<PAGE>
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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the Appropriate Box:
[_] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
THE VIRTUS FUNDS
(NAME OF REGISTRANTS AS SPECIFIED IN THEIR CHARTERS)
THE VIRTUS FUNDS
(NAME OF PERSONS FILING PROXY STATEMENT)
Payment of filing fee (check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
--------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
--------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
--------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
--------------------------------------------------------
(5) Total fee paid:
--------------------------------------------------------
[_] Fee paid previously with preliminary material
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by
registration statement number, or the Form or Schedule and the date
of its filing.
(1) Amount Previously Paid:
--------------------------------
(2) Form, Schedule or Registration Statement No.:
----------
(3) Filing Party:
------------------------------------------
(4) Date Filed:
--------------------------------------------
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- --------------------------------------------------------------------------------
<PAGE>
[LOGO OF VIRTUS APPEARS HERE]
THE MARYLAND MUNICIPAL BOND FUND
FEDERATED INVESTORS TOWER PITTSBURGH,
PENNSYLVANIA 15222-3779
January 8, 1998
Dear Shareholder:
I am writing to shareholders of The Virtus Funds' Maryland Municipal Bond
Fund (the "Fund") to inform you of a special shareholders' meeting (the
"Meeting") to be held on February 20, 1998. Before the Meeting I would like
your vote on the important issues affecting your Fund as described in the
attached Proxy Statement. The Meeting is necessitated by the events described
below.
On July 18, 1997, Signet Banking Corporation ("Signet") agreed to merge with
and into a wholly-owned subsidiary of First Union Corporation ("First Union")
(the "Merger"). Prior to November 28, 1997, Signet was the ultimate parent of
Virtus Capital Management, Inc. ("Virtus"), the investment adviser to the
Fund. Since the consummation of the Merger on November 28, 1997, Virtus has
been a wholly-owned subsidiary of First Union.
First Union National Bank ("FUNB") is a subsidiary of First Union. The
Capital Management Group (the "CMG") of FUNB and its investment adviser
affiliates manage or otherwise oversee the investment of over $75 billion in
assets belonging to a wide-range of clients, including the Evergreen family of
mutual funds, which funds had assets of $40 billion as of November 30, 1997.
As a consequence of the Merger and in order to facilitate the investment
management of assets and the delivery of shareholder services to the Fund and
to integrate the Fund into the Evergreen family of mutual funds, the Trustees
of your Fund are proposing for your approval the reorganization of the Fund
from a series of a Massachusetts business trust (The Virtus Funds) to a series
of a Delaware business trust, Evergreen Municipal Trust (the "Successor
Trust"), an interim investment advisory agreement with Virtus, the
reclassification of the Fund's investment objective from fundamental to
nonfundamental, the adoption of standardized fundamental investment
restrictions for the Fund and the reclassification of certain fundamental
restrictions to nonfundamental.
Although we would like very much to have each shareholder attend the
Meeting, we realize this is not possible. Whether or not you plan to be
present, we need your vote. We urge you to complete, sign and return the
enclosed proxy card promptly. A postage-paid envelope is enclosed for this
purpose.
If you return your proxy promptly you can help your Fund avoid follow-up
mailings to achieve a quorum. If your shares in the Fund are held in street
name, your bank or broker can vote your shares, but may do so only upon
receipt of your specific instructions. Please contact the person responsible
for your account and instruct him or her to execute a proxy card today. If you
decide between now and the meeting that you can attend the meeting in person,
you can revoke your proxy at that time and vote your shares at the meeting.
THE BOARD OF TRUSTEES OF THE FUND HAS UNANIMOUSLY APPROVED THE PROPOSALS AND
RECOMMEND THAT YOU VOTE FOR ALL OF THE PROPOSALS DESCRIBED IN THIS PROXY
STATEMENT.
If we do not receive your completed proxy card after several weeks, you may
be contacted by our proxy solicitor, Shareholder Communications Corporation.
They will remind you to vote your shares.
Thank you for taking these matters seriously and participating in this
important process.
Sincerely,
/s/ Edward C. Gonzales
Edward C. Gonzales
President
The Virtus Funds
<PAGE>
THE VIRTUS FUNDS
THE MARYLAND MUNICIPAL BOND 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 Maryland Municipal Bond Fund (the "Fund") of The Virtus
Funds (the "Current Trust"), will be held at the offices of the Evergreen
Funds, 200 Berkeley Street, 26th Floor, Boston, Massachusetts 02116 on Friday,
February 20, 1998 at 2:00 p.m., Eastern time, for the following purposes:
1. To consider and act upon an Agreement and Plan of Conversion (the
"Plan") for the Fund providing for the reorganization of the Fund from
a series of the Current Trust, a Massachusetts business trust, to a
corresponding series, the Evergreen Maryland Municipal Bond Fund (the
"Successor Fund") of Evergreen Municipal Trust, a Delaware business
trust (the "Successor Trust"), and in connection therewith, the
acquisition by the Successor Fund of all of the assets of the Fund in
exchange for shares of the Successor Fund, and the assumption by the
Successor Fund of all of the liabilities of the Fund. The Plan also
provides for the distribution of such shares of the Successor Fund to
shareholders of the Fund in liquidation and subsequent termination of
the Fund.
2. To consider and act upon an interim investment advisory agreement
between the Fund and Virtus Capital Management, Inc. ("Virtus"), the
Fund's current investment adviser. Prior to November 28, 1997, Virtus
was a subsidiary of Signet Banking Corporation ("Signet"), and since
such date, as a result of a merger of Signet with and into a subsidiary
of First Union Corporation ("First Union"), Virtus has been a
subsidiary of First Union. Such interim investment advisory agreement
will remain in place until the reorganization of the Fund into the
Successor Fund, such reorganization currently being expected to occur
on or about February 27, 1998.
3. To consider approval of the reclassification of the investment
objective of the Fund from fundamental to nonfundamental.
4. To consider adoption of standardized investment restrictions by
amending or reclassifying the current fundamental investment
restrictions of the Fund.
5. To transact any other business which may properly come before the
Meeting or any adjournments thereof.
The close of business on December 26, 1997 has been fixed as the record date
for the determination of shareholders of the Fund entitled to notice of and to
vote at the Meeting or any adjournments thereof.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO NOT
EXPECT TO ATTEND THE MEETING IN PERSON ARE URGED TO SIGN WITHOUT DELAY AND
RETURN THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE,
SO THAT THEIR SHARES MAY BE REPRESENTED AT THE MEETING. YOUR PROMPT ATTENTION
TO THE ENCLOSED PROXY WILL HELP TO AVOID THE EXPENSE OF FURTHER SOLICITATION.
By Order of the Board of Trustees
John W. McGonigle
Secretary
January 8, 1998
<PAGE>
INSTRUCTIONS FOR EXECUTING PROXY CARD
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 properly.
1. INDIVIDUAL ACCOUNTS: Sign your name exactly as it appears on the proxy
card.
2. JOINT ACCOUNTS: Either party may sign, but the name of the party signing
should conform exactly to a name shown on the proxy card.
3. ALL OTHER ACCOUNTS: The capacity of the individual signing the proxy card
should be indicated unless it is reflected in the name on the proxy card. For
example:
<TABLE>
<CAPTION>
REGISTRATION VALID SIGNATURE
<S> <C>
CORPORATE ACCOUNTS
(1) ABC Corp............................ (1) ABC Corp.
John Doe, Treasurer
(2) ABC Corp............................ (2) John Doe, Treasurer
c/o John Doe, Treasurer
(3) ABC Corp. Profit Sharing Plan....... (3) John Doe, Trustee
TRUST ACCOUNTS
(1) ABC Trust........................... (1) Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee................ (2) Jane B. Doe
u/t/d 12/28/78
CUSTODIAL OR ESTATE ACCOUNTS
(1) John B. Smith, Cust................. (1) John B. Smith
f/b/o John B. Smith, Jr. UGMA
(2) John B. Smith, Sr................... (2) John B. Smith, Sr., Executor
</TABLE>
<PAGE>
THE VIRTUS FUNDS
THE MARYLAND MUNICIPAL BOND FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
----------------
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
FEBRUARY 20, 1998
----------------
INTRODUCTION
This proxy statement is furnished in connection with the solicitation of
proxies by the Trustees of The Virtus Funds (the "Current Trust") on behalf of
the Current Trust's Maryland Municipal Bond Fund (the "Fund") for the special
meeting of shareholders to be held on Friday, February 20, 1998, at the
offices of the Evergreen Funds, at 200 Berkeley Street, 26th Floor, Boston,
Massachusetts 02116 at 2:00 p.m., and all adjournments thereof (the
"Meeting"). Shareholders of record at the close of business on December 26,
1997 (the "Record Date") are entitled to notice of, and to vote at, the
Meeting. This proxy statement and the accompanying notice of meeting and proxy
card are first being mailed to shareholders on or about January 8, 1998.
BACKGROUND
On July 18, 1997, First Union Corporation ("First Union") entered into an
Agreement and Plan of Merger with Signet Bank Corporation ("Signet") which
provided, among other things, for the merger of Signet with and into a wholly-
owned subsidiary of First Union (the "Merger"). The Merger was consummated on
November 28, 1997. As a result of the Merger, it is expected that First Union
National Bank ("FUNB"), a subsidiary of First Union, and its affiliates will
succeed to the investment advisory, administrative and transfer agency and
dividend disbursing functions currently performed for the Fund by various
units of Signet and certain other parties unaffiliated with Signet.
As a matter of law, the Merger has caused the termination of the investment
advisory agreement between the Fund and its investment adviser, Virtus Capital
Management, Inc. ("Virtus"). Prior to consummation of the Merger, Virtus was a
subsidiary of Signet but, as a consequence of the consummation of the Merger,
it is now a subsidiary of First Union. The Current Trust has, however,
received an order from the Securities and Exchange Commission (the "SEC")
which permits Virtus to continue to act as the Fund's investment adviser,
without shareholder approval, pursuant to an interim investment advisory
agreement (the "Interim Advisory Agreement") between the Current Trust, on
behalf of the Fund, and Virtus, 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 the Reorganization (currently anticipated to be on or
about February 27, 1998). FUNB will serve as investment adviser to the series
of the Delaware business trust into which the Fund is to be reorganized.
At the Meeting, shareholders will also be asked to vote on several proposals
relating to the Fund's investment restrictions. Currently, the Fund's
investment objective is classified as "fundamental" and, as such, may be
changed only by a vote of the Fund's shareholders. In order to provide the
Fund with enhanced flexibility to respond to market, industry or regulatory
changes, shareholders are being asked to reclassify the Fund's investment
objective as nonfundamental. A nonfundamental investment objective could be
changed by the Trustees at any time without approval of the Fund's
shareholders. Shareholders are being asked to standardize certain fundamental
investment restrictions in order to help provide operational efficiencies and
to make it easier for the Fund to monitor compliance with such restrictions.
Finally, shareholders are also being asked to reclassify certain fundamental
investment restrictions from fundamental to nonfundamental in order to give
the Fund greater flexibility to respond to market, regulatory or industry
changes.
<PAGE>
PROPOSAL 1--THE PROPOSED REORGANIZATION
OF THE FUND AS A SERIES OF A DELAWARE BUSINESS TRUST
At the Meeting, the shareholders of the Fund will be asked to approve an
Agreement and Plan of Conversion (the "Plan"), which provides for the
reorganization (the "Reorganization") of the Fund into Evergreen Maryland
Municipal Bond Fund, a corresponding series (the "Successor Fund") of
Evergreen Municipal Trust, a Delaware business trust (the "Successor Trust").
The Reorganization is occurring as a consequence of the Merger and the fact
that the Current Trust will not survive as an independent entity. The intended
result of the overall restructuring is to produce a more integrated mutual
fund complex with the potential for greater operational efficiencies.
SELECTION OF DELAWARE BUSINESS TRUST FORM OF ORGANIZATION
At their September 16, 1997 meeting, the Board of Trustees of the Current
Trust unanimously approved the proposed reorganization of the Fund as a
separate series of the Successor Trust. The Current Trust is organized as a
Massachusetts business trust. The Fund is a series portfolio of the Current
Trust. As a series of a Delaware business trust, the Successor Fund will have
available to it certain advantages of Delaware law with respect to business
trusts. The Delaware Business Trust Act (the "Delaware Act") has been
specifically drafted to accommodate the unique governance needs of investment
companies and provides that its policy is to give maximum freedom of contract
to the trust instrument of a Delaware business trust.
Under the Delaware Act, a shareholder of a Delaware business trust is
entitled to the same limitation of personal liability extended to stockholders
of Delaware corporations. No similar statutory or other authority limiting
business trust shareholder liability exists in Massachusetts, or in any other
state. As a result, Delaware law is generally considered to afford additional
protection to shareholders than Massachusetts business trusts against
potential shareholder liability. See "Certain Comparative Information About
the Current Trust and the Successor Trust--Shareholder Liability." Similarly,
Delaware law provides that should a Delaware business trust issue multiple
series of shares, each series shall not be liable for the debts of another
series, another potential, though remote, risk in the case of other business
trusts.
Delaware has obtained a favorable national reputation for its business laws
and business environment. The Delaware courts, which may be called upon to
interpret the Delaware Act, are among the nation's most highly respected and
have an expertise in corporate matters which in part grew out of the fact that
Delaware legal issues are concentrated in the Court of Chancery where there
are no juries and where judges issue written opinions explaining their
decisions. Accordingly, there is a well established body of precedent which
may be relevant in deciding issues pertaining to a Delaware business trust.
There are other advantages that may be afforded by a Delaware business
trust. Under Delaware law, the Successor Fund will have the flexibility to
respond to future business contingencies. For example, the Trustees of the
Successor Trust will have the power to incorporate a Successor Trust, to merge
or consolidate it with another entity, to cause each series to become a
separate trust, and to change the Successor Trust's domicile without a
shareholder vote. This flexibility could help to assure that the Successor
Trust operates under the most advanced form of organization and could reduce
the expense and frequency of future shareholder meetings for non-investment
related issues.
DESCRIPTION OF THE REORGANIZATION
The detailed terms and conditions of the Reorganization are contained in the
Plan. The information in this proxy statement with respect to the Plan is
qualified in its entirety by reference to, and made subject to, the complete
text of the form of the Plan, a copy of which is attached to this proxy
statement as Exhibit A.
If the shareholders of the Fund approve the Reorganization and the
conditions of the Reorganization are satisfied, all of the assets and
liabilities of the Fund will be transferred to the Successor Fund and each
shareholder of the Fund will receive shares of the Successor Fund (the "New
Shares"). The New Shares of the
2
<PAGE>
Successor Fund will be issued to the Fund in consideration of the transfer to
the Successor Fund by the Fund of all assets and liabilities of the Fund.
Immediately thereafter, the Fund will liquidate and distribute the New Shares
to its shareholders. New Shares will be issued on a class by class basis. As a
result of the Reorganization, the holders of Investment Shares and Trust
Shares in the Fund will become the owners of that number of full and
fractional Class A and Class Y shares, respectively, of the Successor Fund
having an aggregate net asset value equal to the aggregate net asset value of
the shareholder's shares of the Fund as of the close of business immediately
prior to the date that the Fund's assets are transferred for shares of the
Successor Fund.
