SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act
of 1934 (Amendment No. )
-----
Filed by the Registrant [ XX ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[XX] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Sec. 240.14a-11(c) or
Sec. 240.14a-12
MARKETWATCH FUNDS
-----------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[XX] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) 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 proxy materials.
[ ] 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:
------------------------------------------------------------------------
MARKETWATCH FUNDS
3435 STELZER ROAD
COLUMBUS, OHIO 43219
1-800-752-1823
------------------------
Dear MarketWatch Funds Shareholder:
The Board of Trustees of the MarketWatch Funds ("MarketWatch") has called a
special meeting to consider a proposal intended to reorganize the business of
MarketWatch. At this meeting, shareholders of three portfolios of MarketWatch,
voting by portfolio, will be asked to approve the proposed reorganization of two
portfolios into newly-created portfolios of The Wachovia Funds ("Wachovia
Funds") and the proposed reorganization of one MarketWatch portfolio into a
newly-created portfolio of The Wachovia Municipal Funds ("Wachovia Municipal
Funds"). Each of these registered investment companies is advised by Wachovia
Bank, N.A. ("Wachovia Bank"), the present adviser of MarketWatch. The proposal
has the unanimous support of your Board of Trustees.
Central Fidelity Banks, N.A., the parent of Central Fidelity National Bank
("Central Fidelity"), the former investment adviser to MarketWatch, merged into
Wachovia Corporation in December, 1997 (the "Bank Holding Company Merger").
Wachovia Corporation is the parent of Wachovia Bank. In connection with the Bank
Holding Company Merger, Wachovia Bank became the investment adviser to
MarketWatch. Wachovia Bank continues to serve as the investment adviser to the
Wachovia Funds and the Wachovia Municipal Funds (collectively, the "Wachovia
Fund Group"). In an effort to promote more efficient operations, to eliminate
duplicative costs and to enhance the distribution of shares, it has been
proposed that MarketWatch be reorganized into the Wachovia Fund Group.
At a meeting on January 21, 1998, the Board of Trustees of MarketWatch
considered the reorganization of three MarketWatch portfolios. The proposed
reorganizations, all of which would be into newly-created portfolios in the
Wachovia Fund Group, are described in the attached Proxy Statement. Shareholders
of MarketWatch's fourth portfolio, the MarketWatch Money Market Fund, will be
given the opportunity to invest in a money market portfolio in the Wachovia Fund
Group. Assuming requisite shareholder approval, after the completion of all of
these steps, MarketWatch will be liquidated and deregistered as an investment
company.
After carefully studying the merits of the proposed reorganization of the three
MarketWatch portfolios into the Wachovia Fund Group, the Board of Trustees of
MarketWatch determined that consolidation of MarketWatch and the Wachovia Fund
Group can provide substantial value for the MarketWatch shareholders. To move
forward, however, a majority of the shareholders of each of the three affected
MarketWatch portfolios must vote in favor of the respective reorganization
transaction. Enclosed you'll find a proxy card for the upcoming shareholder
meeting scheduled to be held on Friday, March 27, 1998. IT IS IMPORTANT THAT YOU
COMPLETE, SIGN AND RETURN YOUR CARD AS SOON AS POSSIBLE TO ENSURE YOUR VOTE IS
COUNTED AT THE SPECIAL MEETING.
The Board of Trustees of MarketWatch believes that the proposed reorganization
of the MarketWatch portfolios, discussed in detail in the attached Proxy
Statement, will benefit shareholders in two key ways:
1. Shareholders will be able to choose from 18 investment portfolios in the
Wachovia Fund Group, versus the 4 investment portfolios that are
available through MarketWatch. The wide array of additional investment
options will include emerging markets, state-specific tax-exempt and
market index funds. Shareholders will also be able to exchange from one
portfolio in the Wachovia Fund Group to another portfolio without
incurring any transaction charges.
2. By placing the assets of each MarketWatch portfolio in a corresponding
Wachovia Fund Group portfolio, the two combined investment company
groups' operations may be more efficient than those of three separate
investment company groups, which could ultimately translate into better
expense ratios and enhanced returns for MarketWatch shareholders (who,
following the reorganizations, will become Wachovia Fund Group
shareholders).
Assuming requisite shareholder approval, the reorganization of each MarketWatch
portfolio into the respective Wachovia Fund Group portfolio is anticipated to
occur in late March 1998. In connection with the reorganizations, you should
note the following:
- The reorganization of each of the three MarketWatch portfolios into a
newly-created and corresponding Wachovia Fund Group portfolio will be a
tax free event, and will not entail any sales loads, commissions or
transaction charges.
- There will be no increase in the contractual fees payable to Wachovia
Bank, as investment adviser, as a result of the reorganizations. In the
case of two of the reorganizations, a second proposal to be considered at
this meeting would result in a reduction of Wachovia Bank's advisory fee
below the level of its current fee.
- The shares you own and the value of your investment will not change as a
result of the reorganizations.
The second proposal submitted for consideration by shareholders of the three
MarketWatch portfolios is an investment advisory agreement with Wachovia Bank.
One advisory agreement provides for an advisory fee at the same rate as the
present agreement, and two agreements provide for a reduction in the fees
payable to Wachovia Bank for investment advisory services.
PLEASE REVIEW THE FOLLOWING NOTICE TO SHAREHOLDERS CAREFULLY. IN IT, YOU WILL
FIND A BRIEF SUMMARY OF THE PROPOSALS THAT ARE INCLUDED IN THE PROXY.
YOUR VOTE IS IMPORTANT TO US. PLEASE MARK, SIGN AND DATE THE ENCLOSED PROXY
CARD(S) AND RETURN THEM AS SOON AS POSSIBLE. For your convenience we have
enclosed a self-addressed, stamped envelope. We are genuinely excited about the
proposed reorganizations, and the potential benefits they provide to current
shareholders who are invested in the MarketWatch portfolios. Please call
1-800-752-1823 if you have any questions. Thank you for taking the time to
complete the proxy card(s) and for your investment in the MarketWatch Funds.
Sincerely,
[LOGO]
Walter B. Grimm
Chairman
MarketWatch Funds
March , 1998
MARKETWATCH FUNDS
3435 STELZER ROAD
COLUMBUS, OHIO 43219
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MARCH 27, 1998
To Shareholders of the MarketWatch Intermediate Fixed Income Fund, MarketWatch
Equity Fund and MarketWatch Virginia Municipal Bond Fund:
NOTICE IS HEREBY GIVEN THAT a Special Meeting of Shareholders (the
"Shareholders") of the MarketWatch Funds ("MarketWatch") will be held at the
offices of BISYS Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio 43219 on
Friday, March 27, 1998 at .m. (Eastern time) for the following purposes:
ITEM 1. To consider and act upon a proposal to approve three Agreements and
Plans of Reorganization, each dated March 5, 1998 (each a
"Reorganization Agreement"), and the transactions contemplated thereby,
including (a) the transfer of substantially all of the assets of the
MarketWatch Intermediate Fixed Income Fund, the MarketWatch Equity Fund,
and the MarketWatch Virginia Municipal Bond Fund (collectively, the "Old
Funds"), respectively, to the newly-created Wachovia Intermediate Fixed
Income Fund and the newly-created Wachovia Growth & Income Fund of The
Wachovia Funds, and to the newly-created Wachovia Virginia Municipal
Bond Fund of The Wachovia Municipal Funds (collectively, the "New
Funds"), all newly-established portfolios, in exchange solely for Class
A shares of the respective New Fund, and the latter's assumption of all
the transferor Old Fund's liabilities; (b) the distribution of those
Class A shares to Shareholders of that Old Fund; and (c) the termination
of the Old Funds.
ITEM 2. To consider and act upon a proposal to approve a new investment advisory
agreement for each of the New Funds, in each instance with Wachovia
Bank, N.A., the present investment adviser to the Old Funds, providing
for the same, or for reduced, advisory fees. To be presented only if
Item 1 is approved.
ITEM 3. To transact such other business as may properly come before the Special
Meeting or any adjournment or postponement thereof.
The proposed reorganizations and related matters are described in the
attached Proxy Statement. Appendix I to the Proxy Statement is a copy of the
Reorganization Agreement relating to the MarketWatch Intermediate Fixed Income
Fund and the Wachovia Intermediate Fixed Income Fund. The Reorganization
Agreements for the other two proposed reorganizations are identical, in all
material respects, to the Reorganization Agreement attached as Appendix I, other
than the name of the investment company and the respective New Fund and Old
Fund. The form of the proposed investment advisory agreements for The Wachovia
Funds and The Wachovia Municipal Funds, and the corresponding fee schedule for
each of the three New Funds, appear as Appendices IV-1 and IV-2.
Shareholders of record of the Old Funds as of the close of business on March
, 1998 are entitled to notice of, and to vote at, the Special Meeting.
SHAREHOLDERS ARE REQUESTED TO EXECUTE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE THE ACCOMPANYING PROXY CARD(S) WHICH IS BEING SOLICITED BY
MARKETWATCH'S BOARD OF TRUSTEES. THIS IS IMPORTANT TO ENSURE A QUORUM AT THE
SPECIAL MEETING. PROXIES MAY BE REVOKED AT ANY TIME BEFORE THEY ARE EXERCISED BY
SUBMITTING TO MARKETWATCH A WRITTEN NOTICE OF REVOCATION OR A SUBSEQUENTLY
EXECUTED PROXY OR BY ATTENDING THE SPECIAL MEETING AND VOTING IN PERSON.
By Order of the Board of Trustees
[graphics is scanning sig]
Christina T. Simmons
ASSISTANT SECRETARY
March , 1998
MARKETWATCH FUNDS
3435 STELZER ROAD
COLUMBUS, OHIO 43219
1-800-752-1823
------------------------
PRELIMINARY
PROXY STATEMENT
DATED MARCH , 1998
------------------------
INTRODUCTION
This proxy statement (the "Proxy Statement") is furnished in connection with
the solicitation of proxies by the Board of Trustees of the MarketWatch Funds
("MarketWatch") in connection with a Special Meeting (the "Meeting") of
Shareholders ("Shareholders") of MarketWatch. The Meeting will be held on
Friday, March 27, 1998 at .m. (Eastern time) at the offices of BISYS Fund
Services, Inc., 3435 Stelzer Road, Columbus, Ohio 43219. At the Meeting,
Shareholders of three portfolios of MarketWatch, voting by portfolio, will be
asked to consider and approve a proposed Agreement and Plan of Reorganization
dated March 5, 1998 (each a "Reorganization Agreement," and collectively, the
"Reorganization Agreements"). Each Reorganization Agreement is made by and
between MarketWatch, on behalf of one of three MarketWatch portfolios (each an
"Old Fund" and collectively, the "Old Funds"), and either The Wachovia Funds
("Wachovia Funds"), on behalf of one of two newly-created Wachovia Funds'
portfolios, or The Wachovia Municipal Funds ("Wachovia Municipal Funds," and
with the Wachovia Funds, the "Wachovia Fund Group"), on behalf of one
newly-created Wachovia Municipal Funds' portfolio (the three newly-created
Wachovia Fund Group portfolios are the "New Funds"). Approval of a
Reorganization Agreement on behalf of an Old Fund will authorize the
reorganization of the Old Fund into the corresponding New Fund, and certain
related actions described therein (individually a "Reorganization," and
collectively, the "Reorganizations"), all as described in this Proxy Statement.
A copy of one Reorganization Agreement is attached as Appendix I to this Proxy
Statement. The two other Reorganization Agreements are identical to Appendix I,
except for the names of the respective Old Fund, the respective New Fund, and
the respective investment company.
Assuming that Shareholders of each Old Fund vote to approve the respective
Reorganization Agreement, the Shareholders will also be asked to approve a new
investment advisory agreement with the current adviser to MarketWatch, Wachovia
Bank, N.A. ("Wachovia Bank"), for the corresponding New Fund. One proposed
investment advisory agreement provides for an identical advisory fee as is
payable under the present advisory agreement (in the case of the MarketWatch
Virginia Municipal Bond Fund), and the two other investment advisory agreements
provide for fees that are lower than the fees payable under the present
investment advisory agreement.
1
The following table identifies the proposals to be voted on at the Meeting
and the Shareholders who are being solicited with respect to each proposal:
PROPOSAL SHAREHOLDERS SOLICITED
- -------------------------------------------------- ----------------------------
1. Approval of a Reorganization Agreement between MarketWatch Intermediate
MarketWatch, on behalf of the MarketWatch Fixed Income Fund
Intermediate Fixed Income Fund (the Old Income
Fund), and the Wachovia Funds, on behalf of the
Wachovia Intermediate Fixed Income Fund (the New
Income Fund).
2. Approval of an investment advisory agreement
with Wachovia Bank for the New Income Fund.
- --------------------------------------------------------------------------------
1. Approval of a Reorganization Agreement between MarketWatch Equity Fund
MarketWatch, on behalf of the MarketWatch Equity
Fund (the Old Equity Fund), and the Wachovia
Funds, on behalf of the Wachovia Growth & Income
Fund (the New Equity Fund).
2. Approval of an investment advisory agreement
with Wachovia Bank for the New Equity Fund.
- --------------------------------------------------------------------------------
1. Approval of a Reorganization Agreement between MarketWatch Virginia
MarketWatch, on behalf of the MarketWatch Virginia Municipal Bond Fund
Municipal Bond Fund (the Old Virginia Fund), and
the Wachovia Municipal Funds, on behalf of the
Wachovia Virginia Municipal Bond Fund (the New
Virginia Fund).
2. Approval of an investment advisory agreement
with Wachovia Bank for the New Virginia Fund.
- --------------------------------------------------------------------------------
Such other business as may properly come before MarketWatch, or each
this Meeting or any adjournment thereof affected portfolio, voting
separately, as appropriate
- --------------------------------------------------------------------------------
MarketWatch, the Wachovia Funds, and the Wachovia Municipal Funds are
open-end, series, management investment companies. Following the merger of
Central Fidelity Banks, Inc. ("CFB"), the parent of MarketWatch's former
investment adviser, Central Fidelity National Bank ("Central Fidelity"), into
Wachovia Corporation, the parent of Wachovia Bank, N.A. ("Wachovia Bank"), in
December, 1997 (the "Bank Holding Company Merger"), Wachovia Bank became the
investment adviser to MarketWatch. Wachovia Bank continues to serve as the
investment adviser to the Wachovia Funds and the Wachovia Municipal Funds. When
the shareholders of each portfolio of MarketWatch approved an investment
advisory agreement with Wachovia Bank on December 5, 1997, it was noted that
Wachovia Bank might, in the future, recommend the reorganization of MarketWatch
into the Wachovia Fund Group.
In reviewing the proposed Reorganizations, the Board of Trustees of
MarketWatch considered the consummation of the Bank Holding Company Merger; the
recommendation of Wachovia Bank that MarketWatch and the Wachovia Fund Group be
consolidated in an effort to promote more efficient operations, eliminate
duplicative costs and enhance the distribution of shares by eliminating market
overlap; the fact that each Reorganization would constitute a tax-free
reorganization; and the fact that the interests of shareholders of MarketWatch
would not be diluted as a result of the Reorganizations. The proposal to
reorganize each MarketWatch portfolio into a newly-created Wachovia Fund Group
portfolio with nearly identical investment objectives, policies and restrictions
will assure that the original investment goals of the Shareholders who invested
in the MarketWatch portfolios will continue to guide the investment of their
assets.
The Reorganizations consist of several discrete and separate transactions
that will culminate in MarketWatch being reorganized into the Wachovia Fund
Group. In the Reorganizations, it is proposed
2
that each of the three Old Funds, existing portfolios of MarketWatch, be
reorganized into the New Funds, each newly-created, comparable investment
portfolios in the Wachovia Fund Group. Shareholders of MarketWatch's fourth
portfolio, the MarketWatch Money Market Fund (the "Money Market Fund"), will be
given the opportunity to move their investments to a money market portfolio of
the Wachovia Fund Group.
Each Reorganization Agreement provides that the affected Old Fund will
transfer substantially all its assets to the corresponding New Fund. In exchange
for such transfer, each New Fund will issue its Class A Shares and assume the
Old Fund's liabilities. Assuming requisite Shareholder approval, the
transactions contemplated by the Reorganization Agreements are expected to occur
on or about March 27, 1998.
Each Old Fund has one class of shares outstanding. Each New Fund will have
two classes of shares outstanding (Class A Shares and Class Y Shares). Holders
of shares of the Old Funds will receive Class A Shares (which are similar to the
shares presently held in the Old Funds), so that a holder of shares in each of
the Old Funds will receive the same number of Class A Shares of the respective
New Fund, with the same aggregate value as the Shareholder had in an Old Fund's
shares immediately before the Reorganization.
Following the Reorganizations, and the transactions relating to the Money
Market Fund, MarketWatch will be deregistered as an investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), and MarketWatch's
existence will be terminated under state law (the "Liquidation").
At March , 1998, Central Fidelity owned of record with the power to vote
the following percentages of the outstanding shares of the Old Funds on behalf
of customers maintaining fiduciary, employee benefit, retirement plan or other
qualified accounts at Central Fidelity:
PORTFOLIO PERCENTAGE OF SHARES
- ------------------------------------------------------------------------ -----------------------
MarketWatch Intermediate Fixed Income Fund.............................. %
MarketWatch Equity Fund................................................. %
MarketWatch Virginia Municipal Bond Fund................................ %
The Wachovia Funds, the Wachovia Municipal Funds and MarketWatch have been
advised by Central Fidelity that it intends to exchange the Class A Shares of
each New Fund that it receives in these capacities for Class Y Shares of that
New Fund with the same aggregate net asset value. Central Fidelity intends to
effect these exchanges, which will not cause Shareholders to recognize taxable
gains or losses, promptly after the Reorganizations because it believes that
Class Y Shares are more appropriate than Class A Shares for these customers.
At the meeting, the Shareholders of each Old Fund will be asked to approve
an investment advisory agreement between Wachovia Bank and the Wachovia Funds
(on behalf of the New Income Fund and the New Equity Fund) or between Wachovia
Bank and the Wachovia Municipal Funds (on behalf of the New Virginia Fund), as
applicable. The proposed investment advisory agreements will be presented for
Shareholder approval only if the corresponding Reorganization Agreement is first
approved.
This Proxy Statement sets forth the information that a Shareholder of
MarketWatch should know before voting on a Reorganization and an investment
advisory agreement, and should be retained for future reference. Copies of the
prospectus relating to the Class A Shares of the New Funds, and the Statement of
Additional Information for the New Funds, each dated March 7, 1998, are enclosed
with this Proxy Statement, are on file with the Securities and Exchange
Commission (the "SEC"), and are available without charge upon oral or written
request by writing or calling MarketWatch at the address or telephone number
indicated above.
This Proxy Statement is expected to first be sent to Shareholders on or
about March , 1998.
3
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION RELATING TO THE PROPOSED
REORGANIZATIONS, THE PARTIES THERETO AND THE RELATED TRANSACTIONS, AND IS
QUALIFIED BY REFERENCE TO THE MORE COMPLETE INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT, AND THE REORGANIZATION AGREEMENT ATTACHED TO THIS PROXY
STATEMENT AS APPENDIX I. MARKETWATCH'S ANNUAL REPORT TO SHAREHOLDERS FOR THE
FISCAL YEAR ENDED NOVEMBER 30, 1997 HAS PRECEDED THIS PROXY STATEMENT.
PROPOSED REORGANIZATIONS. Based upon their evaluation of the relevant
information presented to them, and in light of their fiduciary duties under
federal and state law, the Boards of Trustees of MarketWatch, the Wachovia Funds
and the Wachovia Municipal Funds, respectively, including the members of each
Board of Trustees who are not "interested persons" within the meaning of the
1940 Act, have determined that the proposed Reorganizations are in the best
interests of the Old Funds and the New Funds, respectively, and that the
interests of existing shareholders of the Old Funds and the portfolios of the
Wachovia Fund Group, respectively, will not be impaired or diluted as a result
of the Reorganizations.
The Cover Page and pages - hereof summarize the proposed Reorganizations.
MARKETWATCH'S BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS
THAT SHAREHOLDERS OF EACH OLD FUND VOTE "FOR" APPROVAL
OF THE REORGANIZATION AGREEMENTS
REASONS FOR THE REORGANIZATIONS. The Reorganizations are a consequence of
the Bank Holding Company Merger of CFB and Wachovia Corporation. The
consummation of the Bank Holding Company Merger, which occurred on December ,
1997, may be considered to have resulted in a change in control of Central
Fidelity, and hence, the assignment and automatic termination of the existing
investment advisory agreement between MarketWatch and Central Fidelity, a
wholly-owned subsidiary of CFB. In anticipation of the Bank Holding Company
Merger and to provide continuity in investment advisory services to MarketWatch,
shareholders of the MarketWatch Funds approved a new investment advisory
agreement with Wachovia Bank at a special meeting of shareholders of MarketWatch
held on December 5, 1997.
As a result of the Bank Holding Company Merger, Wachovia Bank recommended to
the Boards of Trustees of MarketWatch, the Wachovia Funds and the Wachovia
Municipal Funds that MarketWatch be reorganized into the Wachovia Fund Group, in
an effort to promote more efficient operations, eliminate duplicative costs and
enhance the distribution of shares by eliminating market overlap. In light of
this recommendation, after consideration of the reasons therefor and the
proposed operations of the combined portfolios following the Reorganizations,
and in consideration of the fact that the Reorganizations will be tax-free and
will not dilute the interests of MarketWatch's shareholders, the Board of
Trustees of MarketWatch has authorized and approved the Reorganization
Agreements and has recommended approval of the Reorganizations by Shareholders.
FEDERAL INCOME TAX CONSEQUENCES. Shareholders of each Old Fund will
recognize no gain or loss for federal income tax purposes on their receipt of
Class A Shares of the respective New Fund. See "Federal Income Tax
Consequences."
OVERVIEW OF MARKETWATCH AND THE WACHOVIA FUND GROUP. The investment
objective of each Old Fund is identical to the investment objective of the
corresponding New Fund. The investment policies and limitations of each Old Fund
are substantially similar, but not identical, to the investment policies and
limitations of the corresponding New Fund. Appendix II to this Proxy Statement
contains a detailed discussion of the investment objectives, policies and
limitations, and the risk factors, of the Old Funds and the New Funds.
VOTING INFORMATION. This Proxy Statement is being furnished in connection
with the solicitation of proxies by the Board of Trustees of MarketWatch in
connection with a Special Meeting of Shareholders of
4
the MarketWatch Intermediate Fixed Income Fund, the MarketWatch Equity Fund and
the MarketWatch Virginia Municipal Bond Fund, to be held at the offices of BISYS
Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio 43219, on Friday, March
27, 1998 at .m. (Eastern time). Only Shareholders of record of the Old
Funds at the close of business on March , 1998 will be entitled to notice of
and to vote at the Meeting. Each share or fraction thereof is entitled to one
vote or fraction thereof and all shares will vote separately. Shares represented
by a properly executed proxy will be voted in accordance with the instructions
thereon, or if no specification is made, the persons named as proxies will vote
in favor of each proposal set forth in the Notice of Meeting. Proxies may be
revoked at any time before they are exercised by submitting to MarketWatch a
written notice of revocation or a subsequently executed proxy or by attending
the Meeting and voting in person. For additional information, including a
description of the Shareholder vote required for approval of the Reorganization
Agreements, the proposed investment advisory agreements and related transactions
contemplated thereby, see "Information Relating to Voting Matters."
PROPOSAL 1: APPROVAL OR DISAPPROVAL
OF THE PROPOSED REORGANIZATIONS
BACKGROUND
Wachovia Corporation and CFB, both bank holding companies, entered into an
Agreement and Plan of Merger dated as of June 23, 1997, providing for the merger
of CFB with and into Wachovia Corporation. The board of directors of each bank
holding company approved the Bank Holding Company Merger, as did the
shareholders of CFB, and the Bank Holding Company Merger became effective on
December , 1997.
The consummation of the Bank Holding Company Merger, whereby CFB, the parent
of Central Fidelity, the former investment adviser to MarketWatch, was merged
into Wachovia Corporation, the parent of Wachovia Bank, may be considered to
have resulted in a change of control of Central Fidelity, and an assignment,
thereby automatically terminating the investment advisory agreement for
MarketWatch. In order to provide continuity in investment advisory services to
the MarketWatch Funds, MarketWatch had held a special meeting of shareholders on
December 5, 1997, at which shareholders approved an investment advisory
agreement (the "Current Advisory Contract") with Wachovia Bank effective upon
the consummation of the Bank Holding Company Merger. The Current Advisory
Contract was substantially in the form of the then-existing investment advisory
agreement with Central Fidelity. The proxy statement for that shareholder
meeting noted that, following the consummation of the Bank Holding Company
Merger, Wachovia Bank was expected to recommend that MarketWatch be reorganized
into the Wachovia Fund Group, in order to eliminate certain duplicative
operations and to achieve more efficient management of MarketWatch and the
portfolios of the Wachovia Fund Group.
To accomplish the Reorganizations, MarketWatch has entered into the
Reorganization Agreements with the Wachovia Funds and the Wachovia Municipal
Funds, whereby the Old Income Fund, the Old Equity Fund and the Old Virginia
Fund are to be reorganized into the New Income Fund, the New Equity Fund and the
New Virginia Fund, respectively. Significant components of the Reorganizations
and provisions of the Reorganization Agreements are summarized below; however,
this summary of the Reorganization Agreements is qualified in its entirety by
reference to the full text of the Reorganization Agreement between the Old
Income Fund and the New Income Fund, a copy of which is attached as Appendix I
to this Proxy Statement. The Reorganization Agreements for the reorganization of
the Old Equity Fund into the New Equity Fund and the reorganization of the Old
Virginia Fund into the New Virginia Fund, respectively, are identical, in all
material respects, to the Reorganization Agreement attached as Appendix I,
except for the identities of the Old Funds, the New Funds, and the investment
company.
