respectively, for
the thirty-day period ended April 30, 1994."
June 30, 1994
G00176-01 (6/94)
FIRST UNION UTILITY PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
TRUST SHARES
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectus of Trust Shares, Class B Investment Shares,
or Class C Investment Shares for First Union Utility Portfolio, dated
February 28, 1994. This Statement is not a prospectus itself. To
receive a copy of the Trust Shares' prospectus, write First Union
National Bank of North Carolina, Capital Management Group, 1200 Two
First Union Center, Charlotte, North Carolina 28288-1156 or call
1-800-326-2584. To receive a copy of the Class B Investment Shares' or
Class C Investment Shares' prospectus, write First Union Brokerage
Services, Inc., One First Union Center, 301 S. College Street,
Charlotte, North Carolina 28288-1173 or call 1-800-326-3241.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated February 28, 1994
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------------
Restricted and Illiquid Securities 1
When-Issued and Delayed Delivery
Transactions 1
Lending of Portfolio Securities 2
Reverse Repurchase Agreements 2
Options Transactions 2
Futures Transactions 3
Portfolio Turnover 4
Investment Limitations 4
TRUST MANAGEMENT 6
- ---------------------------------------------------------------
Officers and Trustees 6
Fund Ownership 7
Trustee Liability 7
INVESTMENT ADVISORY SERVICES 8
- ---------------------------------------------------------------
Adviser to the Fund 8
Advisory Fees 8
BROKERAGE TRANSACTIONS 8
- ---------------------------------------------------------------
ADMINISTRATIVE SERVICES 9
- ---------------------------------------------------------------
PURCHASING SHARES 9
- ---------------------------------------------------------------
Distribution Plans (Class B and Class C Investment Shares) 10
DETERMINING NET ASSET VALUE 10
- ---------------------------------------------------------------
Determining Market Value of Securities 10
REDEEMING SHARES 11
- ---------------------------------------------------------------
Redemption in Kind 11
TAX STATUS 11
- ---------------------------------------------------------------
The Fund's Tax Status 11
Shareholders' Tax Status 11
TOTAL RETURN 11
- ---------------------------------------------------------------
YIELD 12
- ---------------------------------------------------------------
PERFORMANCE COMPARISONS 12
- ---------------------------------------------------------------
APPENDIX 14
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
First Union Utility Portfolio (the "Fund") is a portfolio of First Union Funds
(the "Trust"). The Trust was established as a Massachusetts business trust under
a Declaration of Trust dated August 30, 1984. On January 4, 1993, the name of
the Trust was changed from "The Salem Funds" to "First Union Funds."
Shares of the Fund are offered in three classes: Trust Shares, Class B
Investment Shares, and Class C Investment Shares (individually and collectively
referred to as "Shares"). This Combined Statement of Additional Information
relates to the above-mentioned Shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is high current income and moderate capital
appreciation. The Fund invests primarily in a diversified portfolio of equity
and debt securities issued by utility companies. The investment objective cannot
be changed without approval of shareholders.
U.S. GOVERNMENT OBLIGATIONS
The types of U.S. government obligations in which the Fund may invest
generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations issued or guaranteed by
U.S. government agencies or instrumentalities. These securities are
backed by:
the full faith and credit of the U.S. Treasury;
the issuer's right to borrow from the U.S. Treasury;
the discretionary authority of the U.S. government to purchase certain
obligations of agencies or
instrumentalities; or
the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are:
Federal Farm Credit Banks;
Federal Home Loan Banks;
Federal National Mortgage Association;
Student Loan Marketing Association; and
Federal Home Loan Mortgage Corporation.
RESTRICTED AND ILLIQUID SECURITIES
The ability of the Board of Trustees ("Trustees") to determine the liquidity of
certain restricted securities is permitted under a Securities and Exchange
Commission ("SEC") Staff position set forth in the adopting release for Rule
144A under the Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive,
safe-harbor for certain secondary market transactions involving securities
subject to restrictions on resale under federal securities laws. The Rule
provides an exemption from registration for resales of otherwise restricted
securities to qualified institutional buyers. The Rule was expected to further
enhance the liquidity of the secondary market for securities eligible for resale
under the Rule. The Fund believes that the Staff of the SEC has left the
question of determining the liquidity of all restricted securities to the
Trustees. The Trustees consider the following criteria in determining the
liquidity of certain restricted securities:
the frequency of trades and quotes for the security;
the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
dealer undertakings to make a market in the security; and
the nature of the security and the nature of marketplace trades.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund engages in when-issued and delayed delivery transactions only for the
purpose of acquiring portfolio securities consistent with the Fund's investment
objective and policies, not for investment leverage.
These transactions are made to secure what is considered to be an advantageous
price or yield for the Fund. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
No fees or other expenses, other than normal transaction costs, are incurred.
However, liquid assets of the Fund sufficient to make payment for the securities
to be purchased are segregated at the trade date. These securities are marked to
market daily and maintained until the transaction is settled.
The Fund may engage in these transactions to an extent that would cause the
segregation of an amount up to 20% of the total value of its assets.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. The Fund does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement, the Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that the Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be repurchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
OPTIONS TRANSACTIONS
As a means of reducing fluctuations in the net asset value of Shares of the
Fund, the Fund may attempt to hedge all or a portion of its portfolio through
the purchase of put options on portfolio securities and listed put options on
financial futures contracts for portfolio securities. The Fund may also write
covered call options on its portfolio securities to attempt to increase its
current income.
The Fund will maintain its positions in securities, option rights, and
segregated cash subject to puts and calls until the options are exercised,
closed, or have expired.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series.
PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts.
These options will be used only to protect portfolio securities against
decreases in value resulting from market factors such as an anticipated
increase in interest rates.
A futures contract is a firm commitment by two parties: the seller who
agrees to make delivery of the specific type of instrument called for in
the contract ("going short") and the buyer who agrees to take delivery of
the instrument ("going long") at a certain time in the future. Financial
futures contracts call for the delivery of particular debt instruments
issued or guaranteed by the U.S. Treasury or by specified agencies or
instrumentalities of the U.S. government. If the Fund would enter into
financial futures contracts directly to hedge its holdings of fixed
income securities, it would enter into contracts to deliver securities at
an undetermined price (i.e., "go short") to protect itself against the
possibility that the prices of its fixed income securities may decline
during the Fund's anticipated holding period.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at an undetermined
price, the purchase of a put option on a futures contract entitles (but
does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price. Generally, if
the hedged portfolio securities decrease in value during the term of an
option, the related futures contracts will also decrease in value and the
put option will increase in value. In such an event, the Fund will
normally close out its option by selling an identical put option. If the
hedge is successful, the proceeds received by the Fund upon the sale of
the put option will be large enough to offset both the premium paid by
the Fund for the put option plus the realized decrease in value of the
hedged securities.
Alternately, the Fund may exercise its put option to close out the
position. To do so, it would enter into a futures contract of the type
underlying the option. If the Fund neither closes out nor exercises an
option, the option will expire on the date provided in the option
contract, and only the premium paid for the contract will be lost.
WRITING COVERED OPTIONS
The Fund may write (i.e., sell) covered call and put options. By writing
a call option, the Fund becomes obligated during the term of the option
to deliver the securities underlying the option upon payment of the
exercise price. By writing a put option, the Fund becomes obligated
during the term of the option to purchase the securities underlying the
option at the exercise price if the option is exercised. The Fund also
may write straddles (combinations of covered puts and calls on the same
underlying security).
The Fund may only write "covered" options. This means that so long as the
Fund is obligated as the writer of a call option, it will own the
underlying securities subject to the option or, in the case of call
options on U.S. Treasury bills, the Fund might own substantially similar
U.S. Treasury bills.
The Fund will be considered "covered" with respect to a put option it
writes if, so long as it is obligated as the writer of the put option, it
deposits and maintains with its custodian in a segregated account liquid
assets having a value equal to or greater than the exercise price of the
option.
The principal reason for writing call or put options is to obtain,
through a receipt of premiums, a greater current return than would be
realized on the underlying securities alone. The Fund receives a premium
from writing a call or put option which it retains whether or not the
option is exercised. By writing a call option, the Fund might lose the
potential for gain on the underlying security while the option is open,
and by writing a put option, the Fund might become obligated to purchase
the underlying security for more than its current market price upon
exercise.
PURCHASING OPTIONS
The Fund may purchase both put and call options on its portfolio
securities. These options will be used as a hedge to attempt to protect
securities which the Fund holds or will be purchasing against decreases
or increases in value. The Fund may purchase call and put options for the
purpose of offsetting previously written call and put options of the same
series. If the Fund is unable to effect a closing purchase transaction
with respect to covered options it has written, the Fund will not be able
to sell the underlying securities or dispose of assets held in a
segregated account until the options expire or are exercised.
The Fund currently does not intend to invest more than 5% of its net
assets in options transactions.
OPTIONS TRADING MARKETS
Options which the Fund will trade must be listed on national securities
exchanges. Exchanges on which such options currently are traded are the
Chicago Board Options Exchange and the New York, American, Pacific and
Philadelphia Stock Exchanges ("Exchanges").
FUTURES TRANSACTIONS
The Fund may enter into currency and other financial futures contracts and write
options on such contracts. The Fund intends to enter into such contracts and
related options for hedging purposes. The Fund will enter into futures on
securities, currencies or index-based futures contracts in order to hedge
against changes in interest or exchange rates or securities prices. A futures
contract on securities or currencies is an agreement to buy or sell securities
or currencies during a designated month at whatever price exists at that time. A
futures contract on a securities index does not involve the actual delivery of
securities, but merely requires the payment of a cash settlement based on
changes in the securities index. The Fund does not make payment or deliver
securities upon entering into a futures contract. Instead, it puts down a margin
deposit, which is adjusted to reflect changes in the value of the contract and
which remains in effect until the contract is terminated.
The Fund may sell or purchase currency and other financial futures contracts.
When a futures contract is sold by the Fund, the profit on the contract will
tend to rise when the value of the underlying securities or currencies declines
and to fall when the value of such securities or currencies increases. Thus, the
Fund sells futures contracts in order to offset a possible decline in the profit
on its securities or currencies. If a futures contract is purchased by the Fund,
the value of the contract will tend to rise when the value of the underlying
securities or currencies increases and to fall when the value of such securities
or currencies declines.
The Fund intends to purchase put and call options on currency and other
financial futures contracts for hedging purposes. A put option purchased by the
Fund would give it the right to assume a position as the seller of a futures
contract. A call option purchased by the Fund would give it the right to assume
a position as the purchaser of a futures contract. The purchase of an option on
a futures contract requires the Fund to pay a premium. In exchange for the
premium, the Fund becomes entitled to exercise the benefits, if any, provided by
the futures contract, but is not required to take any action under the contract.
If the option cannot be exercised profitably before it expires, the Fund's loss
will be limited to the amount of the premium and any transaction costs.
The Fund may enter into closing purchase and sale transactions in order to
terminate a futures contract and may buy or sell put and call options for the
purpose of closing out its options positions. The Fund's ability to enter into
closing transactions depends on the development and maintenance of a liquid
secondary market. There is no assurance that a liquid secondary market will
exist for any particular contract or at any particular time. As a result, there
can be no assurance that the Fund will be able to enter into an offsetting
transaction with respect to a particular contract at a particular time. If the
Fund is not able to enter into an offsetting transaction, the Fund will continue
to be required to maintain the margin deposits on the contract and to complete
the contract according to its terms, in which case it would continue to bear
market risk on the transaction.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and thereby insure
that the use of such futures contracts is unleveraged.
PORTFOLIO TURNOVER
The Fund will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
the Fund's investment objectives. It is not anticipated that the portfolio
trading engaged in by the Fund will result in its annual rate of turnover
exceeding 85%.
INVESTMENT LIMITATIONS
CONCENTRATION OF INVESTMENTS
The Fund will not invest more than 25% of its total assets (valued at the
time of investment) in securities of companies engaged principally in any
one industry other than the utilities industry, except that this
restriction does not apply to cash or cash items and securities issued or
guaranteed by the United States government or its agencies or
instrumentalities.
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of transactions. A deposit or payment by the Fund of initial or
variation margin in connection with financial futures contracts or
related options transactions is not considered the purchase of a security
on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities except that the Fund may borrow
money directly or through reverse repurchase agreements in amounts up to
one-third of the value of its total assets, including the amount borrowed
and except to the extent that the Fund may enter into futures contracts.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage, but rather as a temporary, extraordinary, or
emergency measure to facilitate management of the portfolio by enabling
the Fund to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. The Fund will
not purchase any securities while borrowings in excess of 5% of its total
assets are outstanding.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities or commodity contracts.
However, the Fund may enter into futures contracts on financial
instruments or currency and sell or buy options on such contracts.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets, except portfolio securities up
to 15% of the value of its total assets. This shall not prevent the Fund
from purchasing or holding corporate or government bonds,
debentures, notes, certificates of indebtedness or other debt securities
of an issuer, repurchase agreements, or other transactions which are
permitted by the Fund's investment objectives and policies or the Trust's
Declaration of Trust.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objectives, policies, and limitations.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, it may pledge assets having
a market value not exceeding the lesser of the dollar amounts borrowed or
15% of the value of total assets at the time of the borrowing. For
purposes of this limitation, the following are not deemed to be pledges:
margin deposits for the purchase and sale of financial futures contracts
and related options and segregation or collateral arrangements made in
connection with options activities.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, including limited partnership
interests in real estate, although it may invest in securities of
companies whose business involves the purchase or sale of real estate or
in securities which are secured by real estate or interests in real
estate.
DIVERSIFICATION OF INVESTMENTS
With respect to 75% of the value of its assets, the Fund will not
purchase the securities of any issuer (other than cash, cash items, or
securities issued or guaranteed by the U.S. government, its agencies, or
instrumentalities and repurchase agreements collateralized by such
securities) if, as a result, more than 5% of the value of its total
assets would be invested in the securities of that issuer. The Fund will
not acquire more than 10% of the outstanding voting securities of any one
issuer.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material changes
in these limitations become effective.
INVESTING IN RESTRICTED SECURITIES
The Fund will not invest more than 10% of its total assets in securities
subject to restrictions on resale under the Securities Act of 1933,
except for commercial paper issued under Section 4(2) of the Securities
Act of 1933 and certain other restricted securities which meet the
criteria for liquidity as established by the Trustees. To comply with
certain state restrictions, the Fund will limit these transactions to 5%
of its total assets. (If state restrictions change, this latter
restriction may be revised without shareholder approval or notification.)
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
securities, including repurchase agreements providing for settlement more
than seven days after notice, non-negotiable time deposits, and certain
restricted securities not determined by the Trustees to be liquid.
INVESTING TO EXERCISE CONTROL
The Fund will not purchase securities of an issuer for the purpose of
exercising control or management.
INVESTING IN PUT OPTIONS
The Fund will not purchase put options on securities, unless the
securities are held in the Fund's portfolio and not more than 5% of the
Fund's total assets would be invested in premiums on open put option
positions.
WRITING COVERED CALL OPTIONS
The Fund will not write call options on securities unless the securities
are held in the Fund's portfolio or unless the Fund is entitled to them
in deliverable form without further payment or after segregating cash in
the amount of any further payment.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES
OF THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or its investment adviser, owning
individually more than 1/2 of 1% of the issuer's securities, together own
more than 5% of the issuer's securities.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of its total assets in securities
of issuers which have records of less than three years of continuous
operations, including their predecessors.
INVESTING IN WARRANTS
The Fund will not invest more than 5% of its net assets in warrants,
including those acquired in units or attached to other securities. To
comply with certain state restrictions, the Fund will limit its
investment in such warrants not listed on the New York or American Stock
Exchanges to 2% of its net assets. (If state restrictions change, this
latter restriction may be revised without notice to shareholders.) For
purposes of this investment restriction, warrants acquired by the Fund in
units or attached to securities may be deemed to be without value.
INVESTING IN MINERALS
The Fund will not purchase interests in oil, gas, or other mineral
exploration or development programs, or leases, although it may purchase
the securities of issuers which invest in or sponsor such programs.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will purchase securities of investment companies only in
open-market transactions involving customary broker's commissions.
However, these limitations are not applicable if the securities are
acquired in a merger, consolidation, or acquisition of assets. It should
be noted that investment companies incur certain expenses such as
management fees, and, therefore, any investment by the Fund in shares of
another investment company would be subject to such duplicate expenses.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
To comply with registration requirements in certain states, the Fund (a) will
limit the aggregate value of the assets underlying covered call options or put
options written by the Fund to not more than 25% of its net assets, (b) will
limit the premiums paid for options purchased by the Fund to 20% of its net
assets, and (c) will limit the margin deposits on futures contracts entered into
by the Fund to 5% of its net assets. (If state requirements change, these
restrictions may be revised without shareholder notification.)
The Fund has no present intention to borrow money in excess of 5% of the value
of its net assets during the coming fiscal year. In addition, the Fund does not
expect to invest more than 5% of its net assets in the securities of other
investment companies during the coming year.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items".
TRUST MANAGEMENT
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
Officers and Trustees of the Trust are listed with their address, principal
occupations, and present positions, including any affiliation with First Union
National Bank of North Carolina ("First Union"), Federated Investors, Federated
Securities Corp., or Federated Administrative Services.
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME THE TRUST DURING PAST FIVE YEARS
<S> <C> <C>
James S. Howell Chairman of Retired Vice President of Lance Inc. (food manufacturing).
the Board and
Trustee
Gerald M. McDonnell Trustee Sales Representative with Nucor-Yamoto, Inc. (steel producer) (since
1988); formerly with Northwestern Steel & Wire Company (1986-1988).
Thomas L. McVerry Trustee Business and management adviser (since 1990); formerly, Vice President
(1989-1990) and member of the Board of Directors (1988-1990), Rexham
Industries, Inc. (diverse manufacturer); and Vice President, Finance and
Resources, Rexham Corporation (1979-1990).
William Walt Pettit* Trustee Principal in the law firm Holcomb and Pettit, P.A. (since 1988);
formerly with Clontz and Clontz (1980-1988).
Russell A. Salton, III, M.D. Trustee Chairman and Medical Director, and formerly, President (1990-1993),
Primary PhysicianCare, Inc.; formerly, President, Metrolina Family
Practice Group, P.A. (1982-1989).
Michael S. Scofield Trustee Attorney; formerly, Partner with Wardlow, Knox, Knox,
Freeman & Scofield (attorneys) (1982-1986).
Edward C. Gonzales* President, Vice President, Treasurer, and Trustee, Federated Investors; Vice
Treasurer, and President and Treasurer, Federated Advisers, Federated Management, and
Trustee Federated Research; Executive Vice President, Treasurer, and Director,
Federated Securities Corp.; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Vice President, Treasurer, and Trustee of
certain investment companies advised or distributed by affiliates of
Federated Investors.
Joseph S. Machi Vice President and Vice President, Federated Administrative Services; Director, Private
Assistant Treasurer Label Management, Federated Investors; Vice President and Assistant
Treasurer of certain investment companies for which Federated Securities
Corp. is the principal distributor.
Peter J. Germain Secretary Corporate Counsel, Federated Investors.
</TABLE>
*This Trustee is deemed to be an "interested person" of the Trust as defined in
the Investment Company Act of 1940.
The address of the officers and Trustees of the Trust is Federated Investors
Tower, Pittsburgh, Pennsylvania 15222-3779.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of February 4, 1994, Trust Shares of the Fund were not effective.
As of February 4, 1994, no shareholders of record owned 5% or more of the
outstanding Class C Investment Shares of the Fund.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that a Trustee shall be liable for his
own wilful defaults, but shall not be liable for errors of judgment or mistakes
of fact or law. If reasonable care has been exercised in the selection of
officers, agents, employees, or investment advisers, a Trustee shall not be
liable for any neglect or wrongdoing of any such person. However, a Trustee is
not protected against any liability to which he would otherwise be subject by
reason of wilful misfeasance, bad faith, gross negligence, or reckless disregard
of the duties involved in the conduct of his office.
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND
The Fund's investment adviser (the "Adviser") is First Union National Bank of
North Carolina. It provides investment advisory services through its Capital
Management Group. First Union is a subsidiary of First Union Corporation, a bank
holding company headquartered in Charlotte, North Carolina.
The Adviser shall not be liable to the Trust, the Fund or any shareholder of the
Fund for any losses that may be sustained in the purchase, holding, or sale of
any security, or for anything done or omitted by it, except acts or omissions
involving wilful misfeasance, bad faith, gross negligence, or reckless disregard
of the duties imposed upon it by its contract with the Trust.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the respective prospectus.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1-1/2% per
year of the remaining average net assets, the Adviser will reimburse the
Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser may, from time
to time, use brokers affiliated with the Trust, Federated Securities Corp., or
their affiliates. The Adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to review by the Trustees.
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the Adviser
and may include:
advice as to the advisability of investing in securities;
security analysis and reports;
economic studies;
industry studies;
receipt of quotations for portfolio evaluations; and
similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers and dealers may be used by the Adviser in
advising the Fund and other accounts. To the extent that receipt of these
services may supplant services for which the Adviser or its affiliates might
otherwise have paid, it would tend to reduce their expenses.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
respective prospectus.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Shares are sold at their net asset value, plus a sales charge, if applicable, on
days the New York Stock Exchange and the Federal Reserve Wire System are open
for business. The procedure for purchasing Shares is explained in the respective
prospectus under "How to Buy Shares."
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Class B Investment
Shares through:
quantity discounts and accumulated purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
Larger purchases reduce the sales charge paid. The Fund will combine
purchases of Shares made on the same day by the investor, his spouse, and
his children under age 21 when it calculates the sales charge.
If an additional purchase of Shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a
shareholder already owns Shares having a current value at the public
offering price of $90,000, and then purchases $10,000 more at the current
public offering price, the sales charge on the additional purchase
according to the schedule now in effect would be 3.50%, not 4.00%.
To receive the sales charge reduction, Federated Securities Corp. ("FSC")
must be notified by the shareholder in writing at the time the purchase
is made that Shares are already owned or that purchases are being
combined. The Fund will reduce the sales charge after it confirms the
purchases.
LETTER OF INTENT
If a shareholder intends to purchase at least $100,000 of Shares in the
Fund over the next 13 months, the sales charge may be reduced by signing
a letter of intent to that effect. This letter of intent includes a
provision for a sales charge adjustment depending on the amount actually
purchased within the 13-month period and a provision for the custodian to
hold up to 4.0% of the total amount intended to be purchased in escrow
(in Shares) until such purchase is completed.
The amount held in escrow will be applied to the shareholder's account at
the end of the 13-month period, unless the amount specified in the letter
of intent is not purchased. In this event, an appropriate number of
escrowed Shares may be redeemed in order to realize the difference in the
sales charge.
This letter of intent will not obligate the shareholder to purchase
Shares, but if the shareholder does, each purchase during the period will
be at the sales charge applicable to the total amount intended to be
purchased. This letter may be dated as of a prior date to include any
purchases made within the past 90 days.
REINVESTMENT PRIVILEGE
If Shares in the Fund have been redeemed, the shareholder has a one-time
right, within 30 days, to reinvest the redemption proceeds at the
next-determined net asset value without any sales charge. FSC must be
notified by the shareholder in writing or by his financial institution of
the reinvestment in order to eliminate a sales charge. If the shareholder
redeems his Shares in the Fund, there may be tax consequences.
CONCURRENT PURCHASES
For purposes of qualifying for a sales charge reduction, a shareholder
has the privilege of combining concurrent purchases of two or more First
Union Funds in the Trust, the purchase price of which includes a sales
charge. For example, if a shareholder concurrently invested $30,000 in
shares of one of the other First Union Funds with a sales charge, and
$70,000 in Shares of the Fund, the sales charge would be reduced.
To receive this sales charge reduction, FSC must be notified by the
shareholder in writing or by his financial institution at the time the
concurrent purchases are made. The Fund will reduce the sales charge
after it confirms the purchases.
DISTRIBUTION PLANS (CLASS B AND CLASS C INVESTMENT SHARES)
With respect to the Class B and Class C Investment Shares classes of the Fund,
the Trust has adopted distribution plans (the "Plans") pursuant to Rule 12b-1
which was promulgated by the SEC pursuant to the Investment Company Act of 1940.
The Plans permit the payment of fees to brokers for distribution and
administrative services and to administrators for administrative services as to
Class B and Class C Investment Shares. The Plans are designed to (i) stimulate
brokers to provide distribution and administrative support services to the Fund
and holders of Class B and Class C Investment Shares and (ii) stimulate
administrators to render administrative support services to the Fund and holders
of Class B and Class C Investment Shares. The administrative services are
provided by a representative who has knowledge of the shareholder's particular
circumstances and goals, and include, but are not limited to: providing office
space, equipment, telephone facilities, and various personnel including
clerical, supervisory, and computer, as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries regarding Class B and Class C Investment
Shares; assisting clients in changing dividend options, account designations,
and addresses; and providing such other services as the Fund reasonably requests
for its Class B and Class C Investment Shares.
By adopting the Plans, the Trustees expect that the Fund will be able to achieve
a more predictable flow of cash for investment purposes and to meet redemptions.
This will facilitate more efficient portfolio management and assist the Fund in
seeking to achieve its investment objectives. By identifying potential investors
whose needs are served by the Fund's objectives, and properly servicing these
accounts, the Fund may be able to curb sharp fluctuations in rates of
redemptions and sales.
Other benefits which the Trust hopes to achieve through the Plans include, but
are not limited to, the following: (1) an efficient and effective administrative
system; (2) a more efficient use of shareholder assets by having them rapidly
invested in the Fund, through an automatic transfer of funds from a demand
deposit account to an investment account, with a minimum of delay and
administrative detail; and (3) an efficient and reliable shareholder records
system with prompt responses to shareholders' requests and inquiries concerning
their accounts.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
Although state securities laws differ, administrators in some states may be
required to register as brokers and dealers pursuant to state law.
ADMINISTRATIVE ARRANGEMENTS
FSC may also pay financial institutions a fee based upon the average net
asset value of Shares of their customers for providing administrative
services. This fee is in addition to the amounts paid under the Plans for
administrative services, and if paid, will be reimbursed by the Adviser
and not the Fund.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value of Shares generally changes each day. The days on which the net
asset values of Shares are calculated by the Fund are described in the
respective prospectus.
DETERMINING MARKET VALUE OF SECURITIES
The market values of the Fund's portfolio securities, other than options, are
determined as follows:
according to the last sale price on a national securities exchange, if
available;
in the absence of recorded sales for equity securities, according to the mean
between the last closing bid and asked prices, and for bonds and other fixed
income securities, as determined by an independent pricing service;
for unlisted equity securities, the latest bid prices; or
for short-term obligations, according to the mean between bid and asked prices
as furnished by an independent pricing service, or for short-term obligations
with remaining maturities of 60 days or less at the time of purchase, at
amortized cost or at fair value as determined in good faith by the Trustees.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices. Pricing services may consider:
yield;
quality;
coupon rate;
maturity;
type of issue;
trading characteristics; and
other market data.
REDEEMING SHARES
- --------------------------------------------------------------------------------
The Fund redeems Shares at the next computed net asset value after the Fund
receives the redemption request, plus a contingent deferred sales charge, if
applicable. Redemptions will be made on days on which the Fund computes its net
asset values. Redemption requests cannot be executed on days on which the New
York Stock Exchange is closed or on federal holidays when wire transfers are
restricted. Redemption procedures are explained in the respective prospectus
under "How to Redeem Shares."
REDEMPTION IN KIND
The Trust has elected to be governed by Rule 18f-1 of the Investment Company Act
of 1940, under which the Fund is obligated to redeem Shares for any one
shareholder in cash only up to the lesser of $250,000 or 1% of the respective
class' net asset value during any 90-day period.
Any redemption beyond this amount will also be in cash unless the Trustees
determine that payments should be in kind. In such a case, the Fund will pay all
or a portion of the remainder of the redemption in portfolio instruments, valued
in the same way as the Fund determines net asset value. The portfolio
instruments will be selected in a manner that the Trustees deem fair and
equitable.
Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.
TAX STATUS
- --------------------------------------------------------------------------------
THE FUND'S TAX STATUS
The Fund will pay no federal income tax because it expects to meet the
requirements of Subchapter M of the Internal Revenue Code, as amended,
applicable to regulated investment companies and to receive the special tax
treatment afforded to such companies. To qualify for this treatment, the Fund
must, among other requirements:
derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
derive less than 30% of its gross income from the sale of securities held less
than three months;
invest in securities within certain statutory limits; and
distribute to its shareholders at least 90% of its net income earned during the
year.
SHAREHOLDERS' TAX STATUS
Shareholders are subject to federal income tax on dividends and capital gains
received as cash or additional Shares.
CAPITAL GAINS
Shareholders will pay federal income tax at capital gains rates on
long-term capital gains distributed to them regardless of how long they
have held the Shares.
TOTAL RETURN
- --------------------------------------------------------------------------------
The average annual total return for all classes of Shares of the Fund is the
average compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of Shares owned at the
end of the period by the net asset value per Share at the end of the period. The
number of Shares owned at the end of the period is based on the number of Shares
purchased at the beginning of the period with $1,000, less any applicable sales
load, adjusted over the period by any additional Shares, assuming a quarterly
reinvestment of all dividends and distributions.
YIELD
- --------------------------------------------------------------------------------
The yield for all classes of Shares of the Fund is determined by dividing the
net investment income per Share (as defined by the SEC) earned by any class of
shares over a thirty-day period by the offering price per Share of any class on
the last day of the period. This value is then annualized using semi-annual
compounding. This means that the amount of income generated during the
thirty-day period is assumed to be generated each month over a twelve-month
period and is reinvested every six months. The yield does not necessarily
reflect income actually earned by any class because of certain adjustments
required by the SEC and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in any class
of shares, the performance will be reduced for those shareholders paying those
fees.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The performance of all classes of Shares depends upon such variables as:
portfolio quality;
average portfolio maturity;
type of instruments in which the portfolio is invested;
changes in interest rates and market value of portfolio securities;
changes in the Fund's or any class of Shares' expenses; and
various other factors.
Each class of Shares' performance fluctuates on a daily basis largely because
net earnings and offering price per Share fluctuate daily. Both net earnings and
offering price per Share are factors in the computation of yield and total
return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
LIPPER ANALYTICAL SERVICES, INC. ("LIPPER"), an independent mutual fund rating
service, ranks funds in various fund categories by making comparative
calculations using total return. Total return assumes the reinvestment of all
capital gains distributions and income dividends and takes into account any
change in net asset value over a specified period of time. From time to time,
the Fund will quote its Lipper ranking in the "utility funds" category in
advertising and sales literature.
DOW JONES INDUSTRIAL AVERAGE ("DJIA") represents share prices of selected blue
chip industrial corporations as well as public utility and transportation
companies. The DJIA indicates daily changes in the average price of stocks in
any of its categories. It also reports total sales for each group of
industries. Because it represents the top corporations of America, the DJIA is
a leading economic indicator for the stock market as a whole.
STANDARD & POOR'S UTILITY INDEX is an unmanaged index of common stocks from
forty different utilities. This index indicates daily changes in the price of
the stocks. The index also provides figures for changes in price from the
beginning of the year to date, and for a twelve month period.
DOW JONES UTILITY INDEX is an unmanaged index comprised of fifteen utility
stocks that tracks changes in price daily and over a six month period. The
index also provides the highs and lows for each of the past five years.
MORNINGSTAR, INC., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a composite
index of common stocks in industry, transportation, and financial and public
utility companies, can be used to compare to the total returns of funds whose
portfolios are invested primarily in common stocks. In addition, the Standard &
Poor's index assumes reinvestments of all dividends paid by stocks listed on
its index. Taxes due on any of these distributions are not included, nor are
brokerage or other fees calculated in the Standard & Poor's figures.
Advertisements and other sales literature for all classes of Shares may quote
total returns which are calculated on non-standardized base periods. These total
returns represent the historic change in the value of an investment in any class
of Shares based on the monthly reinvestment of dividends over a specified period
of time. In addition, advertisements and sales literature for the Fund may
include charts and other illustrations which depict the hypothetical growth of
an investment in a systematic investment plan.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD & POOR'S CORPORATION CORPORATE BOND RATING DEFINITIONS
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's
Corporation. Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effect of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING DEFINITIONS
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
STANDARD & POOR'S CORPORATION COMMERCIAL PAPER RATING DEFINITIONS
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
MOODY'S INVESTORS SERVICE, INC. COMMERCIAL PAPER RATING DEFINITIONS
PRIME-1--Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. PRIME-1
repayment capacity will normally be evidenced by the following characteristics:
Leading market positions in well established industries.
High rates of return on funds employed.
Conservative capitalization structures with moderate reliance on debt and ample
asset protection.
Broad margins in earnings coverage of fixed financial markets and assured
sources of alternate liquidity.
Well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2--Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
3092403B (2/93)
FIRST UNION
SOUTH CAROLINA
MUNICIPAL BOND
PORTFOLIO
Trust Shares
(A Portfolio of First Union Funds)
SUPPLEMENT TO PROSPECTUS
DATED FEBRUARY 28, 1994
June 30, 1994
FEDERATED SECURITIES CORP.
Distributor
G00175-02-A (6/94)
534513
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS
(PORTFOLIOS OF FIRST UNION FUNDS)
TRUST SHARES
- --------------------------------------------------------------------------------
SUPPLEMENT TO PROSPECTUS DATED FEBRUARY 28, 1994
1) Please insert the following 'Financial Highlights' table for First Union
South Carolina Municipal Bond Portfolio after page 11, following
'Financial Highlights for First Union North Carolina Municipal Bond
Portfolio' and before 'Financial Highlights for First Union Virginia
Municipal Bond Portfolio.'
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
CLASS B CLASS C
TRUST INVESTMENT INVESTMENT
SHARES SHARES SHARES
PERIOD ENDED PERIOD ENDED PERIOD ENDED
MAY 31, 1994* MAY 31, 1994** MAY 31, 1994***
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.74 $ 10.00 $ 10.00
- ---------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------------------------
Net investment income 0.13 0.17 0.15
- ---------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.63) (0.89) (0.89)
- --------------------------------------------------------------- ----------------- ----------------- -----------------
Total from investment operations (0.50) (0.72) (0.74)
- ---------------------------------------------------------------
LESS DISTRIBUTIONS
- ---------------------------------------------------------------
Dividends to shareholders from net investment income (0.13) (0.17) (0.15)
- --------------------------------------------------------------- ----------------- ----------------- -----------------
NET ASSET VALUE, END OF PERIOD $ 9.11 $ 9.11 $ 9.11
- --------------------------------------------------------------- ----------------- ----------------- -----------------
TOTAL RETURN\ (5.14%) (7.24%) (7.42%)
- ---------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------------------------------
Expenses 0.00%(b) 0.25%(b) 0.75%(b)
- ---------------------------------------------------------------
Net investment income 18.42%(b) 4.97%(b) 4.63%(b)
- ---------------------------------------------------------------
Expense waiver/reimbursement (a) 2.18%(b) 2.18%(b) 2.18%(b)
- ---------------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------------
Net assets, end of period (000 omitted) $55 $48 $1,413
- ---------------------------------------------------------------
Portfolio turnover rate 28% 28% 28%
- ---------------------------------------------------------------
</TABLE>
* Reflects operations for the period from February 28, 1994 (commencement of
operations) to May 31, 1994 (unaudited).
** Reflects operations for the period from January 4, 1994 (commencement of
operations) to May 31, 1994 (unaudited).
*** Reflects operations for the period from January 5, 1994 (commencement of
operations) to May 31, 1994 (unaudited).
\ Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above (Note 4).
(b) Computed on an annualized basis.
(See Notes which are an integral part of the Financial Statements)
2) Please replace the first sentence in the section entitled 'Shareholder
Accounts' on page 20 with the following:
"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."
3) Please replace the third paragraph in the section entitled 'Fund
Administration' on page 23 with the following:
"State Street Bank and Trust Company of Boston, Massachusetts ("State Street
Bank") serves as custodian for the securities and cash of the Funds.
Federated Services Company serves as transfer agent and provides dividend
disbursement and other shareholder services for the Funds."
4) Please replace the third sentence of the first paragraph in the section
entitled 'Voting Rights' on page 25 with the following:
"As of June 4, 1994, First Union Capital Management of Charlotte, North
Carolina, acting in various capacities for numerous accounts, was the owner of
record of 6,050 Shares (99.65%) of South Carolina Municipal Bond Fund--Trust
Shares. In addition, as of June 4, 1994, First Union Brokerage Services & Co.
("FUBS"), for the exclusive benefit of Robert Allen Jones and Larry Allen Jones
of Florence, South Carolina, and FUBS, for the exclusive benefit of Doris G.
Foster and John H. Foster of Greenville, South Carolina, and acting in various
capacities for numerous other accounts, was the owner of record of 2,546 Shares
(48.86%) and 1,493 Shares (28.65%), respectively, of the South Carolina
Municipal Bond Fund--Class B Investment Shares, and therefore, First Union
Capital Management and FUBS may, for certain purposes, be deemed to control the
South Carolina Municipal Bond Fund and be able to affect the outcome of certain
matters presented for a vote of shareholders."
5) Please insert the following financial statements at the end of the
prospectus after page 30. In addition, please add the heading 'Financial
Statements' to the Table of Contents on page 2, immediately before
'Addresses.'