Each such Class of shares of the Successor Fund has the same Rule 12b-1
distribution related fees, if any, as the shares of the Class of the Fund held
by such holders prior to the Reorganization. No initial sales charge will be
imposed in connection with Class A Shares of the Successor Fund received by
holders of Investment Shares of the Fund. Fund shareholders who purchase Class
A Shares subsequent to the Reorganization will not incur any initial sales
charge.
It will not be necessary for holders of share certificates of the Fund to
exchange their certificates for new certificates following consummation of the
Reorganization. Certificates for shares of the Fund issued prior to the
Reorganization will represent outstanding shares of the Successor Fund after
the Reorganization. Shareholders of the Fund who have not been issued
certificates and whose shares are held in an open account will automatically
have those shares designated as shares of the Successor Fund.
If approved by shareholders of the Fund, it is currently contemplated that
the Reorganization will become effective on or about the close of business on
February 27, 1998. However, the Reorganization may become effective at another
time and date should the Meeting be adjourned to a later date or should any
other condition to the Reorganization not be satisfied at that time.
Notwithstanding prior shareholder approval, the Plan of Reorganization may be
terminated at any time prior to its implementation by the mutual agreement of
the parties thereto.
THE SUCCESSOR TRUST
The Successor Trust was established pursuant to an Agreement and Declaration
of Trust (the "Trust Agreement") under the laws of the State of Delaware. The
Successor Trust is organized as a "series company" as that term is used in
Rule 18f-2 under the Investment Company Act of 1940, as amended (the "1940
Act"). The Successor Trust consists of the Successor Fund and other funds of
the same asset class.
The Board of Trustees of the Successor Trust is different from the Board of
Trustees of the Current Trust. The new Trustees will have ultimate
responsibility for the oversight and management of the Successor Fund
subsequent to the Reorganization. The Trustees of the Successor Trust are
Laurence B. Ashkin, Charles A. Austin III, K. Dun Gifford, James S. Howell,
Leroy Keith, Jr., Gerald M. McDonnell, Thomas L. McVerry, David M. Richardson,
Russell A. Salton III, Michael S. Scofield, Richard J. Shima, and William W.
Pettit.
The Successor Trust is authorized to issue shares divisible into an
indefinite number of different series. At the time of the Reorganization, it
is expected that the Successor Trust will consist of 16 series portfolios in
addition to the Successor Fund. The interests of investors in the various
series of the Successor Trust will be separate and distinct. All consideration
received for the sales of shares of a particular series of the Successor
Trust, all assets in which such consideration is invested, and all income,
earnings and profits derived from such investments, will be allocated to that
series. The Trust Agreement of the Successor Trust provides that the Board of
Trustees of the Successor Trust may: (i) establish one or more additional
series thereof; (ii) issue the shares of any series in any number of classes;
(iii) issue shares of a series to different groups of investors; and (iv)
convert a series into a pooled fund structure, without any further action by
the shareholders of the Successor Trust. The Successor Trust will not engage
in any activities prior to the Reorganization with respect to the Successor
Fund, except as may be required in connection with effecting the
Reorganization.
The Trust Agreement of the Successor Trust provides for shareholder voting
only for the following matters: (a) the election or removal of Trustees as
provided in the Trust Agreement; and (b) with respect to such
3
<PAGE>
additional matters relating to the Successor Trust as may be required by (i)
applicable law, (ii) any by-laws adopted by the Trustees, or (iii) as the
Trustees may consider necessary or desirable. Certain of the foregoing matters
will involve separate votes of one or more of the affected series (or affected
classes of a series) of the Successor Trust, while others will require a vote
of the Successor Trust's shareholders as a whole.
All shares of all series vote together as a single class for the election or
removal of Trustees of the Successor Trust with each having one vote for each
dollar of net asset value applicable to each share, regardless of series. See
"Certain Comparative Information About the Trust and the Successor Trust--
Voting Rights" below.
As required by the 1940 Act, shareholders of each series of the Successor
Trust, voting separately, will have the power to vote at special meetings for,
among other things, changes in fundamental investment restrictions applicable
to such series, approval of any new or amended investment advisory agreement,
approval of any new or amended Rule 12b-1 distribution plan and certain other
matters that affect the shareholders of that series. If, at any time, less
than a majority of the Trustees holding office has been elected by the
shareholders, the Trustees then in office will call a shareholders' meeting
for the purpose of electing Trustees of the Successor Trust.
CERTAIN COMPARATIVE INFORMATION ABOUT THE CURRENT TRUST AND THE SUCCESSOR
TRUST
As a Delaware business trust, the Successor Trust's operations are governed
by the Trust Agreement and applicable Delaware law, rather than by the trust
document of the Current Trust, which is organized under Massachusetts law. For
ease of reference, the organizational document of the Current Trust is
sometimes referred to as the "Charter". As discussed below, certain of the
differences between the Current Trust and the Successor Trust derive from
provisions of the Successor Trust's Trust Agreement and By-laws. Shareholders
entitled to vote at the Meeting may obtain a copy of the Successor Trust's
Trust Agreement and By-laws, without charge, upon written request to the
Successor Trust at Evergreen Funds, 200 Berkeley Street, Boston, Massachusetts
02116.
Capitalization. The beneficial interests in the Successor Trust are issued
as transferable shares of beneficial interest, $.001 par value per share. The
beneficial interests in the Fund are represented by an unlimited number of
transferable shares of beneficial interest without par value. The Trust
Agreement permits the Trustees to issue an unlimited number of shares and to
divide such shares into an unlimited number of series or classes thereof, with
rights determined by the Trustees, all without shareholder approval. Each
share of the Successor Trust and each share of the Current Trust series
represents an equal proportionate interest in the assets and liabilities
belonging to that series (or class) as declared by the Board of Trustees. Both
the Successor Trust and the Trust are authorized to divide their shares into
an unlimited number of series, and the Trustees of both the Successor Trust
and the Current Trust are empowered to establish other classes. Both the
Successor Trust and the Trust have the authority to issue an unlimited number
of transferable shares of beneficial interest.
Amendments to Governing Instrument. Generally, the provisions of the Trust
Agreement of the Successor Trust may be amended without shareholder approval
so long as such amendment is not in contravention of applicable law, by an
instrument in writing signed by a majority of the then Trustees of the
Successor Trust (or by an officer of the Successor Trust pursuant to the vote
of a majority of such Trustees). Under the Trust Agreement of the Successor
Trust, except as provided by applicable law, a quorum is 25 percent of the
shares entitled to vote. The Current Trust's quorum requirement is presently a
majority of the shares entitled to vote. The affirmative vote of a majority of
the shares entitled to be cast is generally required to amend the Charter
(unless otherwise specifically required by applicable law, including the 1940
Act).
Voting Rights. The Charter of the Current Trust provides that a special
meeting of shareholders shall be called upon the written request of
shareholders representing 10 percent of the outstanding shares. The By-laws of
the Successor Trust provide that, to the extent required by the 1940 Act,
meetings of the shareholders for the purpose of voting on the removal of any
Trustee shall be called promptly by the Trustees upon the written request of
Shareholders holding at least 10 percent of the outstanding shares of the
Successor Trust entitled to vote. Like the Current Trust, the Successor Trust
will not be required to hold annual meetings of its shareholders and, at this
time, does not intend to do so. With respect to the Current Trust, the record
date for determining shareholders
4
<PAGE>
who are entitled to notice of, and to vote at, a shareholders' meeting may not
be more than 60 days preceding the scheduled meeting date under the Charter.
Under the By-laws of the Successor Trust the record date may not be more than
90 days nor less than 10 days preceding the scheduled meeting date.
The Trust Agreement provides for shareholder voting in certain
circumstances. See "The Successor Trust" above. Shareholders of the Current
Trust generally have the power to vote with respect to the election of
Trustees, the removal of Trustees, the approval of any investment advisory or
sub-advisory agreement, certain amendments to the Charter, whether or not a
court action, proceeding or claim should be brought or maintained derivatively
or as a class action on behalf of the Current Trust to the same extent as
shareholders of a corporation, and with respect to certain other actions, such
as a transfer of all or substantially all of the Trust's assets or the
dissolution of the Trust.
A Trustee of the Successor Trust may be removed at any meeting of
shareholders by a vote of at least two-thirds of the outstanding shares of the
Successor Trust. The Charter of the Current Trust permits removal of a Trustee
by action of at least two-thirds of the other Trustees.
The Trust Agreement of the Successor Trust provides that a majority of the
shares voted at a meeting at which a quorum is present shall decide any
questions and that a plurality shall elect a Trustee, except when a different
vote is required or permitted by any provision of the 1940 Act or other
applicable law or by the Trust Agreement or the By-laws of the Successor
Trust. Similar requirements apply to the Current Trust. Shareholders of the
Successor Trust are not required to approve the termination or reorganization
of the Successor Trust. Unlike the Trust Agreement of the Successor Trust, the
Charter of the Current Trust requires that any termination or reorganization
of a Fund must be approved by the vote of a majority of the outstanding voting
shares of such Fund.
Under the Trust Agreement, each share of the Successor Fund is entitled to
one vote for each dollar of net asset value applicable to each share. Under
the current voting provisions governing the Fund each share of beneficial
interest is entitled to one vote, regardless of the specific Fund it
represents. Under the Charter of the Current Trust or applicable law, a matter
affecting only one Fund is voted on only by that Fund. Generally, the Charter
of the Current Trust further provides that, where required by law or
applicable regulation, certain matters will be voted on separately by each
fund. In all other matters, all funds vote together as a group. Over time, the
net asset values of such 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 with a lower net asset value
will purchase more shares, and under the present voting provisions, have more
votes, than the same investment in a fund with a higher net asset value. Under
the Trust Agreement, voting power is related to the dollar value of the
shareholders' investments rather than to the number of shares held.
Shareholder Liability. 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 liability exists in any
other state. As a result, to the extent that a Successor 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 trust to liability. To guard against this risk, the Trust Agreement:
(a) provides that any written obligation of the Successor Trust may contain a
statement that such obligation may only be enforced against the assets of the
Successor 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 Successor Trust. Accordingly, the risk of a
shareholder of the Successor Trust incurring financial loss beyond that
shareholder's investment because of shareholder liability is limited to
circumstances in which: (i) a court refuses to apply Delaware law; (ii) no
contractual limitation of liability was in effect; and (iii) the Successor
Trust itself would be unable to meet its obligations. In light of Delaware
law, the nature of the Successor Trust's business, and the nature of its
assets, the risk of personal liability to a shareholder of the Successor Trust
is remote.
Shareholders of the Current Trust may, under certain circumstances, be held
personally liable under applicable state law for the obligations of the
Current Trust. However, the Charter of the Current Trust contains
5
<PAGE>
an express disclaimer of shareholder liability and requires that notice of
such disclaimer be given in each agreement entered into or executed by the
Current Trust or the Trustees of the Current Trust. Such Charter also provides
for indemnification out of the property of the Trust.
Liability and Indemnification of Trustees. Under the Trust Agreement, a
Trustee of the Successor Trust is liable to the Successor Trust and its
shareholders only 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 the duties of a Trustee. Trustees and
officers of the Successor Trust are entitled to be indemnified for the
expenses of litigation against them except with respect to any matter as to
which it has been determined that such person (i) did not act in good faith in
the reasonable belief that his or her action was in or not opposed to the best
interests of the Successor Trust; or (ii) had acted with willful misfeasance,
bad faith, gross negligence or reckless disregard of his or her duties; and
(iii) for a criminal proceeding, had reasonable cause to believe that his or
her conduct was unlawful, such determination to be based upon the outcome of a
court action or administrative proceeding or a reasonable determination,
following a review of the facts, 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 Successor Trust may also advance money to any Trustee or officer
involved in a proceeding discussed above provided that the Trustee or officer
undertakes to repay the Successor Trust if his or her conduct is later
determined to preclude indemnification and certain other conditions are met.
It is currently the view of the staff of the SEC that to the extent that any
provisions such as those described above are inconsistent with the 1940 Act,
the provisions of the 1940 Act may preempt the foregoing provisions.
The Charter of the Current Trust generally provides that the Current Trust's
Trustees shall not be liable to the Current Trust or its shareholders, except
for the Trustees' acts of willful misfeasance, bad faith, gross negligence, or
reckless disregard of duties involved in the conduct of their office. The
Charter generally also provides that Trustees and officers of the Current
Trust will be indemnified against liability and expenses of litigation against
them unless their conduct constituted willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of
their office.
Right of Inspection. The By-laws of the Current Trust generally provide that
no shareholder shall have the right to inspect the books of account and stock
ledger of the Registrant except as conferred by law, or as authorized by the
Board of the Registrant or a resolution of shareholders. The By-laws of the
Successor Trust provide that no shareholder of the Successor Trust shall have
any right to inspect any account or book or document of the Successor Trust
except as conferred by law or otherwise by the Trustees or by resolution of
the shareholders.
The foregoing is only a summary of certain of the differences between the
governing instruments and laws generally applicable to the Current Trust and
Successor Trust. It is not a complete list of differences. Shareholders should
refer directly to the provisions of the governing instruments and applicable
law for more complete information.
CURRENT AND SUCCESSOR DISTRIBUTION ARRANGEMENTS
Federated Securities Corp., ("FSC"), Federated Tower, Pittsburgh,
Pennsylvania, 15222, currently serves as principal underwriter for the Fund.
Evergreen Distributor, Inc. ("EDI"), 125 West 55th Street, New York, New York
10019, will serve as principal distributor for the Successor Trust. It is
anticipated that no material change will occur in the Fund's Rule 12b-1
distribution plans as a result of the Reorganization.
The Successor Fund offers four classes of shares: Class A, Class B, Class C
and Class Y. Each class has separate distribution arrangements. No class bears
the distribution expenses relating to the shares of any other class.
In the proposed Reorganization, shareholders of the Fund who own Trust
Shares and Investment Shares will receive Class Y and Class A Shares,
respectively, of the Successor Fund. The Class Y and Class A Shares
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of the Successor Fund have substantially similar arrangements with respect to
the imposition of Rule 12b-1 distribution and service fees as the Trust and
Investment Shares of the Fund. Because the Reorganization will be effected at
net asset value without the imposition of a sales charge, Successor Fund
shares acquired by shareholders of the Fund pursuant to the proposed
Reorganization would 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
and Class A shares of the Successor Fund which will be received by Fund
shareholders in the Reorganization. More detailed descriptions of the
distribution arrangements applicable to the classes of shares are contained in
the respective Successor Fund's Prospectuses and the Fund's Prospectuses and
in each Fund's respective Statements of Additional Information.
Class Y Shares. Class Y shares are sold at net asset value without any
initial sales charge and are not subject to distribution-related fees. Class Y
shares are only available to (i) persons who at or prior to December 31, 1994
owned shares in a mutual fund advised by Evergreen Asset Management Corp.
("Evergreen Asset"), (ii) certain institutional investors and (iii) investment
advisory clients of FUNB, Evergreen Asset or their affiliates. Fund
shareholders who receive Successor Fund Class Y shares in the Reorganization
who wish to make subsequent purchases of Successor Fund shares will be able to
purchase Class Y shares.