5
DESCRIPTION OF THE REORGANIZATION AGREEMENTS
The Reorganization Agreements provide, first, that substantially all of the
assets of each Old Fund will be transferred to the corresponding New Fund, which
will assume all of the Old Fund's liabilities. The holders of shares of an Old
Fund will receive an equal number of Class A Shares of the corresponding New
Fund with the same aggregate net asset value as the shares of the Old Fund prior
to the respective reorganization transaction. The Old Funds' Shareholders will
not pay a sales charge, commission or other transaction cost in connection with
their receipt of these Class A Shares of the New Funds.
The Reorganization Agreements provide that MarketWatch will declare a
dividend and/or other distribution prior to the Reorganizations which, together
with all previous distributions, will have the effect of distributing to the
shareholders of each Old Fund all its investment company taxable income and net
capital gain realized by that Old Fund up to and including the effective time of
the respective Reorganization.
Following the transfers of assets and assumptions of liabilities of each Old
Fund to and by the corresponding New Fund, and the issuance of Class A Shares by
the New Fund to the corresponding Old Fund, each Old Fund will distribute the
Class A Shares of the New Fund PRO RATA to the holders of shares of the Old Fund
as described above in liquidation of the Old Fund. In addition to the Class A
Shares, each holder of shares of each Old Fund will have a right to receive any
declared and unpaid dividends or other distributions. Following the
Reorganizations, shareholders of each Old Fund will be shareholders of the
corresponding New Fund. Upon the completion of the Reorganizations, MarketWatch
will be deregistered as an investment company under the 1940 Act and its
existence terminated under state law.
At March , 1998, Central Fidelity owned of record with the power to vote
the following percentages of the outstanding shares of the Old Funds on behalf
of customers maintaining fiduciary, employee benefit, retirement plan or other
qualified accounts at Central Fidelity:
PORTFOLIO PERCENTAGE OF SHARES
- ------------------------------------------------------------------------ -----------------------
MarketWatch Intermediate Fixed Income Fund.............................. %
MarketWatch Equity Fund................................................. %
MarketWatch Virginia Municipal Bond Fund................................ %
The Wachovia Funds, the Wachovia Municipal Funds and MarketWatch have been
advised by Central Fidelity that it intends to exchange the Class A Shares of
each New Fund that it receives in these capacities for Class Y Shares of that
New Fund with the same aggregate net asset value. Central Fidelity intends to
effect these exchanges, which will not cause shareholders to realize taxable
gains or losses, promptly after the Reorganizations because Central Fidelity
believes that Class Y Shares are more appropriate than Class A Shares for these
customers.
The stock transfer books of MarketWatch will be permanently closed after the
Reorganizations. The Wachovia Fund Group will not issue share certificates with
respect to shares of the New Funds issued in connection with the
Reorganizations.
The Reorganizations are subject to a number of conditions, including
approval of the Reorganization Agreements and the transactions contemplated
thereby as described in this Proxy Statement by the Shareholders of each of
three Old Funds; the receipt of certain legal opinions described in the
Reorganization Agreements; the receipt of certain certificates from the parties
concerning the continuing accuracy of the representations and warranties in the
Reorganization Agreements and other matters; and the parties' performance in all
material respects of their agreements and undertakings in the Reorganization
Agreements. Assuming satisfaction of the conditions in the Reorganization
Agreements, the Reorganizations are expected to occur on or after March 27,
1998.
6
Wachovia Bank will be responsible for the payment of all expenses incurred
in connection with the Reorganizations.
Each Reorganization may be terminated at any time prior to its consummation
by the Wachovia Funds or the Wachovia Municipal Funds, as the case may be, or
MarketWatch if the conditions specified in the Reorganization Agreement are not
satisfied or by the mutual consent of the Wachovia Funds, the Wachovia Municipal
Funds and MarketWatch. Each Reorganization Agreement provides further that at
any time prior to or (to the fullest extent permitted by law) after approval of
the Reorganization Agreement by the Shareholders of the Old Fund (i) the parties
thereto may, by written agreement approved by each party's respective Board of
Trustees or duly authorized officers and with or without the approval of their
shareholders, amend any of the provisions of the Reorganization Agreement; and
(ii) either party may waive any breach by the other party or the failure to
satisfy any of the conditions to its obligations with or without the approval of
such party's shareholders.
In addition to the transactions contemplated by the Reorganization
Agreements, which relate to the Old Funds, it is anticipated that shareholders
of the fourth MarketWatch portfolio, the Money Market Fund, will be given the
opportunity to invest in a money market portfolio in the Wachovia Fund Group.
After these steps, the Money Market Fund will be liquidated. These actions are
expected to occur in advance of the Reorganizations.
Section 15(f) of the 1940 Act provides that when a change in the control of
an investment adviser occurs, the investment adviser or any of its affiliated
persons may receive any amount or benefit in connection therewith under certain
conditions. One condition is that for three years thereafter, at least 75% of
the board of directors of the surviving investment company are not "interested
persons" of the company's investment adviser or of the investment adviser of the
terminating investment company. Another condition is that no "unfair burden" is
imposed on the investment company as a result of the transaction relating to the
change of control, or any express or implied terms, conditions or understandings
applicable thereto. The term "unfair burden" as defined in the 1940 Act includes
any arrangement during the two-year period after the transaction whereby the
investment adviser (or predecessor or successor adviser), or any "interested
person" of any such adviser, receives or is entitled to receive any
compensation, directly or indirectly, from the investment company or its
security holders (other than fees for bona fide investment advisory or other
services) or from any person in connection with the purchase or sale of
securities or other property to, from or on behalf of the investment company
(other than fees for bona fide principal underwriting services). Wachovia Bank
intends to comply with the conditions set forth in Section 15(f).
BOARD OF TRUSTEES' CONSIDERATIONS AND RECOMMENDATIONS
In its consideration and approval of the Reorganizations at its meetings on
October 15, 1997 and January 21, 1998, the Board of Trustees of MarketWatch
considered the effect of the Bank Holding Company Merger of CFB and Wachovia
Corporation on MarketWatch; the recommendations of Central Fidelity and Wachovia
Bank with respect to the proposed reorganization of MarketWatch and the Wachovia
Fund Group; the structure and organization of Wachovia Bank; the nature, quality
and extent of the services to be provided by Wachovia Bank and the
qualifications and experience of the Wachovia Bank personnel intended to provide
such services; the similarities and compatibilities of the investment objective,
policies and limitations of each Old Fund and the corresponding New Fund; the
improvement of operational efficiencies and achievement of economies of scale
through the reorganization of the Old Funds and the result that two, rather than
three, investment companies would be operating following the Reorganizations and
related transactions; the advisory and other fees of the New Funds; the
projected expense ratios of the New Funds as compared to those of the Old Funds;
the tax-free nature of the Reorganizations; and the fact that the interests of
Shareholders of the Old Funds would not be diluted as a result of the
Reorganizations.
7
After consideration of all of the foregoing factors, together with certain
other factors and information considered to be relevant, the Board of Trustees
of MarketWatch unanimously approved the Reorganization Agreements and directed
that they be submitted to Shareholders for approval.
MARKETWATCH'S BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS OF EACH OLD FUND VOTE "FOR" APPROVAL
OF THE REORGANIZATION AGREEMENTS
The Board of Trustees of MarketWatch has not determined what action it will
take in the event (i) the Shareholders of one or more Old Funds fail to approve
the respective Reorganization Agreement; or (ii) for any reason the
Reorganizations or the Liquidation are not consummated. In any such event, the
Board of Trustees of MarketWatch may choose to consider alternative dispositions
of the MarketWatch Funds' assets, including the sale of assets to, or merger
with, another investment company, or the possible liquidation of any of the
MarketWatch Funds.
At meetings held on March 4, 1998, the Boards of Trustees of the Wachovia
Funds and the Wachovia Municipal Funds considered the proposed Reorganizations.
Based upon their evaluation of the relevant information provided to them, and in
light of their fiduciary duties under federal and state law, the Boards of
Trustees of the Wachovia Funds and the Wachovia Municipal Funds unanimously
determined that the proposed Reorganizations were in the best interests of the
New Funds.
FEDERAL INCOME TAX CONSEQUENCES.
Consummation of the Reorganization between each Old Fund and its
corresponding New Fund is subject to the condition that MarketWatch and the
Wachovia Funds or the Wachovia Municipal Funds, whichever is involved, receive
an opinion from Kirkpatrick & Lockhart LLP, based on certain factual assumptions
and in reliance on certain factual representations by the management of
MarketWatch and the Wachovia Fund Group and conditioned on consummation of the
Reorganization in accordance with the applicable Reorganization Agreement, to
the effect that for federal income tax purposes: (i) the transfer of all of the
assets of the Old Fund to the New Fund in exchange solely for Class A Shares of
the New Fund and the New Fund's assumption of all the Old Fund's liabilities,
followed by the liquidation distribution of those Class A Shares to the Old
Fund's Shareholders, will constitute a reorganization within the meaning of
Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended (the
"Code"), and each of the Old Fund and the New Fund will be considered "a party
to the reorganization" within the meaning of Section 368(b) of the Code; (ii) no
gain or loss will be recognized to the Old Fund as a result of the
Reorganization; (iii) no gain or loss will be recognized to the New Fund as a
result of the Reorganization; (iv) no gain or loss will be recognized to the
Shareholders of the Old Fund on the distribution to them of those Class A Shares
constructively in exchange for their shares of the Old Fund; (v) the aggregate
basis of those Class A Shares received by a Shareholder of the Old Fund will be
the same as the aggregate basis of the Shareholder's shares in the Old Fund
immediately prior to the Reorganization; (vi) the New Fund's basis for the
assets of the Old Fund received pursuant to the Reorganization will be the same
as the Old Fund's basis therefor immediately before the Reorganization; (vii) a
Shareholder's holding period for Class A Shares of the New Fund will include the
period for which the Shareholder held the Old Fund shares constructively
exchanged therefor, provided that the Shareholder held those Old Fund shares as
capital assets; (viii) the New Fund's holding period for the Old Fund's assets
received in the Reorganization will include the period for which those assets
were held by the Old Fund; and (ix) the New Fund will succeed to the Old Fund's
tax attributes described in Section 381(c) of the Code. That opinion may state
that no opinion is expressed as to the effect of the Reorganization on the
constituent Funds or any Shareholder with respect to any asset as to which any
unrealized gain or loss is required to be recognized for federal income tax
purposes on the termination or transfer thereof under a mark-to-market system of
accounting.
8
The Wachovia Funds, the Wachovia Municipal Funds and MarketWatch have not
sought a tax ruling from the Internal Revenue Service ("IRS"), but are acting in
reliance upon the opinion of counsel discussed in the previous paragraph. That
opinion is not binding on the IRS and does not preclude the IRS from adopting a
contrary position. Shareholders should consult their own advisers concerning the
potential tax consequences to them, including state and local income taxes.
COMPARISON OF INVESTMENT POLICIES AND RISK FACTORS
The investment objective of each Old Fund is identical to the investment
objective of the corresponding New Fund. The investment policies and limitations
of each Old Fund are extremely similar, but not identical, to the investment
policies and limitations of the corresponding New Fund. Appendix II to this
Proxy Statement contains a discussion that summarizes significant similarities
and differences in the investment objectives, policies and limitations, and the
risk factors, pertinent to each Old Fund and the corresponding New Fund.
PURCHASE AND REDEMPTION INFORMATION, EXCHANGE PRIVILEGES, DISTRIBUTION AND
PRICING
The purchase, redemption, exchange privileges and distribution policies of
the Old Funds and the New Funds are extremely similar, and are discussed in
Appendix III to this Proxy Statement.
APPROVAL OF PROPOSED INVESTMENT ADVISORY AGREEMENT FOR THE NEW FUNDS
By approving the Reorganizations described in this Proxy Statement,
Shareholders of the Old Funds will be authorizing the Board of Trustees of
MarketWatch, acting on behalf of the Shareholders, to vote each New Fund's Class
A Shares issued in connection with the Reorganizations before such shares are
distributed to the Shareholders. The New Funds' Class A Shares will be voted in
favor of the approval of an investment advisory agreement between Wachovia Bank
and the Wachovia Funds, on behalf of the New Income Fund and the New Equity
Fund, and Wachovia Bank and the Wachovia Municipal Funds, on behalf of the New
Virginia Fund, referred to in this Proxy Statement as the "Proposed Advisory
Agreement," PROVIDED HOWEVER, that if the Shareholders of an Old Fund approve a
new investment advisory agreement as recommended in proposal number two, then
the Board of Trustees of MarketWatch will only vote for, and authorize the
execution of, an agreement in the form of the new agreement authorized under
proposal number two. Proposal number two of the Proxy Statement will be
presented to the Shareholders of an Old Fund only if the respective
Reorganization has been approved by the Shareholders of that Old Fund.
The Board of Trustees of MarketWatch supports the continuation of Wachovia
Bank as the investment adviser to the New Funds (under either form of investment
advisory agreement) based upon the same factors that have supported the approval
of the Current Advisory Contract with Wachovia Bank, including the investment
performance of Wachovia Bank in the past, the knowledge and experience of
personnel at Wachovia Bank with respect to managing the types of portfolio
securities in which the Old Funds and the New Funds invest, and the
reasonableness of Wachovia Bank's fees.
The terms and conditions of the Proposed Advisory Agreement are similar to
the Current Advisory Contract between MarketWatch and Wachovia Bank. The
Proposed Advisory Agreement includes certain changes reflecting matters such as
the name of the parties, the date and period of the Agreement and other
non-material changes. The Proposed Advisory Agreement provides for Wachovia
Bank's compensation to remain the same for each New Fund as for the respective
Old Fund.
CURRENT ADVISORY CONTRACT
The Current Advisory Contract between MarketWatch and Wachovia Bank is dated
December , 1997. The Board of Trustees of MarketWatch unanimously approved the
Current Advisory Contract at its meeting held on October 15, 1997, and the
Current Advisory Contract was approved by the shareholders of
9
each respective Old Fund at a special meeting of shareholders held on December
5, 1997. That meeting was specifically called to approve the Current Advisory
Contract.
The Current Advisory Contract provides that Wachovia Bank shall render
investment management services to the Old Funds, subject to the supervision of
the Board of Trustees of MarketWatch. Under the Current Advisory Contract,
Wachovia Bank is entitled to receive advisory fees from the Old Funds, computed
daily and paid monthly, at the annual rates of 1.00% of the average daily net
assets of the Old Equity Fund, and 0.74 of 1% of the average daily net assets of
each of the Old Income Fund and the Old Virginia Fund, respectively.
The table below sets forth (i) the net assets for each Old Fund as of
MarketWatch's fiscal year ended November 30, 1997; and (ii) the rates of
advisory fees, computed daily and payable monthly, to which Wachovia Bank is
(and to which Central Fidelity, the previous investment adviser to MarketWatch,
had been) entitled for the services provided and expenses assumed pursuant to
the Current Advisory Contract. The table also reflects the actual advisory fees
(net of waivers) paid by each Old Fund for the fiscal year ended November 30,
1997.
ADVISORY FEES
ADVISORY FEES
ANNUAL ADVISORY (NET
FEE (BASED ON OF WAIVERS) PAID
NET ASSETS AS AVERAGE NET FOR FISCAL YEAR
OF 11/30/97 ASSETS) ENDED 11/30/97
-------------- ------------------- -----------------
Old Income Fund.................................... $ 96,625,625 0.74% $ 461,898
Old Equity Fund.................................... $ 338,723,629 1.00% $ 2,107,870
Old Virginia Fund.................................. $ 111,159,973 0.74% $ 439,883
For the fiscal year ended November 30, 1997, the Old Equity Fund paid
$123,991 in total dollar amount of brokerage commissions. In addition, Central
Fidelity, as the investment adviser to the Old Funds at November 30, 1997, on
behalf of the Old Equity Fund, directed brokerage transactions to Interstate
Securities and Autranet in return for the provision of investment information.
For the fiscal year ended November 30, 1997, the amounts of such transactions
and related commissions on behalf of the Old Equity Fund were $16,956 and
$55,693, respectively. Neither of the other Old Funds paid any brokerage
commissions or entered into any brokerage transactions during the fiscal year
ended November 30, 1997. The Old Funds, however, engage in transactions with
dealers acting as principal and the costs of such transactions involve dealer
spreads rather than brokerage commissions.
DESCRIPTION OF THE PROPOSED ADVISORY AGREEMENT
Under the Proposed Advisory Agreement, Wachovia Bank would agree, subject to
the supervision of the Wachovia Fund Group's Boards of Trustees, to provide a
continuous investment program for the New Funds in accordance with each New
Fund's respective investment objective and policies and restrictions as stated
in its then current prospectuses and resolutions of the Boards of Trustees.
Wachovia Bank would determine from time to time what securities and other
investments will be purchased, retained or sold by the Wachovia Funds or the
Wachovia Municipal Funds, as applicable, with respect to each New Fund. Wachovia
Bank would agree not to make loans to any person to purchase or carry shares of
the Wachovia Fund Group.
The terms and conditions of the Proposed Advisory Agreement are
substantially the same as those of the Current Advisory Contract. The advisory
fees payable to Wachovia Bank under the Proposed Advisory Agreement for the New
Funds are identical to the advisory fees payable to Wachovia Bank by the Old
Funds under the Current Advisory Contract.
10
The Proposed Advisory Agreement provides that it will continue in effect as
to each New Fund from the date of its execution until March , 2000, unless
sooner terminated, and thereafter for successive one-year terms, provided that
such continuance is specifically approved at least annually (i) by the vote of a
majority of those members of the Wachovia Fund Group's Boards of Trustees who
are not parties to the Proposed Advisory Agreement or "interested persons" (as
defined in the 1940 Act) of any such party, cast in person at a meeting called
for the purpose of voting on such approval, and (ii) by the vote of a majority
of the Wachovia Fund Group's Boards of Trustees or by a vote of a majority of
the outstanding voting securities of such New Fund. The Proposed Advisory
Agreement may be terminated with respect to a New Fund at any time, without the
payment of any penalty, by any party thereto on 60 days' written notice, and
automatically terminates upon its "assignment" (as defined in the 1940 Act).
Under the Proposed Advisory Agreement and the Current Advisory Contract,
Wachovia Bank pays all expenses incurred by it in connection with its activities
under the agreements, other than the cost of securities (including brokerage
commissions, if any) purchased for the Funds.
Both the Current Advisory Contract and the Proposed Advisory Agreement
require that Wachovia Bank maintain its policy and practice of conducting its
fiduciary functions independently. In making investment recommendations for the
New Funds, Wachovia Bank's personnel will not inquire or take into consideration
whether the issuers of securities proposed for purchase or sale for the Wachovia
Funds' or the Wachovia Municipal Funds' account are customers of Wachovia Bank
or of its parent or its subsidiaries or affiliates. Furthermore, in dealing with
such customers, Wachovia Bank and its parent, subsidiaries and affiliates will
not inquire or take into consideration whether securities of those customers are
held by the Wachovia Fund Group.
Similar to the Current Advisory Contract, the Proposed Advisory Agreement
provides that in executing portfolio transactions and selecting brokers or
dealers, Wachovia Bank will attempt to obtain prompt execution of orders in an
effective manner at the most favorable price. The Proposed Advisory Agreement
provides that, consistent with this obligation and to the extent permitted by
the 1940 Act, when the execution and price offered by two or more brokers or
dealers are comparable, Wachovia Bank may, in its discretion, purchase and sell
portfolio securities to and from brokers and dealers who provide Wachovia Bank
with research advice and other services.
Under both the Current Advisory Contract and the Proposed Advisory
Agreement, portfolio securities will not be purchased from or sold in principal
transactions to Wachovia Bank or any affiliated person of the Wachovia Fund
Group or of Wachovia Bank, except to the extent permitted by law.
Both the Proposed Advisory Agreement and the Current Advisory Contract
provide that Wachovia Bank shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Old Funds and the New Funds,
respectively, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services or a loss resulting from
willful misfeasance, bad faith or gross negligence by Wachovia Bank in the
performance of its duties or from reckless disregard by it of its obligations
and duties under the respective Agreement.
INFORMATION ABOUT WACHOVIA BANK
Wachovia Bank is a wholly-owned subsidiary of Wachovia Corporation. Both
companies have their principal place of business at 100 North Main Street,
Winston-Salem, North Carolina 27101. As of , 1998, no person owned
beneficially or of record 10% or more of any class of issued and outstanding
voting securities of Wachovia Corporation.
11
The name and principal occupation of the principal executive officer and
each director of Wachovia Bank as of , 1998 were as follows:
OTHER TYPE
POSITION WITH BUSINESS OF
NAME WACHOVIA BANK CONNECTIONS BUSINESS
- ------------------------------ -------------- ------------------------------------------ ---------------------
L.M. Baker, Jr. Director President and Chief Executive Officer, Banking
Wachovia Corporation
James S. Balloon Director Chairman and Chief Executive Officer, Diversified
National Service Industries, Inc. Manufacturing and
Services
Peter C. Browning Director President and Chief Operating Officer, Packaging
Sonoco Products Company
John T. Casteen III Director President, The University of Virginia Education
John L. Clendenin Director Chairman of the Board, BellSouth Communications
Corporation
Lawrence M. Gressette, Jr. Director Chairman of the Executive Committee, SCANA Utilities
Corporation
Dr. Thomas K. Hearn, Jr. Director President, Wake Forest University Education
George W. Henderson, III Director President and Chief Executive Officer, Textile Manufacturing
Burlington Industries, Inc.
W. Hayne Hipp Director President and Chief Executive Officer, The Insurance and
Liberty Corporation Broadcasting
Robert M. Holder, Jr. Director Chairman, RMH Group, LLC Construction and
Development
Robert A. Ingram Director President and Chief Executive Officer, Pharmaceuticals
Glaxo Wellcome, Inc.
James W. Johnston Director President and Chief Executive Officer, Consulting and
Stonemaker Enterprises, Inc. Investments
John G. Medlin, Jr. Director Chairman of the Board, Wachovia Banking
Corporation
Wyndham Robertson Director Writer; Former Vice President for Writing
Communications, University of North
Carolina
Herman J. Russell Director Chairman, H.J. Russell & Company Management Services
Sherwood H. Smith, Jr. Director Chairman of the Board, Carolina Power & Utilities
Light Company
John C. Whitaker, Jr. Director Chairman and Chief Executive Officer, Information Services
Inmar Enterprises, Inc. and Transaction
Processing
All of the above persons may be reached c/o Wachovia Bank, N.A., 100 North
Main Street, Winston-Salem, North Carolina 27101.
12
Wachovia Bank serves as the investment adviser to the following portfolios
of the Wachovia Fund Group with investment objectives similar to those of the
Old Funds:
MAXIMUM ANNUAL
FUND NET ASSETS ADVISORY FEE
- --------------------------------------------------- --------------- -------------------
(AS OF (BASED ON
, 1998) AVERAGE NET ASSETS)
Wachovia Equity Fund* $ 0.70%
Wachovia Quantitative Equity Fund* $ 0.70%
Wachovia Fixed Income Fund* $ 0.60%
Wachovia Georgia Municipal Bond Fund* $ 0.75%
Wachovia North Carolina Municipal Bond Fund* $ 0.75%
Wachovia South Carolina Municipal Bond Fund* $ 0.75%
- ------------------------
* Wachovia Bank may from time to time waive its advisory fees and change any
waivers at any time.
AUTHORITY TO ACT AS INVESTMENT ADVISER
Banking laws and regulations currently prohibit a bank holding company
registered under the Bank Holding Company Act of 1956 or any affiliate thereof
from sponsoring, organizing or controlling a registered open-end investment
company continuously engaged in the issuance of its shares, and prohibit banks
generally from underwriting, selling or distributing securities, but in general
do not prohibit such a holding company or affiliate banks generally from acting
as investment adviser, transfer agent or custodian to such an investment company
or from purchasing shares of such a company as agent for and upon the order of
customers. Wachovia Bank is subject to such laws and regulations, but believes
that it may perform the services contemplated by the Proposed Advisory Agreement
discussed above without violating the Glass-Steagall Act or other applicable
banking laws or regulations. Future changes in legal requirements relating to
the permissible activities of banks and their affiliates, as well as future
interpretations of current requirements, could prevent Wachovia Bank from
continuing to perform such services for the Wachovia Funds and the Wachovia
Municipal Funds. If Wachovia Bank were prohibited from acting as investment
adviser to the Wachovia Funds and the Wachovia Municipal Funds, it is expected
that the Boards of Trustees of the Wachovia Fund Group would recommend that
shareholders approve new investment advisory arrangements.
OTHER INFORMATION
MarketWatch, the Wachovia Funds and the Wachovia Municipal Funds are each
registered as open-end, series, management investment companies under the 1940
Act. Currently, MarketWatch offers interests in four investment portfolios, the
Wachovia Funds offer interests in fourteen investment portfolios and the
Wachovia Municipal Funds offer interests in four investment portfolios.
MarketWatch has one class of shares outstanding. Certain portfolios of the
Wachovia Fund Group have three classes of shares outstanding. Each of the New
Funds, following their commencement of operations, will have two classes of
shares outstanding.
MarketWatch is organized as a Massachusetts business trust and is subject to
the provisions of its Agreement and Declaration of Trust and By-Laws. The
Wachovia Funds and the Wachovia Municipal Funds is each organized as a
Massachusetts business trust and is subject to the provisions of its respective
Declaration of Trust and By-Laws. Shares of MarketWatch, the Wachovia Funds and
the Wachovia Municipal Funds: (i) are entitled to one vote for each full share
held and a proportionate fractional vote for each fractional share held; (ii)
will vote in the aggregate and not by class except as otherwise expressly
required by law or when class voting is permitted by MarketWatch's Board of
Trustees or by the Wachovia Fund Group's Boards of Trustees, respectively; and
(iii) are entitled to participate equally in the dividends
13
and distributions that are declared with respect to a particular class and in
the net distributable assets of such class on liquidation. Shares of each of the
Old Funds have a par value of $0.001 per share, while the shares of the New
Funds have no par value. In addition, shares of the Old Funds and the New Funds
have no preemptive rights and only such conversion and exchange rights as the
Board of Trustees of MarketWatch or the Boards of Trustees of the Wachovia Fund
Group, respectively, may grant in their discretion. When issued for payment as
described in their respective prospectuses, the shares of the Old Funds and the
shares of the New Funds are validly issued, fully paid and non-assessable by
such entities except as required under Massachusetts law. Neither MarketWatch
nor the Wachovia Fund Group is required under Massachusetts law to hold annual
shareholder meetings and intends to do so only if required by the 1940 Act.
