EVERGREEN EQUITY TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 633-2700
BALANCED FUNDS
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1998; as amended August 11, 1998
Evergreen Foundation Fund ("Foundation")
Evergreen Tax Strategic Foundation Fund ("Tax Strategic")
Evergreen American Retirement Fund ("American Retirement")
Evergreen Balanced Fund ("Balanced")
(Each a "Fund;" together, the "Funds")
Each Fund is a series of an open-end management investment company
known as Evergreen Equity Trust (the "Trust").
This statement of additional information ("SAI") pertains to all
classes of shares of the Funds listed above. It is not a prospectus and
should be read in conjunction with the Funds' prospectuses dated August 1,
1998, as supplemented from time to time. The Funds are offered through two
separate prospectuses: one offering Class A, Class B and Class C shares of
each Fund and one offering Class Y shares of each Fund. You may obtain
these prospectuses from Evergreen Distributor, Inc.
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TABLE OF CONTENTS
INVESTMENT POLICIES
Fundamental Investment Policies
Additional Information on Securities and Investment Practices
MANAGEMENT OF THE TRUST
PRINCIPAL HOLDERS OF FUND SHARES
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Advisors
Investment Advisory Agreements
Distributor
Distribution Plans and Agreements
Additional Service Providers
BROKERAGE
Brokerage Commissions
Selection of Brokers
Simultaneous Transactions
TRUST ORGANIZATION
Form of Organization
Description of Shares
Voting Rights
Limitation of Trustees' Liability
PURCHASE,REDEMPTION AND PRICING OF SHARES How the Funds Offer Shares to the
Public Contingent Deferred Sales Charge Sales Charge Waivers or
Reductions Exchanges Calculation of Net Asset Value Per Share ("NAV")
Valuation of Portfolio Securities Shareholder Services
PRINCIPAL UNDERWRITER
ADDITIONAL TAX INFORMATION
Requirements for Qualification as a Regulated Investment Company
Taxes on Distributions
Taxes on the Sale or Exchange of Fund Shares
Other Tax Considerations
Special Tax Considerations for Tax Strategic
FINANCIAL INFORMATION
Expenses
Brokerage Commissions Paid
Computation of Class A Offering Price
Performance
ADDITIONAL INFORMATION
APPENDIX A
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INVESTMENT POLICIES
FUNDAMENTAL INVESTMENT POLICIES
Each 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, as amended
(the "1940 Act"). Where necessary, an explanation beneath a fundamental policy
describes a Fund's practices with respect to that policy, as allowed by current
law. If the law governing a policy changes, the Fund's practices may change
accordingly without a shareholder vote. Unless otherwise stated, all references
to the assets of a Fund are in terms of current market value.
1. Diversification
Each Fund may not make any investment that is inconsistent with its
classification as a diversified investment company under the 1940 Act.
Further Explanation of Diversification Policy:
To remain classified as a diversified investment company under the 1940
Act, a Fund must conform with the following: With respect to 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 United States ("U.S.") government or its agencies or
instrumentalities.
2. Concentration
Each 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).
Further Explanation of Concentration Policy:
Each Fund may not invest more than 25% of its total assets, taken at
market value , in the securities of issuers primarily engaged in any particular
industry (other than securities issued or guaranteed by the U.S. government or
its agencies or instrumentalities).
3. Issuing Senior Securities
Except as permitted under the 1940 Act, each Fund may not issue senior
securities.
4. Borrowing
Each Fund may not borrow money, except to the extent permitted by
applicable law.
Further Explanation of Borrowing Policy: Each Fund may borrow from
banks in an amount up to 33 1/3% of its total assets, taken at market value.
Each Fund may also borrow up to an additional 5% of its total assets from banks
or others. A Fund may borrow only as a temporary measure for extraordinary or
emergency purposes such as the redemption of Fund shares. A 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). Each Fund may obtain such short-term
credit as may be necessary for the clearance of purchases and sales of portfolio
securities. A Fund may purchase securities
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on margin and engage in short sales to the extent permitted by applicable law.
In addition to borrowing for temporary or emergency purposes, American
Retirement intends to borrow for the purpose of leveraging.
5. Underwriting
Each Fund may not underwrite securities of other issuers, except
insofar as each Fund may be deemed to be an underwriter in connection with the
disposition of its portfolio securities.
6. Real Estate
Each Fund may not purchase or sell real estate, except that, to the
extent permitted by applicable law, each 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.
7. Commodities
Each Fund may not purchase or sell commodities or contracts on
commodities, except to the extent that each Fund may engage in financial futures
contracts and related options and currency contracts and related options and may
otherwise do so in accordance with applicable law and without registering as a
commodity pool operator under the Commodity Exchange Act.
8. Lending
Each Fund may not make loans to other persons, except that each Fund
may lend its portfolio securities in accordance with applicable law. The
acquisition of investment securities or other investment instruments shall not
be deemed to be the making of a loan.
Further Explanation of Lending Policy:
To generate income and offset expenses, each Fund may lend portfolio
securities to broker-dealers and other financial institutions in an amount up to
33 1/3% of its total assets, taken at market value. While securities are on
loan, the borrower will pay each Fund any income accruing on the security. Each
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 each Fund and its shareholders.
When a Fund lends its securities, it will require the borrower to give
the Fund collateral in cash or government securities. Each Fund will require
collateral in an amount equal to at least 100% of the current market value of
the securities lent, including accrued interest. Each Fund has the right to call
a loan and obtain the securities lent any time on notice of not more than five
business days. Each Fund may pay reasonable fees in connection with such loans.
9. Investments in Federally Tax-Exempt Securities (Tax Strategic)
Tax Strategic will, during periods of normal market conditions, invest
its assets in accordance with applicable guidelines issued by the Securities and
Exchange Commission ("SEC") or its staff concerning investment in tax-exempt
securities for funds with the words tax-exempt, tax free or municipal in their
names.
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ADDITIONAL INFORMATION ON SECURITIES AND INVESTMENT PRACTICES
The investment objectives of each Fund and a description of the
securities in which each Fund may invest are set forth in the Funds'
prospectuses. The following expands upon the discussion in the prospectuses
regarding certain investments of the Funds.
U.S. Government Securities
Each Fund may invest in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, including issues of the U.S.
Treasury. These securities are either backed by the discretionary authority of
the U.S. government to purchase certain obligations of agencies or
instrumentalities or the credit of the agency or instrumentality issuing the
obligations.
Some government agencies and instrumentalities may not receive financial
support from the U.S. government. Examples of such agencies 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.
Securities Issued by the Government National Mortgage Association ("GNMA")
The Funds may invest in securities issued by the GNMA, a
corporation wholly-owned by the U.S. government. GNMA securities or
"certificates" represent ownership in a pool of underlying mortgages. The timely
payment of principal and interest due on these securities is guaranteed.
Unlike conventional bonds, the principal on GNMA certificates is
not paid at maturity but over the life of the security in scheduled monthly
payments. While mortgages pooled in a GNMA certificate may have maturities of up
to 30 years, the certificate itself will have a shorter average maturity and
less principal volatility than a comparable 30-year bond.
The market value and interest yield of GNMA certificates can vary
due not only to market fluctuations, but also to early prepayments of mortgages
within the pool. Since prepayment rates vary widely, it is impossible to
accurately predict the average maturity of a GNMA pool. In addition to the
guaranteed principal payments, GNMA certificates may also make unscheduled
principal payments resulting from prepayments on the underlying mortgages.
Although GNMA certificates may offer yields higher than those
available from other types of U.S. government securities, they may be less
effective as a means of locking in attractive long-term rates because of the
prepayment feature. For instance, when interest rates decline, prepayments are
likely to increase as the holders of the underlying mortgages seek refinancing.
As a result, the value of a GNMA certificate is not likely to rise as much as
the value of a comparable debt security would in response to same decline. In
addition, these prepayments can cause a GNMA certificate originally purchased at
a premium to decline in price compared to its par value, which may result in a
loss.
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Equity Securities
The Funds may invest in equity securities consist primarily of
common stocks and securities convertible into common stocks. Investing in common
stocks, particularly those having growth characteristics, frequently involves
greater risks (and possibly greater rewards) than investing in other types of
securities. Common stock prices tend to be more volatile and companies having
growth characteristics may sometimes be unproven.
Investing in companies with medium market capitalizations involves
greater risk than investing in larger companies. The stock prices of mid-cap
companies can rise quickly and drop substantially in a short period of time.
This volatility results from a number of factors, including reliance by these
companies on relatively limited product lines, markets, and financial resources.
These and other factors may make mid-cap companies more susceptible to setbacks
or downturns.
Investing in companies with small market capitalizations involves
greater risk than investing in larger companies. Their stock prices can rise
very quickly and drop dramatically in a short period of time. This volatility
results from a number of factors, including reliance by these companies on
limited product lines, markets, and financial and management resources. These
and other factors may make small cap companies more susceptible to setbacks or
downturns. These companies may experience higher rates of bankruptcy or other
failures than larger companies. They may be more likely to be negatively
affected by changes in management. In addition, the stock of small cap companies
may be thinly traded.
Derivatives (Balanced and American Retirement)
Derivatives are financial contracts whose value depends on, or is
derived from, the value of an underlying asset, reference rate or index. These
assets, rates, and indices may include bonds, stocks, mortgages, commodities,
interest rates, currency exchange rates, bond indices and stock indices.
Derivatives may be standardized, exchange-traded contracts or customized,
privately negotiated contracts. Exchange-traded derivatives tend to be more
liquid and subject to less credit risk than those that are privately negotiated.
There are four principal types of derivative instruments --
options, futures, forwards, and swaps -- from which virtually any type of
derivative transaction can be created. Debt instruments that incorporate one or
more of these building blocks for the purpose of determining the principal
amount of and/or rate of interest payable on the debt instruments are often
referred to as "structured securities." An example of this type of structured
security is indexed commercial paper. The term is also used to describe certain
securities issued in connection with the restructuring of certain foreign
obligations. The term "derivative" is also sometimes used to describe securities
involving rights to a portion of the cash flows from an underlying pool of
mortgages or other assets from which payments are passed through to the owner
of, or that collateralize, the securities.
