EVERGREEN DOMESTIC EQUITY FUNDS
200 BERKELEY STREET, BOSTON, MASSACHUSETTS
(800) 343-2898
STATEMENT OF ADDITIONAL INFORMATION DATED
NOVEMBER 10, 1997 FOR THE FOLLOWING SERIES OF THE
EVERGREEN EQUITY TRUST (THE "TRUST"):
EVERGREEN SMALL COMPANY GROWTH FUND
(THE "FUND")
This statement of additional information ("SAI") provides additional
information about all classes of shares of the Fund. It is not a prospectus and
you should read it in conjunction with the prospectuses of the Fund dated
November 10, 1997, as supplemented from time to time. You may obtain a copy of
the prospectuses from the Fund's distributor, Evergreen Distributor, Inc.
TABLE OF CONTENTS
INVESTMENT POLICIES........................................................3
Investment Restrictions And Guidelines............................8
MANAGEMENT OF THE TRUST....................................................9
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.......................11
INVESTMENT ADVISORY AND OTHER SERVICES....................................12
Investment Advisory Services.....................................12
Distribution Plans and Agreements................................13
Additional Service Providers.....................................14
BROKERAGE ALLOCATION AND OTHER PRACTICES..................................15
Brokerage Commissions............................................15
Selection of Brokers.............................................15
General Brokerage Policies.......................................16
ORGANIZATION..............................................................16
Form of Organization.............................................16
Description of Shares............................................16
Voting Rights....................................................17
Limitation of Trustees' Liability................................17
PURCHASE, REDEMPTION AND PRICING OF SHARES................................17
How the Fund Offers Shares to the Public.........................17
Sales Charge Waivers or Reductions...............................19
Exchanges........................................................20
How The Fund Values its Shares...................................21
Shareholder Services.............................................21
PRINCIPAL UNDERWRITER.....................................................22
ADDITIONAL TAX INFORMATION................................................22
CALCULATION OF PERFORMANCE DATA...........................................24
ADDITIONAL INFORMATION....................................................25
Other Information................................................25
FINANCIAL STATEMENTS......................................................25
APPENDIX A...............................................................A-1
INVESTMENT POLICIES
SECURITIES AND INVESTMENT PRACTICES
The investment objective of the Fund and a description of the
securities in which the Fund may invest are set forth in the Fund's
prospectuses. The following expands upon the discussion in the prospectuses
regarding certain investments of the Fund.
U.S GOVERNMENT OBLIGATIONS
The types of U.S. Government obligations in which the Fund may invest
generally include obligations that the U.S. Government agencies or
instrumentalities issued or guaranteed.
These securities are backed by:
(1) the discretionary authority of the U.S. Government to purchase certain
obligations of agencies or instrumentalities; or
(2) the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities that may not always receive financial
support from the U.S. Government are:
(i) Farm Credit System, including the National Bank for Cooperatives, Farm
Credit Banks and Banks for Cooperatives;
(ii) Farmers Home Administration;
(iii) Federal Home Loan Banks;
(iv) Federal Home Loan Mortgage Corporation;
(v) Federal National Mortgage Association; and
(vi) Student Loan Marketing Association.
RESTRICTED AND ILLIQUID SECURITIES
Pursuant to Rule 144A under the Securities Act of 1933 ("Rule 144A"), the
Board of Trustees of the Trust determines the liquidity of certain restricted
securities Rule 144A is a non-exclusive, safe-harbor for certain secondary
market transactions involving securities subject to restrictions on resale under
federal securities laws. Rule 144A provides an exemption from registration for
resales of otherwise restricted securities to qualified institutional buyers.
Rule 144A was expected to further enhance the liquidity of the secondary market
for securities eligible for sale under Rule 144A. In determining the liquidity
of certain restricted securities the Trustees consider: (1) the frequency of
trades and quotes for the security; (2) the number of dealers willing to
purchase or sell the security and the number of other potential buyers; (3)
dealer undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades.
WHEN-ISSUED, DELAYED-DELIVERY AND FORWARD COMMITMENT TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis
and may purchase or sell securities on a forward commitment basis. These
transactions involve the purchase of debt obligations with delivery and payment
normally taking place within a month or more after the date of commitment to
purchase. The Fund will only make commitments to purchase obligations on a
when-issued basis with the intention of actually acquiring the securities, but
may sell them before the settlement date. The when-issued securities are subject
to market fluctuation, and no interest accrues on the security to the purchaser
during this period. The payment obligation and the interest rate that will be
received on the securities are each fixed at the time the purchaser enters into
the commitment.
Segregated accounts will be established with the custodian, and the Fund
will maintain liquid assets in an amount at least equal in value to its
commitments to purchase when-issued securities. If the value of these assets
declines, the Fund will place additional liquid assets in the account on a daily
basis so that the value of the assets in the account is equal to the amount of
such commitments.
Purchasing obligations on a when-issued basis is a form of leveraging and
can involve a risk that the yields available in the market when the delivery
takes place may actually be higher than those obtained in the transaction
itself. In that case there could be an unrealized loss at the time of delivery.
The Fund uses when-issued, delayed-delivery and forward commitment
transactions to secure what it considers to be an advantageous price and yield
at the time of purchase. When the Fund engages in when- issued, delayed-delivery
and forward commitment transactions, it relies on the buyer or seller, as the
case may be, to consummate the sale. If the buyer or seller fails to complete
the sale, then the Fund may miss the opportunity to obtain the security at a
favorable price or yield.
Typically, no income accrues on securities the Fund has committed to
purchase prior to the time delivery of the securities is made, although the Fund
may earn income on securities it has deposited in a segregated account. When
purchasing a security on a when-issued, delayed delivery, or forward commitment
basis, the Fund assumes the rights and risks of ownership of the security,
including the risk of price and yield fluctuations, and takes such fluctuations
into account when determining its net asset value. Because the Fund is not
required to pay for the security until the delivery date, these risks are in
addition to the risks associated with its other investments.
LOANS OF SECURITIES
To generate income and offset expenses, the Fund may lend portfolio
securities to broker-dealers and other financial institutions. Loans of
securities by the Fund may not exceed 30% of the value of its total assets.
While securities are on loan, the borrower will pay the Fund any income accruing
on the security. The Fund may invest any collateral it receives in additional
portfolio securities, such as U.S. Treasury notes, certificates of deposit,
other high-grade, short-term obligations or interest bearing cash equivalents.
Gains or losses in the market value of a security lent will affect the Fund and
its shareholders.
When the Fund lends its securities, it will require the borrower to give
the Fund collateral in cash or government securities. The Fund will require
collateral in an amount equal to at least 100% of the current market value of
the securities lent, including accrued interest. The Fund has the right to call
a loan and obtain the securities lent any time on notice of not more than five
business days. The Fund may pay reasonable fees in connection with such loans.
Although voting rights attendant to securities lent pass to the borrower,
the Fund may call such loans at any time and may vote the securities if it
believes a material event affecting the investment is to occur. The Fund may
experience a delay in receiving additional collateral or in recovering the
securities lent or may even suffer a loss of rights in the collateral should the
borrower of the securities fail financially. The Fund may only make loans to
borrowers deemed to be of good standing, under standards approved by the Board
of Trustees, when the income to be earned from the loan justifies the attendant
risks.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with entities that are
registered as U.S. Government securities dealers, including member banks of the
Federal Reserve System having at least $1 billion in assets, primary dealers in
U.S. Government securities or other financial institutions believed by the
Fund's investment adviser (as hereinafter defined) to be creditworthy. In a
repurchase agreement, the Fund obtains a security and simultaneously commits to
return the security to the seller (a member bank of the Federal Reserve System
or recognized securities dealer) at an agreed upon price (including principal
and interest) on an agreed upon date within a number of days (usually not more
than seven) from the date of purchase. The resale price reflects the purchase
price plus an agreed upon market rate of interest which is unrelated to the
coupon rate or maturity of the underlying security. A repurchase agreement
involves the obligation of the seller to pay the agreed upon price, which
obligation is in effect secured by the value of the underlying security.
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund's investment adviser believes that under the
regular procedures normally in effect for custody of the Fund's portfolio
securities subject to repurchase agreements, a court of competent jurisdiction
would rule in favor of the Fund and allow retention or disposition of such
securities. The Fund will only enter into repurchase agreements with banks and
other recognized financial institutions, such as broker-dealers, which are
deemed by the investment adviser to be creditworthy pursuant to guidelines
established by the Board of Trustees.
REVERSE REPURCHASE AGREEMENTS
As described herein, the Fund may also enter into reverse repurchase
agreements. These transactions are similar to borrowing cash. In a reverse
repurchase agreement, the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in return
for a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed upon rate.
The use of reverse repurchase agreements may enable the Fund to avoid
selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase agreements
does not ensure that the Fund will be able to avoid selling portfolio
instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in
a dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
FINANCIAL FUTURES CONTRACTS
The Fund may enter into financial futures contracts as a hedge against
decreases or increases in the value of securities it holds or intends to
acquire.
The Fund will not maintain open positions in futures contracts it has sold
or call options it has written on futures contracts if, in the aggregate, the
value of the open positions (marked to market) exceeds the current market value
of its securities portfolio plus or minus the unrealized gain or loss on those
open positions, adjusted for the correlation of volatility between the hedged
securities and the futures contracts. If this limitation is exceeded at any
time, the Fund will take prompt action to close out a sufficient number of open
contracts to bring its open futures and options positions within this
limitation.
OPTIONS
The Fund may buy or sell (i.e., write) put and call options on securities
it holds or intends to acquire. The Fund may also buy and sell options on
financial futures contracts. The Fund will use options as a hedge against
decreases or increases in the value of securities it holds or intends to
acquire. The Fund may purchase put and call options for the purpose of
offsetting previously written put and call options of the same series.
The Fund may write only covered options. With regard to a call option, this
means that the Fund will own, for the life of the option, the securities subject
to the call option. The Fund will cover put options by holding, in a segregated
account, liquid assets having a value equal to or greater than the price of
securities subject to the put option. If the Fund is unable to effect a closing
purchase transaction with respect to the covered options it has sold, it will
not be able to sell the underlying securities or dispose of assets held in a
segregated account until the options expire or are exercised.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury bills
with its custodian (or the broker, if legally permitted). The nature of initial
margin in futures transactions is different from that of margin in securities
transactions in that futures contract initial margin does not involve the
borrowing of funds by the Fund to finance the transactions. Initial margin is in
the nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day, the Fund pays
or receives cash, called "variation margin", equal to the daily change in value
of the futures contract. This process is known as "marking to market". Variation
margin does not represent a borrowing or loan by the Fund but is instead
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing its daily net asset value, the
Fund will mark-to-market its open futures positions. The Fund is also required
to deposit and maintain margin when it writes call options on futures contracts.
The Fund may not buy or sell futures contracts or related options if,
immediately thereafter, the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets.
FOREIGN SECURITIES
The Fund may invest in foreign securities or U.S. securities traded in
foreign markets. Permissible investments may consist of obligations of foreign
branches of U.S. banks and of foreign banks, including European certificates of
deposit, European time deposits, Canadian time deposits and Yankee certificates
of deposit, and investments in Canadian commercial paper, foreign securities and
Europaper. These instruments may subject the Fund to investment risks that
differ in some respects from those related to investments in obligations of U.S.
domestic issuers. Such risks include future adverse political and economic
developments, the ossible imposition of withholding taxes on interest or other
income, possible seizure, nationalization, or expropriation of foreign deposits,
the possible establishment of exchange controls or taxation at the source,
greater fluctuations in value due to changes in exchange rates, or the adoption
of other foreign governmental restrictions which might adversely affect the
payment of principal and interest on such obligations. Such investments may also
entail higher custodial fees and sales commissions than domestic investments.
Foreign issuers of securities or obligations are often subject to accounting
treatment and engage in business practices different from those respecting
domestic issuers of similar securities or obligations. Foreign branches of U.S.
banks and foreign banks may be subject to less stringent reserve requirements
than those applicable to domestic branches of U.S. banks.
FOREIGN CURRENCY TRANSACTIONS
As one way of managing exchange rate risk, the Fund may enter into forward
currency exchange contracts (agreements to purchase or sell currencies at a
specified price and date). The exchange rate for the transaction (the amount of
currency the Fund will deliver and receive when the contract is completed) is
fixed when the Fund enters into the contract. The Fund usually will enter into
these contracts to stabilize the U.S. dollar value of a security it has agreed
to buy or sell. The Fund intends to use these contracts to hedge the U.S. dollar
value of a security it already owns, particularly if the Fund expects a decrease
in the value of the currency in which the foreign security is denominated.
Although the Fund will attempt to benefit from using forward contracts, the
success of its hedging strategy will depend on the Adviser's ability to predict
accurately the future exchange rates between foreign currencies and the U.S.
dollar. The value of the Fund's investments denominated in foreign currencies
will depend on the relative strengths of those currencies and the U.S. dollar,
and the Fund may be affected favorably or unfavorably by changes in the exchange
rates or exchange control regulations between foreign currencies and the U.S.
dollar. Changes in foreign currency exchange rates also may affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by the Fund. The Fund may also purchase and sell options related to
foreign currencies in connection with hedging strategies.
INVESTMENT RESTRICTIONS AND GUIDELINES
FUNDAMENTAL POLICIES
The Fund has adopted the fundamental investment restrictions set forth
below which may not be changed without the vote of a majority of the Fund's
outstanding shares, as defined in the Investment Company Act of 1940 (the "1940
Act"). Unless otherwise stated, all references to the assets of the Fund are in
terms of current market value.
DIVERSIFICATION
The Fund may not make any investment that is inconsistent with its
classification as a diversified investment company under the 1940 Act.
CONCENTRATION
The Fund may not concentrate its investments in the securities of issuers
primarily engaged in any particular industry (other than securities that are
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities).
ISSUING SENIOR SECURITIES
Except as permitted under the 1940 Act, the Fund may not issue senior
securities.
BORROWING
The Fund may not borrow money, except to the extent permitted by applicable
law.
UNDERWRITING
The Fund may not underwrite securities of other issuers, except insofar as
the Fund may be deemed an underwriter in connection with the disposition of its
portfolio securities.
REAL ESTATE
The Fund may not purchase or sell real estate, except that, to the extent
permitted by applicable law, the Fund may invest in (a) securities that are
directly or indirectly secured by real estate, or (b) securities issued by
issuers that invest in real estate.
COMMODITIES
The Fund may not purchase or sell commodities or contracts on commodities
except to the extent that the Fund may engage in financial futures contacts and
related options and currency contracts and related options and may otherwise do
so in accordance with applicable law and without registering as a commodity pool
operator under the Commodity Exchange Act.
LOANS TO OTHER PERSONS
The Fund may not make loans to other persons, except that the Fund may lend
its portfolio securities in accordance with applicable law. The acquistion of
investment securities or other investment instruments shall not be deemed to be
the making of a loan.
GUIDELINES
Unlike the Fundamental Policies above, the following guidelines may be
changed by each the Trust's Board of Trustees without shareholder approval.
DIVERSIFICATION
Under the 1940 Act, with respect to the 75% of its total assets, a
diversified investment company may not invest more than 5% of its total assets,
determined at market or other fair value at the time of purchase, in the
securities of any one issuer, or invest in more than 10% of the outstanding
voting securities of any one issuer, determined at the time of purchase. These
limitations do not apply to investments in securities issued or guaranteed by
the U.S. Government or its agencies or instrumentalities.
BORROWINGS
The Fund may borrow from banks in an amount up to 33 1/3% of its total
assets, taken at market value. The Fund may only borrow as a temporary measure
for extraordinary or emergency purposes such as the redemption of Fund shares.
The Fund may not purchase securities while borrowings are outstanding except to
exercise prior commitments and to exercise subscription rights (as defined in
the 1940 Act) or enter into reverse repurchase agreements, in amounts up to 33
1/3 % of its total assets (including the amount borrowed). The Fund may borrow
up to an additional 5% of its total assets for temporary purposes. The Fund may
obtain such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities. The Fund may purchase securities on margin
and engage in short sales to the extent permitted by applicable law.
ILLIQUID SECURITIES
The Fund may not invest more than 15% of its net assets in securities that
are Illiquid. A security is Illiquid when the fund may not dispose of it in the
ordinary course of business within seven days at approximately the value at
which the Fund has the investment on its books.
INVESTMENT IN OTHER INVESTMENT COMPANIES
The Fund may purchase the shares of other investment companies to the
extent permitted under the 1940 Act. Currently, the Fund may not (1) own more
than 3% of the outstanding voting stock of another investment company, (2)
invest more than 5% of its assets in any single investment compnay, and (3)
invest more than 10% of its assets in investment companies. However, the Fund
may invest all of its investable assets in securities of a single open-end
management investment company with substantially the same fundamental investment
objectives, policies and limitations as the Fund.
