1933 Act Registration No. 333-41271
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-14AE
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
[X] Pre-Effective [ ] Post-Effective
Amendment No. 2 Amendment No.
EVERGREEN MONEY MARKET TRUST
[Exact Name of Registrant as Specified in Charter]
Area Code and Telephone Number: (617) 210-3200
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------
(Address of Principal Executive Offices)
Rosemary D. Van Antwerp, Esq.
Keystone Investment Management Company
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------------
(Name and Address of Agent for Service)
Copies of All Correspondence to:
Robert N. Hickey, Esq.
Sullivan & Worcester LLP
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036
Approximate date of proposed public offering: As soon as possible after
the effective date of this Registration Statement.
Pursuant to Rule 414 under the Securities Act of 1933, by this
amendment to Registration No. 333-41271 on Form N-14 of The Evergreen Municipal
Trust, a Massachusetts business trust, the Registrant hereby adopts the
Registration Statement of such trust with respect to the Evergreen Tax Exempt
Money Market Fund series thereof under
<PAGE>
the Securities Act of 1933.
<PAGE>
EVERGREEN MONEY MARKET TRUST
CROSS REFERENCE SHEET
Pursuant to Rule 481(a) under the Securities Act of 1933
Location in Prospectus/Proxy
Item of Part A of Form N-14 Statement
1. Beginning of Registration Cross Reference Sheet; Cover
Statement and Outside Page
Front Cover Page of
Prospectus
2. Beginning and Outside Table of Contents
Back Cover Page of
Prospectus
3. Fee Table, Synopsis and Comparison of Fees and
Risk Factors Expenses; Summary; Comparison
of Investment Objectives and
Policies; Risks
4. Information About the Summary; Reasons for the
Transaction Reorganization; Comparative
Information on Shareholders'
Rights; Exhibit A (Agreement
and Plan of Reorganization)
5. Information about the Cover Page; Summary; Risks;
Registrant Comparison of Investment
Objectives and Policies;
Comparative Information on
Shareholders' Rights;
Additional Information
6. Information about the Cover Page; Summary; Risks;
Company Being Acquired Comparison of Investment
Objective and Policies;
Comparative Information on
Shareholders' Rights;
Additional Information
<PAGE>
7. Voting Information
Cover Page; Summary; Voting
Information Concerning the
Meeting
8. Interest of Certain Financial Statements and
Persons and Experts Experts; Legal Matters
9. Additional Information Inapplicable
Required for Reoffering
by Persons Deemed to be
Underwriters
Item of Part B of Form N-14
10. Cover Page Cover Page
11. Table of Contents Omitted
12. Additional Information Statement of Additional
About the Registrant Information of The Evergreen
Municipal Trust - Evergreen
Tax Exempt Money Market Fund
dated October
31, 1996, as amended
13. Additional Information Statement of Additional
about the Company Being Information of The Virtus
Acquired Funds - The Tax Free Money
Market Fund dated November 30,
1997
14. Financial Statements Financial Statements dated
August 31, 1997 of Evergreen
Tax Exempt Money Market Fund;
Financial Statements of The
Virtus Funds - The Tax Free
Money Market Fund dated
September 30, 1997
<PAGE>
Item of Part C of Form N-14
Incorporated by Reference to
Part A Caption - "Comparative
15. Indemnification Information on Shareholders'
Rights - Liability and
Indemnification of Trustees"
16. Exhibits Item 16. Exhibits
17. Undertakings Item 17. Undertakings
<PAGE>
THE VIRTUS FUNDS
THE TAX FREE MONEY MARKET FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
January , 1998
Dear Shareholder,
As a result of the merger of Signet Banking Corporation with and into a
wholly-owned subsidiary of First Union Corporation effective November 28, 1997,
I am writing to shareholders of The Tax Free Money Market Fund (the "Fund"), to
inform you of a Special Shareholders' meeting to be held on February 20, 1998.
Before that meeting, I would like your vote on the important issues affecting
your Fund as described in the attached Prospectus/Proxy Statement.
The Prospectus/Proxy Statement includes two proposals. The first proposal
requests that shareholders consider and act upon an Agreement and Plan of
Reorganization whereby all of the assets of the Fund would be acquired by
Evergreen Tax Exempt Money Market Fund in exchange for Class Y shares of
Evergreen Tax Exempt Money Market Fund and the assumption by Evergreen Tax
Exempt Money Market Fund of certain liabilities of the Fund. You will receive
shares of Evergreen Tax Exempt Money Market Fund having an aggregate net asset
value equal to the aggregate net asset value of your Fund shares. Details about
Evergreen Tax Exempt Money Market Fund's investment objective, portfolio
management team, performance, etc. are contained in the attached
Prospectus/Proxy Statement. The transaction is a non-taxable event for
shareholders.
The second proposal requests shareholder consideration of an Interim Investment
Advisory Agreement between the Fund and Virtus Capital Management, Inc.
Information relating to the Interim Investment Advisory Agreement is contained
in the attached Prospectus/Proxy Statement.
The Board of Trustees has approved the proposals and recommends that you vote
FOR these proposals.
I realize that this Prospectus/Proxy Statement will take time to review, but
your vote is very important. Please take the time to familiarize yourself with
the proposals presented and sign and return your proxy card in the enclosed
postage paid envelope today.
<PAGE>
If you have any questions about this proxy, please call our proxy solicitor,
Shareholder Communications Corporation, at 800-733-8481 ext. 437. You may also
FAX your completed and signed proxy card to 800-733-1885. If we do not receive
your completed proxy card after several weeks, you may be contacted by
Shareholder Communications Corporation who will remind you to vote your shares.
Thank you for taking this matter seriously and participating in this important
process.
Sincerely,
Edward C. Gonzales
President
The Virtus Funds
<PAGE>
[SUBJECT TO COMPLETION, JANUARY 14, 1998
PRELIMINARY COPY]
THE VIRTUS FUNDS
THE TAX FREE MONEY MARKET FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 20, 1998
Notice is hereby given that a Special Meeting (the "Meeting") of
Shareholders of The Tax Free Money Market Fund, a series of The Virtus Funds
(the "Fund"), will be held at the offices of the Evergreen Funds, 200 Berkeley
Street, 26th Floor, Boston, Massachusetts 02116 on February 20, 1998 at 2:00
p.m. for the following purposes:
1. To consider and act upon the Agreement and Plan of Reorganization
(the "Plan") dated as of November 26, 1997, providing for the acquisition of all
of the assets of the Fund by Evergreen Tax Exempt Money Market Fund, a series of
Evergreen Money Market Trust, ("Evergreen Tax Exempt") in exchange for shares of
Evergreen Tax Exempt and the assumption by Evergreen Tax Exempt of certain
identified liabilities of the Fund. The Plan also provides for distribution of
such shares of Evergreen Tax Exempt to shareholders of the Fund in liquidation
and subsequent termination of the Fund. A vote in favor of the Plan is a vote in
favor of the liquidation and dissolution of the Fund.
2. To consider and act upon the Interim Investment Advisory Agreement
between the Fund and Virtus Capital
Management, Inc.
3. To transact any other business which may properly come before the
Meeting or any adjournment or adjournments thereof.
The Trustees of The Virtus Funds on behalf of the Fund have fixed the
close of business on December 26, 1997 as the record date for the determination
of shareholders of the Fund entitled to notice of and to vote at the 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.
<PAGE>
By Order of the Board of Trustees
John W. McGonigle
Secretary
January , 1998
<PAGE>
INSTRUCTIONS FOR EXECUTING PROXY CARDS
The following general rules for signing proxy cards may be of
assistance to you and may help to 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.
c/o John Doe, Treasurer John Doe, Treasurer
(4) ABC Corp. Profit Sharing Plan John Doe, Trustee
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, Sr. John B. Smith, Jr., Executor
<PAGE>
PROSPECTUS/PROXY STATEMENT DATED JANUARY , 1998
Acquisition of Assets of
THE TAX FREE MONEY MARKET FUND
a series of
The Virtus Funds
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
By and in Exchange for Shares of
EVERGREEN TAX EXEMPT MONEY MARKET FUND
a series of
Evergreen Money Market Trust
200 Berkeley Street
Boston, Massachusetts 02116
This Prospectus/Proxy Statement is being furnished to shareholders of
The Tax Free Money Market Fund ("Virtus Tax Free") in connection with a proposed
Agreement and Plan of Reorganization (the "Plan") to be submitted to
shareholders of Virtus Tax Free for consideration at a Special Meeting of
Shareholders to be held on February 20, 1998 at 2:00 p.m. at the offices of the
Evergreen Funds, 200 Berkeley Street, Boston, Massachusetts 02116, and any
adjournments thereof (the "Meeting"). The Plan provides for all of the assets of
Virtus Tax Free to be acquired by Evergreen Tax Exempt Money Market Fund
("Evergreen Tax Exempt") in exchange for shares of Evergreen Tax Exempt and the
assumption by Evergreen Tax Exempt of certain identified liabilities of Virtus
Tax Free (hereinafter referred to as the "Reorganization"). Evergreen Tax Exempt
and Virtus Tax Free are sometimes hereinafter referred to individually as the
"Fund" and collectively as the "Funds." Following the Reorganization, shares of
Evergreen Tax Exempt will be distributed to shareholders of Virtus Tax Free in
liquidation of Virtus Tax Free and such Fund will be terminated. Shareholders of
Virtus Tax Free will receive Class Y shares of Evergreen Tax Exempt. Class Y
shares of Evergreen Tax Exempt have no initial sales charges or Rule 12b-1
distribution fees. As a result of the proposed Reorganization, shareholders of
Virtus Tax Free will receive that number of full and fractional shares of
Evergreen Tax Exempt having an aggregate net asset value equal to the aggregate
net asset value of such shareholder's shares of Virtus Tax Free. The
Reorganization is being structured as a tax-free reorganization for federal
income tax purposes.
Evergreen Tax Exempt is a separate series of Evergreen Money Market
Trust, an open-end management investment company registered under the Investment
Company Act of 1940, as amended
<PAGE>
(the "1940 Act"). The investment objective of Evergreen Tax Exempt is to achieve
as high a level of current income exempt from federal income tax as is
consistent with preserving capital and providing liquidity. The investment
objective of Virtus Tax Free is substantially identical -- to provide current
income exempt from federal income tax consistent with stability of principal by
investing in municipal securities. Each Fund seeks to maintain a stable net
asset value of $1.00 per share although no assurances can be given that such a
stable net asset value will be maintained.
Shareholders of Virtus Tax Free are also being asked to approve the
Interim Investment Advisory Agreement with Virtus Capital Management, Inc., a
subsidiary of First Union Corporation ("Virtus") (the "Interim Advisory
Agreement"), with the same terms and fees as the previous advisory agreement
between Virtus Tax Free and Virtus. The Interim Advisory Agreement will be in
effect for the period of time between November 28, 1997, the date on which the
merger of Signet Banking Corporation with and into a wholly-owned subsidiary of
First Union Corporation was consummated, and the date of the Reorganization
(scheduled for on or about February 27, 1998).
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about Evergreen Tax Exempt that
shareholders of Virtus Tax Free 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 January , 1998,
relating to this Prospectus/Proxy Statement and the Reorganization which
includes the financial statements of Evergreen Tax Exempt dated August 31, 1997
and of Virtus Tax Free dated September 30, 1997, 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 Evergreen Tax Exempt at 200 Berkeley
Street, Boston, Massachusetts 02116 or by calling toll-free 1-800-343- 2898.
The Prospectus of Evergreen Tax Exempt dated October 31, 1996, as
amended, and its Annual Report for the fiscal year ended August 31, 1997 are
incorporated herein by reference in their entirety, insofar as they relate to
Evergreen Tax Exempt only, and not to any other funds described therein.
Shareholders of Virtus Tax Free will receive, with this Prospectus/Proxy
Statement, copies of the Prospectus pertaining to the Class Y shares of
Evergreen Tax Exempt that they will receive as a result of the consummation of
the Reorganization.
<PAGE>
Additional information about Evergreen Tax Exempt is contained in its Statement
of Additional Information of the same date which has been filed with the SEC and
which is available upon request and without charge by writing to or calling
Evergreen Tax Exempt at the address or telephone number listed in the preceding
paragraph.
The two Prospectuses of Virtus Tax Free dated November 30, 1997,
insofar as they relate to Virtus Tax Free only, and not to any other funds
described therein, are incorporated herein in their entirety by reference.
Copies of the Prospectuses and related Statements of Additional Information
dated the same date, are available upon request without charge by writing to
Virtus Tax Free at the address listed on the cover page of this Prospectus/Proxy
Statement or by calling toll-free 1-800-829- 3863.
Included as Exhibits A and B to this Prospectus/Proxy Statement are a
copy of the Plan and the Interim Advisory Agreement, respectively.
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 any bank and are not insured or otherwise protected by the
U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve
Board or any other government agency and involve investment risk, including
possible
loss of capital.
<PAGE>
TABLE OF CONTENTS
Page
COMPARISON OF FEES AND EXPENSES............................................6
SUMMARY ............................................................... 9
Proposed Plan of Reorganization..................................10
Tax Consequences.................................................11
Investment Objectives and Policies of the Funds..................12
Comparative Performance Information for each Fund................12
Management of the Funds....................................... 13
Investment Advisers and Sub-Adviser..............................14
Administrator....................................................15
Distribution of Shares...........................................15
Purchase and Redemption Procedures...............................16
Exchange Privileges..............................................17
Dividend Policy..................................................17
Risks ........................................................18
REASONS FOR THE REORGANIZATION............................................19
Agreement and Plan of Reorganization.............................22
Federal Income Tax Consequences..................................24
Pro-forma Capitalization.........................................26
Shareholder Information..........................................26
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES..........................27
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS...........................29
Forms of Organization............................................29
Capitalization...................................................30
Shareholder Liability............................................30
Shareholder Meetings and Voting Rights...........................31
Liquidation or Dissolution.......................................32
Liability and Indemnification of Trustees........................32
INFORMATION REGARDING THE INTERIM ADVISORY AGREEMENT................... 34
Introduction.................................................. 34
Comparison of the Interim Advisory Agreement and
the Previous Advisory Agreement...........................................35
Information about Virtus Tax Free's Investment
Adviser.....................................................36
ADDITIONAL INFORMATION....................................................37
VOTING INFORMATION CONCERNING THE MEETING.................................37
FINANCIAL STATEMENTS AND EXPERTS..........................................40
<PAGE>
LEGAL MATTERS.............................................................40
OTHER BUSINESS............................................................40
APPENDIX A................................................................42
EXHIBIT A
EXHIBIT B
EXHIBIT C
<PAGE>
COMPARISON OF FEES AND EXPENSES
The amounts for Class Y shares of Evergreen Tax Exempt set forth in the
following tables and in the examples are based on the expenses of Evergreen Tax
Exempt for the fiscal year ended August 31, 1997. The amounts for shares of
Virtus Tax Free set forth in the following tables and in the examples are based
on the expenses for Virtus Tax Free for the fiscal year ended September 30,
1997. The pro forma amounts for Class Y shares of Evergreen Tax Exempt are based
on what the combined expenses would have been for Evergreen Tax Exempt for the
fiscal year ending August 31, 1997. All amounts are adjusted for voluntary
expense waivers.
The following tables show for Evergreen Tax Exempt, Virtus Tax Free and
Evergreen Tax Exempt pro forma, assuming consummation of the Reorganization, the
shareholder transaction expenses and annual fund operating expenses associated
with an investment in the Class Y shares of Evergreen Tax Exempt and shares of
Virtus Tax Free.
<PAGE>
<TABLE>
<CAPTION>
Comparison of Class Y Shares
of Evergreen Tax Exempt With
Shares of Virtus Tax Free
Evergreen Virtus Evergreen
Tax Exempt Tax Free Tax Exempt
Pro Forma
Class Y Shares Class Y
<S> <C> <C> <C>
Shareholder
Transaction Expenses
Maximum Sales Load None None None
Imposed on Purchases
(as a percentage of
offering price)
Maximum Sales Load None None None
Imposed on Reinvested
Dividends (as a
percentage of offering
price)
Contingent Deferred None None (1) None
Sales Charge (as a
percentage of original
purchase price or
redemption proceeds,
whichever is lower)
Exchange Fee None None None
Annual Fund Operating
Expenses (as a
percentage of average
daily net assets)
Management Fee (After 0.47% 0.47%
Waiver)(2) 0.36%
12b-1 Fees None 0.00% None
(3)
Other Expenses (After 0.06% 0.06%
----------- ----- -----
Reimbursement) 0.43%
-----
Annual Fund Operating 0.53% 0.53%
===== ===== =====
Expenses (4) 0.79%
=====
</TABLE>
<PAGE>
(1) A contingent deferred sales charge will be imposed on the shares of
Virtus Tax Free only in the limited circumstances in which shares
being redeemed were acquired in exchange for Investment shares in
those Virtus Funds which charge a contingent deferred sales charge.
The contingent deferred sales charge is 2.00% of the lesser of the
original purchase price or the net asset value of shares redeemed,
within five years following the purchase date of such shares, and
0.00% thereafter.
(2) The management fee has been reduced to reflect the voluntary waiver by
the investment adviser. Each investment adviser can terminate this
voluntary waiver at any time in its sole discretion. The maximum
management fee is 0.49% in the case of Evergreen Tax Exempt and 0.50%
for Virtus Tax Free. Currently, no management fee waiver is in effect
for Virtus Tax Free.
(3) Shares of Virtus Tax Free can pay up to 0.25% of its average daily net
assets as a 12b-1 fee. However, Virtus Tax Free will not accrue or pay
12b-1 fees until a separate class of shares has been created for
certain institutional investors.
(4) Annual Fund Operating Expenses for Class Y shares of Evergreen Tax
Exempt would have been 0.55% for the fiscal year ended August 31, 1997
absent the fee waiver described in footnote 2 above. Annual Fund
Operating Expenses for shares of Virtus Tax Free for the fiscal year
ended September 30, 1997 would have been 0.95% absent the fee waiver
described in footnote 2 above and absent expense reimbursement of
0.02%.
Examples. The following tables show for Evergreen Tax Exempt and Virtus
Tax Free, and for Evergreen Tax Exempt pro forma, 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 each class of shares for the periods specified, assuming (i) a 5%
annual return and (ii) redemption at the end of such period and, additionally,
for shares of Virtus Tax Free, no redemption at the end of each period.
<TABLE>
<CAPTION>
Evergreen Tax Exempt
One Year Three Years Five Years Ten Years
<S> <C> <C> <C> <C>
Class Y $5 $17 $30 $66
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Virtus Tax Free
One Year Three Years Five Years Ten Years
<S> <C> <C> <C> <C>
Shares $28 $45 $44 $98
(Assuming
redemption at
end of
period)
Shares $8 $25 $44 $98
(Assuming no
redemption at
end of
period)
</TABLE>
<TABLE>
<CAPTION>
Evergreen Tax Exempt Pro Forma
One Year Three Years Five Years Ten Years
<S> <C> <C> <C> <C>
Class Y $5 $17 $30 $66
</TABLE>
The purpose of the foregoing examples is to assist Virtus Tax Free
shareholders in understanding the various costs and expenses that an investor in
Evergreen Tax Exempt would bear, directly and indirectly, as a result of the
Reorganization as compared with the various direct and indirect expenses
currently borne by a shareholder in Virtus Tax Free. These examples should not
be considered a representation of past or future expenses or annual return.
Actual expenses may be greater or less than those shown.
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
Prospectus of Evergreen Tax Exempt dated October 31, 1996, as amended, and the
Prospectuses of Virtus Tax Free dated November 30, 1997 (which are incorporated
herein by reference), the Plan and the Interim Advisory Agreement, forms of
which are attached to this Prospectus/Proxy Statement as Exhibits A and B,
respectively.
Proposed Plan of Reorganization
<PAGE>
The Plan provides for the transfer of all of the assets of Virtus Tax
Free in exchange for shares of Evergreen Tax Exempt and the assumption by
Evergreen Tax Exempt of certain identified liabilities of Virtus Tax Free. The
identified liabilities consist only of those liabilities reflected on the Fund's
statement of assets and liabilities determined immediately preceding the
Reorganization. The Plan also calls for the distribution of shares of Evergreen
Tax Exempt to Virtus Tax Free shareholders in liquidation of Virtus Tax Free as
part of the Reorganization. As a result of the Reorganization, the shareholders
of Virtus Tax Free will become the owners of that number of full and fractional
Class Y shares of Evergreen Tax Exempt which have an aggregate net asset value
equal to the aggregate net asset value of the shareholders' shares of Virtus Tax
Free, as of the close of business immediately prior to the date of the
Reorganization. See "Reasons for the Reorganization - Agreement and Plan of
Reorganization."
The Trustees of The Virtus Funds, including the Trustees who are not
"interested persons," as such term is defined in the 1940 Act (the "Independent
Trustees"), have concluded that the Reorganization would be in the best
interests of shareholders of Virtus Tax Free, and that the interests of the
shareholders of Virtus Tax Free 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 Virtus Tax Free's shareholders.
THE BOARD OF TRUSTEES OF THE VIRTUS FUNDS
RECOMMENDS APPROVAL BY SHAREHOLDERS OF VIRTUS TAX
FREE
OF THE PLAN EFFECTING THE REORGANIZATION.
The Trustees of Evergreen Money Market Trust have also approved the Plan
and, accordingly, Evergreen Tax Exempt's participation in the Reorganization.
Approval of the Reorganization on the part of Virtus Tax Free will
require the affirmative vote of a majority of Virtus Tax Free's shares voted and
entitled to vote, with all classes voting together as a single class at a
Meeting at which a quorum of the Fund's shares is present. A majority of the
outstanding shares entitled to vote, represented in person or by proxy, is
required to constitute a quorum at the Meeting. See "Voting Information
Concerning the Meeting."
The merger (the "Merger") of Signet Banking Corporation ("Signet") with
and into a wholly-owned subsidiary of First Union Corporation ("First Union")
has been consummated and, as a result, by law the Merger terminated the
investment advisory
<PAGE>
agreement between Virtus and Virtus Tax Free. Prior to consummation of the
Merger, Virtus Tax Free received an order from the SEC which permitted the
implementation, without formal shareholder approval, of a new investment
advisory agreement between the Fund and Virtus for a period of not more than 120
days beginning on the date of the closing of the Merger and continuing through
the date the Interim Advisory Agreement is approved by the Fund's shareholders
(but in no event later than April 30, 1998). The Interim Advisory Agreement has
the same terms and fees as the previous investment advisory agreement between
Virtus Tax Free and Virtus. The Reorganization is scheduled to take place on or
about February 27, 1998.
Approval of the Interim Advisory Agreement requires the affirmative
vote of (i) 67% or more of the shares of Virtus Tax Free present in person or by
proxy at the Meeting, if holders of more than 50% of the shares of Virtus Tax
Free outstanding on the record date are present, in person or by proxy, or (ii)
more than 50% of the outstanding shares of Virtus Tax Free, whichever is less.
See "Voting Information Concerning the Meeting."
If the shareholders of Virtus Tax Free do not vote to approve the
Reorganization, the Trustees will consider other possible courses of action in
the best interests of shareholders.
Tax Consequences
Prior to or at the completion of the Reorganization, Virtus Tax Free
will have received an opinion of Sullivan & Worcester LLP that the
Reorganization has been structured so that no gain or loss will be recognized by
the Fund or its shareholders for federal income tax purposes as a result of the
receipt of shares of Evergreen Tax Exempt in the Reorganization. The holding
period and aggregate tax basis of shares of Evergreen Tax Exempt that are
received by Virtus Tax Free's shareholders will be the same as the holding
period and aggregate tax basis of shares of the Fund previously held by such
shareholders, provided that shares of the Fund are held as capital assets. In
addition, the holding period and tax basis of the assets of Virtus Tax Free in
the hands of Evergreen Tax Exempt as a result of the Reorganization will be the
same as in the hands of the Fund immediately prior to the Reorganization, and no
gain or loss will be recognized by Evergreen Tax Exempt upon the receipt of the
assets of the Fund in exchange for shares of Evergreen Tax Exempt and the
assumption by Evergreen Tax Exempt of certain identified liabilities.
<PAGE>
Investment Objectives and Policies of the Funds
The investment objectives and policies of Evergreen Tax Exempt and
Virtus Tax Free are substantially identical.
The investment objective of Evergreen Tax Exempt is to achieve as high
a level of current income exempt from federal income tax as is consistent with
preserving capital and providing liquidity. The investment objective of Virtus
Tax Free is current income exempt from federal income tax consistent with
stability of principal and liquidity.
Both Funds maintain a dollar-weighted average portfolio maturity of
ninety days. Both Funds follow policies to maintain a stable net asset value of
$1.00 per share, although there is no assurance that either or both can do so on
a continuing basis. Evergreen Tax Exempt seeks to achieve its objective by
investing substantially all of its assets in a diversified portfolio of
short-term (i.e. with maturities not exceeding 397 days) debt obligations issued
by states, territories and 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. Virtus Tax Free
pursues its investment objective in the same manner. In addition, unlike
Evergreen Tax Free, at least 80% of the annual interest income of Virtus Tax
Free will be exempt from the alternative income tax. See "Comparison of
Investment Objectives and Policies" below.
Comparative Performance Information for each Fund
Discussions of the manner of calculation of total return and yield are
contained in the respective Prospectuses and Statements of Additional
Information of the Funds. The following tables set forth the current yield and
effective yield of the Class Y shares of Evergreen Tax Exempt and of shares of
Virtus Tax Free for the 7 day period ended September 30, 1997 and the total
return of each such Class of the Funds for the one and five year periods ended
September 30, 1997 and for the period from inception through September 30, 1997.
The calculations of total return assume the reinvestment of all dividends and
capital gains distributions on the reinvestment date and the deduction of all
recurring expenses (including sales charges) that were charged to shareholders'
accounts.
<PAGE>
<TABLE>
<CAPTION>
Current Yield- Effective Yield-
7 Days Ended 7 Days Ended
September 30, September 30,
<S> <C> <C>
1997 (1) 1997 (1)
Evergreen Tax Exempt
Class Y ................................... 3.43% 3.49%
Virtus Tax Free . . . 3.06% 3.11%
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Return (1)
1 Year From
Ended 5 Years Inception
September Ended To
30, September September Inception
1997 30, 1997 30, 1997 Date
------- ------- --------- ---------
<S> <C> <C> <C> <C>
Evergreen
Tax Exempt
Class Y 3.45% 3.14% 4.12% 11/2/88
shares
Virtus Tax
Free
shares 2.83% N/A 3.09% 7/27/94
- --------------
</TABLE>
(1) Reflects waiver of advisory fees and reimbursements and/or waivers of
expenses. Without such reimbursements and/or waivers, the yield and
average annual total return during the periods would have been lower.
Important information about Evergreen Tax Exempt is also contained in
management's discussion of Evergreen Tax Exempt's performance, attached hereto
as Exhibit C. This information also appears in Evergreen Tax Exempt's most
recent Annual Report.
Management of the Funds
The overall management of Evergreen Tax Exempt and of Virtus Tax Free
is the responsibility of, and is supervised by, the Board of Trustees of
Evergreen Money Market Trust and The Virtus
Funds, respectively.
<PAGE>
Investment Advisers and Sub-Adviser
Evergreen Asset Management Corp. ("Evergreen Asset") serves as
investment adviser to Evergreen Tax Exempt. Evergreen Asset, with its
predecessors has served as an investment adviser to the Evergreen family of
mutual funds since 1971. Evergreen Asset is a wholly-owned subsidiary of First
Union National Bank ("FUNB"). FUNB is a subsidiary of First Union, the sixth
largest bank holding company in the United States based on total assets as of
September 30, 1997. Evergreen Asset and its affiliates manage the Evergreen
family of mutual funds with assets of approximately $40 billion as of November
30, 1997. For further information regarding Evergreen Asset, FUNB and First
Union, see "Management of the Funds - Investment Advisers" in the Prospectus of
Evergreen Tax Exempt.
Evergreen Asset manages investments and supervises the daily business
affairs of Evergreen Tax Exempt subject to the authority of the Trustees.
Evergreen Asset is entitled to receive from the Fund an annual fee equal to 0.50
of 1% of the Fund's average daily net assets on the first $1 billion, and 0.45
of 1% of average daily net assets in excess of $1 billion.
Evergreen Asset has entered into a sub-advisory agreement with Lieber &
Company, an indirect wholly-owned subsidiary of FUNB, which provides that Lieber
& Company's research department and staff will furnish Evergreen Asset with
information, investment recommendations, advice and assistance, and will be
generally available for consultation on the portfolio of Evergreen Tax Exempt.
Lieber & Company is reimbursed by Evergreen Asset on the basis of the direct and
indirect costs of performing such services. There is no additional charge to
Evergreen Tax Exempt.
Virtus serves as the investment adviser for Virtus Tax Free. As
investment adviser, Virtus continuously conducts investment research and
supervision on behalf of the Fund and is responsible for the purchase and sale
of portfolio securities. For its services as investment adviser, Virtus is
entitled to receive a fee at an annual rate of 0.50 of 1% of the Fund's average
daily net assets.
Each investment adviser may, at its discretion, reduce or waive its fee
or reimburse a Fund for certain of its other expenses in order to reduce its
expense ratios. Each investment adviser may reduce or cease these voluntary
waivers and reimbursements at any time.
Administrator
<PAGE>
Federated Administrative Services ("FAS") provides Virtus Tax Free with
certain administrative personnel and services including certain legal and
accounting services. FAS is entitled to receive a fee for such services at the
following annual rates: 0.15% on the first $250 million of average daily net
assets of the combined assets of the funds in the Blanchard/Virtus mutual fund
family, 0.125% on the next $250 million of such assets, 0.10% on the next $250
million of such assets, and 0.075% on assets in excess of $750 million.
Distribution of Shares
Evergreen Distributor, Inc. ("EDI"), an affiliate of BISYS Fund Services,
acts as underwriter of Evergreen Tax Exempt's shares. EDI distributes the Fund's
shares directly or through broker-dealers, banks (including FUNB), or other
financial intermediaries. Evergreen Tax Exempt offers two classes of shares:
Class A and Class Y. Each class has separate distribution arrangements. (See
"Distribution-Related Expenses" below.) Neither class bears the distribution
expenses relating to the shares of the other class.
In the proposed Reorganization, shareholders of Virtus Tax Free will
receive Class Y shares of Evergreen Tax Exempt. Class Y shares of Evergreen Tax
Exempt have not adopted a Rule 12b-1 plan. Because the Reorganization will be
effected at net asset value without the imposition of a sales charge, Evergreen
Tax Exempt shares acquired by shareholders of Virtus Tax Free pursuant to the
proposed Reorganization will not be subject to any initial sales charge or
contingent deferred sales charge ("CDSC") as a result of the Reorganization.
The following is a summary description of charges and fees for the
Class Y shares of Evergreen Tax Exempt which will be received by Virtus Tax Free
shareholders in the Reorganization. More detailed descriptions of the
distribution arrangements applicable to the classes of shares are contained in
the respective Evergreen Tax Exempt Prospectus and the Virtus Tax Free
Prospectuses and in each Fund's respective Statements of Additional Information.
Class Y Shares. Class Y shares are sold at net asset value without an
initial sales charge or a CDSC. Class Y shares are only available to (i) all
shareholders of record in one or more of the Evergreen family of funds for which
Evergreen Asset served as investment adviser as of December 30, 1994, (ii)
certain institutional investors and (iii) investment advisory clients of FUNB,
Evergreen Asset or their affiliates. Virtus Tax Free shareholders who receive
Evergreen Tax Exempt Class Y shares in the Reorganization will be able to
purchase additional Class Y
<PAGE>
shares of Evergreen Tax Exempt and any other Evergreen fund at
net asset value.
Additional information regarding the classes of shares of each Fund is
included in its respective Prospectuses and Statements of Additional
Information.
Distribution-Related Expenses. Virtus Tax Free has adopted a Rule 12b-1
plan with respect to its shares under which such shares may pay for
distribution-related expenses at an annual rate of 0.25 of 1% of average daily
net assets. However, the plan will not become effective until a separate class
of shares has been created for certain institutional investors.
Additional information regarding the Rule 12b-1 plan adopted by Virtus
Tax Free is included in its Prospectuses and Statements of Additional
Information.
Purchase and Redemption Procedures
Information concerning applicable sales charges and
distribution-related fees is provided above. Investments in the Funds are not
insured. The minimum initial purchase requirement for Evergreen Tax Exempt is
$1,000; with respect to Virtus Tax Free, the minimum initial purchase
requirement is $1,000 for non-institutional purchasers and $10,000 for
institutional purchasers. Except for the minimum subsequent investment
requirement of $100 for non-institutional purchasers of shares of Virtus Tax
Free, there is no minimum for subsequent purchases of shares of either Fund.
Each Fund provides for telephone, mail or wire redemption of shares at net asset
value (less any CDSC in the case of Virtus Tax Free) as next determined after
receipt of a redemption request on each day the New York Stock Exchange ("NYSE")
is open for trading. Additional information concerning purchases and redemptions
of shares, including how each Fund's net asset value is determined, is contained
in the respective Prospectuses for each Fund. Each Fund may involuntarily redeem
shareholders' accounts that have less than $1,000 of invested funds. All funds
invested in each Fund are invested in full and fractional shares. The Funds
reserve the right to reject any purchase order.
Exchange Privileges
Virtus Tax Free currently permits holders of shares to exchange such
shares for shares of other funds managed by Virtus. Holders of shares of a class
of Evergreen Tax Exempt generally may exchange their shares for shares of the
same class of any other Evergreen fund. Virtus Tax Free shareholders will be
<PAGE>
receiving Class Y shares of Evergreen Tax Exempt in the Reorganization and,
accordingly, with respect to shares of Evergreen Tax Exempt received by Virtus
Tax Free shareholders in the Reorganization, the exchange privilege is limited
to the Class Y shares of other Evergreen funds. Evergreen Tax Exempt limits
exchanges to five per calendar year and three per calendar quarter. No sales
charge is imposed on an exchange of shares within the Evergreen group of funds.
An exchange which represents an initial investment in another Evergreen fund is
subject to the minimum investment and suitability requirements of such Fund. The
current exchange privileges, and the requirements and limitations attendant
thereto, are described in each Fund's respective Prospectuses and Statements of
Additional Information.
Dividend Policy
Each Fund declares substantially all of its net investment income as
dividends each business day and each Fund distributes its income dividends
monthly. Distributions of any net realized gains of a Fund will be made at least
annually. Shareholders begin to earn dividends on the first business day after
shares are purchased unless shares were not paid for, in which case dividends
are not earned until the next business day after payment is received. 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 each Fund for further information concerning
dividends and distributions.
After the Reorganization, shareholders of Virtus Tax Free who have
elected to have their dividends and/or distributions reinvested will have
dividends and/or distributions received from Evergreen Tax Exempt reinvested in
shares of Evergreen Tax Exempt. Shareholders of Virtus Tax Free who have elected
to receive dividends and/or distributions in cash will receive dividends and/or
distributions from Evergreen Tax Exempt in cash after the Reorganization,
although they may, after the Reorganization, elect to have such dividends and/or
distributions reinvested in additional shares of Evergreen Tax Exempt.
Each of Evergreen Tax Exempt and Virtus Tax Free 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 net investment company
taxable income and any net realized gains to shareholders, it is expected that a
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
<PAGE>
meet certain distribution requirements by the end of each calendar year. Each
Fund anticipates meeting such distribution requirements.
Risks
Since the investment objectives and policies of each Fund are
substantially the same, the risks involved in investing in each Fund's shares
are similar. There is no assurance that investment performances will be positive
and that the Funds will meet their investment objectives. For a discussion of
each Fund's objectives and policies, see "Comparison of Investment Objectives
and Policies."
Virtus Tax Free is a non-diversified investment company. As such, there
is no limit on the percentage of assets which it can invest in the securities of
a single issuer. An investment in Virtus Tax Free, therefore, may entail greater
risk than would exist by investing in a diversified investment company such as
Evergreen Tax Exempt because the higher percentage of investments among fewer
issuers may result in greater fluctuations in the total market value of a Fund's
portfolio. Any adverse developments affecting the value of the securities of an
issuer in which Virtus Tax Free has concentrated its investments will have a
greater impact on the total value of the portfolio than would be the case if the
portfolio were diversified among more issuers; the opposite is also true.
Municipal bond yields are dependent on several factors including market
conditions, the size of an offering, the maturity of the bond, ratings of the
bond and the ability of issuers to meet their obligations. The prices of bonds
fluctuate inversely in relation to the direction of interest rates, i.e., as
interest rates decline the values of the bonds increase, and vice versa.
Investors should recognize that, in periods of declining interest rates, the
yield of a Fund will tend to be somewhat higher than prevailing market rates,
and in periods of rising interest rates, the yield of a Fund will tend to be
somewhat lower. Also, when interest rates are falling, the inflow of net new
money to a Fund from the continuous sale of its shares will likely be invested
in portfolio instruments producing lower yields than the balance of the Fund's
portfolio, thereby reducing the current yield of the Fund. In periods of rising
interest rates, the opposite can be expected to occur.
It should be noted that municipal securities may be adversely affected
by local political and economic conditions and developments within a state. For
example, adverse conditions in a significant industry within a state may from
time to time have a correspondingly adverse effect on specific issuers within
that
<PAGE>
state or on anticipated revenue to the state itself; conversely, an improving
economic outlook for a significant industry may have a positive effect on such
issuers or revenues.
The value of municipal securities may also be affected by general
conditions in the money markets or the municipal bond markets, the levels of
federal and state income tax rates, the supply of tax-exempt bonds, the size of
the particular offering, the maturity of the obligation, the credit quality and
rating of the issue, and perceptions with respect to the level of interest
rates.
Each Fund is permitted to make taxable temporary investments. Neither
Fund has a current intention of generating income subject to federal regular
income tax. However, certain temporary investments may generate income that is
subject to state taxes. Interest income from Evergreen Tax Exempt's investments
may be subject to the federal alternative minimum tax.
REASONS FOR THE REORGANIZATION
On July 18, 1997, First Union entered into an Agreement and Plan of
Merger with Signet, which provided, among other things, for the Merger of Signet
with and into a wholly-owned subsidiary of First Union. The Merger was
consummated on November 28, 1997. As a result of the Merger it is expected that
FUNB and its affiliates will succeed to the investment advisory and
administrative functions currently performed for Virtus Tax Free by various
units of Signet and various unaffiliated parties. It is also expected that
Signet will no longer, upon completion of the Reorganization and similar
reorganizations of other funds in the Signet mutual fund family, provide
investment advisory or administrative services to investment companies.
At a meeting held on September 16, 1997, the Board of Trustees of The
Virtus Funds considered and approved the Reorganization as in the best interests
of shareholders of Virtus Tax Free and determined that the interests of existing
shareholders of Virtus Tax Free will not be diluted as a result of the
transactions contemplated by the Reorganization. In addition, the Trustees
approved the Interim Advisory Agreement with respect to Virtus Tax Free.
As noted above, Signet has merged with and into a wholly-owned
subsidiary of First Union. Signet is the parent company of Virtus, investment
adviser to the mutual funds which comprise The Virtus Funds. The Merger caused,
as a matter of law, termination of the investment advisory agreement between
each series of The
<PAGE>
Virtus Funds and Virtus. The Virtus Funds have received an order from the SEC
which permits Virtus to continue to act as Virtus Tax Free's investment adviser,
without shareholder approval, for a period of not more than 120 days from the
date the Merger was consummated (November 28, 1997) to the date of shareholder
approval of a new investment advisory agreement. Accordingly, the Trustees have
considered the recommendations of Signet in approving the proposed
Reorganization.
In approving the Plan, the Trustees reviewed various factors about the
Funds and the proposed Reorganization. There are substantial similarities
between Evergreen Tax Exempt and Virtus Tax Free. Specifically, Evergreen Tax
Exempt and Virtus Tax Free have substantially similar investment objectives and
policies and comparable risk profiles. See "Comparison of Investment Objectives
and Policies" below. At the same time, the Board of Trustees evaluated the
potential economies of scale associated with larger mutual funds and concluded
that operational efficiencies may be achieved upon the combination of Virtus Tax
Free with an Evergreen fund with a greater level of assets. As of September 30,
1997, Evergreen Tax Exempt's net assets were approximately $1,014 million and
Virtus Tax Free's net assets were approximately $57 million.
In addition, assuming that an alternative to the Reorganization would
be to propose that Virtus Tax Free continue its existence and be separately
managed by Evergreen Asset or one of its affiliates, Virtus Tax Free would be
offered through common distribution channels with the substantially similar
Evergreen Tax Exempt. Virtus Tax Free would also have to bear the cost of
maintaining its separate existence. Signet and Evergreen Asset believe that the
prospect of dividing the resources of the Evergreen mutual fund organization
between two similar funds could result in each Fund being disadvantaged due to
an inability to achieve optimum size, performance levels and the greatest
possible economies of scale. Accordingly, for the reasons noted above and
recognizing that there can be no assurance that any economies of scale or other
benefits will be realized, Signet and Evergreen Asset believe that the proposed
Reorganization would be in the best interests of each Fund and its shareholders.
The Board of Trustees of The Virtus Funds met and considered the
recommendation of Signet and Evergreen Asset, and, in addition, considered among
other things, (i) the terms and conditions of the Reorganization; (ii) whether
the Reorganization would result in the dilution of shareholders' interests;
(iii) expense ratios, fees and expenses of Evergreen Tax Exempt and Virtus Tax
Free; (iv) the comparative performance records of each of the Funds; (v)
compatibility of their investment objectives
<PAGE>
and policies; (vi) the investment experience, expertise and resources of
Evergreen Asset; (vii) the service and distribution resources available to the
Evergreen funds and the broad array of investment alternatives available to
shareholders of the Evergreen funds; (viii) the personnel and financial
resources of First Union and its affiliates; (ix) the fact that FUNB will bear
the expenses incurred by Virtus Tax Free in connection with the Reorganization;
(x) the fact that Evergreen Tax Exempt will assume certain identified
liabilities of Virtus Tax Free; and (xi) the expected federal income tax
consequences of the Reorganization.
The Trustees also considered the benefits to be derived by shareholders
of Virtus Tax Free from the sale of its assets to Evergreen Tax Exempt. In this
regard, the Trustees considered the potential benefits of being associated with
a larger entity and the economies of scale that could be realized by the
participation in such an entity by shareholders of Virtus Tax Free.
In addition, the Trustees considered that there are alternatives
available to shareholders of Virtus Tax Free, including the ability to redeem
their shares, as well as the option to vote against the Reorganization.
During their consideration of the Reorganization the Trustees met with
Fund counsel and counsel to the Independent Trustees regarding the legal issues
involved. The Trustees of Evergreen Money Market Trust also concluded at a
meeting on September 16, 1997 that the proposed Reorganization would be in the
best interests of shareholders of Evergreen Tax Exempt and that the interests of
the shareholders of Evergreen Tax Exempt would not be diluted as a result of the
transactions contemplated by the Reorganization.
THE TRUSTEES OF THE VIRTUS FUNDS RECOMMEND
THAT THE SHAREHOLDERS OF VIRTUS TAX FREE APPROVE
THE PROPOSED REORGANIZATION.
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 Evergreen Tax Exempt will acquire all of the
assets of Virtus Tax Free in exchange for shares of Evergreen Tax Exempt and the
assumption by Evergreen Tax Exempt of certain identified liabilities of Virtus
Tax Free on or about February 27, 1998 or such other date as may be agreed upon
by the parties (the "Closing Date"). Prior to the Closing Date, Virtus
<PAGE>
Tax Free will endeavor to discharge all of its known liabilities and
obligations. Evergreen Tax Exempt will not assume any liabilities or obligations
of Virtus Tax Free other than those reflected in an unaudited statement of
assets and liabilities of Virtus Tax Free prepared as of the close of regular
trading on the NYSE, currently 4:00 p.m. Eastern time, on the business day
immediately prior to the Closing Date. The number of full and fractional shares
of each class of Evergreen Tax Exempt to be received by the shareholders of
Virtus Tax Free will be determined by multiplying the respective outstanding
class of shares of Virtus Tax Free by a factor which shall be computed by
dividing the net asset value per share of the respective class of shares of
Virtus Tax Free by the net asset value per share of the respective class of
shares of Evergreen Tax Exempt. Such computations will take place as of the
close of regular trading on the NYSE on the business day immediately prior to
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 Evergreen Tax
Exempt, will compute the value of each Fund's respective portfolio securities.
The method of valuation employed will be consistent with the procedures set
forth in the Prospectus and Statement of Additional Information of Evergreen Tax
Exempt, 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, Virtus Tax Free will 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
the Fund's shareholders (in shares of the Fund, or in cash, as the shareholder
has previously elected) all of the Fund's net investment company taxable income
for the taxable period ending on the Closing Date (computed without regard to
any deduction for dividends paid) and all of its net capital gains realized in
all taxable periods ending on the Closing Date (after reductions for any capital
loss carryforward).
As soon after the Closing Date as conveniently practicable, Virtus Tax
Free will liquidate and distribute pro rata to shareholders of record as of the
close of business on the Closing Date the full and fractional shares of
Evergreen Tax Exempt received by Virtus Tax Free. Such liquidation and
distribution will be accomplished by the establishment of accounts in the names
of the Fund's shareholders on the share records of Evergreen Tax Exempt's
transfer agent. Each account will
<PAGE>
represent the respective pro rata number of full and fractional shares of
Evergreen Tax Exempt due to the Fund's shareholders. All issued and outstanding
shares of Virtus Tax Free, including those represented by certificates, will be
canceled. The shares of Evergreen Tax Exempt to be issued will have no
preemptive or conversion rights. After such distributions and the winding up of
its affairs, Virtus Tax Free will be terminated. In connection with such
termination, The Virtus Funds will file with the SEC an application for
termination as a registered investment company.
The consummation of the Reorganization is subject to the conditions set
forth in the Plan, including approval by Virtus Tax Free's shareholders,
accuracy of various representations and warranties and receipt of opinions of
counsel, including opinions with respect to those matters referred to in
"Federal Income Tax Consequences" below. Notwithstanding approval of Virtus Tax
Free's shareholders, the Plan may be terminated (a) by the mutual agreement of
Virtus Tax Free and Evergreen Tax Exempt; 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 Virtus Tax Free in connection with the Reorganization
(including the cost of any proxy soliciting agent) will be borne by FUNB whether
or not the Reorganization is consummated. No portion of such expenses will be
borne directly or indirectly by Virtus Tax Free or its shareholders. There are
not any liabilities or any expected reimbursement in connection with the 12b-1
plan of Virtus Tax Free. As a result, no 12b-1 liabilities will be assumed by
Evergreen Tax Exempt following the Reorganization.
If the Reorganization is not approved by shareholders of Virtus Tax
Free, the Board of Trustees of The Virtus Funds will consider other possible
courses of action in the best interests of shareholders.
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, Virtus Tax Free will receive an
opinion of Sullivan & Worcester LLP 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
<PAGE>
court decisions, for federal income tax purposes, upon
consummation of the Reorganization:
(1) The transfer of all of the assets of Virtus Tax Free solely in
exchange for shares of Evergreen Tax Exempt and the assumption by Evergreen Tax
Exempt of certain identified liabilities, followed by the distribution of
Evergreen Tax Exempt's shares by Virtus Tax Free in dissolution and liquidation
of Virtus Tax Free, will constitute a "reorganization" within the meaning of
section 368(a)(1)(C) of the Code, and Evergreen Tax Exempt and Virtus Tax Free
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 Virtus Tax Free on the
transfer of all of its assets to Evergreen Tax Exempt solely in exchange for
Evergreen Tax Exempt's shares and the assumption by Evergreen Tax Exempt of
certain identified liabilities of Virtus Tax Free or upon the distribution of
Evergreen Tax Exempt's shares to Virtus Tax Free shareholders in exchange for
their shares of Virtus Tax Free;
(3) The tax basis of the assets transferred will be the same to
Evergreen Tax Exempt as the tax basis of such assets to Virtus Tax Free
immediately prior to the Reorganization, and the holding period of such assets
in the hands of Evergreen Tax Exempt will include the period during which the
assets were held by Virtus Tax Free;
(4) No gain or loss will be recognized by Evergreen Tax Exempt upon the
receipt of the assets from Virtus Tax Free solely in exchange for the shares of
Evergreen Tax Exempt and the assumption by Evergreen Tax Exempt of certain
identified liabilities of Virtus Tax Free;
(5) No gain or loss will be recognized by Virtus Tax Free's
shareholders upon the issuance of the shares of Evergreen Tax Exempt to them,
provided they receive solely such shares (including fractional shares) in
exchange for their shares of Virtus Tax Free; and
(6) The aggregate tax basis of the shares of Evergreen Tax Exempt,
including any fractional shares, received by each of the shareholders of Virtus
Tax Free pursuant to the Reorganization will be the same as the aggregate tax
basis of the shares of Virtus Tax Free held by such shareholder immediately
prior to the Reorganization, and the holding period of the shares of Evergreen
Tax Exempt, including fractional shares, received by each such shareholder will
include the period during which the shares of Virtus Tax Free exchanged therefor
were held by such shareholder
<PAGE>
(provided that the shares of Virtus Tax Free 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, a shareholder of Virtus Tax Free would
recognize a taxable gain or loss equal to the difference between his or her tax
basis in his or her Fund shares and the fair market value of Evergreen Tax
Exempt shares he or she received. Shareholders of Virtus Tax Free should consult
their tax advisers regarding the effect, if any, of the proposed Reorganization
in light of their individual circumstances. It is not anticipated that the
securities of the combined portfolio will be sold in significant amounts in
order to comply with the policies and investment practices of Evergreen Tax
Exempt. Since the foregoing discussion relates only to the federal income tax
consequences of the Reorganization, shareholders of Virtus Tax Free should also
consult their tax advisers as to the state and local tax consequences, if any,
of the Reorganization.
Pro-forma Capitalization
The following table sets forth the capitalizations of Evergreen Tax
Exempt and Virtus Tax Free as of September 30, 1997 and the capitalization of
Evergreen Tax Exempt on a pro forma basis as of that date, giving effect to the
proposed acquisition of assets at net asset value. The pro forma data reflects
an exchange ratio of approximately 1.00 Class Y shares of Evergreen Tax Exempt
issued shareholders of Virtus Tax Free shares.
<PAGE>
<TABLE>
<CAPTION>
Capitalization of Virtus Tax Free,
Evergreen Tax Exempt and Evergreen
Municipal (Pro Forma)
Evergreen Tax
Exempt (After
Virtus Tax Evergreen Tax Reorgani-
Free Exempt zation)
---------- -------------- --------------
<S> <C> <C> <C>
Net Assets
Shares.............................. N/A N/A
$57,369,580
Class A............................. N/A $646,298,530 $646,298,530
Class Y............................. N/A $367,492,310 $424,861,890
----------- ------------ --------------
--
Total Net Assets.................... $1,013,790,840
$57,369,580 $1,071,160,420
Net Asset Value
Per Share
Shares.............................. $1.00 N/A
Class A............................. N/A $1.00 $1.00
Class Y............................. N/A $1.00 $1.00
Shares Outstanding
Shares.............................. N/A N/A
57,369,580
Class A............................. N/A 646,419,117 646,419,117
Class Y............................. N/A 367,593,643
------------ -------------- 424,963,223
--------------
All Classes......................... 1,014,012,760
57,369,580 1,071,382,340
</TABLE>
The table set forth above should not be relied upon to reflect the
number of shares to be received in the Reorganization; the actual number of
shares to be received will depend upon the net asset value and number of shares
outstanding of each Fund at the time of the Reorganization.
Shareholder Information
As of December 26, 1997 (the "Record Date"), there were 58,898,704 of
shares of beneficial interest of Virtus Tax Free outstanding.
As of November 30, 1997, the officers and Trustees of The Virtus Funds
beneficially owned as a group less than 1% of the outstanding shares of Virtus
Tax Free. To Virtus Tax Free's knowledge, the following persons owned
beneficially or
<PAGE>
of record more than 5% of Virtus Tax Free's total outstanding shares as of
November 30, 1997:
<TABLE>
<CAPTION>
Percentage Percentage of
of Shares Shares of
Before Class After
No. of Reorgani- Reorgani-
Name and Address Shares zation zation
<S> <C> <C> <C>
Stephens, Inc. 4,490,670 8.69% 1.08% Class Y
111 Center Street
Little Rock, AR
72201-3507
Bova & Co. 37,232,160 72.03% 8.98% Class Y
Signet Trust
Company
P.O. Box 26311
Richmond, VA
23260-6311
</TABLE>
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 Evergreen Tax Exempt can be found in the Prospectus of Evergreen
Tax Exempt under the caption "Investment Objectives and Policies." Evergreen Tax
Exempt's Prospectus also offers additional funds advised by FUNB or its
affiliates. These additional funds are not involved in the Reorganization, their
investment objectives and policies are not discussed in this Prospectus/Proxy
Statement and their shares are not offered hereby. The investment objective,
policies and restrictions of Virtus Tax Free can be found in the Prospectuses of
the Fund under the caption "Investment Objective and Policies of each Fund."
Unlike the investment objective of Virtus Tax Free, which is fundamental, the
investment objective of Evergreen Tax Exempt is non-fundamental and can be
changed by the Board of Trustees without shareholder approval.
The investment objectives and policies of Evergreen Tax Exempt and
Virtus Tax Free are substantially identical. The investment objective of
Evergreen Tax Exempt is to achieve as
<PAGE>
high a level of current income exempt from federal income tax as is consistent
with preserving capital and providing liquidity. The investment objective of
Virtus Tax Free is current income exempt from federal income tax consistent with
stability of principal and liquidity.
Both Funds maintain a dollar-weighted average portfolio maturity of
ninety days. Both Funds follow policies to maintain a stable net asset value of
$1.00 per share, although there is no assurance that either or both can do so on
a continuing basis. Evergreen Tax Exempt seeks to achieve its objective by
investing substantially all of its assets in a diversified portfolio of
short-term debt obligations issued by states, territories and 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. Virtus Tax Free pursues its investment objective in the same manner.
Both Funds pursue their investment objectives by investing
substantially all of their assets in a portfolio of municipal securities
maturing in 13 months (397 days) or less. As a matter of investment policy,
which cannot be changed without shareholder approval, at least 80% of the annual
interest income of Virtus Tax Free will be exempt from federal income tax
(including the alternative minimum tax). As a matter of investment policy, which
may be changed without shareholder approval, at least 80% of the annual interest
income of Evergreen Tax Exempt will be exempt from federal income tax. Evergreen
Tax Exempt may invest without limitation in obligations subject to the
alternative minimum tax. Evergreen Tax Exempt limits investments in taxable
securities to 20% of its net assets as a temporary measure when (1) proceeds of
the sale of Fund shares or of portfolio securities are pending investment, (2)
settlements of purchases of portfolio securities are pending, and (3) liquidity
is needed to meet anticipated redemptions. In addition, Evergreen Tax Exempt may
temporarily invest more than 20% of its total assets in taxable securities for
defensive purposes.
Both Funds invest in municipal securities which are determined to be of
eligible quality under SEC rules and to present minimal credit risk. Municipal
securities in which the Funds may invest include: (1) municipal securities that
are rated in one of the top two short-term rating categories by any two of
Standard & Poor's Ratings Group or Moody's Investors Service or any other
nationally recognized statistical rating organization ("SRO") (or by a single
rating agency if only one of these agencies has assigned a rating); (2)
municipal securities that are issued by
<PAGE>
an issuer that has outstanding a class of short-term instruments that (A) is
comparable in priority and security to such instruments, and (B) meets the
rating requirements above; and (3) bonds with a remaining maturity of 397 days
or less that are rated no lower than one of the top two long-term rating
categories by any SRO and determined by the investment adviser to be of
comparable quality.
Evergreen Tax Exempt may lend portfolio securities to brokers, dealers
and other financial organizations. Such loans may not exceed 30% of Evergreen
Tax Exempt's total assets, and must be collateralized by cash, letters of credit
or U. S. government securities that are at all times equal to at least 100% of
the current market value of the loaned securities, including accrued interest.
Virtus Tax Free may not lend its portfolio securities.
The characteristics of each investment policy and the associated risks
are described in each Fund's respective Prospectuses and Statements of
Additional Information. The Funds have other investment policies and
restrictions which are also set forth in the Prospectuses and Statements of
Additional Information of each Fund.
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS
Forms of Organization
Evergreen Money Market Trust and The Virtus Funds are open-end
management investment companies registered with the SEC under the 1940 Act,
which continuously offer shares to the public. Evergreen Money Market Trust is
organized as a Delaware business trust and The Virtus Funds is organized as a
Massachusetts business trust. Each Trust is governed by a Declaration of Trust,
By-Laws and a Board of Trustees. Each Trust is also governed by applicable
Delaware, Massachusetts and federal law. Evergreen Tax Exempt is a series of
Evergreen Money Market Trust and Virtus Tax Free is a series of The Virtus
Funds.
As set forth in the Supplement to Evergreen Tax Exempt's Prospectuses,
effective January , 1998, Evergreen Tax Exempt Money Market Fund, a series of
The Evergreen Tax Exempt Trust, a Massachusetts business trust, was reorganized
(the "Delaware Reorganization") into a corresponding series (Evergreen Tax
Exempt) of Evergreen Money Market Trust. In connection with the Delaware
Reorganization, the Fund's investment objective was reclassified from
"fundamental" to "non- fundamental" and therefore may be changed without
shareholder approval; the Fund adopted certain standardized investment
<PAGE>
restrictions; and the Fund eliminated or reclassified from fundamental to
non-fundamental certain of the Fund's other currently fundamental investment
restrictions. On January , 1998 Evergreen Tax Exempt Money Market Fund will
change its name to Evergreen Municipal Fund.
Capitalization
The beneficial interests in Evergreen Tax Exempt are represented by an
unlimited number of transferable shares of beneficial interest, $.001 par value
per share. The beneficial interests in Virtus Tax Free are represented by an
unlimited number of transferable shares of beneficial interest without par
value. The respective Declaration of Trust under which each Fund has been
established permits the Trustees to allocate shares into an unlimited number of
series, and classes thereof, with rights determined by the Trustees, all without
shareholder approval. Fractional shares may be issued. Each Fund's shares
represent equal proportionate interests in the assets belonging to the Funds.
Shareholders of each Fund are entitled to receive dividends and other amounts as
determined by the Trustees. Shareholders of each Fund vote separately, by class,
as to matters, such as approval of or amendments to Rule 12b-1 distribution
plans, that affect only their particular class and by series as to matters, such
as approval of or amendments to investment advisory agreements or proposed
reorganizations, that affect only their particular series.
Shareholder Liability
Under Massachusetts law, shareholders of a business trust could, under
certain circumstances, be held personally liable for the obligations of the
business trust. However, the Declaration of Trust under which Virtus Tax Free
was established disclaims shareholder liability for acts or obligations of the
series and requires that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Fund or the Trustees.
The Virtus Funds' Declaration of Trust provides for indemnification out of the
series property for all losses and expenses of any shareholder held personally
liable for the obligations of the 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 series or the trust itself would be unable to meet its obligations.
Under Delaware law, shareholders of a Delaware business trust are
entitled to the same limitation of personal liability extended to stockholders
of Delaware corporations. No similar statutory or other authority limiting
business trust shareholder
<PAGE>
liability exists in any other state. As a result, to the extent that Evergreen
Money Market Trust or a shareholder is subject to the jurisdiction of courts in
those states, the courts may not apply Delaware law, and may thereby subject
shareholders of a Delaware business trust to liability. To guard against this
risk, the Declaration of Trust of Evergreen Money Market Trust (a) provides that
any written obligation of the Trust may contain a statement that such obligation
may only be enforced against the assets of the Trust or the particular series in
question and the obligation is not binding upon the shareholders of the Trust;
however, the omission of such a disclaimer will not operate to create personal
liability for any shareholder; and (b) provides for indemnification out of Trust
property of any shareholder held personally liable for the obligations of the
Trust. Accordingly, the risk of a shareholder of Evergreen Money Market Trust
incurring financial loss beyond that shareholder's investment because of
shareholder liability is limited to circumstances in which: (i) the court
refuses to apply Delaware law; (ii) no contractual limitation of liability was
in effect; and (iii) the Trust itself is unable to meet its obligations. In
light of Delaware law, the nature of the Trust's business, and the nature of its
assets, the risk of personal liability to a shareholder of Evergreen Money
Market Trust is remote.
Shareholder Meetings and Voting Rights
Neither Evergreen Money Market Trust on behalf of Evergreen Tax Exempt
nor The Virtus Funds on behalf of Virtus Tax Free is required to hold annual
meetings of shareholders. However, a meeting of shareholders for the purpose of
voting upon the question of removal of a Trustee must be called when requested
in writing by the holders of at least 10% of the outstanding shares of Evergreen
Money Market Trust or The Virtus Funds. In addition, each is required to call a
meeting of shareholders for the purpose of electing Trustees if, at any time,
less than a majority of the Trustees then holding office were elected by
shareholders. Each Trust currently does not intend to hold regular shareholder
meetings. Each Trust does not permit cumulative voting. Except when a larger
quorum is required by applicable law, with respect to Evergreen Tax Exempt,
twenty-five percent (25%) of the outstanding shares entitled to vote, and with
respect to Virtus Tax Free, a majority of the outstanding shares entitled to
vote constitutes a quorum for consideration of such matter. For Evergreen Tax
Exempt and for Virtus Tax Free, a majority of the votes cast and entitled to
vote is sufficient to act on a matter (unless otherwise specifically required by
the applicable governing documents or other law, including the 1940 Act).
<PAGE>
Under the Declaration of Trust of Evergreen Money Market Trust, each
share of Evergreen Tax Exempt is entitled to one vote for each dollar of net
asset value applicable to each share. Under the voting provisions governing
Virtus Tax Free, each share is entitled to one vote. Over time, the net asset
values of the mutual funds which are each a series of The Virtus Funds have
changed in relation to one another and are expected to continue to do so in the
future. Because of the divergence in net asset values, a given dollar investment
in a fund which is a series of The Virtus Funds and which has a lower net asset
value will purchase more shares and, under the current voting provisions of The
Virtus Funds, will have more votes, than the same investment in a series with a
higher net asset value. Under the Declaration of Trust of Evergreen Money Market
Trust, voting power is related to the dollar value of the shareholders'
investment rather than to the number of shares held.
Liquidation or Dissolution
In the event of the liquidation of Evergreen Tax Exempt and Virtus Tax
Free the shareholders are entitled to receive, when, and as declared by the
Trustees, the excess of the assets belonging to such Fund or attributable to the
class over the liabilities belonging to the Fund or attributable to the class.
In either case, the assets so distributable to shareholders of the Fund will be
distributed among the shareholders in proportion to the number of shares of a
class of the Fund held by them and recorded on the books of the Fund.
Liability and Indemnification of Trustees
The Declaration of Trust of The Virtus Funds provides that a Trustee
shall be liable only for his own willful defaults, and that no Trustee shall be
protected against any liability to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
The By-Laws of The Virtus Funds provide that a present or former
Trustee or officer is entitled to indemnification against liabilities and
expenses with respect to claims related to his or her position with the Trust,
provided that no indemnification shall be provided to a Trustee or officer
against any liability to the Trust or any series thereof or the shareholders of
any series by reasons of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
Under the Declaration of Trust of Evergreen Money Market Trust, a
Trustee is liable to the Trust and its shareholders only
<PAGE>
for such Trustee's own willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of the office of
Trustee or the discharge of such Trustee's functions. As provided in the
Declaration of Trust, each Trustee of the Trust is entitled to be indemnified
against all liabilities against him or her, including the costs of litigation,
unless it is determined that the Trustee (i) did not act in good faith in the
reasonable belief that such Trustee's action was in or not opposed to the best
interests of the Trust; (ii) had acted with willful misfeasance, bad faith,
gross negligence or reckless disregard of such Trustee's duties; and (iii) in a
criminal proceeding, had reasonable cause to believe that such Trustee's conduct
was unlawful (collectively, "disabling conduct"). A determination that the
Trustee did not engage in disabling conduct and is, therefore, entitled to
indemnification may be based upon the outcome of a court action or
administrative proceeding or by (a) a vote of a majority of those Trustees who
are neither "interested persons" within the meaning of the 1940 Act nor parties
to the proceeding or (b) an independent legal counsel in a written opinion. The
Trust may also advance money for such litigation expenses provided that the
Trustee undertakes to repay the Trust if his or her conduct is later determined
to preclude indemnification and certain other conditions are met.
The foregoing is only a summary of certain characteristics of the
operations of the Declarations of Trust, By-Laws, Delaware and Massachusetts law
and is not a complete description of those documents or law. Shareholders should
refer to the provisions of such Declarations of Trust, By-Laws, Delaware and
Massachusetts
law directly for more complete information.
INFORMATION REGARDING THE INTERIM ADVISORY AGREEMENT
Introduction
In view of the Merger discussed above, and the factors discussed below,
the Board of Trustees of The Virtus Funds recommends that shareholders of Virtus
Tax Free approve the Interim Advisory Agreement. The Merger became effective on
November 28, 1997. Pursuant to an order received from the SEC all fees payable
under the Interim Advisory Agreement will be placed in escrow and paid to Virtus
if shareholders approve the contract within 120 days of its effective date. The
Interim Advisory Agreement will remain in effect until the earlier of the
Closing Date for the Reorganization or two years from its effective date. The
terms of the Interim Advisory Agreement are essentially the same as the Previous
Advisory Agreement (as defined below). The only difference between the Previous
<PAGE>
Advisory Agreement and the Interim Advisory Agreement, if approved by
shareholders, is the length of time each Agreement is in effect. A description
of the Interim Advisory Agreement pursuant to which Virtus continues as
investment adviser to Virtus Tax Free, as well as the services to be provided by
Virtus pursuant thereto is set forth below under "Advisory Services." The
description of the Interim Advisory Agreement in this Prospectus/Proxy Statement
is qualified in its entirety by reference to the Interim Advisory Agreement,
attached hereto as Exhibit B.
Virtus, a Maryland corporation formed in 1995 to succeed to the
business of Signet Asset Management (adviser to the Fund since 1990), is an
indirect wholly-owned subsidiary of First Union. Virtus' address is 707 East
Main Street, Suite 1300, Richmond, Virginia 23219. Virtus has served as
investment adviser pursuant to an Investment Advisory Contract dated March 1,
1995, as amended on October 21, 1996. As used herein, the Investment Advisory
Agreement, as amended, for Virtus Tax Free is referred to as the "Previous
Advisory Agreement." At a meeting of the Board of Trustees of The Virtus Funds
held on September 16, 1997, the Trustees, including a majority of the
Independent Trustees, approved the Interim Advisory Agreement for Virtus Tax
Free.
The Trustees have authorized The Virtus Funds, on behalf of Virtus Tax
Free, to enter into the Interim Advisory Agreement with Virtus. Such Agreement
became effective on November 28, 1997. If the Interim Advisory Agreement for
Virtus Tax Free is not approved by the shareholders, the Trustees will consider
appropriate actions to be taken with respect to Virtus Tax Free's investment
advisory arrangements at that time. The Previous Advisory Agreement was last
approved by the Trustees, including a majority of the Independent Trustees, on
February 24, 1997.
Comparison of the Interim Advisory Agreement and the Previous
Advisory Agreement.
Advisory Services. The management and advisory services to be provided
by Virtus under the Interim Advisory Agreement are identical to those currently
provided by Virtus under the Previous Advisory Agreement. Under the Previous
Advisory Agreement and Interim Advisory Agreement, Virtus manages Virtus Tax
Free and continually conducts investment research and supervision for the Fund
and is responsible for the purchase and sale of portfolio securities.
FAS currently acts as administrator of Virtus Tax Free. FAS will
continue during the term of the Interim Advisory Agreement as Virtus Tax Free's
administrator for the same compensation as
<PAGE>
currently received . An affiliate of FAS currently performs transfer agency
services for Virtus Tax Free's shareholders . Commencing February 9, 1998
Evergreen Service Company will provide such transfer agency services for the
same fees charged by Virtus Tax Free's current transfer agent. See "Summary
Administrator."
Fees and Expenses. The investment advisory fees and expense
limitations for Virtus Tax Free under the Previous Advisory
Agreement and the Interim Advisory Agreement are identical. See
"Summary - Investment Advisers and Sub-Adviser."
Expense Reimbursement. The Previous Advisory Agreement included a
provision which provides that Virtus may from time to time and for such periods
as it deems appropriate reduce its compensation to the extent that the Fund's
expenses exceed such lower expense limitation as Virtus may, by notice to The
Virtus Funds, voluntarily declare to be effective. Furthermore, Virtus may, if
it deems appropriate, assume expenses of the Fund or a class to the extent that
the Fund's or classes' expenses exceed such lower expense limitation as Virtus
may, by notice to The Virtus Funds, voluntarily declare to be effective.
The Interim Advisory Agreement contains an identical provision.
Payment of Expenses and Transaction Charges. Under the Previous
Advisory Agreement, The Virtus Funds was required to pay or cause to be paid on
behalf of the Fund or each class, all of the Fund's or classes' expenses and the
Fund's or classes' allocable share of The Virtus Funds' expenses.
The Interim Advisory Agreement contains an identical provision.
Limitation of Liability. The Previous Advisory Agreement provided that
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of obligations or duties under the Agreement on the part of Virtus,
Virtus was not liable to The Virtus Funds or to the Fund or to any shareholder
for any act or omission in the course of or connected in any way with rendering
services or for any losses that may be sustained in the purchase, holding or
sale of any security.
The Interim Advisory Agreement contains an identical provision.
<PAGE>
Termination; Assignment. The Interim Advisory Agreement provides that
it may be terminated without penalty by vote of a majority of the outstanding
voting securities of Virtus Tax Free (as defined in the 1940 Act) or by a vote
of a majority of The Virtus Funds' entire Board of Trustees on 60 days' written
notice to Virtus or by Virtus on 60 days' written notice to The Virtus Funds.
Also, the Interim Advisory Agreement will automatically terminate in the event
of its assignment (as defined in the 1940 Act). The Previous Advisory Agreement
contained identical provisions as to termination and assignment.
Information about Virtus Tax Free's Investment Adviser
Virtus, a registered investment adviser, manages, in addition to the
Fund, other funds of The Virtus Funds, the Blanchard Group of Funds and three
fixed income trust funds. The name and address of each executive officer and
director of Virtus are set forth in Appendix A to this Prospectus/Proxy
Statement.
During the fiscal years ended September 30, 1997, 1996 and 1995, Virtus
received from Virtus Tax Free management fees of $302,027, $462,900 and
$262,792, respectively, of which $94,455, $184,473 and $262,792, respectively,
were voluntarily waived. Signet acts as custodian for Virtus Tax Free and
received $34,273 for the fiscal year ended September 30, 1997. Commencing on or
about January 20, 1998 FUNB will act as Virtus Tax Free's custodian during the
term of the Interim Advisory Agreement.
The Board of Trustees considered the Interim Advisory Agreement as part
of its overall approval of the Plan. The Board of Trustees considered, among
other things, the factors set forth above in "Reasons for the Reorganization."
The Board of Trustees also considered the fact that there were no material
differences between the terms of the Interim Advisory Agreement and the terms of
the Previous Advisory Agreement.
THE TRUSTEES OF THE VIRTUS FUNDS RECOMMEND THAT
THE SHAREHOLDERS OF VIRTUS TAX FREE
APPROVE THE INTERIM ADVISORY AGREEMENT
ADDITIONAL INFORMATION
Evergreen Tax Exempt. Information concerning the operation and
management of Evergreen Tax Exempt is incorporated herein by reference from the
Prospectus dated October 31, 1996, as amended, a copy of which is enclosed, and
Statement of Additional Information of the same date. A copy of such Statement
of Additional Information is available upon request and without charge by
<PAGE>
writing to Evergreen Tax Exempt at the address listed on the cover page of this
Prospectus/Proxy Statement or by calling toll-free 1-800-343-2898.
Virtus Tax Free. Information about the Fund is included in its current
Prospectuses dated November 30, 1997 and in the Statements of Additional
Information of the same date, that have been filed with the SEC, all of which
are incorporated herein by reference. Copies of the Prospectuses and Statements
of Additional Information are available upon request and without charge by
writing to Virtus Tax Free at the address listed on the cover page of this
Prospectus/Proxy Statement or by calling toll-free 1-800-829-3863.
Evergreen Tax Exempt and Virtus Tax Free are each subject to the
informational requirements of the Securities Exchange Act of 1934 and the 1940
Act, and in accordance therewith file reports and other information including
proxy material, and charter documents with the SEC. These items 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, and at the SEC's Regional
Offices located at Northwest Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661-2511 and Seven World Trade Center, Suite 1300, New York, New York
10048.
VOTING INFORMATION CONCERNING THE MEETING
This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Trustees of The Virtus Funds to be used at the
Special Meeting of Shareholders to be held at 2:00 p.m., February 20, 1998, at
the offices of the Evergreen Funds, 200 Berkeley Street, Boston, Massachusetts
02116 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 of Virtus Tax Free on or about January , 1998. 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 outstanding shares entitled to vote, 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, FOR the
Interim Advisory Agreement 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
<PAGE>
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 not be
counted as shares voted and will have no effect on the vote regarding the Plan.
However, such "broker non-votes" will have the effect of being counted as votes
against the Interim Advisory Agreement which must be approved by a percentage of
the shares present at the Meeting or a majority of the outstanding voting
securities. A proxy may be revoked at any time on or before the Meeting by
written notice to the Secretary of The Virtus Funds, Federated Investors Tower,
Pittsburgh, Pennsylvania 15222-3779. 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 and FOR approval of the Interim Advisory Agreement.
Approval of the Plan will require the affirmative vote of a majority of
the shares voted and entitled to vote, with all classes voting together as a
single class at the Meeting at which a quorum of the Fund's shares is present.
Approval of the Interim Advisory Agreement will require the affirmative vote of
(i) 67% or more of the outstanding voting securities if holders of more than 50%
of the outstanding voting securities are present, in person or by proxy, at the
Meeting, or (ii) more than 50% of the outstanding voting securities, whichever
is less, 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.
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 FUNB or Signet, their affiliates or other
representatives of Virtus Tax Free (who will not be paid for their soliciting
activities). Shareholder Communications Corporation has been engaged by Virtus
Tax Free to assist in soliciting proxies.
If you wish to participate in the Meeting, you may submit the proxy
card included with this Prospectus/Proxy Statement or attend in person. Any
proxy given by you is revocable.
In the event that sufficient votes to approve the Reorganization are
not received by February 20 , 1998, the persons named as proxies may propose one
or more adjournments of the Meeting to permit further solicitation of proxies.
In determining whether to adjourn the Meeting, the following factors may be
considered: the percentage of votes actually cast, the percentage of negative
votes actually cast, the nature of any
<PAGE>
further solicitation and the information to be provided to shareholders with
respect to the reasons for the solicitation. Any such adjournment will require
an affirmative vote by the holders of a majority of the shares present in person
or by proxy and entitled to vote at the Meeting. The persons named as proxies
will vote upon such adjournment after consideration of all circumstances which
may bear upon a decision to adjourn the Meeting.
A shareholder who objects to the proposed Reorganization will not be
entitled under either Massachusetts law or the Declaration of Trust of The
Virtus Funds 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 Evergreen Tax Exempt which they receive in
the transaction at their then-current net asset value. Shares of Virtus Tax Free
may be redeemed at any time prior to the consummation of the Reorganization.
Shareholders of Virtus Tax Free may wish to consult their tax advisers as to any
differing consequences of redeeming Fund shares prior to the Reorganization or
exchanging such shares in the Reorganization.
Virtus Tax Free does not hold annual shareholder meetings. If the
Reorganization is not approved, 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 The Virtus Funds
at the address set forth on the cover of this Prospectus/Proxy Statement such
that they will be received by the Fund in a reasonable period of time prior to
any such meeting.
The votes of the shareholders of Evergreen Tax Exempt 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 Virtus Tax Free 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
The financial statements of Evergreen Tax Exempt as of August 31, 1997,
and the financial statements and financial highlights for the periods indicated
therein, have been
<PAGE>
incorporated by reference herein and in the Registration Statement in reliance
upon the report of Price Waterhouse LLP, independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
The financial statements and financial highlights of Virtus Tax Free
incorporated in this Prospectus/Proxy Statement by reference from the Annual
Report of The Virtus Funds for the year ended September 30, 1997 have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report, which is incorporated herein by reference and have been so incorporated
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of Evergreen
Tax Exempt will be passed upon by Sullivan & Worcester LLP, Washington, D.C.
OTHER BUSINESS
The Trustees of The Virtus Funds 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 TRUSTEES OF THE VIRTUS FUNDS RECOMMEND APPROVAL OF THE PLAN AND THE
INTERIM ADVISORY AGREEMENT, AND ANY UNMARKED PROXIES WITHOUT INSTRUCTIONS TO THE
CONTRARY WILL BE VOTED IN FAVOR OF APPROVAL OF THE PLAN AND THE INTERIM ADVISORY
AGREEMENT.
January , 1998
<PAGE>
APPENDIX A
The names and addresses of the principal executive officers
and directors of Virtus Capital Management, Inc. are as follows:
OFFICERS:
Name Address
- ---- -------
David C. Francis, Chief First Union National Bank
Investment Officer 201 South College Street
Charlotte, North Carolina 28288-
1195
Tanya Orr Bird, Vice Virtus Capital Management, Inc.
President 707 East Main Street
Suite 1300
Richmond, Virginia 23219
Josie Virtus Capital Management, Inc.
Clemons Rosson, Vice 707 East Main Street
President, Assistant Suite 1300
Secretary Richmond, Virginia 23219
First Union National Bank
L. 201 South College
Robert Cheshire, Vice Street
President
Charlotte, North Carolina 28288-
1195
John First Union National Bank
E. Gray, 201 South College
Vice President Street
Charlotte, North
Carolina 28288-1195
Dillon S. Harris, Jr., Vice First Union National Bank
President
201 South College
Street
Charlotte, North
Carolina 28288-1195
<PAGE>
Name Address
- ---- -------
J. Kellie Allen, Vice First Union National Bank
President 201
South College Street
Charlotte, North Carolina 28288-
1195
Ethel B. Sutton, Vice Evergreen Asset Management Corp.
President 2500 Westchester Avenue
Purchase, New York 10577
DIRECTORS:
Name Address
- ---- -------
David C. Francis First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-
1195
Donald A. McMullen First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-
1195
William M. Ennis First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-
1195
Barbara J. Colvin First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-
1195
William D. Munn First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-1195
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this 26th day of November, 1997, by and between the Evergreen Money Market
Trust, a Delaware business trust, with its principal place of business at 200
Berkeley Street, Boston, Massachusetts 02116 (the "Trust"), with respect to its
Evergreen Tax Exempt Money Market Fund series (the "Acquiring Fund"), and The
Virtus Funds, a Massachusetts business trust, with its principal place of
business at Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
("Virtus Funds"), with respect to its The Tax-Free Money Market 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)(C) of the
United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of (i) the transfer of all of
the assets of the Selling Fund in exchange solely for Class Y shares of
beneficial interest, $.001 par value per share, of the Acquiring Fund (the
"Acquiring Fund Shares"); (ii) the assumption by the Acquiring Fund of certain
identified liabilities of the Selling Fund; and (iii) 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 each a separate
investment series of an open-end, registered investment company of the
management type and the Selling Fund owns securities that 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 Trust have determined that the exchange of
all of the assets of the Selling Fund for Acquiring Fund Shares and the
assumption of certain identified liabilities of the Selling Fund by the
Acquiring Fund on the terms and conditions hereinafter set forth are in the best
interests of the Acquiring Fund's shareholders;
<PAGE>
WHEREAS, the Trustees of Virtus Funds have determined that the Selling
Fund should exchange all of its assets and certain identified 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 all of the Selling Fund's assets as set forth in
paragraph 1.2 to the Acquiring Fund. 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 multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of each such class of the Selling Fund by the net
asset value per share of the corresponding class of Acquiring Fund Shares
computed in the manner and as of the time and date set forth in paragraph 2.2;
and (ii) to assume certain identified liabilities of the Selling Fund, as set
forth in paragraph 1.3. Such transactions shall take place at the closing
provided for in paragraph 3.1 (the "Closing Date").
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 interests in futures and
dividends or interest receivables, that 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
<PAGE>
connection with the purchase and sale of securities and the
payment of its normal operating expenses.
The Acquiring Fund will, within a reasonable time prior to the Closing
Date, furnish the Selling Fund with a list of the securities, if any, on the
Selling Fund's list referred to in the second sentence of this paragraph that do
not conform to the Acquiring Fund's investment objectives, policies, and
restrictions. The Selling Fund will, within a reasonable period of time prior to
the Closing Date, furnish the Acquiring Fund with a list of its portfolio
securities and other investments. In the event that the Selling Fund holds any
investments that the Acquiring Fund may not hold, the Selling Fund, if requested
by the Acquiring 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. Notwithstanding the foregoing, nothing
herein will require the Selling Fund to dispose of any investments or securities
if, in the reasonable judgment of the Selling Fund, such disposition would
adversely affect the tax-free nature of the Reorganization or would violate the
Selling Fund's fiduciary duty to its shareholders.