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
MAY 31, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ------------ ------------------------------------------------------------------------- ---------- -------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--92.9%
- ---------------------------------------------------------------------------------------
PUERTO RICO--5.8%
-------------------------------------------------------------------------
$ 50,000 Puerto Rico Commonwealth, 5.25%, Highway & Transportation Authority,
7/1/2001 A $ 42,815
-------------------------------------------------------------------------
50,000 Puerto Rico Commonwealth, 5.50%, Public Buildings Authority, 7/1/2021 A 44,418
------------------------------------------------------------------------- -------------
Total 87,233
------------------------------------------------------------------------- -------------
SOUTH CAROLINA--87.1%
-------------------------------------------------------------------------
50,000 Berkeley County, SC, 6.25%, School District (AMBAC Insured), 2/1/2012 AAA 49,750
-------------------------------------------------------------------------
100,000 Charleston, SC, 5.60% GO Bonds, 7/1/2008 AA 97,899
-------------------------------------------------------------------------
50,000 Charleston County, SC, 5.50% Hospital Facilities Revenue Bonds (Medical
Society Health Project)/(MBIA Insured),
10/1/2019 AAA 45,082
-------------------------------------------------------------------------
50,000 Charleston County, SC, 5.625% Hospital Facilities Revenue Bonds (Bon
Secours Project)/(FSA Insured), 8/15/2025 AAA 45,189
-------------------------------------------------------------------------
100,000 Colleton, SC, 5.60% GO Bonds, 3/1/2009 BBB 91,532
-------------------------------------------------------------------------
50,000 Columbia, SC, 5.70% Water & Sewer Revenue Bonds,
2/1/2010 AA 47,656
-------------------------------------------------------------------------
50,000 Gaffney, SC, 5.00% Utility System Revenue Bonds, 3/1/2009 A 44,206
-------------------------------------------------------------------------
50,000 Greenville Hospital System, SC, 5.50% Hospital Facilities Revenue
Refunding Bonds (Series C), 5/1/2016 AA- 43,829
-------------------------------------------------------------------------
</TABLE>
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
- ------------ ------------------------------------------------------------------------- ---------- -------------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- ---------------------------------------------------------------------------------------
SOUTH CAROLINA--CONTINUED
-------------------------------------------------------------------------
$ 200,000 James Island, SC, 5.75% PSD Revenue Bonds (FGIC Insured), 6/1/2018 AAA $ 186,948
-------------------------------------------------------------------------
200,000 Lancaster County, SC, 5.25% Water & Sewer District Revenue Bonds (FGIC
Insured), 5/1/2021 AAA 172,241
-------------------------------------------------------------------------
50,000 Oconee County School District, SC, 5.10% (MBIA Insured),
1/1/2010 AAA 45,107
-------------------------------------------------------------------------
50,000 Piedmont Municipal Power Agency, SC, 5.00% (FGIC Insured), 1/1/2022 AAA 41,656
-------------------------------------------------------------------------
50,000 Richland County, SC, 5.50% Sewer System GO Bonds,
3/1/2018 AA 44,987
-------------------------------------------------------------------------
100,000 Richland County, SC, 6.10% School District Revenue Bonds (Series B)/(MBIA
Insured), 5/1/2011 AAA 99,680
-------------------------------------------------------------------------
50,000 Richland County, SC, 7.125% Solid Waste Revenue Bonds (Union Camp Corp.),
9/1/2021 A-1 52,145
-------------------------------------------------------------------------
50,000 South Carolina State, 5.25%, 3/1/2007 AAA 47,628
-------------------------------------------------------------------------
70,000 South Carolina State, 6.05% Housing Finance and Development Authority
Multi-Family Revenue Bonds, 7/1/2027 AA 67,013
-------------------------------------------------------------------------
50,000 South Carolina State, 5.50% Public Service Authority Revenue Bonds (MBIA
Insured), 7/1/2021 AAA 44,653
-------------------------------------------------------------------------
50,000 Sumter County, SC, 6.625% Hospital Facilities Revenue Bonds (Tuomey
Regional)/(MBIA Insured), 11/15/2003 AAA 53,970
------------------------------------------------------------------------- -------------
Total 1,321,171
------------------------------------------------------------------------- -------------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST $1,484,459) 1,408,404
------------------------------------------------------------------------- -------------
</TABLE>
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
MOODY'S
SHARES OR S&P* VALUE
- ------------ ------------------------------------------------------------------------- ---------- -------------
<C> <S> <C> <C>
MUTUAL FUND SHARES--8.1%
- ---------------------------------------------------------------------------------------
60,000 Dreyfus Municipal Cash Management Plus NR $ 60,000
-------------------------------------------------------------------------
63,000 Dreyfus Tax Exempt Cash Management NR 63,000
------------------------------------------------------------------------- -------------
TOTAL MUTUAL FUND SHARES (AT NET ASSET VALUE) 123,000
------------------------------------------------------------------------- -------------
TOTAL INVESTMENTS (IDENTIFIED COST $1,607,459) $ 1,531,404\
------------------------------------------------------------------------- -------------
</TABLE>
* Please refer to the Appendix of the Statement of Additional Information
for an explanation of the credit ratings.
\ The cost of investments for federal tax purposes amounts to $1,607,459. The
net unrealized depreciation on a federal tax basis amounts to $76,055, which
is comprised of $3,988 appreciation and $80,043 depreciation at May 31, 1994.
Note: The categories of investments are shown as a percentage of net assets
($1,515,858) at
May 31, 1994.
The following abbreviations are used throughout this portfolio:
AMBAC--American Municipal Bond Assurance Corp.
FGIC--Financial Guaranty Insurance Co.
FSA--Financial Security Assurance
GO--General Obligation
MBIA--Municipal Bond Investors Assurance
PSD--Public Service District
(See Notes which are an integral part of the Financial Statements)
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- -------------------------------------------------------------------------------------------------------
Investments in securities, at value (Note 2A) (identified and tax cost $1,607,459) $1,531,404
- -------------------------------------------------------------------------------------------------------
Cash 10,822
- -------------------------------------------------------------------------------------------------------
Receivable for Fund shares sold 2,050
- -------------------------------------------------------------------------------------------------------
Interest receivable 20,505
- -------------------------------------------------------------------------------------------------------
Receivable from Adviser 6,277
- ------------------------------------------------------------------------------------------------------- ----------
Total assets 1,571,058
- -------------------------------------------------------------------------------------------------------
LIABILITIES:
- -------------------------------------------------------------------------------------------------------
Payable for investments purchased $ 50,123
- --------------------------------------------------------------------------------------------
Dividends payable 1,684
- --------------------------------------------------------------------------------------------
Accrued expenses 3,393
- -------------------------------------------------------------------------------------------- ---------
Total liabilities 55,200
- ------------------------------------------------------------------------------------------------------- ----------
NET ASSETS for 166,406 shares of beneficial interest outstanding $1,515,858
- ------------------------------------------------------------------------------------------------------- ----------
NET ASSETS CONSIST OF:
- -------------------------------------------------------------------------------------------------------
Paid-in capital $1,615,392
- -------------------------------------------------------------------------------------------------------
Unrealized depreciation of investments (76,055)
- -------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (23,479)
- ------------------------------------------------------------------------------------------------------- ----------
Total Net Assets $1,515,858
- ------------------------------------------------------------------------------------------------------- ----------
NET ASSET VALUE PER SHARE:
- -------------------------------------------------------------------------------------------------------
Trust Shares (net assets of $55,291 / 6,071 shares of beneficial interest outstanding) $9.11
- ------------------------------------------------------------------------------------------------------- ----------
Class B Investment Shares (net assets of $47,512 / 5,215 shares of beneficial interest outstanding) $9.11
- ------------------------------------------------------------------------------------------------------- ----------
Class C Investment Shares (net assets of $1,413,055 / 155,120 shares of beneficial interest
outstanding) $9.11
- ------------------------------------------------------------------------------------------------------- ----------
OFFERING PRICE PER SHARE:
- -------------------------------------------------------------------------------------------------------
Trust Shares $9.11
- ------------------------------------------------------------------------------------------------------- ----------
Class B Investment Shares (100/96 of $9.11) $9.49*
- ------------------------------------------------------------------------------------------------------- ----------
Class C Investment Shares $9.11
- ------------------------------------------------------------------------------------------------------- ----------
REDEMPTION PROCEEDS PER SHARE:
- -------------------------------------------------------------------------------------------------------
Trust Shares $9.11
- ------------------------------------------------------------------------------------------------------- ----------
Class B Investment Shares $9.11
- ------------------------------------------------------------------------------------------------------- ----------
Class C Investment Shares (96/100 of $9.11) $8.75**
- ------------------------------------------------------------------------------------------------------- ----------
</TABLE>
* See "What Shares Cost" in the prospectus.
** See "How to Redeem Shares" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 4, 1994 (COMMENCEMENT OF OPERATIONS)
TO MAY 31, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ----------------------------------------------------------------------------------------------------------
Interest income (Note 2B) $ 20,129
- ---------------------------------------------------------------------------------------------------------- ---------
Expenses--
- ----------------------------------------------------------------------------------------------------------
Investment advisory fee (Note 4) $ 1,872
- -----------------------------------------------------------------------------------------------
Trustees' fees 5
- -----------------------------------------------------------------------------------------------
Administrative personnel and services fee (Note 4) 39,863
- -----------------------------------------------------------------------------------------------
Custodian and portfolio accounting fees 2,784
- -----------------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses (Note 4) 1,268
- -----------------------------------------------------------------------------------------------
Distribution services fee--Class B Investment Shares (Note 4) 48
- -----------------------------------------------------------------------------------------------
Distribution services fee--Class C Investment Shares (Note 4) 2,664
- -----------------------------------------------------------------------------------------------
Legal fees 178
- -----------------------------------------------------------------------------------------------
Printing and postage 1,119
- -----------------------------------------------------------------------------------------------
Insurance premiums 524
- -----------------------------------------------------------------------------------------------
Miscellaneous 399
- ----------------------------------------------------------------------------------------------- ---------
Total expenses 50,724
- -----------------------------------------------------------------------------------------------
Deduct--
- -----------------------------------------------------------------------------------------------
Waiver of investment advisory fee (Note 4) $ 1,872
- ------------------------------------------------------------------------------------
Waiver of administrative personnel and services fee (Note 4) 39,863
- ------------------------------------------------------------------------------------
Reimbursement of other operating fees and expenses (Note 4) 6,277 48,012
- ------------------------------------------------------------------------------------ --------- ---------
Net expenses 2,712
- ---------------------------------------------------------------------------------------------------------- ---------
Net investment income 17,417
- ---------------------------------------------------------------------------------------------------------- ---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ----------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (23,479)
- ----------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (76,055)
- ---------------------------------------------------------------------------------------------------------- ---------
Net realized and unrealized gain (loss) on investments (99,534)
- ---------------------------------------------------------------------------------------------------------- ---------
Change in net assets resulting from operations $ (82,117)
- ---------------------------------------------------------------------------------------------------------- ---------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
MAY 31, 1994*
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -----------------------------------------------------------------------------------------------
OPERATIONS--
- -----------------------------------------------------------------------------------------------
Net investment income $ 17,417
- -----------------------------------------------------------------------------------------------
Net realized gain (loss) on investments ($23,479 net loss as computed for federal income tax
purposes) (23,479)
- -----------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments (76,055)
- ----------------------------------------------------------------------------------------------- -----------------
Change in net assets from operations (82,117)
- ----------------------------------------------------------------------------------------------- -----------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 2B)--
- -----------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income
- -----------------------------------------------------------------------------------------------
Trust Shares (38)
- -----------------------------------------------------------------------------------------------
Class B Investment Shares (945)
- -----------------------------------------------------------------------------------------------
Class C Investment Shares (16,434)
- ----------------------------------------------------------------------------------------------- -----------------
Change in net assets from distributions to shareholders (17,417)
- ----------------------------------------------------------------------------------------------- -----------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 3)--
- -----------------------------------------------------------------------------------------------
Proceeds from sale of shares 1,667,497
- -----------------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of dividends declared 12,382
- -----------------------------------------------------------------------------------------------
Cost of shares redeemed (64,487)
- ----------------------------------------------------------------------------------------------- -----------------
Change in net assets from Fund share transactions 1,615,392
- ----------------------------------------------------------------------------------------------- -----------------
Change in net assets 1,515,858
- -----------------------------------------------------------------------------------------------
NET ASSETS:
- -----------------------------------------------------------------------------------------------
Beginning of period --
- ----------------------------------------------------------------------------------------------- -----------------
End of period $ 1,515,858
- ----------------------------------------------------------------------------------------------- -----------------
</TABLE>
* For the period from January 4, 1994 (commencement of operations) to May 31,
1994 (unaudited).
(See Notes which are an integral part of the Financial Statements)
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
(1) ORGANIZATION
First Union Funds (the "Trust") is registered under the Investment Company Act
of 1940, as amended, (the "Act") as an open-end, management investment company.
The Trust consists of fifteen portfolios. The financial statements included
herein are only those of First Union South Carolina Municipal Bond Portfolio
(the "Fund"). The financial statements of the other portfolios are presented
separately. The assets of each portfolio are segregated and a shareholder's
interest is limited to the portfolio in which shares are held.
The Fund offers three classes of shares (Trust Shares, Class B Investment
Shares, and Class C Investment Shares). Class B Investment Shares and Class C
Investment Shares are identical in all respects to Trust Shares, except that
Class B Investment Shares and Class C Investment Shares are sold pursuant to a
distribution plan ("Plan") adopted in accordance with the Act's Rule 12b-1.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Municipal bonds are valued by an independent pricing
service taking into consideration yield, liquidity, risk, credit, quality,
coupon, maturity, type of issue, and any other factors or market data it
deems relevant in determining valuations for normal institutional size
trading units of debt securities. The independent pricing service does not
rely exclusively on quoted prices. Short-term securities with remaining
maturities of sixty days or less may be stated at amortized cost, which
approximates value. Investments in other regulated investment companies are
valued at net asset value.
Since the Fund invests a substantial portion of its assets in issuers
located in one state, it will be more susceptible to factors adversely
affecting issuers of that state, than would be a comparable general
tax-exempt mutual fund. In order to reduce the credit risk associated with
such factors, at May 31, 1994, 51.2% of the securities in the portfolio of
investments are backed by letters of credit or bond insurance of various
financial institutions and financial guaranty assurance agencies. The
aggregate percentages by financial institutions and agencies ranged from
3.0% to 26.2% of total investments.
B. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount are amortized as required by
the Internal Revenue Code, as amended ("Code"). Distributions to
shareholders are recorded on the ex-dividend date.
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
C. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its tax-exempt income.
Accordingly, no provisions for federal tax are necessary.
D. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
E. OTHER--Investment transactions are accounted for on the trade date.
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
TRUST SHARES
PERIOD ENDED
----------------------
MAY 31, 1994*
----------------------
SHARES DOLLARS
- -------------------------------------------------------------------------------------------- ----------- ---------
<S> <C> <C>
Shares sold 6,077 $ 55,427
- --------------------------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared -- --
- --------------------------------------------------------------------------------------------
Shares redeemed (6) (48)
- -------------------------------------------------------------------------------------------- ----------- ---------
Net change resulting from Fund share transactions 6,071 $ 55,379
- -------------------------------------------------------------------------------------------- ----------- ---------
</TABLE>
* Reflects operations for the period from February 28, 1994 (commencement of
operations) to May 31, 1994.
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT SHARES
--------------------------------------------------
CLASS B CLASS C
------------------------ ------------------------
PERIOD ENDED PERIOD ENDED
MAY 31, 1994** MAY 31, 1994***
------------------------ ------------------------
SHARES DOLLARS SHARES DOLLARS
- ---------------------------------------------------------------- ----------- ----------- --------- -------------
<S> <C> <C> <C> <C>
Shares sold 10,143 $ 100,960 155,789 $ 1,511,112
- ----------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 58 547 1,283 11,833
- ----------------------------------------------------------------
Shares redeemed (4,986) (47,018) (1,952) (17,421)
- ---------------------------------------------------------------- ----------- ----------- --------- -------------
Net change resulting from Fund share transactions 5,215 $ 54,489 155,120 $ 1,505,524
- ---------------------------------------------------------------- ----------- ----------- --------- -------------
</TABLE>
** Reflects operations for the period from January 4, 1994 (commencement of
operations) to May 31, 1994.
*** Reflects operations for the period from January 5, 1994 (commencement of
operations) to May 31, 1994.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--First Union National Bank of North Carolina, the Fund's
adviser ("Adviser"), receives for its services an annual investment advisory fee
equal to 0.50 of 1% of the Fund's average daily net assets. Adviser may
voluntarily choose to waive a portion of its fee and reimburse certain operating
expenses of the Fund. Adviser can modify or terminate this voluntary waiver and
reimbursement at any time at its sole discretion.
ADMINISTRATION FEE--Federated Administrative Services ("FAS") provides the Fund
with certain administrative personnel and services. The FAS fee is based on the
level of average aggregate net assets of the Fund for the period. FAS may
voluntarily choose to waive a portion of its fee.
DISTRIBUTION PLAN--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's Investment Shares. The Plan provides that the Fund may incur
distribution expenses up to 0.75 of 1% of the average daily net assets of the
Class B Investment Shares and Class C Investment Shares, annually, to compensate
FSC. For the foreseeable future, FSC intends to limit its fees to 0.25 of 1% of
the Class B Investment Shares' average daily net assets. FSC may voluntarily
choose to waive a portion of its fee.
TRANSFER AND DIVIDEND DISBURSING AGENT--Federated Services Company ("FServ")
serves as transfer and dividend disbursing agent for the Fund. The FServ fee is
based on the size, type and number of accounts and transactions made by
shareholders.
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
ORGANIZATIONAL EXPENSES--Organizational expenses incurred by the Fund will be
borne intially by FAS and are estimated to be $50,000. The Fund has agreed to
reimburse FAS for the organizational expenses during the five year period
following January 1, 1994 (date the Fund first became effective).
Certain of the Officers and Trustees of the Trust are Officers and Trustees or
Directors of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term obligations, for the
period ended
May 31, 1994 were as follows:
<TABLE>
<S> <C>
PURCHASES $ 1,781,363
- --------------------------------------------------------------------------------------------------- -------------
SALES $ 273,363
- --------------------------------------------------------------------------------------------------- -------------
</TABLE>
6) Please replace the fourth caption in the section entitled 'Addresses' on
the inside back cover with the following:
<TABLE>
<S> <C> <C>
"Custodian
State Street Bank and Trust Company P.O. Box 8602
Boston, Massachusetts 02266-8609"
</TABLE>
7) Please insert the following as the fifth caption in the section entitled
'Addresses' on the inside back cover:
<TABLE>
<S> <C> <C>
"Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779"
</TABLE>
June 30, 1994
FIRST UNION
- ------------------------- SINGLE STATE -------------------------
- ------------------------- MUNICIPAL BOND -------------------------
FUNDS
Portfolios of First Union Funds
TRUST SHARES
- --------------------------------------------------------------------------------
P R O S P E C T U S
February 28, 1994
First Union Funds (the "Trust") is a mutual fund with 15 portfolios, offering a
variety of investment opportunities. The Trust currently includes five non-
diversified Single State Municipal Bond Funds, seven diversified Equity and
Income Funds and three diversified Money Market Funds. They are:
Single State Municipal Bond Funds
. First Union Florida Municipal Bond Portfolio;
. First Union Georgia Municipal Bond Portfolio;
. First Union North Carolina Municipal Bond Portfolio;
. First Union South Carolina Municipal Bond Portfolio; and
. First Union Virginia Municipal Bond Portfolio.
Equity and Income Funds
. First Union Balanced Portfolio;
. First Union Fixed Income Portfolio;
. First Union High Grade Tax Free Portfolio (formerly, First Union Insured Tax
Free Portfolio);
. First Union Managed Bond Portfolio (Investment Shares not currently
offered);
. First Union U.S. Government Portfolio;
. First Union Utility Portfolio; and
. First Union Value Portfolio.
Money Market Funds
. First Union Money Market Portfolio;
. First Union Tax Free Money Market Portfolio; and
. First Union Treasury Money Market Portfolio.
This prospectus provides you with information specific to the Trust Shares of
First Union Single State Municipal Bond Funds. It concisely describes the
information which you should know before investing in Trust Shares of any of
the First Union Single State Municipal Bond Funds. Please read this prospectus
carefully and keep it for future reference.
You can find more detailed information about each First Union Single State
Municipal Bond Fund in its Statement of Additional Information dated February
28, 1994, filed with the Securities and Exchange Commission and incorporated by
reference into this prospectus. The Statements are available free of charge by
writing to First Union Funds, Federated Investors Tower, Pittsburgh, PA 15222-
3779 or by calling 1-800-326-2584.
The Trust is sponsored and distributed by third parties independent of First
Union National Bank of North Carolina ("First Union").
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF FIRST
UNION, ARE NOT ENDORSED OR GUARANTEED BY FIRST UNION, AND ARE NOT INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- ------------------------- TABLE OF -------------------------
- ------------------------- CONTENTS -------------------------
SUMMARY 2 HOW TO REDEEM SHARES 22
- -------------------------------------- --------------------------------------
SUMMARY OF FUND EXPENSES 4 MANAGEMENT OF FIRST UNION FUNDS 22
- -------------------------------------- --------------------------------------
FINANCIAL HIGHLIGHTS 6 FEES AND EXPENSES 24
- -------------------------------------- --------------------------------------
INVESTMENT OBJECTIVES AND POLICIES 14 SHAREHOLDER RIGHTS AND PRIVILEGES 25
- -------------------------------------- --------------------------------------
OTHER INVESTMENT POLICIES 16 DISTRIBUTIONS AND TAXES 26
- -------------------------------------- --------------------------------------
SHAREHOLDER GUIDE 18 TAX INFORMATION 26
- -------------------------------------- --------------------------------------
HOW TO BUY SHARES 20 OTHER CLASSES OF SHARES 30
- -------------------------------------- --------------------------------------
HOW TO CONVERT YOUR INVESTMENT FROM ADDRESSES Inside Back Cover
ONE FIRST UNION FUND TO ANOTHER --------------------------------------
FIRST UNION FUND 21
- --------------------------------------
- ------------------------- SUMMARY -------------------------
- ------------------------- -------------------------
DESCRIPTION OF THE TRUST
First Union Funds is an open-end, management investment company, established as
a Massachusetts business trust under a Declaration of Trust dated August 30,
1984. The Trust currently consists of 15 portfolios, each representing a
different First Union Fund. Each Single State Municipal Bond Fund currently
offers three classes of shares: Class B Investment Shares ("Class B Shares"),
Class C Investment Shares ("Class C Shares"), and Trust Shares. Class B Shares
and Class C Shares are sold to individuals and other customers of First Union
(the "Adviser"). Trust Shares are designed primarily for institutional
investors (banks, corporations, and fiduciaries). This prospectus relates only
to Trust Shares ("Shares") of the First Union Single State Municipal Bond Funds
(collectively, the "Funds").
THE FUNDS AND OBJECTIVES
As of the date of this prospectus, Shares are offered in the following five
Single State Municipal Bond Funds:
. FIRST UNION FLORIDA MUNICIPAL BOND PORTFOLIO ("FLORIDA MUNICIPAL BOND
FUND")--seeks current income exempt from federal regular income tax
consistent with preservation of capital. In addition, the Fund intends to
qualify as an investment exempt from the Florida state intangibles tax;
. FIRST UNION GEORGIA MUNICIPAL BOND PORTFOLIO ("GEORGIA MUNICIPAL BOND
FUND")--seeks current income exempt from federal regular income tax and
Georgia state income tax, consistent with preservation of capital;
. FIRST UNION NORTH CAROLINA MUNICIPAL BOND PORTFOLIO ("NORTH CAROLINA
MUNICIPAL BOND FUND")-- seeks current income exempt from federal regular
income tax and North Carolina state income tax, consistent with preservation
of capital. In addition, the Fund intends to qualify as an investment
substantially exempt from the North Carolina intangible personal property
tax;
. FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO ("SOUTH CAROLINA
MUNICIPAL BOND FUND")-- seeks current income exempt from federal regular
income tax and South Carolina State income tax; and
. FIRST UNION VIRGINIA MUNICIPAL BOND PORTFOLIO ("VIRGINIA MUNICIPAL BOND
FUND")--seeks current income exempt from federal regular income tax and
Virginia state income tax, consistent with preservation of capital.
INVESTMENT MANAGEMENT
The Funds are advised by First Union, through its Capital Management Group.
First Union has responsibility for investment research and supervision of the
Funds, in addition to the purchase or sale of portfolio instruments, for which
it receives an annual fee.
PURCHASING AND REDEEMING SHARES
For information on purchasing Trust Shares of any of the Single State Municipal
Bond Funds, please refer to the Shareholder Guide section entitled "How to Buy
Shares." Redemption information may be found under "How to Redeem Shares."
- ------------------------ SUMMARY OF ------------------------
- ------------------------ FUND EXPENSES ------------------------
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS
TRUST SHARES
<TABLE>
<CAPTION>
North South
Florida Georgia Carolina Carolina Virginia
Municipal Municipal Municipal Municipal Municipal
Bond Fund Bond Fund Bond Fund Bond Fund Bond Fund
--------- --------- --------- --------- ---------
TRUST SHARES--
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)... None None None None None
Maximum Sales Load Imposed on Rein-
vested
Dividends (as a percentage of offering
price)................................ None None None None None
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, as applicable).............. None None None None None
Redemption Fee (as a percentage of
amount redeemed,
if applicable)........................ None None None None None
Exchange Fee........................... None None None None None
ANNUAL TRUST SHARES OPERATING EXPENSES*
(As a percentage of projected average
net assets)
Management Fee (after waiver) (1)...... 0.00% 0.00% 0.16% 0.00% 0.00%
12b-1 Fees............................. None None None None None
Total Other Expenses (after waiver and
reimbursement) (2).................... 0.37% 0.37% 0.38% 0.00% 0.37%
Total Trust Shares Operating Ex-
penses (3)............................ 0.37% 0.37% 0.54% 0.00% 0.37%
</TABLE>
(1) The estimated management fees have been reduced to reflect the anticipated
voluntary waivers by the Adviser. The Adviser may terminate these
voluntary waivers at any time at its sole discretion. The maximum
management fee for each Fund is 0.50%.
(2) Total Other Expenses for Florida, Georgia, South Carolina, and Virginia
Municipal Bond Funds are estimated to be 0.73%, 2.17%, 2.71%, and 2.41%,
respectively, absent the anticipated voluntary waivers by the
administrator and reimbursement of other operating expenses by the
Adviser. The administrator and Adviser may terminate these waivers and
reimbursements at any time at their sole discretion.
(3) Total Trust Shares operating expenses for Florida, Georgia, North
Carolina, South Carolina, and Virginia Municipal Bond Funds are estimated
to be 1.23%, 2.67%, 0.88%, 3.21%, and 2.91%, respectively, absent the
anticipated voluntary waivers and reimbursements described above in notes
1 and 2.
* Expenses in this table are estimated based on average expenses expected to
be incurred during the fiscal year ending December 31, 1994. During the
course of this period, expenses may be more or less than the average amount
shown.
- ------------------------ SUMMARY OF ------------------------
- ------------------------ FUND EXPENSES ------------------------
(CONTINUED) FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS
TRUST 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 Trust Shares.
Florida Municipal Bond Fund.................................. $4 $12
Georgia Municipal Bond Fund.................................. $4 $12
North Carolina Municipal Bond Fund........................... $6 $17
South Carolina Municipal Bond Fund........................... $0 $ 0
Virginia Municipal Bond Fund................................. $4 $12
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE EXAMPLE
IS BASED ON ESTIMATED DATA FOR THE FISCAL YEAR ENDING DECEMBER 31, 1994.
The information set forth in the foregoing table and example relates only to
Trust Shares of the Funds. The Funds also offer two additional classes of
shares called Class B Shares and Class C Shares. Class B Shares and Class C
Shares are subject to certain of the same expenses as Trust Shares. However,
Class B Shares are subject to a 12b-1 fee of .25 of 1%, and Class C Shares are
subject to a 12b-1 fee of .75 of 1%. In addition, Class B Shares bear a
maximum front-end sales load of 4.00%, while Class C Shares bear a maximum
contingent deferred sales load of 4.00%. See "Other Classes of Shares."
- ------------------------- FINANCIAL HIGHLIGHTS -------------------------
- ------------------------- -------------------------
FIRST UNION FLORIDA MUNICIPAL BOND PORTFOLIO
SUPPLEMENTARY INFORMATION
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by KPMG Peat Marwick, the Fund's
independent auditors. Their report, dated February 11, 1994, on the Fund's
Financial Statements for the year ended December 31, 1993, and on the following
table for each of the periods presented, is included in the Trust's Annual
Report, which is incorporated herein by reference. This table should be read in
conjunction with the Fund's Financial Statements and notes thereto, contained
in the Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
CLASS B CLASS C
INVESTMENT INVESTMENT
SHARES (A) SHARES (A)
------------------ -------------------
PERIOD ENDED PERIOD ENDED
DECEMBER 31, 1993* DECEMBER 31, 1993**
- --------------------------------------- ------------------ -------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00
- ---------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------
Net investment income 0.22 0.20
- ---------------------------------------
Net realized and unrealized gain
(loss) on investments 0.34 0.34
- --------------------------------------- ------ ------
Total from investment operations 0.56 0.54
- ---------------------------------------
LESS DISTRIBUTIONS
- ---------------------------------------
Dividends to shareholders from net in-
vestment income (0.22) (0.20)
- --------------------------------------- ------ ------
NET ASSET VALUE, END OF PERIOD $10.34 $10.34
- --------------------------------------- ------ ------
TOTAL RETURN*** 5.63% 5.40%
- ---------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ---------------------------------------
Expenses 0.25%(c) 0.75%(c)
- ---------------------------------------
Net investment income 4.92%(c) 4.46%(c)
- ---------------------------------------
Expense waiver/reimbursement (b) 1.58%(c) 1.58%(c)
- ---------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------
Net assets, end of period (000 omit-
ted) $8,110 $18,383
- ---------------------------------------
Portfolio turnover rate 3% 3%
- ---------------------------------------
</TABLE>
(See Notes on page 7.)
(Continued)
- ------------------------- FINANCIAL HIGHLIGHTS -------------------------
- ------------------------- -------------------------
(CONTINUED) FIRST UNION FLORIDA MUNICIPAL BOND PORTFOLIO
* Reflects operations for the period from July 6, 1993 (commencement of
operations) to December 31, 1993.
** Reflects operations for the period from July 2, 1993 (commencement of
operations) to December 31, 1993.
*** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Trust Shares were not being offered as of December 31, 1993. Accordingly,
there are no Financial Highlights for such Shares. The Financial
Highlights presented above are historical information for Class B and
Class C Investment Shares.
(b) This voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
(c) Computed on an annualized basis.
Further information about the Fund's performance is contained in the Trust's
Annual Report, dated December 31, 1993, which can be obtained free of charge.
- ------------------------- FINANCIAL HIGHLIGHTS -------------------------
- ------------------------- -------------------------
FIRST UNION GEORGIA MUNICIPAL BOND PORTFOLIO
SUPPLEMENTARY INFORMATION
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by KPMG Peat Marwick, the Fund's
independent auditors. Their report, dated February 11, 1994, on the Fund's
Financial Statements for the year ended December 31, 1993, and on the following
table for each of the periods presented, is included in the Trust's Annual
Report, which is incorporated herein by reference. This table should be read in
conjunction with the Fund's Financial Statements and notes thereto, contained
in the Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
CLASS B CLASS C
INVESTMENT INVESTMENT
SHARES (A) SHARES (A)
------------------ ------------------
PERIOD ENDED PERIOD ENDED
DECEMBER 31, 1993* DECEMBER 31, 1993*
- ---------------------------------------- ------------------ ------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00
- ----------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------
Net investment income 0.201 0.179
- ----------------------------------------
Net realized and unrealized gain (loss)
on investments 0.193 0.193
- ---------------------------------------- ------- -------
Total from investment operations 0.394 0.372
- ----------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------
Dividends to shareholders from net in-
vestment income (0.201) (0.179)
- ----------------------------------------
Distributions to shareholders from net
realized gain on investment transac-
tions (0.003) (0.003)
- ---------------------------------------- ------- -------
TOTAL DISTRIBUTIONS (0.204) (0.182)
- ---------------------------------------- ------- -------
NET ASSET VALUE, END OF PERIOD $10.19 $10.19
- ---------------------------------------- ------- -------
TOTAL RETURN** 3.96% 3.74%
- ----------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------
Expenses 0.25%(c) 0.75%(c)
- ----------------------------------------
Net investment income 4.71%(c) 4.15%(c)
- ----------------------------------------
Expense waiver/reimbursement (b) 6.57%(c) 6.57%(c)
- ----------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------
Net assets, end of period (000 omitted) $817 $3,692
- ----------------------------------------
Portfolio turnover rate 15% 15%
- ----------------------------------------
</TABLE>
(See Notes on page 9.)
(Continued)
- ------------------------- FINANCIAL HIGHLIGHTS -------------------------
- ------------------------- -------------------------
(CONTINUED)
FIRST UNION GEORGIA MUNICIPAL BOND PORTFOLIO
* Reflects operations for the period from July 2, 1993 (commencement of
operations) to December 31, 1993.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Trust Shares were not being offered as of December 31, 1993. Accordingly,
there are no Financial Highlights for such Shares. The Financial Highlights
presented above are historical information for Class B and Class C
Investment Shares.
(b) This voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
(c) Computed on an annualized basis.
Further information about the Fund's performance is contained in the Trust's
Annual Report, dated December 31, 1993, which can be obtained free of charge.
- ------------------------- FINANCIAL HIGHLIGHTS -------------------------
- ------------------------- -------------------------
FIRST UNION NORTH CAROLINA MUNICIPAL BOND PORTFOLIO
SUPPLEMENTARY INFORMATION
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by KPMG Peat Marwick, the Fund's
independent auditors. Their report, dated February 11, 1994, on the Fund's
Financial Statements for the year ended December 31, 1993, and on the following
table for each of the periods presented, is included in the Trust's Annual
Report, which is incorporated herein by reference. This table should be read in
conjunction with the Fund's Financial Statements and notes thereto, contained
in the Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
CLASS B CLASS C
INVESTMENT INVESTMENT
SHARES (B) SHARES (B)
------------------- -------------------
PERIOD ENDED PERIOD ENDED
DECEMBER 31, 1993** DECEMBER 31, 1993**
- ------------------------------------- ------------------- -------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00
- -------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------
Net investment income 0.46 0.42
- -------------------------------------
Net realized and unrealized gain
(loss) on
investments 0.64 0.64
- ------------------------------------- ------ ------
Total from investment operations 1.10 1.06
- -------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------
Dividends to shareholders from net
investment income (0.46) (0.42)
- -------------------------------------
Distributions to shareholders from
net realized gains on investment
transactions (0.03) (0.03)
- ------------------------------------- ------ ------
Total distributions (0.49) (0.45)
- ------------------------------------- ------ ------
NET ASSET VALUE, END OF PERIOD $10.61 $10.61
- ------------------------------------- ------ ------
TOTAL RETURN* 11.28% 10.80%
- -------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------
Expenses 0.32%(a) 0.79%(a)
- -------------------------------------
Net investment income 4.91%(a) 4.47%(a)
- -------------------------------------
Expense waiver/reimbursement(c) 0.93%(a) 0.95%(a)
- -------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------
Net assets, end of period (000 omit-
ted) $12,739 $45,168
- -------------------------------------
Portfolio turnover rate 57% 57%
- -------------------------------------
</TABLE>
(See Notes on page 11.)
(Continued)
- ------------------------- FINANCIAL HIGHLIGHTS -------------------------
- ------------------------- -------------------------
(CONTINUED)
FIRST UNION NORTH CAROLINA MUNICIPAL BOND PORTFOLIO
* Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
** Reflects operations for the period from January 11, 1993 (commencement of
operations) to December 31, 1993.
(a) Computed on an annualized basis.
(b) Trust Shares were not being offered as of December 31, 1993. Accordingly,
there are no Financial Highlights for such Shares. The Financial Highlights
presented above are historical information for Class B and Class C
Investment Shares.
(c) This voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Trust's
Annual Report, dated December 31, 1993, which can be obtained free of charge.
- ------------------------- FINANCIAL HIGHLIGHTS -------------------------
- ------------------------- -------------------------
FIRST UNION VIRGINIA MUNICIPAL BOND PORTFOLIO
SUPPLEMENTARY INFORMATION
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by KPMG Peat Marwick, the Fund's
independent auditors. Their report, dated February 11, 1994, on the Fund's
Financial Statements for the year ended December 31, 1993, and on the following
table for each of the periods presented, is included in the Trust's Annual
Report, which is incorporated herein by reference. This table should be read in
conjunction with the Fund's Financial Statements and notes thereto, contained
in the Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
CLASS B CLASS C
INVESTMENT INVESTMENT
SHARES (A) SHARES (A)
------------------ ------------------
PERIOD ENDED PERIOD ENDED
DECEMBER 31, 1993* DECEMBER 31, 1993*
- ---------------------------------------- ------------------ ------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00
- ----------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------
Net investment income 0.20 0.17
- ----------------------------------------
Net realized and unrealized gain (loss)
on investments 0.19 0.19
- ---------------------------------------- ------ ------
Total from investment operations 0.39 0.36
- ----------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------
Dividends to shareholders from net in-
vestment income (0.20) (0.17)
- ---------------------------------------- ------ ------
NET ASSET VALUE, END OF PERIOD $10.19 $10.19
- ---------------------------------------- ------ ------
TOTAL RETURN** 3.89% 3.66%
- ----------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------
Expenses 0.25%(b) 0.75%(b)
- ----------------------------------------
Net investment income 4.64%(b) 4.25%(b)
- ----------------------------------------
Expense waiver/reimbursement (c) 7.50%(b) 7.50%(b)
- ----------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------
Net assets, end of period (000 omitted) $1,306 $2,235
- ----------------------------------------
Portfolio turnover rate 0% 0%
- ----------------------------------------
</TABLE>
(See Notes on page 13.)
(Continued)
- ------------------------ FINANCIAL HIGHLIGHTS ------------------------
- ------------------------ ------------------------
(CONTINUED)
FIRST UNION VIRGINIA MUNICIPAL BOND PORTFOLIO
* Reflects operations for the period from July 2, 1993 (commencement of
operations) to December 31, 1993.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Trust Shares were not being offered as of December 31, 1993. Accordingly,
there are no Financial Highlights for such Shares. The Financial
Highlights presented above are historical information for Class B and
Class C Investment Shares.
(b) Computed on an annualized basis.
(c) The voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Trust's
Annual Report, dated December 31, 1993, which can be obtained free of charge.