SHORT SALES
The Fund may not make short sales of securities or maintain a short
position unless, at all times when a short position is open, it owns an equal
amount of such securities or of securities which, without payment of any further
consideration, are convertible into or exchangeable for securities of the same
issue as, and equal in amount to, the securities sold short. The Fund may effect
a short sale in connection with an underwriting in which the Fund is a
participant.
MANAGEMENT OF THE TRUST
Set forth below are the Trustees and officers of the Trust and their
principal occupations and some of their affiliations over the last five years.
Unless otherwise indicated, the address for each Trustee and officer is 200
Berkeley Street, Boston, Massachusetts 02116. Each Trustee is also a Trustee of
each of the other Trusts in the Evergreen Fund complex, other than Evergreen
Variable Trust of which Messrs. Howell, Salton and Scofield are the only
Trustees.
<TABLE>
<CAPTION>
NAME AND DATE OF BIRTH POSITION WITH TRUST PRINCIPAL OCCUPATIONS FOR LAST FIVE YEARS
- ------------------------------- -------------------------- -------------------------------------------------------------
<S> <C> <C>
Laurence B. Ashkin Trustee Real estate developer and construction consultant;
(DOB: 2/2/28) President of Centrum Equities and Centrum
Properties, Inc.
Charles A. Austin III Trustee Investment Counselor to Appleton Partners, Inc.;
(DOB: 10/23/34) former Managing Director, Seaward Management
Corporation (investment advice).
K. Dun Gifford Trustee Trustee, Treasurer and Chairman of the Finance
(DOB: 10/12/38) Committee, Cambridge College; Chairman Emeritus
and Director, American Institute of Food and
Wine; Chairman and President, Oldways Preservation
and Exchange Trust (education); former Chairman of
the Board, Director, and Executive Vice President,
The London Harness Company; former Managing Partner,
Roscommon Capital Corp.; former Chief Executive Officer,
Gifford Gifts of Fine Foods; former Chairman, Gifford,
Drescher & Associates (environmental consulting); former
Director, Keystone Investments, Inc.
James S. Howell Chairman of the Former Chairman of the Distribution Foundation for
(DOB: 8/13/24) Board of Trustees the Carolinas; former Vice President of Lance Inc.
(food manufacturing).
Leroy Keith, Jr. Trustee Director of Phoenis Total Return Fund and Equifax,
Inc.; Trustee of Phoenix Series Fund, Phoenix
(DOB: 2/14/39) Multi-Portfolio Fund, and The Phoenix Big Edge
Series Fund; and former President, Morehouse
College.
Gerald M. McDonnell Trustee Sales Representative with Nucor-Yamoto, Inc.
(DOB: 7/14/39) (steel producer).
Thomas L. McVerry Trustee Former Vice President and Director of Rexham
(DOB: 8/2/39) Corporation; and former Director of Carolina
Cooperative Federal Credit Union.
*William Walt Pettit Trustee Partner in the law firm of Holcomb and Pettit, P.A.
(DOB: 8/26/55)
David M. Richardson Trustee Vice Chair and former Executive Vice President,
(DOB: 9/14/41) DHR International, Inc. (executive recruitment);
former Senior Vice President, Boyden International
Inc. (executive recruitment); and Director,
Commerce and Industry Association of New
Jersey, 411 International, Inc., and J&M Cumming
Paper Co.
Russell A. Salton, III MD Trustee Medical Director, U.S. Health Care/Aetna Health
(DOB: 6/2/47) Services; and former Managed Health Care
Consultant; former President, Primary Physician
Care.
Michael S. Scofield Trustee Attorney, Law Offices of Michael S. Scofield.
(DOB: 2/20/43)
Richard J. Shima Trustee Chairman, Environmental Warranty, Inc. (insurance
(DOB: 8/11/39) agency); Executive Consultant, Drake Beam Morin,
Inc. (executive outplacement); Director of Connecticut
Natural Gas Corporation, Hartford Hospital, Old State
House Association, Middlesex Mutual Assurance Company,
and Enhance Financial Services, Inc.; Chairman, Board of
Trustees, Hartford Graduate Center; Trustee, Greater
Hartford YMCA; former Director, Vice Chairman and Chief
Investment Officer, The Travelers Corporation; former
Trustee, Kingswood-Oxford School; and former
Managing Director and Consultant, Russell Miller, Inc.
John J. Pileggi President and Senior Managing Director, Furman Selz LLC since
Treasurer 1992; Managing Director from 1984 to 1992;
Consultant to BISYS Fund Services since 1996;
230 Park Avenue, Suite 910, New York, NY.
George O. Martinez Secretary Senior Vice President and Director of
Administration and Regulatory Services, BISYS
Fund Services; Vice President/Assistant General
Counsel, Alliance Capital Management from 1988
to 1995; 3435 Stelzer Road, Columbus, Ohio.
</TABLE>
*This Trustee may be considered an interested Trustee within the
meaning of the 1940 Act.
The officers of the Trust are all officers and/or employees of BISYS
Fund Services ("BISYS"), except for Mr. Pileggi, who is a consultant to BISYS.
For more information on BISYS, see "Sub-Administrator" below.
Listed below is the estimated Trustee compensation for the twelve-month
period ended June 30, 1998.
COMPENSATION TABLE
Name Of Person, Aggregate Total
Postion Compensation Compensation
From Registant From Registrant
And Fund
Complex Paid To
Directors
Laurence B. Ashkin $27,458 $68,252
Charles A. Austin $22,024 $55,639
K. Dun Gifford $20,177 $51,160
James S. Howell $37,358 $97,924
Leroy Keith Jr. $20,939 $52,641
Gerald M. McDonnell $30,988 $79,369
Thomas L. McVerry $33,345 $87,132
William Walt Petit $30,378 $78,184
David M. Richardson $22,024 $55,639
Russell A. Salton, III $30,450 $78,592
Michael S. Scofield $31,060 $65,188
Richard J. Shima $25,584 $18,366
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of the date of this SAI, the officers and Trustees of the Trust owned as
a group less than 1% of the outstanding Class A, Class B, Class C or Class Y
shares of the Fund. As of the same date, no person, to the Fund's knowledge,
owned beneficially or of record more than 5% of a class of the Fund's
outstanding shares.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISER
The investment adviser to the Fund (the "Adviser") is KEYSTONE INVESTMENT
MANAGEMENT COMPANY, 200 Berkeley Street, Boston, Massachusetts 02116. The
Adviser is a subsidiary of First Union Corporation, which is a bank holding
company headquartered at 301 South College Street, Charlotte North Carolina
28288. First Union Corporation and its subsidiaries provide a broad range of
financial services to individuals and businesses throughout the United States.
The Fund pays the Adviser a fee for its services at the annual rate set
forth below:
Aggregate Net
Asset Value of
Management Fee Fund Shares
- ----------------------------------------------------
0.70% of the first $100,000,000, plus
0.65% of the next $100,000,000, plus
0.60% of the next $100,000,000, plus
0.55% of the next $100,000,000, plus
0.50% of the next $100,000,000, plus
0.45% of the next $500,000,000, plus
0.40% of the next $500,000,000, plus
0.35% of amounts over $1,500,000,000
The Adviser's fee is computed as of the close of business each business day and
payable monthly.
INVESTMENT ADVISORY CONTRACT
On behalf of the Fund, the Trust has entered into an investment advisory
agreement with the Adviser (the "Advisory Agreement"). Under the Advisory
Agreement, and subject to the supervision of the Trust's Board of Trustees, the
Adviser furnishes to the Fund investment advisory, management and administrative
services, office facilities, and equipment in connection with its services for
managing the investment and reinvestment of the Fund's assets. The Adviser pays
for all of the expenses incurred in connection with the provision of its
services. The Fund pays for all charges and expenses, other than those
specifically referred to as being borne by the Adviser, including, but not
limited to, (1) custodian charges and expenses; (2) bookkeeping and auditors'
charges and expenses; (3) transfer agent charges and expenses; (4) fees and
expenses of Independent Trustees; (5) brokerage commissions, brokers' fees and
expenses; (6) issue and transfer taxes; (7) costs and expenses under the
Distribution Plan (as applicable) (8) taxes and trust fees payable to
governmental agencies; (9) the cost of share certificates; (10) fees and
expenses of the registration and qualification of the Fund and its shares with
the Securities and Exchange Commission ("SEC") or under state or other
securities laws; (11) expenses of preparing, printing and mailing prospectuses,
statements of additional information, notices, reports and proxy materials to
shareholders of the Fund; (12) expenses of shareholders' and Trustees' meetings;
(13) charges and expenses of legal counsel for the Fund and for the Independent
Trustees of the Trust on matters relating to the Fund; (14) charges and expenses
of filing annual and other reports with the SEC and other authorities; and all
extraordinary charges and expenses of the Fund.
The Advisory Agreement continues in effect for two years from its
effective date and, thereafter, from year to year only if approved at least
annually by the Board of Trustees of the Trust or by a vote of a majority of the
Fund's outstanding shares. In either case, the terms of the Advisory Agreement
and continuance thereof must be approved by the vote of a majority of the
Independent Trustees (Trustees who are not interested persons of the Trust, as
defined in the 1940 Act) cast in person at a meeting called for the purpose of
voting on such approval. The Advisory Agreement may be terminated, without
penalty, on 60 days' written notice by the Trust's Board of Trustees or by a
vote of a majority of outstanding shares. The Advisory Agreement will terminate
automatically upon its "assignment" as that term is defined in the 1940 Act.
GENERAL
The Trust has adopted procedures pursuant to Rule 17a-7 of the 1940 Act
("Rule 17a-7 Procedures"). The Rule 17a-7 Procedures permit the Fund to buy or
sell securities from another investment company for which a subsidiary of First
Union Corporation is an investment adviser. The Rule 17a-7 Procedures also allow
the Fund to buy or sell securities from other advisory clients for whom a
subsidiary of First Union Corporation is an investment adviser. The Fund may
engage in such transactions if they are equitable to each participant and
consistent with each participant's investment objective.
DISTRIBUTOR
Evergreen Distributor, Inc., (the "Distributor") markets the Fund
through broker-dealers and other financial representatives. Its address is 125
W. 55th Street, New York, NY 10019.
DISTRIBUTION PLANS AND AGREEMENTS
Distribution fees are accrued daily and paid monthly on Class A, Class
B and Class C shares and are charged as class expenses, as accrued. The
distribution fees attributable to the Class B shares and Class C shares are
designed to permit an investor to purchase such shares through broker-dealers
without the assessment of a front-end sales charge, and, in the case of Class C
shares, without the assessment of a contingent deferred sales charge after the
first year following the month of purchase, while at the same time permitting
the Distributor to compensate broker-dealers in connection with the sale of such
shares. In this regard, the purpose and function of the combined contingent
deferred sales charge and distribution services fee on the Class B shares and
the Class C shares are the same as those of the front-end sales charge and
distribution fee with respect to the Class A shares in that in each case the
sales charge and/or distribution fee provide for the financing of the
distribution of the Fund's shares.
Under the Rule 12b-1 Distribution Plans that have been adopted by the
Fund with respect to each of its Class A, Class B and Class C shares (each a
"Plan" and collectively, the "Plans"), the Treasurer of the Fund reports the
amounts expended under the Plans and the purposes for which such expenditures
were made to the Trustees of the Trust for their review on a quarterly basis.
Also, each Plan provides that the selection and nomination of the disinterested
Trustees are committed to the discretion of such disinterested Trustees then in
office.
The Adviser may from time to time and from its own funds or such other
resources as may be permitted by rules of the Securities and Exchange Commission
("SEC") make payments for distribution services to the Distributor; the latter
may in turn pay part or all of such compensation to brokers or other persons for
their distribution assistance.
Each Plan and Distribution Agreement will continue in effect for
successive twelve-month periods provided, however, that such continuance is
specifically approved at least annually by the Trustees of the Trust or by vote
of the holders of a majority of the outstanding voting securities of that Class
and, in either case, by a majority of the Independent Trustees of the Trust who
have no direct or indirect financial interest in the operation of the Plan or
any agreement related thereto.
The Plans permit the payment of fees to brokers and others for
distribution and shareholder-related administrative services and to
broker-dealers, depository institutions, financial intermediaries and
administrators for administrative services as to Class A, Class B and Class C
shares. The Plans are designed to (i) stimulate brokers to provide distribution
and administrative support services to each Fund and holders of Class A, Class B
and Class C shares and (ii) stimulate administrators to render administrative
support services to the Fund and holders of Class A, Class B and Class C shares.
The administrative services are provided by a representative who has knowledge
of the shareholder's particular circumstances and goals, and include, but are
not limited to providing office space, equipment, telephone facilities, and
various personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding Class
A, Class B and Class C shares; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as the
Fund reasonably requests for its Class A, Class B and Class C shares.
In the event that a Plan or Distribution Agreement is terminated or not
continued with respect to one or more Classes of the Fund, (i) no distribution
fees (other than current amounts accrued but not yet paid) would be owed by the
Fund to the Distributor with respect to that Class or Classes, and (ii) the Fund
would not be obligated to pay the Distributor for any amounts expended under the
Distribution Agreement not previously recovered by the Distributor from
distribution services fees in respect of shares of such Class or Classes through
deferred sales charges.
All material amendments to any Plan or Distribution Agreement must be
approved by a vote of the Trustees of the Trust or the holders of the Fund's
outstanding voting securities, voting separately by Class, and in either case,
by a majority of the disinterested Trustees, cast in person at a meeting called
for the purpose of voting on such approval; and any Plan or Distribution
Agreement may not be amended in order to increase materially the costs that a
particular Class of shares of the Fund may bear pursuant to the Plan or
Distribution Agreement without the approval of a majority of the holders of the
outstanding voting shares of the Class affected. Any Plan, Shareholder Services
Plan or Distribution Agreement may be terminated (i) by the Fund without penalty
at any time by a majority vote of the holders of the outstanding voting
securities of the Fund, voting separately by Class or by a majority vote of the
disinterested Trustees, or (ii) by the Distributor. To terminate any
Distribution Agreement, any party must give the other parties 60 days' written
notice; to terminate a Plan only, the Fund need give no notice to the
Distributor. Any Distribution Agreement will terminate automatically in the
event of its assignment.
ADDITIONAL SERVICE PROVIDERS
ADMINISTRATOR
Evergreen Investment Services, Inc. ("EIS") serves as administrator to
the Fund, subject to the supervision and control of the Trust's Board of
Trustees. EIS provides the Fund with facilities, equipment and personnel and is
entitled to receiive a fee based on the aggregate average daily net assets of
the Fund based on the total assets of all mutual funds advised by First Union
Corporation subsidiaries. The fee paid to EIS is calculated in accordance with
the following schedule: 0.50% on the first $7 billion; 0.035% on the next $3
billion; 0.030% on the next $5 billion; 0.020% on the next $10 billion; 0.015%
on the next $5 bilion and 0.010% on assets in excess of $30 billion.
SUB-ADMINISTRATOR
BISYS provides such personnel and certain administrative services to
the Fund pursuant to a sub- administrator agreement. For its services under that
agreement, BISYS receives a fee based on the aggregate average daily net assets
of the Fund at a rate based on the total assets of all mutual funds administered
by EIS for which subsidiaries of First Union Corporation also serve as
investment adviser. The sub-administrator fee is calculated in accordance with
the following schedule: 0.0100% on the first $7 billion; 0.0075% on the next $3
billion; 0.0050% on the next $15 billion; 0.0040% on assets in excess of $25
billion. BISYS is an affiliate of the Distributor.
TRANSFER AGENT
Evergreen Service Company ("ESC"), a subsidiary of First Union
Corporation, is the Fund's transfer agent. The transfer agent issues and redeems
shares, pays dividends and performs other duties in connection with the
maintenance of shareholder accounts. The transfer agent's address is 200
Berkeley Street, Boston, Massachusetts 02116.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP audits the Fund's financial statements. The
auditor's address is 99 High Street, Boston, Massachusetts 02110.
CUSTODIAN
State Street Bank and Trust Company is the Fund's custodian. The bank
keeps custody of the Fund's securities and cash and performs other related
duties. The custodian's address is 225 Franklin Street, Boston, Massachusetts
02110.
LEGAL COUNSEL
Sullivan Worcester LLP provides legal advice to the Fund. Its address
is 1025 Connecticut Avenue, N.W., Washington, D.C. 20036
BROKERAGE ALLOCATION AND OTHER PRACTICES
BROKERAGE COMMISSIONS
Generally, the Fund expects to purchase and sell its securities through
brokerage transactions for which commissions are payable. Purchases from
underwriters will include the underwriting commission or concession, and
purchases from dealers serving as market makers will include a dealer's mark-up
or reflect a dealer's markdown. Where transactions are made in the
over-the-counter market, the Fund will deal with primary market makers unless
more favorable prices are otherwise obtainable.