The Funds can use derivatives to earn income, to enhance returns,
to hedge or adjust the risk profile of the portfolio, in place of more
traditional direct investments or to obtain exposure to otherwise inaccessible
markets. A Fund's use of derivatives for non-hedging purposes entails greater
risks than if a Fund were to use derivatives solely for hedging purposes.
Derivatives are a valuable tool which, when used properly, can provide
significant benefit to a Fund's shareholders.
The Funds' investment advisor is not an aggressive user of
derivatives with respect to the Funds. However, the Funds may take positions in
those derivatives that are within their investment policies if, in the Advisor's
(as hereinafter defined) judgment, this represents an effective response to
current or anticipated market conditions. The Advisor's use of derivatives is
subject to continuous risk assessment and control from the standpoint of the
Funds' investment objective and policies. While the judicious use of derivatives
by experienced investment managers, such as the Advisor, can be beneficial,
derivatives also involve risks different from, and, in certain cases, greater
than, the risks presented by more traditional
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investments. Following is a general discussion of important risk factors and
issues concerning the use of derivatives that investors should understand before
investing in the Funds.
Market Risk -- This is the general risk attendant to all
investments that the value of a particular investment will decline or otherwise
change in a way detrimental to the Funds' interest.
Management Risk -- Derivative products are highly specialized
instruments that require investment techniques and risk analyses different from
those associated with stocks and bonds. The use of a derivative requires an
understanding not only of the underlying instrument, but also of the derivative
itself, without the benefit of observing the performance of the derivative under
all possible market conditions. Because derivatives are complex, a Fund and its
Advisor must (1) maintain controls to monitor the transactions entered into, (2)
assess the risk that a derivative adds to a Fund's portfolio and (3) forecast
price, interest rate or currency exchange rate movements correctly.
Credit Risk -- This is the risk that a Fund may lose money because
the other party to a derivative (usually called a "counter party") failed to
comply with the terms of the derivative contract. The credit risk for
exchange-traded derivatives is generally less than for privately negotiated
derivatives, since the clearing house, which is the issuer or counter party to
each exchange-traded derivative, guarantees performance. This guarantee is
supported by a daily payment system (i.e., margin requirements) operated by the
clearing house to reduce overall credit risk. For privately negotiated
derivatives, there is no similar clearing agency guarantee. Therefore, a Fund
considers the creditworthiness of each counter party to a privately negotiated
derivative in evaluating potential credit risk.
Liquidity Risk -- Liquidity risk is the possibility that a Fund
will have difficulty buying or selling a particular instrument. If a derivative
transaction is particularly large or if the relevant market is illiquid (as is
the case with many privately negotiated derivatives), a Fund may not be able to
initiate a transaction or liquidate a position at an advantageous price.
Leverage Risk -- Since many derivatives have a leverage component,
adverse changes in the value or level of the underlying asset, rate or index can
result in a loss substantially greater than the amount invested in the
derivative itself. In the case of swaps, the risk of loss generally is related
to a notional principal amount, even if the parties have not made any initial
investment. Certain derivatives have the potential for unlimited loss,
regardless of the size of the initial investment.
Other Risks -- Other risks in using derivatives include the risk
of mispricing or improper valuation and the inability of derivatives to
correlate perfectly with underlying assets, rates, and indices. Many
derivatives, in particular privately negotiated derivatives, are complex and
often valued subjectively. Improper valuations can result in increased cash
payment requirements to counter parties or a loss of value to a Fund.
Derivatives do not always perfectly or even highly correlate or track the value
of the assets, rates or indices they are designed to closely track.
Consequently, a Fund's use of derivatives may not always be an effective means
of, and sometimes could be counterproductive to, furthering the Fund's
investment objective.
Options Transactions (Balanced and American Retirement)
Writing Covered Options. A Fund may write (i.e., sell) covered
call and put options. By writing a call option, a Fund becomes obligated during
the term of the option to deliver the securities underlying the option upon
payment of the exercise price. Writing a put option obligates a Fund during the
term of the option to purchase the securities underlying the option at the
exercise price if the option buyer exercises the option. A Fund also may write
straddles (combinations of covered puts and calls on the same underlying
security).
A Fund may only write "covered" options. This means that while a
Fund is obligated as the writer of a call option it will own the underlying
securities subject to the option or, with call options on U.S.
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Treasury bills, it might own similar U.S. Treasury bills. If a Fund has written
options against all of its securities that are available for writing options,
the Fund may be unable to write additional options unless it sells some of its
portfolio holdings to obtain new securities against which it can write options.
If this were to occur, higher portfolio turnover and correspondingly greater
brokerage commissions and other transaction costs may result. A Fund does not
expect, however, that this will occur. A Fund will be considered "covered" with
respect to a put option it writes if, while it is obligated as the writer of the
put option, it deposits and maintains with its custodian in a segregated account
liquid assets having a value equal to or greater than the exercise price of the
option.
The principal reason for writing call or put options is to obtain,
through a receipt of premiums, a greater current return than would be realized
on the underlying securities alone. A Fund receives a premium from writing a
call or put option, which it retains whether or not the option is exercised. By
writing a call option, a Fund might lose the potential for gain on the
underlying security while the option is open, and, by writing a put option, a
Fund might become obligated to purchase the underlying security for more than
its current market price upon exercise.
Purchasing Options. A Fund may purchase put or call options,
including put or call options for offsetting previously written put or call
options of the same series. Once a Fund has written a covered option, it will
continue to hold the segregated securities or assets until it effects a closing
purchase transaction. If a Fund is unable to close the option position, it must
hold the segregated securities or assets until the option expires or is
exercised. An option position may be closed out only in a secondary market for
an option of the same series. Although a Fund generally writes only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular option at
any particular time, and, for some options, no secondary market may exist. In
such event, effecting a closing transaction for a particular option might not be
possible.
Options on some securities are relatively new, and predicting how
much trading interest there will be for such options is impossible. There can be
no assurance that viable markets will develop or continue. The failure of such
markets to develop or continue could significantly impair a Fund's ability to
use such options to achieve its investment objective.
Options Trading Markets. A Fund trades in options that are
generally listed on national securities exchanges, currently including the
Chicago Board Options Exchange and the New York, American, Pacific and
Philadelphia Stock Exchanges. Options on some securities are traded in the
over-the-counter market, and may not be listed on any exchange. Options traded
in the over-the- counter market involve a greater risk that the securities
dealers participating in the transactions could fail to meet their obligations
to a Fund.
A Fund will include the premiums it has paid for the purchase of
unlisted options and the value of securities used to cover options it has
written for purposes of calculating whether the Fund has complied with its
policies on illiquid securities.
Futures Transactions and Related Options Transactions (Balanced and American
Retirement)
A Fund may enter into financial futures contracts as a hedge
against changes in prevailing levels of interest rates to seek relative
stability of principal and to establish more definitely the effective return on
securities held or intended to be acquired by the Fund or as a hedge against
changes in the prices of securities held by the Fund or to be acquired by the
Fund. A Fund's hedging may include sales of futures as an offset against the
effect of expected increases in interest rates or securities prices and
purchases of futures as an offset against the effect of expected declines in
interest rates.
For example, when a Fund anticipates a significant market or
market sector advance, it will purchase a stock index futures contract as a
hedge against not participating in such advance at a time when the Fund is not
fully invested. The purchase of a futures contract serves as a temporary
substitute for the
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purchase of individual securities which may then be purchased in an orderly
fashion. As such purchases are made, an equivalent amount of index based futures
contracts would be terminated by offsetting sales. In contrast, a Fund would
sell stock index futures contracts in anticipation of or in a general market or
market sector decline that may adversely affect the market value of the Fund's
portfolio. To the extent that a Fund's portfolio changes in value in correlation
with a given index, the sale of futures contracts on that index would
substantially reduce the risk to the portfolio of a market decline or change in
interest rates, and, by doing so, provide an alternative to the liquidation of
the Fund's securities positions and the resulting transaction costs.
A Fund intends to engage in options transactions which are related
to financial futures contracts for hedging purposes and in connection with the
hedging strategies described above.
Although techniques other than sales and purchases of futures
contracts and related options transactions could be used to reduce a Fund's
exposure to interest rate and/or market fluctuations, the Fund may be able to
hedge its exposure more effectively and perhaps at a lower cost through using
futures contracts and related options transactions. While a Fund does not intend
to take delivery of the instruments underlying futures contracts it holds, the
Fund does not intend to engage in such futures contracts for speculation.
Futures Contracts (Balanced and American Retirement)
Futures contracts are transactions in the commodities markets
rather than in the securities markets. A futures contract creates an obligation
by the seller to deliver to the buyer the commodity specified in the contract at
a specified future time for a specified price. The futures contract creates an
obligation by the buyer to accept delivery from the seller of the specified
commodity at the specified future time for the specified price. In contrast, a
spot transaction creates an immediate obligation for the seller to deliver and
the buyer to accept delivery of and pay for an identified commodity. In general,
futures contracts involve transactions in fungible goods such as wheat, coffee
and soybeans. However, in the last decade an increasing number of futures
contracts have been developed which specify financial instruments or financially
based indexes as the underlying commodity.
U.S. futures contracts are traded only on national futures
exchanges and are standardized as to maturity date and underlying financial
instrument. The principal financial futures exchanges in the United States are
The Board of Trade of the City of Chicago, the Chicago Mercantile Exchange, the
International Monetary Market (a division of the Chicago Mercantile Exchange),
the New York Futures Exchange and the Kansas City Board of Trade. Each exchange
guarantees performance under contract provisions through a clearing corporation,
a nonprofit organization managed by the exchange membership, which is also
responsible for handling daily accounting of deposits or withdrawals of margin.
A futures commission merchant ("Broker") effects each transaction in connection
with futures contracts for a commission. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC") and National Futures Association ("NFA").
