<PAGE>
EVERGREEN ASSET MANAGEMENT CORP.
2500 WESTCHESTER AVENUE
PURCHASE, NEW YORK 10577
May 2, 1995
Dear Shareholders of Evergreen National Tax Free Fund:
As you are aware, Evergreen Asset Management Corp. ("Evergreen Asset"),
investment adviser to Evergreen National Tax Free Fund ("National"), and Lieber
& Company, which provides sub-advisory services to Evergreen Asset in connection
with its activities as investment adviser to National, were acquired on June 30,
1994 by First Union National Bank of North Carolina ("FUNB-NC"). As I have
mentioned before, one of the expected benefits of the transaction with FUNB-NC
to existing shareholders in the Evergreen Funds, was the prospect that Evergreen
Asset and FUNB-NC would be able to combine their investment management resources
and thereby complement each other's strengths. The proposal contained in the
accompanying proxy statement provides, in effect, for the combination of
National and First Union High Grade Tax Free Portfolio ("High Grade"), funds
with similar investment objectives and policies. Under the proposed Agreement
and Plan of Reorganization (the "Plan"), High Grade will acquire substantially
all of the assets of National in exchange for shares of High Grade. I believe
this combination achieves our goal and serves the interests of National's
shareholders.
As discussed more fully in the accompanying proxy statement, James T.
Colby, III, the current manager of National, will become a dual employee of
Evergreen Asset and FUNB-NC, joining FUNB-NC's Capital Management Group ("CMG").
With the assistance of Robert S. Drye, the current portfolio manager of High
Grade, Mr. Colby will be primarily responsible for the ongoing management of
High Grade. As a result of this, the full resources of a combined Evergreen
Asset/First Union capital management team will be harnessed for the benefit of
High Grade and its shareholders, including National's current shareholders.
If shareholders of National approve the Plan, upon consummation of the
transaction contemplated in the Plan, you will receive shares of a class of High
Grade with the same letter designation and the same distribution-related and
shareholder servicing-related expenses and contingent deferred sales charges, if
any, and having a value equal to the value of your then outstanding shares of
National. The proposed transaction will not result in any federal income tax
liability for you or for National. As a shareholder of High Grade you will have
the ability to exchange your shares for shares of the other funds in the First
Union family of funds comparable to your present right to exchange among the
Evergreen family of funds.
The Trustees of The Evergreen Municipal Trust have called a special meeting
of shareholders of National to be held June 15, 1995 to consider the proposed
transaction. As a shareholder of National, I will be voting to approve the
transactions. I STRONGLY INVITE YOUR PARTICIPATION BY ASKING YOU TO REVIEW,
COMPLETE AND RETURN YOUR PROXY AS SOON AS POSSIBLE.
Detailed information about the proposed transaction is described in the
enclosed proxy statement. I thank you for your participation as a shareholder
and urge you to please exercise your right to vote by completing, dating and
signing the enclosed proxy card. A self-addressed, postage-paid envelope has
been enclosed for your convenience.
If you have any questions regarding the proposed transaction, please call
1-800-326-3241.
IT IS VERY IMPORTANT THAT YOUR VOTING INSTRUCTIONS BE RECEIVED AS SOON AS
POSSIBLE.
Sincerely,
(Signature of Stephen A. Lieber appears here)
STEPHEN A. LIEBER
CHAIRMAN
<PAGE>
THE EVERGREEN MUNICIPAL TRUST -- EVERGREEN NATIONAL TAX FREE FUND
2500 WESTCHESTER AVENUE
PURCHASE, NEW YORK 10577
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 15, 1995
Notice is hereby given that a Special Meeting (the "Meeting") of
Shareholders of the Evergreen National Tax Free Fund ("National"), a series of
The Evergreen Municipal Trust (the "Trust"), will be held at the offices of
First Union Corporation, Two First Union Center, 301 S. Tryon Street, Charlotte,
NC, 28288 on June 15, 1995 at 10:00 a.m. for the following purposes:
1. To consider and act upon the Agreement and Plan of Reorganization (the
"Plan") dated as of March 21, 1995, providing for the acquisition of
substantially all of the assets of National by the First Union High
Grade Tax Free Portfolio ("High Grade"), a portfolio of First Union
Funds, in exchange for shares of High Grade, and the assumption by High
Grade of certain identified liabilities of National. The Plan also
provides for the distribution of such shares of High Grade to
shareholders of National in liquidation of and subsequent termination of
National. A vote in favor of the Plan is a vote in favor of liquidation
and dissolution of National.
2. To transact any other business which may properly come before the
Meeting or any adjournment or adjournments thereof.
The Trustees of the Trust have fixed the close of business on April 17,
1995 as the record date for the determination of shareholders of National
entitled to notice of and to vote at this Meeting or any adjournment thereof.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO NOT
EXPECT TO ATTEND IN PERSON ARE URGED WITHOUT DELAY TO SIGN AND RETURN THE
ENCLOSED PROXY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE, SO THAT
THEIR SHARES MAY BE REPRESENTED AT THE MEETING. YOUR PROMPT ATTENTION TO THE
ENCLOSED PROXY WILL HELP TO AVOID THE EXPENSE OF FURTHER SOLICITATION.
By order of the Board of Trustees
JOAN V. FIORE
SECRETARY
May 2, 1995
<PAGE>
INSTRUCTIONS FOR EXECUTING PROXY CARDS
The following general rules for signing proxy cards may be of assistance to
you and avoid the time and expense involved in validating your vote if you fail
to sign your proxy card(s) properly.
1. INDIVIDUAL ACCOUNTS: Sign your name exactly as it appears in the
Registration on the proxy card(s).
2. JOINT ACCOUNTS: Either party may sign, but the name of the party signing
should conform exactly to a name shown in the Registration on the proxy
card(s).
3. ALL OTHER ACCOUNTS: The capacity of the individual signing the proxy
card(s) should be indicated unless it is reflected in the form of
Registration. For example:
REGISTRATION VALID SIGNATURE
CORPORATE ACCOUNTS
(1) ABC Corp. ABC Corp.
(2) ABC Corp. John Doe, Treasurer
(3) ABC Corp. John Doe
c/o John Doe, Treasurer
(4) ABC Corp. Profit Sharing Plan
TRUST ACCOUNTS
(1) ABC Trust Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee Jane B. Doe
u/t/d/12/28/78
CUSTODIAL OR ESTATE ACCOUNTS
(1) John B. Smith, Cust. John B. Smith
f/b/o John B. Smith, Jr. UGMA
(2) John B. Smith, Jr. John B. Smith, Jr. Executor
<PAGE>
PROSPECTUS/PROXY STATEMENT DATED MAY 2, 1995
ACQUISITION OF ASSETS OF
EVERGREEN NATIONAL TAX FREE FUND,
A SERIES OF
THE EVERGREEN MUNICIPAL TRUST
2500 WESTCHESTER AVENUE
PURCHASE, NEW YORK 10577
BY AND IN EXCHANGE FOR SHARES OF
FIRST UNION HIGH GRADE TAX FREE PORTFOLIO,
A PORTFOLIO OF FIRST UNION FUNDS
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
This Prospectus/Proxy Statement is being furnished to shareholders of
Evergreen National Tax Free Fund ("National"), a series of The Evergreen
Municipal Trust (the "Trust"), in connection with a proposed Agreement and Plan
of Reorganization (the "Plan"), to be submitted to shareholders of National for
consideration at a Special Meeting of Shareholders to be held on June 15, 1995
at 10:00 a.m. Eastern Daylight Time, at the offices of First Union Corporation,
Two First Union Center, 301 S. Tryon Street, Charlotte, N.C. 28288, and any
adjournments thereof (the "Meeting"). The Plan provides for substantially all of
the assets of National to be acquired by the First Union High Grade Tax Free
Portfolio ("High Grade"), a portfolio of First Union Funds, in exchange for
shares of High Grade and the assumption by High Grade of certain identified
liabilities of National (hereinafter referred to as the "Reorganization").
Following the Reorganization, shares of High Grade will be distributed to
shareholders of National in liquidation of National, and National will be
terminated. Holders of shares in National will receive shares of the Class of
High Grade (the "Corresponding Shares") having the same letter designation and
the same distribution-related fees, shareholder servicing-related fees and sales
charges, including contingent deferred sales charges ("CDSCs"), if any, as the
shares of the Class of National held by them prior to the Reorganization (see
"Summary -- Distribution of Shares"). As a result of the proposed
Reorganization, shareholders of National will receive that number of full and
fractional Corresponding Shares of High Grade having an aggregate net asset
value equal to the aggregate net asset value of such shareholder's shares of
National. The Reorganization is being structured as a tax-free reorganization
for federal income tax purposes.
High Grade is a diversified portfolio of First Union Funds, an open-end
management investment company registered under the Investment Company Act of
1940, as amended (the "1940 Act"). First Union Funds currently comprises 17
portfolios, including High Grade.
High Grade seeks a high level of federally tax free income that is
consistent with preservation of capital. High Grade pursues this objective by
investing primarily in a portfolio of insured municipal bonds and, under normal
circumstances, it is expected that at least 65% of the assets of High Grade will
be invested in High Grade Bonds (as defined herein). The shares of High Grade
are presently issued in three Classes: Class A Investment, Class B Investment
and Y Shares (herein referred to as "Class A," "Class B" and "Class Y,"
respectively).
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about High Grade that
shareholders of National should know before voting on the Reorganization.
Certain relevant documents listed below, which have been filed with the
Securities and Exchange Commission ("SEC"), are incorporated in whole or in part
by reference. A Statement of Additional Information dated May 2, 1995, relating
to this Prospectus/Proxy Statement and the Reorganization, incorporating by
reference the financial statements of High Grade dated December 31, 1994 and the
financial statements of National for the fiscal period ended August 31, 1994,
has been filed with the SEC and is incorporated by reference in its entirety
into this Prospectus/Proxy Statement. A copy of such Statement of Additional
Information is available upon request and without charge by writing to First
Union Funds at the address listed on the cover page of this Prospectus/Proxy
Statement or by calling toll-free 1-800-326-3241. In order to expedite delivery,
any such request should refer to "High Grade -- Prospectus/Proxy
Statement/Statement of Additional Information."
The Prospectuses of High Grade dated February 28, 1995 and its Annual
Report for the fiscal year ended December 31, 1994 are incorporated herein by
reference in their entirety, insofar as they relate to High Grade only, and not
to any other fund described therein, and copies are included for your
information. The two Prospectuses, which pertain (i) to Class Y shares and (ii)
to Class A and Class B shares, differ only insofar as they pertain to the
separate distribution and shareholder
<PAGE>
servicing arrangements applicable to the Classes. Shareholders of National will
receive, with this Prospectus/Proxy Statement, copies of the Prospectus
pertaining to the respective Class of High Grade that they will receive as a
result of the consummation of the Reorganization. Additional information about
High Grade is contained in its Statement of Additional Information which has
been filed with the SEC and is available upon request and without charge by
writing to High Grade at the address listed on the cover page of this
Prospectus/Proxy Statement or by calling toll-free 1-800-326-3241.
The Prospectuses of National dated January 3, 1995, insofar as they relate
to National only, and not to any other fund described therein, are incorporated
herein in their entirety by reference. Copies of the Prospectuses and a
Statement of Additional Information dated the same date are available upon
request without charge by writing to National at the address listed on the cover
page of this Prospectus/Proxy Statement or by calling toll-free 1-800-326-3241.
Included as Exhibit A of this Prospectus/Proxy Statement is a copy of the
Plan.
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/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OFFERED BY THIS PROSPECTUS/PROXY STATEMENT ARE NOT DEPOSITS OR
OBLIGATIONS OF FIRST UNION OR ANY SUBSIDIARIES OF FIRST UNION, ARE NOT ENDORSED
OR GUARANTEED BY FIRST UNION OR ANY SUBSIDIARIES OF FIRST UNION, AND ARE NOT
INSURED OR OTHERWISE PROTECTED 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.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
COMPARISON OF FEES AND EXPENSES........................................................................................ 4
EXPENSE RATIOS....................................................................................................... 8
SUMMARY................................................................................................................ 9
Proposed Reorganization.............................................................................................. 9
Tax Consequences..................................................................................................... 9
Investment Objectives and Policies -- High Grade..................................................................... 9
Investment Objectives and Policies -- National....................................................................... 10
Comparative Performance Information for Each Fund.................................................................... 10
Management of the Funds.............................................................................................. 11
Distribution of Shares............................................................................................... 12
Purchase and Redemption Procedures................................................................................... 14
Exchange Privileges.................................................................................................. 14
Dividend Policy...................................................................................................... 15
RISKS.................................................................................................................. 15
INFORMATION ABOUT THE REORGANIZATION................................................................................... 15
Reasons For The Reorganization....................................................................................... 15
Agreement and Plan of Reorganization................................................................................. 15
Federal Income Tax Consequences...................................................................................... 16
Recommendation of the Board.......................................................................................... 17
Pro Forma Capitalization............................................................................................. 18
Shareholder Information.............................................................................................. 18
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES....................................................................... 19
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS........................................................................ 21
Form of Organization................................................................................................. 21
Capitalization....................................................................................................... 21
Shareholder Liability................................................................................................ 22
Shareholder Meetings and Voting Rights............................................................................... 22
Liquidation or Dissolution........................................................................................... 22
Liability and Indemnification of Trustees............................................................................ 22
Rights of Inspection................................................................................................. 22
ADDITIONAL INFORMATION................................................................................................. 23
VOTING INFORMATION CONCERNING THE MEETING.............................................................................. 23
FINANCIAL STATEMENTS AND EXPERTS, LEGAL MATTERS........................................................................ 24
OTHER BUSINESS......................................................................................................... 24
</TABLE>
3
<PAGE>
COMPARISON OF FEES AND EXPENSES
COMPARISON OF FEES AND EXPENSES. The amounts for each of the Classes of
shares of High Grade set forth in the following tables and examples are
estimated based on the expenses expected during the fiscal year ending December
31, 1995. The amounts for Class A and Class B shares of National set forth both
in the tables and in the examples are estimated based on the experience of
National Class Y shares for the fiscal year ended August 31, 1994, without
taking into account voluntary advisory fee waivers. Class A shares and Class B
shares of National were first offered to the public as of January 3, 1995.
The comparison of fees and expenses does not reflect the undertaking of
FUNB-NC to limit certain fees discussed elsewhere in this proxy.
The following tables show for High Grade and National the shareholder
transaction expenses and annual fund operating expenses associated with an
investment in the respective comparable Classes of shares of High Grade and
shares of National, and such costs and expenses associated with an investment in
each Class of shares of High Grade assuming consummation of the Reorganization.
COMPARISON OF CLASS Y SHARES OF HIGH GRADE WITH CLASS Y SHARES OF NATIONAL
<TABLE>
<CAPTION>
HIGH
GRADE
HIGH GRADE NATIONAL PRO FORMA
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)............. None None None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price).................................................. None None None
Contingent Deferred Sales Charge........................................................ None None None
Exchange Fee (only applies after 4 exchanges per calendar year)......................... None $5 None
Redemption Fees......................................................................... None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
Advisory Fee............................................................................ 0.50% 0.50% 0.50%
12b-1 Fees.............................................................................. None None None
Other Expenses.......................................................................... 0.33% 0.39% 0.31%
Annual Fund Operating Expenses (1)........................................................ 0.83% 0.89% 0.81%
</TABLE>
(1) Annual Fund Operating Expenses for Class Y shares of National do not reflect
a voluntary advisory fee waiver by Evergreen Asset (defined below) of .48%
of average net assets and a voluntary reimbursement of a portion of
National's other expenses representing .12% of average net assets for the
fiscal year ending August 31, 1994. From time to time Evergreen Asset may,
at its discretion, reduce or waive its fees or reimburse National for
certain of its other expenses in order to reduce its expense ratio.
Evergreen Asset may cease these voluntary waivers and reimbursements at any
time.
High Grade Class Y shares Annual Fund Operating Expenses were .76% for the
year ended December 31, 1994. Class Y shares Annual Fund Operating Expenses
for High Grade, absent the voluntary waiver of the advisory fee by CMG,
would have been .77% for the year ended December 31, 1994. The Class Y
shares Annual Fund Operating Expenses for High Grade and the High Grade Pro
Forma in the table above are based on expenses expected during the fiscal
year ending December 31, 1995.
4
<PAGE>
COMPARISON OF CLASS A SHARES OF HIGH GRADE WITH CLASS A SHARES OF NATIONAL
<TABLE>
<CAPTION>
HIGH
GRADE
HIGH GRADE NATIONAL PRO FORMA
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)............. 4.75% 4.75% 4.75%
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price).................................................. None None None
Contingent Deferred Sales Charge........................................................ None None None
Exchange Fee............................................................................ None None None
Redemption Fees......................................................................... None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS)
Advisory Fee............................................................................ 0.50% 0.50% 0.50%
12b-1 Fee (1)........................................................................... 0.25% 0.25% 0.25%
Other Expenses.......................................................................... 0.33% 0.39% 0.31%
Annual Fund Operating Expenses (2)........................................................ 1.08% 1.14% 1.06%
</TABLE>
(1) The Class A shares can pay up to .75 of 1% of Class A shares' average daily
net assets as a Rule 12b-1 fee. For the foreseeable future, the High Grade
and National plan to limit the Class A shares' Rule 12b-1 payments to .25 of
1% of Class A shares' average daily net assets. Class A shares of National
began accruing Rule 12b-1 fees effective January, 1995.
(2) Annual Fund Operating Expenses for Class A shares of National do not reflect
a voluntary advisory fee waiver by Evergreen Asset of .48% of average net
assets and a voluntary reimbursement of a portion of National's other
expenses representing .12% of average net assets for the fiscal year ending
August 31, 1994. From time to time Evergreen Asset may, at its discretion,
reduce or waive its fees or reimburse National for certain of its other
expenses in order to reduce its expense ratio. Evergreen Asset may cease
these voluntary waivers and reimbursements at any time.
High Grade Class A shares Annual Fund Operating Expenses were 1.01% for the
year ended December 31, 1994. Class A shares Annual Fund Operating Expenses
for High Grade, absent the voluntary waiver of the advisory fee by CMG,
would have been 1.02% for the year ended December 31, 1994. The Class A
shares Annual Fund Operating Expenses for the High Grade Pro Forma in the
table above are based on expenses expected during the fiscal year ending
December 31, 1995.
5
<PAGE>
COMPARISON OF CLASS B SHARES OF HIGH GRADE WITH CLASS B SHARES OF NATIONAL
<TABLE>
<CAPTION>
HIGH GRADE
HIGH GRADE NATIONAL PRO FORMA
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)............... None None None
Maximum Sales Load Imposed on
Reinvested Dividends (as a
percentage of offering
price)........................ None None None
Contingent Deferred Sales
Charge........................ 5% during 1st year, 5% during 1st year, 5% during 1st year,
4% during 2nd year, 4% during 2nd year, 4% during 2nd year,
3% during 3rd year, 3% during 3rd year, 3% during 3rd year,
3% during 4th year, 3% during 4th year, 3% during 4th year,
2% during 5th year, 2% during 5th year, 2% during 5th year,
1% during 6th year, 1% during 6th year, 1% during 6th year,
1% during 7th year, 1% during 7th year, 1% during 7th year,
and 0% after 7th year and 0% after 7th year and 0% after 7th year
Exchange Fee..................... None None None
Redemption Fees.................. None None None
ANNUAL FUND OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE DAILY NET
ASSETS)
Advisory Fee..................... 0.50% 0.50% 0.50%
12b-1 Fees (1)................... 0.75% 0.75% 0.75%
Other Expenses (including .25%
Shareholder Service Fee
(2)).......................... 0.58% 0.64% 0.56%
Annual Fund Operating Expenses
(3).............................. 1.83% 1.89% 1.81%
</TABLE>
(1) Class B shares of National began accruing Rule 12b-1 fees effective January,
1995 at the maximum rate of .75%.
(2) Class B shares of High Grade began accruing the Shareholder Service Fee in
September, 1994 at the maximum rate of .25%. The Shareholder Service Fee for
Class B shares of High Grade amounted to .07% for the fiscal year ended
December 31, 1994. National began accruing shareholder servicing-related
fees in January, 1995 at the maximum rate of .25%. Evergreen National's
shareholder servicing fees are paid under its Rule 12B-1 Plan.
(3) Annual Fund Operating Expenses for Class B shares of National do not reflect
a voluntary advisory fee waiver by Evergreen Asset of .48% of average net
assets and a voluntary reimbursement of a portion of National's other
expenses representing .12% of average net assets for the fiscal year ending
August 31, 1994. From time to time Evergreen Asset may, at its discretion,
reduce or waive its fees or reimburse National for certain of its other
expenses in order to reduce its expense ratio. Evergreen Asset may cease
these voluntary waivers and reimbursements at any time.
High Grade Class B shares Annual Fund Operating Expenses were 1.58% for the
year ended December 31, 1994. Class B shares Annual Fund Operating Expenses
for High Grade, absent the voluntary waiver of the advisory fee by CMG,
would have been 1.59% for the year ended December 31, 1994. The Class B
shares Annual Fund Operating Expenses for High Grade and the combined High
Grade Pro Forma in the table above are based on expenses expected during the
fiscal year ending December 31, 1995.
Because of the asset-based sales charges, long-term Class A and Class B
shareholders may pay more than the economic equivalent of the maximum front-end
sales loads permitted under the rules of the National Association of Securities
Dealers, Inc.