- ------------------------ INVESTMENT ------------------------
- ------------------------ OBJECTIVES ------------------------
AND POLICIES
First Union Single State Municipal Bond Funds seek current income exempt from
federal regular income tax and, where applicable, state income taxes,
consistent with preservation of capital. In addition, the Florida Municipal
Bond Fund intends to qualify as an investment exempt from the Florida state
intangibles tax, and the North Carolina Municipal Bond Fund intends to qualify
as an investment substantially exempt from the North Carolina intangible
personal property tax.
Each Fund's investment objective cannot be changed without shareholder
approval. While there is no assurance that each objective will be achieved,
the Funds will endeavor to do so by following the investment policies detailed
below. Unless otherwise indicated, the investment policies of a Fund may be
changed by the Trust's Board of Trustees ("Trustees") without the approval of
shareholders. Shareholders will be notified before any material change in
these policies becomes effective.
DESCRIPTION OF THE FUNDS
Each Fund seeks current income which is exempt from federal regular income tax
and (where applicable) the designated state income tax consistent with
preservation of capital. In addition, the Florida Municipal Bond Fund intends
to qualify as an investment exempt from the Florida state intangibles tax, and
the North Carolina Municipal Bond Fund intends to qualify as an investment
substantially exempt from the North Carolina intangible personal property tax.
As a matter of fundamental investment policy, each Fund will normally invest
its assets so that at least 80% of its annual interest income is, or at least
80% of its net assets are invested in, obligations which provide interest
income which is exempt from federal regular income taxes. The interest retains
its tax-free status when distributed to the Fund's shareholders. In addition,
at least 65% of the value of each Fund's total assets will be invested in
municipal bonds of the particular state after which the Fund is named. To
qualify as an investment exempt from the Florida state intangibles tax, the
Florida Municipal Bond Fund's portfolio must consist entirely of investments
exempt from the Florida state intangibles tax on the last business day of the
calendar year.
TYPES OF INVESTMENTS
Each Fund seeks to achieve its investment objective by investing principally
in municipal obligations, including industrial development bonds, of its
designated state. In addition, the Funds may invest in obligations issued by
or on behalf of any state, territory, or possession of the United States,
including the District of Columbia, or their political subdivisions or
agencies and instrumentalities, the interest from which is exempt from federal
regular income tax. It is likely that shareholders who are subject to the
alternative minimum tax will be required to include interest from a portion of
the municipal securities owned by a Fund in calculating the federal individual
alternative minimum tax or the federal alternative minimum tax for
corporations.
The municipal bonds in which the Funds will invest are subject to one or more of
the following quality standards: rated Baa or better by Moody's Investors
Service, Inc. ("Moody's") or BBB or better by Standard & Poor's Corporation
("S&P") or, if unrated, determined by the Adviser to be of comparable quality to
such ratings; insured by a municipal bond insurance company which is rated Aaa
by Moody's or AAA by S&P; guaranteed at the time of purchase by the U.S.
government as to the payment of principal and interest; or fully collateralized
by an escrow of U.S. government securities. Bonds rated BBB by S&P or Baa by
Moody's have speculative characteristics. Changes in economic conditions or
other circumstances are more likely to lead to weakened capacity to make
principal and interest payments than higher rated bonds. If any security owned
by a Fund loses its rating or has its rating reduced after the Fund has
purchased it, the Fund is not required to sell or otherwise dispose of the
security, but may consider doing so. If ratings made by Moody's or S&P change
because of changes in those organizations or their ratings systems, the Funds
will try to use comparable ratings as standards in accordance with the Funds'
investment objectives. A description of the rating categories is contained in
the Appendix of the Statement of Additional Information for each Fund.
Other types of investments include:
participation interests in any of the above obligations. (Participation
interests may be purchased from financial institutions such as commercial
banks, savings and loan associations and insurance companies, and give a
Fund an undivided interest in particular municipal securities);
variable rate municipal securities. (Variable rate securities offer
interest rates which are tied to a money market rate, usually a published
interest rate or interest rate index or the 91-day U.S. Treasury bill rate.
Many of these securities are subject to prepayment of principal on demand
by the Fund, usually in seven days or less); and
municipal leases issued by state and local governments or authorities to
finance the acquisition of equipment and facilities.
TEMPORARY INVESTMENTS
During periods when, in the Adviser's opinion, a temporary defensive position
in the market is appropriate, a Fund may temporarily invest in short-term tax-
exempt or taxable investments. These temporary investments include: notes
issued by or on behalf of municipal or corporate issuers; obligations issued or
guaranteed by the U.S. government, its agencies, or instrumentalities; other
debt securities; commercial paper; bank certificates of deposit; shares of
other investment companies; and repurchase agreements. There are no rating
requirements applicable to temporary investments. However, the Adviser will
limit temporary investments to those it considers to be of comparable quality
to the Fund's primary investments.
Although the Funds are permitted to make taxable, temporary investments, there
is no current intention of generating income subject to federal regular income
tax. However, certain temporary investments will generate income which is
subject to state taxes.
MUNICIPAL BONDS
Municipal bonds are debt obligations issued by the state or local entities to
support a government's general financial needs or special projects, such as
housing projects or sewer works. Municipal bonds include industrial development
bonds issued by or on behalf of public authorities to provide financing aid to
acquire sites or construct or equip facilities for privately or publicly owned
corporations.
The two principal classifications of municipal bonds are "general obligation"
and "revenue" bonds. General obligation bonds are secured by the issuer's
pledge of its full faith and credit and taxing power for the payment of
principal and interest. Revenue bonds are paid off only with the revenue
generated by the project financed by the bond or other specified sources of
revenue. For example, in the case of a bridge project, proceeds from the tolls
would go directly to retiring the bond issue. Thus, unlike general obligation
bonds, revenue bonds do not represent a pledge of credit or create any debt of
or charge against the general revenues of a municipality or public authority.
RISK FACTORS
Bond yields are dependent on several factors including market conditions, the
size of an offering, the maturity of the bond, ratings of the bond and the
ability of issuers to meet their obligations. There is no limit on the maturity
of the bonds purchased by the Funds. Because the prices of bonds fluctuate
inversely in relation to the direction of interest rates, the prices of longer
term bonds fluctuate more widely in response to market interest rate changes. A
Fund's concentration in securities issued by its designated state and that
state's political subdivisions provides a greater level of risk than a fund
which is diversified across numerous states and municipal entities. An expanded
discussion of the risks associated with the purchase of the designated state's
municipal bonds is contained in the respective Statements of Additional
Information.
- ------------------------- OTHER INVESTMENT -------------------------
- ------------------------- POLICIES -------------------------
The Funds have adopted the following practices for specific types of
investments.
REPURCHASE AGREEMENTS
The Funds may invest in repurchase agreements. Repurchase agreements are
agreements by which a Fund purchases a security (usually U.S. government
securities) for cash and obtains a simultaneous commitment from the seller
(usually a bank or broker/dealer) to repurchase the security at an agreed-upon
price and specified future date. The repurchase price reflects an agreed-upon
interest rate for the time period of the agreement. The Fund's risk is the
inability of the seller to pay the agreed-upon price on delivery date. However,
this risk is tempered by the ability of the Fund to sell the security in the
open market in the case of a default. In such a case, the Fund may incur costs
in disposing of the security which would increase Fund expenses. The Adviser
will monitor the creditworthiness of the firms with which the Funds enter into
repurchase agreements.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Funds may purchase portfolio securities on a when-issued or delayed delivery
basis. In such cases, a Fund commits to purchase a security which will be
delivered and paid for at a future date. The Fund relies on the seller to
deliver the securities and risks missing an advantageous price or yield if the
seller does not deliver the security as promised.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Funds may lend their portfolio
securities on a short-term or long-term basis to broker/dealers, banks, or
other institutional borrowers of securities. The Funds will only enter into
loan arrangements with creditworthy borrowers and will receive collateral in
the form of cash or U.S. government securities equal to at least 100% of the
value of the securities loaned. As a matter of fundamental investment policy
which cannot be changed without shareholder approval, the Funds will not lend
any of their assets except portfolio securities up to one-third of the value of
their total assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
Each Fund may invest in the securities of other investment companies. This is a
short-term measure to invest cash which has not yet been invested in other
portfolio instruments and is subject to the following limitations: (1) no Fund
will own more than 3% of the total outstanding voting stock of any one
investment company, (2) no Fund may invest more than 5% of its total assets in
any one investment company and (3) no Fund may invest more than 10% of its
total assets in investment companies in general. The Adviser will waive its
investment advisory fee on assets invested in securities of other open end
investment companies.
OPTIONS AND FUTURES
The Funds may engage in options and futures transactions. Options and futures
transactions are intended to enable a Fund to manage market, interest rate or
exchange rate risk. The Funds do not use these transactions for speculation or
leverage.
Options and futures may be volatile investments and involve certain risks which
might result in lowering the Funds' returns. The three principal areas of risk
include: (1) lack of a liquid secondary market for a futures or option contract
when the Fund wants to close out its position; (2) imperfect correlation of
changes in the prices of futures or options contracts with the prices of the
securities in the Fund's portfolio; and (3) incorrect forecasts by the Adviser
of interest rates, market values or other economic factors. In these events,
the Funds may lose money on the futures contract or option.
RESTRICTED AND ILLIQUID SECURITIES
The Funds may not invest more than 15% of their total assets in securities
which are subject to restrictions on resale under federal securities law.
Certain restricted securities which the Trustees deem to be liquid will be
excluded from this limitation.
The Funds will limit investments in illiquid securities, including certain
restricted securities or municipal leases not determined by the Trustees to be
liquid, non-negotiable time deposits, and repurchase agreements providing for
settlement in more than seven days after notice, to 15% of its net assets.
The following investment limitations cannot be changed without shareholder
approval.
BORROWING MONEY
The Funds will not borrow money or pledge securities, except under certain
circumstances a Fund may borrow up to one-third of the value of its total
assets and pledge assets to secure such borrowings.
NON-DIVERSIFICATION
Each Fund is a non-diversified portfolio of an investment company and as such,
there is no limit on the percentage of assets which can be invested in any
single issuer. An investment in a Fund, therefore, will entail greater risk
than would exist in a diversified investment company because the higher
percentage of investments among fewer issuers may result in greater fluctuation
in the total market value of the Fund's portfolio.
Each Fund intends to comply with Subchapter M of the Internal Revenue Code
which requires that at the end of each quarter of each taxable year, with
regard to at least 50% of the Fund's total assets, no more than 5% of the total
assets may be invested in the securities of a single issuer and that with
respect to the remainder of the Fund's total assets, no more than 25% of its
total assets are invested in the securities of a single issuer.
NEW ISSUERS
The Funds will not invest more than 5% of the value of their total assets in
securities of issuers (or guarantors, where applicable) which have records of
less than three years of continuous operations, including the operation of any
predecessor.
- ------------------------- SHAREHOLDER GUIDE -------------------------
- ------------------------- -------------------------
SHARE PRICE CALCULATION
In the case of no-load Funds, the net asset value (NAV), the market price and
the offering price of Shares are all the same.
Purchases, redemptions, and exchanges are made at net asset value. The net
asset value is determined at 4:00 p.m. (Eastern time), Monday through Friday,
except on: (i) days on which there are not sufficient changes in the value of a
Fund's portfolio securities that its net asset value might be materially
affected; (ii) days during which no Shares are tendered for redemption and no
orders to purchase Shares are received; and (iii) the following holidays: New
Year's Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving Day and
Christmas Day. The net asset value is computed by adding cash and other assets
to the closing market value of all securities owned, subtracting liabilities
and dividing the result by the number of outstanding Shares. The net asset
value will vary each day depending on purchases and redemptions. Expenses and
fees, including the management fee, are accrued daily and taken into account
for the purpose of determining net asset value.
The net asset value of Trust Shares may differ slightly from that of Class B
Shares and Class C Shares of the same Fund due to the variability in daily net
income resulting from different distribution charges for each class of shares.
The net asset value for each Fund will fluctuate for all three classes.
PERFORMANCE INFORMATION
A Fund's performance may be quoted in terms of total return, yield, or tax
equivalent yield. Performance information is historical and is not intended to
indicate future results.
From time to time, the Funds may make available certain information about the
performance of Trust Shares. It is generally reported using total return,
yield, and tax equivalent yield.
Total return takes into account both income (dividends) and changes in the
Fund's Share price (appreciation or depreciation). It is based on the overall
dollar or percentage change in value of an investment assuming reinvestment of
all dividends and capital gains during a specified period. Total return is
measured by comparing the value of an investment at the beginning of a
specified period to the redemption value at the end of the same period,
assuming reinvestment of dividends or capital gains distributions.
Yield shows how much income an investment generates. It refers to the Fund's
income over a 30-day period expressed as a percentage of the Fund's Share
price. The yields of Trust Shares are calculated by dividing the sum of all
interest and dividend income (less Fund expenses) over a 30-day period by the
offering price per Share on the last day of the period. The number is then
annualized using semi-annual compounding.
Tax equivalent yield is calculated like the yield described above, except that
for any given tax bracket, net investment income will be calculated as the sum
of any taxable income and the tax exempt income divided by the difference
between 1 and the federal tax rates for taxpayers in that tax bracket.
The yield and tax equivalent yield do not necessarily reflect income actually
earned by Trust Shares of the Funds and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
Total return, yield, and tax equivalent yield will be calculated separately
for Trust Shares, Class B Shares, and Class C Shares of a Fund. Because Class
B Shares and Class C Shares are subject to 12b-1 fees, the yield and tax
equivalent yield will be lower than that of Trust Shares. The sales load
applicable to Class B Shares also contributes to a lower total return for
Class B Shares. In addition, Class C Shares are subject to similar non-
recurring charges, such as the contingent deferred sales charge ("CDSC"),
which, if excluded, would increase the total return for Class C Shares.
From time to time, a Fund may advertise its performance using certain rankings
published in financial publications and/or compare its performance to certain
indices.
- ------------------------- HOW TO BUY -------------------------
- ------------------------- SHARES -------------------------
Shares may be purchased at a price equal to their net asset value per Share
next determined after receipt of an order.
MINIMUM INVESTMENT
You may invest as often as you want in any of the Funds. There are no sales
charges imposed on Trust Shares of the Funds. However, there is a $1,000
minimum initial investment requirement which may be waived in certain
situations. For further information, please contact the Capital Management
Group of First Union at 1-800-326-2584. Subsequent investments may be in any
amounts.
BY TELEPHONE
You may purchase Trust Shares by telephone from the Capital Management Group of
First Union at 1-800-326-2584. (Texas residents should directly contact the
Mutual Funds Group of First Union Brokerage Services, Inc. at 1-800-326-3241.)
Shares are sold on days on which the New York Stock Exchange and the Federal
Reserve Wire System are open for business.
METHOD OF PAYMENT
Payment may be made by check or federal funds or by debiting your account at
First Union. Purchase orders must be received by 4:00 p.m. (Eastern time).
Payment is required on the next business day.
SHAREHOLDER ACCOUNTS
As transfer agent for the Funds, State Street Bank and Trust Company of Boston,
Massachusetts ("State Street Bank") maintains a Share account for each
shareholder of record. Share certificates are not issued.
MINIMUM BALANCE
Due to the high cost of maintaining smaller holdings, each Fund reserves the
right to redeem a shareholder's Shares if, as a result of redemptions, their
aggregate value drops below $1,000. Reductions in value that result solely from
market activity will not trigger an involuntary redemption. The Funds will
notify shareholders in writing 30 days before taking such action to allow them
to increase their holdings to at least the minimum level.
HOW TO CONVERT
YOUR INVESTMENT
- ------------------------- FROM ONE -------------------------
- ------------------------- FIRST UNION -------------------------
FUND TO ANOTHER
FIRST UNION FUND
As a shareholder, you have the privilege of exchanging your Shares for shares
of another First Union Fund.
As long as the First Union Fund in which you are invested will not be adversely
affected, you may switch among the First Union Funds within the Trust. Before
the exchange, you must call First Union at 1-800-326-2584 to receive a
prospectus for the First Union Fund into which you want to exchange. Read the
prospectus carefully. Each exchange represents the sale of shares of one First
Union Fund and the purchase of shares in another, which may produce a gain or
loss for tax purposes.
You may exchange Trust Shares of one First Union Fund for Trust Shares of any
other First Union Fund by calling toll free 1-800-326-2584 or by writing to
First Union. Telephone exchange instructions may be recorded. Shares purchased
by check are eligible for exchange after the check clears, which could take up
to seven days after receipt of the check. Exchanges are subject to the $1,000
minimum initial purchase requirement for each First Union Fund.
An exchange order must comply with the requirements for a redemption and
purchase order and must specify the dollar value or number of shares to be
exchanged. Once the order is received, the Shares already owned will be
redeemed at current net asset value and, upon receipt of the proceeds by the
First Union Fund, shares of the other First Union Fund will be purchased at
their net asset value determined after the proceeds from such redemption become
available, which may be up to seven days after such redemption. Orders for
exchanges received by a First Union Fund prior to 4:00 p.m. (Eastern time) on
any day the First Union Funds are open for business will be executed as of the
close of business that day. Orders for exchanges received after 4:00 p.m.
(Eastern time) on any business day will be executed at the close of the next
business day.
When exchanging into and out of load and no-load shares of First Union Funds,
shareholders who have already paid a sales charge once at the time of purchase,
including shares obtained through the reinvestment of dividends, will not have
to pay an additional sales charge on an exchange.
If reasonable procedures are not followed by a Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
EXCHANGE RESTRICTIONS
Although the Trust has no intention of terminating or modifying the exchange
privilege, it reserves the right to do so at any time. Excessive trading can
impact the interests of shareholders. Therefore, the Trust reserves the right
to terminate the exchange privilege of any shareholder who makes more than five
exchanges of shares of the First Union Funds in a year or three exchanges in a
calendar quarter.
The exchange privilege is only available in states where shares of the First
Union Fund being acquired may legally be sold. Before the exchange, a
shareholder must receive a prospectus of the First Union Fund for which the
exchange is being made.
- ------------------------- HOW TO -------------------------
- ------------------------- REDEEM SHARES -------------------------
Shares are redeemed at their net asset value next determined after a proper
redemption request has been received, less any fees.
You may redeem Shares in person or by telephoning First Union at 1-800-326-2584
or by written request to First Union. There is no redemption fee charged.
Telephone redemption instructions may be recorded.
The Funds redeem Shares at their net asset value next determined after a Fund
receives the redemption request. Redemptions will be made on days on which a
Fund computes the net asset value of Shares. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed or on federal
holidays when wire transfers are restricted. Proceeds will be wired to the
shareholder's account at First Union or a check will be sent to the address of
record normally within five (but in no case longer than seven) days after a
proper request for redemption has been received.
If reasonable procedures are not followed by a Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
- ------------------------- MANAGEMENT -------------------------
- ------------------------- OF FIRST -------------------------
UNION FUNDS
Responsibility for the overall management of First Union Funds rests with its
Trustees and officers. Other service providers include the Funds' Distributor,
Investment Adviser, Custodian, Transfer Agent, Legal Counsel, and Independent
Auditors.
INVESTMENT ADVISER
Professional investment supervision for the Funds is provided by the investment
adviser, the Capital Management Group of First Union.
First Union is a subsidiary of First Union Corporation, a bank holding company
headquartered in Charlotte, North Carolina, with $70.8 billion in total
consolidated assets as of December 31, 1993. Through offices in 36 states and
one foreign country, First Union Corporation and its subsidiaries provide a
broad range of financial services to individuals and businesses.
First Union's Capital Management Group employs an experienced staff of
professional investment analysts, portfolio managers, and traders, and uses
several proprietary computer-based systems in conjunction with fundamental
analysis to identify investment opportunities. The Capital Management Group has
been managing trust assets for over 50 years and currently oversees assets of
more than $43.0 billion. In addition, the Capital Management Group has advised
the Trust since its inception in 1984.
Robert S. Drye is a Vice President of First Union National Bank of North
Carolina, N.A., and has been with First Union since 1968. Since 1989, Mr. Drye
has served as a portfolio manager for several of the First Union Funds and for
certain common trust funds. Prior to 1989, Mr. Drye worked as a marketing
specialist with First Union Brokerage Services, Inc. Mr. Drye has managed the
South Carolina Municipal Bond Fund since its inception in January 1994. In
addition, Mr. Drye has been the portfolio manager for the Florida Municipal
Bond Fund since its inception in July 1993.
Richard K. Marrone is a Vice President of First Union National Bank of North
Carolina, N.A. Mr. Marrone joined First Union in May 1993 with eleven years of
experience managing fixed income assets at Woodbridge Capital Management, a
subsidiary of Comerica Bank, N.A. Mr. Marrone is responsible for the portfolio
management of several First Union Funds and certain common trust funds. Mr.
Marrone has served as portfolio manager of the North Carolina Municipal Bond
Fund since May 1993, and portfolio manager of the Georgia Municipal Bond Fund
since its inception in July 1993.
Charles E. Jeanne joined First Union National Bank of North Carolina, N.A., in
July 1993. Prior to joining First Union, Mr. Jeanne served as a
trader/portfolio manager for First American Bank where he was responsible for
individual accounts and common trust funds. Mr. Jeanne has been the portfolio
manager for the Virginia Municipal Bond Fund since its inception in July 1993.
From time to time, to the extent consistent with the objectives, policies, and
restrictions of the Funds, the Funds may invest in securities of issuers with
which the Adviser has a lending relationship.
FUND ADMINISTRATION
Federated Securities Corp., a subsidiary of Federated Investors, is the
principal distributor for the Funds. It is a Pennsylvania corporation organized
on November 14, 1969, and is the principal distributor for a number of
investment companies.
Federated Administrative Services ("FAS"), another subsidiary of Federated
Investors,.provides the Funds with administrative personnel and services
necessary to operate the Funds, such as legal and accounting services, for a
specified fee which is detailed below.
State Street Bank serves as custodian and transfer agent, and provides dividend
disbursement and other shareholder services for the Funds.
Legal counsel to those Trustees who are not "interested persons" of the Trust
as defined in the Investment Company Act of 1940, is provided by Sullivan &
Worcester, Washington, D.C., and legal counsel to the Trust is provided by
Houston, Houston & Donnelly, Pittsburgh, Pennsylvania.
The independent auditors for the Trust are KPMG Peat Marwick, Pittsburgh,
Pennsylvania.
- ------------------------- FEES AND EXPENSES -------------------------
- ------------------------- -------------------------
Each Fund pays annual advisory and administrative fees and certain expenses.
ADVISORY AND ADMINISTRATIVE FEES
For managing their investment and business affairs, the Funds pay an annual fee
to First Union. The Adviser receives an annual investment advisory fee equal to
.50 of 1% of each of the Single State Municipal Bond Fund's average daily net
assets. The Adviser may voluntarily choose to waive a portion of its fee or
reimburse the Funds for certain operating expenses.
The Trust also pays a fee for administrative services. FAS provides these at an
annual rate as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE TRUST
------------------- -----------------------------------
<S> <C>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
Unless waived, the administrative fee received during any fiscal year shall
aggregate at least $50,000 per First Union Fund.
EXPENSES OF THE FUNDS AND TRUST SHARES
Holders of Shares pay their allocable portion of Trust and respective Fund
expenses. The Trust expenses for which holders of Shares pay their allocable
portion include, but are not limited to: the cost of organizing the Trust and
continuing its existence; the cost of registering the Trust; Trustees' fees;
auditors' fees; the cost of meetings of Trustees; legal fees of the Trust;
association membership dues and such non-recurring and extraordinary items as
may arise.
Fund expenses for which holders of Shares pay their allocable portion based on
average daily net assets include, but are not limited to: registering a Fund
and Shares of that Fund; investment advisory services; taxes and commissions;
custodian fees; insurance premiums; auditors' fees; and such non-recurring and
extraordinary items as may arise.
The Funds' expenses under the Rule 12b-1 Plans are incurred solely by the Class
B Shares and Class C Shares. The Trustees reserve the right to allocate certain
expenses to holders of Shares as they deem appropriate ("Class Expenses"). In
any case, Class Expenses would be limited to: Rule 12b-1 fees; transfer agent
fees; printing and postage expenses; registration fees; and administrative,
legal, and Trustees' fees. Presently, all Fund expenses, other than Rule 12b-1
fees, are allocated based upon the average daily net assets of each class of a
Fund.
- ------------------------- SHAREHOLDER -------------------------
- ------------------------- RIGHTS AND -------------------------
PRIVILEGES
VOTING RIGHTS
Each share of a Fund is entitled to one vote in Trustee elections and other
voting matters submitted to shareholders. All shares of all classes of each
First Union Fund in the Trust have equal voting rights, except that in matters
affecting only a particular First Union Fund or class, only shares of that
First Union Fund or class are entitled to vote. As of February 4, 1994, First
Union Brokerage Services & Co., for the exclusive benefit of Robert Allen Jones
and Larry Allen Jones of Florence, South Carolina, and for the exclusive
benefit of Doris G. Foster and John H. Foster of Greenville, South Carolina,
and acting in various capacities for numerous accounts, was the owner of record
of 2,402 Shares (60.49%) and 1,493 Shares (37.59%), respectively, of the South
Carolina Municipal Bond Fund--Class B Investment Shares, and therefore, may,
for certain purposes, be deemed to control the South Carolina Municipal Bond
Fund and be able to affect the outcome of certain matters presented for a vote
of shareholders.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust or a Fund's operation and for the election of Trustees
under certain circumstances.
Trustees may be removed by a two-thirds vote of the number of Trustees prior to
such removal or by a two-thirds vote of the shareholders at a special meeting.
A special meeting of shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares of all series entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders for such acts or obligations
of the Trust. These documents require notice of this disclaimer to be given in
each agreement, obligation, or instrument the Trust or its Trustees enter into
or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations the Trust is required, by the Declaration of Trust, to use the
property of the Trust to protect or compensate the shareholder. On request, the
Trust will defend any claim made and pay any judgment against a shareholder for
any act or obligation of the Trust. Therefore, financial loss resulting from
liability as a shareholder will occur only if the Trust cannot meet its
obligations to indemnify shareholders and pay judgments against them from its
assets.
EFFECT OF BANKING LAWS
The Glass-Steagall Act and other banking laws and regulations presently prohibit
banks or non-bank affiliates of member banks of the Federal Reserve System from
sponsoring, organizing, controlling, or distributing the shares of a registered,
open-end investment company continuously engaged in the issuance of its shares.
Further, they prohibit banks from issuing, underwriting, or distributing
securities in general. Such laws and regulations do not prohibit such a holding
company or affiliate from acting as investment adviser, transfer agent, or
custodian to such an investment company or from purchasing shares of such a
company as agent for and upon the order of their customer. The Adviser, First
Union, is subject to and in compliance with such banking laws and regulations.
Sullivan & Cromwell has advised First Union that First Union may perform the
services for the Funds set forth in the investment advisory agreement, this
prospectus, and the Statements of Additional Information without violation of
the Glass-Steagall Act or other applicable federal banking laws or regulations.
Such counsel has pointed out, however, that changes in federal statutes and
regulations relating to the permissible activities of banks, as well as further
judicial or administrative decisions or interpretations of such statutes and
regulations, could prevent First Union from continuing to perform such services
for the Funds or from continuing to purchase Shares for the accounts of its
customers. If First Union were prohibited from acting as investment adviser to
the Funds, it is expected that the Trustees would recommend to the Funds'
shareholders that they approve a new investment adviser selected by the
Trustees. It is not expected that the Funds' shareholders would suffer any
adverse financial consequences (if another adviser with equivalent abilities to
First Union is found) as a result of any of these occurrences.
- ------------------------- DISTRIBUTIONS -------------------------
- ------------------------- AND TAXES -------------------------
Each Fund pays out as dividends substantially all of its net investment income
(dividends and interest on its investments) and net realized short-term gains.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends are declared just
prior to determining net asset value. Any distributions will be automatically
reinvested in additional Shares on payment dates at the ex-dividend date net
asset value without a sales charge unless a shareholder otherwise instructs the
Funds or First Union in writing.
CAPITAL GAINS
Any net long-term capital gains realized by the Funds will be distributed at
least once every 12 months.
- ------------------------- TAX INFORMATION -------------------------
- ------------------------- -------------------------
Income dividends and capital gains distributions are taxable as described
below.
FEDERAL INCOME TAX
The Funds pay no federal income tax if they meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and will
receive the special tax treatment afforded to such companies.
Each First Union Fund is treated as a single, separate entity for federal
income tax purposes so that income (including capital gains) and losses
realized by one First Union Fund will not be combined for tax purposes with
those realized by other First Union Funds.
Shareholders of the Funds are not required to pay the federal regular income
tax on any dividends received from a Fund that represent net interest on tax-
exempt municipal bonds. However, under the Tax Reform Act of 1986, dividends
representing net interest earned on some municipal bonds may be included in
calculating the federal individual alternative minimum tax or the federal
alternative minimum tax for corporations.
The alternative minimum tax, up to 28% of alternative minimum taxable income
for individuals and 20% for corporations, applies when it exceeds the regular
tax for the taxable year. Alternative minimum taxable income is equal to the
adjusted income of the taxpayer increased by certain "tax preference" items not
included in regular taxable income and reduced by only a portion of the
deductions allowed in the calculation of the regular tax.
The Tax Reform Act of 1986 treats interest on certain "private activity" bonds
issued after August 7, 1986, as a tax preference item. Unlike traditional
governmental purpose municipal bonds, which finance roads, schools, libraries,
prisons, and other public facilities, private activity bonds provide benefits
to private parties. The Funds may purchase all types of municipal bonds,
including "private activity" bonds. Thus, should a Fund purchase any such
bonds, a portion of the Fund's dividends may be treated as a tax preference
item.
In addition, in the case of a corporate shareholder, dividends of a Fund which
represent interest on municipal bonds may be subject to the 20% corporate
alternative minimum tax because the dividends are included in a corporation's
"adjusted current earnings." The corporate alternative minimum tax treats 75%
of the excess of a taxpayer's pre-tax "adjusted current earnings" over the
taxpayer's alternative minimum taxable income as a tax preference item.
"Adjusted current earnings" is based upon the concept of a corporation's
"earnings and profits." Since "earnings and profits" generally includes the
full amount of any Fund dividend, and alternative minimum taxable income does
not include the portion of the Fund's dividend attributable to municipal bonds
which are not private activity bonds, the difference will be included in the
calculation of the corporation's alternative minimum tax.
Shareholders are urged to consult their own tax advisers to determine whether
they are subject to alternative minimum tax or the corporate alternative
minimum tax and, if so, the tax treatment of dividends paid by the Funds.
Dividends of a Fund representing net interest income earned on some temporary
investments, income earned on options transactions, and any realized net short-
term gains are taxed as ordinary income. Distributions representing net long-
term capital gains realized by the Funds, if any, will be taxable as long-term
capital gains regardless of the length of time shareholders have held their
Shares.
These tax consequences apply whether dividends are received in cash or as
additional Shares. Information on the tax status of dividends and distributions
is provided annually.
Set forth below are brief descriptions of the personal income tax status of an
investment in each of the Funds under, respectively, Florida, Georgia, North
Carolina, South Carolina, and Virginia tax laws currently in effect. Income
from a Fund is not necessarily free from state income taxes in states other
than its designated state. State laws differ on this issue, and shareholders
are urged to consult their own tax advisers regarding the status of their
accounts under state and local laws. A statement setting forth the state
income tax status of all distributions made during each calendar year will be
sent to shareholders annually.
ADDITIONAL TAX INFORMATION FOR SHAREHOLDERS OF THE FLORIDA MUNICIPAL BOND FUND
Florida does not currently impose an income tax on individuals. Thus,
individual shareholders of the Florida Municipal Bond Fund will not be subject
to any Florida state income tax on distributions received from the Florida
Municipal Bond Fund. However, certain distributions will be taxable to
corporate shareholders which are subject to Florida corporate income tax.
Florida currently imposes an intangibles tax at the annual rate of 0.20% on
certain securities and other intangible assets owned by Florida residents.
Certain types of tax exempt securities of Florida issuers, U.S. government
securities and tax exempt securities issued by certain U.S. territories and
possessions are exempt from this intangibles tax. Shares of the Florida
Municipal Bond Fund will also be exempt from the Florida intangibles tax if
the portfolio consists exclusively of securities exempt from the intangibles
tax on the last business day of the calendar year. If the portfolio consists
of any assets which are not so exempt on the last business day of the calendar
year, however, only the portion of the Shares of the Florida Municipal Bond
Fund which relate to securities issued by the United States and its
possessions and territories will be exempt from the Florida intangibles tax,
and the remaining portion of such Shares will be fully subject to the
intangibles tax, even if they partly relate to Florida tax exempt securities.
ADDITIONAL TAX INFORMATION FOR SHAREHOLDERS OF THE GEORGIA MUNICIPAL BOND FUND
Under existing Georgia law, shareholders of the Georgia Municipal Bond Fund
will not be subject to individual or corporate Georgia income taxes on
distributions from the Georgia Municipal Bond Fund to the extent that such
distributions represent exempt-interest dividends for federal income tax
purposes that are attributable to (1) interest-bearing obligations issued by
or on behalf of the State of Georgia or its political subdivisions, or (2)
interest on obligations of the United States or of any other issuer whose
obligations are exempt from state income taxes under federal law.
Distributions, if any, derived from capital gains or other sources generally
will be taxable for Georgia income tax purposes to shareholders of the Georgia
Municipal Bond Fund who are subject to the Georgia income tax. For purposes of
the Georgia intangibles tax, Shares of the Georgia Municipal Bond Fund likely
are taxable (at the rate of 10 cents per $1,000 in value of the Shares held on
January 1 of each year) to shareholders who are otherwise subject to such tax.
ADDITIONAL TAX INFORMATION FOR SHAREHOLDERS OF THE NORTH CAROLINA MUNICIPAL
BOND FUND
Under existing North Carolina law, shareholders of the North Carolina Municipal
Bond Fund will not be subject to individual or corporate North Carolina income
taxes on distributions from the North Carolina Municipal Bond Fund to the
extent that such distributions represent exempt-interest dividends for federal
income tax purposes that are attributable to (1) interest on obligations issued
by North Carolina and political subdivisions thereof, or (2) interest on
obligations of the United States or its territories or possessions.
Distributions, if any, derived from capital gains or other sources generally
will be taxable for North Carolina income tax purposes to shareholders of the
North Carolina Municipal Bond Fund who are subject to the North Carolina income
tax.
North Carolina currently imposes an intangibles tax (at the rate of 25 cents
per $100 in value of the shares held on December 31 of each year) on all shares
of stock, including mutual funds. However, shareholders of the North Carolina
Municipal Bond Fund may exclude from share value that proportion of the total
share value which is attributable to direct obligations of the State of North
Carolina, its subdivisions, and the United States held in the North Carolina
Municipal Bond Fund as of December 31 of the taxable year. The North Carolina
Municipal Bond Fund will annually furnish to its shareholders a statement
supporting the proper allocation.
ADDITIONAL TAX INFORMATION FOR SHAREHOLDERS OF THE SOUTH CAROLINA MUNICIPAL
BOND FUND
Under existing South Carolina law, shareholders of the South Carolina Municipal
Bond Fund will not be subject to individual or corporate South Carolina income
taxes on South Carolina Municipal Bond Fund dividends to the extent that such
dividends represent exempt-interest dividends for federal income tax purposes
that are attributable to (1) interest on obligations of the State of South
Carolina, or any of its political subdivisions; (2) interest on obligations of
the United States; or (3) interest on obligations of any agency or
instrumentality of the United States that is prohibited by federal law from
being taxed by a state or any political subdivision of a state. To the extent
that distributions from the Fund are attributable to capital gains or other
sources, such distributions will not be exempt from South Carolina income
taxation.
ADDITIONAL TAX INFORMATION FOR SHAREHOLDERS OF THE VIRGINIA MUNICIPAL BOND FUND
Under existing Virginia law, shareholders of the Virginia Municipal Bond Fund
will not be subject to individual or corporate Virginia income taxes on
distributions received from the Virginia Municipal Bond Fund to the extent that
such distributions are attributable to interest earned on (1) obligations
issued by or on behalf of the Commonwealth of Virginia or any political
subdivision thereof or (2) obligations issued by a territory or possession of
the United States or any subdivision thereof, which federal law exempts from
state income taxes. Distributions, if any, derived from capital gains or other
sources generally will be taxable for Virginia income tax purposes to
shareholders of the Virginia Municipal Bond Fund who are subject to Virginia
income tax.
- ------------------------- OTHER CLASSES -------------------------
- ------------------------- OF SHARES -------------------------
First Union Single State Municipal Bond Funds offer three classes of shares:
Trust Shares for institutional investors and Class B Shares and Class C Shares
for individuals and other customers of First Union.
Class B Shares and Class C Shares of First Union Single State Municipal Bond
Funds are sold to customers of First Union and others at net asset value plus a
sales charge which, at the election of the purchaser, may be imposed either (i)
at the time of purchase (the Class B Shares), or (ii) on a contingent deferred
basis (the Class C Shares). Shareholders of record in any First Union Fund at
October 12, 1990, and the members of their immediate family, will be exempt
from sales charges on any future purchases in any of the First Union Funds.
Employees of First Union, Federated Securities Corp. and their affiliates, and
certain trust accounts for which First Union or its affiliates act in an
administrative, fiduciary, or custodial capacity, board members of First Union
and the above-mentioned entities and the members of the immediate families of
any of these persons, will also be exempt from sales charges. Class B and Class
C Investment Shares are distributed pursuant to Rule 12b-1 Plans adopted by the
Trust, whereby the distributor is paid a fee of .25 of 1% for Class B Shares
and .75 of 1% for Class C Shares of each Fund's average daily net asset value.
The stated advisory fee is the same for all classes of the Funds. Financial
institutions and brokers providing sales and/or administrative services may
receive different compensation with respect to one class of shares than with
respect to another class of shares of the same Fund.
The amount of dividends payable to Class B Shares and Class C Shares will be
less than those payable to Trust Shares by the difference between distribution
expenses borne by the shares of each respective class.