SELECTION OF BROKERS
In effecting transactions in portfolio securities for the Fund, the
Adviser seeks the best execution of orders at the most favorable prices. The
Adviser determines whether a broker has provided the Fund with best execution
and price in the execution of a securities transaction by evaluating, among
other things:
1. overall direct net economic result to the Fund,
2. the efficiency with which they effect the transaction,
3. the broker's ability to effect the transaction where a large
block is involved,
4. the broker's readiness to execute potentially difficult
transactions in the future,
5. the financial strength and stability of the broker, and
6. the receipt of research services, such as analyses and reports
concerning issuers, industries,
securities, economic factors and trends and other statistical
and factual information ("research services").
The Fund's management weighs these considerations in determining the
overall reasonableness of the brokerage commissions paid.
The Fund considers the receipt of research services by the Fund or the
Adviser to be in addition to, and not instead of, the services the Adviser is
required to perform under the Advisory Agreement. The Adviser believes that it
cannot determine or practically allocate the cost, value and specific
application of such research services between the Fund and its other clients,
who may indirectly benefit from the availability of such services. Similarly,
the Fund may indirectly benefit from information made available from
transactions effected for the Adviser's other clients. The Advisory Agreement
also permits the Adviser to pay higher brokerage commissions for brokerage and
research services in accordance with Section 28(e) of the Securities Exchange
Act of 1934; if the Adviser does so on a basis that is fair and equitable to the
Fund.
Neither the Fund nor the Adviser intends on placing securities
transactions with any particular broker-dealer. The Trust's Board of Trustees
has determined, however, that the Fund may consider sales of Fund shares when
selecting of broker-dealers to execute portfolio transactions, subject to the
requirements of best execution described above.
GENERAL BROKERAGE POLICIES
The Adviser makes investment decisions for the Fund independently from
those of its other clients. It may frequently develop, however, that the Adviser
will make the same investment decision for more than one client. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one account. When two or more of its clients
are engaged in the purchase or sale of the same security, the Adviser will
allocate the transactions according to a formula that is equitable to each of
its clients. Although, in some cases, this system could have a detrimental
effect on the price or volume of the Fund's securities, the Fund believes that
in other cases its ability to participate in volume transactions will produce
better executions. In order to take advantage of the availability of lower
purchase prices, the Fund may occasionally participate in group bidding for the
direct purchase from an issuer of certain securities.
The Board of Trustees periodically reviews the Fund's brokerage policy.
Because of the possibility of further regulatory developments affecting the
securities exchanges and brokerage practices generally, the Board of Trustees
may change, modify or eliminate any of the foregoing practices.
ORGANIZATION
FORM OF ORGANIZATION
The Fund is a series of an open-end management investment company,
known as "EVERGREEN EQUITY TRUST" (the "Trust"). The Trust was formed as a
Delaware business trust on September 17, 1997 (the "Declaration of Trust"). A
copy of the Declaration of Trust is on file as an exhibit to the Trust's
Registration Statement, of which this SAI is a part. This summary is qualified
in its entirety by reference to the Declaration of Trust.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest of series and classes of shares. Each share of
the Fund represents an equal proportionate interest with each other share of
that series and/or class. Upon liquidation, shares are entitled to a pro rata
share of the Trust based on the relative net assets of each series and/or class.
Shareholders have no preemptive or conversion rights. Shares are redeemable and
transferable.
VOTING RIGHTS
Under the terms of the Declaration of Trust, the Trust is not required
to hold annual meetings. However, the Trust intends to hold meetings at least
annually. At meetings called for the initial election of Trustees or to consider
other matters, each share is entitled to one vote for each dollar of net asset
value applicable to such share. Shares generally vote together as one class on
all matters. Classes of shares of the Fund have equal voting rights. No
amendment may be made to the Declaration of Trust that adversely affects any
class of shares without the approval of a majority of the votes applicable to
the shares of that class. Shares have non-cumulative voting rights, which means
that the holders of more than 50% of the votes applicable to shares voting for
the election of Trustees can elect 100% of the Trustees to be elected at a
meeting and, in such event, the holders of the remaining 50% or less of the
shares voting will not be able to elect any Trustees.
After the initial meeting as described above, no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law, unless and until such time as less than a majority of the Trustees
holding office have been elected by shareholders, at which time, the Trustees
then in office will call a shareholders' meeting for the election of Trustees.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his duties involved in the conduct of his office.
PURCHASE, REDEMPTION AND PRICING OF SHARES
HOW THE FUND OFFERS SHARES TO THE PUBLIC
You may buy shares of the Fund through the distributor, broker-dealers
that have entered into special agreements with the Fund's distributor or certain
other financial institutions. The Fund offers four classes of shares that differ
primarily with respect to sales charges and distribution fees. Depending upon
the class of shares, you will pay an initial sales charge when you buy the
Fund's shares, a contingent deferred sales charge (a "CDSC") when you redeem the
Fund's shares or no sales charges at all.
PURCHASE ALTERNATIVES
CLASS A SHARES
With certain exceptions, when you purchase Class A shares you will pay a
maximum sales charge of 4.75%. (The prospectuses contain a complete table of
applicable sales charges and a discussion of sales charge reductions or waivers
that may apply to purchases.) If you purchase Class A shares in the amount of $1
million or more, without an initial sales charge, the Fund will charge a CDSC of
1.00% if you redeem during the month of your purchase and the 12-month period
following the month of your purchase. See "Contingent Deferred Sales Charge"
below.
CLASS B SHARES
The Fund offers Class B shares at net asset value (without a front-end
load). With certain exceptions, however, the Fund will charge a CDSC on shares
you redeem within 72 months after the month of your purchase. The Fund will
charge CDSCs at the following rate:
REDEMPTION TIMING CDSC RATE
Month of purchase and the first twelve-month
period following the month of purchase..............5.00%
Second twelve-month
period following the month of purchase..............4.00%
Third twelve-month
period following the month of purchase..............3.00%
Fourth twelve-month
period following the month of purchase..............3.00%
Fifth twelve-month
period following the month of purchase..............2.00%
Sixth twelve-month
period following the month of purchase..............1.00%
Thereafter...............................................0.00%
Class B shares that have been outstanding for seven years after the month of
purchase will automatically convert to Class A shares without imposition of a
front-end sales charge. (Conversion of Class B shares represented by stock
certificates will require the return of the stock certificate to ESC.
CLASS C SHARES
Class C shares are available only through broker-dealers who have entered
into special distribution agreements with the Distributor. The Fund offers Class
C shares at net asset value (without an initial sales charge). With certain
exceptions, however, the Fund will charge a CDSC of 1.00% on shares redeemed
within 12-months after the month of purchase. See "Contingent Deferred Sales
Charge" below.
CLASS Y SHARES
No CDSC is imposed on the redemption of Class Y shares. Class Y shares are
not offered to the general public and are available only to (I) persons who at
or prior to December 31, 1994 owned shares in a mutual fund advised by Evergreen
Asset Management Corp. ("Evergreen Asset"), (2) certain institutional investors
and (3) investment advisory clients of the Capital Management Group of First
Union National Bank, Evergreen Asset, Keystone Investment Management Company, or
their affiliates. Class Y shares are offered at net asset value without a
front-end or back-end sales charge and do not bear any Rule 12b-1 distribution
expenses.
CONTINGENT DEFERRED SALES CHARGE
The Fund charges a CDSC as reimbursement for certain expenses, such as
commissions or shareholder servicing fees, that it has incurred in connection
with the sales of its shares (see "Distribution Plans"). If imposed, the Fund
deducts the CDSC from the redemption proceeds you would otherwise receive. The
CDSC is a percentage of the lesser of (1) the net asset value of the shares at
the time of redemption or (2) the shareholder's original net cost for such
shares. Upon request for redemption, to keep the CDSC a shareholder must pay as
low as possible, the Fund will first seek to redeem shares not subject to the
CDSC and/or shares held the longest, in that order. The CDSC on any redemption
is, to the extent permitted by the National Association of Securities Dealers,
Inc. ("NASD"), paid to the Fund's Distributor or a predecessor distributor.
SALES CHARGE WAIVERS OR REDUCTIONS
REDUCING CLASS A FRONT-END LOADS
With a larger purchase, there are several ways that you can combine
multiple purchases of Class A shares in Evergreen funds and take advantage of
lower sales charges.
COMBINED PURCHASES
You can reduce your sales charge by combining purchases of Class A shares
of multiple Evergreen funds. For example, if you invested $75,000 in each of two
different Evergreen funds, you would pay a sales charge based on a $150,000
purchase (i.e., 3.75% of the offering price, rather than 4.75%).
RIGHTS OF ACCUMULATION
You can reduce your sales charge by adding the value of Class A shares of
Evergreen funds you already own to the amount of your next Class A investment.
For example, if you hold Class A shares valued at $99,999 and purchase an
additional $5,000, the sales charge for the $5,000 purchase would be at the next
lower sales charge of 3.75%, rather than 4.75%.
LETTER OF INTENT
You can, by completing the "Letter of Intent" section of the application,
purchase Class A shares over a 13-month period and receive the same sales charge
as if you had invested all the money at once. All purchases of Class A shares of
an Evergreen fund during the period will qualify as Letter of Intent purchases.
SHARES THAT ARE NOT SUBJECT TO A SALES CHARGE OR CDSC
WAIVER OF SALES CHARGES
The Fund may sell their shares at net asset value without an initial sales
charge to:
1. purchasers of shares in the amount of $1 million or more;
2. a corporate or certain other qualified retirement plan or a
non-qualified deferred compensation plan or a Title 1 tax sheltered
annuity or TSA plan sponsored by an organization having 100 or more
eligible employees (a "Qualifying Plan") or a TSA plan sponsored by a
public educational entity having 5,000 or more eligible employees (an
"Educational TSA Plan");
3. institutional investors, which may include bank trust departments and
registered investment advisers;
4. investment advisers, consultants or financial planners who place trades
for their own accounts or the accounts of their clients and who charge
such clients a management, consulting, advisory or other fee;
5. clients of investment advisers or financial planners who place trades
for their own accounts if the accounts are linked to the master account
of such investment advisers or financial planners on the books of the
broker-dealer through whom shares are purchased;
6. institutional clients of broker-dealers, including retirement and
deferred compensation plans and the trusts used to fund these plans,
which place trades through an omnibus account maintained with the Fund
by the broker-dealer;
7. employees of First Union National Bank, its affiliates, Evergreen
Distributor, Inc., any broker-dealer with whom Evergreen Distributor,
Inc. has entered into an agreement to sell shares of the Fund, and
members of the immediate families of such employees;
8. certain Directors, Trustees, officers and employees of the Evergreen
funds, the Distributor or their affiliates and to the immediate
families of such persons; or
9. a bank or trust company in a single account in the name of such bank or
trust company as trustee if the initial investment in any Evergreen
fund made pursuant to this waiver is at least $500,000 and any
commission paid at the time of such purchase is not more than 1% of the
amount invested.
With respect to items 8 and 9 above, the Fund will sell shares to these
parties only upon a purchaser's written assurance that the purchases are for
their personal investment purposes only. Such purchasers may not resell the
securities except through redemption by the Fund. The Fund will not charge any
CDSC on redemptions by such purchasers.
WAIVER OF CDSCS
The Fund does not impose a CDSC when the shares you are redeeming
represent:
1. an increase in the share value above the net cost of such
shares;
2. certain shares for which the Fund did not pay a commission on
issuance, including shares acquired through reinvestment of
dividend income and capital gains distributions;
3. shares that are in the accounts of a shareholder who has died
or become disabled;
4. a lump-sum distribution from a 401(k) plan or other benefit
plan qualified under the Employee Retirement Income Security
Act of 1974 ("ERISA");
5. an automatic withdrawal from the ERISA plan of a shareholder
who is a least 59 1/2 years old;
6. shares in an account that we have closed because the account
has an aggregate net asset value of less than $1,000;
7. an automatic withdrawal under an Systematic Withdrawal Plan of
up to 1.0% per month of your initial account balance;
8. a withdrawal consisting of loan proceeds to a retirement plan
participant;
9. a financial hardship withdrawal made by a retirement plan
participant;
10. a withdrawal consisting of returns of excess contributions or
excess deferral amounts made to a retirement plan; or
11. a redemption by an individual participant in a Qualifying Plan
that purchased Class C shares (this waiver is not available in
the event a Qualifying Plan, as a whole, redeems substantially
all of its assets).
EXCHANGES
Investors may exchange shares of the Fund for shares of the same class of
any other Evergreen fund, as described under the section entitled "Exchanges" in
the Fund's prospectus. Before you make an exchange, you should read the
prospectus of the Evergreen fund into which you want to exchange. The Trust's
Board of Trustees reserves the right to discontinue, alter or limit the exchange
privilege at any time.
HOW THE FUND VALUES ITS SHARES
HOW AND WHEN THE FUND CALCULATES ITS NET ASSET VALUE PER SHARE ("NAV")
The Fund computes its NAV once daily on Monday through Friday, as described
in the Funds' prospectuses. The Fund will not compute its NAV on the day the
following legal holidays are observed: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The NAV of the Fund is calculated by dividing the value of the Fund's net
assets attributable to that class by all of the shares issued for that class.
HOW THE FUND VALUES THE SECURITIES IT OWNS
Current values for the Fund's portfolio securities are determined as
follows:
(1) Securities that are traded on a national securities exchange or the
over-the-counter National Market System ("NMS") are valued on the basis
of the last sales price on the exchange where primarily traded or on
the NMS prior to the time of the valuation, provided that a sale has
occurred.
(2) Securities traded in the over-the-counter market, other than on
NMS, are valued at the mean of the bid and asked prices at the time of
valuation.
(3) Short-term investments maturing in more than sixty days for which
market quotations are readily available are valued at current market
value.
(4) Short-term investments maturing in sixty days or less (including
all master demand notes) are valued at amortized cost (original
purchase cost as adjusted for amortization of premium or accretion of
discount), which, when combined with accrued interest, approximates
market.
(5) Short-term investments maturing in more than sixty days when
purchased that are held on the sixtieth day prior to maturity are
valued at amortized cost (market value on the sixtieth day adjusted for
amortization of premium or accretion of discount), which, when combined
with accrued interest, approximates market.
(6) Securities, including restricted securities, for which complete
quotations are not readily available; listed securities or those on NMS
if, in the Fund's opinion, the last sales price does not reflect a
current market value or if no sale occurred; and other assets are
valued at prices deemed in good faith to be fair under procedures
established by the Board of Trustees.
Foreign securities for which market quotations are not readily available
are valued on the basis of valuations provided by a pricing service, approved by
the Trust's Board of Trustees, which uses information with respect to
transactions in such securities, quotations from broker-dealers, market
transactions in comparable securities and various relationships between
securities and yield to maturity in determining value.
SHAREHOLDER SERVICES
As described in the prospectus, a shareholder may elect to receive their
dividends and capital grains distributions in cash instead of shares. However,
ESC will automatically convert a shareholder's distribution option so that the
shareholder reinvests all dividends and distributions in additional shares when
it learns that the postal or other delivery service is unable to deliver checks
or transaction confirmations to the shareholder's address of record. The Fund
will hold the returned distribution or redemption proceeds in a non
interest-bearing account in the shareholder's name until the shareholder updates
his/her address. No interest will accrue on amounts represented by uncashed
distribution or redemption checks.
PRINCIPAL UNDERWRITER
The Distributor is the principal underwriter for the Trust and with respect
to each class of the Fund (the "Distributor"). The Trust has entered into a
Principal Underwriting Agreement ( "Underwriting Agreement") with the
Distributor with respect to each class of the Fund. The Distributor is a
subsidiary of The BISYS Group, Inc.
The Distributor, as agent, has agreed to use its best efforts to find
purchasers for the shares. The Distributor may retain and employ representatives
to promote distribution of the shares and may obtain orders from broker-dealers,
and others, acting as principals, for sales of shares to them. The Underwriting
Agreement provides that the Distributor will bear the expense of preparing,
printing, and distributing advertising and sales literature and prospectuses
used by it.
All subscriptions and sales of shares by the Distributor are at the public
offering price of the shares, which is determined in accordance with the
provisions of the Trust's Declaration of Trust, By-Laws, current prospectuses
and SAI. All orders are subject to acceptance by the Trust, and the Trust
reserves the right, in its sole discretion, to reject any order received. Under
the Underwriting Agreement, the Trust is not liable to anyone for failure to
accept any order.