6
<PAGE>
IN CONNECTION WITH THE PROPOSED REORGANIZATION, FUNB-NC HAS AGREED TO LIMIT
FOR A PERIOD OF AT LEAST ONE YEAR FROM THE EFFECTIVE DATE OF THE REORGANIZATION
THE EXPENSES OF HIGH GRADE TO THE SAME LEVEL OF NET EXPENSES CURRENTLY BORNE BY
NATIONAL (.66 OF 1% ON AN ANNUAL BASIS EXCLUSIVE OF CLASS SPECIFIC EXPENSES
INCLUDING DISTRIBUTION AND SHAREHOLDER SERVICE FEES) AND TO CONSULT WITH THE
TRUSTEES OF FIRST UNION FUNDS PRIOR TO DISCONTINUING SUCH LIMITATION AFTER THE
ONE YEAR PERIOD.
EXAMPLES
The following tables show for the respective Classes of shares of each
Fund, and for High Grade, assuming consummation of the Reorganization, examples
of the cumulative effect of shareholder transaction expenses and annual fund
operating expenses indicated above on a $1,000 investment in such shares for the
periods specified, assuming (i) a 5% annual return, and (ii) redemption at the
end of such period and, additionally for Class B shares, no redemption at the
end of each period.
In the following examples (i) the expenses for Class A Shares assume
deduction of the maximum 4.75% sales charge at the time of purchase, (ii) the
expenses for Class B Shares assume deduction at the time of redemption (if
applicable) of the maximum CDSC applicable for that time period, and (iii) the
expenses for Class B Shares reflect the conversion to Class A Shares seven years
after purchase (years eight through ten, therefore, reflect Class A expenses).
CLASS Y SHARES
<TABLE>
<CAPTION>
HIGH
GRADE
HIGH GRADE NATIONAL PRO FORMA
<S> <C> <C> <C>
After 1 year...................................................... $ 8 $ 9 $ 8
After 3 years..................................................... $ 26 $ 28 $ 26
After 5 years..................................................... $ 46 $ 49 $ 45
After 10 years.................................................... $103 $110 $ 100
</TABLE>
CLASS A SHARES
<TABLE>
<CAPTION>
HIGH
GRADE
HIGH GRADE NATIONAL PRO FORMA
<S> <C> <C> <C>
After 1 year...................................................... $ 58 $ 59 $ 58
After 3 years..................................................... $ 80 $ 82 $ 80
After 5 years..................................................... $104 $107 $ 103
After 10 years.................................................... $173 $180 $ 171
</TABLE>
CLASS B SHARES
Assuming Redemption at End of Period:
<TABLE>
<CAPTION>
HIGH
GRADE
HIGH GRADE NATIONAL PRO FORMA
<S> <C> <C> <C>
After 1 year...................................................... $ 70 $ 69 $ 70
After 3 years..................................................... $ 91 $ 89 $ 90
After 5 years..................................................... $122 $122 $ 121
After 10 years.................................................... $186 $192 $ 184
</TABLE>
Assuming No Redemption at End of Period:
<TABLE>
<CAPTION>
HIGH
GRADE
HIGH GRADE NATIONAL PRO FORMA
<S> <C> <C> <C>
After 1 year...................................................... $ 19 $ 19 $ 18
After 3 years..................................................... $ 58 $ 59 $ 57
After 5 years..................................................... $ 99 $102 $ 98
After 10 years.................................................... $186 $192 $ 184
</TABLE>
The purpose of the foregoing examples is to assist a National shareholder
in understanding the various costs and expenses that an investment in the
respective Classes of shares of High Grade as a result of the Reorganization
would bear directly and indirectly, as compared with the various direct and
indirect expenses borne by a National shareholder. These
7
<PAGE>
examples should not be considered a representation of past or future expenses or
annual return. Actual expenses and annual return may be greater or less than
those shown.
EXPENSE RATIOS. The net expense ratios for the fiscal year ended December
31, 1994 are as follows:
<TABLE>
<CAPTION>
HIGH GRADE NATIONAL
<S> <C> <C>
Class Y Shares........................................................... .76 of 1% .47 of 1%
Class A Shares........................................................... 1.01 of 1% .72 of 1%*
Class B Shares........................................................... 1.58 of 1% 1.47 of 1%*
</TABLE>
The above-mentioned expense ratios are net of voluntary advisory fee
waivers and expense reimbursements by each Fund's Investment adviser. If no
advisory fee waivers and reimbursements had been made, these expense ratios
would have been as follows:
<TABLE>
<CAPTION>
HIGH GRADE NATIONAL
<S> <C> <C>
Class Y Shares........................................................... .77 of 1% .91 of 1%
Class A Shares........................................................... 1.02 of 1% 1.16 of 1%*
Class B Shares........................................................... 1.59 of 1% 1.91 of 1%*
</TABLE>
If the Funds were consolidated, and based on the level of advisory fee
waiver on the part of First Union in effect for the fiscal year ended December
31, 1994, the pro forma expense ratios for the fiscal year ended December 31,
1994 would have been as follows:
<TABLE>
<CAPTION>
HIGH GRADE PRO FORMA
<S> <C>
Class Y Shares................................................................. .74 of 1%
Class A Shares................................................................. .99 of 1%
Class B Shares................................................................. 1.56 of 1%
</TABLE>
The following are the expense ratios for National for the fiscal year ended
August 31, 1994.
<TABLE>
<CAPTION>
EXCLUDING ADVISORY
NET OF ADVISORY FEE FEE WAIVER AND
WAIVER AND VOLUNTARY VOLUNTARY
REIMBURSEMENTS REIMBURSEMENTS
<S> <C> <C>
Class Y Shares............................................ .29 of 1% .89 of 1%
Class A Shares............................................ .54 of 1%* 1.14 of 1%*
Class B Shares............................................ 1.29 of 1%* 1.89 of 1%*
</TABLE>
* Expense ratios for National Class A and Class B shares are estimated based
upon the expense ratios of the Class Y Shares adjusted for Rule 12b-1
distribution and shareholder servicing fees. Class A and B Shares commenced
operations on January 3, 1995.
8
<PAGE>
SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE ADDITIONAL
INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS/PROXY STATEMENT, AND, TO THE
EXTENT NOT INCONSISTENT WITH SUCH ADDITIONAL INFORMATION, THE PROSPECTUSES OF
HIGH GRADE DATED FEBRUARY 28, 1995, AND THE PROSPECTUSES OF NATIONAL DATED
JANUARY 3, 1995 (WHICH ARE INCORPORATED HEREIN BY REFERENCE), AND THE PLAN, A
COPY OF WHICH IS ATTACHED TO THIS PROSPECTUS/PROXY STATEMENT AS EXHIBIT A.
PROPOSED REORGANIZATION. The Plan provides for the transfer of
substantially all of the assets of National in exchange for shares of High Grade
and the assumption by High Grade of certain identified liabilities of National.
(National and High Grade each may also be referred to in this Prospectus/Proxy
Statement as a "Fund" and collectively as the "Funds"). The Plan also calls for
the distribution of Corresponding Shares (as defined above) of High Grade to
National shareholders in liquidation of National as part of the Reorganization.
As a result of the Reorganization, each shareholder of National will become the
owner of that number of full and fractional Corresponding Shares of High Grade
having an aggregate net asset value equal to the aggregate net asset value of
the shareholder's shares of National as of the close of business on the date
that National's assets are exchanged for shares of High Grade. See "Information
About the Reorganization."
The Trustees of the Trust, including the Trustees who are not "interested
persons," as that term is defined in the 1940 Act (the "Independent Trustees"),
have concluded that the Reorganization would be in the best interests of
shareholders of National and that the interests of the shareholders of National
will not be diluted as a result of the transactions contemplated by the
Reorganization. Accordingly, the Trustees have submitted the Plan for the
approval of National's shareholders.
THE BOARD OF TRUSTEES OF THE TRUST RECOMMENDS APPROVAL OF THE PLAN
EFFECTING THE REORGANIZATION.
The Board of Trustees of First Union Funds has also approved the Plan, and
accordingly, High Grade's participation in the Reorganization.
Approval of the Reorganization on the part of National will require the
affirmative vote of more than 50% of its outstanding voting securities, with
shares of all classes voting together as one class. See "Voting Information
Concerning the Meeting."
If the shareholders of National do not vote to approve the Reorganization,
the Trustees of the Trust will continue to operate National under existing
arrangements, or consider other alternatives, including liquidation of National.
TAX CONSEQUENCES. Prior to or at the completion of the Reorganization,
National will have received an opinion of counsel that the Reorganization has
been structured so that no gain or loss will be recognized by National or its
shareholders for federal income tax purposes as a result of the receipt of
shares of High Grade in the Reorganization. The holding period and aggregate tax
basis of Corresponding Shares of High Grade that are received by National
shareholders will be the same as the holding period and aggregate tax basis of
shares of National previously held by such shareholders, provided that shares of
National are held as capital assets. In addition, the holding period and tax
basis of the assets of National in the hands of High Grade as a result of the
Reorganization will be the same as in the hands of National immediately prior to
the Reorganization.
INVESTMENT OBJECTIVES AND POLICIES -- HIGH GRADE. High Grade seeks a high
level of federally tax free income that is consistent with preservation of
capital. High Grade pursues this objective by investing primarily in a portfolio
of High Grade Bonds. "High Grade Bonds" means bonds insured by a municipal bond
insurance company which is rated AAA by Standard and Poor's Ratings Group
("S&P") and/or Aaa by Moody's Investors Service, Inc. ("Moody's"); bonds rated A
or better by S&P or Moody's; or unrated bonds, if of comparable quality as
determined by High Grade's investment adviser, The Capital Management Group
("CMG") of First Union National Bank of North Carolina ("FUNB-NC"). Under normal
circumstances, it is expected that at least 65% of the value of the total assets
of High Grade will be invested in High Grade Bonds. In addition, High Grade's
assets will be invested so that at least 80% of its assets will be invested in
securities, the income from which will be exempt from federal income taxes
(including the federal alternative minimum tax). There is no restriction on the
maturity of Municipal Securities in which the Fund may invest or on the Fund's
dollar weighted average portfolio maturity. As a matter of policy, the
investment objective of High Grade will not be changed without shareholder
approval.
Municipal bonds are debt obligations issued by states, possessions of the
United States and by the District of Columbia, and their political subdivisions
and duly constituted authorities, the interest from which is exempt from federal
income tax. Such securities are referred to in this Prospectus/Proxy Statement
as Municipal Securities. 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 High Grade in calculating the federal
alternative minimum tax.
9
<PAGE>
The Municipal Securities in which High Grade may invest generally must be
rated A or better by S&P or Moody's or, if unrated, determined to be of
comparable quality to such rated bonds, except that investments in Municipal
Securities not otherwise meeting the Fund's quality standard may be made if
insurance with respect to such securities is obtained from a municipal bond
insurance company rated AAA by S&P or Aaa by Moody's.
INVESTMENT OBJECTIVES AND POLICIES -- NATIONAL. The investment objective of
National is to achieve a high level of current income exempt from federal income
tax. National seeks to achieve its objective by investing substantially all of
its assets in a diversified portfolio of long-term Municipal Securities. The
Fund has no maturity restrictions. Its dollar weighted average portfolio
maturity, however, is generally expected to exceed fifteen years. As a matter of
policy, the investment objective of National will not be changed without
shareholder approval.
Under normal market conditions, National intends to invest at least 80% of
its total assets in Municipal Securities that, at the time of purchase, are
insured or prerefunded. Insured Municipal Securities include securities which
are insured under a mutual fund insurance policy issued to The Evergreen
Municipal Trust for the benefit of National by an insurer having a claims-paying
ability rated AAA by Standard & Poors Ratings Group ("S&P") or Aaa by Moody's
Investors Service, Inc. ("Moody's") or insured by such an insurer under an
insurance policy obtained by the issuer or underwriter of such Municipal
Securities at the time of original issuance. The Fund may also purchase
secondary market insurance on Municipal Securities which it holds or acquires.
Although the fee for secondary market insurance will reduce the yield of the
insured bond, such insurance would be reflected in the market value of the bond
purchased. A Municipal Security is prerefunded if marketable securities,
typically U.S. Treasuries, are escrowed to maturity to assure payment of
principal and interest.
In the case of both High Grade and National, it should be noted that
insurance is not a substitute for the basic credit of the issuer of a Municipal
Security, but supplements the existing credit and provides additional security
therefor. Moreover, while insurance coverage for Municipal Securities reduces
credit risk by insuring the payment of principal and interest, it does not
protect against market fluctuations caused by changes in interest rates and
other factors.
COMPARATIVE PERFORMANCE INFORMATION FOR EACH FUND. Discussions of the
manner of calculation of total return, yield and tax equivalent yield are
contained in the respective Prospectuses and Statements of Additional
Information of the Funds. The total return of each Class of shares of High Grade
and the Class Y shares of National for the one year period ended on December 31,
1994 and the period from inception through December 31, 1994 is set forth in the
table below.
AVERAGE ANNUAL COMPOUNDED TOTAL RETURN
<TABLE>
<CAPTION>
FUND PERIOD CLASS Y CLASS A CLASS B
<S> <C> <C> <C> <C>
High Grade............................................................ 1 year -- -12.12% -12.81%
From inception* -6.31% 3.03% -0.48 %
National.............................................................. 1 year -7.93%
From inception** 3.35%
</TABLE>
* The inception dates for the Class Y, Class A and Class B shares of High Grade
were February 28, 1994, February 25, 1992 and January 11, 1993, respectively.
** The inception dates for the Class Y shares was December 30, 1992 and for the
Class A and Class B shares January 3, 1995.
10
<PAGE>
The yields and tax equivalent yields of each Class of shares of High Grade
and the Class Y shares of National for the 30 days ended December 31, 1994 is
set forth in the tables below.
30 DAY SEC YIELD
<TABLE>
<CAPTION>
CLASS Y CLASS A CLASS B
<S> <C> <C> <C>
High Grade................................................................ 5.85% 5.33% 4.85%
National.................................................................. 5.52% -- --
</TABLE>
30 DAY TAX EQUIVALENT YIELD
<TABLE>
<CAPTION>
CLASS Y CLASS A CLASS B
<S> <C> <C> <C>
High Grade................................................................ 9.14% 8.33% 7.58%
National.................................................................. 8.63% -- --
</TABLE>
Discussions of those factors that materially affected the respective
performance of each Fund during its most recently completed fiscal year,
including a line graph comparison of the Fund's performance with an appropriate
broad-based securities market index, are contained in the annual report of High
Grade for its fiscal year ended December 31, 1994 and, for National, in its
Prospectus dated January 3, 1995.
MANAGEMENT OF THE FUNDS. The overall management of each of the First Union
Funds and of the Trust is the responsibility of, and is supervised by, its
Trustees.
INVESTMENT ADVISERS AND ADMINISTRATORS.
HIGH GRADE. The Capital Management Group ("CMG"), a division of First Union
National Bank of North Carolina ("FUNB-NC"), One First Union Center, 301 S.
College Street, Charlotte, North Carolina 28288, serves as investment adviser to
High Grade and is responsible for the management of its investments and
supervision of the Fund's daily business affairs. CMG is entitled to receive an
annual fee with respect to High Grade under its investment advisory agreement
with First Union Funds at an annual rate equal to .50 of 1% of the Fund's
average daily net assets. In connection with the proposed Reorganization,
FUNB-NC has agreed to limit for a period of at least one year from the effective
date of the Reorganization the expenses of High Grade to the same level of net
expenses currently borne by National (.66 of 1% on an annual basis exclusive of
class-specific expenses including distribution and shareholder service fees) and
to consult with the Trustees of First Union Funds prior to discontinuing such
limitation after the one year period.
Federated Administrative Services ("FAS") acts as administrator and fund
accounting agent for High Grade and the other portfolios of First Union Funds
and provides High Grade with certain administrative personnel and services
necessary to operate the Fund. For its services, FAS is entitled to receive a
fee at an annual rate based on the average daily net assets of First Union
Funds, computed as follows: .15 of 1% of the first $250 million; .125 of 1% of
the next $250 million; .10 of 1% of the next $250 million; and .075 of 1% of
assets in excess of $750 million. Unless waived, the minimum administration fee
during a fiscal year shall aggregate at least $50,000 per portfolio of First
Union Funds. Federated Services Company will serve as the transfer agent and
dividend disbursing agent for High Grade until on or about July 1, 1995 and
Boston Financial Data Services, Inc. will serve in that capacity thereafter.
Commencing on July 1, 1995, Evergreen Asset Management Corp. ("Evergreen Asset")
will become the administrator of First Union Funds pursuant to a contract
approved by the Trustees of First Union Funds on April 20, 1995. After July 1,
1995, High Grade will pay an administrative fee to EAMC based on average daily
net assets on an annual basis in accordance with the following schedule:
<TABLE>
<CAPTION>
AGGREGATE DAILY NET ASSETS OF
FUNDS ADMINISTERED BY EVERGREEN ASSET
FOR WHICH EVERGREEN ASSET OR FIRST UNION
ADMINISTRATIVE NATIONAL BANK OF NORTH CAROLINA
FEE SERVE AS INVESTMENT ADVISER
<C> <S>
.050% on the first $7 billion
.035% on the next $3 billion
.030% on the next $5 billion
.020% on the next $10 billion
.015% on the next $5 billion
.010% on assets in excess of $30 billion
</TABLE>
11
<PAGE>
High Grade (formerly First Union Insured Tax-Free Portfolio) commenced
operations on February 21, 1992. High Grade had $98 million in aggregate net
assets as of March 1, 1995.
NATIONAL. Evergreen Asset Management Corp. ("Evergreen Asset") is the
investment adviser of National and, as such, manages its investments, provides
various administrative services and supervises the Fund's daily business
affairs. Under its investment advisory agreement with National, Evergreen Asset
is entitled to receive an annual fee equal to .50 of 1% of the Fund's average
daily net assets. Evergreen Asset has engaged Lieber & Company to provide
certain sub-advisory services to Evergreen Asset in connection with its
activities as investment adviser to National. The address of Evergreen Asset and
of Lieber & Company is 2500 Westchester Avenue, Purchase, New York 10577. All
reimbursements to Lieber & Company in respect of such services are borne by
Evergreen Asset and do not result in any additional expense to National.
National (formerly Evergreen Insured National Tax-Free Fund) was organized
as a separate investment series of the Evergreen Municipal Trust on November 17,
1992 and commenced operations on December 30, 1992. As of March 1, 1995,
National had total net assets of $24 million.
CERTAIN INFORMATION REGARDING CMG, EVERGREEN ASSET AND FUNB-NC. CMG has
advised First Union Funds since First Union Funds' inception in 1984. CMG has
been managing trust assets for over 50 years and currently oversees assets of
more than $51.2 billion. CMG 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. In addition to High Grade, CMG manages six
other portfolios of First Union Funds that invest primarily in Municipal
Securities: First Union Tax Free Money Market Portfolio, 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.
Including High Grade, CMG acts as investment adviser to mutual funds which
invest principally in Municipal Securities having assets of approximately $211
million, as of March 1, 1995.
Evergreen Asset, together with its predecessor, has served as investment
adviser to the complex of mutual funds comprising the Evergreen Funds since
1971. Since June 30, 1994, Evergreen Asset has been a wholly-owned subsidiary of
FUNB-NC. Stephen A. Lieber and Nola Maddox Falcone serve as the chief investment
officers of Evergreen Asset and, along with Theodore J. Israel, Jr., were the
owners of Evergreen Asset's predecessor of the same name and the former general
partners of Lieber & Company. In addition to National, Evergreen Asset manages
three other mutual funds which invest primarily in Municipal Securities,
Evergreen Short Intermediate Municipal Fund, Evergreen Short Intermediate
Municipal Fund-CA, and Evergreen Tax-Exempt Money Market Fund. Including
National, the total net assets of mutual funds which invest principally in
Municipal Securities for which Evergreen Asset serves as investment adviser are
$488 million, as of March 1, 1995.
FUNB-NC is a subsidiary of First Union Corporation ("First Union"), a bank
holding company headquartered in Charlotte, North Carolina, with $77.3 billion
in total consolidated assets as of December 31, 1994. First Union and its
subsidiaries provide a broad range of financial services to individuals and
businesses through offices in 42 states and two foreign countries. First Union
Brokerage Services, Inc., a wholly-owned subsidiary of FUNB-NC, is a registered
broker-dealer that is principally engaged in providing retail brokerage services
consistent with its federal banking authorizations. First Union Capital Markets
Corp., a wholly-owned subsidiary of First Union, is a registered broker-dealer
principally engaged in providing, consistent with its federal banking
authorizations, private placement, securities dealing, and underwriting
services.
PORTFOLIO MANAGEMENT. The portfolio manager of National is James T. Colby,
III. Mr. Colby has been associated with Evergreen Asset and its predecessor
since 1992 and has served as portfolio manager of National since its inception.
Prior to joining Evergreen Asset, Mr. Colby served as Vice President-Investments
at American Express Company from 1987 to 1992. It is expected that, following
the Reorganization, Mr. Colby will become a dual employee of CMG and Evergreen
Asset and will be primarily responsible for the management of High Grade, in
which function he will be substantially assisted by Robert S. Drye. Mr. Drye,
who is a Vice President of FUNB-NC, currently manages High Grade. Mr. Drye has
been with FUNB-NC since 1968. Mr. Drye has managed High Grade since its
inception in February, 1992. Since 1989, Mr. Drye has served as a portfolio
manager for several portfolios of 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 is also portfolio manager of the First Union
South Carolina Municipal Bond Portfolio and Florida Municipal Bond Portfolio of
First Union Funds.