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.
In addition, upon completion of the Reorganization, for purposes of
calculating the maximum amount of sales charges (including asset based sales
charges) permitted to be imposed by the Acquiring Fund under the National
Association of Securities Dealers, Inc. Conduct Rule 2830 ("Aggregate NASD
Cap"), the Acquiring Fund will add to its Aggregate NASD Cap immediately prior
to the Reorganization the NASD Cap of the Selling Fund
<PAGE>
immediately prior to the Reorganization, in each case calculated in accordance
with such Rule 2830.
1.4 LIQUIDATION AND DISTRIBUTION. On or 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 Valuation 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 paragraph 5.7.
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.
ARTICLE II
VALUATION
<PAGE>
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
business day next preceding 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
prospectuses 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 per share of the 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 Trust's Declaration of Trust and the
Acquiring Fund's then current prospectuses 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 multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of the Selling Fund attributable to each of its
classes by the net asset value per share of the respective classes of the
Acquiring Fund determined in accordance with paragraph 2.2. Shareholders of the
Selling Fund will receive Class Y shares of the Acquiring Fund.
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.
<PAGE>
ARTICLE III
CLOSING AND CLOSING DATE
3.1 CLOSING DATE. The Closing (the "Closing") shall take place on or
about February 27, 1998 or such other date as the parties may agree to in
writing (the "Closing Date"). All acts taking place at the Closing shall be
deemed to take place simultaneously immediately prior to the opening of business
on the Closing Date unless otherwise provided. The Closing shall be held as of
9:00 a.m. at the offices of the Evergreen Funds, 200 Berkeley Street, Boston, MA
02116, or at such other time and/or place as the parties may agree.
3.2 CUSTODIAN'S CERTIFICATE. Signet Trust Company, 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 by the Selling Fund.
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 Valuation 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. Evergreen Service Company, as
transfer agent for the Selling Fund as of the Closing Date shall deliver at the
Closing a certificate of an authorized officer stating that its 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 or
cause Evergreen Service Company, its transfer agent as of the Closing Date, to
issue and deliver a confirmation evidencing the Acquiring Fund Shares to be
credited on the Closing Date to the Secretary of Virtus Funds or provide
evidence satisfactory to the Selling Fund that such Acquiring Fund Shares
<PAGE>
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.
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
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 Securities and Exchange Commission (the "Commission") as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
is in full force and effect.
(c) The current prospectuses 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 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 Virtus Funds' Declaration of Trust or By-Laws
or of any material agreement, indenture, instrument, contract, lease, or other
undertaking to which the Selling Fund is a party or by which it is bound.
<PAGE>
(e) The Selling Fund has no material contracts or other
commitments (other than this Agreement) that will be terminated with liability
to it prior to the Closing Date except for liabilities, if any, to be discharged
or reflected on the Statement of Assets and Liabilities as provided in paragraph
1.3 hereof.
(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 that 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 that materially and
adversely affects its business or its ability to consummate the transactions
herein contemplated.
(g) The financial statements of the Selling Fund at September
30, 1997 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 date, and there are no known contingent liabilities of the
Selling Fund as of such date not disclosed therein.
(h) Since September 30, 1997 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 shown due on said returns
and reports shall have been paid, or provision shall have been made for the
payment thereof. 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.
<PAGE>
(j) For each fiscal year 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 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 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 that 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.
<PAGE>
(o) The Proxy Statement of the Selling Fund to be included in
the Registration Statement (as defined 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.
4.2.1 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
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware.
(b) The Acquiring Fund is a separate investment series of a
Delaware 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 misleading.
(d) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of the Trust's
Declaration of Trust or By-Laws or of any material 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 in writing to the Selling
Fund and accepted by the Selling 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 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
<PAGE>
carry out the transactions contemplated by this Agreement. The Acquiring Fund
knows of no facts that 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 that materially and
adversely affects its business or its ability to consummate the transactions
contemplated herein.
(f) The financial statements of the Acquiring Fund at August
31, 1997 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Selling Fund) fairly reflect the financial condition of the Acquiring
Fund as of such date, and there are no known contingent liabilities of the
Acquiring Fund as of such date not disclosed therein.
(g) Since August 31, 1997, 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 Selling 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 by such dates
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. 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 and has distributed in each such
year all net investment income and realized capital gains.
(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. 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.
<PAGE>
(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.
(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 that 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 (as defined in
paragraph 5.7) 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.
(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.
4.2.2 REPRESENTATIONS OF PREDECESSOR FUND. The representations and
warranties set forth in Section 4.2.1 shall be deemed to include, to the extent
applicable, representations and warranties made by and on behalf of Evergreen
Tax Exempt Money Market Fund (the "Predecessor Fund"), a series of The Evergreen
Municipal Trust, a Massachusetts business trust, as of the date hereof. The
Acquiring Fund shall deliver to the Selling Fund a certificate of the
Predecessor Fund of even date making the representations set forth in Section
4.2.1 with respect to
<PAGE>
the Predecessor Fund to the extent applicable to the Predecessor
Fund as of the date hereof.
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. Virtus Funds 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.
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 that will be carried over by the Acquiring Fund as a
result of Section 381 of the Code, and which will be reviewed by Price
Waterhouse LLP and certified by Virtus Funds' President and Treasurer.
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, which
<PAGE>
will include the proxy statement, referred to in paragraph 4.1(o) (the
"Prospectus and Proxy Statement"), 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.
5.8 CAPITAL LOSS CARRYFORWARDS. AS promptly as practicable, but in any
case within sixty days after the Closing Date, the Acquiring Fund and the
Selling Fund shall cause Price Waterhouse LLP to issue a letter addressed to the
Acquiring Fund and the Selling Fund, 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 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 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 Trust's President or Vice
President and its Treasurer or Assistant Treasurer, in form and substance
reasonably satisfactory to the Selling Fund and dated as of the Closing Date, to
such effect and as to such other matters as the Selling Fund shall reasonably
request.
6.2 The Selling Fund shall have received on the Closing Date an opinion
from Sullivan & Worcester LLP, counsel to the Acquiring Fund, dated as of the
Closing Date, in a form reasonably satisfactory to the Selling Fund, covering
the following points:
<PAGE>
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the power to own all of its
properties and assets and to carry on its business as presently conducted.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust registered as an investment company under the 1940 Act,
and, to such counsel's knowledge, such registration with the Commission as an
investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed, and
delivered by the Acquiring Fund and, assuming due authorization, execution and
delivery of this 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.
(d) Assuming that a consideration therefor not less than the
net asset value thereof 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, and no
shareholder of the Acquiring Fund has any preemptive rights in respect thereof.
(e) The Registration Statement, to such counsel's knowledge,
has been declared effective by the Commission and no stop order under the 1933
Act pertaining thereto has been issued, and to the knowledge of such counsel, no
consent, approval, authorization or order of any court or governmental authority
of the United States or the State of Delaware is required for 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 as may be
required under state securities laws.
(f) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of the 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
<PAGE>
obligation or the imposition of any penalty, under any agreement, judgment, or
decree to which the Acquiring Fund is a party or by which it is bound.
(g) 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.
(h) 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 or filed as
required.
(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.
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 (g) of their above opinion), on the basis of the foregoing (relying
as to materiality to a large extent upon the opinions of the 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 the Registration
<PAGE>
Statement, and that such opinion is solely for the benefit of Virtus Funds and
the Selling Fund. Such opinion shall contain such other assumptions and
limitations as shall be in the opinion of Sullivan & Worcester LLP appropriate
to render the opinions expressed therein.
In this paragraph 6.2, references to the 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.
6.3 The merger between First Union Corporation and Signet Banking
Corporation shall be completed prior to the Closing Date.
6.4 The acquisition of the assets of the Predecessor Fund by the
Acquiring Fund shall have been completed prior to the Closing Date.
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 Virtus Funds'
President or Vice President and the 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 Virtus Funds.
7.3.1 The Acquiring Fund shall have received on the Closing Date an
opinion of Dickstein Shapiro Morin & Oshinsky LLP,
<PAGE>
counsel to the Selling Fund, in a form satisfactory to the Acquiring Fund
covering the following points:
(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 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 knowledge, such registration with the Commission as
an investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed and
delivered by the Selling Fund and, assuming due authorization, execution, and
delivery of this 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.
(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 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 as may be
required under state securities laws.
(e) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of Virtus Funds' 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.
(f) The descriptions in the Prospectus and Proxy Statement of
this Agreement, as set forth under the caption "Reasons for the Reorganization -
Agreement and Plan of Reorganization," the Interim Advisory Agreement and the
Previous Advisory Agreement, as set forth under the caption "Information
<PAGE>
Regarding the Interim Advisory Agreement," and the description of voting
requirements applicable to approval of the Interim Advisory Agreement, as set
forth under the caption "Voting Information Concerning the Meeting," insofar as
the latter constitutes a summary of applicable voting requirements under the
Investment Company Act of 1940, as amended, are, in each case, accurate and
fairly present the information required to be shown by the applicable
requirements of Form N-14.
(g) Such counsel does not know of any legal or governmental
proceedings, 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.
(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.
7.3.2 The Acquiring Fund shall have received on the Closing
Date an opinion of C. Grant Anderson, Esq., Assistant Secretary of Virtus Funds,
in form satisfactory to the Acquiring Fund as follows: Assuming that a
consideration therefor of not less than the net asset value thereof 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).
Mr. Anderson shall also state that he has reviewed and is familiar with
the contents of the Prospectus and Proxy Statement and, although he is not
passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Prospectus and Proxy
Statement, on the basis of the foregoing, no facts have come to his attention
that lead him 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
<PAGE>
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
he 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.
The opinions set forth in paragraphs 7.3.1 and 7.3.2 may state that
such opinions are solely for the benefit of the Acquiring Fund. Such opinions
shall contain such other assumptions and limitations as shall be in the opinion
of Dickstein Shapiro Morin & Oshinsky LLP and C. Grant Anderson, as applicable,
appropriate to render the opinions expressed therein, and shall indicate, with
respect to matters of Massachusetts law, that as Dickstein Shapiro Morin &
Oshinsky LLP and C. Grant Anderson are not admitted to the bar of Massachusetts,
such opinions are based either upon the review of published statutes, cases and
rules and regulations of the Commonwealth of Massachusetts or upon an opinion of
Massachusetts counsel.
In this paragraph 7.3, references to the 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.
7.4 The merger between First Union Corporation and Signet Banking
Corporation shall be completed prior to the Closing Date.
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 This 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 Virtus Funds' 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,
<PAGE>
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 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 net investment
company taxable income for all taxable periods 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 periods 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 LLP, addressed to the Acquiring Fund and the Selling Fund
substantially to the effect that for federal income tax purposes:
(a) The transfer of all of the Selling Fund assets in
exchange for the Acquiring Fund Shares and the assumption by the
<PAGE>
Acquiring Fund of certain stated liabilities of the Selling Fund followed by the
distribution of the Acquiring Fund 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)(C) 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 stated
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 stated 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 the 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).
(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, in form
<PAGE>
and substance satisfactory to the Acquiring Fund, to the effect
that:
(a) 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;
(b) 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;
(c) 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 data utilized in the
calculations of the projected expense ratios appearing in the Registration
Statement and Prospectus and Proxy Statement agree with underlying accounting
records of the Selling Fund or with written estimates by Selling Fund's
management and were found to be mathematically correct.
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),
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.
8.8 The Selling Fund shall have received from Price Waterhouse LLP a
letter addressed to the Selling Fund, in form and substance satisfactory to the
Selling Fund, to the effect that:
(a) 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;
(b) 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
<PAGE>
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; and
(c) 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 written estimates by each Fund's management and were found
to be mathematically correct.
ARTICLE IX
EXPENSES
9.1 Except as otherwise provided for herein, all expenses of the
transactions contemplated by this Agreement incurred by the Selling Fund and the
Acquiring Fund will be borne by First Union National Bank. Such expenses
include, without limitation, (a) expenses incurred in connection with the
entering into and the carrying out of the provisions of this Agreement; (b)
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; (c) 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; (d) postage; (e) printing; (f) accounting
fees; (g) legal fees; and (h) solicitation costs of the transaction.
Notwithstanding the foregoing, the Acquiring Fund shall pay its own federal and
state registration fees.
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
this 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 not survive the consummation of the transactions contemplated hereunder.
<PAGE>
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, the Selling Fund, the Trust, Virtus Funds, the respective
Trustees or officers, to the other party or its Trustees or officers.
ARTICLE XII
AMENDMENTS
12.1 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 Selling Fund 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
HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
13.1 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.
<PAGE>
13.2 This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without giving effect to the conflicts
of laws provisions thereof; provided, however, that the due authorization,
execution and delivery of this Agreement, in the case of the Selling Fund, shall
be governed and construed in accordance with the laws of The Commonwealth of
Massachusetts, without giving effect to the conflicts of laws provisions
thereof.
13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but, except as provided in
this paragraph, 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.
13.5 It is expressly agreed 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 Virtus Funds or the
Trust personally, but shall bind only the trust property of the Selling Fund and
the Acquiring Fund, as provided in the Declarations of Trust of Virtus Funds and
the Trust. The execution and delivery of this Agreement have been authorized by
the Trustees of Virtus Funds on behalf of the Selling Fund and the Trust on
behalf of the Acquiring Fund and signed by authorized officers of Virtus Funds
and the 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 Selling Fund and the
Acquiring Fund as provided in the Declarations of Trust of Virtus Funds and the
Trust.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement, all
as of the date first written above.
EVERGREEN MONEY
MARKET TRUST ON
BEHALF OF
EVERGREEN TAX
EXEMPT MONEY
MARKET FUND By:
Name:
Title:
THE VIRTUS FUNDS
ON BEHALF OF THE TAX-FREE
MONEY MARKET FUND
By:
Name:
Title:
<PAGE>
EXHIBIT B
THE VIRTUS FUNDS
INTERIM INVESTMENT ADVISORY AGREEMENT
This Agreement is made between Virtus Capital Management, Inc., a
Maryland corporation having its principal place of business in Richmond,
Virginia (the "Adviser"), and The Virtus Funds, a Massachusetts business trust
having its principal place of business in Pittsburgh, Pennsylvania (the
"Trust").
WHEREAS, the Trust is an open-end management investment company as that
term is defined in the Investment Company Act of 1940 (the "Act") and
is registered as such with the Securities and Exchange Commission; and
WHEREAS, the Adviser is engaged in the business of rendering investment
advisory and management services.
NOW, THEREFORE, the parties hereto, intending to be legally bound,
agree as follows:
1. The Trust hereby appoints Adviser as Investment Adviser for each of
the portfolios ("Funds") of the Trust, which may be offered in one or more
classes of shares ("Classes"), on whose behalf the Trust executes an exhibit to
this Agreement, and Adviser, by its execution of each such exhibit, accepts the
appointments. Subject to the direction of the Trustees of the Trust, Adviser
shall provide investment research and supervision of the investments of each of
the Funds and conduct a continuous program of investment evaluation and of
appropriate sale or other disposition and reinvestment of each Fund's assets.
2. Adviser, in its supervision of the investments of each of the Funds,
will be guided by each of the Fund's fundamental investment policies and the
provisions and restrictions contained in the Declaration of Trust and By-Laws of
the Trust and as set forth in the Registration Statement and exhibits as may be
on file with the Securities and Exchange Commission.
3. The Trust shall pay or cause to be paid on behalf of each Fund or
Class, all of the Fund's or Classes' expenses and the Fund's or Classes'
allocable share of Trust expenses.
4. The Trust, on behalf of each of the Funds shall pay to Adviser for
all services rendered to such Fund by Adviser hereunder the fees set forth in
the exhibits attached hereto.
<PAGE>
5. The Adviser may from time to time and for such periods as it deems
appropriate reduce its compensation to the extent that any Fund's expenses
exceed such lower expense limitation as the Adviser may, by notice to the Trust,
voluntarily declare to be effective. Furthermore, the Adviser may, if it deems
appropriate, assume expenses of one or more Fund or Class to the extent that any
Fund's or Classes' expenses exceed such lower expense limitation as the Adviser
may, by notice to the Trust, voluntarily declare to be effective.
6. This Agreement shall begin for each Fund on the date that the Trust
executes an exhibit to this Agreement relating to such Fund. This Agreement
shall remain in effect for each Fund until the earlier of the Closing Date
defined in the Agreement and Plan of Reorganization to be dated as of November
26, 1997 with respect to each Fund or for two years from the date of its
execution and from year to year thereafter, subject to the provisions for
termination and all of the other terms and conditions hereof if: (a) such
continuation shall be specifically approved at least annually by the vote of a
majority of the Trustees of the Trust, including a majority of the Trustees who
are not parties to this Agreement or interested persons of any such party (other
than as Trustees of the Trust) cast in person at a meeting called for that
purpose; and (b) Adviser shall not have notified the Trust in writing at least
sixty (60) days prior to the anniversary date of this Agreement in any year
thereafter that it does not desire such continuation with respect to that Fund.
7. Notwithstanding any provision in this Agreement, it may be
terminated at any time with respect to any Fund, without the payment of any
penalty, by the Trustees of the Trust or by a vote of a majority of the
outstanding voting securities of that Fund, as defined in Section 2(a)(42) of
the Act on sixty (60) days' written notice to Adviser.
8. This Agreement may not be assigned by Adviser and shall
automatically terminate in the event of any assignment. Adviser may employ or
contract with such other person, persons, corporation or corporations at its own
cost and expense as it shall determine in order to assist it in carrying out
this Agreement.
9. In the absence of willful misfeasance, bad faith, gross negligence
or reckless disregard of obligations or duties under this Agreement on the part
of Adviser, Adviser shall not be liable to the Trust or to any of the Funds or
to any shareholder for any act or omission in the course of or connected in any
way with rendering services or for any losses that may be sustained in the
purchase, holding or sale of any security.
<PAGE>
10. This Agreement may be amended at any time by agreement of the
parties provided that the amendment shall be approved both by vote of a majority
of the Trustees of the Trust, including a majority of the Trustees who are not
parties to this Agreement or interested persons of any such party to this
Agreement (other than as Trustees of the Trust), cast in person at a meeting
called for that purpose, and on behalf of a Fund by a majority of the
outstanding voting securities of such Fund as defined in Section 2(a)(42) of the
Act.
11. Adviser is hereby expressly put on notice of the limitation of
liability as set forth in Article XI of the Declaration of Trust and agrees that
the obligations pursuant to this Agreement of a particular Fund and of the Trust
with respect to that particular Fund be limited solely to the assets of that
particular Fund, and Adviser shall not seek satisfaction of any such obligation
from the assets of any other Fund, the shareholders of any Fund, the Trustees,
officers, employees or agents of the Trust, or any of them.
12. This Agreement shall be construed in accordance with and governed
by the laws of the Commonwealth of Pennsylvania.
13. This Agreement will become binding on the parties hereto upon their
execution of the attached exhibits to this Agreement.
<PAGE>
EXHIBIT A
THE U.S. GOVERNMENT SECURITIES FUND
THE VIRGINIA MUNICIPAL BOND FUND
THE MARYLAND MUNICIPAL BOND FUND
THE TREASURY MONEY MARKET FUND
THE MONEY MARKET FUND
THE TAX-FREE MONEY MARKET FUND
THE STYLE MANAGER FUND
THE STYLE MANAGER: LARGE CAP FUND
Name of Fund Percentage of Net Assets
- ------------ ------------------------
The Treasury Money Market Fund .50 of 1%
The Money Market Fund .50 of 1%
The Tax-Free Money Market Fund .50 of 1%
The U.S. Government Securities Fund .75 of 1%
The Virginia Municipal Bond Fund .75 of 1%
The Maryland Municipal Bond Fund .75 of 1%
The Style Manager: Large Cap Fund .75 of 1%
The Style Manager Fund 1.25 of 1%
For all services rendered by Adviser hereunder, the Trust shall pay to
Adviser and Adviser agrees to accept as full compensation for all services
rendered hereunder, an annual investment advisory fee equal to the following
percentage (the "applicable percentage") of the average daily net assets of each
Fund.
The fee shall be accrued daily at the rate of 1/365th of the applicable
percentage applied to the daily net assets of the Fund.
The advisory fee so accrued shall be paid to Adviser daily.
Witness the due execution hereof this 28th day of November, 1997.
Attest: VIRTUS CAPITAL MANAGEMENT, INC.
By:
Assistant Secretary President
Attest: THE VIRTUS FUNDS
By:
Assistant Secretary Vice President
C. Grant Anderson
<PAGE>
EXHIBIT C
EVERGREEN
TAX EXEMPT MONEY MARKET FUND
(Evergreen Graphic
Goes Here)
FUND AT A GLANCE
As of August 31, 1997
<TABLE>
<CAPTION>
PERFORMANCE
AVERAGE ANNUALIZED TOTAL
RETURNS YIELDS & DISTRIBUTIONS
---------------------------- -----------------------------
SHARE INCEPTION 3 5 SINCE 7-DAY YIELD 30-DAY YIELD 12-MONTH
CLASS DATE 1 YEAR YEARS YEARS INCEPTION (ANNUALIZED) (ANNUALIZED) DISTRIBUTION
<S> <C> <C> <C> <C> <C> <C> <C> <C>
A 1/5/95 3.13% -- -- 3.24% 2.89% 2.93% $0.03
Y 11/2/88 3.44% 3.52% 3.13% 4.13% 3.19% 3.23% $0.03
</TABLE>
PORTFOLIO CHARACTERISTICS
TOTAL NET ASSETS (ALL CLASSES): $1,044,426,214
AVERAGE MATURITY: 36 days
OBJECTIVE: Stability of principal and tax-free income
STRATEGY: Invests in short-term municipal securities
PORTFOLIO COMPOSITION
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(Pie chart appears here with the following plot points.)
Anticipation Notes 4.2%
Commercial Paper and Bonds 7.0%
Put Bonds 15.5%
Variable Rate Demand Notes 73.3%
PORTFOLIO MANAGER
Steven C. Shachat joined Lieber & Co. in 1988 and has been
managing short-term tax-exempt investments. He is Portfolio
Manager of Evergreen Tax-Exempt Money Market Fund and Evergreen
Short-Intermediate Municipal Fund. Prior to joining Lieber & Co.,
Mr. Shachat was employed by Mitchell Hutchings Asset Management
Inc., a subsidiary of Paine Webber Inc., as a Portfolio Manager of
the Paine Webber Resource Management Account Tax-Free Fund. His
previous experience was with Donald Sheldon & Co., a firm
specializing in tax-exempt securities. Mr. Shachat earned a B.S.
degree from Boston University.
(Photo of
Steven C. Shachat
Goes Here)
STEVEN C. SHACHAT
AN INVESTMENT IN THE FUND IS NEITHER INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, AND THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN
A STABLE NAV OF $1.00 PER SHARE. YIELDS WILL FLUCTUATE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Acquisition of the Assets of
THE TAX FREE MONEY MARKET FUND
a Series of
THE VIRTUS FUNDS
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
(800) 829-3863
By and In Exchange For Shares of
EVERGREEN TAX EXEMPT MONEY MARKET FUND
a Series of
EVERGREEN MONEY MARKET TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 343-2898
This Statement of Additional Information, relating specifically to the
proposed transfer of the assets and liabilities of The Tax Free Money Market
Fund ("Virtus Tax Free"), a series of The Virtus Funds, to Evergreen Tax Exempt
Money Market Fund ("Evergreen Tax Exempt"), a series of the Evergreen Money
Market Trust, in exchange for Class Y shares of beneficial interest, $.001 par
value per share, of Evergreen Tax Exempt, consists of this cover page and the
following described documents, each of which is attached hereto and incorporated
by reference herein:
(1) The Statement of Additional Information of Evergreen Tax
Exempt dated October 31, 1996, as amended;
(2) The Statement of Additional Information of Virtus Tax Free
dated November 30, 1997;
(3) Annual Report of Virtus Tax Free for the year ended September
30, 1997; and
(4) Annual Report of Evergreen Tax Exempt for the year ended
August 31, 1997.
This Statement of Additional Information, which is not a prospectus,
supplements, and should be read in conjunction with,
<PAGE>
the Prospectus/Proxy Statement of Evergreen Tax Exempt and Virtus Tax Free dated
January , 1998. A copy of the Prospectus/Proxy Statement may be obtained without
charge by calling or writing to Evergreen Tax Exempt or Virtus Tax Free at the
telephone numbers or addresses set forth above.
The date of this Statement of Additional Information is January , 1998.
STATEMENT OF ADDITIONAL INFORMATION
October 31, 1996
As Amended August 1, 1997
THE EVERGREEN MONEY MARKET FUNDS
2500 Westchester Avenue, Purchase, New York 10577
800-343-2898
Evergreen Money Market Fund ("Money Market")
Evergreen Tax Exempt Money Market Fund ("Tax Exempt")
Evergreen Pennsylvania Tax-Free Money Market Fund (formerly FFB Pennsylvania
Tax-Free Money Market Fund)("Pennsylvania") Evergreen Treasury Money Market Fund
(formerly First Union Treasury Money Market Portfolio)("Treasury") Evergreen
Institutional Money Market Fund ("Institutional Money Market") Evergreen
Institutional Tax Exempt Money Market Fund ("Institutional Tax Exempt")
Evergreen Institutional Treasury Money Market Fund ("Institutional Treasury")
This Statement of Additional Information pertains to all classes of shares of
the Funds listed above. It is not a prospectus and should be read in conjunction
with the Prospectus dated October 31, 1996, as amended August 1, 1997, for the
Fund in which you are making or contemplating an investment. The Evergreen Money
Market Funds are offered through seven separate prospectuses: one offering Class
A, Class B and Class C shares of Money Market and Class A shares of Tax Exempt
and Treasury, one offering Class K shares of Money Market, one offering Class A
shares of Pennsylvania, one offering Class Y shares of Money Market, Tax Exempt
and Treasury, one offering Class Y shares of Pennsylvania, one offering
Institutional Service shares of Institutional Money Market, Institutional Tax
Exempt and Institutional Treasury and one offering Institutional shares of
Institutional Money Market, Institutional Tax Exempt and Institutional Treasury.
Copies of each Prospectus may be obtained without charge by calling the number
listed above.
TABLE OF CONTENTS
Investment Objectives and Policies................................ 2
Investment Restrictions........................................... 4
Certain Risk Considerations....................................... 8
Management........................................................ 8
Investment Advisers............................................... 15
Distribution Plans................................................ 19
Allocation of Brokerage........................................... 21
Additional Tax Information........................................ 22
Net Asset Value................................................... 24
Purchase of Shares................................................ 25
General Information About the Funds............................... 29
Performance Information........................................... 30
Financial Statements.............................................. 33
Appendix A - Description of Bond, Municipal Note and Commercial Paper Ratings
Appendix B - Special Considerations Relating to Investment In Pennsylvania
Municipal Issuers
INVESTMENT OBJECTIVES AND POLICIES
(See also "Description of the Funds -Investment Objectives and Policies" in
each Fund's Prospectus)
The investment objective of each Fund and a description of the securities in
which each Fund may invest is set forth under "Description of the Funds -
Investment Objectives and Policies" in the relevant Prospectus. The following
expands upon the discussion in the Prospectuses regarding certain investments of
the following Funds:
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Tax Exempt, Pennsylvania and Institutional Tax Exempt
To attain its objectives, each Fund invests primarily in high quality Municipal
Obligations which have remaining maturities not exceeding thirteen months. Each
Fund maintains a dollar-weighted average portfolio maturity of 90 days or less.
For information concerning the investment quality of Municipal Obligations that
may be purchased by the Fund, see "Investment Objective and Policies" in the
Prospectus. The tax-exempt status of a Municipal Obligation is determined by the
issuer's bond counsel at the time of the issuance of the security.
For the purpose of certain requirements under the Investment Company Act of 1940
(the "1940 Act") and each Fund's various investment restrictions, identification
of the "issuer" of a municipal security depends on the terms and conditions of
the security. When the assets and revenues of a political subdivision are
separate from those of the government which created the subdivision and the
security is backed only by the assets and revenues of the subdivision, the
subdivision would be deemed to be the sole issuer. Similarly, in the case of an
industrial development bond, if that bond is backed only by the assets and
revenues of the non-governmental user, then the non-governmental user would be
deemed to be the sole issuer. If, however, in either case, the creating
government or some other entity guarantees the security, the guarantee would be
considered a separate security and would be treated as an issue of the
government or other agency.
Municipal bonds may be categorized as "general obligation" or "revenue" bonds.
General obligation bonds are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
secured by the net revenue derived from a particular facility or group of
facilities or, in some cases, the proceeds of a special excise or other specific
revenue source, but not by the general taxing power. Industrial development
bonds are, in most cases, revenue bonds and do not generally carry the pledge of
the credit of the issuing municipality or public authority.
Municipal Notes. Municipal notes include, but are not limited to, tax
anticipation notes (TANs), bond anticipation notes (BANs), revenue anticipation
notes (RANs), construction loan notes and project notes. Notes sold as interim
financing in anticipation of collection of taxes, a bond sale or receipt of
other revenue are usually general obligations of the issuer. Project notes are
issued by local housing authorities to finance urban renewal and public housing
projects and are secured by the full faith and credit of the U.S. Government.
Municipal Commercial Paper. Municipal commercial paper is issued to finance
seasonal working capital needs or as short-term financing in anticipation of
longer-term debt. It is paid from the general revenues of the issuer or
refinanced with additional issuances of commercial paper or long-term debt.
Municipal Leases. Municipal leases, which may take the form of a lease or an
installment purchase or conditional sale contract, are issued by state and local
governments and authorities to acquire a wide variety of equipment and
facilities such as fire and sanitation vehicles, telecommunications equipment
and other capital assets. Municipal leases frequently have special risks not
normally associated with general obligation or revenue bonds. Leases and
installment purchases or conditional sale contracts (which normally provide for
title to the leased asset to pass eventually to the government issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting the constitutional and statutory requirements for the issuance
of debt. The debt-issuance limitations of many state constitutions and statutes
are deemed to be inapplicable because of the inclusion in many leases or
contracts of "non-appropriation" clauses that provide that the governmental
issuer has no obligation to make future payments under the lease or contract
unless money is appropriated for such purpose by the appropriate legislative
body on a yearly or other periodic basis. These types of municipal leases may be
considered illiquid and subject to the 10% limitation of investment in illiquid
securities set forth under "Investment Restrictions" contained herein. The Board
of Trustees of each Trust under which each Fund operates may adopt guidelines
and delegate to the Adviser (as defined below) the daily function of determining
and monitoring the liquidity of municipal leases. In making such determination,
the Board and the Adviser may consider such factors as the frequency of trades
for the obligations, the number of dealers willing to purchase or sell the
obligations and the number of other potential buyers and the nature of the
marketplace for the obligations, including the time needed to dispose of the
obligations and the method of soliciting offers. If the Board determines that
any municipal leases are illiquid, such leases will be subject to the
21327
2
<PAGE>
10% limitation on investments in illiquid securities.
For purposes of diversification under the 1940 Act, the identification of the
issuer of Municipal Obligations depends on the terms and conditions of the
obligation. If the assets and revenues of an agency, authority, instrumentality
or other political subdivision are separate from those of the government
creating the subdivision and the obligation is backed only by the assets and
revenues of the subdivision, such subdivision would be regarded as the sole
issuer. Similarly, in the case of an industrial development bond, if the bond is
backed only by the assets and revenues of the non-governmental user, the
non-governmental user would be deemed to be the sole issuer. If in either case
the creating government or another entity guarantees an obligation, the
guarantee would be considered a separate security and be treated as an issue of
such government or entity.
As described in each Fund's Prospectus, the Fund may, under limited
circumstances, elect to invest in certain taxable securities and repurchase
agreements with respect to those securities. A Fund will enter into repurchase
agreements only with broker-dealers, domestic banks or recognized financial
institutions which, in the opinion of the Fund's Adviser, present minimal credit
risks. In the event of default by the seller under a repurchase agreement, a
Fund may have problems in exercising its rights to the underlying securities and
may incur costs and experience time delays in connection with the disposition of
such securities. The Fund's Adviser will monitor the value of the underlying
security at the time the transaction is entered into and at all times during the
term of the repurchase agreement to ensure that the value of the security always
equals or exceeds the agreed upon repurchase price. Repurchase agreements may be
considered to be loans under the 1940 Act, collateralized by the underlying
securities.
Each Fund may engage in the following investment activities:
Securities With Put Rights (or "stand-by commitments"). When a Fund
purchases Municipal Obligations it may obtain the right to resell them,
or "put" them, to the seller (a broker-dealer or bank) at an agreed
upon price within a specific period prior to their maturity date. The
Fund does not limit the percentage of its assets that may be invested
in securities with put rights.
The amount payable to a Fund by the seller upon its exercise of a put
will normally be (i) the Fund's acquisition cost of the securities
(excluding any accrued interest which the Fund paid on their
acquisition), less any amortized market premium plus any amortized
market or original issue discount during the period the Fund owned the
securities, plus (ii) all interest accrued on the securities since the
last interest payment date during the period the securities were owned
by the Fund. Absent unusual circumstances, each Fund values the
underlying securities at their amortized cost. Accordingly, the amount
payable by a broker-dealer or bank during the time a put is exercisable
will be substantially the same as the value of the underlying
securities.
A Fund's right to exercise a put is unconditional and unqualified. A
put is not transferable by the Fund, although the Fund may sell the
underlying securities to a third party at any time. Each Fund expects
that puts will generally be available without any additional direct or
indirect cost. However, if necessary and advisable, the Fund may pay
for certain puts either separately in cash or by paying a higher price
for portfolio securities which are acquired subject to such a put (thus
reducing the yield to maturity otherwise available to the same
securities). Thus, the aggregate price paid for securities with put
rights may be higher than the price that would otherwise be paid.
The acquisition of a put will not affect the valuation of the
underlying security, which will continue to be valued in accordance
with the amortized cost method. The actual put will be valued at zero
in determining net asset value. Where a Fund pays directly or
indirectly for a put, its cost will be reflected as an unrealized loss
for the period during which the put is held by that Fund and will be
reflected in realized gain or loss when the put is exercised or
expires. If the value of the underlying security increases, the
potential for unrealized or realized gain is reduced by the cost of the
put.
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<PAGE>
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS
.........Except as noted, the investment restrictions set forth below are
fundamental and may not be changed with respect to each Fund without the
affirmative vote of a majority of the outstanding voting securities of the Fund.
Where an asterisk (*) appears after a Fund's name, the relevant policy is
non-fundamental with respect to that Fund and may be changed by the Fund's
Adviser without shareholder approval, subject to review and approval by the
Trustees. As used in this Statement of Additional Information and in the
Prospectus, "a majority of the outstanding voting securities of the Fund" means
the lesser of (1) the holders of more than 50% of the outstanding shares of
beneficial interest of the Fund or (2) 67% of the shares present if more than
50% of the shares are present at a meeting in person or by proxy.
1........Concentration of Assets in Any One Issuer
.........Tax Exempt, Pennsylvania, Money Market, Institutional Tax Exempt and
Institutional Money Market may not invest more than 5% of their total assets, at
the time of the investment in question, in the securities of any one issuer
other than the U.S. government and its agencies or instrumentalities, except
that up to 25% of the value of Tax Exempt's, Institutional Tax Exempt's and
Pennsylvania's total assets may be invested without regard to such 5%
limitation. For this purpose each political subdivision, agency, or
instrumentality and each multi-state agency of which a state is a member, and
each public authority which issues industrial development bonds on behalf of a
private entity, will be regarded as a separate issuer for determining the
diversification of each Fund's portfolio.
2........Ten Percent Limitation on Securities of Any One Issuer
.........Neither Money Market, Pennsylvania, Tax Exempt, Institutional Money
Market nor Institutional Tax Exempt may purchase more than 10% of any class of
securities of any one issuer other than the U.S. government and its agencies or
instrumentalities.
3........Investment for Purposes of Control or Management
.........Neither Money Market, Pennsylvania, Tax Exempt, Institutional Money
Market* nor Institutional Tax Exempt* may invest in companies for the purpose of
exercising control or management.
4........Purchase of Securities on Margin
.........Neither Money Market, Pennsylvania, Tax Exempt, Treasury, Institutional
Money Market*, Institutional Tax Exempt* nor Institutional Treasury* may
purchase securities on margin, except that each Fund may obtain such short-term
credits as may be necessary for the clearance of transactions. A deposit or
payment by a Fund of initial or variation margin in connection with financial
futures contracts or related options transactions is not considered the purchase
of a security on margin.
5........Unseasoned Issuers
.........Money Market and Institutional Money Market* may not invest more than
5% of their total assets in securities of unseasoned issuers that have been in
continuous operation for less than three years, including operating periods of
their predecessors.
.........Tax Exempt and Institutional Tax Exempt* may not invest more than 5% of
their total assets in taxable securities of unseasoned issuers that have been in
continuous operation for less than three years, including operating periods of
their predecessors, except that (i) each Fund may invest in obligations issued
or guaranteed by the U.S. government and its agencies or instrumentalities, and
(ii) each Fund may invest in municipal securities.
6........Underwriting
.........Money Market, Pennsylvania, Tax Exempt, Institutional Money Market and
Institutional Tax Exempt may not engage in the business of underwriting the
securities of other issuers; provided that the purchase by Tax Exempt and
Institutional Tax Exempt of municipal securities or other permitted investments,
directly from the issuer thereof (or
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4
<PAGE>
from an underwriter for an issuer) and the later disposition of such securities
in accordance with the Fund's investment program shall not be deemed to be an
underwriting.
7........Interests in Oil, Gas or Other Mineral Exploration or Development
Programs
.........Neither Money Market, Pennsylvania, Tax Exempt, Institutional Money
Market* nor Institutional Tax Exempt* may purchase, sell or invest in interests
in oil, gas or other mineral exploration or development programs.
8........Concentration in Any One Industry
.........Neither Money Market, Pennsylvania, Tax Exempt, Institutional Money
Market nor Institutional Tax Exempt may invest 25% or more of its total assets
in the securities of issuers conducting their principal business activities in
any one industry; provided, that this limitation shall not apply to obligations
issued or guaranteed by the U.S. government or its agencies or
instrumentalities, or with respect to Pennsylvania, Tax Exempt and Institutional
Tax Exempt, to municipal securities and certificates of deposit and bankers'
acceptances issued by domestic branches of U.S. banks.
9........Warrants
.........Tax Exempt and Institutional Tax Exempt* may not invest more than 5% of
their total net assets in warrants, and, of this amount, no more than 2% of the
Fund's total net assets may be invested in warrants that are listed on neither
the New York nor the American Stock Exchange.
10.......Ownership by Trustees/Officers
.........Neither Money Market, Tax Exempt, Treasury, Institutional Money
Market*, Institutional Tax Exempt* nor Institutional Treasury* may purchase or
retain the securities of any issuer if (i) one or more officers or Trustees of a
Fund or its investment adviser individually owns or would own, directly or
beneficially, more than 1/2 of 1% of the securities of such issuer, and (ii) in
the aggregate, such persons own or would own, directly or beneficially, more
than 5% of such securities.
11.......Short Sales
.........Neither Money Market, Tax Exempt, Treasury, Institutional Money
Market*, Institutional Tax Exempt* nor Institutional Treasury* may make short
sales of securities or maintain a short position; except that, in the case of
Treasury, Institutional Treasury, Institutional Tax Exempt and Institutional
Money Market, at all times when a short position is open it owns an equal amount
of such securities or of securities which, without payment of any further
consideration are convertible into or exchangeable for securities of the same
issue as, and equal in amount to, the securities sold short.
12.......Lending of Funds and Securities
.........Tax Exempt and Institutional Tax Exempt may not lend their funds to
other persons; however, they may purchase issues of debt securities, enter into
repurchase agreements and acquire privately negotiated loans made to municipal
borrowers.
.........Money Market and Institutional Money Market may not lend their funds to
other persons, provided that they may purchase money market securities or enter
into repurchase agreements.
.........Treasury and Institutional Treasury will not lend any of their assets,
except that they may purchase or hold U.S. Treasury obligations, including
repurchase agreements.
.........Neither Money Market, Pennsylvania, Tax Exempt, Institutional Money
Market nor Institutional Tax Exempt may lend its portfolio securities, unless
the borrower is a broker, dealer or financial institution that pledges and
maintains collateral with the Fund consisting of cash, letters of credit or
securities issued or guaranteed by the U.S. government having a value at all
times not less than 100% of the current market value of the loaned securities,
including accrued interest, provided that the aggregate amount of such loans
shall not exceed 30% of the Fund's total assets (5% in the case of
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5
<PAGE>
Pennsylvania).
13.......Commodities
......... Money Market, Tax Exempt, Treasury*, Institutional Treasury*,
Institutional Money Market* and Institutional Tax Exempt* may not purchase, sell
or invest in commodities, commodity contracts or financial futures contracts.
14.......Real Estate
.........The Funds may not purchase, sell or invest in real estate or interests
in real estate, except that Money Market and Institutional Money Market may
purchase, sell or invest in marketable securities of companies holding real
estate or interests in real estate, including real estate investment trusts, Tax
Exempt and Institutional Tax Exempt may purchase municipal securities and other
debt securities secured by real estate or interests therein and Pennsylvania may
purchase securities secured by real estate or interests therein, or securities
issued by companies which invest in real estate or interests therein.
15.......Borrowing, Senior Securities, Reverse Repurchase Agreements
......... Money Market, Tax Exempt, Institutional Money Market and Institutional
Tax Exempt may not borrow money, issue senior securities or enter into reverse
repurchase agreements, except for temporary or emergency purposes, and not for
leveraging, and then in amounts not in excess of 10% of the value of the Fund's
total assets at the time of such borrowing; or mortgage, pledge or hypothecate
any assets except in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or 10% of the value of the
Fund's total assets at the time of such borrowing, provided that the Fund will
not purchase any securities at times when any borrowings (including reverse
repurchase agreements) are outstanding. The Funds will not enter into reverse
repurchase agreements exceeding 5% of the value of their total assets.
.........Pennsylvania shall not borrow money, issue senior securities, or
pledge, mortgage or hypothecate its assets, except that the Fund may borrow from
banks if immediately after each borrowing there is asset coverage of at least
300%.
.........Treasury and Institutional Treasury will not issue senior securities
except that each Fund may borrow money directly, as a temporary measure for
extraordinary or emergency purposes and then only in amounts not in excess of 5%
of the value of its total assets, or in an amount up to one- third of the value
of its total assets, including the amount borrowed, in order to meet redemption
requests without immediately selling portfolio instruments. Any such borrowings
need not be collateralized. Each Fund will not purchase any securities while
borrowings in excess of 5% of the total value of its total assets are
outstanding. Each Fund will not borrow money or engage in reverse repurchase
agreements for investment leverage purposes. Treasury and Institutional Treasury
will not mortgage, pledge or hypothecate any assets except to secure permitted
borrowings. In these cases, Treasury and Institutional Treasury may pledge
assets having a market value not exceeding the lesser of the dollar amounts
borrowed or 15% of the value of total assets at the time of the pledge.
16.......Options
.........Money Market, Tax Exempt, Institutional Money Market* and Institutional
Tax Exempt* may not write, purchase or sell put or call options, or combinations
thereof, except Money Market and Institutional Money Market may do so as
permitted under "Description of the Funds - Investment Objective and Policies"
in each Fund's Prospectus and Tax Exempt and Institutional Tax Exempt may
purchase securities with rights to put securities to the seller in accordance
with its investment program.
.........Pennsylvania shall not write, purchase or sell puts, calls, warrants or
options or any combination thereof, except that the Fund may purchase securities
with put or demand rights.
17.......Investment in Municipal Securities
.........Pennsylvania, Tax Exempt and Institutional Tax Exempt may not invest
more than 20% of its total assets in securities other than municipal securities
(as described under "Description of Funds - Investment Objectives and Policies"
in each Fund's Prospectus),
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6
<PAGE>
unless extraordinary circumstances dictate a more defensive posture.
18.......Investment in Money Market Securities
.........Money Market may not purchase any securities other than money market
instruments(as described under "Description of Funds - Investment Objectives and
Policies" in the Fund's Prospectus).
19.......Investing in Securities of Other Investment Companies
.........Treasury*, Money Market*, Pennsylvania*, Tax Exempt*, Institutional
Treasury*, Institutional Money Market* and Institutional Tax Exempt* will
purchase securities of investment companies only in open-market transactions
involving customary broker's commissions. However, these limitations are not
applicable if the securities are acquired in a merger, consolidation or
acquisition of assets. It should be noted that investment companies incur
certain expenses such as management fees and therefore any investment by the
Funds in shares of another investment company would be subject to such duplicate
expenses.
Except with respect to borrowing money, if a percentage limitation is adhered to
at the time of investment, a later increase or decrease in percentage resulting
from any change in value or net assets will not result in a violation of such
restriction.
CERTAIN RISK CONSIDERATIONS
There can be no assurance that a Fund will achieve its investment objective and
an investment in the Fund involves certain risks which are described under
"Description of the Funds - Investment Objectives and Policies" in each Fund's
Prospectus.
MANAGEMENT
The age, address and principal occupation of the Trustees and executive officers
of Evergreen Investment Trust (formerly First Union Funds), The Evergreen
Municipal Trust, Evergreen Tax Free Trust (formerly FFB Funds Trust) and
Evergreen Money Market Trust (each a "Trust" and collectively the "Trusts"),
during the past five years are set forth below:
Laurence B. Ashkin (68), 180 East Pearson Street, Chicago, IL-Trustee. Real
estate developer and construction consultant since 1980; President of Centrum
Equities since 1987 and Centrum Properties, Inc. since 1980.
Foster Bam (70), Greenwich Plaza, Greenwich, CT-Trustee. Partner in the law firm
of Cummings and Lockwood since 1968.
James S. Howell (72), 4124 Crossgate Road, Charlotte, NC-Chairman of the
Evergreen Group of Mutual Funds and Trustee. Retired Vice President of Lance
Inc. (food manufacturing); Chairman of the Distribution Comm. Foundation for the
Carolinas from 1989 to 1993.
Gerald M. McDonnell (57), 821 Regency Drive, Charlotte, NC-Trustee. Sales
Representative with Nucor-Yamoto Inc. (steel producer) since 1988.
Thomas L. McVerry (58), 4419 Parkview Drive, Charlotte, NC-Trustee. Director of
Carolina Cooperative Federal Credit Union since 1990 and Rexham Corporation from
1988 to 1990; Vice President of Rexham Industries, Inc. (diversified
manufacturer) from 1989 to 1990. Vice President-Finance and Resources, Rexham
Corporation from 1979 to 1990.
William Walt Pettit* (41), Holcomb and Pettit, P.A., 227 West Trade St.,
Charlotte, NC-Trustee. Partner in the law firm Holcomb and Pettit, P.A. since
1990.
Russell A. Salton, III, M.D. (49), 205 Regency Executive Park, Charlotte, NC-
Trustee. Medical Director, U.S. Healthcare of Charlotte, North Carolina since
1996; President, Primary Physician Care from 1990 to 1996.
Michael S. Scofield (53), 212 S. Tryon Street Suite 980, Charlotte, NC-Trustee.
Attorney, Law Offices of Michael S. Scofield since 1969.
Robert J. Jeffries (73), 2118 New Bedford Drive, Sun City Center, FL-Trustee
Emeritus.
21327
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<PAGE>
Corporate consultant since 1967.
John J. Pileggi (37), 230 Park Avenue, Suite 910, New York, NY-President and
Treasurer. Consultant to BISYS Fund Services since 1996. Senior Managing
Director, Furman Selz LLC since 1992, Managing Director from 1984 to 1992.
George O. Martinez (37), 3435 Stelzer Road, Columbus, OH-Secretary. Senior Vice
President/Director of Administration and Regulatory Services, BISYS Fund
Services since April 1995. Vice President/Assistant General Counsel, Alliance
Capital Management from 1988 to 1995.
The officers listed above hold the same positions with forty-two investment
companies offering a total of seventy-three investment funds within the
Evergreen Keystone mutual fund complex. Messrs. Howell, Salton and Scofield are
Trustees of all forty-two investment companies. Messrs. McDonnell, McVerry and
Pettit are Trustees of forty-one of the investment companies (excluded is
Evergreen Variable Trust). Messrs. Ashkin, Bam are Trustees of forty of the
investment companies (excluded are Evergreen Variable Trust and Evergreen
Investment Trust.) Mr. Jeffries has been serving as a Trustee Emeritus of eleven
of the investment companies since January 1, 1996 (excluded are Evergreen
Variable Trust, Evergreen Investment Trust, as well as the Keystone group of
mutual funds).
- ----------
* Mr. Pettit may be deemed to be an "interested person" within the meaning of
the 1940 Act.
The officers of the Trusts are all officers and/or employees of or consultants
to The BISYS Group ("BISYS"), except for Mr. Pileggi, who is a consultant to
BISYS. BISYS is an affiliate of Evergreen Keystone Distributor, Inc. ("EKD"),
the distributor of each Class of shares of each Fund.
The Funds do not pay any direct remuneration to any officer or Trustee who is an
"affiliated person" of either First Union National Bank, Evergreen Asset
Management Corp., Keystone Investment Management Company or their affiliates.
See "Investment Adviser." Currently, none of the Trustees is an "affiliated
person" as defined in the 1940 Act. Evergreen Investment Trust, Evergreen Money
Market Trust and The Evergreen Municipal Trust pay each Trustee who is not an
"affiliated person" an annual retainer and a fee per meeting attended, plus
expenses. The Evergreen Tax Free Trust pays each Trustee who is not an
"affiliated person" a fee per meeting attended, plus expenses, as follows:
Name of Fund Annual Retainer Meeting Fee
Evergreen Investment Trust - $15,000* $2,000*
Treasury
Evergreen Money Market Trust - **
Money Market $100
Institutional Money Market $100
Institutional Treasury $100
The Evergreen Municipal Trust - **
Tax Exempt $100
Institutional Tax Exempt $100
Evergreen Tax Free Trust - -0-
Pennsylvania $100
- ---------------------------
* The annual retainer and the per meeting fee paid by Evergreen Investment Trust
to each Trustee are allocated among its fourteen series.
** $4,000, allocated among the Evergreen Money Market Trust (which offers three
investment series) and The Evergreen Municipal Trust (which offers five
investment series).
In addition:
(1) Each non-affiliated Trustee is paid a fee of $500 for each special
telephonic meeting in which he participates, regardless of the number
of Funds for which the meeting is called.
(2) The Chairman of the Board of the Evergreen group of mutual funds is
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8
<PAGE>
paid an annual retainer of $5,000, and the Chairman of the Audit
Committee is paid an annual retainer of $2,000. These retainers are
allocated among all the funds in the Evergreen group of mutual funds,
based upon assets.
(3) Each member of the Audit Committee is paid an annual retainer of $500.
(4) Any individual who has been appointed as a Trustee Emeritus of one or
more funds in the Evergreen group of mutual funds is paid one-half of
the fees that are payable to regular Trustees.
Set forth below for each of the Trustees is the aggregate compensation paid
to such Trustees by each of Evergreen Investment Trust, The Evergreen Municipal
Trust, Evergreen Money Market Trust and by Evergreen Tax Free Trust for the
one-year period ended February 28, 1997.
AGGREGATE COMPENSATION FROM TRUST
<TABLE>
<CAPTION>
Total
Compensation
Evergreen The From Trusts
Money Evergreen Evergreen Evergreen & Fund
Name of Market Municipal Investment Tax Free Complex Paid
Trustee Trust Trust Trust Trust to Trustees
<S> <C> <C> <C> <C> <C>
Laurence Ashkin $4,853 $4,119 $ 0 $1,017 $33,621
Foster Bam 4,553 3,719 0 817 30,921
James S. Howell 4,690 4,196 27,817 1,009 66,000
Gerald M.
McDonnell 3,845 3,417 23,927 806 53,300
Thomas L.
McVerry 4,377 3,941 26,637 1,006 59,500
William Walt
Pettit 3,993 3,724 25,459 1,009 57,000
Russell A.
Salton, III, M.D. 3,993 3,724 25,458 1,009 61,000
Michael S.
Scofield 4,070 3,750 25,458 1,009 61,102
Robert Jeffries* 1,867 1,523 0 411 13,305
- --------------------
</TABLE>
* Robert J. Jeffries has been serving as a Trustee Emeritus since January 1,
1996.
As of the date of this Statement of Additional Information, the officers
and Trustees of each of the Trusts as a group owned less than 1% of the
outstanding shares of any of the Funds.
Set forth below is information with respect to each person, who, to each
Fund's knowledge, owned beneficially or of record more than 5% of a class of
each Fund's total outstanding shares and their aggregate ownership of the Fund's
total outstanding shares as of June 30, 1997 (for Money Market, Tax Exempt and
Treasury) and as of April 30, 1997 (for Pennsylvania, Institutional Money
Market, Institutional Tax Exempt and Institutional
Treasury).
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9
<TABLE>
<CAPTION>
Name of % of
Name and Address* Fund/Class No. of Shares Class
- ------------------ ---------- ------------- ------
<S> <C> <C> <C>
First Union National Bank Money Market/A 643,789,855 27.02%
Attn: Cap Finance GL
230 S. Tryon St.
Charlotte, NC 28202-3215
First Union National Bank Money Market/A 158,684,261 6.66%
Trust Accounts
Attn: Ginny Batten CMG 1151-2
401 Tryon Street 3rd Fl.
Charlotte, NC 28202-1911
FUNB Money Market/A 303,558,794 12.74%
Attn: Cap Finance GL
230 S. Tryon St.
Charlotte, NC 28202-3215
FUNB Money Market/A 250,842,296 10.53%
Attn: Cap Finance GL
230 S. Tryon St.
Charlotte, NC 28202-3215
FUNB Money Market/A 126,683,997 5.32%
Attn: Cap Finance GL
230 S. Tryon St.
Charlotte, NC 28202-3215
First Union National Bank Money Market/Y 218,527,368 37.47%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151-2
401 S Tryon Street
Charlotte, NC 28202-1911
Pitcairn Trust C. Money Market/Y 43,272,979 7.42%
One Pitcairn Place
Jenkintown, PA 19046
Evergreen "Y" Fund Money Market/Y 39,929,465 6.85%
Reinvest Account
C/O FUNB-NC For Customers
One First Union Center
301 South College St.
Charlotte, NC 28288-0601
FUNB Tax-Exempt/A 202,940,580 30.57%
Attn: Cap Finance GL
230 S. Tryon St.
Charlotte, NC 28202-3215
FUNB Tax-Exempt/A 144,582,220 21.78%
Attn: Cap Finance GL
230 S. Tryon St.
Charlotte, NC 28202-3215
FUNB Tax-Exempt/A 41,969,118 6.32%
Attn: Cap Finance GL
230 S. Tryon St.
Charlotte, NC 28202-1164
First Union National Bank Tax-Exempt/A 69,558,638 10.48%
Trust Accounts
Attn: Ginny Batten CMG 1151-2
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<PAGE>
301 S. Tryon Street, 3rd Floor
Charlotte, NC 28202-1911
FUNB Tax-Exempt/A 35,610,682 5.36%
Attn: Cap Finance GL
230 S. Tryon St.
Charlotte, NC 28202-1164
First Union National Bank Tax-Exempt/Y 38,867,553 9.79%
Trust Accounts
Attn: Ginny Batten
CMG-1151-2
401 S. Tryon Street, 3rd Floor
Charlotte, NC 28202-1911
Evergreen Tax-Exempt Money Tax Exempt/Y 45,351,226 11.43%
Market "Y" Shr Fund Cash A/C
C/O FUNB for Customers
One First Union Center
301 South College St.
Charlotte, NC 28288-0601
Evergreen Tax-Exempt Money Tax Exempt/Y 22,263,599 5.61%
Market "Y" Shr Fund Cash A/C
C/O FUNB for Customers
One First Union Center
301 South College St.
Charlotte, NC 28288-0601
First Union National Bank Treasury/A 660,907,180 27.23%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28202-1910
FUNB Treasury/A 471,137,573 19.41%
Attn: Cap Finance GL
230 S. Tryon St.
Charlotte, NC 28202-1164
FUNB Treasury/A 239,004,367 9.85%
Attn: Cap Finance GL
230 S. Tryon St.
Charlotte, NC 28202-3215
FUNB Treasury/A 205,832,508 8.48%
Attn: Cap Finance GL
230 S. Tryon St.
Charlotte, NC 28202-3215
FUNB Treasury/A 147,199,520 6.06%
Attn: Cap Finance GL
230 S. Tryon St.
Charlotte, NC 28202-3215
First Union National Bank Treasury/Y 576,673,827 90.31%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28202-0002
Johnathan B. Detwiller Pennsylvania/Y 2,932,014 8.83%/4.65%
P.O. Box 69
Phoenixville, PA 19460-0069
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<PAGE>
First Union National Bank Pennsylvania/Y 10,379,554 31.27%/16.46%
Trust Accounts
Attn: Ginny Batten CMG 11512
301 S. Tryon Street
Charlotte, NC 28202-0001
Agnes C. Kim Pennsylvania/Y 2,335,497 7.04%/3.70%
760 Conshohocken State Rd.
Gladuyne, PA 19035-1416
FUNB Pennsylvania/Y 21,890,603 73.32%/34.72%
Attn: Cap Finance GL
230 S. Tryon St.
Charlotte, NC 28202-3215
Hans P. Utsch Pennsylvania/A 3,648,793 12.22%/5.79%
Susan Utsch JT WROS
819 Church Road
Wayne, PA 19087-4714
First Union National Bank Inst MMkt/I 454,069,389 91.95%/29.21%
Trust Accounts
Attn: Ginny Batten CMG-1151-2
401 S. Tryon St. 3rd Floor
Charlotte, NC 28202-1911
First Union National Bank Inst MMkt/IS 263,973,048 39.74%/22.79%
Trust Accounts
Attn: Ginny Batten CMG-1151-2
401 S. Tryon St. 3rd Floor
Charlotte, NC 28202-1911
Ivax Corporation Inst MMkt/IS 40,411,193 6.08%/3.49%
Attn: Jason White
4400 Biscayne Blvd. 7th Floor
Miami, FL 33137-3212
First Union National Bank Inst Tx-Ex MM/I 155,276,582 100.00%/91.72%
Trust Accounts
Attn: Ginny Batten CMG-1151-2
401 S. Tryon St. 3rd Floor
Charlotte, NC 28202-1911
First Union National Bank Inst Tx-Ex MM/IS 13,616,585 97.12%/8.04%
Trust Accounts
Attn: Ginny Batten CMG-1151-2
401 S. Tryon St. 3rd Floor
Charlotte, NC 28202-1911
First Union National Bank Inst Treas MM/I 527,222,486 99.33%/59.21%
Trust Accounts
Attn: Ginny Batten CMG-1151-2
401 S. Tryon St. 3rd Floor
Charlotte, NC 28202-1911
First Union National Bank Inst Treas MM/I 277,915,322 77.27%/31.21%
Trust Accounts
Attn: Ginny Batten CMG-1151-2
401 S. Tryon St. 3rd Floor
Charlotte, NC 28202-1911
</TABLE>
First Union National Bank and its affiliates act in various capacities
for numerous accounts. As a result of its ownership on June 30, 1997, 90.31% of
Class Y shares and 71.03% of Class A shares of Treasury Money Market Fund,
44.32% of Class Y and 62.27% of Class A shares of Money Market Fund and 26.83%
of Class Y shares and 74.51% of Class A shares of Tax Exempt Money Market Fund
and on April 30, 1997 31.27% and 73.32%, respectively, of Class Y and Class A
shares of Pennsylvania Money Market Fund,, First Union National Bank may be
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12
<PAGE>
deemed to "control" those Funds as that term is defined in the 1940 Act.
INVESTMENT ADVISERS
(See also "Management of the Funds" in each Fund's Prospectus)
The investment adviser of Money Market and Tax Exempt is Evergreen Asset
Management Corp., a New York corporation, with offices at 2500 Westchester
Avenue, Purchase, New York ("Evergreen Asset" or the "Adviser"). Evergreen Asset
is owned by First Union National Bank ("FUNB") which, in turn, is a subsidiary
of First Union Corporation ("First Union"), a bank holding company headquartered
in Charlotte, North Carolina. The investment adviser of Treasury, Institutional
Treasury, Institutional Money Market, Institutional Tax Exempt and Pennsylvania
is FUNB which provides investment advisory services through its Capital
Management Group ("CMG").
The Directors of Evergreen Asset are Richard K. Wagoner and Barbara I. Colvin.
The executive officers of Evergreen Asset are Stephen A. Lieber, Chairman and
Co-Chief Executive Officer, Nola Maddox Falcone, President and Co-Chief
Executive Officer, and Theodore J. Israel, Jr., Executive Vice President.
The partnership interests in Lieber, a New York general partnership, were owned
by Lieber I Corp. and Lieber II Corp., which are both wholly owned subsidiaries
of FUNB.
Prior to January 1, 1996, First Fidelity Bank, N.A. acted as investment adviser
to Pennsylvania.
Under its Investment Advisory Agreement with each Fund, each Adviser has agreed
to furnish reports, statistical and research services and recommendations with
respect to each Fund's portfolio of investments. In addition, each Adviser
provides office facilities to the Funds and performs a variety of administrative
services. Each Fund pays the cost of all of its other expenses and liabilities,
including expenses and liabilities incurred in connection with maintaining their
registration under the Securities Act of 1933, as amended, and the 1940 Act,
printing prospectuses (for existing shareholders) as they are updated, state
qualifications, mailings, brokerage, custodian and stock transfer charges,
printing, legal and auditing expenses, expenses of shareholder meetings and
reports to shareholders. Notwithstanding the foregoing, each Adviser will pay
the costs of printing and distributing prospectuses used for prospective
shareholders.
The method of computing the investment advisory fee for each Fund is described
in such Fund's Prospectus. The advisory fees paid by each Fund for the three
most recent fiscal periods reflected in its registration statement are set forth
below:
TAX EXEMPT Year Ended Year Ended Year Ended
8/31/96 8/31/95 8/31/94
Advisory Fee $5,540,924 $2,329,035 $2,126,246
Waiver (1,243,131) (558,942) (1,256,653)
----------- --------- -----------
Net Advisory Fee $4,297,793 $1,770,093 $ 869,593
=========== ========== ===========
MONEY MARKET Six Months Year Ended Year Ended Year Ended
Ended 2/28/97 8/31/96 8/31/95 8/31/94
Advisory Fee $6,061,353 $8,346,173 $1,831,518 $1,245,513
Waiver 1,255,415 (2,427,423) (732,723) (974,438)
--------- --------- ----------- ----------
Net Advisory Fee 4,805,938 $5,918,750 $1,098,795 $ 271,075
========= ========== ========== ===========
PENNSYLVANIA Six Months Year Ended Year Ended
Ended 8/31/96* 2/29/96 2/28/95
Advisory Fee $148,591 $312,440 $ 85,049
Waiver (59,186) (241,213) (85,049)
-------- --------- ---------
Net Advisory Fee $89,405 $ 71,227 0
======== ========= =========
TREASURY Year Ended Eight Months Year Ended
8/31/96 Ended 12/31/94
8/31/95**
Advisory Fee $8,857,503 $2,814,251 $2,549,955
Waiver (2,109,068) (1,258,611) (1,948,237)
---------- --------- ----------
Net Advisory Fee $6,748,435 $1,555,640 $ 601,718
========== ========== ==========
INSTITUTIONAL MONEY Period From 11/19/96
MARKET Through 2/28/97
Advisory Fee $337,302
Waiver (337,302)
---------
Net Advisory Fee 0
=========
INSTITUTIONAL TAX Period From 11/20/96
EXEMPT Through 2/28/97
Advisory Fee $ 77,430
Waiver (77,430)
---------
Net Advisory Fee 0
=========
INSTITUTIONAL TREASURY Period From 11/20/96
Through 2/28/97
Advisory Fee $199,136
Waiver (199,136)
---------
Net Advisory Fee 0
=========
--------------------
* The Fund changed its fiscal year from February 28 to August 31.
** The Fund changed its fiscal year from December 31 to August 31.
Expense Limitations
Evergreen Asset as Adviser to Money Market and Tax Exempt has, pursuant to each
Investment Advisory Agreement, agreed to reimburse each Fund to the extent that
any of these Funds' aggregate operating expenses (including the Adviser's fee,
but excluding interest, taxes, brokerage commissions, and extraordinary
expenses, and for such Funds' Class A, Class B, Class C and Class K shares, as
applicable, Rule 12b-1 distribution fees and shareholder servicing fees payable)
exceed 1.00% of their average net assets for any fiscal year. FUNB as Adviser to
Institutional Money Market, Institutional Tax Exempt and Institutional Treasury
has voluntarily agreed to reimburse each Fund to the extent that any of these
Funds' aggregate operating expenses (including the Adviser's fee, but excluding
interest, taxes, brokerage commissions, and extraordinary expenses, and for such
Funds Institutional Service shares Rule 12b-1 distribution fees and shareholder
servicing fees payable) exceed 0.20 of 1.00% of their average net assets for any
fiscal year for
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14
<PAGE>
Institutional shares and 0.45 of 1.00% for Institutional Service shares.
The Investment Advisory Agreements are terminable, without the payment of any
penalty, on sixty days' written notice, by a vote of the holders of a majority
of each Fund's outstanding shares, or by a vote of a majority of each Trust's
Trustees or by the respective Adviser. The Investment Advisory Agreements will
automatically terminate in the event of their assignment. Each Investment
Advisory Agreement provides in substance that the Adviser shall not be liable
for any action or failure to act in accordance with its duties thereunder in the
absence of willful misfeasance, bad faith or gross negligence on the part of the
Adviser or of reckless disregard of its obligations thereunder. The Investment
Advisory Agreements with respect to Money Market and Tax Exempt, dated June 30,
1994, were each last approved by the Trustees of each Trust on June 17, 1997,
and will continue from year to year provided that such continuance is approved
annually by a vote of a majority of the Trustees of each Trust including a
majority of those Trustees who are not parties thereto or "interested persons"
(as defined in the 1940 Act) of any such party, cast in person at a meeting duly
called for the purpose of voting on such approval or a majority of the
outstanding voting shares of each Fund. With respect to Treasury, the Investment
Advisory Agreement dated February 28, 1985 and amended from time to time
thereafter was last approved by the Trustees on June 17, 1997, and it will
continue from year to year with respect to each Fund provided that such
continuance is approved annually by a vote of a majority of the Trustees
including a majority of those Trustees who are not parties thereto or
"interested persons" of any such party cast in person at a meeting duly called
for the purpose of voting on such approval or by a vote of a majority of the
outstanding voting securities of the Fund. With respect to Pennsylvania, the
Investment Advisory Agreement dated January 1, 1996 was first approved by the
shareholders of the Fund on December 12, 1995 and will continue until January 1,
1998 and from year to year with respect to the Fund provided that such
continuance is approved annually by a vote of a majority of the Trustees
including a majority of those Trustees who are not parties thereto or
"interested persons" of any such party cast in person at a meeting duly called
for the purpose of voting on such approval or by a vote of a majority of the
outstanding voting securities of the Fund. With respect to Institutional Money
Market, Institutional Tax Exempt and Institutional Treasury, the Investment
Advisory Agreements dated September 30, 1996 were approved by each Fund's
initial shareholder on September 30, 1996, and will continue in effect until
September 30, 1998, and thereafter from year to year provided that their
continuance is approved annually by a vote of a majority of the Trustees of each
Trust including a majority of those Trustees who are not parties thereto or
"interested persons" of any such party cast in person at a meeting duly called
for the purpose of voting on such approval or by a vote of a majority of the
outstanding voting securities of each Fund.
Certain other clients of each Adviser may have investment objectives and
policies similar to those of the Funds. Each Adviser (including the sub-adviser)
may, from time to time, make recommendations which result in the purchase or
sale of a particular security by its other clients simultaneously with a Fund.
If transactions on behalf of more than one client during the same period
increase the demand for securities being purchased or the supply of securities
being sold, there may be an adverse effect on price or quantity. It is the
policy of each Adviser to allocate advisory recommendations and the placing of
orders in a manner which is deemed equitable by the Adviser to the accounts
involved, including the Funds. When two or more of the clients of the Adviser
(including one or more of the Funds) are purchasing or selling the same security
on a given day from the same broker-dealer, such transactions may be averaged as
to price.
Although the investment objectives of the Funds are not the same, and their
investment decisions are made independently of each other, they rely upon the
same resources for investment advice and recommendations. Therefore, on
occasion, when a particular security meets the different investment objectives
of the various Funds, they may simultaneously purchase or sell the same
security. This could have a detrimental effect on the price and quantity of the
security available to each Fund. If simultaneous transactions occur, the Adviser
attempts to allocate the securities, both as to price and quantity, in
accordance with a method deemed equitable to each Fund and consistent with their
different investment objectives. In some cases, simultaneous purchases or sales
could have a beneficial effect, in that the ability of one Fund to participate
in volume transactions may produce better executions for that Fund.
Each Fund has adopted procedures under Rule 17a-7 of the 1940 Act to permit
purchase and sales transactions to be effected between each Fund and the other
registered investment
21327
15
<PAGE>
companies for which either Evergreen Asset or FUNB acts as investment adviser or
between the Fund and any advisory clients of Evergreen Asset, FUNB or Lieber &
Company ("Lieber"). Each Fund may from time to time engage in such transactions
but only in accordance with these procedures and if they are equitable to each
participant and consistent with each participant's investment objectives.
Prior to July 1, 1995, Federated Administrative Services, a subsidiary of
Federated Investors, provided legal, accounting and other administrative
personnel and support services to each of the portfolios of Evergreen Investment
Trust. For the fiscal year ended August 31, 1996, the fiscal period ended August
31, 1995 and the fiscal year ended December 31, 1994, Treasury incurred
$1,255,724, $601,034 and $462,002, respectively, in administrative service
costs.
Prior to January 19, 1996, Furman Selz LLC acted as administrator for
Pennsylvania. For the fiscal period ended January 18, 1996 and the fiscal years
ended February 28, 1995 and 1994 Furman Selz LLC waived its entire
administrative fee.
Evergreen Keystone Investment Services, Inc. ("EKIS") serves as administrator to
the Funds and is entitled to receive a fee based on the average daily net assets
of each Fund at a rate based on the total assets of the mutual funds for which
any affiliate of FUNB serves as investment adviser, calculated daily and payable
monthly at the following annual rates: .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; and .010% on assets in excess of $30
billion. BISYS, an affiliate of EKD, distributor for the Evergreen Keystone
group of mutual funds, serves as sub-administrator to the Funds and is entitled
to receive a fee from EKIS calculated on the average daily net assets of the
Funds at a rate based on the total assets of the mutual funds for which any
affiliate of FUNB serves as investment adviser, calculated in accordance with
the following schedule: .0100% of the first $7 billion; .0075% on the next $3
billion; .0050% on the next $15 billion; .0040% on assets in excess of $25
billion. The total assets of the mutual funds for which FUNB affiliates serve as
investment adviser were approximately $30.5 billion as of June 30, 1997.
DISTRIBUTION PLANS
Reference is made to "Management of the Funds - Distribution Plans and
Agreements" in the Prospectus of each Fund for additional disclosure regarding
the Funds' distribution arrangements. Distribution fees are accrued daily and
paid monthly on the Class A shares of Money Market, Tax Exempt, Treasury,
Pennsylvania, Institutional Service shares of Institutional Treasury,
Institutional Money Market and Institutional Tax Exempt, and for Money Market,
its Class B shares, Class C shares and Class K shares are charged as class
expenses, as accrued. The distribution fees attributable to the Class B shares
and Class C shares are designed to permit an investor to purchase such shares
through broker-dealers without the assessment of a front-end sales charge, while
at the same time permitting the Distributor to compensate broker-dealers in
connection with the sale of such shares. In this regard the purpose and function
of the combined contingent deferred sales charge and distribution services fee
on the Class B shares and the Class C shares, are the same as those of the
front-end sales charge and distribution fee with respect to the Class A shares
in that in each case the sales charge and/or distribution fee provide for the
financing of the distribution of the Fund's shares.
Under the Rule 12b-1 Distribution Plans that have been adopted by each Fund with
respect to each of its Class A, Institutional Service, Class B, Class C and
Class K shares, as applicable, (to the extent that each Fund offers such
classes) (each a "Plan" and collectively, the "Plans"), the Treasurer of each
Fund reports the amounts expended by the Fund under the Plan and the purposes
for which such expenditures were made to the Trustees of each Trust for their
review on a quarterly basis. Also, each Plan provides that the selection and
nomination of the Independent Trustees are committed to the discretion of such
Independent Trustees then in office.
Each Adviser may from time to time and from its own funds or such other
resources as may be permitted by rules of the Securities and Exchange Commission
make payments for distribution services to the Distributor; the latter may in
turn pay part or all of such compensation to brokers or other persons for their
distribution assistance.
Each Plan continues in effect from year to year only if approved at least
annually by each Trust's Board of Trustees or by a vote of a majority of each
Fund's outstanding shares (as
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16
<PAGE>
defined in the 1940 Act). In either case, by the vote of a majority of each
Trust's Independent Trustees who have no direct or indirect financial interest
in the operation of the Plan or any agreement related. Each Distribution
Agreement will continue in effect from year to year, if the Board of Trustees
approves such continuance annually in the same manner as the Advisory Agreement.
On October 1, 1996 Institutional Money Market, Institutional Tax Exempt and
Institutional Treasury commenced the offering of each Fund's Institutional
Service shares. Each Plan with respect to such Funds became effective on August
1, 1996 and was initially approved by the sole shareholder of each Fund on
September 30, 1996 and by the unanimous vote of the Trustees of each Trust,
including the disinterested Trustees voting separately, at a meeting called for
that purpose and held on August 1, 1996. The Distribution Agreements between
each Fund and the Distributor, pursuant to which distribution fees are paid
under the Plans by each Fund with respect to its Institutional Service shares
were also approved at the August 1, 1996 meeting by the unanimous vote of the
disinterested Trustees voting separately. Each Plan and Distribution Agreement
will continue in effect for successive twelve-month periods provided, however,
that such continuance is specifically approved at least annually by the Trustees
of each Trust or by vote of the holders of a majority of the outstanding voting
securities (as defined in the 1940 Act) of that Class and, in either case, by a
majority of the Trustees of the Trust who are not parties to the Distribution
Agreement or interested persons, as defined in the 1940 Act, of any such party
(other than as Trustees of the Trust) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related
thereto.
The Plans permit the payment of fees to brokers and others for distribution and
shareholder-related administrative services and to broker-dealers, depository
institutions, financial intermediaries and administrators for administrative
services as to each Fund's Class A, Institutional Service, Class B, Class C and
Class K shares, as applicable. The Plans are designed to (i) stimulate brokers
to provide distribution and administrative support services to the Funds and
holders of each Fund's Class A, Institutional Service, Class B, Class C and
Class K shares as applicable and (ii) stimulate administrators to render
administrative support services to the Funds and holders of such shares. The
administrative services are provided by a representative who has knowledge of
the shareholder's particular circumstances and goals, and include, but are not
limited to providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding each
Fund's Class A, Institutional Service, Class B, Class C and Class K shares as
applicable; assisting clients in changing dividend options, account
designations, and addresses; and providing such other services as the Fund
reasonably requests for its Class A, Institutional Service, Class B, Class C and
Class K shares, as applicable.
In the event that a Plan or Distribution Agreement is terminated or not
continued with respect to one or more Classes of shares of a Fund, (i) no
distribution fees (other than current amounts accrued but not yet paid) would be
owed by the Fund to the Distributor with respect to that Class or Classes of
shares, and (ii) the Fund would not be obligated to pay the Distributor for any
amounts expended under the Distribution Agreement not previously recovered by
the Distributor from distribution services fees in respect of such Class or
Classes of shares through deferred sales charges. However, the Distributor will
ask the Trust's Independent Trustees to take whatever action they deem
appropriate under the circumstances with respect to payment of Advances.
Any change in the Distribution Plan that would materially increase the
distribution expenses of the Fund provided for in the Distribution Plan requires
shareholder approval. Otherwise, the Distribution Plan may be amended by votes
of each Trust's (1) Board of Trustees and (2) Independent Trustees cast in
person at a meeting called for the purpose of voting on such amendment.
Any Plan or Distribution Agreement may be terminated (a) by a Fund without
penalty at any time by a majority vote of the holders of the outstanding voting
securities of the Fund, voting separately by Class or by a majority vote of the
Independent Trustees, or (b) by the Distributor. To terminate any Distribution
Agreement, any party must give the other parties 60 days' written notice; to
terminate a Plan only, the Fund need give no notice to the Distributor. Any
Distribution Agreement will terminate automatically in
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the event of its assignment.
Fees Paid Pursuant to Distribution Plans. Treasury, Money Market, Tax Exempt and
Pennsylvania incurred the following distribution service fees:
Treasury. For the fiscal year ended August 31, 1996, $6,381,827 on behalf of
Class A shares.
Money Market. For the six months ended February 28, 1997, $2,698,374 on behalf
of Class A shares and $39,539 on behalf of Class B shares.
Tax Exempt. For the fiscal year ended August 31, 1996, $1,898,665 on behalf of
Class A shares.
Pennsylvania. For the six months ended August 31, 1996 (commencement of
operations), $24,476 on behalf of Class A shares.
For the period from November 19, 1996 through February 28, 1997, Institutional
Money Market, Institutional Tax Exempt and Institutional Treasury paid EKD, the
Distributor, fees of $297,918, $11,834 and $165,813, respectively pursuant to
the Distribution Plans.
ALLOCATION OF BROKERAGE
Decisions regarding each Fund's portfolio are made by its Adviser, subject to
the supervision and control of the Trustees. Orders for the purchase and sale of
securities and other investments are placed by employees of the Adviser, all of
whom, in the case of Evergreen Asset, are associated with Lieber. In general,
the same individuals perform the same functions for the other funds managed by
the Adviser. A Fund will not effect any brokerage transactions with any broker
or dealer affiliated directly or indirectly with the Adviser unless such
transactions are fair and reasonable, under the circumstances, to the Fund's
shareholders. Circumstances that may indicate that such transactions are fair or
reasonable include the frequency of such transactions, the selection process and
the commissions payable in connection with such transactions.
It is anticipated that most purchase and sale transactions involving fixed
income securities will be with the issuer or an underwriter or with major
dealers in such securities acting as principals. Such transactions are normally
on a net basis and generally do not involve payment of brokerage commissions.
However, the cost of securities purchased from an underwriter usually includes a
commission paid by the issuer to the underwriter. Purchases or sales from
dealers will normally reflect the spread between bid and ask prices.
In selecting firms to effect securities transactions, the primary consideration
of each Fund shall be prompt execution at the most favorable price. A Fund will
also consider such factors as the price of the securities and the size and
difficulty of execution of the order. If these objectives may be met with more
than one firm, the Fund will also consider the availability of statistical and
investment data and economic facts and opinions helpful to the Fund. To the
extent that receipt of these services for which the Adviser or its affiliates
might otherwise have paid, it would tend to reduce their expenses.
Under Section 11(a) of the Securities Exchange Act of 1934, as amended, and the
rules adopted thereunder by the Securities and Exchange Commission, Lieber may
be compensated for effecting transactions in portfolio securities for a Fund on
a national securities exchange provided the conditions of the rules are met.
Each Fund advised by Evergreen Asset has entered into an agreement with Lieber
authorizing Lieber to retain compensation for brokerage services. In accordance
with such agreement, it is contemplated that Lieber, a member of the New York
and American Stock Exchanges, will, to the extent practicable, provide brokerage
services to the Fund with respect to substantially all securities transactions
effected on the New York and American Stock Exchanges. In such transactions, a
Fund will seek the best execution at the most favorable price while paying a
commission rate no higher than that offered to other clients of Lieber or that
which can be reasonably expected to be offered by an unaffiliated broker-dealer
having comparable execution capability in a similar transaction. However, no
Fund will engage in transactions in which Lieber would be a principal. While no
Fund advised by Evergreen Asset contemplates any ongoing arrangements with other
brokerage firms, brokerage business may be given from time to time to other
firms. In addition, the Trustees have adopted procedures pursuant to Rule 17e-1
under the 1940 Act to ensure that all brokerage transactions with Lieber, as an
affiliated broker-dealer, are fair and reasonable.
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Any profits from brokerage commissions accruing to Lieber as a result of
portfolio transactions for the Fund will accrue to FUNB and to its ultimate
parent, First Union. The Investment Advisory Agreements do not provide for a
reduction of the Adviser's fee with respect to any Fund by the amount of any
profits earned by Lieber from brokerage commissions generated by portfolio
transactions of the Fund.