The Distributor has agreed that it will, in all respects, duly conform with
all state and federal laws applicable to the sale of the shares. The Distributor
has also agreed that it will indemnify and hold harmless the Trust and each
person who has been, is, or may be a Trustee or officer of the Trust against
expenses reasonably incurred by any of them in connection with any claim,
action, suit, or proceeding to which any of them may be a party that arises out
of or is alleged to arise out of any misrepresentation or omission to state a
material fact on the part of the Distributor or any other person for whose acts
the Distributor is responsible or is alleged to be responsible, unless such
misrepresentation or omission was made in reliance upon written information
furnished by the Trust.
The Underwriting Agreement provides that it will remain in effect as long
as its terms and continuance are approved annually (1) by a vote of a majority
of the Trust's Independent Trustees, and (2) by vote of a majority of the
Trust's Trustees, in each case, cast in person at a meeting called for that
purpose.
The Underwriting Agreement may be terminated, without penalty, on 60 days'
written notice by the Board of Trustees or by a vote of a majority of
outstanding shares subject to such agreement. The Underwriting Agreement will
terminate automatically upon its "assignment," as that term is defined in the
1940 Act.
From time to time, if, in the Distributor's judgment, it could benefit the
sales of shares, the Distributor may provide to selected broker-dealers
promotional materials and selling aids, including, but not limited to, personal
computers, related software, and data files.
ADDITIONAL TAX INFORMATION
REQUIREMENTS FOR QUALIFICATION AS A REGISTERED INVESTMENT COMPANY
The Fund intends to qualify for and elect the tax treatment applicable to a
regulated investment company ("RIC") under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"). (Such qualification does not involve
supervision of management or investment practices or policies by the Internal
Revenue Service.) In order to qualify as a RIC, the Fund must, among other
things, (i) derive at least 90% of its gross income from dividends, interest,
payments with respect to proceeds from securities loans, gains from the sale or
other disposition of securities or foreign currencies and other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in such securities; (ii) derive less than
30% of its gross income from the sale or other disposition of securities,
options, futures or forward contracts (other than those on foreign currencies),
or foreign currencies (or options, futures or forward contracts thereon) that
are not directly related to the RIC's principal business of investing in
securities (or options and futures with respect thereto) held for less than
three months (this requirement is repealed for Fund fiscal years beginning after
August 5, 1997); and (iii) diversify its holdings so that, at the end of each
quarter of its taxable year, (a) at least 50% of the market value of the Fund's
total assets is represented by cash, U.S. Government securities and other
securities limited in respect of any one issuer, to an amount not greater than
5% of the Fund's total assets and 10% of the outstanding voting securities of
such issuer, and (b) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S. Government
securities and securities of other regulated investment companies). By so
qualifying, the Fund is not subject to federal income tax if it timely
distributes its investment company taxable income and any net realized capital
gains. A 4% nondeductible excise tax will be imposed on the Fund to the extent
it does not meet certain distribution requirements by the end of each calendar
year. The Fund anticipates meeting such distribution requirements.
TAXES ON DIVIDENDS
Distributions will be taxable to shareholders whether made in shares or in
cash. Shareholders electing to receive distributions in the form of additional
shares will have a cost basis for federal income tax purposes in each share so
received equal to the net asset value of a share of the Fund on the reinvestment
date.
To calculate ordinary income for federal income tax purposes, shareholders
must generally include dividends paid by the Fund from its investment company
taxable income (net investment income plus net realized short-term capital
gains, if any). The Fund will include dividends it receives from domestic
corporations when the Fund calculates its gross investment income. The Fund
anticipates that some of such dividends will qualify for the 70%
dividends-received deduction for corporations. The Fund will inform shareholders
of the amounts that so qualify. Short-term capital gains are not eligible for
the dividends-received deduction.
From time to time, the Fund will distribute the excess of its net long-term
capital gains over its short-term capital loss to shareholders. For federal tax
purposes, shareholders must include such distributions when calculating their
long-term capital gains. Distributions of long-term capital gains are taxable as
such to a shareholder, no matter how long the shareholder has held the shares.
Distributions by the Fund reduce its NAV. A distribution that reduces the
Fund's NAV below a shareholder's cost basis is taxable as described above,
although from an investment standpoint, it is a return of capital. In
particular, if a shareholder buys Fund shares just before the Fund makes a
distribution, when the Fund makes the distribution the shareholder will receive
what is in effect a return of capital. Nevertheless, the shareholder must pay
taxes on the distribution. Therefore, shareholders should carefully consider the
tax consequences of buying Fund shares just before a distribution.
All distributions, whether received in shares or cash, must be reported by
each shareholder on his or her federal income tax return. Each shareholder
should consult his or her own tax adviser to determine the state and local tax
implications of Fund distributions.
If more than 50% of the value of the Fund's total assets at the end of a
fiscal year is represented by securities of foreign corporations and the Fund
elects to make foreign tax credits available to its shareholders, a shareholder
will be required to include in his gross income both cash dividends and the
amount the Fund advises him is his pro rata portion of income taxes withheld by
foreign governments from interest and dividends paid on the Fund's investments.
The shareholder will be entitled, however, to take the amount of such foreign
taxes withheld as a credit against his U.S. income tax, or to treat the foreign
tax withheld as an itemized deduction from his gross income, if that should be
to his advantage. In substance, this policy enables the shareholder to benefit
from the same foreign tax credit or deduction that he would have received if he
had been the individual owner of foreign securities and had paid foreign income
tax on the income therefrom. As in the case of individuals receiving income
directly from foreign sources, the credit or deduction is subject to a number of
limitations.
TAXES ON THE SALE OR EXCHANGE OF FUND SHARES
Upon a sale or exchange of Fund shares, a shareholder will realize a
taxable gain or loss depending on his or her basis in the shares. A shareholder
must treat such gains or losses as a capital gain or loss if the shareholder
held the shares as capital assets. Capital gain on assets held for more than
eighteen months is generally subject to a maximum federal income tax rate of 20%
for an individual. The maximum capital gains tax rate for capital assets held by
an individual for more than twelve months but not more than eighteen months is
generally 28%. Also, a shareholder must treat as long-term capital gains or
losses any capital gains or losses on Fund shares held for more than one year.
Generally, the Code will not allow a shareholder to realize a loss on shares he
or she has sold or exchanged and replaced within a sixty-one-day period
beginning thirty days before and ending thirty days after he or she sold or
exchanged the shares. The Code will treat a shareholder's loss on shares held
for six months or less as a long-term capital loss to the extent the shareholder
received distributions of net capital gains on such shares.
Shareholders who fail to furnish their taxpayer identification numbers
to the Fund and to certify as to its correctness and certain other shareholders
may be subject to a 31% federal income tax backup withholding requirement on
dividends, distributions of capital gains and redemption proceeds paid to them
by the Fund. If the withholding provisions are applicable, any such dividends or
capital gain distributions to these shareholders, whether taken in cash or
reinvested in additional shares, and any redemption proceeds will be reduced by
the amounts required to be withheld. Investors may wish to consult their own tax
advisers about the applicability of the backup withholding provisions.
GENERAL
The foregoing discussion relates solely to U.S. federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates). It does not reflect the special
tax consequences to certain taxpayers (e.g., banks, insurance companies, tax
exempt organizations and foreign persons). Shareholders are encouraged to
consult their own tax advisers regarding specific questions relating to federal,
state and local tax consequences of investing in shares of the Fund. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and foreign tax consequences of ownership of shares of the
Fund, including the possibility that such a shareholder may be subject to a U.S.
withholding tax at a rate of 30% (or at a lower rate under a tax treaty) on
amounts treated as income from U.S. sources under the Code.
CALCULATION OF PERFORMANCE DATA
Total return quotations for a class of shares of the Fund as they may
appear from time to time in advertisements are calculated by finding the average
annual compounded rates of return over one, five and ten year periods, or the
time periods for which such class of shares has been effective, whichever is
relevant, on a hypothetical $1,000 investment that would equate the initial
amount invested in the class to the ending redeemable value. To the initial
investment all dividends and distributions are added, and all recurring fees
charged to all shareholder accounts are deducted. The ending redeemable value
assumes a complete redemption at the end of the relevant periods.
Current yield quotations as they may appear, from time to time, in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of the Fund, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period.
Any given yield or total return quotation should not be considered
representative of the Fund's yield or total return for any future period.
ADDITIONAL INFORMATION
OTHER INFORMATION
Except as otherwise stated in its prospectuses or required by law, the Fund
reserves the right to change the terms of the offer stated in its prospectuses
without shareholder approval, including the right to impose or change fees for
services provided.
No dealer, salesman or other person is authorized to give any information
or to make any representation not contained in the Fund's prospectuses, SAI or
in supplemental sales literature issued by such Fund or the Distributor, and no
person is entitled to rely on any information or representation not contained
therein.
The Fund's prospectuses and SAI omit certain information contained in the
Trust's registration statement. The Fund has filed this SAI with the Securities
and Exchange Commission, and you may obtain a copy of the SAI by writing to the
Securities and Exchange Commission's principal office in Washington, D.C. To
obtain a copy of the SAI from the Securities and Exchange Commission, you will
have to pay the fee prescribed by their rules and regulations.
FINANCIAL STATEMENTS
The audited statement of assets and liabilities and the reports thereon of
KPMG Peat Marwick LLP for the Fund will be filed by amendment.
<PAGE>
APPENDIX A
COMMON AND PREFERRED STOCK RATINGS
A. S&P'S EARNINGS AND DIVIDEND RANKINGS FOR COMMON STOCKS
Because the investment process involves assessment of various factors, such
as product and industry position, corporate resources, and financial policy,
with results that make some common stocks more highly esteemed than others,
Standard & Poor's Ratings Group ("S&P") believes that earnings and dividend
performance is the end result of the interplay of these factors and that, over
the long run, the record of this performance has a considerable bearing on
relative quality. S&P rankings, however, do not reflect all of the factors,
tangible or intangible, that bear on stock quality.
Growth and stability of earnings and dividends are deemed key elements in
establishing S&P earnings and dividend rankings for common stocks, which
capsulize the nature of this record in a single symbol.
S&P has established a computerized scoring system based on per share
earnings and dividend records of the most recent ten years, a period deemed long
enough to measure a company's performance under varying economic conditions. S&P
measures growth, stability within the trend line, and cyclicality. The ranking
system also makes allowances for company size, since large companies have
certain inherent advantages over small ones. From these, scores for earnings and
dividends are determined.
The final score for each stock is measured against a scoring matrix
determined by analysis of the scores of a large and representative sample which
is reviewed and sometimes modified with the following ladder of rankings:
A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A- Above Average B- Lower
S&P believes its rankings are not a forecast of future market price
performance, but are basically an appraisal of past performance of earnings and
dividends, and relative current standing.
B. MOODY'S COMMON STOCK RANKINGS
Moody's Investors Service ("Moody's") presents a concise statement of the
important characteristics of a company and an evaluation of the grade (quality)
of its common stock. Data presented includes: (a) capsule stock information
which reveals short and long term growth and yield afforded by the indicated
dividend, based on a recent price; (b) a long term price chart which shows
patterns of monthly stock price movements and monthly trading volumes; (c) a
breakdown of a company's capital account which aids in determining the degree of
conservatism or financial leverage in a company's balance sheet; (d) interim
earnings for the current year to date, plus three previous years; (e) dividend
information; (f) company background; (g) recent corporate developments; (h)
prospects for a company in the immediate future and the next few years; and (i)
a ten year comparative statistical analysis.
This information provides investors with information on what a company
does, how it has performed in the past, how it is performing currently, and what
its future performance prospects appear to be.
These characteristics are then evaluated and result in a grading, or
indication of quality. The grade is based on an analysis of each company's
financial strength, stability of earnings, and record of dividend payments.
Other considerations include conservativeness of capitalization, depth and
caliber of management, accounting practices, technological capabilities, and
industry position. Evaluation is represented by the following grades:
(1) High Grade
(2) Investment Grade
(3) Medium Grade
(4) Speculative Grade
C. MOODY'S PREFERRED STOCK RATINGS
Preferred stock ratings and their definitions are as follows:
1. AAA: An issue that is rated AAA is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
2. AA: An issue that is rated AA is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
3. A: An issue that is rated A is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the AAA
and AA classification, earnings and asset protection are, nevertheless, expected
to be maintained at adequate levels.
4. BAA: An issue that is rated BAA is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
5. BA: An issue that is rated BA is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
6. B: An issue that is rated B generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
7. CAA: An issue that is rated CAA is likely to be in arrears on
dividend payments. This rating designation does not purport to indicate the
future status of payments.
8. CA: An issue that is rated CA is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payments.
9. C: This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category, the modifier 2 indicates a mid-range ranking
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
CORPORATE BOND RATINGS
A. S&P CORPORATE BOND RATINGS
An S&P corporate bond rating is a current assessment of the
creditworthiness of an obligor, including obligors outside the United States,
with respect to a specific obligation. This assessment may take into
consideration obligors such as guarantors, insurers, or lessees. Ratings of
foreign obligors do not take into account currency exchange and related
uncertainties. The ratings are based on current information furnished by the
issuer or obtained by S&P from other sources it considers reliable.
The ratings are based, in varying degrees, on the following considerations:
a. Likelihood of default - capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
b. Nature of and provisions of the obligation; and
c. Protection afforded by and relative position of the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from AA to A may be modified by the addition of a plus or minus
sign to show relative standing within the major rating categories.
Bond ratings are as follows:
1. AAA - Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
2. AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
3. A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
4. BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
5. BB, B, CCC, CC AND C - Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
B. MOODY'S CORPORATE BOND RATINGS
Moody's ratings are as follows:
1. AAA - Bonds which are rated AAA are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
2. AA - Bonds which are rated AA are judged to be of high quality by all
standards. Together with the AAA group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in AAA securities.
3. A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
4. BAA - Bonds which are rated BAA are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
5. BA - Bonds which are rated BA are judged to have speculative elements.
Their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
6. B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
7. Caa - Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
8. Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
market shortcomings.
9. C - Bonds which are rated as C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from AA through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
<PAGE>
EVERGREEN SPECIALTY GROWTH AND BALANCED FUNDS
200 BERKELEY STREET, BOSTON, MASSACHUSETTS
(800) 343-2898
STATEMENT OF ADDITIONAL INFORMATION DATED
NOVEMBER 10, 1997 FOR THE FOLLOWING SERIES OF THE
EVERGREEN EQUITY TRUST (THE "TRUST"):
EVERGREEN BALANCED FUND
(THE "FUND")
This statement of additional information ("SAI") provides additional
information about all classes of shares of the Fund. It is not a prospectus and
you should read it in conjunction with the prospectus of the Fund dated November
10, 1997, as supplemented from time to time. You may obtain a copy of the
prospectus from the Fund's distributor, Evergreen Distributor, Inc.
22171
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<PAGE>
TABLE OF CONTENTS
INVESTMENT POLICIES......................................................3
Investment Restrictions And Guidelines .........................9
MANAGEMENT OF THE TRUST.................................................11
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.....................13
INVESTMENT ADVISORY AND OTHER SERVICES..................................14
Investment Advisory Services...................................14
Distribution Plans.............................................15
Additional Service Providers...................................16
BROKERAGE ALLOCATION AND OTHER PRACTICES................................17
Brokerage Commissions..........................................17
Selection of Brokers...........................................17
General Brokerage Policies.....................................18
ORGANIZATION............................................................18
Form of Organization...........................................18
Description of Shares..........................................18
Voting Rights..................................................19
Limitation of Trustees' Liability..............................19
PURCHASE, REDEMPTION AND PRICING OF SHARES..............................19
How the Fund Offers Shares to the Public.......................19
Sales Charge Waivers or Reductions.............................21
Exchanges......................................................22
How The Fund Values its Shares.................................23
Shareholder Services...........................................23
PRINCIPAL UNDERWRITER...................................................24
ADDITIONAL TAX INFORMATION..............................................24
22171
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<PAGE>
CALCULATION OF PERFORMANCE DATA........................................26
ADDITIONAL INFORMATION.................................................27
Other Information.............................................27
FINANCIAL STATEMENTS...................................................27
APPENDIX A............................................................A-1
22171
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<PAGE>
INVESTMENT POLICIES
SECURITIES AND INVESTMENT PRACTICES
The investment objective of the Fund and a description of the securities in
which the Fund may invest are set forth in the Fund's prospectuses. The
following expands upon the discussion in the prospectuses regarding certain
investments of the Fund.
U.S GOVERNMENT OBLIGATIONS
The types of U.S. Government obligations in which the Fund may invest
generally include obligations that the U.S. Government agencies or
instrumentalities issued or guaranteed.
