1933 Act Registration No. 333-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-14AE24
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
[ ] Pre-Effective [ ] Post-Effective
Amendment No. Amendment No.
EVERGREEN MUNICIPAL TRUST
[Exact Name of Registrant as Specified in Charter)
Area Code and Telephone Number: (617) 210-3200
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------
(Address of Principal Executive Offices)
Rosemary D. Van Antwerp, Esq.
Keystone Investment Management Company
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------------
(Name and Address of Agent for Service)
Copies of All Correspondence to:
Robert N. Hickey, Esq.
Sullivan & Worcester LLP
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036
Approximate date of proposed public offering: As soon as possible after
the effective date of this Registration Statement.
The Registrant has registered an indefinite amount of securities under
the Securities Act of 1933 pursuant to Section 24(f) under the Investment
Company Act of 1940 (File No. 333-36033); accordingly, no fee is payable
herewith. Registrant is filing as an exhibit to this Registration Statement a
copy of an earlier declaration under Rule 24f-2. Pursuant to Rule 429, this
Registration Statement relates to the aforementioned registration on Form N-1A.
A Rule 24f-2 Notice for the Registrant's fiscal year ending August 31, 1998 will
be filed with the Commission on or about October 30, 1998.
<PAGE>
It is proposed that this filing will become effective on November 10,
1997 pursuant to Rule 488 of the Securities Act of 1933.
<PAGE>
EVERGREEN MUNICIPAL TRUST
CROSS REFERENCE SHEET
Pursuant to Rule 481(a) under the Securities Act of 1933
Location in
Item of Part A of Form N-14 Prospectus/Proxy
Statement
1. Beginning of Registration Cross Reference Sheet;
Statement and Outside Cover Page
Front Cover Page of
Prospectus
2. Beginning and Outside Table of Contents
Back Cover Page of
Prospectus
3. Fee Table, Synopsis and Comparison of Fees and
Risk Factors Expenses; Summary;
Comparison of
Investment Objectives
and Policies; Risks
4. Information About the Summary; Reasons for
Transaction the Reorganizations;
Comparative Information
on Shareholders'
Rights; Exhibits A-1
and A-2 (Agreements and
Plans of
Reorganization)
5. Information about the Cover Page; Summary;
Registrant Risks; Comparison of
Investment Objectives
and Policies;
Comparative Information
on Shareholders'
Rights; Additional
Information
<PAGE>
Location in
Item of Part A of Form N-14 Prospectus/Proxy
Statement
6. Information about the Cover Page; Summary;
Company Being Acquired Risks; Comparison of
Investment Objective
and Policies;
Comparative Information
on Shareholders'
Rights; Additional
Information
7. Voting Information Cover Page; Summary;
Voting Information
Concerning the Meeting
8. Interest of Certain Financial Statements
Persons and Experts and Experts; Legal
Matters
9. Additional Information Inapplicable
Required for Reoffering
by Persons Deemed to be
Underwriters
Item of Part B of Form N-14
10. Cover Page Cover Page
11. Table of Contents Omitted
12. Additional Information Statement of Additional
About the Registrant Information of the
Evergreen Municipal
Trust - Evergreen
Florida Municipal Bond
Fund dated November 10,
1997
<PAGE>
Location in
Item of Part A of Form N-14 Prospectus/Proxy
Statement
13. Additional Information Statement of Additional
about the Company Being Information of
Acquired Evergreen Investment
Trust - Evergreen
Florida Municipal
Bond Fund dated
October 31, 1996, as
supplemented;
Statement of
Additional Information of
Keystone Florida Tax
Free Fund dated July
21, 1997, as
supplemented
14. Financial Statements Financial Statements
dated August 31, 1996
and February 28, 1997
of Evergreen Florida
Municipal Bond Fund;
Financial Statements of
Keystone Florida Tax
Free Fund dated March
31, 1997; Pro Forma
Financial Statements
Item of Part C of Form N-14
Incorporated by
15. Indemnification Reference to Part A
Caption - "Comparative
Information on
Shareholders' Rights -
Liability and
Indemnification of
Trustees"
16. Exhibits Item 16. Exhibits
17. Undertakings Item 17. Undertakings
<PAGE>
EVERGREEN FLORIDA MUNICIPAL BOND FUND
KEYSTONE FLORIDA TAX FREE FUND
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116
November 14, 1997
Dear Shareholder,
I am writing to shareholders of the Evergreen Florida Municipal Bond Fund and
the Keystone Florida Tax Free Fund to inform you of a Special Shareholders'
meeting to be held on January 6, 1998. Before that meeting, I would like your
vote on the important issues affecting your fund as described in
the attached Prospectus/Proxy Statement.
The Prospectus/Proxy Statement includes the proposed reorganization of the
Evergreen Florida Municipal Bond Fund and the Keystone Florida Tax Free Fund.
All of the assets of both funds would be acquired by a new fund, the Evergreen
Florida Municipal Bond Fund. Details about the new fund's investment objective,
portfolio management team, performance, etc. are contained in the attached
Prospectus/Proxy Statement.
The Boards of Trustees have unanimously approved the proposal and recommend that
you vote FOR this proposal.
You will receive shares of the new fund in the same class, with the same letter
designation, the same fees and the same contingent deferred sales charges as the
shares you held prior to the reorganization. This is a non-taxable event for
shareholders.
I realize that this Prospectus/Proxy Statement will take time to review, but
your vote is very important. Please take the time to familiarize yourself with
the proposal presented and sign and return your proxy card(s) in the enclosed
postage-paid envelope today. You may receive more than one proxy card if you own
shares in more than one fund. Please sign and return each card you receive.
If we do not receive your completed proxy card(s) after several weeks, you may
be contacted by our proxy solicitor, Shareholder Communications Corporation.
They will remind you to vote your shares or will record your vote over the phone
if you choose to vote in that manner. You may also call Shareholder
Communications Corporation directly at 800-733- 8481 ext.404 and vote by phone.
<PAGE>
Thank you for taking this matter seriously and participating in this important
process.
Sincerely,
William M. Ennis
Managing Director
Evergreen Funds
<PAGE>
November 1997
IMPORTANT NEWS
FOR EVERGREEN SHAREHOLDERS
We encourage you to read the attached Prospectus/Proxy Statement in full;
however, the following questions and answers represent some typical concerns
that shareholders might have regarding this document.
Q: WHY IS EVERGREEN SENDING ME THIS PROSPECTUS/PROXY
STATEMENT?
Mutual funds are required to get shareholders' votes for certain types of
changes. As a shareholder, you have a right to vote on major policy decisions,
such as those included here.
Q: WHAT ARE THE ISSUES CONTAINED IN THIS PROSPECTUS/PROXY
STATEMENT?
You are being asked to vote to approve a proposal to reorganize the Evergreen
Florida Municipal Bond Fund and the Keystone Florida Tax Free Fund into a new
fund, also called Evergreen Florida Municipal Bond Fund. The new fund's
investment objective is substantially the same as that of the former funds.
Q: HOW WILL THIS CHANGE AFFECT ME AS A FUND SHAREHOLDER?
The reorganization of these funds into the Evergreen Florida Municipal Bond Fund
means that the former Evergreen Florida Municipal Bond Fund and the Keystone
Florida Tax Free Fund would no longer exist after January 23, 1998. Shareholders
would receive shares of the new Evergreen Florida Municipal Bond Fund in the
same class, with the same letter designation, the same fees and the same
contingent deferred sales charges as the shares held prior to the
reorganization. This is a non-taxable event for shareholders.
<PAGE>
Q: WHY IS EVERGREEN PROPOSING THIS CHANGE?
This proposal represents one of the final steps we are undertaking to unify the
Evergreen and Keystone fund families. Shareholders can anticipate the following
benefits:
A comprehensive fund family with a common risk/reward spectrum
The elimination of any overlap or gaps in fund offerings
Reduced confusion surrounding privileges associated with each fund,
specifically regarding exchangeability, letter of intent, and rights of
accumulation.
A user-friendly product line for both shareholders and investment
professionals
A single location for fund information, whether you're looking up funds
in the newspaper or locating a Morningstar report on the Internet.
Q: HOW DO THE BOARD MEMBERS OF MY FUND RECOMMEND THAT I VOTE?
The Board members of each fund recommend that you vote in favor or FOR the
proposal on the enclosed proxy card.
Q: WHOM DO I CALL FOR MORE INFORMATION OR TO PLACE MY VOTE?
Please call Shareholder Communications at 800-733-8481 ext.
404 for additional information. You can vote one of three
ways:
Use the enclosed proxy card to record your vote either FOR, AGAINST or
ABSTAIN, then return the card in the postpaid envelope provided.
or
Complete the enclosed proxy card and FAX to 800-733- 1885.
Call 800-733-8481 ext. 404 and record your vote by
telephone.
Q: WHY ARE MULTIPLE CARDS ENCLOSED?
If you own shares of more than one fund, you will receive a proxy card for each
fund you own. Please sign, date and return each proxy card you receive.
<PAGE>
[SUBJECT TO COMPLETION, OCTOBER 10, 1997 PRELIMINARY COPY]
EVERGREEN FLORIDA MUNICIPAL BOND FUND
KEYSTONE FLORIDA TAX FREE FUND
200 BERKELEY STREET
BOSTON, MASSACHUSETTS 02116
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 6, 1998
Notice is hereby given that a Special Meeting (the "Meeting") of
Shareholders of each of Evergreen Florida Municipal Bond Fund, a series of
Evergreen Investment Trust, and Keystone Florida Tax Free Fund, a series of
Keystone State Tax Free Fund, (each a "Fund"), will be held at the offices of
the Evergreen Keystone Funds, 200 Berkeley Street, Boston, Massachusetts 02116
on January 6, 1998 at 3:00 p.m. for the following purposes:
1. To consider and act upon the Agreement and Plan of Reorganization
(the "Plan") dated as of September 30, 1997, providing for the acquisition of
all of the assets of the Fund by the Evergreen Florida Municipal Bond Fund, a
series of Evergreen Municipal Trust, ("Evergreen Florida Bond") in exchange for
shares of Evergreen Florida Bond and the assumption by Evergreen Florida Bond of
certain identified liabilities of the Fund. The Plan also provides for
distribution of such shares of Evergreen Florida Bond to shareholders of the
Fund in liquidation and subsequent termination of the Fund. A vote in favor of
the Plan is a vote in favor of the liquidation and dissolution of the Fund.
2. To transact any other business which may properly come before the
Meeting or any adjournment or adjournments thereof.
The Trustees of Evergreen Investment Trust on behalf of Evergreen
Florida Municipal Bond Fund and the Trustees of Keystone State Tax Free Fund on
behalf of Keystone Florida Tax Free Fund have fixed the close of business on
November 10, 1997 as the record date for the determination of shareholders of
each respective Fund entitled to notice of and to vote at the Meeting or any
adjournment thereof.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO NOT
EXPECT TO ATTEND IN PERSON ARE URGED WITHOUT DELAY TO SIGN AND RETURN THE
ENCLOSED PROXY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE, SO THAT
THEIR SHARES MAY BE REPRESENTED AT THE MEETING. YOUR PROMPT
<PAGE>
ATTENTION TO THE ENCLOSED PROXY WILL HELP TO AVOID THE EXPENSE OF FURTHER
SOLICITATION.
By Order of the Boards of Trustees
George O. Martinez
Secretary
November 14, 1997
<PAGE>
INSTRUCTIONS FOR EXECUTING PROXY CARDS
The following general rules for signing proxy cards may be of
assistance to you and may help to avoid the time and expense involved in
validating your vote if you fail to sign your proxy card(s) properly.
1. INDIVIDUAL ACCOUNTS: Sign you name exactly as it
appears in the Registration on the proxy card(s).
2. JOINT ACCOUNTS: Either party may sign, but the name
of the party signing should conform exactly to a name shown in
the Registration on the proxy card(s).
3. ALL OTHER ACCOUNTS: The capacity of the individual signing the proxy
card(s) should be indicated unless it is reflected in the form of Registration.
For example:
REGISTRATION VALID SIGNATURE
CORPORATE
ACCOUNTS
(1) ABC Corp. ABC Corp.
(2) ABC Corp. John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer John Doe, Treasurer
(4) ABC Corp. Profit Sharing Plan John Doe, Trustee
TRUST ACCOUNTS
(1) ABC Trust Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee Jane B. Doe
u/t/d 12/28/78
CUSTODIAL OR ESTATE ACCOUNTS
(1) John B. Smith, Cust. John B. Smith
f/b/o John B. Smith, Jr. UGMA
(2) John B. Smith, Jr. John B. Smith, Jr.,
Executor
<PAGE>
PROSPECTUS/PROXY STATEMENT DATED NOVEMBER 14, 1997
Acquisition of Assets of
EVERGREEN FLORIDA MUNICIPAL BOND FUND
a series of
Evergreen Investment Trust
200 Berkeley Street
Boston, Massachusetts 02116
and
KEYSTONE FLORIDA TAX FREE FUND
a series of
Keystone State Tax Free Fund
200 Berkeley Street
Boston, Massachusetts 02116
By and in Exchange for Shares of
EVERGREEN FLORIDA MUNICIPAL BOND FUND
a series of
Evergreen Municipal Trust
200 Berkeley Street
Boston, Massachusetts 02116
This Prospectus/Proxy Statement is being furnished to shareholders of
Evergreen Florida Municipal Bond Fund ("Evergreen Florida") and Keystone Florida
Tax Free Fund ("Keystone Florida") in connection with a proposed Agreement and
Plan of Reorganization (the "Plan") to be submitted to shareholders of each of
Evergreen Florida and Keystone Florida for consideration at a Special Meeting of
Shareholders to be held on January 6, 1998 at 3:00 p.m. at the offices of the
Evergreen Keystone Funds, 200 Berkeley Street, Boston, MA 02116, and any
adjournments thereof (the "Meeting"). Each Plan provides for all of the assets
of Evergreen Florida and Keystone Florida, respectively, to be acquired by
Evergreen Florida Municipal Bond Fund ("Evergreen Florida Bond") in exchange for
shares of Evergreen Florida Bond and the assumption by Evergreen Florida Bond of
certain identified liabilities of Evergreen Florida and Keystone Florida,
respectively (hereinafter referred to individually as the "Reorganization" or
collectively as the "Reorganizations"). Evergreen Florida Bond, Evergreen
Florida and Keystone Florida are sometimes hereinafter referred to individually
as the "Fund" and collectively as the "Funds." Following the Reorganizations,
shares of Evergreen Florida Bond will be distributed to shareholders of
Evergreen Florida and Keystone Florida in liquidation of Evergreen Florida and
Keystone Florida and such Funds will be terminated. Holders of shares of
Evergreen Florida and Keystone Florida will receive shares
<PAGE>
of the class of Evergreen Florida Bond (the "Corresponding Shares") having the
same letter designation and the same distribution-related fees, shareholder
servicing-related fees and contingent deferred sales charges ("CDSCs"), if any,
as the shares of the class of Evergreen Florida and Keystone Florida held by
them prior to the Reorganizations. As a result of the proposed Reorganizations,
shareholders of Evergreen Florida and Keystone Florida will receive that number
of full and fractional Corresponding Shares of Evergreen Florida Bond having an
aggregate net asset value equal to the aggregate net asset value of such
shareholder's shares of Evergreen Florida or Keystone Florida. Each
Reorganization is being structured as a tax-free reorganization for federal
income tax purposes.
Evergreen Florida Bond is a separate series of Evergreen Municipal
Trust, an open-end management investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act"). The investment objective of
Evergreen Florida Bond is to seek current income exempt from federal regular
income tax and the Florida state intangibles tax, consistent with the
preservation of capital. Such investment objective is substantially identical to
those of Evergreen Florida and Keystone Florida.
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about Evergreen Florida Bond
that shareholders of Evergreen Florida and Keystone Florida should know before
voting on the Reorganizations. Certain relevant documents listed below, which
have been filed with the Securities and Exchange Commission ("SEC"), are
incorporated in whole or in part by reference. A Statement of Additional
Information dated November 14, 1997, relating to this Prospectus/Proxy Statement
and the Reorganizations incorporating by reference the financial statements of
Evergreen Florida dated August 31, 1996 and February 28, 1997 and Keystone
Florida dated March 31, 1997, has been filed with the SEC and is incorporated by
reference in its entirety into this Prospectus/Proxy Statement. Evergreen
Florida Bond is a newly created series of Evergreen Municipal Trust and has had
no operations to date. Consequently, there are no current financial statements
of Evergreen Florida Bond. A copy of such Statement of Additional Information is
available upon request and without charge by writing to Evergreen Florida Bond
at 200 Berkeley Street, Boston, Massachusetts 02116 or by calling toll-free 1-
800-343-2898.
The two Prospectuses of Evergreen Florida Bond dated November 10, 1997
are incorporated herein by reference in
<PAGE>
their entirety. The Prospectuses, which pertain (i) to Class Y shares and (ii)
to Class A, Class B and Class C shares, differ only insofar as they describe the
separate distribution and shareholder servicing arrangements applicable to the
classes. Shareholders of Evergreen Florida and Keystone Florida will receive,
with this Prospectus/Proxy Statement, copies of the Prospectus pertaining to the
class of shares of Evergreen Florida Bond that they will receive as a result of
the consummation of each Reorganization. Additional information about Evergreen
Florida Bond is contained in its Statement of Additional Information of the same
date which has been filed with the SEC and which is available upon request and
without charge by writing to or calling Evergreen Florida Bond at the address or
telephone number listed in the preceding paragraph.
The two Prospectuses of Evergreen Florida (which pertain to (i) Class Y
shares and (ii) Class A and Class B shares) dated October 31, 1996, as
supplemented, and the Prospectus of Keystone Florida (which pertains to Class A,
Class B and Class C shares) dated July 21, 1997, as supplemented, insofar as
they relate to such Funds only, and not to any other funds described therein,
are incorporated herein in their entirety by reference. Copies of the
Prospectuses and related Statements of Additional Information dated the same
respective dates, as supplemented, are available upon request without charge by
writing or calling the Fund of which you are a shareholder at the address listed
in the second preceding paragraph.
Included as Exhibits A-1 and A-2 to this Prospectus/Proxy Statement is
a copy of each Plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The shares offered by this Prospectus/Proxy Statement are not deposits
or obligations of any bank and are not insured or otherwise protected by the
U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve
Board or any other government agency and involve investment risk,
including possible loss of capital.
<PAGE>
TABLE OF CONTENTS
Page
COMPARISON OF FEES AND EXPENSES................................. 5
SUMMARY......................................................... 12
Proposed Plans of Reorganization....................... 12
Tax Consequences....................................... 13
Investment Objectives and Policies
of the Funds......................................... 14
Comparative Performance Information
For Each Fund........................................ 15
Management of the Funds................................ 16
Investment Advisers ................................... 16
Portfolio Management................................... 17
Distribution of Shares................................. 17
Purchase and Redemption Procedures..................... 20
Exchange Privileges.................................... 20
Dividend Policy........................................ 21
Risks.................................................. 21
REASONS FOR THE REORGANIZATIONS................................. 22
Agreements and Plans of Reorganization................. 26
Federal Income Tax Consequences........................ 28
Pro-forma Capitalization............................... 30
Shareholder Information................................ 31
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES................ 34
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS................. 37
Forms of Organization.................................. 37
Capitalization......................................... 37
Shareholder Liability.................................. 38
Shareholder Meetings and Voting Rights................. 39
Liquidation or Dissolution............................. 39
Liability and Indemnification of Trustees.............. 40
ADDITIONAL INFORMATION.......................................... 41
VOTING INFORMATION CONCERNING THE MEETINGS...................... 42
FINANCIAL STATEMENTS AND EXPERTS................................ 45
LEGAL MATTERS................................................... 46
OTHER BUSINESS.................................................. 46
<PAGE>
COMPARISON OF FEES AND EXPENSES
The amounts for Class Y, Class A and Class B shares of Evergreen
Florida set forth in the following tables and in the examples are based on the
expenses for Evergreen Florida for the fiscal year ended August 31, 1996. The
amounts for Class A, Class B and Class C shares of Keystone Florida set forth in
the following tables and in the examples are based on the expenses for Keystone
Florida for the fiscal year ended March 31, 1997. The pro forma amounts for
Class Y, Class A, Class B and Class C shares of Evergreen Florida Bond are based
on the estimated expenses of Evergreen Florida Bond for the fiscal year ending
August 31, 1998. All amounts are adjusted for voluntary expense waivers.
The following tables show for Evergreen Florida, Keystone Florida and
Evergreen Florida Bond pro forma the shareholder transaction expenses and annual
fund operating expenses associated with an investment in the Class Y, Class A,
Class B and Class C shares of each Fund, as applicable.
Comparison of Class Y, Class A, Class B and Class C
Shares of Evergreen Florida Bond With
Corresponding Shares of
Evergreen Florida and Keystone Florida
Evergreen Florida
-----------------
Shareholder
Transaction Expenses Class Y Class A Class B
------- ------- -------
Maximum Sales Load None 4.75% None
Imposed on Purchases
(as a percentage of
offering price)
Maximum Sales Load None None None
Imposed on
Reinvested Dividends
(as a percentage of
offering price)
<PAGE>
Contingent Deferred
Sales Charge (as a None None 5.00% in
percentage of the first
original purchase year,
price or redemption declining
proceeds, whichever to 1.00%
is lower) in the
sixth year
and 0.00%
thereafter
Exchange Fee None None None
Annual Fund
Operating Expenses
(as a percentage of
average daily net
assets)
Management Fee 0.50% 0.50% 0.50%
12b-1 Fees (1) (2) None 0.07% 1.00%
Other Expenses 0.07% 0.06% 0.06%
-------- -------- ----------
Annual Fund
Operating 0.57% 0.63% 1.56%
Expenses(3) -------- -------- ----------
-------- -------- ----------
Keystone Florida
----------------
Shareholder Transaction Class A Class B Class C
Expenses ------- ------- -------
Maximum Sales Load 4.75% None None
Imposed on Purchases (as
a percentage of offering
price)
Maximum Sales Load None None None
Imposed on Reinvested
Dividends (as a
percentage of offering
price)
<PAGE>
Contingent Deferred None 5.00% in 1.00% in
Sales Charge (as a the first the first
percentage of original year, year and
purchase price or declining 0.00%
redemption proceeds, to 1.00% thereafter
whichever is lower) in the
sixth year
and 0.00%
thereafter
Exchange Fee None None None
Annual Fund Operating
Expenses (as a
percentage of average
daily net assets)
Management Fee 0.52% 0.52% 0.52%
12b-1 Fees(1) 0.15% 0.90% 0.90%
Other Expenses (2) 0.09% 0.09% 0.09%
----- ----- -----
Annual Fund Operating 0.76% 1.51% 1.51%
Expenses (3)(4) ----- ----- -----
----- ----- -----
Evergreen Florida Bond Pro Forma
Shareholder
Transaction Class Y Class A Class B Class C
Expenses ------- ------- ------- -------
Maximum Sales None 4.75% None None
Load Imposed on
Purchases (as a
percentage of
offering price
Maximum Sales None None None None
Load Imposed on
Reinvested
Dividends (as a
percentage of
offering price)
<PAGE>
Contingent
Deferred Sales None None 5.00% in 1.00% in
Charge (as a the first the first
percentage of year, year and
original declining 0.00%
purchase price to 1.00% thereafter
or redemption in the
proceeds, sixth year
whichever is and 0.00%
lower) thereafter
Exchange Fee None None None None
Annual Fund
Operating
Expenses (as a
percentage of
average daily
net assets)
Management Fee 0.50% 0.50% 0.50% 0.50%
12b-1 Fees None 0.25% 1.00% 1.00%
Other Expenses 0.19% 0.19% 0.19% 0.19%
------ ----- ---------- ----------
Annual Fund
Operating 0.69% 0.94% 1.69% 1.69%
Expenses(3) ------- ------ ---------- ----------
------- ------ ---------- ----------
- ---------------
(1) Class A Shares of Evergreen Florida Bond and Evergreen
Florida can pay up to 0.75% of average daily net assets
as a 12b-1 fee. For the foreseeable future, the Class A
12b-1 fees will be limited to 0.25% of average net
assets. Keystone Florida can pay up to 0.25% of average
daily net assets as a 12b-1 fee on Class A shares. Such
fees for Class A shares of Keystone Florida for the
fiscal year ended March 31, 1997 were limited to 0.15% of
average daily net assets. For Class B shares of each
Fund and Class C shares of Evergreen Florida Bond and
Keystone Florida, a portion of the 12b-1 fees equivalent
to 0.25% of average net assets will be shareholder
servicing-related. Distribution-related 12b-1 fees will
be limited to 0.75% of average net assets as permitted
under the rules of the National Association of Securities
Dealers, Inc. For the fiscal year ended March 31, 1997,
each of the Class B and Class C 12b-1 fees of Keystone
Florida were limited to 0.15% of average net assets.
<PAGE>
(2) Reflects voluntary reimbursements and expense waivers for
Evergreen Florida and Keystone Florida of certain
expenses. These waivers and reimbursements may cease or
be terminated at any time. Absent such reimbursements
and waivers, the operating expenses including indirectly
paid expenses for Evergreen Florida for the fiscal year
ended August 31, 1996 and for Keystone Florida for the
fiscal year ended March 31, 1997 were as follows:
Class Y Class A Class B Class C
------- ------- ------- -------
Evergreen Florida 0.95% 1.76% 0.77% N/A
Keystone Florida N/A 0.92% 1.68% 1.68%
(3) For the fiscal year ended March 31, 1997, Keystone Investment
Management Company voluntarily limited the expenses of Keystone
Florida's Class A, Class B and Class C shares to 0.75%, 1.50% and
1.50%, respectively, excluding indirectly paid expenses.
(4) Expense ratios include indirectly paid expenses.
Examples. The following tables show for Evergreen Florida and Keystone
Florida, and for Evergreen Florida Bond pro forma, assuming consummation of the
Reorganizations, examples of the cumulative effect of shareholder transaction
expenses and annual fund operating expenses indicated above on a $1,000
investment in each class of shares for the periods specified, assuming (i) a 5%
annual return, and (ii) redemption at the end of such period, and additionally
for Class B and Class C shares, no redemption at the end of each period.
Evergreen Florida
-----------------
One Three Five Ten
Year Years Years Years
---- ----- ----- -----
$6 $18 $32 $71
Class Y
Class A $54 $67 $81 $122
<PAGE>
Class B
(Assuming $66 $79 $105 $149
redemption
at end of
period)
Class B $16 $49 $85 $149
(Assuming no
redemption
at end of
period)
Class C N/A N/A N/A N/A
(Assuming
redemption
at end of
period)
Class C N/A N/A N/A N/A
(Assuming no
redemption
at end of
period)
Keystone Florida
----------------
One Three Five Ten
Year Years Years Years
---- ----- ----- -----
Class Y N/A N/A N/A N/A
Class A $55 $71 $88 $137
Class B $65 $78 $102 $150
(Assuming
redemption at
end of
period)
Class B $15 $48 $82 $150
(Assuming no
redemption at
end of
period)
<PAGE>
Class C
(Assuming $25 $48 $82 $180
redemption at
end of
period)
Class C $15 $48 $82 $180
(Assuming no
redemption at
end of
period)
Evergreen Florida Bond - Pro Forma
----------------------------------
One Three Five Ten
Year Years Years Years
----- ----- ----- -----
Class Y $7 $22 $38 $86
Class A $57 $76 $97 $157
Class B $67 $83 $112 $171
(Assuming
redemption at
end of
period)
Class B $17 $53 $92 $171
(Assuming no
redemption at
end of
period)
Class C $27 $53 $92 $200
(Assuming
redemption at
end of
period)
Class C $17 $53 $92 $200
(Assuming no
redemption at
end of
period)
The purpose of the foregoing examples is to assist Evergreen Florida
and Keystone Florida shareholders in understanding the various costs and
expenses that an investor in Evergreen Florida Bond as a result of the
Reorganizations would bear directly and indirectly, as compared with the various
direct and indirect expenses currently borne by a shareholder in each Fund.
These examples should not be considered a representation of past or future
expenses or annual return. Actual expenses may be greater or less than those
shown.
SUMMARY
This summary is qualified in its entirety by reference to the
additional information contained elsewhere in this Prospectus/Proxy Statement,
and, to the extent not inconsistent with such additional information, the
Prospectuses of Evergreen Florida Bond dated November 10, 1997 and the
Prospectuses of Evergreen Florida and Keystone Florida dated October 31, 1996,
as supplemented, and July 21, 1997, as supplemented, respectively (which are
incorporated herein by reference), and the Plans, forms of which are attached to
this Prospectus/Proxy Statement as Exhibits A-1 and A-2.
Proposed Plans of Reorganization
The Plans provide for the transfer of all of the assets of Evergreen
Florida and Keystone Florida, as applicable, in exchange for shares of Evergreen
Florida Bond and the assumption by Evergreen Florida Bond of certain identified
liabilities of each Fund. The Plans also call for the distribution of shares of
Evergreen Florida Bond to Evergreen Florida and Keystone Florida shareholders in
liquidation of those Funds as part of the Reorganizations. As a result of the
Reorganizations, the shareholders of Evergreen Florida and Keystone Florida will
become the owners of that number of full and fractional Corresponding Shares of
Evergreen Florida Bond having an aggregate net asset value equal to the
aggregate net asset value of the shareholder's shares of Evergreen Florida and
Keystone Florida, as of the close of business immediately prior to the date that
such Fund's assets are exchanged for shares of Evergreen Florida Bond. See
"Reasons for the Reorganizations - Agreements and Plans of Reorganization."
The Trustees of Evergreen Investment Trust and the Trustees of Keystone
State Tax Free Fund, including the Trustees who are not "interested persons,"
(the "Trustees") as such term is defined in the 1940 Act (the "Independent
<PAGE>
Trustees"), have concluded that the Reorganizations would be in the best
interests of shareholders of Evergreen Florida and Keystone Florida,
respectively, and that the interests of the shareholders of Evergreen Florida
and Keystone Florida, respectively, will not be diluted as a result of the
transactions contemplated by the Reorganizations. Accordingly, the Trustees have
submitted the Plans for the approval of Evergreen Florida's and Keystone
Florida's shareholders.
THE BOARD OF TRUSTEES OF EVERGREEN INVESTMENT TRUST
RECOMMENDS APPROVAL BY SHAREHOLDERS OF EVERGREEN
FLORIDA OF THE PLAN EFFECTING THE REORGANIZATION.
THE BOARD OF TRUSTEES OF KEYSTONE STATE TAX FREE FUND
RECOMMENDS APPROVAL BY SHAREHOLDERS OF KEYSTONE
FLORIDA OF THE PLAN EFFECTING THE REORGANIZATION.
The Trustees of Evergreen Municipal Trust have also
approved the Plans, and accordingly, Evergreen Florida Bond's
participation in the Reorganizations.
Approval of a Reorganization on the part of Evergreen Florida and
Keystone Florida will require the affirmative vote of a majority of Keystone
Florida's shares present and entitled to vote and for Evergreen Florida, a
majority of the shares entitled to vote, with all classes voting together as a
single class at Meetings at which a quorum of each Fund's shares is present. For
Evergreen Florida, twenty-five percent (25%) of the outstanding shares entitled
to vote and for Keystone Florida, a majority of the outstanding shares entitled
to vote, represented in person or by proxy, is required to constitute a quorum
at the Meetings. See "Voting Information Concerning the Meetings."
The Reorganizations are scheduled to take place on or about January 23,
1998.
If the shareholders of Evergreen Florida or Keystone Florida do not
vote to approve the Reorganizations, the Trustees will consider other possible
courses of action in the best interests of shareholders.
Tax Consequences
Prior to or at the completion of a Reorganization, Evergreen Florida
and Keystone Florida will each have received an opinion of counsel that the
Reorganization has been structured so that no gain or loss will be recognized by
the Fund or its shareholders for federal income tax purposes as a
<PAGE>
result of the receipt of shares of Evergreen Florida Bond in the Reorganization.
The holding period and aggregate tax basis of shares of Evergreen Florida Bond
that are received by each Fund's shareholders will be the same as the holding
period and aggregate tax basis of shares of the Fund previously held by such
shareholders, provided that shares of the Fund are held as capital assets. In
addition, the holding period and tax basis of the assets of each Fund in the
hands of Evergreen Florida Bond as a result of the Reorganization will be the
same as in the hands of each Fund immediately prior to the Reorganization, and
no gain or loss will be recognized by Evergreen Florida Bond upon the receipt of
the assets of each Fund in exchange for shares of Evergreen Florida Bond and the
assumption by Evergreen Florida Bond of certain identified liabilities.
Investment Objectives and Policies of the Funds
The investment objectives and policies of Evergreen Florida Bond,
Evergreen Florida and Keystone Florida are substantially identical. Each Fund
seeks current income exempt from federal regular income tax and the Florida
state intangibles tax, consistent with preservation of capital. It is
anticipated that Evergreen Florida Bond will invest its assets so that at least
80% of its annual interest income is, or at least 80% of its net assets are,
invested in obligations which provide interest income which is exempt from
federal regular income taxes. At least 65% of the value of Evergreen Florida
Bond's total assets will be invested in Florida municipal bonds. To qualify as
an investment exempt from the Florida State intangibles tax, Evergreen Florida
Bond's portfolio must consist entirely of investments exempt from the Florida
state intangibles tax on the last business day of the calendar year.
Evergreen Florida Bond will invest at least 80% of its assets in bonds
that, at the date of investment, are rated within the four highest categories by
Standard & Poor's Ratings Group ("S&P") (AAA, AA, A and BBB), by Moody's
Investors Service ("Moody's") (Aaa, Aa, A and Baa), by Fitch Investors Services,
L.P. ("Fitch") (AAA, AA, A and BBB) or, if not rated or rated under a different
system, are of comparable quality to obligations so rated as determined by
another nationally recognized statistical ratings organization ("NRSRO") or by
the Fund's investment adviser. The Fund may invest the remaining 20% of its
assets in lower rated bonds, but it will not invest in bonds rated below B.
The Fund is permitted to make taxable investments, and may from time to
time generate income subject to federal
<PAGE>
regular income tax. The investment objectives and policies of Evergreen Florida
and Keystone Florida are identical to those of Evergreen Florida Bond. See
"Comparison of Investment Objectives and Policies" below.