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge and, as indicated below, are subject to distribution-related
fees. Holders of Investment Shares of the Fund who receive Class A shares of
the Successor Fund in the Reorganization will be able to purchase additional
Class A shares of the Successor Fund and of any other Evergreen fund at net
asset value. No initial sales charge will be imposed.
CERTAIN VOTES TO BE TAKEN PRIOR TO THE REORGANIZATIONS
Prior to the Reorganization, EDI, the principal underwriter of the Successor
Fund and a subsidiary of the BISYS Group, Inc., 3435 Stelzer Road, Columbus,
Ohio 43219, will own a single outstanding share of the corresponding Successor
Fund. The purpose of the issuance by the Successor Fund of this nominal share
prior to the effective time of the Reorganization is to enable the Successor
Trust to eliminate the need to incur the additional expense by the Successor
Trust of having to hold a separate meeting of shareholders of the Successor
Funds in order to comply with certain shareholder approval requirements of the
1940 Act. Accordingly, EDI will, among other things, have voted to approve an
investment advisory agreement between the Fund and FUNB. See "Information
Concerning Investment Advisory Arrangements."
INVESTMENT OBJECTIVE AND RESTRICTIONS
The Successor Fund will have the same investment objective as the Fund
except that, if Proposal 3 in this proxy statement is approved by
shareholders, the Successor Fund's investment objective will not be considered
"fundamental". As a result, the Successor Fund's investment objective could be
changed by the Trustees, without shareholder approval, after prior notice to
shareholders.
Except as described herein, FUNB does not presently intend to change in any
material way for the Successor Fund the investment strategy or operations
employed by the Fund.
FEDERAL INCOME TAX CONSEQUENCES
It is anticipated that the transactions contemplated by the Plan will be
tax-free. Sullivan & Worcester LLP, counsel to the Successor Trust, has
informed each Board that if substantially all of the assets and liabilities of
the Funds are transferred to the corresponding Successor Funds, it will issue
an opinion that a Reorganization will not give rise to the recognition of
income, gain or loss to the Fund, the Successor Fund, or shareholders of the
Fund for federal income tax purposes pursuant to sections 361, 1032 (a) and
354 (a) (1), respectively, of the Internal Revenue Code of 1986, as amended.
Such opinion will be based upon customary representations of the
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Fund and the Successor Trust and certain customary assumptions. The receipt of
such an opinion is a condition to the consummation of the Reorganization.
A shareholder's adjusted basis for tax purposes in shares of the Successor
Fund after the Reorganization will be the same as the shareholder's adjusted
basis for tax purposes in the shares of the Fund immediately before the
Reorganization. The holding period for the shares of the Successor Fund
received in the Reorganization will include a shareholder's holding period for
shares of the Fund (provided that the shares of the Fund were held as capital
assets on the date of the Reorganization). Shareholders should consult their
own tax advisers with respect to the state and local tax consequences of the
proposed transaction.
REORGANIZATION EXPENSES
The expenses of the Reorganization will be borne by FUNB.
APPRAISAL RIGHTS
Neither the Charter nor Massachusetts law grants shareholders of the Fund
any rights in the nature of appraisal or dissenters' rights with respect to
any action upon which shareholders may be entitled to vote. However, the
customary right of mutual fund shareholders to redeem their shares is not
affected by the proposed Reorganization.
RECOMMENDATION OF TRUSTEES
The Trustees of the Current Trust requested, received and considered such
information as they deemed reasonably necessary to enable the members of such
Board to evaluate the Plan. In approving the Plan, the Trustees considered
that there would be no change in the Fund's investment objective and that in
order to fully integrate the Fund into the Evergreen family of funds it was
appropriate for the Fund to be reorganized as a series of the Successor Trust.
The Trustees also considered the investment experience, expertise and
resources of FUNB, the service and distribution resources available to the
Evergreen funds, the broad array of investment alternatives available to
Evergreen fund shareholders, the personnel and financial resources of First
Union and its affiliates, the fact that FUNB will bear the costs of the
Reorganization, the assumption of the Successor Fund of all Fund liabilities
and the expected federal income tax consequences of the Reorganization.
At the meeting of the Board called for the purpose on September 16, 1997,
the Board of Trustees of the Fund voted to approve the proposed Plan and
determined that participation in the Reorganization is in the best interests
of the Fund and that the interests of existing shareholders will not be
diluted as a result of the Reorganization.
REQUIRED VOTE
The affirmative vote of the holders of a majority of the issued and
outstanding shares of the Fund is required to approve the Reorganization.
THE TRUSTEES RECOMMEND THAT SHAREHOLDERS VOTE TO APPROVE PROPOSAL 1.
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PROPOSAL 2--APPROVAL OR DISAPPROVAL OF AN INTERIM INVESTMENT ADVISORY
AGREEMENT WITH VIRTUS CAPITAL MANAGEMENT, INC.
In view of the Merger discussed above, and the factors discussed below, the
Board of Trustees of the Current Trust recommend that shareholders of the Fund
approve an Interim Advisory Agreement between the Successor Fund and Virtus.
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. If shareholders do not approve
the Interim Advisory Agreement, the escrow agent will return the monies held
by it. The Interim Advisory Agreement will remain in effect until the earlier
of the Closing Date for the Reorganization (currently anticipated to be on or
about February 27, 1998) or two years from its effective date. The terms of
the Interim Advisory Agreement are essentially the same as the terms of the
Existing Advisory Agreement. As used herein the term "Existing Advisory
Agreement" refers to the investment advisory agreement, dated March 1, 1995,
pursuant to which Virtus has served as the Fund's investment adviser. The only
difference between the Existing 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 the Fund, 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
Proxy Statement is qualified in its entirety by reference to the Interim
Advisory Agreement, attached to this proxy statement 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 a 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 the Existing Advisory Agreement dated March 1, 1995, as amended on
October 21, 1996. At the meeting of the Board of Trustees of the Current Trust
held on September 16, 1997, the Trustees, including a majority of the
Independent Trustees, approved the Interim Advisory Agreement for the Fund.
The Trustees have authorized the Current Trust, on behalf of the Fund, to
enter into the Interim Advisory Agreement with Virtus. Such Agreement became
effective on November 28, 1997. If the Interim Advisory Agreement for the Fund
is not approved by shareholders, the Trustees will consider appropriate
actions to be taken with respect to the Fund's investment advisory
arrangements at that time. The Existing 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 EXISTING ADVISORY
AGREEMENT
Advisory Services. The investment advisory services to be provided by Virtus
under the Interim Advisory Agreement are identical to those provided by Virtus
under the Existing Advisory Agreement. See the discussion below under
"Information Concerning Investment Advisory Arrangements."
Federated Administrative Services ("FAS") currently acts as administrator of
the Fund. FAS will continue during the term of the Interim Advisory Agreement
as the Fund's administrator for the same compensation as currently received.
Federated Services Company currently acts as transfer agent and will continue
to do so except that on February 9, 1998, its obligations to provide transfer
agency services for the Fund's shareholders will terminate and such services
will be provided by EIS.
Fees and Expenses. The investment advisory fees and expense limitations for
the Fund under the Existing Advisory Agreement and the Interim Advisory
Agreement are identical.
Expense Reimbursement. The Existing Advisory Agreement includes 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
Current Trust, voluntarily declare to be effective. Furthermore, Virtus may,
if it deems appropriate, assume expenses of the Fund or a class of the Fund to
the extent that the Fund's or the classes' expenses exceed such lower expense
limitation as Virtus may, by notice to the Current Trust voluntarily declare
to be effective. The Interim Advisory Agreement contains an identical
provision.
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Payment of Expenses and Transaction Charges. Under the Existing Advisory
Agreement, the Current Trust 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 Current Trust's expenses. The
Interim Advisory Agreement contains an identical provision.
Limitation of Liability. The Existing Advisory Agreement provided that in
the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of obligations or duties under the Existing Advisory Agreement on
the part of Virtus, 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.
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 the Fund (as defined in the 1940 Act) or by a vote of a majority
of the Current Trust's entire Board of Trustees on 60 days' written notice to
Virtus or by Virtus on 60 days' written notice to the Current Trust. The
Interim Advisory Agreement will automatically terminate in the event of its
assignment (as defined in the 1940 Act). The Existing Advisory Agreement
contains identical provisions as to terminations and assignment.
ADDITIONAL INFORMATION ABOUT VIRTUS
Virtus manages, in addition to the Fund, other funds of the Current Trust,
the Blanchard Group of Funds and three fixed income trust funds. During the
fiscal years ended September 30, 1997, 1996, and 1995, Virtus received from
the Fund management fees of $273,851, $315,941, and $355,431, respectively, of
which $0, $106,102 and $187,476 respectively, were voluntarily waived. Signet
has acted as custodian for the Fund and received $12,079 for the fiscal year
ended September 30, 1997.
RECOMMENDATION OF TRUSTEES
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 there were no material
differences between the terms of the Interim Advisory Agreement and the terms
of the Existing Advisory Agreement.
The affirmative vote of the holders of a majority of the outstanding voting
securities of the Fund is required to approve the Interim Advisory Agreement.
Under the 1940 Act, the affirmative vote of "a majority of the outstanding
voting securities" of the Fund is defined as the lesser of (a) 67% or more of
the voting securities of the Fund present or represented by proxy at the
Meeting, if the holders of more than 50% of the outstanding voting securities
of the Fund are present or represented by proxy, or (b) more than 50% of the
outstanding voting securities of the Fund.
THE TRUSTEES RECOMMEND THAT SHAREHOLDERS VOTE TO APPROVE PROPOSAL 2.
PROPOSAL 3--RECLASSIFICATION AS NONFUNDAMENTAL OF THE FUNDAMENTAL INVESTMENT
OBJECTIVE OF THE FUND
RECLASSIFICATION OF FUNDAMENTAL INVESTMENT OBJECTIVE AS NONFUNDAMENTAL
Under the 1940 Act, the Fund's investment objective is not required to be
classified as "fundamental." A fundamental investment objective may be changed
only by vote of the Fund's shareholders. In order to provide the Fund with
enhanced investment management flexibility to respond to market, industry or
regulatory changes, the Trustees of the Fund have approved the
reclassification from fundamental to nonfundamental of the Fund's investment
objective. A nonfundamental investment objective may be changed at any time by
the Trustees of the Successor Fund without approval by the Successor Fund's
shareholders.
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For a complete description of the investment objective of the Fund, please
consult your Fund prospectus. The reclassification from fundamental to
nonfundamental will not alter the Fund's investment objective. If at any time
in the future, the Trustees of the Successor Fund approve a change in the
Successor Fund's nonfundamental investment objective, shareholders of the
Successor Fund will be given notice of such change prior to its
implementation; however, if such a change were to occur, shareholders would
not be asked to approve such change.
If the reclassification of the Fund's investment objective from fundamental
to nonfundamental is not approved by shareholders of the Fund, the Fund's
investment objective will remain fundamental and shareholder approval (and its
attendant costs and delays) will continue to be required prior to any change
in investment objective.
RECOMMENDATION OF TRUSTEES
The Trustees of the Fund have considered the enhanced management flexibility
to respond to market, industry or regulatory changes that would accrue to the
Fund's investment adviser if the Fund's fundamental investment objective were
reclassified as nonfundamental.
By a unanimous written consent dated December 15, 1997, the Trustees of the
Fund voted to approve the reclassification of the investment objective of the
Fund from fundamental to nonfundamental.
REQUIRED VOTE
The affirmative vote of the holders of a majority of the outstanding voting
securities of the Fund is required to approve the reclassification of the
Fund's investment objective from fundamental to nonfundamental. Under the 1940
Act, the affirmative vote of "a majority of the outstanding voting securities"
of the Fund is defined as the lesser of (a) 67% or more of the voting
securities of the Fund present or represented by proxy at the Meeting, if the
holders of more than 50% of the outstanding voting securities of the Fund are
present or represented by proxy; or (b) more than 50% of the outstanding
voting securities of the Fund.
THE TRUSTEES RECOMMEND THAT SHAREHOLDERS VOTE TO APPROVE PROPOSAL 3.
PROPOSAL 4--CHANGES TO FUNDAMENTAL INVESTMENT RESTRICTIONS
ADOPTION OF STANDARDIZED INVESTMENT RESTRICTIONS (PROPOSALS 4A-4I)
The primary purpose of Proposals 4A through 4I is to revise and standardize
the Fund's fundamental investment restrictions (the "Restrictions"). The
Trustees of the Fund were informed of FUNB's efforts to analyze the
fundamental and nonfundamental investment restrictions of the various funds
offered by the Evergreen family of mutual funds and, where practicable and
appropriate to a Fund's investment objective and policies, propose to
shareholders adoption of standardized Restrictions. Recognizing the effects of
the Merger, the Trustees of the Current Trust have also concurred with FUNB's
efforts.
It is not anticipated that any of the changes will substantially affect the
way the Successor Fund will be managed. These proposals are being presented to
shareholders for approval because it is believed that increased
standardization will help to promote operational efficiencies and facilitate
monitoring of compliance with the Restrictions. Because the proposed
standardized fundamental Restrictions in general are phrased more broadly than
the Fund's current fundamental Restrictions, FUNB will be able to respond more
expeditiously to changed market, industry or regulatory developments. Set
forth below, as sub-sections of this Proposal, are general descriptions of
each of the proposed changes. You will be given the option to approve all,
some, or none of the proposed changes on the proxy card enclosed with this
proxy statement.
A listing of the proposed standardized fundamental Restrictions to be
adopted by the Fund is set forth in Exhibit C to this proxy statement.
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A listing of the current fundamental Restrictions of the Fund is set forth
in Exhibit D. Those fundamental Restrictions that shareholders are being
requested to vote to standardize are shown in Exhibit D by an "S", which
stands for "To be Standardized." If a particular change is not approved by
shareholders of the Fund, the current fundamental Restriction will remain in
place at the Successor Fund. To compare the Fund's current fundamental
Restriction to the proposed changed fundamental Restriction, please refer to
Exhibit D.
Many of the Fund's current Restrictions are accompanied by descriptive
language. Such descriptive language should not be read as part of the
fundamental Restriction. To the extent such descriptive language in a current
Restriction does not conflict with the language in a proposed Restriction, the
language will be retained but will not be considered fundamental and, as such,
may be changed by the Trustees without a further shareholder vote.
If approved by shareholders, the revised fundamental Restrictions described
in Proposals 4A through 4I will remain fundamental and, as such, cannot be
changed without a further shareholder vote. If a proposed standardized
fundamental Restriction is not approved by shareholders of the Fund, the
current Restriction will remain fundamental at the Successor Fund and
shareholder approval (and its attendant costs and delays) will continue to be
required prior to any change in the Restriction.
RECLASSIFICATION OF FUNDAMENTAL RESTRICTIONS AS NONFUNDAMENTAL (PROPOSAL 4J)
The reclassification from fundamental to nonfundamental of certain of the
Fund's other current fundamental Restrictions will enhance the ability of the
Fund to achieve its investment objective because FUNB will have greater
investment management flexibility to respond to changed market, industry or
regulatory conditions without the delay and expense of the solicitation of
shareholder approval.
RECOMMENDATION OF TRUSTEES
The Trustees of the Fund have reviewed the potential benefits associated
with the proposed standardization of the Fund's fundamental Restrictions
(Proposals 4A through 4I below) as well as the potential benefits associated
with the reclassification of the Fund's other fundamental Restrictions to
nonfundamental (Proposal 4J).