Shareholders of the Wachovia Fund Group have the right to remove trustees. To
the extent required by law, Wachovia Bank will assist in shareholder
communications in such matters.
The foregoing is only a summary. Shareholders may obtain copies of the
Agreement and Declaration of Trust and By-Laws of MarketWatch, and the
Declarations of Trust and By-laws of the Wachovia Funds and the Wachovia
Municipal Funds, respectively, upon written request at the address shown on the
cover page of this Proxy Statement.
PROPOSAL 2: APPROVAL OR DISAPPROVAL OF A
NEW INVESTMENT ADVISORY AGREEMENT FOR EACH NEW FUND
The Reorganization of each Old Fund to be considered as proposal one at the
Meeting contemplates that the approval of each Reorganization will authorize the
Board of Trustees of MarketWatch to approve, on behalf of the Shareholders of
each Old Fund, a Proposed Advisory Agreement for the respective New Fund. The
form of the Proposed Advisory Agreement is substantially the same as the Current
Advisory Contract between MarketWatch and Wachovia Bank. The form and structure
of each agreement is substantially identical to the form of the respective
investment advisory agreement between MarketWatch and Central Fidelity that was
in effect prior to the Bank Holding Company Merger.
The form of the Current Advisory Contract and the Proposed Advisory
Agreement (together, the "Old Agreements"), except as set forth below, is
similar as to matters of substance to the form of the advisory agreements
between the Wachovia Funds and Wachovia Bank, and the agreements between the
Wachovia Municipal Funds and Wachovia Bank (together, the "Wachovia Group
Agreements," which are attached to this Proxy Statement as Appendices IV-1 and
IV-2). However, the actual form and structure of the Old Agreements is different
from the form and structure of the Wachovia Group Agreements. A notable
difference in the structure of the Wachovia Group Agreements is that each
agreement is drafted in the form of a single master document, and each portfolio
which adopts the agreement executes an exhibit for that portfolio which
identifies the fee to be paid by the portfolio and the effective date for that
portfolio.
In connection with the recommendation that the MarketWatch Funds be
reorganized into the Wachovia Fund Group, Wachovia Bank considered two other
factors which it deemed to be beneficial to the Shareholders. First, Wachovia
Bank concluded that the operation of the Wachovia Fund Group would be more
efficient if the form of the investment advisory agreement used by each of the
New Funds was in the form of the agreements presently used by the other
portfolios of the Wachovia Funds or the Wachovia Municipal Funds, as applicable,
and recommended that the Shareholders be asked to approve the use of the
respective Wachovia Group Agreement for each New Fund. Second, Wachovia Bank
determined that it was prepared to serve as the investment adviser to the New
Income Fund and to the New Equity Fund for a fee lower than the fee payable
under both the Current Advisory Contract and the Proposed Advisory Agreement. To
avoid the expense of an additional meeting of shareholders to consider these
matters, Wachovia Bank recommended that the Board of Trustees of MarketWatch
present to the Shareholders this proposal to approve for each New Fund the use
of the appropriate Wachovia Group Agreement, and that the proposed Wachovia
Group Agreement exhibit for the New Income Fund and the New Equity Fund should
each reflect the reduced investment advisory fee proposed by Wachovia Bank for
the respective
14
New Fund. This proposal will be presented to the Shareholders of each Old Fund
if the Shareholders of that Old Fund approve the Reorganization discussed in
proposal one of this Proxy Statement.
DESCRIPTION OF THE WACHOVIA GROUP AGREEMENTS
Under the Wachovia Group Agreements, Wachovia Bank agrees, subject to the
supervision of the Wachovia Fund Group's Boards of Trustees, to provide a
continuous investment program for the New Funds in accordance with each New
Fund's respective investment objective and policies and restrictions as stated
in its then current prospectuses and the resolutions of the Boards of Trustees.
Wachovia Bank would determine from time to time what securities and other
investments will be purchased, retained or sold by the Wachovia Funds or the
Wachovia Municipal Funds, as applicable, with respect to each New Fund. Under
the Wachovia Funds' Agreement, Wachovia Bank agrees to select brokers and
dealers to effect the purchase or sale of investments for the Wachovia Fund,
while under the Wachovia Municipal Funds' agreement, Wachovia Bank agrees to
operate generally in accordance with the objectives, policies and restrictions
adopted by the Wachovia Municipal Funds, including those set forth in any
Wachovia Municipal Funds' prospectus. Each Wachovia Group Agreement contains
customary provisions concerning its non-assignability, termination on sixty days
notice without penalty, limitations upon liability in the absence of willful
misfeasance, bad faith, gross negligence, or the reckless disregard of the
duties under the agreement, as well as customary provisions regarding its
continuance from year-to-year after its initial term.
Although structured in a different form, the terms and conditions of the
Wachovia Group Agreements are comparable to those of the respective Current
Advisory Contract. The services provided to the New Funds under the Wachovia
Group Agreements are substantially the same as those under the Current Advisory
Contract. The principal differences, other than the structure of the agreements,
are that: (i) the adviser to the portfolios in the Wachovia Fund Group is
responsible for expenses incurred to provide office space, equipment and
personnel required to provide investment advisory services to the Wachovia
Funds, while each portfolio will pay, or cause to be paid, all of its own
expenses, and an allocable share of the expenses of the respective trust,
including, without limitation, the expenses set forth in the Wachovia Funds'
agreement; (ii) the Wachovia Funds' Agreements provide for expense limitations
in accordance with state securities laws, and such laws are not applicable to
the portfolios under current law; (iii) each Wachovia Group Agreement will have
an initial term as to a New Fund which will run from the date of the execution
of the exhibit adopting the agreement for the respective New Fund until the next
annual renewal date of the applicable Wachovia Funds Agreement; and (iv) the
Wachovia Funds' Agreement is to be construed in accordance with the laws of the
State of North Carolina, while the Wachovia Municipal Funds' Agreement is to be
construed in accordance with the laws of the Commonwealth of Pennsylvania.
The advisory fee payable to Wachovia Bank under the Wachovia Group Agreement
for the New Virginia Fund is identical to the advisory fee payable to Wachovia
Bank by the Old Virginia Fund under the Old Advisory Agreements. However, the
Wachovia Group Agreement contemplates a reduction in the rate of advisory fees
payable to Wachovia Bank for its services in managing the New Income Fund and
the New Equity Fund, as compared to the fees payable to Wachovia Bank under the
Current Advisory Contract for managing the Old Income Fund and the Old Equity
Fund. The Wachovia Group Agreement provides for an advisory fee of 0.60 of 1% of
the New Income Fund's average daily net assets (vs. 0.74 of 1% of the Old Income
Fund's average daily net assets) and an advisory fee of 0.70 of 1% of the New
Equity Fund's average daily net assets (vs. 1.00% of the Old Equity Fund's
average daily net assets).
The Wachovia Group Agreement for each New Fund will continue in effect as to
each New Fund from the date of its execution until the next annual renewal date
of the agreement, unless sooner terminated, and thereafter for successive
one-year terms, provided that such continuance is specifically approved at least
annually (i) by the vote of a majority of those members of the Wachovia Fund
Group's Boards of Trustees who are not parties to the Wachovia Group Agreement
or "interested persons" (as defined in the 1940 Act) of any such party, cast in
person at a meeting called for the purpose of voting on such approval,
15
and (ii) by the vote of a majority of the Wachovia Fund Group's Boards of
Trustees or by a vote of a majority of the outstanding voting securities of such
New Fund. The Wachovia Group Agreement may be terminated with respect to a New
Fund at any time, without the payment of any penalty, by any party thereto on 60
days' written notice, and automatically terminates upon its "assignment" (as
defined in the 1940 Act).
Both the Current Advisory Contract, and the approval of the Wachovia Group
Agreements by the MarketWatch Board of Trustees, contemplates that Wachovia Bank
will maintain its policy and practice of conducting its fiduciary functions
independently. In making investment recommendations for the New Funds, Wachovia
Bank's personnel will not inquire or take into consideration whether the issuers
of securities proposed for purchase or sale for the Wachovia Funds' or the
Wachovia Municipal Funds' account are customers of Wachovia Bank or of its
parent or its subsidiaries or affiliates. Furthermore, in dealing with such
customers, Wachovia Bank and its parent, subsidiaries and affiliates will not
inquire or take into consideration whether securities of those customers are
held by the Wachovia Fund Group.
Similar to the Current Advisory Contract, the Wachovia Funds' Agreement
provides that in executing portfolio transactions and selecting brokers or
dealers, Wachovia Bank will attempt to obtain prompt execution of orders in an
effective manner at the most favorable price. The Wachovia Funds' Agreement
provides that, consistent with this obligation and to the extent permitted by
the 1940 Act, when the execution and price offered by two or more brokers or
dealers are comparable, Wachovia Bank may, in its discretion, purchase and sell
portfolio securities to and from brokers and dealers who provide Wachovia Bank
with research advice and other services.
Under both the Current Advisory Contract and the Wachovia Group Agreement,
portfolio securities will not be purchased from or sold in principal
transactions to Wachovia Bank or any affiliated person of the Wachovia Fund
Group or of Wachovia Bank, except to the extent permitted by law.
Both the Proposed Advisory Agreement and the Wachovia Group Agreement
provide that Wachovia Bank shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Old Funds and the New Funds,
respectively, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services or a loss resulting from
willful misfeasance, bad faith or gross negligence by Wachovia Bank in the
performance of its duties or from reckless disregard by it of its obligations
and duties under the respective Agreement.
MARKETWATCH'S BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS
THAT SHAREHOLDERS OF EACH OLD FUND VOTE "FOR" APPROVAL
OF A WACHOVIA GROUP AGREEMENT FOR THE NEW FUND
PROPOSAL 3:
OTHER MATTERS THAT MAY COME BEFORE THE MEETING
The Meeting of the Shareholders of MarketWatch is a special meeting, and
will generally conduct only those matters set forth in the Notice of Meeting.
The Board of Trustees of MarketWatch knows of no other business to be brought
before the Meeting. However, if any other matters properly come before the
Meeting, it is the intention of the Board that proxies that do not contain
specific instructions to the contrary will be voted on such matters in
accordance with the judgment of the persons designated as proxies thereon.
* * *
CERTAIN NON-ADVISORY ARRANGEMENTS WITH SERVICE PROVIDERS--THE OLD FUNDS.
Administrative services are provided to the Old Funds by BISYS Fund
Services, Inc. ("BISYS"), a subsidiary of The BISYS Group, Inc. For expenses
assumed and services provided as administrator, BISYS
16
is entitled to receive a fee from each Old Fund, computed daily and paid
periodically, calculated at the annual rate of 0.20% of each Old Fund's average
daily net assets. BISYS may periodically waive all or a portion of its
administrative fee and may reimburse an Old Fund for certain expenses to
increase its net income available for distribution as dividends. For the fiscal
year ended November 30, 1997, BISYS received administration fees (net of fee
waivers) at the effective annual rate of 0.15%, 0.15% and 0.15% of the average
daily net assets of the Old Income Fund, the Old Equity Fund and the Old
Virginia Fund, respectively.
Pursuant to its Custodian Agreement with MarketWatch, Central Fidelity
serves as custodian for the Old Funds and receives compensation from each Old
Fund for its services and out-of-pocket expenses. For the fiscal year ended
November 30, 1997, Central Fidelity received custody fees of $18,791, $56,467,
$22,412 and $0, with respect to the Old Income Fund, the Old Equity Fund, the
Old Virginia Fund, and the MarketWatch Money Market Fund, respectively.
BISYS Fund Services Ohio, Inc. ("BISYS Ohio"), which is considered to be an
affiliated person of BISYS under the 1940 Act, serves as MarketWatch's transfer
and dividend disbursing agent.
BISYS serves as the distributor of shares of the Old Funds.
MarketWatch has adopted a Distribution and Services Plan (the "Plan")
pursuant to Rule 12b-1 of the 1940 Act, under which each Old Fund is authorized
to pay BISYS, as distributor, a periodic amount calculated at an annual rate not
to exceed 0.25% of the average daily net assets of the Old Fund, in compensation
for distribution assistance and administrative support services provided to
shareholders and expenses assumed in connection with the distribution of shares
of the Old Fund (collectively referred to herein as the "Fee"). The Fee may be
used to compensate banks for administrative support services and to pay
broker-dealers and other institutions (each such bank, broker-dealer and other
institution is hereafter referred to as a "Participating Organization") for
similar services, including distribution services, pursuant to an agreement
between BISYS and the Participating Organization. Under the Plan, a
Participating Organization may include Central Fidelity, BISYS, and their
subsidiaries and affiliates.
The Plan is a "compensation" type plan as opposed to a "reimbursement" type
plan. BISYS may use the Fee payable by an Old Fund to compensate for payments or
expenses incurred in connection with (1) distribution assistance with respect to
the sale of shares, (2) administrative support services provided to the holder
of shares and (3) Participating Organizations' provision of services to
customers that own shares. Accordingly, payments by an Old Fund under the Plan
are based on the expressed fee rather than on specific amounts expended by BISYS
for distribution purposes. BISYS may earn a profit from payments made by the Old
Funds under the Plan.
For the fiscal year ended November 30, 1997, the Old Income Fund, the Old
Equity Fund and the Old Virginia Fund paid fees to BISYS and other
broker-dealers pursuant to the Plan in the aggregate amount of $234,890,
$705,852 and $280,150, respectively, which represents 0.25%, 0.25% and 0.25% of
the average net assets of the Old Income Fund, the Old Equity Fund and the Old
Virginia Fund, respectively, during that period subject to the Plan.
Pursuant to the Plan, BISYS has entered into a servicing agreement (the
"Agreement") with Central Fidelity pursuant to which Central Fidelity has agreed
to provide certain administrative support services in connection with shares of
an Old Fund purchased and held by Central Fidelity for the accounts of its
customers and shares of the Old Fund purchased and held by customers of Central
Fidelity directly, including, but not limited to, establishing and maintaining
customer accounts and records, aggregating and processing purchase, exchange and
redemption transactions for customers, answering routine customer questions
concerning the Old Fund, and providing such office space, equipment, telephone
facilities and personnel as is necessary and appropriate to accomplish such
matters. In consideration of such services, Central Fidelity receives a monthly
fee from BISYS computed at an annual rate of up to 0.25% of the
17
average aggregate net assets of the Old Fund shares held during this period for
which Central Fidelity has provided services under the Agreement.
For the fiscal year ended November 30, 1997, the Old Income Fund, the Old
Equity Fund, the Old Virginia Fund and MarketWatch Money Market Fund paid fees
to Central Fidelity pursuant to the Agreement in the aggregate amount of $ ,
$ , $ , and $ , respectively, which represents . %, . %, . % and
. % of the average daily net assets of the Old Income Fund, the Old Equity
Fund, the Old Virginia Fund and the MarketWatch Money Market Fund's shares
during that period subject to the Agreement.
CERTAIN NON-ADVISORY ARRANGEMENTS WITH SERVICE PROVIDERS--THE NEW FUNDS.
Federated Services Company ("Federated"), a subsidiary of Federated
Investors, will provide administrative, fund accounting and transfer agency
services to the New Funds. For its services to the Wachovia Fund Group,
Federated receives a fee, computed and payable daily, at the annual rate of 0.10
of 1% of the average aggregate daily net assets of all investment portfolios of
the Wachovia Fund Group (excluding the Wachovia Prime Cash Management Fund, a
portfolio of the Wachovia Funds) up to $3.5 billion of such aggregate assets,
and 0.06 of 1% of such aggregate assets in excess of $3.5 billion. This rate is
lower than the annual rate payable by the Old Funds to BISYS. Federated may
choose voluntarily to waive or reimburse a portion of its fee at any time.
Federated will serve as the shareholder servicing agent (the "Shareholder
Servicing Agent") for the Class A Shares of the New Funds. The New Funds will
pay the Shareholder Servicing Agent a fee computed at an annual rate equal to
0.25 of 1% of the Funds' Class A Shares' average daily net assets for which the
Shareholder Servicing Agent provides services. These shareholder services
include, but are not limited to, distributing prospectuses and other
information, providing shareholder assistance and communicating or facilitating
purchases and redemptions of Class A Shares.
Wachovia Bank will provide custodial services to the New Funds, and will be
entitled to receive an annual fee from the Wachovia Fund Group based upon the
average daily net assets of the portfolios in the Wachovia Fund Group. Wachovia
Bank, in its capacity as custodian, will also charge transaction fees and
out-of-pocket expenses.
Federated Securities Corp., a subsidiary of Federated Investors, is the
principal distributor for the Wachovia Fund Group. Under the distribution
agreement, Federal Securities Corp. acts as the agent of Wachovia Fund Group in
connection with the offering of shares of each class of the Wachovia Fund Group.
Federated Securities Corp. provides its services at cost.
INFORMATION RELATING TO VOTING MATTERS
GENERAL INFORMATION
This Proxy Statement is being furnished in connection with the solicitation
of proxies by the Board of Trustees of MarketWatch in connection with the
Meeting. It is expected that the solicitation of proxies will be primarily by
mail. Officers and service contractors of MarketWatch may also solicit proxies
by telephone, telegraph, facsimile or personal interview. Any Shareholder giving
a proxy may revoke it at any time before it is exercised by submitting to
MarketWatch a written notice of revocation or a subsequently executed proxy or
by attending the Meeting and voting in person.
Only shareholders of record of the Old Income Fund, the Old Equity Fund and
the Old Virginia Fund at the close of business on March , 1998 will be
entitled to vote at the Meeting, and only with respect to those matters
affecting the respective Old Fund. On that date there were outstanding and
entitled to be voted , and shares, respectively, of the Old Income
Fund, the Old Equity Fund and the Old Virginia Fund.
18
At March , 1998, Central Fidelity owned of record with the power to vote
approximately %, % and %, respectively, of the outstanding shares of
the Old Income Fund, the Old Equity Fund and the Old Virginia Fund,
respectively, on behalf of its customers. MarketWatch, the Wachovia Funds and
the Wachovia Municipal Funds have been advised by Central Fidelity that it
intends to vote the shares of each Old Fund over which it has voting power "FOR"
the Reorganization Agreements and "FOR" the Wachovia Group Agreement.
If the accompanying proxy is executed and returned in time for the Meeting,
the shares covered thereby will be voted in accordance with the instructions
marked on the proxy on all matters that may properly come before the Meeting or
any adjournment thereof. In the absence of such instructions, properly executed
proxies will be voted FOR proposals one and two, and in the discretion of the
proxies on any other matter which may properly come before the meeting. For
information on adjournment of the meeting, see "Quorum" below.
SHAREHOLDER APPROVALS
The Reorganization Agreements and the Wachovia Group Agreement are being
submitted for approval at the Meeting by the holders of a majority of the
outstanding shares of the respective Old Fund in accordance with the provisions
of MarketWatch's Agreement and Declaration of Trust and the requirements of the
1940 Act. The term "majority of the outstanding shares" of each Old Fund as used
herein means the lesser of (a) 67% of the shares of the Old Fund present at the
Meeting if the holders of more than 50% of the outstanding shares of the Old
Fund are present in person or by proxy, or (b) more than 50% of the outstanding
shares of the Old Fund.
In tallying Shareholder votes, abstentions and broker non-votes (i.e.,
proxies sent in by brokers and other nominees that cannot be voted on a proposal
under applicable rules because instructions have not been received from the
beneficial owners) will be counted for purposes of determining whether or not a
quorum is present for purposes of convening the meeting. Abstentions and broker
non-votes will be considered to be votes "AGAINST" the Reorganization Agreements
and the Wachovia Group Agreement.
BENEFICIAL OWNERS
As of March , 1998, MarketWatch's trustees and officers, as a group,
beneficially owned less than 1% of the shares of MarketWatch.
19
As of March , 1998, Central Fidelity held of record, but not beneficially,
approximately %, %, and % of the respective outstanding shares of
the Old Income Fund, the Old Equity Fund and the Old Virginia Fund. As of the
same date, the following persons beneficially owned 5% or more of the shares of
each of the Old Funds:
PERCENTAGE
OF
NUMBER OF OUTSTANDING
SHARES SHARES
--------------- ------------
OLD INCOME FUND
CENTRAL FIDELITY NATIONAL BANK %
CASH
LARCO ATTN MUTUAL FUND DESK
P.O. BOX 27602
5th FLOOR
JAMES CENTER
RICHMOND, VA 23261
OLD EQUITY FUND
CORELINK FINANCIAL, INC. %
P.O. BOX 4054
CONCORD, CA 94524
CENTRAL FIDELITY NATIONAL BANK %
REINVEST
LARCO ATTN MUTUAL FUND DESK
P.O. BOX 27602, 5TH FL.
JAMES CENTER
RICHMOND, VA 23261
CENTRAL FIDELITY NATIONAL BANK %
CASH
LARCO ATTN MUTUAL FUND DESK
P.O. BOX 27602, 5TH FL.
JAMES CENTER
RICHMOND, VA 23261
OLD VIRGINIA FUND
CENTRAL FIDELITY NATIONAL BANK %
CASH
LARCO ATTN MUTUAL FUND DESK
P.O. BOX 27602, 5TH FL.
JAMES CENTER
RICHMOND, VA 23261
For purposes of the 1940 Act, any person who owns directly or through one or
more controlled companies more than 25 percent of the voting securities of a
company is presumed to "control" such company. Under this definition, Central
Fidelity and its affiliates may be deemed to be controlling persons of each Old
Fund.
APPRAISAL RIGHTS. Shareholders are not entitled to any rights of share
appraisal under MarketWatch's Agreement and Declaration of Trust or under the
laws of the Commonwealth of Massachusetts in connection with the
Reorganizations. Shareholders have, however, the right to redeem their shares in
each Old Fund at net asset value until the effective time of the respective
Reorganization, and thereafter
20
shareholders may redeem the Class A Shares of each New Fund acquired by them in
a Reorganization at net asset value.
QUORUM. In the event that a quorum is not present at the Meeting, or in the
event that a quorum is present at the Meeting but sufficient votes to approve a
Reorganization or a Wachovia Group Agreement are not received, the persons named
as proxies may propose one or more adjournments of the Meeting to permit further
solicitation of proxies. Any such adjournment will require the affirmative vote
of a majority of those shares that are represented at the Meeting in person or
by proxy. If a quorum is present, the persons named as proxies will vote those
proxies which they are instructed to vote AGAINST a Reorganization or a Wachovia
Group Agreement in opposition to such adjournments, and will vote other proxies
they are authorized to vote FOR any adjournment. A quorum is constituted with
respect to an Old Fund by the presence in person or by proxy of the holders of
more than 50% of the outstanding shares of the Old Fund entitled to vote at the
Meeting. MarketWatch proxies properly executed and marked with an abstention
will be considered to be present at the Meeting for the purposes of determining
the existence of a quorum for the transaction of business.
SHAREHOLDER MEETINGS. As mentioned above, MarketWatch is organized as a
Massachusetts business trust. MarketWatch's Agreement and Declaration of Trust
does not require that an annual meeting of shareholders be held each year.
MarketWatch does not intend to hold annual meetings of shareholders except as
required by the 1940 Act or other applicable law. MarketWatch's Code of
Regulations provides that special meetings of shareholders, including meetings
to consider the removal of trustees, shall be called at the written request of
the shareholders entitled to vote at least 10% of the outstanding shares of
MarketWatch entitled to be voted at such meetings. To the extent required by
law, MarketWatch will assist in shareholder communications on such matters.
ADDITIONAL INFORMATION ABOUT THE WACHOVIA FUNDS AND
THE WACHOVIA MUNICIPAL FUNDS
Information about the New Funds is included in the Wachovia Fund Group's
Prospectus for Class A Shares, dated March 7, 1998, a copy of which accompanies
this Proxy Statement. Additional information about the New Funds is included in
the Wachovia Fund Group's Statement of Additional Information, dated March 7,
1998, which has been filed with the SEC. A copy of the Statement of Additional
Information may be obtained without charge by writing to or calling MarketWatch
at the address or phone number appearing on the front page of this Proxy
Statement.
The current trustees and officers of the Wachovia Funds and the Wachovia
Municipal Funds will continue as trustees and officers following the
Reorganizations. The name and address of the current
21
trustees and officers of the Wachovia Funds and the Wachovia Municipal Funds, as
well as information concerning his principal occupations during the past five
years, are set forth below:
POSITION(S) HELD
WITH THE WACHOVIA
FUNDS AND THE
DATE OF WACHOVIA MUNICIPAL
NAME AND ADDRESS BIRTH FUNDS PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
- ------------------------------- --------- --------------------- ---------------------------------------------
James A. Hanley 8/13/31 Trustee Retired; Vice President and Treasurer, Abbott
4272 Sanctuary Way Laboratories (health care products) (until
Bonita Springs, FL 1992).
Samuel E. Hudgins 3/4/29 Trustee Independent consultant; President, Percival
715 Whitemere Court, N.W. Hudgins & Company, LLC (investment
Atlanta, GA bankers/financial consultants) (until
September 1997); Director, Atlantic American
Corporation (insurance holding company).
J. Berkley Ingram, Jr. 4/17/24 Trustee Real estate investor and partner; formerly,
114-L Reynolda Village Vice Chairman, Massachusetts Mutual Life
Winston-Salem, NC Insurance Company.
D. Dean Kaylor 6/29/30 Trustee Retired; Executive Vice President and Chief
2835 Greenbriar Financial Officer, NBD Bank, N.A. and NBD
Harbor Springs, MI Bancorp, Inc. (bank and bank holding company)
(until 1990).