These securities are backed by:
(1) the discretionary authority of the U.S. Government to purchase certain
obligations of agencies or instrumentalities; or
(2) the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities that may not always receive financial
support from the U.S. Government are:
(i) Farm Credit System, including the National Bank for Cooperatives, Farm
Credit Banks and Banks for Cooperatives;
(ii) Farmers Home Administration;
(iii) Federal Home Loan Banks;
(iv) Federal Home Loan Mortgage Corporation;
(v) Federal National Mortgage Association;
(vi) Government National Mortgage Association; and
(vii) Student Loan Marketing Association
GNMA SECURITIES
The Fund may invest in securities issued by the Government National
Mortgage Association ("GNMA"), a wholly-owned U.S. Government corporation, which
guarantees the timely payment of principal and interest, but not premiums paid
to purchase these instruments. The market value and interest yield of these
instruments can vary due to market interest rate fluctuations and early
prepayments of underlying mortgages. These securities represent ownership in a
pool of federally insured mortgage loans. GNMA certificates consist of
underlying mortgages with a maximum maturity of 30 years. However, due to
scheduled and unscheduled principal payments, GNMA certificates have a shorter
average maturity and, therefore, less principal volatility than a comparable
30-year bond. Since prepayment rates vary widely, it is not possible to
accurately predict the average maturity of a particular GNMA pool. The scheduled
monthly interest and principal payments relating to mortgages in the pool will
be "passed through" to investors. GNMA securities differ from conventional bonds
in that principal is paid back to the certificate holders over the life of the
loan rather than at maturity. As a result, there will be monthly scheduled
payments of principal and interest. In addition, there may be unscheduled
principal payments representing prepayments on the underlying mortgages.
Although GNMA certificates may offer yields higher than those available
from other types of U.S. Government securities, GNMA certificates may be less
effective than other types of securities as a means of "locking in" attractive
long-term rates because of the prepayment feature. For instance, when interest
rates decline, the value of a GNMA certificate likely will not rise as much as
comparable debt securities due to the prepayment feature. In addition, these
prepayments can cause the price of a GNMA certificate originally purchased at a
premium to decline in price compared to its par value, which may result in a
loss.
RESTRICTED AND ILLIQUID SECURITIES
Pursuant to Rule 144A under the Securities Act of 1933 ("Rule 144A"), the
Board of Trustees of the Trust determines the liquidity of certain restricted
securities Rule 144A is a non-exclusive, safe-harbor for certain secondary
market transactions involving securities subject to restrictions on resale under
federal securities laws. Rule 144A provides an exemption from registration for
resales of otherwise restricted securities to qualified institutional buyers.
Rule 144A was expected to further enhance the liquidity of the secondary market
for securities eligible for sale under Rule 144A. In determining the liquidity
of certain restricted securities the Trustees consider: (i) the frequency of
trades and quotes for the security; (ii) the number of dealers willing to
purchase or sell the security and the number of other potential buyers; (iii)
dealer undertakings to make a market in the security; and (iv) the nature of the
security and the nature of the marketplace trades.
WHEN-ISSUED, DELAYED-DELIVERY AND FORWARD COMMITMENT TRANSACTIONS
The Fund may purchase securities on a when-issued or delayed delivery basis
and may purchase or sell securities on a forward commitment basis. These
transactions involve the purchase of debt obligations with delivery and payment
normally taking place within a month or more after the date of commitment to
purchase. The Fund will only make commitments to purchase obligations on a
when-issued basis with the intention of actually acquiring the securities, but
may sell them before the settlement date. The when-issued securities are subject
to market fluctuation, and no interest accrues on the security to the purchaser
during this period. The payment obligation and the interest rate that will be
received on the securities are each fixed at the time the purchaser enters into
the commitment.
Segregated accounts will be established with the custodian, and the Fund
will maintain liquid assets in an amount at least equal in value to its
commitments to purchase when-issued securities. If the value of these assets
declines, the Fund will place additional liquid assets in the account on a daily
basis so that the value of the assets in the account is equal to the amount of
such commitments.
Purchasing obligations on a when-issued basis is a form of leveraging and
can involve a risk that the yields available in the market when the delivery
takes place may actually be higher than those obtained in the transaction
itself. In that case there could be an unrealized loss at the time of delivery.
The Fund uses when-issued, delayed-delivery and forward commitment
transactions to secure what it considers to be an advantageous price and yield
at the time of purchase. When the Fund engages in when- issued, delayed-delivery
and forward commitment transactions, it relies on the buyer or seller, as the
case may be, to consummate the sale. If the buyer or seller fails to complete
the sale, then the Fund may miss the opportunity to obtain the security at a
favorable price or yield.
Typically, no income accrues on securities the Fund has committed to
purchase prior to the time delivery of the securities is made, although the Fund
may earn income on securities it has deposited in a segregated account. When
purchasing a security on a when-issued, delayed delivery, or forward commitment
basis, the Fund assumes the rights and risks of ownership of the security,
including the risk of price and yield fluctuations, and takes such fluctuations
into account when determining its net asset value. Because the Fund is not
required to pay for the security until the delivery date, these risks are in
addition to the risks associated with its other investments.
LOANS OF SECURITIES
To generate income and offset expenses, the Fund may lend portfolio
securities to broker-dealers and other financial institutions. Loans of
securities by the Fund may not exceed 30% of the value of its total assets.
While securities are on loan, the borrower will pay the Fund any income accruing
on the security. The Fund may invest any collateral it receives in additional
portfolio securities, such as U.S. Treasury notes, certificates of deposit,
other high-grade, short-term obligations or interest bearing cash equivalents.
Gains or losses in the market value of a security lent will affect the Fund and
its shareholders.
When the Fund lends its securities, it will require the borrower to give
the Fund collateral in cash or government securities. The Fund will require
collateral in an amount equal to at least 100% of the current market value of
the securities lent, including accrued interest. The Fund has the right to call
a loan and obtain the securities lent any time on notice of not more than five
business days. The Fund may pay reasonable fees in connection with such loans.
Although voting rights attendant to securities lent pass to the borrower,
the Fund may call such loans at any time and may vote the securities if it
believes a material event affecting the investment is to occur. The Fund may
experience a delay in receiving additional collateral or in recovering the
securities lent or may even suffer a loss of rights in the collateral should the
borrower of the securities fail financially. The Fund may only make loans to
borrowers deemed to be of good standing, under standards approved by the Board
of Trustees, when the income to be earned from the loan justifies the attendant
risks.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with entities that are
registered as U.S. Government securities dealers, including member banks of the
Federal Reserve System having at least $1 billion in assets, primary dealers in
U.S. Government securities or other financial institutions believed by the
Fund's investment adviser (as hereinafter defined) to be creditworthy. In a
repurchase agreement, the Fund obtains a security and simultaneously commits to
return the security to the seller (a member bank of the Federal Reserve System
or recognized securities dealer) at an agreed upon price (including principal
and interest) on an agreed upon date within a number of days (usually not more
than seven) from the date of purchase. The resale price reflects the purchase
price plus an agreed upon market rate of interest which is unrelated to the
coupon rate or maturity of the underlying security. A repurchase agreement
involves the obligation of the seller to pay the agreed upon price, which
obligation is in effect secured by the value of the underlying security.
The Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily. To
the extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Fund's investment adviser believes that under the
regular procedures normally in effect for custody of the Fund's portfolio
securities subject to repurchase agreements, a court of competent jurisdiction
would rule in favor of the Fund and allow retention or disposition of such
securities. The Fund will only enter into repurchase agreements with banks and
other recognized financial institutions, such as broker-dealers, which are
deemed by the investment adviser to be creditworthy pursuant to guidelines
established by the Board of Trustees.
REVERSE REPURCHASE AGREEMENTS
As described herein, the Fund may also enter into reverse repurchase
agreements. These transactions are similar to borrowing cash. In a reverse
repurchase agreement, the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in return
for a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed upon rate.
The use of reverse repurchase agreements may enable the Fund to avoid
selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase agreements
does not ensure that the Fund will be able to avoid selling portfolio
instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in
a dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
FINANCIAL FUTURES CONTRACTS
The Fund may enter into financial futures contracts as a hedge against
decreases or increases in the value of securities it holds or intends to
acquire.
The Fund will not maintain open positions in futures contracts it has sold
or call options it has written on futures contracts if, in the aggregate, the
value of the open positions (marked to market) exceeds the current market value
of its securities portfolio plus or minus the unrealized gain or loss on those
open positions, adjusted for the correlation of volatility between the hedged
securities and the futures contracts. If this limitation is exceeded at any
time, the Fund will take prompt action to close out a sufficient number of open
contracts to bring its open futures and options positions within this
limitation.
OPTIONS
The Fund may buy or sell (i.e., write) put and call options on securities
it holds or intends to acquire. The Fund may also buy and sell options on
financial futures contracts. The Fund will use options as a hedge against
decreases or increases in the value of securities it holds or intends to
acquire. The Fund may purchase put and call options for the purpose of
offsetting previously written put and call options of the same series.
The Fund may write only covered options. With regard to a call option, this
means that the Fund will own, for the life of the option, the securities subject
to the call option. The Fund will cover put options by holding, in a segregated
account, liquid assets having a value equal to or greater than the price of
securities subject to the put option. If the Fund is unable to effect a closing
purchase transaction with respect to the covered options it has sold, it will
not be able to sell the underlying securities or dispose of assets held in a
segregated account until the options expire or are exercised.
"MARGIN" IN FUTURES TRANSACTIONS
Unlike the purchase or sale of a security, the Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, the Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury bills
with its custodian (or the broker, if legally permitted). The nature of initial
margin in futures transactions is different from that of margin in securities
transactions in that futures contract initial margin does not involve the
borrowing of funds by the Fund to finance the transactions. Initial margin is in
the nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day, the Fund pays
or receives cash, called "variation margin", equal to the daily change in value
of the futures contract. This process is known as "marking to market". Variation
margin does not represent a borrowing or loan by the Fund but is instead
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing its daily net asset value, the
Fund will mark-to-market its open futures positions. The Fund is also required
to deposit and maintain margin when it writes call options on futures contracts.
The Fund may not buy or sell futures contracts or related options if,
immediately thereafter, the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets.
FOREIGN SECURITIES
The Fund may invest in foreign securities or U.S. securities traded in
foreign markets. Permissible investments may consist of obligations of foreign
branches of U.S. banks and of foreign banks, including European certificates of
deposit, European time deposits, Canadian time deposits and Yankee certificates
of deposit, and investments in Canadian commercial paper, foreign securities and
Europaper. These instruments may subject the Fund to investment risks that
differ in some respects from those related to investments in obligations of U.S.
domestic issuers. Such risks include future adverse political and economic
developments, the possible imposition of withholding taxes on interest or other
income, possible seizure, nationalization, or expropriation of foreign deposits,
the possible establishment of exchange controls or taxation at the source,
greater fluctuations in value due to changes in exchange rates, or the adoption
of other foreign governmental restrictions which might adversely affect the
payment of principal and interest on such obligations. Such investments may also
entail higher custodial fees and sales commissions than domestic investments.
Foreign issuers of securities or obligations are often subject to accounting
treatment and engage in business practices different from those respecting
domestic issuers of similar securities or obligations. Foreign branches of U.S.
banks and foreign banks may be subject to less stringent reserve requirements
than those applicable to domestic branches of U.S. banks.
FOREIGN CURRENCY TRANSACTIONS
As one way of managing exchange rate risk, the Fund may enter into forward
currency exchange contracts (agreements to purchase or sell currencies at a
specified price and date). The exchange rate for the transaction (the amount of
currency the Fund will deliver and receive when the contract is completed) is
fixed when the Fund enters into the contract. The Fund usually will enter into
these contracts to stabilize the U.S. dollar value of a security it has agreed
to buy or sell. The Fund intends to use these contracts to hedge the U.S. dollar
value of a security it already owns, particularly if the Fund expects a decrease
in the value of the currency in which the foreign security is denominated.
Although the Fund will attempt to benefit from using forward contracts, the
success of its hedging strategy will depend on the Adviser's ability to predict
accurately the future exchange rates between foreign currencies and the U.S.
dollar. The value of the Fund's investments denominated in foreign currencies
will depend on the relative strengths of those currencies and the U.S. dollar,
and the Fund may be affected favorably or unfavorably by changes in the exchange
rates or exchange control regulations between foreign currencies and the U.S.
dollar. Changes in foreign currency exchange rates also may affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by the Fund. The Fund may also purchase and sell options related to
foreign currencies in connection with hedging strategies.
HIGH YIELD BONDS
The Fund may invest in high yield, high risk bonds. While investment in
high yield bonds provides opportunities to maximize return over time, investors
should be aware of the following risks associated with high yield bonds:
(1) High yield bonds are rated below investment grade, i.e., BB or lower by
Standard & Poor's Rating Group ("S&P") or Ba or lower by Moody's Investors
Service ("Moody's"). Securities so rated are considered predominantly
speculative with respect to the ability of the issuer to meet principal and
interest payments.
(2) The lower ratings of these securities reflect a greater possibility
that adverse changes in the financial condition of the issuer or in general
economic conditions, or both, or an unanticipated rise in interest rates may
impair the ability of the issuer to make payments of interest and principal,
especially if the issuer is highly leveraged. Such issuer's ability to meet its
debt obligations may also be adversely affected by specific corporate
developments or the issuer's inability to meet specific projected business
forecasts or the unavailability of additional financing. Also, an economic
downturn or an increase in interest rates may increase the potential for default
by the issuers of these securities.
(3) Their value may be more susceptible to real or perceived adverse
economic, company or industry conditions and publicity than is the case for
higher quality securities.
(4) Their value, like those of other fixed income securities, fluctuates in
response to changes in interest rates, generally rising when interest rates
decline and falling when interest rates rise. For example, if interest rates
increase after a fixed income security is purchased, the security, if sold prior
to maturity, may return less than its cost. The prices of below-investment grade
bonds, however, are generally less sensitive to interest rate changes than the
prices of higher-rated bonds, but are more sensitive to adverse or positive
economic changes or individual corporate developments.
(5) The secondary market for such securities may be less liquid at certain
times than the secondary market for higher quality debt securities, which may
adversely effect (1) the market price of the security, (2) the Fund's ability to
dispose of particular issues and (3) the Fund's ability to obtain accurate
market quotations for purposes of valuing its assets.
(6) Zero coupon bonds and PIKs involve additional special considerations.
For example, zero coupon bonds pay no interest to holders prior to maturity of
interest. PIKs are debt obligations that provide that the issuer may, at its
option, pay interest on such bonds in cash or in the form of additional debt
obligations. Such investments may experience greater fluctuation in value due to
changes in interest rates than debt obligations that pay interest currently.
Even though these investments do not pay current interest in cash, the Fund is,
nonetheless, required by tax laws to accrue interest income on such investments
and to distribute such amounts at least annually to shareholders. Thus, the Fund
could be required at times to liquidate investments in order to fulfill its
intention to distribute substantially all of its net income as dividends. The
Fund will not be able to purchase additional income producing securities with
cash used to make such distributions, and its current income ultimately may be
reduced as a result.
The Fund may also invest in unrated securities that, in the investment
adviser's judgment, offer comparable yields and risks as securities that are
rated. It is possible for securities rated D or C-, respectively, to have
defaulted on payments of principal and/or interest at the time of investment.
(See the Appendix to this SAI for a description of these rating categories.) The
Fund intends to invest in D rated debt only in cases when, in the investment
adviser's judgment, there is a distinct prospect of improvement in the issuer's
financial position as a result of the completion of reorganization or otherwise.
The investment adviser considers the ratings of S&P and Moody's assigned to
various securities, but does not rely solely on these ratings because (1) S&P
and Moody's assigned ratings are based largely on historical financial data and
may not accurately reflect the current financial outlook of companies; and (2)
there can be large differences among the current financial conditions of issuers
within the same category.
INVESTMENT RESTRICTIONS AND GUIDELINES
FUNDAMENTAL POLICIES
The Fund has adopted the fundamental investment restrictions set forth
below which may not be changed without the vote of a majority of the Fund's
outstanding shares, as defined in the Investment Company Act of 1940 (the "1940
Act"). Unless otherwise stated, all references to the assets of the Fund are in
terms of current market value.
DIVERSIFICATION
The Fund may not make any investment that is inconsistent with its
classification as a diversified investment company under the 1940 Act.
CONCENTRATION
The Fund may not concentrate its investments in the securities of issuers
primarily engaged in any particular industry (other than securities that are
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities).
ISSUING SENIOR SECURITIES
Except as permitted under the 1940 Act, the Fund may not issue senior
securities.
BORROWING
The Fund may not borrow money, except to the extent permitted by applicable
law.
UNDERWRITING
The Fund may not underwrite securities issued by other persons, except
insofar as the Fund may be deemed an underwriter in connection with the
disposition of its portfolio securities.
REAL ESTATE
The Fund may not purchase or sell real estate, except that, to the extent
permitted applicable by law, the Fund may invest in (a) securities that are
directly or indirectly secured by real estate, or (b) securities issued by
issuers that invest in real estate.