ADDITIONAL TAX INFORMATION
(See also "Taxes" in the Prospectus)
Each Fund has qualified and intends to continue to qualify, for and elect the
tax treatment applicable to regulated investment companies ("RIC") under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
(Such qualification does not involve supervision of management or investment
practices or policies by the Internal Revenue Service.) In order to qualify as a
regulated investment company, a Fund must, among other things, (a) derive at
least 90% of its gross income from dividends, interest, payments with respect to
proceeds from securities loans, gains from the sale or other disposition of
securities or foreign currencies and other income (including gains from options,
futures or forward foreign contracts) derived with respect to its business of
investing in such securities; (b) derive less than 30% of its gross income from
the sale or other disposition of securities, options, futures or forward
contracts (other than those on foreign currencies), or foreign currencies (or
options, futures or forward contracts thereon) that are not directly related to
the RIC's principal business of investing in securities (or options and futures
with respect thereto) held for less than three months; and (c) diversify its
holdings so that, at the end of each quarter of its taxable year, (i) at least
50% of the market value of the Fund's total assets is represented by cash, U.S.
government securities and other securities limited in respect of any one issuer,
to an amount not greater than 5% of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than U.S. government securities and securities of other regulated investment
companies). By so qualifying, a Fund is not subject to Federal income tax if it
timely distributes its investment company taxable income and any net realized
capital gains. A 4% nondeductible excise tax will be imposed on a Fund to the
extent it does not meet certain distribution requirements by the end of each
calendar year. Each Fund anticipates meeting such distribution requirements.
Dividends paid by a Fund from investment company taxable income generally will
be taxed to the shareholders as ordinary income. Investment company taxable
income includes net investment income and net realized short-term gains (if
any). Any dividends received by a Fund from domestic corporations will
constitute a portion of the Fund's gross investment income.
Distributions of the excess of net long-term capital gain over net short-term
capital loss are taxable to shareholders (who are not exempt from tax) as
long-term capital gain, regardless of the length of time the shares of a Fund
have been held by such shareholders. Short-term capital gains distributions are
taxable to shareholders who are not exempt from tax as ordinary income. Such
distributions are not eligible for the dividends-received deduction. Any loss
recognized upon the sale of shares of a Fund held by a shareholder for six
months or less will be treated as a long-term capital loss to the extent that
the shareholder received a long-term capital gain distribution with respect to
such shares.
Distributions of investment company taxable income and any net short-term
capital gains will be taxable as ordinary income as described above to
shareholders (who are not exempt from tax), whether made in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share of a Fund on the reinvestment date.
Distributions by each Fund result in a reduction in the net asset value of the
Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution nevertheless would be taxable as
ordinary income or capital gain as described above to shareholders (who are not
exempt from tax), even though, from an investment standpoint, it may constitute
a return of capital. In particular, investors should be careful to consider the
tax implications of buying shares just prior to a distribution. The price of
shares purchased at that time includes the amount of the forthcoming
distribution. Those purchasing just prior to a distribution will then
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receive what is in effect a return of capital upon the distribution which will
nevertheless be taxable to shareholders subject to taxes.
Upon a sale or exchange of its shares, a shareholder will realize a taxable gain
or loss depending on its basis in the shares. Such gains or losses will be
treated as a capital gain or loss if the shares are capital assets in the
investor's hands and will be a long-term capital gain or loss if the shares have
been held for more than one year. Generally, any loss realized on a sale or
exchange will be disallowed to the extent shares disposed of are replaced within
a period of sixty-one days beginning thirty days before and ending thirty days
after the shares are disposed of. Any loss realized by a shareholder on the sale
of shares of the Fund held by the shareholder for six months or less will be
disallowed to the extent of any exempt interest dividends received by the
shareholder with respect to such shares, and will be treated for tax purposes as
a long-term capital loss to the extent of any distributions of net capital gains
received by the shareholder with respect to such shares.
All distributions, whether received in shares or cash, must be reported by each
shareholder on his or her Federal income tax return. Each shareholder should
consult his or her own tax adviser to determine the state and local tax
implications of Fund distributions.
Shareholders who fail to furnish their taxpayer identification numbers to a Fund
and to certify as to its correctness and certain other shareholders may be
subject to a 31% Federal income tax backup withholding requirement on dividends,
distributions of capital gains and redemption proceeds paid to them by the Fund.
If the withholding provisions are applicable, any such dividends or capital gain
distributions to these shareholders, whether taken in cash or reinvested in
additional shares, and any redemption proceeds will be reduced by the amounts
required to be withheld. Investors may wish to consult their own tax advisers
about the applicability of the backup withholding provisions.
The foregoing discussion relates solely to U.S. federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates). It does not reflect the special
tax consequences to certain taxpayers (e.g., banks, insurance companies, tax
exempt organizations and foreign persons). Shareholders are encouraged to
consult their own tax advisers regarding specific questions relating to Federal,
state and local tax consequences of investing in shares of a Fund. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and foreign tax consequences of ownership of shares of a
Fund, including the possibility that such a shareholder may be subject to a U.S.
withholding tax at a rate of 31% (or at a lower rate under a tax treaty) on
amounts treated as income from U.S. sources under the Code.
Special Tax Considerations for Tax Exempt, Pennsylvania and Institutional Tax
Exempt
To the extent that a Fund distributes exempt interest dividends to a
shareholder, interest on indebtedness incurred or continued by such shareholder
to purchase or carry shares of the Fund is not deductible. Furthermore, entities
or persons who are "substantial users" (or related persons) of facilities
financed by "private activity" bonds (some of which were formerly referred to as
"industrial development" bonds) should consult their tax advisers before
purchasing shares of the Fund. "Substantial user" is defined generally as
including a "non-exempt person" who regularly uses in its trade or business a
part of a facility financed from the proceeds of industrial development bonds.
The percentage of the total dividends paid by a Fund with respect to any taxable
year that qualifies as exempt interest dividends will be the same for all
shareholders of the Fund receiving dividends with respect to such year. If a
shareholder receives an exempt interest dividend with respect to any share and
such share has been held for six months or less, any loss on the sale or
exchange of such share will be disallowed to the extent of the exempt interest
dividend amount.
NET ASSET VALUE
The following information supplements that set forth in each Fund's Prospectus
under the subheading "How to Buy Shares - How the Funds Value Their Shares" in
the Section entitled "Purchase and Redemption of Shares."
The public offering price of shares of a Fund is its net asset value. On each
Fund business day on which a purchase or redemption order is received by a Fund
and trading in
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the types of securities in which a Fund invests might materially affect the
value of Fund shares, the per share net asset value of each such Fund is
computed in accordance with the Declaration of Trust and By-Laws governing each
Fund twice daily, at 12 noon Eastern time and as of the next close of regular
trading on the New York Stock Exchange (the "Exchange") (currently 4:00 p.m.
Eastern time) by dividing the value of the Fund's total assets, less its
liabilities, by the total number of its shares then outstanding. A Fund business
day is any weekday, exclusive of national holidays on which the Exchange is
closed and Good Friday. Each Fund's securities are valued at amortized cost.
Under this method of valuation, a security is initially valued at its
acquisition cost and, thereafter, a constant straight line amortization of any
discount or premium is assumed each day regardless of the impact of fluctuating
interest rates on the market value of the security. If accurate quotations are
not available, securities will be valued at fair value determined in good faith
by the Board of Trustees.
PURCHASE OF SHARES
The following information supplements that set forth in each Fund's Prospectus
under the heading "Purchase and Redemption of Shares - How To Buy Shares."
General
Shares of each Fund will be offered on a continuous basis at a price equal to
their net asset value plus a front-end or contingent deferred sales charges or
with a contingent deferred sales charge (the "deferred sales charge
alternative") as described below. Class Y and Institutional shares which, as
described below, are not offered to the general public or which, in the case of
Institutional shares, are only available to investors having certain
relationships with the Adviser of its affiliates, are offered without any
front-end or contingent deferred sales charges. Shares of each Fund are offered
on a continuous basis through (i) investment dealers that are members of the
National Association of Securities Dealers, Inc. and have entered into selected
dealer agreements with the Distributor ("selected dealers"), (ii) depository
institutions and other financial intermediaries or their affiliates, that have
entered into selected agent agreements with the Distributor ("selected agents"),
or (iii) the Distributor. For Money Market, Tax Exempt, Pennsylvania and
Treasury, the minimum for initial investments is $1,000; there is no minimum for
subsequent investments. For Institutional Money Market, Institutional Tax Exempt
and Institutional Treasury, the minimum amount for initial investments is
$1,000,000; there is no minimum for subsequent investments. The subscriber may
use the Share Purchase Application available from the Distributor for his or her
initial investment. Sales personnel of selected dealers and agents distributing
a Fund's shares may receive differing compensation for selling Class A,
Institutional Service, Class B, Class C or Class K shares.
Investors may purchase shares of a Fund in the United States either through
selected dealers or agents or directly through the Distributor. A Fund reserves
the right to suspend the sale of its shares to the public in response to
conditions in the securities markets or for other reasons.
Each Fund will accept unconditional orders for its shares to be executed at the
public offering price equal to the net asset value next determined, as described
below. Orders received by the Distributor prior to the close of regular trading
on the Exchange on each day the Exchange is open for trading are priced at the
net asset value computed as of the close of regular trading on the Exchange on
that day. In the case of orders for purchase of shares placed through selected
dealers or agents, the applicable public offering price will be the net asset
value as so determined, but only if the selected dealer or agent receives the
order prior to the close of regular trading on the Exchange and transmits it to
the Distributor prior to its close of business that same day (normally 5:00 p.m.
Eastern time). The selected dealer or agent is responsible for transmitting such
orders by 5:00 p.m. If the selected dealer or agent fails to do so, the
investor's right to that day's closing price must be settled between the
investor and the selected dealer or agent. If the selected dealer or agent
receives the order after the close of regular trading on the Exchange, the price
will be based on the net asset value determined as of the close of regular
trading on the Exchange on the next day it is open for trading.
Following the initial purchase of shares of a Fund, a shareholder may place
orders to purchase additional shares by telephone if the shareholder has
completed the appropriate portion of the Application. Payment for shares
purchased by telephone can be made only by Electronic Funds Transfer from a bank
account maintained by the shareholder at a
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bank that is a member of the National Automated Clearing House Association
("ACH"). If a shareholder's telephone purchase request is received before 3:00
p.m. New York time on a Fund business day, the order to purchase shares is
automatically placed the same Fund business day for non-money market funds, and
two days following the day the order is received for money market funds, and the
applicable public offering price will be the public offering price determined as
of the close of business on such business day. Full and fractional shares are
credited to a subscriber's account in the amount of his or her subscription. As
a convenience to the subscriber, and to avoid unnecessary expense to a Fund,
stock certificates are not issued for any class of shares of any Fund, although
such shares remain in the shareholder's account on the records of a Fund. This
facilitates later redemption and relieves the shareholder of the responsibility
for and inconvenience of lost or stolen certificates.
Alternative Purchase Arrangements
The Funds issue the following classes of shares:
Pennsylvania, Money Market, Tax Exempt, and Treasury: Class A shares;
Money Market: Class B and Class C shares;
Money Market: Class K shares;
Pennsylvania, Money Market, Tax Exempt and Treasury: Class Y shares, which are
offered only to (a) persons who at or prior to December 30, 1994, owned shares
in a mutual fund advised by Evergreen Asset, (b) certain investment advisory
clients of the Advisers and its affiliates, and (c) institutional investors;
Institutional Money Market, Institutional Tax Exempt and Institutional Treasury:
Institutional Service shares; and Institutional Money Market, Institutional Tax
Exempt and Institutional Treasury: Institutional shares.
The classes of shares each represent an interest in the same portfolio of
investments of the Fund, have the same rights and are identical in all respects,
except that (1) only Class A, Class B, Class C, Class K and Institutional
Service shares are subject to a Rule 12b-1 distribution fee, (II) Class B, Class
C and, under certain conditions, class K shares bear the expense of the deferred
sales charge, (III) Class B and Class C shares bear the expense of a higher Rule
12b-1 distribution services fee than Class A shares and higher transfer agency
costs, (IV) with the exception of Class Y shares, each Class of each Fund has
exclusive voting rights with respect to provisions of the Rule 12b-1 Plan
pursuant to which its distribution services fee is paid which relates to a
specific Class and other matters for which separate Class voting is appropriate
under applicable law, provided that, if the Fund submits to a simultaneous vote
of Class A, Class B, Class C and Class K shareholders an amendment to the Rule
12b-1 Plan that would materially increase the amount to be paid thereunder with
respect to any class of shares, the Class A shareholders, the Class B
shareholders, the Class C shareholders and the Class K shareholdes will vote
separately by Class, and (VI) only the Class B shares are subject to a
conversion feature. Each Class has different exchange privileges and certain
different shareholder service options available.
The alternative purchase arrangements permit an investor to choose the method of
purchasing shares that is most beneficial. Class A and Class K shares are
subject to a lower distribution services fee and, accordingly, pay
correspondingly higher dividends per share than Class B and Class C shares.
The Trustees have determined that currently no conflict of interest exists
between or among the Class A, Class B, Class C, Class K and Class Y shares of
Money Market, Tax Exempt, Pennsylvania and Treasury, as applicable, and the
Institutional Service and Institutional shares of Institutional Money Market,
Institutional Tax Exempt and Institutional Treasury. On an ongoing basis, the
Trustees, pursuant to their fiduciary duties under the 1940 Act and state laws,
will seek to ensure that no such conflict arises.
CLASS A SHARES
Class A shares of the Funds can be purchased at net asset value without an
initial sales charge. Certain broker-dealers or other financial institutions may
impose a fee in connection with purchases at net asset value.
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CLASS B SHARES--DEFERRED SALES CHARGE ALTERNATIVE
Investors choosing the deferred sales charge alternative purchase Class B shares
at the public offering price equal to the net asset value per share of the Class
B shares on the date of purchase without the imposition of a sales charge at the
time of purchase. The Class B shares are sold without a front-end sales charge
so that the full amount of the investor's purchase payment is invested in the
Fund initially.
Proceeds from the contingent deferred sales charge are paid to the Distributor
and are used by the Distributor to defray the expenses of the Distributor
related to providing distribution-related services to the Fund in connection
with the sale of the Class B shares, such as the payment of compensation to
selected dealers and agents for selling Class B shares.
The combination of the contingent deferred sales charge and the distribution
services fee enables the Fund to sell the Class B shares without a sales charge
being deducted at the time of purchase. The higher distribution services fee
incurred by Class B shares will cause such shares to have a higher expense ratio
and to pay lower dividends than those related to Class A shares.
Contingent Deferred Sales Charge. Class B shares which are redeemed within six
years after the month of purchase will be subject to a contingent deferred sales
charge at the rates set forth in the Prospectus charged as a percentage of the
dollar amount subject thereto. The charge will be assessed on an amount equal to
the lesser of the cost of the shares being redeemed or their net asset value at
the time of redemption. Accordingly, no sales charge will be imposed on
increases in net asset value above the initial purchase price. In addition, no
contingent deferred sales charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions. The amount of the
contingent deferred sales charge, if any, will vary depending on the number of
years from the time of payment for the purchase of Class B shares until the time
of redemption of such shares.
In determining the contingent deferred sales charge applicable to a redemption,
it will be assumed, that the redemption is first of any Class A shares in the
shareholder's Fund account, second of Class B shares held for over six years or
Class B shares acquired pursuant to reinvestment of dividends or distributions
and third of Class B shares held longest during the six-year period.
To illustrate, assume that an investor purchased 1,000 Class B shares at $1 per
share (at a cost of $1,000) and, during such time, the investor has acquired 100
additional Class B shares upon dividend reinvestment. If at such time the
investor makes his or her first redemption of 500 Class B shares, 100 Class B
shares will not be subject to charge because of dividend reinvestment.
Therefore, of the $500 of the shares redeemed $400 of the redemption proceeds
(400 shares x $1 original purchase price) will be charged at a rate of 4.0% (the
applicable rate in the second year after purchase for a contingent deferred
sales charge of $16).
The contingent deferred sales charge is waived on redemptions of shares (i)
following the death or disability, as defined in the Code, of a shareholder, or
(ii) to the extent that the redemption represents a minimum required
distribution from an individual retirement account or other retirement plan to a
shareholder who has attained the age of 70-1/2.
Conversion Feature. At the end of the period ending seven years after the end of
the calendar month in which the shareholder's purchase order was accepted, Class
B shares will automatically convert to Class A shares and will no longer be
subject to a higher distribution services fee imposed on Class B shares. Such
conversion will be on the basis of the relative net asset values of the two
classes, without the imposition of any sales load, fee or other charge. The
purpose of the conversion feature is to reduce the distribution services fee
paid by holders of Class B shares that have been outstanding long enough for the
Distributor to have been compensated for the expenses associated with the sale
of such shares.
For purposes of conversion to Class A, Class B shares purchased through the
reinvestment of dividends and distributions paid in respect of 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, an equal pro-rata portion of the Class B
shares in the sub-account will also convert to Class A.
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The conversion of Class B shares to Class A shares is subject to the continuing
availability of an opinion of counsel to the effect that (i) the assessment of
the higher distribution services fee and transfer agency costs with respect to
Class B shares does not result in the dividends or distributions payable with
respect to other Classes of a Fund's shares being deemed "preferential
dividends" under the Code, and (ii) the conversion of Class B shares to Class A
shares does not constitute a taxable event under Federal income tax law. The
conversion of Class B shares to Class A shares may be suspended if such an
opinion is no longer available at the time such conversion is to occur. In that
event, no further conversions of Class B shares would occur, and shares might
continue to be subject to the higher distribution services fee for an indefinite
period which may extend beyond the period ending seven years after the end of
the calendar month in which the shareholder's purchase order was accepted.
CLASS C SHARES--LEVEL-LOAD ALTERNATIVE
Investors choosing the level load sales charge alternative purchase Class C
shares at the public offering price equal to the net asset value per share of
the Class C shares on the date of purchase without the imposition of a front-end
sales charge. However, you will pay a 1.0% contingent deferred sales charge if
you redeem shares during the first year after the month of purchase. No charge
is imposed in connection with redemptions made more than one year from the month
of purchase. Class C shares are sold without a front-end sales charge so that
the Fund will receive the full amount of the investor's purchase payment and
after the first year without a contingent deferred sales charge so that the
investor will receive as proceeds upon redemption the entire net asset value of
his or her Class C shares. Class C shares do not convert to any other Class
shares of the Fund. Class C shares incur higher distribution services fees than
Class A shares, and will thus have a higher expense ratio and pay
correspondingly lower dividends than Class A shares.
CLASS K SHARES
Class K shares of Money Market can be purchased at net asset value without an
initial sales charge or contingent deferred sales charge.
GENERAL INFORMATION ABOUT THE FUNDS
(See also "Other Information - General Information" in each Fund's Prospectus)
Capitalization and Organization
Evergreen Money Market Fund, Evergreen Institutional Money Market Fund and
Evergreen Institutional Treasury Money Market Fund are each separate series of
Evergreen Money Market Trust, a Massachusetts business trust. Evergreen Tax
Exempt Money Market Fund and Evergreen Institutional Tax Exempt Money Market
Fund are each separate series of The Evergreen Municipal Trust, a Massachusetts
business trust. The Evergreen Treasury Money Market Fund (which prior to July 7,
1995 was known as the First Union Treasury Money Market Portfolio) is a separate
series of Evergreen Investment Trust, a Massachusetts business trust. On July 7,
1995, First Union Funds changed its name to Evergreen Investment Trust. The
Evergreen Pennsylvania Tax Free Money Market Fund is a separate series of
Evergreen Tax Free Trust. Evergreen Tax Free Trust (formerly known as FFB Funds
Trust) is a Massachusetts business trust which was organized on December 4,
1985. Each Trust is governed by a board of trustees. Unless otherwise stated,
references to the "Board of Trustees" or "Trustees" in this Statement of
Additional Information refer to the Trustees of all the Trusts.
Each Fund, other than Pennsylvania, Institutional Money Market, Institutional
Tax Exempt and Institutional Treasury may issue an unlimited number of shares of
beneficial interest with a $0.0001 par value. Pennsylvania, may issue an
unlimited number of shares of beneficial interest with a $.001 par value. All
shares of these Funds have equal rights and privileges. Each share is entitled
to one vote, to participate equally in dividends and distributions declared by
the Funds and on liquidation to their proportionate share of the assets
remaining after satisfaction of outstanding liabilities. Shares of these Funds
are fully paid, nonassessable and fully transferable when issued and have no
pre-emptive, conversion or exchange rights. Fractional shares have
proportionally the same rights, including voting rights, as are provided for a
full share.
Institutional Money Market, Institutional Tax Exempt and Institutional Treasury
may issue an unlimited number of shares of beneficial interest with $0.001 par
value. Each of these Funds
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has two classes of shares, Institutional Service Shares and Institutional Shares
with identical voting, dividend, liquidation and other rights, except that the
Institutional Service Shares bear distribution expenses and have exclusive
voting rights with respect to their Distribution Plans.
Under each Trust's Declaration of Trust, each Trustee will continue in office
until the termination of the Fund or his or her earlier death, incapacity,
resignation or removal. Shareholders can remove a Trustee upon a vote of
two-thirds of the outstanding shares of beneficial interest of the Trust.
Vacancies will be filled by a majority of the remaining Trustees, subject to the
1940 Act. As a result, normally no annual or regular meetings of shareholders
will be held, unless otherwise required by the Declaration of Trust of each
Trust or the 1940 Act.
Shares have noncumulative voting rights, which means that the holders of more
than 50% of the shares voting for the election of Trustees can elect 100% of the
Trustees if they choose to do so and in such event the holders of the remaining
shares so voting will not be able to elect any Trustees.
The Trustees of each Trust are authorized to reclassify and issue any unissued
shares to any number of additional series without shareholder approval.
Accordingly, in the future, for reasons such as the desire to establish one or
more additional portfolios of a Trust with different investment objectives,
policies or restrictions, additional series of shares may be created by one or
more Funds. Any issuance of shares of another series or class would be governed
by the 1940 Act and the law of the Commonwealth of Massachusetts. If shares of
another series of a Trust were issued in connection with the creation of
additional investment portfolios, each share of the newly created portfolio
would normally be entitled to one vote for all purposes. Generally, shares of
all portfolios would vote as a single series on matters, such as the election of
Trustees, that affected all portfolios in substantially the same manner. As to
matters affecting each portfolio differently, such as approval of the Investment
Advisory Agreement and changes in investment policy, shares of each portfolio
would vote separately.
In addition any Fund may, in the future, create additional classes of shares
which represent an interest in the same investment portfolio. Except for the
different distribution related and other specific costs borne by such additional
classes, they will have the same voting and other rights described for the
existing classes of each Fund.
Procedures for calling a shareholders meeting for the removal of the Trustees of
each Trust, similar to those set forth in Section 16(c) of the 1940 Act, will be
available to shareholders of each Fund. The rights of the holders of shares of a
series of a Fund may not be modified except by the vote of a majority of the
outstanding shares of such series.
Distributor
Evergreen Keystone Distributor, Inc. (the "Distributor"), 125 W. 55th Street,
New York, New York 10019, serves as each Fund's principal underwriter, and as
such may solicit orders from the public to purchase shares of any Fund. The
Distributor is not obligated to sell any specific amount of shares and will
purchase shares for resale only against orders for shares. Under the agreement
between each Fund and the Distributor, each Fund has agreed to indemnify the
Distributor, in the absence of its willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations thereunder, against certain
civil liabilities, including liabilities under the Securities Act of 1933, as
amended.
Counsel
Sullivan & Worcester LLP, Washington, D.C., serves as counsel to the Funds.
Independent Auditors
Price Waterhouse LLP has been selected to be the independent auditors of Money
Market, Tax Exempt, Institutional Money Market, Institutional Treasury and
Institutional Tax Exempt.
KPMG Peat Marwick LLP has been selected to be the independent auditors of
Treasury and Pennsylvania.
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PERFORMANCE INFORMATION
YIELD CALCULATIONS
Each Fund may quote a "Current Yield" or "Effective Yield" from time to time.
The Current Yield is an annualized yield based on the actual total return for a
seven-day period. The Effective Yield is an annualized yield based on a
compounding of the Current Yield. These yields are each computed by first
determining the "Net Change in Account Value" for a hypothetical account having
a share balance of one share at the beginning of a seven-day period ("Beginning
Account Value"), excluding capital changes. The Net Change in Account Value will
generally equal the total dividends declared with respect to the account.
The yields are then computed as follows:
Current Yield = Beginning Account Value x 365/7
Effective Yield = (1 + Total Dividend for 7 days) 365/7-1 Tax Equivalent Yield =
Effective Yield
- ----------------------
1 - Fed Tax rate + [state Tax Rate - (state Tax Rate x Fed Tax Rate]
Yield fluctuations may reflect changes in a Fund's net investment income, and
portfolio changes resulting from net purchases or net redemptions of the Fund's
shares may affect the yield. Accordingly, a Fund's yield may vary from day to
day, and the yield stated for a particular past period is not necessarily
representative of its future yield. Since the Funds use the amortized cost
method of net asset value computation, it does not anticipate any change in
yield resulting from any unrealized gains or losses or unrealized appreciation
or depreciation not reflected in the yield computation, or change in net asset
value during the period used for computing yield. If any of these conditions
should occur, yield quotations would be suspended. A Fund's yield is not
guaranteed, and the principal is not insured.
Yield information is useful in reviewing a Fund's performance, but because
yields fluctuate, such information cannot necessarily be used to compare an
investment in a Fund's shares with bank deposits, savings accounts and similar
investment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Shareholders should remember that yield is a
function of the kind and quality of the instruments in the Funds' investment
portfolios, portfolio maturity, operating expenses and market conditions.
It should be recognized that in periods of declining interest rates the yields
will tend to be somewhat higher than prevailing market rates, and in periods of
rising interest rates the yields will tend to be somewhat lower. Also, when
interest rates are falling, the inflow of net new money to a Fund from the
continuous sale of its shares will likely be invested in instruments producing
lower yields than the balance of the Fund's investments, thereby reducing the
current yield of the Fund. In periods of rising interest rates, the opposite can
be expected to occur.
The current yield and effective yield of each Fund (and for Tax Exempt,
Institutional Tax Exempt and Pennsylvania, the tax equivalent yield) for the
seven-day period ended February 28, 1997 for each Class of shares offered by the
Funds is set forth in the table below. The table assumes a Federal tax rate of
36% for Tax Exempt and Institutional Tax Exempt, and a combined Federal and
state tax rate for Pennsylvania of 37.8%.
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Current Effective Tax Equivalent
Yield Yield Yield
Money Market
Class A 4.86% 4.98% N/A
Class B 4.16% 4.25% N/A
Class C N/A N/A N/A
Class Y 5.16% 5.28% N/A
Tax Exempt
Class A 2.97% 3.01% 4.70%
Class Y 3.27% 3.32% 5.19%
Treasury
Class A 4.61% 4.72% N/A
Class Y 4.91% 5.04% N/A
Pennsylvania
Class A 2.89% 2.93% 4.71%
Class Y 3.03% 3.08% 4.95%
Institutional Tax Exempt
Institutional 3.24% 3.34% 5.22%
Institutional Service 2.99% 3.08% 4.81%
Institutional Money Market
Institutional 5.36% 5.57% N/A
Institutional Service 5.10% 5.30% N/A
Institutional Treasury
Institutional 5.35% 5.38% N/A
Institutional Service 5.10% 5.12% N/A
GENERAL
From time to time, a Fund may quote its performance in advertising and other
types of literature as compared to the performance of the Bank Rate Monitor
National Index which publishes weekly average rates of 50 leading bank and
thrift institution money market deposit accounts. A Fund's performance may also
be compared to those of other mutual funds having similar objectives. This
comparative performance would be expressed as a ranking prepared by Lipper
Analytical Services, Inc., Donoghue's Money Fund Report or similar independent
services monitoring mutual fund performance. A Fund's performance will be
calculated by assuming, to the extent applicable, reinvestment of all capital
gains distributions and income dividends paid. Any such comparisons may be
useful to investors who wish to compare a Fund's past performance with that of
its competitors. Of course, past performance cannot be a guarantee of future
results.
Additional Information
Any shareholder inquiries may be directed to the shareholder's broker or to each
Adviser at the address or telephone number shown on the front cover of this
Statement of Additional Information. This Statement of Additional Information
does not contain all the information set forth in the Registration Statement
filed by the Trusts with the Securities and Exchange Commission under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the Securities and Exchange Commission or may be
examined, without charge, at the offices of the Securities and Exchange
Commission in Washington, D.C.
FINANCIAL STATEMENTS
The financial statements of Money Market, Tax Exempt, Treasury, Pennsylvania,
Institutional Money Market, Institutional Tax Exempt and Institutional Treasury
appearing in their most current fiscal year Annual Report to shareholders and
the report thereon of the independent auditors appearing therein, namely Price
Waterhouse LLP (in the case of Money Market, Tax Exempt, Institutional Money
Market, Institutional Tax Exempt and Institutional Treasury) or KPMG Peat
Marwick LLP (in the case of Pennsylvania and Treasury) are incorporated by
reference in this Statement of Additional Information. The Semi-Annual Report of
Money
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Market is also incorporated herein by reference.
You may obtain a copy of each Fund's Annual Report without charge by writing to
EKSC, P.O. Box 2121, Boston, Massachusetts 02106-2121, or by calling EKSC toll
free at 1-800-343-2898.
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APPENDIX "A"
DESCRIPTION OF BOND RATINGS
Standard & Poor's Ratings Group ("S&P"). An S&P corporate or municipal bond
rating is a current assessment of the credit worthiness of an obligor with
respect to a specific obligation. This assessment of credit worthiness may take
into consideration obligors such as guarantors, insurers or lessees. The debt
rating is not a recommendation to purchase, sell or hold a security, inasmuch as
it does not comment as to market price or suitability for a particular investor.
The ratings are based on current information furnished to S&P's by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
any audit in connection with the ratings and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or withdrawn as a
result of changes in, unavailability of such information, or for other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation in the event
of bankruptcy, reorganization or their arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
any principal.
AA - Debt rated AA also qualifies as high quality debt obligations. Capacity to
pay interest and repay principal is very strong and in the majority of instances
they differ from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for debt in this
category than is higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on a balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB - rating.
B - Debt rated B has greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC - Debt rated CCC has a currently indefinable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions to meet
timely payment of
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interest and repayment of principal. In the event of adverse business, financial
or economic conditions, it is not likely to have the capacity to pay interest
and repay principal. The CCC rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied B or B- rating.
CC - The rating CC is typically applied to debt subordinated to senior debt that
is assigned an actual or implied CCC rating.
C - The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
C1 - The rating C1 is reserved for income bonds on which no interest is being
paid.
D - Debt rated D is in payment default. It is used when interest payments or
principal payments are not made on a due date even if the applicable grace
period has not expired, unless S&P's believes that such payments will be made
during such grace periods; it will also be used upon a filing of a bankruptcy
petition if debt service payments are jeopardized. Plus (+) or Minus (-) - To
provide more detailed indications of credit quality, the ratings from AA to CCC
may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
NR - indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P's does not rate
a particular type of obligation as a matter of policy. Debt obligations of
issuers outside the United States and its territories are rated on the same
basis as domestic corporate and municipal issues. The ratings measure the credit
worthiness of the obligor but do not take into account currency exchange and
related uncertainties.
Bond Investment Quality Standards: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories (AAA, AA, A, BBB, commonly known as "Investment Grade" ratings) are
generally regarded as eligible for bank investment. In addition, the Legal
Investment Laws of various states may impose certain rating or other standards
for obligations eligible for investment by savings banks, trust companies,
insurance companies and fiduciaries generally.
Moody's Investors Service ("Moody's"). A brief description of the applicable
Moody's rating symbols and their meanings follows:
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge". Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Some bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well. NOTE: Bonds within the above
categories which possess the strongest investment attributes are designated by
the symbol "1" following the rating.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal
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payments may be very moderate and thereby not well safeguarded during good and
bad times over the future. Uncertainty of position characterizes bonds in this
class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C - bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Duff & Phelps, Inc.: AAA-- highest credit quality, with negligible risk factors;
AA -- high credit quality, with strong protection factors and modest risk, which
may vary very slightly from time to time because of economic conditions;
A--average credit quality with adequate protection factors, but with greater and
more variable risk factors in periods of economic stress. The indicators "+" and
"-" to the AA and A categories indicate the relative position of a credit within
those rating categories.
Fitch Investors Service L.P.: AAA -- highest credit quality, with an
exceptionally strong ability to pay interest and repay principal; AA -- very
high credit quality, with very strong ability to pay interest and repay
principal; A -- high credit quality, considered strong as regards principal and
interest protection, but may be more vulnerable to adverse changes in economic
conditions and circumstances. The indicators "+" and "-" to the AA, A and BBB
categories indicate the relative position of credit within those rating
categories.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
o Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
o Source of Payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.) Note rating symbols
are as follows:
o SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus (+) designation.
o SP-2 Satisfactory capacity to pay principal and interest.
o SP-3 Speculative capacity to pay principal and interest.
Moody's Short-Term Loan Ratings - Moody's ratings for state and municipal
short-term obligations will be designated Moody's Investment Grade (MIG). This
distinction is in recognition of the differences between short-term credit risk
and long-term risk. Factors affecting the liquidity of the borrower are
uppermost in importance in short-term borrowing, while various factors of major
importance in bond risk are of lesser importance over the short run. Rating
symbols and their meanings follow:
o MIG 1 - This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
o MIG 2 - This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
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o MIG 3 - This designation denotes favorable quality. All security elements are
accounted for but this is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
o MIG 4 - This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk. COMMERCIAL
PAPER RATINGS
Moody's: Commercial paper rated "Prime" carries the smallest degree of
investment risk. The modifiers 1, 2, and 3 are used to denote relative strength
within this highest classification.
S&P: "A" is the highest commercial paper rating category utilized by Standard &
Poor's Ratings Group which uses the numbers 1+, 1, 2 and 3 to denote relative
strength within its "A" classification.
Duff & Phelps, Inc.: Duff 1 is the highest commercial paper rating category
utilized by Duff & Phelps which uses + or - to denote relative strength within
this classification. Duff 2 represents good certainty of timely payment, with
minimal risk factors. Duff 3 represents satisfactory protection factors, with
risk factors larger and subject to more variation.
Fitch Investors Service L.P.: F-1+ -- denotes exceptionally strong credit
quality given to issues regarded as having strongest degree of assurance for
timely payment; F-1 -- very strong, with only slightly less degree of assurance
for timely payment than F-1+; F-2 -- good credit quality, carrying a
satisfactory degree of assurance for timely payment.
APPENDIX B
Special Considerations Relating to Investment In Pennsylvania Municipal Issuers
GENERAL
The Commonwealth of Pennsylvania, the fifth most populous state,
historically has been identified as a heavy industry state, although that
reputation has changed with the decline of the coal, steel and railroad
industries and the resulting diversification of the Commonwealth's industrial
composition. The major new sources of growth are in the service sector,
including trade, medical and health services, educational and financial
institutions. Manufacturing has fallen behind in both the service sector and the
trade sector as a source of employment in Pennsylvania. The Commonwealth is the
headquarters for 58 major corporations. Pennsylvania's average annual
unemployment rate for the years 1990 has generally not been more than one
percent greater or lesser than the nation's annual average unemployment rate.
The seasonally adjusted unemployment rate for Pennsylvania for March, 1997 was
5.1% and for the United States for March, 1997 was 5.2%. The population of
Pennsylvania, 12,056 million people in 1996 according to the U.S. Bureau of the
Census, represents an increase from the 1987 estimate of 11,811 million. Per
capita income in Pennsylvania for 1995 of $23,558 was higher than the per capita
income of the United States of $23,208. . The Commonwealth's General Fund, which
receives all tax receipts and most other revenues and through which debt service
on all general obligations of the Commonwealth are made, closed fiscal years
ended June 30, 1994, June 30, 1995 and June 30, 1996 with positive fund balances
of $892,940, $688,304 and $635,182, respectively.
DEBT
The Commonwealth may incur debt to rehabilitate areas affected by
disaster, debt approved by the electorate, debt for certain capital projects
(for projects such as highways, public improvements, transportation assistance,
flood control, redevelopment assistance, site development and industrial
development) and tax anticipation debt payable in the fiscal year of issuance.
The Commonwealth had outstanding general obligation debt of $5,054 million at
June 30, 1996. The Commonwealth is not permitted to fund deficits between fiscal
years with any form of debt. All year-end deficit balances must be funded within
the succeeding fiscal year's budget. At March 11, 1996, all outstanding general
obligation bonds of the
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Commonwealth were rated AA- by Standard & Poor's Corporation and A-1 by Moody's
Investors Service, Inc. (see Appendix A). There can be no assurance that these
ratings will remain in effect in the future. Over the five-year period ending
June 30, 2001, the Commonwealth has projected that it will issue notes and bonds
totaling $2,325 million and retire bonded debt in the principal amount of $2,239
million.
Certain agencies created by the Commonwealth have statutory
authorization to incur debt for which Commonwealth appropriations to pay debt
service thereon are not required. As of December 31, 1996, total combined debt
outstanding for these agencies was $8,356 million. The debt of these agencies is
supported by assets of, or revenues derived from, the various projects financed
and is not an obligation of the Commonwealth. Some of these agencies, however,
are indirectly dependent on Commonwealth appropriations. The only obligations of
agencies in the Commonwealth that bear a moral obligation of the Commonwealth
are those issued by the Pennsylvania Housing Finance Agency ("PHFA"), a
state-created agency which provides housing for lower and moderate income
families, and The Hospitals and Higher Education Facilities Authority of
Philadelphia (the "Hospital Authority"), an agency created by the City of
Philadelphia to acquire and prepare various sites for use as intermediate care
facilities for the mentally retarded.
LOCAL GOVERNMENT DEBT
Numerous local government units in Pennsylvania issue general
obligation (i.e., backed by taxing power) debt, including counties, cities,
boroughs, townships and school districts. School district obligations are
supported indirectly by the Commonwealth. The issuance of non-electoral general
obligation debt is limited by constitutional and statutory provisions. Electoral
debt, i.e., that approved by the voters, is unlimited. In addition, local
government units and municipal and other authorities may issue revenue
obligations that are supported by the revenues generated from particular
projects or enterprises. Examples include municipal authorities (frequently
operating water and sewer systems), municipal authorities formed to issue
obligations benefitting hospitals and educational institutions, and industrial
development authorities, whose obligations benefit industrial or commercial
occupants. In some cases, sewer or water revenue obligations are guaranteed by
taxing bodies and have the credit characteristics of general obligations debt.
LITIGATION
Pennsylvania is currently involved in certain litigation where adverse
decisions could have an adverse impact on its ability to pay debt service. For
example, in BABY NEAL V. COMMONWEALTH, the American Civil Liberties Union filed
a lawsuit against the Commonwealth seeking an order that would require the
Commonwealth to provide additional funding for child welfare services. COUNTY OF
ALLEGHENY V. COMMONWEALTH OF PENNSYLVANIA involves litigation regarding the
state constitutionality of the statutory scheme for county funding of the
judicial system. In PENNSYLVANIA ASSOCIATION OF RURAL AND SMALL SCHOOLS V.
CASEY, the constitutionality of Pennsylvania's system for funding local school
districts has been challenged. No estimates for the amount of these claims are
available.
OTHER FACTORS
The performance of the obligations held by the Fund issued by the
Commonwealth, its agencies, subdivisions and instrumentalities are in part tied
to state-wide, regional and local conditions within the Commonwealth and to the
creditworthiness of certain non- Commonwealth related obligers, depending upon
the Pennsylvania Fund's portfolio mix at any given time. Adverse changes to the
state-wide, regional or local economies or changes in government may adversely
affect the creditworthiness of the Commonwealth, its agencies and
municipalities, and certain other non-government related obligers of
Pennsylvania tax-free obligations (e.g., a university, a hospital or a corporate
obligor). The City of Philadelphia, for example, experienced severe financial
problems which impaired its ability to borrow money and adversely affected the
ratings of its obligations and their marketability. Conversely, some obligations
held by the Fund will be almost exclusively dependent on the creditworthiness of
one underlying obligor, such as a project occupant or provider of credit or
liquidity support.
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SUPPLEMENT TO THE STATEMENTS OF ADDITIONAL INFORMATION OF
Evergreen Aggressive Growth Fund, Evergreen American Retirement Fund,
Evergreen Emerging Markets Growth Fund,
Evergreen Florida High Income Municipal Bond Fund, Evergreen Foundation Fund,
Evergreen Fund, Evergreen Georgia Municipal Bond Fund,
Evergreen Global Leaders Fund, Evergreen Growth and Income Fund,
Evergreen High Grade Tax Free Fund, Evergreen Income and Growth Fund,
Evergreen Intermediate Term Government Securities Fund,
Evergreen International Equity Fund, Evergreen Select Money MarketFund,
Evergreen Institutional Tax Exempt Money Market Fund,
Evergreen Select Treasury Money Market Fund, Evergreen Latin America Fund,
Evergreen Micro Cap Fund, Evergreen Money Market Fund,
Evergreen New Jersey Tax Free Income Fund,
Evergreen North Carolina Municipal Bond Fund,
Evergreen Pennsylvania Tax Free Money Market Fund,
Evergreen Short-Intermediate Bond Fund,
Evergreen Short-Intermediate Municipal Fund,
Evergreen Small Cap Equity Income Fund,
Evergreen South Carolina Municipal Bond Fund,
Evergreen Tax Exempt Money Market Fund,
Evergreen Tax Strategic Foundation Fund, Evergreen Treasury Money Market Fund,
Evergreen U.S. Government Fund, Evergreen Utility Fund,
Evergreen Value Fund, Evergreen Virginia Municipal Bond Fund,
Evergreen Capital Preservation and Income Fund,
Evergreen Fund for Total Return, Evergreen Global Opportunities Fund,
Evergreen Natural Resources Fund, Evergreen Omega Fund,
Evergreen Strategic Income Fund, Evergreen California Tax Free Fund,
Evergreen Massachusetts Tax Free Fund, Evergreen Missouri Tax Free Fund,
Evergreen New York Tax Free Fund, Evergreen Pennsylvania Tax Free Fund,
Evergreen Balanced Fund, Evergreen Diversified Bond Fund,
Evergeen High Yield Bond Fund, Evergreen Small Company Growth Fund,
Evergeen Strategic Growth Fund, Evergeen Blue Chip Fund,
Evergreen Select Adjustable Rate Fund, Evergreen Select Small Cap Growth Fund,
Evergreen International Growth Fund, Evergreen Precious Metals Fund, and
Evergreen Tax Free Fund
(each a "Fund" and, collectively, the "Funds")
The Statements of Additional Information of each of the Funds are hereby
supplemented as follows:
Standardized Fundamental Investment Restrictions
Each of the above Funds except Evergreen Balanced Fund, Evergreen
Diversified Bond Fund, Evergreen Small Company Growth Fund, Evergreen Tax
Free Fund, Evergreen Quality Bond Fund, Evergreen Latin America Fund,
Evergreen New Jersey Tax Free Income Fund, Evergreen Tax Exempt Money Market
Fund, Evergreen Pennsylvania Tax Free Money Market Fund, has adopted the
following standardized fundamental investment restrictions. These
restrictionsmay be changed only by a vote of Fund shareholders.
1. Diversification of Investments
The Fund may not make any investment inconsistent with the Fund's
classification as a diversified [non-diversified] investment company under the
Investment Company Act of 1940.
2. Concentration of a Fund's Assets in a Particular Industry. (All Funds
other than those listed below.)
The Fund may not concentrate its investments in the securities of issuers
primarily engaged in any particular industry (other than securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities [or in
the case of Money Market Funds domestic bank money instruments]).
For Evergreen Utility Fund
The Fund will concentrate its investments in the utilities industry.
For Evergreen Precious Metals Fund
The Fund will concentrate its investments in industries related to the
mining, processing or dealing in gold or other precious metals and minerals.
3. Issuance of Senior Securities
Except as permitted under the Investment Company Act of 1940, the Fund may
not issue senior securities.
4. Borrowing
The Fund may not borrow money, except to the extent permitted by applicable
law.
5. Underwriting
The Fund may not underwrite securities of other issuers, except insofar as
the Fund may be deemed an underwriter in connection with the disposition of its
portfolio securities.
6. Investment in Real Estate
The Fund may not purchase or sell real estate, except that, to the extent
permitted by applicable law, the Fund may invest in (a) securities directly or
indirectly secured by real estate, or (b) securities issued by companies that
invest in real estate.
7. Commodities
The Fund may not purchase or sell commodities or contracts on commodities
except to the extent that the Fund may engage in financial futures contracts and
related options and currency contracts and related options and may otherwise do
so in accordance with applicable law and without registering as a commodity pool
operator under the Commodity Exchange Act.
8. Lending
The Fund may not make loans to other persons, except that the Fund may lend
its portfolio securities in accordance with applicable law. The acquisition of
investment instruments shall not be deemed to be the making of a loan.
9. Investment in Federally Tax Exempt Securities
The following Funds have also adopted a standardized fundamental investment
restriction in regard to investments in federally tax-exempt securities:
<TABLE>
<CAPTION>
<S> <C>
Evergreen Tax Exempt Money Market Fund Evergreen Institutional Tax Exempt Money Market Fund
Evergreen Pennsylvania Tax Free Money Market Fund Evergreen Short-Intermediate Municipal
Evergreen Tax Strategic Foundation Fund Evergreen High Grade Tax Free Fund
Evergreen Georgia Municipal Bond Fund Evergreen North Carolina Municipal Bond Fund
Evergreen South Carolina Municipal Bond Fund Evergreen Virginia Municipal Bond Fund
Evergreen New Jersey Tax Free Income Fund Evergreen Massachusetts Tax Free Fund
Evergreen New York Tax Free Fund Evergreen Pennsylvania Tax Free Fund
Evergreen California Tax Free Fund Evergreen Missouri Tax Free Fund
</TABLE>
The Fund will, during periods of normal market conditions, invest its
assets in accordance with applicable guidelines issued by the Securities and
Exchange Commission or its staff concerning investment in tax-exempt securities
for Funds with the words tax exempt, tax free or municipal in their names.
Elimination of Certain Non-Fundamental Investment Restrictions
The nonfundamental investment restrictions described below have been
eliminated by each Fund listed under such restriction:
1. Prohibition on Investment in Unseasoned Issuers
Evergreen Fund, Growth and Income Fund, Income and Growth Fund, American
Retirement Fund, Money Market Fund, Tax Exempt Money Market Fund,
Short-Intermediate Municipal Fund, Growth and Income Fund (S-1), Omega Fund,
Precious Metals Fund, Strategic Growth Fund, High Yield Bond Fund, Capital
Preservation and Income Fund, Select Adjustable Rate Fund, Strategic Income
Fund, Fund for Total Return, Global Opportunities Fund, International Growth
Fund
2. Prohibition on Investment in Companies for the Purpose of Exercising
Control or Management
Evergreen Fund, Growth and Income Fund, Income and Growth Fund, Value Fund,
Intermediate Term Government Securities Fund, Foundation Fund, American
Retirement Fund, Emerging Markets Growth Fund, International Equity Fund, Global
Leaders Fund, Money Market Fund, Tax Exempt Money Market Fund, Pennsylvania Tax
Free Money Market Fund, Florida High Income Municipal Bond Fund,
Short-Intermediate Municipal Fund, Blue Chip Fund, Precious Metals Fund,
Strategic Growth Fund, High Yield Bond Fund, Fund for Total Return, Global
Opportunities Fund, International Growth Fund
3. Prohibition on Investment in Companies in which Trustees or Officers of
the Funds Also Hold Shares Above Certain Percentage Levels
Evergreen Fund, MicroCap Fund, Growth and Income Fund, Income and Growth
Fund, Intermediate Term Government Securities Fund, Foundation Fund, American
Retirement Fund, Money Market Fund, Tax Exempt Money Market Fund,Treasury Money
Market Fund, Short-Intermediate Municipal Fund, Precious Metals Fund
4. Prohibition on Investment of More Than 5% of a Fund's Net Assets in
Warrants, With No More Than 2% of Net Assets Being Invested in Warrants That Are
Listed on Neither the New York nor American Stock Exchanges
Evergreen Fund, MicroCap Fund, Growth and Income Fund, Income and
Growth Fund, Foundation Fund, American Retirement Fund, Tax Exempt Money Market
Fund, Short-Intermediate Municipal Fund
5. Prohibition on Investment in Oil, Gas or Other Mineral Exploration or
Development Programs
Evergreen Fund, MicroCap Fund, Aggressive Growth Fund, Growth and Income
Fund, Small Cap Equity Fund, Income and Growth Fund, Value Fund, Intermediate
Term Government Securities Fund, Foundation Fund, American Retirement Fund,
Money Market Fund, Tax Exempt Money Market Fund, Pennsylvania Tax Free Money
Market Fund, Florida High Income Municipal Bond Fund, Short-Intermediate
Municipal Fund, High Grade Tax Free Fund, Precious Metals Fund
6. Prohibition on Joint Trading Accounts
Evergreen Fund, MicroCap Fund, Growth and Income Fund, Income and Growth
Fund, Foundation Fund, American Retirement Fund, Florida High Income Municipal
Bond Fund
7. Prohibition on Investment in Other Investment Companies. [Note: The
Funds may invest in such companies to the extent permitted by the Investment
Company Act of 1940 and the rules thereunder.]
Growth and Income Fund, Utility Fund, Small Cap Equity Income Fund, Income
and Growth Fund, Value Fund, Short-Intermediate Bond Fund, Intermediate Term
Government Securities Fund, Foundation Fund, Tax Strategic Foundation Fund,
American Retirement Fund, New Jersey Tax Free Income Fund, High Grade Tax Free
Fund, Blue Chip Fund, Omega Fund, Precious Metals Fund, Strategic Growth Fund,
High Yield Bond Fund, Select Adjustable Rate Fund, Strategic Income Fund, Fund
for Total Return, Global Opportunities Fund, International Growth Fund,
Massachusetts Tax Free Fund, New York Tax Free Fund, Pennsylvania Tax Free Fund,
California Tax Free Fund and Missouri Tax Free Fund.
Reclassification of All Other Fundamental Investment Restrictions
All investment restrictions other than those described above as having been
standardized or eliminated have been reclassified from fundamental to
nonfundamental and, as, such, may be changed by the Funds' Boards of Trustees at
any time without a shareholder vote.
Trustees
The Trustees and executive officers of each Trust, their ages, and their
principal occupations during the last five years are shown below:
JAMES S. HOWELL (72), 4124 Crossgate Road, Charlotte, NC-Chairman of the
Evergreen Group of Mutual Funds and Trustee. Retired Vice President of Lance
Inc. (food manufacturing); Chairman of the Distribution Comm. Foundation for the
Carolinas from 1989 to 1993.
RUSSELL A. SALTON, III, M.D. (49), 205 Regency Executive Park, Charlotte,
NC- Trustee. Medical Director, U.S. Healthcare of Charlotte, North Carolina
since 1996; President, Primary Physician Care from 1990 to 1996.
MICHAEL S. SCOFIELD (53), 212 S. Tryon Street, Suite 980, Charlotte,
NC-Trustee. Attorney, Law Offices of Michael S. Scofield since 1969.
GERALD M. MCDONNELL (57), 821 Regency Drive, Charlotte, NC - Trustee.
SalesRepresentative with Nucor-Yamoto Inc. (steel producer) since 1988.
THOMAS L. McVERRY (58), 4419 Parkview Drive, Charlotte, NC - Trustee.
Director of Carolina Cooperative Federal Credit Union since 1990 and Rexham
Corporation from 1988 to 1990; Vice President of Rexham Industries, Inc.
(diversified manufacturer) from 1989 to 1990; Vice President - Finance and
Resources, Rexham Corporation from 1979 to 1990.
WILLIAM WALT PETTIT (41), Holcomb and Pettit, P.A., 227 West Trade St.,
Charlotte, NC - Trustee. Partner in the law firm William Walt Pettit, P.A. since
1990.
LAURENCE B. ASHKIN (68), 180 East Pearson Street, Chicago, IL - Trustee.
Real estate developer and construction consultant since 1980; President of
Centrum Equities since 1987 and Centrum Properties, Inc. since 1980.
CHARLES A. AUSTIN III (61), Trustee. Investment counselor to Appleton
Partners, Inc.; former Managing Director, Seaward Management Corporation
(investment advice); and former Director, Executive Vice President and
Treasurer, State Street Research & Management Company (investment advice).
K. DUN GIFFORD (57) Trustee. Chairman of the Board, Director, and Executive
Vice President, The London Harness Company; Managing Partner, Roscommon Capital
Corp.; Trustee, Cambridge College; Chairman Emeritus and Director, American
Institute of Food and Wine; Chief Executive Officer, Gifford Gifts of Fine
Foods; Chairman, Gifford, Drescher & Associates (environmental consulting);
President, Oldways Preservation and Exchange Trust (education); and former
Director, Keystone Investments, Inc. and Keystone Investment Management Company.
LEROY KEITH, JR. (57) Trustee. Director of Phoenix Total Return Fund and
Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix Multi-Portfolio Fund, and
The Phoenix Big Edge Series Fund; and former President, Morehouse College.
DAVID M. RICHARDSON (55) Trustee. Executive Vice President, DMR
International, Inc. (executive recruitment); former Senior Vice President,
Boyden International Inc. (executive recruitment); and Director, Commerce and
Industry Association of New Jersey, 411 International, Inc., and J&M Cumming
Paper Co.
RICHARD J. SHIMA (57) Trustee and Advisor to the Boards of Trustees of the
Evergreen Group of Mutual Funds. Chairman, Environmental Warranty, Inc., and
Consultant, Drake Beam Morin, Inc. (executive outplacement); Director of
Connecticut Natural Gas Corporation, Trust Company of Connecticut,
HartfordHospital, Old State House Association, and Enhance Financial Services,
Inc.; Chairman, Board of Trustees, Hartford YMCA; former Director; Executive
Vice President, and Vice Chairman of The Travelers Corporation.
Executive Officers
WILLIAM J. TOMKO (40), 3435 Stelzer Road, Columbus, OH - President and
Treasurer. Senior Vice President and Operations Executive, BISYS Fund Services.
GEORGE O. MARTINEZ (37), 3435 Stelzer Road, Columbus, OH - Secretary.
Senior Vice President/Director of Administration and Regulatory Services, BISYS
Fund Services since April 1995. Vice President/Assistant General Counsel,
Alliance Capital Management from 1988 to 1995.
The officers of the Trusts are officers and/or employees of The BISYS
Group, Inc. ("BISYS Group"). The BISYS Group is an affiliate of Evergreen
Distributor, Inc. ("EDI"), the distributor of each class of shares of each Fund.
No officer or Trustee of the Trusts owned more than 1.0% of any Class of
shares of any of the Funds as of November 30, 1997.
Distribution Plans
The following is added to the disclosure under the caption "Distribution
Plan"
Class A and B shares are made available to employer-sponsored retirement or
savings plans ("Plans") without a sales charge if:
(i) the Plan is recordkept on a daily valuation basis by Merrill Lynch and,
on the date the Plan Sponsor signs the Merrill Lynch Recordkeeping
ServiceAgreement, the Plan has $3 million or more in assets invested in
broker/dealerfunds not advised or managed by Merrill Lynch Asset Management,
L.P. ("MLAM")that are made available pursuant to a Services Agreement between
Merrill Lynchand the Fund's principal underwriter or distributor and in Funds
advised or managed by MLAM (collectively, the "Applicable Investments"); or
(ii) the Plan is record kept on a daily valuation basis by an independent
recordkeeper whose services are provided through a contract or alliance
arrangement with Merrill Lynch, and on the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement, the Plan has $3 million or more
in assets, excluding money market funds, invested in Applicable Investments; or
(iii) the Plan has 500 or more eligible employees, as determined by the
Merrill Lynch plan conversion manager, on the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement.
Plans recordkept on a daily basis by Merrill Lynch or an independent
recordkeeper under a contract with Merrill Lynch that are currently investing in
Class B shares convert to Class A shares once the Plan has reached $5 million
invested in Applicable Investments. The Plan will receive a Plan level share
conversion.
The following is added to the Statement of Additional Information of each
of Evergreen Balanced Fund, Evergreen Diversified Bond Fund, Evergreen High
Yield Bond Fund, Evergreen Small Company Growth Fund, Evergreen Strategic Growth
Fund, Evergreen Blue Chip Fund, Evergreen Precious Metals Fund, Evergreen
International Growth Fund and Evergreen Tax Free Fund.
PURCHASE, REDEMPTION AND PRICING OF SHARES
Distribution Plans and Agreements
Distribution fees are accrued daily and paid monthly on Class A, Class B
and Class C shares and are charged as class expenses, as accrued. The
distribution fees attributable to the Class B shares and Class C shares are
designed to permit an investor to purchase such shares through broker-dealers
without the assessment of a front-end sales charge, and, in the case of Class C
shares, without the assessment of a contingent deferred sales charge after the
first year following the month of purchase, while at the same time permitting
the Distributor to compensate broker-dealers in connection with the sale of such
shares. In this regard, the purpose and function of the combined contingent
deferred sales charge and distribution services fee on the Class B shares and
the Class C shares are the same as those of the front-end sales charge and
distribution fee with respect to the Class A shares in that in each case the
sales charge and/or distribution fee provide for the financing of the
distribution of the Fund's shares.
Under the Rule 12b-1 Distribution Plans that have been adopted by each Fund
with respect to each of its Class A, Class B and Class C shares (each a "Plan"
and collectively, the "Plans"), the Treasurer of each Fund reports the amounts
expended under the Plans and the purposes for which such expenditures were made
to the Trustees of the Trust for their review on a quarterly basis. Also, each
Plan provides that the selection and nomination of the disinterested Trustees
are committed to the discretion of such disinterested Trustees then in office.
Each Adviser may from time to time and from its own funds or such other
resources as may be permitted by rules of the SEC make payments for distribution
services to the Distributor; the latter may in turn pay part or all of such
compensation to brokers or other persons for their distribution assistance.
Each Plan and Distribution Agreement will continue in effect for successive
twelve-month periods provided, however, that such continuance is specifically
approved at least annually by the Trustees of the Trust or by vote of the
holders of a majority of the outstanding voting securities of that Class and, in
either case, by a majority of the Independent Trustees of the Trust who have no
direct or indirect financial interest in the operation of the Plan or any
agreement related thereto.
The Plans permit the payment of fees to brokers and others for distribution
and shareholder-related administrative services and to broker-dealers,
depository institutions, financial intermediaries and administrators for
administrative services as to Class A, Class B and Class C shares. The Plans are
designed to (i) stimulate brokers to provide distribution and administrative
support services to each Fund and holders of Class A, Class B and Class C shares
and (ii) stimulate administrators to render administrative support services to
the Fund and holders of Class A, Class B and Class C shares. The administrative
services are provided by a representative who has knowledge of the shareholder's
particular circumstances and goals, and include, but are not limited to
providing office space, equipment, telephone facilities, and various personnel
including clerical, supervisory, and computer, as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries regarding Class A, Class B and
Class C shares; assisting clients in changing dividend options, account
designations, and addresses; and providing such other services as the Fund
reasonably requests for its Class A, Class B and Class C shares.
In the event that a Plan or Distribution Agreement is terminated or not
continued with respect to one or more Classes of a Fund, (i) no distribution
fees (other than current amounts accrued but not yet paid) would be owed by the
Fund to the Distributor with respect to that Class or Classes, and (ii) the Fund
would not be obligated to pay the Distributor for any amounts expended under the
Distribution Agreement not previously recovered by the Distributor from
distribution services fees in respect of shares of such Class or Classes through
deferred sales charges.
All material amendments to any Plan or Distribution Agreement must be
approved by a vote of the Trustees of the Trust or the holders of the Fund's
outstanding voting securities, voting separately by Class, and in either case,
by a majority of the disinterested Trustees, cast in person at a meeting called
for the purpose of voting on such approval; and any Plan or Distribution
Agreement may not be amended in order to increase materially the costs that a
particular Class of shares of a Fund may bear pursuant to the Plan or
Distribution Agreement without the approval of a majority of the holders of the
outstanding voting shares of the Class affected. Any Plan, Shareholder Services
Plan or Distribution Agreement may be terminated (i) by a Fund without penalty
at any time by a majority vote of the holders of the outstanding voting
securities of the Fund, voting separately by Class or by a majority vote of the
disinterested Trustees, or (ii) by the Distributor. To terminate any
Distribution Agreement, any party must give the other parties 60 days' written
notice; to terminate a Plan only, the Fund need give no notice to the
Distributor. Any Distribution Agreement will terminate automatically in the
event of its assignment.
HOW THE FUNDS OFFER SHARES TO THE PUBLIC
You may buy shares of a Fund through the Funds' distributor, broker-dealers
that have entered into special agreements with the Funds' distributor or certain
other financial institutions. Each Fund offers four classes of shares that
differ primarily with respect to sales charges and distribution fees. Depending
upon the class of shares, you will pay an initial sales charge when you buy a
Fund's shares, a contingent deferred sales charge (a "CDSC") when you redeem a
Fund's shares or no sales charges at all.
Purchase Alternatives
Class A Shares
With certain exceptions, when you purchase Class A shares you will pay a
maximum sales charge of 4.75%. (The prospectus contains a complete table of
applicable sales charges and a discussion of sales charge reductions or waivers
that may apply to purchases.) If you purchase Class A shares in the amount of $1
million or more, without an initial sales charge, the Funds will charge a CDSC
of 1.00% if you redeem during the month of your purchase and the 12-month period
following the month of your purchase. See "Calculation of Contingent Deferred
Sales Charge" below.
Class B Shares
The Funds offer Class B shares at net asset value (without a front-end
load). With certain exceptions, however, the Funds will charge a CDSC of 1.00%
on shares you redeem within 72 months after the month of your purchase. The
Funds will charge CDSCs at the following rate:
REDEMPTION TIMING CDSC RATE
Month of purchase and the first twelve-month
period following the month of purchase....................................5.00%
Second twelve-month period following the month of purchase................4.00%
Third twelve-month period following the month of purchase.................3.00%
Fourth twelve-month period following the month of purchase................3.00%
Fifth twelve-month period following the month of purchase.................2.00%
Sixth twelve-month period following the month of purchase.................1.00%
Thereafter................................................................0.00%
Class B shares that have been outstanding for seven years after the month
of purchase will automatically convert to Class A shares without imposition of a
front-end sales charge or exchange fee. (Conversion of Class B shares
represented by stock certificates will require the return of the stock
certificate to ESC.
Class C Shares
Class C shares are available only through broker-dealers who have entered
into special distribution agreements with the Underwriter. The Funds offer Class
C shares at net asset value (without an initial sales charge). With certain
exceptions, however, the Funds will charge a CDSC of 1.00% on shares you redeem
within 12-months after the month of your purchase. See "Contingent Deferred
Sales Charge" below.
Class Y Shares
No CDSC is imposed on the redemption of Class Y shares. Class Y shares are
not offered to the general public and are available only to (1) persons who at
or prior to December 31, 1994 owned shares in a mutual fund advised by Evergreen
Asset Management Corp. ("Evergreen Asset"), (2) certain institutional investors
and (3) investment advisory clients of the Capital Management Group of First
Union National Bank ("FUNB"), Evergreen Asset, Keystone Investment Management
Company, or their affiliates. Class Y shares are offered at net asset value
without a front-end or back-end sales charge and do not bear any Rule 12b-1
distribution expenses.
Contingent Deferred Sales Charge
The Funds charge a CDSC as reimbursement for certain expenses, such as
commissions or shareholder servicing fees, that it has incurred in connection
with the sale of its shares (see "Distribution Plan"). If imposed, the Funds
deduct the CDSC from the redemption proceeds you would otherwise receive. The
CDSC is a percentage of the lesser of (1) the net asset value of the shares at
the time of redemption or (2) the shareholder's original net cost for such
shares. Upon request for redemption, to keep the CDSC a shareholder must pay as
low as possible, a Fund will first seek to redeem shares not subject to the CDSC
and/or shares held the longest, in that order. The CDSC on any redemption is, to
the extent permitted by the National Association of Securities Dealers, Inc.
("NASD"), paid to the Principal Underwriter or its predecessor.
SALES CHARGE WAIVERS OR REDUCTIONS
Reducing Class a Front-end Loads
With a larger purchase, there are several ways that you can combine
multiple purchases of Class A shares in Evergreen funds and take advantage of
lower sales charges.
Combined Purchases
You can reduce your sales charge by combining purchases of Class A shares
of multiple Evergreen funds. For example, if you invested $75,000 in each of two
different Evergreen funds, you would pay a sales charge based on a $150,000
purchase (i.e., 3.75% of the offering price, rather than 4.75%).
Rights of Accumulation
You can reduce your sales charge by adding the value of Class A shares of
Evergreen funds you already own to the amount of your next Class A investment.
For example, if you hold Class A shares valued at $99,999 and purchase an
additional $5,000, the sales charge for the $5,000 purchase would be at the next
lower sales charge of 3.75%, rather than 4.75%.
Letter of Intent
You can, by completing the "Letter of Intent" section of the application,
purchase Class A shares over a 13-month period and receive the same sales charge
as if you had invested all the money at once. All purchases of Class A shares of
an Evergreen fund during the period will qualify as Letter of Intent purchases.
Shares That Are Not Subject to a Sales Charge or CDSC
Waiver of Sales Charges
The Funds may sell their shares at net asset value without an initial sales
charge to:
1. purchases of shares in the amount of $1 million or more;
2. a corporate or certain other qualified retirement plan or a
non-qualified deferred compensation plan or a Title 1 tax sheltered annuity or
TSA plan sponsored by an organization having 100 or more eligible employees (a
"Qualifying Plan") or a TSA plan sponsored by a public educational entity having
5,000 or more eligible employees (an "Educational TSA Plan");
3. institutional investors, which may include bank trust departments and
registered investment advisers;
4. investment advisers, consultants or financial planners who place trades
for their own accounts or the accounts of their clients and who charge such
clients a management, consulting, advisory or other fee;
5. clients of investment advisers or financial planners who place trades
for their own accounts if the accounts are linked to master account of such
investment advisers or financial planners on the books of the broker-dealer
through whom shares are purchased;
6. institutional clients of broker-dealers, including retirement and
deferred compensation plans and the trusts used to fund these plans, which place
trades through an omnibus account maintained with a Fund by the broker-dealer;
7. employees of FUNB, its affiliates, Evergreen Distributor, Inc., any
broker-dealer with whom Evergreen Distributor, Inc., has entered into an
agreement to sell shares of the Funds, and members of the immediate families of
such employees;
8. certain Directors, Trustees, officers and employees of the Evergreen
Funds, the Distributor or their affiliates and to the immediate families of such
persons; or
9. a bank or trust company in a single account in the name of such bank or
trust company as trustee if the initial investment in or any Evergreen fund made
pursuant to this waiver is at least $500,000 and any commission paid at the time
of such purchase is not more than 1% of the amount invested.
With respect to items 8 and 9 above, each Fund will only sell shares to
these parties upon the purchasers written assurance that the purchase is for
their personal investment purposes only. Such purchasers may not resell the
securities except through redemption by the Fund. The Funds will not charge any
CDSC on redemptions by such purchasers.
Waiver of CDSCs
The Funds do not impose a CDSC when the shares you are redeeming represent:
1. an increase in the share value above the net cost of such shares;
2. certain shares for which the Fund did not pay a commission on issuance,
including shares acquired through reinvestment of dividend income and capital
gains distributions;
3. shares that are in the accounts of a shareholder who has died or become
disabled;
4. a lump-sum distribution from a 401(k) plan or other benefit plan
qualified under the Employee Retirement Income Security Act of 1974 ("ERISA");
5. an automatic withdrawal from the ERISA plan of a shareholder who is a
least 59 1/2 years old;
6. shares in an account that we have closed because the account has an
aggregate net asset value of less than $1,000;
7. an automatic withdrawals under an Systematic Income Plan of up to 1.0%
per month of your initial account balance;
8. a withdrawal consisting of loan proceeds to a retirement plan
participant;
9. a financial hardship withdrawals made by a retirement plan participant;
10. a withdrawal consisting of returns of excess contributions or excess
deferral amounts made to a retirement plan; or
11. a redemption by an individual participant in a Qualifying Plan that
purchased Class C shares (this waiver is not available in the event a Qualifying
Plan, as a whole, redeems substantially all of its assets).
Distribution Plans
The following is added to the disclosure under the caption "Distribution
Plan"
Class A and B shares are made available to employer-sponsored retirement or
savings plans ("Plans") without a sales charge if:
(i) the Plan is recordkept on a daily valuation basis by Merrill Lynch and,
on the date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service
Agreement, the Plan has $3 million or more in assets invested in broker/dealer
funds not advised or managed by Merrill Lynch Asset Management, L.P. ("MLAM")
that are made available pursuant to a Services Agreement between Merrill Lynch
and the Fund's principal underwriter or distributor and in Funds advised or
managed by MLAM (collectively, the "Applicable Investments"); or
(ii) the Plan is record kept on a daily valuation basis by an independent
recordkeeper whose services are provided through a contract or alliance
arrangement with Merrill Lynch, and on the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement, the Plan has $3 million or more
in assets, excluding money market funds, invested in Applicable Investments; or
(iii) the Plan has 500 or more eligible employees, as determined by the
Merrill Lynch plan conversion manager, on the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement.
Plans recordkept on a daily basis by Merrill Lynch or an independent
recordkeeper under a contract with Merrill Lynch that are currently investing in
Class B shares convert to Class A shares once the Plan has reached $5 million
invested in Applicable Investments. The Plan will receive a Plan level share
conversion.
EXCHANGES
Investors may exchange shares of a Fund for shares of the same class of any
other Evergreen fund, as described under the section entitled "Exchanges" in a
Fund's prospectus. Before you make an exchange, you should read the prospectus
of the Evergreen fund into which you want to exchange. The Trust's Board of
Trustees reserves the right to discontinue, alter or limit the exchange
privilege at any time.
HOW THE FUNDS VALUE SHARES
How and When a Fund Calculates its Net Asset Value per Share ("NAV")
Each Fund computes its NAV once daily on Monday through Friday, as
described in the Prospectus. A Fund will not compute its NAV on the day the
following legal holidays are observed: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The NAV of each Fund is calculated by dividing the value of a Fund's net
assets attributable to that class by all of the shares issued for that class.
How a Fund Values the Securities it Owns
Current values for a Fund's portfolio securities are determined as follows:
(1) Securities that are traded on a national securities exchange or the
over-the-counter National Market System ("NMS") are valued on the basis of the
last sales price on the exchange where primarily traded or on the NMS prior to
the time of the valuation, provided that a sale has occurred.
(2) Securities traded in the over-the-counter market, other than on NMS,
are valued at the mean of the bid and asked prices at the time of valuation.
(3) Short-term investments maturing in more than sixty days for which
market quotations are readily available, are valued at current market value.
(4) Short-term investments maturing in sixty days or less (including all
master demand notes) are valued at amortized cost (original purchase cost as
adjusted for amortization of premium or accretion of discount), which, when
combined with accrued interest, approximates market.
(5) short-term investments maturing in more than sixty days when purchased
that are held on the sixtieth day prior to maturity are valued at amortized cost
(market value on the sixtieth day adjusted for amortization of premium or
accretion of discount), which, when combined with accrued interest, approximates
market.
(6) Securities, including restricted securities, for which complete
quotations are not readily available; listed securities or those on NMS if, in
the Fund's opinion, the last sales price does not reflect a current market value
or if no sale occurred; and other assets are valued at prices deemed in good
faith to be fair under procedures established by the Board of Trustees.
SHAREHOLDER SERVICES
As described in the prospectus, a shareholder may elect to receive their
dividends and capital grains distributions in cash instead of shares. However,
ESC will automatically convert a shareholder's distribution option so that the
shareholder reinvests all dividends and distributions in additional shares when
it learns that the postal or other delivery service is unable to deliver checks
or transaction confirmations to the shareholder's address of record. The Funds
will hold the returned distribution or redemption proceeds in a non
interest-bearing account in the shareholder's name until the shareholder updates
their address. No interest will accrue on amounts represented by uncashed
distribution or redemption checks.
January 16, 1998
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THE VIRTUS FUNDS
INVESTMENT SHARES
CONSISTS OF EIGHT PORTFOLIOS:
THE U.S. GOVERNMENT SECURITIES FUND;
THE STYLE MANAGER: LARGE CAP FUND;
THE STYLE MANAGER FUND;
THE VIRGINIA MUNICIPAL BOND FUND;
THE MARYLAND MUNICIPAL BOND FUND;
THE TREASURY MONEY MARKET FUND;
THE MONEY MARKET FUND; AND
THE TAX-FREE MONEY MARKET FUND.
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the Prospectus for
the Investment Shares ("Investment Shares") of The Virtus Funds (the "Trust"),
dated November 30, 1997. This Statement is not a prospectus itself. You may
request a copy of a prospectus or a paper copy of this Statement of Additional
Information, if you have received it electronically, free of charge by writing
to the Trust or calling toll-free 1-800-723-9512.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated November 30, 1997
[GRAPHIC OMITTED]
CUSIP 927913202 CUSIP 927913848 CUSIP 927913400 CUSIP 927913871 CUSIP
927913509 CUSIP 927913889 CUSIP 927913707 CUSIP 927913806 2102608B-R
(11/97)
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Table of Contents
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I
General Information About the Trust 1
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Investment Objective and Policies of the Funds 1
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The U.S. Government Securities Fund 1
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Types of Investments 1
The Style Manager: Large Cap Fund and The Style Manager Fund 2
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Commercial Paper 4
Bank Instruments 4
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund 5
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Acceptable Investments 5
Types of Acceptable Investments 5
The Treasury Money Market Fund 5
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Types of Investments 5
The Money Market Fund 6
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Types of Investments 6
The Tax-Free Money Market Fund 6
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Portfolio Investments and Strategies 6
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Repurchase Agreements 6
Reverse Repurchase Agreements 6
When-Issued and Delayed Delivery Transactions 6
Lending of Portfolio Securities 7
Restricted and Illiquid Securities 7
Participation Interests 7
Variable Rate Municipal Securities 8
Municipal Leases 8
Temporary Investments 8
Adjustable Rate Mortgage Securities 8
Portfolio Turnover 9
Investment Limitations 9
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Virtus Funds Management 12
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Fund Ownership 16
Officers and Trustees Compensation 17
Trustee Liability 17
Investment Advisory Services 17
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Adviser to the Trust 17
Advisory Fees 18
Sub-Adviser to The Style Manager: Large Cap Fund
and The Style Manager Fund 18
Sub-Advisory Fees 18
Other Services 18
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Administrative Services 18
Custodian 19
Transfer Agent 19
Independent Auditors 19
Brokerage Transactions 19
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Purchasing Shares 20
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Distribution Plan 20
Conversion to Federal Funds 20
Determining Net Asset Value 21
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Determining Market Value of Securities 21
Use of the Amortized Cost Method 21
Valuing Municipal Securities 22
Use of Amortized Cost 23
Redeeming Shares 23
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Redemption in Kind 23
Massachusetts Partnership Law 23
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Tax Status 23
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The Funds' Tax Status 23
Shareholders' Tax Status 24
Total Return 24
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Yield 25
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Effective Yield 26
Tax-Equivalent Yield 26
Performance Comparisons 29
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The U.S. Government Securities Fund 30
The Style Manager: Large Cap Fund and The Style Manager Fund 31
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund 31
The Treasury Money Market Fund 31
The Money Market Fund 31
The Tax-Free Money Market Fund 32
Financial Statements 32
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Appendix 33
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24
General Information About the Trust
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The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated June 20, 1990. As of the date of this Statement, the Trust
consists of eight separate portfolios of securities (collectively, the "Funds",
individually, a "Fund") which are as follows: The U. S. Government Securities
Fund, The Style Manager: Large Cap Fund, The Style Manager Fund, The Virginia
Municipal Bond Fund, The Maryland Municipal Bond Fund, The Treasury Money Market
Fund, The Money Market Fund, and The Tax-Free Money Market Fund. On October 1,
1992, the name of the Trust was changed from "The SBK Select Series" to "Signet
Select Funds." On August 15, 1994, the name of the Trust was changed from
"Signet Select Funds" to "The Medalist Funds." On February 15, 1995, the name of
the Trust was changed from "The Medalist Funds" to "The Virtus Funds."
With the exception of The Tax-Free Money Market Fund and The Style Manager Fund,
which offer a single class of shares, the Funds are offered in two classes,
Investment Shares and Trust Shares. This Combined Statement of Additional
Information relates only to the Investment Shares of those Funds offering
classes and to shares of The Tax-Free Money Market Fund and The Style Manager
Fund.
Investment Objective and Policies of the Funds
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The prospectus discusses the objective of each Fund and the policies it employs
to achieve those objectives. The following discussion supplements the
description of the Funds' investment policies in the combined prospectus.
The Funds' respective investment objectives cannot be changed without approval
of shareholders. The investment policies described below may be changed by the
Trustees without shareholder approval. Shareholders will be notified before any
material change in these policies becomes effective.
Additional information about investment limitations, strategies that one or more
Funds may employ, and certain investment policies mentioned below appear in the
prospectus section "Portfolio Investments and Strategies."
The U.S. Government Securities Fund
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Types of Investments
The Fund invests primarily in securities which are guaranteed as to payment of
principal and interest by the U.S. government or its instrumentalities.
U.S. Government Obligations
The types of U.S. government obligations in which the Fund may invest
generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations issued or guaranteed
by U.S. government agencies or instrumentalities. These securities are
backed by: the full faith and credit of the U.S. Treasury; the issuer's
right to borrow from the U.S. Treasury; the discretionary authority of
the U.S. government to purchase certain obligations of agencies or
instrumentalities; or the credit of the agency or instrumentality
issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are: the Farm Credit System;
Federal Home Loan Banks; Farmers Home Administration; and Federal
National Mortgage Association.
Collateralized Mortgage Obligations (CMOs)
Privately issued CMOs generally represent an ownership interest in
federal agency mortgage pass-through securities such as those issued by
the Government National Mortgage Association. The terms and
characteristics of the mortgage instruments may vary among pass-through
mortgage loan pools.
The market for such CMOs has expanded considerably since its inception.
The size of the primary issuance market and the active participation in
the secondary market by securities dealers and other investors make
government-related pools highly liquid.
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The Style Manager: Large Cap Fund and The Style Manager Fund
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The Funds invest primarily in corporate securities, including common stocks,
preferred stocks, corporate bonds, notes, warrants and convertible securities.
Convertible Securities
Convertible securities are fixed income securities which may be
exchanged or converted into a predetermined number of the issuer's
underlying common stock at the option of the holder during a specified
time period. Convertible securities may take the form of convertible
preferred stock, convertible bonds or debentures, units consisting of
"usable" bonds and warrants or a combination of the features of several
of these securities. The investment characteristics of each convertible
security vary widely, which allows convertible securities to be
employed for different investment objectives.
A Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in
which, in the investment adviser's opinion, the investment
characteristics of the underlying common shares will assist the Fund in
achieving its investment objectives. Otherwise, the Fund may hold or
trade convertible securities. In selecting convertible securities for a
Fund, the Fund's adviser evaluates the investment characteristics of
the convertible security as a fixed income instrument, and the
investment potential of the underlying equity security for capital
appreciation. In evaluating these matters with respect to a particular
convertible security, a Fund's adviser considers numerous factors,
including the economic and political outlook, the value of the security
relative to other investment alternatives, trends in the determinants
of the issuer's profits, and the issuer's management capability and
practices.
Warrants
Warrants are basically options to purchase common stock at a specific
price (usually at a premium above the market value of the optioned
common stock at issuance) valid for a specific period of time. Warrants
may have a life ranging from less than a year to twenty years or may be
perpetual. However, most warrants have expiration dates after which
they are worthless. In addition, if the market price of the common
stock does not exceed the warrant's exercise price during the life of
the warrant, the warrant will expire as worthless. Warrants have no
voting rights, pay no dividends, and have no rights with respect to the
assets of the corporation issuing them. The percentage increase or
decrease in the market price of the warrant may tend to be greater than
the percentage increase or decrease in the market price of the optioned
common stock.
Futures And Options Transactions
As a means of reducing fluctuations in the net asset value of shares of
a Fund, the Fund may attempt to hedge all or a portion of its portfolio
by buying and selling financial futures contracts, buying put options
on portfolio securities and listed put options on futures contracts,
and writing call options on futures contracts. A Fund may also write
covered call options on portfolio securities to attempt to increase its
current income. The Fund will maintain its positions in securities,
option rights, and segregated cash subject to puts and calls until the
options are exercised, closed, or have expired. An option position on
financial futures contracts may be closed out only on an exchange which
provides a secondary market from options of the same series.