- ------------------------- ADDRESSES -------------------------
- ------------------------- -------------------------
- --------------------------------------------------------------------------------
First Union Funds Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
- --------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
- --------------------------------------------------------------------------------
Investment Adviser
First Union National Bank of North Carolina
One First Union Center
301 S. College Street
Charlotte, North Carolina
28288
- --------------------------------------------------------------------------------
Custodian, Transfer Agent, and Dividend Disbursing Agent
State Street Bank and Trust Company P.O. Box 8609
Boston, Massachusetts 02266-
8609
- --------------------------------------------------------------------------------
Legal Counsel to the Independent Trustees
Sullivan & Worcester 1025 Connecticut Ave., N.W.
Washington, D.C. 20036
- --------------------------------------------------------------------------------
Legal Counsel to the Trust
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania 15222
- --------------------------------------------------------------------------------
Independent Auditors
KPMG Peat Marwick One Mellon Bank Center
Pittsburgh, Pennsylvania 15219
- --------------------------------------------------------------------------------
3052402A-1 (2/94)
FIRST UNION
SOUTH CAROLINA
MUNICIPAL BOND
PORTFOLIO
Class B Investment Shares
Class C Investment Shares
(A Portfolio of First Union Funds)
SUPPLEMENT TO PROSPECTUS
DATED FEBRUARY 28, 1994
June 30, 1994
FEDERATED SECURITIES CORP.
Distributor
G00175-03-B (6/94)
534511
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
- --------------------------------------------------------------------------------
SUPPLEMENT TO PROSPECTUS DATED FEBRUARY 28, 1994
1) Please insert the following 'Financial Highlights' table for First Union
South Carolina Municipal Bond Portfolio after page 10, following
'Financial Highlights for First Union North Carolina Municipal Bond
Portfolio' and before 'Financial Highlights for First Union Virginia
Municipal Bond Portfolio.'
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
CLASS B CLASS C
TRUST INVESTMENT INVESTMENT
SHARES SHARES SHARES
PERIOD ENDED PERIOD ENDED PERIOD ENDED
MAY 31, 1994* MAY 31, 1994** MAY 31, 1994***
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.74 $ 10.00 $ 10.00
- ------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------
Net investment income 0.13 0.17 0.15
- ------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.63) (0.89) (0.89)
- ------------------------------------------------------------ ----------------- ----------------- -------------------
Total from investment operations (0.50) (0.72) (0.74)
- ------------------------------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------------------------------
Dividends to shareholders from net investment income (0.13) (0.17) (0.15)
- ------------------------------------------------------------ ----------------- ----------------- -------------------
NET ASSET VALUE, END OF PERIOD $ 9.11 $ 9.11 $ 9.11
- ------------------------------------------------------------ ----------------- ----------------- -------------------
TOTAL RETURN\ (5.14%) (7.24%) (7.42%)
- ------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------
Expenses 0.00%(b) 0.25%(b) %0.75(b)
- ------------------------------------------------------------
Net investment income 18.42%(b) 4.97%(b) %4.63(b)
- ------------------------------------------------------------
Expense waiver/reimbursement (a) 2.18%(b) 2.18%(b) %2.18(b)
- ------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------
Net assets, end of period (000 omitted) $55 $48 $1,413
- ------------------------------------------------------------
Portfolio turnover rate 28% 28% 28%
- ------------------------------------------------------------
</TABLE>
* Reflects operations for the period from February 28, 1994 (commencement of
operations) to May 31, 1994 (unaudited).
** Reflects operations for the period from January 4, 1994 (commencement of
operations) to May 31, 1994 (unaudited).
*** Reflects operations for the period from January 5, 1994 (commencement of
operations) to May 31, 1994 (unaudited).
\ Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above (Note 4).
(b) Computed on an annualized basis.
(See Notes which are an integral part of the Financial Statements)
2) Please replace the first sentence of the section entitled 'Shareholder
Accounts' on page 19 with the following:
"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."
3) Please replace the reference to "State Street Bank" in paragraph 2, item
(2) in the section entitled 'How to Redeem Shares' on page 20, with
"Federated Services Company."
4) Please replace the second paragraph in the section entitled 'Fund
Administration' on page 22 with the following:
"State Street Bank and Trust Company of Boston, Massachusetts ("State Street
Bank") serves as custodian for the securities and cash of the Funds.
Federated Services Company serves as transfer agent and provides dividend
disbursement and other shareholder services for the Funds."
5) Please replace the third sentence of the first paragraph in the section
entitled 'Voting Rights' on page 23 with the following:
"As of June 4, 1994, First Union Capital Management of Charlotte, North
Carolina, acting in various capacities for numerous accounts, was the owner of
record of 6,050 Shares (99.65%) of South Carolina Municipal Bond Fund--Trust
Shares. In addition, as of June 4, 1994, First Union Brokerage Services & Co.
("FUBS"), for the exclusive benefit of Robert Allen Jones and Larry Allen Jones
of Florence, South Carolina, and FUBS, for the exclusive benefit of Doris G.
Foster and John H. Foster of Greenville, South Carolina, and acting in various
capacities for numerous other accounts, was the owner of record of 2,546 Shares
(48.86%) and 1,493 Shares (28.65%), respectively, of the South Carolina
Municipal Bond Fund-- Class B Investment Shares, and therefore, First Union
Capital Management and FUBS may, for certain purposes, be deemed to control the
South Carolina Municipal Bond Fund and be able to affect the outcome of certain
matters presented for a vote of shareholders."
6) Please insert the following financial statements at the end of the
prospectus after page 28. In addition, please add the heading 'Financial
Statements' to the Table of Contents on page 2, immediately before
'Addresses.'
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
MAY 31, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
RATING:
PRINCIPAL MOODY'S
AMOUNT OR S&P* VALUE
<C> <S> <C> <C>
- ------------ -------------------------------------------------------------------------- ---------- -------------
LONG-TERM MUNICIPAL SECURITIES--92.9%
- ----------------------------------------------------------------------------------------
PUERTO RICO--5.8%
--------------------------------------------------------------------------
$ 50,000 Puerto Rico Commonwealth, 5.25%, Highway & Transportation Authority,
7/1/2001 A $ 42,815
--------------------------------------------------------------------------
50,000 Puerto Rico Commonwealth, 5.50%, Public Buildings Authority, 7/1/2021 A 44,418
-------------------------------------------------------------------------- -------------
Total 87,233
-------------------------------------------------------------------------- -------------
SOUTH CAROLINA--87.1%
--------------------------------------------------------------------------
50,000 Berkeley County, SC, 6.25%, School District (AMBAC Insured), 2/1/2012 AAA 49,750
--------------------------------------------------------------------------
100,000 Charleston, SC, 5.60% GO Bonds, 7/1/2008 AA 97,899
--------------------------------------------------------------------------
50,000 Charleston County, SC, 5.50% Hospital Facilities Revenue Bonds (Medical
Society Health Project)/(MBIA Insured),
10/1/2019 AAA 45,082
--------------------------------------------------------------------------
50,000 Charleston County, SC, 5.625% Hospital Facilities Revenue Bonds (Bon
Secours Project)/(FSA Insured), 8/15/2025 AAA 45,189
--------------------------------------------------------------------------
100,000 Colleton, SC, 5.60% GO Bonds, 3/1/2009 BBB 91,532
--------------------------------------------------------------------------
50,000 Columbia, SC, 5.70% Water & Sewer Revenue Bonds,
2/1/2010 AA 47,656
--------------------------------------------------------------------------
50,000 Gaffney, SC, 5.00% Utility System Revenue Bonds, 3/1/2009 A 44,206
--------------------------------------------------------------------------
50,000 Greenville Hospital System, SC, 5.50% Hospital Facilities Revenue
Refunding Bonds (Series C), 5/1/2016 AA- 43,829
--------------------------------------------------------------------------
200,000 James Island, SC, 5.75% PSD Revenue Bonds (FGIC Insured),
6/1/2018 AAA 186,948
--------------------------------------------------------------------------
200,000 Lancaster County, SC, 5.25% Water & Sewer District Revenue Bonds (FGIC
Insured), 5/1/2021 AAA 172,241
--------------------------------------------------------------------------
50,000 Oconee County School District, SC, 5.10% (MBIA Insured),
1/1/2010 AAA 45,107
--------------------------------------------------------------------------
50,000 Piedmont Municipal Power Agency, SC, 5.00% (FGIC Insured), 1/1/2022 AAA 41,656
--------------------------------------------------------------------------
50,000 Richland County, SC, 5.50% Sewer System GO Bonds,
3/1/2018 AA 44,987
--------------------------------------------------------------------------
100,000 Richland County, SC, 6.10% School District Revenue Bonds (Series B)/(MBIA
Insured), 5/1/2011 AAA 99,680
--------------------------------------------------------------------------
</TABLE>
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CREDIT
PRINCIPAL RATING:
AMOUNT MOODY'S
OR SHARES OR S&P* VALUE
<C> <S> <C> <C>
- ------------ -------------------------------------------------------------------------- ---------- -------------
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
- ----------------------------------------------------------------------------------------
SOUTH CAROLINA--CONTINUED
--------------------------------------------------------------------------
$ 50,000 Richland County, SC, 7.125% Solid Waste Revenue Bonds (Union Camp Corp.),
9/1/2021 A-1 $ 52,145
--------------------------------------------------------------------------
50,000 South Carolina State, 5.25%, 3/1/2007 AAA 47,628
--------------------------------------------------------------------------
70,000 South Carolina State, 6.05% Housing Finance and Development Authority
Multi-Family Revenue Bonds, 7/1/2027 AA 67,013
--------------------------------------------------------------------------
50,000 South Carolina State, 5.50% Public Service Authority Revenue Bonds (MBIA
Insured), 7/1/2021 AAA 44,653
--------------------------------------------------------------------------
50,000 Sumter County, SC, 6.625% Hospital Facilities Revenue Bonds (Tuomey
Regional)/(MBIA Insured), 11/15/2003 AAA 53,970
-------------------------------------------------------------------------- -------------
Total 1,321,171
-------------------------------------------------------------------------- -------------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST $1,484,459) 1,408,404
-------------------------------------------------------------------------- -------------
MUTUAL FUND SHARES--8.1%
- ----------------------------------------------------------------------------------------
60,000 Dreyfus Municipal Cash Management Plus NR 60,000
--------------------------------------------------------------------------
63,000 Dreyfus Tax Exempt Cash Management NR 63,000
-------------------------------------------------------------------------- -------------
TOTAL MUTUAL FUND SHARES (AT NET ASSET VALUE) 123,000
-------------------------------------------------------------------------- -------------
TOTAL INVESTMENTS (IDENTIFIED COST $1,607,459) $ 1,531,404\
-------------------------------------------------------------------------- -------------
</TABLE>
* Please refer to the Appendix of the Statement of Additional Information
for an explanation of the credit ratings.
\ The cost of investments for federal tax purposes amounts to $1,607,459. The
net unrealized depreciation on a federal tax basis amounts to $76,055, which
is comprised of $3,988 appreciation and $80,043 depreciation at May 31, 1994.
Note: The categories of investments are shown as a percentage of net assets
($1,515,858) at
May 31, 1994.
The following abbreviations are used throughout this portfolio:
AMBAC--American Municipal Bond Assurance Corp.
FGIC--Financial Guaranty Insurance Co.
FSA--Financial Security Assurance
GO--General Obligation
MBIA--Municipal Bond Investors Assurance
PSD--Public Service District
(See Notes which are an integral part of the Financial Statements)
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ----------------------------------------------------------------------------------------------------
Investments in securities, at value (Note 2A) (identified and tax cost $1,607,459) $ 1,531,404
- ----------------------------------------------------------------------------------------------------
Cash 10,822
- ----------------------------------------------------------------------------------------------------
Receivable for Fund shares sold 2,050
- ----------------------------------------------------------------------------------------------------
Interest receivable 20,505
- ----------------------------------------------------------------------------------------------------
Receivable from Adviser 6,277
- ---------------------------------------------------------------------------------------------------- -------------
Total assets 1,571,058
- ----------------------------------------------------------------------------------------------------
LIABILITIES:
- ----------------------------------------------------------------------------------------------------
Payable for investments purchased $ 50,123
- -----------------------------------------------------------------------------------------
Dividends payable 1,684
- -----------------------------------------------------------------------------------------
Accrued expenses 3,393
- ----------------------------------------------------------------------------------------- ---------
Total liabilities 55,200
- ---------------------------------------------------------------------------------------------------- -------------
NET ASSETS for 166,406 shares of beneficial interest outstanding $ 1,515,858
- ---------------------------------------------------------------------------------------------------- -------------
NET ASSETS CONSIST OF:
- ----------------------------------------------------------------------------------------------------
Paid-in capital $ 1,615,392
- ----------------------------------------------------------------------------------------------------
Unrealized depreciation of investments (76,055)
- ----------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (23,479)
- ---------------------------------------------------------------------------------------------------- -------------
Total Net Assets $ 1,515,858
- ---------------------------------------------------------------------------------------------------- -------------
NET ASSET VALUE PER SHARE:
- ----------------------------------------------------------------------------------------------------
Trust Shares (net assets of $55,291 / 6,071 shares of beneficial interest outstanding) $9.11
- ---------------------------------------------------------------------------------------------------- -------------
Class B Investment Shares (net assets of $47,512 / 5,215 shares of beneficial
interest outstanding) $9.11
- ---------------------------------------------------------------------------------------------------- -------------
Class C Investment Shares (net assets of $1,413,055 / 155,120 shares of beneficial interest
outstanding) $9.11
- ---------------------------------------------------------------------------------------------------- -------------
OFFERING PRICE PER SHARE:
- ----------------------------------------------------------------------------------------------------
Trust Shares $9.11
- ---------------------------------------------------------------------------------------------------- -------------
Class B Investment Shares (100/96 of $9.11) $9.49*
- ---------------------------------------------------------------------------------------------------- -------------
Class C Investment Shares $9.11
- ---------------------------------------------------------------------------------------------------- -------------
REDEMPTION PROCEEDS PER SHARE:
- ----------------------------------------------------------------------------------------------------
Trust Shares $9.11
- ---------------------------------------------------------------------------------------------------- -------------
Class B Investment Shares $9.11
- ---------------------------------------------------------------------------------------------------- -------------
Class C Investment Shares (96/100 of $9.11) $8.75**
- ---------------------------------------------------------------------------------------------------- -------------
</TABLE>
* See "What Shares Cost" in the prospectus.
** See "How to Redeem Shares" in the prospectus.
(See Notes which are an integral part of the Financial Statements)
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 4, 1994 (COMMENCEMENT OF OPERATIONS)
TO MAY 31, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ------------------------------------------------------------------------------------------------------
Interest income (Note 2B) $ 20,129
- ------------------------------------------------------------------------------------------------------ ----------
Expenses--
- ------------------------------------------------------------------------------------------------------
Investment advisory fee (Note 4) $ 1,872
- -------------------------------------------------------------------------------------------
Trustees' fees 5
- -------------------------------------------------------------------------------------------
Administrative personnel and services fee (Note 4) 39,863
- -------------------------------------------------------------------------------------------
Custodian and portfolio accounting fees 2,784
- -------------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses (Note 4) 1,268
- -------------------------------------------------------------------------------------------
Distribution services fee--Class B Investment Shares (Note 4) 48
- -------------------------------------------------------------------------------------------
Distribution services fee--Class C Investment Shares (Note 4) 2,664
- -------------------------------------------------------------------------------------------
Legal fees 178
- -------------------------------------------------------------------------------------------
Printing and postage 1,119
- -------------------------------------------------------------------------------------------
Insurance premiums 524
- -------------------------------------------------------------------------------------------
Miscellaneous 399
- ------------------------------------------------------------------------------------------- ---------
Total expenses 50,724
- -------------------------------------------------------------------------------------------
Deduct--
- -------------------------------------------------------------------------------------------
Waiver of investment advisory fee (Note 4) $ 1,872
- --------------------------------------------------------------------------------
Waiver of administrative personnel and services fee (Note 4) 39,863
- --------------------------------------------------------------------------------
Reimbursement of other operating fees and expenses (Note 4) 6,277 48,012
- -------------------------------------------------------------------------------- --------- ---------
Net expenses 2,712
- ------------------------------------------------------------------------------------------------------ ----------
Net investment income 17,417
- ------------------------------------------------------------------------------------------------------ ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (identified cost basis) (23,479)
- ------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on investments (76,055)
- ------------------------------------------------------------------------------------------------------ ----------
Net realized and unrealized gain (loss) on investments (99,534)
- ------------------------------------------------------------------------------------------------------ ----------
Change in net assets resulting from operations $ (82,117)
- ------------------------------------------------------------------------------------------------------ ----------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
MAY 31, 1994*
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
- -------------------------------------------------------------------------------------------------
OPERATIONS--
- -------------------------------------------------------------------------------------------------
Net investment income $ 17,417
- -------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments ($23,479 net loss as computed for federal income tax
purposes) (23,479)
- -------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments (76,055)
- ------------------------------------------------------------------------------------------------- -----------------
Change in net assets from operations (82,117)
- ------------------------------------------------------------------------------------------------- -----------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 2B)--
- -------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income
- -------------------------------------------------------------------------------------------------
Trust Shares (38)
- -------------------------------------------------------------------------------------------------
Class B Investment Shares (945)
- -------------------------------------------------------------------------------------------------
Class C Investment Shares (16,434)
- ------------------------------------------------------------------------------------------------- -----------------
Change in net assets from distributions to shareholders (17,417)
- ------------------------------------------------------------------------------------------------- -----------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 3)--
- -------------------------------------------------------------------------------------------------
Proceeds from sale of shares 1,667,497
- -------------------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of dividends declared 12,382
- -------------------------------------------------------------------------------------------------
Cost of shares redeemed (64,487)
- ------------------------------------------------------------------------------------------------- -----------------
Change in net assets from Fund share transactions 1,615,392
- ------------------------------------------------------------------------------------------------- -----------------
Change in net assets 1,515,858
- -------------------------------------------------------------------------------------------------
NET ASSETS:
- -------------------------------------------------------------------------------------------------
Beginning of period --
- ------------------------------------------------------------------------------------------------- -----------------
End of period $ 1,515,858
- ------------------------------------------------------------------------------------------------- -----------------
</TABLE>
* For the period from January 4, 1994 (commencement of operations) to May 31,
1994 (unaudited).
(See Notes which are an integral part of the Financial Statements)
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1994
(UNAUDITED)
- --------------------------------------------------------------------------------
(1) ORGANIZATION
First Union Funds (the "Trust") is registered under the Investment Company Act
of 1940, as amended, (the "Act") as an open-end, management investment company.
The Trust consists of fifteen portfolios. The financial statements included
herein are only those of First Union South Carolina Municipal Bond Portfolio
(the "Fund"). The financial statements of the other portfolios are presented
separately. The assets of each portfolio are segregated and a shareholder's
interest is limited to the portfolio in which shares are held.
The Fund offers three classes of shares (Trust Shares, Class B Investment
Shares, and Class C Investment Shares). Class B Investment Shares and Class C
Investment Shares are identical in all respects to Trust Shares, except that
Class B Investment Shares and Class C Investment Shares are sold pursuant to a
distribution plan ("Plan") adopted in accordance with the Act's Rule 12b-1.
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
A. INVESTMENT VALUATIONS--Municipal bonds are valued by an independent pricing
service taking into consideration yield, liquidity, risk, credit, quality,
coupon, maturity, type of issue, and any other factors or market data it
deems relevant in determining valuations for normal institutional size
trading units of debt securities. The independent pricing service does not
rely exclusively on quoted prices. Short-term securities with remaining
maturities of sixty days or less may be stated at amortized cost, which
approximates value. Investments in other regulated investment companies are
valued at net asset value.
Since the Fund invests a substantial portion of its assets in issuers
located in one state, it will be more susceptible to factors adversely
affecting issuers of that state, than would be a comparable general
tax-exempt mutual fund. In order to reduce the credit risk associated with
such factors, at May 31, 1994, 56.2% of the securities in the portfolio of
investments are backed by letters of credit or bond insurance of various
financial institutions and financial guaranty assurance agencies. The
aggregate percentages by financial institutions and agencies ranged from
3.0% to 26.2% of total investments.
B. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Interest income and expenses
are accrued daily. Bond premium and discount are amortized as required by
the Internal Revenue Code, as amended ("Code"). Distributions to
shareholders are recorded on the ex-dividend date.
C. FEDERAL TAXES--It is the Fund's policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its tax-exempt income.
Accordingly, no provisions for federal tax are necessary.
D. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.
E. OTHER--Investment transactions are accounted for on the trade date.
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value) for each
class of shares. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
TRUST SHARES
PERIOD ENDED
MAY 31, 1994*
SHARES DOLLARS
- --------------------------------------------------------------------------------------------- ----------- ---------
<S> <C> <C>
Shares sold 6,077 $ 55,427
- ---------------------------------------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared -- --
- ---------------------------------------------------------------------------------------------
Shares redeemed (6) (48)
- --------------------------------------------------------------------------------------------- ----------- ---------
Net change resulting from Fund share transactions 6,071 $ 55,379
- --------------------------------------------------------------------------------------------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT SHARES
CLASS B CLASS C
PERIOD ENDED PERIOD ENDED
MAY 31, 1994** MAY 31, 1994***
SHARES DOLLARS SHARES DOLLARS
- ----------------------------------------------------------------- ----------- ----------- --------- -------------
<S> <C> <C> <C> <C>
Shares sold 10,143 $ 100,960 155,789 $ 1,511,112
- -----------------------------------------------------------------
Shares issued to shareholders in payment of dividends declared 58 547 1,283 11,833
- -----------------------------------------------------------------
Shares redeemed (4,986) (47,018) (1,952) (17,421)
- ----------------------------------------------------------------- ----------- ----------- --------- -------------
Net change resulting from Fund share transactions 5,215 $ 54,489 155,120 $ 1,505,524
- ----------------------------------------------------------------- ----------- ----------- --------- -------------
</TABLE>
* Reflects operations for the period from February 28, 1994 (commencement of
operations) to
May 31, 1994.
** Reflects operations for the period from January 4, 1994 (commencement of
operations)
to May 31, 1994.
*** Reflects operations for the period from January 5, 1994 (commencement of
operations) to
May 31, 1994.
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--First Union National Bank of North Carolina, the Fund's
adviser ("Adviser"), receives for its services an annual investment advisory fee
equal to 0.50 of 1% of the Fund's average daily net assets. Adviser may
voluntarily choose to waive a portion of its fee and reimburse certain operating
expenses of the Fund. Adviser can modify or terminate this voluntary waiver and
reimbursement at any time at its sole discretion.
ADMINISTRATION FEE--Federated Administrative Services ("FAS") provides the Fund
with certain administrative personnel and services. The FAS fee is based on the
level of average aggregate net assets of the Fund for the period. FAS may
voluntarily choose to waive a portion of its fee.
DISTRIBUTION PLAN--The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, the Fund will
compensate Federated Securities Corp. ("FSC"), the principal distributor, from
the net assets of the Fund to finance activities intended to result in the sale
of the Fund's Investment Shares. The Plan provides that the Fund may incur
distribution expenses up to 0.75 of 1% of the average daily net assets of the
Class B Investment Shares and Class C Investment Shares, annually, to compensate
FSC. For the foreseeable future, FSC intends to limit its fees
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO
- --------------------------------------------------------------------------------
to 0.25 of 1% of the Class B Investment Shares' average daily net assets. FSC
may voluntarily choose to waive a portion of its fee.
TRANSFER AND DIVIDEND DISBURSING AGENT--Federated Services Company ("FServ")
serves as transfer and dividend disbursing agent for the Fund. The FServ fee is
based on the size, type and number of accounts and transactions made by
shareholders.
ORGANIZATIONAL EXPENSES--Organizational expenses incurred by the Fund will be
borne intially by FAS and are estimated to be $50,000. The Fund has agreed to
reimburse FAS for the organizational expenses during the five year period
following January 1, 1994 (date the Fund first became effective).
Certain of the Officers and Trustees of the Trust are Officers and Trustees or
Directors of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term obligations, for the
period ended May 31, 1994 were as follows:
<TABLE>
<S> <C>
PURCHASES $ 1,781,363
- ----------------------------------------------------------------------------------------------------- -------------
SALES $ 273,363
- ----------------------------------------------------------------------------------------------------- -------------
</TABLE>
7) Please replace the fourth caption in the section entitled 'Addresses' on
the inside back cover with the following:
<TABLE>
<S> <C> <C>
"Custodian
State Street Bank and Trust Company P.O. Box 8602
Boston, Massachusetts 02266-8609"
</TABLE>
8) Please insert the following as the fifth caption in the section entitled
'Addresses' on the inside back cover:
<TABLE>
<S> <C> <C>
"Transfer Agent and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779"
</TABLE>
June 30, 1994
P R O S P E C T U S
FIRST UNION
SINGLE STATE
MUNICIPAL BOND
PORTFOLIOS
CLASS B AND C
INVESTMENT SHARES
FEBRUARY 28, 1994
[LOGO]
FIRST UNIOIN
FUNDS
FORMERLY THE SALEM FUNDS
FIRST UNION
- ------------------------ SINGLE STATE ------------------------
- ------------------------ MUNICIPAL BOND ------------------------
FUNDS
Portfolios of First Union Funds
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
- --------------------------------------------------------------------------------
P R O S P E C T U S
February 28, 1994
First Union Funds (the "Trust") is a mutual fund with 15 portfolios, offering a
variety of investment opportunities. The Trust currently includes five non-
diversified Single State Municipal Bond Funds, seven diversified Equity and
Income Funds and three diversified Money Market Funds. They are:
Single State Municipal Bond Funds
. First Union Florida Municipal Bond Portfolio;
. First Union Georgia Municipal Bond Portfolio;
. First Union North Carolina Municipal Bond Portfolio;
. First Union South Carolina Municipal Bond Portfolio; and
. First Union Virginia Municipal Bond Portfolio.
Equity and Income Funds
. First Union Balanced Portfolio;
. First Union Fixed Income Portfolio;
. First Union High Grade Tax Free Portfolio (formerly, First Union Insured Tax
Free Portfolio);
. First Union Managed Bond Portfolio (Investment Shares not currently
offered);
. First Union U.S. Government Portfolio;
. First Union Utility Portfolio; and
.First Union Value Portfolio.
Money Market Funds
.First Union Money Market Portfolio;
. First Union Tax Free Money Market Portfolio; and
. First Union Treasury Money Market Portfolio.
This prospectus provides you with information specific to the Class B
Investment Shares ("Class B Shares") and Class C Investment Shares ("Class C
Shares") of First Union Single State Municipal Bond Funds. It concisely
describes the information which you should know before investing in Class B
Shares or Class C Shares of any of the First Union Single State Municipal Bond
Funds. Please read this prospectus carefully and keep it for future reference.
You can find more detailed information about each First Union Single State
Municipal Bond Fund in its Statement of Additional Information dated February
28, 1994, filed with the Securities and Exchange Commission and incorporated by
reference into this prospectus. The Statements are available free of charge by
writing to First Union Funds, Federated Investors Tower, Pittsburgh, PA 15222-
3779 or by calling 1-800-326-3241.
The Trust is sponsored and distributed by third parties independent of First
Union National Bank of North Carolina ("First Union").
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF FIRST
UNION, ARE NOT ENDORSED OR GUARANTEED BY FIRST UNION, AND ARE NOT INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER GOVERNMENT AGENCY. INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- ------------------------ TABLE OF ------------------------
- ------------------------ CONTENTS ------------------------
SUMMARY 2 HOW TO REDEEM SHARES 20
- ------------------------------------- -------------------------------------
SUMMARY OF FUND EXPENSES 4 ADDITIONAL SHAREHOLDER SERVICES 20
- ------------------------------------- -------------------------------------
FINANCIAL HIGHLIGHTS 7 MANAGEMENT OF FIRST UNION FUNDS 21
- ------------------------------------- -------------------------------------
INVESTMENT OBJECTIVES AND POLICIES 12 FEES AND EXPENSES 23
- ------------------------------------- -------------------------------------
OTHER INVESTMENT POLICIES 14 SHAREHOLDER RIGHTS AND PRIVILEGES 23
- ------------------------------------- -------------------------------------
SHAREHOLDER GUIDE 15 DISTRIBUTIONS AND TAXES 24
- ------------------------------------- -------------------------------------
HOW TO BUY SHARES 17 TAX INFORMATION 25
- ------------------------------------- -------------------------------------
HOW TO CONVERT YOUR INVESTMENT FROM OTHER CLASSES OF SHARES 28
ONE FIRST UNION FUND TO ANOTHER -------------------------------------
FIRST UNION FUND 19
- ------------------------------------- ADDRESSES 28
-------------------------------------
- ------------------------ SUMMARY ------------------------
- ------------------------ ------------------------
DESCRIPTION OF THE TRUST
First Union Funds is an open-end, management investment company, established as
a Massachusetts business trust under a Declaration of Trust dated August 30,
1984. The Trust currently consists of 15 portfolios, each representing a
different First Union Fund. Each Single State Municipal Bond Fund currently
offers three classes of shares: Class B Shares, Class C Shares, and Trust
Shares. Class B Shares and Class C Shares are sold to individuals and other
customers of First Union (the "Adviser"), and are sold at net asset value plus
a sales charge which, at the election of the purchaser, may be imposed either
(i) at the time of purchase (the Class B Shares), or (ii) on a contingent
deferred basis (the Class C Shares). Trust Shares are designed primarily for
institutional investors (banks, corporations, and fiduciaries). This prospectus
relates to both classes of Investment Shares ("Shares") of the First Union
Single State Municipal Bond Funds (collectively, the "Funds").
THE FUNDS AND OBJECTIVES
As of the date of this prospectus, Shares are offered in the following five
Single State Municipal Bond Funds:
. FIRST UNION FLORIDA MUNICIPAL BOND PORTFOLIO ("FLORIDA MUNICIPAL BOND
FUND")--seeks current income exempt from federal regular income tax
consistent with preservation of capital. In addition, the Fund intends to
qualify as an investment exempt from the Florida state intangibles tax;
. FIRST UNION GEORGIA MUNICIPAL BOND PORTFOLIO ("GEORGIA MUNICIPAL BOND
FUND")--seeks current income exempt from federal regular income tax and
Georgia state income tax, consistent with preservation of capital;
. FIRST UNION NORTH CAROLINA MUNICIPAL BOND PORTFOLIO ("NORTH CAROLINA
MUNICIPAL BOND FUND")--seeks current income exempt from federal regular
income tax and North Carolina state income tax, consistent with preservation
of capital. In addition, the Fund intends to qualify as an investment
substantially exempt from the North Carolina intangible personal property
tax;
. FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO ("SOUTH CAROLINA
MUNICIPAL BOND FUND")--seeks current income exempt from federal regular
income tax and South Carolina state income tax; and
. FIRST UNION VIRGINIA MUNICIPAL BOND PORTFOLIO ("VIRGINIA MUNICIPAL BOND
FUND")--seeks current income exempt from federal regular income tax and
Virginia state income tax, consistent with preservation of capital.
INVESTMENT MANAGEMENT
The Funds are advised by First Union, through its Capital Management Group.
First Union has responsibility for investment research and supervision of the
Funds, in addition to the purchase or sale of portfolio instruments, for which
it receives an annual fee.
PURCHASING AND REDEEMING SHARES
For information on purchasing Class B and Class C Shares of any of the Single
State Municipal Bond Funds, please refer to the Shareholder Guide section
entitled "How to Buy Shares." Redemption information may be found under "How to
Redeem Shares."
- -------------------------- SUMMARY OF --------------------------
- -------------------------- FUND EXPENSES --------------------------
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS
CLASS B SHARES
<TABLE>
<CAPTION>
North South
Florida Georgia Carolina Carolina Virginia
Municipal Municipal Municipal Municipal Municipal
Bond Fund Bond Fund Bond Fund Bond Fund Bond Fund
CLASS B SHARES-- --------- --------- --------- --------- ---------
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).... 4.00% 4.00% 4.00% 4.00% 4.00%
Maximum Sales Load Imposed on Reinvested
Dividends (as a percentage of offering
price)................................. None None None None None
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, as applicable)............... None None None None None
Redemption Fee (as a percentage of
amount redeemed,
if applicable)......................... None None None None None
Exchange Fee............................ None None None None None
ANNUAL CLASS B SHARES OPERATING EXPENSES
(As a percentage of projected average
net assets)
Management Fee (after waiver) (1)....... 0.00% 0.00% 0.16% 0.00% 0.00%
12b-1 Fees (2).......................... 0.25% 0.25% 0.25% 0.25% 0.25%
Total Other Expenses (after waiver
and reimbursement) (3)................. 0.37% 0.37% 0.38% 0.00% 0.37%
Total Class B Shares Operating Ex-
penses (4)............................. 0.62% 0.62% 0.79% 0.25% 0.62%
</TABLE>
(1) The estimated management fees have been reduced to reflect the anticipated
voluntary waivers by the Adviser. However, the North Carolina Municipal
Bond Fund's management fee has been reduced to reflect the expected
voluntary waiver by the Adviser. The Adviser may terminate these voluntary
waivers at any time at its sole discretion. The maximum management fee for
each Fund is 0.50%.
(2) The Class B Shares can pay up to 0.75% of Class B Shares' average daily
net assets as a 12b-1 fee. For the foreseeable future, the Funds plan to
limit the Class B Shares' 12b-1 payments to 0.25% of Class B Shares'
average daily net assets.
(3) Total Other Expenses for Florida, Georgia, South Carolina, and Virginia
Municipal Bond Funds are estimated to be 0.73%, 2.17%, 2.71%, and 2.41%,
respectively, absent the anticipated voluntary waiver by the administrator
and reimbursement of other operating expenses by the Adviser. The
administrator and Adviser may terminate these waivers and reimbursements
at any time at their sole discretion.
(4) The annual Class B Shares operating expenses for Florida, Georgia, North
Carolina, and Virginia Municipal Bonds Funds were 0.25%, 0.25%, 0.32%, and
0.25%, respectively, for the period ended December 31, 1993. Total Class B
Shares operating expenses for Florida, Georgia, North Carolina, and
Virginia Municipal Bond Funds, absent the voluntary waivers and
reimbursements of other operating expenses, were 1.83%, 6.82%, 1.25%, and
7.75%, respectively, for the period ended December 31, 1993.
The annual Class B Shares operating expenses in the table above are based on
estimated expenses expected during the fiscal year ending December 31, 1994.
Total Class B Shares operating expenses for Florida, Georgia, North
Carolina, South Carolina, and Virginia Municipal Bond Funds are estimated to
be 1.48%, 2.92%, 1.13%, 3.46%, and 3.16%, respectively, absent the
anticipated voluntary waivers and reimbursements described above in notes 1
and 3.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUNDS WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS
AND EXPENSES, SEE "FEES AND EXPENSES." WIRE-TRANSFERRED REDEMPTIONS OF LESS
THAN $5,000 MAY BE SUBJECT TO ADDITIONAL FEES.
Because of the asset-based sales charge, long-term shareholders may pay more
than the economic equivalent of the maximum front-end sales charges permitted
under the rules of the National Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming
(1) a 5% annual return and (2) redemption at
the end of each time period.
The Funds charge no redemption fees for Class
B Shares.
Florida Municipal Bond Fund................. $46 $59 N/A N/A
Georgia Municipal Bond Fund................. $46 $59 N/A N/A
North Carolina Municipal Bond Fund.......... $48 $64 $82 $134
South Carolina Municipal Bond Fund.......... $42 $48 N/A N/A
Virginia Municipal Bond Fund................ $46 $59 N/A N/A
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE EXAMPLE
IS BASED ON ESTIMATED DATA FOR THE FISCAL YEAR ENDING DECEMBER 31, 1994.
- -------------------------- SUMMARY OF --------------------------
- -------------------------- FUND EXPENSES --------------------------
(CONTINUED)
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS
CLASS B SHARES
The information set forth in the foregoing table and example relates only to
Class B Shares of the Funds. The Funds also offer two additional classes of
shares called Trust Shares and Class C Shares. Trust Shares and Class C Shares
are subject to certain of the same expenses as Class B Shares. However, Trust
Shares bear no sales load or 12b-1 fee, and Class C Shares are subject to a
12b-1 fee of .75 of 1%, bear a maximum contingent deferred sales load of 4.00%
and bear no front-end sales load. See "Other Classes of Shares."
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS CLASS C SHARES
<TABLE>
<CAPTION>
Florida Georgia
Municipal Municipal North Carolina
Bond Fund Bond Fund Municipal Bond Fund
----------------------------- --------------------------- ---------------------------
CLASS C SHARES--
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C> <C>
Maximum Sales Load Im-
posed on Purchases
(as a percentage of of-
fering price).......... None None None
Maximum Sales Load
Imposed on Reinvested
Dividends (as a
percentage of offering
price)................. None None None
Deferred Sales Load (as 4% during the first year, 4% during the first year, 4% during the first year,
a percentage of 3% during the second year, 3% during the second year, 3% during the second year,
original purchase price 2.5% during the third year, 2.5% during the third year, 2.5% during the third year,
or redemption proceeds, 2% during the fourth year, 2% during the fourth year, 2% during the fourth year,
as applicable) (1)..... 1.5% during the fifth year, 1.5% during the fifth year, 1.5% during the fifth year,
0.5% during the sixth year, 0.5% during the sixth year, 0.5% during the sixth year,
and 0% after the sixth year and 0% after the sixth year and 0% after the sixth year
Redemption Fee (as a
percentage of amount
redeemed, if
applicable)............ None None None
Exchange Fee............ None None None
ANNUAL CLASS C SHARES
(As a percentage of projected
average net assets)
Management Fee (after
waiver) (2)............ 0.00% 0.00% 0.16%
12b-1 Fees.............. 0.75% 0.75% 0.75%
Total Other Expenses
(after waiver and
reimbursement) (3)..... 0.37% 0.37% 0.38%
Total Class C Shares Operating
Expenses (4)...1.12% 1.12% 1.12% 1.29%
</TABLE>
- -------------------------- SUMMARY OF --------------------------
- -------------------------- FUND EXPENSES --------------------------
(CONTINUED)
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS
CLASS C SHARES
<TABLE>
<CAPTION>
South Carolina Virginia
Municipal Municipal
Bond Fund Bond Fund
--------------------------- ---------------------------
CLASS C SHARES--SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Load Im-
posed on Purchases (as
a percentage of offer-
ing price)............. None None
Maximum Sales Load
Imposed on Reinvested
Dividends (as a
percentage of
offering price)........ None None
Deferred Sales Load (as 4% during the first year, 4% during the first year,
a percentage of 3% during the second year, 3% during the second year,
original purchase price 2.5% during the third year, 2.5% during the third year,
or redemption proceeds, 2% during the fourth year, 2% during the fourth year,
as applicable) (1)..... 1.5% during the fifth year, 1.5% during the fifth year,
0.5% during the sixth year, 0.5% during the sixth year,
and 0% after the sixth year and 0% after the sixth year
Redemption Fee (as a
percentage of amount
redeemed, if
applicable)............ None None
Exchange Fee............ None None
ANNUAL CLASS C SHARES OPERATING EXPENSES
(As a percentage of projected
average net assets)
Management Fee (after
waiver) (2)............ 0.00% 0.00%
12b-1 Fees.............. 0.75% 0.75%
Total Other Expenses
(after waiver and reim-
bursement) (3)......... 0.00% 0.37%
Total Class C Shares
Operating Expenses
(4)................. 0.75% 1.12%
</TABLE>
(1) No contingent deferred sales charge is imposed on (a) Shares purchased
more than six years prior to redemption, (b) Shares acquired through the
reinvestment of dividends and distributions, and (c) the portion of
redemption proceeds attributable to increases in the value of an account
above the net cost of the investment due to increases in the net asset
value per share.