Comparative Performance Information For Each Fund
Discussions of the manner of calculation of total return are contained
in the respective Prospectuses and Statements of Additional Information of the
Funds. Evergreen Florida Bond, as of the date of this Prospectus/Proxy
Statement, had not commenced operations. The total return of Evergreen Florida
for the one and five year periods ended August 31, 1997, the total return of
Keystone Florida for the one and five year periods ended August 31, 1997 and for
both Funds for the periods from inception through August 31, 1997 are set forth
in the table below. The calculations of total return assume the reinvestment of
all dividends and capital gains distributions on the reinvestment date and the
deduction of all recurring expenses (including sales charges) that were charged
to shareholders' accounts.
Average Annual Total Return (1)
1 Year 5 Years From
Ended Ended Inception
August 31, August 31, To August Inception
1997 1997 31, 1997 Date
---------- --------- --------- ---------
Evergreen
Florida
Class A 3.88% 5.92% 7.47% 5/11/88
shares
Class B 3.06% N/A 5.03% 6/30/95
shares
Class Y 9.14% N/A 7.38% 6/30/95
shares
Keystone
Florida
Class A 3.02% 4.85% 6.67% 12/28/90
shares
Class B 2.28% N/A 4.50% 2/1/93
shares
<PAGE>
Class C
shares
6.27% N/A 4.85% 2/1/93
- --------------
(1) Reflects waiver of advisory fees and reimbursements and/or waivers of
expenses. Without such reimbursements and/or waivers, the average
annual total return during the period would have been lower.
Management of the Funds
The overall management of Evergreen Florida Bond, of Evergreen Florida
and of Keystone Florida is the responsibility of, and is supervised by, the
Board of Trustees of Evergreen Municipal Trust, Evergreen Investment Trust and
Keystone State Tax Free Fund, respectively.
Investment Advisers
The investment adviser to Evergreen Florida Bond and Evergreen Florida
is the Capital Management Group of First Union National Bank ("FUNB"). FUNB is a
subsidiary of First Union Corporation, the sixth largest bank holding company in
the United States based on total assets as of June 30, 1997. The Capital
Management Group of FUNB and its affiliates including Keystone Investment
Management Company ("Keystone"), manage the Evergreen Keystone family of mutual
funds with assets of approximately $30 billion as of June 30, 1997. For further
information regarding FUNB and First Union, see "Management of the Fund -
Investment Adviser" in the Prospectuses of Evergreen Florida Bond.
FUNB manages investments and supervises the daily business affairs of
Evergreen Florida Bond and Evergreen Florida subject to the authority of the
Trustees. FUNB is entitled to receive from each Fund an annual fee equal to .50%
of each Fund's average daily net assets.
Keystone serves as investment adviser to Keystone Florida. Keystone
manages investments and supervises the daily business affairs of the Fund and
receives a fee for its services at the annual rate below:
Aggregate Net Asset
Value of the Shares
Management Fee of the Fund
0.55% of the first $50,000,000, plus
0.50% of the first $50,000,000, plus
0.45% of the next $100,000,000, plus
<PAGE>
0.40% of the next $100,000,000, plus
0.35% of the next $100,000,000, plus
0.30% of the next $100,000,000, plus
0.25% of amounts
over $500,000,000.
Each investment adviser may, at its discretion, also reduce or waive
its fee or reimburse a Fund for certain of its other expenses in order to reduce
its expense ratios. Each investment adviser may reduce or cease these voluntary
waivers and reimbursements at any time.
Portfolio Management
The portfolio manager of both Evergreen Florida Bond and Evergreen
Florida is Robert S. Drye, who is a Vice President of FUNB and has been with
FUNB since 1968. Since 1989, Mr. Drye has served as a portfolio manager for
several of the series of Evergreen Investment Trust and certain common trust
funds. Mr. Drye has managed Evergreen Florida since 1993.
Distribution of Shares
Evergreen Keystone Distributor, Inc. ("EKD"), an affiliate of BISYS
Fund Services, acts as underwriter of Evergreen Florida Bond's, Evergreen
Florida's and Keystone Florida's shares. EKD distributes each Fund's shares
directly or through broker-dealers, banks (including FUNB), or other financial
intermediaries. Evergreen Florida Bond offers four classes of shares: Class A,
Class B, Class C and Class Y. Evergreen Florida offers three classes of shares:
Class A, Class B and Class Y. Keystone Florida offers three classes of shares:
Class A, Class B and Class C. Each class has separate distribution arrangements.
(See "Distribution- Related and Shareholder Servicing-Related Expenses" below.)
No class bears the distribution expenses relating to the shares of any other
class.
In the proposed Reorganizations, shareholders of Evergreen Florida and
Keystone Florida will receive the corresponding class of shares of Evergreen
Florida Bond which they currently hold. The Class A, Class B, Class C and Class
Y shares of Evergreen Florida Bond have substantially identical arrangements
with respect to the imposition of initial sales charges, CDSCs and distribution
and service fees as the comparable classes of shares of Evergreen Florida and
Keystone Florida. Because the Reorganizations will be effected at net asset
value without the imposition of a sales charge, Evergreen Florida Bond shares
acquired by shareholders of Evergreen Florida and Keystone Florida pursuant to
the
<PAGE>
proposed Reorganizations would not be subject to any initial sales charge or
CDSC as a result of the Reorganizations. However, holders of Evergreen Florida
Bond shares acquired as a result of the Reorganizations would continue to be
subject to a CDSC upon subsequent redemption to the same extent as if they had
continued to hold their shares of Evergreen Florida and Keystone Florida.
The following is a summary description of charges and fees for each of
the different classes of shares. More detailed descriptions of the distribution
arrangements applicable to the classes of shares are contained in the respective
Evergreen Florida Bond Prospectuses, the Evergreen Florida Prospectuses, the
Keystone Florida Prospectus and in each Fund's respective Statement of
Additional Information.
Class Y Shares. Class Y shares are sold at net asset value without any
initial sales charge and are not subject to distribution-related fees. Class Y
shares are only available to certain classes of investors as is more fully
described in the Prospectus for each Fund.
Class A Shares. Class A shares are sold at net asset value plus an
initial sales charge and, as indicated below, are subject to
distribution-related fees.
Class B Shares. Class B shares are sold without an initial sales charge
but are subject to a CDSC, which ranges from 5% to 1%, if shares are redeemed
during the first six years after the month of purchase. In addition, Class B
shares are subject to distribution-related fees and shareholder
servicing-related fees as described below. Class B shares issued in the
Reorganizations will automatically convert to Class A shares in accordance with
the conversion schedule in effect at the time of the Reorganizations. For
purposes of determining when Class B shares issued in the Reorganizations to
shareholders of Evergreen Florida and Keystone Florida will convert to Class A
shares, such shares will be deemed to have been purchased as of the date the
shares of Evergreen Florida and Keystone Florida were originally purchased.
Class B shares are subject to higher distribution-related fees than the
corresponding Class A shares of each Fund on which a front-end sales charge is
imposed (until they convert to Class A shares). The higher fees mean a higher
expense ratio, so Class B shares pay correspondingly lower dividends and may
have a lower net asset value than Class A shares of the Fund.
<PAGE>
Class C Shares. Class C shares are sold without an initial sales charge
but, as indicated below, are subject to distribution and shareholder
servicing-related fees. Class C shares are subject to a 1% CDSC if such shares
are redeemed during the month of purchase and the 12-month period following the
month of purchase. No CDSC is imposed on amounts redeemed thereafter. Class C
shares incur higher distribution and shareholder servicing-related fees than
Class A shares but, unlike Class B shares, do not convert to any other class of
shares.
The amount of the CDSC applicable to redemptions of Class B and Class C
shares is charged as a percentage of the lesser of the then current net asset
value or original cost. The CDSC is deducted from the amount of the redemption
and is paid to the respective Fund's distributor or its predecessor, as the case
may be. Shares of each Fund acquired through dividend or distribution
reinvestment are not subject to a CDSC. For purposes of determining the schedule
of CDSCs, and the time of conversion to Class A shares, applicable to shares of
Evergreen Florida Bond received by Evergreen Florida's or Keystone Florida's
shareholders in the Reorganizations, Evergreen Florida Bond will treat such
shares as having been sold on the date the shares of Evergreen Florida or
Keystone Florida were originally purchased by such Fund's shareholder.
Additional information regarding the Classes of shares of each Fund is included
in their respective Prospectus and Statement of Additional Information.
Distribution-Related and Shareholder Servicing-Related Expenses.
Evergreen Florida Bond and Evergreen Florida have each adopted a Rule 12b-1 plan
with respect to its Class A shares under which the class may pay for
distribution-related expenses at an annual rate which may not exceed 0.75% of
average daily net assets attributable to the Class. Payments with respect to
Class A shares of Evergreen Florida Bond and Evergreen Florida are currently
limited to 0.25% of average daily net assets attributable to the Class, which
amount may be increased to the full plan rate for such Fund by the Trustees
without shareholder approval. The Rule 12b-1 distribution plan adopted by
Keystone Florida permits Class A shares to pay a maximum of up to 0.25% of
average daily net assets of the Class in distribution related fees.
Each Fund has also adopted a Rule 12b-1 plan with respect to its Class B
and Class C shares, as applicable, under which each Class may pay for
distribution-related and shareholder servicing-related expenses at an annual
rate which may not exceed 1.00% (0.75% for Evergreen Florida Class B shares) of
average daily net assets attributable to the Class. Evergreen
<PAGE>
Florida has also adopted, with respect to its Class B shares, a shareholder
service plan which provides for payments in respect of "shareholder services" at
an annual rate not to exceed 0.25%.
The Class B and Class C Rule 12b-1 plans of Keystone Florida and the
Class C 12b-1 plan of Evergreen Florida provide, as applicable, that of the
total 1.00% 12b-1 fees, up to 0.25% may be for the payment in respect of
"shareholder services." Consistent with the requirements of Rule 12b-1 and the
applicable rules of the National Association of Securities Dealers, Inc.,
following the Reorganizations Evergreen Florida Bond may make
distribution-related and shareholder servicing- related payments with respect to
Evergreen Florida and Keystone Florida shares sold prior to the Reorganizations,
including payments to Keystone Florida's former underwriter.
Additional information regarding the Rule 12b-1 plans adopted by each
Fund is included in its respective Prospectus and Statement of Additional
Information.
Purchase and Redemption Procedures
Information concerning applicable sales charges, distribution-related
fees and shareholder servicing-related fees are described above. Investments in
the Funds are not insured. The minimum initial purchase requirement for each
Fund is $1,000. There is no minimum for subsequent purchases of shares of any
Fund. Each Fund provides for telephone, mail or wire redemption of shares at net
asset value, less any CDSC, as next determined after receipt of a redemption
request on each day the New York Stock Exchange ("NYSE") is open for trading.
Additional information concerning purchases and redemptions of shares, including
how each Fund's net asset value is determined, is contained in the respective
Prospectus for each Fund. Each Fund may involuntarily redeem shareholders'
accounts that have less than $1,000 of invested funds. All funds invested in
each Fund are invested in full and fractional shares. The Funds reserve the
right to reject any purchase order.
Exchange Privileges
Each Fund currently has identical exchange privileges. No sales charge
is imposed on an exchange. An exchange which represents an initial investment in
another fund must amount to at least $1,000. The current exchange privileges,
and the requirements and limitations attendant thereto, are described in each
Fund's respective Prospectus and Statement of Additional Information.
<PAGE>
Dividend Policy
Each Fund declares income dividends daily and pays income dividends
monthly. Distributions of any net realized gains of a Fund will be made at least
annually. Shareholders begin to earn dividends on the first business day after
shares are purchased unless shares were not paid for, in which case dividends
are not earned until the next business day after payment is received. Dividends
and distributions are reinvested in additional shares of the same class of the
respective Fund, or paid in cash, as a shareholder has elected. See the
respective Prospectus of each Fund for further information concerning dividends
and distributions.
After the Reorganizations, shareholders of Evergreen Florida and
Keystone Florida who have elected to have their dividends and/or distributions
reinvested will have dividends and/or distributions received from Evergreen
Florida Bond reinvested in shares of Evergreen Florida Bond. Shareholders of
Evergreen Florida and Keystone Florida who have elected to receive dividends
and/or distributions in cash will receive dividends and/or distributions from
Evergreen Florida Bond in cash after the Reorganizations, although they may,
after the Reorganizations, elect to have such dividends and/or distributions
reinvested in additional shares of Evergreen Florida Bond.
Each of Evergreen Florida and Keystone Florida has qualified and
intends to continue to qualify, and Evergreen Florida Bond intends to qualify,
to be treated as a regulated investment company under the Internal Revenue Code
of 1986, as amended (the "Code"). While so qualified, so long as each Fund
distributes all of its investment company taxable income and any net realized
gains to shareholders, it is expected that a Fund will not be required to pay
any federal income taxes on the amounts so distributed. A 4% nondeductible
excise tax will be imposed on amounts not distributed if a Fund does not meet
certain distribution requirements by the end of each calendar year. Each Fund
anticipates meeting such distribution requirements.
Risks
Since the investment objectives and policies of each Fund are
substantially identical, the risks involved in investing in each Fund's shares
are comparable.
Each Fund stresses earning income by investing in fixed income
securities, which are generally considered to be interest rate sensitive. This
means that their market values
<PAGE>
(and the Fund's share prices) will tend to vary inversely with changes in
interest rates (i.e., decreasing when interest rates rise and increasing when
interest rates fall). For example, if interest rates increase after a security
is purchased, the security, if sold prior to maturity, may return less than its
cost. Shorter term bonds are less sensitive to interest rate changes, but longer
term bonds generally offer higher yields.
In addition, to the extent that investments are made in debt securities
(other than U.S. government securities), derivatives or structured securities,
such investments, despite favorable credit ratings, are subject to some risk of
default.
A Fund's ability to achieve its objective depends partially on the
prompt payment by issuers of the interest on and principal of the municipal
obligations held by the Fund. A moratorium, default or other nonpayment of
interest or principal when due on any municipal obligation could affect the
market value and liquidity of that particular security in addition to that of
other municipal obligations held by a Fund. In addition, the market for
municipal obligations is often thin and can be temporarily affected by large
purchases and sales, including those by a Fund.
An action by the U.S. Congress restricting or eliminating the federal
income tax exemption for interest on municipal obligations could materially
affect the availability of municipal obligations for investment by each Fund and
the value of the Fund's securities. In such an event, the Trustees of the Trust
under which the Fund operates would reevaluate the Fund's investment objective
and policies and consider changes in the structure of the Fund or its
dissolution.
If and when a Fund invests in municipal lease obligations, the
possibility exists that a municipality may not appropriate the funds for lease
payments. Each Trust's Board of Trustees will be responsible for determining, on
an ongoing basis, the credit quality of such leases, including an assessment of
the likelihood of cancellation of any such lease.
For a discussion of the tax considerations for Florida and special
factors, including the risks associated with investing in the municipal
securities of Florida, see Appendix A to the statement of additional information
of Evergreen Florida Bond.
<PAGE>
REASONS FOR THE REORGANIZATIONS
At a regular meeting held on September 16, 1997, the Board of Trustees
of Evergreen Investment Trust considered and approved the Reorganization as in
the best interests of shareholders of Evergreen Florida and determined that the
interests of existing shareholders of Evergreen Florida will not be diluted as a
result of the transactions contemplated by the Reorganization.
At a regular meeting held on September 17, 1997, the Board of Trustees
of Keystone State Tax Free Fund considered and approved the Reorganization as in
the best interests of shareholders of Keystone Florida and determined that the
interests of existing shareholders of Keystone Florida will not be diluted as a
result of the transactions contemplated by the Reorganization.
In approving each Plan, the Trustees reviewed various factors about the
respective Funds and the proposed Reorganizations. The Reorganizations are part
of an overall plan to convert the Evergreen Keystone funds into series of
Delaware business trusts and, to the extent practicable, simplify and make
consistent various investment restrictions and policies. Holders of shares of
beneficial interest in a Massachusetts business trust may, under certain
circumstances, be held personally liable as partners for their obligations of
the trust. Although provisions of the Declaration of Trust and other legal
documents pertaining to each Fund's affairs seek to minimize the potential for
such liability, some degree of exposure, however unlikely, continues to exist
with respect to the Funds as long as they are governed by Massachusetts law.
Substantially all written agreements, obligations, instruments, or undertakings
made by Evergreen Investment Trust or Keystone State Tax Free Fund must contain
a provision limiting the obligations created by that transaction to the Fund to
which the transaction relates, as well as related provisions to the effect that
the shareholders of the Fund and Trustees of the Trust under which the Fund
operates are not personally liable thereunder. Although the Declarations of
Trust of Evergreen Investment Trust and Keystone State Tax Free Fund provide for
indemnification out of the Funds' property of any shareholder held personally
liable for the obligations of a Fund solely by reason of his or her being or
having been a shareholder, a shareholder could conceivably incur financial loss
exceeding any amounts indemnified on account of shareholder liability if the
circumstances were such that the Fund had insufficient assets or would otherwise
be unable to meet its obligations.
<PAGE>
As a Delaware business trust, the Evergreen Municipal Trust's
operations will be governed by applicable Delaware law rather than by applicable
Massachusetts law. The Delaware Business Trust Act (the "Delaware Act") provides
that a shareholder of a Delaware business trust shall be entitled to the same
limitation of personal liability extended to stockholders of Delaware
corporations. Shareholders of Delaware corporations do not have personal
liability for obligations of the corporation.
Delaware has obtained a favorable national reputation for its business
laws and business environment. The Delaware courts, which may be called upon to
interpret the Delaware Act, are among the nation's most highly respected and
have an expertise in corporate matters which in part grew out of the fact that
Delaware corporate legal issues are concentrated in the Court of Chancery where
there are no juries and where judges issue written opinions explaining their
decisions. Thus, there is a well established body of precedent which may be
relevant in deciding issues pertaining to a Delaware business trust.
There are other advantages that may be afforded by a Delaware business
trust. Under Delaware law, the Evergreen Municipal Trust will have the
flexibility to respond to future business contingencies. For example, the
Trustees will have the power to change the Evergreen Municipal Trust to a
corporation, to merge or consolidate it with another entity, to cause each
series to become a separate trust, and to change the Evergreen Municipal Trust's
domicile without a shareholder vote. This flexibility could help to assure that
the Evergreen Municipal Trust operates under the most advanced form of
organization and could reduce the expense and frequency of future shareholder
meetings for non-investment related issues.
In addition, although it is proposed that Evergreen Florida and
Keystone Florida each sell all of its assets to Evergreen Florida Bond, a newly
established series of Evergreen Municipal Trust, an important part of the
Reorganizations is that Keystone Florida, for all practical purposes, will be
combined with Evergreen Florida. The investment objectives and policies of
Evergreen Florida Bond are substantially identical to those of Evergreen Florida
and Keystone Florida. Consequently, in considering the Reorganizations, each
Fund's Trustees reviewed the Reorganization in the context of Keystone Florida
being combined with Evergreen Florida.
<PAGE>
Evergreen Florida and Keystone Florida have substantially identical
investment objectives and policies and comparable risk profiles. See "Comparison
of Investment Objectives and Policies" below. At the same time, the Boards of
Trustees of Evergreen Investment Trust and Keystone State Tax Free Fund
evaluated the potential economies of scale associated with larger mutual funds
and concluded that operational efficiencies may be achieved upon the combination
of Keystone Florida with another Evergreen Keystone fund with a greater level of
assets. As of August 31, 1997, Evergreen Florida's net assets were approximately
$161 million and Keystone Florida's net assets were approximately $78 million.
In addition, assuming that an alternative to the Reorganizations would
be to propose that Evergreen Florida and Keystone Florida continue their
existences as separate series of Evergreen Municipal Trust, Keystone Florida
would be offered through common distribution channels with the substantially
identical Evergreen Florida. Keystone Florida would also have to bear the cost
of maintaining its separate existence. FUNB and Keystone believe that the
prospect of dividing the resources of the Evergreen Keystone mutual fund
organization between two substantially identical funds could result in each Fund
being disadvantaged due to an inability to achieve optimum size, performance
levels and the greatest possible economies of scale. Accordingly, for the
reasons noted above and recognizing that there can be no assurance that any
economies of scale or other benefits will be realized, FUNB and Keystone believe
that the proposed Reorganizations would be in the best interests of each Fund
and its shareholders.
The Board of Trustees of Evergreen Investment Trust on behalf of
Evergreen Florida and the Board of Trustees of Keystone State Tax Free Fund on
behalf of Keystone Florida met and considered the recommendation of FUNB and
Keystone, and, in addition, considered among other things, (i) the disadvantages
which apply to operating each Fund as a Massachusetts business trust or a series
of a Massachusetts business trust; (ii) the advantages which apply to each Fund
operating as a series of a Delaware business trust; (iii) the terms and
conditions of the Reorganization; (iv) whether the Reorganization would result
in the dilution of shareholders' interests; (v) expense ratios, fees and
expenses of Evergreen Florida and Keystone Florida; (vi) the comparative
performance records of each of the Funds; (vii) compatibility of their
investment objectives and policies; (viii) the investment experience, expertise
and resources of FUNB; (ix) service features available to shareholders of the
respective Funds and Evergreen Florida Bond; (x) the fact that FUNB will bear
the
<PAGE>
expenses incurred by Evergreen Florida and Keystone Florida in connection with
the Reorganizations; (xi) the fact that Evergreen Florida Bond will assume
certain identified liabilities of Evergreen Florida and Keystone Florida; and
(xii) the expected federal income tax consequences of the Reorganizations.
The Trustees of Keystone State Tax Free Fund also considered the
benefits to be derived by shareholders of Keystone Florida from its combination,
for all practical purposes, with Evergreen Florida. In this regard, the Trustees
considered the potential benefits of being associated with a larger entity and
the economies of scale that could be realized by the participation by
shareholders of Keystone Florida.
In addition, the Trustees of Evergreen Investment Trust and Keystone
State Tax Free Fund considered that there are alternatives available to
shareholders of Evergreen Florida and Keystone Florida, including the ability to
redeem their shares, as well as the option to vote against the Reorganizations.
During their consideration of the Reorganizations the Trustees met with
Fund counsel and counsel to the Independent Trustees regarding the legal issues
involved. The Trustees of Evergreen Municipal Trust on behalf of Evergreen
Florida Bond also approved at a meeting on September 17, 1997 the proposed
Reorganizations.
THE TRUSTEES OF EVERGREEN INVESTMENT TRUST RECOMMEND
THAT THE SHAREHOLDERS OF EVERGREEN FLORIDA APPROVE
THE PROPOSED REORGANIZATION.
THE TRUSTEES OF KEYSTONE STATE TAX FREE FUND RECOMMEND THAT
THE SHAREHOLDERS OF KEYSTONE FLORIDA APPROVE
THE PROPOSED REORGANIZATION.
Agreements and Plans of Reorganization
The following summary is qualified in its entirety by reference to the
Plans (Exhibits A-1 and A-2 hereto).
Each Plan provides that Evergreen Florida Bond will acquire all of the
assets of Evergreen Florida and Keystone Florida in exchange for shares of
Evergreen Florida Bond and the assumption by Evergreen Florida Bond of certain
identified liabilities of Evergreen Florida and Keystone Florida on or about
January 23, 1998 or such other date as may be agreed upon by the parties (the
"Closing Date"). Prior to the
<PAGE>
Closing Date, Evergreen Florida and Keystone Florida will endeavor to discharge
all of their known liabilities and obligations. Evergreen Florida Bond will not
assume any liabilities or obligations of Evergreen Florida and Keystone Florida
other than those reflected in an unaudited statement of assets and liabilities
of Evergreen Florida and Keystone Florida prepared as of the close of regular
trading on the NYSE, currently 4:00 p.m. Eastern time, on the business day
immediately prior to the Closing Date. Evergreen Florida Bond will provide the
Trustees of Keystone State Tax Free Fund with certain indemnifications as set
forth in the Plan. The number of full and fractional shares of each Class of
Evergreen Florida Bond to be received by the shareholders of Evergreen Florida
and Keystone Florida will be as follows: Shareholders of Evergreen Florida will
receive the number of shares of each class of Evergreen Florida Bond equal to
the number of shares of each corresponding class as they currently hold of
Evergreen Florida. Shareholders of Keystone Florida will receive the number of
shares of Evergreen Florida Bond determined by multiplying the respective
outstanding class of shares of Keystone Florida by a factor which shall be
computed by dividing the net asset value per share of the respective class of
shares of Keystone Florida by the net asset value per share of the respective
class of shares of Evergreen Florida Bond. Such computations will take place as
of the close of regular trading on the NYSE on the business day immediately
prior to the Closing Date. The net asset value per share of each class will be
determined by dividing assets, less liabilities, in each case attributable to
the respective class, by the total number of outstanding shares.
State Street Bank and Trust Company, the custodian for the Funds, will
compute the value of Evergreen Florida's and Keystone Florida's respective
portfolio securities. The method of valuation employed will be consistent with
the procedures set forth in the Prospectuses and Statement of Additional
Information of Evergreen Florida Bond, Rule 22c-1 under the 1940 Act, and with
the interpretations of such Rule by the SEC's Division of Investment Management.
At or prior to the Closing Date, Evergreen Florida and Keystone Florida
will have declared a dividend or dividends and distribution or distributions
which, together with all previous dividends and distributions, shall have the
effect of distributing to each Fund's shareholders (in shares of each Fund, or
in cash, as the shareholder has previously elected) all of each Fund's
investment company taxable income for the taxable period ending on the Closing
Date (computed without regard to any deduction for dividends paid) and all of
its net capital gains realized in all taxable periods ending on the
<PAGE>
Closing Date (after reductions for any capital loss carryforward).
As soon after the Closing Date as conveniently practicable, Evergreen
Florida and Keystone Florida will liquidate and distribute pro rata to
shareholders of record as of the close of business on the Closing Date the full
and fractional Corresponding Shares of Evergreen Florida Bond received by each
Fund. Such liquidation and distribution will be accomplished by the
establishment of accounts in the names of each Fund's shareholders on the share
records of Evergreen Florida Bond's transfer agent. Each account will represent
the respective pro rata number of full and fractional Corresponding Shares of
Evergreen Florida Bond due to each Fund's shareholders. All issued and
outstanding shares of each Fund, including those represented by certificates,
will be canceled. The shares of Evergreen Florida Bond to be issued will have no
preemptive or conversion rights. After such distributions and the winding up of
its affairs, each of Evergreen Florida and Keystone Florida will be terminated.
In connection with such terminations, Evergreen Florida and Keystone Florida
will file with the SEC applications for termination as registered investment
companies.
The consummation of each Reorganization is subject to the conditions
set forth in the Plan for Evergreen Florida and the Plan for Keystone Florida,
including approval by each Fund's shareholders, accuracy of various
representations and warranties and receipt of opinions of counsel, including
opinions with respect to those matters referred to in "Federal Income Tax
Consequences" below. Notwithstanding approval of each Fund's shareholders, each
Plan may be terminated (a) by the mutual agreement of the Fund and Evergreen
Florida Bond; or (b) at or prior to the Closing Date by either party (i) because
of a breach by the other party of any representation, warranty, or agreement
contained therein to be performed at or prior to the Closing Date if not cured
within 30 days, or (ii) because a condition to the obligation of the terminating
party has not been met and it reasonably appears that it cannot be met.
The expenses of Evergreen Florida and Keystone Florida in connection
with the Reorganizations (including the cost of any proxy soliciting agent) will
be borne by FUNB whether or not the Reorganizations are consummated.
If the Reorganization is not approved by shareholders of a Fund, the
Board of Trustees of Evergreen Investment Trust and Keystone State Tax Free
Fund, as applicable, will consider
<PAGE>
other possible courses of action in the best interests of
shareholders.
Federal Income Tax Consequences
Each Reorganization is intended to qualify for federal income tax
purposes as a tax-free reorganization under section 368(a) of the Code. As a
condition to the closing of a Reorganization, Evergreen Florida and Keystone
Florida will each receive an opinion of counsel to the effect that, on the basis
of the existing provisions of the Code, U.S. Treasury regulations issued
thereunder, current administrative rules, pronouncements and court decisions,
for federal income tax purposes, upon consummation of the Reorganization:
(1) The transfer of all of the assets of the Fund solely in exchange
for shares of Evergreen Florida Bond and the assumption by Evergreen Florida
Bond of certain identified liabilities, followed by the distribution of
Evergreen Florida Bond's shares by the Fund in dissolution and liquidation of
the Fund, will constitute a "reorganization" within the meaning of section
368(a)(1)(C) (with respect to Keystone Florida and 368(a)(1)(F) with respect to
Evergreen Florida) of the Code, and Evergreen Florida Bond and the Fund will
each be a "party to a reorganization" within the meaning of section 368(b) of
the Code;
(2) No gain or loss will be recognized by the Fund on the transfer of
all of its assets to Evergreen Florida Bond solely in exchange for Evergreen
Florida Bond's shares and the assumption by Evergreen Florida Bond of certain
identified liabilities of the Fund or upon the distribution of Evergreen Florida
Bond's shares to the Fund's shareholders in exchange for their shares of the
Fund;
(3) The tax basis of the assets transferred will be the same to
Evergreen Florida Bond as the tax basis of such assets to the Fund immediately
prior to the Reorganization, and the holding period of such assets in the hands
of Evergreen Florida Bond will include the period during which the assets were
held by the Fund;
(4) No gain or loss will be recognized by Evergreen Florida Bond upon
the receipt of the assets from the Fund solely in exchange for the shares of
Evergreen Florida Bond and the assumption by Evergreen Florida Bond of certain
identified liabilities of the Fund;
(5) No gain or loss will be recognized by the Fund's shareholders upon
the issuance of the shares of Evergreen
<PAGE>
Florida Bond to them, provided they receive solely such shares (including
fractional shares) in exchange for their shares of the Fund; and
(6) The aggregate tax basis of the shares of Evergreen Florida Bond,
including any fractional shares, received by each of the shareholders of the
Fund pursuant to the Reorganization will be the same as the aggregate tax basis
of the shares of the Fund held by such shareholder immediately prior to the
Reorganization, and the holding period of the shares of Evergreen Florida Bond,
including fractional shares, received by each such shareholder will include the
period during which the shares of the Fund exchanged therefor were held by such
shareholder (provided that the shares of the Fund were held as a capital asset
on the date of the Reorganization).
Opinions of counsel are not binding upon the Internal Revenue Service
or the courts. If a Reorganization is consummated but does not qualify as a
tax-free reorganization under the Code, shareholders of Evergreen Florida and
Keystone Florida would recognize a taxable gain or loss equal to the difference
between his or her tax basis in his or her Fund shares and the fair market value
of Evergreen Florida Bond shares he or she received. Shareholders of Evergreen
Florida and Keystone Florida should consult their tax advisers regarding the
effect, if any, of the proposed Reorganization in light of their individual
circumstances. It is not anticipated that the securities of the combined
portfolio will be sold in significant amounts in order to comply with the
policies and investment practices of Evergreen Florida Bond. Since the foregoing
discussion relates only to the federal income tax consequences of the
Reorganization, shareholders of Evergreen Florida and Keystone Florida should
also consult their tax advisers as to the state and local tax consequences, if
any, of the Reorganization.
Pro-forma Capitalization
The following table sets forth the capitalizations of Evergreen Florida
and Keystone Florida as of August 31, 1997 and the capitalization of Evergreen
Florida Bond on a pro forma basis as of that date, giving effect to the proposed
acquisitions of assets at net asset value. As a newly created series of
Evergreen Municipal Trust, Evergreen Florida Bond immediately preceding the
Closing Date will have nominal assets and liabilities. The pro forma data
reflects an exchange ratio of approximately 1.07, 1.06 and 1.06 Class A, Class B
and Class C shares, respectively, of Evergreen Florida Bond issued for each
Class A, Class B and Class C share,
<PAGE>
respectively, of Keystone Florida and an exchange ratio of approximately 1.00,
1.00, and 1.00 Class A, Class B and Class Y shares, respectively, of Evergreen
Florida Bond issued for each Class A, Class B and Class Y share, respectively,
of Evergreen Florida.
Capitalization of Evergreen Florida,
Keystone Florida and Evergreen
Florida Bond (Pro Forma)
Evergreen
Florida Bond
(After
Evergreen Keystone Reorgani-
Florida Florida zations)
--------- -------- ------------
Net Assets
Class A.............. $105,537,671 $26,797,316 $132,334,987
Class B.............. $31,224,619 $41,422,317 $72,646,936
Class C.............. N/A $9,452,129 $9,452,129
Class Y.............. $24,174,825 N/A $24,174,825
Net Asset Value Per
Share
Class A.............. $9.98 $10.67 $9.98
Class B.............. $9.98 $10.54 $9.98
Class C.............. N/A $10.56 $9.98
Class Y.............. $9.98 N/A $9.98
Shares Outstanding
Class A.............. 10,576,333 2,512,311 13,262,341
Class B.............. 3,129,090 3,929,311 7,278,883
Class C.............. N/A 895,123 947,144
Class Y.............. 2,422,601 N/A 2,422,601
All Classes.......... 16,128,024 7,336,745 23,910,969
The table set forth above should not be relied upon to reflect the
number of shares to be received in the Reorganizations; the actual number of
shares to be received will depend upon the net asset value and number of shares
outstanding of each Fund at the time of the Reorganizations.
Shareholder Information
As of November 10, 1997 (the "Record Date"), there were the following
number of each Class of shares of beneficial interest of Evergreen Florida and
Keystone Florida
outstanding:
<PAGE>
Evergreen Keystone
Class of Shares Florida Florida
- --------------- --------- --------
Class A........................
Class B........................
Class C........................ N/A
Class Y........................ N/A
All Classes....................
As of September 30, 1997, the officers and Trustees of Evergreen
Investment Trust beneficially owned as a group less than 1% of the outstanding
shares of Evergreen Florida. To Evergreen Florida's knowledge, the following
persons owned beneficially or of record more than 5% of Evergreen Florida's
total outstanding shares as of September 30, 1997:
Percen-
Percen- tage of
tage of Shares of
Shares of Class
Class Outstand-
Before ing After
No. of Reorgani- Reorgani-
Name and Address Class Shares zations zations
- ---------------- ----- ------ --------- ---------
First Union National Y 2,243,272 84.42 84.42
Bank
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-
0002
First Union National Y 270,403 10.18 10.18
Bank
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-
0002
As of September 30, 1997, the officers and Trustees of Keystone State
Tax Free Fund beneficially owned as a group less than 1% of the outstanding
shares of Keystone Florida.
<PAGE>
To Keystone Florida's knowledge, the following persons owned beneficially or of
record more than 5% of Keystone Florida's total outstanding shares as of
September 30, 1997.