By a unanimous written consent dated December 15, 1997, the Trustees of the
Fund voted to approve the proposed standardization of the Fund's fundamental
Restrictions (Proposals 4A through 4I below) and the reclassification from
fundamental to nonfundamental of the Fund's other fundamental Restrictions
(Proposal 4J below).
REQUIRED VOTE
The affirmative vote of the holders of a majority of the outstanding voting
securities of the Fund is required to standardize the language of the Fund's
fundamental Restrictions, (Proposals 4A through 4I) and to approve the
reclassification of certain other fundamental Restrictions to nonfundamental
(Proposal 4J). Under the 1940 Act, the affirmative vote of "a majority of the
outstanding existing securities" of the Fund is defined as the lesser of (a)
67% or more of the voting securities of the Fund present or represented by
proxy at the Meeting, if the holders of more than 50% of the outstanding
voting securities of the Fund are present or represented by proxy or (b) more
than 50% of the outstanding voting securities of the Fund.
THE TRUSTEES RECOMMEND THAT SHAREHOLDERS VOTE TO APPROVE PROPOSAL 4.
PROPOSAL 4A: TO AMEND THE FUNDAMENTAL RESTRICTION CONCERNING DIVERSIFICATION
OF INVESTMENTS
The Fund is classified under the 1940 Act as "non-diversified". A non-
diversified investment company is defined in the 1940 Act as any investment
company other than a diversified company. A diversified company cannot
purchase the securities of an issuer if the purchase would cause more than 5%
of the diversified investment company's total assets taken at market value to
be invested in the securities of such issuer, except
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U.S. government securities, or if the purchase would cause more than 10% of
the outstanding voting securities of any one issuer to be held in the
diversified investment company's portfolio. These restrictions apply to 75% of
the diversified investment company's total assets. In general, in order to
meet certain Internal Revenue Code requirements, a non-diversified management
investment company may have no more than 25% of its total assets invested in
the securities (other than U.S. government securities or the shares of other
regulated investment companies) of any one issuer and must invest 50% of its
total assets under the 5% of assets and 10% of outstanding voting securities
tests applicable to diversified investment companies as described above. No
change other than standardized language is being proposed. Adoption of the
change is not expected to materially affect the operation of the Fund.
The Fund is not changing its current classification. As proposed, the Fund's
fundamental Restriction regarding non-diversification will be replaced with
the following fundamental Restriction:
"The Fund may not make any investment
inconsistent with the Fund's
classification as a non-diversified
investment company under the Investment
Company Act of 1940."
PROPOSAL 4B: TO AMEND THE FUNDAMENTAL RESTRICTION CONCERNING CONCENTRATION OF
THE FUND'S ASSETS IN A PARTICULAR INDUSTRY
The Fund currently has a fundamental Restriction concerning the
concentration of investments in a particular industry. The staff of the SEC
takes the position that a mutual fund "concentrates" its investments in a
particular industry if more than 25% of the mutual fund's assets exclusive of
cash and U.S. government securities are invested in the securities of issuers
in such industry. The Fund's Restriction generally embodies the SEC staff
interpretation by stating that the Fund will not concentrate its investments
in a particular industry by investing more than 25% of its assets, exclusive
of cash and U.S. government securities in securities of issuers in any one
industry.
Shareholders are being requested to approve amendment of the foregoing
fundamental Restriction. As proposed, the Fund's current fundamental
Restriction regarding concentration of the Fund's assets in a particular
industry will be replaced by the following fundamental Restriction:
"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.)"
The primary purpose of the proposed amendment is to adopt insofar as
possible a standardized Restriction regarding concentration. Adoption of this
change is not expected to materially affect the operation of the Funds.
PROPOSAL 4C: TO AMEND THE FUNDAMENTAL RESTRICTION CONCERNING THE ISSUANCE OF
SENIOR SECURITIES
The Fund's current fundamental Restriction regarding the issuance of senior
securities generally states that the Fund shall not issue any senior security
and states the criteria under which a security is deemed not to be a senior
security.
It is proposed that shareholders approve replacing the Funds' current
fundamental Restriction concerning the issuance of senior securities with the
following fundamental Restriction governing the issuance of senior securities:
"Except as permitted under the Investment
Company Act of 1940, the Fund may not
issue senior securities."
The primary purpose of this proposed change is to standardize the Fund's
fundamental Restriction regarding senior securities.
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<PAGE>
The proposed fundamental Restriction clarifies that the Fund may issue
senior securities to the full extent permitted under the 1940 Act. Although
the definition of a "senior security" involves complex statutory and
regulatory concepts, a senior security is generally an obligation of the Fund
which has a claim to the Fund's assets or earnings that takes precedence over
the claims of the Fund's shareholders. The 1940 Act generally prohibits open-
end investment companies (i.e. mutual funds) from issuing any senior
securities; however, under current SEC staff interpretations, mutual funds are
permitted to engage in certain types of transactions that might be considered
"senior securities" as long as certain conditions are satisfied. For example,
a transaction that obligates the Fund to pay money at a future date (e.g., the
purchase of securities to be settled on a date that is farther away than the
normal settlement period) may be considered a "senior security." A mutual fund
is permitted to enter into this type of transaction if it maintains a
segregated account containing liquid securities in an amount equal to its
obligation to pay cash for the securities at a future date. The Fund would
engage in transactions that could be considered to involve "senior securities"
only in accordance with applicable regulatory requirements under the 1940 Act.
Adoption of the proposed fundamental Restriction concerning senior
securities is not expected to materially affect the operation of the Fund.
However, adoption of a standardized fundamental Restriction will facilitate
the Fund's investment compliance efforts and will allow the Funds to respond
to legal, regulatory and market developments which may make the use of
permissible senior securities advantageous to the Fund and its shareholders.
PROPOSAL 4D: TO AMEND THE FUNDAMENTAL RESTRICTION CONCERNING BORROWING
Generally, the Fund's current fundamental Restriction concerning borrowing
states that the Fund shall not borrow money except in an amount not in excess
of 5% of the total assets of the Fund, and then only for emergency and
extraordinary purposes, which shall not prohibit escrow and collateral
arrangements in connection with investment in financial futures contracts and
related options. When reviewing the Fund's policies on borrowings as set forth
in Exhibit D, you should also review the Fund's policies on the issuance of
senior securities since the topics are interrelated.
In general, under the 1940 Act, a mutual fund may not borrow money, except
that (i) a fund may borrow from banks (as defined in the Investment Company
Act of 1940, as amended) or enter into reverse repurchase agreements, in
amounts up to 33 1/3% of its total assets (including the amount borrowed),
(ii) a fund may borrow up to an additional 5% of its total assets for
temporary purposes, (iii) a fund may obtain such short-term credit as may be
necessary for the clearance of purchases and sales of portfolio securities,
and (iv) a fund may not pledge its assets other than to secure such borrowings
or, to the extent permitted by the fund's investment policies, as such
policies may be set forth in its Prospectus and Statement of Additional
Information, as they may be amended from time to time, in connection with
hedging transactions, short sales, when-issued and forward commitment
transactions and similar investment strategies.
It is proposed that shareholders approve replacing the Fund's current
fundamental Restriction regarding borrowing with the following fundamental
Restriction:
"The Fund may not borrow money, except to
the extent permitted by applicable law."
If the proposal is approved, the Fund will disclose that it will not engage
in leveraging. The primary purpose of the proposed change to the fundamental
Restriction concerning borrowing is to standardize the Restriction.
Adoption of the proposed Restriction is not currently expected to materially
affect the operation of the Fund. However, the Fund's current Restriction
restricts borrowing to a lower percentage of total assets than the 33 1/3%
permitted under the 1940 Act. The proposed Restriction therefore would allow
the Fund to purchase a security while borrowings representing more than 5% of
total assets are outstanding. While the Fund has no current intention to
leverage, the flexibility to do so may be beneficial to the Fund at a future
date.
14
<PAGE>
PROPOSAL 4E: TO AMEND THE FUNDAMENTAL RESTRICTION CONCERNING UNDERWRITING
The Fund is currently subject to a fundamental Restriction concerning
underwriting. The Restriction generally provides that the Fund shall not
underwrite any securities. It is proposed that shareholders approve replacing
the current fundamental Restriction with the following fundamental Restriction
concerning underwriting:
"The Fund may not underwrite securities
of other issuers, except insofar as the
Fund may technically be deemed an
underwriter in connection with the
disposition of its portfolio securities."
The primary purpose of the proposed change is to clarify that the Fund is
not prohibited from selling securities if, as a result of the sale, the Fund
would be considered an underwriter under the federal securities laws. It is
also intended to standardize the Fund's fundamental Restriction regarding
underwriting. While the proposed change will have no current impact on the
Fund, adoption of the proposed standardized fundamental Restriction will
advance the goals of standardization.
PROPOSAL 4F: TO AMEND THE FUNDAMENTAL RESTRICTION CONCERNING INVESTMENT IN
REAL ESTATE
The Fund currently has a fundamental Restriction concerning the purchase of
real estate. In general, the Restriction states that the Fund shall not
purchase or sell real estate. In the opinion of management, this Restriction
does not currently preclude investment in securities of issuers that deal in
real estate.
Shareholders are being asked to approve amendment of this Restriction. As
proposed, the Fund's current fundamental Restriction will be replaced by the
following fundamental Restriction which will govern future purchases and sales
of 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 issuers that invest
in real estate."
The primary purpose of the proposed amendment is to clarify the types of
securities in which the Fund is authorized to invest and to standardize the
Fund's fundamental Restriction concerning real estate.
The proposed fundamental Restriction would make it explicit that the Fund
may acquire a security or other instrument whose payments of interest and
principal may be secured by a mortgage or other right to foreclose on real
estate, in the event of default. Any investments in these securities are, of
course, subject to the Fund's investment objective and policies and to other
limitations regarding diversification and concentration.
To the extent that the Fund buys securities and instruments of companies in
the real estate business, the Fund's performance will be affected by the
condition of the real estate market. This industry is sensitive to factors
such as changes in real estate values and property taxes, overbuilding,
variations in rental income, and interest rates. Performance could also be
affected by the structure, cash flow, and management skill of real estate
companies.
While the proposed change will have no current impact on the Fund, adoption
of the proposed standardized fundamental Restriction will advance the goal of
standardization.
PROPOSAL 4G: TO AMEND THE FUNDAMENTAL INVESTMENT RESTRICTION CONCERNING
COMMODITIES
The Fund currently is subject to a fundamental Restriction that provides
that the Fund will not purchase or sell commodities, commodity contracts or
commodity futures contracts.
15
<PAGE>
It is proposed that shareholders approve replacing the current fundamental
Restriction with the following fundamental Restriction concerning 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."
The proposed amendment is intended to allow the Fund to have the flexibility
to invest in futures contracts and related options, including financial
futures such as interest rate and stock index futures. The Fund currently has
the ability to invest in financial futures. Under the proposed amendment,
these types of securities may be used for hedging or for investment purposes
and involve certain risks.
While the proposed change will have no material impact on the operation of
the Fund, adoption of the proposed fundamental Restriction will advance the
goals of standardization.
PROPOSAL 4H: TO AMEND THE FUNDAMENTAL INVESTMENT RESTRICTION CONCERNING
LENDING
The Fund's current fundamental Restriction concerning lending states
generally that the Fund will not lend its portfolio securities except that it
may acquire publicly or nonpublicly issued municipal securities or temporary
investments or enter into repurchase agreements as permitted by the Fund's
investment objective, policies, limitations and Charter. In general, it is the
Fund's current policy that such loans must be secured continuously by cash
collateral maintained on a current basis in an amount at least equal to the
market value of the securities loaned, or by irrevocable letters of credit.
During the existence of the loan, the Fund must continue to receive the
equivalent of the interest and dividends paid by the issuer on the securities
loaned and interest on the investment of the collateral; the Fund must have
the right to call the loan and obtain the securities loaned at any time on
five days' notice, including the right to call the loan to enable the Fund to
vote the securities. To comply with previous (but as a result of federal
legislation passed last year, now superseded) requirements of certain state
securities administrators, such loans were not to exceed one-third of the
Fund's net assets taken at market value.
It is proposed that shareholders approve the replacement of the foregoing
fundamental Restriction with the following amended fundamental Restriction
concerning 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 securities or other investment
instruments shall not be deemed to be the
making of a loan."
The proposal is not expected to materially affect the operation of the Fund.
However, the proposed Restriction would clarify the Fund's ability to invest
in direct debt instruments such as loans and loan participations, which are
interests in amounts owed to another party by a company, government or other
borrower. These types of securities may have additional risks beyond
conventional debt securities because they may provide less legal protection
for the Fund, or there may be a requirement that the Fund supply additional
cash to a borrower on demand.
The adoption of a standardized fundamental Restriction will advance the
goals of standardization.
16
<PAGE>
PROPOSAL 4I: TO AMEND THE FUNDAMENTAL RESTRICTION CONCERNING INVESTMENT IN
FEDERALLY TAX EXEMPT SECURITIES
The 1940 Act provides, in effect, that a mutual fund cannot use a name or
title which may be deceptive or misleading. If a fund's name suggests a
certain type of investment policy, its name should be consistent with its
statement of policy. The SEC staff has taken the position that if a mutual
fund's name implies that its distributions will be exempt from federal income
taxation it should have a fundamental policy requiring that during periods of
normal market conditions either (1) the fund's assets will be invested so that
at least 80% of the income will be tax-exempt or (2) the fund will have at
least 80% of its net assets invested in tax-exempt securities. The Fund
currently has a fundamental policy complying with the foregoing requirement.
It is proposed that shareholders of the Fund approve replacing the Fund's
current fundamental Restriction regarding the foregoing 80% test with the
following fundamental Restriction:
"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."
This proposed fundamental Restriction, if adopted by shareholders, will
permit the Fund to respond to changed regulatory requirements without the
delay and expense of the solicitation of shareholder approval. Adoption of the
proposed change is not expected to materially affect the operation of the Fund
and the Fund will continue to follow applicable SEC staff guidelines as
embodied in the Fund's current fundamental Restriction.
PROPOSAL 4J: RECLASSIFICATION AS NONFUNDAMENTAL OF ALL CURRENT FUNDAMENTAL
RESTRICTIONS OTHER THAN THE FUNDAMENTAL RESTRICTIONS DESCRIBED IN
THE FOREGOING PROPOSALS 4A THROUGH 4I.
Like all mutual funds, when the Fund was established the Trustees of the
Current Trust adopted certain investment Restrictions that would govern the
efforts of the Fund's investment advisers in seeking the Fund's investment
objectives. Some of these Restrictions were designated as "fundamental" and,
as such, may not be changed unless the change has first been approved by the
Trustees and then by the shareholders of the Fund. Many of the Fund's
investment restrictions were required to be classified as fundamental under
the securities laws of various states. Since October 1996, such state
securities laws and regulations regarding fundamental investment restrictions
have been preempted by federal law and no longer apply.