DISTRIBUTION OF SHARES. Evergreen Funds Distributor, Inc. ("EFD"), a
wholly-owned subsidiary of Furman Selz Incorporated acts as underwriter of
National's shares. Federated Securities Corp. ("FSC"), a subsidiary of Federated
Investors, has acted as distributor of High Grade's shares. Commencing on July
1, 1995, EFD will become the distributor of High Grade's
12
<PAGE>
shares pursuant to a contract approved by the Trustees of First Union Funds on
April 20, 1995. FSC and EFD distribute Fund shares directly or through
broker-dealers, banks, (including FUNB-NC), or other financial intermediaries.
The respective shares of each Fund with the same Class letter designation
have substantially identical sales charges (including CDSCs),
distribution-related fees and shareholder servicing-related fees, if any. The
following is a description of such charges and fees for each of the different
Classes of shares. More detailed descriptions of the distribution arrangements
applicable to the Classes of shares are contained in the respective High Grade
Prospectuses and National Prospectuses and in each Fund's respective Statement
of Additional Information.
CLASS Y SHARES. Class Y shares are sold without any sales charges and are
not subject to distribution-related fees or shareholder servicing-related fees.
CLASS A SHARES. Class A shares are sold with an initial sales charge
ranging from 4.75% to .25%, as indicated in the following chart. In addition,
Class A shares are subject to distribution-related fees as described below.
<TABLE>
<CAPTION>
SALES CHARGE AS A PERCENTAGE
AMOUNT OF TRANSACTION OF PUBLIC OFFERING PRICE
<S> <C>
$ 0-$ 99,999..................................................... 4.75%
$ 100,000-$ 249,999....................................................... 3.75%
$ 250,000-$ 499,999....................................................... 3.00%
$ 500,000-$ 999,999....................................................... 2.00%
$1,000,000-$2,499,999..................................................... 1.00%
$2,500,000 and above...................................................... 0.25%
</TABLE>
No sales charges will be imposed in respect of the Class A shares of High
Grade to be issued to National and ultimately distributed to shareholders who
currently hold Class A shares of National.
No sales charges are imposed on reinvestment of dividends or distributions
and in other circumstances described in each Fund's respective Prospectuses.
Each Fund has similar programs such as rights of accumulation and letters of
intention that enable investors to pay reduced sales charges under certain
circumstances. See the Fund's respective Statements of Additional Information
for information concerning those programs.
When Class A shares are sold, the underwriter will normally retain a
portion of the applicable sales charge and may also pay fees to banks from sales
charges for services performed on behalf of the banks' customers purchasing the
Class A shares.
CLASS B SHARES. Class B shares are sold without any front-end sales charges
but are subject to a contingent deferred sales charge ("CDSC") if shares are
redeemed during the first seven years after purchase. In addition, Class B
shares are subject to distribution-related fees and shareholder
servicing-related fees as described below. Class B shares held for seven years
are expected to automatically convert to Class A shares at the month end after
expiration of the seven year period.
The amount of the CDSC applicable to redemptions of Class B shares (which
is charged as a percentage of the lesser of the current net asset value or
original cost) will vary according to the number of years from the purchase in
the manner set forth below.
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE CONTINGENT DEFERRED SALES CHARGE
<S> <C>
First................................................................. 5%
Second................................................................ 4%
Third and Fourth...................................................... 3%
Fifth................................................................. 2%
Sixth and Seventh..................................................... 1%
</TABLE>
The CDSC is deducted from the amount of the redemption and is paid to the
respective Fund's distributor. Shares of each Fund acquired through dividend or
distribution reinvestments are not subject to a CDSC. For purposes of
determining the schedule of CDSCs, and the time of conversion to Class A shares,
applicable to Class B shares of High Grade received by National shareholders in
the Reorganization, High Grade will treat such shares as having been sold on the
date the shares of National were originally purchased by the National
shareholder.
CDSCs will be waived on redemptions of shares, following the death or
disability of a shareholder, to meet distribution requirements for certain
qualified retirement plans or in the case of certain redemptions made under a
Fund's Systematic Cash Withdrawal Plan.
13
<PAGE>
For purposes of conversion to Class A shares, Class B shares received
through the reinvestment of dividends and distributions paid on Class B shares
in a shareholder's account will be considered to be held in a separate
sub-account. Each time any Class B shares in the shareholder's account (other
than those in the sub-account) convert to Class A shares, an equal pro rata
portion of the Class B shares in the sub-account will also convert to Class A
shares.
Class B shares are subject to higher distribution-related fees than Class A
shares of a Fund for a period of approximately seven years (after which they are
expected to convert to Class A shares). The higher fees mean a higher expense
ratio, so Class B shares pay correspondingly lower dividends and may have a
lower net asset value than Class Y or Class A shares of a Fund.
At the time Class B shares are sold, the underwriter may pay a commission,
from its own resources (which funds may be obtained pursuant to certain
financing arrangements established for the purpose of enabling it to pay such
commissions at the time of sale) to the broker or other financial intermediary
responsible for making the sale. Financing arrangements with respect to
commissions have been entered into with First Union.
DISTRIBUTION-RELATED AND SHAREHOLDER SERVICING-RELATED EXPENSES. Each Fund
has adopted Rule 12b-1 plans with respect to its Class A shares and Class B
shares under which a Class may pay for distribution-related expenses at an
annual rate which may not exceed .75 of 1% of average daily net assets
attributable to the Class. Payments with respect to Class A shares of each Fund
are currently limited to .25 of 1% of average daily net assets attributable to
the Class, which amount may be increased to the full plan rate for a Fund by its
Trustees without shareholder approval. The 12b-1 fee to be charged to the Class
A shares of High Grade, .25 of 1%, will be in place for at least one year.
The Class B Rule 12b-1 plan for National provides for the payment in
respect of "shareholder services," as that term is defined in the NASD Rule (as
defined below), at an annual rate which may not exceed .25 of 1% (making total
Rule 12b-1 fees for Class B shares of National payable at a maximum annual rate
of 1.00%). The Trustees of First Union Funds have adopted a Shareholder Services
Plan with respect to Class B shares of High Grade under which payments may be
made to compensate organizations, which may include FUNB-NC or its affiliates,
and which may or may not be a broker or other financial intermediary responsible
for the sale of Class B shares, for personal services rendered to Class B
shareholders and/or the maintenance of shareholder accounts, at an annual rate
not to exceed .25 of 1%.
The payment of fees under the respective Rule 12b-1 plans may from time to
time be limited to the extent any amounts payable thereunder exceed the
limitations contained under Section 26(d) of Article III of the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. ("NASD Rule").
The NASD Rule provides that the rate of payments of "asset based sales charges"
shall not exceed .75 of 1% of average annual net assets and, to the extent that
payments are made in respect of "shareholder services," the rate of such
payments shall be limited to .25 of 1% of average annual net assets. In
addition, the payment of such fees and the Funds' sales charges (including
CDSCs) may from time to time be limited by certain other provisions of the NASD
Rule.
PURCHASE AND REDEMPTION PROCEDURES. Information concerning applicable sales
charges, distribution-related fees and shareholder servicing-related fees are
described above. Shares of each Fund are sold at the net asset value (plus any
applicable sales charges) next determined after receipt of a purchase order. The
minimum initial purchase requirement for both National and High Grade is $1,000;
there is no minimum for subsequent purchases. Each Fund provides for telephone,
mail or wire redemption of shares at net asset value (subject, in the case of
Class B shares, to any applicable CDSC) as next determined after receipt of a
redemption request on each day the New York Stock Exchange is open. Additional
information concerning purchases and redemptions of shares, including how the
Funds' net asset values are determined, is contained in the respective
Prospectuses for each Fund. Each Fund may involuntarily redeem shareholder's
accounts that have less than $1,000 of invested funds.
EXCHANGE PRIVILEGES. Holders of shares of each Class of High Grade
currently are permitted to exchange such shares for shares of the same Class of
other portfolios of First Union Funds. Holders of shares of each Class of
National currently are permitted to exchange such shares for shares of the same
Class of other funds in the Evergreen mutual fund complex. The current exchange
privileges, and the requirements and limitations attendant thereto, are
described in the Funds' respective Prospectuses and Statements of Additional
Information. After July 1, 1995 (or as soon thereafter as is reasonably
practicable, and subject to applicable laws), it is expected, although it cannot
be assured, that shareholders in each of First Union Funds and the Evergreen
mutual fund complex will be permitted to exchange their shares for shares of the
same Class (to the extent available) of all portfolios of First Union Funds and
all funds in the Evergreen mutual fund complex. Although there is no present
intention to do so, the exchange privilege may be modified or terminated at any
time.
14
<PAGE>
DIVIDEND POLICY. Each Fund declares income dividends daily and pays such
dividends monthly. Distributions of any net realized capital gains of a Fund
will be made at least annually. Dividends and distributions are reinvested in
additional shares of the same Class of the respective Fund, or paid in cash, as
a shareholder has elected. See the respective Prospectuses of the Funds for
further information concerning dividends and distributions.
After the Reorganization, shareholders of National that have elected (or
that so elect no later than June 15, 1995) to have their dividends and/or
distributions reinvested, will have dividends and/or distributions received from
High Grade reinvested in shares of High Grade. Shareholders of National that
have elected (or that so elect no later than June 15, 1995) to receive dividends
and/or distributions in cash will receive dividends and/or distributions from
High Grade in cash after the Reorganization, although they may, after the
Reorganization, elect to have such dividends and/or distributions reinvested in
additional shares of High Grade.
Each Fund has qualified and intends to continue to qualify to be treated as
a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code"). While so qualified, so long as each Fund distributes all
of its investment company taxable income and non-taxable income and any net
realized gains to shareholders, it is expected that the Fund will not be
required to pay any federal income taxes on the amounts so distributed. A 4%
nondeductible excise tax will be imposed on amounts not distributed if a Fund
does not meet certain distribution requirements with respect to the end of each
calendar year. Each Fund anticipates meeting such distribution requirements.
RISKS
In general, an investment in either of the Funds entails substantially the
same risks, such as interest rate risk (the risk that bond prices, and
accordingly Fund share prices, will decline as interest rates rise), the credit
risk associated with the investment in certain Municipal Securities and the risk
that the credit enhancement provided by insurance may not prove effective in
assuring the timely payment of principal or interest. There is no assurance the
investment objective of any Fund will be achieved. See "Comparison Of Investment
Objectives And Policies".
INFORMATION ABOUT THE REORGANIZATION
REASONS FOR THE REORGANIZATION. There are substantial similarities between
National and High Grade. Specifically, National and High Grade have similar
investment objectives and policies, and comparable risk profiles. See,
"Comparison of Investment Objectives and Policies," below. In addition, the
investment records of each Fund are comparable. See, "Comparative Performance
Information for Each Fund." In terms of total net assets there is, however, a
significant difference between the two Funds: as of March 1, 1995, National had
net assets of $24 million, whereas High Grade had net assets of $98 million.
National has not, since its inception in 1992, achieved asset levels on a
continuing basis that would permit it, without a significant waiver of fees and
reimbursement of expenses by Evergreen Asset (the continuance of which voluntary
waivers and reimbursements cannot be assured) to operate economically and
generate a competitive yield. High Grade, however, has already reached viable
asset levels since its inception in 1992. Given the substantial similarities
between the Funds, and the fact that National and High Grade are now managed by
affiliated entities and offered through certain common distribution channels,
Evergreen Asset believes that National will not be able to achieve significant
increases in asset levels in the foreseeable future. In addition, the prospect
of dividing the resources of the Evergreen/First Union mutual fund advisory
organizations between two substantially identical funds could result in both
Funds being disadvantaged due to an inability to achieve optimum size,
performance levels and the greatest possible economies of scale. There can be no
assurance any anticipated economies of scale in connection with the
Reorganization will be realized.
AGREEMENT AND PLAN OF REORGANIZATION. The following summary is qualified in
its entirety by reference to the Plan (Exhibit A hereto).
The Plan provides that High Grade will acquire all or substantially all of
the assets of National in exchange for shares of High Grade and the assumption
by High Grade of certain identified liabilities of National on June 30, 1995 or
such later date as may be agreed upon by the parties (the "Closing Date"). Prior
to the Closing Date, National will endeavor to discharge all of its known
liabilities and obligations. High Grade will not assume any liabilities or
obligations of National other than those reflected in an unaudited statement of
assets and liabilities of National prepared as of the close of regular trading
on the New York Stock Exchange, Inc. (the "NYSE"), currently 4:00 p.m. Eastern
Time, on the Closing Date. The number of full and fractional common shares of
each Class of High Grade to be received by National will be determined on the
basis of the
15
<PAGE>
relative net asset values per share of each respective Class of High Grade's
shares and the net asset values attributable to each Class of shares of
National, computed as of the close of regular trading on the NYSE on the Closing
Date. The net asset value per share of each Class will be determined by dividing
assets, less liabilities, in each case attributable to the respective Class, by
the total number of outstanding shares.
State Street Bank and Trust Company, the custodian for each Fund, will
compute the value of the Funds' respective portfolio securities. The method of
valuation employed will be consistent with the procedures set forth in the
Prospectuses and Statement of Additional Information of High Grade, Rule 22c-1
under the 1940 Act, and with the interpretations of such rule by the SEC's
Division of Investment Management.
At or prior to the Closing Date, National shall have declared a dividend or
dividends and distribution or distributions which, together with all previous
dividends and distributions, shall have the effect of distributing to National's
shareholders (in shares of National, or in cash, as the shareholder has
previously elected) all of National's investment company taxable income and
non-taxable income for the taxable year ending on or prior to the Closing Date
(computed without regard to any deduction for dividends paid) and all of its net
capital gains realized in all taxable years ending on or prior to the Closing
Date (after reductions for any capital loss carryforward).
As soon after the Closing Date as conveniently practicable, National will
liquidate and distribute pro rata to shareholders of record as of the close of
business on the Closing Date the full and fractional Corresponding Shares of
High Grade received by National. Such liquidation and distribution will be
accomplished by the establishment of accounts in the names of National's
shareholders on the share records of High Grade's transfer agent. Each account
will represent the respective pro rata number of full and fractional
Corresponding Shares of High Grade due to National's shareholders. All issued
and outstanding shares of National, including those represented by certificates,
will be canceled. High Grade does not issue share certificates to shareholders.
The shares of High Grade to be issued will have no pre-emptive or conversion
rights. After such distribution and the winding up of its affairs, National will
be terminated.
The consummation of the Reorganization is subject to the conditions set
forth in the Plan, including approval by National's shareholders, accuracy of
various representations and warranties and receipt of opinions of counsel
including those matters referred to below in "Federal Income Tax Consequences"
below. Notwithstanding approval of National's shareholders, the Plan may be
terminated: (a) by the mutual agreement of both parties; or (b) at or prior to
the Closing Date by either party (i) because of a breach by the other party of
any representation, warranty, or agreement contained therein to be performed at
or prior to the Closing Date if not cured within 30 days or (ii) because a
condition to the obligation of the terminating party has not been met and it
reasonably appears that it cannot be met.
The expenses of National in connection with the Reorganization (including
the cost of any proxy soliciting agents), will be borne by Evergreen Asset. The
expenses of High Grade incurred in connection with the Reorganization will be
borne by FUNB-NC. No portion of such expenses shall be borne directly or
indirectly by National or its shareholders. Following the reorganization, High
Grade will not be assuming any liabilities or making any reimbursements in
connection with the Rule 12b-1 Plan of National.
If the Reorganization is not approved by shareholders of National, the
Board of Trustees of the Trust will continue to operate National under existing
arrangements, or consider other possible courses of action, including
liquidation of National.
FEDERAL INCOME TAX CONSEQUENCES. The Reorganization is intended to qualify
for federal income tax purposes as a tax-free reorganization under section
368(a) of the Code. As a condition to the closing of the Reorganization,
National will receive an opinion of counsel to the effect that, on the basis of
the existing provisions of the Code, U.S. Treasury regulations issued
thereunder, current administrative rules, pronouncements and court decisions,
for federal income tax purposes, upon consummation of the Reorganization:
(1) The transfer of substantially all of the assets of National solely
in exchange for shares of High Grade and the assumption by High Grade of
certain identified liabilities, followed by the distribution of High
Grade's shares by National in dissolution and liquidation of National, will
constitute a "reorganization" within the meaning of section 368(a)(1)(C) of
the Code, and High Grade and National will each be a "party to a
reorganization" within the meaning of section 368(b) of the Code;
(2) No gain or loss will be recognized by National on the transfer of
its assets to High Grade (except, possibly, with respect to certain
options, futures and forward contracts, if any, included in the assets
("Contracts")), solely in exchange for High Grade's shares and the
assumption by High Grade of liabilities or upon the distribution (whether
actual or constructive) of High Grade's shares to National's shareholders
in exchange for their shares of National;
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<PAGE>
(3) The tax basis of the assets transferred (with the possible
exception of the Contracts) will be the same to High Grade as the tax basis
of such assets to National immediately prior to the Reorganization, and the
holding period of such assets (with the possible exception of the
Contracts) in the hands of High Grade will include the period during which
the assets were held by National;
(4) No gain or loss will be recognized by High Grade upon the receipt
of the assets from National solely in exchange for the shares of High Grade
and the assumption by High Grade of certain liabilities;
(5) No gain or loss will be recognized by National's shareholders upon
the issuance of the shares of High Grade to them, provided they receive
solely such shares (including fractional shares) in exchange for their
shares of National; and
(6) The aggregate tax basis of the shares of High Grade, including any
fractional shares, received by each of the shareholders of National
pursuant to the Reorganization will be the same as the aggregate tax basis
of the shares of National held by such shareholder immediately prior to the
Reorganization, and the holding period of the shares of High Grade,
including fractional shares, received by each such shareholder will include
the period during which the shares of National exchanged therefor were held
by such shareholder (provided that the shares of National were held as a
capital asset on the date of the Reorganization).
Opinions of counsel are not binding upon the Internal Revenue Service or
the courts. If the Reorganization is consummated but does not qualify as a
tax-free reorganization under the Code, each National shareholder would
recognize a taxable gain or loss equal to the difference between his tax basis
in his National shares and the fair market value of the High Grade shares he
received. Shareholders of National should consult their tax advisers regarding
the effect, if any, of the proposed Reorganization in light of their individual
circumstances. Tax counsel to the funds knows of no reason why the
Reorganization would not qualify as a tax-exempt reorganization. Since the
foregoing discussion only relates to the federal income tax consequences of the
Reorganization, shareholders of National should also consult their tax advisers
as to state and local tax consequences, if any, of the Reorganization.
RECOMMENDATION OF THE BOARD. Based on the recommendation of Evergreen Asset
and FUNB, at Special Meetings held on January 6, 1995 and March 7, 1995, the
respective Boards of Trustees of the Trust and the First Union Funds considered
and approved the Reorganization, including the entry by the Trust and First
Union Funds into the Plan on behalf of each Fund. Specifically, the Trustees of
the Trust determined that the proposed Reorganization would be in the best
interests of National and its shareholders and would not result in the dilution
of the interests of shareholders.
In reaching their decision to recommend shareholder approval of the
Reorganization, the Trustees of the Trust considered the information discussed
above in "Reasons for the Reorganization," including the fact that National has
never achieved a viable asset level. In addition, the Trustees considered, among
other things, (i) the terms and conditions of the Reorganization; (ii) whether
the Reorganization would result in the dilution of shareholder interests; (iii)
the fact that Evergreen Asset will bear the expenses incurred by National in
connection with the Reorganization; (iv) the fact that High Grade will assume
all of the disclosed obligations and certain stated liabilities of National; and
(v) the expected federal income tax consequences of the Reorganization.
The Trustees also considered the benefits to be derived by shareholders of
National from the sale of its assets to High Grade. In this regard, the Trustees
considered the potential benefits of being associated with a larger more viable
entity (including the economies of scale that could be realized by the
participation by shareholders of National in the combined fund), and the
undertaking made by FUNB-NC in connection with the proposed Reorganization to
limit for a period of at least one year from the effective date of the
Reorganization the expenses borne by High Grade to the same level of net
expenses currently borne by National (.66 of 1% on an annual basis exclusive of
class specific expenses including distribution and shareholder service fees) and
to consult with the Trustees of First Union Funds prior to discontinuing such
limitation after the one year period. In addition, the Trustees considered that
there are alternatives available to shareholders of National, including the
ability to redeem their shares, as well as the option to vote against the
Reorganization.
During their consideration of the Reorganization, the Independent Trustees
met with the other Trustees as well as separately with independent legal counsel
regarding the legal issues involved. The Trustees of High Grade also concluded
that the proposed Reorganization would be in the best interests of shareholders
of High Grade and that the interests of the shareholders of High Grade will not
be diluted as a result of the transactions contemplated by the Reorganization.
THE TRUSTEES OF THE TRUST RECOMMEND THAT THE SHAREHOLDERS OF NATIONAL
APPROVE THE PROPOSED REORGANIZATION.