Financial Futures Contracts
A futures contract is a firm commitment by two parties: the seller, who
agrees to make delivery of the specific type of security called for in
the contract ("going short") and the buyer, who agrees to take delivery
of the security ("going long") at a certain time in the future.
Financial futures contracts call for the delivery of shares of common
stocks represented in a particular index.
Put Options on Financial Futures Contracts
A Fund may purchase listed put options on financial futures contracts.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified
price, the purchase of a put option on a futures contract entitles (but
does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price.
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Generally, if the hedged portfolio securities decrease in value during
the term of an option, the related futures contracts will also decrease
in value and the option will increase in value. In such an event, a
Fund will normally close out its option by selling an identical option.
If the hedge is successful, the proceeds received by a Fund upon the
sale of the second option will be large enough to offset both the
premium paid by the Fund for the original option plus the decrease in
value of the hedged securities.
Alternatively, the Fund may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures
contract of the type underlying the option (for a price less than the
strike price of the option) and exercise the option. The Fund would
then deliver the futures contract in return for payment of the strike
price. If the Fund neither closes out nor exercises an option, the
option will expire on the date provided in the option contract, and
only the premium paid for the contract will be lost.
Call Options on Financial Futures Contracts
In addition to purchasing put options on futures, a Fund may write
listed call options on futures contracts to hedge its portfolio. When a
Fund writes a call option on a futures contract, it is undertaking the
obligation of assuming a short futures position (selling a futures
contract) at the fixed strike price at any time during the life of the
option if the option is exercised. As stock prices fall, causing the
prices of futures to go down, the Fund's obligation under a call option
on a future (to sell a futures contract) costs less to fulfill, causing
the value of the Fund's call option position to increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the
call, so that the Fund keeps the premium received for the option. This
premium can substantially offset the drop in value of the Fund's fixed
income or indexed portfolio which is occurring as interest rates rise.
Prior to the expiration of a call written by a Fund, or exercise of it
by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will
be less than the premium received by the Fund for the initial option.
The net premium income of the Fund will then substantially offset the
decrease in value of the hedged securities.
A Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds
the current market value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Fund will
take prompt action to close out a sufficient number of open contracts
to bring its open futures and options positions within this limitation.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, a Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather,
the Fund is required to deposit an amount of "initial margin" in cash
or U.S. Treasury bills with its custodian (or the broker, if legally
permitted). The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that
futures contract initial margin does not involve the borrowing of funds
by the Fund to finance the transactions. Initial margin is in the
nature of a performance bond or good faith deposit on the contract
which is returned to the Fund upon termination of the futures contract,
assuming all contractual obligations have been satisfied.
A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the
Fund pays or receives cash, called "variation margin," equal to the
daily change in value of the futures contract. This process is known as
"marking to market." Variation margin does not represent a borrowing or
loan by the Fund but is instead settlement between the Fund and the
broker of the amount one would owe the other if the futures contract
expired. In computing its daily net asset value, the Fund will mark to
market its open futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
Purchasing Put Options on Portfolio Securities
A Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A
put option gives the Fund, in return for a premium, the right to sell
the underlying security to the writer (seller) at a specified price
during the term of the option.
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Writing Covered Call Options On Portfolio Securities
A Fund may also write covered call options to generate income. As
writer of a call option, the Fund has the obligation upon exercise of
the option during the option period to deliver the underlying security
upon payment of the exercise price. The Fund may only sell call options
either on securities held in its portfolio or on securities which it
has the right to obtain without payment of further consideration (or
has segregated cash in the amount of any additional consideration).
Over-the-Counter Options
A Fund may purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the
options for those options on portfolio securities held by the Fund and
not traded on an exchange.
Over-the-counter options are two party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded
options are third party contracts with standardized strike prices and
expiration dates and are purchased from a clearing corporation.
Exchange-traded options have a continuous liquid market while
over-the-counter options may not.
U.S. Government Obligations
The types of U.S. government obligations in which the Fund may invest
are those set forth under "The U.S. Government Securities Fund-U.S.
Government Obligations."
Commercial Paper
A Fund may invest in commercial paper rated at least A-1 by Standard & Poor's
Ratings Group ("S&P"), Prime-1 by Moody's Investors Service, Inc. ("Moody's"),
or F-1 by Fitch Investors Service ("Fitch") and money market instruments
(including commercial paper) which are unrated but of comparable quality,
including Canadian Commercial Paper ("CCPs") and Europaper. In the case where
commercial paper, CCPs or Europaper have received different ratings from
different rating services, such commercial paper, CCPs or Europaper is an
acceptable investment so long as at least one rating is one of the preceding
high quality ratings and provided the investment adviser has determined that
such investment presents minimal credit risks.
Bank Instruments
A Fund may invest in the instruments of banks and savings associations whose
deposits are insured by the Bank Insurance Fund ("BIF"), which is administered
by the Federal Deposit Insurance Corporation ("FDIC"), or the Savings
Association Insurance Fund ("SAIF"), which is administered by the FDIC, such as
certificates of deposit, demand and time deposits, savings shares, and bankers'
acceptances. These instruments are not necessarily guaranteed by those
organizations.
In addition to domestic bank obligations such as certificates of deposit, demand
and time deposits, savings shares, and bankers' acceptances, the Fund may invest
in:
o Eurodollar Certificates of Deposit ("ECDs") issued by foreign
branches of U.S. or foreign banks;
o Eurodollar Time Deposits ("ETDs"), which are U.S. dollar-denominated
deposits in foreign branches of U.S. or foreign banks;
o Canadian Time Deposits, which are U.S. dollar-denominated deposits
issued by branches of major Canadian banks located in the United
States; and
o Yankee Certificates of Deposit ("Yankee CDs"), which are U.S.
dollar-denominated certificates of deposit issued by U.S. branches
of foreign banks and held in the United States.
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The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund
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Acceptable Investments
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund pursue
their investment objectives by investing in professionally managed portfolios of
securities at least 65% of which are comprised of Virginia (in the case of The
Virginia Municipal Bond Fund) or Maryland (in the case of The Maryland Municipal
Bond Fund) municipal securities. The Funds will invest their assets so that,
under normal circumstances, at least 80% of their annual interest income is
exempt from federal regular and Virginia (in the case of The Virginia Municipal
Bond Fund) or Maryland (in the case of The Maryland Municipal Bond Fund) state
income taxes or that at least 80% of their total assets are invested in
obligations, the interest income from which is exempt from federal regular and
Virginia (in the case of The Virginia Municipal Bond Fund) or Maryland (in the
case of The Maryland Municipal Bond Fund) state income taxes.
Characteristics
The municipal securities in which the Funds invest have the
characteristics set forth in the prospectus. An unrated municipal
security will be determined by a Fund's adviser to meet the quality
standards established by the Fund's Board of Trustees if it is of
comparable quality to the rated municipal securities which the Fund
purchases. The Trustees consider the creditworthiness of the issuer of
a municipal security, the issuer of a participation interest if the
Fund has the right to demand payment from the issuer of the interest or
the guarantor of payment by either of those issuers.
If Moody's or S&P's ratings change because of changes in those
organizations or in their rating systems, a Fund will try to use
comparable ratings as standards in accordance with the investment
policies described in the Fund's prospectus.
Types of Acceptable Investments
Examples of Virginia and Maryland municipal securities are:
o municipal notes and tax-exempt commercial paper;
o serial bonds sold with a series of maturity dates;
o tax anticipation notes sold to finance working capital needs of
municipalities in anticipation of receiving taxes at a later date;
o bond anticipation notes sold in anticipation of the issuance of
longer-term bonds in the future;
o revenue anticipation notes sold in expectation of receipt of federal
income available under the Federal Revenue Sharing Program;
o prerefunded municipal bonds refundable at a later date (payment of
principal and interest on prerefunded bonds is assured through the
first call date by the deposit in escrow of U.S. government
securities); or
o general obligation bonds secured by a municipality's pledge of
taxation.
The Treasury Money Market Fund
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Types of Investments
The Fund invests only in short-term U.S. Treasury obligations. Short-term U.S.
Treasury obligations as used herein refers to evidences of indebtedness issued
by the United States, or issued by an agency or instrumentality thereof, and
fully guaranteed as to principal and interest by the United States, maturing in
397 days or less from the date of acquisition unless they are purchased under a
repurchase agreement that provides for repurchase by the seller within one year
from the date of acquisition.
The Fund may also retain Fund assets in cash.
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The Money Market Fund
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Types of Investments
The Fund invests primarily in money market instruments maturing in 397 days or
less and which include, but are not limited to, commercial paper and demand
master notes, domestic and foreign bank instruments, U.S. government
obligations, and corporate debt obligations.
Bank Instruments
The types of bank instruments in which the Fund invests are those set
forth under "The Style Manager: Large Cap Fund-Bank Instruments."
U.S. Government Obligations
The types of U.S. government obligations in which the Fund may invest
are those set forth under "The U.S. Government Securities Fund-U.S.
Government Obligations."
The Tax-Free Money Market Fund
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The Fund invests in a portfolio of municipal securities maturing in 13 months or
less. As a matter of investment policy, which cannot be changed without
shareholder approval, at least 80% of the Fund's annual interest income will be
exempt from federal income tax (including alternative minimum tax). The average
maturity of the securities in the Fund's portfolio, computed on a
dollar-weighted basis, will be 90 days or less.
Portfolio Investments and Strategies
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Repurchase Agreements
The Funds or their custodian will take possession of the securities subject to
repurchase agreements and these securities will be marked to market daily. In
the event that a defaulting seller filed for bankruptcy or became insolvent,
disposition of such securities by a Fund might be delayed pending court action.
The Funds believe that under the regular procedures normally in effect for
custody of a Fund's portfolio securities subject to repurchase agreements, a
court of competent jurisdiction would rule in favor of a Fund and allow
retention or disposition of such securities. The Funds will only enter into
repurchase agreements with banks and other recognized financial institutions
such as broker/dealers which are deemed by the adviser to be creditworthy
pursuant to guidelines established by the Trustees.
Reverse Repurchase Agreements
The Funds may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement a Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable a Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that a Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of a Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and are maintained until the transaction is settled.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an advantageous
price or yield for a Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of a Fund sufficient to
make payment for the securities to be purchased are segregated on a Fund's
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Funds may engage in these
transactions to an extent that would cause the segregation of an amount up to
20% of the total value of their assets. The Funds do not intend to engage in
when-issued and delayed delivery transactions to an extent that would cause the
segregation of more than 20% of the total value of their respective assets.
<PAGE>
Lending of Portfolio Securities
The collateral received when The U.S. Government Securities Fund, The Style
Manager: Large Cap Fund, The Style Manager Fund, and The Money Market Fund lend
portfolio securities must be valued daily and, should the market value of the
loaned securities increase, the borrower must furnish additional collateral to
the particular Fund. During the time portfolio securities are on loan, the
borrower pays a Fund any dividends or interest paid on such securities. Loans
are subject to termination at the option of a Fund or the borrower. A Fund may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or equivalent
collateral to the borrower or placing broker. The U.S. Government Securities
Fund and The Style Manager: Large Cap Fund do not have the right to vote
securities on loan, but would terminate the loan and regain the right to vote if
that were considered important with respect to the investment.
Restricted and Illiquid Securities
The Funds may invest in restricted securities. Restricted securities are any
securities in which a Fund may otherwise invest pursuant to its investment
objective and policies but which are subject to restriction on resale under
federal securities law. However, The U.S. Government Securities Fund, The Style
Manager: Large Cap Fund, The Style Manager Fund, The Virginia Municipal Bond
Fund and The Maryland Municipal Bond Fund will limit investments in illiquid
securities, including certain restricted securities determined by the Trustees
not to be liquid, and repurchase agreements providing for settlement in more
than seven days after notice, to 15% of its net assets. In the case of The
Virginia Municpal Bond Fund and The Maryland Municipal Bond Fund, illiquid
securities will include participation interests and variable rate municipal
securities without a demand feature or with a demand feature of longer than
seven days and which the adviser believes cannot be sold within seven days. The
Treasury Money Market Fund, The Money Market Fund, and The Tax-Free Money Market
Fund will limit investments in illiquid securities, including certain securities
determined by the Trustees not to be liquid, and repurchase agreements providing
for settlement in more than seven days after notice, and in the case of The
Money Market Fund, specifically including non-negotiable fixed income time
deposits with maturities over seven days, to 10% of their net assets.
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund, The
Style Manager Fund, and The Money Market Fund may invest in commercial paper
issued in reliance on the exemption from registration afforded by Section 4(2)
of the Securities Act of 1933. Section 4(2) commercial paper is restricted as to
disposition under federal securities law and is generally sold to institutional
investors, such as the Fund, who agree that they are purchasing the paper for
investment purposes and not with a view to public distribution. Any resale by
the purchaser must be in an exempt transaction. Section 4(2) commercial paper is
normally resold to other institutional investors like the Fund through or with
the assistance of the issuer or investment dealers who make a market in Section
4(2) commercial paper, thus providing liquidity. The Funds believe that Section
4(2) commercial paper and possibly certain other restricted securities which
meet the criteria for liquidity established by the Board of Trustees are quite
liquid. The Funds intend, therefore, to treat the restricted securities which
meet the criteria for liquidity established by the Trustees, including Section
4(2) commercial paper, as determined by a Fund's investment adviser, as liquid
and not subject to the investment limitation applicable to illiquid securities.
In addition, because Section 4(2) commercial paper is liquid, the Funds intend
to not subject such paper to the limitation applicable to restricted securities.
Participation Interests
The financial institutions from which The Virginia Municipal Bond Fund, The
Maryland Municipal Bond Fund, and The Tax-Free Money Market Fund purchase
participation interests frequently provide or secure from other financial
institutions irrevocable letters of credit or guarantees and give a Fund the
right to demand payment on specified notice (normally within thirty days for The
Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund and seven days
for The Tax-Free Money Market Fund) from the issuer of the letter of credit or
guarantee. These financial institutions may charge certain fees in connection
with their repurchase commitments, including a fee equal to the excess of the
interest paid on the municipal securities over the negotiated yield at which the
participation interests were purchased by a Fund. By purchasing participation
interests, a Fund is buying a security meeting the maturity and quality
requirements of a Fund and is also receiving the tax-free benefits of the
underlying securities.
In the acquisition of participation interests, a Fund's investment adviser will
consider the following quality factors:
o the quality of the underlying municipal security (of which a Fund
takes possession);
o the quality of the issuer of the participation interest; and
o a guarantee or letter of credit from a high-quality financial
institution supporting the participation interest.
<PAGE>
Variable Rate Municipal Securities
The Virginia Municipal Bond Fund, The Maryland Municipal Bond Fund, and The
Tax-Free Money Market Fund invest in variable municipal securities. Variable
interest rates generally reduce changes in the market value of municipal
securities from their original purchase prices. Accordingly, as interest rates
decrease or increase, the potential for capital appreciation or depreciation is
less for variable rate municipal securities than for fixed income obligations.
Many municipal securities with variable interest rates purchased by the The
Tax-Free Money Market Fund are subject to repayment of principal (usually within
seven days) on the The Tax-Free Money Market Fund's demand. For purposes of
determining the Fund's average maturity, the maturities of these variable rate
demand municipal securities (including participation interests) are the longer
of the periods remaining until the next readjustment of their interest rates or
the periods remaining until their principal amounts can be recovered by
exercising the right to demand payment. The terms of these variable rate demand
instruments require payment of principal and accrued interest from the issuer of
the municipal obligations, the issuer of the participation interests or a
guarantor of either issuer.
Municipal Leases
The Virginia Municipal Bond Fund, The Maryland Municipal Bond Fund, and The
Tax-Free Money Market Fund may purchase municipal securities in the form of
participation interests which represent undivided proportional interests in
lease payments by a governmental or nonprofit entity. The lease payments and
other rights under the lease provide for and secure the payments on the
certificates. Lease obligations may be limited by municipal charter or the
nature of the appropriation for the lease. In particular, lease obligations may
be subject to periodic appropriation. If the entity does not appropriate funds
for future lease payments, the entity cannot be compelled to make such payments.
Furthermore, a lease may provide that the certificate trustee cannot accelerate
lease obligations upon default. The trustee would only be able to enforce lease
payments as they became due. In the event of a default or failure of
appropriation, it is unlikely that the trustee would be able to obtain an
acceptable substitute source of payment.
In determining the liquidity of municipal lease securities, the adviser, under
the authority delegated by the Board of Trustees, will base its determination on
the following factors: (a) whether the lease can be terminated by the lessee;
(b) the potential recovery, if any, from a sale of the leased property upon
termination of the lease; (c) the lessee's general credit strength (e.g., its
debts, administrative, economic and financial characteristics, and prospects);
(d) the likelihood that the lessee will discontinue appropriating funding for
the leased property because the property is no longer deemed essential to its
operations (e.g., the potential for an "event of nonappropriation"); and (e) any
credit enhancement of legal recourse provided upon an event of nonappropriation
or other termination of the lease.
Temporary Investments
The Virginia Municipal Bond Fund, The Maryland Municipal Bond Fund and The
Tax-Free Money Market Fund may also invest in temporary investments during times
of unusual market conditions for defensive purposes and to maintain liquidity.
From time to time, such as when suitable securities are not available to the
respective Fund, a Fund may invest a portion of its assets in cash. Any portion
of a Fund's assets maintained in cash will reduce the amount of assets in
securities held in the respective Fund, and could thereby reduce a Fund's yield.
Adjustable Rate Mortgage Securities
The U.S. Government Securities Fund invests in adjustable rate mortgage
securities ("ARMS"). Not unlike other U.S. government securities, the market
value of ARMS will generally vary inversely with changes in market interest
rates. Thus, the market value of ARMS generally declines when interest rates
rise and generally rises when interest rates decline.
While ARMS generally entail less risk of a decline during periods of rapidly
rising rates, ARMS may also have less potential for capital appreciation than
other similar investments (e.g. investments with comparable maturities) because
as interest rates decline, the likelihood increases that mortgages will be
prepaid. Furthermore, if ARMS are purchased at a premium, mortgage foreclosures
and unscheduled principal payment may result in some loss of a holder's
principal investment to the extent of the premium paid. Conversely, if ARMS are
purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal would increase current and total returns and
would accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
<PAGE>
Portfolio Turnover
The Funds will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
a Fund's investment objective. The Style Manager: Large Cap Fund and The Style
Manager Fund may experience greater portfolio turnover than would be expected
with a portfolio of higher-rated securities. A high portfolio turnover will
result in increased transaction costs to the Fund. For the fiscal years ended
September 30, 1997 and 1996, the portfolio turnover rates were 80% and 118%,
respectively, for The U.S. Government Securities Fund; 56% and 151%,
respectively, for The Style Manager: Large Cap Fund; 19% and 129%, respectively,
for The Virginia Municipal Bond Fund; 13% and 138%, respectively, for The
Maryland Municipal Bond Fund; and 94% and 112%, respectively, for The Style
Manager Fund.
Investment Limitations
- --------------------------------------------------------------------------------
Issuing Senior Securities and Borrowing Money
The Funds will not issue senior securities except that a Fund may
borrow money directly or through reverse repurchase agreements in
amounts up to one-third of the value of its net assets, including the
amount borrowed. The Funds will not borrow money or engage in reverse
repurchase agreements for investment leverage, but rather as a
temporary, extraordinary, or emergency measure or to facilitate
management of the portfolio by enabling a Fund to meet redemption
requests when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. A Fund will not purchase any
securities while any borrowings in excess of 5% of its total assets are
outstanding. With respect to The U.S. Government Securities Fund, The
Style Manager: Large Cap Fund, The Style Manager Fund, The Virginia
Municipal Bond Fund, The Maryland Municipal Bond Fund, The Treasury
Money Market Fund, and The Money Market Fund, during the period any
reverse repurchase agreements are outstanding, the Funds will restrict
the purchase of portfolio securities to money market instruments
maturing on or before the expiration date of the reverse repurchase
agreements, but only to the extent necessary to assure completion of
the reverse repurchase agreements.
Selling Short and Buying on Margin
The Funds will not purchase any securities on margin but they may
obtain such short-term credits as may be necessary for clearance of
transactions. With respect to The U.S. Government Securities Fund, The
Style Manager: Large Cap Fund, and The Style Manager Fund, the deposit
or payment by the Fund of initial or variation margin in connection
with financial futures contracts or related options transactions is not
considered the purchase of a security on margin. The Virginia Municipal
Bond Fund, The Maryland Municipal Bond Fund, The Treasury Money Market
Fund, The Money Market Fund, and The Tax-Free Money Market Fund may not
sell any securities short.
Pledging Assets
The Funds will not mortgage, pledge, or hypothecate any assets except
to secure permitted borrowings. In these cases the Funds, except The
Tax-Free Money Market Fund, may pledge assets having a market value not
exceeding the lesser of the dollar amounts borrowed or 15% of the value
of total assets of a Fund at the time of the pledge. Margin deposits
for the purchase and sale of financial futures contracts and related
options are not deemed to be a pledge.
Lending Cash or Securities
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund,
The Style Manager Fund, The Treasury Money Market Fund and The Money
Market Fund, will not lend any of their assets, except portfolio
securities up to one-third of the value of their total assets. This
shall not prevent a Fund from purchasing or holding bonds, debentures,
notes, certificates of indebtedness, or other debt securities, entering
into repurchase agreements, or engaging in other transactions where
permitted by a Fund's investment objective, policies, and limitations
or the Trust's Declaration of Trust.
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund
will not lend any of their assets, except that they may acquire
publicly or nonpublicly issued municipal securities or temporary
investments or enter into repurchase agreements as permitted by a
Fund's investment objective, policies, limitations and Declaration of
Trust.
The Tax-Free Money Market Fund will not lend any of its assets except
that it may purchase or hold portfolio securities permitted by its
investment objective, policies and limitations, or Declaration of
Trust.
<PAGE>
Investing in Restricted Securities
Except for The Tax-Free Money Market Fund, the Funds will not invest
more than 10% of their net assets in securities subject to restrictions
on resale under the Securities Act of 1933 (except certain restricted
securities which meet the criteria for liquidity as established by the
Board of Trustees. With respect to The U.S. Government Securities Fund,
The Style Manager: Large Cap Fund, The Style Manager Fund and The Money
Market Fund, this exception specifically extends to commercial paper
issued under Section 4(2) of the Securities Act of 1933 and certain
other restricted securities which meet the criteria for liquidity as
established by the Board of Trustees).
The Tax-Free Money Market Fund will not invest more than 10% of its
total assets in securities subject to restrictions on resale under
federal securities law, except for restricted securities determined to
be liquid under criteria established by the Trustees.
Investing in Commodities
The Funds will not purchase or sell commodities, commodity contracts or
commodity futures contracts except for financial futures contracts in
the case of The Style Manager: Large Cap Fund and The Style Manager
Fund.
Investing in Real Estate
The Funds will not purchase or sell real estate, including limited
partnership interests with respect to The Style Manager Fund, although
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund
and The Style Manager Fund may invest in securities secured by real
estate or interests in real estate or issued by companies, including
real estate investment trusts, which invest in real estate or interests
therein. The Virginia Municipal Bond Fund, The Maryland Municipal Bond
Fund, The Money Market Fund, and The Tax-Free Money Market Fund may
invest in securities of issuers whose business involves the purchase or
sale of real estate or in securities which are secured by real estate
or interests in real estate.
Diversification of Investments
With respect to 75% of the value of its total assets, The U.S.
Government Securities Fund, The Style Manager: Large Cap Fund, The
Style Manager Fund and The Money Market Fund will not purchase
securities issued by any one issuer (other than cash, cash items or
securities issued or guaranteed by the government of the United States
or its agencies or instrumentalities and repurchase agreements
collateralized by such securities), if as a result more than 5% of the
value of its total assets would be invested in the securities of that
issuer. The U.S. Government Fund and The Style Manager: Large Cap Fund
will not acquire more than 10% of the outstanding voting securities of
any one issuer.
Concentration of Investments
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund,
The Style Manager Fund and The Money Market Fund will not invest 25% or
more of the value of their total assets in any one industry. With
respect to The Money Market Fund, investing in bank instruments (such
as time and demand deposits and certificates of deposit), U.S.
government obligations, or instruments secured by these money market
instruments, such as repurchase agreements for U.S. government
obligations, shall not be considered investments in any one industry.
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund
will not purchase securities if, as a result of such purchase, 25% or
more of the value of its total assets would be invested in any one
industry or in industrial development bonds or other securities, the
interest on which is paid from revenues of similar types of projects.
However, these Funds may invest as temporary investments more than 25%
of the value of its assets in cash or cash items, securities issued or
guaranteed by the U.S. government, its agencies, or instrumentalities,
or instruments secured by these money market instruments, such as
repurchase agreements.
The Tax-Free Money Market Fund will not invest 25% or more of the value
of its total assets in any one industry, except that it may invest more
than 25% of its total assets in securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities and industrial
development bonds as long as they are not from the same facility or
similar types of facilities. The Tax-Free Money Market Fund does not
intend to purchase securities that would increase the percentage of its
assets invested in the securities of governmental subdivisions located
in any one state, territory, or U.S. possession to 25% or more.
<PAGE>
Underwriting
The Funds will not underwrite any issue of securities, except as a Fund
may be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its
investment objective, policies, and limitations.
The above limitations cannot be changed with respect to a Fund without approval
of a majority of that Fund's Shares. The following limitations may be changed by
the Trustees without shareholder approval. Shareholders will be notified before
any material change in these limitations becomes effective.
Investing in Illiquid Securities
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund,
The Style Manager Fund, The Virginia Municipal Bond Fund, and The
Maryland Municipal Bond Fund will not invest more than 15% of the value
of their net assets in illiquid securities, including repurchase
agreements providing for settlement in more than seven days after
notice, and certain restricted securities determined by the Trustees
not to be liquid; and, in the case of The Virginia Municipal Bond Fund
and The Maryland Municipal Bond Fund, specifically including
participation interests and variable rate municipal securities without
a demand feature or with a demand feature of longer than seven days and
which the adviser believes cannot be sold within seven days. The
Treasury Money Market Fund, The Money Market Fund, and The Tax-Free
Money Market Fund will not invest more than 10% of the value of their
net assets in illiquid securities, including repurchase agreements
providing for settlement more than seven days after notice and certain
securities determined by the Trustees not to be liquid; and, in the
case of The Money Market Fund, specifically including non-negotiable
fixed income time deposits with maturities over seven days.
Investing in Securities of Other Investment Companies
The Funds will limit their respective investment in other investment
companies to no more than 3% of the total outstanding voting stock of
any investment company, invest no more than 5% of total assets in any
one investment company, or invest more than 10% of total assets in
investment companies in general , unless permitted to do so by order of
the SEC. The U.S. Government Securities Fund, The Style Manager: Large
Cap Fund, The Style Manager Fund, The Treasury Money Market Fund and
The Money Market Fund will purchase securities of closed-end investment
companies only in open market transactions involving only customary
broker's commissions. However, these limitations are not applicable if
the securities are acquired in a merger, consolidation, reorganization,
or acquisition of assets. With respect to The Treasury Money Market
Fund and The Money Market Fund, the Funds will limit their investments
and the securities of other investment companies to those of The Money
Market Funds having investment objectives and policies similar to their
own. The Virginia Municipal Bond Fund and The Maryland Municipal Bond
Fund will invest in other investment companies primarily for the
purposes of investing short-term cash which has not yet been invested
in other portfolio instruments. The adviser will waive its investment
advisory fee on assets invested in securities of open-end investment
companies.
Purchasing Securities to Exercise Control
A Fund will not purchase securities of a company for the purpose of
exercising control or management.
Selling Short
Neither The U.S. Government Securities Fund, The Style Manager: Large
Cap Fund, nor The Style Manager Fund will sell securities short unless
(1) it owns, or has a right to acquire, an equal amount of such
securities, or (2) it has segregated an amount of its other assets
equal to the lesser of the market value of the securities sold short or
the amount required to acquire such securities. The segregated amount
will not exceed 10% of The U.S. Government Securities Fund's nor The
Style Manager: Large Cap Fund's net assets.
With respect to The Style Manager Fund, the segregated amount will not
exceed 5% of the Fund's net assets. The dollar amount of short sales at
any one time shall not exceed 5% of the Fund's net assets and the value
of securities of any one issuer in which the Fund is short may not
exceed the lesser of 2% of the value of the Fund's net assets or 2% of
the securities of any class of any issuer.
While in a short position, the Fund will retain the securities, rights
or segregated assets.
<PAGE>
Except with respect to the Funds' policy of borrowing money, if a percentage
limitation is adhered to at the time of investment, a later increase or decrease
in percentage resulting from any change in value or net assets will not result
in a violation of such restriction.
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund and The
Style Manager Fund have no present intent to borrow money, pledge securities,
sell securities short, or invest in restricted or illiquid securities in excess
of 5% of the value of their respective net assets in the coming fiscal year.
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund have no
present intent to issue senior securities or borrow money, pledge securities,
invest in restricted or illiquid securities, sell securities short, or engage in
when-issued and delayed delivery transactions in excess of 5% of the value of
its net assets during the fiscal period.
The Treasury Money Market Fund and The Money Market Fund do not expect to issue
senior securities or borrow money, pledge securities, sell securities short,
engage in when-issued and delayed delivery transactions or reverse repurchase
agreements, for The Money Market Fund only, in excess of 5% of the value of
their net assets during the coming fiscal year.
The Tax-Free Money Market Fund does not intend to borrow money, sell securities
short, or pledge securities in excess of 5% of the value of its net assets
during the coming fiscal year.
Virtus Funds Management
- --------------------------------------------------------------------------------
Officers and Trustees are listed with their addresses, birthdates, present
positions with Virtus Funds, and principal occupations.
- --------------------------------------------------------------------------------
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp. and Federated Global Research Corp.; Chairman, Passport Research, Ltd.;
Chief Executive Officer and Director or Trustee of the Funds.Mr. Donahue is the
father of J. Christopher Donahue, Executive Vice President of the Company.
- --------------------------------------------------------------------------------
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Director, Member of
Executive Committee, University of Pittsburgh; Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; Partner or Trustee in private real estate
ventures in Southwest Florida; formerly, President, Naples Property Management,
Inc. and Northgate Village Development Corporation; Director or Trustee of the
Funds.
- --------------------------------------------------------------------------------
<PAGE>
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.; Director, Ryan
Homes, Inc.; Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or Trustee
of the Funds.
- --------------------------------------------------------------------------------
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine, University of Pittsburgh; Medical Director, University of
Pittsburgh Medical Center - Downtown; Member, Board of Directors, University of
Pittsburgh Medical Center; formerly, Hematologist, Oncologist, and Internist,
Presbyterian and Montefiore Hospitals; Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western Region;
Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
Edward C. Gonzales *
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Shareholder Services Company; Trustee or Director of some of the Funds;
President, Executive Vice President and Treasurer of some of the Funds.
- --------------------------------------------------------------------------------
<PAGE>
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street Boston
Corporation; Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica &
Murray; Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., National Defense University and U.S. Space Foundation; President
Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council
for Environmental Policy and Technology, Federal Emergency Management Advisory
Board and Czech Management Center, Prague; Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/Marketing/Conference Planning; Director or Trustee of the Funds
- --------------------------------------------------------------------------------
<PAGE>
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services Company, and Federated Shareholder
Services; Director, Federated Services Company; President or Executive Vice
President of the Funds; Director or Trustee of some of the Funds. Mr. Donahue is
the son of John F. Donahue, Chairman and Trustee of the Company.
- --------------------------------------------------------------------------------
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President and Secretary
Executive Vice President, Secretary, and Trustee, Federated Investors; Trustee,
Federated Advisers, Federated Management, and Federated Research; Director,
Federated Research Corp. and Federated Global Research Corp.; Trustee, Federated
Shareholder Services Company; Director, Federated Services Company; President
and Trustee, Federated Shareholder Services; Director, Federated Securities
Corp.; Executive Vice President and Secretary of the Funds; Treasurer of some of
the Funds.
- --------------------------------------------------------------------------------
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some of the
Funds; Director or Trustee of some of the Funds.
- --------------------------------------------------------------------------------
Joseph S. Machi
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President and Assistant Treasurer of some of the Funds.
- --------------------------------------------------------------------------------
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board between
meetings of the Board.
<PAGE>
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Arrow Funds; Automated Government
Money Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust
Series II; Cash Trust Series, Inc. ; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity
Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities,
Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Investment Portfolios; Federated Investment Trust; Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond
Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; and World Investment Series, Inc.
Fund Ownership
Officers and Trustees own less than 1% of the outstanding shares of each Fund.
As of October 31, 1997, the following shareholders of record owned 5% or more of
the outstanding shares of the Funds: Stephens Inc., Little Rock, AR, for the
exclusive benefit of their customers owned approximately 4,204,370 (40.26%) of
the Investment Shares of U.S. Government Securities Fund; 1,208,630 (24.63%) of
the Investment Shares of The Style Manager: Large Cap Fund; 1,742,805 (34.81%)
of the Shares of The Style Manager Fund; 1,758,994 (33.10%) of the Investment
Shares of The Virginia Municipal Bond Fund; 629,671 (25.07%) of the Investment
Shares of The Maryland Municipal Bond Fund; 18,064,663 (15.34%) of the
Investment Shares of Treasury Money Market Fund; 21,024,493 (27.80%) of the
Investment Shares of Money Market Fund; and 3,716,118 (6.60%) of the Shares of
The Tax-Free Money Market Fund. As of October 31, 1997, Bova & Co., Richmond,
VA, acting in various capacities for numerous accounts, owned approximately
5,165,113 (100%) of the Trust Shares of The U.S. Government Securities Fund;
1,613,118 (99%) of the Trust Shares of The Style Manager: Large Cap Fund;
1,693,162 (33.82%) of the Shares of The Style Manager Fund; 1,802,105 (99.78%)
of the Trust Shares of The Virginia Municipal Bond Fund; 434,681 (100%) of the
Trust Shares of The Maryland Municipal Bond Fund; 206,814,801 (99.92%) of the
Trust Shares of Treasury Money Market Fund; 177,645,283 (96.43%) of the Trust
Shares of The Money Market Fund; and 42,583,759 (75.60%) of the Shares of The
Tax-Free Money Market Fund.
<PAGE>
Officers and Trustees Compensation
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
NAME , AGGREGATE TOTAL COMPENSATION
POSITION WITH COMPENSATION FROM PAID TO TRUSTEES FROM
TRUST TRUST+ TRUST AND FUND COMPLEX
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
John F. Donahue, $0 $-0- for the Trust and
Chairman and Trustee 2 investment companies
Thomas G. Bigley $2,001 $3,217 for the Trust and
Trustee 2 investment companies
John T. Conroy, Jr., $2,198 $3,538 for the Trust and
Trustee 2 investment companies
William J. Copeland, $2,198 $3,538 for the Trust and
Trustee 2 investment companies
James E. Dowd $2,198 $3,538 for the Trust and
Trustee 2 investment companies
Lawrence D. Ellis, M.D., $2,001 $3,217 for the Trust and
Trustee 2 investment companies
Edward L. Flaherty, Jr., $2,198 $3,538 for the Trust and
Trustee 2 investment companies
Edward C. Gonzales, $0 $-0- for the Trust and
President, Treasurer and Trustee 2 investment companies
Peter E. Madden, $2,001 $3,217 for the Trust and
Trustee 2 investment companies
Wesley W. Posvar, $2,001 $3,217 for the Trust and
Trustee 2 investment companies
Marjorie P. Smuts, $2,001 $3,217 for the Trust and
Trustee 2 investment companies
</TABLE>
+The aggregate compensation is provided for the Trust which is comprised of
eight portfolios.
Trustee Liability
The Trust's Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
Investment Advisory Services
- --------------------------------------------------------------------------------
Adviser to the Trust
The Trust's investment adviser is Virtus Capital Management, Inc., a
wholly-owned subsidiary of Signet Banking Corporation. Because of the internal
controls maintained by Signet Bank to restrict the flow of non-public
information, Fund investments are typically made without any knowledge of Signet
Bank's or its affiliates' lending relationships with an issuer.
The adviser shall not be liable to the Trust, a Fund, or any shareholder of any
of the Funds for any losses that may be sustained in the purchase, holding, or
sale of any security or for anything done or omitted by it, except acts or
omissions involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its contract with the Trust.
<PAGE>
Advisory Fees
For its advisory services, Virtus Capital Management, Inc. receives an annual
investment advisory fee as described in the prospectus. During the fiscal years
ended September 30, 1997, 1996, and 1995, the adviser earned fees from: The U.S.
Government Securities Fund of $1,325,841, $1,612,364, and $1,581,364,
respectively, of which $37,709, $276,121, and $589,885, respectively, were
voluntarily waived; The Style Manager: Large Cap Fund of $749,609, $704,007, and
$678,512, respectively, of which $0, $0, and $189,983, respectively, were
voluntarily waived; The Virginia Municipal Bond Fund of $650,276, $762,051, and
$775,247, respectively, of which $0, $20,993, and $227,301, respectively, were
voluntarily waived; The Maryland Municipal Bond Fund of $273,851, $315,941, and
$316,194, respectively, of which $0, $106,102, and $187,476, respectively, were
voluntarily waived; The Treasury Money Market Fund of $1,897,464, $1,721,497,
and $2,347,424, respectively, of which $46,840, $209,248, and $469,485,
respectively, were voluntarily waived; The Money Market Fund of $1,250,019,
$1,249,811, and $868,490, respectively, of which $57,472, $299,129, and
$336,697, respectively, were voluntarily waived; and The Tax Free Money Market
Fund of $302,027, $462,900 and $262,792, respectively, of which $94,455,
$184,473, and $262,792, respectively, were voluntarily waived. During the fiscal
years ended September 30, 1997, 1996 and for the period from March 7, 1995 (date
of initial public investment) to September 30, 1996, the adviser earned fees
from The Style Manager Fund of $830,673, $657,611 and $374,393, respectively, of
which $326,846, $290,966 and $374,393, respectively, were voluntarily waived.
Sub-Adviser to The Style Manager: Large Cap Fund and The Style Manager Fund
Trend Capital Management, Inc. is the sub-adviser to The Style Manager: Large
Cap Fund and The Style Manager Fund.
Sub-Advisory Fees
For its sub-advisory services, the Sub-Adviser receives an annual sub-advisory
fee as described in the prospectus. For the fiscal years ended September 30,
1997, 1996, and 1995, the sub-adviser earned fees from The Style Manager; Large
Cap Fund of $144,886, $0, and $0, respectively, of which $0, $0, and $0,
respectively, were voluntarily waived. For the fiscal years ended September 30,
1997, 1996, and for the period from March 7, 1995 (date of initial public
investment) to September 30, 1995, the sub-adviser earned fees from The Style
Manager Fund of $74,119, $0, and $0, respectively, of which $0, $0, and $0,
respectively, were voluntarily waived.
Other Services
- --------------------------------------------------------------------------------
Administrative Services
Federated Administrative Services, which is a subsidiary of Federated Investors,
provides administrative personnel and services to the Funds for the fees set
forth in the prospectus. For the fiscal years ended September 30, 1997, 1996,
and 1995, the Funds incurred administrative services fees as follows: The U.S.
Government Securities Fund incurred $172,113, $211,649, and $226,246,
respectively, none of which was voluntarily waived; The Style Manager: Large Cap
Fund incurred $97,360, $92,298, and $97,229, respectively, none of which was
voluntarily waived; The Virginia Municipal Bond Fund incurred $84,421, $100,059,
and $110,908, respectively, none of which was voluntarily waived; The Maryland
Municipal Bond Fund incurred $75,000, $67,667, and $45,246, respectively, none
of which was voluntarily waived; The Treasury Money Market Fund incurred
$369,581, $336,951, and $500,283, respectively, none of which was voluntarily
waived; The Money Market Fund incurred $243,450, $254,134, and $185,586,
respectively, none of which was voluntarily waived; and The Tax-Free Money
Market Fund incurred $75,171, $95,363, and $58,355, respectively, none of which
was voluntarily waived. For the fiscal years ended September 30, 1997, 1996 and
for the period from March 7, 1995 (date of initial public investment) to
September 30, 1995, The Style Manager Fund incurred $75,125, $93,863 and
$85,069, respectively, in administrative services fees, none of which was
voluntarily waived.
<PAGE>
Custodian
Signet Trust Company, Richmond, Virginia, is custodian for the securities and
cash of the Funds. Under the Custodian Agreement, Signet Trust Company holds the
Funds' portfolio securities in safekeeping and keeps all necessary records and
documents relating to its duties.
Transfer Agent
Federated Shareholder Services Company, Boston, Massachusetts, is transfer agent
for the Shares of the Funds and dividend disbursing agent for the Funds.
Independent Auditors
The independent auditors for the Funds are Deloitte & Touche LLP, Pittsburgh,
Pennsylvania.
Brokerage Transactions
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
guidelines established by the Board of Trustees.
The adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Funds or to the
adviser and may include:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the adviser in advising the
Funds and other accounts. To the extent that receipt of these services may
supplant services for which the adviser or its affiliates might otherwise have
paid, it would tend to reduce their expenses.
For the fiscal years ended September 30, 1997, 1996 and 1995, The Style Manager:
Large Cap Fund paid $140,842, $403,888 and $562,493, respectively, in
commissions on brokerage transactions. For the fiscal years ended September 30,
1997, 1996 and for the period from March 7, 1995 (date of initial public
investment) to September 30, 1995, The Style Manager Fund paid $215,622,
$311,323, and $0, respectively, in commissions on brokerage transactions.
<PAGE>
Purchasing Shares
- --------------------------------------------------------------------------------
Shares of the Funds are sold at their net asset value without a sales charge on
days the New York Stock Exchange is open for business. The procedure for
purchasing Shares of the Funds is explained in the prospectus under "Investing
in Shares."
Distribution Plan
The Trust has adopted a Plan for Investment Shares of the The U.S. Government
Securities Fund, The Style Manager: Large Cap Fund, The Virginia Municipal Bond
Fund, The Maryland Municipal Bond Fund, The Treasury Money Market Fund and The
Money Market Fund and Shares of The Style Manager Fund and The Tax-Free Money
Market Fund pursuant to Rule 12b-1 which was promulgated by the Securities and
Exchange Commission pursuant to the Investment Company Act of 1940. The Plan
provides that the Funds' distributor, Federated Securities Corp., shall act as
the distributor of Shares, and it permits the payment of fees to brokers and
dealers for distribution and administrative services and to administrators for
administrative services. The Plan is designed to (i) stimulate brokers and
dealers to provide distribution and administrative support services to the Funds
and their holders of Shares and (ii) stimulate administrators to render
administrative support services to the Funds and their holders of Shares. These
services are to be provided by a representative who has knowledge of the holder
of Shares' particular circumstances and goals, and include, but are not limited
to: providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
Funds; assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Trust reasonably requests.
Other benefits which the Funds hope to achieve through the Plan include, but are
not limited to the following: (1) an efficient and effective administrative
system; (2) a more efficient use of assets of holders of Shares by having them
rapidly invested in the Funds with a minimum of delay and administrative detail;
and (3) an efficient and reliable records system for holders of Shares and
prompt responses to shareholder requests and inquiries concerning their
accounts.
By adopting the Plan, the Board of Trustees expects that the Funds will be able
to achieve a more predictable flow of cash for investment purposes and to meet
redemptions. This will facilitate more efficient portfolio management and assist
the Funds in seeking to achieve their respective investment objectives. By
identifying potential investors in Shares whose needs are served by a particular
Fund's objective, and properly servicing these accounts, the Funds may be able
to curb sharp fluctuations in rates of redemptions and sales.
For the fiscal years ended September 30, 1997, 1996, and 1995, the Funds paid
fees to brokers and administrators (financial institutions) pursuant to the Plan
as follows: The U.S. Government Securities Fund $279,386, $297,511, and
$268,621, respectively; The Style Manager: Large Cap Fund $175,775, $128,090,
and $80,046, respectively; The Virginia Municipal Bond Fund, $158,225, $174,114,
and $174,523, respectively; The Maryland Municipal Bond Fund, $73,620, $82,278,
and $80,136, respectively; The Treasury Money Market Fund, $331,053, $270,001,
and $80,097, respectively; and The Money Market Fund, $206,038, $198,913, and
$79,316, respectively. For the fiscal years ended September 30, 1997, 1996 and
1995, the Tax-Free Money Market Fund paid no fees pursuant to the Plan. For the
fiscal years ended September 30, 1997, 1996 and for the period from March 7,
1995 (date of initial public investment) to September 30, 1995, The Style
Manager Fund paid no fees pursuant to the Plan.
Conversion to Federal Funds
It is the policy of The Treasury Money Market Fund, The Money Market Fund, and
The Tax-Free Money Market Fund to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from shareholders must
be in federal funds or be converted into federal funds. Federated Services
Company acts as the shareholder's agent in depositing checks and converting them
to federal funds.
<PAGE>
Determining Net Asset Value
- --------------------------------------------------------------------------------
Net asset values of The U.S. Government Securities Fund, The Style Manager:
Large Cap Fund, The Style Manager Fund, The Virginia Municipal Bond Fund and The
Maryland Municipal Bond Fund generally change each day. The Treasury Money
Market Fund, The Money Market Fund, and The Tax-Free Money Market Fund attempt
to stabilize the value of their Shares at $1.00. The days on which the net asset
value is calculated by these Funds are described in the prospectus.
Determining Market Value of Securities
The market value of The U.S. Government Securities Fund's portfolio securities
is determined as follows:
o according to the mean between the over-the-counter bid and asked
prices provided by an independent pricing service, if available, or
at fair value as determined in good faith by the Fund's Board of
Trustees; or
o for short-term obligations with remaining maturities of 60 days or
less at the time of purchase at amortized cost unless the Board of
Trustees determines that particular circumstances of the security
indicate otherwise.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.
The market value of portfolio securities of The Style Manager: Large Cap Fund
and The Style Manager Fund is determined as follows:
o for equity securities, according to the last sale price on a
national securities exchange, if available;
o in the absence of recorded sales for listed equity securities,
according to the mean between the last closing bid and asked prices;
o for unlisted equity securities, the latest bid prices;
o for bonds and other fixed income securities, as determined by an
independent pricing service;
o for short-term obligations, according to the mean between bid and
asked prices as furnished by an independent pricing service or for
short-term obligations with remaining maturities of 60 days or less
at the time of purchase at amortized cost; or
o for all other securities, at fair value as determined in good faith
by the Board of Trustees.
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund, and The
Style Manager Fund will value futures contracts, options, and put options on
futures and at their market values established by the exchanges at the close of
option trading on such exchanges unless the Board of Trustees determine in good
faith that another method of valuing option positions is necessary to appraise
their fair value. Over-the-counter put options will be valued at the mean
between the bid and the asked prices.
Use of the Amortized Cost Method
With respect to The Treasury Money Market Fund, The Money Market Fund, and The
Tax-Free Money Market Fund, the Trustees have decided that the best method for
determining the value of portfolio instruments is amortized cost. Under this
method, portfolio instruments are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at current
market value.
A Fund's use of the amortized cost method of valuing portfolio instruments
depends on its compliance with certain conditions in Rule 2a-7 (the "Rule")
promulgated by the Securities and Exchange Commission under the Investment
Company Act of 1940. Under the Rule, the Trustees must establish procedures
reasonably designed to stabilize the net asset value per share, as computed for
purposes of distribution and redemption, at $1.00 per Share, taking into account
current market conditions and a Fund's investment objective.
<PAGE>
Under the Rule, a Fund is permitted to purchase instruments which are subject to
demand features or standby commitments. As defined by the Rule, a demand feature
entitles a Fund to receive the principal amount of the instrument from the
issuer or a third party on (1) no more than 30 days' notice or (2) at specified
intervals not exceeding one year on no more than 30 days' notice. A standby
commitment entitles a Fund to achieve same day settlement and to receive an
exercise price equal to the amortized cost of the underlying instrument plus
accrued interest at the time of exercise.
The Funds acquire instruments subject to demand features and standby commitments
to enhance the instrument's liquidity. The Funds treat demand features and
standby commitments as a part of the underlying instruments, because the Funds
do not acquire them for speculative purposes and cannot transfer them separately
from the underlying instruments. Therefore, although the Rule defines demand
features and standby commitments as "puts", the Fund does not consider them to
be separate investments for purposes of its investment policies.
Monitoring Procedures
The Trustees' procedures include monitoring the relationship between
the amortized cost value per share and the net asset value per share
based upon available indications of market value. The Trustees will
decide what, if any, steps should be taken if there is a difference of
more than .50% between the two. The Trustees will take any steps they
consider appropriate (such as redemption in kind or shortening the
average portfolio maturity) to minimize any material dilution or other
unfair results arising from differences between the two methods of
determining net asset value.
Investment Restrictions
The Rule requires that a Fund limit its investments to instruments
that, in the opinion of the Trustees, present minimal credit risks and
have received the requisite rating from one or more nationally
recognized statistical rating organizations. If the instruments are not
rated, the Trustees must determine that they are of comparable quality.
The Rule also requires a Fund to maintain a dollar-weighted average
portfolio maturity (not more than 90 days) appropriate to the objective
of maintaining a stable net asset value of $1.00 per Share. In
addition, no instrument with a remaining maturity of more than 397 days
can be purchased by a Fund.
Should the disposition of a portfolio security result in a
dollar-weighted average portfolio maturity of more than 90 days, a Fund
will invest its available cash to reduce the average maturity to 90
days or less as soon as possible.
A Fund may attempt to increase yield by trading portfolio securities to take
advantage of short-term market variations. Under the amortized cost method of
valuation, neither the amount of daily income nor the net asset value is
affected by any unrealized appreciation or depreciation of the portfolio.
In periods of declining interest rates, the indicated daily yield on Shares,
computed by dividing the annualized daily income on a Fund's portfolio by the
net asset value computed as above, may tend to be higher than a similar
computation made by using a method of valuation based upon market prices and
estimates.
In periods of rising interest rates, the indicated daily yield on Shares
computed the same way may tend to be lower than a similar computation made by
using a method of calculation based upon market prices and estimates.
Valuing Municipal Securities
With respect to The Virginia Municipal Bond Fund, The Maryland Municipal Bond
Fund, and The Tax-Free Money Market Fund, the Board of Trustees uses an
independent pricing service to value municipal securities. The independent
pricing service takes into consideration: yield; stability; risk; quality;
coupon rate; maturity; type of issue; trading characteristics; special
circumstances of a security or trading market; and any other factors or market
data it considers relevant in determining valuations for normal institutional
size trading units of debt securities and does not rely exclusively on quoted
prices.
<PAGE>
Use of Amortized Cost
With respect to The Virginia Municipal Bond Fund and The Maryland Municipal Bond
Fund, the Board of Trustees has decided that the fair value of debt securities
purchased by a Fund with remaining maturities of 60 days or less at the time of
purchase shall be their amortized cost value, unless the particular
circumstances of the security indicate otherwise. Under this method, portfolio
instruments and assets are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at current
market value. The Executive Committee continually assesses this method of
valuation and recommends changes where necessary to assure that the Fund's
portfolio instruments are valued at their fair value as determined in good faith
by the Trustees.
Redeeming Shares
- --------------------------------------------------------------------------------
Each Fund redeems Shares at the next computed net asset value after a Fund
receives the redemption request, less a contingent deferred sales charge, if
applicable. Redemption procedures are explained in the prospectus under
"Redeeming Investment Shares."
Redemption in Kind
Although the Trust intends to redeem Shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from a Fund's portfolio.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the Board
of Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 of the Investment Company Act
of 1940 under which a Fund is obligated to redeem Shares for any one shareholder
in cash only up to the lesser of $250,000 or 1% of any class' net asset value
during any 90-day period. Although a Fund reserves the right to redeem Shares in
kind, it will activate this right only after providing 60 days' notice to
shareholders.
Massachusetts Partnership Law
- --------------------------------------------------------------------------------
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation, or instrument the Trust or its Trustees
enter into or sign.
In the unlikely event a shareholder is held personally liable for obligations of
the Trust, the Trust is required to use its property to protect or compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust cannot meet its obligations to indemnify shareholders and pay
judgments against them from its assets.
Tax Status
- --------------------------------------------------------------------------------
The Funds' Tax Status
The Funds will pay no federal income tax because they expect to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, each Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
<PAGE>
Shareholders' Tax Status
With respect to The U.S. Government Securities Fund, The Style Manager: Large
Cap Fund, The Style Manager Fund, The Treasury Money Market Fund and The Money
Market Fund, shareholders are subject to federal income tax on dividends
received as cash or additional shares. No portion of any income dividend paid by
a Fund is eligible for the dividends received deduction available to
corporations. These dividends, and any short-term capital gains, are taxable as
ordinary income.
With respect to The Virginia Municipal Bond Fund, The Maryland Municipal Bond
Fund, and The Tax-Free Money Market Fund, no portion of any income dividend paid
by a Fund is eligible for the dividends received deduction available to
corporations.
Capital Gains
Capital gains experienced by The Treasury Money Market Fund and The
Money Market Fund could result in an increase in dividends. Capital
losses could result in a decrease in dividends. If, for some
extraordinary reason, these Funds realize net long-term capital gains,
such net long-term capital gains will be distributed at least once
every 12 months.
With respect to The U.S. Government Securities Fund, The Style Manager: Large
Cap Fund and The Style Manager Fund, long-term capital gains distributed to
shareholders will be treated as long-term capital gains regardless of how long
shareholders have held Shares.
With respect to The Maryland Municipal Bond Fund, The Virginia Municipal Bond
Fund, and The Tax-Free Money Market Fund, capital gains or losses may be
realized by a Fund on the sale of portfolio securities and as a result of
discounts from par value on securities held to maturity. Sales would generally
be made because of:
o the availability of higher relative yields;
o differentials in market values;
o new investment opportunities;
o changes in creditworthiness of an issuer; or
o an attempt to preserve gains or limit losses.
Distribution of long-term capital gains are taxed as such, whether they are
taken in cash or reinvested, and regardless of the length of time the
shareholder has owned the Shares.
Total Return
- --------------------------------------------------------------------------------
The average annual total returns for Investment Shares and Trust Shares of The
U.S. Government Securities Fund for the one-year and five-year periods ended
September 30, 1997 and for the period from October 16, 1990 (date of initial
public investment) to September 30, 1997 were 4.75%, 4.70%, 7.10% and 7.16%,
4.93%, 7.27%, respectively.
The average annual total returns for Investment Shares and Trust Shares of The
Style Manager: Large Cap Fund for the one-year and five-year periods ended
September 30, 1997 and for the period from October 16, 1990 (date of initial
public investment) to September 30, 1997 were 37.02%, 13.84%, 14.03% and 37.37%,
14.09%, 14.21%, respectively.
The average annual total returns for The Style Manager Fund for the one-year
period ended September 30, 1997 and for the period from March 7, 1995 (date of
initial public investment) to September 30, 1997 were 41.85% and 28.04%,
respectively.
The average annual total returns for Investment Shares and Trust Shares of The
Virginia Municipal Bond Fund for the one-year and five-year periods ended
September 30, 1997 and for the period from October 16, 1990 (date of initial
public investment) to September 30, 1997 were 7.74%, 5.73%, 6.45% and 8.00%,
5.96%, 6.62%, respectively.
The average annual total returns for Investment Shares and Trust Shares of The
Maryland Municipal Bond Fund for the one-year and five-year periods ended
September 30, 1997 and for the period from October 16, 1990 (date of initial
public investment) to September 30, 1997 were 6.92%, 5.33%, 6.01% and 7.19%,
5.56%, 6.18%, respectively.
<PAGE>
The average annual total returns for Investment Shares and Trust Shares of The
Treasury Money Market Fund for the one-year and five-year periods ended
September 30, 1997 and for the period from October 16, 1990 (date of initial
public investment) to September 30, 1997 were 4.58%, 3.93%, 4.18% and 4.84%,
4.15%, 4.34%, respectively.
The average annual total returns for Investment Shares and Trust Shares of The
Money Market Fund for the one-year and five-year periods ended September 30,
1997 and for the period from October 16, 1990 (date of initial public
investment) to September 30, 1997 were 4.67%, 4.11%, 4.36% and 4.93%, 4.31%,
4.50%, respectively.
The average annual total returns for The Tax-Free Money Market Fund for the
one-year period ended September 30, 1997 and for the period from July 27, 1994
(date of initial public investment) to September 30, 1997 were 2.83% and 3.09%,
respectively.
The average annual total return for Shares of each Fund is the average
compounded rate of return for a given period that would equate a $1,000 initial
investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of shares owned at the
end of the period by the net asset value per share at the end of the period. The
number if shares owned at the end of the period is based on the number of shares
purchased at the beginning of the period with $1,000, adjusted over the period
by any additional shares, assuming the monthly/quarterly reinvestment of all
dividends and distributions.
Yield
- --------------------------------------------------------------------------------
The yield for the seven-day period ended September 30, 1997 for The Treasury
Money Market Fund and The Money Market Fund were 4.54% and 4.59%, respectively,
for Investment Shares and 4.79% and 4.84%, respectively, for Trust Shares. The
yield for the seven-day period ended September 30, 1997 for The Tax-Free Money
Market Fund was 3.06%.
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund, The
Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund's yield for
the thirty-day period ended September 30, 1997 was 5.27%, 0.36%, 3.72% and 3.10%
for Investment Shares and 5.52%, 0.61%, 3.97% and 3.35% for Trust Shares. The
yield for the thirty-day period ended September 30, 1997 for The Style Manager
Fund was 0.23%.
The Treasury Money Market Fund, The Money Market Fund, and The Tax-Free Money
Market Fund calculate yield daily, based upon the seven days ending on the day
of the calculation, called the "base period." This yield is computed by:
o determining the net change in the value of a hypothetical account
with a balance of one share at the beginning of the base period,
with the net change excluding capital changes but including the
value of any additional Shares purchased with dividends earned from
the original one share and all dividends declared on the original
and any purchased Shares;
o dividing the net change in the account's value by the value of the
account at the beginning of the base period to determine the base
period return; and
o multiplying the base period return by 365/7.
The yield for Shares of The U.S. Government Securities Fund, The Style Manager:
Large Cap Fund, The Style Manager Fund, The Virginia Municipal Bond Fund and The
Maryland Municipal Bond Fund is determined by dividing the net investment income
per share (as defined by the Securities and Exchange Commission) earned by the
class of shares over a thirty-day period by the maximum offering price per share
of the class of shares on the last day of the period. The yield of the
Investment Shares of the Fund is determined each day by dividing the net
investment income per share (as defined by the Securities and Exchange
Commission) earned by the class of shares over a thirty-day period by the
maximum offering price per share of the class of shares on the last day of the
period. This value is then annualized using semiannual compounding. This means
that the amount of income generated during the thirty-day period is assumed to
be generated each month over a 12-month period and is reinvested every six
months. The yield does not necessarily reflect income actually earned by the
Fund because of certain adjustments required by the Securities and Exchange
Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
<PAGE>
With respect to The U.S. Government Securities Fund and The Style Manager: Large
Cap Fund, the yield will be calculated separately for Investment Shares and
Trust Shares. Because Investment Shares are subject to a 12b-1 fee, the net
yield for Trust Shares for the same period will exceed that of Investment
Shares.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in a Fund,
the performance will be reduced for those shareholders paying those fees.
Effective Yield
- --------------------------------------------------------------------------------
The effective yields for the seven-day period ended September 30, 1997 for The
Treasury Money Market Fund and The Money Market Fund were 4.64% and 4.70%,
respectively, for Investment Shares and 4.90% and 4.96%, respectively, for Trust
Shares. The effective yield for the period ended September 30, 1997 for The
Tax-Free Money Market Fund was 3.11%.
The effective yield of The Treasury Money Market Fund, The Money Market Fund,
and The Tax-Free Money Market Fund is computed by compounding the unannualized
base period return by:
o adding 1 to the base period return;
o raising the sum to the 365/7th power; and
o subtracting 1 from the result.
Tax-Equivalent Yield
- --------------------------------------------------------------------------------
The tax-equivalent yield for both classes of shares for The Virginia Municipal
Bond Fund and The Maryland Municipal Bond Fund, and for The Tax-Free Money
Market Fund is calculated similarly to the yield, but is adjusted to reflect the
taxable yield that either class would have had to earn to equal its actual
yield, assuming a 28% tax rate and also assuming that income earned by the Fund
is 100% tax-exempt.
The tax-equivalent yield for the Investment Shares for the thirty-day period
ended September 30, 1997, was 5.17% for The Virginia Municipal Bond Fund and
4.31% for The Maryland Municipal Bond Fund. The tax-equivalent yield for the
Trust Shares was 5.51% for The Virginia Municipal Bond Fund and 4.65% for The
Maryland Municipal Bond Fund for the same period. The tax-equivalent yield for
The Tax-Free Money Market Fund for the seven-day period ended September 30,
1997, was 4.25%.
<PAGE>
Tax-Equivalency Tables
Both classes of shares may also use a tax-equivalency table in
advertising and sales literature. The interest earned by the municipal
bonds in the Fund's portfolio generally remains free from federal
regular income tax, and is often free from state and local taxes as
well. As the tables below indicate, a "tax-free" investment is an
attractive choice for investors, particularly in times of narrow
spreads between tax-free and taxable yields.
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1997
MULTISTATE MUNICIPAL FUNDS
- ---------------------------------------------------------------------------------------------------------------------------------
FEDERAL INCOME TAX BRACKET:
<S> <C> <C> <C> <C> <C>
15.00% 28.00% 31.00% 36.00% 39.60%
- ---------------------------------------------------------------------------------------------------------------------------------
JOINT $1- $41,201- $99,601- $151,751- OVER
RETURN 41,200 99,600 151,750 271,050 $271,050
SINGLE $1- $24,651- $59,751- $124,651- OVER
RETURN 24,650 59,750 124,650 271,050 $271,050
- ---------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt
Yield Taxable Yield Equivalent
- ---------------------------------------------------------------------------------------------------------------------------------
1.00% 1.18% 1.39% 1.45% 1.56% 1.66%
1.50% 1.76% 2.08% 2.17% 2.34% 2.48%
2.00% 2.35% 2.78% 2.90% 3.13% 3.31%
2.50% 2.94% 3.47% 3.62% 3.91% 4.14%
3.00% 3.53% 4.17% 4.35% 4.69% 4.97%
3.50% 4.12% 4.86% 5.07% 5.47% 5.79%
4.00% 4.71% 5.56% 5.80% 6.25% 6.62%
4.50% 5.29% 6.25% 6.52% 7.03% 7.45%
5.00% 5.88% 6.94% 7.25% 7.81% 8.28%
5.50% 6.47% 7.64% 7.97% 8.59% 9.11%
6.00% 7.06% 8.33% 8.70% 9.38% 9.93%
6.50% 7.65% 9.03% 9.42% 10.16% 10.76%
7.00% 8.24% 9.72% 10.14% 10.94% 11.59%
7.50% 8.82% 10.42% 10.87% 11.72% 12.42%
8.00% 9.41% 11.11% 11.59% 12.50% 13.25%
</TABLE>
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. Furthermore, additional state
and local taxes paid on comparable taxable investments were not used to
increase federal deductions.
The chart above is for illustrative purposes only. It is not an
indicator of past or future performance of Fund shares.
* Some portion of the Fund's income may be subject to the federal
alternative minimum tax and state and local income taxes.
<PAGE>
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1997
STATE OF VIRGINIA
- ---------------------------------------------------------------------------------------------------------------------------------
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
<S> <C> <C> <C> <C> <C>
20.75% 33.75% 36.75% 41.75% 45.35%
- ---------------------------------------------------------------------------------------------------------------------------------
JOINT $1- $41,201- $99,601- $151,751- OVER
RETURN 41,200 99,600 151,750 271,050 $271,050
SINGLE $1- $24,651- $59,751- $124,651- OVER
RETURN 24,650 59,750 124,650 271,050 $271,050
- ---------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt
Yield Taxable Yield Equivalent
- ---------------------------------------------------------------------------------------------------------------------------------
1.50% 1.89% 2.26% 2.37% 2.58% 2.74%
2.00% 2.52% 3.02% 3.16% 3.43% 3.66%
2.50% 3.15% 3.77% 3.95% 4.29% 4.57%
3.00% 3.79% 4.53% 4.74% 5.15% 5.49%
3.50% 4.42% 5.28% 5.53% 6.01% 6.40%
4.00% 5.05% 6.04% 6.32% 6.87% 7.32%
4.50% 5.68% 6.79% 7.11% 7.73% 8.23%
5.00% 6.31% 7.55% 7.91% 8.58% 9.15%
5.50% 6.94% 8.30% 8.70% 9.44% 10.06%
6.00% 7.57% 9.06% 9.49% 10.30% 10.98%
</TABLE>
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. Furthermore, additional state
and local taxes paid on comparable taxable investments were not used to
increase federal deductions.
<PAGE>
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1997
STATE OF MARYLAND
INCLUDING LOCAL INCOME TAX
- ---------------------------------------------------------------------------------------------------------------------------------
COMBINED FEDERAL, STATE, AND COUNTY INCOME TAX BRACKET:
<S> <C> <C> <C> <C> <C>
22.50% 35.50% 38.50% 43.50% 47.10%
- ---------------------------------------------------------------------------------------------------------------------------------
JOINT $1- $41,201- $99,601- $151,751- OVER
RETURN: 41,200 99,600 151,750 271,050 $271,050
SINGLE $1- $24,651- $59,751- $124,651- OVER
RETURN: 24,650 59,750 124,650 271,050 $271,050
- ---------------------------------------------------------------------------------------------------------------------------------
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
- ---------------------------------------------------------------------------------------------------------------------------------
2.00% 2.58% 3.10% 3.25% 3.54% 3.78%
2.50% 3.23% 3.88% 4.07% 4.42% 4.73%
3.00% 3.87% 4.65% 4.88% 5.31% 5.67%
3.50% 4.52% 5.43% 5.69% 6.19% 6.62%
4.00% 5.16% 6.20% 6.50% 7.08% 7.56%
4.50% 5.81% 6.98% 7.32% 7.96% 8.51%
5.00% 6.45% 7.75% 8.13% 8.85% 9.45%
5.50% 7.10% 8.53% 8.94% 9.73% 10.40%
6.00% 7.74% 9.30% 9.76% 10.62% 11.34%
6.50% 8.39% 10.08% 10.57% 11.50% 12.29%
NOTE: THE MAXIMUM MARGINAL TAX RATE FOR EACH BRACKET WAS USED IN
CALCULATING THE TAXABLE YIELD EQUIVALENT. FURTHERMORE, ADDITIONAL STATE
AND LOCAL TAXES PAID ON COMPARABLE TAXABLE INVESTMENTS WERE NOT USED TO
INCREASE FEDERAL DEDUCTIONS. THE LOCAL INCOME TAX RATE IS ASSUMED TO BE
50% OF THE STATE RATE FOR ALL COUNTIES EXCLUDING ALLEGANY, BALITMORE,
MONTGOMERY, PRINCE GEORGE'S, QUEEN ANNE'S, ST. MARY'S, SOMERSET,
TALBOT, WICOMICO, AND WORCESTER.
Performance Comparisons
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Each Fund's performance of both classes of shares depends upon such variables
as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates on money market instruments, in the case
of The Treasury Money Market Fund and The Money Market Fund, or
changes in interest rates and market value of portfolio securities
in the case of U.S. Government Income Fund, The Style Manager: Large
Cap Fund, The Style Manager Fund, The Virginia Municipal Bond Fund
and Maryland Municipal Bond Fund;
o changes in each Fund's or each class of Shares' expenses;
o the relative amount of The Treasury Money Market Fund's and The
Money Market Fund's cash flow; and
o various other factors.
<PAGE>
In the case of The U.S. Government Securities Fund, The Style Manager: Large Cap
Fund, The Style Manager Fund, The Virginia Municipal Bond Fund and The Maryland
Municipal Bond Fund, either class of shares' performance fluctuates on a daily
basis largely because net earnings and offering price per Share fluctuate daily.
Both net earnings and offering price per Share are factors in the computation of
yield and total return. The Style Manager Fund and The Style Manger: Large Cap
Fund may also from time to time provide information on, or use quotations from,
studies of investment analysts dealing with the management of equity portfolios
on the basis of "style" selection (i.e., value vs. growth) and stock "size"
(i.e., large cap vs. small cap) and may also use historical data demonstrating
the performance records of the value, growth, large cap and small cap components
of the equity market, and combinations thereof.
From time to time, the Funds may provide information on certain markets or
countries and specific equity securities and quote published editorial comments
and/or information from newspapers, magazines, investment newsletters and other
publications such as The Wall Street Journal, Money Magazine, Forbes, Barron's,
USA Today and Mutual Fund Investors. We may also compare the historical returns
on various investments, performance indexes of those investments or economic
indicators. In addition, the Funds may reprint articles about the Funds and
provide them to prospective shareholders. The Broker/Dealer may also make
available economic, financial and investment reports to shareholders and
prospective shareholders. In order to describe these reports, the Funds may
include descriptive information on the reports in advertising literature sent to
the public prior to the mailing of a prospectus. Performance information may be
quoted numerically or may be represented in a table, graph, chart or other
illustration. It should be noted that such performance ratings and comparison
may be made with funds which may have different investment restrictions,
objectives, policies or techniques than the Funds, and that such other funds or
market indicators may be comprised of securities that differ significantly from
the Funds' investments.
The financial publications and/or indices which the Funds use in advertising may
include, but are not limited to:
The U.S. Government Securities Fund
o MERRILL LYNCH COMPOSITE 1-5 YEAR TREASURY INDEX is comprised of
approximately 66 issues of U.S. Treasury securities maturing between
1 and 4.99 years, with coupon rates of 4.25% or more. These total
return figures are calculated for one, three, six, and twelve month
periods and year-to-date and include the value of the bond plus
income and any price appreciation or depreciation.
o SALOMON BROTHERS 3-5 YEARS GOVERNMENT INDEX quotes total returns for
U.S. Treasury issues (excluding flower bonds) which have maturities
of three to five years. These total returns are year-to-date figures
which are calculated each month following January 1.
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes income into account any
change in net asset value over a specific period of time. From time
to time, the Trust will quote its Lipper ranking in the U.S.
Government funds category in advertising and sales literature.
o MERRILL LYNCH 3-5 YEAR TREASURY INDEX is comprised of approximately
24 issues of intermediate-term U.S. government and U.S. Treasury
securities with maturities between 3 and 4.99 years and coupon rates
above 4.25%. Index returns are calculated as total returns for
periods of one, three, six and twelve months as well as
year-to-date.
o MERRILL LYNCH 3-YEAR TREASURY YIELD CURVE INDEX is an unmanaged
index comprised of the most recently issued 3-year U.S. Treasury
notes. Index returns are calculated as total returns for periods of
one, three, six, and twelve months as well as year-to-date.
o LEHMAN BROTHERS GOVERNMENT INTERMEDIATE INDEX is an unmanaged index
comprised of all publicly issued, non-convertible domestic debt of
the U.S. government, or any agency thereof, or any quasi-federal
corporation and of corporate debt guaranteed by the U.S. government.
Only notes and bonds with a minimum outstanding principal of $1
million and maturities of 1-10 years.
o 3 YEAR TREASURY NOTES Source: Wall Street Journal, Bloomberg
Financial Markets, and Telerate.
o MORNINGSTAR, INC., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns. The maximum rating is five stars, and
ratings are effective for two weeks.
<PAGE>
The Style Manager: Large Cap Fund and The Style Manager Fund
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any change
in net asset value over a specific period of time. From time to
time, the Fund will quote its Lipper ranking in the "growth and
income funds" category in advertising and sales literature.
o DOW JONES INDUSTRIAL AVERAGE ("DJIA") represents share prices of
selected blue-chip industrial corporations as well as public utility
and transportation companies. The DJIA indicates daily changes in
the average price of stocks in any of its categories. It also
reports total sales for each group of industries. Because it
represents the top corporations of America, the DJIA index is a
leading economic indicator for the stock market as a whole.
o STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a
composite index of common stocks in industry, transportation, and
financial and public utility companies, compares total returns of
funds whose portfolios are invested primarily in common stocks. In
addition, the Standard & Poor's index assumes reinvestment of all
dividends paid by stocks listed on the index. Taxes due on any of
these distributions are not included, nor are brokerage or other
fees calculated in the Standard & Poor's figures.
o MORNINGSTAR, INC., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns. The maximum rating is five stars, and
ratings are effective for two weeks.
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any change
in net asset value over a specific period of time. From time to
time, the Fund will quote its Lipper ranking in the "general
municipal bond funds" category in advertising and sales literature.
o MORNINGSTAR, INC., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns.
The maximum rating is five stars, and ratings are effective for two
weeks.
The Treasury Money Market Fund
o LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund
will quote its Lipper ranking in the "short-term U.S. government
funds" category in advertising and sales literature.
o SALOMON 30-DAY TREASURY BILL INDEX is a weekly quote of the most
representative yields for selected securities, issued by the U.S.
Treasury, maturing in 30 days.
The Money Market Fund
o LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund
will quote its Lipper ranking in the "money market instruments fund"
category in advertising and sales literature.
o BANK RATE MONITOR NATIONAL INDEX, Miami, Florida, is a financial
reporting service which publishes weekly average rates of 50 leading
bank and thrift institution money market deposit accounts. The rates
published in the index are an average of the personal account rates
offered on the Wednesday prior to the date of publication by ten of
the largest banks and thrifts in each of the five largest Standard
<PAGE>
Metropolitan Statistical Areas. Account minimums range upward from
$2,500 in each institution and compounding methods vary. If more
than one rate is offered, the lowest rate is used. Rates are subject
to change at any time specified by the institution. Investors may
use such indices or reporting services in addition to either class
of shares' prospectus to obtain a more complete view of the Share's
performance before investing. Of course, when comparing performance
of either class of shares to any index, factors such as portfolio
composition and prevailing market conditions should be considered in
assessing the significance of such comparisons.
The Tax-Free Money Market Fund
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund
will quote its Lipper ranking in the "Tax-Free Money Market Funds"
category in advertising and sales literature.
o IBC/DONOGHUE'S MONEY FUND REPORT publishes annualized yields of
hundreds of money market funds on a weekly basis, and through its
Money Market Insight publication, reports monthly and
12-month-to-date investment results for the same money funds.
o MONEY, A MONTHLY MAGAZINE, regularly ranks money market funds in
various categories based on the latest available seven-day compound
effective yield. From time to time, the Fund will quote its Money
ranking in advertising and sales literature.
o SALOMON BROTHERS SIX-MONTH PRIME MUNI NOTES is an index of selected
municipal notes, maturing in six months, whose yields are chosen as
representative of this market. Calculations are made weekly and
monthly.
o SALOMON BROTHERS ONE-MONTH TAX-EXEMPT COMMERCIAL PAPER is an index
of selected tax-exempt commercial paper issues, maturing in one
month, whose yields are chosen as representative of this particular
market. It is a weekly quote of the most representative yields for
selected securities, issued by the U.S. Treasury, maturing in 30
days. Calculations are made weekly and monthly. Ehrlich-Bober & Co.,
Inc. also tracks this Salomon Brothers Index.
Advertisements and other sales literature for both classes of shares may quote
total returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in
either class of shares based on monthly reinvestment of dividends over a
specified period of time.
Economic and Market Information
Advertising and sales literature for the Trust may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by the Trust's portfolio managers and their views and analysis on
how such developments could affect the Funds. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute ("ICI"). For example, according to the ICI,
thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3.5 trillion t the more than 6,000 funds available.
Financial Statements
- --------------------------------------------------------------------------------
The financial statements for the fiscal period ended September 30, 1997, are
incorporated herein by reference from the Funds' Annual Report dated September
30, 1997. A copy of the Annual Report for a Fund may be obtained without charge
by contacting Signet Trust Company at the address located on the back cover of
the combined prospectus or by calling 804-771-7470.
<PAGE>
Appendix
- --------------------------------------------------------------------------------
Standard and Poor's Ratings Group Municipal Bond Rating Definitions
AAA Debt rated AAA has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues
only in small degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effect of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
BB, B, CCC, CC Debt rated BB, B, CCC and CC is regarded, on
balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance
with the terms of the obligation. BB indicates the lowest
degree of speculation and CC the highest degree of
speculation. While such debt will likely have some quality
and protective characteristics, these are outweighed by
large uncertainties of major risk exposures to adverse
conditions.
CI The rating CI is reserved for income bonds on which no
interest is being paid.
D Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears.
Moody's Investors Service, Inc. Municipal Bond Rating Definitions
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are
generally known as high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long
term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
some time in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small. Caa-Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger
with respect to principal or interest.
<PAGE>
Ca Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Fitch Investors Service, Inc., Long-Term Debt Ratings
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high quality. The
obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in
the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated F-1+.
NR NR indicates that Fitch does not the specific issue.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in AAA category.
Standard & Poor's Corporation, Municipal Note Ratings
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
Moody's Investors Service, Short-Term Loan Ratings
MIG1/VMIG1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for
refinancing.
MIG2/VMIG2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
COMBINED
ANNUAL REPORT
SHAREHOLDERS
September 30, 1997
. The U.S. Government Securities Fund
. The Style Manager: Large Cap Fund
. The Style Manager Fund
. The Virginia Municipal Bond Fund
. The Maryland Municipal Bond Fund
. The Treasury Money Market Fund
. The Money Market Fund
. The Tax-Free Money Market Fund
Funds Managed by
[LOGO] VIRTUS
CAPITAL MANAGEMENT, INC.
The Investment Adviser to The Virtus Funds is Virtus Capital Management, Inc., a
subsidiary of Signet Banking corporation. The Virtus Funds are administered by
subsidiaries of Federated Investors, independent of Signet.
Investment products are not deposits, obligations of, or guaranteed by any bank.
They are not insured by FDIC. They involve risk, including the possible loss of
principal invested.
Virtus Capital Management, Inc. is the investment adviser for The Virtus
Funds. Federated Securities Corp. is the distributor of The Funds.
Federated Securities Corp., Distributor, is independent of Signet Bank.
[LOGO] VIRTUS
FUNDS
MESSAGE TO SHAREHOLDERS
- -------------------------------------------------------------------------------
Dear Investor:
Here is your Annual Report for The Virtus Funds, which covers the 12-month
period from October 1, 1996 through September 30, 1997.
On the following pages, you will find complete financial information for every
fund in the Virtus family. The sections for The U.S. Government Securities Fund,
The Style Manager: Large Cap Fund, The Style Manager Fund, The Virginia
Municipal Bond Fund and The Maryland Municipal Bond Fund begin with a management
discussion and analysis by the portfolio manager, followed by a long-term
performance graph. Each fund also contains a complete list of holdings, and the
financial statements.
As the following fund-by-fund summary indicates, the reporting period was very
strong for stocks and improved for bonds:
. THE U.S. GOVERNMENT SECURITIES FUND paid a dividend stream totaling $0.60 per
share for Investment Shares ($0.63 for Trust Shares). These dividends helped
the fund produce a total return of 6.89% for Investment Shares (7.16% for
Trust Shares) in an improved bond market.* The net asset value of both share
classes increased slightly from $9.89 on the first day of the period to $9.95
on the last day of the period. At the end of the reporting period, net assets
amounted to more than $157 million.
. THE STYLE MANAGER: LARGE CAP FUND produced a strong total return of 37.02% for
Investment Shares (37.37% for Trust Shares) in a highly favorable environment
for stocks.* The fund's high-quality stock portfolio paid dividends of $0.14
per share and capital gains of $1.83 per share for Investment Shares (and
dividends of $0.18 per share and capital gains of $1.83 per share for Trust
Shares). The net asset value of each share class rose 19% from the first day
of the period to the last day of the period. At the end of the reporting
period, net assets amounted to more than $106 million.
. THE STYLE MANAGER FUND produced an extremely strong total return of 44.01%*
through dividends totaling $0.24 per share and capital gains totaling $0.63
per share. In a highly favorable stock market environment, the fund's net
asset value soared from $11.47 on the first day of the period to $15.37 on the
last day. Net assets exceeded $76 million on the last day of the reporting
period.
. THE VIRGINIA MUNICIPAL BOND FUND paid double-tax-free dividends** of $0.42 per
share for Investment Shares ($0.45 for Trust Shares) through a portfolio that
included 29 Virginia municipal bonds. This income stream helped the fund
produce a total return of 7.74% for Investment Shares (8.00% for Trust Shares)
in a difficult bond market.* The net asset value for both share classes
increased from $10.68 on the first day of the period to $11.07 on the last day
of the period. Net assets totaled more than $78 million on the last day of the
reporting period.
. THE MARYLAND MUNICIPAL BOND FUND paid double-tax-free dividends** totaling
$0.37 per share for Investment Shares ($0.40 for Trust Shares). This income
stream helped the fund produce a total return of 6.92% for Investment Shares
(7.19% for Trust Shares) in a difficult bond market.* The net asset value for
both share classes increased from $10.56 on the first day of the period to
$10.91 on the last day of the period. At the end of the reporting period, net
assets totaled more than $33 million.