Charles S. Way, Jr.* 12/18/37 Trustee President and CEO, The Beach Company and its
211 King Street various affiliated companies and
Suite 300 partnerships.
Charleston, SC
John W. McGonigle 10/26/38 President and President and Chief Executive Officer,
Federated Investors Tower Treasurer Federated Investors Management Company;
Pittsburgh, PA Executive Vice President, Secretary, General
Counsel, and Trustee, Federated Investors;
Trustee, Federated Advisers, Federated
Management, Federated Research, and Federated
Services Company; and Director, Federated
Securities Corp.
Charles L. Davis, Jr. 3/23/60 Vice President and Vice President, Federated Services Company.
Federated Investors Tower Assistant Treasurer
Pittsburgh, PA
Peter J. Germain 9/3/59 Secretary Senior Vice President and Director of
Federated Investors Tower Proprietary Funds Services, Federated
Pittsburgh, PA Services Company.
- ------------------------
* This trustee is considered by the Wachovia Funds and the Wachovia Municipal
Funds to be an "interested person" of the Wachovia Funds and the Wachovia
Municipal Funds as defined in the 1940 Act.
22
OTHER BUSINESS
The Board of Trustees of MarketWatch knows of no other business to be
brought before the Meeting. However, if any other matters come before the
Meeting, it is the intention that proxies which do not contain specific
restrictions to the contrary will be voted on such matters in accordance with
the judgment of the person named in the enclosed form of proxy.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to MarketWatch in writing at the
address on the cover page of this Proxy Statement or by telephoning
1-800-752-1823.
* * *
SHAREHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE SPECIAL MEETING
AND WHO WISH TO HAVE THEIR SHARES VOTED ARE REQUESTED TO
DATE AND SIGN THE ENCLOSED PROXY CARD OR CARDS AND RETURN
THE SAME IN THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED
IF MAILED IN THE UNITED STATES.
23
APPENDIX I
AGREEMENT AND PLAN OF REORGANIZATION
between
THE WACHOVIA FUNDS,
on behalf of the
Wachovia Intermediate Fixed Income Fund
and
MARKETWATCH FUNDS,
on behalf of the
MarketWatch Intermediate Fixed Income Fund
March 5, 1998
I-1
CONTENTS
PAGE
---------
I. Transfer of Assets of the Acquired Portfolio...................................................... I-3
II. Liquidating Distributions and Termination of MarketWatch.......................................... I-4
III. Effective Time of the Reorganization.............................................................. I-4
IV. Certain Representations, Warranties and Agreements of MarketWatch................................. I-4
V. Certain Representations, Warranties and Agreements of Wachovia.................................... I-6
VI. Additional Representations, Warranties and Agreements of MarketWatch and Wachovia................. I-8
VII. Shareholder Action on Behalf of the Acquired Portfolio............................................ I-9
VIII. Proxy Solicitation Materials...................................................................... I-9
IX. Delivery of Assets and Shares..................................................................... I-10
X. Wachovia Conditions............................................................................... I-10
XI. MarketWatch Conditions............................................................................ I-12
XII. Tax Documents..................................................................................... I-13
XIII. Finder's Fees..................................................................................... I-13
XIV. Announcements..................................................................................... I-13
XV. Further Assurances................................................................................ I-13
XVI. Termination of Representations and Warranties..................................................... I-13
XVII. Termination of Agreement.......................................................................... I-13
XVIII. Amendment and Waiver.............................................................................. I-14
XIX. Governing Law..................................................................................... I-14
XX. Successors and Assigns............................................................................ I-14
XXI. Beneficiaries..................................................................................... I-14
XXII. MarketWatch Liability............................................................................. I-14
XXIII. Wachovia Liability................................................................................ I-15
XXIV. Notices........................................................................................... I-15
XXV. Expenses.......................................................................................... I-16
XXVI. Entire Agreement.................................................................................. I-16
XXVII. Counterparts...................................................................................... I-16
I-2
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") made as of March 5,
1998 between THE WACHOVIA FUNDS, a Massachusetts business trust ("Wachovia"), on
behalf of the Wachovia Intermediate Fixed Income Fund (the "Acquiring
Portfolio"), and MARKETWATCH FUNDS, a Massachusetts business trust
("MarketWatch"), on behalf of the MarketWatch Intermediate Fixed Income Fund
(the "Acquired Portfolio"). All agreements, representations, actions, and
obligations described herein made or to be taken or undertaken by either the
Acquiring Portfolio or the Acquired Portfolio (collectively, the "Portfolios")
are made and shall be taken or undertaken by Wachovia, on behalf of the
Acquiring Portfolio, and by MarketWatch, on behalf of the Acquired Portfolio.
WHEREAS, Wachovia currently consists of ten investment portfolios, including
the newly organized Acquiring Portfolio; and
WHEREAS, MarketWatch currently consists of four investment portfolios,
including the Acquired Portfolio; and
WHEREAS, the parties intend that the Acquired Portfolio shall engage in a
transaction deemed to be a change of domicile under Rule 145(a)(2) adopted
pursuant to the Securities Act of 1933, as amended (the "1933 Act"), pursuant to
which substantially all of the assets and liabilities of the Acquired Portfolio,
as of the Effective Time (as defined in Article III), shall be transferred to,
and be acquired and assumed by, the Acquiring Portfolio, in exchange for Class A
voting shares of beneficial interest in the Acquiring Portfolio (the "Class A
Shares"), which shall thereafter be distributed by MarketWatch to the holders of
the shares of the Acquired Portfolio (the "Reorganization"); and
WHEREAS, the parties intend that the Acquiring Portfolio will continue the
investment operations of the Acquired Portfolio after the Reorganization; and
WHEREAS, MarketWatch proposes to terminate the business of its other
portfolios, and to cease to conduct its business; and
WHEREAS, the parties intend that the transfer of assets, assumption of
liabilities, and distribution of Class A Shares involving the Portfolios be
treated as a tax-free reorganization under Section 368(a)(1)(F) of the Internal
Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the parties intend that in connection with the Reorganization and
the termination of the business of MarketWatch, the Acquired Portfolio shall be
terminated and MarketWatch shall be deregistered as an investment company and
dissolved under state law as described in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth and subject to the terms and conditions hereof, and
intending to be legally bound hereby, Wachovia and MarketWatch agree as follows:
I. TRANSFER OF ASSETS OF THE ACQUIRED PORTFOLIO.
1.01 At the Effective Time, all property of every description, and all
interests, rights, privileges and powers of the Acquired Portfolio other than
cash in an amount necessary to pay any unpaid dividends and other distributions
as provided in Article IV, Section 4.01(g) (collectively, the "Acquired
Portfolio Assets"), shall be transferred and conveyed by the Acquired Portfolio
to the Acquiring Portfolio, and shall be accepted by the Acquiring Portfolio,
and the Acquiring Portfolio shall assume all liabilities, whether accrued,
absolute, contingent or otherwise, of the Acquired Portfolio, which liabilities
shall include any obligation of the Acquired Portfolio to indemnify
MarketWatch's trustees and officers acting in their capacities as such to the
fullest extent permitted by law and by MarketWatch's Agreement and Declaration
of Trust, dated June 4, 1992, and as in effect on the date hereof (the
"MarketWatch Declaration") (collectively, the "Acquired Portfolio Liabilities"),
so that at and after the Effective Time: (i) all assets of the Acquired
Portfolio (other than the excepted cash referred to above) shall become and be a
part of the
I-3
assets of the Acquiring Portfolio; and (ii) all the Acquired Portfolio
Liabilities shall attach to the Acquiring Portfolio as aforesaid and may
thenceforth be enforced against the Acquiring Portfolio to the extent as if the
same had been incurred by it. Without limiting the generality of the foregoing,
the Acquired Portfolio Assets shall include all property and assets of any
nature whatsoever, including, without limitation, all cash, cash equivalents,
securities, claims and receivables (including dividend and interest receivables)
owned by the Acquired Portfolio, and any deferred or prepaid expenses shown as
an asset on the Acquired Portfolio's books, at the Effective Time, and all good
will, all other intangible property and all books and records belonging to the
Acquired Portfolio. Recourse by any person for the Acquired Portfolio
Liabilities assumed by the Acquiring Portfolio shall, at and after the Effective
Time, be limited to the Acquiring Portfolio. The Acquired Portfolio shall use
its best efforts to discharge its liabilities before the Effective Time.
1.02 In exchange for the transfer of the Acquired Portfolio Assets and the
assumption of the Acquired Portfolio Liabilities, Wachovia shall simultaneously
issue and deliver at the Effective Time to the Acquired Portfolio full and
fractional (to the third decimal place) Class A Shares equal in number to the
full and fractional shares of the Acquired Portfolio then outstanding ("Acquired
Portfolio Shares").
II. LIQUIDATING DISTRIBUTIONS AND TERMINATION OF MARKETWATCH. Immediately
after the Effective Time, the Acquired Portfolio shall distribute in complete
liquidation, PRO RATA to the record holders of any Acquired Portfolio Shares at
the Effective Time ("Shareholders"), the Class A Shares to be received by it.
Except as otherwise directed, such Class A Shares shall be distributed to the
Shareholders by book entry. In addition, each Shareholder shall have the right
to receive any unpaid dividends or other distributions which were declared
before the Effective Time with respect to the Acquired Portfolio Shares that are
held by the Shareholder at the Effective Time. In accordance with instructions
it receives from MarketWatch, Wachovia shall record on its books the ownership
of Class A Shares by the Shareholders. No redemption or repurchase of the Class
A Shares credited to Shareholders with respect to the Acquired Portfolio Shares
represented by share certificates shall be permitted until such certificates
have been surrendered to Wachovia's transfer agent for cancellation. All of the
issued and outstanding Acquired Portfolio Shares and any certificates then
outstanding shall be canceled on the books of MarketWatch immediately after the
Effective Time and shall thereafter represent only the right to receive the
Class A Shares, following which the Acquired Portfolio's transfer books shall be
closed permanently. As soon as practicable after the Effective Time and the
termination of the regular business of MarketWatch, MarketWatch intends to make
all filings and to take all other steps as shall be necessary and proper to
effect its complete dissolution, and intends to file an application pursuant to
Section 8(f) of the Investment Company Act of 1940, as amended (the "1940 Act"),
for an order declaring that it has ceased to be an investment company. After the
Effective Time and the termination of the regular business of MarketWatch,
MarketWatch does not intend to conduct any business except in connection with
its liquidation, dissolution, and deregistration.
III. EFFECTIVE TIME OF THE REORGANIZATION. The effective time of the
Reorganization (the "Effective Time") shall be 4:00 p.m., Eastern Time, on March
27, 1998, or such other time or on such other date as may be agreed to in
writing by the duly authorized officers of both parties hereto.
IV. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF MARKETWATCH.
4.01 MarketWatch, on behalf of itself and the Acquired Portfolio,
represents and warrants to, and agrees with, Wachovia as follows:
4.01(a) MarketWatch is a Massachusetts business trust duly created
pursuant to the MarketWatch Declaration for the purpose of acting as a
management investment company under the 1940 Act and is validly existing
under the laws of, and duly authorized to transact business in, the
Commonwealth of Massachusetts. It is registered with the Securities and
Exchange Commission (the "SEC") as an open-end, management investment
company under the 1940 Act and such registration is in full force and
effect. The Acquired Portfolio is a duly established and designated
portfolio of MarketWatch.
I-4
4.01(b) MarketWatch has power to own all of its properties and assets
and, subject to the approval of shareholders referred to herein, to carry
out and consummate the transactions contemplated herein, and has all
necessary federal, state and local authorizations which are required to
carry on its business as now being conducted and to consummate the
transactions contemplated by this Agreement.
4.01(c) This Agreement has been duly authorized, executed and delivered
by MarketWatch, and represents MarketWatch's valid and binding contract,
enforceable in accordance with its terms, subject as to enforcement to
bankruptcy, insolvency, reorganization, arrangement, moratorium, and other
similar laws of general applicability relating to or affecting creditors'
rights and to general principles of equity. The execution and delivery of
this Agreement does not and will not, and the consummation of the
transactions contemplated by this Agreement will not, violate the
MarketWatch Declaration or MarketWatch's By-Laws or any agreement or
arrangement to which it is a party or by which it is bound.
4.01(d) The Acquired Portfolio is a "fund" as defined in Section
851(g)(2) of the Code and has elected to qualify and has qualified as a
regulated investment company under Part I of Subchapter M of the Code
("RIC"), as of and since its first taxable year; has been a RIC at all times
since the end of its first taxable year when it so qualified; qualifies and
shall continue to qualify as a RIC until the Effective Time; and has no
earnings and profits accumulated in any taxable year in which the provisions
of Subchapter M did not apply to it. The Acquired Portfolio Assets shall be
invested at all times through the Effective Time in a manner that ensures
compliance with the foregoing.
4.01(e) All federal, state, local and foreign income, profits,
franchise, sales, withholding, customs, transfer and other taxes, including
interest, additions to tax and penalties (collectively, "Taxes") relating to
the Acquired Portfolio Assets that may now or hereafter be determined to be
due, or that are properly shown to be due on any return filed by or on
behalf of the Acquired Portfolio, with respect to taxable periods ending on
or prior to, and the portion of any interim period up to, the date hereof
and through the Effective Time, have been fully and timely paid or provided
for; and there are no levies, liens, or other encumbrances relating to Taxes
existing, threatened or pending with respect to the Acquired Portfolio
Assets. At the Effective Time, all returns and reports of MarketWatch and
the Acquired Portfolio respecting Taxes required by law to have been filed
by such time shall have been filed.
4.01(f) The financial statements of the Acquired Portfolio for its
fiscal year ended November 30, 1997, examined by KPMG Peat Marwick LLP,
copies of which have been previously furnished to Wachovia, present fairly
the financial position of the Acquired Portfolio as of such date and the
results of its operations for the year then ended, in conformity with
generally accepted accounting principles.
4.01(g) Prior to the Effective Time, the Acquired Portfolio shall have
declared a dividend and/ or other distribution, with a record date and
ex-distribution date prior thereto, which, together with all previous
distributions, shall have the effect of distributing to its shareholders all
of its investment company taxable income, if any, for the taxable year ended
on November 30, 1997 and for the period from said date to and including the
Effective Time (computed without regard to any deduction for dividends
paid), and all of its net capital gain, if any, realized in such taxable
year and period.
4.01(h) At the Effective Time, there shall be no known liabilities of
the Acquired Portfolio, whether accrued, absolute, contingent or otherwise,
not reflected in the net asset value per share of its outstanding shares.
4.01(i) There are no legal, administrative or other proceedings pending
or, to MarketWatch's knowledge, threatened against MarketWatch which could
result in liability on the part of MarketWatch or the Acquired Portfolio.
I-5
4.01(j) Subject to the approval of shareholders referred to herein, at
the Effective Time MarketWatch shall have full right, power and authority to
sell, assign, transfer and deliver the Acquired Portfolio Assets and, upon
delivery and payment for the Acquired Portfolio Assets as contemplated
herein, the Acquiring Portfolio shall acquire good and marketable title
thereto, free and clear of all liens and encumbrances, and subject to no
restrictions on the ownership or transfer thereof (except as imposed by
federal or state securities laws).
4.01(k) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by MarketWatch of
the transactions contemplated by this Agreement, except such as may be
required under the Securities Exchange Act of 1934, as amended (the "1934
Act"), the 1940 Act, the rules and regulations under those Acts, and state
securities laws.
4.01(l) Insofar as it relates to MarketWatch, the definitive proxy
statement of the Acquired Portfolio and MarketWatch to be distributed to the
Acquired Portfolio's shareholders with respect to the transactions
contemplated by this Agreement (the "Proxy"), and any documents contained in
or incorporated by reference into the Proxy, at the time of any shareholders
meeting referred to herein and at the Effective Time: (i) shall comply in
all material respects with the provisions of the 1934 Act and the 1940 Act,
the rules and regulations thereunder, and state securities laws, and (ii)
shall not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading.
4.01(m) All of the Acquired Portfolio Shares have been duly and validly
issued, are fully paid and non-assessable, and were offered for sale and
sold in conformity with all applicable federal and state securities laws,
and no shareholder of the Acquired Portfolio has any preemptive right of
subscription or purchase in respect of such Shares.
4.01(n) MarketWatch shall not sell or otherwise dispose of any shares
of the Acquiring Portfolio to be received in the transactions contemplated
herein, except in distribution to its shareholders as contemplated herein.
4.01(o) MarketWatch has valued, and will continue to value, its
portfolio securities and other assets in accordance with applicable legal
requirements.
4.01(p) The Acquired Portfolio Liabilities were incurred by the
Acquired Portfolio in the ordinary course of its business.
4.01(q) The Acquired Portfolio is not under the jurisdiction of a court
in a proceeding under Title 11 of the United States Code or similar case
within the meaning of Section 368(a)(3)(A) of the Code.
4.01(r) Not more than 25% of the value of the Acquired Portfolio's
total assets (excluding cash, cash items, and U.S. government securities) is
invested in the stock and securities of any one issuer, and not more than
50% of the value of such assets is invested in the stock and securities of
five or fewer issuers.
4.01(s) The Acquired Portfolio will be terminated as soon as reasonably
practicable after the Reorganization, but in all events within six months
after the Effective Time.
V. CERTAIN REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF WACHOVIA.
5.01 Wachovia, on behalf of itself and the Acquiring Portfolio, represents
and warrants to, and agrees with, MarketWatch as follows:
5.01(a) Wachovia is a Massachusetts business trust duly created
pursuant to its Declaration of Trust dated February 24, 1992 (the "Wachovia
Declaration"), for the purpose of acting as a management investment company
under the 1940 Act and is validly existing under the laws of, and duly
authorized to transact business in, the Commonwealth of Massachusetts. It is
registered with the SEC
I-6
as an open-end, management investment company under the 1940 Act and such
registration is in full force and effect. The Acquiring Portfolio will be,
at or before the Effective Time, a duly established and designated portfolio
of Wachovia.
5.01(b) Wachovia has power to own all of its properties and assets and
to carry out and consummate the transactions contemplated herein, and has
all necessary federal, state and local authorizations to carry on its
business as now being conducted and to consummate the transactions
contemplated by this Agreement.
5.01(c) This Agreement has been duly authorized, executed and delivered
by Wachovia, and represents Wachovia's valid and binding contract,
enforceable in accordance with its terms, subject as to enforcement to
bankruptcy, insolvency, reorganization, arrangement, moratorium, and other
similar laws of general applicability relating to or affecting creditors'
rights and to general principles of equity. The execution and delivery of
this Agreement does not and will not, and the consummation of the
transactions contemplated by this Agreement will not, violate the Wachovia
Declaration or Wachovia's By-Laws or any agreement or arrangement to which
it is a party or by which it is bound.
5.01(d) The Acquiring Portfolio will be a "fund" as defined in Section
851(g)(2) of the Code and will elect to be, and intends to qualify as, a
RIC.
5.01(e) At the Effective Time, there shall be no known liabilities
applicable to the Class A Shares, whether accrued, absolute, contingent or
otherwise.
5.01(f) There are no legal, administrative or other proceedings pending
or, to Wachovia's knowledge, threatened against Wachovia which could result
in liability on the part of Wachovia or the Acquiring Portfolio.
5.01(g) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by Wachovia of the
transactions contemplated by this Agreement, except such as may be required
under the 1934 Act, the 1940 Act, the rules and regulations under those
Acts, and state securities laws.
5.01(h) Insofar as they relate to Wachovia, the Proxy, and any
documents contained in or incorporated by reference into the Proxy, at the
time of any shareholders meeting referred to herein and at the Effective
Time: (i) shall comply in all material respects with the provisions of the
1934 Act and the 1940 Act, the rules and regulations thereunder, and state
securities laws, and (ii) shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading.
5.01(i) The Class A Shares to be issued and delivered to the Acquired
Portfolio pursuant to the terms hereof shall have been duly authorized as of
the Effective Time and, when so issued and delivered, shall be duly and
validly issued, fully paid and non-assessable, and no shareholder of
Wachovia shall have any preemptive right of subscription or purchase in
respect thereto.
5.01(j) Wachovia has valued, and will continue to value, its portfolio
securities and other assets in accordance with applicable legal
requirements.
5.01(k) The Board of Trustees of Wachovia complies with the
requirements of Section 15(f)(1)(A) of the 1940 Act as of the date hereof.
If its Board of Trustees ceases to comply with such requirements at any time
within three years after the Effective Time, Wachovia will take such action
as is necessary to restore such compliance as soon as is reasonably
practicable.
5.01(l) All rights to indemnification and all limitations of liability
existing in favor of the current and former trustees and officers of
MarketWatch under the MarketWatch Declaration shall survive the
Reorganization and shall continue in full force and effect, without any
amendment thereto, and shall constitute rights which may be asserted against
the Acquiring Portfolio.
I-7
5.01(m) No consideration other than the Class A Shares (and the
Acquiring Portfolio's assumption of the Acquired Portfolio Liabilities) will
be issued in exchange for the Acquired Portfolio Assets in the
Reorganization.
5.01(n) The Acquiring Portfolio has no plan or intention to issue
additional shares following the Reorganization except for shares issued in
the ordinary course of its business as a portfolio of an open-end investment
company; nor does the Acquiring Portfolio have any plan or intention to
redeem or otherwise reacquire any Class A Shares issued to the Shareholders
pursuant to the Reorganization, other than through redemptions arising in
the ordinary course of that business.
5.01(o) The Acquiring Portfolio (i) will actively continue the Acquired
Portfolio's business in substantially the same manner that the Acquired
Portfolio conducted that business immediately before the Reorganization,
(ii) has no plan or intention to sell or otherwise dispose of any of the
Acquired Portfolio Assets, except for dispositions made in the ordinary
course of that business and dispositions necessary to maintain its status as
a RIC, and (iii) expects to retain substantially all the Acquired Portfolio
Assets in the same form as it receives them in the Reorganization, unless
and until subsequent investment circumstances suggest the desirability of
change or it becomes necessary to make dispositions thereof to maintain such
status.
5.01(p) There is no plan or intention for the Acquiring Portfolio to be
dissolved or merged into another corporation or business trust or any "fund"
thereof (within the meaning of Section 851(g)(2) of the Code) following the
Reorganization.
5.01(q) Immediately after the Reorganization, (i) not more than 25% of
the value of the Acquiring Portfolio's total assets (excluding cash, cash
items, and U.S. government securities) will be invested in the stock and
securities of any one issuer and (ii) not more than 50% of the value of such
assets will be invested in the stock and securities of five or fewer
issuers.
5.01(r) The Acquiring Portfolio has not commenced operations and will
not commence operations until after the Effective Time.
VI. ADDITIONAL REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF MARKETWATCH
AND WACHOVIA.
6.01 MarketWatch, on behalf of itself and the Acquired Portfolio, and
Wachovia, on behalf of itself and the Acquiring Portfolio, each hereby
represents, and warrants to and agrees with, the other, as follows:
6.01(a) The fair market value of the Class A Shares, when received by
the Shareholders, will be approximately equal to the fair market value of
their Acquired Portfolio Shares constructively surrendered in exchange
therefor.
6.01(b) Its management: (i) is unaware of any plan or intention of
Shareholders to redeem or otherwise dispose of any portion of the Class A
Shares to be received by them in the Reorganization and (ii) does not
anticipate dispositions of those Class A Shares at the time of or soon after
the Reorganization to exceed the usual rate and frequency of dispositions of
shares of the Acquired Portfolio as a portfolio of an open-end investment
company, in each case excepting any dispositions resulting from the
conversion by certain eligible Shareholders of not more than % of those
Class A Shares to Class Y shares of beneficial interest in the Acquiring
Portfolio having an equal aggregate value. Consequently, its management
expects that the percentage, if any, of the Shareholders' equity interests
in the Acquiring Portfolio that will be disposed of as a result of or at the
time of the Reorganization will be DE MINIMIS. Nor does its management
anticipate that there will be extraordinary redemptions of Class A Shares
(excluding any conversions described above) immediately following the
Reorganization.
6.01(c) The Shareholders will pay their own expenses, if any, incurred
in connection with the Reorganization.
I-8
6.01(d) Immediately following consummation of the Reorganization, the
Acquiring Portfolio will hold the same assets--except for assets distributed
to shareholders in the course of its business as a RIC and assets used to
pay expenses incurred in connection with the Reorganization--and be subject
to the same liabilities that the Acquired Portfolio held or was subject to
immediately prior thereto, plus any liabilities and expenses of the parties
incurred in connection with the Reorganization. Such excepted assets,
together with the amount of all redemptions and distributions (other than
regular, normal dividends) made by the Acquired Portfolio immediately before
the Reorganization, will, in the aggregate, constitute less than 1% of its
net assets.
6.01(e) None of the compensation received by any Shareholder who is an
employee of the Acquired Portfolio will be separate consideration for, or
allocable to, any of the Class A Shares held by such Shareholder-employee;
none of the Class A Shares received by any such Shareholder-employee will be
separate consideration for, or allocable to, any employment agreement; and
the consideration paid to any such Shareholder-employee will be for services
actually rendered and will be commensurate with amounts paid to third
parties bargaining at arm's-length for similar services.
6.01(f) Immediately following consummation of the Reorganization, the
Shareholders will own all the shares of the Acquiring Portfolio and will own
such shares solely by reason of their ownership of Acquired Portfolio Shares
immediately before the Reorganization.
VII. SHAREHOLDER ACTION ON BEHALF OF THE ACQUIRED PORTFOLIO.
7.01 As provided in the Proxy, and as a condition to the Reorganization,
MarketWatch shall hold a meeting of its shareholders for the purpose of
considering and voting upon:
7.01(a) Approval of this Agreement and the transactions contemplated
hereby, including, without limitation:
(i) The transfer of the Acquired Portfolio Assets to the Acquiring
Portfolio, and the assumption by the Acquiring Portfolio of the Acquired
Portfolio Liabilities, in exchange for Class A Shares; and
(ii) The liquidation of the Acquired Portfolio through the
distribution to Shareholders of Class A Shares as described in this
Agreement.