Percen-
Percen- tage of
tage of Shares of
Shares of Class
Class Outstand-
Before ing After
No. of Reorgani- Reorgani-
Name and Address Class Shares zations zations
- ---------------- ----- ------ --------- ---------
Merrill, Lynch, A 255,448 10.68 2.10
Pierce, Fenner &
Smith
Attn: Book Entry
4800 Deer Lake Dr.
E. 3rd Fl.
Jacksonville, FL
32246-6484
Merrill, Lynch, B 703,757 18.44 10.34
Pierce, Fenner &
Smith
Attn: Book Entry
4800 Deer Lake Dr.
E. 3rd Fl.
Jacksonville, FL
32246-6484
Merrill, Lynch, C 234,699 28.15 28.15
Pierce, Fenner &
Smith
Attn: Book Entry
4800 Deer Lake Dr.
E. 3rd Fl.
Jacksonville, Fl
32246-6484
Paine Webber for C 62,334 7.48 7.48
the benefit of
Betty J. Puskar
Ttee
Betty J. Puskar
Rev. Trust
708 Ocean Drive
Juno Beach, FL
33408-1911
<PAGE>
Percen-
Percen- tage of
tage of Shares of
Shares of Class
Class Outstand-
Before ing After
No. of Reorgani- Reorgani-
Name and Address Class Shares zations zations
- ---------------- ----- ------ --------- ---------
Paine Webber for C 45,023 5.52 5.52
the benefit of
Wayne D. Rebertus
Ttee
U/A DTD 8/3/89
FBO Wayne D.
Rebertus
720 W. 73 Terrace
Plantation, FL
33317-1028
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
The following discussion is based upon and qualified in its entirety by
the descriptions of the respective investment objectives, policies and
restrictions set forth in the respective Prospectuses and Statements of
Additional Information of the Funds. The investment objective, policies and
restrictions of Evergreen Florida Bond can be found in the Prospectuses of
Evergreen Florida Bond under the caption "Investment Objective and Policies".
The investment objectives, policies and restrictions of Evergreen Florida and
Keystone Florida can be found in the respective Prospectuses of each Fund under
the caption "Investment Objective and Policies."
The investment objectives of Evergreen Florida Bond, Evergreen Florida
and Keystone Florida are substantially identical. Each Fund seeks current income
exempt from federal regular income tax and the Florida state intangibles tax,
consistent with the preservation of capital. Unlike Evergreen Florida Bond, the
investment objective of Evergreen Florida and Keystone Florida cannot be changed
without shareholder approval.
The following discussion of Evergreen Florida Bond's investment policies
and restrictions applies equally to Evergreen Florida. Evergreen Florida Bond
will normally
<PAGE>
invest its assets so that at least 80% of its annual interest income is, or at
least 80% of its net assets are, invested in obligations which provide interest
income which is exempt from federal regular income taxes. In addition, at least
65% of the value of the Fund's total assets will be invested in Florida
municipal bonds. To qualify as an investment exempt from the Florida state
intangibles tax, Evergreen Florida Bond's portfolio must consist entirely of
investments exempt from the Florida state intangibles tax on the last business
day of the calendar year.
Evergreen Florida Bond seeks to achieve its investment objective by
investing principally in Florida municipal bonds, including industrial
development bonds. In addition, the Fund may invest in obligations issued by or
on behalf of any state, territory, or possession of the United States, including
the District of Columbia, or their political subdivisions or agencies and
instrumentalities, the interest from which is exempt from federal (regular, if
applicable) income tax.
Municipal bonds are debt obligations issued by the state or local
entities to support a government's general financial needs or special projects,
such as housing projects or sewer works. Municipal bonds include industrial
development bonds issued by or on behalf of public authorities to provide
financing aid to acquire sites or construct or equip facilities for privately or
publicly owned corporations.
The two principal classifications of municipal bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. Revenue bonds are paid off only with the revenue
generated by the project financed by the bond or other specified sources of
revenue. For example, in the case of a bridge project, proceeds from the tolls
would go directly to retiring the bond issue. Thus, unlike general obligation
bonds, revenue bonds do not represent a pledge of credit or create any debt of
or charge against the general revenues of a municipality or public authority.
Evergreen Florida Bond will invest at least 80% of its assets in bonds
that, at the date of investment, are rated within the four highest categories by
S&P (AAA, AA, A and BBB), by Moody's (Aaa, Aa, A and Baa), by Fitch (AAA, AA, A
and BBB) or, if not rated or rated under a different system, are of comparable
quality to obligations so rated as determined by another nationally recognized
statistical ratings organization ("NRSRO") or by the Fund's investment adviser.
The Fund may invest the remaining 20% of its assets
<PAGE>
in lower rated bonds, but it will not invest in bonds rated
below B.
Evergreen Florida Bond is permitted to make taxable investments, and
may from time to time generate income subject to federal regular income tax.
Evergreen Florida Bond may also invest in participation interests in
any of the above obligations purchased from financial institutions such as
commercial banks, savings and loan associations and insurance companies,
variable rate municipal securities and municipal leases.
During periods when, in the opinion of the Fund's investment adviser, a
temporary defensive position in the market is appropriate, Evergreen Florida
Bond may invest in short-term tax-exempt or taxable investments. These temporary
investments include: notes issued by or on behalf of municipal or corporate
issuers; obligations issued or guaranteed by the U.S. government, its agencies,
or instrumentalities; other debt securities; commercial paper; bank certificates
of deposit; shares of other investment companies; and repurchase agreements.
There are no rating requirements applicable to temporary investments. However,
Evergreen Florida Bond's investment adviser will limit temporary investments to
those it considers to be of comparable quality to the Fund's primary
investments.
Evergreen Florida Bond may also engage in certain derivative
transactions including the purchase and sale of options and futures.
The investment objective and policies of Keystone Florida are
substantially similar to that of Evergreen Florida Bond and Evergreen Florida
except for the fact that it must invest at least 80% of its net assets in
Florida obligations while Evergreen Florida Bond and Evergreen Florida must
invest at least 65% of their assets in Florida obligations. As a practical
matter, however, each Fund invests substantially all of its assets in Florida
obligations in order to be exempt from the Florida state intangibles tax.
Keystone Florida may also engage in certain derivative transactions
including the purchase and sale of options and futures and may invest in
municipal obligations denominated in foreign currencies.
The characteristics of each investment policy and the associated risks are
described in each Fund's respective Prospectus and Statement of Additional
Information. The Funds
<PAGE>
have other investment policies and restrictions which are also set forth in the
Prospectus and Statement of Additional Information of each Fund.
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS
Forms of Organization
Evergreen Municipal Trust, Evergreen Investment Trust and Keystone
State Tax Free Fund are open-end management investment companies registered with
the SEC under the 1940 Act, which continuously offer shares to the public.
Evergreen Investment Trust and Keystone State Tax Free Fund are each organized
as a Massachusetts business trust. Evergreen Municipal Trust is organized as a
Delaware business trust. Each Trust is governed by a Declaration of Trust,
By-Laws and a Board of Trustees. Each Trust is also governed by applicable
Delaware, Massachusetts and federal law. Evergreen Florida Bond is a series of
Evergreen Municipal Trust, Evergreen Florida is a series of Evergreen Investment
Trust and Keystone Florida is a series of Keystone State Tax Free Fund.
Capitalization
The beneficial interests in Evergreen Florida Bond are represented by
an unlimited number of transferable shares of beneficial interest without par
value. The beneficial interests in Evergreen Florida and Keystone Florida are
represented by an unlimited number of transferable shares of beneficial interest
with a $0.0001 par value and without par value per share, respectively. The
respective Declaration of Trust under which each Fund has been established
permits the Trustees to allocate shares into an unlimited number of series, and
classes thereof, with rights determined by the Trustees, all without shareholder
approval. Fractional shares may be issued. Except with respect to Evergreen
Florida Bond where each share of the Fund is entitled to one vote for each
dollar of net asset value applicable to such share, each Fund's shares have
equal voting rights with respect to matters affecting shareholders of all
classes of each Fund and represent equal proportionate interests in the assets
belonging to the Funds. Shareholders of each Fund are entitled to receive
dividends and other amounts as determined by the Trustees. Shareholders of each
Fund vote separately, by class, as to matters, such as approval of or amendments
to Rule 12b-1 distribution plans, that affect only their particular class and by
series as to matters, such as approval of or amendments to investment advisory
agreements or proposed organizations, that affect only their particular series.
<PAGE>
Shareholder Liability
Under Massachusetts law, shareholders of a business trust could, under
certain circumstances, be held personally liable for the obligations of the
business trust. However, the respective Declaration of Trust under which
Evergreen Florida and Keystone Florida was established disclaims shareholder
liability for acts or obligations of the series and requires that notice of such
disclaimer be given in each agreement, obligation or instrument entered into or
executed by the Fund or the Trustees. Each Declaration of Trust provides for
indemnification out of the series property for all losses and expenses of any
shareholder held personally liable for the obligations of the series. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is considered remote since it is limited to circumstances in which a
disclaimer is inoperative and the series or the Trust itself would be unable to
meet its obligations. A substantial number of mutual funds in the United States
are organized as Massachusetts business trusts.
Under Delaware law, shareholders of a Delaware business trust are
entitled to the same limitation of personal liability extended to stockholders
of Delaware corporations. No similar statutory or other authority limiting
business trust shareholder liability exists in any other state. As a result, to
the extent that Evergreen Municipal Trust or a shareholder is subject to the
jurisdiction of courts in those states, the courts may not apply Delaware law,
and may thereby subject shareholders of a Delaware trust to liability. To guard
against this risk, the Declaration of Trust of Evergreen Municipal Trust: (a)
provides that any written obligation of the Trust may contain a statement that
such obligation may only be enforced against the assets of the Trust or the
particular series in question and the obligation is not binding upon the
shareholders of the Trust; however, the omission of such a disclaimer will not
operate to create personal liability for any shareholder; and (b) provides for
indemnification out of Trust property of any shareholder held personally liable
for the obligations of Evergreen Municipal Trust. Accordingly, the risk of a
shareholder of the Trust incurring financial loss beyond that shareholder's
investment because of shareholder liability is limited to circumstances in
which: (i) the court refuses to apply Delaware law; (ii) no contractual
limitation of liability was in effect; and (iii) the Trust itself would be
unable to meet its obligations. In light of Delaware law, the nature of the
Trust's business, and the nature of its assets, the risk of personal liability
to a shareholder of Evergreen Municipal Trust is remote.
<PAGE>
Shareholder Meetings and Voting Rights
Neither Evergreen Municipal Trust on behalf of Evergreen Florida Bond,
Evergreen Investment Trust on behalf of Evergreen Florida nor Keystone State Tax
Free on behalf of Keystone Florida is required to hold annual meetings of
shareholders. However, a meeting of shareholders for the purpose of voting upon
the question of removal of a Trustee must be called when requested in writing by
the holders of at least 25% or 10% of the outstanding shares of Evergreen
Investment Trust or Keystone State Tax Free Fund, respectively. In addition,
each is required to call a meeting of shareholders for the purpose of electing
Trustees if, at any time, less than a majority of the Trustees then holding
office were elected by shareholders. Each Trust currently does not intend to
hold regular shareholder meetings. Each Trust does not permit cumulative voting.
Except when a larger quorum is required by applicable law, with respect to
Evergreen Florida Bond and Evergreen Florida, twenty-five percent (25%) of the
outstanding shares entitled to vote, and with respect to Keystone Florida, a
majority of the outstanding shares entitled to vote on a matter constitutes a
quorum for consideration of such matter. For Evergreen Florida Bond, a majority
of the shares voting, for Keystone Florida, a majority of the shares present and
entitled to vote, and for Evergreen Florida, a majority of the shares entitled
to vote, is sufficient to act on a matter (unless otherwise specifically
required by the applicable governing documents or other law, including the 1940
Act).
Under the Declaration of Trust of Evergreen Municipal Trust, each share
of Evergreen Florida Bond is entitled to one vote for each dollar of net asset
value applicable to each share. Under the current voting provisions governing
Evergreen Florida and Keystone Florida, each share is entitled to one vote. Over
time, the net asset values of the Funds have changed in relation to one another
and are expected to continue to do so in the future. Because of the divergence
in net asset values, a given dollar investment in a Fund with a lower net asset
value will purchase more shares, and under the Funds' current voting provisions,
have more votes, than the same investment in a Fund with a higher net asset
value. Under the Declaration of Trust of Evergreen Municipal Trust, voting power
is related to the dollar value of the shareholders' investment rather than to
the number of shares held.
Liquidation or Dissolution
<PAGE>
In the event of the liquidation of Evergreen Florida Bond, Evergreen
Florida and Keystone Florida the shareholders are entitled to receive, when, and
as declared by the Trustees, the excess of the assets belonging to such Fund or
attributable to the class over the liabilities belonging to the Fund or
attributable to the class. In either case, the assets so distributable to
shareholders of the Fund will be distributed among the shareholders in
proportion to the number of shares of a class of the Fund held by them and
recorded on the books of the Fund.
Liability and Indemnification of Trustees
The Declarations of Trust of Evergreen Investment Trust and of Keystone
State Tax Free Fund provide that a Trustee shall be liable only for his own
willful defaults, and that no Trustee shall be protected against any liability
to which he would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office.
The Declarations of Trust of Evergreen Investment Trust and of Keystone State
Tax Free Fund provide that a Trustee or officer is entitled to indemnification
against liabilities and expenses with respect to claims related to his or her
position with the Fund, unless such Trustee or officer shall have been
adjudicated not to have acted in good faith in the reasonable belief that his or
her action was in the best interests of the Fund, or unless such Trustee or
officer is otherwise subject to liability to the Fund or its shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of office. In the event of settlement, no
such indemnification shall be provided unless there has been a determination
that such Trustee or officer appears to have acted in good faith in the
reasonable belief that his action was in the best interests of the Fund and that
such indemnification would not protect such person against any liability to the
Fund to which such person would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of office.
Under the Declaration of Trust of Evergreen Municipal Trust, a Trustee
is liable to the Trust and its shareholders only for such Trustee's own willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of the office of Trustee or the discharge of such
Trustee's functions. As provided in the Declaration of Trust, each Trustee of
the Trust is entitled to be indemnified against all liabilities against him or
her, including the
<PAGE>
costs of litigation, unless it is determined that the Trustee (i) did not act in
good faith in the reasonable belief that such Trustee's action was in or not
opposed to the best interests of the Trust; (ii) had acted with willful
misfeasance, bad faith, gross negligence or reckless disregard of such Trustee's
duties; and (iii) in a criminal proceeding, had reasonable cause to believe that
such Trustee's conduct was unlawful (collectively, "disabling conduct"). A
determination that the Trustee did not engage in disabling conduct and is,
therefore, entitled to indemnification may be based upon the outcome of a court
action or administrative proceeding or by (a) a vote of a majority of those
Trustees who are neither "interested persons" within the meaning of the 1940 Act
nor parties to the proceeding or (b) an independent legal counsel in a written
opinion. The Trust may also advance money for such litigation expenses provided
that the Trustee undertakes to repay the Trust if his or her conduct is later
determined to preclude indemnification and certain other conditions are met.
The foregoing is only a summary of certain characteristics of the
operations of the Declarations of Trust, By-Laws, Delaware and Massachusetts law
and is not a complete description of those documents or law. Shareholders should
refer to the provisions of such Declarations of Trust, By-Laws, Delaware and
Massachusetts law directly for more complete information.
ADDITIONAL INFORMATION
Evergreen Florida Bond. Information concerning the operation and
management of Evergreen Florida Bond is incorporated herein by reference from
the Prospectuses dated November 10, 1997, copies of which are enclosed, and
Statement of Additional Information dated November 10, 1997. A copy of such
Statement of Additional Information is available upon request and without charge
by writing to Evergreen Florida Bond at the address listed on the cover page of
this Prospectus/Proxy Statement or by calling toll-free 1-800-343- 2898.
Evergreen Florida. Information about the Fund is included in its
current Prospectuses dated October 31, 1996, as supplemented, and in the
Statement of Additional Information of the same date, as supplemented, that have
been filed with the SEC, all of which are incorporated herein by reference.
Copies of the Prospectuses and Statement of Additional Information are available
upon request and without charge by writing to the address listed on the cover
page of
<PAGE>
this Prospectus/Proxy Statement or by calling toll-free 1-800-
343-2898.
Keystone Florida. Information about the Fund is included in its current
Prospectus dated July 21, 1997, as supplemented, and in the Statement of
Additional Information of the same date, as supplemented, that has been filed
with the SEC, all of which are incorporated herein by reference. A copy of the
Prospectus and Statement of Additional Information are available upon request
and without charge by writing to the address listed on the cover page of this
Prospectus/Proxy Statement or by calling toll-free 1-800-343-2898.
Evergreen Florida Bond, Evergreen Florida and Keystone Florida are each
subject to the informational requirements of the Securities Exchange Act of 1934
and the 1940 Act, and in accordance therewith file reports and other information
including proxy material, and charter documents with the SEC. These items can be
inspected and copies obtained at the Public Reference Facilities maintained by
the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's
Regional Offices located at Northwest Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661-2511 and Seven World Trade Center, Suite 1300, New York,
New York 10048.
VOTING INFORMATION CONCERNING THE MEETING
This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Trustees of Evergreen Investment Trust and
Keystone State Tax Free Fund to be used at each Special Meeting of Shareholders
to be held at 3:00 p.m., January 6, 1998, at the offices of the Evergreen
Keystone Funds, 200 Berkeley Street, Boston, MA 02116 and at any adjournments
thereof. This Prospectus/Proxy Statement, along with a Notice of the meeting and
a proxy card, is first being mailed to shareholders of Evergreen Florida and
Keystone Florida on or about November 14, 1997. Only shareholders of record as
of the close of business on the Record Date will be entitled to notice of, and
to vote at, the Meeting or any adjournment thereof. For Evergreen Florida,
twenty-five percent (25%) of the outstanding shares entitled to vote, and for
Keystone Florida, a majority of the outstanding shares entitled to vote, at the
close of business on the Record Date, present in person or represented by proxy,
will constitute a quorum for the Meeting. If the enclosed form of proxy is
properly executed and returned in time to be voted at the Meeting, the proxies
named therein will vote the shares represented by the proxy in accordance with
the instructions marked thereon. Unmarked proxies will be voted FOR the proposed
Reorganization and FOR any other matters deemed
<PAGE>
appropriate. Proxies that reflect abstentions and "broker non-votes" (i.e.,
shares held by brokers or nominees as to which (i) instructions have not been
received from the beneficial owners or the persons entitled to vote or (ii) the
broker or nominee does not have discretionary voting power on a particular
matter) will be counted as shares that are present and entitled to vote for
purposes of determining the presence of a quorum. However, with respect to
Keystone Florida and Evergreen Florida, such proxies will have the effect of
being counted as votes against the Plan since the vote required is, for Keystone
Florida, a majority of the shares present and entitled to vote and, for
Evergreen Florida, a majority of the shares entitled to vote. A proxy may be
revoked at any time on or before the Meeting by written notice to the Secretary
of Evergreen Investment Trust or Keystone State Tax Free Fund, as applicable,
200 Berkeley Street, Boston, Massachusetts 02116. Unless revoked, all valid
proxies will be voted in accordance with the specifications thereon or, in the
absence of such specifications, FOR approval of the Plan and the Reorganization
contemplated thereby.
Approval of each Plan will require, for Keystone Florida, the
affirmative vote of a majority of the shares present and entitled to vote, and
for Evergreen Florida, a majority of the shares entitled to vote, with all
Classes voting together as a single class at Meetings at which a quorum of each
Fund's shares is present. Each full share outstanding is entitled to one vote
and each fractional share outstanding is entitled to a proportionate share of
one vote.
Proxy solicitations will be made primarily by mail, but proxy
solicitations may also be made by telephone, telegraph or personal solicitations
conducted by officers and employees of FUNB, its affiliates or other
representatives of Evergreen Florida and Keystone Florida (who will not be paid
for their soliciting activities). Shareholders Communications Corp. ("SCC") has
been engaged by Evergreen Florida and Keystone Florida to assist in soliciting
proxies, and may contact certain shareholders of the Funds over the telephone.
Shareholders who are contacted by SCC may be asked to cast their vote by
telephonic proxy. Such proxies will be recorded in accordance with the
procedures set forth below. Each Fund believes these procedures are reasonably
designed to ensure that the identity of the shareholder casting the vote is
accurately determined and that the voting instructions of the shareholder are
accurately reflected. Each Fund has received an opinion of counsel that
addresses the validity, under the applicable law of The Commonwealth of
Massachusetts, of a proxy given orally. The opinion concludes that a
<PAGE>
Massachusetts court would find that there is no Massachusetts law or
Massachusetts public policy against the acceptance of proxies signed by an
orally-authorized agent.
In all cases where a telephonic proxy is solicited, the SCC
representative will ask you for your full name, address, social security or
employer identification number, title (if you are authorized to act on behalf of
an entity, such as a corporation), and number of shares owned. If the
information solicited agrees with the information provided to SCC by each Fund's
transfer agent, then the SCC representative will explain the process, read the
proposals listed on the proxy card and ask for your instructions on each
proposal. The SCC representative, although he or she will answer questions about
the process, will not recommend to the shareholder how he or she should vote,
other than to read any recommendations set forth in the proxy statement. Within
72 hours, SCC will send you a letter or mailgram to confirm your vote and asking
you to call immediately if your instructions are not correctly reflected in the
confirmation.
If you wish to participate in the Meeting, but do not wish to give your
proxy by telephone, you may still submit the proxy card included with this
Prospectus/Proxy Statement or attend in person. Any proxy given by you, whether
in writing or by telephone, is revocable.
In the event that sufficient votes to approve a Reorganization are not
received by January 6, 1998, the persons named as proxies may propose one or
more adjournments of the Meeting to permit further solicitation of proxies. In
determining whether to adjourn the Meeting, the following factors may be
considered: the percentage of votes actually cast, the percentage of negative
votes actually cast, the nature of any further solicitation and the information
to be provided to shareholders with respect to the reasons for the solicitation.
Any such adjournment will require an affirmative vote by the holders of a
majority of the shares present in person or by proxy and entitled to vote at the
Meeting. The persons named as proxies will vote upon such adjournment after
consideration of all circumstances which may bear upon a decision to adjourn the
Meeting.
A shareholder who objects to a proposed Reorganization will not be
entitled under either Massachusetts law or the Declaration of Trust of Evergreen
Investment Trust or Keystone State Tax Free, as applicable, to demand payment
for, or an appraisal of, his or her shares. However, shareholders should be
aware that the Reorganizations as proposed are not expected to result in
recognition of gain or loss to shareholders for
<PAGE>
federal income tax purposes and that, if the Reorganizations are consummated,
shareholders will be free to redeem the shares of Evergreen Florida Bond which
they receive in the transaction at their then-current net asset value. Shares of
Evergreen Florida and Keystone Florida may be redeemed at any time prior to the
consummation of the Reorganizations. Shareholders of Evergreen Florida and
Keystone Florida may wish to consult their tax advisers as to any differing
consequences of redeeming Fund shares prior to the Reorganizations or exchanging
such shares in the Reorganizations.
Evergreen Florida and Keystone Florida do not hold annual shareholder
meetings. If a Reorganization is not approved, shareholders wishing to submit
proposals for consideration for inclusion in a proxy statement for a subsequent
shareholder meeting should send their written proposals to the Secretary of
Evergreen Investment Trust or Keystone State Tax Free Fund, as applicable, at
the address set forth on the cover of this Prospectus/Proxy Statement such that
they will be received by the Funds in a reasonable period of time prior to any
such meeting.
The votes of the shareholders of Evergreen Florida Bond are not being
solicited by this Prospectus/Proxy Statement and are not required to carry out
the Reorganizations.
NOTICE TO BANKS, BROKER-DEALERS AND VOTING TRUSTEES AND THEIR NOMINEES.
Please advise Evergreen Florida and Keystone Florida whether other persons are
beneficial owners of shares for which proxies are being solicited and, if so,
the number of copies of this Prospectus/Proxy Statement needed to supply copies
to the beneficial owners of the respective shares.
FINANCIAL STATEMENTS AND EXPERTS
The financial statements of Evergreen Florida as of August 31, 1996,
and the financial statements and financial highlights for the periods indicated
therein, have been incorporated by reference herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
The financial statements of Keystone Florida as of March 31, 1997, and
the financial statements and financial highlights for the periods indicated
therein, have been incorporated by reference herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick
<PAGE>
LLP, independent certified public accountants, incorporated by reference herein,
and upon the authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of Evergreen
Florida Bond will be passed upon by Sullivan & Worcester LLP, Washington, D.C.
OTHER BUSINESS
The Trustees of Evergreen Investment Trust and Keystone State Tax Free
do not intend to present any other business at the Meeting. If, however, any
other matters are properly brought before the Meeting, the persons named in the
accompanying form of proxy will vote thereon in accordance with their judgment.
THE RESPECTIVE TRUSTEES OF EVERGREEN INVESTMENT TRUST AND KEYSTONE
STATE TAX FREE FUND RECOMMEND THEIR APPROVAL OF EACH RESPECTIVE PLAN AND ANY
UNMARKED PROXIES WITHOUT INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR OF
APPROVAL OF THE PLANS.
November 14, 1997
<PAGE>
EXHIBIT A-1
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this 30th day of September, 1997, by and between the Evergreen Municipal
Trust, a Delaware business trust, with its principal place of business at 200
Berkeley Street, Boston, Massachusetts 02116 (the "Trust"), with respect to its
Evergreen Florida Municipal Bond Fund series (the "Acquiring Fund"), and
Keystone State Tax Free Fund, a Massachusetts business trust, with its principal
place of business at 200 Berkeley Street, Boston, Massachusetts 02116 ("Keystone
Trust"), with respect to its Keystone Florida Tax Free Fund series (the "Selling
Fund").
This Agreement is intended to be, and is adopted as, a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(C) of the
United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of (i) the transfer of all of
the assets of the Selling Fund in exchange solely for Class A, Class B and Class
C shares of beneficial interest, without par value, of the Acquiring Fund (the
"Acquiring Fund Shares"); (ii) the assumption by the Acquiring Fund of certain
identified liabilities of the Selling Fund; and (iii) the distribution, after
the Closing Date hereinafter referred to, of the Acquiring Fund Shares to the
shareholders of the Selling Fund in liquidation of the Selling Fund as provided
herein, all upon the terms and conditions hereinafter set forth in this
Agreement.
WHEREAS, the Selling Fund and the Acquiring Fund are each a separate
investment series of an open-end, registered investment company of the
management type, respectively, and the Selling Fund owns securities that
generally are assets of the character in which the Acquiring Fund is permitted
to invest;
WHEREAS, both Funds are authorized to issue their shares
of beneficial interest;
WHEREAS, the Trustees of the Trust have determined that the exchange of
all of the assets of the Selling Fund for Acquiring Fund Shares and the
assumption of certain identified liabilities of the Selling Fund by the
Acquiring Fund on the terms and conditions hereinafter set forth are in the best
interests of the Acquiring Fund's shareholders;
<PAGE>
WHEREAS, the Trustees of Keystone Trust have determined that the
Selling Fund should exchange all of its assets and certain identified
liabilities for Acquiring Fund Shares and that the interests of the existing
shareholders of the Selling Fund will not be diluted as a result of the
transactions contemplated herein;
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
ARTICLE I
TRANSFER OF ASSETS OF THE SELLING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES AND ASSUMPTION OF SELLING FUND
LIABILITIES AND LIQUIDATION OF THE SELLING FUND
1.1 THE EXCHANGE. Subject to the terms and conditions herein set forth
and on the basis of the representations and warranties contained herein, the
Selling Fund agrees to transfer all of the Selling Fund's assets as set forth in
paragraph 1.2 to the Acquiring Fund. The Acquiring Fund agrees in exchange
therefor (i) to deliver to the Selling Fund the number of Acquiring Fund Shares,
including fractional Acquiring Fund Shares, determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of each such class of the Selling Fund by the net
asset value per share of the corresponding class of Acquiring Fund Shares
computed in the manner and as of the time and date set forth in paragraph 2.2;
and (ii) to assume certain identified liabilities of the Selling Fund, as set
forth in paragraph 1.3. Such transactions shall take place at the closing
provided for in paragraph 3.1 (the "Closing Date").
1.2 ASSETS TO BE ACQUIRED. The assets of the Selling Fund to be
acquired by the Acquiring Fund shall consist of all property, including, without
limitation, all cash, securities, commodities, and futures interests and
dividends or interest receivables, that is owned by the Selling Fund and any
deferred or prepaid expenses shown as an asset on the books of the Selling Fund
on the Closing Date.
The Selling Fund has provided the Acquiring Fund with its most recent
audited financial statements, which contain a list of all of Selling Fund's
assets as of the date thereof. The Selling Fund hereby represents that as of the
date of the execution of this Agreement there have been no changes in its
financial position as reflected in said financial statements other than those
occurring in the ordinary course of its
<PAGE>
business in connection with the purchase and sale of securities and the payment
of its normal operating expenses. The Selling Fund reserves the right to sell
any of such securities, but will not, without the prior written approval of the
Acquiring Fund, acquire any additional securities other than securities of the
type in which the Acquiring Fund is permitted to invest.
The Acquiring Fund will, within a reasonable time prior to the Closing
Date, furnish the Selling Fund with a statement of the Acquiring Fund's
investment objectives, policies, and restrictions and a list of the securities,
if any, on the Selling Fund's list referred to in the second sentence of this
paragraph that do not conform to the Acquiring Fund's investment objectives,
policies, and restrictions. In the event that the Selling Fund holds any
investments that the Acquiring Fund may not hold, the Selling Fund will dispose
of such securities prior to the Closing Date. In addition, if it is determined
that the Selling Fund and the Acquiring Fund portfolios, when aggregated, would
contain investments exceeding certain percentage limitations imposed upon the
Acquiring Fund with respect to such investments, the Selling Fund if requested
by the Acquiring Fund will dispose of a sufficient amount of such investments as
may be necessary to avoid violating such limitations as of the Closing Date.
1.3 LIABILITIES TO BE ASSUMED. The Selling Fund will endeavor to
discharge all of its known liabilities and obligations prior to the Closing
Date. Except as specifically provided in this paragraph 1.3, the Acquiring Fund
shall assume only those liabilities, expenses, costs, charges and reserves
reflected on a Statement of Assets and Liabilities of the Selling Fund prepared
on behalf of the Selling Fund, as of the Valuation Date (as defined in paragraph
2.1), in accordance with generally accepted accounting principles consistently
applied from the prior audited period. The Acquiring Fund shall assume only
those liabilities of the Selling Fund reflected in such Statement of Assets and
Liabilities and shall not except as specifically provided in this paragraph 1.3
assume any other liabilities, whether absolute or contingent, known or unknown,
accrued or unaccrued, all of which shall remain the obligation of the Selling
Fund. The Acquiring Fund hereby agrees with the Selling Fund and each Trustee of
Keystone Trust: (i) to indemnify each Trustee of Keystone Trust against all
liabilities and expenses referred to in the indemnification provisions of
Keystone Trust's Declaration of Trust and ByLaws, to the extent provided
therein, incurred by any Trustee of Keystone Trust; and (ii) in addition to the
indemnification provided in (i) above, to indemnify each Trustee of Keystone
<PAGE>
Trust against all liabilities and expenses and pay the same as they arise and
become due, without any exception, limitation or requirement of approval by any
person, and without any right to require repayment thereof by any such Trustee
(unless such Trustee has had the same repaid to him or her) based upon any
subsequent or final disposition or findings made in connection therewith or
otherwise, if such action, suit or other proceeding involves such Trustee's
participation in authorizing or permitting or acquiescing in, directly or
indirectly, by action or inaction, the making of any distribution in any manner
of all or any assets of the Selling Fund without making provision for the
payment of any liabilities of any kind, fixed or contingent, of the Selling
Fund, which liabilities were not actually and consciously personally known to
such Trustee to exist at the time of such Trustee's participation in so
authorizing or permitting or acquiescing in the making of any such distribution.
In addition, upon completion of the Reorganization, for purposes of
calculating the maximum amount permitted to be charged to the Acquiring Fund
under the National Association of Securities Dealers, Inc. Conduct Rule 2830,
minus the amount of the sales charges paid or accrued (including asset based
sales charge), plus permitted interest ("Aggregate NASD Cap"), the Acquiring
Fund will add to its Aggregate NASD Cap immediately prior to the Reorganization
the Aggregate NASD Cap of the Selling Fund immediately prior to the
Reorganization.
1.4 LIQUIDATION AND DISTRIBUTION. On or soon after the Closing Date as
is conveniently practicable (the "Liquidation Date"), (a) the Selling Fund will
liquidate and distribute pro rata to the Selling Fund's shareholders of record,
determined as of the close of business on the Valuation Date (the "Selling Fund
Shareholders"), the Acquiring Fund Shares received by the Selling Fund pursuant
to paragraph 1.1; and (b) the Selling Fund will thereupon proceed to dissolve as
set forth in paragraph 1.8 below. Such liquidation and distribution will be
accomplished by the transfer of the Acquiring Fund Shares then credited to the
account of the Selling Fund on the books of the Acquiring Fund to open accounts
on the share records of the Acquiring Fund in the names of the Selling Fund
Shareholders and representing the respective pro rata number of the Acquiring
Fund Shares due such shareholders. All issued and outstanding shares of the
Selling Fund will simultaneously be canceled on the books of the Selling Fund.
The Acquiring Fund shall not issue certificates representing the Acquiring Fund
Shares in connection with such exchange.
<PAGE>
1.5 OWNERSHIP OF SHARES. Ownership of Acquiring Fund Shares will be
shown on the books of the Acquiring Fund's transfer agent. Shares of the
Acquiring Fund will be issued in the manner described in the combined Prospectus
and Proxy Statement on Form N-14 to be distributed to shareholders of the
Selling Fund as described in paragraph 5.7.
1.6 TRANSFER TAXES. Any transfer taxes payable upon issuance of the
Acquiring Fund Shares in a name other than the registered holder of the Selling
Fund shares on the books of the Selling Fund as of that time shall, as a
condition of such issuance and transfer, be paid by the person to whom such
Acquiring Fund Shares are to be issued and transferred.
1.7 REPORTING RESPONSIBILITY. Any reporting responsibility of the
Selling Fund is and shall remain the responsibility of the Selling Fund up to
and including the Closing Date and such later date on which the Selling Fund is
terminated.
