-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, dN/JMH5BBcUPuleJqPyDieIlLnTtbQfSrus8IcmShms1ogUUSbGkrdPXVfViCYHq tl4VS2Pq/n7PSDqeVp2yLw== 0000820636-95-000011.txt : 19950517 0000820636-95-000011.hdr.sgml : 19950517 ACCESSION NUMBER: 0000820636-95-000011 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19950516 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST UNION FUNDS/ CENTRAL INDEX KEY: 0000757440 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 046599663 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 033-58249 FILM NUMBER: 95539953 BUSINESS ADDRESS: STREET 1: 99 HIGH ST CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6173383200 MAIL ADDRESS: STREET 1: FEDERATED INVESTORS TOWER CITY: PITTSBURGH STATE: PA ZIP: 15222-3779 FORMER COMPANY: FORMER CONFORMED NAME: FIRST UNION HIGH GRADE TAX FREE PORT DATE OF NAME CHANGE: 19940519 FORMER COMPANY: FORMER CONFORMED NAME: FIRST UNION FUNDS DATE OF NAME CHANGE: 19921230 FORMER COMPANY: FORMER CONFORMED NAME: SALEM FUNDS DATE OF NAME CHANGE: 19920703 497 1 PROSPECTUS/PROXY STATEMENT 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 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 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 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 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 TABLE OF CONTENTS
PAGE 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
3 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
HIGH GRADE HIGH GRADE NATIONAL PRO FORMA 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%
(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 COMPARISON OF CLASS A SHARES OF HIGH GRADE WITH CLASS A SHARES OF NATIONAL
HIGH GRADE HIGH GRADE NATIONAL PRO FORMA 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%
(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 COMPARISON OF CLASS B SHARES OF HIGH GRADE WITH CLASS B SHARES OF NATIONAL
HIGH GRADE HIGH GRADE NATIONAL PRO FORMA 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%
(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 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
HIGH GRADE HIGH GRADE NATIONAL PRO FORMA After 1 year...................................................... $ 8 $ 9 $ 8 After 3 years..................................................... $ 26 $ 28 $ 26 After 5 years..................................................... $ 46 $ 49 $ 45 After 10 years.................................................... $103 $110 $ 100
CLASS A SHARES
HIGH GRADE HIGH GRADE NATIONAL PRO FORMA After 1 year...................................................... $ 58 $ 59 $ 58 After 3 years..................................................... $ 80 $ 82 $ 80 After 5 years..................................................... $104 $107 $ 103 After 10 years.................................................... $173 $180 $ 171
CLASS B SHARES Assuming Redemption at End of Period:
HIGH GRADE HIGH GRADE NATIONAL PRO FORMA After 1 year...................................................... $ 70 $ 69 $ 70 After 3 years..................................................... $ 91 $ 89 $ 90 After 5 years..................................................... $122 $122 $ 121 After 10 years.................................................... $186 $192 $ 184
Assuming No Redemption at End of Period:
HIGH GRADE HIGH GRADE NATIONAL PRO FORMA After 1 year...................................................... $ 19 $ 19 $ 18 After 3 years..................................................... $ 58 $ 59 $ 57 After 5 years..................................................... $ 99 $102 $ 98 After 10 years.................................................... $186 $192 $ 184
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 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:
HIGH GRADE NATIONAL 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%*
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:
HIGH GRADE NATIONAL 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%*
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:
HIGH GRADE PRO FORMA Class Y Shares................................................................. .74 of 1% Class A Shares................................................................. .99 of 1% Class B Shares................................................................. 1.56 of 1%
The following are the expense ratios for National for the fiscal year ended August 31, 1994.
EXCLUDING ADVISORY NET OF ADVISORY FEE FEE WAIVER AND WAIVER AND VOLUNTARY VOLUNTARY REIMBURSEMENTS REIMBURSEMENTS 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%*
* 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 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 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
FUND PERIOD CLASS Y CLASS A CLASS B 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%
* 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 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
CLASS Y CLASS A CLASS B High Grade................................................................ 5.85% 5.33% 4.85% National.................................................................. 5.52% -- --
30 DAY TAX EQUIVALENT YIELD
CLASS Y CLASS A CLASS B High Grade................................................................ 9.14% 8.33% 7.58% National.................................................................. 8.63% -- --
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:
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 .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
11 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 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.
SALES CHARGE AS A PERCENTAGE AMOUNT OF TRANSACTION OF PUBLIC OFFERING PRICE $ 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%
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.
YEAR SINCE PURCHASE CONTINGENT DEFERRED SALES CHARGE First................................................................. 5% Second................................................................ 4% Third and Fourth...................................................... 3% Fifth................................................................. 2% Sixth and Seventh..................................................... 1%
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 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 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 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; 16 (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. 17 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
NATIONAL(1) HIGH GRADE CLASS Y CLASS A CLASS B CLASS Y CLASS A CLASS B 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
PRO FORMA COMBINED CAPITALIZATION OF HIGH GRADE(2)
CLASS Y CLASS A CLASS B 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
(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:
PERCENTAGE OF TOTAL CLASS Y SHARES NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE OF CLASS OUTSTANDING Foster Bam, 429,932 19.13% 17.40% 2 Greenwich Plaza Greenwich, CT 06830
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: 18
PERCENTAGE OF TOTAL CLASS Y SHARES NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE OF CLASS OUTSTANDING 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
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. 19 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 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 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. 22 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 23 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 24 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"). A-1 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. A-2 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. A-3 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 A-4 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; A-5 (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. A-6 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 A-7 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] A-8 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 A-9 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: A-10 (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. A-11 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 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 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. STATEMENT OF ADDITIONAL INFORMATION FIRST UNION FUNDS Table of Contents Cover Page Cover Page Financial Statements 1 First Union High Grade Tax Free Fund Evergreen National Tax Free Fund Pro Forma Combining Schedule of Portfolio of Investments December 31, 1994 (unaudited)
First Union High Grade Evergreen National Pro Forma Tax Free Fund Tax Free Fund Combined Principal Principal Principal Amount Value Amount Value Amount Value ----------- --------- -------- ------- ---------- ------- 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%
First Union High Grade Evergreen National Pro Forma Tax Free Fund Tax Free Fund Combined Principal Principal Principal Amount Value Amount Value Amount Value ----------- --------- -------- ------- ---------- ------- 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 --------- ---------
First Union High Grade Evergreen National Pro Forma Tax Free Fund Tax Free Fund Combined Principal Principal Principal Amount Value Amount Value Amount Value ----------- --------- -------- ------- ---------- ------- 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+ ========== ========== =========== - -------- * 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)
First Union High Grade Tax Free Fund Evergreen National Tax Free Fund Pro Forma Combining Statement of Assets and Liabilities December 31, 1994 (unaudited)
First Union Evergreen High Grade Tax National Tax Pro Forma Pro Forma Free Fund Free Fund Adjustments Combined --------- --------- ----------- -------- 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 - -------- (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)
First Union High Grade Tax Free Fund Evergreen National Tax Free Fund Pro Forma Combining Statement of Operations Year Ended December 31, 1994 (unaudited)
First Union Evergreen Combined High Grade Tax National Tax Pro Forma Pro Forma -------------- ------------ --------- --------- 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) ---------- ---------- --------- ---------- - --------- (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)
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. -----END PRIVACY-ENHANCED MESSAGE-----