Interest Rate Futures Contracts. The sale of an interest rate
futures contract creates an obligation by a Fund, as seller, to deliver the type
of financial instrument specified in the contract at a specified future time for
a specified price. The purchase of an interest rate futures contract creates an
obligation by a Fund, as purchaser, to accept delivery of the type of financial
instrument specified at a specified future time for a specified price. The
specific securities delivered or accepted, respectively, at settlement date, are
not determined until at or near that date. The determination is in accordance
with the rules of the exchange on which the futures contract sale or purchase
was made.
Currently, interest rate futures contracts can be purchased or
sold on 90-day U.S. Treasury bills, U.S. Treasury bonds, U.S. Treasury notes
with maturities between 6 1/2 and 10 years, (GNMA) certificates, 90-day domestic
bank certificates of deposit, 90-day commercial paper, and 90-day Eurodollar
certificates of deposit. It is expected that futures contracts trading in
additional financial instruments will be
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authorized. The standard contract size is $100,000 for futures contracts in
U.S. Treasury bonds, U.S. Treasury notes and GNMA certificates, and $1,000,000
for the other designated contracts. While U.S. Treasury bonds, U.S. Treasury
bills, U.S. Treasury notes and GNMA certificates are backed by the full faith
and credit of the U.S. government, futures contracts in U.S. government
securities are not obligations of the U.S. Treasury.
Index Based Futures Contracts, Other Than Stock Index Based. It is
expected that bond index and other financially based index futures contracts
will be developed in the future. It is anticipated that such index based futures
contracts will be structured in the same way as stock index futures contracts
but will be measured by changes in interest rates, related indexes or other
measures, such as the consumer price index. In the event that such futures
contracts are developed, a Fund may sell interest rate index and other index
based futures contracts to hedge against changes which are expected to affect
the Fund's portfolio.
The purchase or sale of a futures contract differs from the
purchase or sale of a security, in that no price or premium is paid or received.
Instead, to initiate trading an amount of cash, cash equivalents, money market
instruments, or U.S. Treasury bills equal to approximately 1 1/2% (up to 5%) of
the contract amount must be deposited by a Fund with the Broker. This amount is
known as initial margin. The nature of initial margin in futures transactions is
different from that of margin in security transactions. Futures contract margin
does not involve the borrowing of funds by the customer to finance the
transactions. Rather, the initial margin is in the nature of a performance bond
or good faith deposit on the contract which is returned to a Fund upon
termination of the futures contract assuming all contractual obligations have
been satisfied. The margin required for a particular futures contract is set by
the exchange on which the contract is traded and may be significantly modified
from time to time by the exchange during the term of the contract.
Subsequent payments, called variation margin, to the Broker and
from the Broker, are made on a daily basis as the value of the underlying
instrument or index fluctuates making the long and short positions in the
futures contract more or less valuable, a process known as mark-to-market. For
example, when a Fund has purchased a futures contract and the price of the
underlying financial instrument or index has risen, that position will have
increased in value, and a Fund will receive from the Broker a variation margin
payment equal to that increase in value. Conversely, where a Fund has purchased
a futures contract and the price of the underlying financial instrument or index
has declined, the position would be less valuable and the Fund would be required
to make a variation margin payment to the Broker. At any time prior to
expiration of the futures contract, a Fund may elect to close the position. A
final determination of variation margin is then made, additional cash is
required to be paid to or released by the Broker, and the Fund realizes a loss
or gain.
The Trust intends to enter into arrangements with its custodian
and with Brokers to enable the initial margin of a Fund and any variation margin
to be held in a segregated account by its custodian on behalf of the Broker.
Although interest rate futures contracts by their terms call for
actual delivery or acceptance of financial instruments, and index based futures
contracts call for the delivery of cash equal to the difference between the
closing value of the index on the expiration date of the contract and the price
at which the futures contract is originally made, in most cases such futures
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out a futures contract sale is effected by an offsetting
transaction in which a Fund enters into a futures contract purchase for the same
aggregate amount of the specific type of financial instrument or index and same
delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is paid the difference and thus realizes a gain. If the
offsetting purchase price exceeds the sale price, the Fund pays the difference
and realizes a loss. Similarly, the closing out of a futures contract purchase
is effected by an offsetting transaction in which a Fund enters into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the Fund
realizes a gain. If the purchase price exceeds the offsetting sale price the
Fund realizes a loss. The amount of a Fund's gain or loss on any transaction is
reduced or increased, respectively, by the amount of
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any transaction costs incurred by the Fund.
As an example of an offsetting transaction, the contractual
obligations arising from the sale of one contract of September U.S. Treasury
bills on an exchange may be fulfilled at any time before delivery of the
contract is required (i.e. on a specified date in September, the "delivery
month") by the purchase of one contract of September U.S. Treasury bills on the
same exchange. In such instance the difference between the price at which the
futures contract was sold and the price paid for the offsetting purchase, after
allowance for transaction costs, represents the profit or loss to a Fund.
There can be no assurance, however, that a Fund will be able to
enter into an offsetting transaction with respect to a particular contract at a
particular time. If a Fund is not able to enter into an offsetting transaction,
the Fund will continue to be required to maintain the margin deposits on the
contract and to complete the contract according to its terms.
Options on Financial Futures. A Fund may purchase call and put
options on financial futures contracts and sell such options to terminate an
existing position. Options on futures are similar to options on stocks except
that an option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put)
rather than to purchase or sell stock at a specified exercise price at any time
during the period of the option. Upon exercise of the option, the delivery of
the futures position by the writer of the option to the holder of the option
will be accompanied by delivery of the accumulated balance in the writer's
futures margin account. This amount represents the amount by which the market
price of the futures contract at exercise exceeds, in the case of a call, or is
less than, in the case of a put, the exercise price of the option on the futures
contract. If an option is exercised on the last trading day prior to the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and value of
the futures contract.
A Fund intends to use options on financial futures contracts in
connection with hedging strategies. In the future the Fund may use such options
for other purposes.
Purchase of Put Options on Futures Contracts. The purchase of
protective put options on financial futures contracts is analogous to the
purchase of protective puts on individual stocks, where an absolute level of
protection is sought below which no additional economic loss would be incurred
by a Fund. Put options may be purchased to hedge a portfolio of stocks or debt
instruments or a position in the futures contract upon which the put option is
based.
Purchase of Call Options on Futures Contracts. The purchase of
call options on financial futures contracts represents a means of obtaining
temporary exposure to market appreciation at limited risk. It is analogous to
the purchase of a call option on an individual stock, which can be used as a
substitute for a position in the stock itself. Depending on the pricing of the
option compared to either the futures contract upon which it is based, or upon
the price of the underlying financial instrument or index itself, purchase of a
call option may be less risky than the ownership of the interest rate or index
based futures contract or the underlying securities. Call options on commodity
futures contracts may be purchased to hedge against an interest rate increase or
a market advance when a Fund is not fully invested.
Use of New Investment Techniques Involving Financial Futures
Contracts or Related Options. A Fund may employ new investment techniques
involving financial futures contracts and related options. A Fund intends to
take advantage of new techniques in these areas which may be developed from time
to time and which are consistent with the Fund's investment objective. The Trust
believes that no additional techniques have been identified for employment by a
Fund in the foreseeable future other than those described above.
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Limitations on Purchase and Sale of Futures Contracts and Related
Options on Such Futures Contracts. A Fund will not enter into a futures contract
if, as a result thereof, more than 5% of the Fund's total assets (taken at
market value at the time of entering into the contract) would be committed to
margin deposits on such futures contracts, including any premiums paid for
options on futures.
A Fund intends that its futures contracts and related options
transactions will be entered into for traditional hedging purposes. That is,
futures contracts will be sold to protect against a decline in the price of
securities that a Fund owns, or futures contracts will be purchased to protect
the Fund against an increase in the price of securities it intends to purchase.
A Fund does not intend to enter into futures contracts for speculation.
In instances involving the purchase of futures contracts by a
Fund, an amount of cash and cash equivalents equal to the market value of the
futures contracts will be deposited in a segregated account and/or in a margin
account with a Broker to collateralize the position and thereby insure that the
use of such futures is unleveraged.
Risks of Futures Contracts. Financial futures contracts prices are
volatile and are influenced, among other things, by changes in stock prices,
market conditions, prevailing interest rates and anticipation of future stock
prices, market movements or interest rate changes, all of which in turn are
affected by economic conditions, such as government fiscal and monetary policies
and actions, and national and international political and economic events.
At best, the correlation between changes in prices of futures
contracts and of the securities being hedged can be only approximate. The degree
of imperfection of correlation depends upon various circumstances, such as
variations in speculative market demand for futures contracts and for
securities, including technical influences in futures contracts trading; and
differences between the securities being hedged and the financial instruments
and indexes underlying the standard futures contracts available for trading, in
such respects as interest rate levels, maturities and creditworthiness of
issuers, or identities of securities comprising the index and those in a Fund's
portfolio. In addition, futures contract transactions involve the remote risk
that a party may be unable to fulfill its obligations and that the amount of the
obligation will be beyond the ability of the clearing broker to satisfy. A
decision of whether, when and how to hedge involves the exercise of skill and
judgment, and even a well conceived hedge may be unsuccessful to some degree
because of market behavior or unexpected interest rate trends.
Because of the low margin deposits required, futures trading
involves an extremely high degree of leverage. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss, as well as gain, to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a 10% decrease
in the value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs. If the account was then
closed out at a total decrease of 15% of the futures contract, it would result
in a loss equal to 150% of the original margin deposit. Thus, a purchase or sale
of a futures contract may result in losses in excess of the amount invested in
the futures contract. However, a Fund would presumably have sustained comparable
losses if, instead of entering into the futures contract, it had invested in the
underlying financial instrument. Furthermore, in order to be certain that a Fund
has sufficient assets to satisfy its obligations under a futures contract, the
Fund will establish a segregated account in connection with its futures
contracts which will hold cash or cash equivalents equal in value to the current
value of the underlying instruments or indices less the margins on deposit.