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<PAGE>
PRO FORMA CAPITALIZATION. The following tables show the capitalization of
High Grade and National as of March 31, 1995 and on a pro forma basis as of that
date, giving effect to the proposed acquisition of assets at net asset value:
CAPITALIZATION OF NATIONAL AND HIGH GRADE
<TABLE>
<CAPTION>
NATIONAL(1) HIGH GRADE
CLASS Y CLASS A CLASS B CLASS Y CLASS A CLASS B
<S> <C> <C> <C> <C> <C> <C>
Net Assets...................... $22,153,451 $ 871,187 1,312,677 $4,836,490 $58,667,683 $33,357,700
Shares Outstanding.............. 2,209,445 86,887 130,829 $ 461,292 5,595,618 3,181,569
Net Asset Value per Share....... $10.03 $10.03 $10.03 $10.48 $10.48 $10.48
</TABLE>
PRO FORMA COMBINED CAPITALIZATION OF HIGH GRADE(2)
<TABLE>
<CAPTION>
CLASS Y CLASS A CLASS B
<S> <C> <C> <C>
Net Assets...................................................................... $26,989,941 $59,538,870 $34,670,377
Shares Outstanding(3)........................................................... 2,575,866 5,678,774 3,306,780
Net Asset Value per Share....................................................... $10.48 $10.48 $10.48
</TABLE>
(1) Net Assets and Net Asset Value per Share of National represent the aggregate
and per share value of National's net assets which would have been
transferred to High Grade had the Reorganization been consummated on March
31, 1995.
(2) Data does not take into account expenses incurred in the Reorganization
which will be borne by Evergreen Asset for National and by FUNB for High
Grade.
(3) Had the Reorganization been consummated on March 31, 1995, National would
have received 2,114,574 Class Y, 83,156 Class A and 125,211 Class B shares
of High Grade, which would then be available for distribution to
shareholders. No assurance can be given as to how many Class Y, Class A and
Class B shares of High Grade National shareholders will receive on the date
that the Reorganization takes place, and the foregoing should not be relied
upon to reflect the number of Class Y, Class A and Class B shares of High
Grade that will actually be received on or after such date.
SHAREHOLDER INFORMATION. As of April 17, 1995 (the "Record Date"), the
following number of each Class of outstanding shares of beneficial interest of
National were outstanding: Class A -- 85,988; Class B -- 137,360; and Class Y --
2,247,702. Other than the shares owned by Foster Bam set forth in the table
below, the officers and Trustees of National own, as a group, less than 1% of
the outstanding shares of National.
The number and percentage of outstanding shares of National owned by the
officers and Trustees of the Trust, or by each person who, to the Trust's
knowledge, owned beneficially or of record more than 5% of National's total
outstanding shares as of the Record Date, is as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
CLASS Y SHARES
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE OF CLASS OUTSTANDING
<S> <C> <C> <C>
Foster Bam, 429,932 19.13% 17.40%
2 Greenwich Plaza
Greenwich, CT 06830
</TABLE>
As of the Record Date, the current officers and current Trustees of
National, and the former officers and former Trustees of National who are
currently officers of, or associated with, Evergreen Asset and Lieber (including
Mr. Lieber), and the accounts for which Lieber or First Union has discretion to
vote the shares, owned in the aggregate 23.49% of National's shares. It is
expected that all of the shares owned by these persons will vote to approve the
Plan.
The number and percentage of outstanding shares of First Union High Grade
Tax-Free owned by the officers and Trustees of the Trust, or by each person who,
to the Trust's knowledge, owned beneficially or of record more than 5% of First
Union High Grade Tax-Free's total outstanding shares as of the Record Date, is
as follows:
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<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
CLASS Y SHARES
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE OF CLASS OUTSTANDING
<S> <C> <C> <C>
First Union National Bank of 365,671 79.20% 3.98%
North Carolina
Trust Accounts
301 S. Tryon Street
Charlotte, NC 28288
First Union National Bank of 61,840 13.40% .67%
North Carolina
Trust Accounts
301 S. Tryon Street
Charlotte, NC 28288
</TABLE>
As of April 17, 1995, the following number of each Class of the shares of
High Grade were outstanding: Class A -- 5,572,891; Class B -- 3,164,718; and
Class Y -- 461,557. As of the Record Date, the officers and Trustees of High
Grade beneficially owned as a group less than 1% of the outstanding shares of
High Grade. To the best knowledge of the Trustees, as of the Record Date, no
other shareholder or "group" (as that term is used in Section 13(d) of the
Securities Exchange Act of 1934, the ("Exchange Act")) beneficially owned more
than 5% of High Grade's outstanding shares.
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
The following discussion is based upon and qualified in its entirety by the
descriptions of the respective investment objectives, policies and restrictions
set forth in the respective Prospectuses and Statements of Additional
Information of the Funds. The investment objectives, policies and restrictions
of High Grade can be found in its Prospectuses under the caption "Investment
Objectives and Policies." High Grade's Prospectuses also offers five additional
funds advised by CMG. These additional funds are not involved in the
Reorganization, their investment objectives, policies and restrictions are not
discussed in this Prospectus/Proxy Statement and their shares are not offered
hereby. The investment objectives, policies and restrictions of National can be
found in its Prospectuses under the caption "Investment Objective and Policies."
National's Prospectuses also offers three additional funds advised by Evergreen
Asset. These additional funds are not involved in the Reorganization, and their
investment objectives, policies and restrictions are not discussed in this
Prospectus/Proxy Statement.
Both High Grade and National seek to achieve a high level of current income
exempt from federal income tax by investing substantially all of their assets in
a diversified portfolio of Municipal Securities. While the investment objectives
and policies of each Fund are similar, certain differences exist that could
impact on the performance of, and risks associated with, an investment in each
Fund.
MUNICIPAL SECURITIES.
CREDIT RATINGS. High Grade will invest at least 65% of its total assets,
and intends to invest primarily, in a portfolio of Municipal Securities rated A
or better by S&P or Moody's; if unrated, determined to be of comparable quality
to such rated bonds; or insured by a municipal bond insurance company rated AAA
by S&P or Aaa by Moody's. High Grade generally will not invest in Municipal
Securities rated BBB by S&P or Baa by Moody's, or having a rating below such
ratings, except that High Grade may invest in Municipal Securities which would
otherwise not meet its quality standards so long as it obtains municipal bond
insurance with respect to such securities.
National intends, under normal market conditions, to invest at least 80% of
its total assets in Municipal Securities that, at the time of purchase, are
insured by an insurer having a claims-paying ability rated AAA by S&P or Aaa by
Moody's, or are prefunded. While National will generally invest in Municipal
Securities rated A or higher by S&P or Moody's, National may also invest in
general obligation bonds which are rated BBB by S&P, Baa by Moody's, or which
bear a similar rating from another nationally recognized statistical rating
organization. Such medium grade bonds are more susceptible to adverse economic
conditions or changing circumstances than higher grade bonds. In general, the
credit criteria of both Funds and the investment strategies pertaining to their
portfolios entail an equivalent level of credit risk. However, because National
may invest in medium-rated Municipal Securities (rated BBB or Baa by S&P or
Moody's, respectively) without having to obtain insurance, it could be deemed to
be subject to more risk than High Grade. If any security invested in by either
of the Funds loses its rating or has its rating reduced after the Fund has
purchased it, the Fund is not required to sell or otherwise dispose of the
security, but may consider doing so.
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<PAGE>
INSURED OBLIGATIONS. The policy of High Grade is to invest at least 65% of
its assets in High Grade Bonds, which includes insured Municipal Securities.
National intends to invest at least 80% of its assets in Municipal Securities
that are either insured or prefunded, although this policy can be changed by the
Trustees without shareholder approval. Notwithstanding the foregoing, High Grade
currently has 100% of its assets invested in Municipal Securities that are
insured. Each Fund may purchase insurance with respect to the Municipal
Securities in which it invests which will result in certain expenses to the
Fund. See the High Grade Prospectuses under "Municipal Bond Insurance." Although
High Grade does not have the same requirement as National to invest at least 80%
of its assets in insured or prerefunded securities, High Grade has, to date,
invested substantially all of its assets in insured securities. To the extent
that High Grade in the future may invest a smaller percentage of its assets than
National in securities that are not insured or prerefunded, the likelihood that
it would experience financial loss resulting from the default of an issuer of
securities could be somewhat greater than in the case of National.
FLOATING RATE AND VARIABLE RATE OBLIGATIONS. Each Fund may invest in
certain variable rate and floating rate municipal obligations, including those
with or without demand features. National may invest up to 10% of its total
assets in such securities which are not readily marketable. Variable rate
securities do not have fixed interest rates; rather, those rates fluctuate based
upon changes in specified market rates, such as the prime rate, or are adjusted
at predesignated periodic intervals and they may carry a demand feature that
gives the Funds the right to demand prepayment of the principal amount of the
security prior to its maturity date.
WHEN-ISSUED SECURITIES. Each Fund may purchase Municipal Securities on a
"when-issued" basis (i.e., for delivery beyond the normal settlement date at a
stated price and yield). The Funds generally would not pay for such securities
or start earning interest on them until they are received, but they assume the
risks of ownership at the time of purchase, not at the time of receipt. Failure
of the issuer to deliver a security purchased by a Fund on a when-issued basis
may result in a Fund's incurring a loss or missing an opportunity to make an
alternative investment. The Funds each maintain cash or liquid high grade debt
obligations in a segregated account, with their custodian, in an amount equal to
such commitments. Each Fund may purchase when-issued securities only in
furtherance of its investment objectives and not for speculative purposes.
Commitments to purchase when-issued securities are limited to 25% of National's
total assets, while High Grade limits the amount it may segregate for the
purpose of making such transactions to 20% of its total assets.
STAND-BY COMMITMENTS. National may also acquire "stand-by commitments" with
respect to Municipal Securities held in its portfolio. Under a stand-by
commitment, a dealer agrees to purchase, at the Fund's option, specified
Municipal Securities at a specified price. National expects that stand-by
commitments generally will be available without the payment of direct or
indirect consideration. However, if necessary and advisable, National may pay
for stand-by commitments either separately in cash or by paying a higher price
for portfolio securities which are acquired subject to such a commitment (thus
reducing the yield to maturity otherwise available for the same securities). The
total amount paid in either manner for outstanding stand-by commitments held in
National's portfolio will not exceed 10% of the value of the Fund's total assets
calculated immediately after each stand-by commitment is acquired. National will
maintain cash or liquid high grade debt obligations in a segregated account,
with its custodian, in an amount equal to such commitments. High Grade does not
currently have a policy concerning investments in or a limitation on investments
in stand-by commitments.
TEMPORARY AND TAXABLE INVESTMENTS. National may temporarily invest up to
20% of its assets, and High Grade may invest without limit, in taxable
securities under any one or more of the following circumstances: (a) pending
investment of proceeds of sale of Fund shares or of portfolio securities, (b)
pending settlement of purchases of portfolio securities, and (c) to maintain
liquidity for the purpose of meeting anticipated redemptions. In addition,
National and High Grade may both temporarily invest more than 20% of their total
assets in taxable securities for defensive purposes. Each Fund may invest for
defensive purposes during periods when each Fund's assets available for
investment exceed the available Municipal Securities that meet each Fund's
quality and other investment criteria. To the extent the Funds invest in taxable
investments, shareholders will be subject to federal income taxes on dividends
from the Funds attributable to such taxable investments.
REPURCHASE AGREEMENTS. The Funds may enter into repurchase agreements with
member banks of the Federal Reserve System, including State Street Bank and
Trust Company, each Fund's custodian, or "primary dealers" (as designated by the
Federal Reserve Bank of New York) in U.S. Government securities. A repurchase
agreement is an arrangement pursuant to which a buyer purchases a security and
simultaneously agrees to resell it to the vendor at a price that results in an
agreed-upon market rate of return which is effective for the period of time
(which is normally one to seven days, but may be longer) the buyer's money is
invested in the security. The arrangement results in a fixed rate of return that
is not subject to market fluctuations during a Fund's holding period. Each Fund
requires continued maintenance of collateral with its custodian in an amount
equal to, or in excess of, the market value of the securities, including accrued
interest, which are the subject of a
20
<PAGE>
repurchase agreement. National and High Grade may not enter into repurchase
agreements if, as a result, more than 10% and 15%, respectively, of each Fund's
net assets would be invested in repurchase agreements maturing in more than
seven days.
REVERSE REPURCHASE AGREEMENTS. Each Fund may agree to sell portfolio
securities to financial institutions such as banks and broker-dealers and to
repurchase them at a mutually agreed upon date and price (a "reverse repurchase
agreement"). At the time a Fund enters into a reverse repurchase agreement, it
will place in a segregated custodial account cash, U.S. Government securities or
liquid high grade debt obligations having a value equal to the repurchase price
(including accrued interest) and will subsequently monitor the account to ensure
that such equivalent value is maintained. Reverse repurchase agreements involve
the risk that the market value of the securities sold by a Fund may decline
below the repurchase price of those securities. National may enter into reverse
repurchase agreements for temporary or emergency purposes only, and in amounts
not exceeding 5% of the value of its total assets. High Grade may enter into
reverse repurchase agreements as a temporary measure for extraordinary or
emergency purposes in an amount up to one-third of the value of its total
assets, including the amount borrowed, in order to meet redemption requests
without immediately selling portfolio instruments. High Grade will not purchase
any securities while borrowings, including reverse repurchase agreements, in
excess of 5% of the value of its total assets are outstanding.
RESTRICTED AND ILLIQUID SECURITIES. National may invest up to 15% of its
net assets in illiquid securities and other securities which are not readily
marketable, except that National may only invest up to 10% of its assets in
repurchase agreements with maturities longer than seven days. High Grade will
not invest more than 15% of its net assets in illiquid securities, including
repurchase agreements providing for settlement in more than seven days after
notice, and certain securities not determined by the Trustees to be liquid. In
addition, High Grade will not invest more than 10% of its total assets in
securities subject to restrictions on resale under federal securities laws. In
the case of National, securities eligible for resale pursuant to Rule 144A under
the Securities Act of 1933, which have been determined to be liquid, will not be
considered by Evergreen Asset to be illiquid or not readily marketable and,
therefore, are not subject to the aforementioned 15% limit. High Grade does not
have a similar policy with respect to investments in Rule 144A securities.
SECURITIES LENDING. In order to generate income and to offset expenses, the
Funds may lend portfolio securities to brokers, dealers and other financial
organizations. Loans of securities by a Fund, if and when made, must be
collateralized by cash, letters of credit or U.S. Government securities that are
maintained at all times in an amount equal to at least 100 percent of the
current market value of the loaned securities, including accrued interest.
National may not make loans of securities in excess of 30% of its total assets.
High Grade limits loans of securities to 15% of its total assets.
ALTERNATIVE MINIMUM TAX INVESTMENTS. Interest income on certain types of
bonds issued after August 7, 1986 to finance nongovernmental activities is an
item of "tax-preference" subject to the federal alternative minimum tax for
individuals and corporations. To the extent either Fund invests in these
"private activity" bonds (some of which were formerly referred to as "industrial
development" bonds), individual and corporate shareholders, depending on their
status, may be subject to the alternative minimum tax on the part of the Fund's
distributions derived from the bonds. High Grade normally will invest its assets
so that at least 80% of its annual interest income will be exempt from federal
income taxes, including the federal alternative minimum tax. As a matter of
fundamental policy, National will invest at least 80% of its net assets in
Municipal Securities, the interest from which is not subject to the federal
alternative minimum tax. It is likely that shareholders who are subject to the
alternative minimum tax will be required to include a portion of the interest
from the Municipal Securities owned by the Fund in calculating the federal
alternative minimum tax.
The foregoing discussion covers the principal investment policies of each
Fund and the manner in which they differ. The characteristics of each investment
policy and the associated risks are described in the Prospectus and Statement of
Additional Information of each Fund. Both High Grade and National have other
investment policies and restrictions which are also set forth in the Prospectus
and Statement of Additional Information of each Fund.
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS
FORM OF ORGANIZATION. Both Funds are series of open-end management
investment companies registered with the SEC under the 1940 Act which
continuously offer shares to the public. Each is organized as a separate
investment series of a Massachusetts business trust and is governed by a
Declaration of Trust, By-Laws and Board of Trustees. Both are also governed by
applicable Massachusetts and federal law.
CAPITALIZATION. The beneficial interests in National are represented by an
unlimited number of transferable shares of beneficial interest with a $0.0001
par value. The beneficial interests in High Grade are represented by an
unlimited number of transferable shares of beneficial interest without par
value. The respective Declarations of Trust under which the Funds
21
<PAGE>
operate permits the respective Trustees to allocate shares into an unlimited
number of series, and classes thereof, with rights determined by the Trustees.
Fractional shares may be issued. Each Fund's shares have equal voting rights
with respect to matters affecting shareholders of all classes of each Fund and
represent equal proportionate interests in the assets belonging to the Funds,
and are entitled to receive dividends and other amounts as determined by its
Trustees. Shareholders of each Fund vote separately, by class, as to matters,
such as approval of Rule 12b-1 distribution plans or amendments thereto, that
affect only their particular class.
SHAREHOLDER LIABILITY. Under Massachusetts law, shareholders of a trust
could, under certain circumstances, be held personally liable for the
obligations of the trust. However, the respective Declarations of Trust under
which the Funds operate disclaim shareholder liability for acts or obligations
of the portfolio or series and require that notice of such disclaimer be given
in each agreement, obligation or instrument entered into or executed by the
Funds or the Trustees. The Declarations of Trust provide for indemnification out
of the portfolio's or series' property for all losses and expenses of any
shareholder held personally liable for the obligations of the portfolio or
series. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered remote since it is limited to circumstances
in which a disclaimer is inoperative and the portfolio or series itself would be
unable to meet its obligations. A substantial number of mutual funds in the
United States are organized as Massachusetts business trusts.
SHAREHOLDER MEETINGS AND VOTING RIGHTS. The Funds are not required to hold
annual meetings of shareholders, but are required to call a meeting of
shareholders for the purpose of voting upon the question of removal of a Trustee
when requested in writing to do so by the holders of at least 10% of its
outstanding shares. In addition, each is required to call a meeting of
shareholders for the purpose of electing Trustees or, if, at any time, less than
a majority of the Trustees then holding office were elected by shareholders. If
Trustees of the Funds fail or refuse to call a meeting as required by the
respective Declarations of Trust for a period of 30 days after a request in
writing by shareholders holding an aggregate of at least 10% of the shares
outstanding, then shareholders holding 10% may call and give notice of a
shareholders' meeting. The Funds currently do not intend to hold regular
shareholder meetings. Neither Fund permits cumulative voting. A majority of
shares entitled to vote on a matter constitutes a quorum for consideration of
such matter. In either case, a majority of the shares voting is sufficient to
act on a matter (unless otherwise specifically required by the applicable
governing documents or other law, including the 1940 Act).
LIQUIDATION OR DISSOLUTION. In the event of the liquidation of the Funds,
the shareholders are entitled to receive, when, and as declared by the Trustees,
the excess of the assets belonging to the Funds or attributable to the relevant
class over the liabilities belonging to the Funds or attributable to the
relevant class. In either case, the assets so distributable to shareholders of
the Funds will be distributed among the shareholders in proportion to the number
of shares of the Funds held by them and recorded on the books of the Funds.
LIABILITY AND INDEMNIFICATION OF TRUSTEES. The By-Laws of The Evergreen
Municipal Trust provide that present and former Trustees or officers are
generally entitled to indemnification against liabilities and expenses with
respect to claims related to their position with National unless, in the case of
any liability to the Fund or its shareholders, it shall have been determined
that such Trustee or officer is liable by reason of his willful misfeasance, bad
faith, gross negligence or reckless disregard of his duties involved in the
conduct of his office.
The Declaration of Trust of First Union Funds provides that no Trustee,
officer or agent of First Union Funds shall be personally liable to any person
for any action or failure to act, except for his own bad faith, willful
misfeasance, or gross negligence, or reckless disregard of his duties. The
Declaration of Trust provides that a Trustee or officer is entitled to
indemnification against liabilities and expenses with respect to claims related
to his position with the Fund, unless such Trustee or officer shall have been
adjudicated to have acted with bad faith, willful misfeasance, or gross
negligence, or in reckless disregard of his duties, or not to have acted in good
faith in the reasonable belief that his action was in the best interest of the
Funds, or, in the event of settlement, unless there has been a determination
that such Trustee or officer has engaged in willful misfeasance, bad faith,
gross negligence, or reckless disregard of his duties.
RIGHTS OF INSPECTION. Shareholders of the Funds have the same right to
inspect in Massachusetts the governing documents, records of meetings of
shareholders, shareholder lists, share transfer records, accounts and books of
the Funds as are permitted shareholders of a corporation under the Massachusetts
corporation law. The purpose of inspection must be for interests of shareholders
relative to the affairs of the Funds.
The foregoing is only a summary of certain characteristics of the
operations of the Funds, the Declarations of Trust, By-Laws, and Massachusetts
law. The foregoing is not a complete description of the documents cited.
Shareholders should refer to the provisions of such respective Declarations of
Trust, By-Laws, and Massachusetts law directly for a more thorough description.
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ADDITIONAL INFORMATION
Each Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act, and must in accordance therewith file
reports and other information including proxy material, reports and charter
documents with the SEC. These reports can be inspected and copies obtained at
the Public Reference Facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at the Northeast Regional Office of the SEC, Seven World
Trade Center, Suite 1300, New York, New York 10048 and at the Southeast Regional
Office of the SEC, 1401 Brickwell Avenue, Suite 200, Miami, Florida 33131.
Copies of such material can also be obtained from the Public Reference Branch,
Office of Consumer Affairs and Information Services, Securities and Exchange
Commission, Washington, D.C. 20549 at prescribed rates.