(2) The estimated management fees have been reduced to reflect the anticipated
voluntary waivers by the Adviser. However, the North Carolina Municipal
Bond Fund's management fee has been reduced to reflect the expected
voluntary waiver by the Adviser. The Adviser may terminate these voluntary
waivers at any time at its sole discretion. The maximum management fee for
each Fund is 0.50%.
(3) Total Other Expenses for Florida, Georgia, South Carolina, and Virginia
Municipal Bond Funds are estimated to be 0.73%, 2.17%, 2.71% and 2.41%,
respectively, absent the anticipated voluntary waiver by the administrator
and reimbursement of other operating expenses by the Adviser. The
administrator and Adviser may terminate these waivers and reimbursements
at any time at their sole discretion.
(4) The annual Class C Shares operating expenses for Florida, Georgia, North
Carolina, and Virginia Municipal Bond Funds were 0.75%, 0.75%, 0.79%, and
0.75%, respectively, for the period ended December 31, 1993. Total Class C
Shares operating expenses for Florida, Georgia, North Carolina, and
Virginia Municipal Bond Funds, absent the voluntary waivers and
reimbursements of other operating expenses, were 2.33%, 7.32%, 1.74%, and
8.25%, respectively, for the period ended December 31, 1993.
The annual Class C Shares operating expenses in the table above are based on
estimated expenses expected during the fiscal year ending December 31, 1994.
Total Class C Shares operating expenses for Florida, Georgia, North
Carolina, South Carolina, and Virginia Municipal Bond Funds are estimated to
be 1.98%, 3.42%, 1.63%, 3.96%, and 3.66%, respectively, absent the
anticipated voluntary waivers and reimbursements described above in notes 2
and 3.
THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUNDS WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS
AND EXPENSES, SEE "FEES AND EXPENSES." WIRE-TRANSFERRED REDEMPTIONS OF LESS
THAN $5,000 MAY BE SUBJECT TO ADDITIONAL FEES.
- -------------------------- SUMMARY OF --------------------------
- -------------------------- FUND EXPENSES --------------------------
(CONTINUED)
FIRST UNION SINGLE STATE MUNICIPAL BOND FUNDS
CLASS C SHARES
Because of the asset-based sales charge, long-term shareholders may pay more
than the economic equivalent of the maximum front-end sales charges permitted
under the rules of the National Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
EXAMPLE 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming
(1) a 5% annual return and (2) redemption at
the end of each time period.
Florida Municipal Bond Fund................. $53 $64 N/A N/A
Georgia Municipal Bond Fund................. $53 $64 N/A N/A
North Carolina Municipal Bond Fund.......... $55 $69 $89 $156
South Carolina Municipal Bond Fund.......... $49 $52 N/A N/A
Virginia Municipal Bond Fund................ $53 $64 N/A N/A
You would pay the following expenses on the
same investment, assuming no
redemptions:
Florida Municipal Bond Fund................. $11 $36 N/A N/A
Georgia Municipal Bond Fund................. $11 $36 N/A N/A
North Carolina Municipal Bond Fund.......... $13 $41 $71 $156
South Carolina Municipal Bond Fund.......... $ 8 $24 N/A N/A
Virginia Municipal Bond Fund................ $11 $36 N/A N/A
</TABLE>
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE EXAMPLE
IS BASED ON ESTIMATED DATA FOR THE FISCAL YEAR ENDING DECEMBER 31, 1994.
The information set forth in the foregoing table and example relates only to
Class C Shares of the Funds. The Funds also offer two additional classes of
shares called Trust Shares and Class B Shares. Trust Shares and Class B Shares
are subject to certain of the same expenses as Class C Shares. However, Trust
Shares bear no sales load or 12b-1 fee, and Class B Shares are subject to a
12b-1 fee of .25 of 1%, bear a maximum front-end sales load of 4.00%, and bear
no contingent deferred sales load. See "Other Classes of Shares."
- ------------------------ FINANCIAL HIGHLIGHTS ------------------------
- ------------------------ ------------------------
FIRST UNION FLORIDA MUNICIPAL BOND PORTFOLIO
SUPPLEMENTARY INFORMATION
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by KPMG Peat Marwick, the Fund's
independent auditors. Their report, dated February 11, 1994, on the Fund's
Financial Statements for the year ended December 31, 1993, and on the following
table for each of the periods presented, is included in the Trust's Annual
Report, which is incorporated herein by reference. This table should be read in
conjunction with the Fund's Financial Statements and notes thereto, contained
in the Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
CLASS B CLASS C
INVESTMENT INVESTMENT
SHARES(A) SHARES(A)
------------------ -------------------
PERIOD ENDED PERIOD ENDED
DECEMBER 31, 1993* DECEMBER 31, 1993**
- ------------------------------------- ------------------ -------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00
- -------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------
Net investment income 0.22 0.20
- -------------------------------------
Net realized and unrealized gain
(loss) on investments 0.34 0.34
- ------------------------------------- ------ ------
Total from investment operations 0.56 0.54
- -------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------
Dividends to shareholders from
net investment income (0.22) (0.20)
- ------------------------------------- ------ ------
NET ASSET VALUE, END OF PERIOD $10.34 $10.34
- ------------------------------------- ------ ------
TOTAL RETURN*** 5.63% 5.40%
- -------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------
Expenses 0.25%(c) 0.75%(c)
- -------------------------------------
Net investment income 4.92%(c) 4.46%(c)
- -------------------------------------
Expense waiver/reimbursement (b) 1.58%(c) 1.58%(c)
- -------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------
Net assets, end of period (000 omit-
ted) $8,110 $18,383
- -------------------------------------
Portfolio turnover rate 3% 3%
- -------------------------------------
</TABLE>
* Reflects operations for the period from July 6, 1993 (commencement of
operations) to December 31, 1993.
** Reflects operations for the period from July 2, 1993 (commencement of
operations) to December 31, 1993.
*** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Trust Shares were not being offered as of December 31, 1993. Accordingly,
there are no Financial Highlights for such Shares. The Financial Highlights
presented above are historical information for Class B and Class C
Investment Shares.
(b) This voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
(c) Computed on an annualized basis.
Further information about the Fund's performance is contained in the Trust's
Annual Report, dated December 31, 1993, which can be obtained free of charge.
- ------------------------ FINANCIAL HIGHLIGHTS ------------------------
- ------------------------ ------------------------
FIRST UNION GEORGIA MUNICIPAL BOND PORTFOLIO
SUPPLEMENTARY INFORMATION
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by KPMG Peat Marwick, the Fund's
independent auditors. Their report, dated February 11, 1994, on the Fund's
Financial Statements for the year ended December 31, 1993, and on the
following table for each of the periods presented, is included in the Trust's
Annual Report, which is incorporated herein by reference. This table should be
read in conjunction with the Fund's Financial Statements and notes thereto,
contained in the Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
CLASS B CLASS C
INVESTMENT INVESTMENT
SHARES(A) SHARES(A)
------------------ ------------------
PERIOD ENDED PERIOD ENDED
DECEMBER 31, 1993* DECEMBER 31, 1993*
- ---------------------------------------- ------------------ ------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00
- ----------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------
Net investment income 0.201 0.179
- ----------------------------------------
Net realized and unrealized gain (loss)
on investments 0.193 0.193
- ---------------------------------------- ------- -------
Total from investment operations 0.394 0.372
- ----------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------
Dividends to shareholders from net in-
vestment income (0.201) (0.179)
- ----------------------------------------
Distributions to shareholders from net
realized gain
on investment transactions (0.003) (0.003)
- ---------------------------------------- ------- -------
TOTAL DISTRIBUTIONS (0.204) (0.182)
- ---------------------------------------- ------- -------
NET ASSET VALUE, END OF PERIOD $10.19 $10.19
- ---------------------------------------- ------ ------
TOTAL RETURN** 3.96% 3.74%
- ----------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------
Expenses 0.25%(c) 0.75%(c)
- ----------------------------------------
Net investment income 4.71%(c) 4.15%(c)
- ----------------------------------------
Expense waiver/reimbursement (b) 6.57%(c) 6.57%(c)
- ----------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------
Net assets, end of period (000 omitted) $817 $3,692
- ----------------------------------------
Portfolio turnover rate 15% 15%
- ----------------------------------------
</TABLE>
* Reflects operations for the period from July 2, 1993 (commencement of
operations) to December 31, 1993.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Trust Shares were not being offered as of December 31, 1993. Accordingly,
there are no Financial Highlights for such Shares. The Financial
Highlights presented above are historical information for Class B and
Class C Investment Shares.
(b) This voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
(c) Computed on an annualized basis.
Further information about the Fund's performance is contained in the Trust's
Annual Report, dated December 31, 1993, which can be obtained free of charge.
- ------------------------ FINANCIAL HIGHLIGHTS ------------------------
- ------------------------ ------------------------
FIRST UNION NORTH CAROLINA MUNICIPAL BOND PORTFOLIO
SUPPLEMENTARY INFORMATION
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by KPMG Peat Marwick, the Fund's
independent auditors. Their report, dated February 11, 1994, on the Fund's
Financial Statements for the year ended December 31, 1993, and on the
following table for each of the periods presented, is included in the Trust's
Annual Report, which is incorporated herein by reference. This table should be
read in conjunction with the Fund's Financial Statements and notes thereto,
contained in the Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
CLASS B CLASS C
INVESTMENT INVESTMENT
SHARES(B) SHARES(B)
------------------- -------------------
PERIOD ENDED PERIOD ENDED
DECEMBER 31, 1993** DECEMBER 31, 1993**
- ------------------------------------- ------------------- -------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00
- -------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------
Net investment income 0.46 0.42
- -------------------------------------
Net realized and unrealized gain
(loss) on investments 0.64 0.64
- ------------------------------------- ------ ------
Total from investment operations 1.10 1.06
- ------------------------------------- ------ ------
LESS DISTRIBUTIONS
- -------------------------------------
Dividends to shareholders from net
investment
income (0.46) (0.42)
- -------------------------------------
Distributions to shareholders from
net realized gains
on investment transactions (0.03) (0.03)
- ------------------------------------- ------ ------
Total distributions (0.49) (0.45)
- ------------------------------------- ------ ------
NET ASSET VALUE, END OF PERIOD $10.61 $10.61
- ------------------------------------- ------ ------
TOTAL RETURN* 11.28% 10.80%
- -------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------
Expenses 0.32%(a) 0.79%(a)
- -------------------------------------
Net investment income 4.91%(a) 4.47%(a)
- -------------------------------------
Expense waiver/reimbursement (c) 0.93%(a) 0.95%(a)
- -------------------------------------
SUPPLEMENTARY DATA
- -------------------------------------
Net assets, end of period (000 omit-
ted) $12,739 $45,168
- -------------------------------------
Portfolio turnover rate 57% 57%
- -------------------------------------
</TABLE>
* Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
** Reflects operations for the period from January 11, 1993 (commencement of
operations) to December 31, 1993.
(a) Computed on an annualized basis.
(b) Trust Shares were not being offered as of December 31, 1993. Accordingly,
there are no Financial Highlights for such Shares. The Financial
Highlights presented above are historical information for Class B and
Class C Investment Shares.
(c) This voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Trust's
Annual Report, dated December 31, 1993, which can be obtained free of charge.
- ------------------------ FINANCIAL HIGHLIGHTS ------------------------
- ------------------------ ------------------------
FIRST UNION VIRGINIA MUNICIPAL BOND PORTFOLIO
SUPPLEMENTARY INFORMATION
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following table has been audited by KPMG Peat Marwick, the Fund's
independent auditors. Their report, dated February 11, 1994, on the Fund's
Financial statements for the year ended December 31, 1993, and on the following
table for each of the periods presented, is included in the Trust's Annual
Report, which is incorporated herein by reference. This table should be read in
conjunction with the Fund's Financial Statements and notes thereto, contained
in the Annual Report, which may be obtained from the Fund.
<TABLE>
<CAPTION>
CLASS B CLASS C
INVESTMENT INVESTMENT
SHARES(A) SHARES(A)
------------------ ------------------
PERIOD ENDED PERIOD ENDED
DECEMBER 31, 1993* DECEMBER 31, 1993*
- ---------------------------------------- ------------------ ------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00
- ----------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------
Net investment income 0.20 0.17
- ----------------------------------------
Net realized and unrealized gain (loss)
on
investments 0.19 0.19
- ---------------------------------------- ------ ------
Total from investment operations 0.39 0.36
- ----------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------
Dividends to shareholders from net in-
vestment
income (0.20) (0.17)
- ---------------------------------------- ------ ------
NET ASSET VALUE, END OF PERIOD $10.19 $10.19
- ---------------------------------------- ------ ------
TOTAL RETURN** 3.89% 3.66%
- ----------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------
Expenses 0.25%(b) 0.75%(b)
- ----------------------------------------
Net investment income 4.64%(b) 4.25%(b)
- ----------------------------------------
Expense waiver/reimbursement (c) 7.50%(b) 7.50%(b)
- ----------------------------------------
SUPPLEMENTARY DATA
- ----------------------------------------
Net assets, end of period (000 omitted) $1,306 $2,235
- ----------------------------------------
Portfolio turnover rate 0% 0%
- ----------------------------------------
</TABLE>
* Reflects operations for the period from July 2, 1993 (commencement of
operations) to December 31, 1993.
** Based on net asset value, which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) Trust Shares were not being offered as of December 31, 1993. Accordingly,
there are no Financial Highlights for such Shares. The Financial Highlights
presented above are historical information for Class B and Class C
Investment Shares.
(b) Computed on an annualized basis.
(c) The voluntary expense decrease is reflected in both the expenses and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Trust's
Annual Report, dated December 31, 1993, which can be obtained free of charge.
- ------------------------ INVESTMENT ------------------------
- ------------------------ OBJECTIVES ------------------------
AND POLICIES
First Union Single State Municipal Bond Funds seek current income exempt from
federal regular income tax and, where applicable, state income taxes,
consistent with preservation of capital. In addition, the Florida Municipal
Bond Fund intends to qualify as an investment exempt from the Florida state
intangibles tax, and the North Carolina Municipal Bond Fund intends to qualify
as an investment substantially exempt from the North Carolina intangible
personal property tax.
Each Fund's investment objective cannot be changed without shareholder
approval. While there is no assurance that each objective will be achieved, the
Funds will endeavor to do so by following the investment policies detailed
below. Unless otherwise indicated, the investment policies of a Fund may be
changed by the Trust's Board of Trustees ("Trustees") without the approval of
shareholders. Shareholders will be notified before any material change in these
policies becomes effective.
DESCRIPTION OF THE FUNDS
Each Fund seeks current income which is exempt from federal regular income tax
and (where applicable) the designated state income tax consistent with
preservation of capital. In addition, the Florida Municipal Bond Fund intends
to qualify as an investment exempt from the Florida state intangibles tax, and
the North Carolina Municipal Bond Fund intends to qualify as an investment
substantially exempt from the North Carolina intangible personal property tax.
As a matter of fundamental investment policy, each Fund will normally invest
its assets so that at least 80% of its annual interest income is, or at least
80% of its net assets are invested in, obligations which provide interest
income which is exempt from federal regular income taxes. The interest retains
its tax-free status when distributed to the Fund's shareholders. In addition,
at least 65% of the value of each Fund's total assets will be invested in
municipal bonds of the particular state after which the Fund is named. To
qualify as an investment exempt from the Florida state intangibles tax, the
Florida Municipal Bond Fund's portfolio must consist entirely of investments
exempt from the Florida state intangibles tax on the last business day of the
calendar year.
TYPES OF INVESTMENTS
Each Fund seeks to achieve its investment objective by investing principally in
municipal obligations, including industrial development bonds, of its
designated state. In addition, the Funds may invest in obligations issued by or
on behalf of any state, territory, or possession of the United States,
including the District of Columbia, or their political subdivisions or agencies
and instrumentalities, the interest from which is exempt from federal regular
income tax. It is likely that shareholders who are subject to the alternative
minimum tax will be required to include interest from a portion of the
municipal securities owned by a Fund in calculating the federal individual
alternative minimum tax or the federal alternative minimum tax for
corporations.
The municipal bonds in which the Funds will invest are subject to one or more
of the following quality standards: rated Baa or better by Moody's Investors
Service, Inc. ("Moody's") or BBB or better by Standard & Poor's Corporation
("S&P") or, if unrated, are determined by the Adviser to be of comparable
quality to such ratings; insured by a municipal bond insurance company which is
rated Aaa by Moody's or AAA by S&P; guaranteed at the time of purchase by the
U.S. government as to the payment of principal and interest; or fully
collateralized by an escrow of U.S. government securities. Bonds rated BBB by
S&P or Baa by Moody's have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to weakened capacity
to make principal and interest payments than higher rated bonds. If any
security owned by a Fund loses its rating or has its rating reduced after the
Fund has purchased it, the Fund is not required to sell or otherwise dispose of
the security, but may consider doing so. If ratings made by Moody's or S&P
change because of changes in those organizations or their ratings systems, the
Funds will try to use comparable ratings as standards in accordance with the
Funds' investment objectives. A description of the rating categories is
contained in the Appendix of the Statement of Additional Information for each
Fund.
Other types of investments include:
participation interests in any of the above obligations. (Participation
interests may be purchased from financial institutions such as commercial
banks, savings and loan associations and insurance companies, and give a
Fund an undivided interest in particular municipal securities);
variable rate municipal securities. (Variable rate securities offer
interest rates which are tied to a money market rate, usually a published
interest rate or interest rate index or the 91-day U.S. Treasury bill rate.
Many of these securities are subject to prepayment of principal on demand
by the Fund, usually in seven days or less); and
municipal leases issued by state and local governments or authorities to
finance the acquisition of equipment and facilities.
TEMPORARY INVESTMENTS
During periods when, in the Adviser's opinion, a temporary defensive position
in the market is appropriate, a Fund may temporarily invest in short-term tax-
exempt or taxable investments. These temporary investments include: notes
issued by or on behalf of municipal or corporate issuers; obligations issued or
guaranteed by the U.S. government, its agencies, or instrumentalities; other
debt securities; commercial paper; bank certificates of deposit; shares of
other investment companies; and repurchase agreements. There are no rating
requirements applicable to temporary investments. However, the Adviser will
limit temporary investments to those it considers to be of comparable quality
to the Fund's primary investments.
Although the Funds are permitted to make taxable, temporary investments, there
is no current intention of generating income subject to federal regular income
tax. However, certain temporary investments will generate income which is
subject to state taxes.
MUNICIPAL BONDS
Municipal bonds are debt obligations issued by the state or local entities to
support a government's general financial needs or special projects, such as
housing projects or sewer works. Municipal bonds include industrial development
bonds issued by or on behalf of public authorities to provide financing aid to
acquire sites or construct or equip facilities for privately or publicly owned
corporations.
The two principal classifications of municipal bonds are "general obligation"
and "revenue" bonds. General obligation bonds are secured by the issuer's
pledge of its full faith and credit and taxing power for the payment of
principal and interest. Revenue bonds are paid off only with the revenue
generated by the project financed by the bond or other specified sources of
revenue. For example, in the case of a bridge project, proceeds from the tolls
would go directly to retiring the bond issue. Thus, unlike general obligation
bonds, revenue bonds do not represent a pledge of credit or create any debt of
or charge against the general revenues of a municipality or public authority.
RISK FACTORS
Bond yields are dependent on several factors including market conditions, the
size of an offering, the maturity of the bond, ratings of the bond and the
ability of issuers to meet their obligations. There is no limit on the maturity
of the bonds purchased by the Funds. Because the prices of bonds fluctuate
inversely in relation to the direction of interest rates, the prices of longer
term bonds fluctuate more widely in response to market interest rate changes. A
Fund's concentration in securities issued by its designated state and that
state's political subdivisions provides a greater level of risk than a fund
which is diversified across numerous states and municipal entities. An expanded
discussion of the risks associated with the purchase of the designated state's
municipal bonds is contained in the respective Statements of Additional
Information.
- ------------------------ OTHER INVESTMENT ------------------------
- ------------------------ POLICIES ------------------------
The Funds have adopted the following practices for specific types of
investments.
REPURCHASE AGREEMENTS
The Funds may invest in repurchase agreements. Repurchase agreements are
agreements by which a Fund purchases a security (usually U.S. government
securities) for cash and obtains a simultaneous commitment from the seller
(usually a bank or broker/dealer) to repurchase the security at an agreed-upon
price and specified future date. The repurchase price reflects an agreed-upon
interest rate for the time period of the agreement. The Fund's risk is the
inability of the seller to pay the agreed-upon price on delivery date. However,
this risk is tempered by the ability of the Fund to sell the security in the
open market in the case of a default. In such a case, the Fund may incur costs
in disposing of the security which would increase Fund expenses. The Adviser
will monitor the creditworthiness of the firms with which the Funds enter into
repurchase agreements.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Funds may purchase portfolio securities on a when-issued or delayed
delivery basis. In such cases, a Fund commits to purchase a security which will
be delivered and paid for at a future date. The Fund relies on the seller to
deliver the securities and risks missing an advantageous price or yield if the
seller does not deliver the security as promised.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Funds may lend their portfolio
securities on a short-term or long-term basis to broker/dealers, banks, or
other institutional borrowers of securities. The Funds will only enter into
loan arrangements with creditworthy borrowers and will receive collateral in
the form of cash or U.S. government securities equal to at least 100% of the
value of the securities loaned. As a matter of fundamental investment policy
which cannot be changed without shareholder approval, the Funds will not lend
any of their assets except portfolio securities up to one-third of the value of
their total assets.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
Each Fund may invest in the securities of other investment companies. This is a
short-term measure to invest cash which has not yet been invested in other
portfolio instruments and is subject to the following limitations: (1) no Fund
will own more than 3% of the total outstanding voting stock of any one
investment company, (2) no Fund may invest more than 5% of its total assets in
any one investment company and (3) no Fund may invest more than 10% of its
total assets in investment companies in general. The Adviser will waive its
investment advisory fee on assets invested in securities of other open end
investment companies.
OPTIONS AND FUTURES
The Funds may engage in options and futures transactions. Options and futures
transactions are intended to enable a Fund to manage market, interest rate or
exchange rate risk. The Funds do not use these transactions for speculation or
leverage.
Options and futures may be volatile investments and involve certain risks which
might result in lowering the Funds' returns. The three principal areas of risk
include: (1) lack of a liquid secondary market for a futures or option contract
when the Fund wants to close out its position; (2) imperfect correlation of
changes in the prices of futures or options contracts with the prices of the
securities in the Fund's portfolio; and (3) incorrect forecasts by the Adviser
of interest rates, market values or other economic factors. In these events,
the Funds may lose money on the futures contract or option.
RESTRICTED AND ILLIQUID SECURITIES
The Funds may not invest more than 15% of their total assets in securities
which are subject to restrictions on resale under federal securities law.
Certain restricted securities which the Trustees deem to be liquid will be
excluded from this limitation.
The Funds will limit investments in illiquid securities, including certain
restricted securities or municipal leases not determined by the Trustees to be
liquid, non-negotiable time deposits, and repurchase agreements providing for
settlement in more than seven days after notice, to 15% of its net assets.
The following investment limitations cannot be changed without shareholder
approval.
BORROWING MONEY
The Funds will not borrow money or pledge securities, except under certain
circumstances a Fund may borrow up to one-third of the value of its total
assets and pledge assets to secure such borrowings.
NON-DIVERSIFICATION
Each Fund is a non-diversified portfolio of an investment company and as such,
there is no limit on the percentage of assets which can be invested in any
single issuer. An investment in a Fund, therefore, will entail greater risk
than would exist in a diversified investment company because the higher
percentage of investments among fewer issuers may result in greater fluctuation
in the total market value of the Fund's portfolio.
Each Fund intends to comply with Subchapter M of the Internal Revenue Code
which requires that at the end of each quarter of each taxable year, with
regard to at least 50% of the Fund's total assets, no more than 5% of the total
assets may be invested in the securities of a single issuer and that with
respect to the remainder of the Fund's total assets, no more than 25% of its
total assets are invested in the securities of a single issuer.
NEW ISSUERS
The Funds will not invest more than 5% of the value of their total assets in
securities of issuers (or guarantors, where applicable) which have records of
less than three years of continuous operations, including the operation of any
predecessor.
- ------------------------ SHAREHOLDER GUIDE ------------------------
- ------------------------ ------------------------
CLASSES OF INVESTMENT SHARES
You may select a method of purchasing Shares which is most beneficial to you by
choosing either Class B Shares or Class C Shares. Your decision will be based
on the amount of your intended purchase and how long you expect to hold the
Shares.
Each Fund offers two types of Investment Shares: Class B Shares and Class C
Shares. Each Share of the Fund represents an identical interest in the
investment portfolio of the Fund and has the same rights. The difference
between Class B Shares and Class C Shares is based on purchasing arrangements
and distribution expenses. Class B Shares have a sales charge included at the
time of purchase and are subject to a lower Rule 12b-1 distribution fee. This
means that investors can purchase fewer Class B Shares for the same initial
investment than Class C Shares due to the initial sales charge, but will
receive higher dividends per Share due to the lower distribution expenses.
Class C Shares impose a contingent deferred sales charge ("CDSC") on most
redemptions made within six years of purchase and have higher distribution
costs resulting from greater Rule 12b-1 distribution fees. This means that
investors may purchase more Class C Shares than Class B Shares for the same
initial investment, but will receive lower dividends per Share.
Investors should consider whether, during the anticipated life of their
investment in the Fund, the accumulated Rule 12b-1 fee and the CDSC on Class C
Shares would be less than the initial sales charge and accumulated Rule 12b-1
fee on Class B Shares purchased at the same time. Investors must also consider
how that differential would be offset by the higher yield of Class B Shares.
SHARE PRICE CALCULATION
The net asset value of a Fund Share equals the market value of all the Fund's
portfolio securities divided by the total Shares outstanding. It is also the
bid price. The offering price is quoted after adding a sales charge to the net
asset value.
Purchases, redemptions, and exchanges are all based on net asset value. (The
purchase price of Class B Shares adds an applicable sales charge, and the
redemption proceeds of Class C Shares deduct an applicable CDSC.) The net asset
value is determined at 4:00 p.m. (Eastern time), Monday through Friday, except
on: (i) days on which there are not sufficient changes in the value of a Fund's
portfolio securities that its net asset value might be materially affected;
(ii) days during which no Shares are tendered for redemption and no orders to
purchase Shares are received; and (iii) the following holidays: New Year's Day,
Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving Day, and
Christmas Day. The net asset value is computed by adding cash and other assets
to the closing market value of all securities owned, subtracting liabilities
and dividing the result by the number of outstanding Shares. The net asset
value will vary each day depending on purchases and redemptions. Expenses and
fees, including the management fee, are accrued daily and taken into account
for the purpose of determining net asset value.
The net asset value of Trust Shares may differ slightly from that of Class B
Shares and Class C Shares of the same Fund due to the variability in daily net
income resulting from different distribution charges for each class of shares.
The net asset value for each Fund will fluctuate for all three classes.
PERFORMANCE INFORMATION
A Fund's performance may be quoted in terms of total return, yield, or tax
equivalent yield. Performance information is historical and is not intended to
indicate future results.
From time to time, the Funds may make available certain information about the
performance of Class B Shares and Class C Shares. It is generally reported
using total return, yield, and tax equivalent yield.
Total return takes into account both income (dividends) and changes in the
Fund's Share price (appreciation or depreciation). It is based on the overall
dollar or percentage change in value of an investment assuming reinvestment of
all dividends and capital gains during a specified period. Total return is
measured by comparing the value of an investment at the beginning of a
specified period to the redemption value at the end of the same period,
assuming reinvestment of dividends or capital gains distributions.
Yield shows how much income an investment generates. It refers to the Fund's
income over a 30-day period expressed as a percentage of the Fund's Share
price. The yields of Class B Shares and Class C Shares are calculated by
dividing the sum of all interest and dividend income (less Fund expenses) over
a 30-day period, by the offering price per Share on the last day of the period.
The number is then annualized using semi-annual compounding.
Tax equivalent yield is calculated like the yield described above, except that
for any given tax bracket, net investment income will be calculated as the sum
of any taxable income and the tax exempt income divided by the difference
between 1 and the federal tax rates for taxpayers in that tax bracket.
The yield and tax equivalent yield do not necessarily reflect income actually
earned by Class B Shares and Class C Shares of the Funds and, therefore, may
not correlate to the dividends or other distributions paid to shareholders.
Performance information for the Class B Shares and Class C Shares reflects the
effect of a sales charge which, if excluded, would increase the total return,
yield, and tax equivalent yield.
Total return, yield, and tax equivalent yield will be calculated separately for
Class B Shares, Class C Shares, and Trust Shares of a Fund. Because Class B
Shares and Class C Shares are subject to 12b-1 fees, the yield and tax
equivalent yield will be lower than that of Trust Shares. The sales load
applicable to Class B Shares also contributes to a lower total return for Class
B Shares. In addition, Class C Shares are subject to similar non-recurring
charges, such as the CDSC, which, if excluded, would increase the total return
for Class C Shares.
From time to time, a Fund may advertise its performance using certain rankings
published in financial publications and/or compare its performance to certain
indices.
- ------------------------ HOW TO BUY ------------------------
- ------------------------ SHARES ------------------------
Shares may be purchased at a price equal to their net asset value per Share
next determined after receipt of an order plus a sales charge which, at the
election of the purchaser, may be imposed either (i) at the time of purchase
(in the case of Class B Shares), or (ii) on a contingent deferred basis (in the
case of Class C Shares).
MINIMUM INVESTMENT
You may invest as often as you want in any of the Funds. There is a $1,000
minimum initial investment requirement which may be waived in certain
situations. For further information, please contact the Mutual Funds Group of
First Union Brokerage Services ("FUBS"), a subsidiary of First Union, at 1-800-
326-3241. Subsequent investments may be in any amounts.
WHAT SHARES COST
Class B Shares are sold at their net asset value plus a sales charge as
follows:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS A
A PERCENTAGE OF PERCENTAGE OF NET
AMOUNT OF TRANSACTION PUBLIC OFFERING PRICE AMOUNT INVESTED
--------------------- --------------------- -----------------
<S> <C> <C>
$ 0-$ 99,999 4.00% 4.17%
$ 100,000-$ 249,999 3.50% 3.63%
$ 250,000-$ 499,999 2.50% 2.56%
$ 500,000-$ 749,999 1.50% 1.52%
$ 750,000-$ 999,999 1.00% 1.01%
$1,000,000-$2,499,999 0.50% 0.50%
$2,500,000+ 0.25% 0.25%
</TABLE>
Shareholders of record in any First Union Fund at October 12, 1990, and the
members of their immediate family, will be exempt from sales charges on any
future purchases in any of the First Union Funds. Employees of First Union,
Federated Securities Corp. (the "distributor" or "FSC") and their affiliates,
and certain trust accounts for which First Union or its affiliates act in an
administrative, fiduciary, or custodial capacity, board members of First Union
and the above-mentioned entities and the members of the immediate families of
any of these persons, will also be exempt from sales charges.
Sales charges may be reduced in some cases. You may be entitled to a reduction
if: (1) you make a single large purchase, (2) you, your spouse and/or children
(under 21 years) make Fund purchases on the same day, (3) you make an
additional purchase to add to an existing account, (4) you sign a letter of
intent indicating your intention to purchase at least $100,000 of Shares over
the next 13 months, (5) you reinvest in a Fund within 30 days of redemption, or
(6) you combine purchases of two or more First Union Funds which include front-
end sales charges. In all of these cases, you must notify the distributor of
your intentions in writing in order to qualify for a sales charge reduction.
For more information, consult the Funds' Statements of Additional Information
or the distributor.
Class C Shares are sold at net asset value per Share without the imposition of
a sales charge at the time of purchase. Shares redeemed within six years of
their purchase will be subject to a CDSC according to the following schedule:
<TABLE>
<CAPTION>
YEAR OF REDEMPTION CONTINGENT DEFERRED
AFTER PURCHASE SALES CHARGE
------------------ -------------------
<S> <C>
First 4.0%
Second 3.0%
Third 2.5%
Fourth 2.0%
Fifth 1.5%
Sixth 0.5%
Seventh None
</TABLE>
No CDSC will be imposed on: (1) the portion of redemption proceeds
attributable to increases in the value of the account due to increases in the
net asset value per Share, (2) Shares acquired through reinvestment of
dividends and capital gains, (3) Shares held for more than six years after the
end of the calendar month of acquisition, (4) accounts following the death or
disability of a shareholder, or (5) minimum required distributions to a
shareholder over the age of 70 1/2 from an IRA or other retirement plan.
CONVERSION FEATURE
Class C Shares include all Shares purchased pursuant to the deferred sales
charge alternative which have been outstanding for less than the period ending
seven years after the end of the month in which the shareholder's order to
purchase Class C Shares was accepted. At the end of this seven year period,
Class C Shares may automatically convert to Class B Shares, in which case the
Shares will no longer be subject to the higher Rule 12b-1 distribution fee
which is assessed on Class C Shares. Such conversion will be on the basis of
the relative net asset values of the two classes, without the imposition of
any sales load, fee, or other charge. The purpose of the conversion feature is
to relieve the holders of the Class C Shares that have been outstanding for a
period of time sufficient for the distributor to have been compensated for
distribution expenses related to the Class C Shares from most of the burden of
such distribution-related expenses.
For purposes of conversion to Class B Shares, Class C Shares purchased through
the reinvestment of dividends and distributions paid on Class C Shares in a
shareholder's Fund account will be considered to be held in a separate sub-
account. Each time any Class C Shares in the shareholder's Fund account (other
than those in the sub-account) convert to Class B Shares, an equal pro rata
portion of the Class C Shares in the sub-account will also convert to Class B
Shares.
The availability of the conversion feature is subject to the granting of an
exemptive order (the "Order") by the Securities and Exchange Commission (the
"SEC") or the adoption of a rule permitting such conversion. In the event that
the Order or rule ultimately issued by the SEC requires any conditions
additional to those described in this prospectus, shareholders will be
notified.
BY TELEPHONE OR IN PERSON
You may purchase Class B Shares and Class C Shares by telephone from the
Mutual Funds Group of FUBS at 1-800-326-3241 or you may place the order in
person at any First Union branch location. Shares are sold on days on which
the New York Stock Exchange and the Federal Reserve Wire System are open for
business.
METHOD OF PAYMENT
Payment may be made by check or federal funds or by debiting your account at
First Union. All purchase orders received prior to 4:00 p.m. (Eastern time) on
a regular business day are processed at that day's offering price. Payment is
required within five business days.
SHAREHOLDER ACCOUNTS
As transfer agent for the Funds, State Street Bank and Trust Company of
Boston, Massachusetts ("State Street Bank") maintains a Share account for each
shareholder of record. Share certificates are not issued, except with respect
to investors who invest $1,000,000 or more in Class B Shares of the Florida
Municipal Bond Fund. In such case, share certificates may be issued upon
request by contacting the Fund.
MINIMUM BALANCE
Due to the high cost of maintaining smaller holdings, each Fund reserves the
right to redeem a shareholder's Shares if, as a result of redemptions, their
aggregate value drops below $1,000. Reductions in value that result solely
from market activity will not trigger an involuntary redemption. The Funds
will notify shareholders in writing 30 days before taking such action to allow
them to increase their holdings to at least the minimum level.
DEALER CONCESSION
For sales of Shares of the Funds, a dealer will normally receive up to 85% of
the applicable sales charge. Any portion of the sales charge which is not paid
to a dealer will be retained by the distributor. However, the distributor, in
its sole discretion, may uniformly offer to pay to all dealers selling Shares
of the Funds, all or a portion of the sales charge it normally retains. If
accepted by the dealer, such additional payments will be predicated upon the
amount of Fund Shares sold. The sales charge for Shares sold other than
through registered broker/dealers will be retained by FSC. FSC may pay fees to
banks out of the sales charge in exchange for sales and/or administrative
services performed on behalf of the bank's customers in connection with the
initiation of customer accounts and purchases of Shares.
HOW TO CONVERT
- ------------------------ YOUR INVESTMENT ------------------------
- ------------------------ FROM ONE FIRST ------------------------
UNION FUND TO
ANOTHER FIRST UNION FUND
As a shareholder, you have the privilege of exchanging your Shares for shares
of another First Union Fund.
As long as the First Union Fund in which you are invested will not be
adversely affected, you may switch among the First Union Funds within the
Trust. Before the exchange, you must call FUBS at 1-800-326-3241 to receive a
prospectus for the First Union Fund into which you want to exchange. Read the
prospectus carefully. Each exchange represents the sale of shares of one First
Union Fund and the purchase of shares in another, which may produce a gain or
loss for tax purposes.
You may exchange Class B Shares of one First Union Fund for Class B Shares of
any other First Union Fund, or Class C Shares of one First Union Fund for
Class C Shares of any other First Union Fund by calling toll free 1-800-326-
3241 or by writing to FUBS. Telephone exchange instructions may be recorded.