Most U.S. futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses because the limit may prevent the
liquidation of
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<PAGE>
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
Risks of Options on Futures Contracts. In addition to the risks
described above for financial futures contracts, there are several special risks
relating to options on futures contracts. The ability to establish and close out
positions on such options will be subject to the development and maintenance of
a liquid secondary market. There is no assurance that a liquid secondary market
will exist for any particular contract or at any particular time. A Fund will
not purchase options on any futures contract unless and until it believes that
the market for such options has developed sufficiently that the risks in
connection with such options are not greater than the risks in connection with
the futures contracts. Compared to the use of futures contracts, the purchase of
options on such futures involves less potential risk to a Fund because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). However, there may be circumstances when the use of an option on a
futures contract would result in a loss to a Fund, even though the use of a
futures contract would not, such as when there is no movement in the level of
the futures contract.
Investment Company Securities
Securities of other investment companies may be acquired by a Fund
to the extent permitted under the 1940 Act. These limits require that, as
determined immediately after a purchase is made, (i) not more than 5% of a
Fund's total assets will be invested in the securities of any one investment
company, (ii) not more than 10% of the value of its total assets will be
invested in the aggregate in securities of investment companies as a group, and
(iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by a Fund. As a shareholder of another investment company,
a Fund would bear, along with other shareholders, its pro rata portion of the
other investment company's expenses, including advisory fees. These expenses
would be in addition to the advisory and other expenses that the Fund bears
directly in connection with its own operations. However, a 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, polices and limitations as the Fund.
Repurchase Agreements
A Fund may enter into repurchase agreements with entities that are
registered 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 Advisor to be creditworthy. A repurchase agreement is an agreement by
which a person (e.g., a 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's custodian or a third party 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 a 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 a Fund
might be delayed pending court action. A Fund 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. A
Fund will only enter into repurchase agreements with banks and other recognized
financial institutions, such as broker-dealers, which are deemed by the Advisor
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<PAGE>
to be creditworthy pursuant to guidelines established by the Trustees.
Reverse Repurchase Agreements
A Fund may also enter into reverse repurchase agreements. These
transactions are similar to borrowing cash. In a reverse repurchase agreement, a
Fund transfers possession of a portfolio instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate.
The use of reverse repurchase agreements may enable a Fund to
avoid selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase agreements
does not ensure that the Fund will be able to avoid selling portfolio
instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of a
Fund, in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked to
market daily and maintained until the transaction is settled.
Illiquid and Restricted Securities
A Fund may not invest more than 15% of its net assets in
securities that are illiquid. A security is illiquid when a Fund cannot 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.
A Fund may invest in "restricted" securities, i.e., securities
subject to restrictions on resale under federal securities laws. Rule 144A under
the Securities Act of 1933 ("Rule 144A") allows certain restricted securities to
trade freely among qualified institutional investors. Since Rule 144A securities
may have limited markets, the Board of Trustees will determine whether such
securities should be considered illiquid for the purpose of determining a Fund's
compliance with the limit on illiquid securities indicated above. In determining
the liquidity of Rule 144A securities, the Trustees will 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
A 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. A 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 and a Fund will maintain
liquid assets in an amount at least equal in value to the Fund's 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
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<PAGE>
obtained in the transaction itself. In that case there could be an unrealized
loss at the time of delivery.
A 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 a 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 a 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 in a segregated account. When purchasing a
security on a when-issued, delayed-delivery, or forward commitment basis, a 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 a Fund is not required to pay for the
security until the delivery date, these risks are in addition to the risks
associated with the Fund's other investments.
Foreign Currency Transactions
As one way of managing exchange rate risk, a 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 a Fund will deliver and receive when the contract is
completed) is fixed when the Fund enters into the contract. A Fund usually will
enter into these contracts to stabilize the U.S. dollar value of a security it
has agreed to buy or sell. Each Fund intends to use these contracts to hedge the
U.S. dollar value of a security it already owns, particularly if the Fund's
advisor expects a decrease in the value of the currency in which the foreign
security is denominated. Although a Fund will attempt to benefit from using
forward contracts, the success of its hedging strategy will depend on the
Advisor's ability to predict accurately the future exchange rates between
foreign currencies and the U.S. dollar. The value of a 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 a Fund. A Fund may also
purchase and sell options related to foreign currencies in connection with
hedging strategies.
Foreign Securities
A 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 a 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; the 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.
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<PAGE>
Lower Rated Bonds (Balanced and American Retirement)
Balanced and American Retirement may invest in high yield, high
risk bonds, commonly known as "junk bonds." While investment in high yield, high
risk bonds provides opportunities to maximize return over time, investors should
be aware of the following risks associated with high yield, high risk bonds:
(1) High yield, high risk bonds are rated below investment grade, i.e.,
BB or lower by Standard & Poor's Ratings 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. Balanced and American Retirement may also invest in unrated
securities that, in their Advisor's judgment, offer comparable yields and risks
as securities that are rated as low as D by S&P or Cby Moody's. 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 Appendix A to this SAI
for a description of these rating categories.) Balanced and American Retirement
intend to invest in D rated debt only in cases when, in their Advisor'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.
(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) The value of high yield, high risk bonds 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) The value, of high yield, high risk bonds like that 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) a Fund's
ability to dispose of particular issues and (3) a Fund's ability to obtain
accurate market quotations for purposes of valuing its assets.
(6) Zero coupon bonds and payment-in-kind securities ("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, a 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, a 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. A 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.
An Advisor 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's and
Moody's assigned ratings are based largely on historical
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<PAGE>
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.
MANAGEMENT OF THE TRUST
Set forth below are the Trustees and officers of the Trust and their
principal occupations and 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.
<TABLE>
<CAPTION>
NAME 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) and President of Centrum Equities and Centrum
Properties, Inc.
Charles A. Austin III Trustee Investment Counselor to Appleton Partners, Inc.;
(DOB: 10/23/34) former Director, Executive Vice President and
Treasurer, State Street Research & Management
Company (investment advice); Director, The Andover
Companies (Insurance); and Trustee, Arthritis
Foundation of New England
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<PAGE>
NAME POSITION WITH TRUST PRINCIPAL OCCUPATIONS FOR LAST FIVE YEARS
- ------------------------------- ------------------------- -----------------------------------------------------------------
K. Dun Gifford Trustee Trustee, Treasurer and Chairman of the Finance Committee,
(DOB: 10/12/38) 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;
and former Chair man,
Gifford, Drescher &
Associates
(environmental
consulting)
James S. Howell Chairman of the Former Chairman of the Distribution Foundation for
(DOB: 8/13/24) Board of Trustees the Carolinas; and former Vice President of Lance Inc.
(food manufacturing).
Leroy Keith, Jr. Trustee Chairman of the Board and Chief Executive Officer, Carson
(DOB: 2/14/39) Products Company; Director of Phoenix Total Return Fund and
Equifax, Inc.;
Trustee of Phoenix
Series Fund, Phoenix
Multi-Portfolio Fund,
and The Phoenix Big
Edge Series Fund; and
former President,
Morehouse College.
Gerald M. McDonnell Trustee Sales Representative with Nucor-Yamoto, Inc. (steel
(DOB: 7/14/39) 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 William Walt Pettit, P.A.
(DOB: 8/26/55)
David M. Richardson Trustee Vice Chair and former Executive Vice President, DHR
(DOB: 9/14/41) 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; former Managed Health Care Consultant;
and former President, Primary Physician Care.
Michael S. Scofield Trustee Attorney, Law Offices of Michael S. Scofield.
(DOB: 2/20/43)
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<PAGE>
NAME POSITION WITH TRUST PRINCIPAL OCCUPATIONS FOR LAST FIVE YEARS
- ------------------------------- ------------------------- -----------------------------------------------------------------
Richard J. Shima Trustee Former 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.
William J. Tomko* President and Senior Vice President and Operations Executive,
(DOB: 8/30/58) Treasurer BISYS Fund Services.
Nimish S. Bhatt* Vice President and Vice President, Tax, BISYS Fund Services; former
(DOB: 6/6/63) Assistant Treasurer Assistant Vice President, Evergreen Asset
Management
Corp./First Union
National Bank; former
Senior Tax
Consulting/Acting
Manager, Investment
Companies Group,
Price Waterhouse LLP,
New York.
Bryan Haft* Vice President Team Leader, Fund Administration, BISYS Fund
(DOB: 1/23/65) Services.
D'Ray Moore* Secretary Vice President, Client Services, BISYS Fund Services.
(DOB: 3/30/59)
</TABLE>
*Address: BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio 43219-8001
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<PAGE>
Trustee Compensation
Listed below is the Trustee compensation for the fiscal year ended
March 31, 1998.
<TABLE>
<CAPTION>
Aggregate
Compensation Total Compensation from Trust
Trustee from Trust and Fund Complex
<S> <C> <C>
Laurence B. Ashkin $ 9,856 $ 72,681
Charles A. Austin III (a) 6,993 49,297
Foster Bam 7,722 53,236
K. Dun Gifford 6,468 46,061
James S. Howell (b) 12,072 109,570
Robert J. Jeffries 2,167 18,222
Leroy Keith Jr. 6,633 46,461
Gerald M. McDonnell (c) 10,718 94,500
Thomas L. McVerry (d) 10,825 96,805
William Walt Pettit (e) 9,700 86,613
David M. Richardson 6,927 48,673
Russell A. Salton, III (f) 10,424 95,031
Michael S. Scofield 10,835 97,794
Richard J. Shima 8,681 67,325
</TABLE>
(a) Compensation from the Trust and from the Trust and Fund Complex include
$1,049 and $7,395, respectively, payable in later years as deferred
compensation.
(b) Compensation from the Trust and from the Trust and Fund Complex include
$9,658 and $87,656, respectively, payable in later years as deferred
compensation.
(c) Total compensation from the Trust and from the Trust and Fund Complex
of $10,718 and $94,500, respectively, payable in later years as
deferred compensation.
(d) Total compensation from the Trust and from the Trust and Fund Complex
of $10,825 and $96,805, respectively, payable in later years as
deferred compensation.
(e) Total compensation from the Trust and from the Trust and Fund Complex
of $9,700 and $86,613, respectively, payable in later years as deferred
compensation.
(g) Total compensation from the Trust and from the Trust and Fund Complex
of $10,424 and $95,031, respectively, payable in later years as
deferred compensation.