. THE TREASURY MONEY MARKET FUND, a portfolio of U.S. Treasury money market
securities, paid dividends totaling $0.05 per share for both Trust Shares
and Investment Shares. Assets totaled more than $317 million on the last day
of the reporting period.+
. THE MONEY MARKET FUND paid dividends totaling $0.05 per share for both Trust
Shares and Investment Shares through its portfolio of high-quality money
market securities. The fund ended the reporting period with more than $241
million in net assets.+
. THE TAX-FREE MONEY MARKET FUND, a portfolio of municipal money market
securities, paid tax-free dividends totaling $0.03 per share.++ At the end of
the reporting period, net assets reached more than $57 million.+
Thank you for pursuing your financial goals through The Virtus Funds. We hope
you are pleased with your progress.
Sincerely,
/s/ John S. Hall
John S. Hall
Chief Investment Officer
Virtus Capital Management, Inc.
Investment Adviser to The Virtus Funds
November 15, 1997
- --------
* Performance quoted reflects past performance and is not indicative of
future results. Investment return and principal value will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than
their original cost. Reflecting the fund's contingent deferred sales
charge, the total returns of The Virtus Funds were as follows: The U.S.
Government Securities Fund (Investment Shares): 4.75%; The Style Manager
Fund: 41.85%; The Style Manager: Large Cap Fund (Investment Shares):
34.75%; The Virginia Municipal Bond Fund (Investment Shares): 5.70%; and
The Maryland Municipal Bond Fund (Investment Shares): 4.87%.
**Income may be subject to the federal alternative minimum tax.
+Although money market funds seek to maintain a stable net asset value of
$1.00 a share, there is no guarantee that they will be able to do so. An
investment in the fund is neither insured nor guaranteed by the U.S.
government.
++Income may be subject to the federal alternative minimum tax and state and
local taxes.
THE U.S. GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS
----------------------------------------------------------------------------
Overall, during the last year, we have experienced a relatively calm U.S. fixed
income market. While interest rates on maturities longer than two years declined
by roughly .50% during the year, that was reasonably mild compared to yield
changes observed over the last 20 years. Even the extreme yields observed on
five-year Treasuries remained in a fairly narrow range by historical standards.
The five-year Treasury saw a low yield of about 5.80% and a high yield of about
6.80% during the 12-month period ended September 30, 1997. One recent study
indicated that a year in which interest rates moved by less than 2.00% is
reasonably uncommon.
Our overall average maturity position has remained neutral since November 1996.
We felt that interest rates would not move by large amounts, and shifted our
investment focus from direct Treasuries to mortgage-backed securities and a few
callable agencies, which seek to provide a better total return through a higher
income component during periods when interest rates are reasonably quiet. Thus,
we were able to provide a good total return despite not actively making changes
to the average maturity of the portfolio in anticipation of changes in interest
rates. For the fiscal year ended September 30, 1997, the fund produced average
annual total returns of 6.89% and 7.16% for Investment Shares and Trust Shares,
respectively.*
Most of the additional mortgage-backed securities were purchased in the
earlier part of the year. After the first quarter of 1997, the yield advantage
of buying mortgage-backed securities fell to near historical lows and
subsequent additional investments have been postponed. Only recently have
yields become slightly more attractive on mortgage-backed securities. For the
time being, the fund will maintain an average maturity similar to that of the
Lehman Brothers Intermediate Government Bond Index**, and will consider buying
additional mortgage-backed securities to help improve the income and total
return characteristics when we believe the additional yield received will
compensate us for the additional risk of pre-payments associated with
mortgage-backed securities.
- --------
* Performance quoted represents past performance and is not indicative of
future results. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
** Lehman Brothers Intermediate Government Bond Index is comprised of all
publicly issued, non-convertible domestic debt of the U.S. government or
any agency thereof, or any quasi-federal corporation and of corporate debt
guaranteed by the U.S. government. This index is unmanaged and investments
cannot be made in an index.
THE U.S. GOVERNMENT SECURITIES FUND--Investment Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE U.S. GOVERNMENT SECURITIES FUND--INVESTMENT
SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
U.S. Government Securities Fund (the "Fund") from October 16, 1990 (start of
performance) to September 30, 1997, compared to the Lehman Brothers Intermediate
Government Bond Index ("LBIGB").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX A
AVERAGE ANNUAL TOTAL RETURN*** FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 4.75%
5 Year 4.70%
Start of Performance (10/16/90) 7.10%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/16/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. Certain investors
are subject to a 2.00% contingent deferred sales charge on shares redeemed
within five years of purchase date. The Fund's performance assumes the
reinvestment of all dividends and distributions.
***Total return quoted reflects all applicable contingent deferred sales
charges.
+The LBIGB is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The LBIGB has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE U.S. GOVERNMENT SECURITIES FUND--Trust Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE U.S. GOVERNMENT SECURITIES FUND--TRUST
SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
U.S. Government Securities Fund (the "Fund") from October 16, 1990 (start of
performance) to September 30, 1997, compared to the Lehman Brothers Intermediate
Government Bond Index ("LBIGB").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX B
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 7.16%
5 Year 4.93%
Start of Performance (10/16/90) 7.27%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/16/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. The Fund's
performance assumes the reinvestment of all dividends and distributions.
+The LBIGB is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The LBIGB has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE U.S. GOVERNMENT SECURITIES FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
LONG-TERM INVESTMENTS--98.9%
---------------------------------------------------------------
U.S. TREASURY BONDS--12.9%
---------------------------------------------------
$ 4,500,000 United States Treasury Bond, 11.75%, 11/15/2014 $ 6,534,225
---------------------------------------------------
13,000,000 United States Treasury Bond, 7.50%, 5/15/2002 13,785,590
--------------------------------------------------- ------------
Total U.S. Treasury Bonds 20,319,815
--------------------------------------------------- ------------
U.S. TREASURY NOTES--30.3%
---------------------------------------------------
22,000,000 United States Treasury Note, 7.125%, 2/29/2000 22,623,920
---------------------------------------------------
2,000,000 United States Treasury Note, 7.50%, 11/15/2001 2,109,080
---------------------------------------------------
22,000,000 United States Treasury Note, 8.875%, 2/15/1999 22,902,220
--------------------------------------------------- ------------
Total U.S. Treasury Notes 47,635,220
--------------------------------------------------- ------------
GOVERNMENT OBLIGATIONS--55.7%
---------------------------------------------------
993,000 Federal Agricultural Mortgage Association, 7.37%,
8/1/2006 1,036,771
---------------------------------------------------
11,350,428 Federal Home Loan Bank, 6.50%, 9/1/2008 11,330,667
---------------------------------------------------
7,801,431 Federal Home Loan Bank, 6.50%, 11/1/2009 7,818,516
---------------------------------------------------
81,255 Federal Home Loan Bank, 7.968%, 8/1/2019 85,404
---------------------------------------------------
29,676 Federal Home Loan Bank, 8.342%, 12/1/2020 30,979
---------------------------------------------------
8,500,000 Federal Home Loan Mortgage Corp., 7.36%, 6/5/2007 8,825,525
---------------------------------------------------
541,561 Federal Home Loan Mortgage Corp., REMIC, 7.80%,
5/15/2012 542,514
---------------------------------------------------
5,000,000 Federal Home Loan Mortgage Corp., 7.974%, 4/20/2005 5,062,750
---------------------------------------------------
4,480,000 Federal National Mortgage Association, 6.16%,
4/3/2001 4,496,486
---------------------------------------------------
4,500,547 Federal National Mortgage Association, 7.00%,
12/1/1999 4,543,933
---------------------------------------------------
3,705,860 Federal National Mortgage Association, 7.00%,
8/1/2001 3,756,816
---------------------------------------------------
15,418,905 Federal National Mortgage Association, 7.00%,
4/1/2011 15,597,148
---------------------------------------------------
23,204,872 Federal National Mortgage Association, 7.50%,
8/1/2026 23,618,151
---------------------------------------------------
341,912 Federal National Mortgage Association, 8.50%,
12/1/2001 354,200
---------------------------------------------------
64,350 Federal National Mortgage Association, 8.83%,
6/1/2019 66,987
---------------------------------------------------
167,619 Government National Mortgage Association, 8.00%,
3/15/2017 175,948
---------------------------------------------------
320,648 Government National Mortgage Association, 9.00%,
9/15/2021 345,196
--------------------------------------------------- ------------
Total Government Obligations 87,687,991
--------------------------------------------------- ------------
TOTAL LONG-TERM INVESTMENTS (IDENTIFIED COST
$154,447,718) 155,643,026
--------------------------------------------------- ------------
</TABLE>
THE U.S. GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- -------------------------------------------------- ------------
<C> <S> <C>
(A) REPURCHASE AGREEMENT--0.3%
--------------------------------------------------------------
$ 460,430 CS First Boston Corp., 6.05%, dated 9/30/1997, due
10/1/1997
(AT AMORTIZED COST) $ 460,430
-------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST
$154,908,148)(B) $156,103,456
-------------------------------------------------- ------------
</TABLE>
(a) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
(b) The cost of investments for federal tax purposes amounts to $154,908,148.
The net unrealized appreciation of investments on a federal tax basis
amounts to $1,195,308 which is comprised of $1,747,639 appreciation and
$552,331 depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($157,425,080) at September 30, 1997.
The following acronym is used throughout this portfolio:
REMIC--Real Estate Mortgage Investment Conduit
(See Notes which are an integral part of the Financial Statements)
THE STYLE MANAGER: LARGE CAP FUND
- -------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS
----------------------------------------------------------------------------
While small cap value stocks had a very successful year relative to small cap
growth stocks*, large cap growth and value stocks remained neck and neck. In
August 1997, we transitioned the fund to a more neutral position and now are
roughly 50% value and 50% growth oriented.
Virtus Capital Management, Inc. continues to implement the "Style" approach to
managing the fund. We seek to capture the predominant investment style to take
greater advantage of market trends. This involves opportunistic positioning
defined by investment style. "Style" refers to two widely accepted
descriptions of stocks known as growth and value. Growth stocks are those
companies with above-average earnings expectations. Value stocks are those
companies selling at a low price relative to the actual value of their
underlying assets. During the 12-month period ended September 30, 1997, the
Standard & Poor's ("S&P") 500 Value Index+ produced a total return of 39.22%,
and the S&P 500 Growth Index+ returned 41.48%, again neck and neck performance
in a very strong year. During the same period, S&P 500 Index+ returned 40.7%.
For the 12-month period ended September 30, 1997, the fund produced average
annual total returns of 37.02% and 37.37% for Investment Shares and Trust
Shares, respectively.++
- --------
* Small cap stocks have historically experienced greater volatility than
average.
+ The S&P 500 is an unmanaged index comprised of common stocks in industry,
transportation and financial and public utility companies. The S&P 500 Value
Index and the S&P 500 Growth Index are sub-indices of the S&P 500 Index.
Investments cannot be made in an index.
++ Performance quoted represents past performance and is not indicative of
future results. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
THE STYLE MANAGER: LARGE CAP FUND--Investment Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE STYLE MANAGER: LARGE CAP FUND--INVESTMENT
SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
Style Manager: Large Cap Fund (the "Fund") from October 16, 1990 (start of
performance) to September 30, 1997, compared to the Standard & Poor's 500 Index
("S&P 500").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX C
AVERAGE ANNUAL TOTAL RETURN*** FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 34.75%
5 Year 13.84%
Start of Performance (10/16/90) 14.03%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/16/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. Certain investors
are subject to a 2.00% contingent deferred sales charge on shares redeemed
within five years of purchase date. The Fund's performance assumes the
reinvestment of all dividends and distributions.
***Total return quoted reflects all applicable contingent deferred sales
charges.
+The S&P 500 is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The S&P 500
has been adjusted to reflect reinvestment of dividends on securities in the
index. This index is unmanaged.
THE STYLE MANAGER: LARGE CAP FUND--Trust Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE STYLE MANAGER: LARGE CAP FUND--TRUST SHARES
The graph below illustrates the hypothetical investment of $10,000** in The
Style Manager: Large Cap Fund (the "Fund") from October 16, 1990 (start of
performance) to September 30, 1997, compared to the Standard & Poor's 500 Index
("S&P 500").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX D
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 37.37%
5 Year 14.09%
Start of Performance (10/16/90) 14.21%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/16/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. The Fund's
performance assumes the reinvestment of all dividends and distributions.
+The S&P 500 is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The S&P has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE STYLE MANAGER: LARGE CAP FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ---------------------------- ------------
<C> <S> <C>
COMMON STOCKS--97.6%
--------------------------------------
AEROSPACE & DEFENSE--1.7%
----------------------------
25,600 Boeing Co. $ 1,393,600
----------------------------
3,600 Lockheed Martin Corp. 383,850
---------------------------- ------------
Total 1,777,450
---------------------------- ------------
AIRLINES--0.4%
----------------------------
1,500 (a)AMR Corp. 166,031
----------------------------
2,400 Delta Air Lines, Inc. 226,050
---------------------------- ------------
Total 392,081
---------------------------- ------------
ALUMINUM--0.5%
----------------------------
17,000 Alcan Aluminum, Ltd. 590,750
---------------------------- ------------
AUTO PARTS & EQUIPMENT--0.5%
----------------------------
5,200 Goodyear Tire & Rubber Co. 357,500
----------------------------
3,100 TRW, Inc. 170,113
---------------------------- ------------
Total 527,613
---------------------------- ------------
AUTOMOBILES--1.8%
----------------------------
22,600 Chrysler Corp. 831,962
----------------------------
23,400 Ford Motor Co. 1,058,850
---------------------------- ------------
Total 1,890,812
---------------------------- ------------
BANKS MAJOR REGIONAL--7.0%
----------------------------
16,400 Banc One Corp. 915,325
----------------------------
18,100 Bank of New York Co., Inc. 868,800
----------------------------
8,300 Barnett Banks, Inc. 587,225
----------------------------
19,800 First Union Corp. 991,237
----------------------------
4,100 Fleet Financial Group, Inc. 268,806
----------------------------
4,300 KeyCorp 273,588
----------------------------
10,600 Mellon Bank Corp. 580,350
----------------------------
5,500 National City Corp. 338,594
----------------------------
16,200 NationsBank Corp. 1,002,375
----------------------------
10,900 Norwest Corp. 667,625
----------------------------
12,600 PNC Financial Corp. 615,038
----------------------------
5,200 SunTrust Banks, Inc. 353,275
---------------------------- ------------
Total 7,462,238
---------------------------- ------------
BANKS-MONEY CENTER--2.3%
----------------------------
15,600 BankAmerica Corp. 1,143,675
----------------------------
6,600 Citicorp 883,987
----------------------------
6,000 First Chicago NBD Corp. 451,500
---------------------------- ------------
Total 2,479,162
---------------------------- ------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
-----------------------------------------------
BEVERAGE-ALCOHOLIC--0.5%
-------------------------------------
15,000 Seagram Co. Ltd. $ 528,750
------------------------------------- ------------
BEVERAGE-SOFT DRINK--2.2%
-------------------------------------
38,700 Coca-Cola Co. 2,358,281
------------------------------------- ------------
BIOTECHNOLOGY--0.1%
-------------------------------------
2,900 (a)Amgen, Inc. 139,019
------------------------------------- ------------
BROADCAST MEDIA--1.1%
-------------------------------------
27,900 (a)Tele-Communications, Inc., Class A 571,950
-------------------------------------
28,900 (a)U.S. West Media Group 644,831
------------------------------------- ------------
Total 1,216,781
------------------------------------- ------------
BUILDING MATERIALS--0.4%
-------------------------------------
9,500 Masco Corp. 435,219
------------------------------------- ------------
BUILDING SUPPLIES--0.5%
-------------------------------------
4,400 Home Depot, Inc. 229,350
-------------------------------------
10,800 Sherwin-Williams Co. 317,925
------------------------------------- ------------
Total 547,275
------------------------------------- ------------
CHEMICALS--1.6%
-------------------------------------
7,200 Air Products & Chemicals, Inc. 597,150
-------------------------------------
7,600 Dow Chemical Co. 689,225
-------------------------------------
8,700 Union Carbide Corp. 423,581
------------------------------------- ------------
Total 1,709,956
------------------------------------- ------------
CHEMICALS-DIVERSE--0.6%
-------------------------------------
6,100 Du Pont (E.I.) de Nemours & Co. 375,531
-------------------------------------
8,600 Morton International, Inc. 305,300
------------------------------------- ------------
Total 680,831
------------------------------------- ------------
CHEMICALS-SPECIALTY--0.7%
-------------------------------------
5,900 Grace (W.R.) & Co. 434,388
-------------------------------------
7,000 Great Lakes Chemical Corp. 345,188
------------------------------------- ------------
Total 779,576
------------------------------------- ------------
COMMUNICATION EQUIPMENT--0.3%
-------------------------------------
6,400 Harris Corp. 292,800
------------------------------------- ------------
COMPUTER HARDWARE--4.7%
-------------------------------------
11,900 (a)Compaq Computer Corp. 889,525
-------------------------------------
6,700 (a)Dell Computer Corp. 649,062
-------------------------------------
9,800 (a)Digital Equipment Corp. 424,462
-------------------------------------
3,700 (a)EMC Corp. Mass 215,987
-------------------------------------
22,700 International Business Machines Corp. 2,404,781
-------------------------------------
4,700 (a)Seagate Technology, Inc. 169,788
-------------------------------------
11,300 (a)Silicon Graphics, Inc. 296,625
------------------------------------- ------------
Total 5,050,230
------------------------------------- ------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- --------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
-------------------------------------------------
COMPUTER SERVICES--2.3%
---------------------------------------
5,300 (a)3Com Corp. $ 271,625
---------------------------------------
12,200 (a)Cisco Systems, Inc. 891,362
---------------------------------------
8,800 Computer Associates International, Inc. 631,950
---------------------------------------
18,600 (a)Oracle Corp. 677,738
--------------------------------------- ------------
Total 2,472,675
--------------------------------------- ------------
COMPUTER SOFTWARE--0.2%
---------------------------------------
4,300 (a)Parametric Technology Corp. 189,738
--------------------------------------- ------------
CONTAINERS & PACKAGING--0.1%
---------------------------------------
1,700 Union Camp Corp. 104,869
--------------------------------------- ------------
COSMETICS & TOILETRIES--2.5%
---------------------------------------
1,800 Colgate-Palmolive Co. 125,437
---------------------------------------
9,100 Gillette Co. 785,444
---------------------------------------
24,800 Procter & Gamble Co. 1,712,750
--------------------------------------- ------------
Total 2,623,631
--------------------------------------- ------------
ELECTRIC COMPANIES--3.6%
---------------------------------------
6,800 Carolina Power & Light Co. 244,375
---------------------------------------
10,800 Consolidated Edison Co. 367,200
---------------------------------------
11,600 Duke Power Co. 573,475
---------------------------------------
29,700 Edison International 749,925
---------------------------------------
13,600 Entergy Corp. 354,450
---------------------------------------
28,400 P G & E Corp. 658,525
---------------------------------------
15,500 Peco Energy Co. 363,281
---------------------------------------
24,200 Southern Co. 546,013
--------------------------------------- ------------
Total 3,857,244
--------------------------------------- ------------
ELECTRICAL EQUIPMENT--3.3%
---------------------------------------
13,100 AMP, Inc. 701,669
---------------------------------------
41,400 General Electric Co. 2,817,788
--------------------------------------- ------------
Total 3,519,457
--------------------------------------- ------------
ELECTRONICS-DEFENSE--0.4%
---------------------------------------
7,000 Raytheon Co. 413,875
--------------------------------------- ------------
ELECTRONICS-DISTRIBUTORS--0.3%
---------------------------------------
3,900 (W.W.) Grainger Inc. 347,100
--------------------------------------- ------------
ELECTRONICS-SEMICONDUCTORS--3.5%
---------------------------------------
3,400 (a)Applied Materials, Inc. 323,850
---------------------------------------
26,200 Intel Corp. 2,418,588
---------------------------------------
10,200 (a)LSI Logic Corp. 327,675
---------------------------------------
4,900 Micron Technology, Inc. 169,969
---------------------------------------
3,800 Texas Instruments, Inc. 513,475
--------------------------------------- ------------
Total 3,753,557
--------------------------------------- ------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
-----------------------------------------------------
ENTERTAINMENT--1.3%
-------------------------------------------
17,200 (a)Viacom, Inc., Class B $ 543,950
-------------------------------------------
10,200 Disney (Walt) Co. 822,375
------------------------------------------- ------------
Total 1,366,325
------------------------------------------- ------------
FINANCIAL--3.7%
-------------------------------------------
5,500 American Express Co. 450,312
-------------------------------------------
13,100 American General Corp. 679,562
-------------------------------------------
30,200 Federal Home Loan Mortgage Corp. 1,064,550
-------------------------------------------
21,200 Morgan Stanley, Dean Witter, Discover & Co. 1,146,125
-------------------------------------------
9,300 Washington Mutual, Inc. 648,675
------------------------------------------- ------------
Total 3,989,224
------------------------------------------- ------------
FOODS--0.2%
-------------------------------------------
4,400 Kellogg Co. 185,350
------------------------------------------- ------------
GOLD & PRECIOUS METAL MINES--0.4%
-------------------------------------------
15,100 Barrick Gold Corp. 373,725
------------------------------------------- ------------
HEALTHCARE--2.7%
-------------------------------------------
10,000 Abbott Laboratories 639,375
-------------------------------------------
10,600 American Home Products Corp. 773,800
-------------------------------------------
18,000 Bristol-Myers Squibb Co. 1,489,500
------------------------------------------- ------------
Total 2,902,675
------------------------------------------- ------------
HEALTHCARE-DRUGS MAJOR--3.9%
-------------------------------------------
12,900 Eli Lilly & Co. 1,553,644
-------------------------------------------
21,100 Pfizer, Inc. 1,267,319
-------------------------------------------
19,500 Pharmacia & Upjohn, Inc. 711,750
-------------------------------------------
11,400 Schering Plough Corp. 587,100
------------------------------------------- ------------
Total 4,119,813
------------------------------------------- ------------
HEALTHCARE-HOSPITAL MANAGEMENT--0.7%
-------------------------------------------
27,700 Columbia/HCA Healthcare Corp. 796,375
------------------------------------------- ------------
HEALTHCARE-MEDICAL PRODUCTS & SUPPLY--2.5%
-------------------------------------------
14,400 Baxter International, Inc. 752,400
-------------------------------------------
3,800 (a)Boston Scientific Corp. 209,712
-------------------------------------------
2,800 Guidant Corp. 156,800
-------------------------------------------
18,200 Johnson & Johnson 1,048,775
-------------------------------------------
10,600 Medtronic, Inc. 498,200
------------------------------------------- ------------
Total 2,665,887
------------------------------------------- ------------
HOUSEHOLD FURNITURE & APPLIANCES--0.1%
-------------------------------------------
2,100 Whirlpool Corp. 139,256
------------------------------------------- ------------
INSURANCE-BROKERS--0.5%
-------------------------------------------
9,300 AON Corp. 491,737
------------------------------------------- ------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------------------------------ ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
----------------------------------------------
INSURANCE-LIFE/HEALTH--0.9%
------------------------------------
3,900 Aetna Services, Inc. $ 317,606
------------------------------------
8,200 Conseco, Inc. 400,262
------------------------------------
3,000 Jefferson-Pilot Corp. 237,000
------------------------------------ ------------
Total 954,868
------------------------------------ ------------
INSURANCE-MULTILINE--2.1%
------------------------------------
6,200 American International Group, Inc. 639,762
------------------------------------
2,600 Lincoln National Corp. 181,025
------------------------------------
20,100 Travelers Group, Inc. 1,371,825
------------------------------------ ------------
Total 2,192,612
------------------------------------ ------------
INSURANCE-PROPERTY--0.9%
------------------------------------
8,000 Chubb Corp. 568,500
------------------------------------
7,800 SAFECO Corp. 413,400
------------------------------------ ------------
Total 981,900
------------------------------------ ------------
INVESTMENT BANK-BROKERAGE--0.7%
------------------------------------
10,600 Merrill Lynch & Co., Inc. 786,388
------------------------------------ ------------
IRON & STEEL--0.1%
------------------------------------
3,000 USX-U.S. Steel Group, Inc. 104,250
------------------------------------ ------------
LODGING-HOTELS--0.4%
------------------------------------
5,600 (a)ITT Corp. 379,400
------------------------------------ ------------
MACHINERY--1.0%
------------------------------------
9,800 Cooper Industries, Inc. 529,812
------------------------------------
11,700 Ingersoll-Rand Co. 503,831
------------------------------------ ------------
Total 1,033,643
------------------------------------ ------------
MANUFACTURER-SPECIAL--0.4%
------------------------------------
9,600 Parker-Hannifin Corp. 432,000
------------------------------------ ------------
MANUFACTURING-DIVERSE--2.1%
------------------------------------
7,800 Allied-Signal, Inc. 331,500
------------------------------------
2,000 Minnesota Mining & Manufacturing Co. 185,000
------------------------------------
8,000 Tenneco, Inc. 383,000
------------------------------------
4,200 Textron, Inc. 273,000
------------------------------------
3,300 Unilever N.V., ADR 701,663
------------------------------------
4,600 United Technologies Corp. 372,600
------------------------------------ ------------
Total 2,246,763
------------------------------------ ------------
METALS & MINING--0.3%
------------------------------------
11,900 Inco Ltd. 298,244
------------------------------------ ------------
NATURAL GAS--0.3%
------------------------------------
6,900 Williams Cos., Inc. (The) 323,006
------------------------------------ ------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------------------------------ ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
----------------------------------------------
OIL & GAS-DRILL & EQUIPMENT--0.7%
------------------------------------
8,800 Baker Hughes, Inc. $ 385,000
------------------------------------
3,800 Schlumberger Ltd. 319,913
------------------------------------ ------------
Total 704,913
------------------------------------ ------------
OIL-DOMESTIC--1.1%
------------------------------------
8,900 Phillips Petroleum Co. 459,463
------------------------------------
19,200 USX Corp. 714,000
------------------------------------ ------------
Total 1,173,463
------------------------------------ ------------
OIL-INTERNATIONAL--7.4%
------------------------------------
6,300 Amoco Corp. 607,162
------------------------------------
9,900 Chevron Corp. 823,556
------------------------------------
46,700 Exxon Corp. 2,991,719
------------------------------------
12,600 Mobil Corp. 932,400
------------------------------------
45,700 Royal Dutch Petroleum Co., ADR 2,536,350
------------------------------------ ------------
Total 7,891,187
------------------------------------ ------------
PAPER & FOREST PRODUCTS--1.3%
------------------------------------
3,300 Champion International Corp. 201,094
------------------------------------
13,100 International Paper Co. 721,319
------------------------------------
8,600 Weyerhaeuser Co. 510,625
------------------------------------ ------------
Total 1,433,038
------------------------------------ ------------
PHOTOGRAPH/IMAGING--0.9%
------------------------------------
11,600 Xerox Corp. 976,575
------------------------------------ ------------
RAILROADS--1.1%
------------------------------------
2,800 Burlington Northern Santa Fe 270,550
------------------------------------
7,900 CSX Corp. 462,150
------------------------------------
1,100 Norfolk Southern Corp. 113,575
------------------------------------
5,500 Union Pacific Corp. 344,438
------------------------------------ ------------
Total 1,190,713
------------------------------------ ------------
RETAIL-DEPARTMENT STORES--2.2%
------------------------------------
13,600 (a)Federated Department Stores, Inc. 586,500
------------------------------------
11,200 May Department Stores Co. 610,400
------------------------------------
7,700 Nordstrom, Inc. 490,875
------------------------------------
11,400 J.C. Penney Co., Inc. 664,050
------------------------------------ ------------
Total 2,351,825
------------------------------------ ------------
RETAIL-DRUG STORES--0.5%
------------------------------------
9,500 CVS Corp. 540,312
------------------------------------ ------------
RETAIL-GENERAL MERCHANDISE--1.6%
------------------------------------
10,100 (a)Costco Cos., Inc. 380,012
------------------------------------
16,800 Sears, Roebuck & Co. 956,550
------------------------------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- -------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
-------------------------------------------------
RETAIL-GENERAL MERCHANDISE--CONTINUED
--------------------------------------
8,800 Wal-Mart Stores, Inc. $ 322,300
-------------------------------------- ------------
Total 1,658,862
-------------------------------------- ------------
RETAIL-SPECIALTY--0.5%
--------------------------------------
15,100 (a)Toys 'R' Us, Inc. 536,050
-------------------------------------- ------------
SERVICES-COMMERCIAL & CONSUMER--0.4%
--------------------------------------
12,800 Service Corp. International 412,000
-------------------------------------- ------------
SERVICES-DATA PROCESSING--0.3%
--------------------------------------
8,120 First Data Corp., Class 305,007
-------------------------------------- ------------
SPECIALTY PRINTING--0.4%
--------------------------------------
10,900 Donnelley (R.R.) & Sons Co. 388,994
-------------------------------------- ------------
TELECOMMUNICATIONS-CELLULAR--0.7%
--------------------------------------
20,900 (a)Airtouch Communications, Inc. 740,644
-------------------------------------- ------------
TELECOMMUNICATIONS-EQUIPMENT--1.3%
--------------------------------------
10,600 Lucent Technologies, Inc. 862,575
--------------------------------------
3,500 Northern Telecom Ltd. 363,781
--------------------------------------
3,000 (a)Tellabs, Inc. 154,500
-------------------------------------- ------------
Total 1,380,856
-------------------------------------- ------------
TELECOMMUNICATIONS-LONG DISTANCE--3.3%
--------------------------------------
40,800 AT&T Corp. 1,807,950
--------------------------------------
25,500 MCI Communications Corp. 749,063
--------------------------------------
13,700 Sprint Corp. 685,000
--------------------------------------
7,000 (a)WorldCom, Inc. 247,625
-------------------------------------- ------------
Total 3,489,638
-------------------------------------- ------------
TELEPHONE--2.8%
--------------------------------------
10,398 Bell Atlantic Corp. 836,421
--------------------------------------
30,300 BellSouth Corp. 1,401,375
--------------------------------------
20,200 U.S. West, Inc. 777,700
-------------------------------------- ------------
Total 3,015,496
-------------------------------------- ------------
TEXTILES-APPAREL--0.4%
--------------------------------------
5,100 V.F. Corp. 472,388
-------------------------------------- ------------
TOBACCO--1.4%
--------------------------------------
9,200 Fortune Brands, Inc. 309,925
--------------------------------------
9,200 (a)Gallaher Group PLC, ADR 176,525
--------------------------------------
23,600 Philip Morris Cos., Inc. 980,875
-------------------------------------- ------------
Total 1,467,325
-------------------------------------- ------------
TRUCKS & PARTS--0.1%
--------------------------------------
1,900 Cummins Engine Co., Inc. 148,319
-------------------------------------- ------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
---------- --------------------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
--------------------------------------------------------------
WASTE MANAGEMENT--0.9%
---------------------------------------------------
24,300 Browning-Ferris Industries, Inc. $ 924,919
--------------------------------------------------- ------------
TOTAL COMMON STOCKS (IDENTIFIED COST $83,618,762) 104,106,935
--------------------------------------------------- ------------
(B) REPURCHASE AGREEMENT--2.4%
--------------------------------------------------------------
$2,576,249 Credit Suisse First Boston, 6.05%, dated 9/30/1997,
due 10/1/1997 (AT AMORTIZED COST) 2,576,249
--------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST $86,195,011)(C) $106,683,184
--------------------------------------------------- ------------
</TABLE>
(a) Non-income producing security.
(b) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
(c) The cost of investments for federal tax purposes amounts to $86,195,011. The
net unrealized appreciation of investments on a federal tax basis amounts to
$20,488,173 which is comprised of $22,202,146 appreciation and $1,713,973
depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($106,684,527) at September 30, 1997.
The following acronyms are used throughout this portfolio:
ADR--American Depository Receipt
PLC--Public Limited Company
(See Notes which are an integral part of the Financial Statements)
THE STYLE MANAGER FUND
- -------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS
----------------------------------------------------------------------------
The 12-month period ended September 30, 1997 was highlighted by significant
growth in small cap stocks*. Feeling that small cap growth stocks were
particularly overvalued, the fund focused on small cap value stocks for the
majority of 1997. During the 12-month period ended September 30, 1997, small cap
value stocks recorded a total return of 48.9% as measured by the S&P 600 Value
Index**, whereas small cap growth stocks returned only 25.2% as measured by the
S&P 600 Growth Index**. The S&P 600 Index** recorded a total return 37.0% and
the S&P 500 Index returned 40.7% for the 12-month period ended September 30,
1997. During the 12-month period ended September 30, 1997, the fund produced an
average annual total return of 44.01%.***
We continue to focus on small cap value stocks which have demonstrated greater
stability in an investment environment characterized by excessive risk
measures. In general, we believe that small cap value stocks will remain less
volatile than small cap growth stocks over time. Due to our value orientation,
the fund remains positioned in a defensive mode.
- --------
* Small capitalization stocks have historically experienced greater volatility
than average.
** The S&P 600 Index is an unmanaged capitalization weighted index representing
all major industries in the mid-range of the U.S. stock market. The S&P 600
Growth Index and the S&P 600 Value Index are sub- indices of the S&P 600
Index. Investments cannot be made in an index.
*** Performance quoted represents past performance and is not indicative of
future results. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
THE STYLE MANAGER FUND
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE STYLE MANAGER FUND.
The graph below illustrates the hypothetical investment of $10,000** in The
Style Manager Fund (the "Fund") from March 7, 1995 (start of performance) to
September 30, 1997, compared to the Standard & Poor's 500 Index ("S&P 500").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX E
AVERAGE ANNUAL TOTAL RETURN*** FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 41.85%
Start of Performance (3/7/95) 28.04
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 3/7/95 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. The ending value
of the Fund reflects a 2.00% contingent deferred sales charge on any
redemption less than five years from the purchase date. The Fund's performance
assumes the reinvestment of all dividends and distributions.
***Total return quoted reflects all applicable contingent deferred sales
charges.
+The S&P 500 is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The S&P 500
has been adjusted to reflect reinvestment of dividends on securities in the
index. The index is unmanaged.
THE STYLE MANAGER FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ----------------------------- -----------
<C> <S> <C>
COMMON STOCKS--98.2%
----------------------------------------
AEROSPACE & DEFENSE--1.2%
-----------------------------
22,200 Orbital Sciences Corp. $ 543,900
-----------------------------
20,100 Trimble Navigation Ltd. 394,463
----------------------------- -----------
Total 938,363
----------------------------- -----------
AIR FREIGHT--0.5%
-----------------------------
27,500 Fritz Companies, Inc. 405,625
----------------------------- -----------
APPAREL--0.7%
-----------------------------
15,500 Kellwood Co. 549,281
----------------------------- -----------
AUTO PARTS & EQUIPMENT--1.3%
-----------------------------
6,700 SPX Corp. 392,788
-----------------------------
15,400 Smith (A.O.) Corp. 610,225
----------------------------- -----------
Total 1,003,013
----------------------------- -----------
BANKING-MAJOR REGIONAL--13.3%
-----------------------------
7,920 Associated Banc Corp. 356,895
-----------------------------
10,043 Bankers Trust New York Corp. 1,230,267
-----------------------------
6,400 CCB Financial Corp. 516,000
-----------------------------
11,900 Central Fidelity Banks, Inc. 526,575
-----------------------------
14,300 Centura Banks, Inc. 787,394
-----------------------------
9,812 Commerce Bancorp, Inc. 381,441
-----------------------------
9,600 Commercial Federal Corp. 452,400
-----------------------------
10,600 Cullen Frost Bankers, Inc. 502,175
-----------------------------
27,200 Deposit Guaranty Corp. 906,100
-----------------------------
11,100 First Commercial Corp. 532,800
-----------------------------
15,500 First Michigan Bank Corp. 641,312
-----------------------------
23,600 Firstmerit Corp. 637,200
-----------------------------
22,650 Keystone Financial, Inc. 855,038
-----------------------------
13,200 Magna Group, Inc. 520,575
-----------------------------
15,400 Riggs National Corp. 362,863
-----------------------------
15,975 Summit Bancorp 709,889
-----------------------------
11,100 Susquehanna Bankshares, Inc. 341,325
----------------------------- -----------
Total 10,260,249
----------------------------- -----------
BUILDING MATERIALS--1.5%
-----------------------------
14,700 Lone Star Industries, Inc. 793,800
-----------------------------
13,400 TJ International, Inc. 342,538
----------------------------- -----------
Total 1,136,338
----------------------------- -----------
CHEMICALS--2.2%
-----------------------------
10,000 Cambrex Corp. 466,250
-----------------------------
12,800 ChemFirst, Inc. 321,600
-----------------------------
14,600 Dexter Corp. 584,912
-----------------------------
</TABLE>
THE STYLE MANAGER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------------------------------ -----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
-----------------------------------------------
CHEMICALS--CONTINUED
------------------------------------
15,400 Mississippi Chemical Corp. $ 300,300
------------------------------------ -----------
Total 1,673,062
------------------------------------ -----------
COMMERCIAL SERVICES--0.4%
------------------------------------
9,300 Primark Corp. 274,931
------------------------------------ -----------
COMMUNICATION EQUIPMENT--0.7%
------------------------------------
18,800 Allen Telecom, Inc. 535,800
------------------------------------ -----------
COMPUTER SOFTWARE--1.0%
------------------------------------
34,700 Platinum Technology, Inc. 746,050
------------------------------------ -----------
COMPUTERS-PERIPHERAL--1.4%
------------------------------------
31,000 Komag, Inc. 631,625
------------------------------------
17,700 Telxon Corp. 433,650
------------------------------------ -----------
Total 1,065,275
------------------------------------ -----------
COMPUTERS-NETWORKING--0.7%
------------------------------------
28,700 Network Equipment Technologies, Inc. 500,456
------------------------------------ -----------
DEPARTMENT STORES--2.4%
------------------------------------
14,000 Carson Pirie Scott & Co. 552,125
------------------------------------
13,400 Proffitts, Inc. 793,950
------------------------------------
20,400 Shopko Stores, Inc. 530,400
------------------------------------ -----------
Total 1,876,475
------------------------------------ -----------
DISTRIBUTORS-FOOD & HEALTH--0.7%
------------------------------------
20,100 Rykoff Sexton, Inc. 520,088
------------------------------------ -----------
DRUG STORES--0.8%
------------------------------------
22,600 Longs Drug Stores Corp. 603,138
------------------------------------ -----------
ELECTRIC COMPANIES--2.8%
------------------------------------
33,500 Atlantic Energy, Inc. NJ 600,906
------------------------------------
37,179 MidAmerican Energy Holdings Co. 641,338
------------------------------------
13,500 United Illuminating Co. 491,906
------------------------------------
20,500 United Water Resources, Inc. 381,813
------------------------------------ -----------
Total 2,115,963
------------------------------------ -----------
ELECTRICAL EQUIPMENT--0.7%
------------------------------------
29,700 Anixter International, Inc. 510,469
------------------------------------ -----------
ELECTRONICS-DISTRIBUTORS--1.9%
------------------------------------
23,100 Kent Electronics Corp. 912,450
------------------------------------
13,900 Marshall Industries 538,625
------------------------------------ -----------
Total 1,451,075
------------------------------------ -----------
ELECTRONICS-INSTRUMENTS--0.5%
------------------------------------
7,600 John Fluke Manufacturing, Co. 410,400
------------------------------------ -----------
ELECTRONICS-SEMICONDUCTORS--3.0%
------------------------------------
17,500 Cyrix Corp. 586,250
------------------------------------
14,500 Dallas Semiconductor Corp. 648,875
------------------------------------
</TABLE>
THE STYLE MANAGER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
------------------------------------------------
ELECTRONICS-SEMICONDUCTORS--CONTINUED
-------------------------------------
11,300 Photronic Labs, Inc. $ 684,356
-------------------------------------
16,700 Zilog, Inc. 364,269
------------------------------------- -----------
Total 2,283,750
------------------------------------- -----------
ENTERTAINMENT--0.9%
-------------------------------------
9,900 Carmike Cinemas, Inc., Class A 297,000
-------------------------------------
9,800 GC Cos., Inc. 421,400
------------------------------------- -----------
Total 718,400
------------------------------------- -----------
FOOD CHAINS--0.6%
-------------------------------------
26,400 Ruddick Corp. 425,700
------------------------------------- -----------
FOODS--1.3%
-------------------------------------
33,400 Chiquita Brands International 538,575
-------------------------------------
16,400 Smithfield Foods, Inc. 492,000
------------------------------------- -----------
Total 1,030,575
------------------------------------- -----------
FOOTWEAR--0.8%
-------------------------------------
8,200 Timberland Co., Class A 653,950
------------------------------------- -----------
GAMING & LOTTERY--1.0%
-------------------------------------
28,100 Grand Casinos, Inc. 430,281
-------------------------------------
16,800 Showboat, Inc. 342,300
------------------------------------- -----------
Total 772,581
------------------------------------- -----------
GOLD & PRECIOUS METAL MINES--1.1%
-------------------------------------
32,100 Coeur d'Alene Mines Corp. 523,631
-------------------------------------
16,300 Stillwater Mining Co. 347,394
------------------------------------- -----------
Total 871,025
------------------------------------- -----------
HARDWARE & TOOLS--0.5%
-------------------------------------
9,800 Toro Co. 388,325
------------------------------------- -----------
HEALTHCARE-DIVERSIFIED--0.6%
-------------------------------------
12,700 Sierra Health Services, Inc. 465,138
------------------------------------- -----------
HEALTHCARE-LONG TERM CARE--2.7%
-------------------------------------
18,800 Genesis Health Ventures, Inc. 732,025
-------------------------------------
14,200 Integrated Health Services, Inc. 474,812
-------------------------------------
13,600 Living Centers of America, Inc. 554,200
-------------------------------------
20,700 Mariner Health Group, Inc. 326,025
------------------------------------- -----------
Total 2,087,062
------------------------------------- -----------
HEALTHCARE-MANAGED CARE--0.4%
-------------------------------------
19,500 Coventry Corp. 321,750
------------------------------------- -----------
HOMEBUILDING--1.4%
-------------------------------------
15,093 Fleetwood Enterprises, Inc. 506,559
-------------------------------------
14,800 U.S. Home Corp. 571,650
------------------------------------- -----------
Total 1,078,209
------------------------------------- -----------
</TABLE>
THE STYLE MANAGER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ---------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
---------------------------------------------------
HOMEFURNISHINGS--1.4%
----------------------------------------
18,800 Fieldcrest Cannon, Inc. $ 648,600
----------------------------------------
8,300 Springs Industries, Inc., Class A 435,750
---------------------------------------- -----------
Total 1,084,350
---------------------------------------- -----------
HOSPITAL MANAGEMENT--1.0%
----------------------------------------
17,000 Universal Health Services, Inc., Class B 735,250
---------------------------------------- -----------
HOTELS--1.4%
----------------------------------------
22,700 Prime Hospitality Corp. 512,169
----------------------------------------
19,300 Marcus Corp. 562,113
---------------------------------------- -----------
Total 1,074,282
---------------------------------------- -----------
HOUSEHOLD FURNITURE & APPLIANCES--1.9%
----------------------------------------
12,900 Bassett Furniture Industries, Inc. 367,650
----------------------------------------
21,400 Ethan Allen Interiors, Inc. 663,400
----------------------------------------
11,100 Kimball International, Inc., Class B 466,200
---------------------------------------- -----------
Total 1,497,250
---------------------------------------- -----------
INSURANCE-LIFE/HEALTH--1.4%
----------------------------------------
9,100 Life Re Corp. 480,025
----------------------------------------
12,500 Protective Life Corp. 631,250
---------------------------------------- -----------
Total 1,111,275
---------------------------------------- -----------
INSURANCE-MULTILINE--0.8%
----------------------------------------
17,800 American Bankers Insurance Group, Inc. 649,700
---------------------------------------- -----------
INSURANCE-PROPERTY--3.9%
----------------------------------------
9,000 Allied Group, Inc. 457,312
----------------------------------------
7,900 Capital Re Corp. 481,900
----------------------------------------
9,200 Enhance Financial Services Group, Inc. 503,700
----------------------------------------
9,500 First American Financial Corp. 570,000
----------------------------------------
13,400 Frontier Insurance Group, Inc. 509,200
----------------------------------------
10,000 Orion Capital Corp. 453,125
---------------------------------------- -----------
Total 2,975,237
---------------------------------------- -----------
INVESTMENT BANKING/BROKERAGE--3.6%
----------------------------------------
7,100 Interra Financial, Inc. 426,444
----------------------------------------
13,467 Legg Mason, Inc. 710,367
----------------------------------------
14,100 Piper Jaffray Cos., Inc. 430,931
----------------------------------------
17,300 Quick & Reilly Group, Inc. 647,669
----------------------------------------
14,800 Raymond James Financial, Inc. 532,800
---------------------------------------- -----------
Total 2,748,211
---------------------------------------- -----------
IRON & STEEL--0.6%
----------------------------------------
12,500 Quanex Corp. 438,281
---------------------------------------- -----------
LEISURE TIME--0.5%
----------------------------------------
14,700 K2, Inc. 369,337
---------------------------------------- -----------
</TABLE>
THE STYLE MANAGER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- -------------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
------------------------------------------------------
MACHINERY & EQUIPMENT--0.4%
--------------------------------------------
16,700 Global Industrial Technologies, Inc. $ 345,481
-------------------------------------------- -----------
MANUFACTURING-DIVERSIFIED--1.6%
--------------------------------------------
21,000 Figgie International Holdings, Inc., Class A 309,750
--------------------------------------------
28,200 Premark International, Inc. 902,400
-------------------------------------------- -----------
Total 1,212,150
-------------------------------------------- -----------
MANUFACTURING-SPECIALIZED--3.9%
--------------------------------------------
11,100 Aptargroup, Inc. 620,906
--------------------------------------------
11,218 Flowserve Corp. 335,138
--------------------------------------------
13,000 Greenfield Industries, Inc. 373,750
--------------------------------------------
14,600 Halter Marine Group, Inc. 706,275
--------------------------------------------
12,300 Ionics, Inc. 545,044
--------------------------------------------
13,300 Regal Beloit Corp. 408,975
-------------------------------------------- -----------
Total 2,990,088
-------------------------------------------- -----------
NATURAL GAS--2.7%
--------------------------------------------
9,800 Eastern Enterprises 365,662
--------------------------------------------
17,300 K N Energy, Inc. 791,475
--------------------------------------------
16,400 Northwest Natural Gas Co. 422,300
--------------------------------------------
18,300 Piedmont Natural Gas, Inc. 532,988
-------------------------------------------- -----------
Total 2,112,425
-------------------------------------------- -----------
OFFICE EQUIPMENT & SUPPLIES--0.5%
--------------------------------------------
11,300 Standard Register 376,431
-------------------------------------------- -----------
OIL & GAS--2.8%
--------------------------------------------
22,300 Camco International, Inc. 1,555,425
--------------------------------------------
25,400 Snyder Oil Corp. 576,263
-------------------------------------------- -----------
Total 2,131,688
-------------------------------------------- -----------
PAPER & FOREST PRODUCTS--1.4%
--------------------------------------------
28,600 Longview Fibre Co. 568,425
--------------------------------------------
10,700 Rayonier, Inc. 517,613
-------------------------------------------- -----------
Total 1,086,038
-------------------------------------------- -----------
PHARMACEUTICALS--0.5%
--------------------------------------------
16,900 Alpharma, Inc., Class A 378,137
--------------------------------------------
2,817 Alpharma, Inc., Rights 15,844
-------------------------------------------- -----------
Total 393,981
-------------------------------------------- -----------
PRINTING & PUBLISHING--0.5%
--------------------------------------------
11,700 Bowne & Co., Inc. 410,962
-------------------------------------------- -----------
PROPERTY--1.7%
--------------------------------------------
10,600 Fremont General Corp. 506,150
--------------------------------------------
9,100 Selective Insurance Group, Inc. 468,650
--------------------------------------------
11,300 Zenith National Insurance Corp. 322,756
-------------------------------------------- -----------
Total 1,297,556
-------------------------------------------- -----------
</TABLE>
THE STYLE MANAGER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- -------------------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
-------------------------------------------------------------
RESTAURANTS--2.2%
--------------------------------------------------
11,900 IHOP Corp. $ 425,425
--------------------------------------------------
20,300 Landrys Seafood Restaurants, Inc. 596,313
--------------------------------------------------
13,800 Ruby Tuesday, Inc. 351,900
--------------------------------------------------
13,300 ShowBiz Pizza Time, Inc. 305,900
-------------------------------------------------- -----------
Total 1,679,538
-------------------------------------------------- -----------
RETAIL--0.9%
--------------------------------------------------
13,100 Fabri-Centers of America, Class A 302,937
--------------------------------------------------
12,750 Hughes Supply, Inc. 384,891
-------------------------------------------------- -----------
Total 687,828
-------------------------------------------------- -----------
RETAIL-SPECIALTY--2.4%
--------------------------------------------------
14,600 Michaels Stores, Inc. 446,213
--------------------------------------------------
22,200 O'Reilly Automotive, Inc. 505,050
--------------------------------------------------
31,050 Pier 1 Imports, Inc. 556,959
--------------------------------------------------
17,000 Sports Authority, Inc. 316,625
-------------------------------------------------- -----------
Total 1,824,847
-------------------------------------------------- -----------
SAVINGS & LOAN--5.6%
--------------------------------------------------
15,600 Astoria Financial Corp. 784,875
--------------------------------------------------
18,100 Charter One Financial, Inc. 1,070,162
--------------------------------------------------
18,600 Downey Financial Corp. 453,375
--------------------------------------------------
15,100 JSB Financial, Inc. 738,956
--------------------------------------------------
10,900 RCSB Financial, Inc. 594,050
--------------------------------------------------
27,900 St. Paul Bancorp, Inc. 697,500
-------------------------------------------------- -----------
Total 4,338,918
-------------------------------------------------- -----------
SERVICES-COMMERCIAL & CONSUMER--1.7%
--------------------------------------------------
21,700 Cerner Corp. 519,444
--------------------------------------------------
17,000 Franklin Covey Co. 474,937
--------------------------------------------------
14,247 Ogden Corp. 336,585
-------------------------------------------------- -----------
Total 1,330,966
-------------------------------------------------- -----------
SERVICES-COMPUTER SYSTEMS--0.5%
--------------------------------------------------
13,600 BancTec, Inc. 362,100
-------------------------------------------------- -----------
TRUCKERS--2.8%
--------------------------------------------------
22,900 Alexander and Baldwin, Inc. 592,537
--------------------------------------------------
18,100 American Freightways Corp. 343,900
--------------------------------------------------
16,700 Werner Enterprises, Inc. 404,975
--------------------------------------------------
24,000 Yellow Corp. 781,500
-------------------------------------------------- -----------
Total 2,122,912
-------------------------------------------------- -----------
TRUCKS & PARTS--0.6%
--------------------------------------------------
15,600 Wabash National Corp. 451,425
-------------------------------------------------- -----------
TOTAL COMMON STOCKS (IDENTIFIED COST $60,491,069) 75,511,023
-------------------------------------------------- -----------
</TABLE>
THE STYLE MANAGER FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
---------- --------------------------------------------------- -----------
<C> <S> <C>
(A) REPURCHASE AGREEMENT--1.6%
--------------------------------------------------------------
$1,219,266 C.S. First Boston, 6.05%, dated 9/30/1997, due
10/1/1997
(AT AMORTIZED COST) $ 1,219,266
--------------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST $61,710,335)(B) $76,730,289
--------------------------------------------------- -----------
</TABLE>
(a) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
(b) The cost of investments for federal tax purposes amounts to $61,750,880. The
net unrealized appreciation of investments on a federal tax basis amounts to
$14,979,409 which is comprised of $15,597,054 appreciation and $617,645
depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($76,873,948) at September 30, 1997.
(See Notes which are an integral part of the Financial Statements)
THE VIRGINIA MUNICIPAL BOND FUND
- -------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS
----------------------------------------------------------------------------
During the last year, interest rates have been relatively calm, but the year
ended with lower yields than were seen at the beginning of the year. Municipal
bonds, in general, outperformed Treasuries during the same period as a lack of
supply and a quieting of tax reform allowed the municipal bond market to gain
strength.
Towards the end of the year, yields on municipal bonds were at their most
attractive level relative to Treasuries at any time in the last three months.
This shift created a buying opportunity especially in the 10 to 15 year maturity
range desirable for this fund. We expect that the supply of municipal bonds will
remain relatively weak through the end of this calendar year and we would expect
municipal bonds to continue to outperform Treasuries during the same period.
Going forward, we expect overall interest rates to remain relatively calm with a
gradual bias toward lower interest rates. We will continue to maintain an
average maturity of about 15 years in an attempt to maximize yield while keeping
risk to changes in interest rates somewhat lower than the average fund.
THE VIRGINIA MUNICIPAL BOND FUND--Investment Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE VIRGINIA MUNICIPAL BOND FUND--INVESTMENT
SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
Virginia Municipal Bond Fund (the "Fund") from October 24, 1990 (start of
performance) to September 30, 1997, compared to the Lehman Brothers 10 Year
Municipal Bond Index ("LBMBI").+
GRAPHIC REPRESENTATION OMITTED. SEE APPEDIX F
AVERAGE ANNUAL TOTAL RETURN*** FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 5.70%
5 Year 5.73%
Start of Performance (10/24/90) 6.45%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/24/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. Certain investors
are subject to a 2.00% contingent deferred sales charge on shares redeemed
within five years of purchase date. The Fund's performance assumes the
reinvestment of all dividends and distributions.
***Total return quoted reflects all applicable contingent deferred sales
charges.
+The LBMBI is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The LBMBI has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE VIRGINIA MUNICIPAL BOND FUND--Trust Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE VIRGINIA MUNICIPAL BOND FUND--TRUST SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
Virginia Municipal Bond Fund (the "Fund") from October 24, 1990 (start of
performance) to September 30, 1997, compared to the Lehman Brothers 10 Year
Municipal Bond Index ("LBMBI").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX G
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 8.00%
5 Year 5.96%
Start of Performance (10/24/90) 6.62%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/24/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. The Fund's
performance assumes the reinvestment of all dividends and distributions.
+The LBMBI is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The LBMBI has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE VIRGINIA MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--95.6%
--------------------------------------------------------
VIRGINIA--95.6%
---------------------------------------------
$1,000,000 Albemarle County, VA IDA, Hospital Revenue
Refunding Bonds, 5.75% (Martha Jefferson
Hospital), 10/1/2008 A $ 1,056,730
---------------------------------------------
1,000,000 Arlington County, VA, GO UT Bonds, 5.30%
(Original Issue Yield: 5.40%), 6/1/2011 AAA 1,030,440
---------------------------------------------
3,175,000 Big Stone Gap, VA Redevelopment & Housing
Authority, Correctional Facility Lease
Revenue Bonds, 6.00% (Wallens Ridge
Development Project), 9/1/2007 AA 3,500,247
---------------------------------------------
2,890,000 Chesapeake Bay Bridge & Tunnel District, VA,
Revenue Bonds, 5.875% (FGIC INS)/(Original
Issue Yield: 5.95%), 7/1/2010 AAA 3,116,605
---------------------------------------------
3,500,000 Chesapeake, VA, GO UT Bonds, 5.375% (Commonwealth of Virginia
GTD)/(Original
Issue Yield: 5.45%), 5/1/2010 AA 3,635,870
---------------------------------------------
2,980,000 Chesterfield County, VA, GO UT Bonds, 5.25%,
3/1/2010 AA+ 3,051,550
---------------------------------------------
2,860,000 Commonwealth of Virginia, GO UT Bonds,
5.375%, 6/1/2009 AAA 2,993,905
---------------------------------------------
4,000,000 Commonwealth of Virginia, GO UT Public
Facilities Bonds (Series A), 5.70% (Original
Issue Yield: 5.75%), 6/1/2008 AAA 4,289,720
---------------------------------------------
2,545,000 Danville, VA IDA, Hospital Refunding Revenue Bonds, 6.20% (Danville
Regional Medical Center)/(FGIC INS)/(Original Issue Yield:
6.30%), 10/1/2009 AAA 2,779,395
---------------------------------------------
2,605,000 Fairfax County, VA Sewer Revenue, Revenue
Bonds, 5.625%, 7/15/2011 AA 2,748,197
---------------------------------------------
1,140,000 Fairfax County, VA Sewer Revenue, Sewer
Refunding Revenue Bonds, 5.30% (AMBAC INS),
11/15/2006 AAA 1,197,467
---------------------------------------------
1,505,000 Fairfax County, VA Sewer Revenue, Sewer
Refunding Revenue Bonds, 5.40% (AMBAC INS),
11/15/2007 AAA 1,583,681
---------------------------------------------
Fairfax County, VA Water Authority, 6.00%,
2,000,000 4/1/2022 AA 2,167,290
---------------------------------------------
1,000,000 Fairfax County, VA Water Authority, Revenue
Refunding Bonds, 4.65% (Original Issue Yield:
4.85%), 4/1/2010 AA 977,750
---------------------------------------------
3,500,000 Fairfax County, VA, (Series A), 5.25% (State Aid Withholding
LOC)/(Original Issue Yield:
5.35%), 6/1/2009 AAA 3,627,960
---------------------------------------------
2,000,000 Henrico County, VA IDA, Refunding Revenue Bonds, 5.60% (Bon Secours
Health System)/(MBIA INS)/(Original Issue Yield:
5.65%), 8/15/2010 AAA 2,090,720
---------------------------------------------
600,000 Loudoun County, VA IDA, Lease Revenue Bonds,
5.50% (Northern Virginia Criminal
Justice)/(Original Issue Yield: 5.829%),
6/1/2008 AA- 623,910
---------------------------------------------
1,000,000 Loudoun County, VA, GO UT Refunding Bonds
(Series A), 5.50% (Commonwealth of Virginia
GTD)/(Original Issue Yield: 5.649%),
10/1/2007 AA- 1,061,750
---------------------------------------------
4,440,000 Newport News, VA, GO UT, 5.75%, 1/15/2017 AA- 4,607,743
---------------------------------------------
3,000,000 Norfolk, VA, GO UT Bonds, 5.25% (Commonwealth of Virginia
GTD)/(Original Issue Yield:
5.55%), 6/1/2011 AA 3,052,140
---------------------------------------------
</TABLE>
THE VIRGINIA MUNICIPAL BOND FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CREDIT
OR SHARES RATING* VALUE
---------- -------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
-------------------------------------------------------
$2,000,000 Norfolk, VA, GO UT Bonds, 5.70% (MBIA INS), AAA
6/1/2008 $ 2,152,380
--------------------------------------------
2,535,000 Portsmouth, VA, GO UT Bonds, 5.00% (FGIC
INS), 8/1/2011 AAA 2,532,313
--------------------------------------------
3,375,000 Riverside, VA Regional Jail Authority, Jail
Facility Revenue Bonds, 5.625% (MBIA
INS)/(Original Issue Yield: 5.75%), 7/1/2007 AAA 3,638,655
--------------------------------------------
1,185,000 Roanoke, VA IDA, Hospital Revenue Refunding
Bonds (Series B), 6.00% (Roanoke Memorial
Hospital)/(Original Issue Yield: 6.10%),
7/1/2007 AA- 1,260,212
--------------------------------------------
3,510,000 Virginia College Building Authority, Revenue
Bonds, 5.40% (21ST Century College Program),
8/1/2015 AA 3,555,700
--------------------------------------------
7,255,000 Virginia State Public Building Authority,
Revenue Bonds, 5.20% (Original Issue Yield:
5.40%), 8/1/2010 AA 7,366,146
--------------------------------------------
2,030,000 Virginia State Transportation Board, Revenue
Bonds, 6.00% (Northern Virginia
Transportation District)/(Original Issue
Yield: 6.10%), 5/15/2008 AA 2,198,348
--------------------------------------------
1,000,000 Virginia State Transportation Board,
Transportation Contract Revenue Refunding
Bonds, 5.375% (U.S. Route 58 Corridor
PG-A), 5/15/2007 AA 1,048,000
--------------------------------------------
2,325,000 Virginia State University-Virginia
Commonwealth, Revenue Bonds, 5.75% (Original
Issue Yield: 5.827%), 5/1/2021 AA- 2,386,055
-------------------------------------------- -----------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST $72,293,301) 75,330,879
-------------------------------------------- -----------
MUTUAL FUND ISSUES--3.5%
-------------------------------------------------------
928,302 Goldman Sachs & Co. ILA Tax Exempt 928,302
--------------------------------------------
1,793,570 Municipal Fund for Temporary Investment 1,793,570
-------------------------------------------- -----------
TOTAL MUTUAL FUND ISSUES (AT NET ASSET
VALUE) 2,721,872
-------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST
$75,015,173)(A) $78,052,751
-------------------------------------------- -----------
</TABLE>
(a) The cost of investments for federal tax purposes amounts to $75,015,173. The
net unrealized appreciation of investments on a federal tax basis amounts to
$3,037,578 which is comprised of $3,041,196 appreciation and $3,618
depreciation at September 30, 1997.
* Please refer to the Appendix of the Statement of Additional Information for
an explanation of the credit ratings. Current credit ratings are unaudited.
Note: The categories of investments are shown as a percentage of net assets
($78,772,564) at September 30, 1997.
The following acronyms are used throughout this portfolio:
AMBAC--American Municipal Bond Assurance Corporation FGIC--Financial Guaranty
Insurance Company GO--General Obligation GTD--Guaranty IDA--Industrial
Development Authority INS--Insured LOC--Letter of Credit MBIA--Municipal Bond
Investors Assurance UT--Unlimited Tax
(See Notes which are an integral part of the Financial Statements)
THE MARYLAND MUNICIPAL BOND FUND
- -------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS
----------------------------------------------------------------------------
During the last year, interest rates have been relatively calm, but the year
ended with lower yields than were seen at the beginning of the year. Municipal
bonds, in general, outperformed Treasuries during the same period as a lack of
supply and a quieting of tax reform allowed the municipal bond market to gain
strength.
Towards the end of the year, yields on municipal bonds were at their most
attractive level relative to Treasuries at any time in the last three months.
This shift created a buying opportunity especially in the 10 to 15 year maturity
range desirable for this fund. We expect that the supply of municipal bonds will
remain relatively weak through the end of this calendar year and we would expect
municipal bonds to continue to outperform Treasuries during the same period.
Bonds for the Maryland area continue to enjoy good demand, and typically yield 5
to 10 basis points less than similar bonds nationwide.
Going forward, we expect overall interest rates to remain relatively calm with a
gradual bias toward lower interest rates. We will continue to maintain an
average maturity of about 15 years in an attempt to maximize yield while keeping
risk to changes in interest rates somewhat lower than the average fund.
THE MARYLAND MUNICIPAL BOND FUND--Investment Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE MARYLAND MUNICIPAL BOND FUND--INVESTMENT
SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
Maryland Municipal Bond Fund (the "Fund") from October 30, 1990 (start of
performance) to September 30, 1997, compared to the Lehman Brothers 10 Year
Municipal Bond Index ("LBMBI").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX H
AVERAGE ANNUAL TOTAL RETURN*** FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 4.87%
5 Year 5.33%
Start of Performance (10/30/90) 6.01%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/30/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. Certain investors
are subject to a 2.00% contingent deferred sales charge on shares redeemed
within five years of purchase date. The Fund's performance assumes the
reinvestment of all dividends and distributions.
***Total return quoted reflects all applicable contingent deferred sales
charges.
+The LBMBI is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The LBMBI has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE MARYLAND MUNICIPAL BOND FUND--Trust Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE MARYLAND MUNICIPAL BOND FUND--TRUST SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
Maryland Municipal Bond Fund (the "Fund") from October 30, 1990 (start of
performance) to September 30, 1997, compared to the Lehman Brothers 10 Year
Municipal Bond Index ("LBMBI").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX I
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 7.19%
5 Year 5.56%
Start of Performance (10/30/90) 6.18%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/30/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. The Fund's
performance assumes the reinvestment of all dividends and distributions.
+The LBMBI is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The LBMBI has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE MARYLAND MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--91.0%
--------------------------------------------------------
MARYLAND--91.0%
---------------------------------------------
$1,000,000 Baltimore County, MD Revenue Authority,
Revenue Refunding Bonds, 5.25% (Original
Issue Yield: 5.40%), 7/1/2008 A $ 1,038,610
---------------------------------------------
1,000,000 Baltimore, MD, GO UT Bonds (Series A), 5.375%
(AMBAC INS), 10/15/2008 AAA 1,035,650
---------------------------------------------
1,500,000 Calvert County, MD, Pollution Control Revenue
Bonds, 5.55% (Baltimore Gas & Electric
Co.)/(Original Issue Yield: 5.601%),
7/15/2014 A 1,528,065
---------------------------------------------
1,400,000 Carroll County, MD, GO UT, 5.35%, 12/1/2016 AA 1,411,144
---------------------------------------------
1,000,000 Harford County, MD, GO UT, 4.65%, 12/1/2006 AA- 1,012,150
---------------------------------------------
1,430,000 Howard County, MD, GO Refunding Bonds (Series
A), 5.25% (Original Issue Yield: 5.60%),
8/15/2011 AA+ 1,460,416
---------------------------------------------
1,000,000 Maryland Health & Higher Educational Facilities Authority, Refunding
Revenue Bonds, 5.30% (Francis Scott Key Medical Center)/(FGIC
INS)/(Original Issue Yield:
5.40%), 7/1/2008 AAA 1,037,220
---------------------------------------------
1,500,000 Maryland Health & Higher Educational
Facilities Authority, Revenue Bonds, 5.20%
(Frederick Memorial Hospital)/(FGIC
INS)/(Original Issue Yield: 5.30%), 7/1/2008 AAA 1,565,205
---------------------------------------------
1,740,000 Maryland National Capital Park & Planning
Commission, GO UT Bonds, 5.125% (Park
Aquisition & Development-S-2)/
(Original Issue Yield: 5.25%), 7/1/2010 AA 1,773,982
---------------------------------------------
1,470,000 Maryland State Community Development
Administration, Revenue Bonds (Single Family
Program-Fifth Series), 5.40%, 4/1/2008 Aa 1,508,279
---------------------------------------------
1,800,000 Maryland State Stadium Authority, Revenue
Bonds, 5.875% (AMBAC INS), 12/15/2011 AAA 1,927,980
---------------------------------------------
850,000 Maryland State Transportation Authority,
Refunding Revenue Bonds, 5.80% (Original
Issue Yield: 5.90%), 7/1/2006 A+ 927,223
---------------------------------------------
1,000,000 Maryland State, GO UT Bonds, 5.25%, 6/15/2007 AAA 1,054,210
---------------------------------------------
2,500,000 Maryland State, GO UT Bonds, 5.70% (Original
Issue Yield: 5.75%), 3/15/2010 AAA 2,682,875
---------------------------------------------
820,000 Montgomery County, MD, GO UT Refunding Bonds (Series A), 5.75%
(Original Issue Yield:
5.85%), 7/1/2006 AAA 897,146
---------------------------------------------
1,000,000 Ocean City, MD, GO UT Refunding Bonds, 5.50%
(MBIA Insurance Corporation INS), 3/15/2009 AAA 1,046,760
---------------------------------------------
500,000 Prince Georges County, MD, GO UT Bonds, 5.50% (Stormwater
Management)/(Original Issue
Yield: 5.55%), 3/15/2008 AA 524,910
---------------------------------------------
1,435,000 Prince Georges County, MD IDA, Lease Revenue
Bonds, 6.00% (Hyattsville District Court
Facility)/(Original Issue Yield: 6.10%),
7/1/2009 AA 1,590,941
---------------------------------------------
1,425,000 Rockville, MD, GO UT Revenue Refunding Bonds,
4.90% (Original Issue Yield: 5.00%),
4/15/2007 AA+ 1,449,995
---------------------------------------------
</TABLE>
THE MARYLAND MUNICIPAL BOND FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR CREDIT
SHARES RATING* VALUE
---------- -------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
-------------------------------------------------------
$1,500,000 University of Maryland, System Auxiliary
Facilities & Tuition Revenue Bonds (Series
A), 5.40% (Original Issue Yield: 5.45%),
4/1/2009 AA+ $ 1,573,170
--------------------------------------------
1,600,000 Washington Suburban Sanitation District, MD,
GO UT Bonds, 5.375%, 6/1/2011 AA 1,627,520
--------------------------------------------
1,700,000 Washington Suburban Sanitation District, MD,
GO UT Bonds, 5.50%, 6/1/2010 AA 1,768,781
-------------------------------------------- -----------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST $29,252,821) 30,442,232
-------------------------------------------- -----------
MUTUAL FUND ISSUES--8.0%
-------------------------------------------------------
1,430,264 Goldman Sachs & Co. 1,430,264
--------------------------------------------
1,243,349 Municipal Fund for Temporary Investment 1,243,349
-------------------------------------------- -----------
TOTAL MUTUAL FUND ISSUES (AT NET ASSET 2,673,613
VALUE) -----------
--------------------------------------------
TOTAL INVESTMENTS (IDENTIFIED COST $33,115,845
$31,926,434)(A) -----------
--------------------------------------------
</TABLE>
At September 30, 1997, 4.7% of the total investments at market value were
subject to alternative minimum tax.
(a) The cost of investments for federal tax purposes amounts to $31,926,434. The
unrealized appreciation of investments on a federal tax basis amounts to
$1,189,411 at September 30, 1997.
* Please refer to the Appendix of the Statement of Additional Information for
an explanation of the credit ratings. Current credit ratings are unaudited.
Note: The categories of investments are shown as a percentage of net assets
($33,468,781) at September 30, 1997.
The following acronym(s) are used throughout this portfolio:
AMBAC--American Municipal Bond Assurance Corporation
FGIC--Financial Guaranty Insurance Company
GO--General Obligation
IDA--Industrial Development Authority
INS--Insured
MBIA--Municipal Bond Investors Assurance
UT--Unlimited Tax
(See Notes which are an integral part of the Financial Statements)
THE TREASURY MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- ------------------------------------------------ ------------
<C> <S> <C>
U.S. TREASURY OBLIGATIONS--52.6%
------------------------------------------------------------
U.S. TREASURY BILL--15.7%
------------------------------------------------
$50,000,000 10/16/1997 $ 49,906,604
------------------------------------------------
------------
------------
U.S. TREASURY NOTES--36.9%
------------------------------------------------
12,000,000 5/125%, 4/30/1998 11,935,655
------------------------------------------------
31,000,000 5.625% - 5.750%, 10/31/1997 31,002,067
------------------------------------------------
15,000,000 6.125%, 5/15/1998 15,031,852
------------------------------------------------
8,000,000 6.125%, 8/31/1998 8,024,535
------------------------------------------------
3,000,000 6.250%, 7/31/1998 3,014,931
------------------------------------------------
27,000,000 7.875%, 1/15/1998 27,168,155
------------------------------------------------
7,000,000 8.250%, 7/15/1998 7,135,850
------------------------------------------------
14,000,000 8.750%, 10/15/1997 14,016,352
------------------------------------------------
------------
Total 117,329,397
------------------------------------------------
------------
TOTAL U.S. TREASURY OBLIGATIONS 167,236,001
------------------------------------------------ ------------
(A) REPURCHASE AGREEMENTS--47.0%
------------------------------------------------------------
40,000,000 CS First Boston, 6.050%, dated 9/30/1997, due
10/1/1997 40,000,000
------------------------------------------------
40,000,000 Merrill Lynch, Pierce, Fenner and Smith, 6.050%,
dated
9/30/1997, due 10/1/1997 40,000,000
------------------------------------------------
29,310,947 Prudential Securities, Inc., 6.050%, dated
9/30/1997, due 10/1/1997 29,310,947
------------------------------------------------
40,000,000 Smith Barney, Inc., 6.000%, dated 9/30/1997, due
10/1/1997 40,000,000
------------------------------------------------
------------
TOTAL REPURCHASE AGREEMENTS 149,310,947
------------------------------------------------ ------------
------------
TOTAL INVESTMENTS (AT AMORTIZED COST)(B) $316,546,948
------------------------------------------------ ------------
</TABLE>
(a) The repurchase agreements are fully collateralized by U.S. Treasury and/or
agency obligations based on market prices at the date of the portfolio.
(b) Also represents cost for federal tax purposes.
Note: The categories of investments are shown as a percentage of net assets
($317,749,268) at September 30, 1997.
(See Notes which are an integral part of the Financial Statements)
THE MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
(A) COMMERCIAL PAPER--55.0%
---------------------------------------------------------------
ASSET BACKED--12.7%
---------------------------------------------------
$ 7,000,000 Ascot Capital Corp., 5.621%, 12/5/1997 $ 6,929,981
---------------------------------------------------
10,000,000 Centre Square Funding, 5.574%, 10/20/1997 9,970,708
---------------------------------------------------
Fleet Funding Corp., 5.557%-5.578%, 10/6/1997-
6,000,000 10/10/1997 5,994,168
---------------------------------------------------
8,000,000 Sigma Finance, 5.697%-5.716%, 2/2/1998-2/27/1998 7,827,485
--------------------------------------------------- ------------
Total 30,722,342
--------------------------------------------------- ------------
BANKING-FINANCE--2.5%
---------------------------------------------------
3,000,000 Banc One Funding Corp., 5.605%, 12/12/1997 2,966,820
---------------------------------------------------
3,000,000 Credit Suisse First Boston, 5.691%, 1/16/1998 2,950,691
--------------------------------------------------- ------------
Total 5,917,511
--------------------------------------------------- ------------
COMMERCIAL SERVICES--1.5%
---------------------------------------------------
3,600,000 McGraw-Hill Cos., Inc., 5.565%, 10/7/1997 3,596,700
--------------------------------------------------- ------------
CONSUMER NON-DURABLES--2.9%
---------------------------------------------------
Campbell Soup Co., 5.476%-5.688%, 11/18/1997-
7,000,000 4/17/1998 6,904,653
--------------------------------------------------- ------------
FINANCE-AUTOMOTIVE--1.2%
---------------------------------------------------
Ford Motor Credit Corp., 5.725%-5.857%, 10/27/1997-
3,000,000 4/13/1998 2,962,196
--------------------------------------------------- ------------
FINANCE-RETAIL--2.9%
---------------------------------------------------
7,000,000 Xerox Credit Corp., 5.493%-5.495%, 11/5/1997 6,964,067
--------------------------------------------------- ------------
FINANCE-LEASING--3.3%
---------------------------------------------------
Pitney Bowes Credit Corp., 5.679%-5.837%,
8,000,000 10/2/1997-1/9/1998 7,922,860
--------------------------------------------------- ------------
FINANCIAL SERVICES--14.8%
---------------------------------------------------
2,000,000 American General Finance Corp., 5.780%, 6/9/1998 1,922,748
---------------------------------------------------
General Electric Capital Corp., 5.761%-5.813%,
8,000,000 5/6/1998-6/9/1998 7,700,036
---------------------------------------------------
2,000,000 Marsh & McLennan Cos., Inc., 5.597%, 12/18/1997 1,976,167
---------------------------------------------------
Merrill Lynch & Co., Inc., 5.741%-5.981%, 1/5/1998-
11,640,000 4/13/1998 11,379,917
---------------------------------------------------
5,000,000 Republic New York Corp., 5.654%, 3/27/1998 4,864,792
---------------------------------------------------
Smith Barney, Inc., 5.560%-5.564%, 10/10/1997-
8,000,000 11/17/1997 7,960,030
--------------------------------------------------- ------------
Total 35,803,690
--------------------------------------------------- ------------
HEALTH SERVICES--4.1%
---------------------------------------------------
10,000,000 Schering Corp., 5.813%-5.822%, 10/7/1997-12/2/1997 9,946,639
--------------------------------------------------- ------------
PROCESS INDUSTRIES--2.5%
---------------------------------------------------
Du Pont (E.I.) de Nemours & Co., 5.847%-5.890%,
6,000,000 10/28/1997 5,974,350
--------------------------------------------------- ------------
PRODUCER MANUFACTURING--1.2%
---------------------------------------------------
3,000,000 Xerox Corp., 5.579%, 10/15/1997 2,993,583
--------------------------------------------------- ------------
</TABLE>
THE MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR SHARES VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
(A) COMMERCIAL PAPER--CONTINUED
---------------------------------------------------------------
UTILITIES--5.4%
---------------------------------------------------
Southern California Edison Co., 5.604%-5.665%,
$ 8,000,000 10/17/1997-11/14/1997 $ 7,967,456
---------------------------------------------------
5,000,000 Virginia Electric Power Co., 9.375%, 6/1/1998 5,105,256
--------------------------------------------------- ------------
Total 13,072,712
--------------------------------------------------- ------------
TOTAL COMMERCIAL PAPER 132,781,303
--------------------------------------------------- ------------
CORPORATE BONDS--12.2%
---------------------------------------------------------------
BANKING-FINANCE--4.5%
---------------------------------------------------
Associates Corp. of North America, 8.375%,
4,000,000 1/15/1998 4,026,490
---------------------------------------------------
900,000 CIT Group Holdings, Inc., 6.750%, 4/30/1998 901,848
---------------------------------------------------
4,000,000 NationsBank Corp., 6.625%, 1/15/1998 4,007,304
---------------------------------------------------
2,000,000 Norwest Financial, Inc., 8.500%, 8/15/1998 2,042,512
--------------------------------------------------- ------------
Total 10,978,154
--------------------------------------------------- ------------
FINANCE-LEASING--3.2%
---------------------------------------------------
3,000,000 International Lease Finance Corp., 5.609%, 1/5/1998 2,956,160
---------------------------------------------------
International Lease Finance Corp., 8.125%,
4,760,000 1/15/1998 4,789,290
--------------------------------------------------- ------------
Total 7,745,450
--------------------------------------------------- ------------
FINANCIAL SERVICES--2.1%
---------------------------------------------------
5,000,000 American General Finance Corp., 8.250%, 1/15/1998 5,032,656
--------------------------------------------------- ------------
OIL/GAS--0.2%
---------------------------------------------------
500,000 Texaco Capital, Inc., 9.000%, 11/15/1997 501,886
--------------------------------------------------- ------------
PROCESS INDUSTRIES--0.8%
---------------------------------------------------
1,925,000 Du Pont (E.I.) de Nemours & Co., 8.650%, 12/1/1997 1,933,167
--------------------------------------------------- ------------
RESTAURANT/FOOD SERVICE--1.4%
---------------------------------------------------
3,238,000 PepsiCo, Inc., 6.125%, 1/15/1998 3,241,451
--------------------------------------------------- ------------
TOTAL CORPORATE BONDS 29,432,764
--------------------------------------------------- ------------
CORPORATE NOTES--2.2%
---------------------------------------------------------------
BANKING-FINANCE--1.3%
---------------------------------------------------
3,000,000 CIT Group Holdings, Inc., 6.500%, 7/13/1998 3,016,257
--------------------------------------------------- ------------
ELECTRONIC TECHNOLOGY--0.9%
---------------------------------------------------
2,250,000 Rockwell International Corp., 7.625%, 2/17/1998 2,264,006
--------------------------------------------------- ------------
TOTAL CORPORATE NOTES 5,280,263
--------------------------------------------------- ------------
GOVERNMENT AGENCIES--23.7%
---------------------------------------------------------------
(b)Federal National Mortgage Association, 5.360%,
2,000,000 12/14/1998 2,000,382
---------------------------------------------------
55,250,000 (b)Student Loan Marketing Association, 5.220%-
5.410%, 10/30/1997-3/7/2001 55,262,286
--------------------------------------------------- ------------
TOTAL GOVERNMENT AGENCIES 57,262,668
--------------------------------------------------- ------------
</TABLE>
THE MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- ------------------------------------------ ------------
<C> <S> <C>
(C) REPURCHASE AGREEMENT--6.8%
------------------------------------------------------
Prudential Securities, Inc., 6.050%, dated
$16,490,289 9/30/1997, due 10/1/1997 $ 16,490,289
------------------------------------------ ------------
TOTAL INVESTMENTS (AT AMORTIZED COST)(D) $241,247,287
------------------------------------------ ------------
</TABLE>
(a) Each issue shows the rate of discount at the time of purchase for discount
issues, or the coupon for interest bearing issues.
(b) Current rate and next reset date shown.
(c) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
(d) Also represents cost for federal tax purposes.
Note: The categories of investments are shown as a percentage of net assets
($241,510,750) at September 30, 1997.