Shares purchased by check are eligible for exchange after the check clears,
which could take up to seven days after receipt of the check. Exchanges are
subject to the $1,000 minimum initial purchase requirement for each First
Union Fund.
An exchange order must comply with the requirements for a redemption and
purchase order and must specify the dollar value or number of shares to be
exchanged. Once the order is received, the Shares already owned will be redeemed
at current net asset value and, upon receipt of the proceeds by the First Union
Fund, shares of the other First Union Fund will be purchased at their offering
price determined after the proceeds from such redemption become available, which
may be up to seven days after such redemption. Orders for exchanges received by
a First Union Fund prior to 4:00 p.m. (Eastern time) on any day the First Union
Funds are open for business will be executed as of the close of business that
day. Orders for exchanges received after 4:00 p.m. (Eastern time) on any
business day will be executed at the close of the next business day.
When exchanging into and out of load and no-load shares of First Union Funds,
shareholders who have already paid a sales charge once at the time of purchase,
including shares obtained through the reinvestment of dividends, will not have
to pay an additional sales charge on an exchange.
The exchange of Class C Shares will not be subject to a CDSC. However, if the
shareholder redeems Class C Shares within six years of the original purchase, a
CDSC will be imposed. For purposes of computing the CDSC, the length of time
the shareholder has owned Class C Shares will be measured from the date of
original purchase and will not be affected by the exchange.
If reasonable procedures are not followed by a Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
EXCHANGE RESTRICTIONS
Although the Trust has no intention of terminating or modifying the exchange
privilege, it reserves the right to do so at any time. Excessive trading can
impact the interests of shareholders. Therefore, the Trust reserves the right
to terminate the exchange privilege of any shareholder who makes more than five
exchanges of shares of the First Union Funds in a year or three exchanges in a
calendar quarter.
The exchange privilege is only available in states where shares of the First
Union Fund being acquired may legally be sold. Before the exchange, a
shareholder must receive a prospectus of the First Union Fund for which the
exchange is being made.
- ------------------------ HOW TO ------------------------
- ------------------------ REDEEM SHARES ------------------------
Shares are redeemed at their net asset value next determined after a proper
redemption request has been received, less, in the case of Class C Shares, any
applicable CDSC.
You may redeem Shares in three ways: (1) by telephoning FUBS at 1-800-326-3241,
(2) by written request to FUBS or State Street Bank, or (3) in person at First
Union. Telephone redemption instructions may be recorded.
The Funds redeem Shares at their net asset value next determined after a Fund
receives the redemption request. Redemptions will be made on days on which a
Fund computes the net asset value of Shares. Redemption requests cannot be
executed on days on which the New York Stock Exchange is closed or on federal
holidays when wire transfers are restricted. Proceeds will be wired to the
shareholder's account at First Union or a check will be sent to the address of
record, normally within five (but in no case longer than seven) days after a
proper request for redemption has been received.
If reasonable procedures are not followed by a Fund, it may be liable for
losses due to unauthorized or fraudulent telephone instructions.
- ------------------------ ADDITIONAL ------------------------
- ------------------------ SHAREHOLDER ------------------------
SERVICES
TELEPHONE SERVICES
You may authorize electronic transfers of money to purchase Shares in any
amount or to redeem any or all Shares in an account. The service may be used
like an "electronic check" to move money between a bank account and an account
in the Fund with a single telephone call.
SYSTEMATIC INVESTMENT PLAN
You may arrange for systematic monthly or quarterly investments in your account
in amounts of $25 or more by directly debiting your bank account.
TAX SHELTERED PLANS
You may open a pension and profit sharing account in any First Union Fund
(except those First Union Funds having an objective of providing tax free
income) including Individual Retirement Accounts (IRAs), Rollover IRAs, Keogh
Plans, Corporate Profit-Sharing, Pension and Salary-Reduction Plans. For
details, including fees and application forms, call First Union toll free at 1-
800-669-2136 or write to First Union National Bank of North Carolina,
Retirement Services, 301 South College Street, Charlotte, NC 28288-1169.
SYSTEMATIC WITHDRAWAL PLAN
If you are a shareholder with an account valued at $10,000 or more, you may
have amounts of $100 or more sent from your account to you on a regular monthly
or quarterly basis.
- ------------------------ MANAGEMENT ------------------------
- ------------------------ OF FIRST ------------------------
UNION FUNDS
Responsibility for the overall management of First Union Funds rests with its
Trustees and officers. Other service providers include the Funds' Distributor,
Investment Adviser, Custodian, Transfer Agent, Legal Counsel, and Independent
Auditors.
INVESTMENT ADVISER
Professional investment supervision for the Funds is provided by the investment
adviser, the Capital Management Group of First Union.
First Union is a subsidiary of First Union Corporation, a bank holding company
headquartered in Charlotte, North Carolina, with $70.8 billion in total
consolidated assets as of December 31, 1993. Through offices in 36 states and
one foreign country, First Union Corporation and its subsidiaries provide a
broad range of financial services to individuals and businesses.
First Union's Capital Management Group employs an experienced staff of
professional investment analysts, portfolio managers, and traders, and uses
several proprietary computer-based systems in conjunction with fundamental
analysis to identify investment opportunities. The Capital Management Group has
been managing trust assets for over 50 years and currently oversees assets of
more than $43.0 billion. In addition, the Capital Management Group has advised
the Trust since its inception in 1984.
Robert S. Drye is a Vice President of First Union National Bank of North
Carolina, N.A., and has been with First Union since 1968. Since 1989, Mr. Drye
has served as a portfolio manager for several of the First Union Funds and for
certain common trust funds. Prior to 1989, Mr. Drye worked as a marketing
specialist with FUBS. Mr. Drye has managed the South Carolina Municipal Bond
Fund since its inception in January 1994. In addition, Mr. Drye has been the
portfolio manager for the Florida Municipal Bond Fund since its inception in
July 1993.
Richard K. Marrone is a Vice President of First Union National Bank of North
Carolina, N.A. Mr. Marrone joined First Union in May 1993 with eleven years of
experience managing fixed income assets at Woodbridge Capital Management, a
subsidiary of Comerica Bank, N.A. Mr. Marrone is responsible for the portfolio
management of several First Union Funds and certain common trust funds. Mr.
Marrone has served as portfolio manager of the North Carolina Municipal Bond
Fund since May 1993, and portfolio manager of the Georgia Municipal Bond Fund
since its inception in July 1993.
Charles E. Jeanne joined First Union National Bank of North Carolina, N.A. in
July 1993. Prior to joining First Union, Mr. Jeanne served as a
trader/portfolio manager for First American Bank where he was responsible for
individual accounts and common trust funds. Mr. Jeanne has been the portfolio
manager for the Virginia Municipal Bond Fund since its inception in July 1993.
From time to time, to the extent consistent with the objectives, policies and
restrictions of the Funds, the Funds may invest in securities of issuers with
which the Adviser has a lending relationship.
DISTRIBUTION OF INVESTMENT SHARES
FSC, a subsidiary of Federated Investors, is the principal distributor for the
Funds. It is a Pennsylvania corporation organized on November 14, 1969, and is
the principal distributor for a number of investment companies.
Each class of Investment Shares of a Fund has adopted a separate plan for
distribution of Shares permitted by Rule 12b-1 under the Investment Company Act
of 1940 (the "Plans"), whereby each Fund has authorized a daily expense ("Rule
12b-1 fee") at an annual rate of 0.75% of the average daily net asset value of
the Fund to finance the sale of Shares. It is currently intended that annual
Rule 12b-1 fees will be limited for the foreseeable future to payments to the
distributor equal to 0.25% for Class B Shares and 0.75% for Class C Shares of a
Fund's average daily net asset value.
The distributor may pay all or a portion of the Rule 12b-1 fee to compensate
selected brokers and financial institutions for selling Shares or for
administrative services rendered in connection with the Shares.
The Funds make no payments in connection with the sale of Shares other than the
Rule 12b-1 fees paid to its distributor. The distributor, however, may pay a
sales commission to brokers (including FUBS) in connection with the sale of
Class C Shares. Except as set forth in the next paragraph, the Funds do not pay
for unreimbursed expenses of the distributor. Since the Funds' Plans are
"compensation" type plans, however, future Rule 12b-1 fees may permit recovery
of such amounts or may result in a profit to the distributor.
The distributor may sell, assign, or pledge its right to receive Rule 12b-1
fees and CDSCs to finance payments made to brokers (including FUBS) in
connection with the sale of Class C Shares. First Union Corporation currently
serves as principal lender in this financing program. Actual distribution
expenses for Class C Shares at any given time may exceed the Rule 12b-1 fees
and payments received pursuant to CDSCs. These unrecovered amounts, plus
interest thereon, will be carried forward and paid from future Rule 12b-1 fees
and payments received through CDSCs. If a Plan were terminated or not
continued, the Funds would not be contractually obligated to pay for any
expenses not previously reimbursed by the Funds or recovered through CDSCs.
FSC, from time to time, may pay brokers additional sums of cash or promotional
incentives based upon the amount of Shares sold. Such payments, if made, will
be in addition to amounts paid under the Plans and will not be an expense of
the Funds.
FUND ADMINISTRATION
Federated Administrative Services ("FAS"), a subsidiary of Federated Investors,
provides the Funds with administrative personnel and services necessary to
operate the Funds, such as legal and accounting services, for a specified fee
which is detailed below.
State Street Bank serves as custodian and transfer agent, and provides dividend
disbursement and other shareholder services for the Funds.
Legal counsel to those Trustees who are not "interested persons" of the Trust
as defined in the Investment Company Act of 1940, is provided by Sullivan &
Worcester, Washington, D.C., and legal counsel to the Trust is provided by
Houston, Houston & Donnelly, Pittsburgh, Pennsylvania.
The independent auditors for the Trust are KPMG Peat Marwick, Pittsburgh,
Pennsylvania.
- ------------------------ FEES AND EXPENSES ------------------------
- ------------------------ ------------------------
Each Fund pays annual advisory and administrative fees and certain expenses.
ADVISORY AND ADMINISTRATIVE FEES
For managing their investment and business affairs, the Funds pay an annual fee
to First Union. The Adviser receives an annual investment advisory fee equal to
.50 of 1% of each of the Single State Municipal Bond Fund's average daily net
assets. The Adviser may voluntarily choose to waive a portion of its fee or
reimburse the Funds for certain operating expenses.
The Trust also pays a fee for administrative services. FAS provides these at an
annual rate as specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE TRUST
------------------- -----------------------------------
<S> <C>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
Unless waived, the administrative fee received during any fiscal year shall
aggregate at least $50,000 per First Union Fund.
EXPENSES OF THE FUNDS AND INVESTMENT SHARES
Holders of Shares pay their allocable portion of Trust and respective Fund
expenses. The Trust expenses for which holders of Shares pay their allocable
portion include, but are not limited to: the cost of organizing the Trust and
continuing its existence; the cost of registering the Trust; Trustees' fees;
auditors' fees; the cost of meetings of Trustees; legal fees of the Trust;
association membership dues and such non-recurring and extraordinary items as
may arise.
Fund expenses for which holders of Shares pay their allocable portion based on
average daily net assets include, but are not limited to: registering a Fund
and Shares of that Fund; investment advisory services; taxes and commissions;
custodian fees; insurance premiums; auditors' fees; and such non-recurring and
extraordinary items as may arise.
The Funds' expenses under the Rule 12b-1 Plans are incurred solely by the Class
B Shares and Class C Shares. The Trustees reserve the right to allocate certain
expenses to holders of Shares as they deem appropriate ("Class Expenses"). In
any case, Class Expenses would be limited to: Rule 12b-1 fees; transfer agent
fees; printing and postage expenses; registration fees; and administrative,
legal and Trustees' fees. Presently, all Fund expenses, other than Rule 12b-1
fees, are allocated based upon the average daily net assets of each class of a
Fund.
- ------------------------ SHAREHOLDER ------------------------
- ------------------------ RIGHTS AND ------------------------
PRIVILEGES
VOTING RIGHTS
Each Share of a Fund is entitled to one vote in Trustee elections and other
voting matters submitted to shareholders. All shares of all classes of each
First Union Fund in the Trust have equal voting rights, except that in matters
affecting only a particular First Union Fund or class, only shares of that
First Union Fund or class are entitled to vote. As of February 3, 1994, FUBS,
for the exclusive benefit of Robert Allen Jones and Larry Allen Jones of
Florence, South Carolina, and for the exclusive benefit of Doris G. Foster and
John H. Foster of Greenville, South Carolina, and acting in various capacities
for numerous accounts, was the owner of record of 2,402 Shares (60.49%) and
1,493 Shares (37.59%), respectively, of the South Carolina Municipal Bond
Fund--Class B Investment Shares, and therefore, may, for certain purposes, be
deemed to control the South Carolina Municipal Bond Fund and be able to affect
the outcome of certain matters presented for a vote of shareholders.
As a Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the Trust or a Fund's operation and for the election of Trustees
under certain circumstances.
Trustees may be removed by a two-thirds vote of the number of Trustees prior to
such removal or by a two-thirds vote of the shareholders at a special meeting.
A special meeting of shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares of all series entitled to vote.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of the Trust. To protect
shareholders, the Trust has filed legal documents with Massachusetts that
expressly disclaim the liability of shareholders for such acts or obligations
of the Trust. These documents require notice of this disclaimer to be given in
each agreement, obligation, or instrument the Trust or its Trustees enter into
or sign.
In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust is required, by the Declaration of Trust, to use the
property of the Trust to protect or compensate the shareholder. On request, the
Trust will defend any claim made and pay any judgment against a shareholder for
any act or obligation of the Trust. Therefore, financial loss resulting from
liability as a shareholder will occur only if the Trust cannot meet its
obligations to indemnify shareholders and pay judgments against them from its
assets.
EFFECT OF BANKING LAWS
The Glass-Steagall Act and other banking laws and regulations presently
prohibit banks or non-bank affiliates of member banks of the Federal Reserve
System from sponsoring, organizing, controlling, or distributing the shares of
a registered, open-end investment company continuously engaged in the issuance
of its shares. Further, they prohibit banks from issuing, underwriting, or
distributing securities in general. Such laws and regulations do not prohibit
such a holding company or affiliate from acting as investment adviser, transfer
agent, or custodian to such an investment company or from purchasing shares of
such a company as agent for and upon the order of their customer. The Adviser,
First Union, is subject to and in compliance with such banking laws and
regulations.
Sullivan & Cromwell has advised First Union that First Union may perform the
services for the Funds set forth in the investment advisory agreement, this
prospectus, and the Statements of Additional Information without violation of
the Glass-Steagall Act or other applicable federal banking laws or regulations.
Such counsel has pointed out, however, that changes in federal statutes and
regulations relating to the permissible activities of banks, as well as further
judicial or administrative decisions or interpretations of such statutes and
regulations, could prevent First Union from continuing to perform such services
for the Funds or from continuing to purchase Shares for the accounts of its
customers. If First Union were prohibited from acting as investment adviser to
the Funds, it is expected that the Trustees would recommend to the Funds'
shareholders that they approve a new investment adviser selected by the
Trustees. It is not expected that the Funds' shareholders would suffer any
adverse financial consequences (if another adviser with equivalent abilities to
First Union is found) as a result of any of these occurrences.
- ------------------------ DISTRIBUTIONS ------------------------
- ------------------------ AND TAXES ------------------------
Each Fund pays out as dividends substantially all of its net investment income
(dividends and interest on its investments) and net realized short-term gains.
DIVIDENDS
Dividends are declared daily and paid monthly. Dividends are declared just
prior to determining net asset value. Any distributions will be automatically
reinvested in additional Shares on payment dates at the ex-dividend date net
asset value without a sales charge unless a shareholder otherwise instructs the
Funds or FUBS in writing.
CAPITAL GAINS
Any net long-term capital gains realized by the Funds will be distributed at
least once every 12 months.
- ------------------------ TAX INFORMATION ------------------------
- ------------------------ ------------------------
Income dividends and capital gains distributions are taxable as described
below.
FEDERAL INCOME TAX
The Funds pay no federal income tax if they meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and will
receive the special tax treatment afforded to such companies.
Each First Union Fund is treated as a single, separate entity for federal
income tax purposes so that income (including capital gains) and losses
realized by one First Union Fund will not be combined for tax purposes with
those realized by other First Union Funds.
Shareholders of the Funds are not required to pay the federal regular income
tax on any dividends received from a Fund that represent net interest on tax-
exempt municipal bonds. However, under the Tax Reform Act of 1986, dividends
representing net interest earned on some municipal bonds may be included in
calculating the federal individual alternative minimum tax or the federal
alternative minimum tax for corporations.
The alternative minimum tax, up to 28% of alternative minimum taxable income
for individuals and 20% for corporations, applies when it exceeds the regular
tax for the taxable year. Alternative minimum taxable income is equal to the
adjusted income of the taxpayer increased by certain "tax preference" items not
included in regular taxable income and reduced by only a portion of the
deductions allowed in the calculation of the regular tax.
The Tax Reform Act of 1986 treats interest on certain "private activity" bonds
issued after August 7, 1986, as a tax preference item. Unlike traditional
governmental purpose municipal bonds, which finance roads, schools, libraries,
prisons, and other public facilities, private activity bonds provide benefits
to private parties. The Funds may purchase all types of municipal bonds,
including "private activity" bonds. Thus, should a Fund purchase any such
bonds, a portion of the Fund's dividends may be treated as a tax preference
item.
In addition, in the case of a corporate shareholder, dividends of a Fund which
represent interest on municipal bonds may be subject to the 20% corporate
alternative minimum tax because the dividends are included in a corporation's
"adjusted current earnings." The corporate alternative minimum tax treats 75%
of the excess of a taxpayer's pre-tax "adjusted current earnings" over the
taxpayer's alternative minimum taxable income as a tax preference item.
"Adjusted current earnings" is based upon the concept of a corporation's
"earnings and profits." Since "earnings and profits" generally includes the
full amount of any Fund dividend, and alternative minimum taxable income does
not include the portion of the Fund's dividend attributable to municipal bonds
which are not private activity bonds, the difference will be included in the
calculation of the corporation's alternative minimum tax.
Shareholders are urged to consult their own tax advisers to determine whether
they are subject to alternative minimum tax or the corporate alternative
minimum tax and, if so, the tax treatment of dividends paid by the Funds.
Dividends of a Fund representing net interest income earned on some temporary
investments, income earned on options transactions, and any realized net short-
term gains are taxed as ordinary income. Distributions representing net long-
term capital gains realized by the Funds, if any, will be taxable as long-term
capital gains regardless of the length of time shareholders have held their
Shares.
These tax consequences apply whether dividends are received in cash or as
additional Shares. Information on the tax status of dividends and distributions
is provided annually.
Set forth below are brief descriptions of the personal income tax status of an
investment in each of the Funds under, respectively, Florida, Georgia, North
Carolina, South Carolina, and Virginia tax laws currently in effect. Income
from a Fund is not necessarily free from state income taxes in states other
than its designated state. State laws differ on this issue, and shareholders
are urged to consult their own tax advisers regarding the status of their
accounts under state and local laws. A statement setting forth the state income
tax status of all distributions made during each calendar year will be sent to
shareholders annually.
ADDITIONAL TAX INFORMATION FOR SHAREHOLDERS OF THE FLORIDA MUNICIPAL BOND FUND
Florida does not currently impose an income tax on individuals. Thus,
individual shareholders of the Florida Municipal Bond Fund will not be subject
to any Florida state income tax on distributions received from the Florida
Municipal Bond Fund. However, certain distributions will be taxable to
corporate shareholders which are subject to Florida corporate income tax.
Florida currently imposes an intangibles tax at the annual rate of 0.20% on
certain securities and other intangible assets owned by Florida residents.
Certain types of tax exempt securities of Florida issuers, U.S. government
securities and tax exempt securities issued by certain U.S. territories and
possessions are exempt from this intangibles tax. Shares of the Florida
Municipal Bond Fund will also be exempt from the Florida intangibles tax if the
portfolio consists exclusively of securities exempt from the intangibles tax on
the last business day of the calendar year. If the portfolio consists of any
assets which are not so exempt on the last business day of the calendar year,
however, only the portion of the Shares of the Florida Municipal Bond Fund
which relate to securities issued by the United States and its possessions and
territories will be exempt from the Florida intangibles tax, and the remaining
portion of such Shares will be fully subject to the intangibles tax, even if
they partly relate to Florida tax exempt securities.
ADDITIONAL TAX INFORMATION FOR SHAREHOLDERS OF THE GEORGIA MUNICIPAL BOND FUND
Under existing Georgia law, shareholders of the Georgia Municipal Bond Fund
will not be subject to individual or corporate Georgia income taxes on
distributions from the Georgia Municipal Bond Fund to the extent that such
distributions represent exempt-interest dividends for federal income tax
purposes that are attributable to (1) interest-bearing obligations issued by or
on behalf of the State of Georgia or its political subdivisions, or (2)
interest on obligations of the United States or of any other issuer whose
obligations are exempt from state income taxes under federal law.
Distributions, if any, derived from capital gains or other sources generally
will be taxable for Georgia income tax purposes to shareholders of the Georgia
Municipal Bond Fund who are subject to the Georgia income tax. For purposes of
the Georgia intangibles tax, Shares of the Georgia Municipal Bond Fund likely
are taxable (at the rate of 10 cents per $1,000 in value of the Shares held on
January 1 of each year) to shareholders who are otherwise subject to such tax.
ADDITIONAL TAX INFORMATION FOR SHAREHOLDERS OF THE NORTH CAROLINA MUNICIPAL
BOND FUND
Under existing North Carolina law, shareholders of the North Carolina Municipal
Bond Fund will not be subject to individual or corporate North Carolina income
taxes on distributions from the North Carolina Municipal Bond Fund to the
extent that such distributions represent exempt-interest dividends for federal
income tax purposes that are attributable to (1) interest on obligations issued
by North Carolina and political subdivisions thereof or (2) interest on
obligations of the United States or its territories or possessions.
Distributions, if any, derived from capital gains or other sources generally
will be taxable for North Carolina income tax purposes to shareholders of the
North Carolina Municipal Bond Fund who are subject to the North Carolina income
tax.
North Carolina currently imposes an intangibles tax (at the rate of 25 cents
per $100 in value of the shares held on December 31 of each year) on all shares
of stock, including mutual funds. However, shareholders of North Carolina
Municipal Bond Fund may exclude from share value that proportion of the total
share value which is attributable to direct obligations of the State of North
Carolina, its subdivisions, and the United States held in the North Carolina
Municipal Bond Fund as of December 31 of the taxable year. The North Carolina
Municipal Bond Fund will annually furnish to its shareholders a statement
supporting the proper allocation.
ADDITIONAL TAX INFORMATION FOR SHAREHOLDERS OF THE SOUTH CAROLINA MUNICIPAL
BOND FUND
Under existing South Carolina law, shareholders of the South Carolina Municipal
Bond Fund will not be subject to individual or corporate South Carolina income
taxes on South Carolina Municipal Bond Fund dividends to the extent that such
dividends represent exempt-interest dividends for federal income tax purposes
that are attributable to (1) interest on obligations of the State of South
Carolina, or any of its political subdivisions; (2) interest on obligations of
the United States; or (3) interest on obligations of any agency or
instrumentality of the United States that is prohibited by federal law from
being taxed by a state or any political subdivision of a state. To the extent
that distributions from the Fund are attributable to capital gains or other
sources, such distributions will not be exempt from South Carolina income
taxation.
ADDITIONAL TAX INFORMATION FOR SHAREHOLDERS OF THE VIRGINIA MUNICIPAL BOND FUND
Under existing Virginia law, shareholders of the Virginia Municipal Bond Fund
will not be subject to individual or corporate Virginia income taxes on
distributions received from the Virginia Municipal Bond Fund to the extent that
such distributions are attributable to interest earned on (1) obligations
issued by or on behalf of the Commonwealth of Virginia or any political
subdivision thereof, or (2) obligations issued by a territory or possession of
the United States or any subdivision thereof which federal law exempts from
state income taxes. Distributions, if any, derived from capital gains or other
sources generally will be taxable for Virginia income tax purposes to
shareholders of the Virginia Municipal Bond Fund who are subject to Virginia
income tax.
- ------------------------ OTHER CLASSES ------------------------
- ------------------------ OF SHARES ------------------------
First Union Single State Municipal Bond Funds offer three classes of shares:
Class B Shares and Class C Shares for individuals and other customers of First
Union and Trust Shares for institutional investors.
Trust Shares are sold to accounts for which First Union or other financial
institutions act in a fiduciary or agency capacity at net asset value without a
sales charge at a minimum investment of $1,000. Trust Shares are not sold
pursuant to a Rule 12b-1 plan.
The stated advisory fee is the same for all classes of the Funds. Financial
institutions and brokers providing sales and/or administrative services may
receive different compensation with respect to one class of shares than with
respect to another class of shares of the same Fund.
The amount of dividends payable to Class B Shares and Class C Shares will be
less than those payable to Trust Shares by the difference between distribution
expenses borne by the shares of each respective class.
- ------------------------ ADDRESSES ------------------------
- ------------------------ ------------------------
- --------------------------------------------------------------------------------
First Union Funds Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
- --------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania
15222-3779
- --------------------------------------------------------------------------------
Investment Adviser
First Union National Bank of North Carolina
One First Union Center
301 S. College Street
Charlotte, North Carolina
28288
- --------------------------------------------------------------------------------
Custodian, Transfer Agent, and Dividend Disbursing Agent
State Street Bank and Trust Company P.O. Box 8609
Boston, Massachusetts
02266-8609
- --------------------------------------------------------------------------------
Legal Counsel to the Independent Trustees
Sullivan & Worcester 1025 Connecticut Ave., N.W.
Washington, D.C. 20036
- --------------------------------------------------------------------------------
Legal Counsel to the Trust
Houston, Houston & Donnelly 2510 Centre City Tower
Pittsburgh, Pennsylvania
15222
- --------------------------------------------------------------------------------
Independent Auditors
KPMG Peat Marwick One Mellon Bank Center
Pittsburgh, Pennsylvania
15219
- --------------------------------------------------------------------------------
3052402A (6/93)
Federated Securities Corp., Distributor
3052402 A-$ (2/94)
533107
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO
(A Portfolio of First Union Funds)
Trust Shares
Class B Investment Shares
Class C Investment Shares
- --------------------------------------------------------------------------------
SUPPLEMENT TO THE COMBINED STATEMENT OF ADDITIONAL INFORMATION DATED
FEBRUARY 28, 1994
1. Please insert the following as the last sentence in the section
entitled 'Portfolio Turnover' on page 5:
"For the period from January 4, 1994 (commencement of operations) to
May 31, 1994, the portfolio turnover rate for the Fund was 28%."
2. Please delete the second, third, and fourth paragraphs in the
section entitled 'Fund Ownership' on page 9 and replace with the
following:
"As of June 4, 1994, the following shareholder of record owned 5% or
more of the outstanding Trust Shares of the Fund: First Union
Capital Management of Charlotte, North Carolina, owned approximately
6,050 Shares (99.65%).
As of June 4, 1994, the following shareholders of record owned 5% or
more of the outstanding Class B Investment Shares of the Fund: First
Union Brokerage Services & Co. ("FUBS"), for the exclusive benefit
of Robert Allen Jones and Larry Allen Jones of Florence, South
Carolina, owned approximately 2,546 Shares (48.86%); FUBS for the
exclusive benefit of Doris G. Foster and John H. Foster of
Greenville, South Carolina, owned approximately 1,493 Shares
(28.65%); and FUBS for the exclusive benefit of Sara C. Fort of
Clemson, South Carolina, owned approximately 1,085 Shares (20.82%).
As of June 4, 1994, the following shareholders of record owned 5% or
more of the outstanding Class C Investment Shares of the Fund: FUBS,
for the exclusive benefit of Harry B. Slice of Chapin, South
Carolina, owned approximately 10,586 Shares (6.82%); and FUBS, for
the exclusive benefit of Gladys H. Wiley of York, South Carolina,
owned approximately 10,650 Shares (6.87%)."
3. Please insert the following as the last paragraph in the sub-section
entitled 'Advisory Fees' under the main section entitled "Investment
Advisory Services" on page 10:
"For the period from January 4, 1994 (commencement of operations) to
May 31, 1994, the Adviser earned advisory fees of $1,872, all of
which were voluntarily waived."
4. Please insert the following information as the second sentence in
the section entitled 'Administrative Services' on page 10:
"For the period from January 4, 1994 (commencement of operations) to
May 31, 1994, the Fund incurred $39,863 in administrative service
costs, all of which were waived."
5. Please insert the following information as the final paragraph in
the sub-section entitled 'Distribution Plans (Class B and Class C
Investment Shares)' on page 11:
"For the period from January 4, 1994 (commencement of operations) to
May 31, 1994, the Fund incurred $2,712 in distribution services fees
(Class B Investment and Class C Investment Shares only)."
6. Please insert the following information as the first paragraph in
the section entitled 'Total Return' on page 13:
"The Fund's cumulative total returns for Class B Investment Shares
and Class C Investment Shares from January 3, 1994 (start of
performance) to May 31, 1994, were (10.98%) and (11.07%),
respectively. The Fund's cumulative total return for Trust Shares
from February 28, 1994 (start of performance) to May 31, 1994, was
(5.14)%. 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 B Investment Shares and Class C
Investment Shares is representative of only five months of
investment activity since the Fund's effective date. The Fund's
total return for Trust Shares is representative of only three months
of Fund activity since the Fund's effective date."
7. Please insert the following information as the first paragraph in
the section entitled 'Yield' on page 14:
"The Fund's yields for Class B Investment Shares, Class C Investment
Shares, and Trust Shares were 5.27%, 4.95%, and 5.74%, respectively,
for the thirty-day period ended May 31, 1994."
8. Please insert the following information as the first paragraph in
the section entitled 'Tax Equivalent Yield' on page 14:
"The Fund's tax equivalent yields for Class B Investment Shares,
Class C Investment Shares, and Trust Shares for the thirty-day
period ended May 31, 1994, were 8.11%, 7.62%, and 8.83%,
respectively, assuming a 28% federal tax rate."
June 30, 1994
G00175-01 (6/94)
FIRST UNION SOUTH CAROLINA MUNICIPAL BOND PORTFOLIO
A PORTFOLIO OF FIRST UNION FUNDS
TRUST SHARES
CLASS B INVESTMENT SHARES
CLASS C INVESTMENT SHARES
COMBINED STATEMENT OF ADDITIONAL INFORMATION
This Combined Statement of Additional Information should be read with
the respective prospectus of Trust Shares, Class B Investment Shares,
or Class C Investment Shares for First Union South Carolina Municipal
Bond Portfolio, dated February 28, 1994. This Statement is not a
prospectus itself. To receive a copy of the Trust Shares' prospectus,
write First Union National Bank of North Carolina, Capital Management
Group, 1200 Two First Union Center, Charlotte, North Carolina
28288-1156 or call 1-800-326-2584. To receive a copy of the Class B
Investment Shares' or Class C Investment Shares' prospectus, write
First Union Brokerage Services, Inc., One First Union Center, 301 S.
College Street, Charlotte, North Carolina 28288-1173 or call
1-800-326-3241.
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
Statement dated February 28, 1994.
[LOGO] FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND 1
- ---------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 1
- ---------------------------------------------------------------
Acceptable Investments 1
When-Issued and Delayed Delivery
Transactions 2
Futures and Options Transactions 2
Repurchase Agreements 4
Reverse Repurchase Agreements 4
Lending of Portfolio Securities 5
Restricted Securities 5
Portfolio Turnover 5
Investment Limitations 5
South Carolina Investment Risks 7
TRUST MANAGEMENT 8
- ---------------------------------------------------------------
Officers and Trustees 8
Fund Ownership 9
Trustee Liability 9
INVESTMENT ADVISORY SERVICES 10
- ---------------------------------------------------------------
Adviser to the Fund 10
Advisory Fees 10
BROKERAGE TRANSACTIONS 10
- ---------------------------------------------------------------
ADMINISTRATIVE SERVICES 10
- ---------------------------------------------------------------
PURCHASING SHARES 11
- ---------------------------------------------------------------
Distribution Plans (Class B and Class C Investment Shares) 11
DETERMINING NET ASSET VALUE 12
- ---------------------------------------------------------------
Valuing Municipal Bonds 12
Use of Amortized Cost 12
Valuing Options 12
REDEEMING SHARES 13
- ---------------------------------------------------------------
Redemption in Kind 13
TAX STATUS 13
- ---------------------------------------------------------------
The Fund's Tax Status 13
Shareholders' Tax Status 13
TOTAL RETURN 13
- ---------------------------------------------------------------
YIELD 14
- ---------------------------------------------------------------
TAX EQUIVALENT YIELD 14
- ---------------------------------------------------------------
Tax Equivalency Table 14
PERFORMANCE COMPARISONS 15
- ---------------------------------------------------------------
APPENDIX 16
- ---------------------------------------------------------------
GENERAL INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
First Union South Carolina Municipal Bond Portfolio (the "Fund") is a portfolio
of First Union Funds (the "Trust"). The Trust was established as a Massachusetts
business trust under a Declaration of Trust dated August 30, 1984. On January 4,
1993, the name of the Trust was changed from "The Salem Funds" to "First Union
Funds."
Shares of the Fund are offered in three classes: Trust Shares, Class B
Investment Shares and Class C Investment Shares (individually and collectively
referred to as "Shares"). This Combined Statement of Additional Information
relates to the above-mentioned Shares of the Fund.
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide current income which is exempt
from federal regular income tax and South Carolina state income tax consistent
with the preservation of capital. The objective cannot be changed without
approval of shareholders.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in a non-diversified portfolio of South Carolina
municipal securities.
PARTICIPATION INTERESTS
Participation interests may take the form of participations, beneficial
interests in a trust, partnership interests, or any other form of
indirect ownership that allows the Fund to treat the income from the
investment as exempt from federal and state tax. The financial
institutions from which the Fund purchases participation interests
frequently provide or secure from another financial institution
irrevocable letters of credit or guarantees and give the Fund the right
to demand payment of the principal amounts of the participation interests
plus accrued interest on short notice (usually within seven days).
VARIABLE RATE MUNICIPAL SECURITIES
Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital
appreciation or depreciation is less for variable rate municipal
securities than for fixed income obligations.
Many municipal securities with variable interest rates purchased by the
Fund are subject to repayment of principal (usually within seven days) on
the Fund's demand. The terms of these variable rate demand instruments
require payment of principal obligations by the issuer of the
participation interests or a guarantor of either issuer. All variable
rate municipal securities will meet the quality standards for the Fund.
The Fund's adviser has been instructed by the Trust's Board of Trustees
(the "Trustees") to monitor the pricing, quality, and liquidity of the
variable rate municipal securities, including participation interests
held by the Fund, on the basis of published financial information and
reports of the rating agencies and other analytical services.
MUNICIPAL LEASES
The Fund may purchase municipal securities in the form of participation
interests which represent undivided proportional interests in lease
payments by a governmental or non-profit entity. The lease payments and
other rights under the lease provide for and secure the payments on the
certificates. Lease obligations may be limited by municipal charter or
the nature of the appropriation for the lease. In particular, lease
obligations may be subject to periodic appropriation. If the entity does
not appropriate funds for future lease payments, the entity cannot be
compelled to make such payments. Furthermore, a lease may provide that
the certificate trustee cannot accelerate lease obligations upon default.
The trustee would only be able to enforce lease payments as they become
due. In the event of a default or failure of appropriation, it is
unlikely that the trustee would be able to obtain an acceptable
substitute source of payment or that the substitute source of payment
would generate tax-exempt income.
When determining whether municipal leases purchased by the Fund will be
classified as a liquid or illiquid security, the Trustees have directed
the Fund's adviser to consider certain factors, such as: the frequency of
trades and quotes for the security; the volatility of quotations and
trade prices for the security, the number of dealers willing to purchase
or sell the security and the number of potential purchasers; dealer
undertakings to make a market in the security; the nature of the security
and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers, and the
mechanics of transfer); the rating of the security and the financial
condition and prospects of the issuer of the security; whether the lease
can be terminated by the lessee; the potential recovery, if any, from a
sale of the leased property upon termination of the lease; the lessee's
general
credit strength (e.g., its debt, administrative, economic and financial
characteristics and prospects); the likelihood that the lessee will
discontinue appropriating funding for the lease property because the
property is no longer deemed essential to its operations (e.g., the
potential for an "event of nonappropriation"); any credit enhancement or
legal recourse provided upon an event of nonappropriation or other
termination of the lease; and such other factors as may be relevant to
the Fund's ability to dispose of the security.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund engages in when-issued and delayed delivery transactions only for the
purpose of acquiring portfolio securities consistent with the Fund's investment
objective and policies, not for investment leverage.
These transactions are made to secure what is considered to be an advantageous
price and yield for the Fund. Settlement dates may be a month or more after
entering into these transactions, and the market values of the securities
purchased may vary from the purchase prices.
No fees or expenses, other than normal transaction costs, are incurred. However,
liquid assets of the Fund sufficient to make payment for the securities to be
purchased are segregated on the Fund's records at the trade date. These
securities are marked to market daily and maintained until the transaction is
settled.
The Fund may engage in these transactions to an extent that would cause the
segregation of an amount up to 20% of the total value of its assets.
FUTURES AND OPTIONS TRANSACTIONS
The Fund may attempt to hedge all or a portion of its portfolio by buying and
selling financial futures contracts and options on financial futures contracts.
Additionally, the Fund may buy and sell call and put options on portfolio
securities.
FINANCIAL FUTURES CONTRACTS
A futures contract is a firm commitment by two parties, the seller who
agrees to make delivery of the specific type of security called for in
the contract ("going short") and the buyer who agrees to take delivery of
the security ("going long") at a certain time in the future. Financial
futures contracts call for the delivery of particular debt securities
issued or guaranteed by the U.S. Treasury or by specified agencies or
instrumentalities of the U.S. government.