PRINCIPAL HOLDERS OF FUND SHARES
As of July 1, 1998, the officers and Trustees of the Trust owned as a
group less than 1% of the outstanding of any class of each Fund.
Set forth below is information with respect to each person who, to each
Fund's knowledge, owned beneficially or of record 5% or more of a class of each
Fund's outstanding shares as of July 1, 1998.
Foundation Class A
None
Foundation Class B
None
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<PAGE>
Foundation Class C
MLPF&S for the sole benefit of its customers
Attn: Fund Administration 26.21%
4800 Deer Lake Dr. East 2nd fl.
Jacksonville, FL 32246-6484
Foundation Class Y
First Union National Bank/EB/INT, Cash Account
Attn: Trust Operations Fund Group 10.43%
401 S. Tryon Street; 3rd Floor CMG 1151
Charlotte, NC 28202-1911
First Union National Bank/EB/INT, Reinvest Account
Attn: Trust Operations Fund Group 36.39%
401 S. Tryon Street;3rd Floor CMG 1151
Charlotte, NC 29202-1911 Mac & Co.
Aetna Retirement Services/Central Valuation Unit 12.01%
Attn: Mutual Funds Operations
P.O. Box 3198
Pittsburgh, PA 15230-3198
AETNA Life Insurance
Life & Annuity/Central Valuation Unit 5.41%
Attn: Jackie Johnson, Conveyor TS31
151 Farminton Ave.
Hartford, CT 06156-0001
Charles Schwab & Co. Inc.
Special Custody Account fo r the Exclusive Benefit of Customers 6.46%
Reinvest Account Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104-4122
Tax Strategic Class A
None
Tax Strategic Class B
MLPF&S for the sole benefit of its customers
Attn: Fund Administration 97H99 10.52%
4800 Deer Lake Dr. East 2nd Fl.
Jacksonville, FL 32246-6484
Tax Strategic Class C
MLPF&S for the sole benefit of its customers
Attn: Fund Administration 29.86%
4800 Deer Lake Dr., East 2nd Fl.
Jacksonville, FL 32246-6484
Tax Strategic Class Y
Nola Maddox Falcone
70 Drake Rd. 7.81%
Scarsdale, NY 10583-6447
First Union National Bank, EB/INT, Cash Account
Attn: Trust Operations Fund Group 7.79%
401 S. Tryon St. 3rd Floor CMG 1151
Charlotte, NC 28202-1911
Stephen A. Lieber
1210 Greacen Point Rd. 39.63%
Mamaroneck, NY 10543-4613
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<PAGE>
First Union National Bank EB/INT/ Cash Account
Attn: Trust Operations Fund Group 7.27%
401 S. Tryon St., 3rd Fl
Charlotte, NC 28202-1911
American Retirement Class A None
American Retirement Class B None
American Retirement Class C None
American Retirement Class Y
Charles Schwab & Co. Inc.
Special Custody Account FBO Exclusive Benefit of Customers 21.21%
Reinvest Account, Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
First Union National Bank/EB/INT, Reinvest Account
Attn: Trust Operations Fund Group 18.70%
401 S. Tryon Street, 3rd Fl., CMG 1151
Charlotte, NC 28202-1911
Balanced Class A
None
Balanced Class B
None
Balanced Class C
MLPF&S for the sole benefit of its customers
Attn: Fund Administration 15.72%
4800 Deer Lake Dr. East 2nd Fl.
Jacksonville, FL 32246-6484
FUBS & Co. FEBO
FUNB NC FBO Goldstein S. Bldg./Supply Loan Account 5.81%
Attn: Frank Pierce Loan Ofcs.
P.O. Box 3008, 6th Fl.
Raleigh, NC 27602-3008
Donaldson Lufkin Jenrette
Securities Corporation Inc. 5.16%
P.O. Box 2052
Jersey City, NJ 07303-2052
State Street Bank and Trust Company
Rollover IRA FBO Rita E. Resina 6.77%
291 Minneford
Bronx, NY 10464-1421
Balanced Class Y
First Union National Bank
Trust Accounts/ Attn: Ginny Batten 65.77%
11th Floor CMG - 1151
301 S. Tryon St.
Charlotte, NC 28202-1910
First Union National Bank
Trust Accounts Attn: Ginny Batten 30.89%
11th Floor CMG - 1151
301 S. Tryon St.
Charlotte, NC 28202-1910
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORS
Each Fund has its own investment advisor (the "Advisor"). Each Advisor
is a direct or indirect subsidiary of First Union Corporation ("First Union"), a
bank holding company headquartered at 301 South College Street, Charlotte, North
Carolina 28288-0630. First Union and its subsidiaries provide a broad range of
financial services to individuals and businesses throughout the United States.
Some of the Funds also have an investment subadvisor (the
"Subadvisor"). Each Fund's Advisor and, if applicable, its Subadvisor, is
discussed below, including a description of fees. For a summary of amounts paid
by the Funds to their Advisor for the last three fiscal years see the section
"Financial Information" below.
Evergreen Asset Management Corp. ("Evergreen Asset"), 2500 Westchester
Avenue, Purchase, New York 10577, is the Advisor to Foundation, Tax Strategic
and American Retirement, each of which pays Evergreen Asset an annual percentage
of its average daily net assets, as follows:
Agregate Net Asset Value of
Management Fee the Shares of a Fund
Foundation and Tax Strategic:
0.875% of the first $750,000,000; and
0.750% of the next $250,000,000; and
0.700% of amounts over $1,000,000,000.
Aggregate Net Asset Value of
Management Fee the Shares of a Fund
American Retirement:
0.75% of the first $750,000,000; and
0.70% of amounts over $750,000,000.
Keystone Investment Management Company ("Keystone"), 200 Berkeley
Street, Boston, Massachusetts 02116, is the Advisor to Balanced.
Balanced pays Keystone a fee for its services at the annual rate set
forth below
1.5% of Gross Dividend
and Interest Income
Aggregate Net Plus Aggregate Net Asset Value
Management Fee of the 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.
Keystone's fee is computed as of the close of business each
business day and is payable monthly.
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<PAGE>
Lieber & Company, 2500 Westchester Avenue, Purchase, New York 10577, is the
Subadvisor to Foundation, Tax Strategic and American Retirement. Lieber &
Company is reimbursed by Evergreen Asset for the direct and indirect costs of
providing subadvisory services to a Fund.
INVESTMENT ADVISORY AGREEMENTS
On behalf of each of its Funds, the Trust has entered into an
investment advisory agreement with each Advisor (the "Advisory Agreements").
Under each Advisory Agreement, and subject to the supervision of the Trust's
Board of Trustees, the Advisor furnishes to the appropriate 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 Advisor pays for all of the expenses
incurred in connection with the provision of its services. Each Fund pays for
all charges and expenses, other than those specifically referred to as being
borne by the Advisor, 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 of the Trust
(Trustees who are not interested persons of the Fund, as defined in the 1940
Act); (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 such Fund and its shares with the SEC or under state or other
securities laws; (11) expenses of preparing, printing and mailing prospectuses,
SAIs, notices, reports and proxy materials to shareholders of such Fund; (12)
expenses of shareholders' and Trustees' meetings; (13) charges and expenses of
legal counsel for such Fund and for the Independent Trustees of the Trust on
matters relating to such Fund; (14) charges and expenses of filing annual and
other reports with the SEC and other authorities; and (15) all extraordinary
charges and expenses of such Fund. (See also the section entitled "Financial
Information.")
Each 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 a
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 cast in person at a meeting called for the purpose of
voting on such approval. The Advisory Agreements 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. Each Advisory Agreement will terminate
automatically upon its "assignment" as that term is defined in the 1940 Act.
Transactions Among Advisory Affiliates
The Trust has adopted procedures pursuant to Rule 17a-7 under the
1940 Act ("Rule 17a-7 Procedures"). The Rule 17a-7 Procedures permit a Fund to
buy or sell securities from another investment company for which a subsidiary of
First Union is an investment advisor. The Rule 17a-7 Procedures also allow the
Funds to buy or sell securities from other advisory clients for whom a
subsidiary of First Union is an investment advisor. The Funds 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 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 and Class
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<PAGE>
C shares are designed to permit an investor to purchase such shares through
broker-dealers without the assessment of a front-end sales charge, while at the
same time permitting the Distributor to compensate broker-dealers in connection
with the sale of such shares. In this regard, the purpose and function of the
combined contingent deferred sales charge and distribution services fee on the
Class B shares 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 a Fund's shares.
Under the Rule 12b-1 Distribution Plans that have been adopted by
each Fund with respect to each of its Class A, Class B and Class C shares (each
a "Plan" and collectively, the "Plans"), the Treasurer of the Trust reports the
amounts expended under the Plans for a Fund 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 Independent Trustees are committed to the discretion of such Independent
Trustees then in office.
Each Advisor may from time to time from its own funds or such
other resources as may be permitted by rules of the SEC make payments for
distribution services to the Distributor; the latter may in turn pay part or all
of such compensation to brokers or other persons for their distribution
assistance.
Each Plan and Distribution Agreement will continue in effect for
successive twelve-month periods provided, however, that such continuance is
specifically approved at least annually by the Trustees of the Trust or by vote
of the holders of a majority of the outstanding voting securities of that Class
and, in either case, by a majority of the Independent Trustees of the Trust who
have no direct or indirect financial interest in the operation of the Plan or
any agreement related thereto.
The Plans permit the payment of fees to brokers and others for
distribution and shareholder related administrative services and to
broker-dealers, depository institutions, financial intermediaries and
administrators for administrative services as to Class A, Class B and Class C
shares. The Plans are designed to (i) stimulate brokers to provide distribution
and administrative support services to a Fund and holders of Class A, Class B
and Class C shares, and (ii) stimulate administrators to render administrative
support services to a 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 a Fund
reasonably requests for its Class A, Class B and Class C shares.