1.8 TERMINATION. The Selling Fund shall be terminated promptly
following the Closing Date and the making of all distributions pursuant to
paragraph 1.4.
ARTICLE II
VALUATION
2.1 VALUATION OF ASSETS. The value of the Selling Fund's assets to be
acquired by the Acquiring Fund hereunder shall be the value of such assets
computed as of the close of business on the New York Stock Exchange on the
business day next preceding the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in the Trust's Declaration of Trust and the Acquiring Fund's then current
prospectus and statement of additional information or such other valuation
procedures as shall be mutually agreed upon by the parties.
2.2 VALUATION OF SHARES. The net asset value per share of the Acquiring
Fund Shares shall be the net asset value per share computed as of the close of
business on the New York Stock Exchange on the Valuation Date, using the
valuation procedures set forth in the Trust's Declaration of Trust and the
Acquiring Fund's then current prospectus and statement of additional
information.
2.3 SHARES TO BE ISSUED. The number of the Acquiring Fund Shares of each
class to be issued (including fractional shares, if any) in exchange for the
Selling Fund's assets
<PAGE>
shall be determined by multiplying the shares outstanding of each class of the
Selling Fund by the ratio computed by dividing the net asset value per share of
the Selling Fund attributable to each of its classes by the net asset value per
share of the respective classes of the Acquiring Fund determined in accordance
with paragraph 2.2.
2.4 DETERMINATION OF VALUE. All computations of value shall be made by
State Street Bank and Trust Company in accordance with its regular practice in
pricing the shares and assets of the Acquiring Fund.
ARTICLE III
CLOSING AND CLOSING DATE
3.1 CLOSING DATE. The Closing (the "Closing") shall take place on or
about January 23, 1998 or such other date as the parties may agree to in writing
(the "Closing Date"). All acts taking place at the Closing shall be deemed to
take place simultaneously immediately prior to the opening of business on the
Closing Date unless otherwise provided. The Closing shall be held as of 9:00
a.m. at the offices of the Evergreen Keystone Funds, 200 Berkeley Street,
Boston, MA 02116, or at such other time and/or place as the parties may agree.
3.2 CUSTODIAN'S CERTIFICATE. State Street Bank and Trust Company, as
custodian for the Selling Fund (the "Custodian"), shall deliver at the Closing a
certificate of an authorized officer stating that (a) the Selling Fund's
portfolio securities, cash, and any other assets shall have been delivered in
proper form to the Acquiring Fund on the Closing Date; and (b) all necessary
taxes including all applicable federal and state stock transfer stamps, if any,
shall have been paid, or provision for payment shall have been made, in
conjunction with the delivery of portfolio securities by the Selling Fund.
3.3 EFFECT OF SUSPENSION IN TRADING. In the event that on the Valuation
Date (a) the New York Stock Exchange or another primary trading market for
portfolio securities of the Acquiring Fund or the Selling Fund shall be closed
to trading or trading thereon shall be restricted; or (b) trading or the
reporting of trading on said Exchange or elsewhere shall be disrupted so that
accurate appraisal of the value of the net assets of the Acquiring Fund or the
Selling Fund is impracticable, the Valuation Date shall be postponed until the
first business day after the day when trading shall have been fully resumed and
reporting shall have been restored.
<PAGE>
3.4 TRANSFER AGENT'S CERTIFICATE. Evergreen Keystone Service Company,
as transfer agent for the Selling Fund as of the Closing Date ("EKSC"), shall
deliver at the Closing a certificate of an authorized officer stating that its
records contain the names and addresses of the Selling Fund Shareholders and the
number and percentage ownership of outstanding shares owned by each such
shareholder immediately prior to the Closing. The Acquiring Fund shall issue and
deliver or cause EKSC, its transfer agent as of the Closing Date, to issue and
deliver a confirmation evidencing the Acquiring Fund Shares to be credited on
the Closing Date to the Secretary of Keystone Trust or provide evidence
satisfactory to the Selling Fund that such Acquiring Fund Shares have been
credited to the Selling Fund's account on the books of the Acquiring Fund. At
the Closing, each party shall deliver to the other such bills of sale, checks,
assignments, share certificates, if any, receipts and other documents as such
other party or its counsel may reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS OF THE SELLING FUND. The Selling
Fund represents and warrants to the Acquiring Fund as follows:
(a) The Selling Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing, and in good
standing under the laws of The Commonwealth of Massachusetts.
(b) The Selling Fund is a separate investment series of a
registered investment company classified as a management company of the open-end
type, and its registration with the Securities and Exchange Commission (the
"Commission") as an investment company under the Investment Company Act of 1940,
as amended (the "1940 Act"), is in full force and effect.
(c) The current prospectus and statement of additional
information of the Selling Fund conform in all material respects to the
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), and the 1940 Act and the rules and regulations of the Commission
thereunder and do not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
<PAGE>
(d) The Selling Fund is not, and the execution, delivery, and
performance of this Agreement (subject to shareholder approval) will not result,
in violation of any provision of Keystone Trust's Declaration of Trust or
By-Laws or of any material agreement, indenture, instrument, contract, lease, or
other undertaking to which the Selling Fund is a party or by which it is bound.
(e) The Selling Fund has no material contracts or other
commitments (other than this Agreement) that will be terminated with liability
to it prior to the Closing Date.
(f) Except as otherwise disclosed in writing to and accepted
by the Acquiring Fund, no litigation, administrative proceeding, or
investigation of or before any court or governmental body is presently pending
or to its knowledge threatened against the Selling Fund or any of its properties
or assets, which, if adversely determined, would materially and adversely affect
its financial condition, the conduct of its business, or the ability of the
Selling Fund to carry out the transactions contemplated by this Agreement. The
Selling Fund knows of no facts that might form the basis for the institution of
such proceedings and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that materially and
adversely affects its business or its ability to consummate the transactions
herein contemplated.
(g) The financial statements of the Selling Fund at March 31,
1997 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Acquiring Fund) fairly reflect the financial condition of the Selling
Fund as of such date, and there are no known contingent liabilities of the
Selling Fund as of such date not disclosed therein.
(h) Since March 31, 1997 there has not been any material
adverse change in the Selling Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Selling Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Acquiring Fund. For the purposes of this subparagraph (h), a
decline in the net asset value of the Selling Fund shall not constitute a
material adverse change.
(i) At the Closing Date, all federal and other tax
returns and reports of the Selling Fund required by law to
<PAGE>
have been filed by such dates shall have been filed, and all federal and other
taxes shown due on said returns and reports shall have been paid, or provision
shall have been made for the payment thereof. To the best of the Selling Fund's
knowledge, no such return is currently under audit, and no assessment has been
asserted with respect to such returns.
(j) For each fiscal year of its operation, the Selling Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains.
(k) All issued and outstanding shares of the Selling Fund are,
and at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable by the Selling Fund (except that, under Massachusetts
law, Selling Fund Shareholders could under certain circumstances be held
personally liable for obligations of the Selling Fund). All of the issued and
outstanding shares of the Selling Fund will, at the time of the Closing Date, be
held by the persons and in the amounts set forth in the records of the transfer
agent as provided in paragraph 3.4. The Selling Fund does not have outstanding
any options, warrants, or other rights to subscribe for or purchase any of the
Selling Fund shares, nor is there outstanding any security convertible into any
of the Selling Fund shares.
(l) At the Closing Date, the Selling Fund will have good and
marketable title to the Selling Fund's assets to be transferred to the Acquiring
Fund pursuant to paragraph 1.2 and full right, power, and authority to sell,
assign, transfer, and deliver such assets hereunder, and, upon delivery and
payment for such assets, the Acquiring Fund will acquire good and marketable
title thereto, subject to no restrictions on the full transfer thereof,
including such restrictions as might arise under the 1933 Act, other than as
disclosed to the Acquiring Fund and accepted by the Acquiring Fund.
(m) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Selling
Fund and, subject to approval by the Selling Fund Shareholders, this Agreement
constitutes a valid and binding obligation of the Selling Fund, enforceable in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights and to general equity principles.
<PAGE>
(n) The information to be furnished by the Selling Fund for
use in no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations thereunder applicable thereto.
(o) The Proxy Statement of the Selling Fund to be included in
the Registration Statement (as defined in paragraph 5.7)(other than information
therein that relates to the Acquiring Fund) will, on the effective date of the
Registration Statement and on the Closing Date, not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading.
4.2 REPRESENTATIONS OF THE ACQUIRING FUND. The Acquiring
Fund represents and warrants to the Selling Fund as follows:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust that is registered as an investment company classified
as a management company of the open-end type, and its registration with the
Commission as an investment company under the 1940 Act is in full force and
effect.
(c) The current prospectuses and statement of additional
information of the Acquiring Fund conform in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder and do not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(d) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of the Trust's
Declaration of Trust or By-Laws or of any material agreement, indenture,
instrument, contract, lease, or other undertaking to which the Acquiring Fund is
a party or by which it is bound.
<PAGE>
(e) Except as otherwise disclosed in writing to the Selling
Fund and accepted by the Selling Fund, no litigation, administrative proceeding
or investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquiring Fund or any of its
properties or assets, which, if adversely determined, would materially and
adversely affect its financial condition and the conduct of its business or the
ability of the Acquiring Fund to carry out the transactions contemplated by this
Agreement. The Acquiring Fund knows of no facts that might form the basis for
the institution of such proceedings and is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental body
that materially and adversely affects its business or its ability to consummate
the transactions contemplated herein.
(f) The Acquiring Fund has no known liabilities of a material
amount, contingent or otherwise.
(g) At the Closing Date, there will not be any material
adverse change in the Acquiring Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Selling Fund. For the purposes of this subparagraph (g), a
decline in the net asset value of the Acquiring Fund shall not constitute a
material adverse change.
(h) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law then to be filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid or provision shall have been made for the
payment thereof. To the best of the Acquiring Fund's knowledge, no such return
is currently under audit, and no assessment has been asserted with respect to
such returns.
(i) All issued and outstanding Acquiring Fund Shares are, and
at the Closing Date will be, duly and validly issued and outstanding, fully paid
and non-assessable. The Acquiring Fund does not have outstanding any options,
warrants, or other rights to subscribe for or purchase any Acquiring Fund
Shares, nor is there outstanding any security convertible into any Acquiring
Fund Shares.
(j) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Acquiring
Fund, and this Agreement
<PAGE>
constitutes a valid and binding obligation of the Acquiring Fund enforceable in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights and to general equity principles.
(k) The Acquiring Fund Shares to be issued and delivered to
the Selling Fund, for the account of the Selling Fund Shareholders, pursuant to
the terms of this Agreement will, at the Closing Date, have been duly authorized
and, when so issued and delivered, will be duly and validly issued Acquiring
Fund Shares, and will be fully paid and non-assessable.
(l) The information to be furnished by the Acquiring Fund for
use in no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations applicable thereto.
(m) The Prospectus and Proxy Statement (as defined in
paragraph 5.7) to be included in the Registration Statement (only insofar as it
relates to the Acquiring Fund) will, on the effective date of the Registration
Statement and on the Closing Date, not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not misleading.
(n) The Acquiring Fund agrees to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the 1940 Act,
and such of the state Blue Sky or securities laws as it may deem appropriate in
order to continue its operations after the Closing Date.
ARTICLE V
COVENANTS OF THE ACQUIRING FUND AND THE SELLING FUND
5.1 OPERATION IN ORDINARY COURSE. The Acquiring Fund and the Selling
Fund each will operate its business in the ordinary course between the date
hereof and the Closing Date, it being understood that such ordinary course of
business will include customary dividends and distributions.
<PAGE>
5.2 APPROVAL OF SHAREHOLDERS. Keystone Trust will call a meeting of the
Selling Fund Shareholders to consider and act upon this Agreement and to take
all other action necessary to obtain approval of the transactions contemplated
herein.
5.3 INVESTMENT REPRESENTATION. The Selling Fund covenants that the
Acquiring Fund Shares to be issued hereunder are not being acquired for the
purpose of making any distribution thereof other than in accordance with the
terms of this Agreement.
5.4 ADDITIONAL INFORMATION. The Selling Fund will assist the Acquiring
Fund in obtaining such information as the Acquiring Fund reasonably requests
concerning the beneficial ownership of the Selling Fund shares.
5.5 FURTHER ACTION. Subject to the provisions of this Agreement, the
Acquiring Fund and the Selling Fund will each take, or cause to be taken, all
action, and do or cause to be done, all things reasonably necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement, including any actions required to be taken after the Closing Date.
5.6 STATEMENT OF EARNINGS AND PROFITS. As promptly as practicable, but
in any case within sixty days after the Closing Date, the Selling Fund shall
furnish the Acquiring Fund, in such form as is reasonably satisfactory to the
Acquiring Fund, a statement of the earnings and profits of the Selling Fund for
federal income tax purposes that will be carried over by the Acquiring Fund as a
result of Section 381 of the Code, and which will be reviewed by its independent
auditors and certified by Keystone Trust's President and Treasurer.
5.7 PREPARATION OF FORM N-14 REGISTRATION STATEMENT. The Selling Fund
will provide the Acquiring Fund with information reasonably necessary for the
preparation of a prospectus, which will include the proxy statement, referred to
in paragraph 4.1(o) (the "Prospectus and Proxy Statement"), all to be included
in a Registration Statement on Form N-14 of the Acquiring Fund (the
"Registration Statement"), in compliance with the 1933 Act, the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act in
connection with the meeting of the Selling Fund Shareholders to consider
approval of this Agreement and the transactions contemplated herein.
ARTICLE VI
<PAGE>
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLING FUND
The obligations of the Selling Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations, covenants, and warranties of the Acquiring
Fund contained in this Agreement shall be true and correct as of the date hereof
and as of the Closing Date with the same force and effect as if made on and as
of the Closing Date, and the Acquiring Fund shall have delivered to the Selling
Fund a certificate executed in its name by the Trust's President or Vice
President and its Treasurer or Assistant Treasurer, in form and substance
reasonably satisfactory to the Selling Fund and dated as of the Closing Date, to
such effect and as to such other matters as the Selling Fund shall reasonably
request.
6.2 The Selling Fund shall have received on the Closing Date an opinion
from Sullivan & Worcester LLP, counsel to the Acquiring Fund, dated as of the
Closing Date, in a form reasonably satisfactory to the Selling Fund, covering
the following points:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the power to own all of its
properties and assets and to carry on its business as presently conducted.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust registered as an investment company under the 1940 Act,
and, to such counsel's knowledge, such registration with the Commission as an
investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed, and
delivered by the Acquiring Fund, and, assuming that the Prospectus and Proxy
Statement, and Registration Statement comply with the 1933 Act, the 1934 Act,
and the 1940 Act and the rules and regulations thereunder and, assuming due
authorization, execution and delivery of this Agreement by the Selling Fund, is
a valid and binding obligation of the Acquiring Fund enforceable against the
Acquiring Fund in accordance with its terms, subject as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium, and other
<PAGE>
laws relating to or affecting creditors' rights generally and
to general equity principles.
(d) Assuming that a consideration therefor not less than the
net asset value thereof has been paid, the Acquiring Fund Shares to be issued
and delivered to the Selling Fund on behalf of the Selling Fund Shareholders as
provided by this Agreement are duly authorized and upon such delivery will be
legally issued and outstanding and fully paid and non-assessable, and no
shareholder of the Acquiring Fund has any preemptive rights in respect thereof.
(e) The Registration Statement, to such counsel's knowledge,
has been declared effective by the Commission and no stop order under the 1933
Act pertaining thereto has been issued, and to the knowledge of such counsel, no
consent, approval, authorization or order of any court or governmental authority
of the United States or the State of Delaware is required for consummation by
the Acquiring Fund of the transactions contemplated herein, except such as have
been obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by the
Selling Fund of all the obligations to be performed by it hereunder on or before
the Closing Date and, in addition thereto, the following conditions:
7.1 All representations, covenants, and warranties of the Selling Fund
contained in this Agreement shall be true and correct as of the date hereof and
as of the Closing Date with the same force and effect as if made on and as of
the Closing Date, and the Selling Fund shall have delivered to the Acquiring
Fund on the Closing Date a certificate executed in its name by Keystone Trust's
President or Vice President and the Treasurer or Assistant Treasurer, in form
and substance satisfactory to the Acquiring Fund and dated as of the Closing
Date, to such effect and as to such other matters as the Acquiring Fund shall
reasonably request.
7.2 The Selling Fund shall have delivered to the Acquiring Fund a
statement of the Selling Fund's assets and liabilities, together with a list of
the Selling Fund's portfolio securities showing the tax costs of such securities
<PAGE>
by lot and the holding periods of such securities, as of the Closing Date,
certified by the Treasurer of Keystone Trust.
7.3 The Acquiring Fund shall have received on the Closing Date an
opinion of Sullivan & Worcester LLP, counsel to the Selling Fund, in a form
satisfactory to the Acquiring Fund covering the following points:
(a) The Selling Fund is a separate investment series a
Massachusetts business trust duly organized, validly existing and in good
standing under the laws of The Commonwealth of Massachusetts and has the power
to own all of its properties and assets and to carry on its business as
presently conducted.
(b) The Selling Fund is a separate investment series of a
Massachusetts business trust registered as an investment company under the 1940
Act, and, to such counsel's knowledge, such registration with the Commission as
an investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed and
delivered by the Selling Fund, and, assuming that the Prospectus and Proxy
Statement, and Registration Statement comply with the 1933 Act, the 1934 Act,
and the 1940 Act and the rules and regulations thereunder and, assuming due
authorization, execution, and delivery of this Agreement by the Acquiring Fund,
is a valid and binding obligation of the Selling Fund enforceable against the
Selling Fund in accordance with its terms, subject as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium and other laws relating to or
affecting creditors' rights generally and to general equity principles.
(d) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority of the United
States or The Commonwealth of Massachusetts is required for consummation by the
Selling Fund of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND AND THE SELLING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Selling Fund or
<PAGE>
the Acquiring Fund, the other party to this Agreement shall, at its option, not
be required to consummate the transactions contemplated by this Agreement:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
the Selling Fund in accordance with the provisions of Keystone Trust's
Declaration of Trust and By-Laws and certified copies of the resolutions
evidencing such approval shall have been delivered to the Acquiring Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring Fund nor
the Selling Fund may waive the conditions set forth in this paragraph 8.1.
8.2 On the Closing Date, the Commission shall not have issued an
unfavorable report under Section 25(b) of the 1940 Act, nor instituted any
proceeding seeking to enjoin the consummation of the transactions contemplated
by this Agreement under Section 25(c) of the 1940 Act and no action, suit or
other proceeding shall be threatened or pending before any court or governmental
agency in which it is sought to restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the transactions contemplated
herein.
8.3 All required consents of other parties and all other consents,
orders, and permits of federal, state and local regulatory authorities
(including those of the Commission and of state Blue Sky securities authorities,
including any necessary "no-action" positions of and exemptive orders from such
federal and state authorities) to permit consummation of the transactions
contemplated hereby shall have been obtained, except where failure to obtain any
such consent, order, or permit would not involve a risk of a material adverse
effect on the assets or properties of the Acquiring Fund or the Selling Fund,
provided that either party hereto may for itself waive any of such conditions.
8.4 The Registration Statement shall have become effective under the
1933 Act, and no stop orders suspending the effectiveness thereof shall have
been issued and, to the best knowledge of the parties hereto, no investigation
or proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act.
8.5 The Selling Fund shall have declared a dividend or dividends which,
together with all previous such dividends, shall have the effect of distributing
to the Selling Fund Shareholders all of the Selling Fund's investment company
taxable income for all taxable periods ending on the Closing
<PAGE>
Date (computed without regard to any deduction for dividends paid) and all of
its net capital gains realized in all taxable periods ending on the Closing Date
(after reduction for any capital loss carryforward).
8.6 The parties shall have received a favorable opinion of Sullivan &
Worcester LLP, addressed to the Acquiring Fund and the Selling Fund
substantially to the effect that for federal income tax purposes:
(a) The transfer of all of the Selling Fund assets in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund followed by the distribution of
the Acquiring Fund Shares to the Selling Fund in dissolution and liquidation of
the Selling Fund will constitute a "reorganization" within the meaning of
Section 368(a)(1)(C) of the Code and the Acquiring Fund and the Selling Fund
will each be a "party to a reorganization" within the meaning of Section 368(b)
of the Code.
(b) No gain or loss will be recognized by the Acquiring Fund
upon the receipt of the assets of the Selling Fund solely in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of certain stated
liabilities of the Selling Fund.
(c) No gain or loss will be recognized by the Selling Fund
upon the transfer of the Selling Fund assets to the Acquiring Fund in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund or upon the distribution (whether
actual or constructive) of the Acquiring Fund Shares to Selling Fund
Shareholders in exchange for their shares of the Selling Fund.
(d) No gain or loss will be recognized by the Selling Fund
Shareholders upon the exchange of their Selling Fund shares for the Acquiring
Fund Shares in liquidation of the Selling Fund.
(e) The aggregate tax basis for the Acquiring Fund Shares
received by each Selling Fund Shareholder pursuant to the Reorganization will be
the same as the aggregate tax basis of the Selling Fund shares held by such
shareholder immediately prior to the Reorganization, and the holding period of
the Acquiring Fund Shares to be received by each Selling Fund Shareholder will
include the period during which the Selling Fund shares exchanged therefor were
held by such
<PAGE>
shareholder (provided the Selling Fund shares were held as capital assets on the
date of the Reorganization).
(f) The tax basis of the Selling Fund assets acquired by the
Acquiring Fund will be the same as the tax basis of such assets to the Selling
Fund immediately prior to the Reorganization, and the holding period of the
assets of the Selling Fund in the hands of the Acquiring Fund will include the
period during which those assets were held by the Selling Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring
Fund nor the Selling Fund may waive the conditions set forth in this paragraph
8.6.
8.7 The Acquiring Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Acquiring Fund, in form and substance satisfactory to
the Acquiring Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Selling Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards) consisting of a reading
of any unaudited pro forma financial statements included in the Registration
Statement and Prospectus and Proxy Statement, and inquiries of appropriate
officials of the Selling Fund responsible for financial and accounting matters,
nothing came to their attention that caused them to believe that such unaudited
pro forma financial statements do not comply as to form in all material respects
with the applicable accounting requirements of the 1933 Act and the published
rules and regulations thereunder;
(c) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the Capitalization Table
appearing in the Registration Statement and Prospectus and Proxy Statement has
been obtained from and is consistent with the accounting records of the Selling
Fund;
(d) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing
<PAGE>
standards), the pro forma financial statements that are included in the
Registration Statement and Prospectus and Proxy Statement were prepared based on
the valuation of the Selling Fund's assets in accordance with the Trust's
Declaration of Trust and the Acquiring Fund's then current prospectus and
statement of additional information pursuant to procedures customarily utilized
by the Acquiring Fund in valuing its own assets; and
(e) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the data utilized in the
calculations of the projected expense ratios appearing in the Registration
Statement and Prospectus and Proxy Statement agree with underlying accounting
records of the Selling Fund or to written estimates by Selling Fund's management
and were found to be mathematically correct.
In addition, the Acquiring Fund shall have received from KPMG Peat
Marwick LLP a letter addressed to the Acquiring Fund dated on the Closing Date,
in form and substance satisfactory to the Acquiring Fund, to the effect, that on
the basis of limited procedures agreed upon by the Acquiring Fund (but not an
examination in accordance with generally accepted auditing standards), the
calculation of net asset value per share of the Selling Fund as of the Valuation
Date was determined in accordance with generally accepted accounting practices
and the portfolio valuation practices of the Acquiring Fund.
8.8 The Selling Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Selling Fund, in form and substance satisfactory to the
Selling Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Acquiring Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards) consisting of a reading of any
unaudited pro forma financial statements included in the Registration Statement
and Prospectus and Proxy Statement, and inquiries of appropriate officials of
the Trust responsible for financial and accounting matters, nothing came to
their attention that caused them to believe that such unaudited pro forma
financial statements do not comply as to form in all material respects
<PAGE>
with the applicable accounting requirements of the 1933 Act
and the published rules and regulations thereunder;
(c) on the basis of limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards), the Capitalization Table appearing
in the Registration Statement and Prospectus and Proxy Statement has been
obtained from and is consistent with the accounting records of the Acquiring
Fund; and
(d) on the basis of limited procedures agreed upon by the
Selling Fund (but not an examination in accordance with generally accepted
auditing standards), the data utilized in the calculations of the projected
expense ratio appearing in the Registration Statement and Prospectus and Proxy
Statement agree with written estimates by each Fund's management and were found
to be mathematically correct.
8.9 The Acquiring Fund and the Selling Fund shall also have received
from KPMG Peat Marwick LLP a letter addressed to the Acquiring Fund and the
Selling Fund, dated on the Closing Date in form and substance satisfactory to
the Funds, setting forth the federal income tax implications relating to capital
loss carryforwards (if any) of the Selling Fund and the related impact, if any,
of the proposed transfer of all of the assets of the Selling Fund to the
Acquiring Fund and the ultimate dissolution of the Selling Fund, upon the
shareholders of the Selling Fund.
ARTICLE IX
EXPENSES
9.1 Except as otherwise provided for herein, all expenses of the
transactions contemplated by this Agreement incurred by the Selling Fund and the
Acquiring Fund will be borne by First Union National Bank. Such expenses
include, without limitation, (a) expenses incurred in connection with the
entering into and the carrying out of the provisions of this Agreement; (b)
expenses associated with the preparation and filing of the Registration
Statement under the 1933 Act covering the Acquiring Fund Shares to be issued
pursuant to the provisions of this Agreement; (c) registration or qualification
fees and expenses of preparing and filing such forms as are necessary under
applicable state securities laws to qualify the Acquiring Fund Shares to be
issued in connection herewith in each state in which the Selling Fund
Shareholders are resident as of the date of the mailing of the Prospectus and
Proxy Statement to such shareholders; (d)
<PAGE>
postage; (e) printing; (f) accounting fees; (g) legal fees; and (h) solicitation
costs of the transaction. Notwithstanding the foregoing, the Acquiring Fund
shall pay its own federal and state registration fees.
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Selling Fund agree that neither party
has made any representation, warranty or covenant not set forth herein and that
this Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties, and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall survive the consummation of the transactions contemplated hereunder.
ARTICLE XI
TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the
Acquiring Fund and the Selling Fund. In addition, either the Acquiring Fund or
the Selling Fund may at its option terminate this Agreement at or prior to the
Closing Date because:
(a) of a breach by the other of any representation, warranty,
or agreement contained herein to be performed at or prior to the Closing Date,
if not cured within 30 days; or
(b) a condition herein expressed to be precedent to the
obligations of the terminating party has not been met and it reasonably appears
that it will not or cannot be met.
11.2 In the event of any such termination, in the absence of willful
default, there shall be no liability for damages on the part of either the
Acquiring Fund, the Selling Fund, the Trust, the respective Trustees or
officers, to the other party or its Trustees or officers.
ARTICLE XII
AMENDMENTS
This Agreement may be amended, modified, or supplemented in such manner
as may be mutually agreed upon in writing by the authorized officers of the
Selling Fund and the Acquiring
<PAGE>
Fund; provided, however, that following the meeting of the Selling Fund
Shareholders called by the Selling Fund pursuant to paragraph 5.2 of this
Agreement, no such amendment may have the effect of changing the provisions for
determining the number of the Acquiring Fund Shares to be issued to the Selling
Fund Shareholders under this Agreement to the detriment of such shareholders
without their further approval.
ARTICLE XIII
HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
13.1 The Article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without giving effect to the conflicts
of laws provisions thereof; provided, however, that the due authorization,
execution and delivery of this Agreement, in the case of Keystone Trust, shall
be governed and construed in accordance with the laws of The Commonwealth of
Massachusetts, without giving effect to the conflicts of laws provisions
thereof.
13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm, or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
13.5 It is expressly agreed that the obligations of the Selling Fund
hereunder shall not be binding upon any of the Trustees, shareholders, nominees,
officers, agents, or employees of Keystone Trust personally, but bind only the
trust property of the Selling Fund, as provided in the Declaration of Trust of
Keystone Trust. The execution and delivery of this Agreement have been
authorized by the Trustees of Keystone Trust on behalf of the Selling Fund and
signed by authorized officers of Keystone Trust, acting as such, and neither
such authorization by such Trustees nor such
<PAGE>
execution and delivery by such officers shall be deemed to have been made by any
of them individually or to impose any liability on any of them personally, but
shall bind only the trust property of the Selling Fund as provided in the
Declaration of Trust of Keystone Trust.
IN WITNESS WHEREOF, the parties have duly executed and sealed this
Agreement, all as of the date first written above.
EVERGREEN MUNICIPAL TRUST
ON BEHALF OF EVERGREEN
FLORIDA MUNICIPAL BOND FUND
By:
Name:
Title:
KEYSTONE STATE TAX FREE FUND
ON BEHALF OF KEYSTONE FLORIDA
TAX FREE FUND
By:
Name:
Title:
<PAGE>
EXHIBIT A-2
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this 30th day of September, 1997, by and between the Evergreen Municipal
Trust, a Delaware business trust, with its principal place of business at 200
Berkeley Street, Boston, Massachusetts 02116 (the "Trust"), with respect to its
Evergreen Florida Municipal Bond Fund series (the "Acquiring Fund"), and
Evergreen Investment Trust, a Massachusetts business trust, with its principal
place of business at 200 Berkeley Street, Boston, Massachusetts 02116
("Evergreen Trust") with respect to its Evergreen Florida Municipal Bond Fund
series (the "Selling Fund").
This Agreement is intended to be, and is adopted as, a plan of
reorganization and liquidation within the meaning of Section 368 (a)(1)(F) of
the United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of (i) the transfer of all of
the assets of the Selling Fund in exchange solely for Class A, Class B and Class
Y shares of beneficial interest, without par value, of the Acquiring Fund (the
"Acquiring Fund Shares"); (ii) the assumption by the Acquiring Fund of certain
identified liabilities of the Selling Fund; and (iii) the distribution, after
the Closing Date hereinafter referred to, of the Acquiring Fund Shares to the
shareholders of the Selling Fund in liquidation of the Selling Fund as provided
herein, all upon the terms and conditions hereinafter set forth in this
Agreement.
WHEREAS, the Selling Fund and the Acquiring Fund are each separate
investment series of an open-end, registered investment company of the
management type, and the Selling Fund owns securities that generally are assets
of the character in which the Acquiring Fund is permitted to invest;
WHEREAS, both Funds are authorized to issue their shares
of beneficial interest;
WHEREAS, the Trustees of the Trust have determined that the exchange of
all of the assets of the Selling Fund for Acquiring Fund Shares and the
assumption of certain identified liabilities of the Selling Fund by the
Acquiring Fund on the terms and conditions hereinafter set forth are in the best
interests of the Acquiring Fund's shareholders;
WHEREAS, the Trustees of Evergreen Trust have determined that the
Selling Fund should exchange all of its assets and
<PAGE>
certain identified liabilities for Acquiring Fund Shares and that the interests
of the existing shareholders of the Selling Fund will not be diluted as a result
of the transactions contemplated herein;
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
ARTICLE I
TRANSFER OF ASSETS OF THE SELLING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES AND ASSUMPTION OF SELLING FUND
LIABILITIES AND LIQUIDATION OF THE SELLING FUND
1.1 THE EXCHANGE. Subject to the terms and conditions herein set forth
and on the basis of the representations and warranties contained herein, the
Selling Fund agrees to transfer all of the Selling Fund's assets as set forth in
paragraph 1.2 to the Acquiring Fund. The Acquiring Fund agrees in exchange
therefor (i) to deliver to the Selling Fund the number of Acquiring Fund Shares,
including fractional Acquiring Fund Shares, determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of each such class of the Selling Fund by the net
asset value per share of the corresponding class of Acquiring Fund Shares
computed in the manner and as of the time and date set forth in paragraph 2.2;
and (ii) to assume certain identified liabilities of the Selling Fund, as set
forth in paragraph 1.3. Such transactions shall take place at the closing
provided for in paragraph 3.1 (the "Closing Date").
1.2 ASSETS TO BE ACQUIRED. The assets of the Selling Fund to be
acquired by the Acquiring Fund shall consist of all property, including, without
limitation, all cash, securities, commodities, and futures interests and
dividends or interest receivables, that is owned by the Selling Fund and any
deferred or prepaid expenses shown as an asset on the books of the Selling Fund
on the Closing Date.
The Selling Fund has provided the Acquiring Fund with its most recent
audited financial statements, which contain a list of all of Selling Fund's
assets as of the date thereof. The Selling Fund hereby represents that as of the
date of the execution of this Agreement there have been no changes in its
financial position as reflected in said financial statements other than those
occurring in the ordinary course of its business in connection with the purchase
and sale of securities and the payment of its normal operating expenses.
<PAGE>
The Selling Fund reserves the right to sell any of such securities, but will
not, without the prior written approval of the Acquiring Fund, acquire any
additional securities other than securities of the type in which the Acquiring
Fund is permitted to invest.
The Acquiring Fund will, within a reasonable time prior to the Closing
Date, furnish the Selling Fund with a statement of the Acquiring Fund's
investment objectives, policies, and restrictions and a list of the securities,
if any, on the Selling Fund's list referred to in the second sentence of this
paragraph that do not conform to the Acquiring Fund's investment objectives,
policies, and restrictions. In the event that the Selling Fund holds any
investments that the Acquiring Fund may not hold, the Selling Fund will dispose
of such securities prior to the Closing Date. In addition, if it is determined
that the Selling Fund and the Acquiring Fund portfolios, when aggregated, would
contain investments exceeding certain percentage limitations imposed upon the
Acquiring Fund with respect to such investments, the Selling Fund if requested
by the Acquiring Fund will dispose of a sufficient amount of such investments as
may be necessary to avoid violating such limitations as of the Closing Date.
1.3 LIABILITIES TO BE ASSUMED. The Selling Fund will endeavor to
discharge all of its known liabilities and obligations prior to the Closing
Date. The Acquiring Fund shall assume only those liabilities, expenses, costs,
charges and reserves reflected on a Statement of Assets and Liabilities of the
Selling Fund prepared on behalf of the Selling Fund, as of the Valuation Date
(as defined in paragraph 2.1), in accordance with generally accepted accounting
principles consistently applied from the prior audited period. The Acquiring
Fund shall assume only those liabilities of the Selling Fund reflected in such
Statement of Assets and Liabilities and shall not assume any other liabilities,
whether absolute or contingent, known or unknown, accrued or unaccrued, all of
which shall remain the obligation of the Selling Fund.