VOTING INFORMATION CONCERNING THE MEETING
This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Board of Trustees of the Trust to be used at the
Special Meeting of Shareholders to be held at 10:00 a.m. June 15, 1995, at the
offices of First Union Corporation, Two First Union Center, 301 S. Tryon Street,
Charlotte, N.C., 28288 and at any adjournments thereof. This Prospectus/Proxy
Statement, along with a Notice of the Meeting and a proxy card, is first being
mailed to shareholders on or about May 10, 1995. Only shareholders of record as
of the close of business on the Record Date will be entitled to notice of, and
to vote at, the Meeting or any adjournment thereof. The holders of a majority of
the shares outstanding at the close of business on the Record Date present in
person or represented by proxy will constitute a quorum for the Meeting. If the
enclosed form of proxy is properly executed and returned in time to be voted at
the Meeting, the proxies named therein will vote the shares represented by the
proxy in accordance with the instructions marked thereon. Unmarked proxies will
be voted FOR the proposed Reorganization and FOR any other matters deemed
appropriate. Proxies that reflect abstentions and "broker non-votes" (i.e.,
shares held by brokers or nominees as to which (i) instructions have not been
received from the beneficial owners or the persons entitled to vote or (ii) the
broker or nominee does not have discretionary voting power on a particular
matter) will be counted as shares that are present and entitled to vote for
purposes of determining the presence of a quorum, but will have the effect of
being counted as votes against the Plan. A proxy may be revoked at any time on
or before the Meeting by written notice to the Secretary of The Evergreen
Municipal Trust, 2500 Westchester Avenue, Purchase, New York 10577. Unless
revoked, all valid proxies will be voted in accordance with the specifications
thereon or, in the absence of such specifications, FOR approval of the Plan and
the Reorganization contemplated thereby.
Approval of the Plan will require the affirmative vote of more than 50% of
the outstanding voting securities, with all Classes voting together as one
class. Each full share outstanding is entitled to one vote and each fractional
share outstanding is entitled to a proportionate share of one vote.
If the shareholders do not vote to approve the Reorganization, the Trustees
will continue to operate National under existing arrangements or consider other
alternatives, including liquidation of National.
Proxy solicitations will be made primarily by mail, but proxy solicitations
may also be made by telephone, telegraph or personal solicitations conducted by
officers and employees of Evergreen Asset, its affiliates or other
representatives of National. Proxies are solicited by mail. The cost of
solicitation will be borne by Evergreen Asset. Trustees and officers of the
Funds and officers of Evergreen Asset may also solicit proxies, without
compensation. Proxies may be solicited by mail, in person or by telephone.
Proxies may be recorded pursuant to telephone or electronically transmitted
instructions obtained pursuant to procedures reasonably designed to verify that
such instructions have been authorized.
Evergreen Asset will be responsible for the respective expenses of National
incurred in connection with entering into and carrying out the Reorganization,
whether or not the Reorganization is consummated.
In the event that sufficient votes to approve the Reorganization are not
received by June 15, 1995, the persons named as proxies may propose one or more
adjournments of either or both of the Meetings to permit further solicitation of
proxies. The persons named as proxies will vote in favor of any such adjournment
if they determine that such adjournment and additional solicitation are
reasonable and in the interests of National's shareholders. If such adjournment
is for more than 120 days after the record date, the Trust will give notice of
the adjourned Meeting to National's shareholders.
A shareholder who objects to the proposed Reorganization will not be
entitled under either Massachusetts law or the Declaration of Trust of the Trust
to demand payment for, or an appraisal of, his or her shares. However,
shareholders should be aware that the Reorganization as proposed is not expected
to result in recognition of gain or loss to shareholders for federal income tax
purposes and that, if the Reorganization is consummated, shareholders will be
free to redeem the shares of High Grade which they receive in the transaction at
their then-current net asset value. Shares of National may be redeemed at any
time prior to the consummation of the Reorganization.
The Trust does not hold annual shareholder meetings. Shareholders wishing
to submit proposals for consideration for inclusion in a proxy statement for a
subsequent shareholder meeting should send their written proposals to the
Secretary of
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the Trust at the address set forth on the cover of this Prospectus/Proxy
Statement such that they will be received by the Trust in a reasonable period of
time prior to any such meeting.
The votes of the shareholders of High Grade are not being solicited by this
Prospectus/Proxy Statement and are not required to carry out the Reorganization.
NOTICE TO BANKS, BROKER-DEALERS AND VOTING TRUSTEES AND THEIR NOMINEES.
Please advise National whether other persons are beneficial owners of shares for
which proxies are being solicited and, if so, the number of copies of this
Prospectus/Proxy Statement needed to supply copies to the beneficial owners of
the respective shares.
FINANCIAL STATEMENTS AND EXPERTS, LEGAL MATTERS
The audited financial statements and financial highlights incorporated into
this Prospectus/Proxy Statement by reference to the National Annual Report to
Shareholders for the year ended August 31, 1994 have been so incorporated in
reliance on the reports of Price Waterhouse LLP, independent accountants for
National, given on the authority of the firm as experts in accounting and
auditing.
The audited financial statements of High Grade as of December 31, 1994 and
the statement of operations for the year ended December 31, 1994 and changes in
net assets for the two years ended December 31, 1994 and financial highlights
for the period indicated therein have been incorporated by reference into this
Prospectus/Proxy Statement in reliance on the report of KPMG Peat Marwick LLP,
independent accountants for High Grade, given on the authority of the firm as
experts in accounting and auditing.
Certain legal matters concerning the issuance of shares of High Grade will
be passed upon by Sullivan & Worcester, 1025 Connecticut Avenue N.W.,
Washington, D.C. 20036
OTHER BUSINESS
The Trustees of National do not intend to present any other business at the
Meeting. If, however, any other matters are properly brought before the Meeting,
the persons named in the accompanying form of proxy will vote thereon in
accordance with their judgment.
THE BOARD OF TRUSTEES OF THE TRUST, INCLUDING THE INDEPENDENT TRUSTEES,
RECOMMEND APPROVAL OF THE PLAN, AND ANY UNMARKED PROXIES WITHOUT INSTRUCTIONS TO
THE CONTRARY WILL BE VOTED IN FAVOR OF APPROVAL OF THE PLAN.
May 2, 1995
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EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this 21st day of March, 1995, by and between First Union Funds, a Massachusetts
business trust (the "First Union Trust"), with its principal place of business
at Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779, with respect
to its First Union High Grade Municipal Bond Portfolio series (the "Acquiring
Fund"), and Evergreen Municipal Trust (the "Evergreen Trust"), a Massachusetts
business trust, with its principal place of business at 2500 Westchester Avenue
Purchase, New York 10577, with respect to its Evergreen National Tax Free Fund
series (the "Selling Fund").
This Agreement is intended to be and is adopted as a plan of reorganization
and liquidation within the meaning of Section 368 (a)(1)(D) of the United States
Internal Revenue Code of 1986 (the "Code"). The reorganization (the
"Reorganization") will consist of the transfer of substantially all of the
assets of the Selling Fund in exchange solely for shares of beneficial interest,
no par value per share, of the Acquiring Fund (the "Acquiring Fund Shares") and
the assumption by the Acquiring Fund of certain stated liabilities of the
Selling Fund and the distribution, after the Closing Date hereinafter referred
to, of the Acquiring Fund Shares to the shareholders of the Selling Fund in
liquidation of the Selling Fund as provided herein, all upon the terms and
conditions hereinafter set forth in this Agreement.
WHEREAS, the Selling Fund and the Acquiring Fund are separate investment
series of open-end, registered investment companies of the management type and
the Selling Fund owns securities which generally are assets of the character in
which the Acquiring Fund is permitted to invest;
WHEREAS, both Funds are authorized to issue their shares of beneficial
interest;
WHEREAS, the Trustees of the First Union Trust have determined that the
exchange of substantially all of the assets of the Selling Fund for Acquiring
Fund Shares and the assumption of certain stated liabilities by the Acquiring
Fund on the terms and conditions hereinafter set forth is in the best interests
of the Acquiring Fund shareholders and that the interests of the existing
shareholders of the Acquiring Fund will not be diluted as a result of the
transactions contemplated herein;
WHEREAS, the Trustees of the Evergreen Trust have determined that the
Selling Fund should exchange substantially all of its assets and certain of its
liabilities for Acquiring Fund Shares and that the interests of the existing
shareholders of the Selling Fund will not be diluted as a result of the
transactions contemplated herein;
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
ARTICLE I
TRANSFER OF ASSETS OF THE SELLING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES AND ASSUMPTION OF SELLING FUND LIABILITIES AND
LIQUIDATION OF THE SELLING FUND
1.1 THE EXCHANGE. Subject to the terms and conditions herein set forth and
on the basis of the representations and warranties contained herein, the Selling
Fund agrees to transfer the Selling Fund's assets as set forth in paragraph 1.2
to the Acquiring Fund, and the Acquiring Fund agrees in exchange therefor (i) to
deliver to the Selling Fund the number of Acquiring Fund Shares, including
fractional Acquiring Fund Shares, determined by dividing the value of the
Selling Fund's net assets computed in the manner and as of the time and date set
forth in paragraph 2.1 by the net asset value of one Acquiring Fund Share
computed in the manner and as of the time and date set forth in paragraph 2.2
and (ii) to assume certain liabilities of the Selling Fund, as set forth in
paragraph 1.3. The determination of the number of Acquiring Fund Shares to be
delivered shall be made in such a manner as to result in the Selling Fund
receiving a number of shares of the respective classes of the Acquiring Fund as
shall permit shareholders of the Selling Fund to receive shares of a class
having the same letter designation and the same distribution-related fees,
shareholder servicing-related fees and sales charges, including contingent
deferred sales charges, if any, as the shares of the class of the Selling Fund
held by them prior to the Reorganization. Such transactions shall take place at
the closing provided for in paragraph 3.1 (the "Closing Date").
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1.2 ASSETS TO BE ACQUIRED. The assets of the Selling Fund to be acquired by
the Acquiring Fund shall consist of all property, including without limitation
all cash, securities, commodities and futures interests and dividends or
interest receivable, which is owned by the Selling Fund and any deferred or
prepaid expenses shown as an asset on the books of the Selling Fund on the
Closing Date. The Selling Fund has provided the Acquiring Fund with its most
recent audited financial statements which contain a list of all of Selling
Fund's assets as of the date thereof. The Selling Fund hereby represents that as
of the date of the execution of this Agreement there have been no changes in its
financial position as reflected in said financial statements other than those
occurring in the ordinary course of its business in connection with the purchase
and sale of securities and the payment of its normal operating expenses. The
Selling Fund reserves the right to sell any of such securities but will not,
without the prior written approval of the Acquiring Fund, acquire any additional
securities other than securities of the type in which the Acquiring Fund is
permitted to invest. The Acquiring Fund will, within a reasonable time prior to
the Closing Date, furnish the Selling Fund with a statement of the Acquiring
Fund's investment objectives, policies and restrictions and a list of the
securities, if any, on the Selling Fund's list referred to in the second
sentence of this paragraph which do not conform to the Acquiring Fund's
investment objectives, policies, and restrictions. In the event that the Selling
Fund holds any investments which the Acquiring Fund may not hold, the Selling
Fund will dispose of such securities prior to the Closing Date. In addition, if
it is determined that the Selling Fund and the Acquiring Fund portfolios, when
aggregated, would contain investments exceeding certain percentage limitations
imposed upon the Acquiring Fund with respect to such investments, the Selling
Fund if requested by the Acquiring Fund will dispose of a sufficient amount of
such investments as may be necessary to avoid violating such limitations as of
the Closing Date.
1.3 LIABILITIES TO BE ASSUMED. The Selling Fund will endeavor to discharge
all of its known liabilities and obligations prior to the Closing Date. The
Acquiring Fund shall assume only those liabilities, expenses, costs, charges and
reserves reflected on a Statement of Assets and Liabilities of the Selling Fund
prepared on behalf of the Selling Fund, as of the Valuation Date (as defined in
paragraph 2.1), in accordance with generally accepted accounting principles
consistently applied from the prior audited period. The Acquiring Fund shall
assume only those liabilities of the Selling Fund reflected in such Statement of
Assets and Liabilities and shall not assume any other liabilities, whether
absolute or contingent, known or unknown, accrued or unaccrued, all of which
shall remain the obligation of the Selling Fund.
1.4 LIQUIDATION AND DISTRIBUTION. As soon after the Closing Date as is
conveniently practicable (the "Liquidation Date"), (a) the Selling Fund will
liquidate and distribute pro rata to the Selling Fund's shareholders of record,
determined as of the close of business on the Closing Date (the "Selling Fund
Shareholders"), the Acquiring Fund Shares received by the Selling Fund pursuant
to paragraph 1.1. and (b) the Selling Fund will thereupon proceed to dissolve as
set forth in paragraph 1.8 below. Such liquidation and distribution will be
accomplished by the transfer of the Acquiring Fund Shares then credited to the
account of the Selling Fund on the books of the Acquiring Fund, to open accounts
on the share records of the Acquiring Fund in the names of the Selling Fund
Shareholders and representing the respective pro rata number of the Acquiring
Fund Shares due such shareholders. All issued and outstanding shares of the
Selling Fund will simultaneously be canceled on the books of the Selling Fund.
The Acquiring Fund shall not issue certificates representing the Acquiring Fund
Shares in connection with such exchange.
1.5 OWNERSHIP OF SHARES. Ownership of Acquiring Fund Shares will be shown
on the books of the Acquiring Fund's transfer agent. Shares of the Acquiring
Fund will be issued in the manner described in the combined Prospectus and Proxy
Statement on Form N-14 to be distributed to shareholders of the Selling Fund as
described in Section 5.
1.6 TRANSFER TAXES. Any transfer taxes payable upon issuance of the
Acquiring Fund Shares in a name other than the registered holder of the Selling
Fund shares on the books of the Selling Fund as of that time shall, as a
condition of such issuance and transfer, be paid by the person to whom such
Acquiring Fund Shares are to be issued and transferred.
1.7 REPORTING RESPONSIBILITY. Any reporting responsibility of the Selling
Fund is and shall remain the responsibility of the Selling Fund up to and
including the Closing Date and such later date on which the Selling Fund is
terminated.
1.8 TERMINATION. The Selling Fund shall be terminated promptly following
the Closing Date and the making of all distributions pursuant to paragraph 1.4.
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ARTICLE II
VALUATION
2.1 VALUATION OF ASSETS. The value of the Selling Fund's assets to be
acquired by the Acquiring Fund hereunder shall be the value of such assets
computed as of the close of business on the New York Stock Exchange on the
Closing Date (such time and date being hereinafter called the "Valuation Date"),
using the valuation procedures set forth in the Trust's Declaration of Trust and
the Acquiring Fund's then current prospectus and statement of additional
information or such other valuation procedures as shall be mutually agreed upon
by the parties.
2.2 VALUATION OF SHARES. The net asset value of each class of Acquiring
Fund Shares shall be the net asset value per share computed as of the close of
business on the New York Stock Exchange on the Valuation Date, using the
valuation procedures set forth in the First Union Trust's Declaration of Trust
and the Acquiring Fund's then current prospectus and statement of additional
information.
2.3 SHARES TO BE ISSUED. The number of the Acquiring Fund Shares of each
class to be issued (including fractional shares, if any) in exchange for the
Selling Fund's assets shall be determined by dividing the value of the assets of
the Selling Fund attributable to each of its classes determined using the same
valuation procedures referred to in paragraph 2.1 by the net asset value of the
respective classes of Acquiring Fund Shares determined in accordance with
paragraph 2.2.
2.4 DETERMINATION OF VALUE. All computations of value shall be made by
State Street Bank and Trust Company in accordance with its regular practice in
pricing the shares and assets of the Acquiring Fund.
ARTICLE III
CLOSING AND CLOSING DATE
3.1 CLOSING DATE. The Closing Date shall be June 30, 1995 or such later
date as the parties may agree to in writing. All acts taking place at the
Closing shall be deemed to take place simultaneously as of the close of business
on the Closing Date unless otherwise provided. The Closing shall be held as of
5:00 o'clock p.m. at the offices of Evergreen Asset Management Corp., 2500
Westchester Avenue, Purchase, New York 10577, or at such other time and/or place
as the parties may agree.
3.2 CUSTODIAN'S CERTIFICATE. The Bank of New York, as custodian for the
Selling Fund (the "Custodian"), shall deliver at the Closing a certificate of an
authorized officer stating that: (a) the Selling Fund's portfolio securities,
cash, and any other assets shall have been delivered in proper form to the
Acquiring Fund on the Closing Date and (b) all necessary taxes including all
applicable Federal and state stock transfer stamps, if any, shall have been
paid, or provision for payment shall have been made, in conjunction with the
delivery of portfolio securities.
3.3 EFFECT OF SUSPENSION IN TRADING. In the event that on the Valuation
Date (a) the New York Stock Exchange or another primary trading market for
portfolio securities of the Acquiring Fund or the Selling Fund shall be closed
to trading or trading thereon shall be restricted, or (b) trading or the
reporting of trading on said Exchange or elsewhere shall be disrupted so that
accurate appraisal of the value of the net assets of the Acquiring Fund or the
Selling Fund is impracticable, the Closing Date shall be postponed until the
first business day after the day when trading shall have been fully resumed and
reporting shall have been restored.
3.4 TRANSFER AGENT'S CERTIFICATE. Boston Financial Data Services, Inc., as
transfer agent for each of the Selling Fund and the Acquiring Fund shall deliver
at the Closing a certificate of an authorized officer stating that their records
contain the names and addresses of the Selling Fund Shareholders and the number
and percentage ownership of outstanding shares owned by each such shareholder
immediately prior to the Closing. The Acquiring Fund shall issue and deliver a
confirmation evidencing the Acquiring Fund Shares to be credited on the Closing
Date to the Secretary of the Evergreen Trust , or provide evidence satisfactory
to the Selling Fund that such Acquiring Fund Shares have been credited to the
Selling Fund's account on the books of the Acquiring Fund. At the Closing each
party shall deliver to the other such bills of sale, checks, assignments, share
certificates, if any, receipts and other documents as such other party or its
counsel may reasonably request.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS OF THE SELLING FUND. The Selling Fund represents and
warrants to the Acquiring Fund as follows:
(a) The Selling Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing and in good
standing under the laws of The Commonwealth of Massachusetts;
(b) The Selling Fund is a separate investment series of a registered
investment company classified as a management company of the open-end type
and its registration with the Securities and Exchange Commission (the
"Commission") as an investment company under the Investment Company Act of
1940 (the "1940 Act") is in full force and effect;
(c) The current prospectus and statement of additional information of
the Selling Fund conform in all material respects to the applicable
requirements of the Securities Act of 1933, as amended, (the "1933 Act")
and the 1940 Act and the rules and regulations of the Commission thereunder
and do not include any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not materially misleading;
(d) The Selling Fund is not, and the execution, delivery and
performance of this Agreement (subject to shareholder approval) will not,
result in violation of any provision of the Evergreen Trust's Declaration
of Trust or By-Laws or of any agreement, indenture, instrument, contract,
lease or other undertaking to which the Selling Fund is a party or by which
it is bound;
(e) The Selling Fund has no material contracts or other commitments
(other than this Agreement) which will be terminated with liability to it
prior to the Closing Date;
(f) Except as otherwise disclosed in writing to and accepted by the
Acquiring Fund, no litigation, administrative proceeding or investigation
of or before any court or governmental body is presently pending or to its
knowledge threatened against the Selling Fund or any of its properties or
assets which, if adversely determined, would materially and adversely
affect its financial condition, the conduct of its business or the ability
of the Selling Fund to carry out the transactions contemplated by this
Agreement. The Selling Fund knows of no facts which might form the basis
for the institution of such proceedings and is not a party to or subject to
the provisions of any order, decree or judgment of any court or
governmental body which materially and adversely affects its business or
its ability to consummate the transactions herein contemplated;
(g) The financial statements of the Selling Fund at August 31, 1994
have been audited by Price Waterhouse LLP, certified public accountants,
and are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been
furnished to the Acquiring Fund) fairly reflect the financial condition of
the Selling Fund as of such dates, and there are no known contingent
liabilities of the Selling Fund as of such dates not disclosed therein;
(h) Since August 31, 1994, there has not been any material adverse
change in the Selling Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business,
or any incurrence by the Selling Fund of indebtedness maturing more than
one year from the date such indebtedness was incurred, except as otherwise
disclosed to and accepted by the Acquiring Fund. For the purposes of this
subparagraph (h), a decline in the net asset value of the Selling Fund
shall not constitute a material adverse change;
(i) At the Closing Date, all Federal and other tax returns and reports
of the Selling Fund required by law to have been filed by such dates shall
have been filed, and all Federal and other taxes shall have been paid so
far as due, or provision shall have been made for the payment thereof and
to the best of the Selling Fund's knowledge no such return is currently
under audit and no assessment has been asserted with respect to such
returns;
(j) For each of the preceding six fiscal years of its operation the
Selling Fund has met the requirements of Subchapter M of the Code for
qualification and treatment as a regulated investment company and has
distributed in each such year all net investment income and realized
capital gains;
(k) All issued and outstanding shares of the Selling Fund are, and at
the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable by the Selling Fund (except that, under
Massachusetts law, Selling Fund Shareholders could, under certain
circumstances be held personally liable for obligations of the Selling
Fund). All of the issued and outstanding shares of the Selling Fund will,
at the time of the Closing Date, be held by the persons and
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in the amounts set forth in the records of the transfer agent as provided
in paragraph 3.4. The Selling Fund does not have outstanding any options,
warrants or other rights to subscribe for or purchase any of the Selling
Fund shares, nor is there outstanding any security convertible into any of
the Selling Fund shares;
(l) At the Closing Date, the Selling Fund will have good and
marketable title to the Selling Fund's assets to be transferred to the
Acquiring Fund pursuant to paragraph 1.2 and full right, power, and
authority to sell, assign, transfer and deliver such assets hereunder, and
upon delivery and payment for such assets, the Acquiring Fund will acquire
good and marketable title thereto, subject to no restrictions on the full
transfer thereof, including such restrictions as might arise under the 1933
Act, other than as disclosed to the Acquiring Fund and accepted by the
Acquiring Fund;
(m) The execution, delivery and performance of this Agreement have
been duly authorized by all necessary action on the part of the Selling
Fund and, subject to approval by the Selling Fund's shareholders, this
Agreement constitutes a valid and binding obligation of the Selling Fund,
enforceable in accordance with its terms, subject as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium and other laws relating
to or affecting creditors' rights and to general equity principles;
(n) The information to be furnished by the Selling Fund for use in
no-action letters, applications for orders, registration statements, proxy
materials and other documents which may be necessary in connection with the
transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with Federal
securities and other laws and regulations thereunder applicable thereto;
(o) The proxy statement of the Selling Fund to be included in the
Registration Statement referred to in paragraph 5.7 (other than information
therein that relates to the Acquiring Fund) will, on the effective date of
the Registration Statement and on the Closing Date, not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which such statements were made, not misleading.