The Fund's fundamental Restrictions were established to reflect certain
regulatory, business or industry conditions as they existed at the time the
Fund was established. Many such conditions no longer exist. The 1940 Act
requires only that the Restrictions discussed in Proposals 4A through 4H above
be classified as fundamental and certain SEC staff guidelines require Proposal
4I to be classified as fundamental. As a result, this Proposal 4J proposes to
reclassify as nonfundamental all current fundamental Restrictions of the Fund
other than the fundamental Restrictions discussed in the foregoing Proposals
4A through 4I.
Nonfundamental Restrictions may be changed or eliminated by the Fund's
Trustees at any time without approval of the Fund's shareholders. The current
fundamental Restrictions proposed to be reclassified as nonfundamental are
shown in Exhibit D by an "R", which stands for "To be Reclassified."
None of the proposed changes will alter the Fund's investment objective.
Indeed, the Trustees believe that approval of the reclassification of
fundamental Restrictions to nonfundamental Restrictions will enhance the
ability of the Funds to achieve its investment objectives because the Fund's
investment adviser will have greater investment management flexibility to
respond to changed market, industry or regulatory conditions without the delay
and expense of the solicitation of shareholder approval.
17
<PAGE>
INFORMATION CONCERNING INVESTMENT ADVISORY ARRANGEMENTS
CURRENT AND SUCCESSOR INVESTMENT ADVISORY ARRANGEMENTS
In connection with the Reorganization, the Successor Fund will be subject to
an investment advisory agreement between the Successor Trust, on behalf of the
Successor Fund, and FUNB (the "Successor Advisory Agreement") to become
effective on or about February 27, 1998. A description of the Successor
Advisory Agreement pursuant to which FUNB will be the investment adviser to
the Successor Fund, as well as the services to be provided by FUNB pursuant
thereto is set forth below under "Advisory Services." Under the Successor
Advisory Agreement, the rate payable annually by the Fund for investment
advisory services will be reduced from 0.75% of the Fund's average annual net
assets to 0.50% of such net assets. The same general types of services
currently provided to the Fund by Virtus will be provided to the Successor
Fund by FUNB. The description of the Successor Advisory Agreement in this
Proxy Statement is qualified in its entirety by reference to the form of the
Successor Advisory Agreement attached to this proxy statement as Exhibit E.
EXISTING INVESTMENT ADVISORY AGREEMENT
Virtus or its predecessor has served as investment adviser to the Fund since
the commencement of operations of the Fund pursuant to the Existing Advisory
Agreement. During the fiscal year ended September 30, 1997, the Fund paid
$273,851 to Virtus for investment advisory services.
COMPARISON OF THE SUCCESSOR ADVISORY AGREEMENT AND THE EXISTING INVESTMENT
ADVISORY AGREEMENT
Advisory Services. The investment advisory services to be provided by FUNB
under the Successor Advisory Agreement are similar to those currently provided
by Virtus under the Existing Advisory Agreement. Under such Agreement, Virtus
serves as investment adviser and furnishes to the Fund investment guidance and
policy direction in connection therewith. Virtus provides to the Fund, among
other things, information relating to portfolio composition, credit conditions
and average maturity of the portfolio of the Fund. Virtus also furnishes to
the Trustees periodic reports on the investment performance of the Fund.
Pursuant to the Existing Advisory Agreement, Virtus is obligated to provide
certain administrative assistance in connection with the operation of the
Fund. Administrative services which Virtus is obligated to provide include,
among other things, (i) data processing, clerical and bookkeeping services
required in connection with maintaining the financial accounts and records for
the Fund, (ii) compiling statistical and research data required for the
preparation of reports and statements which are periodically distributed to
the Current Trust's officers and Trustees, (iii) handling general shareholder
relations with Fund investors, such as advice as to the status of shareholder
accounts, the current yield and dividends declared to date and assistance with
other questions related to their accounts, and (iv) compiling information
required in connection with the Current Trust's filings with the SEC.
Pursuant to an Administrative Services Agreement (the "Existing
Administrative Services Agreement") between the Trust and Federated
Administrative Services ("FAS"), Federated Tower, Pittsburgh, Pennsylvania
15222-3779, FAS acts as the Administrator of the Fund. FAS provides the Fund
with certain administrative personnel and services necessary to operate the
Fund. Such services include shareholder servicing and certain legal and
accounting services. FAS is entitled to receive from the Fund a fee based on
the net assets of the Fund as compensation for its provision of administrative
services to the Fund. For the fiscal year ended September 30, 1997, such fee
was $75,000.
The Successor Advisory Agreement provides that FUNB will furnish reports,
statistical and research services and make investment decisions with respect
to the Fund's portfolio of investments. While the Successor Advisory Agreement
does not expressly require that FUNB provide general supervision of the Fund's
affairs, if
18
<PAGE>
the Reorganization is consummated, the Successor Trust on behalf of the
Successor Fund, will enter into a "New Administrative Services Agreement" with
Evergreen Investment Services, Inc. ("EIS"). EIS will manage the day-to-day
business administration of the Fund and provide services similar to those
currently provided to the Fund by FAS. The New Administrative Services
Agreement is not subject to shareholder approval and it is expected that the
Successor Trust will, on behalf of the Fund, enter into such Agreement on
behalf of the Fund only if the events described above in this paragraph occur.
FEES AND EXPENSES
The investment advisory fees and expense limitations for the Fund under the
Existing Advisory Agreement and the Successor Advisory Agreement are set forth
below, along with a discussion of how such fees and expenses compare.
Under the Successor Advisory Agreement, the rate of the investment advisory
fee payable by the Successor Fund, will be reduced but will continue to be
expressed as a percentage of net assets at an annual rate, based on the
Successor Fund's average daily net assets; such fee currently is accrued and
paid daily. Under the Successor Advisory Agreement, the fee will be accrued
daily and paid monthly.
Under the Existing Advisory Agreement, Virtus receives an annual fee at a
rate equal to 0.75% of the Fund's average net assets. Under the Successor
Advisory Agreement the rate payable to FUNB for investment advisory services
will be 0.50% of the Successor Fund's average net assets.
Under the Existing Administrative Services Agreement, FAS is paid by the
Fund for the administrative services it performs for the Fund according to the
following fee schedule:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATION FEE NET ASSETS OF THE TRUST
------------------- -------------------------
<S> <C>
0.15% on the first $250 million
0.125% on the next $250 million
0.10% on the next $250 million
0.075% on the next $250 million
</TABLE>
As noted above, it is expected that the Trustees of the Successor Trust will
authorize the Successor Trust, on behalf of the Successor Fund, to enter into
an Administrative Services Agreement with EIS. Pursuant to such Administrative
Services Agreement, EIS will provide services similar to those currently
provided to the Funds by FAS. For such services, EIS would be entitled to
receive a fee based on the average daily net assets of the Fund at a rate
based on the total assets of the mutual funds administered by EIS for which
FUNB or Evergreen Asset Management also serves as investment adviser,
calculated in accordance with the following schedule: 0.050% on the first $7
billion; 0.035% on the next $3 billion; 0.030% on the next $5 billion; 0.020%
on the next $10 billion; 0.015% on the next $5 billion and 0.010% on assets in
excess of $30 billion. The total assets of the mutual funds administered by
EIS for which either FUNB or Evergreen Asset Management acts as investment
adviser were approximately $40 billion as of November 30, 1997.
19
<PAGE>
The amounts for Trust and Investment shares of the Fund set forth in the
following tables and in the examples are based on the expenses for the Fund
for the fiscal year ended September 30, 1997. The pro forma amounts for Class
Y and Class A shares of the Successor Fund are based on the estimated expenses
of the Successor Fund for the fiscal year ending September 30, 1998.
The following tables show for the Fund and the Successor Fund pro forma,
assuming consummation of the Reorganization, the shareholder transaction
expenses and annual fund operating expenses associated with an investment in
the Class Y, Class A, Trust and Investment shares of each Fund, as applicable.
COMPARISON OF CLASS Y AND CLASS A SHARES
OF THE SUCCESSOR FUND WITH TRUST AND
INVESTMENT SHARES OF THE SUCCESSOR FUND
THE FUND
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES TRUST INVESTMENT
- -------------------------------- ----- ----------
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)..................... None None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)..................... None None
Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds,
whichever is lower)..................................... None 2.00% within
five years of
purchase date
and 0.00%
thereafter
Exchange Fee............................................. None None
Annual Fund Operating Expenses
(as a percentage of average daily net assets)...........
Management Fee........................................... 0.75% 0.75%
12b-1 Fees............................................... None 0.25%
Other Expenses........................................... 0.49% 0.49%
---- ----
Annual Fund Operating Expenses........................... 1.24% 1.49%
<CAPTION>
THE SUCCESSOR FUND PRO FORMA
SHAREHOLDER TRANSACTION EXPENSES CLASS Y CLASS A
- -------------------------------- ------- -------
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)..................... None 4.75%
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)..................... None None
Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds,
whichever is lower)..................................... None None
Exchange Fee............................................. None None
Annual Fund Operating Expenses
(as a percentage of average daily net assets)...........
Management Fee(1)........................................ 0.60% 0.60%
12b-1 Fees............................................... None 0.25%
Other Expenses........................................... 0.52% 0.52%
---- ----
Annual Fund Operating Expenses........................... 1.12% 1.37%
==== ====
</TABLE>
- --------
(1) Represents blended management fees of 0.75% to be paid to Virtus through
the closing of the Reorganization and 0.50% to be paid to FUNB thereafter.
20
<PAGE>
Examples. The following tables show for the Fund and for the Successor Fund
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 Investment shares,
no redemption at the end of each period. In the case of the Successor Fund pro
forma, the examples do not reflect the imposition of the 4.75% maximum sales
load on purchases since Fund shareholders who receive Class A shares of the
Successor Fund in the Reorganization or who purchase additional Class A shares
subsequent to the Reorganization will not incur any sales load.
THE FUND
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Trust Shares........................................... $13 $39 $ 68 $150
Investment Shares (Assuming redemption at end of
period)............................................... $35 $67 $ 81 $178
Investment (Assuming no redemption at end of period)... $15 $47 $ 81 $178
THE SUCCESSOR FUND--PRO FORMA
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Class Y Shares......................................... $11 $36 $ 62 $136
Class A Shares......................................... $61 $89 $119 $204
</TABLE>
The purpose of the foregoing examples is to assist Fund shareholders in
understanding the various costs and expenses that an investor in the Successor
Fund 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 the Fund. 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.
The Existing Advisory Agreement is similar in many respects to the Successor
Advisory Agreement. Except as noted herein, the Successor Advisory Agreement
contains the material terms of the Existing Advisory Agreement. Most
importantly, the rate at which fees are required to be paid by the Fund for
investment advisory services, as a percentage of average daily net assets,
will be lower.
The following summarizes certain aspects of the Existing Advisory Agreement
and the Successor Advisory Agreement.
Brokerage Transactions. The Successor Advisory Agreement sets forth specific
terms as to brokerage transactions and the investment adviser's use of broker-
dealers. For example, the Successor Fund's investment adviser will be
obligated to use its best efforts to seek to execute portfolio transactions at
prices which, under the circumstances, result in total costs or proceeds being
most favorable to the Successor Fund. In assessing the best overall terms
available for any transaction, the investment adviser will consider all
factors it deems relevant, including the breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker or dealer, research services provided and the
reasonableness of the commission, if any, both for the specific transaction
and on a continuing basis. The Successor Advisory Agreement also specifically
states that the investment adviser is entitled to rely on the provisions of
Section 28(e) of the Securities Exchange Act of 1934, as amended (the "1934
Act"), which permits an investment adviser to have its client, including an
21
<PAGE>
investment company, pay more than the lowest available commission for
executing a securities trade in return for research services and products. The
Existing Advisory Agreement of the Fund does not specify the standards to be
used in the selection of brokers or refer to the provisions of Section 28(e)
of the 1934 Act.
Expenses. The Successor Advisory Agreement provides that the investment
adviser is required to pay or reimburse the Successor Fund for (i) the
compensation (if any) of the Trustees who are affiliated with the investment
adviser or with its affiliates, or with any adviser retained by the investment
adviser, and of all officers of the Successor Fund as such, and (ii) all
expenses of the investment adviser incurred in connection with its services
thereunder. Under the Existing Advisory Agreement, the Fund is responsible for
payment of its own expenses.
Liability and Indemnification. The Successor Advisory Agreement and the
Existing Advisory Agreement provide that the investment adviser shall have no
liability in connection with rendering services thereunder, other than
liabilities resulting from the adviser's willful misfeasance, bad faith, gross
negligence or reckless disregard of its duties.
Indemnification. The Successor Advisory Agreement provides that the Fund
will indemnify the investment adviser against liabilities, losses and expenses
incurred in connection with the performance of such agreement, except those
stated above and liabilities involving a breach of the investment adviser's
fiduciary duties in respect of the receipt of compensation for its services.
The Existing Advisory Agreement does not contain a similar provision.
Amendments. The Successor Advisory Agreement, provides in general that only
amendments of substance require shareholder approval. The Existing Advisory
Agreement is silent in regard to the substance of amendments.
Term. The Successor Advisory Agreement will become effective on or about
February 27, 1998. The Successor Advisory Agreement will have an initial term
of two years. Thereafter, the Successor Advisory Agreement will be continued
from year to year, provided that its continuation is specifically approved at
least annually, in the manner required by the 1940 Act. The 1940 Act requires
that the Successor Advisory Agreement and any renewal thereof be approved by a
vote of a majority of Trustees of the Successor Trust who are not parties
thereto or interested persons (as such term is 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 and by a vote of the Trustees of the Successor Trust or a
majority of the outstanding voting securities of the Fund. A vote of a
majority of the outstanding voting securities of the Fund is defined in the
1940 Act to mean a vote of the lesser of (i) more than 50% of the outstanding
voting securities of the Fund or (ii) 67% or more of the voting securities
which are present or represented by proxy. The Existing Advisory Agreement
contains comparable provisions.
Termination; Assignment. The Successor Advisory Agreement provides that it
may be terminated without penalty upon 60 days' written notice by a majority
of the Trustees of the Successor Trust, or by the affirmative vote of the
holders of a "majority of the outstanding voting securities" (as defined in
the 1940 Act) of the Successor Fund or by FUNB. Also, the Successor Advisory
Agreement will automatically terminate in the event of its "assignment" (as
defined in the 1940 Act). The Existing Advisory Agreement contains
substantially similar provisions as to termination and assignment.
INFORMATION ABOUT THE FUNDS' CURRENT AND PROPOSED NEW INVESTMENT ADVISER
Virtus. Currently, investment decisions for the Fund are made by Virtus,
subject to direction by the Trustees. Virtus continually conducts investment
research and supervision for the Fund and is responsible for the purchase or
sale of portfolio instruments, for which it receives an annual fee from the
assets of the Fund. Virtus, a Maryland corporation formed in 1995 to succeed
to the business of Signet Asset Management (adviser to the Fund since 1990),
was, prior to the Merger, a wholly-owned subsidiary of Signet. Prior to the
Merger, Signet was a multi-state, multi-bank holding company which had
provided investment management services since 1956.
22
<PAGE>
Prior to the Merger, Virtus, which is a registered investment adviser,
managed, in addition to the Fund and the other series portfolios of the
Current Trust, and the Blanchard Funds family of mutual funds and three fixed
income common trust funds with $163.6 million in assets. Since consummation of
the Merger, Virtus has been a subsidiary of First Union. Attached to this
proxy statement as Exhibit F is a table that provides information with respect
to the current directors and principal executive officers of Virtus.