(See Notes which are an integral part of the Financial Statements)
THE TAX-FREE MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES--99.2%
--------------------------------------------------------
ALABAMA--4.4%
---------------------------------------------
$2,500,000 Columbia, AL IDB , PCR (Series C) Daily VRDNs
(Alabama Power Co.) A $ 2,500,000
--------------------------------------------- -----------
ALASKA--5.2%
---------------------------------------------
3,000,000 Alaska State Housing Finance Corp., Revenue
Bonds (Series 1991C) Weekly VRDNs (Swiss Bank
Capital Markets SPA) AAA 3,000,000
--------------------------------------------- -----------
ARIZONA--3.5%
---------------------------------------------
2,000,000 Arizona Health Facilities Authority, Pooled
Loan Program Revenue Bonds (Series 1985B)
Weekly VRDNs (FGIC INS)/(Chase Manhattan Bank
N.A., New York LIQ) AAA 2,000,000
--------------------------------------------- -----------
FLORIDA--5.7%
---------------------------------------------
3,290,000 Putnam County, FL Development Authority, PCR Bonds (Series 1984H)
Weekly VRDNs (Seminole Electric Cooperative, Inc (FL))/(National
Rural Utilities Cooperative Finance Corp.
LOC) AA- 3,290,000
--------------------------------------------- -----------
GEORGIA--12.6%
---------------------------------------------
2,000,000 Burke County, GA Development Authority, PCR
Bonds Daily VRDNs (Georgia Power Company
Plant Vogtle) A+ 2,000,000
---------------------------------------------
2,700,000 Gwinnett County, GA School District, GO UT
Refunding Bonds, 4.40% Bonds, 2/1/1998 AA+ 2,707,489
---------------------------------------------
1,500,000 Monroe County, GA Development Authority IDRB,
PCR Refunding Bonds (Series 2) Daily VRDNs
(Gulf Power Co.) A+ 1,500,000
---------------------------------------------
1,000,000 Putnam County, GA Development Authority Daily
VRDNs (Georgia Power Co.) A+ 1,000,000
--------------------------------------------- -----------
Total 7,207,489
--------------------------------------------- -----------
MARYLAND--8.3%
---------------------------------------------
1,000,000 Anne Arundel County, MD, GO UT, 4.00% Bonds,
4/1/1998 AA+ 1,001,229
---------------------------------------------
1,750,000 Baltimore County, MD Metropolitan District,
GO UT (65th Series), 5.00% Bonds, 6/1/1998 AAA 1,764,110
---------------------------------------------
2,000,000 Maryland Health & Higher Educational
Facilities Authority, Revenue Bonds Weekly
VRDNs (Greater Baltimore Medical
Center)/(First National Bank of Maryland,
Baltimore LOC) A1 2,000,000
--------------------------------------------- -----------
Total 4,765,339
--------------------------------------------- -----------
MASSACHUSETTS--4.4%
---------------------------------------------
2,500,000 Massachusetts IFA, (Series 1992A) Weekly
VRDNs (Ogden Haverhill)/(Union Bank of
Switzerland, Zurich LOC) AA+ 2,500,000
--------------------------------------------- -----------
MINNESOTA--0.7%
---------------------------------------------
400,000 Beltrami County, MN, Environmental Control
Authority Daily VRDNs (Northwood Panelboard
Co.)/(Union Bank of Switzerland, Zurich LOC) AA+ 400,000
--------------------------------------------- -----------
</TABLE>
THE TAX-FREE MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES--CONTINUED
--------------------------------------------------------
NEW YORK--10.3%
---------------------------------------------
$1,000,000 New York City Municipal Water Finance
Authority, Water and Sewer System Revenue
Bonds (Series 1995 A) Daily VRDNs (FGIC
INS)/(FGIC Securities Purchase, Inc. LIQ) AAA $ 1,000,000
---------------------------------------------
1,000,000 New York City, NY Daily VRDNs (AMBAC INS) AAA 1,000,000
---------------------------------------------
900,000 New York City, NY Daily VRDNs (Morgan
Guaranty Trust Co., New York LOC) AAA 900,000
---------------------------------------------
100,000 New York City, NY, (Subseries B-4) Daily
VRDNs AA+ 100,000
---------------------------------------------
400,000 New York City, NY, GO Bonds Series-B Daily
VRDNs (FGIC INS)/(FGIC Securities Purchase,
Inc. LIQ) AAA 400,000
---------------------------------------------
500,000 New York City, NY, Series B Daily VRDNs (FGIC
INS)/(FGIC Securities Purchase, Inc. LIQ) AAA 500,000
---------------------------------------------
2,000,000 New York City, NY, Subseries A-10 Daily VRDNs AAA 2,000,000
--------------------------------------------- -----------
Total 5,900,000
--------------------------------------------- -----------
OHIO--6.8%
---------------------------------------------
1,900,000 Clermont County, OH , Revenue Bonds (Series
B) Weekly VRDNs (Mercy Health Systems) AA- 1,900,000
---------------------------------------------
2,000,000 Ohio State Air Quality Development Authority, Revenue Bonds (Series
B) Daily VRDNs (Cincinnati Gas and Electric Co.)/(J.P.
Morgan Delaware, Wilmington LOC) AAA 2,000,000
--------------------------------------------- -----------
Total 3,900,000
--------------------------------------------- -----------
PENNSYLVANIA--3.5%
---------------------------------------------
2,000,000 Allegheny County, PA HDA, (Series 1990 A)
Daily VRDNs (Presbyterian University
Hospital)/(MBIA Insurance Corporation
INS)/(PNC Bank, N.A. LIQ) AAA 2,000,000
--------------------------------------------- -----------
TEXAS--6.1%
---------------------------------------------
1,500,000 Lower Neches Valley, TX, Refunding Revenue Bonds, 3.75% TOBs
(Chevron U.S.A., Inc.)
2/16/1998 AA 1,500,000
---------------------------------------------
2,000,000 Sabine River Authority, TX , PCR Bonds
(Series B) Daily VRDNs (Texas Utilities
Electric Co.)/(Union Bank of Switzerland,
Zurich LOC) AA+ 2,000,000
--------------------------------------------- -----------
Total 3,500,000
--------------------------------------------- -----------
VIRGINIA--26.0%
---------------------------------------------
2,200,000 Fairfax County, VA IDA, Refunding Revenue
Bonds (Series A) Weekly VRDNs (Fairfax
Hospital System) AA 2,200,000
---------------------------------------------
2,000,000 Fairfax County, VA, GO UT (Series A), 5.50%
Bonds, 6/1/1998 AAA 2,022,729
---------------------------------------------
2,215,000 Loudoun County, VA, GO UT (Series A), 4.375%
Bonds, 8/1/1998 AA- 2,226,345
---------------------------------------------
965,000 Richmond, VA Public Utility, Series A, 8.00%
Bonds (United States Treasury PRF), 1/15/1998
(@102) AAA 996,204
---------------------------------------------
1,400,000 Virginia College Building Authority Weekly
VRDNs (University of Richmond)/(Crestar Bank
of Virginia, Richmond SA) Aa2 1,400,000
---------------------------------------------
</TABLE>
THE TAX-FREE MONEY MARKET FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CREDIT
OR SHARES RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES--CONTINUED
--------------------------------------------------------
$2,000,000 Virginia State Housing Development Authority,
(Series C), 3.80% TOBs, Mandatory Tender
6/10/1998 AA+ $ 1,999,173
---------------------------------------------
500,000 Virginia State Public Building Authority,
(Series A), 3.90% Bonds, 8/1/1998 AA 500,192
---------------------------------------------
1,500,000 Virginia State Public School Authority,
Series A, 6.00% Bonds, 1/1/1998 AA 1,508,956
---------------------------------------------
2,000,000 Virginia State Transportation Board, 7.70%
Bonds (Route 28 Project)/(United States
Treasury PRF), 3/1/1998 (@102) AAA 2,072,480
--------------------------------------------- -----------
Total 14,926,079
--------------------------------------------- -----------
WYOMING--1.7%
---------------------------------------------
1,000,000 Lincoln County, WY, Revenue Bonds Daily VRDNs
(Exxon Corp.) AA 1,000,000
--------------------------------------------- -----------
TOTAL SHORT-TERM MUNICIPAL SECURITIES 56,888,907
--------------------------------------------- -----------
MUTUAL FUND ISSUES--0.4%
--------------------------------------------------------
247,772 Goldman Sachs & Co. (AT NET ASSET VALUE) 247,772
--------------------------------------------- -----------
TOTAL INVESTMENTS (AT AMORTIZED COST AND NET
ASSET VALUE)(A) $57,136,679
--------------------------------------------- -----------
</TABLE>
(a) Also represents cost for federal tax purposes.
* Please refer to the Appendix of the Statement of Additional Information for
an explanation of the credit ratings. Current credit ratings are unaudited.
Note: The categories of investments are shown as a percentage of net assets
($57,369,580) at September 30, 1997.
The following acronyms are used throughout this portfolio:
AMBAC--American Municipal Bond Assurance Corporation FGIC--Financial Guaranty
Insurance Company GO--General Obligation HDA--Hospital Development Authority
IDA--Industrial Development Authority IDB--Industrial Development Bond
IDRB--Industrial Development Revenue Bond IFA--Industrial Finance Authority
INS--Insured LIQ--Liquidity Agreement LOC--Letter of Credit MBIA--Municipal Bond
Investors Assurance PCR--Pollution Control Revenue PRF--Prerefunded SA--Support
Agreement SPA--Standby Purchase Agreement TOBs--Tender Option Bonds
UT--Unlimited Tax VRDNs--Variable Rate Demand Notes
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE U.S. THE STYLE THE THE
GOVERNMENT MANAGER: THE STYLE VIRGINIA MARYLAND
SECURITIES LARGE CAP MANAGER MUNICIPAL MUNICIPAL
FUND FUND FUND BOND FUND BOND FUND
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in
repurchase agreements $ 460,430 $ 2,576,249 $ 1,219,266 $ -- $ --
Investments in
securities 155,643,026 104,106,935 75,511,023 78,052,751 33,115,845
- ------------------------------------------------------------------------------------------
Total investments in
securities, at value $156,103,456 $106,683,184 $76,730,289 $78,052,751 $33,115,845
- ------------------------------------------------------------------------------------------
Cash -- 446 -- -- --
Income receivable 1,935,302 128,141 96,421 1,121,169 438,320
Receivable for shares
sold 117,229 57,067 275,041 37,019 200
Deferred expenses -- -- 9,103 -- --
- ------------------------------------------------------------------------------------------
Total assets 158,155,987 106,868,838 77,110,854 79,210,939 33,554,365
- ------------------------------------------------------------------------------------------
LIABILITIES:
Payable for shares
redeemed 249,193 87,484 187,792 238,933 13,519
Income distribution
payable 362,543 -- -- 105,709 33,929
Payable to Bank 3,989 -- -- -- --
Accrued expenses 115,182 96,827 49,114 93,733 38,136
- ------------------------------------------------------------------------------------------
Total liabilities 730,907 184,311 236,906 438,375 85,584
- ------------------------------------------------------------------------------------------
TOTAL NET ASSETS $157,425,080 $106,684,527 $76,873,948 $78,772,564 $33,468,781
- ------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in capital $174,339,274 $ 69,922,418 $48,156,564 $75,912,084 $32,631,102
Net unrealized
appreciation of
investments 1,195,308 20,488,173 15,019,954 3,037,578 1,189,411
Accumulated net realized
gain (loss) on
investments (18,155,068) 16,158,724 13,635,635 (177,098) (351,732)
Accumulated
undistributed net
investment income 45,566 115,212 61,795 -- --
- ------------------------------------------------------------------------------------------
TOTAL NET ASSETS $157,425,080 $106,684,527 $76,873,948 $78,772,564 $33,468,781
- ------------------------------------------------------------------------------------------
NET ASSETS:
Trust Shares $ 52,177,289 $ 26,611,481 $ -- $19,891,348 $ 5,682,750
Investment Shares 105,247,791 80,073,046 76,873,948 58,881,216 27,786,031
- ------------------------------------------------------------------------------------------
Total $157,425,080 $106,684,527 $76,873,948 $78,772,564 $33,468,781
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AND
OFFERING PRICE PER SHARE
Trust Shares $9.95 $16.31 -- $11.07 $10.91
Investment Shares $9.95 $16.31 $15.37 $11.07 $10.91
- ------------------------------------------------------------------------------------------
REDEMPTION PROCEEDS PER
SHARE*
Trust Shares $9.95 $16.31 -- $11.07 $10.91
Investment Shares** $9.75 $15.98 $15.06 $10.85 $10.69
- ------------------------------------------------------------------------------------------
SHARES OUTSTANDING
Trust Shares 5,246,259 1,632,012 -- 1,797,148 521,087
Investment Shares 10,582,280 4,910,713 5,002,112 5,319,803 2,547,851
- ------------------------------------------------------------------------------------------
Total Shares Outstanding 15,828,539 6,542,725 5,002,112 7,116,951 3,068,938
- ------------------------------------------------------------------------------------------
Investments, at
identified cost $154,908,148 $ 86,195,011 $61,710,335 $75,015,173 $31,926,434
- ------------------------------------------------------------------------------------------
Investments, at tax cost $154,908,148 $ 86,195,011 $61,750,880 $75,015,173 $31,926,434
- ------------------------------------------------------------------------------------------
</TABLE>
*See "Redeeming Shares" in the Prospectus.
**Computation of redemption proceeds per share: 98/100 of net asset value.
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE TREASURY THE TAX-FREE
MONEY THE MONEY MONEY
MARKET FUND MARKET FUND MARKET FUND
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments in repurchase agreements $149,310,947 $ 16,490,289 $ --
Investments in securities 167,236,001 224,756,998 57,136,679
- -------------------------------------------------------------------------------
Total investments in securities, at
value 316,546,948 241,247,287 57,136,679
- -------------------------------------------------------------------------------
Income receivable 2,578,221 1,133,016 371,750
Receivable for shares sold 3,106 11,582 69,301
Deferred expenses -- -- 4,692
- -------------------------------------------------------------------------------
Total assets 319,128,275 242,391,885 57,582,422
- -------------------------------------------------------------------------------
LIABILITIES:
Payable for shares redeemed 206,703 66,719 6,000
Income distribution payable 930,196 602,201 135,472
Payable to Bank -- 67,897 --
Accrued expenses 242,108 144,318 71,370
- -------------------------------------------------------------------------------
Total liabilities 1,379,007 881,135 212,842
- -------------------------------------------------------------------------------
TOTAL NET ASSETS $317,749,268 $241,510,750 $57,369,580
- -------------------------------------------------------------------------------
NET ASSETS:
Trust Shares $196,450,150 $164,290,280 $ --
Investment Shares 121,299,118 77,220,470 57,369,580
- -------------------------------------------------------------------------------
TOTAL NET ASSETS $317,749,268 $241,510,750 $57,369,580
- -------------------------------------------------------------------------------
NET ASSET VALUE AND REDEMPTION PROCEEDS
PER SHARE
Trust Shares $1.00 $1.00 --
Investment Shares $1.00 $1.00 $1.00
- -------------------------------------------------------------------------------
SHARES OUTSTANDING
Trust Shares 196,450,150 164,290,280 --
Investment Shares 121,466,050 77,220,470 57,369,580
- -------------------------------------------------------------------------------
Total Shares Outstanding 317,916,200 241,510,750 57,369,580
- -------------------------------------------------------------------------------
Investments, at amortized cost and net
asset value $316,546,948 $241,247,287 $57,136,679
- -------------------------------------------------------------------------------
Investments, at tax cost $316,546,948 $241,247,287 $57,136,679
- -------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE U.S. THE STYLE THE
GOVERNMENT MANAGER: THE STYLE THE VIRGINIA MARYLAND
SECURITIES LARGE CAP MANAGER MUNICIPAL MUNICIPAL
FUND FUND FUND BOND FUND BOND FUND
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ -- $ 2,280,851 $ 1,853,994 $ -- $ --
Interest 12,930,324 109,465 110,776 4,537,516 1,875,016
- --------------------------------------------------------------------------------------
Total income 12,930,324 2,390,316 1,964,770 4,537,516 1,875,016
- --------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fee 1,325,841 749,609 830,673 650,276 273,851
Administrative personnel
and services fee 172,113 97,360 75,125 84,421 75,000
Custodian fees 46,191 47,362 31,329 28,448 12,079
Transfer and dividend
disbursing agent fees
and expenses 132,824 198,044 64,733 80,614 60,084
Directors'/Trustees'
fees 3,071 3,593 2,496 2,754 2,202
Auditing fees 15,412 18,571 12,506 14,195 14,018
Legal fees 2,633 12,728 1,920 2,436 19
Portfolio accounting
fees 58,744 59,472 38,520 62,576 55,277
Distribution services
fee--
Investment Shares 279,386 175,775 -- 158,225 73,620
Share registration costs 15,210 26,705 11,764 15,011 9,626
Printing and postage 14,918 15,397 26,489 12,992 20,995
Insurance premiums 4,006 6,951 2,903 2,092 2,368
Miscellaneous 5,441 7,121 11,563 3,681 14
- --------------------------------------------------------------------------------------
Total expenses 2,075,790 1,418,688 1,110,021 1,117,721 599,153
Waivers--
Waiver of investment
advisory fee 37,709 -- 326,846 -- --
- --------------------------------------------------------------------------------------
Net expenses 2,038,081 1,418,688 783,175 1,117,721 599,153
- --------------------------------------------------------------------------------------
Net investment income 10,892,243 971,628 1,181,595 3,419,795 1,275,863
- --------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss)
on investments (3,831,048) 16,227,730 13,831,352 579,805 163,436
Change in unrealized
appreciation
of investments 4,711,022 14,347,096 9,985,998 2,442,760 982,703
- --------------------------------------------------------------------------------------
Net realized and
unrealized gain (loss)
on investments 879,974 30,574,826 23,817,350 3,022,565 1,146,139
- --------------------------------------------------------------------------------------
Change in net assets
resulting from
operations $11,772,217 $31,546,454 $24,998,945 $ 6,442,360 $2,422,002
- --------------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE TAX-
THE TREASURY FREE
MONEY THE MONEY MONEY
MARKET FUND MARKET FUND MARKET FUND
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $20,757,671 $13,828,345 $2,158,617
- ------------------------------------------------------------------------------
Total income 20,757,671 13,828,345 2,158,617
- ------------------------------------------------------------------------------
EXPENSES:
Investment advisory fee 1,897,464 1,250,019 302,027
Administrative personnel and services
fee 369,581 243,450 75,171
Custodian fees 120,115 74,934 34,273
Transfer and dividend disbursing agent
fees and expenses 240,905 123,295 44,277
Directors'/Trustees' fees 5,057 3,656 3,408
Auditing fees 20,051 16,000 16,613
Legal fees 412 4,687 2,434
Portfolio accounting fees 109,149 75,599 46,105
Distribution services fee--Investment
Shares 331,053 206,038 --
Share registration costs 18,320 24,568 12,242
Printing and postage 26,923 28,499 23,513
Insurance premiums 4,988 6,662 2,870
Miscellaneous 2,993 8,156 6,815
- ------------------------------------------------------------------------------
Total expenses 3,147,011 2,065,563 569,748
Waivers and Reimbursements--
Waiver of investment advisory fee (46,840) (57,472) (94,455)
Reimbursements of other operating
expenses (4,897) -- --
- ------------------------------------------------------------------------------
Total waivers and reimbursements (51,737) (57,472) (94,455)
- ------------------------------------------------------------------------------
Net expenses 3,095,274 2,008,091 475,293
- ------------------------------------------------------------------------------
Net investment income 17,662,397 11,820,254 1,683,324
- ------------------------------------------------------------------------------
Change in net assets resulting
from operations $17,662,397 $11,820,254 $1,683,324
- ------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE U.S. GOVERNMENT THE STYLE MANAGER:
SECURITIES FUND LARGE CAP FUND
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
OPERATIONS--
Net investment income $ 10,892,243 $ 13,381,466 $ 971,628 $ 1,995,250
Net realized gain (loss)
on investments (3,831,048) (3,219,621) 16,227,730 12,982,465
Net change in unrealized
appreciation
(depreciation) of
investments 4,711,022 (2,011,452) 14,347,096 (2,926,184)
- -------------------------------------------------------------------------------------
Change in net assets
resulting from operations 11,772,217 8,150,393 31,546,454 12,051,531
- -------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS-- Distributions from net investment income:
Trust Shares (4,109,350) (6,107,288) (350,276) (926,390)
Investment Shares (6,782,893) (7,274,178) (656,481) (1,026,148)
Distributions from net realized gains:
Trust Shares -- -- (4,272,531) (3,898,915)
Investment Shares -- -- (7,971,845) (3,989,082)
- -------------------------------------------------------------------------------------
Change in net assets
resulting from
distributions to
shareholders (10,892,243) (13,381,466) (13,251,133) (9,840,535)
- -------------------------------------------------------------------------------------
SHARE TRANSACTIONS--
Proceeds from sale of
shares 22,960,997 46,455,480 17,201,667 18,263,662
Shares issued in
connection with the
acquisition -- -- 1,509,197 9,245,450
Net asset value of
shares issued to
shareholders in payment
of
distributions declared 5,396,173 6,142,681 9,353,220 5,478,249
Cost of shares redeemed (67,228,310) (68,163,717) (33,248,877) (31,477,651)
- -------------------------------------------------------------------------------------
Change in net assets
resulting from share
transactions (38,871,140) (15,565,556) (5,184,793) 1,509,710
- -------------------------------------------------------------------------------------
Change in net assets (37,991,166) (20,796,629) 13,110,528 3,720,706
NET ASSETS:
Beginning of period 195,416,246 216,212,875 93,573,999 89,853,293
- -------------------------------------------------------------------------------------
End of period $157,425,080 $195,416,246 $106,684,527 $ 93,573,999
- -------------------------------------------------------------------------------------
Undistributed net
investment income
included in net assets
at end of period $ 45,566 $ 45,566 $ 115,212 $ 150,341
- -------------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE VIRGINIA MUNICIPAL
THE STYLE MANAGER FUND BOND FUND
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
OPERATIONS--
Net investment income $ 1,181,595 $ 1,728,218 $ 3,419,795 $ 3,919,914
Net realized gain (loss)
on investments 13,831,352 4,542,510 579,805 780,289
Net change in unrealized
appreciation
(depreciation) of
investments 9,985,998 (119,759) 2,442,760 (2,101,082)
- -------------------------------------------------------------------------------------
Change in net assets
resulting
from operations 24,998,945 6,150,969 6,442,360 2,599,121
- -------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS-- Distributions from net investment income:
Trust Shares -- -- (965,706) (1,287,834)
Investment Shares (1,233,260) (1,638,472) (2,454,089) (2,632,080)
Distributions from net realized gains:
Trust Shares -- -- -- --
Investment Shares (3,328,990) (8,143,290) -- --
- -------------------------------------------------------------------------------------
Change in net assets
resulting from
distributions to
shareholders (4,562,250) (9,781,762) (3,419,795) (3,919,914)
- -------------------------------------------------------------------------------------
SHARE TRANSACTIONS--
Proceeds from sale of
shares 40,136,505 16,506,045 6,840,095 16,125,700
Net asset value of
shares issued to
shareholders in payment
of
distributions declared 4,503,897 9,243,789 1,888,518 1,997,026
Cost of shares redeemed (50,985,728) (37,724,499) (26,788,539) (27,234,673)
- -------------------------------------------------------------------------------------
Change in net assets
resulting
from share
transactions (6,345,326) (11,974,665) (18,059,926) (9,111,947)
- -------------------------------------------------------------------------------------
Change in net assets 14,091,369 (15,605,458) (15,037,361) (10,432,740)
NET ASSETS:
Beginning of period 62,782,579 78,388,037 93,809,925 104,242,665
- -------------------------------------------------------------------------------------
End of period $ 76,873,948 $ 62,782,579 $ 78,772,564 $ 93,809,925
- -------------------------------------------------------------------------------------
Undistributed net
investment income
included in net assets
at end of period $ 61,795 $ 113,460 $ -- $ --
- -------------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE MARYLAND MUNICIPAL THE TREASURY
BOND FUND MONEY MARKET FUND
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
OPERATIONS--
Net investment income $ 1,275,863 $ 1,527,863 $ 17,662,397 $ 16,209,478
Net realized gain
(loss) on investments 163,436 186,173 -- --
Net change in
unrealized
appreciation
(depreciation) of
investments 982,703 (739,639) -- --
- --------------------------------------------------------------------------------------
Change in net assets
resulting
from operations 2,422,002 974,397 17,662,397 16,209,478
- --------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS--
Distributions from net investment income:
Trust Shares (261,815) (352,284) (11,714,695) (11,356,506)
Investment Shares (1,015,074) (1,175,552) (5,947,702) (4,852,972)
- --------------------------------------------------------------------------------------
Change in net assets
resulting from
distributions to
shareholders (1,276,889) (1,527,836) (17,662,397) (16,209,478)
- --------------------------------------------------------------------------------------
SHARE TRANSACTIONS--
Proceeds from sale of
shares 2,708,043 8,364,014 723,861,521 659,743,838
Shares issued in
connection with the
acquisition -- -- -- 122,108,127
Net asset value of
shares issued to
shareholders in
payment of
distributions declared 770,265 989,879 5,621,031 4,898,441
Cost of shares redeemed (11,327,459) (10,247,633) (784,872,329) (661,630,604)
- --------------------------------------------------------------------------------------
Change in net assets
resulting
from share
transactions (7,849,151) (893,740) (55,389,777) 125,119,802
- --------------------------------------------------------------------------------------
Change in net assets (6,704,038) (1,447,179) (55,389,777) 125,119,802
NET ASSETS:
Beginning of period 40,172,819 41,619,998 373,139,045 248,019,243
- --------------------------------------------------------------------------------------
End of period $ 33,468,781 $ 40,172,819 $ 317,749,268 $ 373,139,045
- --------------------------------------------------------------------------------------
Undistributed net
investment income
included in net assets
at end of period $ -- $ 1,026 $ -- $ --
- --------------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE TAX-FREE MONEY
THE MONEY MARKET FUND MARKET FUND
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
OPERATIONS--
Net investment income $ 11,820,254 $ 12,191,680 $ 1,683,324 $ 2,734,120
- --------------------------------------------------------------------------------------
Change in net assets
resulting
from operations 11,820,254 12,191,680 1,683,324 2,734,120
- --------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS--
Distributions from net investment income:
Trust Shares (8,056,642) (8,395,610) -- --
Investment Shares (3,763,612) (3,796,070) (1,683,324) (2,734,120)
- --------------------------------------------------------------------------------------
Change in net assets
resulting from
distributions to
shareholders (11,820,254) (12,191,680) (1,683,324) (2,734,120)
- --------------------------------------------------------------------------------------
SHARE TRANSACTIONS--
Proceeds from sale of
shares 618,631,500 576,928,235 315,423,874 389,800,080
Net asset value of
shares issued to
shareholders in
payment of
distributions declared 3,617,170 3,626,658 417,624 459,305
Cost of shares redeemed (624,937,753) (551,929,373) (310,970,825) (419,737,938)
- --------------------------------------------------------------------------------------
Change in net assets
resulting
from share
transactions (2,689,083) 28,625,520 4,870,673 (29,478,553)
- --------------------------------------------------------------------------------------
Change in net assets (2,689,083) 28,625,520 4,870,673 (29,478,553)
NET ASSETS:
Beginning of period 244,199,833 215,574,313 52,498,907 81,977,460
- --------------------------------------------------------------------------------------
End of period $ 241,510,750 $ 244,199,833 $ 57,369,580 $ 52,498,907
- --------------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE U.S. GOVERNMENT SECURITIES FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------
INVESTMENT SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.89 $10.13 $ 9.83 $10.90 $10.95
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.60 0.62 0.64 0.61 0.66
Net realized and
unrealized gain (loss) on
investments 0.06 (0.24) 0.30 (0.94) 0.03
- -------------------------------------------------------------------------------
Total from investment
operations 0.66 0.38 0.94 (0.33) 0.69
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.60) (0.62) (0.64) (0.61) (0.66)
Distributions from net
realized gain on
investments -- -- -- -- (0.08)
Distributions in excess of
net realized gain on
investments (a) -- -- -- (0.13) --
- -------------------------------------------------------------------------------
Total distributions (0.60) (0.62) (0.64) (0.74) (0.74)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 9.95 $ 9.89 $10.13 $ 9.83 $10.90
- -------------------------------------------------------------------------------
TOTAL RETURN (B) 6.89% 3.79% 9.84% (3.36)% 6.82%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS
Expenses 1.25% 1.14% 1.01% 0.99% 0.77%
Net investment income 6.07% 6.11% 6.41% 5.94% 5.91%
Expense
waiver/reimbursement (c) 0.02% 0.13% 0.28% 0.32% 0.43%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $105,248 $116,418 $114,803 $112,439 $119,187
Portfolio turnover 80% 118% 82% 227% 154%
- -------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------
TRUST SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.89 $10.13 $ 9.83 $10.90 $10.95
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.63 0.64 0.66 0.63 0.67
Net realized and
unrealized gain (loss) on
investments 0.06 (0.24) 0.30 (0.94) 0.03
- -------------------------------------------------------------------------------
Total from investment
operations 0.69 0.40 0.96 (0.31) 0.70
- -------------------------------------------------------------------------------
Less distributions
Distributions from net
investment income (0.63) (0.64) (0.66) (0.63) (0.67)
Distributions from net
realized gain on
investments -- -- -- -- (0.08)
Distributions in excess of
net realized gain on
investments (a) -- -- -- (0.13) --
- -------------------------------------------------------------------------------
Total distributions (0.63) (0.64) (0.66) (0.76) (0.75)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 9.95 $ 9.89 $10.13 $ 9.83 $10.90
- -------------------------------------------------------------------------------
TOTAL RETURN (B) 7.16% 4.05% 10.11% (3.12)% 6.94%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS
Expenses 1.00% 0.89% 0.76% 0.74% 0.63%
Net investment income 6.32% 6.36% 6.66% 6.19% 6.17%
Expense
waiver/reimbursement (c) 0.02% 0.13% 0.28% 0.32% 0.43%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $52,177 $78,998 $101,410 $107,103 $112,334
Portfolio turnover 80% 118% 82% 227% 154%
- -------------------------------------------------------------------------------
</TABLE>
(a) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principals. These
distributions do not represent a return of capital for federal income tax
purposes.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
THE STYLE MANAGER: LARGE CAP FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
INVESTMENT SHARES 1997(C) 1996 1995(C) 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $13.68 $13.70 $11.80 $12.39 $12.02
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.13 0.27 0.09 0.17 0.24
Net realized and unrealized
gain (loss) on investments 4.47 1.18 2.20 (0.39) 0.54
- -------------------------------------------------------------------------------
Total from investment operations 4.60 1.45 2.29 (0.22) 0.78
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.14) (0.27) (0.09) (0.17) (0.25)
Distributions from net realized
gain on investments (1.83) (1.20) (0.30) (0.20) (0.16)
- -------------------------------------------------------------------------------
Total distributions (1.97) (1.47) (0.39) (0.37) (0.41)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $16.31 $13.68 $13.70 $11.80 $12.39
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 37.02% 11.28% 20.02% (1.72%) 6.31%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.49% 1.36% 1.21% 1.20% 0.87%
Net investment income 0.88% 2.01% 0.67% 1.40% 1.81%
Expense waiver/reimbursement
(b) -- -- 0.21% 0.23% 0.55%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000
omitted) $80,073 $59,891 $44,509 $26,739 $18,691
Average commission rate paid
(d) $0.0783 $0.0616 -- -- --
Portfolio turnover 56% 151% 208% 205% 67%
- -------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
TRUST SHARES 1997(C) 1996 1995(C) 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $13.68 $13.70 $11.80 $12.39 $12.02
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.18 0.33 0.12 0.20 0.28
Net realized and unrealized
gain (loss) on investments 4.46 1.15 2.20 (0.40) 0.51
- -------------------------------------------------------------------------------
Total from investment operations 4.64 1.48 2.32 (0.20) 0.79
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.18) (0.30) (0.12) (0.19) (0.26)
Distributions from net realized
gain on investments (1.83) (1.20) (0.30) (0.20) (0.16)
- -------------------------------------------------------------------------------
Total distributions (2.01) (1.50) (0.42) (0.39) (0.42)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $16.31 $13.68 $13.70 $11.80 $12.39
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 37.37% 11.55% 20.33% (1.50%) 6.42%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.24% 1.11% 0.96% 0.95% 0.66%
Net investment income 1.17% 2.26% 0.92% 1.68% 2.09%
Expense waiver/reimbursement
(b) -- -- 0.21% 0.23% 0.55%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000
omitted) $26,611 $33,683 $45,345 $70,374 $65,841
Average commission rate paid
(d) $0.0783 $0.0616 -- -- --
Portfolio turnover 56% 151% 208% 205% 67%
- -------------------------------------------------------------------------------
</TABLE>
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Per share information presented is based on the monthly number of shares
outstanding due to large fluctuations in the number of shares outstanding
during the period.
(d) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
(See Notes which are an integral part of the Financial Statements)
THE STYLE MANAGER FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD
SEPTEMBER 30, ENDED
---------------- SEPTEMBER 30,
INVESTMENT SHARES 1997 1996 1995(A)
- --------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.47 $12.03 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.23 0.31 0.03
Net realized and unrealized gain on
investments 4.54 0.77 2.03
- --------------------------------------------------------------------------
Total from investment operations 4.77 1.08 2.06
- --------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net investment income (0.24) (0.29) (0.03)
Distributions from net realized gain on
investments (0.63) (1.35) --
- --------------------------------------------------------------------------
Total distributions (0.87) (1.64) (0.03)
- --------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $15.37 $11.47 $12.03
- --------------------------------------------------------------------------
TOTAL RETURN (B) 44.01% 10.19% 20.59%
- --------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.17% 0.99% 0.44%*
Net investment income 1.76% 2.63% 0.46%*
Expense waiver/reimbursement (c) 0.50% 0.44% 1.03%*
- --------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $76,874 $62,783 $78,388
Average commission rate paid (d) $0.0789 $0.0514 --
Portfolio turnover 94% 112% 92%
- --------------------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from March 7, 1995 (date of initial
public investment) to September 30, 1995.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
(See Notes which are an integral part of the Financial Statements)
THE VIRGINIA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
INVESTMENT SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $10.68 $10.81 $10.26 $11.26 $10.46
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.42 0.41 0.45 0.45 0.51
Net realized and unrealized
gain (loss) on investments 0.39 (0.13) 0.55 (0.92) 0.89
- -------------------------------------------------------------------------------
Total from investment
operations 0.81 0.28 1.00 (0.47) 1.40
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.42) (0.41) (0.45) (0.45)(e) (0.51)
Distributions from net
realized gain on
investments -- -- -- (0.06) (0.09)
Distributions in excess of
net realized gain on
investments (a) -- -- -- (0.02) --
- -------------------------------------------------------------------------------
Total distributions (0.42) (0.41) (0.45) (0.53) (0.60)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.07 $10.68 $10.81 $10.26 $11.26
- -------------------------------------------------------------------------------
TOTAL RETURN (B) 7.74% 2.60% 10.00% (4.25)% 13.49%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.36% 1.32% 1.17% 1.15% 0.90%
Net investment income 3.87% 3.78% 4.32% 4.22% 4.68%
Expense waiver/reimbursement
(c) -- 0.02% 0.22% 0.27% 0.50%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $58,881 $65,700 $70,572 $74,706 $63,492
Portfolio turnover 19% 129% 26% 29% 17%
- -------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
TRUST SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $10.68 $10.81 $10.26 $11.26 $10.46
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.45 0.44 0.48 0.48 0.53
Net realized and unrealized
gain (loss) on investments 0.39 (0.13) 0.55 (0.92) 0.89
- -------------------------------------------------------------------------------
Total from investment
operations 0.84 0.31 1.03 (0.44) 1.42
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.45) (0.44) (0.48) (0.48)(d) (0.53)
Distributions from net
realized gain on
investments -- -- -- (0.06) (0.09)
Distributions in excess of
net realized gain on
investments (a) -- -- -- (0.02) --
- -------------------------------------------------------------------------------
Total distributions (0.45) (0.44) (0.48) (0.56) (0.62)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.07 $10.68 $10.81 $10.26 $11.26
- -------------------------------------------------------------------------------
TOTAL RETURN (B) 8.00% 2.86% 10.27% (4.01%) 13.62%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.11% 1.06% 0.92% 0.90% 0.75%
Net investment income 4.12% 4.03% 4.57% 4.47% 4.85%
Expense waiver/reimbursement
(c) -- 0.02% 0.22% 0.27% 0.50%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $19,891 $28,110 $33,670 $34,165 $41,204
Portfolio turnover 19% 129% 26% 29% 17%
- -------------------------------------------------------------------------------
</TABLE>
(a) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Amount includes distributions to shareholders in excess of net investment
income of $0.0002 per share.
(e) Amount includes distributions to shareholders in excess of net investment
income of $0.0001 per share.
(See Notes which are an integral part of the Financial Statements)
THE MARYLAND MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
INVESTMENT SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $10.56 $10.69 $10.17 $11.24 $10.39
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.37 0.38 0.40 0.45 0.49
Net realized and unrealized
gain (loss) on investments 0.35 (0.13) 0.54 (0.97) 0.85
- -------------------------------------------------------------------------------
Total from investment operations 0.72 0.25 0.94 (0.52) 1.34
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.37) (0.38) (0.40) (0.45) (0.49)
Distributions from net realized
gain on investments -- -- (0.02) (0.10) --
- -------------------------------------------------------------------------------
Total distributions (0.37) (0.38) (0.42) (0.55) (0.49)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.91 $10.56 $10.69 $10.17 $11.24
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 6.92% 2.36% 9.81% (4.74%) 13.24%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.69% 1.43% 1.24% 1.17% 1.00%
Net investment income 3.45% 3.57% 4.24% 4.22% 4.50%
Expense waiver/reimbursement
(b) -- 0.25% 0.44% 0.51% 0.77%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000
omitted) $27,786 $31,284 $32,172 $34,580 $33,907
Portfolio turnover 13% 138% 21% 27% 23%
- -------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
TRUST SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $10.56 $10.69 $10.17 $11.24 $10.39
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.40 0.41 0.42 0.48 0.50
Net realized and unrealized
gain (loss)
on investments 0.35 (0.13) 0.54 (0.97) 0.85
- -------------------------------------------------------------------------------
Total from investment operations 0.75 0.28 0.96 (0.49) 1.35
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.40) (0.41) (0.42) (0.48) (0.50)
Distributions from net realized
gain on investments -- -- (0.02) (0.10) --
- -------------------------------------------------------------------------------
Total distributions (0.40) (0.41) (0.44) (0.58) (0.50)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.91 $10.56 $10.69 $10.17 $11.24
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 7.19% 2.61% 10.09% (4.50%) 13.37%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.44% 1.18% 0.99% 0.92% 0.86%
Net investment income 3.70% 3.82% 4.49% 4.46% 4.64%
Expense waiver/reimbursement
(b) -- 0.25% 0.44% 0.51% 0.77%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000
omitted) $5,683 $8,889 $9,447 $11,301 $12,014
Portfolio turnover 13% 138% 21% 27% 23%
- -------------------------------------------------------------------------------
</TABLE>
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
THE TREASURY MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
INVESTMENT SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.05 0.05 0.05 0.03 0.02
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.05) (0.05) (0.05) (0.03) (0.02)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 4.58% 4.67% 4.98% 2.90% 2.52%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 0.98% 0.90% 0.85% 0.84% 0.70%
Net investment income 4.49% 4.49% 4.92% 3.05% 2.47%
Expense
waiver/reimbursement (b) 0.01% 0.09% 0.10% 0.18% 0.20%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $121,299 $146,161 $39,363 $21,883 $20,382
- -------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
TRUST SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.05 0.05 0.05 0.03 0.03
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.05) (0.05) (0.05) (0.03) (0.03)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 4.84% 4.89% 5.24% 3.16% 2.64%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 0.73% 0.65% 0.60% 0.59% 0.58%
Net investment income 4.74% 4.81% 5.17% 3.30% 2.60%
Expense
waiver/reimbursement (b) 0.01% 0.06% 0.10% 0.18% 0.20%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $196,450 $226,978 $208,656 $304,285 $152,921
- -------------------------------------------------------------------------------
</TABLE>
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
THE MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
INVESTMENT SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.05 0.05 0.05 0.03 0.03
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.05) (0.05) (0.05) (0.03) (0.03)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 4.67% 4.91% 5.11% 3.10% 2.77%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 0.97% 0.73% 0.80% 0.80% 0.64%
Net investment income 4.57% 4.77% 5.04% 3.07% 2.68%
Expense
waiver/reimbursement (b) 0.02% 0.23% 0.21% 0.25% 0.30%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $77,220 $83,525 $41,813 $15,236 $9,905
- -------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
TRUST SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.05 0.05 0.05 0.03 0.03
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.05) (0.05) (0.05) (0.03) (0.03)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 4.93% 5.04% 5.36% 3.35% 2.89%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 0.72% 0.60% 0.57% 0.55% 0.50%
Net investment income 4.81% 4.93% 5.27% 3.25% 2.83%
Expense
waiver/reimbursement (b) 0.02% 0.12% 0.19% 0.25% 0.30%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $164,290 $160,675 $173,761 $132,445 $134,397
- -------------------------------------------------------------------------------
</TABLE>
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
THE TAX-FREE MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------
INVESTMENT SHARES 1997 1996 1995 1994(A)
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.03 0.03 0.03 0.01
- ----------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.03) (0.03) (0.03) (0.01)
- ----------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------
TOTAL RETURN (B) 2.83% 3.01% 3.53% 0.45%
- ----------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 0.79% 0.56% 0.39% 0.36%(c)
Net investment income 2.79% 2.95% 3.55% 2.65%(c)
Expense waiver/reimbursement (d) 0.16% 0.20% 0.56% 0.70%(c)
- ----------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000
omitted) $57,370 $52,499 $81,977 $21,967
- ----------------------------------------------------------------------------
</TABLE>
(a) Reflects operations for the period from July 27, 1994 (date of initial
public investment) to September 30, 1994.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) Computed on an annualized basis.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
- -------------------------------------------------------------------------------
(1) ORGANIZATION
The Virtus Funds (the "Trust") is registered under the Investment Company Act of
1940, as amended (the "Act"), as an open-end management investment company. The
Trust consists of eight portfolios (individually referred to as the "Fund", or
collectively as the "Funds"). All Funds, except The Style Manager Fund and The
Tax-Free Money Market Fund are offered in two classes of shares: Trust Shares
and Investment Shares. The Style Manager Fund and The Tax-Free Money Market Fund
are presented as Investment Shares for financial statement purposes. The
following portfolios comprise the Trust:
<TABLE>
<CAPTION>
PORTFOLIO NAME INVESTMENT OBJECTIVE
- ------------------------------------------------------------------------------------------
<C> <S>
The U.S. Government Securities Fund Current Income
("Government Securities Fund") (d)
- ------------------------------------------------------------------------------------------
The Style Manager: Large Cap Fund Growth of capital and income
(" Large Cap Fund") (d)
- ------------------------------------------------------------------------------------------
The Style Manager Fund ("Style Manager Growth of capital
Fund") (d)
- ------------------------------------------------------------------------------------------
The Virginia Municipal Bond Fund Current income exempt from federal regular
("Virginia Municipal Bond Fund") (n) income tax and the personal income tax
imposed
by the Commonwealth of Virginia
- ------------------------------------------------------------------------------------------
The Maryland Municipal Bond Fund Current income exempt from federal regular
("Maryland Municipal Bond Fund") (n) income tax and the personal income tax
imposed
by the State of Maryland
- ------------------------------------------------------------------------------------------
The Treasury Money Market Fund Current income consistent with stability of
("Treasury Money Market Fund") (d) principal
- ------------------------------------------------------------------------------------------
The Money Market Fund Current income consistent with stability of
("Money Market Fund") (d) principal
- ------------------------------------------------------------------------------------------
The Tax-Free Money Market Fund Current income exempt from federal income tax
("Tax-Free Money Market Fund") (d) consistent with stability of principal
</TABLE>
(d) Diversified
(n) Non-diversified
The assets of each portfolio are segregated and a shareholder's interest is
limited to the portfolio in which shares are held.
On June 24, 1996, the Large Cap Fund acquired all the net assets of the
Blanchard American Equity Fund ("Acquired Fund") pursuant to a plan of
reorganization approved by the Acquired Fund's shareholders. The acquisition was
accomplished by a tax-free exchange of 695,476 shares of the Large Cap Fund
(valued at $9,245,652) for the 845,351 shares of the Acquired Fund outstanding
on June 21, 1996. The Acquired Fund's net assets of $9,245,652, which consisted
of $7,444,690 of Paid in Capital and $2,066,228 of unrealized appreciation, were
combined at that date with those of the Large Cap Fund. The aggregate net assets
of the Large Cap Fund and the Acquired Fund immediately before the acquisition
were $92,855,251 and $9,245,652, respectively.
On April 21, 1997, the Large Cap Fund acquired all the net assets of the
Blanchard Capital Growth Fund ("Acquired Fund") pursuant to a plan of
reorganization approved by the Acquired Fund's shareholders. The acquisition was
accomplished by a tax-free exchange of 113,473 shares of the Large Cap Fund
(valued at $1,509,197) for the 202,789 shares of the Acquired Fund outstanding
on April 18, 1997. The Acquired Fund's net assets of $1,509,197, which consisted
of $1,319,703 of Paid in Capital and $271,223 of unrealized appreciation, were
combined at that date with those of the Large Cap Fund. The aggregate net assets
of the Large Cap Fund and the Acquired Fund immediately before the acquisition
were $91,970,866 and $1,509,197, respectively.
THE VIRTUS FUNDS
- -------------------------------------------------------------------------------
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--Municipal bonds are valued by an independent pricing
service, taking into consideration yield, liquidity, risk, credit quality,
coupon, maturity, type of issue, and any other factors or market data the
pricing service deems relevant. U.S. government securities, listed corporate
bonds, other fixed income and asset-backed securities, and unlisted
securities and private placement securities are generally valued at the mean
of the latest bid and asked price as furnished by an independent pricing
service. Listed equity securities are valued at the last sale price reported
on a national securities exchange. The Funds use the amortized cost method to
value portfolio securities in accordance with Rule 2a-7 under the Act. For
fluctuating net asset value Funds within the Trust, short-term securities are
valued at the prices provided by an independent pricing service. However,
short-term securities purchased with remaining maturities of sixty days or
less may be valued at amortized cost, which approximates fair market value.
Investments in other open-end investment companies are valued at net asset
value.
REPURCHASE AGREEMENTS--It is the policy of the Funds to require a custodian
bank to take possession, to have legally segregated in the Federal Reserve
Book Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Funds to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to be
paid under the repurchase agreement transaction.
The Funds will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed by
the Funds' adviser to be creditworthy pursuant to guidelines and/or standards
reviewed or established by the Board of Trustees (the "Trustees"). Risks may
arise from the potential inability of counterparties to honor the terms of the
repurchase agreement. Accordingly, the Funds could receive less than the
repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code").
FEDERAL TAXES--It is the Funds' policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of their income. Accordingly, no
provisions for federal tax are necessary.
At September 30, 1997, Government Securities Fund, Virginia Municipal Bond
Fund, and Maryland Municipal Bond Fund, for federal tax purposes, each had a
capital loss carryforward, as noted below. These capital loss carryforwards
will reduce the Fund's taxable income arising from future net realized gain on
investments, if any, to the extent permitted by the Code, and thus will reduce
the amount of the distributions to shareholders which would otherwise be
necessary to relieve the Funds of any liability for federal tax.
<TABLE>
<CAPTION>
FUNDS TOTAL TAX LOSS CARRYFORWARD
---------------------------
<S> <C>
Government Securities Fund $14,431,018
Virginia Municipal Bond Fund $ 178,797
Maryland Municipal Bond Fund $ 351,799
</TABLE>
THE VIRTUS FUNDS
- -------------------------------------------------------------------------------
Pursuant to the Code, such capital loss carryforwards will expire as follows:
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES FUND VIRGINIA MUNICIPAL BOND FUND
------------------------------------- ------------------------------------
EXPIRATION YEAR EXPIRATION AMOUNT EXPIRATION YEAR EXPIRATION AMOUNT
--------------- ----------------- --------------- -----------------
<S> <C> <C> <C>
2003 9,742,636 2004 178,797
2004 1,378,030
2005 3,310,352
</TABLE>
<TABLE>
<CAPTION>
MARYLAND MUNICIPAL BOND FUND
----------------------------------------------
EXPIRATION YEAR EXPIRATION AMOUNT
--------------- -----------------
<S> <C>
2004 351,799
</TABLE>
Additionally, net capital losses, as noted below, attributable to security
transactions incurred after September 30, 1996 are treated as arising on
October 1, 1997 the first day of the Funds' next taxable year.
<TABLE>
<CAPTION>
FUND TOTAL TAX LOSS PUSHFORWARD
-------------------------- --------------------------
<S> <C>
Government Securities Fund $3,736,134
</TABLE>
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Funds may engage in
when-issued or delayed delivery transactions. The Funds record when-issued
securities on the trade date and maintain security positions such that
sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis are
marked to market daily and begin earning interest on the settlement date.
DEFERRED EXPENSES--The costs incurred by each Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering its shares, have been deferred and are being amortized
over a period not to exceed five years from each Fund's commencement date.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets, liabilities, expenses and
revenues reported in the financial statements. Actual results could differ
from those estimated.
OTHER--Investment transactions are accounted for on the trade date.
THE VIRTUS FUNDS
- --------------------------------------------------------------------------------
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value). At
September 30, 1997, Treasury Money Market Fund, Money Market Fund, and Tax-Free
Money Market Fund, capital paid-in aggregated $317,749,268, $241,510,750, and
$57,369,580, respectively. Transactions in shares were as follows:
<TABLE>
<CAPTION>
GOVERNMENT
SECURITIES FUND LARGE CAP FUND
------------------------ ------------------------
FOR THE YEAR ENDED
SEPTEMBER 30, 1997: SHARES DOLLARS SHARES DOLLARS
- -------------------------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES:
- --------------------------
Shares sold 1,348,256 $ 13,371,271 878,296 $ 12,745,846
- --------------------------
Shares issued in
connection with the
acquisition -- -- 113,473 1,509,197
- --------------------------
Shares issued to
shareholders in payment of
distributions declared 544,149 5,396,169 640,836 8,496,790
- --------------------------
Shares redeemed (3,077,778) (30,479,752) (1,098,303) (16,038,717)
- -------------------------- ---------- ------------ ---------- ------------
Net change resulting from
Investment Share
transactions (1,185,373) $(11,712,312) 534,302 $ 6,713,116
- -------------------------- ---------- ------------ ---------- ------------
TRUST SHARES:
- --------------------------
Shares sold 966,507 $ 9,589,726 64,549 $ 4,455,821
- --------------------------
Shares issued to
shareholders in payment of
distributions declared -- 4 324,411 856,430
- --------------------------
Shares redeemed (3,705,430) (36,748,558) (1,219,486) (17,210,160)
- -------------------------- ---------- ------------ ---------- ------------
Net change resulting from
Trust Share transactions (2,738,923) (27,158,828) (830,526) (11,897,909)
- -------------------------- ---------- ------------ ---------- ------------
Net change resulting from
Fund Share transactions (3,924,296) $(38,871,140) (296,224) $ (5,184,793)
- -------------------------- ---------- ------------ ---------- ------------
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT
SECURITIES FUND LARGE CAP FUND
------------------------ ------------------------
FOR THE YEAR ENDED
SEPTEMBER 30, 1996: SHARES DOLLARS SHARES DOLLARS
- -------------------------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES:
- --------------------------
Shares sold 2,763,200 $ 27,838,858 965,024 $ 12,986,255
- --------------------------
Shares issued in
connection with the
acquisition -- -- 695,147 9,245,450
- --------------------------
Shares issued to
shareholders in payment of
distributions declared 611,870 6,142,678 379,876 4,969,161
- --------------------------
Shares redeemed (2,935,461) (29,411,819) (913,112) (13,464,743)
- -------------------------- ---------- ------------ ---------- ------------
Net change resulting from
Investment Share
transactions 439,609 $ 4,569,717 1,126,935 $ 13,736,123
- -------------------------- ---------- ------------ ---------- ------------
TRUST SHARES:
- --------------------------
Shares sold 1,853,668 $ 18,616,622 395,754 $ 5,277,407
- --------------------------
Shares issued to
shareholders in payment of
distributions declared 1 3 38,987 509,088
- --------------------------
Shares redeemed (3,875,084) (38,751,898) (1,282,606) (18,012,908)
- -------------------------- ---------- ------------ ---------- ------------
Net change resulting from
Trust Share transactions (2,021,415) (20,135,273) (847,865) (12,226,413)
- -------------------------- ---------- ------------ ---------- ------------
Net change resulting from
Fund Share transactions (1,581,806) $(15,565,556) 279,070 $ (1,509,710)
- -------------------------- ---------- ------------ ---------- ------------
</TABLE>
THE VIRTUS FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STYLE MANAGER FUND
------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 1997: SHARES DOLLARS
- ------------------------------------------------- ---------- ------------
<S> <C> <C>
INVESTMENT SHARES:
- -------------------------------------------------
Shares sold 3,251,568 $ 40,136,505
- -------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 383,514 4,503,897
- -------------------------------------------------
Shares redeemed (4,107,368) (50,985,728)
- ------------------------------------------------- ---------- ------------
Net change resulting from Fund Share transactions (472,286) $ (6,345,326)
- ------------------------------------------------- ---------- ------------
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30, 1996: SHARES DOLLARS
- ------------------------------------------------- ---------- ------------
<S> <C> <C>
INVESTMENT SHARES:
- -------------------------------------------------
Shares sold 1,489,971 $16,506,045
- -------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 863,431 9,243,789
- -------------------------------------------------
Shares redeemed (3,397,734) (37,724,499)
- ------------------------------------------------- ---------- ------------
Net change resulting from Fund Share transactions (1,044,332) $(11,974,665)
- ------------------------------------------------- ---------- ------------
</TABLE>
<TABLE>
<CAPTION>
VIRGINIA MUNICIPAL MARYLAND MUNICIPAL
BOND FUND BOND FUND
------------------------ ---------------------
FOR THE YEAR ENDED SEPTEMBER SHARES DOLLARS SHARES DOLLARS
30, 1997: ---------- ------------ -------- -----------
- -----------------------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES:
- -----------------------------
Shares sold 509,188 $ 5,533,656 192,865 $ 2,067,713
- -----------------------------
Shares issued to shareholders
in payment of distributions
declared 173,844 1,888,518 71,862 770,265
- -----------------------------
Shares redeemed (1,515,555) (16,472,000) (679,110) (7,269,728)
- ----------------------------- ---------- ------------ -------- -----------
Net change resulting from
Investment Share transactions (832,523) $ (9,049,826) (414,383) $(4,431,750)
- ----------------------------- ---------- ------------ -------- -----------
TRUST SHARES:
- -----------------------------
Shares sold 120,060 $ 1,306,439 59,419 $ 640,330
- -----------------------------
Shares issued to shareholders
in payment of distributions
declared -- -- -- --
- -----------------------------
Shares redeemed (955,166) (10,316,539) (380,036) (4,057,731)
- ----------------------------- ---------- ------------ -------- -----------
Net change resulting from
Trust Share transactions (835,106) (9,010,100) (320,617) (3,417,401)
- ----------------------------- ---------- ------------ -------- -----------
Net change resulting from
Fund Share transactions (1,667,629) $(18,059,926) (735,000) $(7,849,151)
- ----------------------------- ---------- ------------ -------- -----------
</TABLE>
THE VIRTUS FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VIRGINIA MUNICIPAL MARYLAND MUNICIPAL
BOND FUND BOND FUND
------------------------ ---------------------
FOR THE YEAR ENDED SHARES DOLLARS SHARES DOLLARS
SEPTEMBER 30, 1996: ---------- ------------ -------- -----------
- -----------------------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES:
- -----------------------------
Shares sold 1,022,563 $ 11,073,171 574,103 $ 6,142,806
- -----------------------------
Shares issued to shareholders
in payment of distributions
declared 184,796 1,997,026 92,527 989,879
- -----------------------------
Shares redeemed (1,580,634) (17,022,733) (712,478) (7,557,624)
- ----------------------------- ---------- ------------ -------- -----------
Net change resulting from
Investment Share transactions (373,275) $ (3,952,536) (45,848) $(424,939)
- ----------------------------- ---------- ------------ -------- -----------
TRUST SHARES:
- -----------------------------
Shares sold 468,285 $ 5,052,529 209,103 $ 2,221,208
- -----------------------------
Shares issued to shareholders
in payment of distributions
declared -- -- -- --
- -----------------------------
Shares redeemed (950,703) (10,211,940) (252,990) (2,690,009)
- ----------------------------- ---------- ------------ -------- -----------
Net change resulting from
Trust Share transactions (482,418) (5,159,411) (43,887) (468,801)
- ----------------------------- ---------- ------------ -------- -----------
Net change resulting from
Fund Share transactions (855,693) $ (9,111,947) (89,735) $ (893,740)
- ----------------------------- ---------- ------------ -------- -----------
</TABLE>
<TABLE>
<CAPTION>
TREASURY MONEY
MARKET FUND MONEY MARKET FUND
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES:
- -----------------------
Shares sold 67,174,914 92,237,108 92,778,441 144,072,045
- -----------------------
Shares issued in
connection with the
Acquisition -- 122,108,127 -- --
- -----------------------
Shares issued to
shareholders in payment
of distributions
declared 5,621,028 4,898,438 3,617,167 3,626,655
- -----------------------
Shares redeemed (97,657,884) (112,278,779) (102,699,797) (105,987,535)
- ----------------------- ------------ ------------ ------------ ------------
Net change resulting
from Investment Share
transactions (24,861,942) 106,964,894 (6,304,189) 41,711,165
- ----------------------- ------------ ------------ ------------ ------------
TRUST SHARES:
- -----------------------
Shares sold 656,686,607 567,506,731 525,853,059 432,856,190
- -----------------------
Shares issued to
shareholders in payment
of distributions
declared 3 3 3 3
- -----------------------
Shares redeemed (687,214,445) (549,184,891) (522,237,956) (445,941,838)
- ----------------------- ------------ ------------ ------------ ------------
Net change resulting
from Trust Share
transactions (30,527,835) 18,321,843 3,615,106 (13,085,645)
- ----------------------- ------------ ------------ ------------ ------------
Net change resulting
from Fund Share
transactions (55,389,777) 125,286,737 (2,689,083) 28,625,520
- ----------------------- ------------ ------------ ------------ ------------
</TABLE>
THE VIRTUS FUNDS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TAX-FREE MONEY MARKET FUND
----------------------------
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
INVESTMENT SHARES:
- -------------------------------------------------
Shares sold 315,423,874 389,800,080
- -------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 417,624 459,305
- -------------------------------------------------
Shares redeemed (310,970,825) (419,737,938)
- ------------------------------------------------- ------------ ------------
Net change resulting from Fund Share transactions 4,870,673 (29,478,553)
- ------------------------------------------------- ------------ ------------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Virtus Capital Management, Inc., the Trust's investment
adviser (the "Adviser"), receives for its services an annual investment advisory
fee based on a percentage of each Fund's average daily net assets (see below).
<TABLE>
<CAPTION>
FUND ANNUAL RATE
---------------------------- -----------
<C> <S>
Government Securities Fund 0.75%
Large Cap Fund 0.75%
Style Manager Fund 1.25%
Virginia Municipal Bond Fund 0.75%
Maryland Municipal Bond Fund 0.75%
Treasury Money Market Fund 0.50%
Money Market Fund 0.50%
Tax-Free Money Market Fund 0.50%
</TABLE>
The Adviser may voluntarily choose to waive a portion of its fee. The Adviser
can modify or terminate this voluntary waiver at any time at its sole
discretion.
Effective October 22, 1996 the Adviser increased its annual fee to 1.25% on the
Style Manager Fund.
Effective October 22, 1996 the Adviser entered into a sub-advisory agreement
with Trend Capital Management ("Trend") on behalf of the Style Manager Fund and
Large Cap Fund. Under the terms of a sub-advisory agreement between the Adviser
and Trend, with respect to the Style Manager Fund, the Adviser will pay Trend an
annual fee as follows: (a) an amount equal to .10% of the first $60 million of
the Fund's average daily net assets; and (b) with respect to average daily net
assets of the Fund in excess of $60 million, an amount equal to (i) one-third of
the Adviser's advisory fee to the extent that such advisory fee is less than or
equals 1% of the Fund's average daily net assets (but not to exceed .25% of the
Fund's average daily net assets); plus (ii) to the extent that the annual
advisory fee exceeds 1% of the Fund's average daily net assets, an additional
amount equal to two-thirds of such excess. With respect to the Large Cap Fund,
the Adviser will pay Trend an amount equal to .15% of the first $100 million of
the Fund's average daily net assets; and .33 1/3% of the Fund's average daily
net assets in excess of $100 million. Trend may voluntarily choose to reduce its
compensation. Trend can modify of terminate this voluntary reduction at any time
at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS"), under the
Administrative Services Agreement, provides the Funds with administrative
personnel and services. The fee paid to FAS is based on the level of average
aggregate daily net assets of the Trust, the Blanchard Precious Metals Fund,
Inc., and the Blanchard Funds, all of which are advised by the Adviser. The
administrative fee received during any fiscal year shall be at least $50,000 per
Fund. With respect to the Style Manager Fund and the Tax-Free Money Market Fund,
the fee shall be at least $75,000.
DISTRIBUTION SERVICES FEE--The Trust has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, each
Fund will reimburse Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Funds to finance activities intended to
result in the sale of the Funds' Investment Shares. The Plan provides that the
Funds may incur distribution expenses up to 0.25 % of the average daily net
assets of the Investment Shares, annually, to reimburse FSC. The Tax-Free Money
Market Fund and the Style Manager Fund will not accrue or pay any distribution
expenses pursuant to the Plan until a second class of shares has been created
for certain institutional investors.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated Services
Company ("FServ"), through its subsidiary, Federated Shareholder Services
Company ("FSSC") serves as transfer and dividend disbursing agent for the Funds.
The fee paid to FSSC is based on the size, type, and number of accounts
and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ also maintains the Funds' accounting records
for which it receives a fee. The fee is based on the level of each Fund's
average net assets for the period, plus out-of-pocket expenses.
CUSTODIAN FEES--Signet Trust Company is the Funds' custodian for which it
receives a fee. The fee is based on the level of each Fund's average net assets
for the period, plus out-of-pocket expenses.
ORGANIZATIONAL EXPENSES--Organizational expenses were borne initially by FAS.
The Funds have agreed to reimburse FAS for the organizational expenses during
the five year period following each Fund's effective date. For the year ended
September 30, 1997, the following amounts were paid pursuant to this agreement:
<TABLE>
<CAPTION>
AMOUNT REIMBURSED
TO FAS FOR THE
EXPENSES OF YEAR ENDED
FUND ORGANIZING THE FUND SEPTEMBER 30, 1997
-------------------------- ------------------- ------------------
<S> <C> <C>
Style Manager Fund $28,773 $4,620
Tax-Free Money Market Fund $17,883 $2,933
</TABLE>
GENERAL--Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended September 30, 1997, were as follows:
<TABLE>
<CAPTION>
FUND PURCHASES SALES
------------ ------------
<S> <C> <C>
Government Securities Fund $138,698,434 $175,501,963
Large Cap Fund 55,144,492 73,658,378
Style Manager Fund 61,085,310 70,071,792
Virginia Municipal Bond Fund 15,978,372 33,799,963
Maryland Municipal Bond Fund 4,638,966 13,686,700
</TABLE>
(6) CONCENTRATION OF CREDIT RISK
Since Virginia Municipal Bond Fund and Maryland Municipal Bond Fund invest a
substantial portion of their assets in issuers located in one state, they will
be more susceptible to factors adversely affecting issuers of those states than
would be a comparable general tax-exempt mutual fund. In order to reduce the
credit risk associated with such factors, at September 30, 1997, 39% of the
securities in Virginia Municipal Bond Fund's portfolio of investments were
backed by letters of credit or bond insurance of various financial institutions
and financial guaranty assurance agencies. The value of investments insured by
or supported (backed) by a letter of credit from any one institution or agency
did not exceed 11% of total investments. At September 30, 1997, 20% of the
securities in Maryland Municipal Bond Fund's portfolio of investments were
backed by letters of credit or bond insurance of various financial institutions
and financial guaranty assurance agencies. The value of investments insured by
or supported (backed) by a letter of credit from any one institution or agency
did not exceed 9% of total investments.
THE VIRTUS FUNDS
- -------------------------------------------------------------------------------
(7) PROPOSED FUND MERGER
On July 18, 1997, Signet Banking Corporation ("Signet") entered into a
definitive Agreement and Plan of Reorganization whereby Signet was acquired by
First Union Corporation ("First Union"). It is anticipated that the merger will
be consummated on or about November 28, 1997.
As a result of this merger, First Union will succeed to the investment advisory
and functions formerly performed for the funds by various units of Signet and
various unaffiliated parties.
The Board of Trustees of the Trust has approved an Agreement and Plan of
Reorganization pursuant to which, on or about February 27, 1998, all of the
assets, and certain liabilities of the Funds would be acquired in exchange for
shares of a similarly managed fund (the "Acquiring Fund") that is advised by
affiliates of First Union. The reorganizations would result in the liquidation
and termination of the Funds. Pursuant to the reorganizations, shareholders of
the Funds will receive, tax-free, the number of shares of the acquiring fund
having a value equal to the value of their shares immediately prior to the
reorganizations. Consummation of the reorganizations is subject to approval of
the shareholders of the Funds.
THE VIRTUS FUNDS
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------
To the Board of Trustees and Shareholders of
The Virtus Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Virtus Funds (comprising the following
portfolios: The U.S. Government Securities Fund, The Style Manager: Large Cap
Fund, The Style Manager Fund, The Virginia Municipal Bond Fund, The Maryland
Municipal Bond Fund, The Treasury Money Market Fund, The Money Market Fund, and
The Tax-Free Money Market Fund) as of September 30, 1997, and the related
statements of operations for the year then ended, the statements of changes in
net assets for the years ended September 30, 1997 and 1996, and the financial
highlights for the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
September 30, 1997 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Virtus Funds as
of September 30, 1997, the results of its operations, the changes in its net
assets and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
As more fully described in Note 7, in November, 1997 the Funds are expected to
enter into an Agreement and Plan of Reorganization, pursuant to which (subject
to Fund shareholder approval) on or about February 27, 1998, all of the assets,
and certain liabilities of the Funds would be acquired in exchange for shares of
similarly managed funds that are advised by affiliates of First Union
Corporation. The reorganization would result in the liquidation and termination
of the Funds.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
November 7, 1997
TRUSTEES OFFICERS
- --------------------------------------------------------------------------------
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. Edward C. Gonzales
William J. Copeland President and Treasurer
James E. Dowd J. Christopher Donahue
Lawrence D. Ellis, M.D. Executive Vice President
Edward L. Flaherty, Jr. John W. McGonigle
Edward C. Gonzales Executive Vice President and
Peter E. Madden Secretary
John E. Murray, Jr. Joseph S. Machi
Wesley W. Posvar Vice President and Assistant
Marjorie P. Smuts Treasurer
Richard B. Fisher
Vice President
C. Grant Anderson
Assistant Secretary
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the Funds' prospectus which contains facts concerning
their objective and policies, management fees, expenses and other information.
Cusip 927913608 Cusip 927913855 Cusip 927913400
Cusip 927913707 Cusip 927913848 Cusip 927913301
Cusip 927913863 Cusip 927913830 Cusip 927913889
Cusip 927913871 Cusip 927913509 Cusip 927913103
Cusip 927913806 Cusip 927913202
G00716-01 (11/97)
THE VIRTUS FUNDS APPENDIX
A. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The U.S. Government Securities Fund-Investment
Shares (the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Lehman Brothers
Intermediate Government Bond Index is represented by a solid line. The line
graph is a visual representation of a comparison of change in value of a
hypothetical $10,000 purchase in the Fund and The Lehman Brothers Intermediate
Government Bond Index. The "y" axis reflects the cost of the investment. The "x"
axis reflects computation periods from the Fund's start of performance, 10/16/90
through 9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to The Lehman Brothers Intermediate
Government Bond Index; the ending values are $16,120 and $16,983, respectively.
B. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The U.S. Government Securities Fund-Trust Shares
(the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Lehman Brothers
Intermediate Government Bond Index is represented by a solid line. The line
graph is a visual representation of a comparison of change in value of a
hypothetical $10,000 purchase in the Fund and The Lehman Brothers Intermediate
Government Bond Index. The "y" axis reflects the cost of the investment. The "x"
axis reflects computation periods from the Fund's start of performance, 10/16/90
through 9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to The Lehman Brothers Intermediate
Government Bond Index; the ending values are $16,301 and $16,983, respectively.
C. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Style Manager: Large Cap Fund-Investment
Shares (the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Standard & Poor's 500
Index is represented by a solid line. The line graph is a visual representation
of a comparison of change in value of a hypothetical $10,000 purchase in the
Fund and The Standard & Poor's 500 Index. The "y" axis reflects the cost of the
investment. The "x" axis reflects computation periods from the Fund's start of
performance, 10/16/90 through 9/30/97. The right margin reflects the ending
value of the hypothetical investment in the Fund as compared to the Standard &
Poor's 500 Index; the ending values are $24,937 and $37,387, respectively.
D. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Style Manager: Large Cap Fund-Trust Shares
(the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Standard & Poor's 500
Index is represented by a solid line. The line graph is a visual representation
of a comparison of change in value of a hypothetical $10,000 purchase in the
Fund and The Standard & Poor's 500 Index. The "y" axis reflects the cost of the
investment. The "x" axis reflects computation periods from the Fund's start of
performance, 10/16/90 through 9/30/97. The right margin reflects the ending
value of the hypothetical investment in the Fund as compared to the Standard &
Poor's 500 Index; the ending values are $25,208 and $37,387, respectively.
E. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Style Manager Fund (the "Fund"). The
corresponding components of the line graph are listed underneath. The Fund is
represented by a broken line. The Standard & Poor's 500 Index is represented by
a solid line. The line graph is a visual representation of a comparison of
change in value of a hypothetical $10,000 purchase in the Fund and The Standard
& Poor's 500 Index. The "y" axis reflects the cost of the investment. The "x"
axis reflects computation periods from the Fund's start of performance, 3/7/95
through 9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the Standard & Poor's 500 Index; the
ending values are $18,536 and $20,576, respectively.
F. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Virginia Municipal Bond Fund-Investment
Shares (the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Lehman Brothers 10
Year Municipal Bond Index is represented by a solid line. The line graph is a
visual representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund and The Lehman Brothers 10 Year Municipal Bond
Index. The "y" axis reflects the cost of the investment. The "x" axis reflects
computation periods from the Fund's start of performance, 10/24/90 through
9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the Lehman Brothers 10 Year Municipal Bond
Index; the ending values are $15,433 and $17,493, respectively.
G. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Virginia Municipal Bond Fund-Trust Shares
(the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Lehman Brothers 10
Year Municipal Bond Index is represented by a solid line. The line graph is a
visual representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund and The Lehman Brothers 10 Year Municipal Bond
Index. The "y" axis reflects the cost of the investment. The "x" axis reflects
computation periods from the Fund's start of performance, 10/24/90 through
9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the Lehman Brothers 10 Year Municipal Bond
Index; the ending values are $15,605 and $17,493, respectively.
H. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Maryland Municipal Bond Fund-Investment
Shares (the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Lehman Brothers 10
Year Municipal Bond Index is represented by a solid line. The line graph is a
visual representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund and The Lehman Brothers 10 Year Municipal Bond
Index. The "y" axis reflects the cost of the investment. The "x" axis reflects
computation periods from the Fund's start of performance, 10/30/90 through
9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the Lehman Brothers 10 Year Municipal Bond
Index; the ending values are $14,974 and $17,493, respectively.
I. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Maryland Municipal Bond Fund-Trust Shares
(the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Lehman Brothers 10
Year Municipal Bond Index is represented by a solid line. The line graph is a
visual representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund and The Lehman Brothers 10 Year Municipal Bond
Index. The "y" axis reflects the cost of the investment. The "x" axis reflects
computation periods from the Fund's start of performance, 10/30/90 through
9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the Lehman Brothers 10 Year Municipal Bond
Index; the ending values are $15,142 and $17,493, respectively.
Evergreen
Money Market
Funds
(Photo of mountains, stream, and trees)
1997 Annual Report
(Evergreen Tree Symbol Goes Here)
Evergreen Funds (sm)
Since 1932
<PAGE>
EVERGREEN
(Evergreen Graphic
Goes Here)
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders............................... 1
FUND AT A GLANCE
Evergreen Money Market Fund........................ 2
Evergreen Pennsylvania Tax-Free Money Market
Fund............................................ 3
Evergreen Tax Exempt Money Market
Fund............................................ 4
Evergreen Treasury Money Market Fund............... 5
FINANCIAL HIGHLIGHTS
Evergreen Money Market Fund........................ 6
Evergreen Pennsylvania Tax-Free Money Market
Fund............................................ 9
Evergreen Tax Exempt Money Market
Fund............................................ 10
Evergreen Treasury Money Market Fund............... 11
SCHEDULES OF INVESTMENTS
Evergreen Money Market Fund........................ 12
Evergreen Pennsylvania Tax-Free Money Market
Fund............................................ 17
Evergreen Tax Exempt Money Market
Fund............................................ 20
Evergreen Treasury Money Market Fund............... 29
Statements of Assets and Liabilities................. 31
Statements of Operations............................. 32
Statements of Changes in Net Assets.................. 33
Combined Notes to Financial Statements............... 35
Report of Independent Accountants--
Price Waterhouse LLP............................... 41
Independent Auditors' Report--
KPMG Peat Marwick LLP.............................. 42
Federal Income Tax Status of Distributions........... 43
</TABLE>
ABOUT EVERGREEN KEYSTONE
Since 1971, the Evergreen Funds have been providing investors with a proven,
value-driven approach to equity investment management. For over 60 years of
changing economic conditions, Keystone has taken pride in helping investors meet
their financial goals through a broad range of financial products and services.
Combined, Evergreen Keystone offers over 70 funds designed to meet a broad range
of objectives, including fixed-income, balanced, growth and income, and
aggressive growth. Assets under management total more than $30 billion.
<PAGE>
EVERGREEN
LETTER TO SHAREHOLDERS (Evergreen Graphic
October 1997 Goes Here)
(Photo of William M Ennis Goes Here)
WILLIAM M. ENNIS
Dear Shareholders:
Money market funds did their job during the past year.
During a period when both the stock and bond markets delivered generous returns,
although with some short-term instability, money market funds provided investors
with an opportunity to receive competitive current income, to maintain
liquidity, and to have a safe harbor from the fluctuations of riskier parts of
the capital markets.
During the year, the U.S. economy continued its extraordinary performance.
Unemployment neared 24-year lows, the Gross Domestic Product grew strongly, and
consumer confidence soared. Through it all, inflation remained benign, despite
the exceptional growth and low unemployment.
This near-perfect environment was interrupted briefly in March when Federal
Reserve Board Chairman Alan Greenspan, in an appearance before Congress,
suggested that it was necessary that the Federal Reserve Board raise short-term
rates to curb potential inflation. On March 25, the board did just that, raising
the Fed Funds rate by one-quarter of one-percent. Subsequently, the economy
continued its healthy, non-inflationary pace of growth, and the board did not
change rates again for the remainder of your fund's fiscal year, which ended on
August 31, 1997.
In the bond market, after the rates jumped up in March, they started a gradual
decline during the following two months. As measured by the three-month Treasury
Bill, interest rates bottomed out at 4.84% on June 2, then climbed steadily
before closing at 5.22% on the final business day of August.
Throughout this period, your Evergreen money market funds retained their $1.00
net asset values, while income tended to move with changes in market rates.
These funds proved to be an excellent place for assets of those investors who
wanted a relatively safe place for their money, either because they wanted
liquidity or because they were concerned about volatility in the markets.
I am delighted to inform you that Evergreen Keystone has successfully integrated
all service functions of Evergreen and Keystone Funds. This means that you now
have full exchange privileges among all Evergreen and Keystone America funds. In
addition, you will be receiving the top-flight service that earned Evergreen
Keystone the 1996 Dalbar Quality Tested Service Seal, the highest award for
mutual fund service presented by Dalbar, an independent mutual fund survey and
rating firm.
In the following pages, we provide specific information about each Evergreen
money market fund. We present this information in a new format that makes
information easily accessible. We are very interested in hearing your thoughts
on this new format, and we welcome your suggestions.
Sincerely,
/s/ Bill Ennis
WILLIAM M. ENNIS
MANAGING DIRECTOR
1
<PAGE>
EVERGREEN
MONEY MARKET FUND
(Evergreen Graphic
Goes Here)
FUND AT A GLANCE
As of August 31, 1997
<TABLE>
<CAPTION>
PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVERAGE ANNUALIZED TOTAL
RETURNS YIELDS & DISTRIBUTIONS
-------------------------- -----------------------
SHARE INCEPTION 3 5 SINCE 7-DAY YIELD 30-DAY YIELD 12-MONTH
CLASS DATE 1 YEAR 1 YEAR1 YEARS YEARS INCEPTION (ANNUALIZED) (ANNUALIZED) DISTRIBUTION
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A 1/4/95 4.95% -- -- -- 5.10% 4.91% 4.90% $0.05
B 1/26/95 4.22% -0.78% -- -- 4.36%1 4.20% 4.20% $0.04
C 8/1/97 -- -- -- -- -- 4.20% 4.20% $0.0042
K 8/1/97 -- -- -- -- -- 4.90% -- $0.0042
Y 11/2/87 5.27% -- 5.34% 4.54% 5.91% 5.20% 5.20% $0.05
</TABLE>
1 THE PERFORMANCE SHOWN REFLECTS THE APPLICABLE CDSC (CONTINGENT DEFERRED SALES
CHARGE).
2 THE 12-MONTH DISTRIBUTION IS CUMULATIVE SINCE INCEPTION FOR CLASS C AND CLASS
K SHARES.
PORTFOLIO CHARACTERISTICS
TOTAL NET ASSETS (ALL CLASSES): $3,465,323,866
AVERAGE MATURITY: 80 days
OBJECTIVE: Stability of principal and competitive income
STRATEGY: Invests in high quality
money market instruments
PORTFOLIO COMPOSITION
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(Pie chart appears here with the following plot points.)
U.S. Gov't and other Agency 0.5%
Bankers' Acceptance 3.7%
Corp. Notes/Bonds 5.5%
Certificates of Deposit 12.9%
Commercial Paper 77.4%
PORTFOLIO MANAGER
Ethel B. Sutton joined Lieber & Co. in 1985 and has fifteen
years experience managing portfolios of money market
instruments. At Lieber & Co., she is Vice President-
Investments of Evergreen Money Market Trust, which she has
(Photo of managed since its inception in 1987. Prior to joining Lieber &
Ethel B. Co., Mrs. Sutton was Money Market Manager from 1980-1985 for
Sutton Avco Corporation's Paul Revere Life Insurance Company and its
Appears U.S. and Canadian subsidiaries, as well as for the credit life
Here) and casualty companies of Avco Financial Services. Mrs. Sutton
is a graduate of Mount Holyoke College where she received a
B.A. degree in English.
ETHEL B. SUTTON
AN INVESTMENT IN THE FUND IS NEITHER INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, AND THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN
A STABLE NAV OF $1.00 PER SHARE. YIELDS WILL FLUCTUATE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS.
2
<PAGE>
EVERGREEN
PENNSYLVANIA TAX-FREE MONEY MARKET FUND (Evergreen Graphic
Goes Here)
FUND AT A GLANCE
As of August 31, 1997
<TABLE>
<CAPTION>
PERFORMANCE
AVERAGE ANNUALIZED TOTAL
RETURNS YIELDS & DISTRIBUTIONS
------------------------------ ---------------------------
SHARE INCEPTION 3 5 SINCE 7-DAY YIELD 30-DAY YIELD 12-MONTH
CLASS DATE 1 YEAR YEARS YEARS INCEPTION (ANNUALIZED) (ANNUALIZED) DISTRIBUTION
<S> <C> <C> <C> <C> <C> <C> <C> <C>
A 8/22/95 3.05% -- -- 3.10% 2.89% 2.87% $0.03
Y 8/15/91 3.15% 3.31% 2.87% 2.98% 2.99% 2.97% $0.03
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
<S> <C>
TOTAL NET ASSETS (ALL CLASSES): $67,704,382
AVERAGE MATURITY: 40 days
OBJECTIVE: Stability of principal and tax-free income
STRATEGY: Invests in short-term tax-free securities issued
in Pennsylvania
</TABLE>
PORTFOLIO COMPOSITION
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(Pie chart appears here with the following plot points.)
General Market Notes 4.5%
Put or Option Tender Bonds 8.0%
Cash Equivalents 8.5%
Revenue & General
Obligation Bonds 22.5%
Variable Rate Notes 56.5%
PORTFOLIO MANAGER
Diane Beaver joined First Union in 1992. Ms. Beaver has over 14
years of investment experience. She currently manages the
Pennsylvania Tax-Free Money Market Fund, co-manages the Evergreen
Institutional Tax-Free Money Market Fund, and is responsible for
purchasing municipal bonds for individual trust accounts. Ms.