4.2 REPRESENTATIONS OF THE ACQUIRING FUND. The Acquiring Fund represents
and warrants to the Selling Fund as follows:
(a) The Acquiring Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing and in good
standing under the laws of The Commonwealth of Massachusetts.
(b) The Acquiring Fund is a separate investment series of a
Massachusetts business trust that is registered as an investment company
classified as a management company of the open-end type and its
registration with the Commission as an investment company under the 1940
Act is in full force and effect;
(c) The current prospectus and statement of additional information of
the Acquiring Fund conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and regulations
of the Commission thereunder and do not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not materially misleading;
(d) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not, result in violation of First Union
Trust's Declaration of Trust or By-Laws or of any agreement, indenture,
instrument, contract, lease or other undertaking to which the Acquiring
Fund is a party or by which it is bound;
(e) Except as otherwise disclosed to the Selling Fund and accepted by
the Selling Fund, no material litigation, administrative proceeding or
investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquiring Fund or any of
its properties or assets which, if adversely determined, would materially
and adversely affect its financial condition and the conduct of its
business or the ability of the Acquiring Fund to carry out the transactions
contemplated by this Agreement. The Acquiring Fund knows of no facts which
might form the basis for the institution of such proceedings and is not a
party to or subject to the provisions of any order, decree or judgment of
any court or governmental body which materially and adversely affects its
business or its ability to consummate the transactions contemplated herein;
(f) The financial statements of the Acquiring Fund at December 31,
1994, certified by KPMG Peat Marwick LLP, independent accountants, copies
of which have been furnished to the Selling Fund, fairly and accurately
reflect the financial condition of the Acquiring Fund as of such date in
accordance with generally accepted accounting principles consistently
applied;
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(g) Since December 31, 1994, there has not been any material adverse
change in the Acquiring Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business,
or any incurrence by the Acquiring Fund of indebtedness maturing more than
one year from the date such indebtedness was incurred, except as otherwise
disclosed to and accepted by the Acquiring Fund. For the purposes of this
subparagraph (g), a decline in the net asset value of the Acquiring Fund
shall not constitute a material adverse change;
(h) At the Closing Date, all Federal and other tax returns and reports
of the Acquiring Fund required by law then to be filed shall have been
filed, and all Federal and other taxes shown due on said returns and
reports shall have been paid or provision shall have been made for the
payment thereof and to the best of the Acquiring Fund's knowledge, no such
return is currently under audit and no assessment has been asserted with
respect to such returns;
(i) For each fiscal year of its operation the Acquiring Fund has met
the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company;
(j) All issued and outstanding Acquiring Fund Shares are, and at the
Closing Date will be, duly and validly issued and outstanding, fully paid
and non-assessable (except that, under Massachusetts law, shareholders of
the Acquiring Fund could, under certain circumstances, be held personally
liable for obligations of the Acquiring Fund). The Acquiring Fund does not
have outstanding any options, warrants or other rights to subscribe for or
purchase any Acquiring Fund Shares, nor is there outstanding any security
convertible into any Acquiring Fund Shares;
(k) The execution, delivery and performance of this Agreement have
been duly authorized by all necessary action on the part of the Acquiring
Fund, and this Agreement constitutes a valid and binding obligation of the
Acquiring Fund enforceable in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium and
other laws relating to or affecting creditors' rights and to general equity
principles;
(l) The Acquiring Fund Shares to be issued and delivered to the
Selling Fund, for the account of the Selling Fund Shareholders, pursuant to
the terms of this Agreement will at the Closing Date have been duly
authorized and, when so issued and delivered, will be duly and validly
issued Acquiring Fund Shares, and will be fully paid and non-assessable
(except that, under Massachusetts law, shareholders of the Acquiring Fund
could, under certain circumstances, be held personally liable for
obligations of the Acquiring Fund);
(m) The information to be furnished by the Acquiring Fund for use in
no-action letters, applications for orders, registration statements, proxy
materials and other documents which may be necessary in connection with the
transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with Federal
securities and other laws and regulations applicable thereto;
(n) The Prospectus and Proxy Statement to be included in the
Registration Statement (only insofar as it relates to the Acquiring Fund )
will, on the effective date of the Registration Statement and on the
Closing Date, not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which such
statements were made, not misleading; and
(o) The Acquiring Fund agrees to use all reasonable efforts to obtain
the approvals and authorizations required by the 1933 Act, the 1940 Act and
such of the state Blue Sky or securities laws as it may deem appropriate in
order to continue its operations after the Closing Date.
ARTICLE V
COVENANTS OF THE ACQUIRING FUND AND THE SELLING FUND
5.1 OPERATION IN ORDINARY COURSE. The Acquiring Fund and the Selling Fund
each will operate its business in the ordinary course between the date hereof
and the Closing Date, it being understood that such ordinary course of business
will include customary dividends and distributions.
5.2 APPROVAL OF SHAREHOLDERS. The Evergreen Trust will call a meeting of
the Selling Fund Shareholders to consider and act upon this Agreement and to
take all other action necessary to obtain approval of the transactions
contemplated herein.
5.3 INVESTMENT REPRESENTATION. The Selling Fund covenants that the
Acquiring Fund Shares to be issued hereunder are not being acquired for the
purpose of making any distribution thereof other than in accordance with the
terms of this Agreement.
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5.4 ADDITIONAL INFORMATION. The Selling Fund will assist the Acquiring Fund
in obtaining such information as the Acquiring Fund reasonably requests
concerning the beneficial ownership of the Selling Fund shares.
5.5 FURTHER ACTION. Subject to the provisions of this Agreement, the
Acquiring Fund and the Selling Fund will each take, or cause to be taken, all
action, and do or cause to be done, all things reasonably necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement, including any actions required to be taken after the Closing Date.
5.6 STATEMENT OF EARNINGS AND PROFITS. As promptly as practicable, but in
any case within sixty days after the Closing Date, the Selling Fund shall
furnish the Acquiring Fund, in such form as is reasonably satisfactory to the
Acquiring Fund, a statement of the earnings and profits of the Selling Fund for
Federal income tax purposes which will be carried over by the Acquiring Fund as
a result of Section 381 of the Code, and which will be certified by the
Evergreen Trust's President, its Treasurer and its independent auditors.
5.7 PREPARATION OF FORM N-14 REGISTRATION STATEMENT. The Selling Fund will
provide the Acquiring Fund with information reasonably necessary for the
preparation of a prospectus (the "Prospectus and Proxy Statement") which will
include the Prospectus and Proxy Statement, referred to in paragraph 4.2(n), all
to be included in a Registration Statement on Form N-14 of the Acquiring Fund
(the "Registration Statement"), in compliance with the 1933 Act, the Securities
Exchange Act of 1934, as amended, (the "1934 Act") and the 1940 Act in
connection with the meeting of the Selling Fund Shareholders to consider
approval of this Agreement and the transactions contemplated herein.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLING FUND
The obligations of the Selling Fund to consummate the transactions provided
for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations, covenants and warranties of the Acquiring Fund
contained in this Agreement shall be true and correct as of the date hereof and
as of the Closing Date with the same force and effect as if made on and as of
the Closing Date, and the Acquiring Fund shall have delivered to the Selling
Fund a certificate executed in its name by the First Union Trust's President or
Vice President and its Treasurer or Assistant Treasurer, in a form reasonably
satisfactory to the Selling Fund and dated as of the Closing Date, to such
effect and as to such other matters as the Acquiring Fund shall reasonably
request; and
6.2 The Selling Fund shall have received on the Closing Date an opinion
from Sullivan & Worcester, counsel to the Acquiring Fund, dated as of the
Closing Date, in a form reasonably satisfactory to the Selling Fund, covering
the following points:
That (a) the Acquiring Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing and in good
standing under the laws of The Commonwealth of Massachusetts and has the power
to own all of its properties and assets and to carry on its business as
presently conducted; (b) the Agreement has been duly authorized, executed and
delivered by the Acquiring Fund, and, assuming that the Prospectus, Registration
Statement and Proxy Statement comply with the 1933 Act, the 1934 Act and the
1940 Act and the rules and regulations thereunder and, assuming due
authorization, execution and delivery of the Agreement by the Selling Fund, is a
valid and binding obligation of the Acquiring Fund enforceable against the
Acquiring Fund in accordance with its terms, subject as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium and other laws relating to or
affecting creditors' rights generally and to general equity principles; (c)
assuming that a consideration therefor not less than the net asset value
therefor has been paid, the Acquiring Fund Shares to be issued and delivered to
the Selling Fund on behalf of the Selling Fund Shareholders as provided by this
Agreement are duly authorized and upon such delivery will be legally issued and
outstanding and fully paid and non-assessable (except that, under Massachusetts
law, shareholders of the Acquiring Fund could, under certain circumstances, be
held personally liable for obligations of the Acquiring Fund), and no
shareholder of the Acquiring Fund has any preemptive rights in respect thereof;
(d) the execution and delivery of the Agreement did not, and the consummation of
the transactions contemplated hereby will not, result in a violation of the
First Union Trust's Declaration of Trust or By-Laws or any provision of any
material agreement, indenture, instrument, contract, lease or other undertaking
(in each case known to such counsel) to which the Acquiring Fund is a party or
by which it or any of its properties may be bound or to the knowledge of such
counsel, result in the acceleration of any obligation or the imposition of any
penalty, under any agreement, judgment, or
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decree to which the Acquiring Fund is a party or by which it is bound; (e) to
the knowledge of such counsel, no consent, approval, authorization or order of
any court or governmental authority of the United States or the Commonwealth of
Massachusetts, is required for the consummation by the Acquiring Fund of the
transactions contemplated herein, except such as have been obtained under the
1933 Act, the 1934 Act and the 1940 Act, and such as may be required under state
securities laws; (f) only insofar as they relate to the Acquiring Fund, the
descriptions in the Prospectus and Proxy Statement of statutes, legal and
governmental proceedings and material contracts, if any, are accurate and fairly
present the information required to be shown; (g) such counsel does not know of
any legal or governmental proceedings, only insofar as they relate to the
Acquiring Fund, existing on or before the effective date of the Registration
Statement or the Closing Date required to be described in the Registration
Statement or to be filed as exhibits to the Registration Statement which are not
described as required; (h) the Acquiring Fund is a separate investment series of
a Massachusetts business trust registered as an investment company under the
1940 Act and to such counsel's best knowledge, such registration with the
Commission as an investment company under the 1940 Act is in full force and
effect; and (i) to the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Acquiring Fund or
any of its properties or assets and the Acquiring Fund is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body, which materially and adversely affects its business, other
than as previously disclosed in the Registration Statement. In addition, such
counsel shall also state that they have participated in conferences with
officers and other representatives of the Acquiring Fund at which the contents
of the Prospectus and Proxy Statement and related matters were discussed and,
although they are not passing upon and do not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the Prospectus
and Proxy Statement (except to the extent indicated in paragraph (f) of their
above opinion), on the basis of the foregoing (relying as to materiality to a
large extent upon the opinions of the First Union Trust's officers and other
representatives of the Acquiring Fund), no facts have come to their attention
that lead them to believe that the Prospectus and Proxy Statement as of its
date, as of the date of the Selling Fund Shareholders' meeting, and as of the
Closing Date, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein regarding the Acquiring Fund
or necessary, in the light of the circumstances under which they were made, to
make the statements therein regarding the Acquiring Fund not misleading. Such
opinion may state that such counsel does not express any opinion or belief as to
the financial statements or any financial or statistical data, or as to the
information relating to the Selling Fund, contained in the Prospectus and Proxy
Statement or Registration Statement, and that such opinion is solely for the
benefit of the Evergreen Trust and the Selling Fund. Such opinion shall contain
such other assumptions and limitations as shall be in the opinion of Sullivan &
Worcester appropriate to render the opinions expressed.
In this paragraph 6.2, references to Prospectus and Proxy Statement include
and relate to only the text of such Prospectus and Proxy Statement and not to
any exhibits or attachments thereto or to any documents incorporated by
reference therein.
[INTENTIONALLY LEFT BLANK]
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ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions provided
for herein shall be subject, at its election, to the performance by the Selling
Fund of all the obligations to be performed by it hereunder on or before the
Closing Date and, in addition thereto, the following conditions:
7.1 All representations, covenants and warranties of the Selling Fund
contained in this Agreement shall be true and correct as of the date hereof and
as of the Closing Date with the same force and effect as if made on and as of
the Closing Date, and the Selling Fund shall have delivered to the Acquiring
Fund on the Closing Date a certificate executed in its name by the Evergreen
Trust's President or Vice President and its Treasurer or Assistant Treasurer, in
form and substance satisfactory to the Acquiring Fund and, dated as of the
Closing Date, to such effect and as to such other matters as the Acquiring Fund
shall reasonably request;
7.2 The Selling Fund shall have delivered to the Acquiring Fund a statement
of the Selling Fund's assets and liabilities, together with a list of the
Selling Fund's portfolio securities showing the tax costs of such securities by
lot and the holding periods of such securities, as of the Closing Date,
certified by the Treasurer of the Evergreen Trust; and
7.3 The Acquiring Fund shall have received on the Closing Date an opinion
of Shereff, Friedman, Hoffman & Goodman, LLP counsel to the Selling Fund, in a
form satisfactory to the Acquiring Fund covering the following points:
That (a) the Selling Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing and in good
standing under the laws of The Commonwealth of Massachusetts and has the power
to own all of its properties and assets and to carry on its business as
presently conducted; (b) the Agreement has been duly authorized, executed and
delivered by the Selling Fund, and, assuming that the Prospectus, the
Registration Statement and the Prospectus and Proxy Statement comply with the
1933 Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder
and, assuming due authorization, execution and delivery of the Agreement by the
Acquiring Fund, is a valid and binding obligation of the Selling Fund
enforceable against the Selling Fund in accordance with its terms, subject as to
enforcement to bankruptcy, insolvency, reorganization, moratorium and other laws
relating to or affecting creditors' rights generally and to general equity
principles; (c) the execution and delivery of the Agreement did not, and the
consummation of the transactions contemplated hereby will not, result in a
violation of the Evergreen Trust's Declaration of Trust or By-laws, or any
provision of any material agreement, indenture, instrument, contract, lease or
other undertaking (in each case known to such counsel) to which the Selling Fund
is a party or by which it or any of its properties may be bound or, to the
knowledge of such counsel, result in the acceleration of any obligation or the
imposition of any penalty, under any agreement, judgment, or decree to which the
Selling Fund is a party or by which it is bound; (d) to the knowledge of such
counsel, no consent, approval, authorization or order of any court or
governmental authority of the United States, or the Commonwealth of
Massachusetts is required for the consummation by the Selling Fund of the
transactions contemplated herein, except such as have been obtained under the
1933 Act, the 1934 Act and the 1940 Act, and such as may be required under state
securities laws; (e) only insofar as they relate to the Selling Fund, the
descriptions in the Prospectus and Proxy Statement of statutes, legal and
governmental proceedings and material contracts, if any, are accurate and fairly
present the information required to be shown; (f) such counsel does not know of
any legal or governmental proceedings, only insofar as they relate to the
Selling Fund existing on or before the date of mailing of the Prospectus and
Proxy Statement and the Closing Date, required to be described in the Prospectus
and Proxy Statement or to be filed as an exhibit to the Registration Statement
which are not described or filed as required; (g) the Selling Fund is a separate
investment series of a Massachusetts business trust registered as an investment
company under the 1940 Act and to such counsel's best knowledge, such
registration with the Commission as an investment company under the 1940 Act is
in full force and effect; (h) to the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Selling Fund or
any of its respective properties or assets and the Selling Fund is neither a
party to nor subject to the provisions of any order, decree or judgment of any
court or governmental body, which materially and adversely affects its business
other than as previously disclosed in the Prospectus and Proxy Statement; (i)
assuming that a consideration therefor not less than the net asset value
therefor has been paid, and assuming that such shares were issued in accordance
with the terms of the Selling Fund's registration statement, or any amendment
thereto, in effect at the time of such issuance all issued and outstanding
shares of the Selling Fund are legally issued and fully paid and non-assessable
(except that, under Massachusetts law, Selling Fund Shareholders could, under
certain circumstances be held personally liable for obligations of the Selling
Fund). Such counsel shall also state that they have participated in conferences
with officers and other representatives of the Selling Fund at which the
contents of the Prospectus and Proxy Statement and related matters were
discussed and, although they are not passing upon and do not assume any
responsibility for the accuracy, completeness or fairness of the
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statements contained in the Prospectus and Proxy Statement (except to the extent
indicated in paragraph (e) of their above opinion), on the basis of the
foregoing (relying as to materiality to a large extent upon the opinions of the
Evergreen Trust's officers and other representatives of the Selling Fund), no
facts have come to their attention that lead them to believe that the Prospectus
and Proxy Statement as of its date, as of the date of the Selling Fund
Shareholders' meeting, and as of the Closing Date, contained an untrue statement
of a material fact or omitted to state a material fact required to be stated
therein regarding the Selling Fund or necessary, in the light of the
circumstances under which they were made, to make the statements therein
regarding the Selling Fund not misleading. Such opinion may state that such
counsel does not express any opinion or belief as to the financial statements or
any financial or statistical data, or as to the information relating to the
Acquiring Fund, contained in the Prospectus and Proxy Statement or Registration
Statement, and that such opinion is solely for the benefit of the First Union
Trust and the Acquiring Fund. Such opinion shall contain such other assumptions
and limitations as shall be in the opinion of Shereff, Friedman, Hoffman &
Goodman LLP appropriate to render the opinions expressed therein and shall
indicate, with respect to matters of Massachusetts law that as Shereff,
Friedman, Hoffman & Goodman LLP are not admitted to the bar of Massachusetts,
such opinions are based solely upon the review of published statutes, cases and
rules and regulations of the Commonwealth of Massachusetts.
In this paragraph 7.3, references to Prospectus and Proxy Statement include
and relate to only the text of such Prospectus and Proxy Statement and not to
any exhibits or attachments thereto or to any documents incorporated by
reference therein.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF
THE ACQUIRING FUND AND THE SELLING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Selling Fund or the Acquiring Fund, the other
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:
8.1 The Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of the
Selling Fund in accordance with the provisions of the Evergreen Trust's
Declaration of Trust and By-Laws and certified copies of the resolutions
evidencing such approval shall have been delivered to the Acquiring Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring Fund nor
the Selling Fund may waive the conditions set forth in this paragraph 8.1;
8.2 On the Closing Date the Commission shall not have issued an unfavorable
report under Section 25(b) of the 1940 Act, nor instituted any proceeding
seeking to enjoin the consummation of the transactions contemplated by this
Agreement under Section 25(c) of the 1940 Act and no action, suit or other
proceeding shall be threatened or pending before any court or governmental
agency in which it is sought to restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the transactions contemplated
herein;
8.3 All required consents of other parties and all other consents, orders
and permits of Federal, state and local regulatory authorities (including those
of the Commission and of state Blue Sky and securities authorities. Including
any necessary "no-action" positions of and exemptive orders from such Federal
and state authorities) to permit consummation of the transactions contemplated
hereby shall have been obtained, except where failure to obtain any such
consent, order or permit would not involve a risk of a material adverse effect
on the assets or properties of the Acquiring Fund or the Selling Fund, provided
that either party hereto may for itself waive any of such conditions;
8.4 The Registration Statement shall have become effective under the 1933
Act and no stop orders suspending the effectiveness thereof shall have been
issued and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending, threatened
or contemplated under the 1933 Act;
8.5 The Selling Fund shall have declared a dividend or dividends which,
together with all previous such dividends, shall have the effect of distributing
to the Selling Fund Shareholders all of the Selling Fund's investment company
taxable income for all taxable years ending on or prior to the Closing Date
(computed without regard to any deduction for dividends paid) and all of its net
capital gain realized in all taxable years ending on or prior to the Closing
Date (after reduction for any capital loss carryforward);
8.6 The parties shall have received a favorable opinion of Sullivan &
Worcester, addressed to the Acquiring Fund and the Selling Fund substantially to
the effect that for Federal income tax purposes:
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(a) The transfer of substantially all of the Selling Fund assets in
exchange for the Acquiring Fund Shares and the assumption by the Acquiring Fund
of certain identified liabilities of the Selling Fund followed by the
distribution of the Acquiring Fund's shares to the Selling Fund in dissolution
and liquidation of the Selling Fund, will constitute a "reorganization" within
the meaning of Section 368(a)(1)(D) of the Code and the Acquiring Fund and the
Selling Fund will each be a "party to a reorganization" within the meaning of
Section 368(b) of the Code; (b) no gain or loss will be recognized by the
Acquiring Fund upon the receipt of the assets of the Selling Fund solely in
exchange for the Acquiring Fund Shares and the assumption by the Acquiring Fund
of certain identified liabilities of the Selling Fund; (c) no gain or loss will
be recognized by the Selling Fund upon the transfer of the Selling Fund assets
to the Acquiring Fund in exchange for the Acquiring Fund Shares and the
assumption by the Acquiring Fund of certain identified liabilities of the
Selling Fund or upon the distribution (whether actual or constructive) of the
Acquiring Fund Shares to Selling Fund Shareholders in exchange for their shares
of the Selling Fund; (d) no gain or loss will be recognized by Selling Fund
Shareholders upon the exchange of their Selling Fund shares for the Acquiring
Fund Shares in liquidation of the Selling Fund; (e) the aggregate tax basis for
the Acquiring Fund Shares received by each Selling Fund Shareholder pursuant to
the Reorganization will be the same as the aggregate tax basis of the Selling
Fund shares held by such shareholder immediately prior to the Reorganization,
and the holding period of the Acquiring Fund Shares to be received by each
Selling Fund Shareholder will include the period during which the Selling Fund
shares exchanged therefor were held by such shareholder (provided the Selling
Fund shares were held as capital assets on the date of the Reorganization); and
(f) the tax basis of the Selling Fund assets acquired by the Acquiring Fund will
be the same as the tax basis of such assets to the Selling Fund immediately
prior to the Reorganization, and the holding period of the assets of the Selling
Fund in the hands of the Acquiring Fund will include the period during which
those assets were held by the Selling Fund. Notwithstanding anything herein to
the contrary, neither the Acquiring Fund nor the Selling Fund may waive the
conditions set forth in this paragraph 8.6.