In the event that a Plan or Distribution Agreement is terminated
or not continued with respect to one or more Classes of a Fund, (i) no
distribution fees (other than current amounts accrued but not yet paid) would be
owed by 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 a Fund's
outstanding voting securities, voting separately by class, and in either case,
by a majority of the Independent 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 a Plan or Distribution
Agreement without the approval of a majority of the holders of the outstanding
voting shares of the Class affected. Any Plan or Distribution Agreement may be
terminated (i) by a Fund without penalty at
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<PAGE>
any time by a majority vote of the holders of the outstanding voting securities
of a Fund, voting separately by Class or by a majority vote of the Independent
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, a Fund need give no notice to the Distributor. Any Distribution
Agreement will terminate automatically in the event of its assignment.
For a summary of distribution fees paid by the Funds for the last three fiscal
years see "Financial Information" below.
ADDITIONAL SERVICE PROVIDERS
Administrator
Evergreen Investment Services, Inc. ("EIS"), 200 Berkeley Street,
Boston, Massachusetts 02116-5034, serves as administrator to the Funds, subject
to the supervision and control of the Trust's Board of Trustees. EIS provides
each Fund with facilities, equipment and personnel and is entitled to receive a
fee from the Fund at a rate based on the total assets of all mutual funds
advised by First Union subsidiaries, and for which EIS serves as administrator,
as follows:
Total assets of
Administrator Fee First Union subsidiaries
Foundation, Tax Strategic and American Retirement:
0.060% of the first $7 billion
0.0425% of the next $3 billion
0.035% of the next $5 billion
0.025% of the next $10 billion
0.019% of the next $5 billion
0.014% of amounts over $30 billion
Aggregate Net Total assets of
Administrator Fee First Union subsidiaries
Balanced:
0.050% of the first $7 billion
0.035% of the next $3 billion
0.030% of the next $5 billion
0.020% of the next $10 billion
0.015% of the next $5 billion
0.010% of amounts over $30 billion
Transfer Agent
Evergreen Service Company ("ESC"), a subsidiary of First Union, is
the Funds' transfer agent. The transfer agent issues and redeems shares, pays
dividends and performs other duties in connection with the maintenance of
shareholder accounts. ESC's address is 200 Berkeley Street, Boston,
Massachusetts 02116-5034.
Independent Auditors
KPMG Peat Marwick LLP, is the Funds' independent auditor. The
independent auditor audits the Funds' annual financial statements. The address
of KPMG Peat Marwick LLP is 99 High Street, Boston, Massachusetts 02110.
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<PAGE>
Custodian
State Street Bank and Trust Company is the Funds' custodian. The custodian
keeps custody of each Fund's securities and cash and performs other related
duties. State Street Bank and Trust Company's address is P.O. Box 9021, Boston,
Massachusetts 02205-9827.
Legal Counsel
Sullivan & Worcester LLP provides legal advice to the Funds. Its address is
1025 Connecticut Avenue, N.W., Washington, D.C. 20036.
BROKERAGE
The Board of Trustees periodically reviews each Fund's brokerage
policy. Due to future regulatory developments affecting the securities exchanges
and brokerage practices, the Board of Trustees may modify or eliminate any of
the following policies.
BROKERAGE COMMISSIONS
Generally, a Fund expects to purchase and sell its equity
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 mark-down.
A Fund expects to purchase and sell its fixed income securities
through principal transactions directly from the issuer or an underwriter or
market maker for the securities. Generally, a Fund will not pay brokerage
commissions for such purchases. When a Fund buys a security from an underwriter,
the purchase price will usually include an 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 a 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
When buying and selling portfolio securities, each Advisor seeks
brokers who can provide the most benefit to a Fund or Funds for which a trade is
being made. When selecting a broker, an Advisor will primarily look for the best
price at the lowest commission, but in the context of the broker's:
1. ability to provide the best net financial result to a Fund;
2. efficiency in handling trades;
3. ability to trade large blocks of securities;
4. readiness to handle difficult trades;
5. financial strength and stability; and
6. provision of "research services," defined as (a) reports and
analyses concerning issuers, industries, securities and
economic factors, and (b) other information useful in making
investment decisions.
A Fund's management weighs these considerations in determining the
overall reasonableness of the brokerage commission paid.
Research services provided by a broker to an Advisor do not
replace, but supplement, the services an Advisor is required to deliver to a
Fund under the Advisory Agreement. It is impracticable for an Advisor to
allocate the cost, value and specific application of such research services
among its clients
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<PAGE>
because research services intended for one client may indirectly benefit
another. Under its Investment Advisory Agreement, Keystone is permitted to pay
higher brokerage commissions for brokerage and research services in accordance
with Section 28(e) of the 1934 Act. In the event Keystone follows such a
practice, it will do so on a basis that is fair and equitable to Balanced.
The Trust's Board of Trustees has determined that the Funds may
consider sales of Fund shares as a factor in the selection of brokers to execute
portfolio transactions, subject to the requirements of best execution described
above.
Lieber & Company ("Lieber"), an affiliate of Evergreen Asset and a
member of the New York and American Stock Exchanges, will to the extent
practicable effect substantially all of the portfolio transactions for
Foundation, Tax Strategic and American Retirement effected on those exchanges.
Under Section 11(a) of the Securities Exchange Act of 1934 (the
"1934 Act"), as amended, and the rules adopted thereunder by the SEC, Lieber may
be compensated for effecting transactions in the rules are met. Each Fund
advised by Evergreen Asset has entered into an agreement with Lieber authorizing
Lieber to retain compensation fro brokerage services. In accordance with such
agreement, it is contemplated that Lieber, a member of the New York and American
Stock Exchanges, will, to the extent practicable, provide brokerage services to
Foundation, Tax Strategic and American Retirement with respect to substantially
all securities transactions effected on the New York and American Stock
Exchanges. In such transactions, the Advisor will seek the best execution at the
most favorable price while paying a commission rate no higher than that offered
to other clients of Lieber or that comparable execution capability in a similar
transaction. However, no Fund will engage in transactions in which Lieber would
be a principal. While no Fund advised by Evergreen Asset contemplates any
ongoing arrangements with other brokerage firms, brokerage business may be given
from time to time to the firms. In addition, the Trustees have adopted
procedures pursuant to Rule 17e-1 under the 1940 Act to ensure that all
brokerage transactions with Lieber, as an affiliated broker-dealer, are fair and
reasonable.
SIMULTANEOUS TRANSACTIONS
An Advisor makes investment decisions for a Fund independently of
decisions made for its other clients. When a security is suitable for the
investment objective of more than one client, it may be prudent for an Advisor
to engage in a simultaneous transaction, that is, buy or sell the same security
for more than one client. Each Advisor strives for an equitable result in such
transactions by using an allocation formula. The high volume involved in some
simultaneous transactions can result in greater value to the Funds, but the
ideal price or trading volume may not always be achieved for an individual Fund.
In order to take advantage of the availablility of lower purchase prices, the
Funds may occasionally participate in group bidding for the direct purchase from
an issuer of certain securities.
For a summary of brokerage commission paid by the Funds for the
last three fiscal years see "Financial Information" below.
TRUST ORGANIZATION
FORM OF ORGANIZATION
Each Fund is a series of an open-end management investment
company, known as Evergreen Equity Trust. The Trust was formed as a Delaware
business trust under an Agreement and Declaration of Trust dated September 18,
1997 (the "Declaration of Trust"). A copy of the Declaration of Trust is on file
at the SEC 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.
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<PAGE>
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 each 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 shareholder meetings. 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 shares voting will not be able to elect any Trustees.
After the initial meeting as described above, no further
shareholder meetings 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 FUNDS OFFER SHARES TO THE PUBLIC
You may buy shares of a Fund through the Distributor,
broker-dealers that have entered into special agreements with the Distributor or
certain other financial institutions. Each Fund offers four classes of shares
that differ primarily with respect to sales charges and distribution fees.
Depending upon the class of shares, you will pay an initial sales charge when
you buy a Fund's shares, a contingent deferred sales charge (a "CDSC") when you
redeem a Fund's shares or no sales charges at all.
Class A Shares
With certain exceptions, when you purchase Class A shares you will
pay a maximum sales charge equal to 4.75% of the offering price. (The
prospectuses contain a complete table of applicable sales charges and a
discussion of sales charge reductions or waivers that may apply to purchases.
See also the section in this SAI entitled "Financial Information" for an example
of the method of computing the offering price of Class A shares.) If you
purchase Class A shares in the amount of $1 million or more, without an initial
sales charge, the Funds will charge a CDSC of 1.00% if you redeem during the
month of your purchase and the 12-month period following the month of your
purchase. See "Contingent Deferred Sales Charge" below.
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<PAGE>
Class B Shares
The Funds offer Class B shares at net asset value without an
initial sales charge. With certain exceptions, however, the Funds will charge a
CDSC on shares you redeem within 72 months after the month of your purchase, in
accordance with the following schedule:
<TABLE>
<CAPTION>
REDEMPTION TIMING CDSC RATE
<S> <C>
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%
</TABLE>
Class B shares that have been outstanding for seven years after the
month of purchase will automatically convert to Class A shares without
imposition of a front-end sales charge or exchange fee. (Conversion of Class B
shares represented by stock certificates will require the return of the stock
certificate to ESC.)
Class C Shares
Class C shares are available only through broker-dealers who have
entered into special distribution agreements with the Distributor. The Funds
offer Class C shares at net asset value without an initial sales charge. With
certain exceptions, however, the Funds will charge a CDSC of 1.00% on shares you
redeem within 12 months after the month of your purchase. See "Contingent
Deferred Sales Charge" below.
Class Y Shares
No CDSC is imposed on the redemption of Class Y shares. Class Y shares
are not offered to the general public and are available only to (1) persons who
at or prior to December 31, 1994 owned shares in a mutual fund advised by
Evergreen Asset, (2) certain institutional investors and (3) investment advisory
clients of First Union national Bank ("FUNB"), Evergreen Asset, Keystone, 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
A Funds charges a CDSC as reimbursement for certain expenses, such as
commissions or shareholder servicing fees, that it has incurred in connection
with the sale of its shares (see "Distribution Plans and Agreements," above). If
imposed, a 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, a Fund will first seek to redeem shares
not subject to the CDSC and/or shares held the longest, in that order. The CDSC
on any redemption is, to the extent permitted by the National Association of
Securities Dealers, Inc., paid to the Distributor or its predecessor.