Charles E. Jeanne is the portfolio manager of the Fund. He joined FUNB in
1993. Prior to joining FUNB, Mr. Jeanne served as a trader/portfolio manager
for First American Bank where he was responsible for individual accounts and
common trust funds. He also serves as portfolio manager for the Evergreen
Virginia Municipal Bond Fund. He is also an employee of Virtus which, since
consummation of the Merger, has been a subsidiary of First Union. He has
served as portfolio manager of the Fund since December, 1997.
The table below indicates the amount of compensation received by Virtus for
providing investment advisory services to the Fund. Federated Services Company
currently serves as the Fund's transfer agent and dividend disbursing agent
and Signet Trust Company serves as the Fund's custodian. FUNB, as successor to
Signet Trust Company, is expected to serve as the Fund's custodian during the
period January 19, 1998 through February 27, 1998. It is expected that if the
New Advisory Agreement is approved, the Successor Trust, on behalf of the
Successor Fund, will enter into arrangements providing for State Street Bank
and Trust Company ("State Street") to become transfer agent, dividend
disbursing agent and custodian for the Fund.
<TABLE>
<CAPTION>
TRANSFER
AGENCY FEES
PAID TO
INVESTMENT ADMINISTRATIVE FEDERATED CUSTODIAN
ADVISORY FEES PAID FEES PAID TO DISTRIBUTION SHAREHOLDER FEES PAID TO
TO VIRTUS FAS FEES(1) SERVICES SIGNET TRUST
------------------ -------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
$273,851 $75,000 $73,620 $60,084 $12,079
</TABLE>
- --------
(1) Paid to FSC which, in turn, pays such fees to broker-dealers selling
shares of the Fund.
During the fiscal year ended September 30, 1997, the Fund paid no brokerage
commissions to FSC or to any affiliated broker thereof.
FUNB. First Union, the corporate parent of FUNB, is a bank holding company
headquartered in Charlotte, North Carolina, which had over $155 billion in
consolidated assets as of November 30, 1997. First Union and its subsidiaries
provide a broad range of financial services to individuals and businesses. The
Capital Management Group of FUNB and investment advisory affiliates of FUNB
manage or otherwise oversee the investment of over $75 billion in assets
belonging to a wide range of clients, including the Evergreen family of mutual
funds. First Union Brokerage Services, Inc. ("FUBS"), a wholly-owned
subsidiary of FUNB, is a registered broker-dealer that is principally engaged
in providing retail brokerage services consistent with its federal banking
authorizations. First Union Capital Markets Corp., a wholly-owned subsidiary
of First Union, is a registered broker-dealer principally engaged in
providing, consistent with its federal banking authorization, private
placement securities dealing, and underwriting services.
23
<PAGE>
While FUNB currently does not serve as investment adviser to any investment
company or series of an investment company with an investment objective
similar to the Fund, as of November 30, 1997, FUNB served as investment
adviser to ten series of investment companies with investment objectives
similar to the Fund in that they seek income exempt from Federal and state
income tax in particular states, with net assets, as of November 30, 1997, as
follows:
<TABLE>
<CAPTION>
INVESTMENT
ADVISORY
NET ASSETS FEES
------------ ----------
<S> <C> <C>
Evergreen Florida Municipal Bond Fund................... $511,825,817 0.50%
Evergreen Georgia Municipal Bond Fund................... $ 77,109,941 0.50%
Evergreen North Carolina Municipal Bond Fund............ $317,626,342 0.50%
Evergreen South Carolina Municipal Bond Fund............ $ 65,373,623 0.50%
Evergreen Virginia Municipal Bond Fund.................. $ 91,857,671 0.50%
Evergreen Massachusetts Tax Free Fund................... $ 10,908,140 0.55%
Evergreen New York Tax Free Fund........................ $ 24,137,118 0.55%
Evergreen Pennsylvania Tax Free Fund.................... $ 68,647,446 0.53%
Evergreen California Tax Free Fund...................... $ 26,464,221 0.56%
Evergreen Missouri Tax Free Fund........................ $ 26,121,747 0.55%
</TABLE>
During First Union's fiscal year ended December 31, 1996, there were no
transactions in First Union's securities by any current officer or current
Trustee of the Current Trust or of the Successor Trust and or officer or
director of First Union or FUNB or Evergreen Asset in an amount equal to or
exceeding 1% of the outstanding securities of First Union.
Attached to this proxy statement as Exhibit G is a table showing the name,
address and principal occupation of the directors and principal executive
officers of FUNB.
VOTING INFORMATION CONCERNING THE MEETING
At the close of business on December 26, 1997, there were issued and
outstanding 416,608.745 shares of the Trust Class of shares and 2,448,717.423
shares of the Investment Class of shares of the Fund. Each full share
outstanding is entitled to one vote and each fractional share outstanding is
entitled to a proportionate share of one vote.
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 each proposal listed thereon and FOR any
other matters deemed appropriate. Proxies that reflect abstentions and "broker
non-votes" (i.e., shares held by brokers or nominees as to which (i)
instructions have not been received from the beneficial owners or the persons
entitled to vote or (ii) the broker or nominee does not have discretionary
voting power on a particular matter) will be counted as shares that are
present and entitled to vote for purposes of determining the presence of a
quorum, but will have no effect on the outcome of the vote to approve any
proposal requiring a vote based on the percentage of shares actually voted. A
proxy may be revoked at any time on or before the Meeting by written notice to
the Secretary of the Fund, Federated Investors Tower, Pittsburgh, Pennsylvania
15222-3799. 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 each
proposal listed thereon and FOR any other matters deemed appropriate.
24
<PAGE>
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, its affiliates or other representatives of
the Fund (who will not be paid for their solicitation activities). Shareholder
Communications Corporation ("SCC") and its agents have also been engaged by
the Fund to assist in soliciting proxies. Any proxy given by you is revocable.
In the event that sufficient votes to approve a proposal are not received,
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 further solicitation and the information to be provided to
shareholders with respect to the reasons for the solicitation.
Neither the Fund nor the Successor Fund is required or intends to hold
annual or other periodic meeting of shareholders except as may be required by
the 1940 Act. If the Reorganization is not approved by shareholders of the
Fund, the next meeting of the shareholders of the Fund will be held at such
time as the Board may determine or as may be legally required. If the
Reorganization is 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 Successor
Fund at Evergreen Funds, 200 Berkeley Street, Boston, Massachusetts 02116 such
that they will be received by the Fund in a reasonable period of time prior to
any such meeting.
NOTICE TO BANKS, BROKER-DEALERS AND VOTING TRUSTEES AND THEIR NOMINEES.
Please advise each Fund whether other persons are beneficial owners of shares
for which proxies are being solicited and, if so, the number of copies of this
proxy statement needed to supply copies to the beneficial owners of the
respective shares.
ADDITIONAL INFORMATION
PAYMENT OF EXPENSES
FUNB will pay for the preparation, printing and mailing to its shareholders
of the proxy, accompanying notice of meeting and this proxy statement and any
supplementary solicitation of its shareholders.
BENEFICIAL OWNERSHIP
As of December 26, 1997, Stephens Inc., P.O. Box 34127, Little Rock,
Arkansas 72203 owned for the benefit of its customers 610,859.166 Investment
Class shares, representing 24.95% of such class and BOVA & Co., Signet Trust
Co., P.O. Box 26311, Richmond, Virginia 23260 owned 416,608.745 Trust Class
shares, representing 100% of such class. On December 26, 1997, the existing
Trustees and officers of the Fund, together as a group, "beneficially owned"
less than one percent of the Fund's outstanding Shares. The term "beneficial
ownership" is as defined under Section 13(d) of the Securities Exchange Act of
1934. The information as to beneficial ownership is based on statements
furnished to the Fund by the existing Trustees, officers of such Fund, and/or
on the records of the Fund.
ANNUAL AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS
The Fund will furnish, without charge, a copy of its most recent annual
report (and most recent semi-annual report succeeding the annual report, if
any) to a shareholder of the Fund upon request. Any such request should be
directed to the Fund at the address on the first page of this Proxy Statement
or at 800-829-3863 (prior to February 9, 1998) or 800-343-2898 (from February
9, 1998).
25
<PAGE>
OTHER BUSINESS
The Board does 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 proxy card(s) will vote thereon in
accordance with their judgment.
THE BOARD, INCLUDING ITS INDEPENDENT TRUSTEES, RECOMMENDS APPROVAL OF EACH
PROPOSAL AND ANY UNMARKED PROXIES WITHOUT INSTRUCTIONS TO THE CONTRARY WILL BE
VOTED IN FAVOR OF APPROVAL OF THE PROPOSALS.
January 8, 1998
26
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF CONVERSION
Agreement and Plan of Conversion dated as of November 26, 1997 (the
"Agreement") between The Virtus Funds, a Massachusetts business trust ("Virtus
Funds"), with respect to its The Maryland Municipal Bond Fund series with its
principal place of business at Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779 (the "Fund") and Evergreen Municipal Trust (the
"Trust"), a Delaware business trust, with respect to its Maryland Municipal
Bond Fund having an office at 200 Berkeley Street, Boston, Massachusetts
02116.
Whereas, the Board of Trustees of the Virtus Funds and the Board of Trustees
of the Trust have determined that it is in the best interests of the Fund and
the Trust, respectively, that the assets of the Fund be acquired by a new
series of the Trust pursuant to this Agreement and in accordance with the
applicable laws of the Commonwealth of Massachusetts and the State of
Delaware; and
Whereas, the parties desire to enter into a plan of exchange which would
constitute a reorganization within the meaning of Section 368 of the Internal
Revenue Code of 1986, as amended (the "Code"):
Now Therefore, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto agree as follows:
1. PLAN OF EXCHANGE.
(a) Subject to the terms and conditions set forth herein, on the Exchange
Date (as defined herein) the Fund shall assign, transfer and convey its
assets, including all securities and cash held by the Fund (subject to the
liabilities of the Fund) to a corresponding series of the Trust (the
"Successor Fund"), and the Successor Fund shall acquire all of the assets of
the Fund (subject to the liabilities of the Fund) in exchange for full and
fractional Class A and Class Y shares of beneficial interest of the Successor
Fund, $.001 par value per share (the "Fund Shares"), to be issued by the
Trust, having an aggregate net asset value equal to the value of the net
assets of the Fund. The value of the assets of the Fund and the net asset
value per share of the Fund Shares shall be determined as of the Valuation
Date (as defined herein) in accordance with the procedures for determining the
value of the Fund's assets set forth in the Successor Fund's organizational
documents and the then-current prospectus and statement of addition
information for the Fund that forms a part of the Successor Fund's
Registration Statement on Form N-1A (the "Registration Statement"). In lieu of
delivering certificates for the Fund Shares, the Trust shall credit the Fund
Shares to the Fund's account on the share record books of the Trust and shall
deliver a confirmation thereof to the Fund. The Fund shall then deliver
written instructions to the Trust's transfer agent to establish accounts for
the shareholders on the share record books relating to the Fund. The Fund
currently offers Trust shares and Investment shares. Holders of Trust shares
will receive Class Y shares of the Successor Fund and holders of Investment
shares will receive Class A shares of the Successor Fund. Fund Shares of each
such class shall have the same aggregate net asset value as the aggregate net
asset value of the corresponding class of the Fund.
(b) Delivery of the assets of the Fund to be transferred shall be made not
later than the next business day following the Valuation Date (the "Exchange
Date"). Assets transferred shall be delivered to State Street Bank and Trust
Company, the Trust's custodian (the "Custodian"), for the account of the Trust
and the Successor Fund with all securities not in bearer or book entry form
duly endorsed, or accompanied by duly executed separate assignments or stock
powers, in proper form for transfer, with signatures guaranteed, and with all
necessary stock transfer stamps, sufficient to transfer good and marketable
title thereto (including all accrued interest and dividends and rights
pertaining thereto) to the Custodian for the account of the Trust and the
Successor Fund free and clear of all liens, encumbrances, rights, restrictions
and claims. All cash delivered shall be in the form of immediately available
funds payable to the order of the Custodian for the account of the Trust and
the Successor Fund.
A-1
<PAGE>
(c) Virtus Funds will pay or cause to be paid to the Trust any interest
received on or after the Exchange Date with respect to assets transferred from
the Fund to the Successor Fund hereunder and to the Trust and any
distributions, rights or other assets received by Virtus Funds after the
Exchange Date as distributions on or with respect to the securities
transferred from the Fund to the Successor Fund hereunder. All such assets
shall be deemed included in assets transferred to the Successor Fund on the
Exchange Date and shall not be separately valued.
(d) The Valuation Date shall be February 26, 1998, or such earlier or later
date as may be mutually agreed upon by the parties.
(e) As soon as practicable after the Exchange Date, Virtus Funds shall
distribute all of the Fund Shares received by it among the shareholders of the
Fund in proportion to the number of shares each such shareholder holds in the
Fund. After the Exchange Date, the Fund shall not conduct any business except
in connection with its dissolution and termination.
(f) All costs incurred by the Fund in connection with the transactions
contemplated by this Agreement shall be borne by First Union National Bank.
2. VIRTUS FUNDS' REPRESENTATIONS AND WARRANTIES. Virtus Funds represents and
warrants to and agrees with the Trust as follows:
(a) Virtus Funds is a business trust duly organized, validly existing and
in good standing under the laws of the Commonwealth of Massachusetts and
has power to own all of its properties and assets and, subject to the
approval of its shareholders as contemplated hereby, to carry out this
Agreement.
(b) Virtus Funds is registered under the Investment Company Act of 1940,
as amended (the "1940 Act"), as an open-end management investment company,
and such registration has not been revoked or rescinded and is in full
force and effect.
(c) Except as shown on the audited financial statements of Virtus Funds
for its most recently completed fiscal period and as incurred in the
ordinary course of the Virtus Funds' and the Fund's business since then,
neither Virtus Funds nor the Fund has any known liabilities of a material
amount, contingent or otherwise, and there are no material legal,
administrative or other proceedings pending or threatened against Virtus
Funds or the Fund.
(d) On the Exchange Date, Virtus Funds will have full right, power and
authority to sell, assign, transfer and deliver the Fund's assets to be
transferred by it hereunder.
3. THE TRUST'S REPRESENTATIONS AND WARRANTIES. The Trust represents and
warrants to and agrees with Virtus Funds as follows:
(a) The Trust is a business trust duly organized, validly existing and in
good standing under the laws of the State of Delaware and has power to
carry on its business as it is now being conducted and to carry out this
Agreement.
(b) The Trust is registered as an open-end management investment company
and will adopt the Registration Statement of the Virtus Funds with respect
to the Fund, for purposes of the Securities Act of 1933, as amended, (the
"1933 Act") and the 1940 Act, if applicable.
(c) Neither the Trust nor the Successor Fund has any known liabilities of
a material amount, contingent or otherwise, and there are no material
legal, administrative or other proceedings pending or threatened against
the Trust or the Successor Fund. Other than organizational activities, the
Successor Fund has not engaged in any business activities.