8.7 The Acquiring Fund shall have received from Price Waterhouse LLP a
letter addressed to the Acquiring Fund dated on the Closing Date, in form and
substance satisfactory to the Acquiring Fund, to the effect that (i) they are
independent certified public accountants with respect to the Selling Fund within
the meaning of the 1933 Act and the applicable published rules and regulations
thereunder; (ii) in their opinion, the audited financial statements and the per
share data and ratios contained in the section entitled Financial Highlights and
provided in accordance with Item 3 of Form N-1A (the "Per Share Data") of the
Selling Fund included in or incorporated by reference into the Registration
Statement and Prospectus and Proxy Statement and previously reported on by them
comply as to form in all material respects with the applicable accounting
requirements of the l933 Act and the published rules and regulations thereunder;
(iii) on the basis of limited procedures agreed upon by the Acquiring Fund and
described in such letter (but not an examination in accordance with generally
accepted auditing standards) consisting of a reading of any unaudited pro forma
financial statements included in the Registration Statement and Prospectus and
Proxy Statement, and inquiries of appropriate officials of the Evergreen Trust
responsible for financial and accounting matters, nothing came to their
attention which caused them to believe that (A) such unaudited pro forma
financial statements do not comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published rules and
regulations thereunder, or (B) said unaudited pro forma financial statements are
not fairly presented in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited financial
statements; (iv) on the basis of limited procedures agreed upon by the Acquiring
Fund and described in such letter (but not an examination in accordance with
generally accepted auditing standards), the Capitalization Table appearing in
the Registration Statement and Prospectus and Proxy Statement, has been obtained
from and is consistent with the accounting records of the Selling Fund; and (v)
on the basis of limited procedures agreed upon by the Acquiring Fund and
described in such letter (but not an examination in accordance with generally
accepted auditing standards), the pro forma financial statements which are
included in the Registration Statement and Prospectus and Proxy Statement, were
prepared based on the valuation of the Selling Fund's assets in accordance with
the First Union Trust's Declaration of Trust and the Acquiring Fund's then
current prospectus and statement of additional information pursuant to
procedures customarily utilized by the Acquiring Fund in valuing its own assets
(such procedures having been previously described to Price Waterhouse LLP in
writing by the Acquiring Fund).
In addition, the Acquiring Fund shall have received from Price Waterhouse
LLP a letter addressed to the Acquiring Fund dated on the Closing Date, in form
and substance satisfactory to the Acquiring Fund, to the effect that on the
basis of limited procedures agreed upon by the Acquiring Fund (but not an
examination in accordance with generally accepted auditing standards) (i) the
data utilized in the calculations of the projected expense ratio appearing in
the Registration Statement and Prospectus and Proxy Statement agree with
underlying accounting records of the Selling Fund or to written estimates by
Selling Fund's management and were found to be mathematically correct; and (ii)
the calculation of net asset value per share of the Selling Fund as of the
Valuation Date was determined in accordance with generally accepted accounting
practices and the portfolio valuation practices of the Acquiring Fund.
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8.8 The Selling Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Selling Fund dated on the Closing Date, in form and
substance satisfactory to the Selling Fund, to the effect that (i) they are
independent certified public accountants with respect to the Acquiring Fund
within the meaning of the 1933 Act and the applicable published rules and
regulations thereunder; (ii) in their opinion, the audited financial statements
and the per share data and ratios contained in the section entitled Financial
Highlights and provided in accordance with Item 3 of Form N-1A (the "Per Share
Data") of the Acquiring Fund included in or incorporated by reference into the
Registration Statement and Prospectus and Proxy Statement and previously
reported on by them comply as to form in all material respects with the
applicable accounting requirements of the l933 Act and the published rules and
regulations thereunder; (iii) on the basis of limited procedures agreed upon by
the Selling Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards) consisting of a reading
of any unaudited pro forma financial statements included in the Registration
Statement and Prospectus and Proxy Statement, and inquiries of appropriate
officials of the First Union Trust responsible for financial and accounting
matters, nothing came to their attention which caused them to believe that (A)
such unaudited pro forma financial statements do not comply as to form in all
material respects with the applicable accounting requirements of the 1933 Act
and the published rules and regulations thereunder, or (B) said unaudited pro
forma financial statements are not fairly presented in conformity with generally
accepted accounting principles applied on a basis substantially consistent with
that of the audited financial statements; and (iv) on the basis of limited
procedures agreed upon by the Selling Fund and described in such letter (but not
an examination in accordance with generally accepted auditing standards), the
Capitalization Table appearing in the Registration Statement and Prospectus and
Proxy Statement, has been obtained from and is consistent with the accounting
records of the Acquiring Fund.
In addition, the Selling Fund shall have received from KPMG Peat Marwick
LLP a letter addressed to the Selling Fund dated on the Closing Date, in form
and substance satisfactory to the Selling Fund, to the effect that on the basis
of limited procedures agreed upon by the Selling Fund (but not an examination in
accordance with generally accepted auditing standards) the data utilized in the
calculations of the projected expense ratio appearing in the Registration
Statement and Prospectus and Proxy Statement agree with underlying accounting
records of the Acquiring Fund and the Selling Fund or to written estimates by
each Fund's management and were found to be mathematically correct.
8.9 The Acquiring Fund and the Selling Fund shall also have received from
Price Waterhouse LLP a letter addressed to the Acquiring Fund and the Selling
Fund, dated on the Closing Date in form and substance satisfactory to the Funds,
setting forth the Federal income tax implications relating to Capital Loss
Carryforwards (if any) of the Selling Fund and the related impact, if any, of
the proposed transfer of all or substantially all of the assets of the Selling
Fund to the Acquiring Fund and the ultimate dissolution of the Selling Fund,
upon the shareholders of the Selling Fund.
ARTICLE IX
BROKERAGE FEES AND EXPENSES
9.1 The Acquiring Fund and the Selling Fund each represents and warrants to
the other that there are no brokers or finders entitled to receive any payments
in connection with the transactions provided for herein.
9.2 (a) Except as otherwise provided for herein, all expenses of the
transactions contemplated by this Agreement incurred by the Acquiring Fund will
be borne by First Union National Bank of North Carolina. The expenses of the
transactions contemplated by this Agreement incurred by the Selling Fund will be
borne by Evergreen Asset Management Corp. Such expenses include, without
limitation, (i) expenses incurred in connection with the entering into and the
carrying out of the provisions of this Agreement; (ii) expenses associated with
the preparation and filing of the Registration Statement under the 1933 Act
covering the Acquiring Fund Shares to be issued pursuant to the provisions of
this Agreement; (iii) registration or qualification fees and expenses of
preparing and filing such forms as are necessary under applicable state
securities laws to qualify the Acquiring Fund Shares to be issued in connection
herewith in each state in which the Selling Fund Shareholders are resident as of
the date of the mailing of the Prospectus and Proxy Statement to such
shareholders; (iv) postage; (v) printing; (vi) accounting fees; (vii) legal
fees; and (viii) solicitation cost of the transactions. (b) Consistent with the
provisions of paragraph 1.3, the Selling Fund, prior to the Closing Date, shall
pay for or include in the audited statement of assets and liabilities prepared
pursuant to paragraph 1.3 all of its known and reasonably estimated expenses
associated with the transactions contemplated by this Agreement.
A-12
<PAGE>
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Selling Fund agree that neither party has
made any representation, warranty or covenant not set forth herein and that the
Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall survive the consummation of the transactions contemplated hereunder.
ARTICLE XI
TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the
Acquiring Fund and the Selling Fund. In addition, either the Acquiring Fund or
the Selling Fund may at its option terminate this Agreement at or prior to the
Closing Date because:
(a) of a breach by the other of any representation, warranty or agreement
contained herein to be performed at or prior to the Closing Date, if not cured
within 30 days; or
(b) a condition herein expressed to be precedent to the obligations of the
terminating party has not been met and it reasonably appears that it will not or
cannot be met.
11.2 In the event of any such termination, in the absence of willful
default, there shall be no liability for damages on the part of either the
Acquiring Fund or the Selling Fund, the First Union Trust or the Evergreen Trust
or their respective Trustees or officers, to the other party or its, Trustees or
officers, but each shall bear the expenses incurred by it incidental to the
preparation and carrying out of this Agreement as provided in paragraph 9.2.
ARTICLE XII
AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the authorized officers of the Selling
Fund and the Acquiring Fund: provided, however, that following the meeting of
the Selling Fund Shareholders called by the Evergreen Trust pursuant to
paragraph 5.2 of this Agreement, no such amendment may have the effect of
changing the provisions for determining the number of the Acquiring Fund Shares
to be issued to the Selling Fund Shareholders under this Agreement to the
detriment of such shareholders without their further approval.
ARTICLE XIII
NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be given by prepaid
telegraph, telecopy, overnight courier or certified mail addressed to
the Acquiring Fund
First Union Funds
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Attention: Peter J. Germain, Esq.
or to the Selling Fund
Evergreen Municipal Trust
2500 Westchester Avenue
Purchase, New York 10577
Attention: Joseph J. McBrien, Esq.
A-13
<PAGE>
ARTICLE XIV
HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT; LIMITATION OF LIABILITY
14.1 The Article and paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
14.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
14.5 It is expressly agreed to that the obligations of the Selling Fund and
the Acquiring Fund hereunder shall not be binding upon any of the Trustees,
shareholders, nominees, officers, agents, or employees of the First Union Trust
or the Evergreen Trust, personally, but bind only the trust property of the
Selling Fund and the Acquiring Fund, as provided in the Declarations of Trust of
the First Union Trust and the Evergreen Trust. The execution and delivery of
this Agreement have been authorized by the Trustees of the First Union Trust and
the Evergreen Trust on behalf of the Acquiring Fund and the Selling Fund,
respectively, and signed by authorized officers of the First Union Trust and the
Evergreen Trust, acting as such, and neither such authorization by such Trustees
nor such execution and delivery by such officers shall be deemed to have been
made by any of them individually or to impose any liability on any of them
personally, but shall bind only the trust property of the First Union Trust and
the Evergreen Trust as provided in their Declarations of Trust.
IN WITNESS WHEREOF, the parties have duly executed and sealed this
Agreement, all as of the date first written above.
FIRST UNION FUNDS
on behalf of First Union High Grade
Municipal Bond Portfolio
By: /s/ EDWARD GONZALES
Name: Edward Gonzales
Title: President
(Seal)
EVERGREEN MUNICIPAL TRUST
on behalf of Evergreen National Tax
Free Fund
By: /s/ JOHN J. PILEGGI
Name: John J. Pileggi
Title: President
(Seal)
A-14
STATEMENT OF ADDITIONAL INFORMATION
Transfer of substantially all of the assets and certain identified liabilities
of
EVERGREEN NATIONAL TAX FREE FUND, a series of
THE EVERGREEN MUNICIPAL TRUST
by and in exchange for the shares of
FIRST UNION HIGH GRADE TAX FREE PORTFOLIO, a portfolio of
FIRST UNION FUNDS
This Statement of Additional Information relates specifically to the
proposed transfer of substantially all of the assets and certain identified
liabilities of Evergreen National Tax Free Fund ("National"), a series of The
Evergreen Municipal Trust, by and in exchange for the shares of First Union High
Grade Tax Free Portfolio ("High Grade"), a portfolio of First Union Funds. This
Statement of Additional Information incorporates by reference the documents
described below:
(1) Statement of Additional Information of High Grade dated February 28, 1995
(Post-Effective Amendment No. 39 to the Registration Statement of First
Union Funds on Form N-1A; File No. 2-94560);
(2) Annual Report for High Grade for the fiscal year ended December 31, 1994;
(3) Statement of Additional Information of National dated January 3, 1995
(Post-Effective Amendment No. 16 to the Registration Statement of Evergreen
Municipal Trust on Form N-1A; File No. 33-23180);
(4) Annual Report for National for the fiscal year ended August 31, 1994.
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Proxy Statement/Prospectus of First Union Funds
dated April , 1995, which has been filed with the Securities and Exchange
Commission and can be obtained, without charge, by writing to First Union Funds
at Federated Investors Tower, Pittsburgh, Pennsylvania, 15222-3779, or by
calling toll-free 1-800-[326-3241]. This Statement of Additional Information has
been incorporated into the Proxy Statement/Prospectus.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FIRST UNION FUNDS
Table of Contents
Cover Page Cover Page
Financial Statements 1
<PAGE>
First Union High Grade Tax Free Fund
Evergreen National Tax Free Fund
Pro Forma Combining Schedule of Portfolio of Investments
December 31, 1994 (unaudited)
<TABLE>
<CAPTION>
First Union High Grade Evergreen National Pro Forma
Tax Free Fund Tax Free Fund Combined
Principal Principal Principal
Amount Value Amount Value Amount Value
----------- --------- -------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Long-Term Municipal Securities Fund - 95.9%
Alaska - 0.4%
Municipality of Anchorage Senior Lien
Electric, 6.20% RRB (Series1993)/
(MBIA Insured), 12/1/2013 $500,000 $476,975 $500,000 $476,975
Arkansas - 0.8% --------- ---------
Beaver Water District of Benton and Washington
Counties, 5.75% RRB, (Series 1994)/
(MBIA Insured), 11/15/2007 900,000 875,232 900,000 875,232
California - 7.2% --------- ---------
California State, 6.80% GO Bonds (Callable
11/1/2004 @ 102)/(FGIC Insured), 11/1/2009 $1,700,00 $1,747,112 1,700,000 1,747,112
City and County of San Francisco Airports
Commission, 6.75% RRB (San Francisco
International Airport)/(Second Series)/
(Issue 2 Bonds)/ (MBIA Insured), 5/1/2013 1,000,000 1,012,480 1,000,000 1,012,480
City of Fresno Sewer System, 6.25% RB
(Series 1993A)/(AMBAC Insured), 9/1/2014 1,500,000 1,452,060 1,500,000 1,452,060
Redevelopment Agency of the City of San
Jose, 6.00% Tax Allocation Bonds (Merged
Area Redevelopment Project)/(Series 1993)/
(MBIA Insured), 8/1/2008 1,000,000 974,580 1,000,000 974,580
San Jose, CA, 6.00% Redevelopment Tax
Allocation Bonds (MBIA Insured), 8/1/2015 3,000,000 2,742,123 3,000,000 2,742,123
San Mateo County Joint Powers Financing
Authority Lease, 6.50% RRB (Capital
Projects Program)/(Series 1993A)/
(MBIA Insured), 7/1/2016 500,000 492,880 500,000 492,880
--------- --------- ---------
Total 4,489,235 3,932,000 8,421,235
District of Columbia - 3.3% --------- --------- ---------
District of Columbia, 5.50% GO Refunding
Bonds (Series B)/(FSA Insured)/(Original
Issue Discount: 5.70%), 6/1/2010 3,250,000 2,892,734 3,250,000 2,892,734
Washington Metropolitan Area Transit
Authority, 6.00% RB (Gross Revenue Transit)/
(Series 1993)/(FGIC Insured), 7/1/2008 1,000,000 976,520 1,000,000 976,520
--------- --------- ---------
Total 2,892,734 976,520 3,869,254
--------- --------- ---------
Florida - 2.7%
Hillsborough County, FL, 6.50% IDA RB
(University Community Hospital)/
(MBIA Insured), 8/15/2019 1,000,000 987,810 1,000,000 987,810
Orange County, FL, Water and Waste
Authority, 6.25% RRB
(AMBAC Insured), 10/1/2017 2,250,000 2,139,869 2,250,000 2,139,869
--------- ---------
Total 3,127,679 3,127,679
--------- ---------
Georgia - 9.0%
Atlanta, GA, 6.00% Airport Facilities
RB (Series B)/(AMBAC Insured)/(Original
Issue Discount: 6.35%)/(Subject to AMT),
1/1/2021 7,000,00 6,212,703 7,000,00 6,212,703
Brunswick, GA, 6.10% Water & Sewer RB
(MBIA Insured)/(Original Issue Discount:
6.27%), 10/1/2019 1,500,000 1,415,916 1,500,000 1,415,916
City of Atlanta Airport Facilities, 6.50%
RRB (Series 1994A)/(AMBAC Insured), 1/1/2010 500,000 505,735 500,000 505,735
Georgia Municipal Electric Authority, 6.50%
Special Obligation Bonds (Fifth Crossover
Project 1)/(MBIA Insured), 1/1/2017 2,400,000 2,305,224 2,400,000 2,305,224
--------- --------- ---------
Total 9,933,843 505,735 10,439,578
--------- --------- ---------
Hawaii - 1.1%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
First Union High Grade Evergreen National Pro Forma
Tax Free Fund Tax Free Fund Combined
Principal Principal Principal
Amount Value Amount Value Amount Value
----------- --------- -------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Hawaii State Airport Systems, 7.50% RB
(Second Series 1990)/(FGIC Insured), 7/1/2020 1,250,000 1,299,263 1,250,000 1,299,263
Idaho - 0.8% --------- ---------
Idaho Housing Agency, 6.30% Term Mezzanine
SFM Bonds (Series 1994C-1), 7/1/2011 1,000,000 967,180 1,000,000 967,180
Illinois - 7.6% --------- ---------
Chicago, IL, 5.75% RB, Public Building
(Chicago Bank District)/(FGIC Insured),
1/1/2010 2,000,000 1,828,984 2,000,000 1,828,984
Chicago, IL, 5.60% GO Bonds (Emergency
Telephone System)/(FGIC Insured)/
(Original Issue Discount: 5.62%), 1/1/2010 1,500,000 1,345,352 1,500,000 1,345,352
City of Chicago Water, 6.50% RRB (Series
1993)/(FGIC Insured), 11/1/2015 1,250,000 1,226,112 1,250,000 1,226,112
Illinois Development Finance Authority,
7.25% PCR Bonds
(Commonwealth Edison Co. Project)/(MBIA
Insured), 6/1/2011 3,000,000 3,108,528 3,000,000 3,108,528
Illinois Health Facilities Authority, 6.25%
RB (Children's Memorial Hospital)/(MBIA
Insured), 8/15/2013 1,400,000 1,310,814 1,400,000 1,310,814
--------- --------- ---------
Total 7,593,678 1,226,112 8,819,790
Indiana - 3.5% --------- --------- ---------
Indiana Health Facilities Finance
Authority Hospital, 5.875% RRB
(Series 1993)/(Lafayette Home Hospital)/
(MBIA Insured), 8/1/2013 500,000 455,995 500,000 455,995
Indiana Municipal Power Supply System,
6.125% RB (Series A)/ (MBIA Insured),
1/1/2019 2,300,000 2,116,193 2,300,000 2,116,193
Lawrence Township, IN, Metropolitan
School District, 6.875% First Mortgage