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<PAGE>
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 the 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.
Waiver of Initial Sales Charges
The Funds 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 a
master account of such investment advisers or financial planners
on the books of the broker-dealer through whom shares are
purchased;
6. institutional clients of broker-dealers, including retirement and
deferred compensation plans and the trusts used to fund these
plans, which place trades through an omnibus account maintained
with a Fund by the broker-dealer;
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<PAGE>
7. employees of FUNB, its affiliates, the Distributor, any
broker-dealer with whom the Distributor, has entered into an
agreement to sell shares of the Funds, and members of the
immediate families of such employees;
8. certain Directors, Trustees, officers and employees of the
Evergreen funds, the Distributor or their affiliates and the
immediate families of such persons; or
9. a bank or trust company in a single account in the name of such
bank or trust company as trustee if the initial investment in or
any Evergreen fund made pursuant to this waiver is at least
$500,000 and any commission paid at the time of such purchase is
not more than 1% of the amount invested.
With respect to items 8 and 9 above, each Fund will only sell shares to
these parties upon the purchasers' written assurance that the purchase is for
their personal investment purposes only. Such purchasers may not resell the
securities except through redemption by a Fund. The Funds will not charge any
CDSC on redemptions by such purchasers.
Waiver of CDSC
The Funds do not impose a CDSC when the shares you are redeeming
represent:
1. an increase in the share value above the net cost of such shares;
2. certain shares for which a 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 a Fund has 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).
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EXCHANGES
Investors may exchange shares of a Fund for shares of the same class of
any other Evergreen fund, as described under the section entitled "Exchanges" in
the 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 reserves the right to discontinue, alter or limit the exchange
privilege at any time.
CALCULATION OF NET ASSET VALUE PER SHARE ("NAV")
Each Fund computes its NAV once daily on Monday through Friday, as
described in the prospectuses. A Fund will not compute its NAV on the day the
following legal holidays are observed: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The NAV of each class of shares of a Fund is calculated by dividing the
value of a Fund's net assets attributable to that class by the number of all
shares issued for that class.
VALUATION OF PORTFOLIO SECURITIES
Current values for a Fund's portfolio securities are determined as
follows:
(1) An independent pricing service values each Fund's municipal bonds
at fair value using a variety of factors which may include yield, liquidity,
interest rate risk, credit quality, coupon, maturity and type of issue.
(2) Short-term investments with remaining maturities of sixty days or
less are carried at amortized cost, which approximates market value.
(3) Securities for which valuations are not available from an
independent pricing service, including restricted securities, are valued at fair
value according to procedures established by the Trust's Board of Trustees.
SHAREHOLDER SERVICES
As described in the prospectuses, a shareholder may elect to receive
his or her dividends and capital gains distributions in cash instead of shares.
However, ESC will automatically convert a shareholder's distribution option so
that the shareholder reinvests all dividends and distributions in additional
shares when it learns that the postal or other delivery service is unable to
deliver checks or transaction confirmations to the shareholder's address of
record. The Funds will hold the returned distribution or redemption proceeds in
a non interest-bearing account in the shareholder's name until the shareholder
updates his or 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 each Fund. The Trust has entered into a Principal
Underwriting Agreement ("Underwriting Agreement") with the Distributor with
respect to each class of each 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
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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 ofering 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 comply
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 (i) by a vote of a
majority of the Trust's Independent Trustees, and (ii) 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 REGULATED INVESTMENT
COMPANY
Each Fund has qualified and intends to continue to qualify for and
elect the tax treatment applicable to a regulated investment company (a "RIC")
under 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, a 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; and (ii) 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, a Fund is
not subject to federal income tax if it timely distributes its investment
company taxable income and any net realized capital gains. A 4% nondeductible
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excise tax will be imposed on a Fund to the extent it does not meet certain
distribution requirements by the end of each calendar year. Each Fund
anticipates meeting such distribution requirements.
TAXES ON DISTRIBUTIONS
Distributions will be taxable to shareholders whether made in
additional 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 a Fund from its investment
company taxable income (net taxable investment income plus net realized
short-term capital gains, if any). A Fund will include dividends it receives
from domestic corporations when it calculates its gross investment income. A
Fund anticipates that all or a portion of the ordinary dividends which it pays
will qualify for the 70% dividends-received deduction for corporations. A Fund
will inform shareholders of the amounts that so qualify.
From time to time, a Fund will distribute the excess of its net
long-term capital gains over its short-term capital losses to shareholders
(i.e., capital gain dividends). For federal tax purposes, shareholders must
include such capital gain dividends when calculating their net long-term capital
gains. Capital gain dividends are taxable as net long-term capital gains to a
shareholder, no matter how long the shareholder has held the shares. Each Fund
will inform its shareholders of the portion, if any, of a long-term capital gain
distribution which is subject to tax at the maximum 28% rate and the portion, if
any, of a long term capital gain distribution which is subject to tax at the
maximum 20% rate. 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 a Fund reduce its NAV. A distribution that reduces a
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 a 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 may incur
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 additional shares or cash, must
be reported by each shareholder on his or her federal income tax return. Each
shareholder should consult his or her tax advisor to determine the state and
local tax implications of Fund distributions.
If more than 50% of the value of a 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 may 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
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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%.
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 capital gain dividends on such shares.
Shareholders who fail to furnish their taxpayer identification numbers
to a Fund and to certify as to its correctness and certain other shareholders
may be subject to a 31% federal income tax backup withholding requirement on
dividends, distributions of capital gains and redemption proceeds paid to them
by a 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
advisors about the applicability of the backup withholding provisions.
OTHER TAX CONSIDERATIONS
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 advisors regarding specific questions relating to federal,
state and local tax consequences of investing in shares of a Fund. Each
shareholder who is not a U.S. person should consult his or her tax advisor
regarding the U.S. and foreign tax consequences of ownership of shares of a
Fund, including the possibility that such a shareholder may be subject to a U.S.
withholding tax at a rate of 30% (or at a lower rate under a tax treaty) on
amounts treated as income from U.S. sources under the Code.
SPECIAL TAX CONSIDERATIONS FOR TAX STRATEGIC
With respect to Tax Strategic, to the extent that the Fund distributes
exempt-interest dividends to a shareholder, interest on indebtedness incurred or
continued by such shareholder to purchase or carry shares of the Fund is not
deductible. Furthermore, entities or persons who are "substantial users" (or
related persons) of facilities financed by "private activity" bonds (some of
which were formerly referred to as "industrial development" bonds) should
consult their tax advisors before purchasing shares of Tax Strategic.
"Substantial user" is defined generally as including a "non-exempt person" who
regularly uses in its trade or business a part of a facility financed from the
proceeds of industrial development bonds.
The percentage of the total dividends paid by Tax Strategic with
respect to any taxable year that qualifies as exempt-interest dividends will be
the same for all shareholders of Tax Strategic receiving dividends with respect
to such year. If a shareholder receives an exempt-interest dividend with respect
to any share and such share has been held for six months or less, any loss on
the sale or exchange of such shares will be disallowed to the extent of the
exempt-interest dividend amount.
FINANCIAL INFORMATION
EXPENSES
The table below shows the total dollar amounts paid by each Fund for
services rendered during the fiscal periods specified. For more information on
specific expenses, see "Investment Advisory and Other Services," "Distribution
Plans and Agreements" and "Purchase, Redemption and Pricing of Shares."
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<TABLE>
<CAPTION>
Class A Class B Class C
Advisory Distribution Distribution Distribution Class B Class C
Fees Fees Fees Fees Service Fees Service Fees
============================== =========== ============= ============= ============= ============= ============
1998 Fund Expenses
============= ============= ============= ============= ============
<S> <C> <C> <C> <C> <C> <C>
Foundation $16,156,433 $695,844 $6,237,105 $274,265 $2,079,035 $91,422
Tax Strategic $1,451,786 $94,260 $734,118 $95,227 $244,706 $31,743
American Retirement $1,350,506 $54,682 $870,882 $15,708 $290,294 $5,236
Balanced(d) $5,534,574 $611,968 $4,710,580 $907 $2,330,725 $303
1997 Fund Expenses
Expenses
- ------------------------------ ---------------------------------------------------------------------------
Foundation(a) $3,246,270 $135,502 $1,113,659 $51,839 $371,220 $17,280
Tax Strategic(a) $143,945 $8,004 $62,195 $8,824 $20,732 $2,941
American Retirement(a) $255,438 $7,950 $124,370 $2,995 $41,475 $998
Balanced $1,170,691 $26,750 $205,485 $710 $68,495 $237
1996 Fund Expenses
- ------------------------------ --------------
Foundation $11,140,780 $414,289 $3,487,899 $152,488 $1,162,633 $50,829
Tax Strategic $354,958(b) $16,426 $131,282 $16,493 $43,761 $5,498
- ------------------------------
American Retirement $549,949(c) $14,426 $199,829 $5,713 $66,610 $1,904
- ------------------------------
Balanced $4,765,912 $107,023 $810,803 $1,883 $270,267 $628
</TABLE>
(a) Foundation, Tax Strategic and American Retirement changed their fiscal
year end from December 31 to March 31, effective March 31, 1997. The
expenses at March 31, 1997 reflect a 3 month period.
(b) Of that amount $90,551 was waived by the Advisor. (c) Of that amount,
$24,841 was waived by the Advisor.
(d) Balanced changed its fiscal year end from June 30 to March 31,
effective March 31, 1998. The expenses at March 31, 1998 reflect a nine
month period.
BROKERAGE COMMISSIONS PAID
The table below shows (1) total amounts paid by each Fund in brokerage
commissions and (2) brokerage commissions paid by each Fund to Lieber & Company,
an affiliate of FUNB, during each of the fiscal periods specified.