Beaver is an active participant in the Carolina Women in
Investments organization. She graduated from Lenoir Ryhne College
in 1973 with a B.A. in History and Sociology.
(Photo of
Diane Beaver
Goes Here)
DIANE BEAVER
AN INVESTMENT IN THE FUND IS NEITHER INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, AND THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN
A STABLE NAV OF $1.00 PER SHARE. YIELDS WILL FLUCTUATE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS.
3
<PAGE>
EVERGREEN
TAX EXEMPT MONEY MARKET FUND
(Evergreen Graphic
Goes Here)
FUND AT A GLANCE
As of August 31, 1997
<TABLE>
<CAPTION>
PERFORMANCE
AVERAGE ANNUALIZED TOTAL
RETURNS YIELDS & DISTRIBUTIONS
---------------------------- -----------------------------
SHARE INCEPTION 3 5 SINCE 7-DAY YIELD 30-DAY YIELD 12-MONTH
CLASS DATE 1 YEAR YEARS YEARS INCEPTION (ANNUALIZED) (ANNUALIZED) DISTRIBUTION
<S> <C> <C> <C> <C> <C> <C> <C> <C>
A 1/5/95 3.13% -- -- 3.24% 2.89% 2.93% $0.03
Y 11/2/88 3.44% 3.52% 3.13% 4.13% 3.19% 3.23% $0.03
</TABLE>
PORTFOLIO CHARACTERISTICS
TOTAL NET ASSETS (ALL CLASSES): $1,044,426,214
AVERAGE MATURITY: 36 days
OBJECTIVE: Stability of principal and tax-free income
STRATEGY: Invests in short-term municipal securities
PORTFOLIO COMPOSITION
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(Pie chart appears here with the following plot points.)
Anticipation Notes 4.2%
Commercial Paper and Bonds 7.0%
Put Bonds 15.5%
Variable Rate Demand Notes 73.3%
PORTFOLIO MANAGER
Steven C. Shachat joined Lieber & Co. in 1988 and has been
managing short-term tax-exempt investments. He is Portfolio
Manager of Evergreen Tax-Exempt Money Market Fund and Evergreen
Short-Intermediate Municipal Fund. Prior to joining Lieber & Co.,
Mr. Shachat was employed by Mitchell Hutchings Asset Management
Inc., a subsidiary of Paine Webber Inc., as a Portfolio Manager of
the Paine Webber Resource Management Account Tax-Free Fund. His
previous experience was with Donald Sheldon & Co., a firm
specializing in tax-exempt securities. Mr. Shachat earned a B.S.
degree from Boston University.
(Photo of
Steven C. Shachat
Goes Here)
STEVEN C. SHACHAT
AN INVESTMENT IN THE FUND IS NEITHER INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, AND THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN
A STABLE NAV OF $1.00 PER SHARE. YIELDS WILL FLUCTUATE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS.
4
<PAGE>
EVERGREEN
TREASURY MONEY MARKET FUND (Evergreen Graphic
Goes Here)
FUND AT A GLANCE
As of August 31, 1997
<TABLE>
<CAPTION>
PERFORMANCE
AVERAGE ANNUALIZED TOTAL
RETURNS YIELDS & DISTRIBUTIONS
-------------------------------- -------------------------------
SHARE INCEPTION 3 5 SINCE 7-DAY YIELD 30-DAY YIELD 12-MONTH
CLASS DATE 1 YEAR YEARS YEARS INCEPTION (ANNUALIZED) (ANNUALIZED) DISTRIBUTION
<S> <C> <C> <C> <C> <C> <C> <C> <C>
A 3/6/91 4.82% 4.98% 4.17% 4.27% 4.87% 4.89% $0.05
Y 3/6/91 5.14% 5.30% 4.48% 4.57% 5.18% 5.18% $0.05
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
<S> <C>
TOTAL NET ASSETS (ALL CLASSES): $3,031,680,413
AVERAGE MATURITY: 51 days
OBJECTIVE: Stability of principal and current income
STRATEGY: Invests in short-term U.S. Treasuries and
repurchase agreements
</TABLE>
PORTFOLIO COMPOSITION
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(Pie chart appears here with the following plot points.)
Mutual Fund Shares 1.4%
U.S. Treasury Notes 27.6%
Repurchase Agreements 71%
PORTFOLIO MANAGER
Kellie Allen has over 11 years of investment experience. She is
Vice President and Fixed Income Portfolio Manager. She manages
three money market and short-term funds as well as several
separately managed accounts and has responsibility for a total of
$2.4 billion in assets. Ms. Allen started at First Union as an
equity trader in 1986. Prior to joining First Union, she worked as
an equity trader for First Tennessee Bank in Memphis, TN.
(Photo of
Kellie Allen
Goes Here)
KELLIE ALLEN
AN INVESTMENT IN THE FUND IS NEITHER INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, AND THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN
A STABLE NAV OF $1.00 PER SHARE. YIELDS WILL FLUCTUATE. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS.
5
<PAGE>
EVERGREEN
MONEY MARKET FUND
(Evergreen Graphic
Goes Here)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
JANUARY 4, 1995
YEAR ENDED (COMMENCEMENT OF
AUGUST 31, CLASS OPERATIONS) TO
1997 1996 AUGUST 31, 1995
<S> <C> <C> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF YEAR................................................. $ 1.00 $ 1.00 $ 1.00
Net investment income............................................................. 0.05 0.05 0.03
Less distributions to shareholders from net investment income..................... (0.05) (0.05) (0.03)
NET ASSET VALUE END OF YEAR....................................................... $ 1.00 $ 1.00 $ 1.00
Total return...................................................................... 4.95% 5.05% 3.53%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................................. 0.79% 0.75% 0.81%(a)
Total expenses excluding indirectly paid expenses............................... 0.79% -- --
Total expenses excluding waivers and/or reimbursements.......................... 0.88% 0.89% 1.02%(a)
Net investment income........................................................... 4.87% 4.86% 5.26%(a)
NET ASSETS END OF YEAR (MILLIONS)................................................. $2,803 $1,755 $ 685
</TABLE>
(a) Annualized.
<TABLE>
<CAPTION>
JANUARY 26, 1995
YEAR ENDED (COMMENCEMENT OF
AUGUST 31, CLASS OPERATIONS) TO
1997 1996 AUGUST 31, 1995
<S> <C> <C> <C>
CLASS B SHARES
NET ASSET VALUE BEGINNING OF YEAR.................................................. $ 1.00 $ 1.00 $ 1.00
Net investment income.............................................................. 0.04 0.04 0.03
Less distributions to shareholders from net investment income...................... (0.04) (0.04) (0.03)
NET ASSET VALUE END OF YEAR........................................................ $ 1.00 $ 1.00 $ 1.00
Total return (a)................................................................... 4.22% 4.31% 2.78%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses................................................................... 1.49% 1.45% 1.51%(b)
Total expenses excluding indirectly paid expenses................................ 1.49% -- --
Total expenses excluding waivers and/or reimbursements........................... 1.55% 1.59% 2.39%(b)
Net investment income............................................................ 4.16% 4.18% 4.54%(b)
NET ASSETS END OF YEAR (MILLIONS).................................................. $ 23 $ 10 $ 8
</TABLE>
(a) Excluding applicable sales charges.
(b) Annualized.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
EVERGREEN
MONEY MARKET FUND (Evergreen Graphic
Goes Here)
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
AUGUST 1, 1997
(COMMENCEMENT OF
CLASS OPERATIONS) TO
AUGUST 31, 1997
<S> <C>
CLASS C SHARES
NET ASSET VALUE BEGINNING OF PERIOD...................................................................... $ 1.00
Net investment income.................................................................................... 0.00(c)
Less distributions to shareholders from net investment income............................................ (0.00)(c)
NET ASSET VALUE END OF PERIOD............................................................................ $ 1.00
Total return (a)......................................................................................... 0.37%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses......................................................................................... 1.67%(b)
Total expenses excluding indirectly paid expenses...................................................... 1.66%(b)
Total expenses excluding waivers and/or reimbursements................................................. 1.69%(b)
Net investment income.................................................................................. 4.42%(b)
NET ASSETS END OF PERIOD (MILLIONS)...................................................................... $ 5
</TABLE>
(a) Excluding applicable sales charges.
(b) Annualized.
(c) Represents an amount less than $0.01 per share.
<TABLE>
<CAPTION>
AUGUST 1, 1997
(COMMENCEMENT OF
CLASS OPERATIONS) TO
AUGUST 31, 1997
<S> <C>
CLASS K SHARES
NET ASSET VALUE BEGINNING OF PERIOD...................................................................... $ 1.00
Net investment income.................................................................................... 0.00(c)
Less distributions to shareholders from net investment income............................................ (0.00)(c)
NET ASSET VALUE END OF PERIOD............................................................................ $ 1.00
Total return (a)......................................................................................... 0.38%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses......................................................................................... 0.88%(b)
Total expenses excluding indirectly paid expenses...................................................... 0.87%(b)
Total expenses excluding waivers and/or reimbursements................................................. 0.91%(b)
Net investment income.................................................................................. 4.90%(b)
NET ASSETS END OF PERIOD (THOUSANDS)..................................................................... $ 105
</TABLE>
(a) Excluding applicable sales charges.
(b) Annualized.
(c) Represents an amount less than $0.01 per share.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
EVERGREEN
MONEY MARKET FUND
(Evergreen Graphic
Goes Here)
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996 1995
<S> <C> <C> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF YEAR.............................................. $ 1.00 $ 1.00 $ 1.00
======= ======= =======
Net investment income.......................................................... 0.05 0.05 0.05
Less distributions to shareholders from net investment income.................. (0.05) (0.05) (0.05)
------- ------- -------
NET ASSET VALUE END OF YEAR.................................................... $ 1.00 $ 1.00 $ 1.00
======= ======= =======
Total return................................................................... 5.27% 5.36% 5.38%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................................... 0.48% 0.45% 0.53%
Total expenses excluding indirectly paid expenses............................ 0.48% -- --
Total expenses excluding waivers and/or reimbursements....................... 0.54% 0.59% 0.73%
Net investment income........................................................ 5.13% 5.16% 5.26%
NET ASSETS END OF YEAR (MILLIONS).............................................. $ 635 $ 671 $ 283
<CAPTION>
TEN MONTHS
AUGUST 31, 1994(B)
<S> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF YEAR.............................................. $ 1.00
======
Net investment income.......................................................... 0.03
Less distributions to shareholders from net investment income.................. (0.03)
------
NET ASSET VALUE END OF YEAR.................................................... $ 1.00
======
Total return................................................................... 2.92%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................................... 0.32%(a)
Total expenses excluding indirectly paid expenses............................ --
Total expenses excluding waivers and/or reimbursements....................... 0.71%(a)
Net investment income........................................................ 3.46%(a)
NET ASSETS END OF YEAR (MILLIONS).............................................. $ 273
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------
1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
CLASS Y SHARES (continued)
NET ASSET VALUE BEGINNING OF YEAR........................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
Net investment income....................................... 0.03 0.04 0.07 0.08 0.09
Less distributions to shareholders from net investment
income.................................................... (0.03) (0.04) (0.07) (0.08) (0.09)
------- -------- -------- -------- --------
NET ASSET VALUE END OF YEAR................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======== ======== ========
Total return................................................ 3.23% 4.23% 6.73% 8.40% 9.39%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................ 0.39% 0.36% 0.30% 0.35% 0.38%
Total expenses excluding indirectly paid expenses......... -- -- -- -- --
Total expenses excluding waivers and/or reimbursements.... 0.71% 0.72% 0.70% 0.69% 0.75%
Net investment income..................................... 3.19% 4.18% 6.53% 8.08% 9.42%
NET ASSETS END OF YEAR (MILLIONS)........................... $ 299 $ 358 $ 438 $ 458 $ 408
<CAPTION>
NOVEMBER 2, 1987
(COMMENCEMENT OF
CLASS OPERATIONS)
TO OCTOBER 31,
1988
<S> <C>
CLASS Y SHARES (continued)
NET ASSET VALUE BEGINNING OF YEAR........................... $ 1.00
=======
Net investment income....................................... 0.07
Less distributions to shareholders from net investment
income.................................................... (0.07)
-------
NET ASSET VALUE END OF YEAR................................. $ 1.00
=======
Total return................................................ 7.37%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................ 0.43%(a)
Total expenses excluding indirectly paid expenses......... --
Total expenses excluding waivers and/or reimbursements.... 0.93%(a)
Net investment income..................................... 7.26%(a)
NET ASSETS END OF YEAR (MILLIONS)........................... $ 161
</TABLE>
(a) Annualized.
(b) The Fund changed its fiscal year end from October 31 to August 31.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
EVERGREEN
PENNSYLVANIA TAX-FREE MONEY MARKET FUND
(Evergreen Graphic
Goes Here)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
AUGUST 22, 1995
SIX MONTHS (COMMENCEMENT OF
YEAR ENDED ENDED CLASS OPERATIONS) TO
AUGUST 31, 1997 AUGUST 31, 1996 (B) FEBRUARY 29, 1996
<S> <C> <C> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF YEAR................................. $ 1.00 $ 1.00 $ 1.00
======== ======== =======
Net investment income............................................. 0.03 0.01 0.02
Less distributions to shareholders from net investment income..... (0.03) (0.01) (0.02)
------- -------- -------
NET ASSET VALUE END OF YEAR....................................... $ 1.00 $ 1.00 $ 1.00
======== ======== =======
Total return...................................................... 3.05% 1.49% 1.72%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................. 0.60% 0.55%(a) 0.47%(a)
Total expenses excluding indirectly paid expenses............... 0.60% -- --
Total expenses excluding waivers and/or reimbursements.......... 0.89% 0.96%(a) 1.08%(a)
Net investment income............................................. 3.01% 2.97%(a) 3.14%(a)
NET ASSETS END OF YEAR (MILLIONS)................................. $ 36 $ 22 $ 4
</TABLE>
(a) Annualized.
(b) The Fund changed its fiscal year end from February 28 to August 31.
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
YEAR ENDED ENDED FEBRUARY 29, YEAR ENDED FEBRUARY 28,
AUGUST 31, 1997 AUGUST 31, 1996 (B) 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING
OF YEAR................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======= ======= ======= =======
Net investment income.... 0.03 0.01 0.03 0.03 0.02 0.03
Less distributions to
shareholders from net
investment income...... (0.03) (0.01) (0.03) (0.03) (0.02) (0.03)
-------- ------- ------- -------- ------- -------
NET ASSET VALUE
END OF YEAR............ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ======== ======= ======== ======= ========
Total return............. 3.15% 1.51% 3.55% 2.81% 2.10% 2.68%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET
ASSETS:
Total expenses......... 0.50% 0.50%(a) 0.37% 0.33% 0.47% 0.35%
Total expenses
excluding indirectly
paid
expenses............. 0.50% -- -- -- -- --
Total expenses
excluding waivers
and/or
reimbursements....... 0.60% 0.66%(a) 0.73% 1.05% 1.26% 1.07%
Net investment
income............... 3.10% 2.92%(a) 3.42% 3.09% 2.10% 2.62%
NET ASSETS END OF YEAR
(MILLIONS)............. $ 32 $ 48 $ 83 $ 44 $ 14 $ 16
<CAPTION>
AUGUST 15, 1991
(COMMENCEMENT OF
CLASS OPERATIONS) TO
FEBRUARY 29, 1992
<S> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING
OF YEAR................ $ 1.00
=======
Net investment income.... 0.02
Less distributions to
shareholders from net
investment income...... (0.02)
--------
NET ASSET VALUE
END OF YEAR............ $ 1.00
========
Total return............. 2.20%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET
ASSETS:
Total expenses......... 0.19%(a)
Total expenses
excluding indirectly
paid
expenses............. --
Total expenses
excluding waivers
and/or
reimbursements....... 0.77%(a)
Net investment
income............... 3.90%(a)
NET ASSETS END OF YEAR
(MILLIONS)............. $ 21
</TABLE>
(a) Annualized.
(b) The Fund changed its fiscal year end from February 28 to August 31.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
EVERGREEN
TAX EXEMPT MONEY MARKET FUND
(Evergreen Graphic
Goes Here)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 5, 1995
AUGUST 31, (COMMENCEMENT OF
----------------- CLASS OPERATIONS) TO
1997 1996 AUGUST 31, 1995
<S> <C> <C> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF YEAR................................................ $ 1.00 $ 1.00 $ 1.00
======= ======= =======
Net investment income............................................................ 0.03 0.03 0.02
Less distributions to shareholders from net investment income.................... (0.03) (0.03) (0.02)
-------- ------- -------
NET ASSET VALUE END OF YEAR...................................................... $ 1.00 $ 1.00 $ 1.00
======== ======= =======
Total return..................................................................... 3.13% 3.22% 2.24%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses................................................................. 0.83% 0.79% 0.78%(a)
Total expenses excluding indirectly paid expenses.............................. 0.83% -- --
Total expenses excluding waivers and/or reimbursements......................... 0.86% 0.90% 0.90%(a)
Net investment income.......................................................... 3.09% 3.14% 3.28%(a)
NET ASSETS END OF YEAR (MILLIONS)................................................ $ 667 $ 661 $ 555
</TABLE>
(a) Annualized.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF YEAR.................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income.............................. 0.03 0.03 0.04 0.02 0.03 0.04 0.05 0.06
Less distributions to shareholders from net
investment income................................ (0.03) (0.03) (0.04) (0.02) (0.03) (0.04) (0.05) (0.06)
NET ASSET VALUE END OF YEAR........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Total return....................................... 3.44% 3.53% 3.59% 2.50% 2.61% 3.73% 5.46% 6.15%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses................................... 0.53% 0.49% 0.50% 0.34% 0.34% 0.32% 0.28% 0.31%
Total expenses excluding indirectly paid
expenses....................................... 0.53% -- -- -- -- -- -- --
Total expenses excluding waivers and/or
reimbursements................................. 0.55% 0.60% 0.63% 0.64% 0.63% 0.63% 0.66% 0.71%
Net investment income............................ 3.37% 3.44% 3.53% 2.47% 2.58% 3.72% 5.23% 5.94%
NET ASSETS END OF YEAR (MILLIONS).................. $ 378 $ 617 $ 421 $ 402 $ 401 $ 417 $ 510 $ 311
<CAPTION>
NOVEMBER 2,
1988
(COMMENCEMENT
OF CLASS
OPERATIONS)
TO AUGUST 31,
1989
<S> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF YEAR.................. $ 1.00
Net investment income.............................. 0.05
Less distributions to shareholders from net
investment income................................ (0.05)
NET ASSET VALUE END OF YEAR........................ $ 1.00
Total return....................................... 5.51%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses................................... 0.24%(a)
Total expenses excluding indirectly paid
expenses....................................... --
Total expenses excluding waivers and/or
reimbursements................................. 0.79%(a)
Net investment income............................ 6.77%(a)
NET ASSETS END OF YEAR (MILLIONS).................. $ 109
</TABLE>
(a) Annualized.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
EVERGREEN
TREASURY MONEY MARKET FUND
(Evergreen Graphic
Goes Here)
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
EIGHT MONTHS
YEAR ENDED ENDED YEAR ENDED
AUGUST 31, AUGUST 31, DECEMBER 31,
1997 1996 1995 (B) 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF YEAR.................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income................................ 0.05 0.05 0.03 0.04 0.03 0.03
Less distributions to shareholders from net
investment income.................................. (0.05) (0.05) (0.03) (0.04) (0.03) (0.03)
NET ASSET VALUE END OF YEAR.......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Total return......................................... 4.82% 4.98% 3.58% 3.75% 2.73% 3.36%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses..................................... 0.72% 0.69% 0.63%(a) 0.50% 0.48% 0.48%
Total expenses excluding indirectly paid
expenses......................................... 0.72% -- -- -- -- --
Total expenses excluding waivers and/or
reimbursements................................... 0.72% 0.77% 0.79%(a) 0.78% 0.82% 0.82%
Net investment income.............................. 4.73% 4.76% 5.30%(a) 3.91% 2.70% 3.22%
NET ASSETS END OF YEAR (MILLIONS).................... $2,485 $2,608 $1,178 $ 755 $ 261 $ 209
<CAPTION>
MARCH 6, 1991
(COMMENCEMENT OF
CLASS OPERATIONS) TO
DECEMBER 31, 1991
<S> <C>
CLASS A SHARES
NET ASSET VALUE BEGINNING OF YEAR.................... $ 1.00
Net investment income................................ 0.04
Less distributions to shareholders from net
investment income.................................. (0.04)
NET ASSET VALUE END OF YEAR.......................... $ 1.00
Total return......................................... 4.46%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses..................................... 0.47%(a)
Total expenses excluding indirectly paid
expenses......................................... --
Total expenses excluding waivers and/or
reimbursements................................... 1.08%(a)
Net investment income.............................. 4.95%(a)
NET ASSETS END OF YEAR (MILLIONS).................... $ 100
</TABLE>
(a) Annualized.
(b) The Fund changed its fiscal year end from December 31 to August 31.
<TABLE>
<CAPTION>
EIGHT MONTHS
YEAR ENDED ENDED YEAR ENDED
AUGUST 31, AUGUST 31, DECEMBER 31,
1997 1996 1995 (B) 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF YEAR.................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income................................ 0.05 0.05 0.04 0.04 0.03 0.04
Less distributions to shareholders from net
investment income.................................. (0.05) (0.05) (0.04) (0.04) (0.03) (0.04)
NET ASSET VALUE END OF YEAR.......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Total return......................................... 5.14% 5.29% 3.78% 4.06% 3.04% 3.67%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses..................................... 0.42% 0.39% 0.33%(a) 0.20% 0.18% 0.17%
Total expenses excluding indirectly paid
expenses......................................... 0.42% -- -- -- -- --
Total expenses excluding waivers and/or
reimbursements................................... 0.43% 0.47% 0.49%(a) 0.48% 0.52% 0.52%
Net investment income.............................. 5.02% 5.12% 5.60%(a) 3.78% 3.00% 3.61%
NET ASSETS END OF YEAR (MILLIONS).................... $ 547 $ 760 $ 277 $ 163 $ 366 $ 286
<CAPTION>
MARCH 6, 1991
(COMMENCEMENT OF
CLASS OPERATIONS) TO
DECEMBER 31, 1991
<S> <C>
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF YEAR.................... $ 1.00
Net investment income................................ 0.05
Less distributions to shareholders from net
investment income.................................. (0.05)
NET ASSET VALUE END OF YEAR.......................... $ 1.00
Total return......................................... 4.66%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses..................................... 0.20%(a)
Total expenses excluding indirectly paid
expenses......................................... --
Total expenses excluding waivers and/or
reimbursements................................... 0.52%(a)
Net investment income.............................. 5.53%(a)
NET ASSETS END OF YEAR (MILLIONS).................... $ 265
</TABLE>
(a) Annualized.
(b) The Fund changed its fiscal year end from December 31 to August 31.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
EVERGREEN
MONEY MARKET FUND
(Evergreen Graphic
Goes Here)
SCHEDULE OF INVESTMENTS
August 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C>
BANKERS' ACCEPTANCES-- 0.1%
(cost $3,995,621)
$ 4,000,000 Bank Of Hawaii Nassau,
5.63%, 9/8/97................... $ 3,995,621
BANKERS' ACCEPTANCES--
YANKEE & EURO DOLLAR-- 3.6%
30,000,000 Bank Of Tokyo Mitsubishi
Limited,
5.70%, 12/31/97................. 29,425,250
14,200,000 Dai-Ichi Kangyo Bank,
5.70%, 12/9/97.................. 13,977,415
Fuji Bank Limited New York:
10,000,000 5.62%, 2/2/98..................... 9,759,589
13,000,000 5.70%, 1/5/98..................... 12,740,650
10,000,000 5.77%, 1/5/98..................... 9,798,050
Fuji Bank Limited:
10,000,000 5.68%, 9/10/97.................... 9,985,800
16,000,000 5.74%, 10/6/97.................... 15,910,711
8,000,000 5.86%, 10/28/97................... 7,925,773
Sanwa Bank Limited:
5,700,000 5.63%, 12/2/97.................... 5,617,990
8,100,000 5.66%, 9/16/97.................... 8,080,897
TOTAL BANKERS' ACCEPTANCES--
YANKEE & EURO DOLLAR
(COST $123,222,125)............. 123,222,125
CERTIFICATES OF DEPOSIT-- 12.9%
25,000,000 Bank Brussels Lambert America
Inc.,
5.85%, 1/9/98................... 25,000,000
5,000,000 Bank of New York,
5.93%, 9/3/97................... 4,999,970
50,000,000 Bank Of Nova Scotia,
5.81%, 8/5/98................... 49,986,704
25,000,000 Banque National De Paris,
5.86%, 1/23/98.................. 25,000,000
25,000,000 Bayerische Vereinsbank AG,
5.76%, 12/19/97................. 25,000,000
25,000,000 Bayerische Vereinsbank AG, New
York,
6.15%, 5/11/98.................. 25,000,000
25,000,000 Canadian Imperial Bank of
Commerce,
5.70%, 1/2/98................... 25,000,000
5,000,000 Commerzbank AG, New York
Branch,
5.67%, 9/18/97.................. 4,999,704
Deutsche Bank AG:
5,000,000 5.91%, 3/17/98.................... 4,999,226
25,000,000 6.00%, 9/23/97.................... 25,000,000
25,000,000 National Bank of Canada,
5.50%, 11/14/97................. 25,000,000
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C>
CERTIFICATES OF DEPOSIT-- CONTINUED
$50,000,000 National Bank Of Canada, New
York,
6.00%, 6/26/98.................. $ 50,000,000
Rabobank Nederland N.V.:
5,000,000 5.78%, 12/8/97.................... 5,002,961
1,000,000 5.99%, 3/24/98.................... 998,835
Societe Generale:
25,000,000 5.70%, 12/16/97................... 25,000,000
25,000,000 5.70%, 1/2/98..................... 25,000,000
25,000,000 5.80%, 1/9/98..................... 25,000,000
25,000,000 Societe Generale (New York),
5.66%, 2/23/98.................. 25,000,000
50,000,000 Svenska Handlesbanken Inc.,
5.96%, 8/13/98.................. 49,981,880
TOTAL CERTIFICATES OF DEPOSIT
(COST $445,969,280)............. 445,969,280
COMMERCIAL PAPER-- 77.4%
AUTOMOTIVE EQUIPMENT &
MANUFACTURING-- 0.6%
22,500,000 BMW U.S. Capital Corp.,
5.53%, 11/10/97................. 22,258,063
BANK HOLDING COMPANIES-- 16.4%
5,000,000 ABN Amro North America,
5.52%, 11/10/97................. 4,946,333
25,000,000 Bankers Trust Company,
6.145%, 5/28/98................. 24,998,242
Bankers Trust New York Corp.:
25,000,000 5.48%, 10/20/97................... 24,813,528
25,000,000 5.51%, 10/10/97................... 24,850,771
Chiao Tung Bank:
20,000,000 5.55%, 12/11/97................... 19,688,583
24,900,000 5.57%, 11/3/97.................... 24,657,287
25,000,000 5.70%, 12/11/97................... 24,600,209
50,000,000 5.75%, 10/9/97.................... 49,696,528
Export Import Bank Korea:
46,500,000 5.63%, 10/10/97................... 46,216,389
50,000,000 5.67%, 10/7/97.................... 49,716,500
Industrial Bank Korea:
10,000,000 5.70%, 9/15/97.................... 9,977,833
10,000,000 5.70%, 10/7/97.................... 9,943,000
15,000,000 5.72%, 9/26/97.................... 14,940,417
9,700,000 5.78%, 11/4/97.................... 9,600,327
25,000,000 5.85%, 9/26/97.................... 24,898,438
Korea Development Bank:
11,000,000 5.63%, 9/22/97.................... 10,963,874
40,000,000 5.65%, 9/3/97..................... 39,987,444
25,000,000 5.70%, 10/7/97.................... 24,857,500
20,000,000 5.75%, 10/23/97................... 19,833,889
Sumitomo Bank Capital Mkts., Inc.:
26,223,000 5.70%, 10/6/97.................... 26,077,681
33,000,000 5.73%, 9/18/97.................... 32,910,707
</TABLE>
(CONTINUED)
12
<PAGE>
EVERGREEN
MONEY MARKET FUND
(Evergreen Graphic
Goes Here)
SCHEDULE OF INVESTMENTS (CONTINUED)
August 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
COMMERCIAL PAPER-CONTINUED
BANK HOLDING COMPANIES-- CONTINUED
Unifunding, Inc.:
$30,400,000 5.51%, 10/21/97.................. $ 30,167,355
20,000,000 5.53%, 11/12/97.................. 19,778,800
568,121,635
CHEMICALS-- 0.4%
15,000,000 Arco Chemical Company,
5.55%, 11/7/97................. 14,845,063
DIVERSIFIED COMPANIES-- 2.4%
50,000,000 Duke Capital Corp.,
5.55%, 10/6/97................. 49,730,208
12,000,000 First Brands Commercial Inc. (a),
5.54%, 9/5/97.................. 11,992,613
23,150,000 Mitsui & Co. (USA), Inc.,
5.55%, 10/14/97................ 22,996,535
84,719,356
ELECTRONICS-- 3.5%
10,000,000 Avnet, Inc.,
5.53%, 9/29/97................. 9,956,989
Orix America, Inc.,
(LOC: Norinchukin Bank) (a):
26,000,000 5.60%, 11/5/97................... 25,737,111
44,675,000 5.62%, 11/6/97................... 44,214,699
6,500,000 5.63%, 11/3/97................... 6,435,959
9,300,000 5.70%, 9/15/97................... 9,279,385
Seiko Corp,
(LOC: Sumitomo Bank):
10,000,000 5.66%, 9/16/97................... 9,976,417
15,000,000 5.68%, 10/6/97................... 14,917,166
120,517,726
ENERGY-- 2.1%
CSW Credit Inc.:
15,100,000 5.50%, 9/11/97.................. 15,076,931
15,300,000 5.50%, 9/16/97................... 15,264,937
16,393,000 5.53%, 11/7/97................... 16,224,284
Oglethorpe Power Company:
11,799,000 5.55%, 9/18/97................... 11,768,077
13,000,000 5.56%, 9/11/97................... 12,979,922
71,314,151
FINANCE & INSURANCE-- 29.2%
5,000,000 American Express Credit Corp.,
5.53%, 9/12/97................. 4,991,551
Aristar, Inc.:
30,000,000 5.59%, 10/17/97.................. 29,785,717
22,000,000 5.60%, 9/2/97.................... 21,996,578
16,000,000 5.60%, 9/5/97.................... 15,990,044
750,000 Associates Corp. North America,
6.63%, 11/15/97................ 751,930
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
COMMERCIAL PAPER-- CONTINUED
FINANCE & INSURANCE-- CONTINUED
Astro Capital Corp.,
(LOC: Industrial Bank of
Japan Ltd.):
$30,000,000 5.61%, 12/30/97.................. $ 29,439,000
10,000,000 5.63%, 10/31/97.................. 9,906,167
Banner Receivables Corp.,
(LOC: Republic Bank) (a):
21,840,000 5.58%, 10/24/97................. 21,660,584
32,000,000 5.60%, 10/14/97.................. 31,785,956
22,000,000 Crown International Finance,
(LOC: Credit Suisse) (a)
5.56%, 9/5/97.................. 21,986,409
10,000,000 Dynamic Funding Corp.,
(LOC: Sumitomo Bank)
5.70%, 9/29/97............... 9,955,667
Finova Capital Corp.:
25,000,000 5.54%, 10/31/97.................. 24,769,167
15,000,000 5.55%, 10/10/97.................. 14,909,812
10,000,000 5.55%, 10/17/97.................. 9,929,083
15,000,000 5.55%, 11/12/97.................. 14,833,500
27,015,000 5.56%, 9/15/97................... 26,956,588
2,000,000 Ford Motor Credit Company,
5.54%, 10/28/97................. 1,982,457
5,142,000 Fountain Square Commerce
Funding,
(LOC: Fifth Third Bank) (a)
5.55%, 9/9/97.................. 5,135,658
40,000,000 FP Funding Corp.,
(LOC: The Bank of
Tokyo-Mitsubishi Ltd.) (a)
5.57%, 9/30/97................. 39,820,522
5,000,000 General Electric Capital Corp.,
5.55%, 9/25/97................. 4,981,500
16,076,000 Gotham Funding Corp.,
(LOC: Republic Bank)
5.58%, 10/27/97................ 15,936,460
Green Tree Financial Corp.:
40,000,000 5.63%, 9/5/97.................... 39,974,978
25,000,000 5.70%, 10/14/97.................. 24,829,792
30,000,000 5.70%, 10/24/97.................. 29,748,250
20,000,000 5.70%, 10/27/97.................. 19,822,666
20,000,000 5.71%, 10/31/97.................. 19,809,667
10,000,000 5.72%, 10/20/97.................. 9,922,144
Jet Funding Corp.,
(LOC: Sanwa Bank):
15,000,000 5.63%, 9/30/97................... 14,931,971
40,300,000 5.70%, 9/30/97................... 40,114,956
15,000,000 5.72%, 9/30/97................... 14,930,883
10,000,000 KFW International Finance Inc.,
5.49%, 10/20/97................ 9,925,275
(CONTINUED)
13
(Evergreen Graphic
Goes Here)
EVERGREEN
MONEY MARKET FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
August 31, 1997
PRINCIPAL
AMOUNT VALUE
COMMERCIAL PAPER--continued
FINANCE & INSURANCE-- CONTINUED
$25,000,000 Lehman Brothers Holdings, Inc.,
5.82%, 11/26/97................ $24,652,417
24,000,000 Market Street Funding Corp.,
(LOC: Royal Bank of Canada) (a)
5.53%, 10/14/97................ 23,841,473
Merrill Lynch & Company Inc.:
50,000,000 5.52%, 9/29/97................... 49,785,333
5,000,000 5.63%, 10/15/97.................. 4,965,595
5,000,000 Motorola Inc.,
5.46%, 9/9/97.................. 4,993,933
Old Line Funding Corp.,
(LOC: Dai-Ichi Kangyo Bank,
Ltd.):
50,000,000 5.53%, 10/3/97................... 49,754,222
20,000,000 5.55%, 9/2/97 (a)................ 19,996,917
Progress Funding Corp.,
30,000,000 5.64%, 10/22/97 (a).............. 29,760,300
(LOC: Sumitomo Bank):
20,000,000 5.63%, 9/12/97................... 19,965,594
6,500,000 5.65%, 9/26/97................... 6,474,497
22,750,000 Sanwa Business Credit Corp.,
(LOC: Fuji Bank Ltd.)
5.70%, 9/3/97.................. 22,742,796
5,000,000 Sara Lee Corp.,
5.48%, 9/25/97................. 4,981,733
Sigma Finance Inc. (a):
50,000,000 5.53%, 9/22/97................... 49,838,708
12,450,000 5.55%, 9/29/97................... 12,396,258
Strait Capital Corp.,
(LOC: The Bank of
Tokyo-Mitsubishi Ltd.):
9,924,000 5.62%, 10/15/97................. 9,855,833
17,083,000 5.62%, 12/1/97.................. 16,840,317
25,668,000 Strategic Asset Funding Corp.,
(LOC: Fuji Bank Ltd.)
5.80%, 9/30/97................. 25,548,074
Tri-Lateral Capital (USA), Inc.,
(LOC: Industrial Bank of
Japan Ltd.):
34,270,000 5.65%, 10/6/97.................. 34,081,753
8,749,000 5.68%, 12/10/97................. 8,610,960
11,800,000 Wood Street Funding Corp.,
(LOC: Royal Bank of Canada)
5.54%, 11/13/97................ 11,667,440
1,012,269,085
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C>
COMMERCIAL PAPER-- CONTINUED
FOOD & BEVERAGE PRODUCTS-- 0.6%
Cargill Financial Services Corp:
$10,000,000 5.40%, 10/10/97.................. $ 9,941,500
12,000,000 5.60%, 12/5/97................... 11,822,667
21,764,167
HEALTHCARE PRODUCTS & SERVICES-- 0.2%
8,000,000 Holy Cross Health System Corp.,
5.55%, 10/16/97................ 7,944,500
INSURANCE-- 3.4%
Equitable of Iowa:
23,000,000 5.56%, 9/26/97................... 22,911,194
23,000,000 5.56%, 9/29/97................... 22,900,538
Safeco Credit Company Inc.:
13,000,000 5.58%, 11/13/97.................. 12,852,905
35,000,000 5.62%, 11/7/97................... 34,633,920
16,000,000 5.63%, 10/29/97.................. 15,854,871
8,000,000 5.63%, 10/31/97.................. 7,924,933
117,078,361
MACHINERY-- DIVERSIFIED-- 2.7%
27,500,000 American Honda Finance Corp.,
5.56%, 10/21/97................ 27,287,639
General Motors Acceptance Corp.:
25,000,000 5.82%, 11/12/97.................. 24,709,000
25,000,000 5.84%, 10/14/97.................. 24,825,760
17,000,000 Mitsubishi Motors Credit of
America, Inc.,
(LOC: Republic Bank)
5.68%, 9/15/97................. 16,962,449
93,784,848
OIL-- 1.6%
10,000,000 Fina Oil & Chemical Company,
5.52%, 10/27/97................ 9,914,133
45,625,000 Koch Industries,
5.51%, 10/2/97................. 45,408,522
55,322,655
PHARMACEUTICALS-- 1.0%
AC Acquisition Holding Co.:
17,000,000 5.50%, 9/26/97 (a)............... 16,935,069
14,000,000 5.50%, 10/7/97................... 13,923,000
5,200,000 5.52%, 9/22/97 (a)............... 5,183,256
36,041,325
PUBLISHING, BROADCASTING &
ENTERTAINMENT-- 4.3%
Dun & Bradstreet Corp:
14,000,000 5.65%, 9/17/97................... 13,964,844
30,000,000 5.65%, 9/23/97................... 29,896,417
(CONTINUED)
14
EVERGREEN
MONEY MARKET FUND
(Evergreen Graphic
Goes Here)
SCHEDULE OF INVESTMENTS (CONTINUED)
August 31, 1997
PRINCIPAL
AMOUNT VALUE
COMMERCIAL PAPER-- CONTINUED
PUBLISHING, BROADCASTING & ENTERTAINMENT--
CONTINUED
$22,700,000 Knight Ridder Inc.,
5.58%, 10/3/97.............. $ 22,587,408
Tribune Company (a):
5,900,000 5.55%, 9/24/97................ 5,879,080
44,100,000 5.60%, 9/24/97................ 43,942,220
32,000,000 5.63%, 12/19/97............... 31,454,515
147,724,484
REAL ESTATE-- 3.1%
11,588,000 Four Embarcadero,
(LOC: Sanwa Bank)
5.62%, 11/13/97................ 11,455,942
MEC Finance USA, Inc. (a):
20,000,000 5.53%, 10/17/97.................. 19,858,678
11,000,000 5.68%, 9/18/97................... 10,970,495
Twin Towers, Inc.
32,443,000 5.52%, 11/21/97.................. 32,040,058
(LOC: NatWest Bank):
11,153,000 5.52%, 10/16/97.................. 11,076,045
17,325,000 5.54%, 9/24/97 (a)............... 17,263,679
6,000,000 5.55%, 10/21/97.................. 5,953,750
108,618,647
RETAIL-- 2.3%
Avon Capital Corp. (a):
20,000,000 5.62%, 9/16/97................... 19,953,167
30,000,000 5.62%, 9/17/97................... 29,925,066
21,000,000 5.64%, 9/15/97................... 20,953,940
7,000,000 Sothebys Inc.,
5.58%, 9/22/97................. 6,977,215
77,809,388
TELECOMMUNICATIONS-- 1.0%
8,000,000 Ameritech Corp.,
5.58%, 10/6/97................. 7,956,600
25,000,000 GTE Corp.,
5.54%, 9/26/97................. 24,903,819
32,860,419
TEXTILE & APPAREL-- 0.2%
Calcot Ltd.:
3,000,000 5.58%, 9/11/97................. 2,995,350
2,000,000 5.58%, 9/12/97................. 1,996,590
3,000,000 5.60%, 9/12/97................. 2,994,867
7,986,807
TRANSPORTATION-- 0.1%
5,000,000 Harper Group, Inc. (The),
5.64%, 10/14/97................ 4,966,317
CONTAINERS & PACKAGES-- 0.5%
B.I. Funding, Inc.:
6,200,000 5.52%, 10/8/97.................. 6,164,825
5,000,000 5.54%, 9/10/97.................. 4,993,075
6,200,000 5.55%, 10/16/97................. 6,156,988
17,314,888
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<S> <C>
COMMERCIAL PAPER-- CONTINUED
LEASING-- 1.8%
$13,000,000 JLUS Funding Corp.,
(LOC: Norinchukin Bank)
5.67%, 9/17/97................. $ 12,967,240
Shimizu International Finance,
(LOC: Sanwa Bank):
19,000,000 5.62%, 11/13/97.................. 18,783,474
14,000,000 5.67%, 9/12/97................... 13,975,745
15,000,000 5.72%, 9/12/97................... 14,973,783
60,700,242
TOTAL COMMERCIAL PAPER
(COST $2,683,962,127)..... 2,683,962,127
CORPORATE NOTES-- 5.5%
25,000,000 Abbey National Treasury
Services PLC,
Medium Term Note,
6.19%, 4/7/98.................. 24,990,444
BankBoston, Senior Medium
Term Notes,
25,000,000 5.74%, 4/21/98................... 25,000,000
25,000,000 5.90%, 8/7/98.................... 25,000,000
50,000,000 6.05%, 7/17/98................... 50,000,000
5,000,000 Federal Home Loan Bank,
5.88%, 2/26/98................. 5,000,000
5,000,000 Federal National Mortgage
Association, Notes
5.53%, 2/13/98................... 5,000,000
25,000,000 Morgan Guaranty Trust Company
New York,
5.93%, 8/31/98................. 24,990,469
5,000,000 Northern Trust Company Bank,
Medium Term Note,
5.96%, 6/17/98................. 5,001,062
25,000,000 Student Loan Corp.,
5.76%, 1/14/98................. 25,000,000
TOTAL CORPORATE NOTES
(COST $189,981,975)............ 189,981,975
U.S. GOVERNMENT-- DISCOUNT-- 0.3%
5,000,000 Federal Home Loan Mortgage
Discount Notes,
5.55%, 9/2/97.................. 4,999,241
5,000,000 Federal National Mortgage
Association, Discount Notes,
5.56%, 10/2/97................... 4,976,061
TOTAL U.S. GOVERNMENT-- DISCOUNT
(COST $14,975,302)............. 9,975,302
TAXABLE MUNICIPALS-- 0.2%
(COST $5,900,000)
5,900,000 Brittany Acres, 5,900,000
5.90%, VRDN....................
(CONTINUED)
15
EVERGREEN
MONEY MARKET FUND
(Evergreen Graphic
Goes Here)
SCHEDULE OF INVESTMENTS (CONTINUED)
August 31, 1997
<CAPTION>
PRINCIPAL
SHARES VALUE
<S> <C>
MUTUAL FUND SHARES-- 0.0%
(COST $1,432,838)
1,432,838 Federated Prime Value
Obligation Fund................ $ 1,432,838
TOTAL INVESTMENTS--
(COST $3,464,439,268)... 100.0% 3,464,439,268
OTHER ASSETS AND
LIABILITIES-- NET...... 0.0 884,598
NET ASSETS--.............. 100.0% $3,465,323,866
</TABLE>
(a) Securities may be sold to "qualified institutional buyers" under Rule 144A
or securities offered pursuant to Section 4(2) of the Securities Act of
1933, as amended. These securities have been determined to be liquid under
guidelines established by the Board of Trustees.
SUMMARY OF ABBREVIATIONS:
LOC Line of Credit
VRDN Variable Rate Demand Notes
Variable Rate Demand Notes are payable on demand on no more than seven calendar
days notice given by the Fund to the issuer or other parties not affiliated with
the issuer. Interest rates are determined and reset by the issuer daily, weekly,
or monthly depending upon the terms of the security. Interest rates presented
for these securities are those in effect at August 31, 1997.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
EVERGREEN
PENNSYLVANIA TAX-FREE MONEY MARKET FUND
(EVERGREEN GRAPHIC
GOES HERE)
SCHEDULE OF INVESTMENTS
August 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
SHORT-TERM MUNICIPAL SECURITIES-- 99.3%
PENNSYLVANIA-- 98.0%
$1,500,000 Allegheny Cnty. Higher Ed. Bldg.
Auth. RB, Allegheny Cnty. Cmnty.
College, Prerefunded @ 100,
(Ins. by MBIA),
6.65%, 11/1/97................... $ 1,507,446
Allegheny Cnty. Hosp. Dev. Auth.
RB:
1,000,000 Allegheny Gen. Hosp., Ser.
1995B,
(LOC: Morgan Gty. Tr. Co. of NY),
3.25%, VRDN...................... 1,000,000
800,000 Allegheny Health Ed. & Resh.
Corp., Ser. A-ACES,
(LOC: PNC Bk., Pittsburgh),
3.40%, VRDN...................... 800,000
1,100,000 Allegheny Health Ed. & Resh.
Corp., Ser. C-ACES,
(LOC: PNC Bk., Pittsburgh),
3.40%, VRDN...................... 1,100,000
Allegheny Cnty. Hospital
Development Revenue:
405,000 7.75%, 10/1/97..................... 414,394
1,000,000 Prerefunded @ 102,
(COLL: US Govt. Sec.),
7.60%, 10/1/97................... 1,023,145
3,750,000 Allegheny Cnty. IDR,
3.70%, VRDN...................... 3,750,000
Beaver Cnty. IDA-PCR:
300,000 Duquesne Light Co., Beaver
Vly., Ser. A,
(LOC: Barclays Bk. PLC),
3.25%, VRDN...................... 300,000
2,000,000 The Toledo Edison Co.
Mansfield, Ser. 1992E-TECP,
(LOC: Toronto Dominion Bk.),
3.70%, 12/4/97................... 2,000,000
500,000 Berks Cnty. Municipal Auth. RB,
Pooled Fin. Prog., Prerefunded
@100,
(COLL: US Govt. Sec.),
7.00%, 9/1/97.................... 500,000
1,000,000 Bucks Cnty. IDA, USX Corp.
Project, ARB,
(LOC: Wachovia Bk., NC),
3.75%, 1/15/98................... 1,000,000
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SHORT-TERM MUNICIPAL SECURITIES-- CONTINUED
<C> <S> <C>
PENNSYLVANIA-- CONTINUED
$ 100,000 Bucks Cnty. IDA-RRB, SHV Real
Estate, Inc., Ser. 1984,
(LOC: ABN-Amro Bk.),
3.40%, VRDN...................... $ 100,000
1,000,000 Chester Cnty. Hlth. & Ed. Fac.
Auth. RB, Barclays Friends, Ser.
A,
(LOC: Bk. of Ireland),
3.30%, VRDN...................... 1,000,000
435,000 Coudersport School Dist. GO Bds.,
(Ins. by FSA),
3.75%, 9/1/97.................... 435,000
Delaware Cnty. IDA Solid Waste RB,
Scott Paper Co., 1984:
700,000 Ser. C,
3.25%, VRDN...................... 700,000
400,000 Ser. D,
3.25%, VRDN...................... 400,000
2,000,000 Delaware Vly., Registered Financing
Bonds,
(LOC: Credit Suisse),
3.25%, VRDN...................... 2,000,000
1,000,000 Delaware Vly. Regl. Fin. Auth.
Local Govt. RB, Ser. 1985A,
(LOC: Midland Bk. PLC),
3.25%, VRDN...................... 1,000,000
445,000 East Hempfield Township GO Bds.,
(Ins. by AMBAC),
4.25%, 11/1/97................... 445,357
Emmaus Gen. Auth. Local Govt. RB,
Ser. 1989:
1,000,000 (LOC: Midland Bk. PLC)
3.35%, VRDN...................... 1,000,000
3,300,000 (GIC: Goldman Sachs)
3.35%, VRDN........................ 3,300,000
1,400,000 Bd. Pool Program, Subsrs. D-11,
(LOC: Midland Bk. PLC),
3.40%, VRDN...................... 1,400,000
400,000 Bd. Pool Program, Subsrs. E-8,
(LOC: Canadian Imperial Bk.
of Commerce),
3.35%, VRDN...................... 400,000
425,000 Bd. Pool Program, Subsrs. E-9,
(LOC: Midland Bk. PLC),
3.40%, VRDN...................... 425,000
1,400,000 Geisinger Auth. Hlth. Systems
Revenue,
(SPA: Morgan Gty. Tr. Co. of NY),
3.70%, VRDN...................... 1,400,000
</TABLE>
(CONTINUED)
17
<PAGE>
EVERGREEN
PENNSYLVANIA TAX-FREE MONEY MARKET FUND
(Evergreen Graphic Goes Here)
SCHEDULE OF INVESTMENTS (CONTINUED)
August 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
SHORT-TERM MUNICIPAL SECURITIES-- CONTINUED
PENNSYLVANIA-- CONTINUED
$1,600,000 Harrisburg Auth. Lease Revenue,
Green County Prison Project,
(COLL: US Govt. Sec),
5.90%, 6/1/98.................... $ 1,622,656
2,000,000 Indiana Cnty. Pennsylvania IDA,
(LOC: UBS),
3.35%, VRDN...................... 2,000,000
500,000 Lancaster School Dist. GO Bds.,
(Ins. by FGIC),
4.00%, 2/15/98................... 500,324
200,000 Lehigh Cnty. IDA-PCRB, Ser. 1985A,
(LOC: Rabobank Nederland),
3.40%, VRDN...................... 200,000
470,000 Lehigh Cnty. Water Auth. RB, Ser.
1984,
(SPA: ABN-Amro Bk.),
3.25%, VRDN...................... 470,000
1,960,000 New Castle Area Hosp. Auth. RB,
Jameson Mem. Hosp.,
(SPA: PNC Bk.),
3.40%, VRDN...................... 1,960,000
North Penn Water Auth. RB,
(Ins. by FGIC)
500,000 6.75%, 11/1/97..................... 512,233
1,000,000 Prerefunded @ 102,
6.90%, 11/1/97................... 1,010,104
1,000,000 Northeastern Hosp. & Ed. Auth.
Rev., Health Care Rev. Wyoming
Vly., Ser. A,
(SPA: Kredeitbank N.V.),
3.30%, VRDN...................... 1,000,000
400,000 Penns Manor Area School Dist.,
(Ins. by MBIA),
6.20%, 9/15/97................... 400,327
2,000,000 Pennsylvania HFA,
4.00%, VRDN*..................... 2,000,000
1,000,000 Pennsylvania Higher Ed. Fac. Auth.
RB, Allegheny Delaware Vly., Ser.
D,
(LOC: PNC Bk., Pittsburgh),
3.30%, VRDN...................... 1,000,000
Pennsylvania Higher Ed. Facs. Auth.
RB:
3,000,000 Allegheny College,
(LOC: Mellon Bk. PLC),
3.30%, VRDN...................... 3,000,000
500,000 The Univ. of Pennsylvania
Health Svs., Ser. 1994B-ACES,
3.20%, VRDN...................... 500,000
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
SHORT-TERM MUNICIPAL SECURITIES-- CONTINUED
PENNSYLVANIA-- CONTINUED
$2,000,000 Pennsylvania St. Higher Education
Standard Loan,
(LOC: SLMA),
3.55%, VRDN...................... $2,000,000
Pennsylvania St. Higher Educational
Revenue:
3,000,000 4.50%, 11/15/97.................... 3,004,989
1,445,000 5.75%, 6/15/98..................... 1,466,857
2,000,000 Philadelphia Pennsylvania Airport
Revenue,
3.55%, VRDN*..................... 2,000,000
2,170,000 Philadelphia Pennsylvania School
District,
(LIQ: Merrill Lynch),
3.35%, VRDN*..................... 2,170,000
2,000,000 Philadelphia TANS, Ser. A,
4.50%, 6/30/98................... 2,007,953
Pittsburgh:
1,500,000 Floating Rate Receipts,
(LOC: Societe Generale),
3.45%, VRDN*..................... 1,500,000
500,000 GO Refunding Bds.,
Prerefunded @ 102,
(Ins. by AMBAC),
6.80%, 9/1/97.................... 510,000
665,000 Pottstown Borough Sewer Auth. RB,
4.00%, 11/1/97................... 665,374
400,000 Sayre Health Care Facs. Auth. RB,
VHA of Pennsylvania, Inc.,
Capital
Asset Fin. Prog., Ser. A,
(SPA: Mellon Bk. PLC),
3.30%, VRDN...................... 400,000
2,200,000 Schuylkill Cnty. IDA, Northeastern
Power Co.,
(LOC: Credit Local de France),
3.75%, VRDN...................... 2,200,000
3,200,000 Schuylkill Cnty. IDA Res. Recovery
RB, Gilberton Pwr.,
(LOC: Mellon Bk. PLC),
3.30%, VRDN...................... 3,200,000
500,000 State Public School Bldg. Auth. RB,
(Ins. by AMBAC),
7.25%, 10/1/97................... 506,382
1,000,000 Temple University Of Commonwealth
of Pennsylvania System,
4.75%, 5/18/98................... 1,005,799
160,000 Upper Merion Township GO Bds.,
3.80%, 11/1/97................... 160,000
66,373,340
<PAGE>
(CONTINUED)
18
EVERGREEN
PENNSYLVANIA TAX-FREE MONEY MARKET FUND
(Evergreen Graphic
Goes Here)
SCHEDULE OF INVESTMENTS (CONTINUED)
August 31, 1997
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
SHORT-TERM MUNICIPAL SECURITIES-- CONTINUED
PUERTO RICO-- 1.3%
$ 875,000 Puerto Rico Indl. Med. &
Environmental Pollution Control
Facs. Fin. Auth. RB,
4.00%, 12/1/97*.................. $ 875,000
TOTAL SHORT-TERM MUNICIPAL
SECURITIES
(COST $67,248,340)............... 67,248,340
<CAPTION>
SHARES VALUE
<C> <S> <C>
MUTUAL FUND SHARES-- 0.2%
(COST-- $140,000)
140,000 Federated Pennsylvania Municipal
Cash Trust (Institutional Service
Shares).......................... $ 140,000
TOTAL INVESTMENTS--
(COST $67,388,340)........ 99.5% 67,388,340
OTHER ASSETS AND
LIABILITIES-- NET......... 0.5 316,042
NET ASSETS--................ 100.0% $67,704,382
</TABLE>
SUMMARY OF ABBREVIATIONS:
ACES Adjustable Convertible Extendable Securities
AMBAC American Municipal Bond Assurance Corp.
ARB Adjustable Rate Bonds
COLL Collateral
FGIC Financial Guaranty Insurance Co.
FSA Financial Security Assurance Inc.
GIC Guaranteed Investment Contract
GO General Obligations
HFA Housing Finance Authority
IDA Industrial Development Authority
IDR Industrial Development Revenue
LIQ Liquidity Provider
LOC Letter of Credit
MBIA Municipal Bond Investors Assurance Corp.
PCR Pollution Control Revenue
PCRB Pollution Control Revenue Bond
RB Revenue Bonds
RRB Refunding Revenue Bonds
SLMA Student Loan Marketing Association
SPA Securities Purchase Agreement
TANS Tax Anticipation Notes
TECP Tax Exempt Commercial Paper
VHA Veterans' Health Administration
VRDN Variable Rate Demand Notes
Adjustable Rate Bonds are putable back to the issuer or other parties not
affiliated with the issuer at par on the interest reset dates. Interest rates
are determined and set by the issuer quarterly, semi-annually or annually
depending upon the terms of the security. Interest rates presented for these
securities are those in effect at August 31, 1997.
Variable Rate Demand Notes are payable on demand on no more than seven calendar
days notice given by the Fund to the issuer or other parties not affiliated with
the issuer. Interest rates are determined and reset by the issuer daily, weekly,
or monthly depending upon the terms of the security. Interest rates presented
for these securities are those in effect at August 31, 1997.
Certain obligations held in the portfolio have credit enhancements or liquidity
features that may, under certain circumstances, provide for repayment of
principal and interest on the obligation upon demand date, interest rate reset
date or final maturity. These enhancements include: letters of credit; liquidity
guarantees; standby bond purchase agreements; tender option purchase agreements;
and third party insurance (i.e. AMBAC, FGIC and MBIA). Adjustable rate bonds and
variable rate demand notes held in the portfolio may be considered derivative
securities within the standards imposed by the Securities and Exchange
Commission under Rule 2a-7 which were designed to minimize both credit and
market risk.
* Securities may be sold to "qualified institutional buyers" under Rule 144A or
securities offered pursuant to Section 4(2) of the Securities Act of 1933, as
amended. These securities have been determined to be liquid under guidelines
established by the Board of Trustees.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
EVERGREEN
(Evergreen Graphic TAX EXEMPT MONEY MARKET FUND
Goes Here)
SCHEDULE OF INVESTMENTS
August 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
SHORT-TERM INVESTMENTS-- 99.6%
ALABAMA-- 2.4%
Alabama IDA-IDRB:
$ 2,290,000 Air-Dro Cylinders, Inc.,
(LOC: Southtrust Bank of
Alabama, N.A.),
3.75%, VRDN.................... $ 2,290,000
3,590,000 Automation Technologies Ind.,
Inc., (LOC: Columbus Bank &
Trust Co.),
3.75%, VRDN.................... 3,590,000
Coml. Dev. Auth. of the City of
Birmingham RB:
1,090,000 Avondale Comm. Park, Phase II,
(LOC: Amsouth Bank, N.A.),
3.70%, VRDN.................... 1,090,000
645,000 Southside Business Ctr.,
(LOC: Amsouth Bank, N.A),
3.70%, VRDN.................... 645,000
2,955,000 IDB of Mobile County RB, Sherman
Intl. Corp., Ser. 1994A, (LOC:
Columbus Bank & Trust Co.),
3.75%, VRDN.................... 2,955,000
14,590,000 Mobile Alabama IDB-PCRB,
International Paper Project,
(Gtd. by International Paper),
4.00%, 10/15/97................ 14,590,000
25,160,000
ALASKA-- 2.0%
19,620,000 Alaska State Dept. Admin. COP,
Ser. PT-94, (LIQ: Credit Suisse
First Boston & Ins. by Capital
Mkt. Assuran),
3.50%, VRDN.................... 19,620,000
785,000 Anchorage Alaska Hospital RB,
6.50%, 10/1/97................. 786,457
750,000 Kenai Peninsula Borough Alaska,
GO, (Ins. by AMBAC),
8.20%, 1/1/98.................. 759,937
21,166,394
ARIZONA-- 0.7%
7,500,000 IDA of the City of Glendale RB,
Thunderbird Gardens,
(LOC: Sumitomo Bank, Ltd.),
3.70%, VRDN.................... 7,500,000
200,000 Maricopa County IDA,
McLane Co., Inc., Ser. 1984,
(LOC: Wachovia Bank of
Georgia),
3.80%, VRDN.................... 200,000
7,700,000
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
SHORT-TERM INVESTMENTS-- CONTINUED
CALIFORNIA-- 8.3%
$ 2,535,000 California Statewide Community
Development MHRB, Argis
Pleasant Hill Project,
(LOC: Banque Paribas),
3.65%, VRDN.................... $ 2,535,000
4,250,000 City of Paramount MHRB, Century
Place Apt., Ser. 1989A,
(LOC: Heller Finl. Inc.),
3.99%, VRDN.................... 4,250,000
2,500,000 City of Simi Valley
IDA-IDRB, Wambold Furniture,
Ser. 1984, (LOC: Wells Fargo
Bank, N.A.),
3.90%, VRDN.................... 2,500,000
1,900,000 Glenn County IDA-PCRB,
Land O'Lakes, Inc., Ser. 1995,
(LOC: Sanwa Bank, Ltd.),
3.75%, VRDN.................... 1,900,000
5,000,000 Los Angeles, California MHRB,
Channel Gateway Apts.,
(LOC: Fuji Bank, Ltd.),
3.90%, VRDN.................... 5,000,000
1,100,000 Ontario California IDA, Erenberg
Bros. Project,
(LOC: Tokai Bank, Ltd.),
3.95%, VRDN.................... 1,100,000
12,200,000 Orange County California
Apartment Development ARB,
(Villas De La Paz), Issue O,
(LOC: Tokai Bank, Ltd.),
4.35%, 8/15/98................. 12,200,000
5,000,000 Orange County California
Apartment Development ARB,
(Villas Aliento Project), Issue
R,
(LOC: Tokai Bank, Ltd.),
4.35%, 8/15/98................. 5,000,000
Pitney Bowes Corp. Leasetops
Trs.:
23,670,645 Bart Telesystem Lease, (LOC:
ABN-Amro Bank, N.V.),
3.65%, VRDN*................... 23,670,645
12,930,099 San Diego Regl. Comm. Sys.
Lease, Ser. 1996A,
(LOC: Landesbank Hessen & Ins.
by Pitney Bowes),
3.65%, VRDN*................... 12,930,099
15,375,000 San Bernardino County COP Medical
Center Financing Project, Ser.
1995, (LIQ: Merrill Lynch &
Ins. by MBIA),
3.60%, VRDN.................... 15,375,000
86,460,744
</TABLE>
(CONTINUED)
20
<PAGE>
EVERGREEN
TAX EXEMPT MONEY MARKET FUND (Evergreen Graphic
Goes Here)
SCHEDULE OF INVESTMENTS (CONTINUED)
August 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
SHORT-TERM INVESTMENTS-- CONTINUED
COLORADO-- 1.3%
$ 2,500,000 Adams County IDRB, Yellow Freight
Sys., Inc., Ser. 1983, (LOC:
Union Bank of Switzerland),
3.70%, VRDN.................... $ 2,500,000
1,100,000 Arapahoe County MHRB,
Stratford Sta., Ser. 1994,
(LOC: Heller Finl., Inc.),
4.15%, VRDN.................... 1,100,000
4,760,000 Colorado HFA RB MERLOTS, Ser.
C-ARB, (LIQ: Corestates Bank,
N.A.),
4.15%, 11/1/97................. 4,760,000
3,000,000 Dove Valley Metropolitan District
Arapahoe County GO, Ser.
1996C-ARB, (LOC: Dai-Ichi
Kangyo Bank, Ltd.),
4.15%, 11/1/97................. 3,000,000
2,680,000 Parkview Met. District Arapahoe
County GO, Ser. 1993,
(LIQ: Colorado National Bank),
3.60%, VRDN.................... 2,680,000
14,040,000
DELAWARE-- 0.7%
3,000,000 Delaware EDA-IDRB, Arlon, Inc.,
Ser. 1989, (LOC: Bank of
America, IL),
3.85%, VRDN.................... 3,000,000
1,640,000 Delaware Hsg. Auth. RB MERLOTS,
Ser. G ARB,
(LIQ: Corestates Bank, N.A. &
Ins. by FGIC),
4.20%, 9/1/97.................. 1,640,000
2,480,000 New Castle County EDRB,
Toys R Us, (LOC: Bankers Trust
Co., NY),
3.60%, VRDN.................... 2,480,000
7,120,000
DISTRICT OF COLUMBIA-- 1.4%
500,000 District of Columbia, GO Series
A,
(Ins. by AMBAC),
7.25%, 6/1/98.................. 511,799
5,120,000 District of Columbia GO Ref.,
Puttable Floating Opt. Tax-
Exempt Rcpt., Ser. PA-64, Ser.
1993C, (LIQ: Merrill Lynch &
Ins. by FGIC),
3.60%, VRDN.................... 5,120,000
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
SHORT-TERM INVESTMENTS-- CONTINUED
DISTRICT OF COLUMBIA-- CONTINUED
$ 4,500,000 District of Columbia Hsg. Fin.
Agy. Single Family Mortgage RB,
Series 1997C-ARB,
(COLL: GNMA),
4.05%, 9/1/98.................. $ 4,500,000
5,000,000 District of Columbia Hsg. Fin.
Agy., Single Family Mortgage
RB, Ser. 1996 C-ARB,
(Invest. Agreement: Trinity
Funding Corp.),
3.90%, 12/1/97................. 5,000,000
15,131,799
FLORIDA-- 1.9%
2,800,000 Orange County HFA MHRB, Oakwood
Project, Ser. E,
(LOC: Fleet Bank, N.A.),
4.15%, 10/1/97................. 2,800,000
955,000 Palm Beach County Hsg. RB,
Meridian Hsg., Ser. 1985,
(LOC: Union Bank of California,
N.A.),
4.33%, VRDN.................... 955,000
5,875,000 Palm Beach County School Board,
MSTR Ser. 1996B,
(LIQ: Norwest Bank, MN
& Ins. by AMBAC),
3.55%, VRDN.................... 5,875,000
9,900,000 Tampa Florida Capital Improvement
Program RB Puttable Floating
Trust Rcpt. PT-96, (LOC:
Rabobank Nederland N.V.; LIQ:
Bayerische Hypotheken-und and
Wechsel-Bank AG),
3.60%, 9/4/97.................. 9,900,000
19,530,000
GEORGIA-- 1.4%
1,000,000 Albany Dougherty County Hosp. RB,
Ser. 1984A,
(Gtd. by Merck & Co.),
3.85%, VRDN.................... 1,000,000
5,000,000 Albany Dougherty Payroll Series
1982A, (Gtd. by Merck & Co.),
3.60%, VRDN.................... 5,000,000
6,000,000 Polk County Dev. Auth. RB, Kimoto
Tech. Inc., Ser. 1985,
(LOC: Indl. Bank of Japan,
Ltd.),
3.85%, VRDN.................... 6,000,000
</TABLE>
(CONTINUED)
21
<PAGE>
EVERGREEN
(Evergreen Graphic TAX EXEMPT MONEY MARKET FUND
Goes Here)
SCHEDULE OF INVESTMENTS (CONTINUED)
August 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
SHORT-TERM INVESTMENTS-- CONTINUED
GEORGIA-- CONTINUED
$ 2,200,000 Columbus Hsg. Auth. MHRB Ref.,
Quail Ridge Project, Ser. 1988,
(LOC: Columbus Bank & Trust
Co.),
3.75%, VRDN.................... $ 2,200,000
14,200,000
ILLINOIS-- 13.7%
2,820,000 Arlington Heights Illinois MHRB,
(LOC: Heller Finl., Inc.),
3.90%, VRDN.................... 2,820,000
14,850,000 Chicago Illinois Board of
Education Return Bonds, MERLOTS
(LIQ: Corestates Bank, N.A. &
Ins. by AMBAC),
3.61%, VRDN.................... 15,323,574
1,700,000 Chicago IDR,
Federal Marine Terminal
Project,
(LOC: Canadian Imperial Bank of
Commerce),
3.70%, VRDN.................... 1,700,000
9,670,000 City of Aurora MHRB, Fox Vly Vlg.
Apts, Ser. 1993,
(LOC: Sumitomo Bank, Ltd.),
3.65%, VRDN.................... 9,670,000
2,900,000 City of Chicago GO, MSTR SAK-13,
Series 1995A-2,
(LIQ: Credit Suisse First
Boston & Ins. by AMBAC),
3.55%, VRDN.................... 2,900,000
29,000,000 City of Oakbrook Terrace MHRB,
Renaissance, Ser. 1985A-ARB,
(LOC: Bayerische Landesbank,
Girozentrale),
4.90%, VRDN.................... 29,000,000
4,000,000 City of Peoria Solid Waste
Disposal RB, PMP Fermentation
Products,
Inc., Ser. 1996, (LOC: Sanwa
Bank, Ltd.),
3.80%, VRDN.................... 4,000,000
5,900,000 City of West Chicago IDRB, Acme
Printing Inc., Ser. 1989,
(LOC: Bank of Tokyo-Mitsubishi,
Ltd.),
3.975%, VRDN................... 5,900,000
4,500,000 Crawford County Illinois
Manufacturing Facilities RB,
Fair-Rite Prdts. Corp., (LOC:
Corestates Bank, N.A.),
3.65%, VRDN.................... 4,500,000
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
SHORT-TERM INVESTMENTS-- CONTINUED
ILLINOIS-- CONTINUED
$ 3,500,000 Illinois Dev. Fin. Auth. EDRB,
MTI Corp.,
(LOC: Indl. Bank of Japan,
Ltd.),
4.10%, VRDN.................... $ 3,500,000
6,800,000 Illinois Dev. Fin. Auth. RB, Gen.
Accident Ins. Co., Ser. 1985-
ARB, (Gtd. by Gen. Accident
Ins. Co. of Amer.),
3.70%, 9/1/97.................. 6,800,000
3,500,000 Illinois Dev. Fin. Auth. RB,
Decatur Mental Health Ctr.
(LOC: First of America, IL),
3.50%, VRDN.................... 3,500,000
3,500,000 Illinois Ed. Fac. Auth. RB,
Cultural Pooled Financing
Program,
(LOC: First National Bank of
Chicago, Inc.)
3.35%, VRDN.................... 3,500,000
6,566,021 Lasalle Natl. Bank Leasetops
Trs.,
Ser. 1995A,
(LIQ: LaSalle National Bank),
3.65%, VRDN*................... 6,566,021
16,640,000 Village of Hazel Crest Retirement
Ctr. RB, Waterford Estates,
Ser. 1992A,
(LOC: Sumitomo Bank, Ltd.),
3.65%, VRDN.................... 16,640,000
10,000,000 Village of Schaumburg MHRB,
Treehouse II Apt., Ser. 1989,
(LOC: Sumitomo Bank, Ltd.),
3.65%, VRDN.................... 10,000,000
2,000,000 Village of Skokie EDRB, Skokie
Fashion Square Assn., Ser.
1984, (LOC: LaSalle National
Bank),
3.725%, VRDN................... 2,000,000
15,210,000 Village of Vernon Hills MHRB,
Hawthorn Lakes, Ser. 1991,
(LIQ: Fuji Bank, Ltd. & Ins. by
FSA),
3.80%, VRDN.................... 15,210,000
143,529,595
INDIANA-- 1.6%
6,500,000 Avilla EDRB, Pent Assemblies
Inc., Ser. 1996-ARB, (LOC: Fort
Wayne National Bank),
4.35%, 2/1/98.................. 6,500,000
7,600,000 City of Fort Wayne PCRB, Gen.
Mtrs. Corp.,
(Gtd. by Gen. Mtrs. Corp.),
3.55%, VRDN.................... 7,600,000
</TABLE>
(CONTINUED)
22
<PAGE>
EVERGREEN
TAX EXEMPT MONEY MARKET FUND (Evergreen Graphic
Goes Here)
SCHEDULE OF INVESTMENTS (CONTINUED)
August 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
SHORT-TERM INVESTMENTS-- CONTINUED
INDIANA-- CONTINUED
$ 2,000,000 City of South Bend MHRB, Maple
Lane Assn., Ser. 1987,
(LOC: FHLB of Indianapolis),
3.60%, VRDN.................... $ 2,000,000
925,000 Decatur Indl. EDA-RB, Silberline
Mfg. Co. Inc., (LOC: Corestates
Bank, N.A.),
4.30%, 12/1/97................. 925,000
17,025,000
IOWA-- 1.3%
3,800,000 Algona IDR, George A.
Hormel & Co.,
(LOC: Sumitomo Bank Ltd.),
3.75%, VRDN.................... 3,800,000
City of Council Bluffs RB,
Catholic
Hlth. Corp.:
2,240,000 Mercy Hospital Project
4.00%, 10/1/97................. 2,240,000
7,025,000 Ser. 1985, Mercy Hospital Project
(LOC: Fuji Bank, Ltd.),
4.00%, 10/1/97................. 7,025,000
13,065,000
KANSAS-- 0.4%
540,000 City of Manhattan Tax Increment
RRB, Central Business Dist. Tax
Increment Redev., Ser. 1996A,
(Ins. by Asset Guaranty),
4.10%, 12/1/97................. 540,000
1,800,000 City of Prairie Village MHRB,
J.C.
Nichol's Co., Ser. 1985,
(Gtd. by Principal Mutual Life
Ins. Co.),
4.00%, VRDN.................... 1,800,000
City of Salina RB (Salina Central
Mall L.P.), Ser. 1984, (LOC:
National Bank of St. Louis):
1,200,000 Dillard's,
3.60%, VRDN.................... 1,200,000
1,105,000 Penny's,
3.60%, VRDN.................... 1,105,000
4,645,000
KENTUCKY-- 1.9%
20,300,000 County of Ohio PCRB, Big Rivers
Elec. Corp., Ser. 1985,
(LOC: Chemical Bank),
3.95%, VRDN.................... 20,300,000
LOUISIANA-- 0.6%
3,400,000 Bastrop IDB-PCRB,
International Paper Project,
ARB,
(Gtd. by International Paper),
4.00%, 10/15/97................ 3,400,000
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
SHORT-TERM INVESTMENTS-- CONTINUED
LOUISIANA-- CONTINUED
$ 3,050,000 IDB of the Parish of Bossier,
Inc., H. J. Wilson Co., Inc.,
Ser. 1982-ARB,
(LIQ: Canadian
Imperial Bank of Commerce),
4.00%, 12/1/97................. $ 3,050,000
6,450,000
MAINE-- 0.4%
3,685,000 Jay Solid Waste Disposal RB,
International Paper Project
ARB,
(Gtd. by International Paper),
4.20%, 6/1/98.................. 3,685,000
MASSACHUSETTS-- 0.2%
400,000 Massachusetts Indl. Finl. Agy.,
Copley Pharmacy,
(LOC: First National Bank of
Boston),
4.58%, VRDN.................... 400,000
600,000 Massachusetts Indl. Finl. Auth.
IDRB, Leavy Realty & Jen-coat
Metal, Ser. 1994, (LOC: First
National Bank of Boston),
4.33%, VRDN.................... 600,000
700,000 Massachusetts Indl. Finl. Auth.
IDRB, Portland Causeway Rlty.,
Ser. 1988,
(LOC: Citibank, N.A.),
4.33%, VRDN.................... 700,000
1,700,000
MICHIGAN-- 0.4%
4,315,000.. Sault Ste. Marie Tribe Bldg.
Auth. RB, Ser. 1996A ARB, (LOC:
First of America Bank, N.A.),
4.42%, 12/1/97................. 4,315,000
MINNESOTA-- 8.0%
27,135,000 Capital Investors Tax Exempt Fund
Ltd., Partnership, Ser. 1996-5,
(LOC: Swiss Bank Corp.),
3.60%, VRDN.................... 27,135,000
14,905,000 City of Eden Prairie MHRB, Park
at City West Apt., Ser. 1990,
(LOC: Sumitomo Bank, Ltd.),
3.65%, VRDN.................... 14,905,000
2,300,000 City of Robbinsdale IDR, Unicare
Homes, Inc., Ser. 1984,
(LOC: Banque Paribas),
3.60%, VRDN.................... 2,300,000
4,420,000 Dakota & Washington Counties Hsg.
& Redev. Auth., ARB MERLOTS,
Ser. J,
(LOC: Corestates Bank, N.A.),
4.20%, 9/1/97.................. 4,420,000
</TABLE>
(CONTINUED)
23
<PAGE>
EVERGREEN
(Evergreen Graphic TAX EXEMPT MONEY MARKET FUND
Goes Here)
SCHEDULE OF INVESTMENTS (CONTINUED)
August 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
SHORT-TERM INVESTMENTS-- CONTINUED
MINNESOTA-- CONTINUED
$ 4,220,000 Minneapolis GO Sports Arena, MSTR
Ser. 1996A,
(LIQ: Norwest Bank, MN),
3.55%, VRDN.................... $ 4,220,000
765,000 Minneapolis/St. Paul Hsg. Fin.
Bd. RB, Minneapolis/Saint Paul
Fam. Hsg. Prog., Phase VI, ARB,
(COLL: GNMA),
4.00%, 11/1/97................. 765,000
1,960,000 Plymouth, Minnesota MHRB, At-
the-Lakes Apts., (LOC: FNMA),
3.70%, VRDN.................... 1,960,000
1,510,000 Richfield Independent School
District #280, MSTR Ser. 1994P,
(LIQ: First Bank, N.A. & Ins.
by FGIC),
3.55%, VRDN.................... 1,510,000
750,000 Southern Minnesota Muni. Pwr.
Agy. Supply Sys., MSTR Ser.
1996I, (LIQ: Norwest Bank, MN &
Ins. by FGIC),
3.55%, VRDN.................... 750,000
1,000,000 Spring Lake Park ISD No. 16, MSTR
Ser. 1996G,
(LIQ: Norwest Bank, MN & Ins.
by MBIA),
3.55%, VRDN.................... 1,000,000
24,200,000 St. Louis Park Hlth. Care Fac. RB
Fltg. Tr. Cert., (LIQ: Norwest
Bank, MN & Ins. by AMBAC),
3.55%, VRDN.................... 24,200,000
83,165,000
MISSOURI-- 0.4%
4,330,000 Missouri Dev. Fin. Bd. IDRB,
Cook Composites & Polymers
Co., Ser. 1994,
(LOC: Societe Generale),
3.80%, VRDN.................... 4,330,000
MONTANA-- 0.1%
710,000 Butte Silver Bow City & County,
Copper City Assn., Ser. 1988,
(LOC: Bank of America, N.T. &
S.A.),
3.55%, VRDN.................... 710,000
NEBRASKA-- 0.4%
4,200,000 Lancaster County IDRB, Mid-
America, Inc., Ser. 1994,
(LOC: Heller Finl., Inc.),
3.90%, VRDN.................... 4,200,000
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
SHORT-TERM INVESTMENTS-- CONTINUED
NEW JERSEY-- 4.1%
County of Essex, BAN,
$ 5,000,000 Ser. 1997A 4.25%, 8/7/98......... $ 5,013,880
15,000,000 Ser. 1996A 4.50%, 9/17/97........ 15,002,836
4,220,000 Jersey City, Refunding Notes,
Real Property Tax Appeals,
4.13%, 1/16/98................. 4,221,880
10,000,000 Jersey City, BAN,
4.75%, 9/26/97................. 10,004,601
8,140,000 Jersey City, Refunding Notes,
4.30%, 9/26/97................. 8,139,181
42,382,378
NEW MEXICO-- 0.5%
4,855,000 County of Sandoval MHRB,
Arrowhead Ridge Apts., Ser.
1996-ARB, (FGIC),
4.65%, 12/31/97................ 4,855,000
NEW YORK-- 9.0%
Battery Park City Auth. Hsg. RB,
Marina Towers Tender Corp.,
(LOC: Sumitomo Bank Ltd.):
8,560,000 Ser. A,
3.85%, VRDN.................... 8,560,000
7,765,000 Ser. B,
3.85%, VRDN.................... 7,765,000
26,200,000 New York City Municipal Wtr. Fin.
Auth., Wtr. & Swr. RB (LOC:
Societe General & Ins. by
MBIA),
3.45%, VRDN.................... 26,200,000
32,600,000 New York City GO, Series L,
(LIQ: Merrill Lynch),
3.50%, VRDN.................... 32,600,000
10,100,000 New York State Med. Care Fac.
Finance Agency RB, Fltg-Rate
Rcpts. PT-100, (LIQ: Credit
Suisse & Ins. by FHA),
4.00%, VRDN.................... 10,100,000
8,305,000 New York State Thruway Auth.
General RB, MSTR-SG119, (LIQ:
Societe Generale),
3.80%, VRDN.................... 8,305,000
93,530,000
NORTH CAROLINA-- 0.7%
3,600,000 Cabarrus County Indl. Fac. PCRB,
Oiles America Corp., Ser. 1989,
(LOC: Indl. Bank of Japan,
Ltd., NY),
4.00%, VRDN.................... 3,600,000
</TABLE>
(CONTINUED)
24
<PAGE>
EVERGREEN
TAX EXEMPT MONEY MARKET FUND (Evergreen Graphic
Goes Here)
SCHEDULE OF INVESTMENTS (CONTINUED)
August 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
SHORT-TERM INVESTMENTS-- CONTINUED
NORTH CAROLINA-- CONTINUED
$ 3,000,000 Guilford County Indl. Fac.
PCRB Sewage Disp., High Pt.