(d) At the Exchange Date, the Fund Shares to be issued to Virtus Funds
(the only Fund Shares to be issued as of the Exchange Date, except for the
initial capital, if any, of the Trust) will have been duly authorized and,
when issued and delivered pursuant to this Agreement, will be legally and
validly issued
A-2
<PAGE>
and will be fully paid and non-assessable by the Trust. No Trust or
Successor Fund shareholder will have any preemptive right of subscription
or purchase in respect thereof.
4. THE TRUST'S CONDITIONS PRECEDENT. The obligations of the Trust hereunder
shall be subject to the following conditions:
(a) Virtus Funds shall have furnished to the Trust a statement of the
Fund's assets, including a list of securities owned by the Fund with their
respective tax costs and values determined as provided in Section 1 hereof,
all as of the Valuation Date.
(b) As of the Exchange Date, all representations and warranties of Virtus
Funds made in this Agreement shall be true and correct as if made at and as
of such date, and Virtus Funds shall have complied with all the agreements
and satisfied all the conditions on its part to be performed or satisfied
at or prior to such date.
(c) A vote of the shareholders of the Fund approving this Agreement and
the transactions and exchange contemplated hereby shall have been adopted
by the vote required by applicable law.
5. VIRTUS FUNDS' CONDITIONS PRECEDENT. The obligations of Virtus Funds
hereunder with respect to the Fund shall be subject to the condition that as
of the Exchange Date all representations and warranties of the Trust made in
the Agreement shall be true and correct as if made at and as of such date, and
that the Trust shall have complied with all of the agreements and satisfied
all the conditions on its part to be performed or satisfied at or prior to
such date.
6. THE TRUST'S AND THE VIRTUS FUNDS' CONDITIONS PRECEDENT. The obligations
of both the Trust and the Virtus Funds hereunder as to the Fund and the
Successor Fund shall be subject to the following conditions:
(a) The receipt of such authority, including "no-action" letters and
orders from the Securities and Exchange Commission (the "Commission") or
state securities commissions, as may be necessary to permit the parties to
carry out the transaction contemplated by this Agreement shall have been
received.
(b) The Trust's adoption of the Registration Statement on Form N-1A under
the 1933 Act and the 1940 Act, if applicable, shall have become effective,
and any post-effective amendments to such Registration Statement as are
determined by the Trustees of the Trust to be necessary and appropriate
shall have been filed with the Commission and shall have become effective.
(c) The Commission shall not have issued an unfavorable advisory report
under Section 25(b) of the 1940 Act nor instituted or threatened to
institute any proceeding seeking to enjoin consummation of the
reorganization transaction contemplated hereby under Section 25(c) of the
1940 Act and no other action, suit or other proceeding shall be threatened
or pending before any court or governmental agency which seeks to restrain
or prohibit, or obtain damages or other relief in connection with, this
Agreement or the transaction contemplated herein.
(d) Each party shall have received an opinion of Sullivan & Worcester LLP
that the Trust is duly formed and existing under the laws of the State of
Delaware and that the shares of the Successor Fund to be issued pursuant to
the terms of this Agreement have been duly authorized, and, when issued and
delivered as provided in this Agreement, will have been validly issued,
fully paid and nonassessable.
(e) Each party shall have received an opinion of Sullivan & Worcester LLP
to the effect that the reorganization contemplated by this Agreement
qualifies as a "reorganization" under Section 368(a)(1) of the Code, and
each party shall have received an opinion of Sullivan & Worcester LLP to
the effect that the Successor Fund, established pursuant to the Agreement
and Declaration of Trust of the Trust, will be treated as a separate
association taxable as a corporation for federal income tax purposes as a
regulated investment company under the Code.
Provided, however, that at any time prior to the Exchange Date, any of the
foregoing conditions in this Section 6 may be waived by the parties if, in the
judgment of the parties, such waiver will not have a material adverse effect
on the benefits intended under this Agreement to the shareholders of the Fund.
A-3
<PAGE>
7. TERMINATION OF AGREEMENT. This Agreement and the transactions
contemplated hereby may be terminated and abandoned by resolution of the Board
of Trustees of Virtus Funds or the Board of Trustees of the Trust at any time
prior to the Exchange Date (and notwithstanding any vote of the shareholders
of the Fund) if circumstances should develop that, in the opinion of either
the Board of Trustees of Virtus Funds or the Board of Trustees of the Trust,
make proceeding with this Agreement inadvisable.
If this Agreement is terminated and the exchange contemplated hereby is
abandoned pursuant to the provisions of this Section 7, this Agreement shall
become void and have no effect, without any liability on the part of any party
hereto or the Trustees, officers or shareholders of the Trust or the Trustees,
officers or shareholders of Virtus Funds, in respect of this Agreement.
8. WAIVER AND AMENDMENTS. At any time prior to the Exchange Date, any of the
conditions set forth in Section 4 may be waived by the Board of the Trust, and
any of the conditions set forth in Section 5 may be waived by the Board of
Virtus Funds, if, in the judgment of the waiving party, such waiver will not
have a material adverse effect on the benefits intended under this Agreement
to the shareholders of the Fund or the shareholders of the Successor Fund, as
the case may be. In addition, prior to the Exchange Date, any provision of
this Agreement may be amended or modified by the Boards of Virtus Funds and
the Trust if such amendment or modification would not have a material adverse
effect upon the benefits intended under this Agreement and would be consistent
with the best interests of shareholders of the Fund and the Successor Fund.
9. NO SURVIVAL OF REPRESENTATIONS. None of the representations and
warranties included or provided for herein shall survive consummation of the
transactions contemplated hereby.
10. GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware, without giving effect to
principles of conflict of laws; provided, however, that the due authorization,
execution and delivery of this Agreement, in the case of Virtus Funds, shall
be governed and construed in accordance with the laws of the Commonwealth of
Massachusetts without giving effect to principles of conflict of laws.
11. CAPACITY OF TRUSTEES, ETC. With respect to Virtus Funds, the names refer
respectively to the trust created and, as the case may be, the Trustees, as
trustees but not individually or personally, acting from time to time under
organizational documents filed in the Virtus Funds' state of organization,
which is hereby referred to and is also on file at the principal office of
Virtus Funds. The obligations of Virtus Funds entered into in the name or on
behalf thereof by any of the Trustees, representatives or agents are made not
individually, but in such capacities, and are not binding upon any of the
Trustees, shareholders or representatives of Virtus Funds personally, but bind
only the trust property, and all persons dealing with any fund of Virtus Funds
must look solely to the trust property belonging to the Fund for the
enforcement of any claims against Virtus Funds.
12. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which, when executed and delivered, shall be deemed to be an original.
A-4
<PAGE>
IN WITNESS WHEREOF, Virtus Funds and the Trust have caused this Agreement and
Plan of Conversion to be executed as of the date above first written.
THE VIRTUS FUNDS
ON BEHALF OF THE
MARYLAND MUNICIPAL BOND FUND
ATTEST: By:
------------------------------ ----------------------------------
Title:
EVERGREEN MUNICIPAL TRUST
ATTEST: By:
------------------------------ ----------------------------------
Title:
A-5
<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.
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 Contract 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.
B-1
<PAGE>
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.
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.
Witness the due execution hereof this 28th day of November, 1997.
Attest:
VIRTUS CAPITAL MANAGEMENT, INC.
- -------------------------------------
Assistant Secretary By:
----------------------------------
President
Attest:
THE VIRTUS FUNDS
- -------------------------------------
Assistant Secretary By:
C. Grant Anderson ----------------------------------
Vice President
B-2
<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
<TABLE>
<CAPTION>
NAME OF FUND PERCENTAGE OF NET ASSETS
------------ ------------------------
<S> <C>
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%
</TABLE>
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.
B-3
<PAGE>
EXHIBIT C
PROPOSED STANDARDIZED FUNDAMENTAL RESTRICTIONS
1. DIVERSIFICATION OF INVESTMENTS
The Fund may not make any investment inconsistent with the Fund's
classification as a non-diversified investment company under the Investment
Company Act of 1940.
2. CONCENTRATION OF THE FUND'S ASSETS IN A PARTICULAR INDUSTRY
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).
3. ISSUANCE OF SENIOR SECURITIES
Except as permitted under the Investment Company Act of 1940, as amended,
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 technically 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 issuers 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 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 securities or other investment instruments shall not be deemed to
be the making of a loan.
9. INVESTMENT IN FEDERALLY TAX EXEMPT SECURITIES
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.
C-1
<PAGE>
EXHIBIT D
THE MARYLAND MUNICIPAL BOND FUND
CURRENT FUNDAMENTAL INVESTMENT RESTRICTIONS
"S": FUNDAMENTAL RESTRICTION TO BE STANDARDIZED
"R": FUNDAMENTAL RESTRICTION TO BE RECLASSIFIED AS NONFUNDAMENTAL
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TOPIC THE MARYLAND MUNICIPAL BOND FUND
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<C> <C> <S>
1. DIVERSIFICATION The Fund is a non-diversified investment
(S) company, as defined by the Investment Company
Act of 1940, as amended. As such, there is no
limit on the percentage of assets which can be
invested in any single issuer. To meet federal
tax requirements for qualifications as a
"regulated investment company" the Fund will
limit its investments so at the close of each
quarter of each fiscal year: (a) with regard to
at least 50% of its total assets no more than 5%
of its total assets is invested in the
securities of a single issuer, and (b) no more
than 25% of its total assets is invested in the
securities of a single issuer.
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2. CONCENTRATION The Fund will not purchase securities if, as a
(S) 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, the Fund may invest as
temporary investments more than 25% of the value
of its assets in cash or cash items, securities
issued or guaranteed by the U.S. government, its
agencies, or instrumentalities, or instruments
secured by these money market instruments, such
as repurchase agreements.
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3. ISSUING SENIOR The Fund will not issue senior securities except
SECURITIES that it may borrow money directly or through
(S) reverse repurchase agreements in amounts up to
one-third of the value of its net assets,
including the amount borrowed.
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4. BORROWING The Fund may borrow money directly or through
(S) reverse repurchase agreements in amounts up to
one-third of the value of its net assets,
including the amount borrowed. The Fund will not
borrow money or engage in reverse repurchase
agreements for investment leverage, but rather
as a temporary, extraordinary, or emergency
measure or to facilitate management of the
portfolio by enabling the Fund to meet
redemption requests when the liquidation of
portfolio securities is deemed to be
inconvenient or disadvantageous. The Fund will
not purchase any securities while any borrowings
in excess of 5% of its total assets are
outstanding. During the period any reverse
repurchase agreements are outstanding, the Fund
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.
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</TABLE>
D-1
<PAGE>
<TABLE>
<CAPTION>
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TOPIC THE MARYLAND MUNICIPAL BOND FUND
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<C> <C> <S>
5. UNDERWRITING SECURITIES The Fund will not underwrite any issue of
OF OTHER ISSUERS securities, except as the Fund may be deemed to
(S) 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.
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6. REAL ESTATE The Fund will not purchase or sell real estate,
(S) although it 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.
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7. COMMODITIES The Fund will not purchase or sell commodities,
(S) commodity contracts or commodity futures
contracts.
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8. LOANS TO OTHERS The Fund will not lend any of its assets, except
(S) that it may acquire publicly or nonpublicly
issued municipal securities or temporary
investments or enter into repurchase agreements
as permitted by the Fund's investment objective,
policies, limitations and Declaration of Trust.
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9. INVESTMENT IN FEDERALLY The Fund will invest its assets so that, under
TAX EXEMPT SECURITIES normal circumstances, at least 80% of its annual
(S) interest income is exempt from federal regular
income taxes or at least 80% of its net assets
are invested in obligations, the interest income
from which is exempt from federal regular income
taxes.
Federal regular income tax does not include the
federal individual alternative minimum tax or
the federal alternative minimum tax for
corporations.
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10. MARGIN PURCHASES The Fund will not purchase any securities on
(R) margin but it may obtain such short-term credits
as may be necessary for clearance of
transactions.
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11. SHORT SALES The Fund may not sell any securities short.
(R)
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12. PLEDGES The Fund will not mortgage, pledge, or
(R) hypothecate any assets except to secure
permitted borrowings. In these cases the 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
the 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.
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13. ILLIQUID SECURITIES The Fund will not invest more than 10% of its
(R) 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).
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14. INVESTMENT IN STATE TAX The Fund will invest its assets so that, under
EXEMPT SECURITIES normal circumstances, at least 80% of its annual
(R) interest income is exempt from Maryland state
income taxes or at least 80% of its net assets
are invested in obligations, the interest income
from which is exempt from Maryland state income
taxes.
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</TABLE>
D-2
<PAGE>
EXHIBIT E
FORM OF INVESTMENT ADVISORY AGREEMENT
BETWEEN THE SUCCESSOR TRUST ON BEHALF OF
THE MARYLAND MUNICIPAL BOND FUND AND FUNB
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
Agreement made the day of 1997, by and between EVERGREEN MUNICIPAL
TRUST, a Delaware business trust (the "Trust"), and FIRST UNION NATIONAL BANK,
a national banking association (the "Adviser").
Whereas, the Trust and the Adviser wish to enter into an Agreement setting
forth the terms on which the Adviser will perform certain services for the
Trust, its series of shares as listed on Schedule 1 to this agreement and each
series of shares subsequently issued by the Trust (each singly a "Fund" or
collectively the "Funds").
Therefore, in consideration of the promises and the mutual agreements
hereinafter contained, the Trust and the Adviser agree as follows:
1. (a) The Trust hereby employs the Adviser to manage and administer the
operation of the Trust and each of its Funds, to supervise the provision of
the services to the Trust and each of its Funds by others, and to manage the
investment and reinvestment of the assets of each Fund of the Trust in
conformity with such Fund's investment objectives and restrictions as may be
set forth from time to time in the Fund's then current prospectus and
statement of additional information, if any, and other governing documents,
all subject to the supervision of the Board of Trustees of the Trust, for the
period and on the terms set forth in this Agreement. The Adviser hereby
accepts such employment and agrees during such period, at its own expense, to
render the services and to assume the obligations set forth herein, for the
compensation provided herein. The Adviser shall for all purposes herein be
deemed to be an independent contractor and shall, unless otherwise expressly
provided or authorized, have no authority to act for or represent the Trust in
any way or otherwise be deemed an agent of the Trust.
(b) In the event that the Trust establishes one or more Funds, in addition
to the Funds listed on Schedule 1, for which it wishes the Adviser to perform
services hereunder, it shall notify the Adviser in writing. If the Adviser is
willing to render such services, it shall notify the Trust in writing and such
Fund shall become a Fund hereunder and the compensation payable to the Adviser
by the new Fund will be as agreed in writing at the time.
2. The Adviser shall place all orders for the purchase and sale of portfolio
securities for the account of each Fund with broker-dealers selected by the
Adviser. In executing portfolio transactions and selecting broker-dealers, the
Adviser will use its best efforts to seek best execution on behalf of each
Fund. In assessing the best execution available for any transaction, the
Adviser shall consider all factors it deems relevant, including the breadth of
the market in the security, the price of the security, the financial condition
and execution capability of the broker-dealer, and the reasonableness of the
commission, if any (all for the specific transaction and on a continuing
basis). In evaluating the best execution available, and in selecting the
broker-dealer to execute a particular transaction, the Adviser may also
consider the brokerage and research services (as those terms are used in
Section 28(e) of the Securities Exchange Act of 1934 (the "1934 Act"))
provided to a Fund and/or other accounts over which the Adviser or an
affiliate of the Adviser exercises investment discretion. The Adviser is
authorized to pay a broker-dealer who provides such brokerage and research
services a commission for executing a portfolio transaction for a Fund which
is in excess of the amount of commission another broker-dealer would have
charged for effecting that transaction if, but only if, the Adviser determines
in good faith that such commission was reasonable in relation to the value of
the brokerage and research services provided by such broker-dealer viewed in
terms of that particular transaction or in terms of all of the accounts over
which investment discretion is so exercised.