7.01(b) The approval by the Acquired Portfolio's shareholders of the
Reorganization contemplated by this Agreement shall authorize the Board of
Trustees of MarketWatch to approve, on behalf of the Shareholders, for the
Acquiring Portfolio, such ballots or consents as may be necessary and
appropriate to approve for the Acquiring Portfolio an investment advisory
agreement, plan of distribution, or other action(s) which may be required by
law or otherwise to be approved or affirmed by the public shareholders of
the Acquiring Portfolio. Such ballots or consents shall be executed on
behalf of the MarketWatch Board of Trustees following receipt of the Class A
Shares, but prior to the distribution of such shares to the Shareholders.
7.01(c) Such other matters as may be determined by the parties hereto.
7.02 Approval of this Agreement and the transactions contemplated herein
by the Acquired Portfolio's shareholders shall constitute the waiver of the
application of any fundamental policy of the Acquired Portfolio that might be
deemed to prevent it from taking the actions necessary to effectuate the
Reorganization as described, and such policies, if any, shall be deemed to have
been amended accordingly.
VIII. PROXY SOLICITATION MATERIALS. MarketWatch shall file the Proxy under
the 1934 Act and 1940 Act proxy rules with the SEC as promptly as practicable.
Each of Wachovia and MarketWatch has cooperated and shall continue to cooperate
with the other, and has furnished and shall continue to furnish the other with
the information relating to itself and affiliated persons thereof that is
required by the 1934 Act, the 1940 Act, the rules and regulations under each of
those Acts and state securities laws, to be included in the Proxy.
I-9
IX. DELIVERY OF ASSETS AND SHARES. Delivery of the Acquired Portfolio
Assets and the Class A Shares to be issued pursuant to Article I shall occur at
the Effective Time, at such place as may be determined by the duly authorized
officers of both parties hereto. To the extent the Acquired Portfolio Assets
are, for any reason, not transferred at the Effective Time, MarketWatch shall
cause the Acquired Portfolio Assets to be transferred in accordance with this
Agreement at the earliest practicable date thereafter.
X. WACHOVIA CONDITIONS.
10.01 The obligations of Wachovia hereunder with respect to the Acquiring
Portfolio shall be subject to the following conditions precedent:
10.01(a) This Agreement and the transactions contemplated by this
Agreement shall have been approved by the trustees of MarketWatch and the
Acquired Portfolio's shareholders, in the manner required by law.
10.01(b) MarketWatch shall have duly executed and delivered to Wachovia
such bills of sale, assignments, certificates and other instruments of
transfer ("Transfer Documents") as may be necessary or desirable to transfer
all right, title and interest of MarketWatch and the Acquired Portfolio in
and to the Acquired Portfolio Assets. The Acquired Portfolio Assets shall be
accompanied by all necessary state stock transfer stamps or cash for the
appropriate purchase price therefor.
10.01(c) All representations and warranties of MarketWatch made in this
Agreement shall be true and correct in all material respects as if made at
and as of the Effective Time. As of the Effective Time, there shall have
been no material adverse change in the financial condition of the Acquired
Portfolio since November 30, 1997, other than those changes incurred in the
ordinary course of business as a portfolio of an investment company. No
action, suit or other proceeding shall be threatened or pending before any
court or governmental agency in which it is sought to restrain or prohibit,
or obtain damages or other relief in connection with, this Agreement or the
transactions contemplated herein.
10.01(d) Wachovia shall have received an opinion of Drinker Biddle &
Reath LLP, addressed to Wachovia in form reasonably satisfactory to Wachovia
and dated the Effective Time, substantially to the effect that: (i)
MarketWatch is a Massachusetts business trust duly organized and validly
existing under the laws of the Commonwealth of Massachusetts; (ii) the
Acquired Portfolio Shares outstanding at the Effective Time are duly
authorized, validly issued, fully paid and non-assessable by the Acquired
Portfolio, and to such counsel's knowledge no shareholder of the Acquired
Portfolio has any option, warrant or preemptive right to subscription or
purchase in respect thereof; (iii) this Agreement and the Transfer Documents
have been duly authorized, executed and delivered by MarketWatch and,
assuming due authorization, execution and delivery thereof by Wachovia,
represent its legal, valid and binding contracts or instruments, enforceable
against MarketWatch in accordance with their terms, subject to the effect of
bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws
relating to or affecting creditors' rights generally and court decisions
with respect thereto, and such counsel shall not be required to express an
opinion with respect to the application of equitable principles in any
proceeding, whether at law or in equity, or with respect to the provisions
of this Agreement intended to limit liability for particular matters to the
Acquired Portfolio and its assets; (iv) the execution and delivery of this
Agreement did not, and the consummation of the transactions contemplated by
this Agreement will not, violate the MarketWatch Declaration or
MarketWatch's By-Laws or any material agreement known to such counsel to
which MarketWatch is a party or by which MarketWatch is bound; and (v) to
such counsel's knowledge, no consent, approval, authorization or order of
any court or governmental authority is required for the consummation by
MarketWatch of the transactions contemplated by this Agreement, except such
as have been obtained under the 1934 Act, the 1940 Act, the rules and
regulations under those Acts, and such as may be
I-10
required under state securities laws. Such opinion may rely on the opinion
of other counsel to the extent set forth in such opinion, provided such
other counsel is reasonably acceptable to Wachovia.
10.01(e) Wachovia shall have received an opinion of Kirkpatrick &
Lockhart LLP, addressed to Wachovia and MarketWatch in form reasonably
satisfactory to them and dated the Effective Time (the "Tax Opinion"),
substantially to the effect that, based on the facts and assumptions stated
therein and conditioned on consummation of the Reorganization in accordance
with this Agreement, for federal income tax purposes (i) the transfer by the
Acquired Portfolio of all of the Acquired Portfolio Assets to the Acquiring
Portfolio, in exchange solely for Class A Shares and the Acquiring
Portfolio's assumption of the Acquired Portfolio Liabilities, and the
distribution of those Class A Shares to the Shareholders, as provided in
this Agreement, will constitute a reorganization within the meaning of
Section 368(a)(1)(F) of the Code, and each Portfolio will be considered "a
party to a reorganization" within the meaning of Section 368(b) of the Code;
(ii) in accordance with Sections 361(a), 361(c)(1) and 357(a) of the Code,
no gain or loss will be recognized to the Acquired Portfolio as a result of
the Reorganization; (iii) in accordance with Section 1032(a) of the Code, no
gain or loss will be recognized to the Acquiring Portfolio as a result of
the Reorganization; (iv) in accordance with Section 354(a)(1) of the Code,
no gain or loss will be recognized to the Shareholders on the distribution
to them by the Acquired Portfolio of Class A Shares constructively in
exchange for their Acquired Portfolio Shares; (v) in accordance with Section
358(a)(1) of the Code, the aggregate basis of Class A Shares received by
each Shareholder will be the same as the aggregate basis of the
Shareholder's Acquired Portfolio Shares immediately prior to the
Reorganization; (vi) in accordance with Section 362(b) of the Code, the
Acquiring Portfolio's basis for the Acquired Portfolio Assets will be the
same as the Acquired Portfolio's basis therefor immediately prior to the
Reorganization; (vii) in accordance with Section 1223 of the Code, a
Shareholder's holding period for Class A Shares received pursuant to the
Reorganization will include the period for which the Shareholder held the
Acquired Portfolio Shares constructively exchanged therefor, provided that
the Shareholder held such Acquired Portfolio Shares as capital assets;
(viii) in accordance with Section 1223 of the Code, the Acquiring
Portfolio's holding period for the Acquired Portfolio Assets will include
the period for which the Acquired Portfolio Assets were held by the Acquired
Portfolio; and (ix) in accordance with Section 381(a) of the Code, the
Acquiring Portfolio will succeed to the Acquired Portfolio's tax attributes
described in Section 381(c) of the Code. In rendering the Tax Opinion,
Kirkpatrick & Lockhart LLP may rely as to factual matters, exclusively and
without independent verification, on the representations made in this
Agreement (or in separate letters addressed to such counsel) and any
certificates delivered pursuant to this Agreement. Notwithstanding anything
in this Section 10.01(e), the Tax Opinion may state that no opinion is
expressed as to the effect of the Reorganization on the Portfolios or any
Shareholder with respect to any asset as to which any unrealized gain or
loss is required to be recognized for federal income tax purposes on the
termination or transfer thereof under a mark-to-market system of accounting.
10.01(f) The SEC shall not have issued any unfavorable advisory report
under Section 25(b) of the 1940 Act nor instituted or, to the knowledge of
Wachovia, contemplated any proceeding seeking to enjoin consummation of the
transactions contemplated by this Agreement under Section 25(c) of the 1940
Act or otherwise.
10.01(g) The Proxy shall have been filed with the SEC under the proxy
rules under the 1934 Act, and the parties shall have received all permits
and other authorizations necessary under state securities laws to consummate
the Reorganization contemplated by this Agreement.
10.01(h) MarketWatch shall have delivered or caused to be delivered to
Wachovia each account, book, record or other document of MarketWatch
applicable to the Acquired Portfolio which is required to be maintained by
Section 31(a) of the 1940 Act and Rule 31a-1 to 31a-3 thereunder (regardless
of what person possesses the same) and a copy of all agreements and
instruments to which MarketWatch is a party or signatory. MarketWatch has
instructed its service contractors to provide
I-11
Wachovia upon request with access to and copies of all documents belonging
to MarketWatch relating to the Acquired Portfolio. MarketWatch shall have
delivered to Wachovia a preliminary list of the tax basis of the securities
of the Acquired Portfolio by lot and the holding periods of such securities,
as expected to be held at the Effective Time.
10.01(i) The President or any Vice President of MarketWatch shall have
certified that MarketWatch has performed and complied in all material
respects with each of its agreements and covenants required by this
Agreement to be performed or complied with by it prior to or at the
Effective Time.
10.01(j) The Acquired Portfolio Assets to be transferred to the
Acquiring Portfolio under this Agreement shall include no assets which the
Acquiring Portfolio may not properly acquire pursuant to its investment
objective, policies or limitations, or may not otherwise lawfully acquire.
10.01(k) Wachovia (on behalf of and with respect to the Acquiring
Portfolio) shall have entered into such agreements as are necessary and
appropriate for the conduct of its business, and shall have approved a plan
of distribution pursuant to Rule 12b-1 under the 1940 Act. Each such
agreement shall have been approved by Wachovia's trustees and, to the extent
required by law, by such of those trustees who are not "interested persons"
thereof (as defined in the 1940 Act) and by Federated Administrative
Services as the Acquiring Portfolio's sole shareholder.
XI. MARKETWATCH CONDITIONS.
11.01 The obligations of MarketWatch hereunder with respect to the Acquired
Portfolio shall be subject to the following conditions precedent:
11.01(a) This Agreement and the transactions contemplated by this
Agreement shall have been approved by the trustees of MarketWatch and the
Acquired Portfolio's shareholders in the manner required by law.
11.01(b) All representations and warranties of Wachovia made in this
Agreement shall be true and correct in all material respects as if made at
and as of the Effective Time. No action, suit or other proceeding shall be
threatened or pending before any court or governmental agency in which it is
sought to restrain or prohibit, or obtain damages or other relief in
connection with, this Agreement or the transactions contemplated herein.
11.01(c) MarketWatch shall have received an opinion of Kirkpatrick &
Lockhart LLP, addressed to MarketWatch in form reasonably satisfactory to it
and dated the Effective Time, substantially to the effect that: (i) Wachovia
is a Massachusetts business trust duly organized and validly existing under
the laws of the Commonwealth of Massachusetts; (ii) the Class A Shares to be
delivered at such time to the Acquired Portfolio as provided for by this
Agreement are duly authorized and upon delivery will be validly issued,
fully paid and non-assessable by the Acquiring Portfolio, and to such
counsel's knowledge no shareholder of the Acquiring Portfolio has any
option, warrant or preemptive right to subscription or purchase in respect
thereof; (iii) this Agreement has been duly authorized, executed and
delivered by Wachovia and, assuming due authorization, execution and
delivery by MarketWatch, represents its legal, valid and binding contract,
enforceable against Wachovia in accordance with its terms, subject to the
effect of bankruptcy, insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors' rights generally and court
decisions with respect thereto, and such counsel shall not be required to
express an opinion with respect to the application of equitable principles
in any proceeding, whether at law or in equity, or with respect to the
provisions of this Agreement intended to limit liability for particular
matters to the Acquiring Portfolio and its assets; (iv) the execution and
delivery of this Agreement did not, and the consummation of the transactions
contemplated by this Agreement will not, violate the Wachovia Declaration or
Wachovia's By-Laws, or any material agreement known to such counsel to which
Wachovia is a party or by which Wachovia is bound; and (v) to such counsel's
knowledge, no consent,
I-12
approval, authorization or order of any court or governmental authority is
required for the consummation by Wachovia of the transactions contemplated
by this Agreement, except such as have been obtained under the 1934 Act, the
1940 Act, the rules and regulations under those Acts and such as may be
required under state securities laws. Such opinion may rely on the opinion
of other counsel to the extent set forth in such opinion, provided such
other counsel is reasonably acceptable to MarketWatch.
11.01(d) MarketWatch shall have received the Tax Opinion.
11.01(e) The Proxy shall have been filed with the SEC under the proxy
rules under the 1934 Act, and the parties shall have received all permits
and other authorizations necessary under state securities laws to consummate
the transactions contemplated by this Agreement.
11.01(f) The SEC shall not have issued any unfavorable advisory report
under Section 25(b) of the 1940 Act nor instituted or, to the knowledge of
MarketWatch, contemplated any proceeding seeking to enjoin consummation of
the transactions contemplated by this Agreement under Section 25(c) of the
1940 Act or otherwise.
11.01(g) The President or any Vice President of Wachovia shall have
certified that Wachovia has performed and complied in all material respects
with each of its agreements and covenants required by this Agreement to be
performed or complied with by it prior to or at the Effective Time.
11.01(h) The conditions described in Section 10.01(k) shall have been
satisfied.
XII. TAX DOCUMENTS. MarketWatch shall deliver to Wachovia at the
Effective Time confirmations or other adequate evidence as to the adjusted tax
basis of the securities of the Acquired Portfolio by lot and the holding periods
of such securities delivered to the Acquiring Portfolio in accordance with the
terms of this Agreement.
XIII. FINDER'S FEES. Each party represents and warrants to the other party
hereto that there is no person who is entitled to any finder's or other similar
fee or commission arising out of the transactions contemplated by this
Agreement.
XIV. ANNOUNCEMENTS. Any announcements or similar publicity with respect
to this Agreement or the transactions contemplated herein shall be at such time
and in such manner as the parties shall agree; provided, that nothing herein
shall prevent either party upon notice to the other party from making such
public announcements as such party's counsel may consider advisable in order to
satisfy the party's legal and contractual obligations.
XV. FURTHER ASSURANCES. Subject to the terms and conditions herein
provided, each of the parties hereto shall use its best efforts to take, or
cause to be taken, such action, to execute and deliver, or cause to be executed
and delivered, such additional documents and instruments, and to do, or cause to
be done, all things necessary, proper or advisable under the provisions of this
Agreement and under applicable law to consummate and make effective the
transactions contemplated by this Agreement.
XVI. TERMINATION OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of MarketWatch and Wachovia set forth in this Agreement shall
terminate upon the consummation of the Reorganization.
XVII. TERMINATION OF AGREEMENT.
17.01 This Agreement may be terminated by either party at any time at or
prior to the Effective Time, by its respective Board of Trustees, as provided
below:
17.01(a) By Wachovia if the conditions set forth in Article X are not
satisfied as specified in said Article;
I-13
17.01(b) By MarketWatch if the conditions set forth in Article XI are
not satisfied as specified in said Article;
17.01(c) By the mutual consent of the parties; or
17.01(d) By either party, if the Reorganization is not consummated by
March 31, 1998.
17.02 If a party terminates this Agreement because one or more of the
conditions precedent have not been fulfilled, or if this Agreement is terminated
by mutual consent, this Agreement will become null and void without any
liability of either party or any of their investment portfolios to the other;
provided, however, that if such termination is by Wachovia pursuant to Section
17.01(a) as a result of a breach by MarketWatch of any of its representations,
warranties or covenants in this Agreement, or such termination is by MarketWatch
pursuant to Section 17.01(b) as a result of a breach by Wachovia of any of its
representations, warranties or covenants in this Agreement, nothing herein shall
affect the non-breaching party's right to damages on account of such other
party's breach.
XVIII. AMENDMENT AND WAIVER. At any time prior to or (to the fullest
extent permitted by law) after approval of this Agreement by the Acquired
Portfolio's shareholders, (a) the parties hereto may, by written agreement
authorized by the Board of Trustees of Wachovia and the Board of Trustees of
MarketWatch or their duly authorized officers and with or without the approval
of their shareholders, amend any of the provisions of this Agreement, and (b)
either party may waive any breach by the other party or the failure to satisfy
any of the conditions to its obligations (such waiver to be in writing and
authorized by any duly authorized officer of the waiving party with or without
the approval of such party's shareholders).
XIX. GOVERNING LAW. This Agreement and the transactions contemplated
hereby shall be governed, construed and enforced in accordance with the laws of
the Commonwealth of Massachusetts, without giving effect to the conflicts of law
principles otherwise applicable therein; provided that, in the case of any
conflict between such laws and the federal securities laws, the latter shall
govern.
XX. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
respective successors and permitted assigns of the parties hereto. This
Agreement and the rights, obligations and liabilities hereunder may not be
assigned by either party without the consent of the other party.
XXI. BENEFICIARIES. Nothing contained in this Agreement shall be deemed to
create rights in or eliminate liabilities of persons not parties hereto, other
than the successors and permitted assigns of the parties.
XXII. MARKETWATCH LIABILITY.
22.01 The names "MarketWatch Funds" and "Board of Trustees of MarketWatch
Funds" refer, respectively, to the trust created and the trustees, as trustees
but not individually or personally, acting from time to time under the
MarketWatch Declaration, which is hereby referred to and a copy of which is on
file at the office of the State Secretary of the Commonwealth of Massachusetts
and at the principal office of MarketWatch. The obligations of MarketWatch
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
MarketWatch personally, but bind only the trust property, and all persons
dealing with any portfolio of shares of MarketWatch must look solely to the
trust property belonging to such portfolio for the enforcement of any claims
against MarketWatch.
22.02 Both parties specifically acknowledge and agree that any liability of
MarketWatch under this Agreement with respect to the Acquired Portfolio, or in
connection with the transactions contemplated herein with respect to the
Acquired Portfolio, shall be discharged only out of the assets of the Acquired
Portfolio and that no other portfolio of MarketWatch shall be liable with
respect thereto.
I-14
XXIII. WACHOVIA LIABILITY.
23.01 The names "The Wachovia Funds" and "Board of Trustees of The Wachovia
Funds" refer, respectively, to the trust created and the trustees, as trustees
but not individually or personally, acting from time to time under the Wachovia
Declaration, which is hereby referred to and a copy of which is on file at the
office of the State Secretary of the Commonwealth of Massachusetts and at the
principal office of Wachovia. The obligations of Wachovia 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 Wachovia personally, but bind
only the trust property, and all persons dealing with any portfolio of shares of
Wachovia must look solely to the trust property belonging to such portfolio for
the enforcement of any claims against Wachovia.
23.02 Both parties specifically acknowledge and agree that any liability of
Wachovia under this Agreement with respect to the Acquiring Portfolio, or in
connection with the transactions contemplated herein with respect to the
Acquiring Portfolio, shall be discharged only out of the assets of the Acquiring
Portfolio and that no other portfolio of Wachovia shall be liable with respect
thereto.
XXIV. NOTICES. All notices required or permitted herein shall be in
writing and shall be deemed to be properly given when delivered personally or by
telecopier to the party entitled to receive the notice or when sent by certified
or registered mail, postage prepaid, or delivered to a nationally recognized
overnight courier service, in each case properly addressed to the party entitled
to receive such notice at the address or telecopier number stated below or to
such other address or telecopier number as may hereafter be furnished in writing
by notice similarly given by one party to the other party hereto:
If to Wachovia:
The Wachovia Funds
c/o Gail Cagney, Esq.
Federated Investors
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Telecopier Number: (412) 288-8141
With a copy to:
Donald W. Smith, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Washington, DC 20036-1800
Telecopier Number: (202) 778-9100
If to MarketWatch:
MarketWatch Funds
c/o Walter B. Grimm
BISYS Fund Services
3435 Stelzer Road
Columbus, OH 43219-3035
Telecopier Number: (614) 470-8712
I-15
With a copy to:
Christina T. Simmons, Esq.
Drinker Biddle & Reath LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107
Telecopier Number: (215) 988-2757
XXV. EXPENSES. Each party shall be responsible for the payment of all of
its respective expenses incurred in connection with this Agreement and the
transactions contemplated hereby. Such expenses include (i) expenses incurred in
connection with entering into and carrying out the provisions of this Agreement,
(ii) expenses associated with preparing and filing the Proxy, (iii) registration
or qualification fees and expenses of preparing and filing such forms as are
necessary under applicable state securities laws to qualify the Class A Shares
to be issued in connection herewith in each state in which the Shareholders are
resident as of the date of the mailing of the Proxy to the Acquired Portfolio's
shareholders, (iv) printing and postage expenses, (v) legal and accounting fees,
and (vi) solicitation costs.
XXVI. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding of the parties hereto with respect to the subject matter hereof
and supersedes any and all prior agreements, arrangements and understandings
relating to matters provided for herein.
XXVII. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which, when executed and delivered shall be deemed to be
an original, but all of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their duly authorized officers designated below as of the date first
written above.
THE WACHOVIA FUNDS
ATTEST:
- -------------------------------------- By:
--------------------------------------
MARKETWATCH FUNDS
ATTEST:
- -------------------------------------- By:
--------------------------------------
I-16
APPENDIX II
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND LIMITATIONS
The investment objectives of the MarketWatch Intermediate Fixed Income Fund
("Old Income Fund"), the MarketWatch Equity Fund ("Old Equity Fund") and the
MarketWatch Virginia Municipal Bond Fund ("Old Virginia Fund") (collectively,
the "Old Funds") are identical to the investment objectives of the Wachovia
Intermediate Fixed Income Fund ("New Income Fund"), the Wachovia Growth & Income
Fund ("New Equity Fund") and the Wachovia Virginia Municipal Bond Fund ("New
Virginia Fund"), respectively (collectively, the "New Funds"). (The Old Funds
and the New Funds are collectively referred to in this Appendix II as the
"Funds.") The investment policies and limitations of each Old Fund are extremely
similar, but not identical, to the investment policies and limitations of the
corresponding New Fund. Set forth below is a discussion that summarizes the
investment objectives, policies and limitations, and relevant risks, of each Old
Fund and the corresponding New Fund, and identifies any significant differences.
INVESTMENT POLICIES AND RISKS--GENERAL
The investment objective of each of the Old Funds and the New Funds is
fundamental, meaning that it may not be changed without the vote of the holders
of a majority of the respective Fund's outstanding shares (as defined in the
1940 Act). Unless otherwise indicated, the investment policies of the Old Funds
and the New Funds are not fundamental and may be changed by the Board of
Trustees of MarketWatch, Wachovia or Wachovia Municipal, as applicable.
Because of the similarities of the investment objectives, policies and
limitations of each Old Fund and the corresponding New Fund, management believes
that an investment in a New Fund involves risks that are similar to those of the
corresponding Old Fund. These investment risks include those typically
associated with investing in a diversified portfolio of either fixed income
securities (in the case of the Old Income Fund and the New Income Fund
(collectively, the "Income Funds")) or equity securities (in the case of the Old
Equity Fund and the New Equity Fund (collectively, the "Equity Funds")), and in
a non-diversified portfolio of state specific municipal securities (in the case
of the Old Virginia Fund and the New Virginia Fund (collectively, the "Virginia
Funds")).
There are differences, however, between the investment policies and
limitations of the Old Funds and the New Funds, as described below. These
differences can result in varied risks. For example, while the Income Funds will
only invest in investment grade corporate debt securities, i.e., corporate debt
securities rated in one of the four highest rating categories assigned by one or
more nationally recognized statistical rating organizations (each an "NRSRO"),
or, if unrated, determined by Wachovia Bank to be of comparable quality, the Old
Income Fund may invest an unlimited percentage of its total assets in fixed
income securities rated, at the time of purchase, in the fourth highest rating
category, whereas the New Income Fund is limited to investing 5% of the Fund's
total assets in securities rated in that rating category. Fixed income
securities rated in the lowest investment grade rating category do not have
outstanding investment characteristics and may have speculative characteristics
as well.
The Old Funds may acquire puts with respect to their portfolio securities,
and may also purchase or sell index options (and options on securities indices)
for hedging purposes. The New Income Fund and the New Equity Fund may purchase
put and call options, futures, and options on futures for hedging purposes, and
the New Equity Fund may purchase stock index futures contracts. In addition, the
New Income Fund may invest in futures on foreign government debt obligations for
speculative purposes. Unlike the Old Funds, the New Income Fund and the New
Equity Fund may also purchase and write listed and unlisted options, including
over-the-counter options. If either the New Income Fund or the New Equity Fund
uses these investment techniques, there is the risk that the prices of the
securities subject to the options or
II-1
futures may not correlate perfectly with the prices of the securities in the
Fund's portfolio. In addition, it is not certain a secondary market for
positions in futures contracts or for options will exist at all times.
The Income Funds may purchase mortgage-related asset-backed securities. Both
Funds may also purchase non-mortgage-related asset-backed securities, which
involve certain risks that are not presented by mortgage-related asset-backed
securities arising primarily from the nature of the underlying collateral (i.e.
credit card receivables and automobile loan receivables as opposed to mortgage
loans or interests in mortgage loans).