In addition, upon completion of the Reorganization, for purposes of
calculating the maximum amount permitted to be charged to the Acquiring Fund
under the National Association of Securities Dealers, Inc. Conduct Rule 2830,
minus the amount of the sales charges paid or accrued (including asset based
sales charge), plus permitted interest ("Aggregate NASD Cap"), the Acquiring
Fund will add to its Aggregate NASD Cap immediately prior to the Reorganization
the Aggregate NASD Cap of the Selling Fund immediately prior to the
Reorganization.
<PAGE>
1.4 LIQUIDATION AND DISTRIBUTION. On or soon after the Closing Date as
is conveniently practicable (the "Liquidation Date"), (a) the Selling Fund will
liquidate and distribute pro rata to the Selling Fund's shareholders of record,
determined as of the close of business on the Valuation Date (the "Selling Fund
Shareholders"), the Acquiring Fund Shares received by the Selling Fund pursuant
to paragraph 1.1; and (b) the Selling Fund will thereupon proceed to dissolve as
set forth in paragraph 1.8 below. Such liquidation and distribution will be
accomplished by the transfer of the Acquiring Fund Shares then credited to the
account of the Selling Fund on the books of the Acquiring Fund to open accounts
on the share records of the Acquiring Fund in the names of the Selling Fund
Shareholders and representing the respective pro rata number of the Acquiring
Fund Shares due such shareholders. All issued and outstanding shares of the
Selling Fund will simultaneously be canceled on the books of the Selling Fund.
The Acquiring Fund shall not issue certificates representing the Acquiring Fund
Shares in connection with such exchange.
1.5 OWNERSHIP OF SHARES. Ownership of Acquiring Fund Shares will be
shown on the books of the Acquiring Fund's transfer agent. Shares of the
Acquiring Fund will be issued in the manner described in the combined Prospectus
and Proxy Statement on Form N-14 to be distributed to shareholders of the
Selling Fund as described in paragraph 5.7.
1.6 TRANSFER TAXES. Any transfer taxes payable upon issuance of the
Acquiring Fund Shares in a name other than the registered holder of the Selling
Fund shares on the books of the Selling Fund as of that time shall, as a
condition of such issuance and transfer, be paid by the person to whom such
Acquiring Fund Shares are to be issued and transferred.
1.7 REPORTING RESPONSIBILITY. Any reporting responsibility of the
Selling Fund is and shall remain the responsibility of the Selling Fund up to
and including the Closing Date and such later date on which the Selling Fund is
terminated.
1.8 TERMINATION. The Selling Fund shall be terminated promptly
following the Closing Date and the making of all distributions pursuant to
paragraph 1.4.
ARTICLE II
VALUATION
<PAGE>
2.1 VALUATION OF ASSETS. The value of the Selling Fund's assets to be
acquired by the Acquiring Fund hereunder shall be the value of such assets
computed as of the close of business on the New York Stock Exchange on the
business day next preceding the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in the Trust's Declaration of Trust and the Acquiring Fund's then current
prospectus and statement of additional information or such other valuation
procedures as shall be mutually agreed upon by the parties.
2.2 VALUATION OF SHARES. The net asset value per share of the Acquiring
Fund Shares shall be the net asset value per share computed as of the close of
business on the New York Stock Exchange on the Valuation Date, using the
valuation procedures set forth in the Trust's Declaration of Trust and the
Acquiring Fund's then current prospectus and statement of additional
information.
2.3 SHARES TO BE ISSUED. The number of the Acquiring Fund Shares of
each class to be issued (including fractional shares, if any) in exchange for
the Selling Fund's assets shall be determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of the Selling Fund attributable to each of its
classes by the net asset value per share of the respective classes of the
Acquiring Fund determined in accordance with paragraph 2.2.
2.4 DETERMINATION OF VALUE. All computations of value shall be made by
State Street Bank and Trust Company in accordance with its regular practice in
pricing the shares and assets of the Acquiring Fund.
ARTICLE III
CLOSING AND CLOSING DATE
3.1 CLOSING DATE. The Closing (the "Closing") shall take place on or
about January 23, 1998 or such other date as the parties may agree to in writing
(the "Closing Date"). All acts taking place at the Closing shall be deemed to
take place simultaneously immediately prior to the opening of business on the
Closing Date unless otherwise provided. The Closing shall be held as of 9:00
a.m. at the offices of the Evergreen Keystone Funds, 200 Berkeley Street,
Boston, MA 02116, or at such other time and/or place as the parties may agree.
3.2 CUSTODIAN'S CERTIFICATE. State Street Bank and Trust Company, as
custodian for the Selling Fund (the
<PAGE>
"Custodian"), shall deliver at the Closing a certificate of an authorized
officer stating that (a) the Selling Fund's portfolio securities, cash, and any
other assets shall have been delivered in proper form to the Acquiring Fund on
the Closing Date; and (b) all necessary taxes including all applicable federal
and state stock transfer stamps, if any, shall have been paid, or provision for
payment shall have been made, in conjunction with the delivery of portfolio
securities by the Selling Fund.
3.3 EFFECT OF SUSPENSION IN TRADING. In the event that on the Valuation
Date (a) the New York Stock Exchange or another primary trading market for
portfolio securities of the Acquiring Fund or the Selling Fund shall be closed
to trading or trading thereon shall be restricted; or (b) trading or the
reporting of trading on said Exchange or elsewhere shall be disrupted so that
accurate appraisal of the value of the net assets of the Acquiring Fund or the
Selling Fund is impracticable, the Valuation Date shall be postponed until the
first business day after the day when trading shall have been fully resumed and
reporting shall have been restored.
3.4 TRANSFER AGENT'S CERTIFICATE. Evergreen Keystone Service Company,
as transfer agent for the Selling Fund as of the Closing Date ("EKSC"), shall
deliver at the Closing a certificate of an authorized officer stating that its
records contain the names and addresses of the Selling Fund Shareholders and the
number and percentage ownership of outstanding shares owned by each such
shareholder immediately prior to the Closing. The Acquiring Fund shall issue and
deliver or cause EKSC, its transfer agent as of the Closing Date, to issue and
deliver a confirmation evidencing the Acquiring Fund Shares to be credited on
the Closing Date to the Secretary of Evergreen Trust on behalf of the Selling
Fund or provide evidence satisfactory to the Selling Fund that such Acquiring
Fund Shares have been credited to the Selling Fund's account on the books of the
Acquiring Fund. At the Closing, each party shall deliver to the other such bills
of sale, checks, assignments, share certificates, if any, receipts and other
documents as such other party or its counsel may reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS OF THE SELLING FUND. The Selling
Fund represents and warrants to the Acquiring Fund as follows:
<PAGE>
(a) The Selling Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing, and in good
standing under the laws of The Commonwealth of Massachusetts.
(b) The Selling Fund is a separate investment series of a
registered investment company classified as a management company of the open-end
type, and its registration with the Securities and Exchange Commission (the
"Commission") as an investment company under the Investment Company Act of 1940,
as amended (the "1940 Act"), is in full force and effect.
(c) The current prospectuses and statement of additional
information of the Selling Fund conform in all material respects to the
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), and the 1940 Act and the rules and regulations of the Commission
thereunder and do not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(d) The Selling Fund is not, and the execution, delivery, and
performance of this Agreement (subject to shareholder approval) will not result,
in violation of any provision of Evergreen Trust's Declaration of Trust or
By-Laws or of any material agreement, indenture, instrument, contract, lease, or
other undertaking to which the Selling Fund is a party or by which it is bound.
(e) The Selling Fund has no material contracts or other
commitments (other than this Agreement) that will be terminated with liability
to it prior to the Closing Date.
(f) Except as otherwise disclosed in writing to and accepted
by the Acquiring Fund, no litigation, administrative proceeding, or
investigation of or before any court or governmental body is presently pending
or to its knowledge threatened against the Selling Fund or any of its properties
or assets, which, if adversely determined, would materially and adversely affect
its financial condition, the conduct of its business, or the ability of the
Selling Fund to carry out the transactions contemplated by this Agreement. The
Selling Fund knows of no facts that might form the basis for the institution of
such proceedings and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that materially and
adversely
<PAGE>
affects its business or its ability to consummate the transactions herein
contemplated.
(g) The financial statements of the Selling Fund at August 31,
1996 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Acquiring Fund) fairly reflect the financial condition of the Selling
Fund as of such date, and there are no known contingent liabilities of the
Selling Fund as of such date not disclosed therein.
(h) Since August 31, 1996 there has not been any material
adverse change in the Selling Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Selling Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Acquiring Fund. For the purposes of this subparagraph (h), a
decline in the net asset value of the Selling Fund shall not constitute a
material adverse change.
(i) At the Closing Date, all federal and other tax returns and
reports of the Selling Fund required by law to have been filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid, or provision shall have been made for the
payment thereof. To the best of the Selling Fund's knowledge, no such return is
currently under audit, and no assessment has been asserted with respect to such
returns.
(j) For each fiscal year of its operation, the Selling Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains.
(k) All issued and outstanding shares of the Selling Fund are,
and at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable by the Selling Fund (except that, under Massachusetts
law, Selling Fund Shareholders could under certain circumstances be held
personally liable for obligations of the Selling Fund). All of the issued and
outstanding shares of the Selling Fund will, at the time of the Closing Date, be
held by the persons and in the amounts set forth in the records of the transfer
agent as provided in paragraph 3.4. The Selling Fund does not have outstanding
any options, warrants, or other rights to subscribe for or purchase any of the
Selling Fund shares, nor
<PAGE>
is there outstanding any security convertible into any of the Selling Fund
shares.
(l) At the Closing Date, the Selling Fund will have good and
marketable title to the Selling Fund's assets to be transferred to the Acquiring
Fund pursuant to paragraph 1.2 and full right, power, and authority to sell,
assign, transfer, and deliver such assets hereunder, and, upon delivery and
payment for such assets, the Acquiring Fund will acquire good and marketable
title thereto, subject to no restrictions on the full transfer thereof,
including such restrictions as might arise under the 1933 Act, other than as
disclosed to the Acquiring Fund and accepted by the Acquiring Fund.
(m) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Selling
Fund and, subject to approval by the Selling Fund Shareholders, this Agreement
constitutes a valid and binding obligation of the Selling Fund, enforceable in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights and to general equity principles.
(n) The information to be furnished by the Selling Fund for
use in no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations thereunder applicable thereto.
(o) The Proxy Statement of the Selling Fund to be included in
the Registration Statement (as defined in paragraph 5.7)(other than information
therein that relates to the Acquiring Fund) will, on the effective date of the
Registration Statement and on the Closing Date, not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading.
4.2 REPRESENTATIONS OF THE ACQUIRING FUND. The Acquiring Fund represents
and warrants to the Selling Fund as follows:
(a) The Acquiring Fund is a separate investment series of a Delaware
business trust duly organized, validly
<PAGE>
existing and in good standing under the laws of the State of
Delaware.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust that is registered as an investment company classified
as a management company of the open-end type, and its registration with the
Commission as an investment company under the 1940 Act is in full force and
effect.
(c) The current prospectuses and statement of additional
information of the Acquiring Fund conform in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder and do not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(d) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of the Trust's
Declaration of Trust or By-Laws or of any material agreement, indenture,
instrument, contract, lease, or other undertaking to which the Acquiring Fund is
a party or by which it is bound.
(e) Except as otherwise disclosed in writing to the Selling
Fund and accepted by the Selling Fund, no litigation, administrative proceeding
or investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquiring Fund or any of its
properties or assets, which, if adversely determined, would materially and
adversely affect its financial condition and the conduct of its business or the
ability of the Acquiring Fund to carry out the transactions contemplated by this
Agreement. The Acquiring Fund knows of no facts that might form the basis for
the institution of such proceedings and is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental body
that materially and adversely affects its business or its ability to consummate
the transactions contemplated herein.
(f) The Acquiring Fund has no known liabilities of a material
amount, contingent or otherwise.
(g) At the Closing Date, there will not be any material
adverse change in the Acquiring Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any
<PAGE>
incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Selling Fund. For the purposes of this subparagraph (g), a
decline in the net asset value of the Acquiring Fund shall not constitute a
material adverse change.
(h) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law then to be filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid or provision shall have been made for the
payment thereof. To the best of the Acquiring Fund's knowledge, no such return
is currently under audit, and no assessment has been asserted with respect to
such returns.
(i) All issued and outstanding Acquiring Fund Shares are, and
at the Closing Date will be, duly and validly issued and outstanding, fully paid
and non-assessable. The Acquiring Fund does not have outstanding any options,
warrants, or other rights to subscribe for or purchase any Acquiring Fund
Shares, nor is there outstanding any security convertible into any Acquiring
Fund Shares.
(j) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Acquiring
Fund, and this Agreement constitutes a valid and binding obligation of the
Acquiring Fund enforceable in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium, and other
laws relating to or affecting creditors' rights and to general equity
principles.
(k) The Acquiring Fund Shares to be issued and delivered to
the Selling Fund, for the account of the Selling Fund Shareholders, pursuant to
the terms of this Agreement will, at the Closing Date, have been duly authorized
and, when so issued and delivered, will be duly and validly issued Acquiring
Fund Shares, and will be fully paid and non-assessable.
(l) The information to be furnished by the Acquiring Fund for
use in no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations applicable thereto.
<PAGE>
(m) The Prospectus and Proxy Statement (as defined in
paragraph 5.7) to be included in the Registration Statement (only insofar as it
relates to the Acquiring Fund) will, on the effective date of the Registration
Statement and on the Closing Date, not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not misleading.
(n) The Acquiring Fund agrees to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the 1940 Act,
and such of the state Blue Sky or securities laws as it may deem appropriate in
order to continue its operations after the Closing Date.
ARTICLE V
COVENANTS OF THE ACQUIRING FUND AND THE SELLING FUND
5.1 OPERATION IN ORDINARY COURSE. The Acquiring Fund and the Selling
Fund each will operate its business in the ordinary course between the date
hereof and the Closing Date, it being understood that such ordinary course of
business will include customary dividends and distributions.
5.2 APPROVAL OF SHAREHOLDERS. Evergreen Trust will call a meeting of
the Selling Fund Shareholders to consider and act upon this Agreement and to
take all other action necessary to obtain approval of the transactions
contemplated herein.
5.3 INVESTMENT REPRESENTATION. The Selling Fund covenants that the
Acquiring Fund Shares to be issued hereunder are not being acquired for the
purpose of making any distribution thereof other than in accordance with the
terms of this Agreement.
5.4 ADDITIONAL INFORMATION. The Selling Fund will assist the Acquiring
Fund in obtaining such information as the Acquiring Fund reasonably requests
concerning the beneficial ownership of the Selling Fund shares.
5.5 FURTHER ACTION. Subject to the provisions of this Agreement, the
Acquiring Fund and the Selling Fund will each take, or cause to be taken, all
action, and do or cause to be done, all things reasonably necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement, including any actions required to be taken after the Closing Date.
<PAGE>
5.6 STATEMENT OF EARNINGS AND PROFITS. As promptly as practicable, but
in any case within sixty days after the Closing Date, the Selling Fund shall
furnish the Acquiring Fund, in such form as is reasonably satisfactory to the
Acquiring Fund, a statement of the earnings and profits of the Selling Fund for
federal income tax purposes that will be carried over by the Acquiring Fund as a
result of Section 381 of the Code, and which will be reviewed by its independent
auditors and certified by Evergreen Trust's President and Treasurer.
5.7 PREPARATION OF FORM N-14 REGISTRATION STATEMENT. The Selling Fund
will provide the Acquiring Fund with information reasonably necessary for the
preparation of a prospectus, which will include the proxy statement, referred to
in paragraph 4.1(o) (the "Prospectus and Proxy Statement"), all to be included
in a Registration Statement on Form N-14 of the Acquiring Fund (the
"Registration Statement"), in compliance with the 1933 Act, the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act in
connection with the meeting of the Selling Fund Shareholders to consider
approval of this Agreement and the transactions contemplated herein.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLING FUND
The obligations of the Selling Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations, covenants, and warranties of the Acquiring
Fund contained in this Agreement shall be true and correct as of the date hereof
and as of the Closing Date with the same force and effect as if made on and as
of the Closing Date, and the Acquiring Fund shall have delivered to the Selling
Fund a certificate executed in its name by the Trust's President or Vice
President and its Treasurer or Assistant Treasurer, in form and substance
reasonably satisfactory to the Selling Fund and dated as of the Closing Date, to
such effect and as to such other matters as the Selling Fund shall reasonably
request.
6.2 The Selling Fund shall have received on the Closing Date an opinion
from Sullivan & Worcester LLP, counsel to the Acquiring Fund, dated as of the
Closing Date, in a form
<PAGE>
reasonably satisfactory to the Selling Fund, covering the
following points:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the power to own all of its
properties and assets and to carry on its business as presently conducted.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust registered as an investment company under the 1940 Act,
and, to such counsel's knowledge, such registration with the Commission as an
investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed, and
delivered by the Acquiring Fund, and, assuming that the Prospectus and Proxy
Statement, and Registration Statement comply with the 1933 Act, the 1934 Act,
and the 1940 Act and the rules and regulations thereunder and, assuming due
authorization, execution and delivery of this Agreement by the Selling Fund, is
a valid and binding obligation of the Acquiring Fund enforceable against the
Acquiring Fund in accordance with its terms, subject as to enforcement, to
bankruptcy, insolvency, reorganization, moratorium, and other laws relating to
or affecting creditors' rights generally and to general equity principles.
(d) Assuming that a consideration therefor not less than the
net asset value thereof has been paid, the Acquiring Fund Shares to be issued
and delivered to the Selling Fund on behalf of the Selling Fund Shareholders as
provided by this Agreement are duly authorized and upon such delivery will be
legally issued and outstanding and fully paid and non-assessable, and no
shareholder of the Acquiring Fund has any preemptive rights in respect thereof.
(e) The Registration Statement, to such counsel's knowledge,
has been declared effective by the Commission and no stop order under the 1933
Act pertaining thereto has been issued, and to the knowledge of such counsel, no
consent, approval, authorization or order of any court or governmental authority
of the United States or the State of Delaware is required for consummation by
the Acquiring Fund of the transactions contemplated herein, except such as have
been obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
ARTICLE VII
<PAGE>
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by the
Selling Fund of all the obligations to be performed by it hereunder on or before
the Closing Date and, in addition thereto, the following conditions:
7.1 All representations, covenants, and warranties of the Selling Fund
contained in this Agreement shall be true and correct as of the date hereof and
as of the Closing Date with the same force and effect as if made on and as of
the Closing Date, and the Selling Fund shall have delivered to the Acquiring
Fund on the Closing Date a certificate executed in its name by Evergreen Trust's
President or Vice President and the Treasurer or Assistant Treasurer, in form
and substance satisfactory to the Acquiring Fund and dated as of the Closing
Date, to such effect and as to such other matters as the Acquiring Fund shall
reasonably request.
7.2 The Selling Fund shall have delivered to the Acquiring Fund a
statement of the Selling Fund's assets and liabilities, together with a list of
the Selling Fund's portfolio securities showing the tax costs of such securities
by lot and the holding periods of such securities, as of the Closing Date,
certified by the Treasurer of Evergreen Trust.
7.3 The Acquiring Fund shall have received on the Closing Date an
opinion of Sullivan & Worcester LLP, counsel to the Selling Fund, in a form
satisfactory to the Acquiring Fund covering the following points:
(a) The Selling Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing and in good
standing under the laws of The Commonwealth of Massachusetts and has the power
to own all of its properties and assets and to carry on its business as
presently conducted.
(b) The Selling Fund is a separate investment series of a
Massachusetts business trust registered as an investment company under the 1940
Act, and, to such counsel's knowledge, such registration with the Commission as
an investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed and
delivered by the Selling Fund, and, assuming that the Prospectus and Proxy
Statement, and Registration Statement
<PAGE>
comply with the 1933 Act, the 1934 Act, and the 1940 Act and the rules and
regulations thereunder and, assuming due authorization, execution, and delivery
of this Agreement by the Acquiring Fund, is a valid and binding obligation of
the Selling Fund enforceable against the Selling Fund in accordance with its
terms, subject as to enforcement, to bankruptcy, insolvency, reorganization,
moratorium and other laws relating to or affecting creditors' rights generally
and to general equity principles.
(d) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority of the United
States or The Commonwealth of Massachusetts is required for consummation by the
Selling Fund of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND AND THE SELLING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Selling Fund or the Acquiring Fund, the other
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
the Selling Fund in accordance with the provisions of Evergreen Trust's
Declaration of Trust and By-Laws and certified copies of the resolutions
evidencing such approval shall have been delivered to the Acquiring Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring Fund nor
the Selling Fund may waive the conditions set forth in this paragraph 8.1.
8.2 On the Closing Date, the Commission shall not have issued an
unfavorable report under Section 25(b) of the 1940 Act, nor instituted any
proceeding seeking to enjoin the consummation of the transactions contemplated
by this Agreement under Section 25(c) of the 1940 Act and no action, suit or
other proceeding shall be threatened or pending before any court or governmental
agency in which it is sought to restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the transactions contemplated
herein.
<PAGE>
8.3 All required consents of other parties and all other consents,
orders, and permits of federal, state and local regulatory authorities
(including those of the Commission and of state Blue Sky securities authorities,
including any necessary "no-action" positions of and exemptive orders from such
federal and state authorities) to permit consummation of the transactions
contemplated hereby shall have been obtained, except where failure to obtain any
such consent, order, or permit would not involve a risk of a material adverse
effect on the assets or properties of the Acquiring Fund or the Selling Fund,
provided that either party hereto may for itself waive any of such conditions.
8.4 The Registration Statement shall have become effective under the
1933 Act, and no stop orders suspending the effectiveness thereof shall have
been issued and, to the best knowledge of the parties hereto, no investigation
or proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act.
8.5 The Selling Fund shall have declared a dividend or dividends which,
together with all previous such dividends, shall have the effect of distributing
to the Selling Fund Shareholders all of the Selling Fund's investment company
taxable income for all taxable periods ending on the Closing Date (computed
without regard to any deduction for dividends paid) and all of its net capital
gains realized in all taxable periods ending on the Closing Date (after
reduction for any capital loss carryforward).
8.6 The parties shall have received a favorable opinion of Sullivan &
Worcester LLP, addressed to the Acquiring Fund and the Selling Fund
substantially to the effect that for federal income tax purposes:
(a) The transfer of all of the Selling Fund assets in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund followed by the distribution of
the Acquiring Fund Shares to the Selling Fund in dissolution and liquidation of
the Selling Fund will constitute a "reorganization" within the meaning of
Section 368(a)(1)(F) of the Code and the Acquiring Fund and the Selling Fund
will each be a "party to a reorganization" within the meaning of Section 368(b)
of the Code.
(b) No gain or loss will be recognized by the Acquiring Fund
upon the receipt of the assets of the Selling Fund solely in exchange for the
Acquiring Fund Shares and the
<PAGE>
assumption by the Acquiring Fund of certain stated liabilities
of the Selling Fund.
(c) No gain or loss will be recognized by the Selling Fund
upon the transfer of the Selling Fund assets to the Acquiring Fund in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund or upon the distribution (whether
actual or constructive) of the Acquiring Fund Shares to Selling Fund
Shareholders in exchange for their shares of the Selling Fund.
(d) No gain or loss will be recognized by the Selling Fund
Shareholders upon the exchange of their Selling Fund shares for the Acquiring
Fund Shares in liquidation of the Selling Fund.
(e) The aggregate tax basis for the Acquiring Fund Shares
received by each Selling Fund Shareholder pursuant to the Reorganization will be
the same as the aggregate tax basis of the Selling Fund shares held by such
shareholder immediately prior to the Reorganization, and the holding period of
the Acquiring Fund Shares to be received by each Selling Fund Shareholder will
include the period during which the Selling Fund shares exchanged therefor were
held by such shareholder (provided the Selling Fund shares were held as capital
assets on the date of the Reorganization).
(f) The tax basis of the Selling Fund assets acquired by the
Acquiring Fund will be the same as the tax basis of such assets to the Selling
Fund immediately prior to the Reorganization, and the holding period of the
assets of the Selling Fund in the hands of the Acquiring Fund will include the
period during which those assets were held by the Selling Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring
Fund nor the Selling Fund may waive the conditions set forth in this paragraph
8.6.
8.7 The Acquiring Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Acquiring Fund, in form and substance satisfactory to
the Acquiring Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Selling Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
<PAGE>
(b) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards) consisting of a reading
of any unaudited pro forma financial statements included in the Registration
Statement and Prospectus and Proxy Statement, and inquiries of appropriate
officials of the Selling Fund responsible for financial and accounting matters,
nothing came to their attention that caused them to believe that such unaudited
pro forma financial statements do not comply as to form in all material respects
with the applicable accounting requirements of the 1933 Act and the published
rules and regulations thereunder;
(c) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the Capitalization Table
appearing in the Registration Statement and Prospectus and Proxy Statement has
been obtained from and is consistent with the accounting records of the Selling
Fund;
(d) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the pro forma financial
statements that are included in the Registration Statement and Prospectus and
Proxy Statement were prepared based on the valuation of the Selling Fund's
assets in accordance with the Trust's Declaration of Trust and the Acquiring
Fund's then current prospectus and statement of additional information pursuant
to procedures customarily utilized by the Acquiring Fund in valuing its own
assets; and
(e) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the data utilized in the
calculations of the projected expense ratios appearing in the Registration
Statement and Prospectus and Proxy Statement agree with underlying accounting
records of the Selling Fund or to written estimates by Selling Fund's management
and were found to be mathematically correct.
In addition, the Acquiring Fund shall have received from KPMG Peat
Marwick LLP a letter addressed to the Acquiring Fund dated on the Closing Date,
in form and substance satisfactory to the Acquiring Fund, to the effect, that on
the basis of limited procedures agreed upon by the Acquiring Fund (but not an
examination in accordance with generally accepted auditing
<PAGE>
standards), the calculation of net asset value per share of the Selling Fund as
of the Valuation Date was determined in accordance with generally accepted
accounting practices and the portfolio valuation practices of the Acquiring
Fund.
8.8 The Selling Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Selling Fund, in form and substance satisfactory to the
Selling Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Acquiring Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards) consisting of a reading of any
unaudited pro forma financial statements included in the Registration Statement
and Prospectus and Proxy Statement, and inquiries of appropriate officials of
the Trust responsible for financial and accounting matters, nothing came to
their attention that caused them to believe that such unaudited pro forma
financial statements do not comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published rules and
regulations thereunder;
(c) on the basis of limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards), the Capitalization Table appearing
in the Registration Statement and Prospectus and Proxy Statement has been
obtained from and is consistent with the accounting records of the Acquiring
Fund; and
(d) on the basis of limited procedures agreed upon by the
Selling Fund (but not an examination in accordance with generally accepted
auditing standards), the data utilized in the calculations of the projected
expense ratio appearing in the Registration Statement and Prospectus and Proxy
Statement agree with written estimates by each Fund's management and were found
to be mathematically correct.
8.9 The Acquiring Fund and the Selling Fund shall also have received
from KPMG Peat Marwick LLP a letter addressed to the Acquiring Fund and the
Selling Fund, dated on the Closing Date in form and substance satisfactory to
the Funds, setting forth the federal income tax implications relating to capital
loss carryforwards (if any) of the Selling Fund and the
<PAGE>
related impact, if any, of the proposed transfer of all of the assets of the
Selling Fund to the Acquiring Fund and the ultimate dissolution of the Selling
Fund, upon the shareholders of the Selling Fund.
ARTICLE IX
EXPENSES
9.1 Except as otherwise provided for herein, all expenses of the
transactions contemplated by this Agreement incurred by the Selling Fund and the
Acquiring Fund will be borne by First Union National Bank. Such expenses
include, without limitation, (a) expenses incurred in connection with the
entering into and the carrying out of the provisions of this Agreement; (b)
expenses associated with the preparation and filing of the Registration
Statement under the 1933 Act covering the Acquiring Fund Shares to be issued
pursuant to the provisions of this Agreement; (c) registration or qualification
fees and expenses of preparing and filing such forms as are necessary under
applicable state securities laws to qualify the Acquiring Fund Shares to be
issued in connection herewith in each state in which the Selling Fund
Shareholders are resident as of the date of the mailing of the Prospectus and
Proxy Statement to such shareholders; (d) postage; (e) printing; (f) accounting
fees; (g) legal fees; and (h) solicitation costs of the transaction.
Notwithstanding the foregoing, the Acquiring Fund shall pay its own federal and
state registration fees.
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Selling Fund agree that neither party
has made any representation, warranty or covenant not set forth herein and that
this Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties, and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall survive the consummation of the transactions contemplated hereunder.
ARTICLE XI
TERMINATION
<PAGE>
11.1 This Agreement may be terminated by the mutual agreement of the
Acquiring Fund and the Selling Fund. In addition, either the Acquiring Fund or
the Selling Fund may at its option terminate this Agreement at or prior to the
Closing Date because:
(a) of a breach by the other of any representation, warranty,
or agreement contained herein to be performed at or prior to the Closing Date,
if not cured within 30 days; or
(b) a condition herein expressed to be precedent to the
obligations of the terminating party has not been met and it reasonably appears
that it will not or cannot be met.
11.2 In the event of any such termination, in the absence of willful
default, there shall be no liability for damages on the part of either the
Acquiring Fund, the Selling Fund, the Trust, Evergreen Trust, the respective
Trustees or officers, to the other party or its Trustees or officers.
ARTICLE XII
AMENDMENTS
This Agreement may be amended, modified, or supplemented in such manner
as may be mutually agreed upon in writing by the authorized officers of the
Selling Fund and the Acquiring Fund; provided, however, that following the
meeting of the Selling Fund Shareholders called by the Selling Fund pursuant to
paragraph 5.2 of this Agreement, no such amendment may have the effect of
changing the provisions for determining the number of the Acquiring Fund Shares
to be issued to the Selling Fund Shareholders under this Agreement to the
detriment of such shareholders without their further approval.
ARTICLE XIII
HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
13.1 The Article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without giving effect to the conflicts
of laws provisions thereof;
<PAGE>
provided, however, that the due authorization, execution and delivery of this
Agreement, in the case of Evergreen Trust, shall be governed and construed in
accordance with the laws of The Commonwealth of Massachusetts, without giving
effect to the conflicts of laws provisions thereof.
13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm, or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
13.5 It is expressly agreed that the obligations of the Selling Fund
hereunder shall not be binding upon any of the Trustees, shareholders, nominees,
officers, agents, or employees of Evergreen Trust personally, but bind only the
trust property of the Selling Fund, as provided in the Declaration of Trust of
Evergreen Trust. The execution and delivery of this Agreement have been
authorized by the Trustees of Evergreen Trust on behalf of the Selling Fund and
signed by authorized officers of Evergreen Trust, acting as such, and neither
such authorization by such Trustees nor such execution and delivery by such
officers shall be deemed to have been made by any of them individually or to
impose any liability on any of them personally, but shall bind only the trust
property of the Selling Fund as provided in the Declaration of Trust of
Evergreen Trust.
IN WITNESS WHEREOF, the parties have duly executed and sealed this
Agreement, all as of the date first written above.
EVERGREEN MUNICIPAL TRUST
ON BEHALF OF EVERGREEN
FLORIDA MUNICIPAL BOND FUND
By:
Name:
Title:
EVERGREEN INVESTMENT TRUST
ON BEHALF OF EVERGREEN
<PAGE>
FLORIDA MUNICIPAL BOND FUND
By:
Name:
Title:
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Acquisition of the Assets of
EVERGREEN FLORIDA MUNICIPAL BOND FUND
a Series of
EVERGREEN INVESTMENT TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 343-2898
and
KEYSTONE FLORIDA TAX FREE FUND
a Series of
KEYSTONE STATE TAX FREE FUND
200 Berkeley Street
Boston, Massachusetts 02116
(800) 343-2898
By and In Exchange For Shares of
EVERGREEN FLORIDA MUNICIPAL BOND FUND
a Series of
EVERGREEN TAX FREE TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 343-2898
This Statement of Additional Information, relating specifically to the
proposed transfer of the assets and liabilities of Evergreen Florida Municipal
Bond Fund, a series of Evergreen Investment Trust ("Evergreen Florida") and
Keystone Florida Tax Free Fund, a series of Keystone State Tax Free Fund,
("Keystone Florida") to Evergreen Florida Municipal Bond Fund ("Evergreen
Florida Bond"), a series of the Evergreen Tax Free Trust, in exchange, as
applicable, for Class A, Class B, Class C and Class Y shares of beneficial
interest, no par value, of Evergreen Florida Bond, consists of this cover page
and the following described documents, each of which is attached hereto and
incorporated by reference herein:
(1) The Statement of Additional Information of Evergreen
Florida dated October 31, 1996;
<PAGE>
(2) The Statement of Additional Information of Keystone
Florida dated July 21, 1997;
(3) Annual Report of Evergreen Florida for the year ended August
31, 1997;
(4) Annual Report of Keystone Florida for the [year] ended March
31, 1997; and
(5) Pro-Forma Combining Financial Statements (unaudited) dated ,
1997.
This Statement of Additional Information, which is not a prospectus,
supplements, and should be read in conjunction with, the Prospectus/Proxy
Statement of Evergreen Florida Bond, Evergreen Florida and Keystone Florida
dated October , 1997. A copy of the Prospectus/Proxy Statement may be obtained
without charge by calling or writing to Evergreen Florida Bond, Evergreen
Florida or Keystone Florida at the telephone numbers or addresses set forth
above.
The date of this Statement of Additional Information is October , 1997.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
October 31, 1996
THE EVERGREEN TAX-FREE FUNDS
2500 Westchester Avenue, Purchase, New York 10577
800-807-2940
Evergreen Florida Municipal Bond Fund("Florida Municipal Bond") Evergreen
Georgia Municipal Bond Fund ("Georgia Municipal Bond") Evergreen New Jersey
Tax-Free Income Fund ("New Jersey Tax-Free") Evergreen North Carolina Municipal
Bond Fund ("North Carolina Municipal Bond") Evergreen South Carolina Municipal
Bond Fund ("South Carolina Municipal Bond") Evergreen Virginia Municipal Bond
Fund ("Virginia Municipal Bond") Evergreen Florida High Income Municipal Bond
Fund ("Florida High Income") Evergreen High Grade Tax Free Fund ("High Grade")
Evergreen Short-Intermediate Municipal Fund ("Short-Intermediate") Evergreen
Short-Intermediate Municipal Fund-California ("Short-Intermediate-CA")
This Statement of Additional Information pertains to all classes of shares
of the Funds listed above. It is not a prospectus and should be read in
conjunction with the Prospectus dated October 31, 1996 for the Fund in which you
are making or contemplating an investment. The Evergreen Tax-Free Funds are
offered through four separate prospectuses: one offering Class A and Class B
shares, and a separate prospectus offering Class Y shares of Florida Municipal
Bond, Georgia Municipal Bond, New Jersey Tax-Free, North Carolina Municipal
Bond, South Carolina Municipal Bond, Virginia Municipal Bond and Florida High
Income; and one offering Class A and Class B shares and a separate prospectus
offering Class Y shares of High Grade, Short-Intermediate and
Short-Intermediate-CA. Copies of each Prospectus may be obtained without charge
by calling the number listed above.