Chem., Ser. 1994, (LOC:
Sumitomo Bank, Ltd., NY),
3.70%, VRDN.................... $ 3,000,000
470,000 NCNB Pooled Tax-Exempt Tr. COP,
Ser. 1990A,
(LOC: NationsBank, N.A.),
4.25%, VRDN.................... 470,000
7,070,000
OHIO-- 0.4%
Ohio Hsg. Fin. Agy. MHRB:
Pine Crossing Project, (LOC:
Sumitomo Bank, Ltd.),
1,130,000 3.85%, VRDN...................... 1,130,000
3,000,000 10 Wilmington Place, Ser. 1991B,
(LIQ: Fuji Bank, Ltd. & Ins. by
FSA),
3.80%, VRDN.................... 3,000,000
4,130,000
OREGON-- 0.4%
Oregon EDRB Series CLVI:
(LOC: Union Bank of California,
N.A.),
1,830,000 Pacific Coast Seafoods Co.,
3.75%, VRDN.................... 1,830,000
1,130,000 Pacific Oyster Co.,
3.75%, VRDN.................... 1,130,000
1,200,000 Oregon State EDRB; Georgia-
Pacific Corp., 95A Project,
(LOC: Deutsche Genossen-
schaftshank),
3.65%, VRDN.................... 1,200,000
4,160,000
PENNSYLVANIA-- 5.2%
2,400,000 Chartiers Valley Industrial and
Commercial Dev. Auth., William
Penn Place Project,
(LOC: Corestates Bank, N.A.),
4.10%, VRDN.................... 2,400,000
2,855,000 Chester County IDA Mfg. Fac. RB,
Devault Packing Co., Inc.,
Ser. 1995,
(LOC: Corestates Bank, N.A.),
3.65%, VRDN.................... 2,855,000
8,100,000 City of Philadelphia GO,
Ser. 1990 TECP,
(LOC: Fuji Bank, Ltd. NY),
3.90%, 9/15/97................. 8,100,000
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
SHORT-TERM INVESTMENTS-- CONTINUED
PENNSYLVANIA-- CONTINUED
$10,000,000 City of Philadelphia Water and
Waste Water Rev., MSTR
#11 ARB,
(LIQ: Bear Stearns Capital
Markets & Ins. by FGIC),
4.15%, 6/4/98*................. $ 10,000,000
500,000 Elk County IDA-IDRB Ref.,
Stackpole Corp. Project,
Ser. 1989,
(LOC: Fleet Bank, N.A.),
4.33%, VRDN.................... 500,000
650,000 Lawrence County IDA-PCRB, Calgon
Carbon, Ser. 1983A,
(Gtd. by Merck & Co.),
3.85%, VRDN.................... 650,000
1,990,000 Monroe County IDA-RB, United
Steel, Ser. A,
(LOC: Corestates Bank, N.A.),
3.65%, VRDN.................... 1,990,000
1,200,000 Montgomery County IDA-RB, Laneko
Engineering Co.,
Ser. 1995,
(LOC: Corestates Bank, N.A.),
3.65%, VRDN.................... 1,200,000
13,250,000 Montgomery County PA Higher Ed.
and Hlth Auth. RB, Higher
Education on Health Loan, (LOC:
Dauphin Deposit Bank & Trust),
3.50%, VRDN.................... 13,250,000
1,000,000 Montgomery County Series A
IDA-RB, Noesc Tech. Inc.,
(LOC: Corestates Bank, N.A.),
3.65%, VRDN.................... 1,000,000
1,235,000 Pennsylvania Econ. Dev. Fin.
Auth. RB, C.F. Martin & Co.,
Inc., Ser. H, (LOC: Corestates
Bank, N.A.),
3.65%, VRDN.................... 1,235,000
3,460,000 Pennsylvania Hsg. Fin. Agy.
MERLOTS, Ser. I-ARB,
(LOC: Corestates Bank, N.A.),
4.125%, 10/1/97................ 3,460,000
920,000 Reading School District GO,
Ser. 1997,
3.95%, 1/15/98................. 920,315
2,000,000 Schuylkill County IDA-RB, Craftex
Mills, Inc.,
(LOC: Corestates Bank, N.A.),
3.65%, VRDN.................... 2,000,000
1,945,000 West Cornwall Twp. Muni. Auth.
RB, Lebanon Valley Brethren
Home, Ser. 1995,
(LOC: Corestates Bank, N.A.),
3.60%, VRDN.................... 1,945,000
</TABLE>
(CONTINUED)
25
<PAGE>
EVERGREEN
(Evergreen Graphic TAX EXEMPT MONEY MARKET FUND
Goes Here)
SCHEDULE OF INVESTMENTS (CONTINUED)
August 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
SHORT-TERM INVESTMENTS-- CONTINUED
PENNSYLVANIA-- CONTINUED
$ 3,065,000 Westmoreland County IDA-IDRB,
White Consolidated Ind., Inc.,
ARB,
(LOC: Bank of Nova Scotia),
4.35%, 12/1/97................. $ 3,067,957
54,573,272
SOUTH CAROLINA-- 2.3%
3,500,000 Darlington County IDA-IDRB,
Hobert Corp., Ser. 1995,
(LOC: Fuji Bank, Ltd.),
3.85%, VRDN.................... 3,500,000
Georgetown County SC, PCRB,
International Paper Project,
ARB,
(Gtd. by International Paper):
4,780,000 4.00%, 9/1/97.................... 4,780,000
11,250,000 4.00%, 9/1/98.................... 11,250,000
950,000 South Carolina Jobs EDA Hosp.
Facs. RB, Beloit Corp.,
(LOC: Cr. Coml. de France),
3.85%, VRDN.................... 950,000
South Carolina Jobs EDA-EDRB:
600,000 Ridge Pallets, Ser. B,
(LOC: Cr. Coml. de France),
3.85%, VRDN.................... 600,000
2,700,000 Roller Bearing Co., Ser. 1994A,
(LOC: Heller Finl. Inc.),
4.10%, VRDN.................... 2,700,000
750,000 Tuttle Co., Inc., Ser. A,
(LOC: NationsBank, N.A.),
3.85%, VRDN.................... 750,000
24,530,000
SOUTH DAKOTA-- 0.5%
5,285,000 Rapid City EDRB, Civic Center
Assoc.,
(LOC: CitiBank, N.A.),
3.65%, VRDN.................... 5,285,000
400,000 South Dakota EDA-RB, Lumar
Development Co.,
(LOC: First Bank, N.A.),
3.65%, VRDN.................... 400,000
5,685,000
TENNESSEE-- 6.1%
2,600,000 Bristol IDB, Robinette Co., (LOC:
First American Nat'l Bank),
3.80%, VRDN.................... 2,600,000
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
SHORT-TERM INVESTMENTS-- CONTINUED
TENNESSEE-- CONTINUED
IDB of Met. Govt. of Nashville &
Davidson County, Ser. 1989:
(LOC: Sumitomo Bank Ltd.),
$ 8,995,000 Beechwood Terrace Apts.,
3.65%, VRDN.................... $ 8,995,000
4,680,000 Belle Valley,
3.65%, VRDN.................... 4,680,000
6,710,000 Graybrook Apts.,
3.65%, VRDN.................... 6,710,000
3,200,000 IDB of the City Chattanooga RRB,
Radisson Read House, Ser. 1995,
(LOC: Heller Finl. Inc.),
4.20%, VRDN.................... 3,200,000
5,000,000 IDB of the City of Morristown
IDRB, Camvac Intl., Inc., Ser.
1983, (LOC: ABN Amro Bank),
3.725%, VRDN................... 5,000,000
4,400,000 Jackson Tennessee Hlth. and Ed.
Hsg. Fac. RB, Union University,
(LOC: First American Nat'l
Bank),
3.65%, VRDN.................... 4,400,000
10,000,000 Johnson City Sales Tax RB, MSTR-
SGAYS, (LOC: Societe Generale &
Ins. by FGIC),
3.50%, VRDN.................... 10,000,000
5,000,000 Maryville IDB of Ed., RB,
Maryville College (LOC: First
American
Nat'l Bank),
3.65%, VRDN.................... 5,000,000
700,000 Metro Government Nashville &
Davidson County IDRB,
(LOC: First Bank, N.A.),
3.75%, VRDN.................... 700,000
500,000 Shelby County Tennessee Hlth.,
Ed. and Hsg., MHRB, 99 Tower
Place, (LOC: Boatman's Bank,
St. Louis, MO),
4.05%, VRDN.................... 500,000
4,285,000 Smyrna Hsg. Assn. MHRB,
Imperial Gardens Apts., Ser.
1989,
(LOC: Sumitomo Bank, Ltd.),
3.65%, VRDN.................... 4,285,000
8,000,000 Wilson County, Knight Leasing
Co., IDRB, (LOC: First American
Nat'l Bank),
3.80%, VRDN.................... 8,000,000
64,070,000
</TABLE>
(CONTINUED)
26
<PAGE>
EVERGREEN
TAX EXEMPT MONEY MARKET FUND (Evergreen Graphic
Goes Here)
SCHEDULE OF INVESTMENTS (CONTINUED)
August 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
SHORT-TERM INVESTMENTS-- CONTINUED
TEXAS-- 7.1%
$10,890,000 Aldine Independent School
District, MSTR SGB30
(LOC: Societe Gen'l & Gtd. by
Permanent School Fund),
3.40%, VRDN.................... $ 10,890,000
2,900,000 Dallas Indl. Dev. Corp. RB, Crane
Plumbing Project,
3.85%, VRDN.................... 2,900,000
4,000,000 Dallas Independent School
District, MSTR#6, Class A-ARB,
(LIQ: Credit Suisse & Gtd. by
Permanent School Fund),
4.00%, 12/8/97*................ 4,000,000
5,985,000 Galveston Hsg. Fin. Corp. MHRB
Ref., Village by the Sea Apt.,
Ser. 1993, (LIQ: Sumitomo Bank,
Ltd. & Ins. by FHA),
3.60%, VRDN.................... 5,985,000
7,005,000 NCNB Pooled Tax-Exempt Tr. COP,
Ser. 1990B,
(LOC: NationsBank of Texas),
4.25%, VRDN.................... 7,005,000
4,000,000 Port of Corpus Christi Auth.
Nueces County RRB, Union
Pacific Corp., Ser. 1989 TECP,
(Gtd. by Union Pacific Corp.),
4.00%, 12/19/97................ 4,000,000
34,825,000 San Antonio Electric and Gas RB,
MSTR SG104
(LIQ: Societe Generale),
3.55%, VRDN.................... 34,825,000
4,380,000 Tarrant County Hsg. Fin. Corp.
MHRB Ref., Lincoln Meadows
Project, Ser. 1988 ARB, (Surety
Bond: Continental Casualty
Corp.),
4.10%, 12/1/97................. 4,379,879
73,984,879
UTAH-- 5.4%
2,700,000 Summit County IDRB, Hornes'
Kimball Junction L.P.,
Ser. 1985,
(LOC: West One Bank, Idaho),
3.85%, VRDN.................... 2,700,000
Tooele County Hazardous Waste
Treatment RB, Union Pacific
Corp., Ser. A, TECP,
(Gtd. by Union Pacific Corp.):
10,000,000 4.00%, 11/24/97.................. 10,000,000
10,000,000 4.00%, 11/25/97.................. 10,000,000
17,500,000 4.10%, 10/23/97.................. 17,500,000
10,000,000 4.15%, 9/10/97................... 10,000,000
6,290,000 4.15%, 9/15/97................... 6,290,000
56,490,000
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
SHORT-TERM INVESTMENTS-- CONTINUED
VERMONT-- 0.2%
$ 2,000,000 Burlington Wastewater Revenue
TRANS,
5.60%, 1/30/98................. $ 2,012,867
VIRGINIA-- 0.9%
2,900,000 Henrico County IDA RB, San-J,
(LOC: Tokai Bank, Ltd.),
3.85%, VRDN.................... 2,900,000
5,000,000 Richmond County Indl. Fac. PCRB,
Cogentrix of Richmond,
(LOC: Banque Paribas),
4.10%, VRDN.................... 5,000,000
1,000,000 Rockingham County IDA-PCRB, Merck
& Co., Inc., Ser. 1983A, (Gtd.
by Merck & Co.),
3.60%, VRDN.................... 1,000,000
8,900,000
WASHINGTON-- 1.5%
2,200,000 Klickitat County Pub. Corp. RB,
Mercer Ranches, Ser. 1996,
(LOC: U.S. Bank of Washington,
N.A.),
3.90%, VRDN.................... 2,200,000
2,000,000 Pierce County Econ. Dev. Corp.,
McFarland Cascade, (LOC: U.S.
Bank of Washington, N.A.),
3.90%, VRDN.................... 2,000,000
Pilchuck Dev. Pub. Corp. IDRB,
(LOC: U.S. Bank of Washington,
N.A.):
1,318,000 Canyon Park Assn., -Lot 12,
3.80%, VRDN.................... 1,318,000
966,000 Hillside Assn., -Lot 6,
3.80%, VRDN.................... 966,000
1,218,000 Omni Assn., -Lot 7,
3.80%, VRDN.................... 1,218,000
7,950,000 Romac Industries, Inc.,
Ser. 1995,
(LOC: Union Bank of California,
N.A.),
3.60%, VRDN.................... 7,950,000
15,652,000
OTHER-- 5.8%
14,900,000 Capital Investors Tax Exempt
Fund,
Ltd. Partnership, Series
1996-Z, (LOC: Swiss Bank
Corp.),
3.60%, VRDN.................... 14,900,000
4,500,000 Puttable Floating Option Tax
Exempt Receipts, PPT-6,
(LOC: Credit Suisse),
3.95%, VRDN.................... 4,500,000
</TABLE>
(CONTINUED)
27
<PAGE>
EVERGREEN
(Evergreen Graphic TAX EXEMPT MONEY MARKET FUND
Goes Here)
SCHEDULE OF INVESTMENTS
August 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
SHORT-TERM INVESTMENTS-- CONTINUED
OTHER-- CONTINUED
$19,790,000 Puttable Floating Option Tax
Exempt Receipts, PPT-7,
(LOC: Credit Suisse),
3.95%, VRDN.................... $ 19,790,000
2,395,000 Puttable Floating Option Tax
Exempt Receipts, PPT-4,
(Ins. by AMBAC),
3.90%, VRDN.................... 2,395,000
9,210,000 Puttable Floating Option Tax
Exempt Receipts, Koch Financial
Corp.,
(LIQ: Credit Suisse & Ins. by
AMBAC),
3.50%, VRDN.................... 9,210,000
5,035,000 Puttable Floating Option Tax
Exempt Receipts, PPT-5, (LIQ:
Credit Suisse & Ins. by FHA),
3.50%, VRDN.................... 5,035,000
4,554,855 Tax Exempt Private Municipal
Trust, Koch Financial Corp.,
Series 1997-1 Tax-Exempt Lease
Certificate Traunche A,
4.10%, 5/6/98*................. 4,554,855
60,384,855
TOTAL INVESTMENTS--
(COST $1,040,038,783).. 99.6% 1,040,038,783
OTHER ASSETS AND
LIABILITIES-- NET...... 0.4 4,387,431
NET ASSETS--............. 100.0% $1,044,426,214
</TABLE>
SUMMARY OF ABBREVIATIONS:
AMBAC American Municipal Bond Assurance Corp.
ARB Adjustable Rate Bonds
BAN Bond Anticipation Note
COLL Collateral
COP Certificates of Participation
EDA Economic Development Authority
EDRB Economic Development Revenue Bond
FGIC Financial Guaranty Insurance Co.
FHA Federal Housing Authority
FHLB Federal Home Loan Bank
FNMA Federal National Mortgage Association
FSA Financial Security Assurance Inc.
GIC Guaranteed Investment Contract
GNMA Government National Mortgage Association
GO General Obligations
HFA Housing Finance Authority
IDA Industrial Development Authority
IDB Industrial Development Board
IDR Industrial Development Revenue
IDRB Industrial Development Revenue Bond
ISD Independent School District
LIQ Liquidity Provider
LOC Letter of Credit
MBIA Municipal Bond Investors Assurance Corp.
MERLOTS Municipal Exempt Receipts Liquidity Option
Tenders
MHRB Multifamily Housing Revenue Bond
MSTR Municipal Securities Trust Receipt
PCRB Pollution Control Revenue Bond
RB Revenue Bonds
RRB Refunding Revenue Bonds
TECP Tax Exempt Commercial Paper
TRANS Tax Revenue Anticipation Notes
VRDN Variable Rate Demand Notes
* Securities may be sold to "qualified institutional buyers" under Rule 144A or
securities offered pursuant to Section 4(2) of the Securities Act of 1933, as
amended. These securities have been determined to be liquid under guidelines
established by the Board of Trustees.
Adjustable Rate Bonds are puttable back to the issuer or other parties not
affiliated with the issuer at par on the interest reset dates. Interest rates
are determined and set by the issuer quarterly, semi-annually or annually
depending upon the terms of the security. Interest rates and reset dates
presented for these securities are those in effect at August 31, 1997.
Variable Rate Demand Notes are payable on demand on no more than seven calendar
days notice given by the Fund to the issuer or other parties not affiliated with
the issuer. Interest rates are determined and reset by the issuer daily, weekly,
or monthly depending upon the terms of the security. Interest rates presented
for these securities are those in effect at August 31, 1997.
Certain obligations held in the portfolio have credit enhancements or liquidity
features that may, under certain circumstances, provide for repayment of
principal and interest on the obligation upon demand date, interest rate reset
date or final maturity. These enhancements include: letters of credit, liquidity
guarantees, standby bond purchase agreements, tender option purchase agreements,
and third party insurance (i.e. AMBAC, FGIC and MBIA). Adjustable rate bonds and
variable rate demand notes held in the portfolio may be considered derivative
securities within the standards imposed by the Securities and Exchange
Commission under Rule 2a-7 which were designed to minimize both credit and
market risk.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
EVERGREEN
TREASURY MONEY MARKET FUND (Evergreen Graphic
Goes Here)
SCHEDULE OF INVESTMENTS
August 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
UNITED STATES TREASURY NOTES-- 31.8%
$110,000,000 6.00%, 9/2/97***.............. $ 110,000,000
185,000,000 5.75%, 9/30/97***............. 185,024,352
50,000,000 5.75%, 10/31/97............... 50,009,276
75,000,000 6.00%, 11/30/97............... 75,023,570
175,000,000 5.25%, 12/31/97***............ 174,828,048
75,000,000 6.125%, 3/31/98............... 75,140,658
50,000,000 5.875%, 4/30/98............... 49,994,621
135,000,000 6.25%, 6/30/98................ 135,548,782
110,000,000 4.75%-- 6.125%, 8/31/98....... 109,666,028
TOTAL UNITED STATES TREASURY
NOTES
(COST $965,235,335)......... 965,235,335
REPURCHASE AGREEMENTS*-- 82.0%
19,136,406 Aubrey G. Lanston,
5.55%, dated 8/29/97, due
9/2/97 (1).................. 19,136,406
90,000,000 Barclays Bank, PLC,
5.56%, dated 8/29/97,
due 9/2/97 (2).............. 90,000,000
100,000,000 Dean Witter Reynolds, Inc.,
5.53%, dated 8/29/97, due
9/2/97 (3).................. 100,000,000
140,000,000 Deutsche Bank GC,
5.57%, dated 8/29/97,
due 9/2/97 (4).............. 140,000,000
140,000,000 Donaldson, Lufkin & Jenrette
Securities Corp., 5.53%,
dated 8/29/97, due 9/2/97
(5)......................... 140,000,000
100,000,000 Dresdner Bank AG,
5.64%, dated 8/29/97,
due 9/2/97 (6).............. 100,000,000
111,237,500 Dresdner Bank AG,
5.64%, dated 8/29/97,
due 9/2/97 (7)**............ 111,237,500
40,200,000 Dresdner Bank AG, 5.7%,
dated 8/29/97, due
9/2/97 (8)**................ 40,200,000
177,843,750 Dresdner Bank AG, 5.85%, dated
8/29/97, due
9/2/97 (9)**................ 177,843,750
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
REPURCHASE AGREEMENTS*-- CONTINUED
$140,000,000 First Boston Corp., 5.53%,
dated 8/29/97, due 9/2/97
(10)........................ $ 140,000,000
140,000,000 HSBC, 5.57%, dated 8/29/97,
due 9/2/97 (11)............. 140,000,000
300,000,000 Lehman Brothers, Inc.,
5.50%, dated 8/29/97, due
9/2/97 (12)................. 300,000,000
140,000,000 Merrill Lynch, Pierce, Fenner
& Smith, 5.55%, dated
8/29/97, due 9/2/97 (13).... 140,000,000
140,000,000 Morgan Guaranty Trust Co. of
New York, 5.56%, dated
8/29/97, due 9/2/97 (14).... 140,000,000
50,000,000 NationsBank, Charlotte, NC,
5.53%, dated 8/29/97, due
9/2/97 (15)................. 50,000,000
210,000,000 Smith Barney Shearson, Inc.,
5.57%, dated 8/29/97, due
9/2/97 (16)................. 210,000,000
145,725,000 Smith Barney Shearson, Inc.,
5.75%, dated 8/29/97, due
9/2/97 (17)**............... 145,725,000
300,000,000 Union Bank Switzerland,
5.59%, dated 8/29/97, due
9/2/97 (18)................. 300,000,000
TOTAL REPURCHASE AGREEMENTS
(COST $2,484,142,656)....... 2,484,142,656
SHARES
MUTUAL FUND SHARES-- 1.6%
(COST $49,315,922)
49,315,922 Fidelity U.S. Treasury, Inc.
Portfolio................... 49,315,922
TOTAL INVESTMENTS-- (COST
$3,498,693,913)....... 115.4% 3,498,693,913
OTHER ASSETS AND
LIABILITIES-- NET... (15.4) (467,013,500)
NET ASSETS............ 100.0% $3,031,680,413
</TABLE>
(CONTINUED)
29
<PAGE>
EVERGREEN
(Evergreen Graphic TREASURY MONEY MARKET FUND
Goes Here)
SCHEDULE OF INVESTMENTS (CONTINUED)
August 31, 1997
* Collateralized by:
(1) $15,934,000 U.S. Treasury Notes, 5.625% to 8.875%, 1/15/00 to 11/30/00;
value including accrued interest-- $16,388,876, $3,120,000 U.S. Treasury
Bonds, 6.50% to 6.625%, 11/15/26 to 2/15/27; value including accrued
interest-- $3,132,341.
(2) $27,102,000 U.S. Treasury Bills, 11/13/97 to 8/20/98; value including
accrued interest-- $26,192,415, $51,225,000 U.S. Treasury Bonds, 9.25%,
2/15/16; value including accrued interest-- $65,608,213.
(3) $357,182,000 U.S. Treasury Strips, 11/15/97 to 8/15/25; value including
accrued interest-- $102,000,016.
(4) $13,821,000 U.S. Treasury Bills, 11/13/97; value including accrued
interest-- $13,671,982, $52,198,000 U.S. Treasury Notes, 6.625%, 7/31/01;
value including accrued interest-- $53,339,142, $26,899,000 U.S. Treasury
Bonds, 14.25%, 2/15/02; value including accrued interest-- $34,226,067 and
$59,973,000 GNMA, 5.50% to 9.50%, 1/1/00 to 4/15/29; value including
accrued interest-- $40,063,252.
(5) $22,982,000 U.S. Treasury Notes, 8.00% to 8.875%, 11/15/98 to 5/15/01;
value including accrued interest-- $24,047,930 and $55,561,000 U.S.
Treasury Bonds, 6.00%, 2/15/26; value including accrued
interest-- $50,678,667, $177,031,000 U.S. Treasury Strips, 11/15/97 to
8/15/21; value including accrued interest-- $68,073,977.
(6) $90,180,000 U.S. Treasury Bonds, 6.50% to 9.25%, 2/15/16 to 11/15/26; value
including accrued interest-- $102,004,192.
(7) $116,526,310 GNMA, 7.50% to 8.50%; value including accrued
interest-- $114,416,627.
(8) $2,600,000 U.S. Treasury Notes, 6.125%, 7/31/00; value including accrued
interest-- $2,618,244, $40,200,757 GNMA, 6.50% to 7.50%; value including
accrued interest-- $38,819,048.
(9) $50,000,000 U.S. Treasury Notes, 6.50%, 8/15/05; value including accrued
interest-- $50,608,142, $128,400,000 U.S. Treasury Bonds, 6.00% to 11.25%,
2/15/15 to 2/15/26; value including accrued interest-- $130,945,206 and
$2,300,000 GNMA, 8.50%; value including accrued interest-- $1,499,795.
(10) $137,932,000 U.S. Treasury Notes, 6.75% to 7.75%, 2/15/98 to 2/15/05; value
including accrued interest-- $144,179,245.
(11) $143,930,000 U.S. Treasury Bills, 10/23/97; value including accrued
interest-- $142,804,471.
(12) $486,244,112 GNMA, 5.50% to 11.25%, 5/20/99 to 8/20/27; value including
accrued interest-- $305,965,182.
(13) $110,393,000 U.S. Treasury Bonds, 7.625% to 14.00%, 2/15/07 to 11/15/11;
value including accrued interest-- $142,804,948.
(14) $135,815,000 U.S. Treasury Notes, 5.875% to 7.75%, 8/15/98 to 11/30/99;
value including accrued interest-- $137,374,570, $5,510,000 U.S. Treasury
Bills, 12/18/97; value including accrued interest-- $5,426,072.
(15) $49,625,000 U.S. Treasury Notes, 6.375%, 4/30/99; value including accrued
interest-- $49,660,151.
(16) & (17) $9,177,000 U.S. Treasury Bills, 2/19/98; value including accrued
interest-- $8,948,025, $29,338,000 U.S. Treasury Notes, 5.25% to 6.875%,
9/30/98 to 5/15/06; value including accrued interest-- $29,858,352,
$8,254,000 REMIC, 7.00% to 8.00%, 6/15/06 to 5/20/24; value including
accrued interest-- $5,965,419, $90,830,000 U.S. Treasury Strips, 8/15/03 to
11/15/18; value including accrued interest-- $37,628,410 and $409,435,458
GNMA, 5.00% to 17.00%, 11/15/97 to 8/20/27; value including accrued
interest-- $278,397,905.
(18) $377,414,341 GNMA, 6.00% to 9.50%; value including accrued
interest-- $306,004,521.
** Represents investment of cash collateral received for securities on loan.
*** Securities on loan (See Note 3).
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
30
<PAGE>
EVERGREEN
(Evergreen Graphic
STATEMENTS OF ASSETS AND LIABILITIES Goes Here)
August 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(Logo) (Logo) (Logo) (Logo)
MONEY PENNSYLVANIA TAX EXEMPT TREASURY
MARKET TAX-FREE MONEY MONEY MARKET MONEY MARKET
FUND MARKET FUND FUND FUND
<CAPTION>
<S> <C> <C> <C> <C>
ASSETS
Investments in securities.............................. $3,464,439,268 $ 67,388,340 $1,040,038,783 $1,014,551,257
Investments in repurchase agreements................... 0 0 0 2,484,142,656
Investments at market value (identified cost-
$3,464,439,268, $67,388,340, $1,040,038,783 and
$3,498,693,913, respectively)...................... 3,464,439,268 67,388,340 1,040,038,783 3,498,693,913
Cash................................................... 67,134 0 2,703,051 0
Interest receivable.................................... 13,537,719 525,390 7,232,591 28,945,172
Receivable for investments sold........................ 0 0 11,488,005 0
Receivable for Fund shares sold........................ 6,471,028 0 1,342,565 1,798,592
Prepaid expenses and other assets...................... 161,476 3,819 44,994 71,884
Total assets....................................... 3,484,676,625 67,917,549 1,062,849,989 3,529,509,561
LIABILITIES
Payable for securities on loan......................... 0 0 0 483,676,736
Payable for investments purchased...................... 0 0 15,750,000 0
Payable for Fund shares redeemed....................... 6,322,523 0 0 549,886
Dividends payable...................................... 9,949,004 85,439 1,703,837 10,996,800
Due to custodian....................................... 0 29,154 0 0
Distribution fee payable............................... 1,390,333 8,492 360,161 1,266,292
Due to related parties................................. 1,316,976 54,127 452,256 994,434
Accrued Trustees' fees and expenses.................... 45,487 5,102 25,000 132,000
Accrued professional fees.............................. 26,700 17,900 24,500 6,432
Accrued expenses and other liabilities................. 301,736 12,953 108,021 206,568
Total liabilities.................................. 19,352,759 213,167 18,423,775 497,829,148
NET ASSETS............................................... $3,465,323,866 $ 67,704,382 $1,044,426,214 $3,031,680,413
NET ASSETS REPRESENTED BY
Paid-in capital........................................ $3,465,958,299 $ 67,714,599 $1,044,687,001 $3,031,630,773
Undistributed net investment income.................... 2,555 0 0 49,640
Accumulated net realized gain (loss) on investments.... (636,988) (10,217) (260,787) 0
TOTAL NET ASSETS................................... $3,465,323,866 $ 67,704,382 $1,044,426,214 $3,031,680,413
NET ASSETS CONSIST OF
Class A................................................ $2,802,600,125 $ 35,728,195 $ 666,745,832 $2,484,759,269
Class B................................................ 22,872,405 -- -- --
Class C................................................ 5,086,778 -- -- --
Class K................................................ 105,412 -- -- --
Class Y................................................ 634,659,146 31,976,187 377,680,382 546,921,144
$3,465,323,866 $ 67,704,382 $1,044,426,214 $3,031,680,413
SHARES OUTSTANDING
Class A................................................ 2,802,742,607 35,729,874 666,866,419 2,484,732,831
Class B................................................ 22,875,453 -- -- --
Class C................................................ 5,088,082 -- -- --
Class K................................................ 105,412 -- -- --
Class Y................................................ 635,220,110 31,984,725 377,781,716 546,914,493
NET ASSET VALUE PER SHARE
Class A................................................ $ 1.00 $ 1.00 $ 1.00 $ 1.00
Class B................................................ $ 1.00 -- -- --
Class C................................................ $ 1.00 -- -- --
Class K................................................ $ 1.00 -- -- --
Class Y................................................ $ 1.00 $ 1.00 $ 1.00 $ 1.00
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>
EVERGREEN
(Evergreen Graphic
Goes Here) STATEMENTS OF OPERATIONS
Year Ended August 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(Logo) (Logo) (Logo) (Logo)
MONEY PENNSYLVANIA TAX EXEMPT TREASURY
MARKET TAX-FREE MONEY MONEY MARKET MONEY MARKET
FUND MARKET FUND FUND FUND
<CAPTION>
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest............................................... $159,154,235 $2,481,018 $ 45,162,514 $168,500,697
EXPENSES
Management fee......................................... 13,092,396 275,516 5,695,367 10,831,288
Distribution Plan expenses............................. 6,359,402 90,259 1,988,796 7,263,329
Transfer agent fees.................................... 923,159 20,100 213,468 184,287
Custodian fees......................................... 545,241 39,336 266,070 580,475
Administrative services fees........................... 0 27,793 0 1,241,466
Professional fees...................................... 32,998 15,890 37,267 28,199
Trustees' fees and expenses............................ 53,364 5,512 25,813 65,862
Other.................................................. 595,807 24,404 123,733 203,935
Fee waivers and/or expense reimbursements.............. (1,482,584) (123,088) (183,559) (132,244)
Total expenses..................................... 20,119,783 375,722 8,166,955 20,266,597
Less: Indirectly paid expenses......................... (21,867) (88) (27,673) (9,969)
Net expenses....................................... 20,097,916 375,634 8,139,282 20,256,628
NET INVESTMENT INCOME.................................. 139,056,319 2,105,384 37,023,232 148,244,069
Net realized loss on investments....................... (85,308) 0 (2,907) 0
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..... $138,971,011 $2,105,384 $ 37,020,325 $148,244,069
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
32
<PAGE>
EVERGREEN
(Evergreen Graphic
STATEMENTS OF CHANGES IN NET ASSETS Goes Here)
Year Ended August 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(Logo) (Logo) (Logo) (Logo)
MONEY PENNSYLVANIA TAX EXEMPT TREASURY
MARKET TAX-FREE MONEY MONEY MARKET MONEY MARKET
FUND MARKET FUND FUND FUND
<CAPTION>
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income.................................. $ 139,056,319 $ 2,105,384 $ 37,023,232 $ 148,244,069
Net realized loss on investments....................... (85,308) 0 (2,907) 0
Net increase in net assets resulting from
operations....................................... 138,971,011 2,105,384 37,020,325 148,244,069
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME
Class A................................................ (101,255,910) (905,311) (20,900,359) (114,457,775)
Class B................................................ (509,494) 0 0 0
Class C................................................ (17,908) 0 0 0
Class K................................................ (2,220) 0 0 0
Class Y................................................ (37,268,232) (1,203,873) (16,122,873) (33,786,294)
Total distributions to shareholders................ (139,053,764) (2,109,184) (37,023,232) (148,244,069)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold.............................. 8,940,579,510 127,715,297 2,604,375,798 6,954,597,959
Proceeds from shares issued in acquisition of Keystone
Liquid Trust......................................... 163,579,564 0 0 0
Proceeds from reinvestment of distributions............ 38,314,180 1,021,288 14,787,888 19,627,202
Payment for shares redeemed............................ (8,113,736,002) (131,543,821) (2,852,083,788) (7,310,208,436)
Net increase (decrease) in net assets resulting
from capital share transactions.................. 1,028,737,252 (2,807,236) (232,920,102) (335,983,275)
Total increase (decrease) in net assets............ 1,028,654,499 (2,811,036) (232,923,009) (335,983,275)
NET ASSETS
Beginning of year...................................... 2,436,669,367 70,515,418 1,277,349,223 3,367,663,688
END OF YEAR............................................ $3,465,323,866 $ 67,704,382 $1,044,426,214 $3,031,680,413
Undistributed net investment income...................... $ 2,555 $ 0 $ 0 $ 49,640
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
33
<PAGE>
EVERGREEN
(Evergreen Graphic
Goes Here) STATEMENTS OF CHANGES IN NET ASSETS
Prior Fiscal Periods
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
(Logo) (Logo) (Logo) (Logo)
MONEY PENNSYLVANIA TAX-FREE TAX EXEMPT TREASURY
MARKET MONEY MARKET FUND MONEY MARKET MONEY MARKET
FUND YEAR ENDED FUND FUND
YEAR ENDED SIX MONTHS ENDED FEBRUARY 29, YEAR ENDED YEAR ENDED
AUGUST 31, 1996 AUGUST 31, 1996* 1996 AUGUST 31, 1996 AUGUST 31, 1996
<CAPTION>
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income......... $ 85,949,891 $ 1,091,227 $ 2,665,986 $ 36,638,019 $ 121,967,383
Net realized gain (loss) on
investments................. (26,141) (378) (189) (6,227) 161,674
Net increase in net assets
resulting from
operations................ 85,923,750 1,090,849 2,665,797 36,631,792 122,129,057
DISTRIBUTIONS TO SHAREHOLDERS
FROM NET INVESTMENT INCOME
Class A....................... (63,327,347) (242,309) (9,466) (19,837,670) (101,441,299)
Class B....................... (382,116) 0 0 0 0
Class Y....................... (22,240,428) (848,918) (2,656,520) (16,800,349) (20,526,084)
Total distributions to
shareholders.............. (85,949,891) (1,091,227) (2,665,986) (36,638,019) (121,967,383)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold..... 6,275,701,649 61,460,030 179,632,522 2,572,408,736 6,442,829,718
Proceeds from shares issued in
acquisition of:
FFB Cash Management Fund.... 592,358,361 0 0 0 0
FFB Lexicon Cash Management
Fund...................... 95,834,929 0 0 0 0
FFB Tax-Free Money Market
Fund...................... 0 0 0 103,129,021 0
FFB U.S. Treasury Fund...... 0 0 0 0 1,070,672,333
FFB U.S. Government Fund.... 0 0 0 0 327,532,054
FFB 100% U.S. Treasury
Fund...................... 0 0 0 0 28,227,573
Proceeds from reinvestment of
distributions............... 28,242,023 621,908 1,766,790 16,202,992 17,972,077
Payment for shares redeemed... (5,531,191,681) (79,296,671) (137,207,686) (2,390,799,129) (5,974,992,600)
Net increase (decrease) in
net assets resulting from
capital share
transactions.............. 1,460,945,281 (17,214,733) 44,191,626 300,941,620 1,912,241,155
Total increase (decrease)
in net assets........... 1,460,919,140 (17,215,111) 44,191,437 300,935,393 1,912,402,829
NET ASSETS
Beginning of period........... 975,750,227 87,730,529 43,539,092 976,413,830 1,455,260,859
END OF PERIOD................. $2,436,669,367 $ 70,515,418 $ 87,730,529 $1,277,349,223 $3,367,663,688
Undistributed net investment
income........................ $ 0 $ 3,800 $ 3,800 $ 0 $ 0
</TABLE>
* The Fund changed its fiscal year end from February 29 to August 31.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
34
<PAGE>
EVERGREEN
(Evergreen Graphic
COMBINED NOTES TO FINANCIAL STATEMENTS Goes Here)
1. SIGNIFICANT ACCOUNTING POLICIES
The Evergreen Money Market Funds (the "Funds") consist of the Evergreen Money
Market Fund ("Money Market Fund"), Evergreen Pennsylvania Tax-Free Money Market
Fund ("Pennsylvania Tax-Free Money Market Fund"), Evergreen Tax Exempt Money
Market Fund ("Tax Exempt Money Market Fund") and Evergreen Treasury Money Market
Fund ("Treasury Money Market Fund"), known collectively as the "Funds". The
Funds are all registered under the Investment Company Act of 1940, as amended
(the "1940 Act"), as diversified, open-end management investment companies.
Money Market Fund is a series of Evergreen Money Market Trust, Pennsylvania
Tax-Free Money Market Fund is a series of Evergreen Tax-Free Trust, Tax Exempt
Money Market Fund is a series of Evergreen Municipal Trust and Treasury Money
Market Fund is a series of Evergreen Investment Trust.
Each Fund offers Class A and Class Y shares. In addition, the Money Market Fund
offers Class B, Class C and Class K shares. Class A shares are sold at net asset
value without a front-end sales charge. Class B and Class C shares pay a higher
ongoing distribution fee than Class A shares. Class B shares are sold subject to
a contingent deferred sales charge that is payable upon redemption and decreases
depending on how long the shares have been held. Class C shares are sold subject
to a contingent deferred sales charge payable on shares redeemed within one year
after the month of purchase. Class K shares are available for exchange by
shareholders of any Keystone Classic Fund. The contingent deferred sales charge
applicable to shares of the Keystone Classic Fund exchanged for Class K shares
will carry over to the Class K shares received in the exchange. Class Y shares
are not subject to any sales charges or distribution fees. Class Y shares are
sold only to investment advisory clients of First Union Corporation ("First
Union") and its affiliates, certain institutional investors or Class Y
shareholders of record of certain other funds managed by First Union and its
affiliates as of December 30, 1994.
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect amounts
reported herein. Actual results could differ from these estimates.
A. VALUATION OF SECURITIES
Portfolio securities are valued at amortized cost which approximates market
value. The amortized cost method involves valuing a security at cost on the date
of purchase and thereafter assuming a straight-line amortization of any discount
or premium.
B. REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements. Securities pledged as collateral
for repurchase agreements are held by the custodian on the Fund's behalf. Each
Fund monitors the adequacy of the collateral daily and will require the seller
to provide additional collateral in the event the market value of the securities
pledged falls below the carrying value of the repurchase agreement, including
accrued interest. Each Fund will only enter into repurchase agreements with
banks and other financial institutions which are deemed by the investment
adviser to be creditworthy pursuant to guidelines established by the Board of
Trustees.
C. SECURITIES LENDING
In order to generate income and to offset expenses, the Funds may lend portfolio
securities to brokers, dealers and other financial organizations. The Funds'
investment adviser will monitor the creditworthiness of such borrowers. Loans of
securities may not exceed 30% of a Fund's total assets and will be
collateralized by cash, letters of credit or United States Government securities
that are maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities, including accrued interest. While
such securities are on loan, the borrower will pay a Fund any income accruing
thereon, and the Fund may invest the collateral in portfolio securities, thereby
increasing its return. A Fund will have the right to call any such loan and
obtain the securities loaned at any time on five days' notice. Any gain or loss
in the market price of the loaned securities which occurs during the term of the
loan would affect a Fund and its investors. A Fund may pay reasonable fees in
connection with such loans.
D. SECURITY TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Interest income is recorded on the accrual basis and includes accretion
of discounts and amortization of premiums.
E. FEDERAL INCOME TAXES
The Funds have qualified and intend to continue to qualify as regulated
investment companies under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Funds will not incur any federal income tax liability since
they are expected to distribute all of their net investment company taxable
income, net tax-exempt income and net capital gains, if any, to their
shareholders. The Funds also intend to avoid any excise tax liability by making
the required distributions under the Code. Accordingly, no provision for federal
income taxes is required. To the extent that realized capital gains can be
offset by capital loss carryforwards, it is each Fund's policy not to distribute
such gains.
F. DISTRIBUTIONS
Distributions from net investment income for each Fund are declared daily and
paid monthly. Distributions from net realized capital gains, if any, are paid at
least annually. Distributions to shareholders are recorded at the close of
business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. To the extent these differences are permanent in nature,
such amounts are reclassified within the components of net assets.
35
<PAGE>
EVERGREEN
(Evergreen Graphic
Goes Here) COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
G. CLASS ALLOCATIONS
Income, expenses (other than class specific expenses) and realized and
unrealized gains and losses are prorated among the classes based on the relative
net assets of each class. Currently, class specific expenses are limited to
expenses incurred under the Distribution Plans for each class.
2. CAPITAL SHARE TRANSACTIONS
The Money Market and Tax Exempt Money Market Funds have an unlimited number of
$0.0001 par value shares of beneficial interest authorized. The Pennsylvania
Tax-Free Money Market and Treasury Money Market Funds have an unlimited number
of $.001 par value shares of beneficial interest authorized. The shares are
divided into classes which are designated Class A and Class Y shares. In
addition, the Money Market Fund offers Class B, Class C and Class K shares.
Transactions in shares of beneficial interest (valued at $1.00 per share) of the
Funds were as follows:
<TABLE>
<S> <C> <C> <C>
YEAR ENDED AUGUST 31,
MONEY MARKET FUND 1997 1996
CLASS A
Shares sold..................................................... 4,913,816,942 3,360,065,151
Shares issued in acquisition of:
FFB Cash Management Fund...................................... 0 592,362,245
Keystone Liquid Trust......................................... 151,861,145 0
Shares issued in reinvestment of distributions.................. 19,783,898 13,630,468
Shares redeemed................................................. (4,037,993,646) (2,895,924,591)
Net increase.................................................... 1,047,468,339 1,070,133,273
CLASS B
Shares sold..................................................... 22,383,686 13,107,126
Shares issued in acquisition of Keystone Liquid Trust........... 7,303,582 0
Shares issued in reinvestment of distributions.................. 442,030 307,330
Shares redeemed................................................. (17,471,935) (11,123,113)
Net increase.................................................... 12,657,363 2,291,343
</TABLE>
<TABLE>
<CAPTION>
AUGUST 1, 1997
(COMMENCEMENT OF
CLASS OPERATIONS) TO
AUGUST 31, 1997
<S> <C> <C> <C>
CLASS C
Shares sold..................................................... 1,309,779
Shares issued in acquisition of Keystone Liquid Trust........... 4,493,120
Shares issued in reinvestment of distributions.................. 16,706
Shares redeemed................................................. (731,523)
Net increase.................................................... 5,088,082
CLASS K
Shares sold..................................................... 156,690
Shares issued in reinvestment of distributions.................. 208
Shares redeemed................................................. (51,486)
Net increase.................................................... 105,412
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1997 1996
<S> <C> <C> <C>
CLASS Y
Shares sold..................................................... 4,002,912,413 2,902,529,372
Shares issued in acquisition of FFB Lexicon Cash Management
Fund.......................................................... 0 95,834,876
Shares issued in reinvestment of distributions.................. 18,071,338 14,304,225
Shares redeemed................................................. (4,057,487,412) (2,624,143,977)
Net increase (decrease)......................................... (36,503,661) 388,524,496
</TABLE>
36
<PAGE>
EVERGREEN
(Evergreen Graphic
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED) Goes Here)
<TABLE>
<CAPTION>
AUGUST 22, 1995
SIX MONTHS (COMMENCEMENT OF
YEAR ENDED ENDED CLASS OPERATIONS) TO
PENNSYLVANIA TAX-FREE MONEY MARKET FUND AUGUST 31, 1997 AUGUST 31, 1996 FEBRUARY 29, 1996
<S> <C> <C> <C>
CLASS A
Shares sold..................................................... 84,061,251 40,205,338 4,636,845
Shares issued in reinvestment of distributions.................. 196,984 35,417 3,934
Shares redeemed................................................. (70,724,545) (22,377,383) (307,967)
Net increase.................................................... 13,533,690 17,863,372 4,332,812
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED
AUGUST 31, 1997 AUGUST 31, 1996 FEBRUARY 29, 1996
<S> <C> <C> <C>
CLASS Y
Shares sold..................................................... 43,654,046 21,254,692 174,995,677
Shares issued in reinvestment of distributions.................. 824,304 586,491 1,762,856
Shares redeemed................................................. (60,819,276) (56,919,288) (136,899,719)
Net increase (decrease)......................................... (16,340,926) (35,078,105) 39,858,814
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
TAX EXEMPT MONEY MARKET FUND 1997 1996
<S> <C> <C> <C>
CLASS A
Shares sold..................................................... 1,491,746,339 1,329,098,871
Shares issued in acquisition of FFB Tax-Free Money Market
Fund.......................................................... 0 103,102,728
Shares issued in reinvestment of distributions.................. 3,081,550 3,435,421
Shares redeemed................................................. (1,488,596,189) (1,330,067,450)
Net increase.................................................... 6,231,700 105,569,570
CLASS Y
Shares sold..................................................... 1,112,629,458 1,243,309,865
Shares issued in reinvestment of distributions.................. 11,706,339 12,767,571
Shares redeemed................................................. (1,363,487,668) (1,060,731,679)
Net increase (decrease)......................................... (239,151,871) 195,345,757
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
TREASURY MONEY MARKET FUND 1997 1996
<S> <C> <C> <C>
CLASS A
Shares sold..................................................... 4,767,671,119 4,828,856,886
Shares issued in acquisition of:
FFB U.S. Treasury Fund........................................ 0 1,070,688,429
FFB U.S. Government Fund...................................... 0 327,554,031
FFB 100% U.S. Treasury Fund................................... 0 28,227,628
Shares issued in reinvestment of distributions.................. 16,715,941 16,836,594
Shares redeemed................................................. (4,907,328,690) (4,842,442,130)
Net increase (decrease)......................................... (122,941,630) 1,429,721,438
CLASS Y
Shares sold..................................................... 2,186,926,840 1,613,972,832
Shares issued in reinvestment of distributions.................. 2,911,261 1,135,483
Shares redeemed................................................. (2,402,879,746) (1,132,550,470)
Net increase (decrease)......................................... (213,041,645) 482,557,845
</TABLE>
3. SECURITIES TRANSACTIONS
The Treasury Money Market Fund loaned securities during the year ended August
31, 1997 to certain brokers who paid the Fund a negotiated lenders' fee. These
fees are included in interest income. The Fund received cash as collateral
against the loaned securities in an amount at least equal to 100% of the market
value of the loaned securities at the inception of each loan. The Fund monitors
the adequacy of the collateral daily and will require the broker to provide
additional collateral in the event the value of the collateral falls below 100%
of the market value of the securities on loan. At August 31, 1997, the value of
securities on loan and the value of collateral amounted to $469,852,400 and
$475,006,250, respectively. During the year ended August 31, 1997, the Fund
earned $499,529 in income from securities lending transactions.
37
<PAGE>
EVERGREEN
(Evergreen Graphic
Goes Here) COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
On August 31, 1997, the cost of investments for federal income tax purposes of
each Fund was the same as for financial reporting purposes.
As of August 31, 1997, the Funds had capital loss carryovers for federal income
tax purposes as follows:
<TABLE>
<CAPTION>
EXPIRATION
2001 2002 2003 2004 2005
<S> <C> <C> <C> <C> <C>
Money Market Fund............................................... -- -- $517,000 -- $33,000
Pennsylvania Tax-Free Money Market Fund......................... -- $4,000 6,000 -- --
Tax Exempt Money Market Fund.................................... $177,000 -- 16,000 $65,000 --
</TABLE>
4. DISTRIBUTION PLANS
Evergreen Keystone Distributor, Inc. ("EKD"), a wholly-owned subsidiary of The
BISYS Group Inc. ("BISYS"), serves as the principal underwriter to the Funds.
The Funds have adopted Distribution Plans (the "Plans") for their Class A
shares, Class B shares, Class C shares and Class K shares pursuant to Rule 12b-1
under the 1940 Act. The Plans permit each Fund to reimburse its principal
underwriter for costs related to selling shares of the Fund and for various
other services. These costs, which consist primarily of commissions and services
fees to broker-dealers who sell shares of each Fund, are paid by the Fund and
classified as "Distribution Plan expenses". Distribution Plan expenses are
calculated daily and paid monthly.
Under the terms of the Plans, the Funds may incur distribution-related and
shareholder servicing expenses which may not exceed 0.75% of average daily net
assets for Class A Shares of Money Market and Tax Exempt Money Market Funds and
0.35% for Class A Shares of the Pennsylvania Tax-Exempt Money Market and
Treasury Money Market Funds. The payments for Class A Shares of the Funds are
voluntarily limited to 0.30% of average daily net assets.
The Money Market Fund may incur distribution-related and shareholder servicing
expenses which may not exceed an annual fee of 1.00% of average daily net assets
of its Class B and Class C shares and up to 0.30% of its average daily net
assets of its Class K shares.
During the year ended August 31, 1997, amounts paid to EKD pursuant to each
Fund's Class A, Class B, Class C and Class K Distribution Plans were as follows:
<TABLE>
<CAPTION>
AMOUNTS PAID AMOUNTS WAIVED
CLASS A CLASS B CLASS C CLASS K CLASS A
<S> <C> <C> <C> <C> <C>
Money Market Fund................................... $6,232,581 $122,419 $4,266 $ 136 --
Pennsylvania Tax-Free Money Market Fund............. 90,259 -- -- -- $ 61,039
Tax Exempt Money Market Fund........................ 1,988,796 -- -- -- --
Treasury Money Market Fund.......................... 7,263,329 -- -- -- --
</TABLE>
EKD has entered into a Shareholder Services Agreement with First Union Brokerage
Services ("FUBS"), an affiliate of First Union, whereby EKD will compensate FUBS
for certain services provided to shareholders and/or maintenance of shareholder
accounts relating to Money Market Fund's Class B shares.
EKD intends, but is not obligated, to continue to pay distribution costs that
exceed the current annual payments from the Money Market Fund. EKD intends to
seek full payment of such distribution costs from the Money Market Fund at such
time in the future as, and to the extent that, payment thereof by the Class B,
Class C or Class K shares would be within permitted limits.
For the Money Market Fund's Class B, Class C and Class K shares, contingent
deferred sales charges paid by redeeming shareholders are paid to EKD.
5. INVESTMENT ADVISORY AGREEMENT AND OTHER AFFILIATED TRANSACTIONS
Evergreen Asset Management Corp. ("EAM"), a wholly-owned subsidiary of First
Union, is the investment adviser for the Money Market and Tax Exempt Money
Market Funds. In return for providing investment management and administrative
services to the Funds, the Funds pay EAM a management fee that is calculated
daily and paid monthly. The management fee is computed by applying percentage
rates starting at 0.50% and declining to 0.45% per annum as net assets increase,
to the average daily net asset value of each Fund.
The Capital Management Group ("CMG") of First Union National Bank of North
Carolina ("FUNB"), a subsidiary of First Union, serves as the investment adviser
to the Pennsylvania Tax-Free Money Market and Treasury Money Market Funds. In
return for providing investment management and administrative services to the
Funds, the Funds pay CMG a management fee that is calculated daily and paid
monthly. For the Pennsylvania Tax-Free Money Market Fund, the management fee is
calculated by applying percentage rates starting at 0.40% and declining to 0.28%
per annum as net assets increase, to the average daily net asset value of the
Pennsylvania Tax-Free Money Market Fund. CMG is entitled to an annual fee of
0.35% of the average daily net asset value of the Treasury Money Market Fund.
38
<PAGE>
EVERGREEN
(Evergreen Graphic
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED) Goes Here)
Evergreen Keystone Investment Services, Inc. ("EKIS"), a subsidiary of First
Union, serves as the administrator for each Fund. Prior to March 11, 1997, EAM
was the administrator. Furman Selz LLC ("Furman Selz") was the sub-administrator
through December 31, 1996. Effective January 1, 1997, BISYS acquired Furman
Selz' mutual fund unit and accordingly BISYS Fund Services became
sub-administrator.
The administrator and sub-administrator for the Pennsylvania Tax-Free Money
Market and Treasury Money Market Funds are entitled to an annual fee based on
the average daily net assets of the funds administered by EKIS for which First
Union or its investment advisory subsidiaries are also the investment advisers.
The administration fee is calculated by applying percentage rates, which start
at 0.05% and decline to 0.01% per annum as net assets increase, to the average
daily net asset value of the Pennsylvania Tax-Free Money Market and Treasury
Money Market Funds. The sub-administration fee is calculated by applying
percentage rates, which start at 0.01% and decline to .004% per annum as net
assets increase, to the average daily net asset value of the Pennsylvania
Tax-Free Money Market and Treasury Money Market Funds.
During the year ended August 31, 1997, the Pennsylvania Tax-Free Money Market
and Treasury Money Market Funds paid or accrued to EKIS $23,109 and $1,030,140,
respectively, for certain administrative services.
For the Money Market and Tax Exempt Money Market Funds the administration and
sub-administration fees are paid by EAM and are not fund expenses.
Lieber & Company, an affiliate of First Union, is the investment sub-adviser to
the Money Market and Tax Exempt Money Market Funds. Lieber & Company is
reimbursed by EAM, at no additional expense to the Money Market and Tax Exempt
Money Market Funds, for its cost of providing sub-investment advisory services.
During the year ended August 31, 1997, the Funds' fees were waived as follows:
<TABLE>
<CAPTION>
MANAGEMENT
FEE WAIVER
<S> <C>
Money Market Fund........................................ $1,482,584
Pennsylvania Tax-Free Money Market Fund.................. 62,049
Tax Exempt Money Market Fund............................. 183,559
Treasury Money Market Fund............................... 132,244
</TABLE>
The investment manager can modify or discontinue these voluntary waivers at any
time.
Effective May 5, 1997, Evergreen Keystone Service Company ("EKSC"), a
wholly-owned subsidiary of FUNB, provides transfer and dividend disbursing agent
services for the Funds. These services were formerly provided by State Street
Bank and Trust Company ("State Street").
As of August 31, 1997, the Funds' accrued or paid to EKSC the following amounts
for these services:
<TABLE>
<S> <C>
Money Market Fund............................................ $482,639
Pennsylvania Tax-Free Money Market Fund...................... 3,203
Tax Exempt Money Market Fund................................. 99,662
Treasury Money Market Fund................................... 71,754
</TABLE>
For certain accounts of the Money Market and the Treasury Money Market Funds,
First Union had been sub-contracted by State Street to maintain shareholder
sub-account records, take fund purchase and redemption orders and answer
inquiries. For each account of the Funds, First Union earned a fee which
aggregated as follows for the year ended August 31, 1997:
<TABLE>
<S> <C>
Money Market Fund........................................ $ 32,890
Treasury Money Market Fund............................... 93,455
</TABLE>
Officers of the Funds and affiliated Trustees receive no compensation directly
from the Funds. As sub-administrator, BYSIS compensates the officers of the
Funds.
6. EXPENSE OFFSET ARRANGEMENT
The Funds have entered into an expense offset arrangement with their custodian.
The assets deposited with the custodian under this expense offset arrangement
could have been invested in income-producing assets.
39
<PAGE>
EVERGREEN
(Evergreen Graphic
Goes Here) COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. DEFERRED TRUSTEES' FEES
Each Independent Trustee of the Funds may defer any or all compensation related
to performance of their duties as a Trustee. Each Trustee's deferred balance is
allocated to deferral accounts which are included in the accrued expenses for
each Fund. The investment performance of the deferral accounts is based on the
investment performance of certain Evergreen Keystone Funds. Any gains earned or
losses incurred in the deferral accounts are reported in the Fund's Trustees'
fees and expenses. Trustees will be paid either in one lump sum or in quarterly
installments for up to ten years at their election, not earlier than either the
year in which the Trustee ceases to be a member of the Board of Trustees or
January 1, 2000. As of August 31, 1997, the value of the Trustees' deferral
accounts was as follows:
<TABLE>
<S> <C>
Money Market Fund........................................ $ 45,487
Pennsylvania Tax-Free Money Market Fund.................. 5,102
Tax Exempt Money Market Fund............................. 18,639
Treasury Money Market Fund............................... 111,635
</TABLE>
8. ACQUISITION INFORMATION
Effective August 1, 1997, the Money Market Fund acquired substantially all the
assets and assumed the liabilities of Keystone Liquid Trust in exchange for
Class A, Class B and Class C shares of the Money Market Fund. The acquisition
was accomplished by a tax-free exchange of the respective shares of the Money
Market Fund for the net assets of Keystone Liquid Trust. The net assets
acquired, valued at $1 per share, amounted to $163,579,564. The aggregate net
assets of the Money Market Fund immediately after the acquisition was
$3,202,817,920.
Effective January 1, 1996, First Union merged with First Fidelity
Bancorporation. Effective on the close of business January 19, 1996, the Funds
noted below acquired substantially all of the net assets of the following
management investment companies, previously advised by a subsidiary of First
Fidelity Bancorporation, through non-taxable exchanges. The net assets acquired,
valued at $1 per share, and class of shares exchanged are as follows:
<TABLE>
<CAPTION>
CLASS OF
ACQUIRED FUND ACQUIRING FUND SHARES EXCHANGED NET ASSETS
<S> <C> <C> <C>
FFB Cash Management Fund Money Market Fund Class A $ 592,358,361
FFB Lexicon Cash Management Fund Money Market Fund Class Y 95,834,929
FFB Tax-Free Money Market Fund Tax Exempt Money Class A 103,129,021
Market Fund
FFB U.S. Treasury Fund Treasury Money Class A 1,070,672,333
Market Fund
FFB U.S. Government Fund Treasury Money Class A 327,532,054
Market Fund
FFB 100% U.S. Treasury Fund Treasury Money Class A 28,227,573
Market Fund
</TABLE>
The aggregate net assets of the Money Market, Tax Exempt Money Market and
Treasury Money Market Funds immediately after the acquisitions were
$1,865,328,722, $1,141,961,188 and $3,053,739,559, respectively.
9. FINANCING AGREEMENT
On October 31, 1996, a financing agreement between all of the Evergreen Funds
and State Street, Societe Generale and ABN Amro Bank N.V. (collectively, the
"Banks") became effective. Under this agreement, the Banks provide an unsecured
credit facility in the aggregate amount of $225 million ($112.5 million
committed and $112.5 million uncommitted) allocated evenly between the Banks.
Borrowings under this facility bear interest at 0.75% per annum above the
Federal Funds rate. A commitment fee of 0.10% per annum will be incurred on the
unused portion of the committed facility which will be allocated to all
participating funds. State Street acts as agent for the Banks, and as agent is
entitled to a fee of $15,000 which is allocated to all of the Evergreen Funds.
During the year ended August 31, 1997, the Tax Exempt Money Market Fund had
borrowings outstanding for 3 days under the line of credit and incurred $28,513
in interest charges related to these borrowings. The Tax Exempt Money Market
Fund's average amount of debt outstanding during the year ended August 31, 1997
aggregated $47,400,000 at a weighted average interest rate of 7.218%. The
maximum amount outstanding under the line of credit during the year ended August
31, 1997 was $67,212,367 (including accrued interest). The Funds had no
outstanding borrowings under this agreement at August 31, 1997.
10. CONCENTRATION OF CREDIT RISK
The Pennsylvania Tax-Free Money Market Fund invests a substantial portion of its
assets in issuers located in a single state, therefore, it may be more affected
by economic and political developments in that state or region than would be a
comparable general tax-exempt money market fund.
40
<PAGE>
EVERGREEN
(Evergreen Graphic
REPORT OF INDEPENDENT ACCOUNTANTS Goes Here)
TO THE TRUSTEES AND SHAREHOLDERS OF
EVERGREEN MONEY MARKET FUND AND
EVERGREEN TAX EXEMPT MONEY MARKET FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Evergreen Money Market Fund,
(the "Fund"), a series of the Evergreen Money Market Trust, at August 31, 1997,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the periods indicated and the financial position of the
Evergreen Tax Exempt Money Market Fund (the "Fund"), one of the Evergreen
Municipal Trust Portfolios, at August 31, 1997, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Funds' management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at August
31, 1997 by correspondence with the custodian and the application of alternative
auditing procedures where securities purchased were not received, provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
October 14, 1997
41
<PAGE>
EVERGREEN
(Evergreen Graphic
Goes Here) INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Evergreen Tax-Free Trust
Evergreen Investment Trust
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments of the Evergreen Money Market Funds listed below as
of August 31, 1997, and the related statements of operations, statements of
changes in net assets, and financial highlights for each of the years or periods
listed below:
EVERGREEN PENNSYLVANIA TAX-FREE MONEY MARKET FUND (ONE OF THE PORTFOLIOS
CONSTITUTING EVERGREEN TAX-FREE TRUST)-- statement of operations for the
year ended August 31, 1997, statements of changes in nets assets for the
year ended August 31, 1997, the six-months ended August 31, 1996 and the
year ended February 29, 1996, and financial highlights for the periods
presented on page 9.
EVERGREEN TREASURY MONEY MARKET FUND (ONE OF THE PORTFOLIOS CONSTITUTING
EVERGREEN INVESTMENT TRUST)-- statement of operations for the year ended
August 31, 1997, statements of changes in net assets for each of the years
in the two-year period then ended, and the financial highlights for the
periods presented on page 11.
These financial statements and financial highlights are the responsibility of
the Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1997 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Evergreen Pennsylvania Tax-Free Money Market Fund and Evergreen Treasury Money
Market Fund as of August 31, 1997, the results of their operations for the year
then ended, and the changes in their net assets and financial highlights for
each of the years or periods specified in the first paragraph above in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
October 10, 1997
42
<PAGE>
EVERGREEN
(Evergreen Graphic
Goes Here)
FEDERAL INCOME TAX STATUS OF DIVIDENDS (UNAUDITED)
100% of the dividends distributed by the Pennsylvania Tax-Exempt Money Market
Fund and the Tax-Exempt Money Market Fund for the year ended August 31, 1997 are
exempt from federal income tax, other than alternative minimum tax.
43
<PAGE>
This brochure must be preceded or accompanied by a prospectus of an Evergreen
fund contained herein. The prospectus contains more complete information,
including fees and expenses, and should be read carefully before investing
or sending money.
NOT May lose value
FDIC
INSURED No bank guarantee
Evergreen Funds Distributor, Inc.
62545 540710 Rev. 01
10/97
<PAGE>
EVERGREEN FUNDS
EVERGREEN INVESTMENT SERVICES, INC.
200 Berkeley Street
Boston, MA 02116-5034
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, NW
Washington, D.C.
Attn: File Room
Re: The Evergreen Tax Free Trust
Evergreen Pennsylvania Tax Free Money Market Fund
CCC # jwt7mcw$
CIK # 0000784975
File No. 811-4510
The Evergreen Municipal Trust
Evergreen Tax Exempt Money Market Fund
CCC # 4#95fcsi
CIK # 0000836375
File No. 811-5579
The Evergreen Investment Trust
Evergreen Treasury Money Market Fund
CCC # 4apyfsr*
CIK # 0000757440
File No. 811-4154
Commissioners:
Please be advised that the 8/31/97 Annual Report for the above referenced
Trust(s) were submitted to your office on October 31, 1997, via electronic
transmission (EDGAR).
Any questions or comments about this document should be directed to the
undersigned at (617) 210-3258.
Very Truly Yours,
/s/ Laura Yong
Laura Yong
Assistant Vice President
<PAGE>
EVERGREEN MONEY MARKET TRUST
PART C
OTHER INFORMATION
Item 15. Indemnification.
The response to this item is incorporated by reference to "Liability
and Indemnification of Trustees" under the caption "Comparative Information on
Shareholders' Rights" in Part A of this Registration Statement.
Item 16. Exhibits:
1(a). Declaration of Trust . Incorporated by reference to Evergreen Money Market
Trust's Registration Statement on Form N-1A filed on December 12, 1997 -
Registration No. 333-42181 ("Form N- 1A Registration Statement").
2. Bylaws. Incorporated by reference to the Form N-1A Registration Statement.
3. Not applicable.
4. Agreement and Plan of Reorganization. Exhibit A to Prospectus contained in
Part A of this Registration Statement.
5. Declaration of Trust of Evergreen Money Market Trust Articles II., III.6(c),
IV.(3), IV.(8), V., VI., VII., and VIII and By-Laws Articles II., III. and VIII.
6(a). Form of Investment Advisory Agreement between Evergreen
Asset Management Corp. and Evergreen Money Market Trust.
Incorporated by reference to the Form N-1A
Registration Statement.
6(b). Form of Interim Investment Advisory Agreement. Exhibit
B to Prospectus contained in Part A of this Registration
Statement.
7. Distribution Agreement between Evergreen Distributor,
Inc. and Evergreen Money Market Trust.
Incorporated by reference to the Form N-1A Registration
Statement.
<PAGE>
8. Deferred Compensation Plan. Incorporated by reference to the
Form N-1A Registration Statement.
9. Custody Agreement between State Street Bank and Trust Company and Evergreen
Money Market Trust. Incorporated by reference to the Form N-1A Registration
Statement.
10. Not applicable.
11. Opinion and consent of Sullivan & Worcester LLP. Filed herewith.
12. Tax opinion and consent of Sullivan & Worcester LLP. Filed herewith.
13. Not applicable.
14(a). Consent of Price Waterhouse LLP. Filed herewith.
14(b). Consent of Deloitte & Touche LLP. Filed herewith.
15. Not applicable.
16. Powers of Attorney. Previously filed.
17. Form of Proxy Card. Filed herewith.
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus that is
a part of this Registration Statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933,
the reoffering prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be
<PAGE>
used until the amendment is effective, and that, in determining any liability
under the Securities Act of 1933, each post-effective amendment shall be deemed
to be a new Registration Statement for the securities offered therein, and the
offering of the securities at that time shall be deemed to be the initial bona
fide offering of them.
(3) The undersigned Registrant agrees to file, by post-effective
amendment, an opinion of counsel or copy of an Internal Revenue Service ruling
supporting the tax consequences of the proposed Reorganization within a
reasonable time after receipt of such opinion or ruling.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Pre- Effective
Amendment No. 2 to the Registration Statement has been signed on behalf of the
Registrant, in the City of Columbus and State of Ohio, on the 14th day of
January, 1998.
EVERGREEN MONEY MARKET
TRUST
By: /s/ William J. Tomko
-----------------------
Name: William J. Tomko
Title: President
As required by the Securities Act of 1933, the following persons have
signed this Pre-Effective Amendment No. 2 to the Registration Statement in the
capacities indicated on the 14th day of January, 1998.
Signatures Title
- ---------- -----
/s/William J. Tomko President and
- ------------------- Treasurer
William J. Tomko
/s/Laurence B. Ashkin* Trustee
- ---------------------
Laurence B. Ashkin
/s/Charles A. Austin III* Trustee
- -------------------------
Charles A. Austin III
/s/K. Dun Gifford* Trustee
- -----------------
K. Dun Gifford
/s/James S. Howell* Trustee
- ------------------
James S. Howell
/s/Leroy Keith, Jr.* Trustee
<PAGE>
- -------------------
Leroy Keith, Jr.
/s/Gerald M. McDonnell* Trustee
- ----------------------
Gerald M. McDonnell
/s/Thomas L. McVerry* Trustee
- --------------------
Thomas L. McVerry
/s/William Walt Pettit* Trustee
- ---------------------
William Walt Pettit
/s/David M. Richardson* Trustee
- ----------------------
David M. Richardson
/s/Russell A. Salton III* Trustee
- -------------------------
Russell A. Salton III
/s/Michael S. Scofield* Trustee
- ----------------------
Michael S. Scofield
/s/Richard J. Shima* Trustee
- -------------------
Richard J. Shima
* By: /s/Martin J. Wolin
------------------
Martin J. Wolin
Attorney-in-Fact
Martin J. Wolin, by signing his name hereto, does hereby sign this
document on behalf of each of the above-named individuals pursuant to powers of
attorney duly executed by such persons and included as Exhibit 16 to this
Registration Statement.
<PAGE>
INDEX TO EXHIBITS
N-14
EXHIBIT NO.
11 Opinion and Consent of Sullivan & Worcester LLP
12 Tax Opinion and Consent of Sullivan & Worcester LLP
14(a) Consent of Price Waterhouse LLP
14(b) Consent of Deloitte & Touche LLP
17 Form of Proxy
- --------------------
<PAGE>
SULLIVAN & WORCESTER LLP
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: 202-775-8190
FACSIMILE: 202-293-2275
767 THIRD AVENUE ONE POST OFFICE SQUARE
NEW YORK, NEW YORK 10017 BOSTON, MASSACHUSETTS 02109
TELEPHONE: 212-486-8200 TELEPHONE: 617-338-2800
FACSIMILE: 212-758-2151 FACSIMILE: 617-338-2880
January 14, 1998
Evergreen Money Market Trust
200 Berkeley Street
Boston, Massachusetts 02116
Ladies and Gentlemen:
We have been requested by the Evergreen Money Market Trust, a Delaware
business trust with transferable shares (the "Trust") established under an
Agreement and Declaration of Trust dated September 17, 1997, as amended (the
"Declaration"), for our opinion with respect to certain matters relating to
Evergreen Municipal Money Market Fund (formerly Evergreen Tax Exempt Money
Market Fund) (the "Acquiring Fund"), a series of the Trust. We understand that
the Trust is about to file Pre-Effective Amendment No. 2 to its Registration
Statement on Form N-14 (Registration No. 333-41271) for the purpose of
registering shares of the Trust under the Securities Act of 1933, as amended
(the "1933 Act"), in connection with the proposed acquisition by the Acquiring
Fund of all of the assets of The Tax Free Money Market Fund (the "Acquired
Fund"), a series of a Massachusetts business trust with transferable shares, in
exchange solely for shares of the Acquiring Fund and the assumption by the
Acquiring Fund of certain identified liabilities of the Acquired Fund pursuant
to an Agreement and Plan of Reorganization, the form of which is included in the
Form N-14 Registration Statement (the "Plan").
We have, as counsel, participated in various business and other
proceedings relating to the Trust. We have examined copies, either certified or
otherwise proved to be genuine to our satisfaction, of the Trust's Declaration
and By-Laws, and other documents relating to its organization, operation, and
proposed operation, including the proposed Plan and we have made such other
investigations as, in our judgment, are necessary or appropriate to enable us to
render the opinion expressed below.
We are admitted to the Bars of The Commonwealth of Massachusetts and the
District of Columbia and generally do not
<PAGE>
purport to be familiar with the laws of the State of Delaware. To the extent
that the conclusions based on the laws of the State of Delaware are involved in
the opinion set forth herein below, we have relied, in rendering such opinions,
upon our examination of Chapter 38 of Title 12 of the Delaware Code Annotated,
as amended, entitled "Treatment of Delaware Business Trusts" (the "Delaware
business trust law") and on our knowlege of interpretation of analogous common
law of The Commonwealth of Massachusetts.
Based upon the foregoing, and assuming the approval by shareholders of
the Acquired Fund of certain matters scheduled for their consideration at a
meeting presently anticipated to be held on February 20, 1998, it is our opinion
that the shares of the Acquiring Fund currently being registered, when issued in
accordance with the Plan and the Trust's Declaration and By-Laws, will be
legally issued, fully paid and non-assessable by the Trust, subject to
compliance with the 1933 Act, the Investment Company Act of 1940, as amended and
applicable state laws regulating the offer and sale of securities.
We hereby consent to the filing of this opinion with and as a part of
the Registration Statement on Form N-14 and to the reference to our firm under
the caption "Legal Matters" in the Prospectus/Proxy Statement filed as part of
the Registration Statement. In giving such consent, we do not thereby admit that
we come within the category of persons whose consent is required under Section 7
of the 1933 Act or the rules and regulations promulgated thereunder.
Very truly yours,
/s/SULLIVAN & WORCESTER LLP
---------------------------
SULLIVAN & WORCESTER LLP
<PAGE>
SULLIVAN & WORCESTER LLP
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: 202-775-8190
FACSIMILE: 202-293-2275
767 THIRD AVENUE ONE POST OFFICE SQUARE
NEW YORK, NEW YORK 10017 BOSTON, MASSACHUSETTS 02109
TELEPHONE: 212-486-8200 TELEPHONE: 617-338-2800
FACSIMILE: 212-758-2151 FACSIMILE: 617-338-2880
January 14, 1998
The Tax-Free Money Market Fund
Evergreen Tax Exempt Money Market Fund
200 Berkeley Street
Boston, Massachusetts 02116
Re: Acquisition of Assets of The Tax-Free Money Market
Fund by Evergreen Tax Exempt Money Market Fund
Ladies and Gentlemen:
You have asked for our opinion as to certain Federal income tax
consequences of the transactions described below:
Parties to the Transaction. The Tax-Free Money Market Fund ("Target Fund")
is a series of The Virtus Funds, a Massachusetts business trust.
Evergreen Tax Exempt Money Market Fund ("Acquiring Fund") is a series of
Evergreen Money Market Trust, a Delaware business trust.
Description of Proposed Transaction. Acquiring Fund will issue its
shares to Target Fund and assume certain stated liabilities of Target Fund, in
exchange for all of the assets of Target Fund. Target Fund will then immediately
dissolve and distribute all of the Acquiring Fund shares which it holds to its
shareholders pro rata in proportion to their shareholdings in Target Fund, in
complete redemption of all outstanding shares of Target Fund.
Scope of Review and Assumptions. In rendering our opinion, we have
reviewed and relied upon the form of Agreement and Plan of Reorganization (the
"Reorganization Agreement") between Acquiring Fund and Target Fund dated as of
November 26, 1997 which is enclosed in a draft preliminary prospectus/proxy
statement to be dated January 14, 1998 which describes the proposed transaction,
and on the information provided in such prospectus/proxy statement. We have
relied, without independent verification, upon the factual statements made
therein, and assume that there will be no change in material facts disclosed
therein between the date of this letter and the date of the
<PAGE>
closing of the transaction. We further assume that the transaction will be
carried out in accordance with the Reorganization Agreement.
Representations. Written representations, copies of which are attached
hereto, have been made to us by the appropriate officers of Target Fund and of
Acquiring Fund, and we have without independent verification relied upon such
representations in rendering our opinions.
<PAGE>
Opinions
Based on and subject to the foregoing, and our examination of the legal
authority we have deemed to be relevant, we have the following opinions:
1. The acquisition by Acquiring Fund of all of the assets of Target
Fund solely in exchange for voting shares of Acquiring Fund and assumption of
certain specified liabilities of Target Fund followed by the distribution by
Target Fund of said Acquiring Fund shares to the shareholders of Target Fund in
exchange for their Target Fund shares will constitute a reorganization within
the meaning of ss. 368(a)(1)(C) of the Code, and Acquiring Fund and Target Fund
will each be "a party to a reorganization" within the meaning of ss. 368(b) of
the Code.
2. No gain or loss will be recognized to Target Fund upon the transfer
of all of its assets to Acquiring Fund solely in exchange for Acquiring Fund
voting shares and assumption by Acquiring Fund of certain specified liabilities
of Target Fund, or upon the distribution of such Acquiring Fund voting shares to
the shareholders of Target Fund in exchange for all of their Target Fund shares.
3. No gain or loss will be recognized by Acquiring Fund upon the
receipt of the assets of Target Fund solely in exchange for Acquiring Fund
voting shares and assumption by Acquiring Fund of any liabilities of Target
Fund.
4. The basis of the assets of Target Fund acquired by Acquiring Fund
will be the same as the basis of those assets in the hands of Target Fund
immediately prior to the transfer, and the holding period of the assets of
Target Fund in the hands of Acquiring Fund will include the period during which
those assets were held by Target Fund.
5. The shareholders of Target Fund will recognize no gain or loss upon
the exchange of all of their Target Fund shares solely for Acquiring Fund voting
shares.
6. The basis of the Acquiring Fund voting shares to be received by the
Target Fund shareholders will be the same as the basis of the Target Fund shares
surrendered in exchange therefor.
<PAGE>
7. The holding period of the Acquiring Fund voting shares to be
received by the Target Fund shareholders will include the period during which
the Target Fund shares surrendered in exchange therefor were held, provided the
Target Fund shares were held as a capital asset on the date of the exchange.
This opinion letter is delivered to you in satisfaction of the
requirements of Section 8.6 of the Reorganization Agreement. We hereby consent
to the filing of this opinion as an exhibit to the Registration Statement on
Form N-14 and to use of our name and any reference to our firm in such
Registration Statement or in the Prospectus/Proxy Statement constituting a part
thereof. In giving such consent, we do not thereby admit that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission thereunder.
Very truly yours,
SULLIVAN & WORCESTER LLP
<PAGE>
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus/Proxy
Statement (the "Prospectus/Proxy") and Statement of Additional Information
constituting parts of this Registration Statement on Form N-14 (the
"Registration Statement") of Evergreen Money Market Trust of our report dated
October 14, 1997, relating to the financial statements and financial highlights
of Evergreen Tax Exempt Money Market Fund (the "Fund") appearing in the Fund's
August 31, 1997 Annual Report to Shareholders, which is also incorporated by
reference into the Registration Statement.
We also consent to the reference to us under the heading "Financial Statements
and Experts" in such Prospectus/Proxy.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
January 14, 1998
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Evergreen Money Market Trust on Form N-14 of our report on The Tax Free Money
Market Fund dated November 7, 1997, appearing in the Annual Report of The Virtus
Funds for the year ended September 30, 1997, and to the reference to us under
the heading "Financial Statements and Experts" in the Prospectus/Proxy
Statement, which is part of this Registration Statement.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
January 14, 1998
<PAGE>
EVERY SHAREHOLDER'S VOTE IS IMPORTANT!
THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR" EACH PROPOSAL.
PLEASE VOTE, SIGN, DATE AND PROMPTLY RETURN
YOUR PROXY IN THE ENCLOSED ENVELOPE TODAY!
Please detach at perforation before mailing.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
THE TAX FREE MONEY MARKET FUND,
a series of The Virtus Funds
PROXY FOR THE MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 20, 1998
The undersigned, revoking all Proxies heretofore given, hereby appoints
C. Grant Anderson, Carol B. Kayworth, Patricia F. Conner, Ann M. Scanlon and
Catherine M. Ryan or any of them as Proxies of the undersigned, with full power
of substitution, to vote on behalf of the undersigned all shares of The Tax Free
Money Market Fund, a series of The Virtus Funds ("Virtus Tax Free") that the
undersigned is entitled to vote at the special meeting of shareholders of Virtus
Tax Free to be held at 2:00 p.m. on Friday, February 20, 1998 at the offices of
the Evergreen Funds, 200 Berkeley Street, Boston, Massachusetts 02116 and at any
adjournments thereof, as fully as the undersigned would be entitled to vote if
personally present.
NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR ON
THIS PROXY. If joint owners, EITHER may sign this
Proxy. When signing as attorney, executor,
administrator, trustee, guardian, or custodian for a
minor, please give your full title. When signing on
behalf of a corporation or as a partner for a
partnership, please give the full corporate or
partnership name and your title, if any.
Date , 199
----------------------------------------
----------------------------------------
Signature(s) and Title(s), if applicable
<PAGE>
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF THE VIRTUS
FUNDS. THIS PROXY WILL BE VOTED AS SPECIFIED BELOW WITH RESPECT TO THE ACTION TO
BE TAKEN ON THE FOLLOWING PROPOSALS. THE SHARES REPRESENTED HEREBY WILL BE VOTED
AS INDICATED OR FOR THE PROPOSALS IF NO CHOICE IS INDICATED. THE BOARD OF
TRUSTEES OF THE VIRTUS FUNDS RECOMMENDS A VOTE FOR THE PROPOSALS. PLEASE MARK
YOUR VOTE BELOW IN BLUE OR BLACK INK. DO NOT USE RED INK. EXAMPLE: X
1. To approve an Agreement and Plan of Reorganization whereby Evergreen
Tax Exempt Money Market Fund, a series of Evergreen Money Market Trust, will (i)
acquire all of the assets of Virtus Tax Free in exchange for shares of Evergreen
Tax Exempt Money Market Fund; and (ii) assume certain identified liabilities of
Virtus Tax Free, as substantially described in the accompanying Prospectus/Proxy
Statement.
- ---- FOR ---- AGAINST ---- ABSTAIN
2. To approve the proposed Interim Investment Advisory Agreement with
Virtus Capital Management, Inc.
- ---- FOR ---- AGAINST ---- ABSTAIN
3. To consider and vote upon such other matters as may properly come
before said meeting or any adjournments thereof.
<PAGE>