The Equity Funds may invest in securities of foreign issuers, either
directly (in the case of the New Equity Fund) or indirectly (in the case of both
Equity Funds). There may be certain risks associated with investing in foreign
securities. These include risks of adverse political and economic developments
(including possible governmental seizure or nationalization of assets), the
possible imposition of exchange controls or other governmental restrictions,
less conformity in accounting and reporting requirements, and the possibility
that there will be less information on such securities and the issuers available
to the public. As a matter of investment practice, the New Equity Fund will not
directly invest in the securities of a foreign issuer if any of these risks
appears to Wachovia Bank to be substantial.
The Funds may enter into repurchase agreements and reverse repurchase
agreements. Default by a counterparty to a repurchase agreement could expose a
Fund to loss because of adverse market action or possible delay in disposing of
the underlying collateral. Reverse repurchase agreements are subject to the risk
that the market value of the securities sold by a Fund will decline below the
repurchase price which the Fund is obligated to pay.
The per share price of each Fund will fluctuate with changes in the value of
the investments held by that Fund. In the case of the Income Funds and the
Virginia Funds, the market value of fixed income securities generally will vary
inversely to changes in prevailing interest rates.
There is no assurance that any Fund will achieve its investment objective.
OLD INCOME FUND AND NEW INCOME FUND
The investment objective of the Old Income Fund and the New Income Fund is
to seek to provide current income consistent with preservation of capital. Under
normal market conditions, the Income Funds invest substantially all, but in no
event less than 65%, of the value of their total assets in fixed income
securities with stated maturities or estimated average lives of 10 years or
less. The instruments purchased by the Income Funds will generally have a stated
or remaining maturity within the maximum maturity established for the Income
Funds, or may have an unconditional redemption feature that would permit the
Income Fund to require the issuer of the security to redeem the security within
the 10-year period from the date of purchase by the Fund. Each Income Fund may
also acquire portfolio securities with stated or remaining maturities in excess
of the Fund's maximum maturity if the Fund also acquires an unconditional put to
sell the security within the 10-year period. Each Income Fund maintains a
dollar-weighted average portfolio maturity of 3 to 10 years.
Wachovia Bank, in managing the Old Income Fund and the New Income Fund,
purchases and sells securities using a discretionary investment process which
complies with the investment objective and policies of each Income Fund.
The Old Income Fund and the New Income Fund invest in investment grade
securities, i.e. securities rated at the time of purchase in the four highest
rating categories assigned by an NRSRO or, if unrated, determined by Wachovia
Bank to be of comparable quality. However, the New Income Fund is limited to
investing up to 5% of its total assets in fixed income securities rated in the
fourth highest investment grade rating category assigned by an NRSRO (or of
comparable quality, as determined by Wachovia Bank), whereas the Old Income Fund
may invest up to all of its total assets in fixed income securities falling
within
II-2
this rating category. Fixed income securities with the lowest investment grade
rating do not have outstanding investment characteristics and may have
speculative characteristics as well.
The fixed income securities in which the Income Funds may invest include
fixed and variable (or floating) rate bonds, notes, and debentures. These fixed
income securities may include domestic issues of corporate debt obligations
(subject to the quality parameters described above), and securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities. The Income
Funds may also invest in warrants, demand master notes, and commercial paper
rated in the highest rating category assigned by an NRSRO (or judged to be of
comparable quality by Wachovia Bank). The Income Funds may also invest in high
quality money market instruments or time and savings deposits (such as
certificates of deposit and bankers' acceptances). The New Income Fund (but not
the Old Income Fund) may invest in convertible securities (including securities
convertible into or exchangeable for preferred stock). The Old Income Fund (but
not the New Income Fund) may invest in state, municipal or industrial revenue
bonds. The Income Funds may purchase fixed income securities that have warrants
or options attached.
The Income Funds may invest in mortgage-backed securities, mortgage-related
securities, and asset-backed securities, including collateralized mortgage
obligations ("CMOs"). The Old Income Fund may invest in such securities provided
the securities are rated, at the time of purchase, in one of the four highest
rating categories assigned by an NRSRO, or determined to be of comparable
quality by Wachovia Bank. The New Income Fund may invest in CMOs rated in the
highest rating category assigned by an NRSRO, or determined by Wachovia Bank to
be of comparable quality, and may invest up to 5% of its total assets in CMOs
rated in one of the four highest rating categories assigned by an NRSRO, or
determined to be of comparable quality by Wachovia Bank. The New Income Fund may
invest in asset-backed securities rated in one of the three highest rating
categories assigned by an NRSRO, or determined by Wachovia Bank to be of
comparable quality, and may invest up to 5% of its total assets in asset-backed
securities rated in one of the four highest rating categories assigned by an
NRSRO, or determined by Wachovia Bank to be of comparable quality.
The average life of asset-backed securities varies with the underlying
instruments or assets and market conditions, which in the case of mortgages have
maximum maturities of 40 years. The average life of a mortgage-backed
instrument, in particular, is likely to be substantially less than the original
maturity of the mortgages underlying the securities as the result of unscheduled
principal payments and mortgage prepayments. The relationship between mortgage
prepayment and interest rates may give some high-yielding mortgage-backed
securities less potential for growth in value than conventional bonds with
comparable maturities. In addition, in periods of falling interest rates, the
rate of mortgage prepayments tends to increase. During such periods, the
reinvestment of prepayment proceeds by an Income Fund will generally be at lower
rates than the rates that were carried by the obligations that have been
prepaid. When interest rates rise, the value of an asset-backed security
generally will decline; however, when interest rates decline, the value of an
asset-backed security with prepayment features may not increase as much as that
of other fixed-income securities. Because of these and other reasons, an
asset-backed security's total return may be difficult to predict.
The collateral supporting non-mortgage-related asset-backed securities is of
shorter maturity than mortgage loans and is less likely to experience
substantial prepayments. Non-mortgage-related asset-backed securities involve
certain risks that are not presented by mortgage-backed securities arising
primarily from the nature of the underlying assets (i.e., credit card and
automobile loan receivables as opposed to mortgage loans or interests in
mortgage loans). For example, credit card receivables are generally unsecured
and the repossession of automobiles and other personal property upon the default
of the debtor may be difficult or impracticable in some cases. The New Income
Fund may also invest in participations in certificates of pools of mortgages.
The New Income Fund (but not the Old Income Fund) may purchase put and call
options, provided the options are listed on a recognized options exchange.
Purchasing options is a specialized investment
II-3
technique that entails a substantial risk of a complete loss of the amounts paid
as premiums to the option writer. The New Income Fund (but not the Old Income
Fund) may also write covered call options and covered put options listed on a
recognized options exchange. These transactions are subject to the limitation
that not more than 5% of the value of the New Income Fund's total assets will be
invested in premiums on open put positions. The New Income Fund may also
purchase and write unlisted over-the-counter options which are not subject to
the protections afforded purchasers of exchange-traded options. The Old Income
Fund (but not the New Income Fund) may purchase or sell index options (or
options on securities indices).
The Income Funds may, at the time of purchasing a fixed income security,
also acquire a put with respect to such security. The Income Funds will only
acquire puts from banks and broker-dealers that Wachovia Bank has determined are
creditworthy. The Income Funds will acquire puts solely to shorten the
maturities of the fixed income securities held in the Funds' portfolios.
The New Income Fund (but not the Old Income Fund) may purchase and sell
futures contracts and options on futures contracts as a hedge against
anticipated changes in interest rates or market conditions. The New Income Fund
will not purchase or sell futures contracts or related options for hedging
purposes if, immediately after purchase, the aggregate initial margin deposits
and premiums paid by the New Income Fund on its open futures and options
positions exceeds 5% of the New Income Fund's total assets. When futures and
related options are used as a hedging device by the New Income Fund, there is a
risk that the prices of the securities subject to the futures contract may not
correlate with the prices of the Fund's investment securities. This may cause
the futures contract and any related options to react differently than the New
Income Fund's investment securities to market changes. In addition to entering
into futures contracts and options on futures contracts for hedging purposes,
the New Income Fund may invest in futures contracts on foreign government debt
obligations. The New Income Fund's investment in these latter types of futures
contracts will be primarily for speculative purposes. These contracts implicate
currency risk and the risks involved in investing in foreign issuers (i.e.,
future political and economic developments and the possible imposition of
exchange controls or other foreign governmental laws or restrictions), in
addition to the risks described above.
The Old Income Fund may hold, for temporary defensive purposes, up to 100%
of its total assets in money market instruments and repurchase agreements when,
in Wachovia Bank's opinion, it is in the best interests of the Old Income Fund
to do so. The New Income Fund may, for temporary defensive purposes (up to 100%
of its total assets) and to maintain liquidity (up to 35% of its total assets),
invest in commercial paper rated in the highest rating category by an NRSRO,
money market instruments (such as bankers' acceptances, certificates of deposit,
demand and time deposits of domestic and foreign banks and savings and loan
associations), obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities, and repurchase agreements.
The Old Income Fund may purchase "stripped" securities limited to stripped
U.S. Treasury obligations. Stripped securities are issued at a discount to their
face value and may exhibit greater price volatility than ordinary debt
securities because of the manner in which their principal and interest are
returned to investors.
The Income Funds may purchase securities on a "when issued" or "delayed
delivery" basis. The Old Income Fund may purchase such securities without
limitation, whereas the New Income Fund will not engage in such transactions to
an extent that would cause the segregation of more than 20% of the total value
of the New Income Fund's assets. The Income Funds may enter into repurchase and
reverse repurchase agreement transactions, lend their portfolio securities and
invest in the securities of other investment companies. MarketWatch has obtained
an exemptive order (the "Order") from the SEC that permits the Old Income Fund
to invest in the other MarketWatch Funds (except the Money Market Fund) in
accordance with the limitations contained in the 1940 Act for an investment
company to purchase shares of another investment company. Wachovia has not
obtained a similar order and hence, the New Income
II-4
Fund generally may not invest in the other portfolios of the Wachovia Fund
Group. Neither Income Fund will invest more than 15% of the value of its net
assets in illiquid securities.
OLD EQUITY FUND AND NEW EQUITY FUND
The investment objective of the Equity Funds is to seek to provide total
return through growth of capital and current income. Each Equity Fund pursues
its investment objective by investing primarily in a professionally-managed and
diversified portfolio of equity securities. Under normal market conditions, each
Equity Fund invests substantially all, but in no event less than 65%, of its
total assets in equity securities.
In managing the Old Equity Fund and the New Equity Fund, Wachovia Bank
selects securities based on a number of factors, including return on equity,
price to earnings ratio, dividend paying ability and liquidity. The securities
in which the Equity Funds invest may be expected to produce some income, but
income alone is not the primary criterion for the securities' selection by
Wachovia Bank for inclusion in the Equity Funds' portfolios.
The portfolio securities in which the Old Equity Fund and the New Equity
Fund may invest include common and preferred stocks of U.S. companies which are
either listed on a national securities exchange, or which are unlisted but
traded in the over-the-counter markets and considered by Wachovia Bank to have
an established market. The Equity Funds may invest in convertible securities,
warrants and puts to purchase common stocks. Wachovia Bank will purchase a
convertible security for an Equity Fund when Wachovia Bank believes the price
and yield of the convertible security is favorable compared with the price and
yield of the common stock.
As with other mutual funds that invest in equity securities, the Old Equity
Fund and the New Equity Fund are subject to market risks. That is, the
possibility exists that common stocks will decline over short or even extended
periods of time. The U.S. equity market tends to be cyclical, experiencing both
periods when stock prices generally increase and periods when stock prices
generally decrease.
The Old Equity Fund and the New Equity Fund may indirectly invest in foreign
securities through the purchase of American Depository Receipts of foreign
companies traded on the New York Stock Exchange or in the over-the-counter
markets and the purchase of European Depository Receipts (sometimes also
referred to as Continental Depository Receipts), which are receipts, issued in
Europe, typically by foreign banks and trust companies, that evidence ownership
of either foreign or domestic underlying securities. The Old Equity Fund limits
its investments in foreign securities to less than 5% of its total assets. The
New Equity Fund may also invest directly in the securities of foreign issuers.
Both the Old Equity Fund and the New Equity Fund may invest in fixed income
securities rated A or better by an NRSRO (or judged to be comparable quality, as
determined by Wachovia Bank). These securities are subject to the risks
described above.
The Old Equity Fund and the New Equity Fund may purchase put and call
options, provided the options are listed on a recognized options exchange. As
described above, purchasing options is a specialized investment technique that
entails a substantial risk of a complete loss of the amounts paid as premiums to
the option writer. Both Equity Funds may utilize index options. The Equity Funds
may also write covered call options and covered put options listed on a
recognized options exchange. These transactions are subject to the limitation
that, in the case of the Old Equity Fund, the underlying value of the Fund's
portfolio securities subject to index options or covered call options may not
exceed 25% of its net assets. In the case of the New Equity Fund, not more than
5% of the Fund's total assets will be invested in premiums on open put option
positions. The New Equity Fund (but not the Old Equity Fund) may purchase and
sell futures contracts and options on futures contracts as a hedge against
anticipated changes in market conditions. The New Equity Fund may utilize stock
index futures contracts, options and options
II-5
on futures contracts, subject to the limitation that the value of these future
contracts and options will not exceed 20% of the Fund's total assets. The risks
of these investment techniques are described above.
The Old Equity Fund may hold, for temporary defensive purposes, up to 100%
of its total assets in money market instruments and repurchase agreements when,
in Wachovia Bank's opinion, it is in the best interests of the Fund to do so.
The New Equity Fund may, for temporary defensive purposes (up to 100% of its
total assets) and to maintain liquidity (up to 35% of its total assets), invest
in commercial paper rated in the highest rating category by an NRSRO, money
market instruments (such as bankers' acceptances, certificates of deposit,
demand and time deposits of domestic and foreign banks and savings and loan
associations), obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities, and repurchase agreements.
The Equity Funds may purchase securities on a "when issued" or "delayed
delivery" basis. The Old Equity Fund may purchase such securities without
limitation, whereas the New Equity Fund will not engage in such transactions to
an extent that would cause the segregation of more than 20% of the total value
of the New Equity Fund's assets. Both Equity Funds may enter into repurchase and
reverse repurchase agreement transactions, lend their portfolio securities and
invest in the securities of other investment companies. As permitted by the
Order, the Old Equity Fund may invest in the other MarketWatch Funds (except the
Money Market Fund) in accordance with the limitations contained in the 1940 Act
for an investment company to purchase shares of another investment company.
Wachovia has not obtained a similar order and hence, the New Equity Fund
generally may not invest in affiliated investment companies, but may invest in
other investment companies in accordance with the 1940 Act. Neither Equity Fund
will invest more than 15% of the value of its net assets in illiquid securities.
OLD VIRGINIA FUND AND NEW VIRGINIA FUND
The investment objective of the Virginia Funds is to seek to provide as high
a level of current income that is exempt from federal regular income tax and the
income tax imposed by the Commonwealth of Virginia as is consistent with the
preservation of capital. Under normal market conditions, the Old Virginia Fund
invests at least 80% of its net assets in high-grade debt obligations issued by
or on behalf of the Commonwealth of Virginia and the territories and possessions
of the United States and their respective authorities, agencies,
instrumentalities and political subdivisions, the interest on which, in the
opinion of bond counsel to the issuer, is exempt from federal income tax and
Virginia income tax ("Municipal Securities"). At least 65% of the Old Virginia
Fund's total assets are invested in Municipal Securities issued by or on behalf
of the Commonwealth of Virginia and its political subdivisions, municipalities
and public authorities ("Virginia Municipal Securities"). As a matter of
investment policy that may not be changed without shareholder approval, the New
Virginia Fund will invest its assets so that, under normal circumstances, at
least 80% of its total assets are invested in Virginia Municipal Securities.
There are no maturity limits with respect to the securities that the Virginia
Funds may purchase.
Virginia Municipal Securities include revenue bonds, the interest on and
principal of which are payable only from the revenue generated by the facility
financed by the bond or other specified sources of revenue. Revenue bonds do not
represent a pledge of credit or create any debt of or charge against the general
revenue of a municipality or public authority. Industrial development bonds are
typically classified as revenue bonds; the industry which is the beneficiary of
such bonds is generally the only source of payment for the bonds.
Although the Old Virginia Fund does not intend to do so on a regular basis,
the Fund may invest more than 25% of its total assets in Municipal Securities
the interest on which is paid solely from revenues of similar projects if such
investment is deemed necessary or appropriate by Wachovia Bank. To the extent
that more than 25% of the Old Virginia Fund's total assets are invested in
Municipal Securities that are payable from the revenues of similar projects, the
Old Virginia Fund will be subject to the particular risks
II-6
presented by such projects to a greater extent than it would be if the Fund's
assets were not so concentrated. The New Virginia Fund does not possess a
similar flexibility to concentrate.
The Virginia Municipal Securities which may be purchased by the Old Virginia
Fund and the New Virginia Fund are subject to similar, but not identical,
quality standards. In the case of the Old Virginia Fund, the Fund may purchase
Virginia Municipal Securities: (i) rated in one of the four highest rating
categories assigned by an NRSRO, in the case of bonds; (ii) rated in one of the
two highest rating categories assigned by an NRSRO, in the case of notes and
variable rate demand notes; (iii) rated in the highest rating category assigned
by an NRSRO, in the case of tax-exempt commercial paper; or (iv) unrated
obligations if, in Wachovia Bank's opinion, the obligations are of comparable
quality to rated obligations that are eligible for purchase by the Old Virginia
Fund.
In the case of the New Virginia Fund, the Fund may purchase Virginia
Municipal Securities: (i) rated in the top three rating categories assigned by
an NRSRO; (ii) with respect to 5% of the Fund's total assets, rated in the
fourth highest rating category assigned by an NRSRO; or (iii) unrated but
determined to be of comparable quality by Wachovia Bank. In addition, the New
Virginia Fund may purchase two other categories of Virginia Municipal Securities
which are not contemplated by the Old Virginia Fund. These are: (i) securities
which are secured by an irrevocable escrow of direct obligations of the U.S.
government; and (ii) securities which are insured by a municipal bond insurance
company which is rated in the highest rating category assigned by an NRSRO. In
this regard, the New Virginia Fund may purchase Virginia Municipal Securities
covered by insurance which guarantees the timely payment of principal at
maturity and interest on such Securities. The insured Virginia Municipal
Securities acquired by the New Virginia Fund are either: (i) covered by an
insurance policy applicable to a particular Virginia Municipal Security, whether
obtained by the issuer of the security or by a third-party, or (ii) insured
under master insurance policies issued by municipal bond insurers meeting the
New Virginia Fund's quality parameters described above. The New Virginia Fund
will require or obtain municipal bond insurance when purchasing any Virginia
Municipal Securities that would not otherwise meet the Fund's quality standards.
Wachovia Bank anticipates that between 30% and 60% of the New Virginia Fund's
net assets will be invested in Virginia Municipal Securities that are insured.
A portion of the interest from certain Virginia Municipal Securities owned
by the Virginia Funds may be treated as a preference item for purposes of the
federal alternative minimum tax. Thus, depending on their tax status, certain
shareholders of the Virginia Funds may be subject to the alternative minimum tax
on that part of the distributions of the Old Virginia Fund or the New Virginia
Fund that are derived from such securities.
The Old Virginia Fund and the New Virginia Fund are non-diversified
investment portfolios for purposes of the 1940 Act. As such, there is no limit
in the percentage of assets that either Virginia Fund may invest in any single
issuer. An investment in either Virginia Fund will entail greater risk than
would exist in a diversified investment company because the higher percentage of
investments among fewer issuers by the Virginia Funds may result in greater
fluctuation in the total market value of either Fund's portfolio. Any economic,
political or regulatory developments affecting the value of the securities in a
Virginia Fund's portfolio will have a greater impact on the total value of the
portfolio than would be the case if the portfolio were diversified among more
issuers. Furthermore, because the Virginia Funds invest primarily in Virginia
Municipal Securities, the performance of the Virginia Funds is closely tied to
the general economic conditions within particular industries and geographic
areas located within the Commonwealth of Virginia.
The value of the Virginia Funds' portfolio securities and the Virginia
Funds' shares will generally vary inversely with changes in prevailing interest
rates. Because the Virginia Funds invest in fixed income securities, they are
subject to interest rate risks to the extent that market interest rates
increase.
The Old Virginia Fund (but not the New Virginia Fund) may acquire puts with
respect to Municipal Securities held in the Fund's portfolio. The Old Virginia
Fund acquires puts solely to facilitate portfolio
II-7
liquidity, to shorten the maturity of the underlying securities, or to permit
the investment of the Fund's assets at a more favorable rate of return. In
addition, the Old Virginia Fund (but not the New Virginia Fund) may purchase or
sell index options.
For temporary defensive purposes or if suitable tax-exempt securities are
not available, the Virginia Funds may invest all or a portion of its assets in
taxable obligations when, in Wachovia Bank's opinion, it is in the best
interests of the Virginia Funds to do so. These taxable temporary obligations
include obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities; certificates of deposit (both Virginia Funds) and bankers'
acceptances (in the case of the Old Virginia Fund); commercial paper otherwise
meeting the Funds' quality standards; and notes issued by or on behalf of
municipal or corporate issuers and other debt securities (in the case of the New
Virginia Fund). There is no current intention, by the Virginia Funds, of
generating income subject to the federal regular income tax.
The Virginia Funds may purchase securities on a "when issued" or "delayed
delivery" basis. The Old Virginia Fund may purchase such securities without
limitation, whereas the New Virginia Fund will not engage in such transactions
to an extent that would cause the segregation of more than 20% of the total
value of the New Virginia Fund's assets. The Virginia Funds may enter into
repurchase agreements and reverse repurchase agreement transactions, lend
portfolio securities and invest in the securities of other investment companies.
In the case of the Old Virginia Fund, such investments may be made in other
MarketWatch Funds, in accordance with the Order. Neither Virginia Fund will
invest more than 15% of the value of its net assets in illiquid securities.
INVESTMENT LIMITATIONS OF THE OLD FUNDS AND THE NEW FUNDS
No Fund may change its fundamental investment limitations without the
affirmative vote of the holders of a majority of the outstanding shares (as
defined in the 1940 Act) of the Fund. The investment limitations of the Income
Funds, the Equity Funds and the Virginia Funds are similar, but not identical.
Each of the Income Funds and the Equity Funds is a diversified investment
portfolio and, therefore, each Fund has a fundamental policy limiting
investments in securities of any one issuer (other than cash, cash items or
securities issued by the U.S. government, its agencies and instrumentalities,
and repurchase agreements collateralized by such securities, in the case of the
New Income Fund and the New Equity Fund; and other than obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities, in the
case of the Old Income Fund and the Old Equity Fund) to 5% of the value of each
Fund's total assets, and further specifying that none of the above-mentioned
Funds may acquire more than 10% of the outstanding voting securities of any one
issuer (and further, in the case of the Old Income and Old Equity Funds,
prohibiting each Fund from holding more than 10% of any class of securities of
an issuer), except that up to 25% of the value of each Fund's total assets may
be invested without regard to these restrictions.
The New Virginia Fund is a non-diversified investment portfolio, and is not
subject to the foregoing limitation. The Old Virginia Fund is also a
non-diversified investment portfolio, and will not purchase securities of any
one issuer if, immediately after such purchase, more than 5% of the value of the
Old Virginia Fund's total assets would be invested in such issuer, except that
up to 50% of the value of the Old Virginia Fund's total assets may be invested
without regard to this 5% restriction, provided, however, that no more than 25%
of the value of the Fund's total assets are invested in the securities of any
one issuer, and further provided, however, that these restrictions do not apply
to obligations issued or guaranteed by the U.S. government, the Commonwealth of
Virginia and their agencies, authorities, instrumentalities and political
subdivisions.
The Old Funds may not borrow money or issue senior securities, except that
each Old Fund may borrow from banks or enter into reverse repurchase agreements
for temporary purposes in amounts up to 10% of the Old Fund's total assets at
the time of such borrowing. The Old Funds will not mortgage, pledge or
hypothecate any assets, except in connection with any such borrowing and in
amounts not in excess of
II-8
the lesser of the dollar amounts borrowed or 10% of the value of an Old Fund's
total assets at the time of its borrowing. The Old Funds will not purchase
securities while their borrowings, including reverse repurchase agreements,
exceed 5% of their total assets.
The New Equity Fund and the New Income Fund will not borrow money directly
or through reverse repurchase agreements or pledge securities except, under
certain circumstances, either New Fund may borrow up to one-third of the value
of its total assets and pledge, mortgage or hypothecate up to the lesser of the
dollar amount borrowed or 15% of the value of the Fund's total assets, at the
time of any borrowing, to secure permitted borrowings. For purposes of this
limitation, the New Income Fund and the New Equity Fund do not deem the
following to be pledges: margin deposits for the purchase and sale of futures
contracts and related options, and segregation or collateral arrangements made
in connection with options activities or the purchase of securities on a
when-issued basis. The New Virginia Fund will not borrow money or pledge
securities except, under certain circumstances, the Fund may borrow up to
one-third of the value of its total assets and pledge up to 10% of the value of
those assets to secure such borrowings.
The investment limitations described in the preceding paragraphs are
fundamental with respect to both the Old Funds and the New Funds.
The Old Funds will not make loans, except that: (i) the Old Funds may lend
portfolio securities, provided that the aggregate of all outstanding loans of an
Old Fund does not exceed 30% of the value of its total assets; and (ii) the Old
Funds may enter into repurchase agreements. The New Funds will not lend any of
their assets, except portfolio securities up to one-third of the value of each
New Fund's total assets. This shall not prevent the New Income Fund from
purchasing or holding U.S. government obligations, money market instruments,
demand master notes, bonds, debentures, notes, certificates of indebtedness, or
other debt securities, entering into repurchase agreements, or engaging in other
transactions where permitted by the Fund's investment objective, policies and
limitations, nor shall it prevent the New Virginia Fund from acquiring publicly
or non-publicly issued municipal bonds or temporary investments or from entering
into repurchase agreements in accordance with the New Virginia Fund's investment
objective, policies and limitations. The foregoing limitations on lending
securities or cash are fundamental limitations for both the Old Funds and the
New Funds.