TABLE OF CONTENTS
Investment Objectives and Policies................................ 2
Investment Restrictions........................................... 11
Non-Fundamental Operating Policies................................ 18
Management........................................................ 19
Investment Advisers............................................... 28
Distribution Plans................................................ 35
Allocation of Brokerage........................................... 38
Additional Tax Information........................................ 39
Net Asset Value................................................... 41
Purchase of Shares................................................ 42
Performance Information........................................... 56
Financial Statements.............................................. 62
Appendix A - Description of Bond, Municipal Note And Commercial
Paper Ratings..................................................... 63
Appendix B - Additional Information Concerning California..... 68
Appendix C - Additional Information Concerning Florida.......... 69
Appendix D - Additional Information Concerning Georgia........... 71
Appendix E - Additional Information Concerning North Carolina..... 72
Appendix F - Additional Information Concerning South Carolina. 73
Appendix G - Additional Information Concerning Virginia........... 74
1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
(See also "Description of the Funds - Investment Objectives
and Policies" in each Fund's Prospectus)
The investment objective of each Fund and a description of the
securities in which each Fund may invest is set forth under "Description of the
Funds- Investment Objectives and Policies" in the relevant Prospectus. The
investment objectives of Florida Municipal Bond, Georgia Municipal Bond, New
Jersey Tax- Free, North Carolina Municipal Bond, South Carolina Municipal Bond,
Virginia Municipal Bond and High Grade are fundamental and cannot be changed
without the approval of shareholders. The following expands the discussion in
the Prospectus regarding certain investments of each Fund.
Additional Information Regarding Investments that each Fund May Make
Participation Interests (All Funds)
Participation interests may take the form of participations, beneficial
interests, in a trust, partnership interests, or any other form of indirect
ownership that allows a Fund to treat the income from the investments as exempt
from federal and state tax. The financial institutions from which a Fund
purchases participation interests frequently provide or secure from another
financial institution irrevocable letters of credit or guarantees and give a
Fund the right to demand payment of the principal amounts of the participation
interests plus accrued interest on short notice (usually within seven days).
Variable Rate Municipal Securities (All Funds)
Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation or
depreciation is less for variable rate municipal securities than for fixed
income obligations.
Many municipal securities with variable interest rates purchased by a Fund
are subject to repayment of principal (usually within seven days) on the Fund's
demand. The terms of these variable rates demand instruments require payment of
principal obligations by the issuer of the participation interests or a
guarantor of either issuer. All variable rate municipal securities will meet the
quality standards for a Fund. The Fund's investment adviser has been instructed
by the Board of Trustees (the "Trustees") to monitor the pricing, quality, and
liquidity of the variable rate municipal securities, including participation
interests held by a Fund, on the basis of published financial information and
reports of the rating agencies and other analytical services.
Municipal Leases (All Funds)
When determining whether municipal leases purchased by a Fund will be
classified as a liquid or illiquid security, the Trustees have directed each
Fund's investment adviser to consider certain factors, such as: the frequency of
trades and quotes for the security; the volatility of quotations and trade
prices for the security, the number of dealers willing to purchase or sell the
security and the number of potential purchasers; dealer undertakings to make a
market in the security; the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers, and the mechanics of transfer); the rating of the security
and the financial condition and prospects of the issuer of the security; whether
the lease can be terminated by the lessee; the potential recovery, if any, from
a sale of the leased property upon termination of the lease; the lessee's
general credit strength (e.g., its debt, administrative, economic and financial
2
<PAGE>
characteristics and prospects); the likelihood that the lessee will discontinue
appropriating funding for the leased property because the property is no longer
deemed essential to its operations (e.g., the potential for an "event of
nonappropriation"); any credit enhancement or legal recourse provided upon an
event of nonappropriation or other termination of the lease; and such other
factors as may be relevant to the Fund's ability to dispose of the security.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an
advantageous price or yield for a Fund. No fees or other expenses, other than
normal transaction costs, are incurred. However, liquid assets of a Fund
sufficient to make payment for the securities to be purchased are segregated on
the Fund's records at the trade date. These assets are marked to market daily
and are maintained until the transaction has been settled. The Funds (other than
High Grade, Short-Intermediate and Short-Intermediate-CA) do not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
Short-Intermediate and Short-Intermediate-CA do not expect that commitments to
purchase when-issued securities will normally exceed 25% of their total assets
and High Grade does not expect that such commitments will exceed 20% of its
total assets.
Futures and Options Transactions (All Funds Except New Jersey Tax-
Free, High Grade, Short-Intermediate and Short-Intermediate-CA)
A Fund may attempt to hedge all or a portion of its portfolio by buying and
selling financial futures contracts and options on financial futures contracts.
Additionally, a Fund may buy and sell call and put options on portfolio
securities. The Funds do not intend to invest more than 5% of their assets in
options and futures.
Purchasing Put Options on Financial Futures Contracts
A Fund may purchase listed put and call options on financial futures
contracts for U.S. government securities. Unlike entering directly into a
futures contract, which requires the purchaser to buy a financial instrument on
a set date at a specified price, the purchase of a put option on a futures
contract entitles (but does not obligate) its purchaser to decide on or before a
future date whether to assume a short position at the specified price.
A Fund may purchase put options on futures to protect portfolio securities
against decreases in value resulting from an anticipated increase in market
interest rates. Generally, if the hedged portfolio securities decrease in value
during the term of an option, the related futures contracts will also decrease
in value and the option will increase in value. In such an event, the Fund will
normally close out its option by selling an identical option. If the hedge is
successful, the proceeds received by a Fund upon the sale of the second option
will be large enough to offset both the premium paid by the Fund for the
original option plus the realized decrease in value of the hedged securities.
Alternatively, a Fund may exercise its put option. To do so, it would
simultaneously enter into a futures contract of the type underlying the option
(for a price less than the strike price of the option) and exercise the option.
A Fund would then deliver the futures contract in return for payment of the
strike price. If a Fund neither closes out nor exercises an option, the option
will expire on the date provided in the option contract, and the premium paid
for the contract will be lost.
Writing Call Options on Financial Futures Contracts
In addition to purchasing put options on futures, a Fund may write listed
3
<PAGE>
call options on futures contracts for U.S. government securities to hedge its
portfolio against an increase in market interest rates. When a Fund writes a
call option on a futures contract, it is undertaking the obligation of assuming
a short futures position (selling a futures contract) at the fixed strike price
at any time during the life of the option, if the option is exercised. As market
interest rates rise, causing the prices of futures to go down, a Fund's
obligation under a call option on a future (to sell a futures contract) costs
less to fulfill, causing the value of the Fund's call option position to
increase.
In other words, as the underlying futures price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that the
Fund keeps the premium received for the option. This premium can offset the drop
in value of a Fund's fixed income portfolio which is occurring as interest rates
rise.
Prior to the expiration of a call written by a Fund, or exercise of it by
the buyer, a Fund may close out the option by buying an identical option. If the
hedge is successful, the cost of the second option will be less than the premium
received by the Fund for the initial option. The net premium income of a Fund
will then offset the decrease in value of the hedged securities.
Writing Put Options on Financial Futures Contracts
A Fund may write listed put options on financial futures contracts for U.S.
government securities to hedge its portfolio against a decrease in market
interest rates. When a Fund writes a put option on a futures contract, it
receives a premium for undertaking the obligation to assume a long futures
position (buying a futures contract) at a fixed price at any time during the
life of the option. As market interest rates decrease, the market price of the
underlying futures contract normally increases.
As the market value of the underlying futures contract increases, the buyer
of the put option has less reason to exercise the put because the buyer can sell
the same futures contract at a higher price in the market. The premium received
by a Fund can then be used to offset the higher prices of portfolio securities
to be purchased in the future due to the decrease in the market interest rates.
Prior to the expiration of the put option or its exercise by the buyer, a
Fund may close out the option by buying an identical option. If the hedge is
successful, the cost of buying the second option will be less than the premium
received by the Fund for the initial option.
Purchasing Call Options on Financial Futures Contracts
An additional way in which a Fund may hedge against decreases in market
interest rates is to buy a listed call option on a financial futures contract
for U.S. government securities. When a Fund purchases a call option on a futures
contract, it is purchasing the right (not the obligation) to assume a long
futures position (buy a futures contract) at a fixed price at any time during
the life of the option. As market interest rates fall, the value of the
underlying futures contract will normally increase, resulting in an increase in
value of the Fund's option position. When the market price of the underlying
futures contract increases above the strike price plus premium paid, the Fund
could exercise its option and buy the futures contract below market price.
Prior to the exercise or expiration of the call option a Fund could sell an
identical call option and close out its position. If the premium received upon
selling the offsetting call is greater than the premium originally paid, the
Fund has completed a successful hedge.
Limitation on Open Futures Positions
4
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A Fund will not maintain open positions in futures contracts it has sold or
call options it has written on futures contracts if, in the aggregate, the value
of the open positions (marked to market) exceeds the current market value of its
securities portfolio plus or minus the unrealized gain or loss on those open
positions, adjusted for the correlation of volatility between the hedged
securities and the futures contracts. If this limitation is exceeded at any
time, a Fund will take prompt action to close out a sufficient number of open
contracts to bring its open futures and options positions within this
limitation.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, a Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, a Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury bills
with its custodian (or the broker, if legally permitted). The nature of initial
margin in futures transactions is different from that of margin in securities
transactions in that futures contract initial margin does not involve the
borrowing of funds by a Fund to finance the transactions. Initial margin is in
the nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. A Fund may not purchase or sell
futures contracts or related options if immediately thereafter the sum of the
amount of margin deposits on the Fund's existing futures positions and premiums
paid for related options would exceed 5% of the market value of the Fund's total
assets.
A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund pays
or receives cash, called "variation margin", equal to the daily change in value
of the futures contract. This process is known as "marking to market". Variation
margin does not represent a borrowing or loan by a Fund but is instead
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing its daily net asset value, the
Fund will mark-to-market its open futures positions.
A Fund is also required to deposit and maintain margin when it writes call
options on futures contracts.
Purchasing and Writing Put and Call Options on Portfolio Securities (All Funds,
except New Jersey Tax-Free, High Grade, Short-Intermediate and Short-
Intermediate-CA).
A Fund may purchase put and call options on portfolio securities to protect
against price movements in particular securities. A put option gives the Fund,
in return for a premium, the right to sell the underlying security to the writer
(seller) at a specified price during the term of the option. A call option gives
the Fund, in return for a premium, the right to buy the underlying security from
the seller.
A Fund may generally purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the writers or buyers of
the options since options on the portfolio securities held by the Fund are to be
traded on an exchange. A Fund purchases and writes options only with investment
dealers and other financial institutions (such as commercial banks or savings
and loan associations) deemed creditworthy by the Fund's adviser.
Over-the-counter options are two party contracts with price and terms
negotiated between buyer and seller. In contrast, exchange-traded options are
third party contracts with standardized strike prices and expiration dates and
are purchased from a clearing corporation. Exchange traded options have a
continuous liquid market while over-the-counter options may not.
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Repurchase Agreements (All Funds)
Repurchase agreements are arrangements in which banks, broker/dealers, and
other recognized financial institutions sell U.S. government securities or other
securities to a Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price within one year from the date of
acquisition. A Fund or its custodian will take possession of the securities
subject to repurchase agreements. 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 the Fund might be delayed pending court action. Each 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 may only enter into repurchase agreements with banks
and other recognized financial institutions, such as broker/dealers, which are
found by the Fund's investment adviser to be creditworthy pursuant to guidelines
established by the Trustees.
Reverse Repurchase Agreements (All Funds)
A Fund may 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.
Lending of Portfolio Securities (All Funds)
The collateral received when a Fund lends portfolio securities must be
valued daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of the Fund or the borrower. A Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. A Fund does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
Restricted Securities (All Funds)
With the expectations noted below, a Fund may invest in restricted
securities. Restricted securities are any securities in which a Fund may
otherwise invest pursuant to its investment objectives and policies but which
are subject to restrictions on resale under federal securities laws. A Fund will
not invest
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more than 15% (10% for High Grade) of the value of its net assets in restricted
securities; however, certain restricted securities which the Trustees deem to be
liquid will be excluded from this 15% limitation. New Jersey Tax-Free may invest
up to 10% of its net assets in restricted securities which are determined to be
liquid.
The ability of the Trustees to determine the liquidity of certain
restricted securities is permitted under a Securities and Exchange Commission
("SEC") Staff position set forth in the adopting release for Rule 144A under the
Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive, safe-harbor
for certain secondary market transactions involving securities subject to
restrictions on resale under federal securities laws. The Rule provides an
exemption from registration for resales of otherwise restricted securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for resale under the
Rule 144A. Each Fund believes that the Staff of the SEC has left the question of
determining the liquidity of all restricted securities (eligible for resale
under Rule 144A) for determination by the Trustees. The Trustees consider the
following criteria in determining the liquidity of certain restricted
securities:
(i) the frequency of trades and quotes for the security; (ii) the number of
dealers willing to purchase or sell the security
and the number of other potential buyers;
(iii) dealer undertakings to make a market in the security; and
(iv) the nature of the security and the nature of the marketplace trades.
Municipal Bond Insurance (High Grade)
The Fund may purchase two types of municipal bond insurance policies
("Policies") issued by municipal bond insurers. One type of Policy covers
certain municipal securities only during the period in which they are in the
Fund's portfolio. In the event that a municipal security covered by such a
Policy is sold by the Fund, the insurer of the relevant Policy will be liable
only for those payments of interest and principal which are then due and owing
at the time of sale.
The other type of Policy covers municipal securities not only while they
remain in the Fund's portfolio but also until their final maturity, even if they
are sold out of the Fund's portfolio, so that the coverage may benefit all
subsequent holders of those municipal securities. The Fund will obtain insurance
which covers municipal securities until final maturity even after they are sold
out of the Fund's portfolio only if, in the judgment of the investment adviser,
the Fund would receive net proceeds from the sale of those securities, after
deducting the cost of such permanent insurance and related fees, significantly
in excess of the proceeds it would receive if such municipal securities were
sold without insurance. Payments received from municipal bond insurers may not
be tax-exempt income to shareholders of the Fund.
Depending upon the characteristics of the municipal security held by the
Fund, the annual premiums for the Policies are estimated to range from 0.10% to
0.25% of the value of the municipal securities covered under the Policies, with
an average annual premium rate of approximately 0.175%.
The Fund may purchase Policies from Municipal Bond Investors Assurance
Corp. ("MBIA"), AMBAC Indemnity Corporation ("AMBAC"), Financial Guaranty
Insurance Company ("FGIC"), each as described under "Municipal Bond Insurers",
or any other municipal bond insurer which is rated at least Aa by Moody's
Investors Service Inc ("Moody's") or AA by Standards & Poor's Ratings Service
("S&P"). Each Policy guarantees the payment of principal and interest on those
municipal securities it insures. The Policies will have the same general
characteristics and features. A municipal security will be eligible for coverage
if it meets certain requirements set forth in a Policy. In the event interest or
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principal on an insured municipal security is not paid when due, the insurer
covering the security will be obligated under its Policy to make such payment
not later than 30 days after it has been notified by the Fund that such
non-payment has occurred.
MBIA, AMBAC, and FGIC will not have the right to withdraw coverage on
securities insured by their Policies so long as such securities remain in the
Fund's portfolio, nor may MBIA, AMBAC, or FGIC cancel their Policies for any
reason except failure to pay premiums when due. MBIA, AMBAC, and FGIC will
reserve the right at any time upon 90 days' written notice to the Fund to refuse
to insure any additional municipal securities purchased by the Fund after the
effective date of such notice. The Fund's investment adviser will reserve the
right to terminate any of the Policies if it determines that the benefits to the
Fund of having its portfolio insured under such Policy are not justified by the
expense involved.
Additionally, the Fund's investment adviser reserves the right to enter
into contracts with insurance carriers other than MBIA, AMBAC, or FGIC, if such
carriers are rated Aaa by Moody's or AAA by S&P.
Under the Policies, municipal bond insurers unconditionally guarantee to
the Fund the timely payment of principal and interest on the insured municipal
securities when and as such payments shall become due but shall not be paid by
the issuer, except that in the event of any acceleration of the due date of the
principal by reason of mandatory or optional redemption (other than acceleration
by reason of mandatory sinking fund payments), default or otherwise, the
payments guaranteed will be made in such amounts and at such times as payments
of principal would have been due had there not been such acceleration. The
municipal bond insurers will be responsible for such payments less any amounts
received by the Fund from any trustee for the municipal bond holders or from any
other source. The Policies do not guarantee payment on an accelerated basis, the
payment of any redemption premium, the value for the shares of the Fund, or
payments of any tender purchase price upon the tender of the municipal
securities. The Policies also do not insure against nonpayment of principal of
or interest on the securities resulting from the insolvency, negligence or any
other act or omission of the trustee or other paying agent for the securities.
However, with respect to small issue industrial development municipal bonds and
pollution control revenue municipal bonds covered by the Policies, the municipal
bond insurers guarantee the full and complete payments required to be made by or
on behalf of an issuer of such municipal securities if there occurs any change
in the tax-exempt status of interest on such municipal securities, including
principal, interest or premium payments, if any, as and when required to be made
by or on behalf of the issuer pursuant to the terms of such municipal
securities. A when-issued municipal security will be covered under the Policies
upon the settlement date of the original issue of such when-issued municipal
securities. In determining whether to insure municipal securities held by the
Fund, each municipal bond insurer has applied its own standard, which
corresponds generally to the standards it has established for determining the
insurability of new issues of municipal securities. This insurance is intended
to reduce financial risk, but the cost thereof and compliance with investment
restrictions imposed under the Policies and these guidelines will reduce the
yield to shareholders of the Fund.
If a Policy terminates as to municipal securities sold by the Fund on the
date of sale, in which event municipal bond insurers will be liable only for
those payments of principal and interest that are then due and owing, the
provision for insurance will not enhance the marketability of securities held by
the Fund, whether or not the securities are in default or subject to significant
risk of default, unless the option to obtain permanent insurance is exercised.
On the other hand, since issuer-obtained insurance will remain in effect as long
as the insured municipal securities are outstanding, such insurance may enhance
the marketability of municipal securities covered thereby, but the exact effect,
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if any, on marketability cannot be estimated. The Fund generally intends to
retain any securities that are in default or subject to significant risk of
default and to place a value on the insurance, which ordinary will be the
difference between the market value of the defaulted security and the market
value of similar securities of minimum high grade (i.e., rated A by Moody's or
S&P) that are not in default. To the extent that the Fund holds defaulted
securities, it may be limited in its ability to manage its investment and to
purchase other municipal securities. Except as described above with respect to
securities that are in default or subject to significant risk of default, the
Fund will not place any value on the insurance in valuing the municipal
securities that it holds.
Municipal Bond Insurers (High Grade)
Municipal bond insurance may be provided by one or more of the following
insurers or any other municipal bond insurer which is rated at least Aaa by
Moody's or AAA by S&P.
Municipal Bond Investors Assurance Corp. (High Grade)
Municipal Bond Investors Assurance Corp. is a wholly-owned subsidiary of
MBIA, Inc., a Connecticut insurance company, which is owned by AEtna Life and
Casualty, Credit Local DeFrance CAECL, S.A., The Fund American Companies, and
the public. The investors of MBIA, Inc. are not obligated to pay the obligations
of MBIA. MBIA, domiciled in New York, is regulated by the New York State
Insurance Department and licensed to do business in various states. The address
of MBIA is 113 King Street, Armonk, New York, 10504, and its telephone number is
(914) 273-4345. S&P has rated the claims-paying ability of MBIA AAA.
AMBAC Indemnity Corporation (High Grade)
AMBAC Indemnity Corporation is a Wisconsin-domiciled stock insurance
company, regulated by the Insurance Department of Wisconsin, and licensed to do
business in various states. AMBAC is a wholly-owned subsidiary of AMBAC, Inc., a
financial holding company which is owned by the public. Copies of certain
statutorily required filings of AMBAC can be obtained from AMBAC. The address of
AMBAC's administrative offices is One State Street Plaza, 17th Floor, New York,
New York, 10004, and its telephone number is (212) 668-0340.
S&P has rated the claims-paying ability of AMBAC AAA.
Financial Guaranty Insurance Company (High Grade)
Financial Guaranty Insurance Company is a wholly-owned subsidiary of FGIC
Corporation, a Delaware holding company. FGIC Corporation is wholly-owned by
General Electric Capital Corporation. The investors of FGIC Corporation are not
obligated to pay the debts of or the claims against Financial Guaranty.
Financial Guaranty is subject to regulation by the state of New York Insurance
Department and is licensed to do business in various states. The address of
Financial Guaranty is 115 Broadway, New York, New York, 10006, and its telephone
number is (212) 312-3000. S&P has rated the claims-paying ability of Financial
Guaranty AAA.
Municipal Bonds
The two principal classifications of municipal bonds are "general
obligation" bonds and "revenue bonds". General obligation bonds are secured by
the issuer's pledge of its full faith, credit and unlimited taxing power for the
payment of principal and interest. Revenue or special tax bonds are payable only
from the revenues derived from a particular facility or class of facilities or
projects or, in a few cases, from the proceeds of a special excise or other tax,
but are not supported by the issuer's power to levy general taxes. There are, of
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course, variations in the security of municipal bonds, both within a particular
classification and between classifications, depending on numerous factors. The
yields of municipal bonds depend on, among other things, general money market
conditions, general conditions of the municipal bond market, size of a
particular offering, the maturity of the obligations and rating of the issue.
Since the Funds may invest in industrial development bonds, the Funds may
not be appropriate investment for entities which are "substantial users" of
facilities financed by industrial development bonds or for investors who are
"related persons". Generally, an individual will not be a "related person" under
the Internal Revenue Code of 1986 (the "Code") unless such investor or his
immediate family (spouse, brothers, sisters and lineal descendants) own directly
or indirectly in the aggregate more than 50 percent of the value of the equity
of a corporation or partnership which is a "substantial user" of a facility
financed from proceeds of "industrial development bonds". A "substantial user"
of such facilities is defined generally as a "non-exempt person who regularly
uses a part of a facility" financed from the proceeds of industrial development
bonds.
As set forth in the Prospectus, the Code establishes new unified volume
caps for most "private purpose" municipal bonds (such as industrial development
bonds and obligations to finance low-interest mortgages on owner-occupied
housing and student loans). The unified volume cap is not expected to affect
adversely the availability of municipal bonds for investment by the Funds;
however, it is possible that proposals will be introduced before Congress to
further restrict or eliminate the federal income tax exemption for interest on
Municipal Obligations. Any such proposals, if enacted, could adversely affect
the availability of municipal bonds for investment by the Funds and the value of
each Fund's portfolio might be affected. In that event, each Fund might
reevaluate its investment policies and restrictions and consider recommending to
its shareholders changes in both.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS
.........Except as noted, the investment restrictions set forth below are
fundamental and may not be changed with respect to each Fund without the
affirmative vote of a majority of the outstanding voting securities of the Fund.
Where an asterisk (*) appears after a Fund's name, the relevant policy is
non-fundamental with respect to that Fund and may be changed by the Fund's
investment adviser without shareholder approval, subject to review and approval
by the Trustees. As used in this Statement of Additional Information and in the
Prospectus, "a majority of the outstanding voting securities of the Fund" means
the lesser of (1) the holders of more than 50% of the outstanding shares of
beneficial interest of the Fund or (2) 67% of the shares present if more than
50% of the shares are present at a meeting in person or by proxy.
1........Concentration of Assets in Any One Issuer
.........None of Florida High Income, Short-Intermediate or
Short-Intermediate-CA may invest more than 5% of its total assets, at the time
of the investment in question, in the securities of any one issuer other than
the U.S. government and its agencies or instrumentalities, except that up to 25%
of the value of each Fund's total assets may be invested without regard to such
5% limitation. For this purpose each political subdivision, agency, or
instrumentality and each multi-state agency of which a state is a member, and
each public authority which issues industrial development bonds on behalf of a
private entity, will be regarded as a separate issuer for determining the
diversification of each Fund's portfolio.
With respect to 75% of the value of its total assets, High Grade will not
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purchase securities of any one issuer (other than cash, cash items or securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities)
if as a result more than 5% of the value of its total assets would be invested
in the securities of that issuer.
Under this limitation, each governmental subdivision, including states and
the District of Columbia, territories, possessions of the United States, or
their political subdivisions, agencies, authorities, instrumentalities, or
similar entities, will be considered a separate issuer if its assets and
revenues are separate from those of the governmental body creating it and the
security is backed only by its own assets and revenues.
Industrial development bonds, backed only by the assets and revenues of a
nongovernmental issuer, are considered to be issued solely by that issuer. If,
in the case of an industrial development bond or governmental-issued security, a
governmental or other entity guarantees the security, such guarantee would be
considered a separate security issued by the guarantor as well as the other
issuer, subject to limited exclusions allowed by the Investment Company Act of
1940.
2........Ten Percent Limitation on Securities of Any One Issuer
.........Short-Intermediate-CA, Florida High Income*, and Short-Intermediate may
not purchase more than 10% of any class of securities (voting securities in the
case of Florida High Income* and Short-Intermediate) of any one issuer other
than the U.S. government and its agencies or instrumentalities.
3........Investment for Purposes of Control or Management
.........None of Florida High Income, Short-Intermediate or
Short-Intermediate-CA may invest in companies for the purpose of exercising
control or management.
4........Purchase of Securities on Margin
.........None of Florida Municipal Bond, Georgia Municipal Bond, New Jersey Tax
Free, North Carolina Municipal Bond, South Carolina Municipal Bond, Virginia
Municipal Bond, Florida High Income*, High Grade, Short-Intermediate or
Short-Intermediate-CA may purchase securities on margin, except that each Fund
may obtain such short-term credits as may be necessary for the clearance of
transactions. A deposit or payment by a Fund of initial or variation margin in
connection with financial futures contracts or related options transactions is
not considered the purchase of a security on margin.
5........Unseasoned Issuers
.........None of Florida Municipal Bond*, Georgia Municipal Bond*, North
Carolina Municipal Bond*, South Carolina Municipal Bond*, Virginia Municipal
Bond* or High Grade* will invest more than 5% of its total assets in industrial
development bonds (and, in the case of High Grade, other municipal securities)
where the principal and interest are the responsibility of companies (or
guarantors, where applicable) with less than three years of continuous
operations, including the operation of any predecessor.
.........None of Florida High Income*, Short-Intermediate or
Short-Intermediate-CA may invest more than 5% of its total assets in securities
of unseasoned issuers (taxable securities of unseasoned issuers for
Short-Intermediate and Short-Intermediate-CA) that have been in continuous
operation for less than three years, including operating periods of their
predecessors, except that no such limitation shall apply to the extent that (i)
each Fund may invest in obligations issued or guaranteed by the U.S. government
and its agencies or instrumentalities, (ii) Short-Intermediate and
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Short-Intermediate-CA may invest in municipal securities, and (iii) Florida High
Income* may invest in municipal bonds.
6........Underwriting
.........None of Florida Municipal Bond, Georgia Municipal Bond, New Jersey Tax-
Free, North Carolina Municipal Bond, South Carolina Municipal Bond, Virginia
Municipal Bond, High Grade, Florida High Income*, Short-Intermediate or
Short-Intermediate-CA may engage in the business of underwriting the securities
of other issuers, provided that the purchase of municipal securities or other
permitted investments, directly from the issuer thereof (or from an underwriter
for an issuer) and the later disposition of such securities in accordance with a
Fund's investment program shall not be deemed to be an underwriting.
7........Interests in Oil, Gas or Other Mineral Exploration or Development
Programs
.........Neither Florida High Income, Short-Intermediate nor
Short-Intermediate-CA may purchase, sell or invest in interests in oil, gas or
other mineral exploration or development programs.
.........Florida Municipal Bond*, Georgia Municipal Bond*, North Carolina
Municipal Bond*, South Carolina Municipal Bond*, Virginia Municipal Bond*, or
High Grade will not purchase interests in or sell oil, gas or other mineral
exploration or development programs or leases, although they may purchase the
securities of issuers which invest in or sponsor such programs.
8........Concentration in Any One Industry
.........Neither New Jersey Tax Free, Short-Intermediate, nor
Short-Intermediate-CA may invest 25% or more of its total assets in the
securities of issuers conducting their principal business activities in any one
industry; provided, that this limitation shall not apply (i) with respect to
each Fund, to obligations issued or guaranteed by the U.S. government or its
agencies or instrumentalities and to municipal securities, or (ii) with respect
to New Jersey Tax-Free and Short-Intermediate-CA to certificates of deposit
and bankers' acceptances issued by domestic branches of U.S. banks or (iii)
with respect to New Jersey Tax-Free to municipal obligations.
.........Florida Municipal Bond, Georgia Municipal Bond, North Carolina
Municipal Bond, South Carolina Municipal Bond, Virginia Municipal Bond, High
Grade and Florida High Income will not purchase securities if, as a result of
such purchase, 25% or more of the value of their total assets would be invested
in any one industry, or in industrial development bonds or other securities, the
interest upon which is paid from revenues of similar types of projects. However,
the Fund may invest as temporary investments more than 25% of the value of
theirtotal assets in cash or cash items, securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, or instruments secured by
these money market instruments, such as repurchase agreements.
9........Warrants
.........None of Florida High Income*, Short-Intermediate or
Short-Intermediate-CA may invest more than 5% of its total net assets in
warrants, and, of this amount, no more than 2% of each Fund's total net assets
may be invested in warrants that are listed on neither the New York nor the
American Stock Exchange.
10.......Ownership by Trustees/Officers
.........None of Florida Municipal Bond*, Georgia Municipal Bond*, North
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Carolina Municipal Bond*, South Carolina Municipal Bond*, Virginia Municipal
Bond*, High Grade*, Florida High Income*, Short-Intermediate or
Short-Intermediate-CA may purchase or retain the securities of any issuer if (i)
one or more officers or Trustees of a Fund or its investment adviser
individually owns or would own, directly or beneficially, more than 1/2 of 1% of
the securities of such issuer, and (ii) in the aggregate, such persons own or
would own, directly or beneficially, more than 5% of such securities.
11.......Short Sales
.........High Grade and Florida High Income* will not make short sales of
securities or maintain a short position, unless at all times when a short
position is open a Fund owns an equal amount of such securities or of securities
which, without payment of any further consideration are convertible into or
exchangeable for securities of the same issue as, and equal in amount to, the
securities sold short. The use of short sales will allow the Funds to retain
certain bonds in their portfolios longer than it would without such sales. To
the extent that a Fund receives the current income produced by such bonds for a
longer period than it might otherwise, a Fund's investment objective is
furthered.
.........Florida Municipal Bond, Georgia Municipal Bond, North Carolina
Municipal Bond, South Carolina Municipal Bond, Virginia Municipal Bond,
Short-Intermediate and Short- Intermediate-CA will not sell any securities short
or maintain a short position.
12.......Lending of Funds and Securities
.........None of Florida High Income, Short-Intermediate or
Short-Intermediate-CA may lend its funds to other persons, provided that each
Fund may purchase issues of debt securities, acquire privately negotiated loans
made to municipal borrowers and enter into repurchase agreements.
.........Neither Florida High Income* nor Short-Intermediate may lend its
portfolio securities, unless the borrower is a broker, dealer or financial
institution that pledges and maintains collateral with the Fund consisting of
cash or securities issued or guaranteed by the U.S. government having a value at
all times not less than 100% of the current market value of the loaned
securities, including accrued interest, provided that the aggregate amount of
such loans shall not exceed 30% of the Fund's total assets.
.........Short-Intermediate-CA may not lend its portfolio securities, unless the
borrower is a broker, dealer or financial institution that pledges and maintains
collateral with the Fund consisting of cash, letters of credit or securities
issued or guaranteed by the U.S. government having a value at all times not less
than 100% of the current market value of the loaned securities, including
accrued interest, provided that the aggregate amount of such loans shall not
exceed 30% of the Fund's total assets.
.........Florida Municipal Bond, Georgia Municipal Bond, North Carolina
Municipal Bond, South Carolina Municipal Bond and Virginia Municipal Bond will
not lend any of their assets, except portfolio securities up to one-third of the
value of their total assets. Each Fund may, however, acquire publicly or
non-publicly issued municipal bonds or temporary investments or enter into
repurchase agreements in accordance with its investment objective, policies and
limitations or the Declaration of Trust.
.........High Grade will not lend any of its assets except that it may purchase
or hold money market instruments, including repurchase agreements and variable
amount demand master notes in accordance with its investment objective, policies
and limitations and it may lend portfolio securities valued at not more than 15%
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of its total assets to broker-dealers.
13.......Commodities
.........Florida High Income* may not purchase, sell or invest in physical
commodities unless acquired as a result of ownership of securities or other
instruments (but this shall not prevent the Fund from purchasing or selling
options and futures contracts or from investing in securities or other
instruments backed by physical commodities).
.........Neither Short-Intermediate nor Short-Intermediate-CA may purchase, sell
or invest in commodities, commodity contracts or financial futures contracts.
........New Jersey Tax-Free and High Grade will not purchase or sell
commodities or commodity contracts.
.........Florida Municipal Bond, Georgia Municipal Bond, North Carolina
Municipal Bond, South Carolina Municipal Bond and Virginia Municipal Bond will
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not purchase or sell commodities. However, each Fund may purchase put and call
options on portfolio securities and on financial futures contracts. In addition,
each Fund reserves the right to hedge its portfolio by entering into financial
futures contracts and to sell puts and calls on financial futures contracts.
14.......Real Estate
.........Florida Municipal Bond, Georgia Municipal Bond, North Carolina
Municipal Bond, South Carolina Municipal Bond and Virginia Municipal Bond will
not buy or sell real estate, including limited partnership interests, although
each Fund may invest in municipal bonds secured by real estate or interests in
real estate.