COMMODITIES
The Fund may not purchase or sell commodities or contracts on commodities
except to the extent that the Fund may engage in financial futures contacts and
related options and currency contracts and related options and may otherwise do
so in accordance with applicable law and without registering as a commodity pool
operator under the Commodity Exchange Act.
LOANS TO OTHER PERSONS
The Fund may not make loans to other persons, except that the Fund may lend
its portfolio securities in accordance with applicable law. The acquistion of
investment securities or other investment instruments shall not be deemed
instruments to be the making of a loan.
GUIDELINES
Unlike the Fundamental Policies above, the following guidelines may be
changed by the Trust's Board of Trustees without shareholder approval.
DIVERSIFICATION
Under the 1940 Act, with respect to the 75% of its total assets, a
diversified investment company may not invest more than 5% of its total assets,
determined at market or other fair value at the time of purchase, in the
securities of any one issuer, or invest in more than 10% of the outstanding
voting securities of any one issuer, determined at the time of purchase. These
limitations do not apply to investments in securities issued or guaranteed by
the U.S. Government or its agencies or instrumentalities.
BORROWINGS
The Fund may borrow from banks in an amount up to 33 1/3% of its total
assets, taken at market value. The Fund may only borrow as a temporary measure
for extraordinary or emergency purposes such as the redemption of Fund shares.
The Fund may not purchase securities while borrowings are outstanding except to
exercise prior commitments and to exercise subscription rights (as defined in
the 1940 Act) or enter into reverse repurchase agreements, in amounts up to 33
1/3 % of its total assets (including the amount borrowed). The Fund may borrow
up to an additional 5% of its total assets for temporary purposes. The Fund may
obtain such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities. The Fund may purchase securities on margin
and engage in short sales to the extent permitted by applicable law.
ILLIQUID SECURITIES
The Fund may not invest more than 15% of its net assets in securities that
are Illiquid. A security is Illiquid when the Fund may not dispose of it in the
ordinary course of business within seven days at approximately the value at
which the Fund has the investment on its books.
INVESTMENT IN OTHER INVESTMENT COMPANIES
The Fund may purchase the shares of other investment companies to the
extent permitted under the 1940 Act. Currently, the Fund may not (1) own more
than 3% of the outstanding voting stock of another investment company, (2)
invest more than 5% of its assets in any single investment company, and (3)
invest more than 10% of its assets in investment companies. However, the Fund
may invest all of its investable assets in securities of a single open-end
management investment company with substantially the same fundamental investment
objectives, policies and limitations as the Fund.
SHORT SALES
The Fund may not make short sales of securities or maintain a short
position unless, at all times when a short position is open, it owns an equal
amount of such securities or of securities which, without payment of any further
consideration, are convertible into or exchangeable for securities of the same
issue as, and equal in amount to, the securities sold short. The Fund may effect
a short sale in connection with an underwriting in which the Fund is a
participant.
MANAGEMENT OF THE TRUST
Set forth below are the Trustees and officers of the Trust and their
principal occupations and some of their affiliations over the last five years.
Unless otherwise indicated, the address for each Trustee and officer is 200
Berkeley Street, Boston, Massachusetts 02116. Each Trustee is also a Trustee of
each of the other Trusts in the Evergreen Fund complex other than Evergreen
Variable Trust of which Messrs. Howell, Slaton, and Scofield are the only
Trustees.
<TABLE>
<CAPTION>
NAME AND DATE OF BIRTH POSITION WITH TRUST PRINCIPAL OCCUPATIONS FOR LAST FIVE YEARS
- ------------------------------- -------------------------- -------------------------------------------------------------
<S> <C> <C>
Laurence B. Ashkin Trustee Real estate developer and construction consultant;
(DOB: 2/2/28) President of Centrum Equities and Centrum
Properties, Inc.
Charles A. Austin III Trustee Investment Counselor to Appleton Partners, Inc.;
(DOB: 10/23/34) former Managing Director, Seaward Management
Corporation (investment advice).
K. Dun Gifford Trustee Trustee, Treasurer and Chairman of the Finance
(DOB: 10/12/38) Committee, Cambridge College; Chairman Emeritus
and Director, American Institute of Food and
Wine; Chairman and President, Oldways Preservation
and Exchange Trust (education); former Chairman of
the Board, Director, and Executive Vice President,
The London Harness Company; former Managing Partner,
Roscommon Capital Corp.; former Chief Executive Officer,
Gifford Gifts of Fine Foods; former Chairman, Gifford,
Drescher & Associates (environmental consulting); former
Director, Keystone Investments, Inc.
James S. Howell Chairman of the Former Chairman of the Distribution Foundation for
(DOB: 8/13/24) Board of Trustees the Carolinas; former Vice President of Lance Inc.
(food manufacturing).
Leroy Keith, Jr. Trustee Director of Phoenis Total Return Fund and Equifax,
Inc.; Trustee of Phoenix Series Fund, Phoenix
(DOB: 2/14/39) Multi-Portfolio Fund, and The Phoenix Big Edge
Series Fund; and former President, Morehouse
College.
Gerald M. McDonnell Trustee Sales Representative with Nucor-Yamoto, Inc.
(DOB: 7/14/39) (steel producer).
Thomas L. McVerry Trustee Former Vice President and Director of Rexham
(DOB: 8/2/39) Corporation; and former Director of Carolina
Cooperative Federal Credit Union.
*William Walt Pettit Trustee Partner in the law firm of Holcomb and Pettit, P.A.
(DOB: 8/26/55)
David M. Richardson Trustee Vice Chair and former Executive Vice President,
(DOB: 9/14/41) DHR International, Inc. (executive recruitment);
former Senior Vice President, Boyden International
Inc. (executive recruitment); and Director,
Commerce and Industry Association of New
Jersey, 411 International, Inc., and J&M Cumming
Paper Co.
Russell A. Salton, III MD Trustee Medical Director, U.S. Health Care/Aetna Health
(DOB: 6/2/47) Services; and former Managed Health Care
Consultant; former President, Primary Physician
Care.
Michael S. Scofield Trustee Attorney, Law Offices of Michael S. Scofield.
(DOB: 2/20/43)
Richard J. Shima Trustee Chairman, Environmental Warranty, Inc. (insurance
(DOB: 8/11/39) agency); Executive Consultant, Drake Beam Morin,
Inc. (executive outplacement); Director of Connecticut
Natural Gas Corporation, Hartford Hospital, Old State
House Association, Middlesex Mutual Assurance Company,
and Enhance Financial Services, Inc.; Chairman, Board of
Trustees, Hartford Graduate Center; Trustee, Greater
Hartford YMCA; former Director, Vice Chairman and Chief
Investment Officer, The Travelers Corporation; former
Trustee, Kingswood-Oxford School; and former
Managing Director and Consultant, Russell Miller, Inc.
John J. Pileggi President and Senior Managing Director, Furman Selz LLC since
Treasurer 1992; Managing Director from 1984 to 1992;
Consultant to BISYS Fund Services since 1996;
George O. Martinez Secretary Senior Vice President and Director of
Administration and Regulatory Services, BISYS
Fund Services; Vice President/Assistant General
Counsel, Alliance Capital Management from 1988
to 1995; 3435 Stelzer Road, Columbus, Ohio.
</TABLE>
*This Trustee may be considered an interested Trustee within the
meaning of the 1940 Act.
The officers of the Trust are all officers and/or employees of BISYS
Fund Services ("BISYS"), except for Mr. Pileggi, who is a consultant to BISYS.
For more information on BISYS, see "Sub-Administrator" below.
Listed below is the estimated Trustee compensation for the twelve-month
period ended June 30, 1998.
COMPENSATION TABLE
Name Of Person, Aggregate Total
Postion Compensation Compensation
From Registant From Registrant
And Fund
Complex Paid To
Directors
Laurence B. Ashkin $27,458 $68,252
Charles A. Austin $22,024 $55,639
K. Dun Gifford $20,177 $51,160
James S. Howell $37,358 $97,924
Leroy Keith Jr. $20,939 $52,641
Gerald M. McDonnell $30,988 $79,369
Thomas L. McVerry $33,345 $87,132
William Walt Petit $30,378 $78,184
David M. Richardson $22,024 $55,639
Russell A. Salton, III $30,450 $78,592
Michael S. Scofield $31,060 $65,188
Richard J. Shima $25,584 $18,366
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of the date of this SAI, the officers and Trustees of the Trust owned as
a group less than 1% of the outstanding Class A, Class B, Class C or Class Y
shares of the Fund. As of the same date, no person, to the Fund's knowledge,
owned beneficially or of record more than 5% of a class of the Fund's
outstanding shares.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY SERVICES
INVESTMENT ADVISER
The investment adviser to the Fund (the "Adviser") is KEYSTONE INVESTMENT
MANAGEMENT COMPANY, 200 Berkeley Street, Boston, Massachusetts 02116. The
Adviser is a subsidiary of First Union Corporation, which is a bank holding
company headquartered at 301 South College Street, Charlotte North Carolina
28288. First Union Corporation and its subsidiaries provide a broad range of
financial services to individuals and businesses throughout the United States.
The Fund pays the Adviser a fee for its services at the annual rate set forth
below:
Aggregate Net
1.5% of Gross Dividend Asset Value of the
Management Fee and Interest Income plus Shares of the Fund
- ----------------------------------------------------------------------------
0.60% of the first $100,000,000, plus
0.55% of the next $100,000,000, plus
0.50% of the next $100,000,000, plus
0.45% of the next $100,000,000, plus
0.40% of the next $100,000,000, plus
0.35% of the next $500,000,000, plus
0.30% of amounts over $1,000,000,000
The Adviser's fee is computed as of the close of business each business day and
payable monthly.
INVESTMENT ADVISORY CONTRACTS
On behalf of the Fund, the Trust has entered into an investment advisory
agreement with the Adviser (the "Advisory Agreement") . Under the Advisory
Agreement, and subject to the supervision of the Trust's Board of Trustees, the
Adviser furnishes to the Fund investment advisory, management and administrative
services, office facilities, and equipment in connection with its services for
managing the investment and reinvestment of the Fund's assets. The Adviser pays
for all of the expenses incurred in connection with the provision of its
services. The Fund pays for all charges and expenses, other than those
specifically referred to as being borne by the Adviser, including, but not
limited to, (1) custodian charges and expenses; (2) bookkeeping and auditors'
charges and expenses; (3) transfer agent charges and expenses; (4) fees and
expenses of Independent Trustees; (5) brokerage commissions, brokers' fees and
expenses; (6) issue and transfer taxes; (7) costs and expenses under the
Distribution Plan (as applicable) (8) taxes and trust fees payable to
governmental agencies; (9) the cost of share certificates; (10) fees and
expenses of the registration and qualification of the Fund and its shares with
the Securities and Exchange Commission ("SEC") or under state or other
securities laws; (11) expenses of preparing, printing and mailing prospectuses,
statements of additional information, notices, reports and proxy materials to
shareholders of the Fund; (12) expenses of shareholders' and Trustees' meetings;
(13) charges and expenses of legal counsel for the Fund and for the Independent
Trustees of the Trust on matters relating to the Fund; (14) charges and expenses
of filing annual and other reports with the SEC and other authorities; and all
extraordinary charges and expenses of the Fund.
The Advisory Agreement continues in effect for two years from its effective
date and, thereafter, from year to year only if approved at least annually by
the Board of Trustees of the Trust or by a vote of a majority of the Fund's
outstanding shares. In either case, the terms of the Advisory Agreement and
continuance thereof must be approved by the vote of a majority of the
Independent Trustees (Trustees who are not interested persons of the Fund, as
defined in the 1940 Act) cast in person at a meeting called for the purpose of
voting on such approval. The Advisory Agreement may be terminated, without
penalty, on 60 days' written notice by the Trust's Board of Trustees or by a
vote of a majority of outstanding shares. The Advisory Agreement will terminate
automatically upon its "assignment" as that term is defined in the 1940 Act.
GENERAL
The Trust has adopted procedures pursuant to Rule 17a-7 of the 1940 Act
("Rule 17a-7 Procedures"). The Rule 17a-7 Procedures permit the Fund to buy or
sell securities from another investment company for which a subsidiary of First
Union Corporation is an investment adviser. The Rule 17a-7 Procedures also allow
the Fund to buy or sell securities from other advisory clients for whom a
subsidiary of First Union Corporation is an investment adviser. The Fund may
engage in such transactions if they are equitable to each participant and
consistent with each participant's investment objective.
DISTRIBUTOR
Evergreen Distributor, Inc. (the "Distributor"), markets the Funds through
broker-dealers and other financial representatives. Its address is 125 W. 55th
Street, New York, NY 10019.
DISTRIBUTION PLANS
Distribution fees are accrued daily and paid monthly on Class A, Class B
and Class C shares and are charged as class expenses, as accrued. The
distribution fees attributable to the Class B shares and Class C shares are
designed to permit an investor to purchase such shares through broker-dealers
without the assessment of a front-end sales charge, and, in the case of Class C
shares, without the assessment of a contingent deferred sales charge after the
first year following the month of purchase, while at the same time permitting
the Distributor to compensate broker-dealers in connection with the sale of such
shares. In this regard, the purpose and function of the combined contingent
deferred sales charge and distribution services fee on the Class B shares and
the Class C shares are the same as those of the front-end sales charge and
distribution fee with respect to the Class A shares in that in each case the
sales charge and/or distribution fee provide for the financing of the
distribution of the Fund's shares.
Under the Rule 12b-1 Distribution Plans that have been adopted by the Fund
with respect to each of its Class A, Class B and Class C shares (each a "Plan"
and collectively, the "Plans"), the Treasurer of the Fund reports the amounts
expended under the Plans and the purposes for which such expenditures were made
to the Trustees of the Trust for their review on a quarterly basis. Also, each
Plan provides that the selection and nomination of the disinterested Trustees
are committed to the discretion of such disinterested Trustees then in office.
The Adviser may from time to time and from its own funds or such other
resources as may be permitted by rules of the Securities and Exchange Commission
("SEC") make payments for distribution services to the Distributor; the latter
may in turn pay part or all of such compensation to brokers or other persons for
their distribution assistance.
Each Plan and Distribution Agreement will continue in effect for successive
twelve-month periods provided, however, that such continuance is specifically
approved at least annually by the Trustees of the Trust or by vote of the
holders of a majority of the outstanding voting securities of that Class and, in
either case, by a majority of the Independent Trustees of the Trust who have no
direct or indirect financial interest in the operation of the Plan or any
agreement related thereto.
The Plans permit the payment of fees to brokers and others for distribution
and shareholder-related administrative services and to broker-dealers,
depository institutions, financial intermediaries and administrators for
administrative services as to Class A, Class B and Class C shares. The Plans are
designed to (i) stimulate brokers to provide distribution and administrative
support services to each Fund and holders of Class A, Class B and Class C shares
and (ii) stimulate administrators to render administrative support services to
the Fund and holders of Class A, Class B and Class C shares. The administrative
services are provided by a representative who has knowledge of the shareholder's
particular circumstances and goals, and include, but are not limited to
providing office space, equipment, telephone facilities, and various personnel
including clerical, supervisory, and computer, as necessary or beneficial to
establish and maintain shareholder accounts and records; processing purchase and
redemption transactions and automatic investments of client account cash
balances; answering routine client inquiries regarding Class A, Class B and
Class C shares; assisting clients in changing dividend options, account
designations, and addresses; and providing such other services as the Fund
reasonably requests for its Class A, Class B and Class C shares.
In the event that a Plan or Distribution Agreement is terminated or not
continued with respect to one or more Classes of the Fund, (i) no distribution
fees (other than current amounts accrued but not yet paid) would be owed by the
Fund to the Distributor with respect to that Class or Classes, and (ii) the Fund
would not be obligated to pay the Distributor for any amounts expended under the
Distribution Agreement not previously recovered by the Distributor from
distribution services fees in respect of shares of such Class or Classes through
deferred sales charges.
All material amendments to any Plan or Distribution Agreement must be
approved by a vote of the Trustees of the Trust or the holders of the Fund's
outstanding voting securities, voting separately by Class, and in either case,
by a majority of the disinterested Trustees, cast in person at a meeting called
for the purpose of voting on such approval; and any Plan or Distribution
Agreement may not be amended in order to increase materially the costs that a
particular Class of shares of a Fund may bear pursuant to the Plan or
Distribution Agreement without the approval of a majority of the holders of the
outstanding voting shares of the Class affected. Any Plan, Shareholder Services
Plan or Distribution Agreement may be terminated (i) by the Fund without penalty
at any time by a majority vote of the holders of the outstanding voting
securities of the Fund, voting separately by Class or by a majority vote of the
disinterested Trustees, or (ii) by the Distributor. To terminate any
Distribution Agreement, any party must give the other parties 60 days' written
notice; to terminate a Plan only, the Fund need give no notice to the
Distributor. Any Distribution Agreement will terminate automatically in the
event of its assignment.