In the fixed income securities market, price moves inversely to interest
rates. A rise in rates means a drop in price. Conversely, a drop in rates
means a rise in price. In order to hedge its holdings of fixed income
securities against a rise in market interest rates, the Fund could enter
into contracts to deliver securities at a predetermined price (i.e., "go
short") to protect itself against the possibility that the prices of its
fixed income securities may decline during the Fund's anticipated holding
period. The Fund would "go long" (agree to purchase securities in the
future at a predetermined price) to hedge against a decline in market
interest rates.
PURCHASING PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may purchase listed put options on financial futures contracts
for U.S. government securities. Unlike entering directly into a futures
contract, which requires the purchaser to buy a financial instrument on a
set date at a specified price, the purchase of a put option on a futures
contract entitles (but does not obligate) its purchaser to decide on or
before a future date whether to assume a short position at the specified
price.
The Fund would purchase put options on futures to protect portfolio
securities against decreases in value resulting from an anticipated
increase in market interest rates. Generally, if the hedged portfolio
securities decrease in value during the term of an option, the related
futures contracts will also decrease in value and the option will
increase in value. In such an event, the Fund will normally close out its
option by selling an identical option. If the hedge is successful, the
proceeds received by the Fund upon the sale of the second option will be
large enough to offset both the premium paid by the Fund for the original
option plus the realized decrease in value of the hedged securities.
Alternatively, the Fund may exercise its put option. To do so, it would
simultaneously enter into a futures contract of the type underlying the
option (for a price less than the strike price of the option) and
exercise the option. The Fund would then deliver the futures contract in
return for payment of the strike price. If the Fund neither closes out
nor exercises an option, the option will expire on the date provided in
the option contract, and the premium paid for the contract will be lost.
WRITING CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
In addition to purchasing put options on futures, the Fund may write
listed call options on futures contracts for U.S. government securities
to hedge its portfolio against an increase in market interest rates. When
the Fund writes a call option on a futures contract, it is undertaking
the obligation of assuming a short futures position (selling a futures
contract) at the fixed strike price at any time during the life of the
option if the option is exercised. As market interest rates rise, causing
the prices of futures to go down, the Fund's obligation under a call
option on a future (to sell a futures contract) costs less to fulfill,
causing the value of the Fund's call option position to increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the call,
so that the Fund keeps the premium received for the option. This premium
can offset the drop in value of the Fund's fixed income portfolio which
is occurring as interest rates rise.
Prior to the expiration of a call written by the Fund, or exercise of it
by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will be
less than the premium received by the Fund for the initial option. The
net premium income of the Fund will then offset the decrease in value of
the hedged securities.
WRITING PUT OPTIONS ON FINANCIAL FUTURES CONTRACTS
The Fund may write listed put options on financial futures contracts for
U.S. government securities to hedge its portfolio against a decrease in
market interest rates. When the Fund writes a put option on a futures
contract, it receives a premium for undertaking the obligation to assume
a long futures position (buying a futures contract) at a fixed price at
any time during the life of the option. As market interest rates
decrease, the market price of the underlying futures contract normally
increases.
As the market value of the underlying futures contract increases, the
buyer of the put option has less reason to exercise the put because the
buyer can sell the same futures contract at a higher price in the market.
The premium received by the Fund can then be used to offset the higher
prices of portfolio securities to be purchased in the future due to the
decrease in market interest rates.
Prior to the expiration of the put option, or its exercise by the buyer,
the Fund may close out the option by buying an identical option. If the
hedge is successful, the cost of buying the second option will be less
than the premium received by the Fund for the initial option.
PURCHASING CALL OPTIONS ON FINANCIAL FUTURES CONTRACTS
An additional way in which the Fund may hedge against decreases in market
interest rates is to buy a listed call option on a financial futures
contract for U.S. government securities. When the Fund purchases a call
option on a futures contract, it is purchasing the right (not the
obligation) to assume a long futures position (buy a futures contract) at
a fixed price at any time during the life of the option. As market
interest rates fall, the value of the underlying futures contract will
normally increase, resulting in an increase in value of the Fund's option
position. When the market price of the underlying futures contract
increases above the strike price plus premium paid, the Fund could
exercise its option and buy the futures contract below market price.
Prior to the exercise or expiration of the call option the Fund could
sell an identical call option and close out its position. If the premium
received upon selling the offsetting call is greater than the premium
originally paid, the Fund has completed a successful hedge.
LIMITATION ON OPEN FUTURES POSITIONS
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds the
current market value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Fund will take
prompt action to close out a sufficient number of open contracts to bring
its open futures and options positions within this limitation.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather,
the Fund is required to deposit an amount of "initial margin" in cash or
U.S. Treasury bills with its custodian (or the broker, if legally
permitted). The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that futures
contract initial margin does not involve the borrowing of funds by the
Fund to finance the transactions. Initial margin is in the nature of a
performance bond or good faith deposit on the contract which is returned
to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. The Fund may not purchase
or sell futures contracts or related options if immediately thereafter
the sum of the amount of margin deposits on the Fund's existing futures
positions and premiums paid for related options would exceed 5% of the
market value of the Fund's total assets.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund
pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as
"marking to market." Variation margin does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund and the
broker of the amount one would owe the other if the futures contract
expired. In computing its daily net asset value, the Fund will
mark-to-market its open futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
PURCHASING AND WRITING PUT AND CALL OPTIONS ON PORTFOLIO SECURITIES
The Fund may purchase put and call options on portfolio securities to
protect against price movements in particular securities. A put option
gives the Fund, in return for a premium, the right to sell the underlying
security to the writer (seller) at a specified price during the term of
the option. A call option gives the Fund, in return for a premium, the
right to buy the underlying security from the seller.
The Fund may write covered put and call options to generate income. As
writer of a call option, the Fund has the obligation upon exercise of the
option during the option period to deliver the underlying security upon
payment of the exercise price. As a writer of a put option, the Fund has
the obligation to purchase a security from the purchaser of the option
upon the exercise of the option.
The Fund may only write call options either on securities held in its
portfolio or on securities which it has the right to obtain without
payment of further consideration (or has segregated cash in the amount of
any additional consideration). In the case of put options, the Fund will
segregate cash or U.S. Treasury obligations with a value equal to or
greater than the exercise price of the underlying securities.
The Fund may generally purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the writers or
buyers of the options since options on the portfolio securities held by
the Fund are not traded on an exchange. The Fund purchases and writes
options only with investment dealers and other financial institutions
(such as commercial banks or savings and loan associations) deemed
creditworthy by the Fund's adviser.
Over-the-counter options are two party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded options
are third party contracts with standardized strike prices and expiration
dates and are purchased from a clearing corporation. Exchange-traded
options have a continuous liquid market while over-the-counter options
may not.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and other
recognized financial institutions sell U.S. government securities or other
securities to the Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price within one year from the date of
acquisition. The Fund or its custodian will take possession of the securities
subject to repurchase agreements. To the extent that the original seller does
not repurchase the securities from the Fund, the Fund could receive less than
the repurchase price on any sale of such securities. In the event that such a
defaulting seller filed for bankruptcy or became insolvent, disposition of such
securities by the Fund might be delayed pending court action. The Fund believes
that under the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or disposition
of such securities. The Fund may only enter into repurchase agreements with
banks and other recognized financial institutions, such as broker/dealers, which
are found by the Fund's adviser to be creditworthy pursuant to guidelines
established by the Trustees.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements. These transactions are
similar to borrowing cash. In a reverse repurchase agreement, the Fund transfers
possession of a portfolio instrument to another person, such as a financial
institution, broker, or dealer, in return for a percentage of the instrument's
market value in cash, and agrees that on a stipulated date in the future the
Fund will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate.
The use of reverse repurchase agreements may enable the Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not ensure that
the Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for obligations to be purchased, are
segregated at the trade date. These securities are marked to market daily and
maintained until the transaction is settled.
LENDING OF PORTFOLIO SECURITIES
The collateral received when the Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. The Fund does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
RESTRICTED SECURITIES
The Fund may invest in restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to its investment
objective and policies but which are subject to restrictions on resale under
federal securities laws. The Fund will not invest more than 15% of the value of
its total assets in restricted securities; however, certain restricted
securities which the Trustees deem to be liquid will be excluded from this 10%
limitation.
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission ("SEC") Staff
position set forth in the adopting release for Rule 144A under the Securities
Act of 1933 (the "Rule"). The Rule is a non-exclusive, safe-harbor for certain
secondary market transactions involving securities subject to restrictions on
resale under federal securities laws. The Rule provides an exemption from
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the liquidity of
the secondary market for securities eligible for resale under Rule 144A. The
Fund believes that the Staff of the SEC has left the question of determining the
liquidity of all restricted securities (eligible for resale under Rule 144A) for
determination by the Trustees. The Trustees consider the following criteria in
determining the liquidity of certain restricted securities:
the frequency of trades and quotes for the security;
the number of dealers willing to purchase or sell the security and the number
of other potential buyers;
dealer undertakings to make a market in the security; and
the nature of the security and the nature of the marketplace trades.
PORTFOLIO TURNOVER
The Fund may trade or dispose of portfolio securities as considered necessary to
meet its investment objective. It is not anticipated that the portfolio trading
engaged in by the Fund will result in its annual rate of portfolio turnover
exceeding 100%.
INVESTMENT LIMITATIONS
SELLING SHORT AND BUYING ON MARGIN
The Fund will not sell any securities short or purchase any securities on
margin but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of securities. A deposit or payment by
the Fund of initial or variation margin in connection with financial
futures contracts or related options transactions is not considered the
purchase of a security on margin.
ISSUING SENIOR SECURITIES AND BORROWING MONEY
The Fund will not issue senior securities, except that the Fund may
borrow money directly or through reverse repurchase agreements as a
temporary measure for extraordinary or emergency purposes in an amount up
to one-third of the value of its total assets, including the amounts
borrowed, in order to meet redemption requests without immediately
selling portfolio instruments; and except to the extent that the
Fund will enter into futures contracts. Any such borrowings need not be
collateralized. The Fund will not purchase any securities while
borrowings in excess of 5% of its total assets are outstanding.
The Fund will not borrow money or engage in reverse repurchase agreements
for investment leverage purposes.
UNDERWRITING
The Fund will not underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objective, policies, and limitations.
PLEDGING ASSETS
The Fund will not mortgage, pledge, or hypothecate its assets except to
secure permitted borrowings. For purposes of this limitation, the
following are not deemed to be pledges: margin deposits for the purchase
and sale of financial futures contracts and related options and
segregation of collateral arrangements made in connection with options
activities or the purchase of securities on a when-issued basis.
INVESTING IN REAL ESTATE
The Fund will not buy or sell real estate, including limited partnership
interests, although it may invest in municipal bonds secured by real
estate or interests in real estate.
INVESTING IN COMMODITIES
The Fund will not purchase or sell commodities. However, the Fund may
purchase put and call options on portfolio securities and on financial
futures contracts. In addition, the Fund reserves the right to hedge the
portfolio by entering into financial futures contracts and to sell puts
and calls on financial futures contracts.
LENDING CASH OR SECURITIES
The Fund will not lend any of its assets except portfolio securities up
to one-third of the value of its total assets. The Fund may, however,
acquire publicly or non-publicly issued municipal bonds or temporary
investments or enter into repurchase agreements in accordance with its
investment objective, policies, and limitations or the Declaration of
Trust.
CONCENTRATION OF INVESTMENTS
The Fund will not purchase securities if, as a result of such purchase,
25% or more of the value of its total assets would be invested in any one
industry, or in industrial development bonds or other securities, the
interest upon which is paid from revenues of similar types of projects.
However, the Fund may invest as temporary investments more than 25% of
the value of its assets in cash or cash items, securities issued or
guaranteed by the U.S. government, its agencies, or instrumentalities, or
instruments secured by these money market instruments, such as repurchase
agreements.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these limitations becomes effective.
INVESTING IN ILLIQUID SECURITIES
The Fund will not invest more than 15% of its net assets in illiquid
obligations, including repurchase agreements providing for settlement in
more than seven days after notice, and certain restricted securities and
municipal leases not determined by the Trustees to be liquid.
INVESTING IN NEW ISSUERS
The Fund will not invest more than 5% of the value of its total assets in
industrial development bonds where the principal and interest are the
responsibility of companies (or guarantors, where applicable) with less
than three years of continuous operations, including the operation of any
predecessor.
INVESTING IN MINERALS
The Fund will not purchase interests in or sell, oil, gas, or other
mineral exploration or development programs, or leases, although it may
purchase the securities of issuers which invest in or sponsor such
programs.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund will purchase securities of investment companies only in
open-market transactions involving customary broker's commissions.
However, these limitations are not applicable if the securities are
acquired in a merger, consolidation, or acquisition of assets. It should
be noted that investment companies incur certain expenses such as
management fees, and therefore any investment by the Fund in shares of
another investment company would be subject to such duplicate expenses.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF
THE TRUST
The Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or its investment adviser, owning
individually more than 1/2 of 1% of the issuer's securities, together own
more than 5% of the issuer's securities.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
The Fund has no present intention to borrow money in excess of 5% of the value
of its net assets during the coming fiscal year. In addition, the Fund does not
expect to invest more than 5% of its net assets in the securities of other
investment companies during the coming year.
For purposes of its policies and limitations, the Fund considers certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings and loan having capital, surplus, and undivided profits in excess of
$100,000,000 at the time of investment to be "cash items".
SOUTH CAROLINA INVESTMENT RISKS
The State of South Carolina has an economy dominated from the early 1920's to
the present by the textile industry, with over one of every three manufacturing
workers directly or indirectly related to the textile industry. However, since
1950 the economic bases of the State have become more diversified, as the trade
and service sectors and durable goods manufacturing industries have developed.
Currently, Moody's Investors Service, Inc. ("Moody's") rates South Carolina
general obligation bonds "Aaa" and Standard & Poor's Corporation ("S&P") rates
such bonds "AA+." There can be no assurance that the economic conditions on
which those ratings are based will continue or that particular bond issues may
not be adversely affected by changes in economic or political conditions.
The South Carolina State Constitution mandates a balanced budget. If a deficit
occurs, the General Assembly must account for it in the succeeding fiscal year.
In addition, if a deficit appears likely, the State Budget and Control Board
(the "State Board") may reduce appropriations during the current fiscal year as
necessary to prevent the deficit. The State Constitution limits annual increases
in State appropriations to the average growth rate of the economy of the State
and annual increases in the number of State employees to the average growth of
the population of the State.
The State Constitution requires a General Reserve Fund ("General Fund") that
equals three percent of General Fund revenue for the latest fiscal year. When
deficits have occurred, the State has funded them out of the General Fund. The
State Constitution also requires a Capital Reserve Fund ("Capital Fund") equal
to two percent of General Fund revenue. Before March 1st of each year, the
Capital Fund must be used to offset mid-year budget reductions before mandating
cuts in operating appropriations, and after March 1st, the Capital Fund may be
appropriated by a special vote of the General Assembly to finance previously
authorized capital improvement bond projects, to retire bond principal or pay
interest on bonds previously issued, and to pay for capital improvements or
other nonrecurring purposes. Monies in the Capital Fund not appropriated or any
appropriation for a particular project or item that has been reduced due to
application of the monies to a year-end deficit must go back to the General
Fund.
Several lawsuits have been filed against the State, asserting that the decision
in Davis v. Michigan Department of Treasury, 489 U.S. 803 (1989), invalidates
the State's tax treatment of federal retirement benefits for years before 1989.
Under the State's applicable statute of limitation, the State estimates that its
maximum potential liability under those suits is approximately $200 million. The
plaintiffs in those suits, however, may request funds for periods that the State
believes are closed under the applicable statute of limitation, and those refund
requests, if ultimately granted, could result in liability for the State in
excess of the amounts indicated above. Any such liability would be predicated on
a holding by a State court or the United States Supreme Court that the Davis
decision is applicable to the State's prior method of taxing federal retirement
benefits and that the Davis decision is to be given retroactive effect.
The effects of the most recent military base-closing and consolidation
legislation will be pronounced for several sections of South Carolina, most
particularly in the Charleston area, where the cutbacks were large and
represented a not insignificant percentage of total economic activity. Another
round of military base-closings is scheduled for 1995, which may further impact
South Carolina.
The Fund's concentration in securities issued by the State or its subdivisions
provides a greater level of risk than an investment company which is diversified
across a larger geographic area. For example, the passage of the North American
Free Trade Agreement could result in increased competition for the State's
textile industry due to the availability of less-expensive foreign labor.
Presently, South Carolina subjects bonds issued by other states to its income
tax. If this tax was declared unconstitutional, the value of bonds in the Fund
could decline a small but measurable amount. Also, the Fund could become
slightly less attractive to potential future investors.
The Fund's investment adviser believes that the information summarized above
describes some of the more significant matters relating to the Fund. The sources
of the information are the official statements of issuers located in South
Carolina, other publicly available documents, and oral statements from various
State agencies. The Fund's investment adviser has not independently verified any
of the information contained in the official statement, other publicly available
documents, or oral statements from various State agencies.
TRUST MANAGEMENT
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
Officers and Trustees of the Trust are listed with their address, principal
occupations, and present positions, including any affiliation with First Union
National Bank of North Carolina ("First Union"), Federated Investors, Federated
Securities Corp., or Federated Administrative Services.
<TABLE>
<CAPTION>
POSITIONS WITH PRINCIPAL OCCUPATIONS
NAME THE TRUST DURING PAST FIVE YEARS
<S> <C> <C>
James S. Howell Chairman of Retired Vice President of Lance Inc. (food manufacturing).
the Board and
Trustee
Gerald M. McDonnell Trustee Sales Representative with Nucor-Yamoto, Inc. (steel producer) (since
1988); formerly with Northwestern Steel & Wire Company (1986-1988).
Thomas L. McVerry Trustee Business and management adviser (since 1990); formerly, Vice President
(1989-1990) and member of the Board of Directors (1988-1990), Rexham
Industries, Inc. (diverse manufacturer); and Vice President, Finance and
Resources, Rexham Corporation (1979-1990).
William Walt Pettit* Trustee Principal in the law firm Holcomb and Pettit, P.A. (since 1988);
formerly with Clontz and Clontz (1980-1988).
Russell A. Salton, III, M.D. Trustee Chairman and Medical Director, and formerly, President (1990-1993),
Primary PhysicianCare, Inc.; formerly, President, Metrolina Family
Practice Group, P.A. (1982-1989).
Michael S. Scofield Trustee Attorney; formerly, Partner with Wardlow, Knox, Knox, Freeman & Scofield
(attorneys) (1982-1986).
Edward C. Gonzales* President, Vice President, Treasurer, and Trustee, Federated Investors; Vice
Treasurer, President and Treasurer, Federated Advisers, Federated Management, and
and Trustee Federated Research; Executive Vice President, Treasurer, and Director,
Federated Securities Corp.; Chairman, Treasurer, and Trustee, Federated
Administrative Services; Vice President, Treasurer, and Trustee of
certain investment companies advised or distributed by affiliates of
Federated Investors.
Joseph S. Machi Vice President Vice President, Federated Administrative Services; Director, Private
and Assistant Label Management, Federated Investors; Vice President and Assistant
Treasurer Treasurer of certain investment companies for which Federated Securities
Corp. is the principal distributor.
Peter J. Germain Secretary Corporate Counsel, Federated Investors.
</TABLE>
*This Trustee is deemed to be an "interested person" of the Trust as defined
in the Investment Company Act of 1940.
The address of the officers and Trustees of the Trust is Federated Investors
Tower, Pittsburgh, Pennsylvania 15222-3779.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the Fund's outstanding Shares.
As of February 4, 1994, Trust Shares of the Fund were not effective.
As of February 4, 1994, the following shareholders of record owned 5% or more of
the outstanding Class B Investment Shares of the Fund: First Union Brokerage
Services & Co. ("FUBS"), for the exclusive benefit of Robert Allen Jones and
Larry Allen Jones of Florence, South Carolina, owned approximately 2,402 Shares
(60.49%); and FUBS, for the exclusive benefit of Doris G. Foster and John H.
Foster of Greenville, South Carolina, owned approximately 1,493 Shares (37.59%).
As of February 4, 1994, the following shareholders of record owned 5% or more of
the outstanding Class C Investment Shares of the Fund: FUBS, for the exclusive
benefit of Patricia B. Stokes of Florence, South Carolina, owned approximately
3,003 Shares (5.79%); FUBS, for the exclusive benefit of James M. Inabinette and
Lena C. Inabinette of West Columbia, South Carolina, owned approximately 7,200
Shares (13.88%); FUBS, for the exclusive benefit of Mollie L. Fogle of
Orangeburg, South Carolina, owned approximately 6,199 Shares (11.95%); FUBS, for
the exclusive benefit of Jimmie D. Evans of Cayce, South Carolina, owned
approximately 3,999 Shares (7.71%); FUBS, for the exclusive benefit of Betty C.
Gonzalez of Columbia, South Carolina, owned approximately 2,650 Shares (5.11%);
FUBS, for the exclusive benefit of Dorothy H. Campbell of Greenville, South
Carolina, owned approximately 2,784 Shares (5.37%); FUBS, for the exclusive
benefit of James R. Lingle and Elizabeth W. Lingle of Florence, South Carolina,
owned approximately 4,972 Shares (9.58%); and FUBS, for the exclusive benefit of
John Edgar Lockman Senior Trust, Dianne Lockman Price, Trustee, of Liberty,
South Carolina, owned approximately 4,469 Shares (8.61%).
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that a Trustee shall be liable for his
own wilful defaults, but shall not be liable for errors of judgment or mistakes
of fact or law. If reasonable care has been exercised in the selection of
officers, agents, employees, or investment advisers, a Trustee shall not be
liable for any neglect or wrongdoing of any such person. However, a Trustee is
not protected against any liability to which he would otherwise be subject by
reason of wilful misfeasance, bad faith, gross negligence, or reckless disregard
of the duties involved in the conduct of his office.
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
ADVISER TO THE FUND
The Fund's investment adviser (the "Adviser") is First Union National Bank of
North Carolina. It provides investment advisory services through its Capital
Management Group. First Union is a subsidiary of First Union Corporation, a bank
holding company headquartered in Charlotte, North Carolina.
The Adviser shall not be liable to the Trust, the Fund or any shareholder of the
Fund for any losses that may be sustained in the purchase, holding, or sale of
any security, or for anything done or omitted by it, except acts or omissions
involving wilful misfeasance, bad faith, gross negligence, or reckless disregard
of the duties imposed upon it by its contract with the Trust.
ADVISORY FEES
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the respective prospectus.
STATE EXPENSE LIMITATIONS
The Adviser has undertaken to comply with the expense limitations
established by certain states for investment companies whose shares are
registered for sale in those states. If the Fund's normal operating
expenses (including the investment advisory fee, but not including
brokerage commissions, interest, taxes, and extraordinary expenses)
exceed 2-1/2% per year of the first $30 million of average net assets, 2%
per year of the next $70 million of average net assets, and 1-1/2% per
year of the remaining average net assets, the Adviser will reimburse the
Fund for its expenses over the limitation.
If the Fund's monthly projected operating expenses exceed this
limitation, the investment advisory fee paid will be reduced by the
amount of the excess, subject to an annual adjustment. If the expense
limitation is exceeded, the amount to be reimbursed by the Adviser will
be limited, in any single fiscal year, by the amount of the investment
advisory fee.
This arrangement is not part of the advisory contract and may be amended
or rescinded in the future.
BROKERAGE TRANSACTIONS
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the Adviser will generally utilize those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The Adviser may, from time
to time, use brokers affiliated with the Trust, Federated Securities Corp., or
their affiliates. The Adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to review by the Trustees.
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Fund or to the Adviser
and may include:
advice as to the advisability of investing in securities;
security analysis and reports;
economic studies;
industry studies;
receipt of quotations for portfolio evaluations; and
similar services.
The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers and dealers may be used by the Adviser in
advising the Fund and other accounts. To the extent that receipt of these
services may supplant services for which the Adviser or its affiliates might
otherwise have paid, it would tend to reduce their expenses.
ADMINISTRATIVE SERVICES
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Fund for a fee as described in the
respective prospectus.
PURCHASING SHARES
- --------------------------------------------------------------------------------
Shares are sold at their net asset value, plus a sales charge, if applicable, on
days the New York Stock Exchange and the Federal Reserve Wire System are open
for business. The procedure for purchasing Shares is explained in the respective
prospectus under "How to Buy Shares."
REDUCING THE SALES CHARGE
The sales charge can be reduced on the purchase of Class B Investment
Shares through:
quantity discounts and accumulated purchases;
signing a 13-month letter of intent;
using the reinvestment privilege; or
concurrent purchases.
QUANTITY DISCOUNTS AND ACCUMULATED PURCHASES
Larger purchases reduce the sales charge paid. The Fund will combine
purchases of Shares made on the same day by the investor, his spouse, and
his children under age 21 when it calculates the sales charge.
If an additional purchase of Shares is made, the Fund will consider the
previous purchases still invested in the Fund. For example, if a
shareholder already owns Shares having a current value at the public
offering price of $90,000, and then purchases $10,000 more at the current
public offering price, the sales charge on the additional purchase
according to the schedule now in effect would be 3.50%, not 4.00%.
To receive the sales charge reduction, Federated Securities Corp. ("FSC")
must be notified by the shareholder in writing at the time the purchase
is made that Shares are already owned or that purchases are being
combined. The Fund will reduce the sales charge after it confirms the
purchases.
LETTER OF INTENT
If a shareholder intends to purchase at least $100,000 of Shares in the
Fund over the next 13 months, the sales charge may be reduced by signing
a letter of intent to that effect. This letter of intent includes a
provision for a sales charge adjustment depending on the amount actually
purchased within the 13-month period and a provision for the custodian to
hold up to 4.0% of the total amount intended to be purchased in escrow
(in Shares) until such purchase is completed.
The amount held in escrow will be applied to the shareholder's account at
the end of the 13-month period, unless the amount specified in the letter
of intent is not purchased. In this event, an appropriate number of
escrowed Shares may be redeemed in order to realize the difference in the
sales charge.
This letter of intent will not obligate the shareholder to purchase
Shares, but if the shareholder does, each purchase during the period will
be at the sales charge applicable to the total amount intended to be
purchased. This letter may be dated as of a prior date to include any
purchases made within the past 90 days.
REINVESTMENT PRIVILEGE
If Shares in the Fund have been redeemed, the shareholder has a one-time
right, within 30 days, to reinvest the redemption proceeds at the
next-determined net asset value without any sales charge. FSC must be
notified by the shareholder in writing or by his financial institution of
the reinvestment in order to eliminate a sales charge. If the shareholder
redeems his Shares in the Fund, there may be tax consequences.
CONCURRENT PURCHASES
For purposes of qualifying for a sales charge reduction, a shareholder
has the privilege of combining concurrent purchases of two or more First
Union Funds in the Trust, the purchase price of which includes a sales
charge. For example, if a shareholder concurrently invested $30,000 in
shares of one of the other First Union Funds with a sales charge, and
$70,000 in Shares of the Fund, the sales charge would be reduced.
To receive this sales charge reduction, FSC must be notified by the
shareholder in writing or by his financial institution at the time the
concurrent purchases are made. The Fund will reduce the sales charge
after it confirms the purchases.
DISTRIBUTION PLANS (CLASS B AND CLASS C INVESTMENT SHARES)
With respect to the Class B and Class C Investment Shares classes of the Fund,
the Trust has adopted distribution plans (the "Plans") pursuant to Rule 12b-1
which was promulgated by the SEC pursuant to the Investment Company Act of 1940.
The Plans permit the payment of fees to brokers for distribution and
administrative services and to administrators for administrative services as to
Class B and Class C Investment Shares. The Plans are designed to (i) stimulate
brokers to provide distribution and administrative support services to the Fund
and holders of Class B and Class C Investment Shares and (ii) stimulate
administrators to render administrative support services to the Fund and holders
of Class B and Class C Investment Shares. The administrative services are
provided by a representative who has knowledge of the shareholder's particular
circumstances and goals, and include, but are not limited to: providing office
space, equipment, telephone facilities, and various personnel, including
clerical, supervisory, and computer, as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries regarding Class B and Class C Investment
Shares; assisting clients in changing dividend options, account designations,
and addresses; and providing such other services as the Fund reasonably requests
for its Class B and Class C Investment Shares.
By adopting the Plans, the Trustees expect that the Fund will be able to achieve
a more predictable flow of cash for investment purposes and to meet redemptions.
This will facilitate more efficient portfolio management and assist the Fund in
seeking to achieve its investment objectives. By identifying potential investors
whose needs are served by the Fund's objectives, and properly servicing these
accounts, the Fund may be able to curb sharp fluctuations in rates of
redemptions and sales.
Other benefits which the Trust hopes to achieve through the Plans include, but
are not limited to, the following: (1) an efficient and effective administrative
system; (2) a more efficient use of shareholder assets by having them rapidly
invested in the Fund, through an automatic transfer of funds from a demand
deposit account to an investment account, with a minimum of delay and
administrative detail; and (3) an efficient and reliable shareholder records
system with prompt responses to shareholders' requests and inquiries concerning
their accounts.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
Although state securities laws differ, administrators in some states may be
required to register as brokers and dealers pursuant to state law.
ADMINISTRATIVE ARRANGEMENTS
FSC may also pay financial institutions a fee based upon the average net
asset value of Shares of their customers for providing administrative
services. This fee is in addition to the amounts paid under the Plans for
administrative services, and if paid, will be reimbursed by the Adviser
and not the Fund.
DETERMINING NET ASSET VALUE
- --------------------------------------------------------------------------------
Net asset value of Shares generally changes each day. The days on which the net
asset values of Shares are calculated by the Fund are described in the
respective prospectus.
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 average annual total return for all classes of Shares of the Fund is the
average compounded rate of return for a given period that would equate a $1,000
initial investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of Shares owned at the
end of the period by the net asset value per Share at the end of the period. The
number of Shares owned at the end of the period is based on the number of Shares
purchased at the beginning of the period with $1,000, less any applicable sales
load, adjusted over the period by any additional Shares, assuming the monthly
reinvestment of all dividends and distributions.
YIELD
- --------------------------------------------------------------------------------
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 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>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1994 STATE OF SOUTH CAROLINA
- -------------------------------------------------------------------------------
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
<S> <C> <C> <C> <C> <C>
22.00% 35.00% 38.00% 43.00% 46.60%
- -------------------------------------------------------------------------------
JOINT $1- $38,001- $91,851 $140,001 Over
RETURN: 38,000 91,850 140,000 250,000 $ 250,000
SINGLE $1- $22,751- $55,101 $115,001 Over
RETURN: 22,750 55,100 115,000 250,000 $ 250,000
- -------------------------------------------------------------------------------
<CAPTION>
TAX-EXEMPT YIELD TAXABLE YIELD EQUIVALENT
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
2.50% 3.21% 3.85% 4.03% 4.39% 4.68%
3.00 3.85 4.62 4.84 5.26 5.62
3.50 4.49 5.38 5.65 6.14 6.55
4.00 5.13 6.15 6.45 7.02 7.49
4.50 5.77 6.92 7.26 7.89 8.43
5.00 6.41 7.69 8.06 8.77 9.36
5.50 7.05 8.46 8.87 9.65 10.30
6.00 7.69 9.23 9.68 10.53 11.24
6.50 8.33 10.00 10.48 11.40 12.17
7.00 8.97 10.77 11.29 12.28 13.11
</TABLE>
Note: The maximum marginal tax rate for each bracket was used in calculating the
taxable yield equivalent. Furthermore, additional state and local taxes
paid on comparable taxable investments were not used to increase federal
deductions.
The chart above is for illustrative purposes only. It is not an indicator of
past or future performance of any class of Shares.
*Some portion of each class's income may be subject to the federal alternative
minimum tax and state and local taxes.
PERFORMANCE COMPARISONS
- --------------------------------------------------------------------------------
The performance of all classes of Shares depends upon such variables as:
portfolio quality;
average portfolio maturity;
type of instruments in which the portfolio is invested;
changes in interest rates and market value of portfolio securities;
changes in the Fund's or any class of Shares' expenses; and
various other factors.
Each class of Shares' performance fluctuates on a daily basis largely because
net earnings and offering price per Share fluctuate daily. Both net earnings and
offering price per Share are factors in the computation of yield and total
return.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories by
making comparative calculations using total return. Total return assumes the
reinvestment of all capital gains distributions and income dividends and takes
into account any change in net asset value over a specific period of time. From
time to time, the Fund will quote its Lipper ranking in the "general municipal
bond funds" category in advertising and sales literature.
MORNINGSTAR, INC. an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and ratings are effective for two
weeks.
LEHMAN SOUTH CAROLINA MUNICIPAL BOND INDEX is a total return performance
benchmark for the South Carolina long-term, investment grade, tax-exempt bond
market. Returns and attributes for this index are calculated semi-monthly using
municipal bonds classified as General Obligation Bonds (state and local),
Revenue Bonds (excluding insured revenue bonds), Insured Bonds (includes all
bond insurers with Aaa/AAA ratings), and Prerefunded Bonds.
Advertisements and other sales literature for all classes of Shares may quote
total returns which are calculated on non-standardized base periods. These total
returns represent the historic change in the value of an investment in any class
of Shares based on the monthly reinvestment of dividends over a specified period
of time. In addition, advertisements and sales literature for the Fund may
include charts and other illustrations which depict the hypothetical growth of
an investment in a systematic investment plan.
Advertisements may quote performance information which does not reflect the
effect of the sales load.
APPENDIX
- --------------------------------------------------------------------------------
STANDARD & POOR'S CORPORATION MUNICIPAL BOND RATING DEFINITIONS
AAA-- Debt rated AAA has the highest rating assigned by Standard & Poor's
Corporation. Capacity to pay interest and repay principal is extremely strong.
AA-- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A-- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effect of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB-- Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
MOODY'S INVESTORS SERVICE, INC. MUNICIPAL BOND RATING DEFINITIONS
Aaa-- Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa-- Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A-- Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the future.
Baa-- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
3092402B (2/94)
PART C. OTHER INFORMATION.
Item 24. Financial Statements and Exhibits:
(a) Financial Statements: Incorporated into the
Supplement Statement of Additional Information by
reference to the Trust's Annual Report.
(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) Copy of Investment Advisory Contract of the
Registrant (2);
(i) Conformed copy of exhibit to
the Advisory Contract of the Registrant
(18);
(6) Conformed copy of Distributor's Contract of
the Registrant (18);
(i) Copy of exhibit to the
Distributor's Contract of the
Registrant (17);
(7) Copy of Administrative Agreement of the
Registrant (6);
(8) Copy of Custodian Contract of the Registrant
(14);
(i) Copy of amendment to the
Custodian Contract of the Registrant
(17);
+ 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).
(9) Conformed Copy of the Fund
Accounting and Shareholder Recordkeeping
Agreement of the Registrant;+
(10) Copy of Opinion and Consent of Counsel
as to legality of shares being
registered (8);
(11) Conformed copy of Consent of Independent
Auditors (19);
(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)First Union Funds - Class B
Investment Shares (17);
(b)First Union Funds - Class C
Investment Shares (17);
(ii) Rule 12b-1 Agreement (14);
(16) Schedules for Computation of Fund
Performance Data;+
(17) Conformed copy of the Power of Attorney
(19);
(18) Conformed copy of Opinion and Consent of
Counsel as to availability of Rule
485(b);+
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 May 20, 1994
Shares of beneficial interest
(no par value)
First Union Value Portfolio
a) Trust Shares 10
b) Class B Investment Shares 16,121
c) Class C Investment Shares 7,845
+ 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).
First Union Fixed Income Portfolio
a) Trust Shares 5
b) Class B Investment Shares 1,615
c) Class C Investment Shares 795
First Union High Grade Tax Free Portfolio
(formerly, First Union Insured Tax Free Portfolio)
a) Trust Shares 6
b) Class B Investment Shares 2,148
c) Class C Investment Shares 1,118
First Union Tax Free Money Market Portfolio
a) Trust Shares 4
b) Class B Investment Shares 1,422
First Union Money Market Portfolio
a) Trust Shares 5
b) Class B Investment Shares 5,078
c) Class C Investment Shares 140
First Union Treasury Money Market Portfolio
a) Trust Shares 4
b) Class B Investment Shares 1,627
First Union Balanced Portfolio
a) Trust Shares 5
b) Class B Investment Shares 3,065
c) Class C Investment Shares 7,181
First Union Managed Bond Portfolio
a) Trust Shares 22
b) Investment Shares 0
First Union North Carolina Municipal Bond Portfolio
a) Trust Shares 7
b) Class B Investment Shares 342
c) Class C Investment Shares 1,666
First Union U.S. Government Portfolio
a) Trust Shares 5
b) Class B Investment Shares 1,323
c) Class C Investment Shares 9,637
First Union Florida Municipal Bond Portfolio
a) Trust Shares 10
b) Class B Investment Shares 241
c) Class C Investment Shares 694
First Union Georgia Municipal Bond Portfolio
a) Trust Shares 4
b) Class B Investment Shares 59
c) Class C Investment Shares 284
First Union Virginia Municipal Bond Portfolio
a) Trust Shares 5
b) Class B Investment Shares 64
c) Class C Investment Shares 158
Number of Record Holders
as of June 3, 1994
First Union Utility Portfolio
a) Trust Shares 5
b) Class B Investment Shares 468
c) Class C Investment Shares 2,073
First Union South Carolina Municipal Bond Portfolio
a) Trust Shares 4
b) Class B Investment Shares 7
c) Class C Investment Shares 66
Item 27. Indemnification: (1.)
Item 28. Business and Other Connections of Investment Adviser:
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 and
officers 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
(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).
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.
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; Automated Cash Management Trust; Automated
Government Money Trust; BayFunds; The Biltmore
Funds; The Biltmore Municipal Funds; The Boulevard
Funds; California Municipal Cash Trust; Cambridge
Series 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 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; Mark Twain Funds; Marshall Funds, Inc.;
Money Market Management, Inc.; 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; Signet Select Funds; 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 and
Federated Investors Tower President, and Treasurer, Treasurer
Pittsburgh, PA 15222-3779 Federated Securities
Corp.
John W. McGonigle Director, Executive Vice
Federated Investors Tower President, and Assistant
Pittsburgh, PA 15222-3779 Secretary, Federated
Securities Corp.