.........Florida High Income* may not purchase, sell or invest in real estate or
interests in real estate, except that it may purchase, sell or invest in
marketable securities of companies holding real estate or interests in real
estate, including real estate investment trusts.
.........High Grade will not buy or sell real estate, although it may invest in
securities of companies whose business involves the purchase or sale of real
estate or in securities which are secured by real estate or interests in real
estate.
.........Neither Short-Intermediate nor Short-Intermediate-CA may purchase, sell
or invest in real estate or interests in real estate, except that each Fund may
purchase municipal securities and other debt securities secured by real estate
or interests therein.
.........New Jersey Tax-Free will not purchase or sell real estate except that
it may purchase municipal obligations or other securities issued by companies
which invest in real estate or securities issued by companies which invest in
real estate or interests therein.
15.......Borrowing, Senior Securities, Reverse Repurchase Agreements
.........Neither Short-Intermediate nor Short-Intermediate-CA nor Florida High
Income may borrow money, issue senior securities or enter into reverse
repurchase agreements, except for temporary or emergency purposes, and not for
leveraging, and then in amounts not in excess of 10% of the value of each Fund's
total assets at the time of such borrowing; or mortgage, pledge or hypothecate
any assets except in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or 10% of the value of each
Fund's total assets at the time of such borrowing, provided that
Short-Intermediate and Short-Intermediate-CA will not purchase any securities at
any time when borrowings, including reverse repurchase agreements, are
outstanding. No Fund will enter into reverse repurchase agreements exceeding 5%
of the value of its total assets.
.........Florida Municipal Bond, Georgia Municipal Bond, North Carolina
Municipal Bond, South Carolina Municipal Bond, Virginia Municipal Bond and High
Grade will not issue senior securities, except each Fund may borrow money
directly or through reverse repurchase agreement as a temporary measure for
extraordinary or emergency purposes in an amount up to one-third of the value of
its total assets, including the amount borrowed, in order to meet redemption
requests without immediately selling portfolio instruments; and except to the
15
<PAGE>
extent a Fund will enter into futures contracts. Any such borrowings need not be
collateralized. No Fund will purchase any securities while borrowings in excess
of 5% of its total assets are outstanding. No Fund will borrow money or engage
in reverse repurchase agreements for investment leverage purposes. None of
Florida Municipal Bond*, Georgia Municipal Bond*, North Carolina Municipal
Bond*, South Carolina Municipal Bond*, Virginia Municipal Bond* or High Grade
will mortgage, pledge or hypothecate any assets except to secure permitted
borrowings. In those cases, High Grade may pledge assets having a market value
not exceeding the lesser of the dollar amounts borrowed or 15% of the value of
total assets at the time of borrowing. Margin deposits for the purchase and sale
of financial futures contracts and related options and segregation or collateral
arrangements made in connection with options activities and the purchase of
securities on a when-issued basis are not deemed to be a pledge.
16.......Joint Trading
.........Florida High Income may not participate on a joint or joint and several
basis in any trading account in any securities. (The "bunching of orders for the
purchase or sale of portfolio securities with its investment adviser or accounts
under its management to reduce brokerage commissions, to average prices among
them or to facilitate such transactions is not considered a trading account in
securities for purposes of this restriction).
.........New Jersey Tax-Free will not issue senior securities, borrow money
or pledge or mortgage its assets, except that the Fund may borrow from banks up
to 10% of the value of its total net assets for temporary or emergency purposes
only to meet anticipated redemption requirements. The Fund will not purchase
securities while any such borrowings are outstanding.
17.......Options
.........Neither New Jersey Tax Free, Short-Intermediate nor
Short-Intermediate-CA may write, purchase or sell put or call options, or
combinations thereof, except that each Fund may purchase securities with rights
to put securities to the seller in accordance with its investment program.
18.......Investing in Securities of Other Investment Companies
.........Florida Municipal Bond*, Georgia Municipal Bond*, North Carolina
Municipal Bond*, South Carolina Municipal Bond*, Virginia Municipal Bond* and
High Grade will purchase securities of investment companies only in open-market
transactions involving customary broker's commissions. However, these
limitations are not applicable if the securities are acquired in a merger,
consolidation or acquisition of assets. It should be noted that investment
companies incur certain expenses such as management fees and therefore any
investment by a Fund in shares of another investment company would be subject to
such duplicate expenses.
.........Florida High Income*, New Jersey Tax-Free, Short-Intermediate* and
Short-Intermediate-CA* may not purchase the securities of other investment
companies, except to the extent such purchases are not prohibited by applicable
law.
19.......Restricted Securities
16
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.........High Grade will not invest more than 10% of its total assets in
securities subject to restrictions on resale under the Federal securities laws.
.........New Jersey Tax-Free will not purchase restricted securities, which are
securities that must be registered under the Securities Act of 1933 before they
may be offered or sold to the public. This restriction does not apply to
restricted securities which are determined to be liquid by the Fund's
investment adviser under supervision of the Board of Trustees.
20.......Investment in Municipal Securities
.........Neither Short-Intermediate nor Short-Intermediate-CA may invest more
than 20% of its total assets in securities other than, in the case of
Short-Intermediate, municipal securities, and in the case of
Short-Intermediate-CA, California municipal securities (as described under
"Description of the Funds - Investment Objectives and Policies" in the Funds'
Prospectus), unless extraordinary circumstances dictate a more defensive
posture.
.........Florida High Income will invest, under normal market conditions, at
least 80% of its net assets in municipal securities and at least 90% of such
assets will be invested in Florida obligations.
21.......Equity Securities
New Jersey Tax-Free may not purchase equity securities or securities
convertible into equity securities.
NON FUNDAMENTAL OPERATING POLICIES
.........Certain Funds have adopted additional non-fundamental operating
policies. Operating policies may be changed by the Board of Trustees without a
shareholder vote.
1........Securities Issued by Government Units; Industrial Development Bonds
.........Short-Intermediate has determined not to invest more than 25% of its
total assets (i) in securities issued by governmental units located in any one
state, territory or possession of the United States (but this limitation does
not apply to project notes backed by the full faith and credit of the U.S.
government) or (ii) industrial development bonds not backed by bank letters of
credit. In addition, Short-Intermediate-CA has determined not to invest more
than 25% of its total assets in industrial development bonds not backed by bank
letters of credit.
2........Illiquid Securities.
.........Florida Municipal Bond, Georgia Municipal Bond, North Carolina
Municipal Bond, South Carolina Municipal Bond, Virginia Municipal Bond, High
Grade, Short-Intermediate and Short-Intermediate-CA may not invest more than 15%
(10% in the case of High Grade) of their net assets in illiquid securities and
other securities which are not readily marketable, including repurchase
agreements which have a maturity of longer than seven days, but excluding
certain securities and municipal leases determined by the Trustees to be liquid.
17
<PAGE>
3........Other. In order to comply with certain state blue sky limitations:
-----
...........Each of Short-Intermediate and Short-Intermediate-CA interprets
fundamental investment restriction 7 to prohibit investments in oil, gas and
mineral leases.
...........Each of Short-Intermediate and Short-Intermediate-CA interprets
fundamental investment restriction 14 to prohibit investment in real estate
limited partnerships which are not readily marketable.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a violation
of such restriction.
The Funds (other than Short-Intermediate, Short-Intermediate-CA and Florida
High Income) have no present intention to borrow money or invest in reverse
repurchase agreements in excess of 5% of the value of their net assets during
the coming fiscal year. The Funds did not invest more than 5% of their net
assets in securities of other investment companies in the last fiscal year, and
have no present intent to do so during the coming year.
For purposes of their policies and limitations, the Funds consider
certificates of deposit and demand and time deposits issued by a U.S. branch of
a domestic bank or savings and loan having capital, surplus, and undivided
profits in excess of $100,000,000 at the time of investment to be "cash items".
.........High Grade does not intend to invest more than 25% of the value of its
assets in any issuer in a single state.
MANAGEMENT
The age, address and principal occupation of the Trustees and executive
officers of The Evergreen Municipal Trust, the Evergreen Tax Free Trust
(formerly, FFB Funds Trust) and Evergreen Investment Trust (formerly, First
Union Funds) (each a "Trust") and collectively the "Trust") during the
past five years are set forth below.
Laurence B. Ashkin (68), 180 East Pearson Street, Chicago, IL-Trustee. Real
estate developer and construction consultant since 1980; President of Centrum
Equities since 1987 and Centrum Properties, Inc. since 1980.
Foster Bam (69), Greenwich Plaza, Greenwich, CT-Trustee. Partner in the law firm
of Cummings and Lockwood since 1968.
James S. Howell (72), 4124 Crossgate Road, Charlotte, NC-Chairman and Trustee.
Retired Vice President of Lance Inc. (food manufacturing); Chairman of the
Distribution Comm. Foundation for the Carolinas from 1989 to 1993.
Gerald M. McDonnell (57), 209 East Nucor Rd. Norfolk, NE, NC-Trustee.
Sales Representative with Nucor-Yamoto Inc. (steel producer) since 1988.
18
<PAGE>
Thomas L. McVerry (58), 4419 Parkview Drive, Charlotte, NC-Trustee. Director of
Carolina Cooperative Federal Credit Union since 1990 and Rexham Corporation from
1988 to 1990; Vice President of Rexham Industries, Inc. (diversified
manufacturer) from 1989 to 1990; Vice President-Finance and Resources, Rexham
Corporation from 1979 to 1990.
William Walt Pettit*(41), Holcomb and Pettit, P.A., 227 West Trade St.,
Charlotte, NC-Trustee. Partner in the law firm Holcomb and Pettit, P.A. since
1990; Attorney, Clontz and Clontz from 1980 to 1990.
Russell A. Salton, III, M.D. (49) 205 Regency Executive Park, Charlott,
NC-Trustee. Medical Director, U.S. Healthcare of Charlotte, North Carolina since
1995, President, Primary Physician Care from 1990 to 1996.
Michael S. Scofield (53), 212 S. Tryon Street Suite 1280, Charlotte,
NC-Trustee. Attorney, Law Offices of Michael S. Scofield since 1969.
Robert J. Jeffries (73), 2118 New Bedford Drive, Sun City Center, FL-Trustee
Emeritus. Corporate consultant since 1967.
John J. Pileggi (37), 237 Park Avenue, Suite 910, New York, NY-President and
Treasurer. Senior Managing Director, Furman Selz LLC since 1992, Managing
Director from 1984 to 1992.
Joan V. Fiore (40), 237 Park Avenue, Suite 910, New York, NY-Secretary. Managing
Director and Counsel, Furman Selz LLC since 1991; Staff Attorney, Securities and
Exchange Commission from 1986 to 1991.
The officers listed above hold the same positions with thirteen investment
companies offering a total of forty-three investment funds within the Evergreen
mutual fund complex. Messrs. Howell, Salton and Scofield are Trustees of all
thirteen investment companies. Messrs. McDonnell, McVerry and Pettit are
Trustees of twelve of the investment companies (excluded is Evergreen Variable
Trust). Messrs. Ashkin, Bam and Jeffries are Trustees of eleven of the
investment companies (excluded are Evergreen Variable Trust and Evergreen
Investment Trust).
- - --------
* Mr. Pettit may each be deemed to be an "interested person" within the
meaning of the Investment Company Act of 1940, as amended (the "1940 Act").
The officers of the Trusts are all officers and/or employees of Furman
Selz LLC. Furman Selz LLC is an affiliate of Evergreen Funds Distributor, Inc.,
the distributor of each Class of shares of each Fund.
The Funds do not pay any direct remuneration to any officer or Trustee
who is an "affiliated person" of either First Union National Bank of North
Carolina or Evergreen Asset Management Corp. or their affiliates. See
"Investment Adviser." Currently, none of the Trustees is an "affiliated person"
as defined in the 1940 Act. The Evergreen Municipal Trust and Evergreen
Investment Trust pay each Trustee who is not an "affiliated person" an annual
retainer and fee per meeting attended, plus expenses. The Evergreen Tax Free
Trust pays each Trustee who is not an "affiliated person a fee per meeting
attended, plus expenses, as follows:
19
<PAGE>
Name of Trust/Fund Annual Retainer Meeting Fee
The Evergreen Municipal Trust - $ 4,000*
Florida High Income $100
Short-Intermediate $100
Short-Intermediate-CA $100
Evergreen Investment Trust - $15,000** $2,000**
Florida Municipal Bond
Georgia Municipal Bond
North Carolina Municipal Bond
South Carolina Municipal Bond
Virginia Municipal Bond
High Grade
Evergreen Tax Free Trust $ 0 $100
New Jersey Tax-Free
- ------------------------
* Allocated among the Evergreen Money Market Trust, which offers three
investment series (Evergreen Money Market Fund, Evergreen Institutional Money
Market Fund and Evergreen Institutional Treasury Money Market Fund), and the
Evergreen Municipal Trust, which offers five investment series (Evergreen Tax
Exempt Money Market Fund, Evergreen Short-Intermediate Municipal Fund, Evergreen
Short-Intermediate Municipal Fund-California, Evergreen Florida High Income
Municipal Bond Fund and Evergreen Institutional Tax-Exempt Money Market Fund).
** The annual retainer and the per meeting fee paid by Evergreen Investment
Trust to each Trustee are allocated among its fourteen series.
In addition:
(1) Each non-affiliated Trustee is paid a fee of $500 for each special
telephonic meeting in which he participates, regardless of the number of Funds
for which the meeting is called.
(2) The Chairman of the Board of the Evergreen Group of mutual funds is paid an
annual retainer of $5,000, and the Chairman of the Audit Committee is paid an
annual retainer of $2,000. These retainers are allocated among all the funds in
the Evergreen group of mutual funds, based upon assets.
(3) Each member of the Audit Committee is paid an annual retainer of $500.
(4) Any individual who has been appointed as a Trustee Emeritus of one or more
funds in the Evergreen Group of mutual funds is paid one-half of the fees that
are payable to regular Trustees.
Set fourth below for each of the Trustees is the aggregate compensation
paid to such Trustees by each of The Evergreen Municipal Trust and Evergreen
Investment Trust for the fiscal year ended August 31, 1996, and by Evergreen Tax
Free Trust for the period January 19, 1996 (the date of their election as
Trustees )through August 31, 1996:
20
<PAGE>
Total
Compensation
Aggregate Compensation From Each Trust From Trusts
The Evergreen Evergreen Evergreen & Fund
Name of Municipal Investment Tax Free Complex Paid
Trustee Trust Trust* Trust to Trustees
Laurence Ashkin 3,522 -0- 611 26,475
Foster Bam 3,522 -0- 611 26,475
James S. Howell 3,771 22,029 606 53,000
Robert J.
Jeffries** 2,170 -0- 311 15,238
Gerald M.
McDonnell 3,447 19,916 606 45,975
Thomas L.
McVerry 3,537 20,456 606 47,100
William Walt
Pettit 3,411 19,737 606 45,600
Russell A.
Salton, III, M.D. 3,411 19,737 606 48,750
Michael S.
Scofield 3,411 19,737 606 48,750
* Formerly known as First Union Funds.
** Robert J. Jeffries has been serving as a Trustee Emeritus since
January 1, 1996.
No officer or Trustee of the Trusts owned Class A or B shares of any Fund
as of the date hereof. The number and percent of outstanding Class Y shares of
of each Fund owned by officers and Trustees as a group on October 10, 1996 is as
follows:
No. of Shares Owned
By Officers and Ownership by Officers and
Trustees Trustees as a % of Class &
Name of Fund as a Group as a % of Fund
Florida Municipal Bond -0-
Georgia Municipal Bond -0-
North Carolina Municipal Bond 2,213 .24%
South Carolina Municipal Bond -0-
Virginia Municipal Bond -0-
Florida High Income -0-
High Grade 410,541 17.50%
Short-Intermediate 15,558 0.50%
Short-Intermediate-CA -0-
21
<PAGE>
New Jersey Tax-Free -0-
Set forth below is information with respect to each person, who, to
each Fund's knowledge, owned beneficially or of record more than 5% of a class
of each Fund's total outstanding shares and their aggregate ownership of the
Fund's total outstanding shares as of October 10, 1996.
Name of No. of % of
Name and Address Fund/Class Shares Class/Fund
- - ---------------- ---------- ------ ----------
First Union National Bank of NC North Carolina 347,331 90.93%/ 5.67%
Trust Accounts Municipal Bond/Y
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank of NC North Carolina 20,039 5.25%/ .33%
Trust Accounts Municipal Bond/Y
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo South Carolina 16,327 18.78%/ 1.40%
7RK0124218 Municipal Bond/A
Thomas B. Carr and
Louise R. Carr
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo South Carolina 5,943 6.84%/ .51%
Charles Dean Turner Municipal Bond/A
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo South Carolina 19,247 22.14%/ 1.65%
Mildred R. Robards Municipal Bond/A
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo South Carolina 5,407 6.22%/ .46%
Warren A. Ransom, Jr. Municipal Bond/A
Laurie P. Ransom
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo South Carolina 4,979 5.73%/ .43%
Virginia C. Thomas Municipal Bond/A
22
<PAGE>
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo South Carolina 28,220 6.44%/ 2.43%
Ruby B. Motsinger Municipal Bond/B
Joseph Glenn Motsinger
Tennants by Common
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank of NC* South Carolina 225,966 42.00%/ 19.42%
Trust Accounts Municipal Bond/Y
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank of NC* South Carolina 310,535 57.72%/ 26.69%
Trust Accounts Municipal Bond/Y
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
Duff M. Green Virginia 22,596 7.57%/ 1.66%
c/o First Union National Bank Municipal Bond/A
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo Virginia 17,966 6.02%/ 1.32%
David A. Hetzer and Municipal Bond/A
Iris L. Hetzer
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo Virginia 41,533 6.75%/ 3.05%
Harry S. Williams Municipal Bond/B
Patsy Williams
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank of NC* Virginia 332,285 74.33%/ 24.41%
Trust Accounts Municipal Bond/Y
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
23
<PAGE>
First Union National Bank of NC* Virginia 111,321 24.90%/ 8.18%
Trust Accounts Municipal Bond/Y
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
Merrill Lynch Pierce Fenner Florida
Private Client Group Municipal Bond/A 607,260 5.21%/ 3.81%
C/O FUBS
301 S. Tryon St.
Charlotte, NC 28288
First Union National Bank Florida 1,179,622 87.83%/ 7.40%
Trust Accounts Municipal Bond/Y
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank of NC* Florida 122,721 9.14%/ .77%
Trust Accounts Municipal Bond/Y
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo Georgia 11,087 5.23%/ .82%
Yasmin M. Dharamsi Municipal Bond/A
Farid M Dharamsi
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo Georgia 10,828 6.11/.76%
Yasmin M. Dharamsi Municipal Bond/A
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo Georgia 10,966 5.17%/ .81%
William F. Hill Jr. and Municipal Bond/A
Marvin Hill
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank of NC Georgia 135,291 79.67%/ 9.95%
Trust Accounts Municipal Bond/Y
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
24
<PAGE>
First Union National Bank of NC Georgia 31,929 18.80%/12.35%
Trust Accounts Municipal Bond/Y
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank of NC Fl.High Income 165,822 80.86%/1.68%
Trust Accounts Muni Bond/Y
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank of NC Fl.High Income 11,845 5.78%/.12%
Trust Accounts Muni Bond/Y
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
Merrill Lynch Fl.High Income 789,508 10.52%/8.02%
Trade House Account - Aid Muni Bond/A
c/o:FUBS & Co. FEBO
301 S.Tryon St.
Charlotte, NC 28288
First Union National Bank of NC High Grade/Y 515,367 22.07%/ 5.14%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
Foster & Foster High Grade/Y 405,595 17.37%/ 4.05%
P.O. Box 1669
c/o Lieber & Co.
2500 Westchester Ave.
Purchase, NY 10577
Fubs & Co. Febo ** Short-Intermediate/A 1,984,127 72.66%/28.87%
Irwin Belk
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. FBO Short-Intermediate/B 37,083 5.40%/ .54%
Mark E. Smith
Melissa A. Smith JT TEN
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
25
<PAGE>
Fubs & Co. FBO Short-Intermediate/B 48,961 7.13%/ .71%
Carl R. Nodine and
Linda F. Nodine
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Band/EB/INT Short-Intermediate/Y 417,133 12.07%/6.07%
Trust Account
Attn: Trust Operation Fund Group
401 S. Tryon St.
Charlotte, NC 28202-1911
Fubs & Co. Febo New Jersey Tax-Free/Y 649,555 76.42%/15.57%
Trust Accounts
Attn: Ginny Batten CMG-1151-2
C/O First Union National Bank
401 S. Tryon Street
Charlotte, NC 28202-1911
Fubs & Co. Febo New Jersey Tax-Free/Y 200,425 23.58%/4.80%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo New Jersey Tax-Free/B 26,116 8.82%/ 63%
Dominick J. Huster and
Grace D. Huster
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo New Jersey Tax-Free/B 18,978 6.41%/45%
Ralph Gangemi and
Alice Gangemi
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank of North Carolina and its affiliates act in
various capacities for numerous accounts. As a result of its ownership on
October 10, 1996, it may be deemed to "control" the Funds listed below, as that
term is defined in the 1940 Act.
Fund % of Ownership - Class % of Ownership - Fund
- ---- ---------------------- ---------------------
Evergreen VA Muni Bond 99.23% - Class(Y) 32.59%
Evergreen SC Muni Bond 84.08% - Class(Y) 46.12%
26
<PAGE>
** As a result of his ownership of 72.66% of Class A shares and 28.87% overall
of Evergreen Short-Intermediate Municipal Fund on October 10, 1996, Irwin Belk
may be deemed to "control" the Fund as that each term is defined in the 1940
Act.
INVESTMENT ADVISERS
(See also "Management of the Funds" in each Fund's Prospectus)
The investment adviser of Short-Intermediate and Short-Intermediate-CA is
Evergreen Asset Management Corp., a New York corporation, with offices at 2500
Westchester Avenue, Purchase, New York ("Evergreen Asset" or the "Adviser").
Evergreen Asset is owned by First Union National Bank of North Carolina ("FUNB"
or the "Adviser") which, in turn, is a subsidiary of First Union Corporation
("First Union"), a bank holding company headquartered in Charlotte, North
Carolina. The investment adviser of Florida Municipal Bond, Georgia Municipal
Bond, New Jersey Tax Free, North Carolina Municipal Bond, South Carolina
Municipal Bond, Virginia Municipal Bond, Florida High Income and High Grade is
FUNB which provides investment advisory services through its Capital Management
Group. The Directors of Evergreen Asset are Richard K. Wagoner and Barbara I.
Colvin. The executive officers of Evergreen Asset are Stephen A. Lieber,
Chairman and Co-Chief Executive Officer, Nola Maddox Falcone, President and
Co-Chief Executive Officer and Theodore J. Israel, Jr., Executive Vice
President.
On June 30, 1994, Evergreen Asset and Lieber and Company ("Lieber")
were acquired by First Union through certain of its subsidiaries. Evergreen
Asset was acquired by FUNB, a wholly-owned subsidiary (except for directors'
qualifying shares) of First Union, by merger into EAMC Corporation ("EAMC") a
wholly-owned subsidiary of FUNB. EAMC then assumed the name "Evergreen Asset
Management Corp." and succeeded to the business of Evergreen Asset.
Contemporaneously with the succession of EAMC to the business of Evergreen Asset
and its assumption of the name "Evergreen Asset Management Corp.", Short-
Intermediate and Short-Intermediate-CA entered into a new investment advisory
agreement with EAMC and into a distribution agreement with Evergreen Funds
Distributor, Inc. (the "Distributor"), an affiliate of Furman Selz LLC. At that
time, EAMC also entered into a new sub-advisory agreement with Lieber pursuant
to which Lieber provides certain services to Evergreen Asset in connection with
its duties as investment adviser.
The partnership interests in Lieber, a New York general partnership,
were acquired by Lieber I Corp. and Lieber II Corp., which are both wholly-owned
subsidiaries of FUNB. The business of Lieber is being continued. The new
advisory and sub-advisory agreements were approved by the shareholders of
Short-Intermediate and Short-Intermediate-CA at their meeting held on June 23,
1994, and became effective on June 30, 1994. Florida High Income, which
commenced operations on June 30, 1995, entered into an advisory agreement with
FUNB on June 30, 1995.
Prior to January 1, 1996, First Fidelity Bank, N.A. ("First Fidelity")
acted as investment adviser to New Jersey Tax-Free. On June 18, 1995, First
Union entered into an Agreement and Plan of Merger (the "Merger Agreement")
with First Fidelity Bancorporation ("FFB"), the corporate parent of First
Fidelity which provided, among other things, for the merger (the "Merger") of
FFB with and into a wholly-owned subsidiary of First Union. The Merger was
27
<PAGE>
consummated on January 1, 1996. As a result of the Merger, FUNB and Evergreen
Asset, succeeded to the investment advisory and administrative functions
currently performed by various units of First Fidelity.
Under its Investment Advisory Agreement with each Fund, each Adviser has
agreed to furnish reports, statistical and research services and recommendations
with respect to each Fund's portfolio of investments. In addition, each Adviser
provides office facilities to the Funds and performs a variety of administrative
services. Each Fund pays the cost of all of its other expenses and liabilities,
including expenses and liabilities incurred in connection with maintaining their
registration under the Securities Act of 1933, as amended, and the 1940 Act,
printing prospectuses (for existing shareholders) as they are updated, state
qualifications, share certificates, mailings, brokerage, custodian and stock
transfer charges, printing, legal and auditing expenses, expenses of shareholder
meetings and reports to shareholders. Notwithstanding the foregoing, each
Adviser will pay the costs of printing and distributing prospectuses used for
prospective shareholders.
The method of computing the investment advisory fee for each Fund is
described in such Fund's Prospectus. The advisory fees paid by each Fund for the
three most recent fiscal periods reflected in its registration statement are set
forth below:
FLORIDA MUNICIPAL
BOND Year Ended Period Ended Year Ended
8/31/96 8/31/95 12/31/94
Advisory Fee $803,741 $243,413 $171,732
Waiver (321,496) (73,661) (171,732)
-------- -------- ---------
Net Advisory Fee 482,245 169,752 $ 0
========= ========== ==========
Expense
Reimbursement (152,334) (46,864) (90,218)
-------- -------- ---------
GEORGIA MUNICIPAL
BOND Year Ended Period Ended Year Ended
8/31/96 8/31/95 12/31/94
Advisory Fee $63,102 $ 32,646 $36,674
Waiver (63,102) (32,646) (36,674)
-------- -------- --------
Net Advisory Fee $ 0 $ 0 $ 0
======== ======== =========
Expense
Reimbursement (176,832) (105,409) (189,746)
---------- ---------
NEW JERSEY
TAX FREE Year Ended Period Ended Year Ended
8/31/96 2/28/96 2/28/95
Advisory Fee $107,212 $190,195 $191,038
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Waiver (107,212) (190,195) (191,038)
---------- --------- --------
Net Advisory Fee $ 0 $ 0 $ 0
========== ========== ==========
Expense
Reimbursement ($47,673) $ 63,918 $107,952
--------- ---------- ----------
NORTH CAROLINA
MUNICIPAL BOND Year Ended Period Ended Year Ended
8/31/96 8/31/95 12/31/94
Advisory Fee $306,892 $190,284 $287,040
Waiver (164,001) (132,051) (193,158)
--------- --------- ---------
Net Advisory Fee $142,891 $ 58,233 $93,882
========== ========== ==========
Expense
Reimbursement -0- -0- (28,121)
--------- ---------- ----------
SOUTH CAROLINA
MUNICIPAL BOND Year Ended Period Ended Year Ended
8/31/96 8/31/95 12/31/94
Advisory Fee $ 40,781 $ 13,154 $8,905
Waiver (40,781) (13,154) (8,905)
-------- -------- --------
Net Advisory Fee $ 0 $ 0 $ 0
======== ======== ========
Expense
Reimbursement (213,820) (144,430) (177,387)
--------- --------- ----------
VIRGINIA
MUNICIPAL BOND Year Ended Period Ended Year Ended
8/31/96 8/31/95 12/31/94
Advisory Fee $51,952 $ 23,156 $24,942
Waiver (51,952) ($ 23,156) ($24,942)
Net Advisory Fee 0 0 0
======== ======== ========
Expense
Reimbursement (209,667) (120,876) (205,073)
--------- --------- --------
FLORIDA HIGH
INCOME Year Ended Year Ended
8/31/96 8/31/95
Advisory Fee $477,128 $123,320
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Waiver (238,564) (71,690)
--------- --------
Net Advisory Fee 238,564 $ 51,630
======== ========
Expense
Reimbursement 0 0
HIGH GRADE Year Ended Period Ended Year Ended
8/31/96 8/31/95 12/31/94
Advisory Fee $575,456 $338,767 $599,854
Waiver (228,548) ( 20,456) (16,091)
--------- --------- --------
Net Advisory Fee 346,908 $318,311 $583,763
========= ========= ==========
SHORT-INTERMEDIATE Year Ended Year Ended Year Ended
8/31/96 8/31/95 8/31/94
Advisory Fee $287,149 $263,947 $301,565
Waiver (109,619) ( 63,612) (150,194)
--------- -------- --------
Net Advisory Fee 177,530 $200,335 $151,371
======== ======== ========
Expense
Reimbursement (30,962) ( 28,521) $ 0
-------- -------- -------
SHORT-INTERMEDIATE-
CA Year Ended Year Ended Year Ended
8/31/96 8/31/95 8/31/94
Advisory Fee $109,714 $134,625 $164,447
Waiver (49,870) ( 48,955) (129,952)
------- -------- ---------
Net Advisory Fee $59,844 $ 85,670 $34,495
======= ======= =======
Expense
Reimbursement 0 0 0
-------- ------- ------
South Carolina Municipal Bond and Florida High Grade commenced
operations on January 4, 1994, and June 30, 1995, respectively, and, therefore,
the first year's figures set forth in the table above reflect investment
advisory fees paid for the period from commencement of operations through
December 31, 1994 for South Carolina Municipal Bond and, with respect to Florida
High Income, for the period from commencement of operations through August 31,
1995.
Expense Limitations
With respect to Short-Intermediate and Short-Intermediate CA, Evergreen
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Asset has agreed to reimburse each Fund to the extent that the Fund's aggregate
operating expenses (including the Adviser's fee but excluding interest, taxes,
brokerage commissions and extraordinary expenses, and, for Class A and Class B
shares Rule 12b-1 distribution fees and shareholder servicing fees payable)
exceed 1% of its average net assets for any fiscal year.
The Investment Advisory Agreements are terminable, without the payment of
any penalty, on sixty days' written notice, by a vote of the holders of a
majority of each Fund's outstanding shares, or by a vote of a majority of each
Trust's Trustees or by the respective Adviser. The Investment Advisory
Agreements will automatically terminate in the event of their assignment. Each
Investment Advisory Agreement provides in substance that the Adviser shall not
be liable for any action or failure to act in accordance with its duties
thereunder in the absence of willful misfeasance, bad faith or gross negligence
on the part of the Adviser or of reckless disregard of its obligations
thereunder. The Investment Advisory Agreements with respect to Florida High
Income, Short-Intermediate and Short-Intermediate-CA were approved by each
Fund's shareholders on June 23, 1994, became effective on June 30, 1994, (June
30, 1995 with respect to Florida High Income) was last approved on February
8,1996, and will continue in effect until April 30, 1997, (June 30, 1997 with
respect to Florida High Income) and thereafter from year to year provided that
their continuance is approved annually by a vote of a majority of the Trustees
of each Trust including a majority of those Trustees who are not parties thereto
or "interested persons" (as defined in the 1940 Act) of any such party, cast in
person at a meeting duly called for the purpose of voting on such approval or a
majority of the outstanding voting shares of each Fund. With respect to Florida
Municipal Bond, Georgia Municipal Bond, North Carolina Municipal Bond, South
Carolina Municipal Bond, Virginia Municipal Bond and High Grade, the Investment
Advisory Agreement dated February 28, 1985 and amended from time to time
thereafter was last approved by the Trustees of Evergreen Investment Trust
(formerly, First Union Funds) on February 8, 1996 and it will continue in effect
until April 30, 1997 and from year to year with respect to each Fund provided
that such continuance is approved annually by a vote of a majority of the
Trustees of Evergreen Investment Trust including a majority of those Trustees
who are not parties thereto or "interested persons" of any such party cast in
person at a meeting duly called for the purpose of voting on such approval or by
a vote of a majority of the outstanding voting securities of each Fund. With
respect to New Jersey Tax Free, the Investment Advisory Agreement dated January
1, 1996 was first approved by the shareholders of the Fund on December 12, 1995
and will continue until January 1, 1998 and from year to year with respect to
the Fund provided that such continuance is approved annually by a vote of a
majority of the Trustees of Evergreen Tax Free Trust including a majority of
those Trustees who are not parties thereto or "interested persons" of any such
party cast in person at a meeting duly called for the purpose of voting on such
approval or by a vote of a majority of the outstanding voting securities of the
Fund.
Certain other clients of each Adviser may have investment objectives
and policies similar to those of the Funds. Each Adviser (including the
sub-adviser) may, from time to time, make recommendations which result in the
purchase or sale of a particular security by its other clients simultaneously
with a Fund. If transactions on behalf of more than one client during the same
period increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price or quantity. It
is the policy of each Adviser to allocate advisory recommendations and the
placing of orders in a manner which is deemed equitable by the Adviser to the
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<PAGE>
accounts involved, including the Funds. When two or more of the clients of the
Adviser (including one or more of the Funds) are purchasing or selling the same
security on a given day from the same broker-dealer, such transactions may be
averaged as to price.
Although the investment objectives of the Funds are not the same, and
their investment decisions are made independently of each other, they rely upon
the same resources for investment advice and recommendations. Therefore, on
occasion, when a particular security meets the different investment objectives
of the various Funds, they may simultaneously purchase or sell the same
security. This could have a detrimental effect on the price and quantity of the
security available to each Fund. If simultaneous transactions occur, the Adviser
attempts to allocate the securities, both as to price and quantity, in
accordance with a method deemed equitable to each Fund and consistent with their
different investment objectives. In some cases, simultaneous purchases or sales
could have a beneficial effect, in that the ability of one Fund to participate
in volume transactions may produce better executions for that Fund.