ADDITIONAL SERVICE PROVIDERS
ADMINISTRATOR
Evergreen Investment Services, Inc. ("EIS") serves as administrator to the
Fund, subject to the supervision and control of the Trust's Board of Trustees.
EIS provides the Fund with facilities, equipment and personnel and is entitled
to receive a fee based on the aggregate average daily net assets of the Fund
based on the total assets of all mutual funds advised by First Union Corporation
subsidiaries. The fee paid to EIS is calculated in accordance with the following
schedule: 0.50% on the first $7 billion; 0.035% on the next $3 billion; 0.030%
on the next $5 billion; 0.020% on the next $10 billion; 0.015% on the next $5
bilion and 0.010% on assets in excess of $30 billion.
SUB-ADMINISTRATOR
BISYS provides such personnel and certain administrative services to the
Fund pursuant to a sub- administrator agreement. For its services under that
agreement, BISYS receives a fee from EIS (as per prospectus) based on the
aggregate average daily net assets of the Fund at a rate based on the total
assets of all mutual funds administered by EIS for which First Union Corporation
also serves as investment adviser. The sub-administrator fee is calculated in
accordance with the following schedule: 0.0100% on the first $7 billion; 0.0075%
on the next $3 billion; 0.0050% on the next $15 billion; 0.0040% on assets in
excess of $25 billion. BISYS is an affiliate of the Distributor.
TRANSFER AGENT
Evergreen Service Company ("ESC"), a subsidiary of First Union Corporation,
is the Fund's transfer agent. Under an agreement with the Fund, the transfer
agent issues and redeems shares, pays dividends and performs other duties in
connection with the maintenance of shareholder accounts. The transfer agent's
address is 200 Berkeley Street, Boston, Massachusetts 02116.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP audits the Fund's financial statements. The auditor's
address is 99 High Street, Boston, Massachusetts 02110.
CUSTODIAN
State Street Bank and Trust Company is the Fund's custodian. Under an
agreement with the Fund, the bank keeps custody of the Fund's securities and
cash and performs other related duties. The custodian's address is 225 Franklin
Street, Boston, Massachusetts 02110.
LEGAL COUNSEL
Sullivan & Worcester LLP provides legal advice to the Fund. Its address is
1025 Connecticut Avenue, N.W., Washington, D.C. 20036.
BROKERAGE ALLOCATION AND OTHER PRACTICES
BROKERAGE COMMISSIONS
Generally, the Fund expects to purchase and sell its securities through
brokerage transactions for which commissions are payable. Purchases from
underwriters will include the underwriting commission or concession, and
purchases from dealers serving as market makers will include a dealer's mark-up
or reflect a dealer's markdown. Where transactions are made in the
over-the-counter market, the Fund will deal with primary market makers unless
more favorable prices are otherwise obtainable.
The Fund expects to buy and sell its fixed-income securities through
principal transactions directly from the issuer or from an underwriter or market
maker for the securities. Generally, the Fund will not pay brokerage commissions
for such purchases. Usually, when the Fund buys a security from an underwriter,
the purchase price will include underwriting commission or concession. The
purchase price for securities bought from dealers serving as market makers will
similarly include the dealer's mark up or reflect a dealer's mark down. When the
Fund executes transactions in the over-the-counter market, it will deal with
primary market makers unless more favorable prices are otherwise obtainable.
SELECTION OF BROKERS
In effecting transactions in portfolio securities for the Fund, the Adviser
seeks the best execution of orders at the most favorable prices. The Adviser
determines whether a broker has provided the Fund with best execution and price
in the execution of a securities transaction by evaluating, among other things:
1. overall direct net economic result to the Fund,
2. the efficiency with which they effect the transaction,
3. the broker's ability to effect the transaction where a large
block is involved,
4. the broker's readiness to execute potentially difficult
transactions in the future,
5. the financial strength and stability of the broker, and
6. the receipt of research services, such as analyses and reports
concerning issuers, industries, securities, economic factors
and trends and other statistical and factual information
("research services").
The Fund's management weighs these considerations in determining the
overall reasonableness of the brokerage commissions paid.
The Fund considers the receipt of research services by the Fund or the
Adviser to be in addition to, and not instead of, the services the Adviser is
required to perform under the Advisory Agreement. The Adviser believes that it
cannot determine or practically allocate the cost, value and specific
application of such research services between the Fund and its other clients,
who may indirectly benefit from the availability of such services. Similarly,
the Fund may indirectly benefit from information made available from
transactions effected for the Adviser's other clients. The Advisory Agreement
also permits the Adviser to pay higher brokerage commissions for brokerage and
research services in accordance with Section 28(e) of the Securities Exchange
Act of 1934; if the Adviser does so on a basis that is fair and equitable to the
Fund.
Neither the Fund nor the Adviser intends on placing securities transactions
with any particular broker-dealer. The Trust's Board of Trustees has determined,
however, that the Fund may consider sales of Fund shares when selecting of
broker-dealers to execute portfolio transactions, subject to the requirements of
best execution described above.
GENERAL BROKERAGE POLICIES
The Adviser makes investment decisions for the Fund independently from
those of its other clients. It may frequently develop, however, that the Adviser
will make the same investment decision for more than one client. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one account. When two or more of its clients
are engaged in the purchase or sale of the same security, the Adviser will
allocate the transactions according to a formula that is equitable to each of
its clients. Although, in some cases, this system could have a detrimental
effect on the price or volume of the Fund's securities, the Fund believes that
in other cases its ability to participate in volume transactions will produce
better executions. In order to take advantage of the availability of lower
purchase prices, the Fund may occasionally participate in group bidding for the
direct purchase from an issuer of certain securities.
The Board of Trustees periodically reviews the Fund's brokerage policy.
Because of the possibility of further regulatory developments affecting the
securities exchanges and brokerage practices generally, the Board of Trustees
may change, modify or eliminate any of the foregoing practices.
ORGANIZATION
FORM OF ORGANIZATION
The Fund is a series of an open-end management investment company, known as
"EVERGREEN EQUITY TRUST" (the "Trust"). The Trust was formed as a Delaware
business trust under an Agreement and Declaration of Trust dated September 17,
1997 (the "Declaration of Trust"). A copy of the Declaration of Trust is on file
as an exhibit to the Trust's Registration Statement, of which this SAI is a
part. This summary is qualified in its entirety by reference to the Declaration
of Trust.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest of series and classes of shares. Each share of the
Fund represents an equal proportionate interest with each other share of that
series and/or class. Upon liquidation, shares are entitled to a pro rata share
of the Trust based on the relative net assets of each series and/or class.
Shareholders have no preemptive or conversion rights. Shares are redeemable and
transferable.
VOTING RIGHTS
Under the terms of the Declaration of Trust, the Trust is not required to
hold annual meetings. However, the Trust intends to hold meetings at least
annually. At meetings called for the initial election of Trustees or to consider
other matters, each share is entitled to one vote for each dollar of net asset
value applicable to such share. Shares generally vote together as one class on
all matters. Classes of shares of each Fund have equal voting rights. No
amendment may be made to the Declaration of Trust that adversely affects any
class of shares without the approval of a majority of the votes applicable to
the shares of that class. Shares have non-cumulative voting rights, which means
that the holders of more than 50% of the votes applicable to shares voting for
the election of Trustees can elect 100% of the Trustees to be elected at a
meeting and, in such event, the holders of the remaining 50% or less of the
shares voting will not be able to elect any Trustees.
After the initial meeting as described above, no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law, unless and until such time as less than a majority of the Trustees
holding office have been elected by shareholders, at which time, the Trustees
then in office will call a shareholders' meeting for the election of Trustees.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his duties involved in the conduct of his office.
PURCHASE, REDEMPTION AND PRICING OF SHARES
HOW THE FUND OFFERS SHARES TO THE PUBLIC
You may buy shares of the Fund through the Distributor, broker-dealers that
have entered into special agreements with the Fund's distributor or certain
other financial institutions. The Fund offers four classes of shares that differ
primarily with respect to sales charges and distribution fees. Depending upon
the class of shares, you will pay an initial sales charge when you buy the
Fund's shares, a contingent deferred sales charge (a "CDSC") when you redeem the
Fund's shares or no sales charges at all.
PURCHASE ALTERNATIVES
CLASS A SHARES
With certain exceptions, when you purchase Class A shares you will pay a
maximum sales charge of 4.75%. (The prospectuses contain a complete table of
applicable sales charges and a discussion of sales charge reductions or waivers
that may apply to purchases.) If you purchase Class A shares in the amount of $1
million or more, without an initial sales charge, the Fund will charge a CDSC of
1.00% if you redeem during the month of your purchase and the 12-month period
following the month of your purchase. See "Contingent Deferred Sales Charge"
below.
CLASS B SHARES
The Fund offers Class B shares at net asset value (without an initial sales
charge). With certain exceptions, however, the Fund will charge a CDSC on shares
you redeem within 72 months after the month of your purchase. The Fund will
charge CDSCs at the following rate:
22166
19
<PAGE>
REDEMPTION TIMING CDSC RATE
Month of purchase and the first twelve-month
period following the month of purchase...............5.00%
Second twelve-month
period following the month of purchase...............4.00%
Third twelve-month
period following the month of purchase...............3.00%
Fourth twelve-month
period following the month of purchase...............3.00%
Fifth twelve-month
period following the month of purchase...............2.00%
Sixth twelve-month
period following the month of purchase...............1.00%
Thereafter................................................0.00%
Class B shares that have been outstanding for seven years after the month
of purchase will automatically convert to Class A shares without imposition of a
front-end sales charge. (Conversion of Class B shares represented by stock
certificates will require the return of the stock certificate to ESC.
CLASS C SHARES
Class C shares are available only through broker-dealers who have entered
into special distribution agreements with the Distributor. The Fund offers Class
C shares at net asset value (without an initial sales charge). With certain
exceptions, however, the Fund will charge a CDSC of 1.00% on shares redeemed
within 12-months after the month of purchase. See "Contingent Deferred Sales
Charge" below.
CLASS Y SHARES
No CDSC is imposed on the redemption of Class Y shares. Class Y shares are
not offered to the general public and are available only to (I) persons who at
or prior to December 31, 1994 owned shares in a mutual fund advised by Evergreen
Asset Management Corp. ("Evergreen Asset"), (2) certain institutional investors
and (3) investment advisory clients of The Capital Management Group of First
Union National Bank, Evergreen Asset, Keystone Investment Management Company, or
their affiliates. Class Y shares are offered at net asset value without a
front-end or back-end sales charge and do not bear any Rule 12b-1 distribution
expenses.
CONTINGENT DEFERRED SALES CHARGE
The Fund charges a CDSC as reimbursement for certain expenses, such as
commissions or shareholder servicing fees, that it has incurred in connection
with the sales of its shares (see "Distribution Plan"). If imposed, the Fund
deducts the CDSC from the redemption proceeds you would otherwise receive. The
CDSC is a percentage of the lesser of (1) the net asset value of the shares at
the time of redemption or (2) the shareholder's original net cost for such
shares. Upon request for redemption, to keep the CDSC a shareholder must pay as
low as possible, the Fund will first seek to redeem shares not subject to the
CDSC and/or shares held the longest, in that order. The CDSC on any redemption
is, to the extent permitted by the National Association of Securities Dealers,
Inc. ("NASD"), paid to the Distributor or any predecessor distributor.
SALES CHARGE WAIVERS OR REDUCTIONS
REDUCING CLASS A FRONT-END LOADS
With a larger purchase, there are several ways that you can combine
multiple purchases of Class A shares in Evergreen funds and take advantage of
lower sales charges.
COMBINED PURCHASES
You can reduce your sales charge by combining purchases of Class A shares
of multiple Evergreen funds. For example, if you invested $75,000 in each of two
different Evergreen funds, you would pay a sales charge based on a $150,000
purchase (i.e., 3.75% of the offering price, rather than 4.75%).
RIGHTS OF ACCUMULATION
You can reduce your sales charge by adding the value of Class A shares of
Evergreen funds you already own to the amount of your next Class A investment.
For example, if you hold Class A shares valued at $99,999 and purchase an
additional $5,000, the sales charge for the $5,000 purchase would be at the next
lower sales charge of 3.75%, rather than 4.75%.
LETTER OF INTENT
You can, by completing the "Letter of Intent" section of the Application,
purchase Class A shares over a 13-month period and receive the same sales charge
as if you had invested all the money at once. All purchases of Class A shares of
an Evergreen fund during the period will qualify as Letter of Intent purchases.
SHARES THAT ARE NOT SUBJECT TO A SALES CHARGE OR CDSC
WAIVER OF SALES CHARGES
The Fund may sell their shares at net asset value without an initial sales
charge to:
1. purchasers of shares in the amount of $1 million or more;
2. a corporate or certain other qualified retirement plan or a
non-qualified deferred compensation plan or a Title 1 tax
sheltered annuity or TSA plan sponsored by an organization
having 100 or more eligible employees (a "Qualifying Plan") or
a TSA plan sponsored by a public educational entity having
5,000 or more eligible employees (an "Educational TSA Plan");
3. institutional investors, which may include bank trust
departments and registered investment advisers;
4. investment advisers, consultants or financial planners who
place trades for their own accounts or the accounts of their
clients and who charge such clients a management, consulting,
advisory or other fee;
5. clients of investment advisers or financial planners who place
trades for their own accounts if the accounts are linked to
the master account of such investment advisers or financial
planners on the books of the broker-dealer through whom shares
are purchased;
6. institutional clients of broker-dealers, including retirement
and deferred compensation plans and the trusts used to fund
these plans, which place trades through an omnibus account
maintained with the Fund by the broker-dealer;
7. employees of the Adviser, its affiliates, the Distributor, any
broker-dealer with whom the Distributor has entered into an
agreement to sell shares of the Fund, and members of the
immediate families of such employees;
8. certain Directors, Trustees, officers and employees of the
Evergreen funds, the Distributor or their affiliates and to
the immediate families of such persons; or
9. a bank or trust company in a single account in the name of
such bank or trust company as trustee if the initial
investment in any Evergreen fund made pursuant to this waiver
is at least $500,000 and any commission paid at the time of
such purchase is not more than 1% of the amount invested.
With respect to items 8 and 9 above, the Fund will only sell shares to
these parties upon the purchasers' written assurance that the purchases are for
their personal investment purposes only. Such purchasers may not resell the
securities except through redemption by the Fund. The Fund will not charge any
CDSC on redemptions by such purchasers.
WAIVER OF CDSCS
The Fund does not impose a CDSC when the shares you are redeeming
represent:
1. an increase in the share value above the net cost of such
shares;
2. certain shares for which the Fund did not pay a commission on
issuance, including shares acquired through reinvestment of
dividend income and capital gains distributions;
3. shares that are in the accounts of a shareholder who has died
or become disabled;
4. a lump-sum distribution from a 401(k) plan or other benefit
plan qualified under the Employee Retirement Income Security
Act of 1974 ("ERISA");
5. an automatic withdrawal from the ERISA plan of a shareholder
who is a least 59 1/2 years old;
6. shares in an account that we have closed because the account
has an aggregate net asset value of less than $1,000;
7. an automatic withdrawal under a Systematic Withdrawal Plan of
up to 1.0% per month of your initial account balance;
8. a withdrawal consisting of loan proceeds to a retirement plan
participant;
9. a financial hardship withdrawal made by a retirement plan
participant;
10. a withdrawal consisting of returns of excess contributions or
excess deferral amounts made to a retirement plan; or
11. a redemption by an individual participant in a Qualifying Plan
that purchased Class C shares (this waiver is not available in
the event a Qualifying Plan, as a whole, redeems substantially
all of its assets).
EXCHANGES
Investors may exchange shares of the Fund for shares of the same class of
any other Evergreen fund, as described under the section entitled "Exchanges" in
the Fund's prospectuses. Before you make an exchange, you should read the
prospectus of the Evergreen fund into which you want to exchange. The Trust's
Board of Trustees of the Trust reserves the right to discontinue, alter or limit
the exchange privilege at any time.
HOW THE FUND VALUES ITS SHARES
HOW AND WHEN THE FUND CALCULATES ITS NET ASSET VALUE PER SHARE ("NAV")
The Fund computes its NAV once daily on Monday through Friday, as described
in the Fund's prospectuses. The Fund will not compute its NAV on the day the
following legal holidays are observed: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The NAV of the Fund is calculated by dividing the value of the Fund's
net assets attributable to that class by all of the shares issued for that
class.
HOW THE FUND VALUES THE SECURITIES IT OWNS
Current values for the Fund's portfolio securities are determined as
follows:
(1) Securities that are traded on a national securities exchange or the
over-the-counter National Market System ("NMS") are valued on the basis
of the last sales price on the exchange where primarily traded or on
the NMS prior to the time of the valuation, provided that a sale has
occurred.