John A. Staley, IV Executive Vice President --
Federated Investors Tower and Assistant Secretary,
Pittsburgh, PA 15222-3779 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
James R. Ball 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
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
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
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
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.
____________________
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933
and the Investment Company Act of 1940, the Registrant, FIRST
UNION FUNDS, certifies that it meets all of the requirements for
effectiveness of this Amendment to its Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has
duly caused this Amendment to its Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of Pittsburgh and Commonwealth of
Pennsylvania, on the 27th day of June, 1994.
FIRST UNION FUNDS
BY: /s/Mark A. Sheehan
Mark A. Sheehan, Assistant Secretary
Attorney in Fact for John F. Donahue
June 27, 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 June 27, 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
Michael S. Scofield* Trustee
Russell A. Salton, III, M.D.* Trustee
* By Power of Attorney
Exhibit 18 under Form N-1A
Exhibit 99 under Item 601/Reg. S-K
HOUSTON, HOUSTON & DONNELLY
ATTORNEYS AT LAW
2510 CENTRE CITY TOWER
WILLIAM McC. HOUSTONPITTSBURGH, PA. 15222
FRED CHALMERS HOUSTON, JR.__________
THOMAS J. DONNELLY
JOHN F. MECK (412) 471-5828 FRED CHALMERS HOUSTON
FAX (412) 471-0736 (1914 - 1971)
MARIO SANTILLI, JR.
THEODORE M. HAMMER
June 21, 1994
First Union Funds
Federated Investors Tower
Pittsburgh, PA 15222-3779
Gentlemen:
As counsel to First Union Funds ("Trust") we have reviewed
Post-effective Amendment No. 36 to the Trust's Registration
Statement to be filed with the Securities and Exchange Commission
under the Securities Act of 1933 (File No. 2-94560). The subject
Post-effective Amendment will be filed pursuant to Paragraph (b)
of Rule 485 and become effective pursuant to said Rule on June
30, 1994.
Our review also included an examination of other relevant
portions of the amended 1933 Act Registration Statement of the
Trust and such other documents and records deemed appropriate.
On the basis of this review we are of the opinion that Post-
effective Amendment No. 36 does not contain disclosures which
would render it ineligible to become effective pursuant to
Paragraph (b) of Rule 485.
We hereby consent to the filing of this representation
letter as a part of the Trust's Registration Statement filed with
the Securities and Exchange Commission under the Securities Act
of 1933 and as part of any application or registration statement
filed under the Securities Laws of the States of the United
States.
Very truly yours,
Houston, Houston & Donnelly
By: Thomas J. Donnelly
TJD:heh
Exhibit 9 under Form N-1A
Exhibit 10 under Item 601/Reg. S-K
AGREEMENT
for
FUND ACCOUNTING,
SHAREHOLDER RECORDKEEPING,
and
CUSTODY SERVICES PROCUREMENT
AGREEMENT made as of the 1st day of December, 1993, by and between
those investment companies listed on Exhibit 1 as may be amended from
time to time, having their principal office and place of business at
Federated Investors Tower, Pittsburgh, PA 15222-3779 (the "Trust"), on
behalf of the portfolios (individually referred to herein as a "Fund" and
collectively as "Funds") of the Trust, and FEDERATED SERVICES COMPANY, a
Delaware business trust, having its principal office and place of
business at Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
(the "Company").
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended
(the "1940 Act"), with authorized and issued shares of capital stock or
beneficial interest ("Shares"); and
WHEREAS, the Trust wishes to retain the Company to provide certain
pricing, accounting and recordkeeping services for each of the Funds,
including any classes of shares issued by any Fund ("Classes"), and the
Company is willing to furnish such services; and
WHEREAS, the Trust desires to appoint the Company as its transfer
agent, dividend disbursing agent, and agent in connection with certain
other activities, and the Company desires to accept such appointment; and
WHEREAS, the Trust desires to appoint the Company as its agent to
select, negotiate and subcontract for custodian services from an approved
list of qualified banks and the Company desires to accept such
appointment; and
WHEREAS, from time to time the Trust may desire and may instruct the
Company to subcontract for the performance of certain of its duties and
responsibilities hereunder to State Street Bank and Trust Company or
another agent (the "Agent"); and
WHEREAS, the words Trust and Fund may be used interchangeably for
those investment companies consisting of only one portfolio;
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be legally bound hereby, the parties
hereto agree as follows:
SECTION ONE: Fund Accounting.
Article 1. Appointment.
The Trust hereby appoints the Company to provide certain pricing and
accounting services to the Funds, and/or the Classes, for the period and
on the terms set forth in this Agreement. The Company accepts such
appointment and agrees to furnish the services herein set forth in return
for the compensation as provided in Article 3 of this Section.
Article 2. The Company and Duties.
Subject to the supervision and control of the Trust's Board of
Trustees or Directors ("Board"), the Company will assist the Trust with
regard to fund accounting for the Trust, and/or the Funds, and/or the
Classes, and in connection therewith undertakes to perform the following
specific services;
A. Value the assets of the Funds and determine the net asset value per
share of each Fund and/or Class, at the time and in the manner from
time to time determined by the Board and as set forth in the
Prospectus and Statement of Additional Information ("Prospectus")
of each Fund;
B. Calculate the net income of each of the Funds, if any;
C. Calculate capital gains or losses of each of the Funds resulting
from sale or disposition of assets, if any;
D. Maintain the general ledger and other accounts, books and financial
records of the Trust, including for each Fund, and/or Class, as
required under Section 31(a) of the 1940 Act and the Rules
thereunder in connection with the services provided by the Company;
E. Preserve for the periods prescribed by Rule 31a-2 under the 1940
Act the records to be maintained by Rule 31a-1 under the 1940 Act
in connection with the services provided by the Company. The
Company further agrees that all such records it maintains for the
Trust are the property of the Trust and further agrees to surrender
promptly to the Trust such records upon the Trust's request;
F. At the request of the Trust, prepare various reports or other
financial documents required by federal, state and other applicable
laws and regulations; and
G. Such other similar services as may be reasonably requested by the
Trust.
Article 3. Compensation and Allocation of Expenses.
A. The Funds will compensate the Company for its services rendered
pursuant to Section One of this Agreement in accordance with the
fees set forth on Fee Schedules A ("A1, A2, A3 etc..."), annexed
hereto and incorporated herein, as may be added or amended from
time to time. Such fees do not include out-of-pocket disbursements
of the Company for which the Funds shall reimburse the Company upon
receipt of a separate invoice. Out-of-pocket disbursements shall
include, but shall not be limited to, the items specified in
Schedules B ("B1, B2, B3, etc..."), annexed hereto and incorporated
herein, as may be added or amended from time to time. Schedules B
may be modified by the Company upon not less than thirty days'
prior written notice to the Trust.
B. The Fund and/or the Class, and not the Company, shall bear the cost
of: custodial expenses; membership dues in the Investment Company
Institute or any similar organization; transfer agency expenses;
investment advisory expenses; costs of printing and mailing stock
certificates, Prospectuses, reports and notices; administrative
expenses; interest on borrowed money; brokerage commissions; taxes
and fees payable to federal, state and other governmental agencies;
fees of Trustees or Directors of the Trust; independent auditors
expenses; Federated Administrative Services and/or Federated
Administrative Services, Inc. legal and audit department expenses
billed to Federated Services Company for work performed related to
the Trust, the Funds, or the Classes; law firm expenses; or other
expenses not specified in this Article 3 which may be properly
payable by the Funds and/or classes.
C. The Company will send an invoice to each of the Funds as soon as
practicable after the end of each month. Each invoice will provide
detailed information about the compensation and out-of-pocket
expenses in accordance with Schedules A and Schedules B. The Funds
and or the Classes will pay to the Company the amount of such
invoice within 30 days of receipt of the invoices.
D. Any compensation agreed to hereunder may be adjusted from time to
time by attaching to Schedules A revised Schedules dated and signed
by a duly authorized officer of the Trust and/or the Funds and a
duly authorized officer of the Company.
E. The fee for the period from the effective date of this Agreement
with respect to a Fund or a Class to the end of the initial month
shall be prorated according to the proportion that such period
bears to the full month period. Upon any termination of this
Agreement before the end of any month, the fee for such period
shall be prorated according to the proportion which such period
bears to the full month period. For purposes of determining fees
payable to the Company, the value of the Fund's net assets shall be
computed at the time and in the manner specified in the Fund's
Prospectus.
F. The Company, in its sole discretion, may from time to time
subcontract to, employ or associate with itself such person or
persons as the Company may believe to be particularly suited to
assist it in performing services under this Section One. Such
person or persons may be third-party service providers, or they may
be officers and employees who are employed by both the Company and
the Funds. The compensation of such person or persons shall be
paid by the Company and no obligation shall be incurred on behalf
of the Trust, the Funds, or the Classes in such respect.
SECTION TWO: Shareholder Recordkeeping.
Article 4. Terms of Appointment.
Subject to the terms and conditions set forth in this Agreement, the
Trust hereby appoints the Company to act as, and the Company agrees to
act as, transfer agent and dividend disbursing agent for each Fund's
Shares, and agent in connection with any accumulation, open-account or
similar plans provided to the shareholders of any Fund
("Shareholder(s)"), including without limitation any periodic investment
plan or periodic withdrawal program.
As used throughout this Agreement, a "Proper Instruction" means a
writing signed or initialed by one or more person or persons as the Board
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 deemed to be Proper Instructions if (a) the Company
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, and (b) the Trust, or the Fund, and the
Company promptly cause such oral instructions to be confirmed in writing.
Proper Instructions may include communications effected directly between
electro-mechanical or electronic devices provided that the Trust, or the
Fund, and the Company are satisfied that such procedures afford adequate
safeguards for the Fund's assets. Proper Instructions may only be
amended in writing.
Article 5. Duties of the Company.
The Company shall perform the following services in accordance with
Proper Instructions as may be provided from time to time by the Trust as
to any Fund:
A. Purchases
(1) The Company shall receive orders and payment for the purchase
of shares and promptly deliver payment and appropriate
documentation therefore to the custodian of the relevant Fund,
(the "Custodian"). The Company 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 Fund's
current Prospectus, the Company shall compute and issue the
appropriate number of Shares of each Fund and/or Class and
hold such Shares in the appropriate Shareholder accounts.
(3) For certificated Funds and/or Classes, if a Shareholder or its
agent requests a certificate, the Company, as Transfer Agent,
shall countersign and mail by first class mail, a certificate
to the Shareholder at its address as set forth on the transfer
books of the Funds, and/or Classes, 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 and/or Class is returned unpaid for any
reason, the Company shall debit the Share account of the
Shareholder by the number of Shares that had been credited to
its account upon receipt of the check or other order, promptly
mail a debit advice to the Shareholder, and notify the Fund
and/or Class 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 Fund and/the Class or its distributor will
reimburse the Company on the amount of such excess.
B. Distribution
(1) Upon notification by the Funds of the declaration of any
distribution to Shareholders, the Company shall act as
Dividend Disbursing Agent for the Funds in accordance with the
provisions of its governing document and the then-current
Prospectus of the Fund. The Company shall prepare and mail or
credit income, capital gain, or any other payments to
Shareholders. As the Dividend Disbursing Agent, the Company
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 Company 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, for certificated Funds and/or
Classes, delivered where requested; and
(2) The Company shall maintain records of account for each Fund
and Class and advise the Trust, each Fund and Class and its
Shareholders as to the foregoing.
C. Redemptions and Transfers
(1) The Company 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 therefor to the Custodian. The Company shall
notify the Funds on a daily basis of the total amount of
redemption requests processed and monies paid to the Company
by the Custodian for redemptions.
(2) At the appropriate time upon receiving redemption proceeds
from the Custodian with respect to any redemption, the Company
shall pay or cause to be paid the redemption proceeds in the
manner instructed by the redeeming Shareholders, pursuant to
procedures described in the then-current Prospectus of the
Fund.
(3) If any certificate returned for redemption or other request
for redemption does not comply with the procedures for
redemption approved by the Fund, the Company shall promptly
notify the Shareholder 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 Company shall effect transfers of Shares by the registered
owners thereof.
(5) The Company 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 Company shall record the issuance of Shares of each Fund,
and/or Class, and maintain pursuant to applicable rules of the
Securities and Exchange Commission ("SEC") a record of the
total number of Shares of the Fund and/or Class which are
authorized, based upon data provided to it by the Fund, and
issued and outstanding. The Company 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 Funds.
(2) The Company shall establish and maintain records pursuant to
applicable rules of the SEC relating to the services to be
performed hereunder in the form and manner as agreed to by the
Trust or the Fund to include a record for each Shareholder's
account of the following:
(a) Name, address and tax identification 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 withholding 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 Company to
perform the calculations contemplated or required by this
Agreement.
(3) The Company shall preserve any such records required to be
maintained pursuant to the rules of the SEC for the periods
prescribed in said rules as specifically noted below. Such
record retention shall be at the expense of the Company, and
such records may be inspected by the Fund at reasonable times.
The Company 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 Company's files, records and documents
created and maintained by the Company pursuant to this
Agreement, which are no longer needed by the Company 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 Company 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 Company 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 Company;
(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 Company 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 Company 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, 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 of each Fund and/or Class sold
in each state ("blue sky reporting"). The Fund shall by
Proper Instructions (i) identify to the Company 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
Company for each Fund's and/or Class's state blue sky
registration status is limited solely 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 Company shall answer correspondence from Shareholders
relating to their Share accounts and such other correspondence
as may from time to time be addressed to the Company;
(2) The Company shall prepare Shareholder meeting lists, mail
proxy cards and other material supplied to it by the Fund in
connection with Shareholder Meetings of each Fund; receive,
examine and tabulate returned proxies, and certify the vote of
the Shareholders;
(3) The Company 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 6. Duties of the Trust.
A. Compliance
The Trust or Fund assume full responsibility for the preparation,
contents and distribution of their own and/or their classes'
Prospectus and for complying with all applicable requirements of
the Securities Act of 1933, as amended (the "1933 Act"), the 1940
Act and any laws, rules and regulations of government authorities
having jurisdiction.
B. Share Certificates
The Trust shall supply the Company with a sufficient supply of
blank Share certificates and from time to time shall renew such
supply upon request of the Company. Such blank Share certificates
shall be properly signed, manually or by facsimile, if authorized
by the Trust and shall bear the seal of the Trust or facsimile
thereof; and notwithstanding the death, resignation or removal of
any officer of the Trust authorized to sign certificates, the
Company may continue to countersign certificates which bear the
manual or facsimile signature of such officer until otherwise
directed by the Trust.
C. Distributions
The Fund shall promptly inform the Company of the declaration of
any dividend or distribution on account of any Fund's shares.
Article 7. Compensation and Expenses.
A. Annual Fee
For performance by the Company pursuant to Section Two of this
Agreement, the Trust and/or the Fund agree to pay the Company an
annual maintenance fee for each Shareholder account as set out in
Schedules C ("C1, C2, C3 etc..."), attached hereto, as may be added
or amended from time to time. Such fees may be changed from time
to time subject to written agreement between the Trust and the
Company. Pursuant to information in the Fund Prospectus or other
information or instructions from the Fund, the Company may sub-
divide any Fund into Classes or other sub-components for
recordkeeping purposes. The Company will charge the Fund the fees
set forth on Schedule C for each such Class or sub-component the
same as if each were a Fund.
B. Reimbursements
In addition to the fee paid under Article 7A above, the Trust
and/or Fund agree to reimburse the Company for out-of-pocket
expenses or advances incurred by the Company for the items set out
in Schedules D ("D1, D2, D3 etc..."), attached hereto, as may be
added or amended from time to time. In addition, any other
expenses incurred by the Company at the request or with the consent
of the Trust and/or the Fund, will be reimbursed by the appropriate
Fund.
C. Payment
The Company shall send an invoice with respect to fees and
reimbursable expenses to the Trust or each of the Funds as soon as
practicable at the end of each month. Each invoice will provide
detailed information about the Compensation and out-of-pocket
expenses in accordance with Schedules C and Schedules D. The Trust
or the Funds will pay to the Company the amount of such invoice
within 30 days following the receipt of the invoices.
Article 8. Assignment of Shareholder Recordkeeping.
Except as provided below, no right or obligation under this Section
Two 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 Company may without further consent on the part of the
Trust subcontract for the performance hereof with (A) State
Street Bank and its subsidiary, Boston Financial Data
Services, Inc., a Massachusetts Trust ("BFDS"), which is duly
registered as a transfer agent pursuant to Section 17A(c)(1)
of the Securities Exchange Act of 1934, as amended, 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, or (D) such other
provider of services duly registered as a transfer agent under
Section 17A(c)(1) as Company shall select; provided, however,
that the Company shall be as fully responsible to the Trust
for the acts and omissions of any subcontractor as it is for
its own acts and omissions; or
(3) The Company shall upon instruction from the Trust subcontract
for the performance hereof with an Agent selected by the
Trust, other than BFDS or a provider of services selected by
Company, as described in (2) above; provided, however, that
the Company shall in no way be responsible to the Trust for
the acts and omissions of the Agent.
SECTION THREE: Custody Services Procurement
Article 9. Appointment.
The Trust hereby appoints Company as its agent to evaluate and
obtain custody services from a financial institution that (i) meets
the criteria established in Section 17(f) of the 1940 Act and (ii)
has been approved by the Board as eligible for selection by the
Company as a custodian (the "Eligible Custodian"). The Company
accepts such appointment.
Article 10. The Company and Its Duties.
Subject to the review, supervision and control of the Board, the
Company shall:
(1) evaluate the nature and the quality of the custodial services
provided by the Eligible Custodian;
(2) employ the Eligible Custodian to serve on behalf of the Trust
as Custodian of the Trust's assets substantially on the terms
set forth as the form of agreement in Exhibit 2;
(3) negotiate and enter into agreements with the Custodians for
the benefit of the Trust, with the Trust as a party to each
such agreement. The Company shall not be a party to any
agreement with any such Custodian;
(4) establish procedures to monitor the nature and the quality of
the services provided by the Custodians;
(5) continuously monitor the nature and the quality of services
provided by the Custodians; and
(6) periodically provide to the Trust (i) written reports on the
activities and services of the Custodians; (ii) the nature and
amount of disbursement made on account of the Trust with
respect to each custodial agreement; and (iii) such other
information as the Board shall reasonably request to enable it
to fulfill its duties and obligations under Sections 17(f) and
36(b) of the 1940 Act and other duties and obligations
thereof.
Article 11. Fees and Expenses.
A. Annual Fee
For the performance by the Company pursuant to Section Three of
this Agreement, the Trust and/or the Fund agree to pay the Company
an annual fee as set forth in Schedule E, attached hereto.
B. Payment
The Company shall send an invoice with respect to fees and
reimbursable expenses to each of the Trust/or Fund as soon as
practicable at the end of each month. Each invoice will provide
detailed information about the Compensation and out-of-pocket
expenses in occurrence with Schedule E. The Trust and/or Fund will
pay to the Company the amount of such invoice within 30 days
following the receipt of the invoice.
Article 12. Representations.
The Company represents and warrants that it has obtained all
required approvals from all government or regulatory authorities
necessary to enter into this arrangement and to provide the
services contemplated in Section Three of this Agreement.
SECTION FOUR: General Provisions.
Article 13. Documents.
A. In connection with the appointment of the Company under this
Agreement, the Trust shall file with the Company the following
documents:
(1) A copy of the Charter and By-Laws of the Trust and all
amendments thereto;
(2) A copy of the resolution of the Board of the Trust authorizing
this Agreement;
(3) Specimens of all forms of outstanding Share certificates of
the Trust or the Funds in the forms approved by the Board of
the Trust with a certificate of the Secretary of the Trust as
to such approval;
(4) All account application forms and other documents relating to
Shareholders accounts; and
(5) A copy of the current Prospectus for each Fund.
B. The Fund will also furnish from time to time the following
documents:
(1) Each resolution of the Board of the Trust authorizing the
original issuance of each Fund's, and/or Class's Shares;
(2) Each Registration Statement filed with the SEC and amendments
thereof and orders relating thereto in effect with respect to
the sale of Shares of any Fund, and/or Class;
(3) A certified copy of each amendment to the governing document
and the By-Laws of the Trust;
(4) Certified copies of each vote of the Board authorizing
officers to give Proper Instructions to the Custodian and
agents for fund accountant, custody services procurement, and
shareholder recordkeeping or transfer agency services;
(5) Specimens of all new Share certificates representing Shares of
any Fund, accompanied by Board resolutions approving such
forms;
(6) Such other certificates, documents or opinions which the
Company may, in its discretion, deem necessary or appropriate
in the proper performance of its duties; and
(7) Revisions to the Prospectus of each Fund.
Article 14. Representations and Warranties.
A. Representations and Warranties of the Company
The Company represents and warrants to the Trust that:
(1) It is a business trust duly organized and existing and in good
standing under the laws of the State of Delaware.
(2) It is duly qualified to carry on its business in the State of
Delaware.
(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 its obligations under
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 Trust
The Trust represents and warrants to the Company that:
(1) It is an investment company duly organized and existing and in
good standing under the laws of its state of organization;
(2) It is empowered under applicable laws and by its Charter and
By-Laws to enter into and perform its obligations under this
Agreement;
(3) All corporate proceedings required by said Charter and By-Laws
have been taken to authorize it to enter into and perform its
obligations under this Agreement;
(4) The Trust is an open-end investment company registered under
the 1940 Act; and
(5) A registration statement under the 1933 Act will be effective,
and appropriate state securities law filings have been made
and will continue to be made, with respect to all Shares of
each Fund being offered for sale.
Article 15. Indemnification.
A. Indemnification by Trust
The Company shall not be responsible for and the Trust or Fund
shall indemnify and hold the Company, including its officers,
directors, shareholders and their agents employees and affiliates,
harmless against any and all losses, damages, costs, charges,
counsel fees, payments, expenses and liabilities arising out of or
attributable to:
(1) The acts or omissions of any Custodian,
(2) The Trust's or Fund's refusal or failure to comply with the
terms of this Agreement, or which arise out of the Trust's or
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 Trust or Fund hereunder or
otherwise.
(3) The reliance on or use by the Company or its agents or
subcontractors of information, records and documents in proper
form which
(a) are received by the Company 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
Trust.
(4) The reliance on, or the carrying out by the Company or its
agents or subcontractors of Proper Instructions of the Trust
or the Fund.
(5) 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 Company shall not be protected by
this Article 15.A. from liability for any act or omission
resulting from the Company's willful misfeasance, bad faith,
gross negligence or reckless disregard of its duties.
B. Indemnification by the Company
The Company shall indemnify and hold the Trust or each Fund
harmless from and against any and all losses, damages, costs,
charges, counsel fees, payments, expenses and liabilities arising
out of or attributable to any action or failure or omission to act
by the Company as a result of the Company's willful misfeasance,
bad faith, gross negligence or reckless disregard of its duties.
C. Reliance
At any time the Company may apply to any officer of the Trust or
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 Company under this Agreement, and the Company and
its agents or subcontractors shall not be liable and shall be
indemnified by the Trust or the appropriate 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 Company, 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 officers of the Trust or the Fund, and the proper
countersignature of any former transfer agent or registrar, or of a
co-transfer agent or co-registrar.
D. Notification
In order that the indemnification provisions contained in this
Article 15 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 16. Termination of Agreement.
This Agreement may be terminated by either party upon one hundred
twenty (120) days written notice to the other. Should the Trust
exercise its rights to terminate, all out-of-pocket expenses
associated with the movement of records and materials will be borne
by the Trust or the appropriate Fund. Additionally, the Company
reserves the right to charge for any other reasonable expenses
associated with such termination. The provisions of Article 15
shall survive the termination of this Agreement.
Article 17. Amendment.
This Agreement may be amended or modified by a written agreement
executed by both parties.
Article 18. Interpretive and Additional Provisions.
In connection with the operation of this Agreement, the Company and
the Trust may from time to time agree on such provisions
interpretive of or in addition to the provisions of this Agreement
as may in their joint opinion be consistent with the general tenor
of this Agreement. 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 Charter. No interpretive or additional provisions
made as provided in the preceding sentence shall be deemed to be an
amendment of this Agreement.
Article 19. Governing Law.
This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the
Commonwealth of Massachusetts
Article 20. 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 Company at Federated Investors Tower, Pittsburgh,
Pennsylvania, 15222-3779, or to such other address as the Trust or
the Company may hereafter specify, shall be deemed to have been
properly delivered or given hereunder to the respective address.
Article 21. Counterparts.
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original.
Article 22. Limitations of Liability of Trustees and Shareholders of
the Trust.
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, but bind only the appropriate property
of the Fund, or Class, as provided in the Declaration of Trust.
Article 23. Limitations of Liability of Trustees and Shareholders of
the Company.
The execution and delivery of this Agreement have been authorized
by the Trustees of the Company and signed by an authorized officer
of the Company, 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 Company, but bind only the property of the
Company as provided in the Declaration of Trust.
Article 24. Assignment.
This Agreement and the rights and duties hereunder shall not be
assignable with respect to the Trust or the Funds by either of the
parties hereto except by the specific written consent of the other
party.
Article 25. 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.
Article 26. Successor Agent.
If a successor agent for the Trust shall be appointed by the Trust,
the Company shall upon termination of this Agreement deliver to
such successor agent at the office of the Company all properties of
the Trust held by it hereunder. If no such successor agent shall
be appointed, the Company shall at its office upon receipt of
Proper Instructions deliver such properties in accordance with such
instructions.
In the event that no written order designating a successor agent or
Proper Instructions shall have been delivered to the Company on or
before the date when such termination shall become effective, then
the Company shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the 1940 Act, of its own
selection, having an aggregate capital, surplus, and undivided
profits, as shown by its last published report, of not less than
$2,000,000, all properties held by the Company under this
Agreement. Thereafter, such bank or trust company shall be the
successor of the Company under this Agreement.
Article 27. Force Majeure.
The Company shall have no liability for cessation of services
hereunder or any damages resulting therefrom to the Fund as a
result of work stoppage, power or other mechanical failure, natural
disaster, governmental action, communication disruption or other
impossibility of performance.
Article 28. Assignment; Successors.
This Agreement shall not be assigned by either party without the
prior written consent of the other party, except that either party
may assign to a successor all of or a substantial portion of its
business, or to a party controlling, controlled by, or under common
control with such party. Nothing in this Article 28 shall prevent
the Company from delegating its responsibilities to another entity
to the extent provided herein.
Article 29. Severability.
In the event any provision of this Agreement is held illegal, void
or unenforceable, the balance shall remain in effect.
Article 30. Modifications and Amendments to Agreement.
The parties hereby agree to the following modifications or
amendments to this Agreement:
A. The proviso at the end of Article 15.A. shall read in its
entirety as follows:
"Provided, however, that the Company shall not be protected by
this Article 15.A. from liability for any act or omission
resulting from the Company's lack of good faith, negligence,
willful misconduct, or failure to meet the standard of care
set forth in Article 15.E. below."
B. Article 15.B. shall be amended to read in its entirety as
follows:
"The Company shall indemnify and hold the Trust or each Fund
harmless from and against any and all losses, damages, costs,
charges, counsel fees, payments, expenses and liabilities
arising out of or attributable to any action or failure or
omission to act by the Company as a result of the Company's
lack of good faith, negligence, willful misconduct, or failure
to meet the standard of care set forth in Article 15.E.
below."
C. Article 15 shall be amended to include the following at the end
of such Article 15:
"E. Standard of Care
The Company shall be held to a standard of reasonable care
in carrying out the provisions of this Agreement;
provided, however that the Company shall be held to any
higher standard of care which would be imposed upon the
Company by any applicable law or regulation even though
such stated standard of care was not part of this
Agreement."
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
between them dated March 1, 1994, solely as it appears in Section Two:
Shareholder Recordkeeping and Section Four: General Provisions, to be
executed in their names and on their behalf under their seals by and
through their duly authorized officers.
ATTEST: FEDERATED SERVICES COMPANY
/s/Jeannette Fisher-Garber By: /s/James J. Dolan
Jeannette Fisher-Garber James J. Dolan
Secretary President
ATTEST: FIRST UNION FUNDS
/s/Peter J. Germain By: /s/Edward C. Gonzales
Peter J. Germain Edward C. Gonzales
Secretary President
Exhibit 1
FIRST UNION FUNDS
Exhibit 16 under Form N-1A
Exhibit 99 under Item 601/Reg.S-K
Schedule for Computation Initial
of Fund Performance Data Invest of: $1,000
Offering
FU Utility Port. Trust Price/
Share= $9.53
Return Since Inception
ending 4/30/94 NAV= $9.53
FYE: December 31
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Begin Capital Reinvest Ending Total
DECLARED: MONTHLY Reinvest Period Dividend Gain Price Period Ending Invest
PAID: MONTHLY Dates Shares /Share /Share /Share Shares Price Value
2/28/94 104.932 0.000000000 0.00000 $9.53 104.932 $9.53 $1,000.00
3/15/94 104.932 0.039000000 0.00000 $9.43 105.366 $9.43 $993.60
4/15/94 105.366 0.040000000 0.00000 $9.22 105.823 $9.22 $975.69
4/30/94 105.823 0.000000000 0.00000 $9.36 105.823 $9.36 $990.50
$1,000 (1+T) = End Value
T = -0.95%
</TABLE>
<TABLE>
<S> <C> <C> <C>
FU UTILITY PORT TRUST Yield = 2{( $20,574.69 - $0.00 )+1)^6-1}=
Computation of SEC Yield 521,838 * $9.36 - 0.01870 )
As of: April 30, 1994
SEC Yield = 5.12%
Dividend and/or Interest
Inc for the 30 days ended $20,574.69
Net Expenses for $0.00
the Period
Avg Daily Shares
Outstanding and entitled
to receive dividends 521,838
Maxium offering price $9.36
per share as of 4-30-94
Undistributed net income 0.01870
Tax Equivalent Yield
(assumes individual
does not itemize
on Federal Return)
100 % minus the Federal
taxable % (100%-28%=72%)
30 SEC yield / by the tax
equiv % (0.00% / 72.0%)= 7.11%
</TABLE>
Schedule for Computation Initial
of Fund Performance Data Invest of: $1,000
Offering
FU Utility Port. - B Price/
Share= $10.42
Return Since Inception
ending 4/30/94 NAV= $10.00
FYE: December 31
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Begin Capital Reinvest Ending Total
DECLARED: MONTHLY Reinvest Period Dividend Gain Price Period Ending Invest
PAID: MONTHLY Dates Shares /Share /Share /Share Shares Price Value
1/4/94 95.969 0.000000000 0.00000 $10.00 95.969 $10.00 $959.69
1/17/94 95.969 0.039000000 0.00000 $9.74 96.354 $9.74 $938.48
2/15/94 96.354 0.039000000 0.00000 $9.68 96.742 $9.68 $936.46
3/15/94 96.742 0.039000000 0.00000 $9.42 97.142 $9.42 $915.08
4/15/94 97.142 0.038000000 0.00000 $9.20 97.544 $9.20 $897.40
4/30/94 97.544 0.000000000 0.00000 $9.36 97.544 $9.36 $913.01
$1,000 (1+T) = End Value
T = -8.70%
</TABLE>
<TABLE>
<S> <C> <C> <C>
FU UTILITY PORT - B Yield = 2{( $12,200.44 - $595.65 )+1)^6-1}=
Computation of SEC Yield 309,705 * $9.75 - 0.01770 )
As of: April 30, 1994
SEC Yield = 4.66%
Dividend and/or Interest
Inc for the 30 days ended $12,200.44
Net Expenses for $595.65
the Period
Avg Daily Shares
Outstanding and entitled
to receive dividends 309,705
Maxium offering price $9.75
per share as of 4-30-94
Undistributed net income 0.01770
</TABLE>
Schedule for Computation Initial
of Fund Performance Data Invest of: $1,000
Offering
FU Utility Port. - C Price/
Share= $10.00
Return Since Inception
ending 4/30/94 NAV= $10.00
FYE: December 31
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Begin Capital Reinvest Ending Total
DECLARED: MONTHLY Reinvest Period Dividend Gain Price Period Ending Invest
PAID: MONTHLY Dates Shares /Share /Share /Share Shares Price Value
1/4/94 100.000 0.000000000 0.00000 $10.00 100.000 $10.00 $1,000.00
1/17/94 100.000 0.033000000 0.00000 $9.75 100.338 $9.75 $978.30
2/15/94 100.338 0.033000000 0.00000 $9.68 100.681 $9.68 $974.59
3/15/94 100.681 0.033000000 0.00000 $9.43 101.033 $9.43 $952.74
4/15/94 101.033 0.034000000 0.00000 $9.21 101.406 $9.21 $933.95
4/30/94 101.406 0.000000000 0.00000 $9.36 101.406 $8.99 $911.64
$1,000 (1+T) = End Value
T = -8.84%
</TABLE>
<TABLE>
<S> <C> <C> <C>
FU UTILITY PORT - c Yield = 2{( $89,474.39 - $12,949.24 )+1)^6-1}=
Computation of SEC Yield 2,269,672 * $9.36 - 0.01590 )
As of: April 30, 1994
SEC Yield = 4.37%
Dividend and/or Interest
Inc for the 30 days ended $89,474.39
Net Expenses for $12,949.24
the Period
Avg Daily Shares
Outstanding and entitled
to receive dividends 2,269,672
Maxium offering price $9.36
per share as of 4-30-94
Undistributed net income 0.01590
</TABLE>
Schedule for Computation Initial
of Fund Performance Data Invest of: $1,000
Offering
F U S.C. Muni Bond - A Price/
Share= $9.74
Return Since Inception
ending 5/31/94 NAV= $9.74
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Begin Capital Reinvest Ending Total
DECLARED: DAILY Reinvest Period Dividend Gain Price Period Ending Invest
PAID: MONTHLY Dates Shares /Share /Share /Share Shares Price Value
2/28/94 102.669 0.000000000 0.00000 $9.74 102.669 $9.74 $1,000.00
3/31/94 102.669 0.043564084 0.00000 $9.15 103.158 $9.15 $943.90
4/30/94 103.158 0.042400043 0.00000 $9.13 103.637 $9.13 $946.21
5/31/94 103.637 0.042715642 0.00000 $9.11 104.123 $9.11 $948.56
$1,000 (1+T) = End Value
T = -5.14%
</TABLE>
<TABLE>
<S> <C> <C> <C>
FU UTILITY PORT - A Yield = 2{( $75.44 - $0.00 )+1)^6-1}=
Computation of SEC Yield 1,750 * $9.11 - 0.00000 )
As of: May 31, 1994
SEC Yield = 5.74%
Dividend and/or Interest
Inc for the 30 days ended $75.44
Net Expenses for $0.00
the Period
Avg Daily Shares
Outstanding and entitled
to receive dividends 1,750
Maxium offering price $9.11
per share as of 5-31-94
Undistributed net income 0.00000
</TABLE>
Schedule for Computation Initial
of Fund Performance Data Invest of: $1,000
Offering
F.U.S.C. MUNI BOND - B Price/
Share= $10.42
Return Since Inception
ending 5/31/94 NAV= $10.00
FYE: December 31
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Begin Capital Reinvest Ending Total
DECLARED: DAILY Reinvest Period Dividend Gain Price Period Ending Invest
PAID: MONTHLY Dates Shares /Share /Share /Share Shares Price Value
1/3/94 95.969 0.000000000 0.00000 $10.00 95.969 $10.00 $959.69
1/31/94 95.969 0.011086127 0.00000 $10.14 96.074 $10.14 $974.19
2/28/94 96.074 0.034192983 0.00000 $9.74 96.411 $10.15 $978.58
3/31/94 96.411 0.041600373 0.00000 $9.15 96.850 $9.15 $886.18
4/30/94 96.850 0.040509242 0.00000 $9.13 97.280 $9.13 $888.16
5/31/94 97.280 0.040820440 0.00000 $9.11 97.715 $9.11 $890.19
$1,000 (1+T) = End Value
T = -10.98%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
FU UTILITY PORT - B Yield = 2{( $2,130.96 - $92.68 )+1)^6-1}=
Computation of SEC Yield 49,475 * $9.49 - 0.00000 )
As of: May 31, 1994
SEC Yield = 5.27%
Dividend and/or Interest
Inc for the 30 days ended $2,130.96
Net Expenses for $92.68
the Period
Avg Daily Shares
Outstanding and entitled
to receive dividends 49,475
Maxium offering price $9.49
per share as of 5-31-94
Undistributed net income 0.00000
</TABLE>
Schedule for Computation Initial
of Fund Performance Data Invest of: $1,000
Offering
F.U.S.C. MUNI BOND. - C Price/
Share= $10.00
Return Since Inception
ending 5/31/94 NAV= $10.00
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Begin Capital Reinvest Ending Total
DECLARED: DAILY Reinvest Period Dividend Gain Price Period Ending Invest
PAID: MONTHLY Dates Shares /Share /Share /Share Shares Price Value
1/3/94 100.000 0.000000000 0.00000 $10.00 100.000 $10.00 $1,000.00
1/31/94 100.000 0.008512067 0.00000 $10.14 100.084 $10.14 $1,014.85
2/28/94 100.084 0.030037330 0.00000 $9.74 100.393 $9.74 $977.82
3/31/94 100.393 0.037672952 0.00000 $9.15 100.806 $9.15 $922.37
4/30/94 100.806 0.036727650 0.00000 $9.13 101.211 $9.13 $924.06
5/31/94 101.211 0.037030043 0.00000 $9.11 101.623 $8.75 $889.30
$1,000 (1+T) = End Value
T = -11.07%
</TABLE>
<TABLE>
<S> <C> <C> <C>
F.U.S.C. MUNI BOND - C Yield = 2{( $4,481.17 - $584.67 )+1)^6-1}=
Computation of SEC Yield 104,732 * $9.11 - 0.00000 )
As of: May 31, 1994
SEC Yield = 4.95%
Dividend and/or Interest
Inc for the 30 days ended $4,481.17
Net Expenses for $584.67
the Period
Avg Daily Shares
Outstanding and entitled
to receive dividends 104,732
Maxium offering price $9.11
per share as of 5-31-94
Undistributed net income 0.00000
</TABLE>