3. The Adviser, at its own expense, shall furnish to the Trust office space
in the offices of the Adviser or in such other place as may be agreed upon by
the parties from time to time, all necessary office facilities, equipment
E-1
<PAGE>
and personnel in connection with its services hereunder, and shall arrange, if
desired by the Trust, for members of the Adviser's organization to serve
without salaries from the Trust as officers or, as may be agreed from time to
time, as agents of the Trust. The Adviser assumes and shall pay or reimburse
the Trust for:
(a) the compensation (if any) of the Trustees of the Trust who are
affiliated with the Adviser or with its affiliates, or with any adviser
retained by the Adviser, and of all officers of the Trust as such, and
(b) all expenses of the Adviser incurred in connection with its services
hereunder.
The Trust assumes and shall pay all other expenses of the Trust and its
Funds, including, without limitation:
(a) all charges and expenses of any custodian or depository appointed by
the Trust for the safekeeping of the cash, securities and other property of
any of its Funds;
(b) all charges and expenses for bookkeeping and auditors;
(c) all charges and expenses of any transfer agents and registrars
appointed by the Trust;
(d) all fees of all Trustees of the Trust who are not affiliated with the
Adviser or any of its affiliates, or with any adviser retained by the
Adviser;
(e) all brokers' fees, expenses, and commissions and issue and transfer
taxes chargeable to a Fund in connection with transactions involving
securities and other property to which the Fund is a party;
(f) all costs and expenses of distribution of shares of its Funds
incurred pursuant to Plans of Distribution adopted under Rule 12b-1 under
the Investment Company Act of 1940 ("1940 Act");
(g) all taxes and trust fees payable by the Trust or its Funds to
Federal, state, or other governmental agencies;
(h) all costs of certificates representing shares of the Trust or its
Funds;
(i) all fees and expenses involved in registering and maintaining
registrations of the Trust, its Funds and of their shares with the
Securities and Exchange Commission (the "Commission") and registering or
qualifying the Funds' shares under state or other securities laws,
including, without limitation, the preparation and printing of registration
statements, prospectuses, and statements of additional information for
filing with the Commission and other authorities;
(j) expenses of preparing, printing, and mailing prospectuses and
statements of additional information to shareholders of each Fund of the
Trust;
(k) all expenses of shareholders' and Trustees' meetings and of
preparing, printing, and mailing notices, reports, and proxy materials to
shareholders of the Funds;
(l) all charges and expenses of legal counsel for the Trust and its Funds
and for Trustees of the Trust in connection with legal matters relating to
the Trust and its Funds, including, without limitation, legal services
rendered in connection with the Trust and its Funds' existence, trust, and
financial structure and relations with its shareholders, registrations and
qualifications of securities under Federal, state, and other laws, issues
of securities, expenses which the Trust and its Funds has herein assumed,
whether customary or not, and extraordinary matters, including, without
limitation, any litigation involving the Trust and its Funds, its Trustees,
officers, employees, or agents;
(m) all charges and expenses of filing annual and other reports with the
Commission and other authorities; and
(n) all extraordinary expenses and charges of the Trust and its Funds.
In the event that the Adviser provides any of these services or pays any of
these expenses, the Trust and any affected Fund will promptly reimburse the
Adviser therefor.
The services of the Adviser to the Trust and its Funds hereunder are not to
be deemed exclusive, and the Adviser shall be free to render similar services
to others.
E-2
<PAGE>
4. As compensation for the Adviser's services to the Trust with respect to
each Fund during the period of this Agreement, the Trust will pay to the
Adviser a fee at the annual rate set forth on Schedule 2 for such Fund.
The Adviser's fee is computed as of the close of business on each business
day.
A pro rata portion of the Trust's fee with respect to a Fund shall be
payable in arrears at the end of each day or calendar month as the Adviser may
from time to time specify to the Trust. If and when this Agreement terminates,
any compensation payable hereunder for the period ending with the date of such
termination shall be payable upon such termination. Amounts payable hereunder
shall be promptly paid when due.
5. The Adviser may enter into an agreement to retain, at its own expense, a
firm or firms ("SubAdviser") to provide the Trust with respect to all or any
of its Funds all of the services to be provided by the Adviser hereunder, if
such agreement is approved as required by law. Such agreement may delegate to
such SubAdviser all of Adviser's rights, obligations, and duties hereunder.
6. The Adviser shall not be liable for any error of judgment or mistake of
law or for any loss suffered by the Trust or any of its Funds in connection
with the performance of this Agreement, except a loss resulting from the
Adviser's willful misfeasance, bad faith, gross negligence, or from reckless
disregard by it of its obligations and duties under this Agreement. Any
person, even though also an officer, Director, partner, employee, or agent of
the Adviser, who may be or become an officer, Trustee, employee, or agent of
the Trust, shall be deemed, when rendering services to the Trust or any of its
Funds or acting on any business of the Trust or any of its Funds (other than
services or business in connection with the Adviser's duties hereunder), to be
rendering such services to or acting solely for the Trust or any of its Funds
and not as an officer, Director, partner, employee, or agent or one under the
control or direction of the Adviser even though paid by it.
7. The Trust shall cause the books and accounts of each of its Funds to be
audited at least once each year by a reputable independent public accountant
or organization of public accountant or organization of public accountants who
shall render a report to the Trust.
8. Subject to and in accordance with the Declaration of Trust of the Trust,
the governing documents of the Adviser and the governing documents of any
SubAdviser, it is understood that Trustees, Directors, officers, agents and
shareholders of the Trust or any Adviser are or may be interested in the
Adviser (or any successor thereof) as Directors and officers of the Adviser or
its affiliates, as stockholders of First Union Corporation or otherwise; that
Directors, officers and agents of the Adviser and its affiliates or
stockholders of First Union Corporation are or may be interested in the Trust
or any Adviser as Trustees, Directors, officers, shareholders or otherwise;
that the Adviser (or any such successor) is or may be interested in the Trust
or any SubAdviser as shareholder, or otherwise; and that the effect of any
such adverse interests shall be governed by the Declaration of Trust of the
Trust, governing documents of the Adviser and governing documents of any
SubAdviser.
9. This Agreement shall continue in effect for two years from the date set
forth above and after such date (a) such continuance is specifically approved
at least annually by the Board of Trustees of the Trust or by a vote of a
majority of the outstanding voting securities of the Trust, and (b) such
renewal has been approved by the vote of the majority of Trustees of the Trust
who are not interested persons, as that term is defined in the 1940 Act, of
the Adviser or of the Trust, cast in person at a meeting called for the
purpose of voting on such approval.
10. On sixty days' written notice to the Adviser, this Agreement may be
terminated at any time without the payment of any penalty by the Board of
Trustees of the Trust or by vote of the holders of a majority of the
outstanding voting securities of the unaffected Funds; and on sixty days'
written notice to the Trust, this Agreement may be terminated at any time
without the payment of any penalty by the Adviser. This Agreement shall
automatically terminate upon its assignment (as that term is defined in the
1940 Act). Any notice under this Agreement shall be given in writing,
addressed and delivered, or mailed postage prepaid, to the other party at the
main office of such party.
E-3
<PAGE>
11. This Agreement may be amended at any time by an instrument in writing
executed by both parties hereto or their respective successors, provided that
with regard to amendments of substance such execution by the Trust shall have
been first approved by the vote of the holders of a majority of the
outstanding voting securities of the affected Funds and by the vote of a
majority of Trustees of the Trust who are not interested persons (as that term
is defined in the 1940 Act) of the Adviser, any predecessor of the Adviser, or
of the Trust, cast in person at a meeting called for the purpose of voting on
such approval. A "majority of the outstanding voting securities of the Trust
or the affected Funds" shall have, for all purposes of this Agreement, the
meaning provided therefor in the 1940 Act.
12. Any compensation payable to the Adviser hereunder for any period other
than a full year shall be proportionately adjusted.
13. The provisions of this Agreement shall be governed, construed, and
enforced in accordance with the laws of The State of Delaware.
In Witness Whereof, the parties hereto have duly executed this Agreement on
the day and year first above written.
Evergreen Municipal Trust
By:
----------------------------------
Name:
Title:
First Union National Bank
By:
----------------------------------
Name:
Title:
E-4
<PAGE>
SCHEDULE 1
<TABLE>
<C> <S>
1. Evergreen Connecticut Municipal Bond Fund
2. Evergreen Florida Municipal Bond Fund
3. Evergreen Georgia Municipal Bond Fund
4. Evergreen New Jersey Tax Free Income Fund
5. Evergreen North Carolina Municipal Bond Fund
6. Evergreen South Carolina Municipal Bond Fund
7. Evergreen Virginia Municipal Bond Fund
8. Evergreen Florida High Income Municipal Bond Fund
9. Evergreen High Grade Tax Free Fund
10. Evergreen Short-Intermediate Municipal Fund
11. Evergreen Tax Exempt Money Market Fund
12. Evergreen Pennsylvania Tax Free Money Market Fund
13. Evergreen Maryland Municipal Bond Fund
</TABLE>
SCHEDULE 2
Fees for the Evergreen Maryland Municipal Bond Fund:
0.50 of 1.00%
The advisory fee shall be accrued daily at the rate of 1/365th of the
applicable percentage applied to the daily net assets of the Evergreen
Maryland Municipal Bond Fund. The advisory fee so accrued shall be paid to
FUNB monthly.
E-5
<PAGE>
EXHIBIT F
The names and addresses of the principal executive officers and directors of
Virtus Capital Management, Inc. are as follows:
OFFICERS:
<TABLE>
<CAPTION>
NAME ADDRESS
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<S> <C>
Tanya Orr Bird............................. Virtus Capital Management, Inc.
707 East Main Street
Suite 1300
Richmond, Virginia 23219
Josie Clemons Rosson....................... Virtus Capital Management, Inc.
707 East Main Street
Suite 1300
Richmond, Virginia 23219
DIRECTORS:
<CAPTION>
NAME ADDRESS
---- -------
<S> <C>
John S. Hall............................... Virtus Capital Management, Inc.
707 East Main Street
Suite 1300
Richmond, Virginia 23219
Tanya Orr Bird............................. Virtus Capital Management, Inc.
707 East Main Street
Suite 1300
Richmond, Virginia 23219
</TABLE>
F-1
<PAGE>
EXHIBIT G
The names and addresses of the directors and principal executive officers of
FUNB are as follows:
<TABLE>
<S> <C>
Edward E. Crutchfield, Jr. .. Chairman and Chief Executive Officer, First
Union Corporation; Chief Executive Officer and
Chairman, First Union National Bank
John R. Georgius............. Vice Chairman and President, First Union
Corporation; Vice Chairman and President, First
Union National Bank
Marion A. Cowell, Jr. ....... Executive Vice President, Secretary & General
Counsel, First Union Corporation; Secretary and
Executive Vice President, First Union National
Bank
Robert T. Atwood............. Executive Vice President and Chief Financial
Officer, First Union Corporation; Chief
Financial Officer and Executive Vice President
</TABLE>
All of the above persons are located at: First Union National Bank, One
First Union Center, Charlotte, North Carolina 28288.
G-1
<PAGE>
[LOGO OF VIRTUS APPEARS HERE]
PROXY SERVICES
P.O. BOX 9148
FARMINGDALE, NY 11735
MARYLAND MUNICIPAL BOND FUND
a series of The Virtus Funds
SPECIAL MEETING OF SHAREHOLDERS
FEBRUARY 20, 1998
The undersigned hereby appoints C. Grant Anderson, Carol B. Kayworth,
Terrence J. Cullen, Dorothy E. Bourassa, and Martin J. Wolin or any of them,
attorneys and proxies for the undersigned, with full powers of substitution and
revocation, to represent the undersigned and to vote on behalf of the
undersigned all shares of the Maryland Municipal Bond Fund (the "Fund") of The
Virtus Funds (the "Trust"), which the undersigned is entitled to vote at a
special meeting of Shareholders of the Fund to be held at 200 Berkeley Street,
26th Floor, Boston, Massachusetts 02116 on February 20, 1998, at 2:00 p.m. and
any adjournments thereof (the "Meeting"). The undersigned hereby acknowledges
receipt of the Notice of Meeting and Proxy Statement, and hereby instructs said
attorneys and proxies to vote said shares as indicated hereon. Unless Indicated
to the contrary, this proxy shall be deemed to grant authority to vote "FOR" all
proposals relating to the Fund. In their discretion, the proxies are authorized
to vote upon such other matters as may properly come before the Meeting. A
majority of the proxies present and acting at the Meeting in person or by
substitute (or, if only one shall be so present, then that one) shall have and
may exercise all of the powers and authority of said proxies hereunder. The
undersigned hereby revokes any proxy previously given.
This proxy is solicited on behalf of the Board of Trustees. Please indicate
your vote by an "X" in the appropriate box below. This proxy will be voted as
specified below with respect to the action to be taken on the following
proposals. In the absence of any specification, this proxy will be voted in
favor of the proposals.
EVERY SHAREHOLDER'S VOTE IS IMPORTANT!
VOTE THIS PROXY CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE THE EXPENSE OF ADDITIONAL MAILINGS
NOTE: Please sign exactly as your name appears on this Proxy. If joint owners,
EITHER may sign this Proxy. When signing as attorney, executor, administrator,
trustee, guardian, or corporate officer, please give your title.
PLEASE SIGN, DATE AND RETURN YOUR PROXY TODAY!
TO VOTE. MARK BLOCKS BELOW
IN BLUE OR BLACK INK AS FOLLOWS: VIRMMB KEEP THIS PORTION FOR YOUR RECORDS
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DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
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MARYLAND MUNICIPAL BOND FUND
VOTE ON PROPOSALS For Against Abstain
1. To approve the proposed Agreement and Plan of
Conversion with the Evergreen Maryland Municipal [_] [_] [_]
Bond Fund of the Evergreen Municipal Trust
2. To approve an interim investment advisory agreement
between the Fund and Virtus Capital Management, Inc. [_] [_] [_]
until the reorganization of the Fund into the
Evergreen Maryland Municipal Bond Fund
3. To approve the proposed reclassification of the
Fund's investment objective from fundamental to [_] [_] [_]
nonfundamental
4. To approve the proposed changes to the Fund's
fundamental investment restrictions [_] [_] [_]
To vote against the proposed changes to one or more of
the specific fundamental investment restrictions, but
to approve the others, fill in the box at the right AND [_]
indicate the number(s) of the fundamental investment
restrictions you do not want to change on this line:
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To transact any other business that may come before
the Meeting or any adjournment thereof.
- ---------------------------------- -----------------------------------
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Signature Date Signature Date
(PLEASE SIGN WITHIN BOX) (JOINT OWNERS)
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