(2) Securities traded in the over-the-counter market, other than on
NMS, are valued at the mean of the bid and asked prices at the time of
valuation.
(3) Short-term investments maturing in more than sixty days for which
market quotations are readily available are valued at current market
value.
(4) Short-term investments maturing in sixty days or less (including
all master demand notes) are valued at amortized cost (original
purchase cost as adjusted for amortization of premium or accretion of
discount), which, when combined with accrued interest, approximates
market.
(5) Short-term investments maturing in more than sixty days when
purchased that are held on the sixtieth day prior to maturity are
valued at amortized cost (market value on the sixtieth day adjusted for
amortization of premium or accretion of discount), which, when combined
with accrued interest, approximates market.
(6) Securities, including restricted securities, for which complete
quotations are not readily available; listed securities or those on NMS
if, in the Adviser's opinion, the last sales price does not reflect a
current market value or if no sale occurred; and other assets are
valued at prices deemed in good faith to be fair under procedures
established by the Board of Trustees.
Foreign securities for which market quotations are not readily available
are valued on the basis of valuations provided by a pricing service, approved by
the Trust's Board of Trustees, which uses information with respect to
transactions in such securities, quotations from broker-dealers, market
transactions in comparable securities and various relationships between
securities and yield to maturity in determining value.
SHAREHOLDER SERVICES
As described in the Prospectuses, shareholder's may elect to receive their
dividends and capital grains distributions in cash instead of shares. However,
ESC, will automatically convert a shareholder's distribution option so that the
shareholder reinvests all dividends and distributions in additional shares when
it learns that the postal or other delivery service is unable to deliver checks
or transaction confirmations to the shareholder's address of record. The Fund
will hold the returned distribution or redemption proceeds in a non
interest-bearing account in the shareholder's name until the shareholder updates
their address. No interest will accrue on amounts represented by uncashed
distribution or redemption checks.
PRINCIPAL UNDERWRITER
Evergreen Distributor, Inc., 125 W. 55th Street, New York, New York 10019
is the principal underwriter for the Trust and with respect to each class of the
Fund (the "Distributor"). The Trust has entered into a Principal Underwriting
Agreement ( "Underwriting Agreement") with the Distributor with respect to each
class of the Fund. The Distributor is a subsidiary of The BISYS Group, Inc.
The Distributor, as agent, has agreed to use its best efforts to find
purchasers for the Fund's shares. The Distributor may retain and employ
representatives to promote distribution of the shares and may obtain orders from
broker-dealers, and others, acting as principals, for sales of shares to them.
The Underwriting Agreement provides that the Distributor will bear the expense
of preparing, printing, and distributing advertising and sales literature and
prospectuses used by it.
All subscriptions and sales of shares by the Distributor are at the public
offering price of the shares, which is determined in accordance with the
provisions of the Trust's Declaration of Trust, By-Laws, current prospectuses
and SAI. All orders are subject to acceptance by the trust, and the trust
reserves the right, in its sole discretion, to reject any order received. Under
the Underwriting Agreement, the trust is not liable to anyone for failure to
accept any order.
The Distributor has agreed that it will, in all respects, duly conform with
all state and federal laws applicable to the sale of the shares. The Distributor
has also agreed that it will indemnify and hold harmless the Trust and each
person who has been, is, or may be a Trustee or officer of the Trust against
expenses reasonably incurred by any of them in connection with any claim,
action, suit, or proceeding to which any of them may be a party that arises out
of or is alleged to arise out of any misrepresentation or omission to state a
material fact on the part of the Distributor or any other person for whose acts
the Distributor is responsible or is alleged to be responsible, unless such
misrepresentation or omission was made in reliance upon written information
furnished by the Trust.
The Underwriting Agreement provides that it will remain in effect as long
as its terms and continuance are approved annually (1) by a vote of a majority
of the Trust's Independent Trustees, and (2) by vote of a majority of the
Trust's Trustees, in each case, cast in person at a meeting called for that
purpose.
The Underwriting Agreement may be terminated, without penalty, on 60 days'
written notice by the Board of Trustees or by a vote of a majority of
outstanding shares subject to such agreement. The Underwriting Agreement will
terminate automatically upon its "assignment" as that term is defined in the
1940 Act.
From time to time, if, in the Distributor's judgment, it could benefit the
sales of shares, the Distributor may provide to selected broker-dealers
promotional materials and selling aids, including, but not limited to, personal
computers, related software, and data files.
ADDITIONAL TAX INFORMATION
REQUIREMENTS FOR QUALIFICATION AS A REGISTERED INVESTMENT COMPANY
The Fund intends to qualify for and elect the tax treatment applicable to a
regulated investment company ("RIC") under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"). (Such qualification does not involve
supervision of management or investment practices or policies by the Internal
Revenue Service.) In order to qualify as a RIC, the Fund must, among other
things, (i) derive at least 90% of its gross income from dividends, interest,
payments with respect to proceeds from securities loans, gains from the sale or
other disposition of securities or foreign currencies and other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in such securities; (ii) derive less than
30% of its gross income from the sale or other disposition of securities,
options, futures or forward contracts (other than those on foreign currencies),
or foreign currencies (or options, futures or forward contracts thereon) that
are not directly related to the RIC's principal business of investing in
securities (or options and futures with respect thereto) held for less than
three months (this requirement is repealed for Fund fiscal years beginning after
August 5, 1997); and (iii) diversify its holdings so that, at the end of each
quarter of its taxable year, (a) at least 50% of the market value of the Fund's
total assets is represented by cash, U.S. Government securities and other
securities limited in respect of any one issuer, to an amount not greater than
5% of the Fund's total assets and 10% of the outstanding voting securities of
such issuer, and (b) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S. Government
securities and securities of other regulated investment companies). By so
qualifying, the Fund is not subject to federal income tax if it timely
distributes its investment company taxable income and any net realized capital
gains. A 4% nondeductible excise tax will be imposed on the Fund to the extent
it does not meet certain distribution requirements by the end of each calendar
year. The Fund anticipates meeting such distribution requirements.
TAXES ON DIVIDENDS
Distributions will be taxable to shareholders whether made in shares or in
cash. Shareholders electing to receive distributions in the form of additional
shares will have a cost basis for federal income tax purposes in each share so
received equal to the net asset value of a share of a Fund on the reinvestment
date.
To calculate ordinary income for federal income tax purposes, shareholders
must generally include dividends paid by the Fund from its investment company
taxable income (net investment income plus net realized short-term capital
gains, if any). Since none of a Fund's income will consist of corporate
dividends, no distributions will qualify for the 70% corporate dividends
received deduction.
From time to time, the Fund will distribute the excess of its net long-term
capital gains over its short-term capital loss to shareholders. For federal tax
purposes, shareholders must include such distributions when calculating their
long-term capital gains. Distributions of long-term capital gains are taxable as
such to a shareholder, no matter how long the shareholder has held the shares.
Distributions by the Fund reduce its NAV. A distribution that reduces the
Fund's NAV below a shareholder's cost basis is taxable as described above,
although from an investment standpoint, it is a return of capital. In
particular, if a shareholder buys Fund shares just before the Fund makes a
distribution, when the Fund makes the distribution the shareholder will receive
what is in effect a return of capital. Nevertheless, the shareholder must pay
taxes on the distribution. Therefore, shareholders should carefully consider the
tax consequences of buying Fund shares just before a distribution.
All distributions, whether received in shares or cash, must be reported by
each shareholder on his or her federal income tax return. Each shareholder
should consult his or her own tax adviser to determine the state and local tax
implications of Fund distributions.
If more than 50% of the value of the Fund's total assets at the end of a
fiscal year is represented by securities of foreign corporations and the Fund
elects to make foreign tax credits available to its shareholders, a shareholder
will be required to include in his gross income both cash dividends and the
amount the Fund advises him is his pro rata portion of income taxes withheld by
foreign governments from interest and dividends paid on the Fund's investments.
The shareholder will be entitled, however, to take the amount of such foreign
taxes withheld as a credit against his U.S. income tax, or to treat the foreign
tax withheld as an itemized deduction from his gross income, if that should be
to his advantage. In substance, this policy enables the shareholder to benefit
from the same foreign tax credit or deduction that he would have received if he
had been the individual owner of foreign securities and had paid foreign income
tax on the income therefrom. As in the case of individuals receiving income
directly from foreign sources, the credit or deduction is subject to a number of
limitations.
TAXES ON THE SALE OR EXCHANGE OF FUND SHARES
Upon a sale or exchange of Fund shares, a shareholder will realize a
taxable gain or loss depending on his or her basis in the shares. A shareholder
must treat such gains or losses as a capital gain or loss if the shareholder
held the shares as capital assets. Capital gain on assets held for more than
eighteen months is generally subject to a maximum federal income tax rate of 20%
for an individual. The maximum capital gains tax rate for capital assets held by
an individual for more than twelve months but not more than eighteen months is
generally 28%. Also, a shareholder must treat as long-term capital gains or
losses any capital gains or losses on Fund shares held for more than one year.
Generally, the Code will not allow a shareholder to realize a loss on shares he
or she has sold or exchanged and replaced within a sixty-one-day period
beginning thirty days before and ending thirty days after he or she sold or
exchanged the shares. The Code will treat a shareholder's loss on shares held
for six months or less as a long-term capital loss to the extent the shareholder
received distributions of net capital gains on such shares.
Shareholders who fail to furnish their taxpayer identification numbers to
the Fund and to certify as to its correctness and certain other shareholders may
be subject to a 31% federal income tax backup withholding requirement on
dividends, distributions of capital gains and redemption proceeds paid to them
by the Fund. If the withholding provisions are applicable, any such dividends or
capital gain distributions to these shareholders, whether taken in cash or
reinvested in additional shares, and any redemption proceeds will be reduced by
the amounts required to be withheld. Investors may wish to consult their own tax
advisers about the applicability of the backup withholding provisions.
GENERAL
The foregoing discussion relates solely to U.S. federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates). It does not reflect the special
tax consequences to certain taxpayers (e.g., banks, insurance companies, tax
exempt organizations and foreign persons). Shareholders are encouraged to
consult their own tax advisers regarding specific questions relating to federal,
state and local tax consequences of investing in shares of the Fund. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and foreign tax consequences of ownership of shares of the
Fund, including the possibility that such a shareholder may be subject to a U.S.
withholding tax at a rate of 30% (or at a lower rate under a tax treaty) on
amounts treated as income from U.S. sources under the Code.
CALCULATION OF PERFORMANCE DATA
Total return quotations for a class of shares of the Fund as they may
appear from time to time in advertisements are calculated by finding the average
annual compounded rates of return over one, five and ten year periods, or the
time periods for which such class of shares has been effective, whichever is
relevant, on a hypothetical $1,000 investment that would equate the initial
amount invested in the class to the ending redeemable value. To the initial
investment all dividends and distributions are added, and all recurring fees
charged to all shareholder accounts are deducted. The ending redeemable value
assumes a complete redemption at the end of the relevant periods.
Current yield quotations as they may appear, from time to time, in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of the Fund, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period.
Any given yield or total return quotation should not be considered
representative of the Fund's yield or total return for any future period.
ADDITIONAL INFORMATION
OTHER INFORMATION
Except as otherwise stated in its prospectuses or required by law, the Fund
reserves the right to change the terms of the offer stated in its prospectuses
without shareholder approval, including the right to impose or change fees for
services provided.
No dealer, salesman or other person is authorized to give any information
or to make any representation not contained in the Fund's prospectuses, SAI or
in supplemental sales literature issued by such Fund or the Distributor, and no
person is entitled to rely on any information or representation not contained
therein.
The Fund's prospectuses and SAI omit certain information contained in its
registration statement. The Fund has filed this SAI with the SEC and you may
obtain a copy of the SAI by writing to the Securities and Exchange Commission's
principal office in Washington, D.C. To obtain a copy of the SAI from the
Securities and Exchange Commission, you will have to pay the fee prescribed by
their rules and regulations.
FINANCIAL STATEMENTS
Attached are the audited statement of assets and liabilities and the
report thereon of KPMG Peat Marwick LLP for the Fund will be filed by amendment.
APPENDIX A
COMMON AND PREFERRED STOCK RATINGS
A. S&P'S EARNINGS AND DIVIDEND RANKINGS FOR COMMON STOCKS
Because the investment process involves assessment of various factors,
such as product and industry position, corporate resources, and financial
policy, with results that make some common stocks more highly esteemed than
others, Standard & Poor's Ratings Group ("S&P") believes that earnings and
dividend performance is the end result of the interplay of these factors and
that, over the long run, the record of this performance has a considerable
bearing on relative quality. S&P rankings, however, do not reflect all of the
factors, tangible or intangible, that bear on stock quality.
Growth and stability of earnings and dividends are deemed key elements
in establishing S&P earnings and dividend rankings for common stocks, which
capsulize the nature of this record in a single symbol.
S&P has established a computerized scoring system based on per share
earnings and dividend records of the most recent ten years, a period deemed long
enough to measure a company's performance under varying economic conditions. S&P
measures growth, stability within the trend line, and cyclicality. The ranking
system also makes allowances for company size, since large companies have
certain inherent advantages over small ones. From these, scores for earnings and
dividends are determined.
The final score for each stock is measured against a scoring matrix
determined by analysis of the scores of a large and representative sample which
is reviewed and sometimes modified with the following ladder of rankings:
A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A- Above Average B- Lower
S&P believes its rankings are not a forecast of future market price
performance, but are basically an appraisal of past performance of earnings and
dividends, and relative current standing.
B. MOODY'S COMMON STOCK RANKINGS
Moody's Investors Service ("Moody's") presents a concise statement of the
important characteristics of a company and an evaluation of the grade (quality)
of its common stock. Data presented includes: (a) capsule stock information
which reveals short and long term growth and yield afforded by the indicated
dividend, based on a recent price; (b) a long term price chart which shows
patterns of monthly stock price movements and monthly trading volumes; (c) a
breakdown of a company's capital account which aids in determining the degree of
conservatism or financial leverage in a company's balance sheet; (d) interim
earnings for the current year to date, plus three previous years; (e) dividend
information; (f) company background; (g) recent corporate developments; (h)
prospects for a company in the immediate future and the next few years; and (i)
a ten year comparative statistical analysis.
This information provides investors with information on what a company
does, how it has performed in the past, how it is performing currently, and what
its future performance prospects appear to be.
These characteristics are then evaluated and result in a grading, or
indication of quality. The grade is based on an analysis of each company's
financial strength, stability of earnings, and record of dividend payments.
Other considerations include conservativeness of capitalization, depth and
caliber of management, accounting practices, technological capabilities, and
industry position. Evaluation is represented by the following grades:
(1) High Grade
(2) Investment Grade
(3) Medium Grade
(4) Speculative Grade
C. MOODY'S PREFERRED STOCK RATINGS
Preferred stock ratings and their definitions are as follows:
1. AAA: An issue that is rated AAA is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
2. AA: An issue that is rated AA is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
3. A: An issue that is rated A is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the AAA
and AA classification, earnings and asset protection are, nevertheless, expected
to be maintained at adequate levels.
4. BAA: An issue that is rated BAA is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
5. BA: An issue that is rated BA is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
6. B: An issue that is rated B generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
7. CAA: An issue that is rated CAA is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
8. CA: An issue that is rated CA is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payments.
9. C: This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category, the modifier 2 indicates a mid-range ranking
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
CORPORATE BOND RATINGS
A. S&P CORPORATE BOND RATINGS
An S&P corporate bond rating is a current assessment of the
creditworthiness of an obligor, including obligors outside the United States,
with respect to a specific obligation. This assessment may take into
consideration obligors such as guarantors, insurers, or lessees. Ratings of
foreign obligors do not take into account currency exchange and related
uncertainties. The ratings are based on current information furnished by the
issuer or obtained by S&P from other sources it considers reliable.
The ratings are based, in varying degrees, on the following considerations:
a. Likelihood of default - capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
b. Nature of and provisions of the obligation; and
c. Protection afforded by and relative position of the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from AA to A may be modified by the addition of a plus or minus
sign to show relative standing within the major rating categories.
Bond ratings are as follows:
1. AAA - Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
2. AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
3. A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
4. BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
5. BB, B, CCC, CC AND C - Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
B. MOODY'S CORPORATE BOND RATINGS
Moody's ratings are as follows:
1. AAA - Bonds which are rated AAA are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
2. AA - Bonds which are rated AA are judged to be of high quality by all
standards. Together with the AAA group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in AAA securities.
3. A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
4. BAA - Bonds which are rated BAA are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
5. BA - Bonds which are rated BA are judged to have speculative elements.
Their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
6. B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
7. Caa - Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
8. Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
market shortcomings.
9. C - Bonds which are rated as C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from AA through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