<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------------------------------------------------------------
3/31/98 3 months ended 3/31/97 12/31/96
-------------------------- --------------------------- --------------------------
Total Total Total
Brokerage Commission Brokerage Commission Brokerage Commission
Commission Paid to Lieber Commission Paid to Lieber Commission Paid to Lieber
<S> <C> <C> <C> <C> <C> <C>
Fund:
Foundation $486,478 $483,014 $83,153 $81,365 $689,724 $680,252
Tax Strategic 116,583 113,411 11,342 10,758 51,273 50,033
American
Retirement 89,819 80,739 14,549 11,925 55,581 51,579
</TABLE>
COMPUTATION OF CLASS A OFFERING PRICE
Class A shares are sold at the NAV plus a sales charge. Below is an
example of the method of computing the offering price of Class A shares of each
Fund. The example assumes a purchase aggregating less than $50,000 subject to
the schedule of sales charges set forth in the Class A prospectus at a price
based upon the NAV of each Fund's Class A shares as of March 31, 1998.
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Per Share Offering Price
Fund: Net Asset Value Sales Charge Per Share
Foundation $20.44 $1.02 $21.46
Tax Strategic $16.36 $0.82 $17.18
American Retirement $16.70 $0.83 $17.53
Balanced $12.87 $0.64 $13.51
PERFORMANCE
Total Return
Total return quotations for a class of shares of a 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. All dividends and
distributions are added to the initial investment, and all recurring fees
charged to all shareholder accounts are deducted. The ending redeemable value
assumes a complete redemption at the end of each period.
The average annual total returns for each class of shares of the Funds
(including applicable sales charges) as of March 31, 1998 are as follows:
<TABLE>
<CAPTION>
Ten Years
or Since Inception
Fund/Class One Year Five Years Inception Date
Foundation
<S> <C> <C> <C> <C> <C>
Class A 27.52% -- 20.64% 01/03/95
Class B 27.81% -- 20.92% 01/03/95
Class C 31.81% -- 21.47% 01/03/95
Class Y 34.12% 15.72% 17.83% 01/02/90
Tax Strategic
Class A 18.49% -- 18.50% 01/17/95
Class B 18.44% -- 19.15% 01/06/95
Class C 22.49% -- 19.40% 03/03/95
Class Y 24.73% -- 16.86% 11/02/93
American Retirement
Class A 21.94% -- 18.07% 01/03/95
Class B 22.06% -- 18.32% 01/03/95
Class C 26.08% -- 18.97% 01/03/95
Class Y 28.34% 13.59% 12.25% 03/14/88
Balanced
Class A -- -- 2.28% 01/20/98
Class B 21.77% 13.24% 12.29% 09/11/35
Class C -- -- 5.58% 01/22/98
Class Y -- -- 7.79% 01/26/98
</TABLE>
YIELD CALCULATIONS
From time to time, a Fund may quote its yield in advertisements or in
reports or other communications to shareholders. Yield quotations are expressed
in annualized terms and may be quoted on a compounded basis. Yields are computed
by dividing a Fund's interest income (as defined in the SEC
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yield formula) for a given 30-day or one month period, net of expenses, by the
average number of shares entitled to receive distributions during the period,
dividing this figure by the Fund's net asset value per share at the end of the
period and annualizing the result (assuming compounding of income) in order to
arrive at an annual percentage rate. The formula for calculating yield is as
follows:
YIELD = 2[(a-b/cd + 1)6-1]
Where a = Dividends and interest earned during the period b = Expenses
accrued for the period (net of reimbursements) c = The average daily
number of shares outstanding during the period that were entitled to
receive dividends d = The maximum offering price per share on the last
day of the period
Income is calculated for purposes of yield quotations in accordance
with standardized methods applicable to all stock and bond funds. Gains and
losses generally are excluded from the calculation. Income calculated for
purposes of determining a Fund's yield differs from income as determined for
other accounting purposes. Because of the different accounting methods used, and
because of the compounding assumed in yield calculations, the yields quoted for
a Fund may differ from the rates of distributions the Fund paid over the same
period, or the net investment income reported in the Fund's financial
statements.
Yield information is useful in reviewing a Fund's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in the Fund's shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that yield
is a function of the kind and quality of the instruments in a Fund's investment
portfolios, portfolio maturity, operating expenses and market conditions.
It should be recognized that in periods of declining interest rates the
yields will tend to be somewhat higher than prevailing market rates, and in
periods of rising interest rates the yields will tend to be somewhat lower.
Also, when interest rates are falling, the inflow of net new money to a Fund
from the continuous sale of its shares will likely be invested in instruments
producing lower yields than the balance of the Fund's investments, thereby
reducing the current yield of the Fund. In periods of rising interest rates, the
opposite can be expected to occur.
The yield of Foundation, Tax Strategic, American Retirement and
Balanced for the thirty-day period ended March 31, 1998 for each class of shares
offered by the Funds is set forth in the table below: <TABLE> <CAPTION>
Yield Tax-Equivalent Yield Yield Tax-Equivalent Yield
AMERICAN
FOUNDATION RETIREMENT
<S> <C> <C> <C> <C> <C>
Class A 1.83% N/A Class A 3.30% N/A
Class B 1.18% N/A Class B 2.72% N/A
Class C 1.18% N/A Class C 2.72% N/A
Class Y 2.17% N/A Class Y 3.71% N/A
TAX BALANCED
STRATEGIC
Class A 1.95% % Class A 2.76% N/A
Class B 1.31% % Class B 2.16% N/A
Class C 1.31% % Class C 2.16% N/A
Class Y 2.30% % Class Y 3.15% N/A
</TABLE>
Non-Standardized Performance
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In addition to the performance information described above, a Fund may
provide total return information for designated periods, such as for the most
recent six months or most recent twelve months. This total return information is
computed as described under "Total Return" above except that no annualization is
made.
General
From time to time, a Fund may quote its performance in advertising and
other types of literature as compared to the performance of the Standard &
Poor's 500 Composite Stock Price Index, the Dow Jones Industrial Average,
Russell 2000 Index, or any other commonly quoted index of common stock prices.
The Standard & Poor's 500 Composite Stock Price Index, the Dow Jones Industrial
Average and the Russell 2000 Index are unmanaged indices of selected common
stock prices. A Fund's performance may also be compared to those of other mutual
funds having similar objectives. This comparative performance would be expressed
as a ranking prepared by Lipper Analytical Services, Inc. or similar independent
services monitoring mutual fund performance. A Fund's performance will be
calculated by assuming, to the extent applicable, reinvestment of all capital
gains distributions and income dividends paid. Any such comparisons may be
useful to investors who wish to compare a Fund's past performance with that of
its competitors. Of course, past performance cannot be a guarantee of future
results.
Financial Statements
The audited financial statements and the reports thereon are hereby
incorporated by reference to each Fund's Annual Report, a copy of which may be
obtained without charge from ESC by calling toll-free 1-800-633-2700 or by
writing to ESC at P.O. Box 2121, Boston, Massachusetts 02106-2121.
ADDITIONAL INFORMATION
Except as otherwise stated in its prospectuses or required by law, a
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 a 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.
Each Fund's prospectuses and SAI omit certain information contained in
the Trust's Registration Statement, which you may obtain for a fee from the SEC
in Washington, D.C.
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APPENDIX A
S&P AND MOODY'S BOND RATINGS
S&P Bond Ratings
An S&P bond rating is a current assessment of the creditworthiness of
an obligor, including obligors outside the U.S., 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 and capacity and willingness of the obligor to
make 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 "BBB" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
A provisional rating is sometimes used by S&P. It assumes the
successful completion of the project being financed by the debt being rated and
indicates that payment of debt service requirements is largely or entirely
dependent upon the successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of default upon
failure of, such completion.
S&P bond ratings are as follows:
a. AAA - Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
b. 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
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outweighed by large uncertainties or major risk exposures to adverse conditions.
Moody's 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 a
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 to 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 Baa 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.
24202
A-2
<PAGE>
MONEY MARKET INSTRUMENTS
Money market securities are instruments with remaining maturities of
one year or less such as bank certificates of deposit, bankers' acceptances,
commercial paper (including variable rate master demand notes), and obligations
issued or guaranteed by the U.S. government, its agencies or instrumentalities,
some of which may be subject to repurchase agreements.
Commercial Paper
Commercial paper will consist of issues rated at the time of purchase
A-1 by S&P or Prime-1 by Moody's or F-1 by Fitch IBCA Inc. ("Fitch"). If not
rated, commercial paper will be issued by companies which have an outstanding
debt issue rated at the time of purchase Aaa, Aa or A by Moody's or AAA, AA or A
by S&P or Fitch, or will be determined by a Fund's investment advisor to be of
comparable quality.
A. S&P Ratings
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The top category is as
follows:
1. A: Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
2. A-1: This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
B. Moody's Ratings
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months. Moody's
commercial paper ratings are opinions as to the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following designation, judged to be investment
grade, to indicate the relative repayment capacity of rated issuers.
1. The rating Prime-1 is the highest commercial paper rating assigned
by Moody's. Issuers rated Prime-1 (or related supporting institutions) are
deemed to have a superior capacity for repayment of short term promissory
obligations. Repayment capacity of Prime-1 issuers is normally evidenced by the
following characteristics:
a) leading market positions in well-established industries;
b) high rates of return on funds employed;
c) conservative capitalization structures with moderate reliance on
debt and ample asset protection;
d) broad margins in earnings coverage of fixed financial charges and
high internal cash generation; and
e) well established access to a range of financial markets and
assured sources of alternate liquidity.
24202
A-3
<PAGE>
In assigning ratings to issuers whose commercial paper obligations are
supported by the credit of another entity or entities, Moody's evaluates the
financial strength of the affiliated corporations, commercial banks, insurance
companies, foreign governments or other entities, but only as one factor in the
total rating assessment.
C. Fitch Ratings
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating
on the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+."
F-2: Good Credit Quality. Issues assigned to this rating have a
satisfactory degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned "F-1+" and "F-1" ratings.
F-3: Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely payment is
adequate; however, near-term adverse changes could cause these securities to be
rated below investment grade.
F-5: Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely payment and
are vulnerable to near-term adverse changes in financial and economic
conditions.
D: Default. Issues assigned to this rating are in actual or imminent
payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
24202
A-4
<PAGE>