RB (MBIA Insured), 7/5/2011 1,500,000 1,546,447 1,500,000 1,546,447
--------- --------- ---------
Total 3,662,640 455,995 4,118,635
Iowa - 1.7% --------- --------- ---------
City of Iowa City, 6.00% RB (Johnson
County Sewer)/(Series 1993)/ (AMBAC
Insured), 7/1/2012 500,000 472,590 500,000 472,590
Salix, IA, 5.90%, PCR Bonds (Northwestern
Public Service Co.)/ (MBIA Insured),
6/1/2023 1,750,00 1,515,713 1,750,000 1,515,713
--------- --------- ---------
Total 1,515,713 472,590 1,988,303
Louisiana - 2.2% --------- --------- ---------
Jefferson, LA, 6.75% Sales Tax RB
(Series A)/(FGIC Insured), 12/1/2006 2,500,000 2,584,855 2,500,000 2,584,855
Maine - 0.9%
Maine Turnpike Authority, 7.125%
Turnpike RB (Series 1994)/(MBIA
Insured), 7/1/2008 1,000,000 1,076,150 1,000,000 1,076,150
Maryland - 0.4% --------- ---------
Community Development Administration,
5.70% Department of Housing and
Community Single Family Program Bonds
(First Series 1994), 4/1/2017 500,000 468,840 500,000 468,840
Massachusetts - 0.7% --------- ---------
Massachusetts Housing Finance Agency,
6.15% RB (Housing Project)/(Series
1993A)/(AMBAC Insured), 10/1/2015 725,000 666,130 725,000 666,130
Massachusetts Housing Finance Agency,
6.60% Insured Rental Housing Bonds
(Series 1994A)/(AMBAC Insured), 7/1/2014 150,000 145,527 150,000 145,527
--------- ---------
Total 811,657 811,657
Michigan - 0.9% --------- ---------
City of Detroit Water Supply System,
6.50% RRB (Series 1993)/ (FGIC
Insured), 7/1/2015 1,000,000 996,030 1,000,000 996,030
Minnesota - 0.8% --------- ---------
Minnesota Housing Finance Agency,
6.70% SFM Bonds (Series 1994H), 1/1/2018 1,000,000 974,850 1,000,000 974,850
--------- ---------
Nevada - 5.8%
Clark County School District, NV,
6.75% GO Bonds (Series A)/(MBIA
Insured), 3/1/2007 2,500,000 2,557,890 2,500,000 2,557,890
Clark County, NV, 6.50% GO Bonds
(Series A)/(AMBAC Insured)/(Original
Issue Discount: 6.52%), 6/1/2017 1,575,000 1,531,489 1,575,000 1,531,489
Las Vegas Library District, NV,
6.00% GO Bonds (FGIC Insured), 2/1/2012 1,000,000 930,295 1,000,000 930,295
Washoe County, NV, 5.70% GO Bonds
(Series A)/(FGIC Insured), 7/1/2017 2,000,000 1,731,832 2,000,000 1,731,832
--------- ---------
Total 6,751,506 6,751,506
--------- ----------
New York - 0.4%
New York State Thruway Authority,
5.75% Local Highway and Bridge
Service Contract Bonds (Series
1993)/(MBIA Insured), 1/1/2013 500,000 458,205 500,000 458,205
North Carolina - 0.5% --------- ---------
North Carolina Municipal Power
Agency No. 1, 6.50% RB (MBIA Insured)/
(Escrowed to Maturity), 1/1/2010 570,000 570,000 570,000 570,000
Ohio - 1.1% --------- ---------
Ohio Air Quality Development Authority,
6.375% Air Quality Development RRB
(JMG Funding, Limited Partnership Project)/
(Series 1994)/(AMBAC Insured), 4/1/2029 600,000 566,214 600,000 566,214
Ohio Water Development Authority,
6.00% Water Development RRB
(MBIA Insured), 12/1/2016 750,000 703,950 750,000 703,950
--------- ---------
Total 1,270,164 1,270,164
--------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
First Union High Grade Evergreen National Pro Forma
Tax Free Fund Tax Free Fund Combined
Principal Principal Principal
Amount Value Amount Value Amount Value
----------- --------- -------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Oklahoma - 1.0%
Enid, OK, Municipal Authority Tax
and Utility, 6.20% RB (FGIC
Insured), 2/1/2012 1,250,000 1,186,878 1,250,000 1,186,878
Pennsylvania - 0.5% --------- ---------
Pennsylvania Industrial Development
Authority, 7.00% RB (Series 1994)/
(AMBAC Insured), 1/1/2007 500,000 533,505 500,000 533,505
Rhode Island - 1.6% --------- ---------
Rhode Island Depositors Economic
Protection, 5.80% RRB
(MBIA Insured), 8/1/2012 2,000,000 1,813,596 2,000,000 1,813,596
South Carolina - 3.0% --------- ---------
South Carolina Port Authority,
6.625% RB (AMBAC Insured)/
(Subject to AMT), 7/1/2011 3,500,000 3,451,697 3,500,000 3,451,697
South Dakota - 5.7% --------- ---------
Heartland Consumers Power District,
SD, 6.00% Electric RB
(FSA Insured)/(Original Issue Discount:
6.40%), 1/1/2017 3,500,000 3,197,625 3,500,000 3,197,625
South Dakota State Health and Education
Facilities Authority,
6.625% RB (MBIA Insured), 7/1/2011 3,500,000 3,479,178 3,500,000 3,479,178
--------- ---------
Total 6,676,803 6,676,803
Tennessee - 5.6% --------- ---------
Bristol, TN, Health & Educational
Facilities, 6.75% RB (Bristol
Memorial Hospital)/(FGIC Insured),
9/1/2007 1,200,000 1,234,888 1,200,000 1,234,888
Knox County, TN, Health, Educational &
Housing Facilities Board, 6.25%
Hospital Facilities RB (Fort Sanders
Alliance)/(Series B)/(MBIA Insured),
1/1/2013 1,700,000 1,634,395 1,700,000 1,634,395
Knox County, TN, Health, Educational &
Housing Facilities Board,
5.75% Hospital Facilities RB (Fort
Sanders Alliance)/(Series C)/
(MBIA Insured), 1/1/2014 4,100,000 3,701,086 4,100,000 3,701,086
--------- ---------
Total 6,570,369 6,570,369
Texas - 6.3% --------- ---------
City of Houston Water Conveyance
Systems Contract, 7.50% COP (Series
1993H)/(AMBAC Insured), 12/15/2014 1,000,00 1,108,480 1,000,00 1,108,480
Dallas-Fort Worth, TX, Regional
Airport, 7.80% RB (FGIC Insured),
11/1/2007 2,000,00 2,234,496 2,000,000 2,234,496
Harris County, TX, 5.30% Revenue
Toll Roads, Senior Lien Bonds
(AMBAC Insured)/(Original Issue
Discount: 5.40%), 8/15/2013 2,000,000 1,687,494 2,000,000 1,687,494
Southland Oaks, TX, Municipal
Utility District, 6.50% RB (City of
Austin)/(FGIC Insured), 11/15/2009 2,290,000 2,306,147 2,290,000 2,306,147
--------- --------- ---------
Total 6,228,137 1,108,480 7,336,617
Utah - 5.2% --------- --------- ---------
Iron County School District, UT,
6.40% GO Bonds (MBIA Insured)/
(Original Issue Discount: 6.45%),
1/15/2012 2,500,000 2,444,200 2,500,000 2,444,200
Salt Lake City, UT, 6.00% RB, Utah
Airport Authority (FGIC Insured),
12/1/2012 1,000,000 914,884 1,000,000 914,884
Salt Lake City, UT, 5.875% RRB,
Utah Airport Authority (FGIC
Insured), 12/1/2018 3,000,000 2,672,385 3,000,000 2,672,385
--------- ---------
Total 6,031,469 6,031,469
Virginia - 0.7% --------- ---------
County of Roanoke Water System,
5.00% RRB (Series 1993)/
(FGIC Insured), 7/1/2021 1,000,000 784,340 1,000,000 784,340
Washington - 7.2% --------- ---------
Seattle, WA, Metropolitan Seattle
Sewer, 6.25% RB (MBIA Insured),
1/1/2021 3,965,000 3,691,542 3,965,000 3,691,542
Spokane, WA, Regional Solid Waste
Management System, 6.25% RB
(AMBAC Insured), 12/1/2011 1,000,000 942,268 1,000,000 942,268
Tacoma, WA, Electric System,
6.25% RRB (Series 1992A)/
(AMBAC Insured), 1/1/2011 500,000 485,745 500,000 485,745
Tacoma, WA, Electric System,
6.25% RB (FGIS Insured)/
(Original Issue Discount: 6.45%),
1/1/2015 3,500,000 3,313,103 3,500,000 3,313,103
--------- --------- ---------
Total 7,946,913 485,745 8,432,658
West Virginia - 1.3% --------- --------- ---------
Harrison County, WV, Board of
Education, 6.30% GO Bonds
(FGIC Insured), 5/1/2005 1,500,000 1,516,865 1,500,000 1,516,865
Wisconsin - 6.0% --------- ---------
Superior, WS, 6.90% Limited
Obligations RB (Midwest Energy)/
(Series E)/(FGIC Insured), 8/1/2021 4,500,000 4,549,068 4,500,000 4,549,068
Wisconsin Housing & Economic
Development Authority, 6.875% RRB
(Home Ownership)/(Series 1992),
9/1/2024 500,000 480,125 500,000 480,125
Wisconsin State Health and Education
Facilities Authority, 6.625% RB
(Wausau Hospital)/(AMBAC Insured),
8/15/2011 2,000,000 1,964,266 2,000,000 1,964,266
--------- --------- --------
Total 6,513,334 480,125 6,993,459
Total Long-Term Municipal Securities --------- --------- ---------
(identified cost, $117,125,314) 91,057,944 20,635,693 111,693,637
---------- ---------- -----------
Short-Term Investments - 2.1%
Short-Term Municipal Securities - 0.7%
Pennsylvania - 0.7%
Schuylkill County IDA Weekly VRDNs
Resource Recovery Bonds
(Series 1985)(Westwood Energy
Properties Limited Partnership
Project)/(Fuji Bank LOC) 800,000 800,000 800,000 800,000
Mutual Fund Shares - 1.4% --------- ---------
Lehman Municipal Money Market Fund 1,595,103 1,595,103 1,595,103 1,595,103
Lehman Tax-Free Money Market Fund 61,616 61,616 61,616 61,616
Total Mutual Fund Shares (at ---------- ----------
net asset value) 1,656,719 1,656,719
Total Short-Term Investments ---------- ----------
(at amortized cost) 1,656,719 800,000 2,456,719
Total Investments (identified ---------- ---------- -----------
cost, $119,582,033) $92,714,663 $21,435,693 $114,150,356+
========== ========== ===========
<FN>
- --------
* The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
+ The cost of investments for federal tax purposes amounts to $119,582,033.
The net unrealized depreciation of investments on a federal tax basis
amount to $5,431,677, which is comprised of $366,587 appreciation and
$5,795,264 depreciation, at December 31, 1994.
Note: The categories of investments are shown as a percentage of net assets
($116,438,472) at December 31, 1994.
The following abbreviations are used in this portfolio:
AMBAC - American Municipal Bond Assurance Corporation
AMT - Alternative Minimum Tax
COP - Certificates of Participation
FGIC - Financial Guaranty Insurance Company
FSA - Financial Security Assurance
GO - General Obligations
IDA - Industrial Development Authority
LOC - Letter of Credit
MBIA - Municipal Bond Investors Assurance
PCR - Pollution Control Revenue
RB - Revenue Bonds
RRB - Revenue Refunding Bonds
SFM - Single Family Mortgage
VRDN - Variable Rate Demand Note
(See Notes to Pro Forma Financial Statements)
</FN>
</TABLE>
<PAGE>
First Union High Grade Tax Free Fund
Evergreen National Tax Free Fund
Pro Forma Combining Statement of Assets and Liabilities
December 31, 1994 (unaudited)
<TABLE>
<CAPTION>
First Union Evergreen
High Grade Tax National Tax Pro Forma Pro Forma
Free Fund Free Fund Adjustments Combined
--------- --------- ----------- --------
<S> <C> <C> <C> <C>
Assets:
Investments in securities, at amortized cost
and value (identified and tax cost, $119,582,033) $92,714,663 $21,435,693 $114,150,356
Cash 5,829 51,523 57,352
Interest receivable 2,388,442 527,768 2,916,210
Receivable for investments sold 1,039,313 ---- 1,039,313
Receivable for Fund shares sold 355,046 980 356,026
Receivable from Adviser ---- ---- 54,645 (2) 54,645
Prepaid expenses ---- 26,462 (26,462)(2) -0-
Deferred expenses 4,003 28,183 (28,183)(2) 4,003
----------- ----------- --------- ------------
Total assets 96,507,296 22,070,609 -0- 118,577,905
----------- ----------- --------- ------------
Liabilities:
Payable for investments purchased 1,440,086 ---- 1,440,086
Payable for Fund shares redeemed 417,468 ---- 417,468
Dividends payable 175,084 22,660 197,744
Accrued advisory fee ---- 8,321 8,321
Accrued expenses 44,978 30,836 75,814
----------- ----------- --------- ------------
Total liabilities 2,077,616 61,817 2,139,433
----------- ----------- --------- ------------
Net Assets $94,429,680 $22,008,792 $116,438,472
----------- ----------- --------- ------------
Net Assets Consist of:
Paid-in capital $99,317,449 $26,206,861 $125,524,310
Net unrealized appreciation (depreciation)
of investments (3,976,541) (1,455,136) (5,431,677)
Accumulated net realized gain (loss)
on investments (911,228) (2,742,933) (3,654,161)
----------- ----------- --------- ------------
Total Net Assets $94,429,680 $22,008,792 $116,438,472
----------- ----------- --------- ------------
Net Assets:
-Class A Investment Shares $57,676,448 $9 $57,676,457
-Class B Investment Shares $32,434,792 $9 $32,434,801
-Y Shares $4,318,440 $22,008,774 $26,327,214
Shares Outstanding:
-Class A Investment Shares 5,888,392 1 5,888,393
-Class B Investment Shares 3,311,416 1 3,311,417
-Y Shares 440,914 2,326,272 (78,414) (1) 2,688,772
Net Asset Value:
-Class A Investment Shares $9.79 $9.46 $9.79
-Class B Investment Shares $9.79 $9.46 $9.79
-Y Shares $9.79 $9.46 $9.79
Offering Price Per Share:
-Class A Investment Shares $10.28 * $9.93 * $10.28 *
-Class B Investment Shares $9.79 $9.46 $9.79
-Y Shares $9.79 $9.46 $9.79
Redemption Proceeds Per Share:
-Class A Investment Shares $9.79 $9.46 $9.79
-Class B Investment Shares $9.30 ** $8.99 ** $9.30 **
-Y Shares $9.79 $9.46 $9.79
<FN>
- --------
(1) Adjustment to reflect share balance as a result of the combination based on
an exchange ratio of .166292 ($9.46/$9.79).
* See "What Shares Cost" in the respective Fund's prospectus.
** See "Redeeming Shares" in the respective Fund's prospectus.
(2) Adjustments to write off deferred organizational and prepaid state filing
expenses of Evergreen National Tax Free Fund, and to reflect reimbursement
of these expenses by the Adviser.
(See Notes to Pro Forma Financial Statements)
</FN>
</TABLE>
<PAGE>
<PAGE>
First Union High Grade Tax Free Fund
Evergreen National Tax Free Fund
Pro Forma Combining Statement of Operations
Year Ended December 31, 1994 (unaudited)
<TABLE>
<CAPTION>
First Union Evergreen Combined
High Grade Tax National Tax Pro Forma Pro Forma
-------------- ------------ --------- ---------
<S> <C> <C> <C> <C>
Investment Income:
Interest income $7,261,577 $2,229,797 $9,491,374
--------- --------- --------- ---------
Expenses:
Investment advisory fee 599,854 196,104 795,958
Trustees' fees 1,879 5,384 (5,106) (1) 2,157
Administrative personnel and services fees 101,004 ---- 32,945 (2) 133,949
Custodian and portfolio accounting fees 75,807 47,826 (41,326) (3) 82,307
Transfer and dividend disbursing agent fees and expenses 64,729 22,281 (7,291) (4) 79,719
Distribution services fee - Class A Investment Shares 197,562 ---- 197,562
Distribution services fee - Class B Investment Shares 287,858 ---- 287,858
Shareholder services fee - Class B Investment Shares 26,443 ---- 26,443
Fund share registration costs 20,228 27,930 (24,534) (1) 23,624
Auditing fees 12,000 18,296 (18,296) (1) 12,000
Legal fees 3,154 3,942 (3,217) (1) 3,879
Printing and postage 31,364 17,031 (16,289) (1) 32,106
Insurance premiums 8,336 6,975 (6,769) (1) 8,542
Miscellaneous 7,711 10,855 18,566
--------- --------- --------- ---------
Total expenses 1,437,929 356,624 (89,883) 1,704,670
Deduct- --------- --------- --------- ---------
Waiver of investment advisory fee 16,090 157,606 (152,507) (5) 21,189
Reimbursement of other expenses ---- 16,939 (16,939) (5) 0
--------- --------- --------- ---------
Total waivers 16,090 174,545 (169,446) 21,189
--------- --------- --------- ---------
Net expenses 1,421,839 182,079 79,563 1,683,481
--------- --------- --------- ---------
Net investment income 5,839,738 2,047,718 (79,563) 7,807,893
Realized and Unrealized Gain (Loss) on Investments: --------- --------- --------- ---------
Net realized gain (loss) on investments (identified
cost basis) (912,236) (2,805,985) (3,718,221)
Net change in unrealized appreciation (depreciation)
on investments (15,618,845) (2,697,179) (18,316,024)
---------- ---------- --------- ----------
Net realized and unrealized gain (loss) on investments (16,531,081) (5,503,164) (22,034,245)
---------- ---------- --------- ----------
Change in net assets resulting from operations ($10,691,343) ($3,455,446) ($79,563) ($14,226,352)
---------- ---------- --------- ----------
<FN>
- ---------
(1) Adjustment reflects expected savings when the two funds combine.
(2) Reflects an increase in administrative personnel and services fees based
on the surviving Fund's fee schedules.
(3) Based on First Union High Grade Tax Free Fund custodian and portfolio
accounting contract.
(4) Based on First Union High Grade Tax Free Fund transfer agent and dividend
disbursing contract.
(5) Reflects a decrease in the waiver of the investment advisory fees and a
decrease in the reimbursement of other expenses by the investment advisor
based on the surviving Fund's voluntary fee waiver and voluntary
reimbursement of other expenses in effect for the year ended
December 31, 1994.
(See Notes to Pro Forma Financial Statements)
</FN>
</TABLE>
First Union High Grade Tax Free Fund
Notes to Pro Forma Combining Financial Statements (unaudited)
1. Basis of Combination - The Pro forma Statement of
Assets and Liabilities, including the Portfolio of
Ivestments, and the related Statement of Operations ("Pro
forma Statements") reflect the accounts of First Union High
Grade Tax Free Fund ("First Union") and Evergreen National
Tax Free Fund ("Evergreen") at December 31, 1994 and for the
year then ended.
The Pro forma Statements give effect to the proposed transfer
of all assets and liabilities of Evergreen in exchange for
shares of First Union. The Pro forma Statements do not
reflect the expense of either Fund in carrying out its
obligations under the Agreement and Plan of Reorganization.
The actual fiscal year end of the combined Fund will be
December 31, the fiscal year end of First Union.
The Reorganization will be accomplished through the acquisition of substantially
all of the assets of Evergreen by First Union, and the assumption by First Union
of certain identified liabilities of Evergreen. Thereafter there will be a
distribution of such shares of First Union to shareholders of Evergreen in
liquidation of and subsequent termination of Evergreen. The information
contained herein is based on the experience of each fund for the period ended
December 31, 1994 and is designed to permit shareholders of Evergreen to
evaluate the financial effect of the proposed Reorganization. The expenses of
Evergreen in connection with the Reorganization (including the cost of any proxy
soliciting agents), will be borne by Evergreen Asset. The expenses of First
Union incurred in connection with the Reorganization will be borne by FUNB-NC.
No portion of such expenses shall be borne directly indirectly by Evergreen or
its shareholders.
The Pro forma Statements should be read in conjunction with
the historical financial statements of each Fund included in
or incorporated by reference in the Statement of Additional
Information.
2. Shares of Beneficial Interest - The pro forma net
asset value per share assumes the issuance of additional
shares of First Union Class A, Class B, and Y shares which
would have been issued at December 31, 1994 in connection
with the proposed reorganization. The amount of additional
shares assumed to be issued was calculated based on the
December 31, 1994 net assets of Evergreen ($22,008,792) and
the net asset value per share of First Union of $9.79.
The pro forma shares outstanding of 11,888,582 consist of
2,247,860 additional shares to be issued in the proposal
reorganization, as calculated above, plus 9,640,722 shares
of First Union outstanding as of December 31, 1994.
3. Pro Forma Operations - The Pro Forma Statement of
Operations assumes similar rates of gross investment income
for the investments of each Fund. Accordingly, the combined
gross investment income is equal to the sum of each Fund's
gross investment income. Pro forma operating expenses include
the actual expenses of the Funds and the combined Fund, with
certain expenses adjusted to reflect the expected expenses of
the combined equity. The investment advisory fee has been charged
to the combined Fund based on the fee schedule in effect for
First Union at the combined level of average net assets for
the year ended December 31, 1994. First Union National Bank
of North Carolina (the Adviser), may, at its discretion,
waive its fee or reimburse the Fund for certain expenses in
order to reduce the Fund's expense ratio. An adjustment has
been made to the combined Fund expense to decrease the waiver
of investment advisory fee and reimbursement of other
expenses based on the voluntary advisory fee waiver in effect
for First Union (0.013% of average net assets) for the year
ended December 31, 1994.
Administrative personnel and services fees for the combined
Fund would be charged at an annual rate of .15 of 1% on the
first $250 million of average aggregate daily net assets of
the Trust; .125 of 1% on the next $250 million; .10 of 1%
on the next $250 million; and .075 of 1% on the average
aggregate daily net assets of the Trust in excess of $750
million, subject to a $80,000 per year minimum. There would
have been no voluntary waiver of administrative personnel and
services fees by the administrator.