The Old Equity Fund and the Old Income Fund may not purchase any securities
which would cause more than 25% of the value of each Fund's total assets at the
time of purchase to be invested in the securities of one or more issuers
conducting their principal business activities in the same industry, provided
that (i) there is no restriction with respect to obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities and
repurchase agreements secured by obligations of the U.S. government, its
agencies or instrumentalities; (ii) wholly-owned finance companies will be
considered to be in the industries of their parents if their activities are
primarily related to financing the activities of their parents; and (iii)
utilities will be divided according to their services. For example, gas, gas
transmission, electric and gas, electric and telephone will each be considered a
separate industry. The Old Virginia Fund may not purchase any securities which
would cause 25% or more of the Fund's total assets at the time of purchase to be
invested in the securities of one or more issuers conducting their principal
business activities in the same industry, provided that this restriction shall
not apply to obligations issued or guaranteed by the U.S. government, its
agencies, or instrumentalities (and repurchase agreements secured by obligations
of the U.S. government, its agencies, or instrumentalities) or to Municipal
Securities or governmental guarantees of Municipal Securities.
The New Equity Fund and the New Income Fund will not invest 25% or more of
the value of their total assets in any one industry, except that either New Fund
may invest 25% or more of the value of its total assets in securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities, and
repurchase agreements collateralized by such securities. The New Virginia Fund
will not purchase securities if, as a result of such purchase, 25% or more of
the value of its total assets would be invested in industrial development bonds
or other securities, the interest upon which is paid from revenues of similar
II-9
type projects. The New Virginia Fund may invest 25% or more of the value of its
total assets in cash, cash items, or securities issued or guaranteed by the
government of the United States, its agencies, or instrumentalities and
repurchase agreements collateralized by such U.S. government securities. The
foregoing investment limitations with respect to concentration of investments
are fundamental investment limitations as to the Old Funds and the New Funds.
The Old Funds may not purchase or sell real estate, although the Old Equity
Fund and the Old Income Fund may invest in marketable securities of companies
engaged in real estate activities. The New Equity Fund and the New Income Fund
will not buy or sell real estate, including limited partnership interests,
although either New Fund may invest in the securities of companies whose
business involves the purchase or sale of real estate or in securities which are
secured by real estate or interests in real estate. The New Virginia Fund will
not buy or sell real estate, although the Fund may invest in municipal bonds
secured by real estate or interests in real estate. The foregoing investment
limitations with respect to investments in real estate are fundamental as to
both the Old Funds and the New Funds.
The Old Funds may not underwrite securities issued by other persons, except
to the extent that an Old Fund may be deemed to be an underwriter under certain
securities laws in the disposition of restricted securities. The New Income Fund
will not underwrite any issue of securities, except as it may be deemed to be an
underwriter under the Securities Act of 1933, as amended (the "1933 Act"), in
connection with the sale of restricted securities which the Fund may purchase
pursuant to its investment objective, policies and limitations. The New Equity
Fund and the New Virginia Fund will not underwrite any issue of securities,
except as either New Fund may be deemed to be an underwriter under the 1933 Act
in connection with the sale of securities which either New Fund may purchase
pursuant to its investment objective, policies and limitations. The foregoing
limitations on underwriting are fundamental as to both the Old Funds and the New
Funds.
The Old Funds may not purchase or sell commodities or commodity contracts.
The New Income Fund may not purchase or sell commodities, commodity contracts,
or commodity futures contracts, except to the extent the Fund may engage in
transactions involving futures contracts and related options. The New Equity
Fund will not purchase or sell commodities, commodity contracts or commodity
futures contracts. However, the New Equity Fund may purchase put options on
stock index futures, put options on financial futures, stock index futures
contracts, and put options on portfolio securities, and may write covered call
options. The New Virginia Fund will not buy or sell commodities, commodity
contracts or commodity futures contracts. The foregoing investment limitations
on investing in commodities are fundamental investment limitations as to the Old
Funds and the New Funds.
The New Funds may not purchase securities of companies for the purpose of
exercising control. The foregoing limitations are non-fundamental as to the New
Funds. The Old Funds are not subject to a similar limitation.
The Old Funds may not enter into repurchase agreements with maturities in
excess of seven days if such investments, together with other instruments owned
by an Old Fund that are not readily marketable or are otherwise illiquid, exceed
15% of the Old Fund's net assets. The New Funds will not invest more than 10% of
their total assets in securities subject to restrictions on resale under the
1933 Act, except for certain restricted securities which meet the criteria for
liquidity as established by the Wachovia Fund Group's trustees. The New Funds
will not invest more than 15% of their net assets in securities which are
illiquid, including repurchase agreements providing for settlement in more than
seven days after notice, over-the-counter options, non-negotiable time deposits
with maturities over seven days, and certain securities not determined under
guidelines established by the Wachovia Fund Group's trustees to be liquid. The
foregoing investment limitations with respect to illiquid and restricted
securities are non-fundamental as to both the Old Funds and the New Funds.
The Old Funds may not invest more than 5% of their total assets in puts,
calls, straddles, spreads or any combination thereof. The New Equity Fund and
the New Income Fund will not purchase put options
II-10
on securities, other than put options on stock indices, unless the securities
are held in the Funds' portfolios and not more than 5% of the value of either
Fund's total assets would be invested in premiums on open put positions. The New
Virginia Fund will not buy or sell puts, calls, straddles, spreads or any
combination thereof. The New Funds will not write call options on securities
unless the securities are held in a New Fund's portfolio or unless a Fund is
entitled to them in deliverable form without further payment or after
segregating cash in the amount of any further payment. The foregoing investment
limitations are non-fundamental with respect to the Old Funds and the New Funds.
Neither the Old Funds nor the New Funds may purchase securities on margin,
make short sales of securities or maintain a short position, except that (i)
each Fund may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of portfolio securities; (ii) this limitation
shall not apply to the New Equity Fund's and the New Income Fund's transactions
in options and futures contracts and related options; and (iii) with respect to
the New Equity Fund and the New Income Fund, the deposit or payment of initial
or variation margin in connection with financial futures contracts or related
options transactions is not considered the purchase of a security on margin. The
foregoing limitations are fundamental as to the New Funds, but are
non-fundamental for the Old Funds.
The Old Funds and the New Funds will not purchase securities of other
investment companies, except in connection with a merger, consolidation,
acquisition, reorganization, or to the extent permitted by the 1940 Act and the
SEC. The foregoing limitations are non-fundamental as to both the Old Funds and
the New Funds.
II-11
APPENDIX III
SHAREHOLDER TRANSACTIONS AND SERVICES
This Appendix compares the shareholder transactions and services that are
available in connection with: (1) Class A Shares and Class Y Shares of the New
Funds, and (2) shares of the Old Funds. The term "Wachovia Fund Group" refers to
the funds offered by both The Wachovia Funds and by The Wachovia Municipal
Funds, including the New Funds.
A. GENERAL
1. SALES CHARGES AND EXEMPTIONS
THE NEW FUNDS--CLASS A SHARES AND CLASS Y SHARES
(a) Class A Shares of the New Funds are sold with a maximum 4.50% front-end
sales charge, subject to the following graduated sales charge schedule:
SALES LOAD AS SALES LOAD AS
A PERCENTAGE A PERCENTAGE
OF PUBLIC OF NET AMOUNT
AMOUNT OF TRANSACTION OFFERING PRICE INVESTED
- --------------------------------------------------------------- --------------- -----------------
Less than $100,000............................................. 4.50% 4.71%
$100,000 but less than $250,000................................ 3.75% 3.90%
$250,000 but less than $500,000................................ 2.50% 2.56%
$500,000 but less than $750,000................................ 2.00% 2.04%
$750,000 but less than $1 million.............................. 1.00% 1.01%
$1 million or more............................................. 0.25% 0.25%
(b) The New Funds offer sales charge exemptions to the following classes of
shareholders: (1) investment advisers registered under the Investment Advisers
Act of 1940, purchasing on behalf of their clients; (2) Wachovia Bank or its
affiliates, for funds which are held in a fiduciary, advisory, agency,
custodial, or similar capacity, and for which Wachovia Bank, an affiliate or a
third party provides shareholder services for a fee paid by one of the funds in
the Wachovia Fund Group; and (3) trustees, officers, directors and retired
directors, advisory board members, employees and retired employees of any of the
funds in the Wachovia Fund Group, Wachovia Bank, the spouses and children under
the age of 21 of such persons, and any trusts or individual retirement accounts
operated for such persons. Class A Shares may also be purchased at net asset
value by participants in certain qualified retirement plans for which Wachovia
Bank had previously, but no longer, serves as administrator. Purchases made by
or through qualified retirement plans (each a "Retirement Plan") which have in
excess of an aggregate investment of $500,000 in certain Delaware Group Funds
and any funds in the Wachovia Fund Group that are available through that
Retirement Plan and purchases made by companies participating in the Retirement
Plan that have at least 100 employees will be made at net asset value. No sales
charge is imposed on Class A Shares purchased through "wrap accounts" or similar
programs under which clients pay a fee for services. In addition, trustees,
officers, directors and employees of Federated Securities Corp. and its
affiliates, and any bank or investment dealer that has a sales agreement with
Federated Securities Corp., may also purchase Class A Shares at their net asset
value.
The sales charge will not apply to purchases of Class A Shares made through
the reinvestment of dividends and distributions on Class A Shares. The sales
charge also will not apply to exchanges between funds in the Wachovia Fund
Group, to the extent that a shareholder has a credit for previously paid sales
charges on purchases of Class A Shares of a fund in the Wachovia Fund Group.
III-1
(c) Wachovia also offers quantity discounts and accumulated purchases, a
letter of intent program, a reinvestment privilege and a concurrent purchases
feature, each of which can reduce or eliminate the sales charge payable on Class
A Share purchases of the New Funds.
(d) Class Y Shares of the New Funds are sold without any sales charge.
THE OLD FUNDS
(a) Shares of the Old Funds are sold with a maximum 4.50% front-end sales
charge, subject to the following graduated sales charge schedule:
DEALER DISCOUNT
AND BROKERAGE
SALES LOAD AS COMMISSIONS AS
PERCENTAGE OF SALES LOAD AS A PERCENTAGE OF
PUBLIC OFFERING PERCENTAGE OF NET PUBLIC OFFERING
AMOUNT OF TRANSACTION PRICE AMOUNT INVESTED PRICE
- ------------------------------------------------ --------------- ----------------- ---------------
Less than $100,000.............................. 4.50% 4.71% 4.25%
$100,000 but less than $250,000................. 3.50% 3.63% 3.25%
$250,000 but less than $500,000................. 2.50% 2.56% 2.25%
$500,000 but less than $1,000,000... 1.50% 1.52%
1.25%
$1,000,000 but less than $1,500,000............. 0.75% 0.76% 0.75%
$1,500,000 but less than $2,000,000............. 0.50% 0.50% 0.50%
$2,000,000 or more.............................. 0.25% 0.25% 0.25%
(b) The Old Funds offer sales charge exemptions to the following classes of
shareholders: (1) existing shareholders of the Old Funds upon the automatic
reinvestment of dividend and capital gains distributions; (2) trustees of
MarketWatch and officers, directors, employees, and retired employees of (a)
Central Fidelity and its affiliates and (b) BISYS and its affiliates, as well as
spouses and children under the age of 21 of each of the foregoing; (3) employees
(and their spouses and children under the age of 21) of any broker-dealer with
which BISYS, as distributor of MarketWatch, enters into a dealer agreement to
sell shares of the Old Funds; (4) investors for whom Central Fidelity or one of
its affiliates acts in a fiduciary, advisory, or agency capacity and for whom
purchases are made through Central Fidelity or its affiliates; (5) individuals
who receive shares in connection with a distribution paid from a Central
Fidelity Financial Services Group trust or agency account; (6) individuals who
receive cash in connection with a distribution paid from a Central Fidelity
Financial Services Group trust or agency account. This waiver applies only to
the initial purchase of shares of the Old Funds with the total amount of cash
received in the distribution; (7) orders placed on behalf of other investment
companies distributed by The BISYS Group, Inc. or its affiliated companies; (8)
banks, trust companies and thrift institutions purchasing shares in a fiduciary
capacity and for which Central Fidelity or any of its affiliates acts in an
advisory capacity; (9) broker-dealers and their affiliates purchasing shares in
a fiduciary, advisory, custodial, agency or similar capacity for managed account
programs or with the liquidation proceeds from such accounts; and (10) investors
who have redeemed shares within the previous 365 days may reinvest an amount
equal to all or a portion of the redemption proceeds in shares of the Old Funds
within such 365 day period.
The sales charge will not apply to purchases of shares made through the
reinvestment of dividends and distributions. The sales charge also will not
apply to exchanges between an Old Fund and another Old Fund to the extent that a
shareholder has previously paid a sales charge on purchasing shares of the other
Old Fund.
(c) MarketWatch also offers rights of accumulation, a concurrent purchase
program, and a letter of intent program that can reduce or eliminate the sales
charge payable on share purchases of the Old Funds.
III-2
B. PURCHASE POLICIES
NEW FUNDS OLD FUNDS
------------------------------------------ ------------------------------------------
Minimum Initial CLASS A SHARES--$250 for initial purchases - $1,000 for initial purchases.
Investments of Class A Shares. - $500 for initial purchases made in
CLASS Y SHARES--$250 for initial purchases connection with Individual Retirement
of Class Y Shares. Accounts and deferred contribution
plans, including simplified employee,
401(k), profit sharing and money
purchase pension plans (collectively,
Retirement Accounts), which minimum may
be satisfied by investments in the Old
Funds.
- $100 for (a) employees (and their
spouses and children under age 21) of
(1) Central Fidelity or (2) any
broker/dealer with which BISYS has
entered into a dealer agreement to sell
shares of the Old Funds (collectively,
Employees), and (b) investors investing
using the Auto Invest Plan.
Minimum Subsequent CLASS A SHARES--$50 ($25 for subsequent - $100.
Investments purchases through a Systematic Investment - $50 for Employees.
Program). - $100 for Retirement Accounts, which
CLASS Y SHARES--$50 ($25 for subsequent minimum may be satisfied by investments
purchases through a Systematic Investment in the Old Funds.
Program).
Automatic Investment Plan CLASS A SHARES--Shares may be purchased on Shares may be purchased on a regular basis
a regular basis through automatic once an account has been opened through
deductions of at least $25 from a the Auto Invest Plan, with automatic
shareholder's checking account. deductions from a shareholder's checking
CLASS Y SHARES--Shares may be purchased on account in a minimum amount of $50.
a regular basis through automatic
deductions of at least $25 from a
shareholder's checking account.
Purchase Methods CLASS A SHARES--Shares may be purchased By mail, by telephone or by electronic
through the Trust Division of Wachovia transfer or through broker/dealers that
Bank, Wachovia Investments, Inc. or have established a dealer agreement with
authorized broker-dealers that have a BISYS.
sales agreement with the distributor.
CLASS Y SHARES--Shares may be purchased
through the Trust Division of Wachovia
Bank.
III-3
NEW FUNDS OLD FUNDS
------------------------------------------ ------------------------------------------
Payment Methods CLASS A SHARES--By check, by wire of By check, money order or federal funds.
federal funds, or by debiting a customer's
account with Wachovia Bank.
CLASS Y SHARES--By check, by wire of
federal funds, or by debiting a customer's
account with Wachovia Bank.
A shareholder in an Old Fund who, at the effective time of the
Reorganization, meets the Old Fund's, but not the New Fund's, minimum investment
requirement, will not be required to redeem a New Fund's Class A Shares received
in connection with the Reorganization, unless the balance in the shareholder's
account drops below the Old Fund's minimum as a result of redemptions.
The New Funds and the Old Funds each reserve the right to reject any
purchase order.
C. REDEMPTION POLICIES
NEW FUNDS OLD FUNDS
------------------------------------------ ------------------------------------------
Redemption Methods CLASS A SHARES--By mail or telephone Through BISYS Ohio by mail or telephone.
through Wachovia Bank, Wachovia
Investments, Inc., or the Wachovia Fund
Group.
CLASS Y SHARES--By mail or telephone
through Wachovia Bank or the Wachovia Fund
Group.
Payment Methods CLASS A SHARES--By check or wire. Payment By check or wire. Payment is normally made
is normally made within 3 business days, within 3 business days.
but the Wachovia Fund Group may take up to
7 days to honor redemption requests.
CLASS Y SHARES--By check or wire. Payment
is normally made within 3 business days,
but the Wachovia Fund Group may take up to
7 days to honor redemption requests.
Automatic Withdrawal Plan CLASS A SHARES--Yes ($10,000 minimum Yes ($10,000 minimum balance/$100 minimum
account balance/$100 minimum per per transaction).
transaction).
CLASS Y SHARES--Yes ($10,000 minimum
account balance/$100 minimum per
transaction).
A shareholder of record may be required to redeem Class A Shares or Class Y
Shares in a New Fund upon 30 days' written notice if the balance in the
shareholder's account in the New Fund drops below $250 as the result of a
redemption request. An Old Fund, upon 60 days' written notice, may redeem shares
in any account if the account balance falls below $100. Each New Fund and each
Old Fund may also redeem shares involuntarily when appropriate in light of its
responsibilities under the 1940 Act, and may make payment for redemptions in
securities in lieu of cash.
III-4
D. SHARE EXCHANGES.
NEW FUNDS OLD FUNDS
------------------------------------------ ------------------------------------------
By Mail CLASS A SHARES--Yes. Yes.
CLASS Y SHARES--Yes.
By Telephone CLASS A SHARES--Yes. Yes.
CLASS Y SHARES--Yes.
Minimum CLASS A SHARES--At least equal to minimum At least equal to minimum required for the
required for the fund in the Wachovia Fund Old for which shares are exchanged.
Group for which shares are exchanged.
CLASS Y SHARES--None.
Class A Shares of a New Fund may be exchanged for Class A Shares of another
fund in the Wachovia Fund Group. Class Y Shares of a New Fund may be exchanged
for Class Y Shares of another fund in the Wachovia Fund Group.
Shareholders in a fund in the Wachovia Fund Group who exchange into any fund
of the Wachovia Fund Group, and shareholders of any fund of MarketWatch that
exchange into another fund in MarketWatch, which latter fund imposes a sales
charge, may be subject to such sales charge if applicable and not previously
paid. Exchanges are only available in states where exchanges can lawfully be
made from one portfolio to another, and must satisfy the requirements relating
to the minimum initial investment in a portfolio. The New Funds and the Old
Funds reserve the right to reject any exchange request and to modify or
terminate the exchange privilege upon prior written notice to shareholders.
MarketWatch has established a policy that limits to six the number of
substantive exchange redemptions that a shareholder can make from an Old Fund
during any calendar year.
MarketWatch also offers a Systematic Exchange Program, which enables
shareholders with a minimum initial balance of $5000 in the Money Market Fund to
automatically exchange shares of the Money Market Fund for shares of an Old
Fund.
E. RESPONSIBILITY FOR TELEPHONE INSTRUCTIONS.
The New Funds, the Old Funds and their respective service contractors may be
liable for losses due to unauthorized or fraudulent telephone instructions if
they do not follow reasonable procedures to verify the authenticity of such
instructions.
II. DIVIDENDS AND OTHER DISTRIBUTIONS
The Old Funds distribute, and the New Funds will distribute, their net
capital gains to shareholders at least annually. Dividends for the Old Income
Fund, the Old Equity Fund and the Old Virginia Fund are, and for the New Income
Fund will be, declared and paid monthly to all shareholders invested in the
respective Funds. Dividends for the New Equity Fund will be declared and paid
quarterly to all shareholders invested in the New Equity Fund. Dividends for the
New Virginia Fund will be declared daily and paid monthly to all shareholders
invested in the New Virginia Fund.
III-5
APPENDIX IV-1
INVESTMENT ADVISORY CONTRACT
This Investment Advisory Contract is made as of the 9th day of March, 1992,
between The Biltmore Funds, a Massachusetts business trust (the "Trust"), and
WACHOVIA BANK OF NORTH CAROLINA, N.A. (the "Adviser").
WHEREAS, the Trust is a Massachusetts business trust, consisting of one or
more series ("Portfolios"), which operates as an open-end management investment
company and will so register under the Investment Company Act of 1940, as
amended ("1940 Act"); and
WHEREAS, the Adviser is engaged in the business of rendering investment
advisory and management services;
WHEREAS, the Trust desires to retain the Adviser as investment adviser to
those of its Portfolios which are identified in an exhibit hereto, and the
Adviser is willing to render such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants set
forth herein, the parties hereto agree as follows:
1. APPOINTMENT OF ADVISER; SERVICES AND DUTIES.
(a) The Trust hereby appoints the Adviser as investment adviser for each
of the Portfolios of the Trust which executes an exhibit to this Contract,
and the Adviser accepts the appointments. Subject to the direction of the
Trustees of the Trust, the Adviser shall provide investment research and
supervision of the investments of such Portfolios and conduct a continuous
program of investment evaluation and of appropriate investment, sale or
other disposition and reinvestment of the Portfolios' assets.
(b) The Adviser shall direct the investments of each such Portfolio
subject to and in accordance with the Portfolio's investment objective,
policies, limitations and other provisions contained in the Portfolio's
prospectus and statement of additional information, as amended from time to
time, the Trust's Declaration of Trust and By-Laws, and any other directions
and policies which the Trustees of the Trust may issue to the Adviser from
time to time.
(c) The Adviser shall provide to Federated Administrative Services
("FAS"), or arrange for the provision of, such information as FAS reasonably
requests that is necessary to enable FAS to monitor the sale of Trust shares
and ensure Trust shares are properly and duly registered with applicable
state securities authorities.
2. EXECUTION AND ALLOCATION OF BROKERAGE
(a) The Adviser, subject to the control and direction of the Trustees,
shall have authority and discretion to select brokers and dealers to execute
portfolio transactions for each Portfolio, and to select the markets on or
in which transactions will be executed. In acting pursuant to this paragraph
2, the Adviser will place orders through such brokers or dealers in
conformity with the policies with respect to portfolio transactions set
forth in the applicable Portfolio's prospectus and statement of additional
information. It is understood that neither the Trust nor the Adviser will
adopt a formula for allocation of each Portfolio's brokerage. It is
understood that the Adviser may, to the extent permitted by applicable laws
and regulations, aggregate securities to be sold or purchased for a
Portfolio and for other clients in order to obtain the most favorable price
and efficient execution. In that event, allocation of the securities
purchased or sold, as well as expenses incurred in the transaction, will be
made by the Adviser in the manner it considers to be the most equitable and
consistent with its fiduciary obligations to the Trust and to its other
clients. The Adviser shall provide such reports as the
IV-1-1
Trustees may reasonably request with respect to each Portfolio's total
brokerage and portfolio transaction activities and the manner in which that
business was allocated.
(b) The Adviser agrees that in placing orders with brokers and dealers,
it will attempt to obtain the best net results in terms of price and
execution; provided that, on behalf of any Portfolio, the Adviser may, in
its discretion, purchase and sell portfolio securities to and from brokers
and dealers who provide research, analysis, advice and similar services, and
the Adviser may pay to those brokers and dealers, in return for research and
analysis, a higher commission or spread than may be charged by other brokers
and dealers, subject to the Adviser determining in good faith that such
commission or spread is reasonable in terms either of the particular
transaction or of the overall responsibility of the Adviser to such
Portfolio and its other clients and that the total commissions or spreads
paid by such Portfolio will be reasonable in relation to the benefits to the
Portfolio over the long term. In no instance will portfolio securities be
purchased from or sold to the Adviser, or any affiliated person thereof,
except in accordance with the federal securities laws and the rules,
regulations and orders thereunder.
(c) The Trust hereby authorizes the Adviser and any entity or person
associated with the Adviser which is a member of a national securities
exchange to effect any transaction on such exchange for the account of any
Portfolio, which transaction is permitted by Section 11(a) of the Securities
Exchange Act of 1934 and Rule 11a2-2(T) thereunder, and the Trust hereby
consents to the retention of compensation by the Adviser or any person or
entity associated with the Adviser for such transactions in accordance with
Rule 11a2-2(T)(a)(2)(iv).
3. RECORDS. The Adviser shall create and maintain all necessary books and
records in accordance with all applicable laws, rules and regulations, including
but not limited to records required by Section 31(a) of the 1940 Act and the
rules thereunder, as the same may be amended from time to time, pertaining to
the investment advisory services performed by it and not otherwise created and
maintained by another party pursuant to contract with the Trust. Where
applicable, such records shall be maintained by the Adviser for the periods and
in the places required by Rule 31a-2 under the 1940 Act. The books and records
pertaining to the Trust which are in the possession of the Adviser shall be the
property of the Trust. The Trust, or the Trust's authorized representatives,
shall have access to such books and records at all times during the Adviser's
normal business hours. Upon the reasonable request of the Trust, copies of any
such books and records shall be provided promptly by the Adviser to the Trust or
the Trust's authorized representatives.
4. ACTIVITIES AND AFFILIATES OF THE ADVISER.
(a) The services furnished by the Adviser hereunder to the Trust are not
to be deemed exclusive, the Adviser being free to render services to others
and engage in other activities, provided, however, that such other services
and activities do not, during the term of this Agreement, interfere, in a
material manner, with the Adviser's ability to meet all of its obligations
with respect to rendering services to the Trust hereunder.
(b) The Trust acknowledges that the Adviser or one or more of its
affiliated persons may have investment responsibilities or render investment
advice to or perform other investment advisory services for other
individuals or entities and that the Adviser, its affiliated persons or any
of its or their directors, officers, agents or employees may buy, sell or
trade in securities for its or their respective accounts ("Affiliated
Accounts"). Subject to the provisions of paragraph 2, the Trust agrees that
the Adviser or its affiliated persons may give advice or exercise investment
responsibility and take such other action with respect to Affiliated
Accounts which may differ from the advice given or the timing or nature of
action with respect to a Portfolio of the Trust, provided that the Adviser
acts in good faith. The Trust acknowledges that one or more of the
Affiliated Accounts may at any time hold, acquire, increase, decrease,
dispose of or otherwise deal with positions in investments in which a
Portfolio may have an interest. The Adviser shall have no obligation to
recommend for a Portfolio a
IV-1-2
position in any investment which an Affiliated Account may acquire, and the
Trust shall have no first refusal, co-investment or other rights in respect
of any such investment, either for its Portfolios or otherwise.
(c) Subject to and in accordance with the Trust's Declaration of Trust
and By-Laws, as currently in effect and as amended from time to time, the
1940 Act and the rules thereunder, and the Banking Act of 1933, it is
understood that Trustees, officers, agents and shareholders of the Trust are
or may be interested in the Adviser or its affiliated persons as directors,
officers, agents or shareholders of the Adviser or its affiliated persons;
that directors, officers, agents and shareholders of the Adviser or its
affiliated persons are or may be interested in the Trust as trustees,
officers, agents, shareholders or otherwise; that the Adviser or its
affiliated persons may be interested in the Trust as shareholders or
otherwise; and that the effect of any such interests shall be governed by
said Declaration of Trust, By-Laws and the 1940 Act and the rules
thereunder.
5. EXPENSES. The Adviser shall be responsible for expenses incurred in
providing office space, equipment and personnel as may be necessary or
convenient to provide investment advisory services to the Trust. Each Portfolio
shall pay or cause to be paid all of its own expenses and its allocable share of
Trust expenses, including, without limitation, the expenses of organizing the
Trust and continuing its existence; fees and expenses of Trustees and officers
of the Trust; fees for administrative services; fees and expenses of preparing
and printing its Registration Statements under the Securities Act of 1933 and
the 1940 Act and any amendments thereto; expenses of registering and qualifying
the Trust, the Portfolios, and shares ("Shares") of the Portfolios under federal
and state laws and regulations; expenses of preparing, printing, and
distributing prospectuses (and any amendments thereto) to existing shareholders;
interest expense, taxes, fees, and commissions of every kind; expenses of issue
(including cost of Share certificates), purchase, repurchase, and redemption of
Shares, including expenses attributable to a program of periodic issue; charges
and expenses of custodians, transfer agents, dividend disbursing agents,
shareholder servicing agents, and registrars; printing and mailing costs,
auditing, accounting, and legal expenses; reports to shareholders and
governmental officers and commissions; expenses of meetings of Trustees and
shareholders and proxy solicitations therefor; insurance expenses; association
membership dues and such nonrecurring items as may arise, including all losses
and liabilities incurred in administering the Trust and the Portfolios. Each
Portfolio will also pay its allocable share of such extraordinary expenses as
may arise including expenses incurred in connection with litigation,
proceedings, and claims and the legal obligations of the Trust to indemnify its
officers and Trustees and agents with respect thereto.
6. COMPENSATION.
(a) The Trust shall pay to the Adviser, for all services rendered to
each Portfolio by the Adviser hereunder, the fees set forth in the exhibits
attached hereto. If applicable, for purposes of calculating such fees, the
value of each Portfolio's net assets shall be determined pursuant to the
applicable provisions of the Portfolio's prospectus and statement of
additional information, the Trust's Declaration of Trust and By-Laws and the
1940 Act.
(b) The Adviser agrees to reimburse the Trust or to waive all or part of
its advisory fee, with the same frequency with which the advisory fee is
paid to the Adviser, to the extent the annual operating expenses of any
Portfolio or class thereof exceeds the highest applicable expense limitation
established pursuant to the statutes or regulations of any jurisdiction in
which the Shares of the Portfolios are qualified or registered for offer and
sale.
(c) The Adviser may from time to time and for such periods as it deems
appropriate reduce its compensation from a Portfolio (and, if appropriate,
assume expenses of one or more of the Portfolios or classes thereof) to the
extent the expenses of any Portfolio or a class thereof exceed such lower
expense limitation as the Adviser may, by notice to the Portfolio,
voluntarily declare to be effective.
IV-1-3
(d) To the extent the Adviser has reimbursed the Trust or waived all or
part of its advisory fee, the Trust agrees to reimburse the Adviser if so
requested by the Adviser, provided that such reimbursement does not cause
the annual operating expenses of any Portfolio or class thereof to exceed
the highest applicable expense limitation established pursuant to the
statutes or regulations of any jurisdiction in which the Shares of the
Portfolios are qualified or registered for offer and sale.
7. EFFECTIVE DATE; TERM. This Contract shall begin for each Portfolio as
of the date of execution of the applicable exhibit and shall continue in effect
with respect to each Portfolio initially set forth on an exhibit (and any
subsequent Portfolios added pursuant to an exhibit during the initial term of
this contract) for two years from the date of this contract set forth above,
provided that this Contract has first been approved by a vote of a majority of
(a) those Trustees who are not parties to this Contract or interested persons of
any such party, cast in person at a meeting called for the purpose of voting on
such approval and (b) the Portfolio's outstanding voting securities. Thereafter,
this Contract shall continue for successive periods of one year, subject to the
provisions for termination and all of the other terms and conditions hereof, but
only so long as such continuance is specifically approved at least annually (a)
by the vote of a majority of the Trustees who are not parties to this Contract
or interested persons of any such party, cast in person at meeting called for
the purpose of voting on such approval and (b) by the Board of Trustees or with
respect to any given Series by vote of a majority of the outstanding voting
securities. If a Portfolio is added after the first approval by the Trustees as
described above, this Contract will be effective as to that Portfolio upon
execution of the applicable exhibit and will continue in effect until the next
annual approval of this Contract by the Trustees and thereafter for successive
periods of one year, subject to approval as described above.
8. TERMINATION. Notwithstanding any provision in this Contract, it may be
terminated at any time with respect to any Portfolio, without the payment of any
penalty, by the Trustees of the Trust or by a vote of the majority of the
outstanding voting securities of that Portfolio on sixty (60) days' written
notice to the Adviser, or by the Adviser on sixty (60) days' written notice to
the Trust. Termination of this Contract with respect to any given Portfolio
shall in no way affect the continued validity of this Contract or the
performance thereunder with respect to any other Portfolio. This Contract will
terminate automatically in the event of its assignment.
9. ASSIGNMENT. This Contract may not be assigned by the Adviser and shall
automatically terminate in the event of any assignment. The Adviser shall notify
the Trust in writing in advance of any proposed change of control of the Adviser
to enable the Trust to take the steps necessary to enter into a new advisory
contract.
10. LIABILITIES OF THE ADVISER.
(a) Except as provided below, in the absence of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the obligations or duties
under this Contract on the part of the Adviser, the Adviser shall not be
liable to the Trust or to any of the Portfolios 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 or the making of any investment for or on behalf of
the Trust.
(b) No provision of this Contract shall be construed to protect any
Trustee or officer of the Trust, or the Adviser, from liability in violation
of Sections 17(h), 17(i) or 36(b) of the 1940 Act.
11. AMENDMENT. This Contract may be amended at any time by agreement of
the parties provided that the amendment shall be approved both by the vote of a
majority of the Trustees of the Trust, including a majority of the Trustees who
are not parties to this Contract or interested persons of any such party to this
Contract (other than as Trustees of the Trust) cast in person at a meeting
called for that purpose, and, where required by the 1940 Act, on behalf of a
Portfolio by a majority of the outstanding voting securities of such Portfolio.
IV-1-4
12. LIMITATION OF LIABILITY. The Adviser is expressly put on notice of the
limitation of liability set forth in the Trust's Declaration of Trust and agrees
that the obligations assumed by the Trust or any Portfolio pursuant to this
Agreement shall be limited in any case to the Trust and its assets and that the
Adviser shall not seek satisfaction of any such obligations from the
Shareholders of the Trust, the Trustees, officers, employees or agents of the
Trust, or any of them.
13. DEFINITIONS. As used in this Contract, the terms "affiliated person,"
"assignment," "control," "interested person" and "vote of a majority of the
outstanding voting securities" shall have the meanings set forth in the 1940 Act
and the rules and regulations thereunder, subject to any applicable orders of
exemption issued by the Securities and Exchange Commission.
14. GOVERNING LAW. This Contract shall be construed in accordance with and
governed by the laws of the State of North Carolina, provided, however, that
nothing herein shall be construed in a manner inconsistent with the 1940 Act or
any rule or regulation promulgated by the Securities and Exchange Commission
thereunder.
IV-1-5
APPENDIX IV-2
THE PASSAGEWAY FUNDS
INVESTMENT ADVISORY CONTRACT
This Contract is made as of the 6th day of December, 1991, between The South
Carolina National Bank, a national banking association having its principal
place of business in Columbia, South Carolina (the "Adviser"), and The
Passageway 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
Contract, 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.
The investment management services furnished by the Investment Adviser hereunder
are not to be deemed exclusive, and the Investment Adviser shall be free to
furnish similar services to others so long as its services under this Contract
are not impaired.
2. Subject to the supervision of the Trust's Board of Trustees (the
"Board"), the Adviser will provide a continuous investment program for the
Funds, including investment research and management with respect to all
securities and investments and cash-equivalents in the Funds. The Adviser will
determine from time to time what securities and other investments will be
purchased, retained or sold by the Trust with respect to the Funds. The Adviser
will provide services under this Contract in accordance with each of the Fund's
investment objectives, policies, and restrictions as stated in the Prospectus,
Declaration of Trust, the By-Laws of the Trust, resolutions of the Board, and
Registration Statements and exhibits on file with respect to the Funds with the
Securities and Exchange Commission, and in any amendments to any of the
preceding.
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, as determined by the Board.
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 with regard to any Fund to the extent that
such 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 Contract shall begin for each Fund as of the date of execution of
the applicable exhibit and shall continue in effect with respect to each Fund
presently set forth on an exhibit (and any subsequent Funds added pursuant to an
exhibit during the initial term of this Contract) for two years from the date of
IV-2-1
this Contract set forth above and thereafter for successive periods of one year,
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 Contract 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 with respect to a Fund in writing at least sixty (60) days prior to
the anniversary date of this Contract in any year thereafter that it does not
desire such continuation with respect to that Fund. If a Fund is added after the
first approval by the Trustees as described above, this Contract will be
effective as to that Fund upon execution of the applicable exhibit and will
continue in effect until the next annual approval of this Contract by the
Trustees and thereafter for successive periods of one year, subject to approval
as described above.
7. Notwithstanding any provision in this Contract, 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 the Adviser.
8. This Contract 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
Contract.
9. In the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of obligations or duties under this Contract 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 Contract may be amended at any time by agreement of the parties
provided that the amendment shall be approved both by the vote of a majority of
the Trustees of the Trust, including a majority of Trustees who are not parties
to this Contract or interested persons of any such party to this Contract (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
obligation pursuant to this Contract 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 Contract shall be construed in accordance with and governed by the
laws of the Commonwealth of Pennsylvania.
13. This Contract will become binding on the parties hereto upon their
execution of the attached exhibits to this Contract.
IV-2-2
INTERMEDIATE FIXED INCOME FUND
OF
MARKETWATCH FUNDS
THIS PROXY IS SOLICITED BY THE BOARD OF TRUSTEES OF THE MARKETWATCH FUNDS
("MARKETWATCH") FOR USE AT A SPECIAL MEETING OF SHAREHOLDERS OF THE INTERMEDIATE
FIXED INCOME FUND (THE "MEETING") TO BE HELD AT THE OFFICES OF BISYS FUND
SERVICES, INC., 3435 STELZER ROAD, COLUMBUS, OHIO 43219 ON FRIDAY, MARCH 27,
1998 AT _____ _.M. (EASTERN TIME).
THE UNDERSIGNED HEREBY APPOINTS WALTER B. GRIMM AND ____________ AS PROXIES
OF THE UNDERSIGNED WITH THE POWER OF SUBSTITUTION AND RESUBSTITUTION, TO
ATTEND, VOTE AND ACT FOR THE UNDERSIGNED AT THE MEETING AND AT ANY ADJOURNMENT
OR ADJOURNMENTS THEREOF, CASTING VOTES ACCORDING TO THE NUMBER OF SHARES OF THE
INTERMEDIATE FIXED INCOME FUND WHICH THE UNDERSIGNED MAY BE ENTITLED TO VOTE
WITH RESPECT TO THE PROPOSALS SET FORTH BELOW, IN ACCORDANCE WITH THE
SPECIFICATION INDICATED, IF ANY, AND WITH ALL THE POWERS WHICH THE UNDERSIGNED
WOULD POSSESS IF PERSONALLY PRESENT, HEREBY REVOKING ANY PRIOR PROXY TO VOTE AT
SUCH MEETING, AND HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS AND
PROXIES MAY LAWFULLY DO BY VIRTUE HEREOF.
EVERY PROPERLY SIGNED PROXY WILL BE VOTED IN THE MANNER SPECIFIED HEREON
AND, IN THE ABSENCE OF SPECIFICATION, WILL BE TREATED AS GRANTING AUTHORITY TO
VOTE "FOR" PROPOSALS 1 AND 2, AND IN THE DISCRETION OF THE NAMED PROXIES ON ANY
OTHER MATTER AS MAY COME BEFORE THE MEETING.
TO VOTE, MARK AN "X" IN BLUE OR BLACK INK ON THE PROXY CARD BELOW. KEEP THIS
PORTION FOR YOUR RECORDS.
- --------------------------------------------------------------------------------
(DETACH HERE AND RETURN THIS PORTION ONLY)
MARKETWATCH INTERMEDIATE FIXED INCOME FUND
VOTE ON PROPOSAL 1.
FOR / / AGAINST / / ABSTAIN / /
ITEM 1. APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION, DATED MARCH 5, 1998,
BETWEEN THE MARKETWATCH FUNDS, ON BEHALF OF THE MARKETWATCH
INTERMEDIATE FIXED INCOME FUND, AND THE WACHOVIA FUNDS, ON BEHALF OF
THE WACHOVIA INTERMEDIATE FIXED INCOME FUND, AND THE TRANSACTIONS
CONTEMPLATED THEREBY, INCLUDING (a) THE TRANSFER OF SUBSTANTIALLY ALL
OF THE ASSETS OF THE MARKETWATCH INTERMEDIATE FIXED INCOME FUND TO THE
WACHOVIA INTERMEDIATE FIXED INCOME FUND, IN EXCHANGE SOLELY FOR CLASS
A SHARES OF THE WACHOVIA INTERMEDIATE FIXED INCOME FUND, AND THE
LATTER'S ASSUMPTION OF ALL THE LIABILITIES OF THE MARKETWATCH
INTERMEDIATE FIXED INCOME FUND, (b) THE DISTRIBUTION OF THE CLASS A
SHARES SO RECEIVED TO SHAREHOLDERS OF THE MARKETWATCH INTERMEDIATE
FIXED INCOME FUND, AND (c) THE TERMINATION UNDER STATE LAW OF
MARKETWATCH, ALL AS SET FORTH IN THE PROXY STATEMENT.
VOTE ON PROPOSAL 2.
FOR / / AGAINST / / ABSTAIN / /
ITEM 2. APPROVE AN INVESTMENT ADVISORY AGREEMENT BETWEEN THE WACHOVIA FUNDS,
ON BEHALF OF THE WACHOVIA INTERMEDIATE FIXED INCOME FUND, AND WACHOVIA
BANK, N.A., ALL AS SET FORTH IN THE PROXY STATEMENT.
ITEM 3. THE PROXIES ARE AUTHORIZED TO VOTE, IN THEIR DISCRETION, UPON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY
ADJOURNMENT(S) THEREOF.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS OF THE INTERMEDIATE FIXED INCOME FUND OF MARKETWATCH AND THE PROXY
STATEMENT DATED MARCH __, 1998.
PLEASE SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR(S) HEREON. WHEN SHARES ARE HELD BY
JOINT TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY OR EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A
CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED
OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED
PERSON.
- ------------------------------------------- -----------------------------
SIGNATURE(S) TITLES(S), IF APPLICABLE, DATE SIGNATURE (JOINT OWNERS) DATE
EQUITY FUND
OF
MARKETWATCH FUNDS
THIS PROXY IS SOLICITED BY THE BOARD OF TRUSTEES OF THE MARKETWATCH FUNDS
("MARKETWATCH") FOR USE AT A SPECIAL MEETING OF SHAREHOLDERS OF THE EQUITY FUND
(THE "MEETING") TO BE HELD AT THE OFFICES OF BISYS FUND SERVICES, INC., 3435
STELZER ROAD, COLUMBUS, OHIO 43219 ON FRIDAY, MARCH 27, 1998 AT _____ _.M.
(EASTERN TIME).
THE UNDERSIGNED HEREBY APPOINTS WALTER B. GRIMM AND ____________ AS PROXIES
OF THE UNDERSIGNED WITH THE POWER OF SUBSTITUTION AND RESUBSTITUTION, TO
ATTEND, VOTE AND ACT FOR THE UNDERSIGNED AT THE MEETING AND AT ANY ADJOURNMENT
OR ADJOURNMENTS THEREOF, CASTING VOTES ACCORDING TO THE NUMBER OF SHARES OF THE
EQUITY FUND WHICH THE UNDERSIGNED MAY BE ENTITLED TO VOTE WITH RESPECT TO THE
PROPOSALS SET FORTH BELOW, IN ACCORDANCE WITH THE SPECIFICATION INDICATED, IF
ANY, AND WITH ALL THE POWERS WHICH THE UNDERSIGNED WOULD POSSESS IF PERSONALLY
PRESENT, HEREBY REVOKING ANY PRIOR PROXY TO VOTE AT SUCH MEETING, AND HEREBY
RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS AND PROXIES MAY LAWFULLY DO BY
VIRTUE HEREOF.
EVERY PROPERLY SIGNED PROXY WILL BE VOTED IN THE MANNER SPECIFIED HEREON
AND, IN THE ABSENCE OF SPECIFICATION, WILL BE TREATED AS GRANTING AUTHORITY TO
VOTE "FOR" PROPOSALS 1 AND 2, AND IN THE DISCRETION OF THE NAMED PROXIES ON ANY
OTHER MATTER AS MAY COME BEFORE THE MEETING.
TO VOTE, MARK AN "X" IN BLUE OR BLACK INK ON THE PROXY CARD BELOW. KEEP THIS
PORTION FOR YOUR RECORDS.
- --------------------------------------------------------------------------------
(DETACH HERE AND RETURN THIS PORTION ONLY)
MARKETWATCH EQUITY FUND
VOTE ON PROPOSAL 1.
FOR / / AGAINST / / ABSTAIN / /
ITEM 1. APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION, DATED MARCH 5, 1998,
BETWEEN THE MARKETWATCH FUNDS, ON BEHALF OF THE MARKETWATCH EQUITY
FUND, AND THE WACHOVIA FUNDS, ON BEHALF OF THE WACHOVIA GROWTH &
INCOME FUND, AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING (a)
THE TRANSFER OF SUBSTANTIALLY ALL OF THE ASSETS OF THE MARKETWATCH
EQUITY FUND TO THE WACHOVIA GROWTH & INCOME FUND, IN EXCHANGE SOLELY
FOR CLASS A SHARES OF THE WACHOVIA GROWTH & INCOME FUND, AND THE
LATTER'S ASSUMPTION OF ALL THE LIABILITIES OF THE MARKETWATCH EQUITY
FUND, (b) THE DISTRIBUTION OF THE CLASS A SHARES SO RECEIVED TO
SHAREHOLDERS OF THE MARKETWATCH EQUITY FUND, AND (c) THE TERMINATION
UNDER STATE LAW OF MARKETWATCH, ALL AS SET FORTH IN THE PROXY
STATEMENT.
VOTE ON PROPOSAL 2.
FOR / / AGAINST / / ABSTAIN / /
ITEM 2. APPROVE AN INVESTMENT ADVISORY AGREEMENT BETWEEN THE WACHOVIA FUNDS,
ON BEHALF OF THE WACHOVIA GROWTH & INCOME FUND, AND WACHOVIA BANK,
N.A., ALL AS SET FORTH IN THE PROXY STATEMENT.
ITEM 3. THE PROXIES ARE AUTHORIZED TO VOTE, IN THEIR DISCRETION, UPON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING OR ANY
ADJOURNMENT(S) THEREOF.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS OF THE EQUITY FUND OF MARKETWATCH AND THE PROXY STATEMENT DATED
MARCH __, 1998.
PLEASE SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR(S) HEREON. WHEN SHARES ARE HELD BY
JOINT TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY OR EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A
CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED
OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED
PERSON.
- ------------------------------------------- -----------------------------
SIGNATURE(S) TITLES(S), IF APPLICABLE, DATE SIGNATURE (JOINT OWNERS) DATE
VIRGINIA MUNICIPAL BOND FUND
OF
MARKETWATCH FUNDS
THIS PROXY IS SOLICITED BY THE BOARD OF TRUSTEES OF THE MARKETWATCH FUNDS
("MARKETWATCH") FOR USE AT A SPECIAL MEETING OF SHAREHOLDERS OF THE VIRGINIA
MUNICIPAL BOND FUND (THE "MEETING") TO BE HELD AT THE OFFICES OF BISYS FUND
SERVICES, INC., 3435 STELZER ROAD, COLUMBUS, OHIO 43219 ON FRIDAY, MARCH 27,
1998 AT _____ _.M. (EASTERN TIME).
THE UNDERSIGNED HEREBY APPOINTS WALTER B. GRIMM AND ____________ AS PROXIES
OF THE UNDERSIGNED WITH THE POWER OF SUBSTITUTION AND RESUBSTITUTION, TO
ATTEND, VOTE AND ACT FOR THE UNDERSIGNED AT THE MEETING AND AT ANY ADJOURNMENT
OR ADJOURNMENTS THEREOF, CASTING VOTES ACCORDING TO THE NUMBER OF SHARES OF THE
VIRGINIA MUNICIPAL BOND FUND WHICH THE UNDERSIGNED MAY BE ENTITLED TO VOTE WITH
RESPECT TO THE PROPOSALS SET FORTH BELOW, IN ACCORDANCE WITH THE SPECIFICATION
INDICATED, IF ANY, AND WITH ALL THE POWERS WHICH THE UNDERSIGNED WOULD POSSESS
IF PERSONALLY PRESENT, HEREBY REVOKING ANY PRIOR PROXY TO VOTE AT SUCH MEETING,
AND HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS AND PROXIES MAY
LAWFULLY DO BY VIRTUE HEREOF.
EVERY PROPERLY SIGNED PROXY WILL BE VOTED IN THE MANNER SPECIFIED HEREON
AND, IN THE ABSENCE OF SPECIFICATION, WILL BE TREATED AS GRANTING AUTHORITY TO
VOTE "FOR" PROPOSALS 1 AND 2, AND IN THE DISCRETION OF THE NAMED PROXIES ON ANY
OTHER MATTER AS MAY COME BEFORE THE MEETING.
TO VOTE, MARK AN "X" IN BLUE OR BLACK INK ON THE PROXY CARD BELOW. KEEP THIS
PORTION FOR YOUR RECORDS.
- --------------------------------------------------------------------------------
(DETACH HERE AND RETURN THIS PORTION ONLY)
MARKETWATCH INTERMEDIATE FIXED INCOME FUND
VOTE ON PROPOSAL 1.
FOR / / AGAINST / / ABSTAIN / /
ITEM 1. APPROVE AN AGREEMENT AND PLAN OF REORGANIZATION, DATED MARCH 5, 1998,
BETWEEN THE MARKETWATCH FUNDS, ON BEHALF OF THE MARKETWATCH VIRGINIA
MUNICIPAL BOND FUND, AND THE WACHOVIA MUNICIPAL FUNDS, ON BEHALF OF
THE WACHOVIA VIRGINIA MUNICIPAL BOND FUND, AND THE TRANSACTIONS
CONTEMPLATED THEREBY, INCLUDING (a) THE TRANSFER OF SUBSTANTIALLY ALL
OF THE ASSETS OF THE VIRGINIA MUNICIPAL BOND FUND TO THE WACHOVIA
VIRGINIA MUNICIPAL BOND FUND, IN EXCHANGE SOLELY FOR CLASS A SHARES OF
THE WACHOVIA VIRGINIA MUNICIPAL BOND FUND, AND THE LATTER'S ASSUMPTION
OF ALL THE LIABILITIES OF THE MARKETWATCH VIRGINIA MUNICIPAL BOND
FUND, (b) THE DISTRIBUTION OF THE CLASS A SHARES SO RECEIVED TO
SHAREHOLDERS OF THE MARKETWATCH VIRGINIA MUNICIPAL BOND FUND, AND (c)
THE TERMINATION UNDER STATE LAW OF MARKETWATCH, ALL AS SET FORTH IN
THE PROXY STATEMENT.
VOTE ON PROPOSAL 2.
FOR / / AGAINST / / ABSTAIN / /
ITEM 2. APPROVE AN INVESTMENT ADVISORY AGREEMENT BETWEEN THE WACHOVIA
MUNICIPAL FUNDS, ON BEHALF OF THE WACHOVIA VIRGINIA MUNICIPAL BOND
FUND, AND WACHOVIA BANK, N.A., ALL AS SET FORTH IN THE PROXY
STATEMENT.
ITEM 3. THE PROXIES ARE AUTHORIZED TO VOTE, IN THEIR DISCRETION, UPON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING OR ANY
ADJOURNMENT(S) THEREOF.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS OF THE VIRGINIA MUNICIPAL BOND FUND OF MARKETWATCH AND THE PROXY
STATEMENT DATED MARCH __, 1998.
PLEASE SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR(S) HEREON. WHEN SHARES ARE HELD BY
JOINT TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY OR EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A
CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED
OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED
PERSON.
- ------------------------------------------- -----------------------------
SIGNATURE(S) TITLES(S), IF APPLICABLE, DATE SIGNATURE (JOINT OWNERS) DATE