Each Fund has adopted procedures under Rule 17a-7 of the 1940 Act to
permit purchase and sales transactions to be effected between each Fund and the
other registered investment companies for which either Evergreen Asset or FUNB
acts as investment adviser or between the Fund and any advisory clients of
Evergreen Asset, FUNB or Lieber. Each Fund may from time to time engage in such
transactions but only in accordance with these procedures and if they are
equitable to each participant and consistent with each participant's investment
objectives.
Prior to July 1, 1995, Federated Administrative Services, a subsidiary of
Federated Investors, provided legal, accounting and other administrative
personnel and support services to each of the portfolios of Evergreen Investment
Trust. The Trust paid a fee for such services at the following annual rate: .15%
on the first $250 million average daily net assets of the Trust; .125% on the
next $250 million; .10% on the next $250 million and .075% on assets in excess
of $250 million. On July 1, 1995, Evergreen Asset commenced providing
administrative services to each of the portfolios of Evergreen Investment Trust
and on January 19, 1996 Evergreen Asset commenced providing administrative
services to each of the portfolios of Evergreen Tax Free Trust for a fee based
on the average daily net assets of each fund administered by Evergreen Asset for
which Evergreen Asset or FUNB also serves as investment adviser, calculated
daily and payable monthly at the following annual rates: .050% on the first $7
billion; .035% on the next $3 billion; .030% on the next $5 billion; .020% on
the next $10 billion; .015% on the next $5 billion; and .010% on assets in
excess of $30 billion.
Prior to January 1, 1996, Furman Selz LLC acted as administrator for
New Jersey Tax Free. For the fiscal years ended February 28, 1994, 1995 and the
fiscal period ended January 18, 1996, Furman Selz LLC waived its entire
administrative fee.
Furman Selz LLC, an affiliate of the Distributor, serves as
sub-administrator to Florida Municipal Bond, Georgia Municipal Bond, North
Carolina Municipal Bond, South Carolina Municipal Bond, Virginia Municipal Bond,
High Grade and New Jersey Tax Free and is entitled to receive a fee from each
Fund calculated on the average daily net assets of each Fund at a rate based on
the total assets of the mutual funds administered by Evergreen Asset for which
FUNB or Evergreen Asset also serve as investment adviser, calculated in
accordance with the following schedule:
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<PAGE>
.0100% of the first $7 billion; .0075% on the next $3 billion; .0050% on the
next $15 billion; and .0040% on assets in excess of $25 billion. The total
assets of mutual funds administered by Evergreen Asset for which Evergreen Asset
or FUNB serve as investment adviser as of September 30, 1996 were approximately
$16 billion.
For the fiscal year ended August 31, 1996, the fiscal period ended August
31, 1995, and the year ended December 31, 1994 Florida Municipal Bond incurred
$81,881, $38,751 and $75,397 respectively, in administrative service costs, all
of which were voluntarily waived for the year ended December 31, 1994. For the
fiscal year ended August 31, 1996, the fiscal period ended August 31, 1995 and
the fiscal year ended December 31, 1994, Georgia Municipal Bond incurred $4,159,
$3,901 and $75,479, respectively, in administrative service costs, all of which
were voluntarily waived. For the fiscal year ended August 31, 1996, the fiscal
period ended August 31, 1995 and the fiscal year ended December 31, 1994, North
Carolina Municipal Bond incurred $31,447, $23,309 and $75,476, respectively, in
administrative service costs, of which $ 0, $0 and $28,121, respectively were
voluntarily waived. For the fiscal year ended August 31, 1996, the fiscal period
ended August 31, 1995, and the period January 3, 1994 (commencement of
operations) to December 31, 1994, South Carolina Municipal Bond incurred $4,123,
$1,451 and $104,356, respectively in administrative service costs, all of which
were voluntarily waived. For the fiscal year ended August 31, 1996, the fiscal
period ended August 31, 1995 and the fiscal year ended December 31, 1994,
Virginia Municipal Bond incurred $5,136, $2,701 and $75,479 ,respectively, in
administrative service costs, all of which were voluntarily waived. For the
fiscal year ended August 31, 1996, the fiscal period ended August 31, 1995 and
the fiscal year ended December 31, 1994, High Grade incurred $59,073, $50,406
and $101,004, respectively, in administrative service costs. For the fiscal
period from January 19, 1996 through August 31, 1996 New Jersey Tax-Free
incurred $9,468, in administrative service costs.
DISTRIBUTION PLANS
Reference is made to "Management of the Funds - Distribution Plans and
Agreements" in the Prospectus of each Fund for additional disclosure regarding
the Funds' distribution arrangements. Distribution fees are accrued daily and
paid monthly on the Class A and B shares and are charged as class expenses, as
accrued. The distribution fees attributable to the Class B 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 the Fund's
shares.
Under the Rule 12b-1 Distribution Plans that have been adopted by each
Fund with respect to each of its Class A and Class B shares (each a "Plan" and
collectively, the "Plans"), the Treasurer of each Fund reports the amounts
expended under the Plan and the purposes for which such expenditures were made
to the Trustees of each Trust for their review on a quarterly basis. Also, each
Plan provides that the selection and nomination of Trustees who are not
"interested persons" of each Trust (as defined in the 1940 Act) are committed to
the discretion of such disinterested Trustees then in office.
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<PAGE>
Each Adviser may from time to time and from its own funds or such other
resources as may be permitted by rules of the Securities and Exchange Commission
make payments for distribution services to the Distributor; the latter may in
turn pay part or all of such compensation to brokers or other persons for their
distribution assistance.
Short-Intermediate and Short-Intermediate-CA commenced offering Class A and
Class B shares on January 3, 1995 and Florida High Income commenced offering
Class A and Class B shares on June 30, 1995. Each Plan with respect to such
Funds became effective on December 30, 1994 (June 30, 1995 with respect to
Florida High Income) and was initially approved by the sole shareholder of each
Class of shares of each Fund with respect to which a Plan was adopted on that
date and by the unanimous vote of the Trustees of each Trust, including the
disinterested Trustees voting separately, at a meeting called for that purpose
and held on December 13, 1994 (April 20, 1995 with respect to Florida High
Income). The Distribution Agreements between each Fund and the Distributor,
pursuant to which distribution fees are paid under the Plans by each Fund with
respect to its Class A and Class B shares were also approved at the December 13,
1994 (April 20, 1995 with respect to Florida High Income) meeting by the
unanimous vote of the Trustees, including the disinterested Trustees voting
separately. Each Plan and Distribution Agreement will continue in effect for
successive twelve-month periods provided, however, that such continuance is
specifically approved at least annually by the Trustees of each Trust or by vote
of the holders of a majority of the outstanding voting securities (as defined in
the 1940 Act) of that Class, and, in either case, by a majority of the Trustees
of the Trust who are not parties to the Agreement or interested persons, as
defined in the 1940 Act, of any such party (other than as Trustees of the Trust)
and who have no direct or indirect financial interest in the operation of the
Plan or any agreement related thereto.
Prior to July 7, 1995, Federated Securities Corp., a subsidiary of
Federated Investors, served as the distributor for Florida Municipal Bond,
Georgia Municipal Bond, North Carolina Municipal Bond, South Carolina Municipal
Bond, Virginia Municipal Bond and High Grade as well as other portfolios of
Evergreen Investment Trust. The Distribution Agreements between each Fund and
the Distributor pursuant to which distribution fees are paid under the Plans by
each Fund with respect to its Class A and Class B shares were approved on April
20, 1995 by the unanimous vote of the Trustees including the disinterested
Trustees voting separately.
New Jersey Tax-Free commenced offering Class B shares on January 19,
1996. Prior to January 19, 1996, FFB Funds Distributor, Inc. served as
distributor to New Jersey Tax-Free. The Distribution Agreement between New
Jersey Tax-Free and the Distributor pursuant to which distribution fees are paid
under the Plan by New Jersey Tax-Free with respect to its Class A and Class B
shares was approved on January 19, 1996, by the unanimous vote of the Trustees
including the disinterested Trustees voting separately.
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 and Class B shares. The
Plans are designed to (i) stimulate brokers to provide distribution and
34
<PAGE>
administrative support services to each Fund and holders of Class A and Class B
shares and (ii) stimulate administrators to render administrative support
services to the Fund and holders of Class A and Class B 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 and Class B shares; assisting clients in changing dividend options, account
designations, and addresses; and providing such other services as the Fund
reasonably requests for its Class A and Class B shares.
In addition to the Plans, Florida Municipal Bond, Georgia Municipal
Bond, North Carolina Municipal Bond, South Carolina Municipal Bond, Virginia
Municipal Bond, High Grade and New Jersey Tax-Free have each adopted a
Shareholder Services Plan whereby shareholder servicing agents may receive fees
from the Fund for providing services which include, but are not limited to,
distributing prospectuses and other information, providing shareholder
assistance, and communicating or facilitating purchases and redemptions of Class
B shares of the Fund.
In the event that a Plan or Distribution Agreement is terminated or not
continued with respect to one or more Classes of a Fund, (i) no distribution
fees (other than current amounts accrued but not yet paid) would be owed by the
Fund to the Distributor with respect to that Class or Classes, and (ii) the Fund
would not be obligated to pay the Distributor for any amounts expended under the
Distribution Agreement not previously recovered by the Distributor from
distribution services fees in respect of shares of such Class or Classes through
deferred sales charges.
All material amendments to any Plan or Distribution Agreement must be
approved by a vote of the Trustees of a Trust or the holders of the Fund's
outstanding voting securities, voting separately by Class, and in either case,
by a majority of the disinterested Trustees, cast in person at a meeting called
for the purpose of voting on such approval; and any Plan or Distribution
Agreement may not be amended in order to increase materially the costs that a
particular Class of shares of a Fund may bear pursuant to the Plan or
Distribution Agreement without the approval of a majority of the holders of the
outstanding voting shares of the Class affected. With respect to Florida
Municipal Bond, Georgia Municipal Bond, North Carolina Municipal Bond, South
Carolina Municipal Bond, Virginia Municipal Bond and High Grade, amendments to
the Shareholder Services Plan require a majority vote of the disinterested
Trustees but do not require a shareholders vote. Any Plan, Shareholder Services
Plan or Distribution Agreement may be terminated (a) by a Fund without penalty
at any time by a majority vote of the holders of the outstanding voting
securities of the Fund, voting separately by Class or by a majority vote of the
Trustees who are not "interested persons" as defined in the 1940 Act, or (b) by
the Distributor. To terminate any Distribution Agreement, any party must give
the other parties 60 days' written notice; to terminate a Plan only, the Fund
need give no notice to the Distributor. Any Distribution Agreement will
terminate automatically in the event of its assignment.
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<PAGE>
Fees Paid Pursuant To Distribution Plans. The Funds incurred the following
distribution services fee:
Florida Municipal Bond. For the fiscal period from January 1, 1995 through
August 31, 1995, and the fiscal year ended August 31, 1996, $59,721 and
$240,978, respectively, on behalf of Class A shares; and $28,054 and $215,869,
respectively, on behalf of Class B shares.
Georgia Municipal Bond. For the fiscal period from January 1, 1995 through
August 31, 1995, and the fiscal year ended August 31, 1996, $2,856 and $5,047,
respectively, on behalf of Class A shares; and $37,476 and $63,447,
respectively, on behalf of Class B shares.
North Carolina Municipal Bond. For the fiscal period from January 1, 1995
through August 31, 1995,and the fiscal year ended August 31, 1996, $13,739 and
$20,833, respectively, on behalf of Class A shares; and $239,789 and $375,352,
respectively, on behalf of Class B shares.
South Carolina Municipal Bond. For the fiscal period from January 1, 1995
through August 31, 1995,and the fiscal year ended August 31, 1996, $788 and
$1,917, respectively, on behalf of Class A shares; and $15,094 and $29,922,
respectively, on behalf of Class B shares.
Virginia Municipal Bond. For the fiscal period from January 1, 1995 through
August 31, 1995,and the fiscal year ended August 31, 1996, $3,127 and $6,048,
respectively, on behalf of Class A shares; and $22,700 and $43,430,
respectively, on behalf of Class B shares.
High Grade. For the fiscal period from January 1, 1995 through August 31, 1995,
and the fiscal year ended August 31, 1996, $97,996 and $138,927, respectively,
on behalf of Class A shares; and $167,706 and $258,074, respectively, on behalf
of Class B shares.
New Jersey Tax-Free. For the fiscal periods from March 1, 1995 through February
29, 1996, and March 1, 1996 through August 31, 1996, $11,178 and $42,308,
respectively, on behalf of Class A shares; and $87 and $5,865 for the period
from January 19, 1996 through February 29, 1996 and March 1, 1996 through August
31, 1996 on behalf of Class B shares.
Short-Intermediate. For the fiscal period from January 3, 1995 through August
31, 1995, and the fiscal year ended August 31, 1996, $4,106 and $13,347,
respectively, on behalf of Class A shares; and $20,584 and $52,375,
respectively, on behalf of Class B shares.
Short-Intermediate-CA. For the fiscal period from January 3, 1995 through August
31, 1995,and the fiscal year ended August 31, 1996, $0 and $0, respectively, on
behalf of Class A shares; and $0 and $0, respectively, on behalf of Class B
shares.
Florida High Income. For the fiscal period from June 30, 1995 through August 31,
1995, and the fiscal year ended August 31, 1996, $41,690 and $169,651,
respectively, on behalf of Class A shares; and $1,565 and $80,050, respectively,
on behalf of Class
36
<PAGE>
B shares.
Fee Paid Pursuant To Shareholder Services Plans. The Funds incurred the
following shareholder services fees:
Florida Municipal Bond. For the fiscal period from January 1, 1995 through
August 31, 1995, and the fiscal year ended August 31, 1996, $9,351 and $71,956,
respectively, on behalf of Class B shares.
Georgia Municipal Bond. For the fiscal period from January 1, 1995 through
August 31, 1995, and the fiscal year ended August 31, 1996, $12,492 and $21,149,
respectively, on behalf of Class B shares.
North Carolina Municipal Bond. For the fiscal period from January 1, 1995
through August 31, 1995, and the fiscal year ended August 31, 1996, $79,930 and
$125,117, respectively, on behalf of Class B shares.
South Carolina Municipal Bond. For the fiscal period from January 1, 1995
through August 31, 1995, and the fiscal year ended August 31, 1996, $5,031 and
$9,974, respectively, on behalf of Class B shares.
Virginia Municipal Bond. For the fiscal period from January 1, 1995 through
August 31, 1995, and the fiscal year ended August 31, 1996, $7,567 and $14,476,
respectively, on behalf of Class B shares.
High Grade. For the fiscal period from January 1, 1995 through August 31, 1995,
and the fiscal year ended August 31, 1996, $55,902 and $86,025, respectively, on
behalf of Class B shares.
Florida High Income. For the fiscal period from July 10, 1995 through August 31,
1995 and for the fiscal year ended August 31, 1996, $522 and $26,683,
respectively, on behalf of Class B shares.
Short Intermediate. For the fiscal period from January 5, 1995 through August
31, 1995 and the fiscal year ended August 31, 1996, $6,861 and $17,458,
respectively, on behalf of Class B shares.
New Jersey Tax-Free. For the fiscal period January 30, 1996 through February 29,
1996 and March 1, 1996 throuth August 31, 1996, $29 and $1,949 on behalf of
Class B shares.
ALLOCATION OF BROKERAGE
Decisions regarding each Fund's portfolio are made by its Adviser,
subject to the supervision and control of the Trustees. Orders for the purchase
and sale of securities and other investments are placed by employees of the
Adviser, all of whom, in the case of Evergreen Asset, are associated with
Lieber. In general, the same individuals perform the same functions for the
other funds managed by the Adviser. A Fund will not effect any brokerage
transactions with any broker or dealer affiliated directly or indirectly with
the Adviser unless such transactions are fair and reasonable, under the
circumstances, to the Fund's shareholders. Circumstances that may indicate that
such transactions are fair or reasonable include the frequency of such
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<PAGE>
transactions, the selection process and the commissions payable in connection
with such transactions.
It is anticipated that most of the Funds purchase and sale transactions
will be with the issuer or an underwriter or with major dealers in such
securities acting as principals. Such transactions are normally on a net basis
and generally do not involve payment of brokerage commissions. However, the cost
of securities purchased from an underwriter usually includes a commission paid
by the issuer to the underwriter. Purchases or sales from dealers will normally
reflect the spread between bid and ask prices.
In selecting firms to effect securities transactions, the primary
consideration of each Fund shall be prompt execution at the most favorable
price. A Fund will also consider such factors as the price of the securities and
the size and difficulty of execution of the order. If these objectives may be
met with more than one firm, the Fund will also consider the availability of
statistical and investment data and economic facts and opinions helpful to the
Fund. To the extent that receipt of these services for which the Adviser or its
affiliates might otherwise have paid, it would tend to reduce their expenses.
Except with respect to North Carolina Municipal Bond, the transactions
in which the Funds engage do not involve the payment of brokerage commissions
and are executed with dealers other than Lieber. For the fiscal year ended
August 31, 1996, the fiscal period ended August 31, 1995 and the fiscal year
ended December 31, 1994, North Carolina Municipal Bond paid $0, $ 0 and $ 1,250,
respectively, in commissions on brokerage transactions.
ADDITIONAL TAX INFORMATION
(See also "Taxes" in the Prospectus)
Each Fund has qualified and intends to continue to qualify for and
elect the tax treatment applicable to regulated investment companies ("RIC")
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). (Such qualification does not involve supervision of management or
investment practices or policies by the Internal Revenue Service.) In order to
qualify as a regulated investment company, a Fund must, among other things, (a)
derive at least 90% of its gross income from dividends, interest, payments with
respect to proceeds from securities loans, gains from the sale or other
disposition of securities or foreign currencies and other income (including
gains from options, futures or forward contracts) derived with respect to its
business of investing in such securities; (b) derive less than 30% of its gross
income from the sale or other disposition of securities, options, futures or
forward contracts (other than those on foreign currencies), or foreign
currencies (or options, futures or forward contracts thereon) that are not
directly related to the RIC's principal business of investing in securities (or
options and futures with respect thereto) held for less than three months; and
(c) diversify its holdings so that, at the end of each quarter of its taxable
year, (i) at least 50% of the market value of the Fund's total assets is
represented by cash, U.S. government securities and other securities limited in
respect of any one issuer, to an amount not greater than 5% of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. government securities and securities of other
regulated investment companies). By so qualifying, a Fund is not subject to
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<PAGE>
Federal income tax if it timely distributes its investment company taxable
income and any net realized capital gains. A 4% nondeductible excise tax will be
imposed on a Fund to the extent it does not meet certain distribution
requirements by the end of each calendar year. Each Fund anticipates meeting
such distribution requirements.
Dividends paid by a Fund from investment company taxable income
generally will be taxed to the shareholders as ordinary income. Investment
company taxable income includes net investment income and net realized
short-term gains (if any). Any dividends received by a Fund from domestic
corporations will constitute a portion of the Fund's gross investment income. It
is anticipated that this portion of the dividends paid by a Fund (other than
distributions of securities profits) will qualify for the 70% dividends-received
deduction for corporations. Shareholders will be informed of the amounts of
dividends which so qualify.
Distributions of the excess of net long-term capital gain over net
short-term capital loss are taxable to shareholders (who are not exempt from
tax) as long-term capital gain, regardless of the length of time the shares of a
Fund have been held by such shareholders. Short-term capital gains distributions
are taxable to shareholders who are not exempt from tax as ordinary income. Such
distributions are not eligible for the dividends-received deduction. Any loss
recognized upon the sale of shares of a Fund held by a shareholder for six
months or less will be treated as a long-term capital loss to the extent that
the shareholder received a long-term capital gain distribution with respect to
such shares.
Distributions of investment company taxable income and any net
short-term capital gains will be taxable as ordinary income as described above
to shareholders (who are not exempt from tax), whether made in shares or in
cash. Shareholders electing to receive distributions in the form of additional
shares will have a cost basis for Federal income tax purposes in each share so
received equal to the net asset value of a share of a Fund on the reinvestment
date.
Distributions by each Fund result in a reduction in the net asset value
of the Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution nevertheless would be taxable as
ordinary income or capital gain as described above to shareholders (who are not
exempt from tax), even though, from an investment standpoint, it may constitute
a return of capital. In particular, investors should be careful to consider the
tax implications of buying shares just prior to a distribution. The price of
shares purchased at that time includes the amount of the forthcoming
distribution. Those purchasing just prior to a distribution will then receive
what is in effect a return of capital upon the distribution which will
nevertheless be taxable to shareholders subject to taxes.
Upon a sale or exchange of its shares, a shareholder will realize a
taxable gain or loss depending on its basis in the shares. Such gains or losses
will be treated as a capital gain or loss if the shares are capital assets in
the investor's hands and will be a long-term capital gain or loss if the shares
have been held for more than one year. Generally, any loss realized on a sale or
exchange will be disallowed to the extent shares disposed of are replaced within
a period of sixty-one days beginning thirty days before and ending thirty days
after the shares are disposed of. Any loss realized by a shareholder on the sale
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of shares of the Fund held by the shareholder for six months or less will be
disallowed to the extent of any exempt interest dividends received by the
shareholder with respect to such shares, and will be treated for tax purposes as
40
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a long-term capital loss to the extent of any distributions of net capital gains
received by the shareholder with respect to such shares.
All distributions, whether received in shares or cash, must be reported
by each shareholder on his or her Federal income tax return. Each shareholder
should consult his or her own tax adviser to determine the state and local tax
implications of Fund distributions.
Shareholders who fail to furnish their taxpayer identification numbers to a
Fund and to certify as to its correctness and certain other shareholders may be
subject to a 31% Federal income tax backup withholding requirement on dividends,
distributions of capital gains and redemption proceeds paid to them by the Fund.
If the withholding provisions are applicable, any such dividends or capital gain
distributions to these shareholders, whether taken in cash or reinvested in
additional shares, and any redemption proceeds will be reduced by the amounts
required to be withheld. Investors may wish to consult their own tax advisers
about the applicability of the backup withholding provisions.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates). It does not reflect the special
tax consequences to certain taxpayers (e.g., banks, insurance companies, tax
exempt organizations and foreign persons). Shareholders are encouraged to
consult their own tax advisers regarding specific questions relating to Federal,
state and local tax consequences of investing in shares of a Fund. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and foreign tax consequences of ownership of shares of a
Fund, including the possibility that such a shareholder may be subject to a U.S.
withholding tax at a rate of 31% (or at a lower rate under a tax treaty) on
amounts treated as income from U.S. sources under the Code.
Special Tax Considerations
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 advisers before
purchasing shares of the Fund. "Substantial user" is defined generally as
including a "non-exempt person" who regularly uses in its trade or business a
part of a facility financed from the proceeds of industrial development bonds.
The percentage of the total dividends paid by a Fund with respect to
any taxable year that qualifies as exempt interest dividends will be the same
for all shareholders of the Fund receiving dividends with respect to such year.
If a shareholder receives an exempt interest dividend with respect to any share
and such share has been held for six months or less, any loss on the sale or
exchange of such share will be disallowed to the extent of the exempt interest
dividend amount.
NET ASSET VALUE
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The following information supplements that set forth in each Fund's
Prospectus under the subheading "How to Buy Shares - How the Funds Value Their
Shares" in the Section entitled "Purchase and Redemption of Shares".
The public offering price of shares of a Fund is its net asset value,
plus, in the case of Class A shares, a sales charge which will vary depending on
the purchase alternative chosen by the investor, as more fully described in the
Prospectus. See "Purchase of Shares - Class A Shares - Front-End Sales Charge
Alternative. " On each Fund business day on which a purchase or redemption order
is received by a Fund and trading in the types of securities in which a Fund
invests might materially affect the value of Fund shares, the per share net
asset value of each such Fund is computed in accordance with the Declaration of
Trust and By-Laws governing each Fund as of the next close of regular trading on
the New York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time)
by dividing the value of the Fund's total assets, less its liabilities, by the
total number of its shares then outstanding. A Fund business day is any weekday,
exclusive of national holidays on which the Exchange is closed and Good Friday.
For each Fund, securities for which the primary market is on a domestic or
foreign exchange and over-the-counter securities admitted to trading on the
NASDAQ National List are valued at the last quoted sale or, if no sale, at the
mean of closing bid and asked price and portfolio bonds are presently valued by
a recognized pricing service when such prices are believed to reflect the fair
value of the security. Over-the-counter securities not included in the NASDAQ
National List for which market quotations are readily available are valued at a
price quoted by one or more brokers. If accurate quotations are not available,
securities will be valued at fair value determined in good faith by the Board of
Trustees.
The respective per share net asset values of the Class A, Class B and
Class Y shares are expected to be substantially the same. Under certain
circumstances, however, the per share net asset values of the Class B shares may
be lower than the per share net asset value of the Class A shares (and, in turn,
that of Class A shares may be lower than Class Y shares) as a result of the
greater daily expense accruals, relative to Class A and Class Y shares, of Class
B shares relating to distribution services fees (and, with respect to Florida
Municipal Bond, Georgia Municipal Bond, New Jersey Tax-Free, North Carolina
Municipal Bond, South Carolina Municipal Bond, Virginia Municipal Bond, Florida
High Income and High Grade, shareholder service fee) and, to the extent
applicable, transfer agency fees and the fact that Class Y shares bear no
additional distribution, shareholder service or transfer agency related fees.
While it is expected that, in the event each Class of shares of a Fund realizes
net investment income or does not realize a net operating loss for a period, the
per share net asset values of the three classes will tend to converge
immediately after the payment of dividends, which dividends will differ by
approximately the amount of the expense accrual differential among the Classes,
there is no assurance that this will be the case. In the event one or more
Classes of a Fund experiences a net operating loss for any fiscal period, the
net asset value per share of such Class or Classes will remain lower than that
of Classes that incurred lower expenses for the period.
PURCHASE OF SHARES
The following information supplements that set forth in each Prospectus
under the heading "Purchase and Redemption of Shares - How To Buy Shares".
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General
Shares of each Fund will be offered on a continuous basis at a price
equal to their net asset value plus an initial sales charge at the time of
purchase (the "front-end sales charge alternative"), or with a contingent
deferred sales charge (the deferred sales charge alternative"), as described
below. Class Y shares which, as described below, are not offered to the general
public, are offered without any front-end or contingent sales charges. Shares of
each Fund are offered on a continuous basis through (i) investment dealers that
are members of the National Association of Securities Dealers, Inc. and have
entered into selected dealer agreements with the Distributor ("selected
dealers"), (ii) depository institutions and other financial intermediaries or
their affiliates, that have entered into selected agent agreements with the
Distributor ("selected agents"), or (iii) the Distributor. The minimum for
initial investments is $1,000; there is no minimum for subsequent investments.
The subscriber may use the Share Purchase Application available from the
Distributor for his or her initial investment. Sales personnel of selected
dealers and agents distributing a Fund's shares may receive differing
compensation for selling Class A or Class B shares.
Investors may purchase shares of a Fund in the United States either
through selected dealers or agents or directly through the Distributor. A Fund
reserves the right to suspend the sale of its shares to the public in response
to conditions in the securities markets or for other reasons.
Each Fund will accept unconditional orders for its shares to be
executed at the public offering price equal to the net asset value next
determined (plus for Class A shares, the applicable sales charges), as described
below. Orders received by the Distributor prior to the close of regular trading
on the Exchange on each day the Exchange is open for trading are priced at the
net asset value computed as of the close of regular trading on the Exchange on
that day (plus for Class A shares the sales charges). In the case of orders for
purchase of shares placed through selected dealers or agents, the applicable
public offering price will be the net asset value as so determined, but only if
the selected dealer or agent receives the order prior to the close of regular
trading on the Exchange and transmits it to the Distributor prior to its close
of business that same day (normally 5:00 p.m. Eastern time). The selected dealer
or agent is responsible for transmitting such orders by 5:00 p.m. If the
selected dealer or agent fails to do so, the investor's right to that day's
closing price must be settled between the investor and the selected dealer or
agent. If the selected dealer or agent receives the order after the close of
regular trading on the Exchange, the price will be based on the net asset value
determined as of the close of regular trading on the Exchange on the next day it
is open for trading.
Following the initial purchase of shares of a Fund, a shareholder may
place orders to purchase additional shares by telephone if the shareholder has
completed the appropriate portion of the Share Purchase Application. Payment for
shares purchased by telephone can be made only by Electronic Funds Transfer from
a bank account maintained by the shareholder at a bank that is a member of the
National Automated Clearing House Association ("ACH"). If a shareholder's
telephone purchase request is received before 3:00 p.m. New York time on a Fund
business day, the order to purchase shares is automatically placed the same Fund
business day for non-money market funds, and two days following the day the
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order is received for money market funds, and the applicable public offering
price will be the public offering price determined as of the close of business
on such business day. Full and fractional shares are credited to a subscriber's
account in the amount of his or her subscription. As a convenience to the
subscriber, and to avoid unnecessary expense to a Fund, stock certificates
representing shares of a Fund are not issued for any class of shares of any
Fund. This facilitates later redemption and relieves the shareholder of the
responsibility for and inconvenience of lost or stolen certificates.
Alternative Purchase Arrangements
Each Fund issues three classes of shares: (i) Class A shares, which are
sold to investors choosing the front-end sales charge alternative; (ii) Class B
shares, which are sold to investors choosing the deferred sales charge
alternative; and (iii) Class Y shares, which are offered only to (a) persons who
at or prior to December 30, 1994 owned shares in a mutual fund advised by
Evergreen Asset, (b) certain investment advisory clients of the Advisers and
their affiliates, and (c) institutional investors. The three classes of shares
each represent an interest in the same portfolio of investments of the Fund,
have the same rights and are identical in all respects, except that (I) only
Class A and Class B shares are subject to a Rule 12b-1 distribution fee, (II)
Class B shares of Florida Municipal Bond, Georgia Municipal Bond, New Jersey
Tax- Free, North Carolina Municipal Bond, South Carolina Municipal Bond,
Virginia Municipal Bond and High Grade are subject to a shareholder service fee,
(III) Class A shares bear the expense of the front-end sales charge and Class B
shares bear the expense of the deferred sales charge, (IV) Class B shares bear
the expense of a higher Rule 12b-1 distribution services fee and shareholder
service fee than Class A shares and higher transfer agency costs, (V) with the
exception of Class Y shares, each Class of each Fund has exclusive voting rights
with respect to provisions of the Rule 12b-1 Plan pursuant to which its
distribution services (and, to the extent applicable, shareholder service) fee
is paid which relates to a specific Class and other matters for which separate
Class voting is appropriate under applicable law, provided that, if the Fund
submits to a simultaneous vote of Class A and Class B shareholders an amendment
to the Rule 12b-1 Plan that would materially increase the amount to be paid
thereunder with respect to the Class A shares, the Class A shareholders and the
Class B shareholders will vote separately by Class, and (VI) only the Class B
shares are subject to a conversion feature. Each Class has different exchange
privileges and certain different shareholder service options available.
The alternative purchase arrangements permit an investor to choose the
method of purchasing shares that is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares, and other
circumstances. Investors should consider whether, during the anticipated life of
their investment in the Fund, the accumulated distribution services (and, to the
extent applicable, shareholder service) fee and contingent deferred sales
charges on Class B shares prior to conversion would be less than the front-end
sales charge and accumulated distribution services fee on Class A shares
purchased at the same time, and to what extent such differential would be offset
by the higher return of Class A shares. Class B shares will normally not be
suitable for the investor who qualifies to purchase Class A shares at the lowest
applicable sales charge. For this reason, the Distributor will reject any order
(except orders for Class B shares from certain retirement plans) for more than
$2,500,000 for Class B shares.
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Class A shares are subject to a lower distribution services fee and no
shareholder service fee and, accordingly, pay correspondingly higher dividends
per share than Class B shares. However, because front-end sales charges are
deducted at the time of purchase, investors purchasing Class A shares would not
have all their funds invested initially and, therefore, would initially own
fewer shares. Investors not qualifying for reduced front-end sales charges who
expect to maintain their investment for an extended period of time might
consider purchasing Class A shares because the accumulated continuing
distribution (and, to the extent applicable, shareholder service) charges on
Class B shares may exceed the front-end sales charge on Class A shares during
the life of the investment. Again, however, such investors must weigh this
consideration against the fact that, because of such front-end sales charges,
not all their funds will be invested initially.
Other investors might determine, however, that it would be more
advantageous to purchase Class B shares in order to have all their funds
invested initially, although remaining subject to higher continuing distribution
services (and, to the extent applicable, shareholder service) fees and being
subject to a contingent deferred sales charge for a seven-year period. For
example, based on current fees and expenses, an investor subject to the 4.75%
front-end sales charge imposed by the Evergreen Equity and Long-Term Bond Funds,
(i.e., Florida Municipal Bond, Georgia Municipal Bond, New Jersey Tax-Free,
North Carolina Municipal Bond, South Carolina Municipal Bond, Virginia Municipal
Bond, Florida High Income and High Grade)or the 3.25% front end sales charge
imposed by the Evergreen Intermediate and Short-Term Bond Funds (i.e.,
Short-Intermediate and Short-Intermediate-CA) would have to hold his or her
investment approximately seven years for the Class B distribution services (and,
to the extent applicable, shareholders service) fees to exceed the front-end
sales charge plus the accumulated distribution services fee of Class A shares.
In this example, an investor intending to maintain his or her investment for a
longer period might consider purchasing Class A shares. This example does not
take into account the time value of money, which further reduces the impact of
the Class B distribution services (and, to the extent applicable, shareholder
service) fees on the investment, fluctuations in net asset value or the effect
of different performance assumptions.
With respect to each Fund, the Trustees have determined that currently
no conflict of interest exists between or among the Class A, Class B and Class Y
shares. On an ongoing basis, the Trustees, pursuant to their fiduciary duties
under the 1940 Act and state laws, will seek to ensure that no such conflict
arises.
Front-end Sales Charge Alternative--Class A Shares
The public offering price of Class A shares for purchasers choosing the
front-end sales charge alternative is the net asset value plus a sales charge as
set forth in the Prospectus for each Fund.
Shares issued pursuant to the automatic reinvestment of income
dividends or capital gains distributions are not subject to any sales charges.
The Fund receives the entire net asset value of its Class A shares sold to
investors. The Distributor's commission is the sales charge set forth in the
Prospectus for each Fund, less any applicable discount or commission "reallowed"
to selected dealers and agents. The Distributor will reallow discounts to
selected dealers and agents in the amounts indicated in the table in the
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Prospectus. In this regard, the Distributor may elect to reallow the entire
sales charge to selected dealers and agents for all sales with respect to which
orders are placed with the Distributor.
Set forth below is an example of the method of computing the offering
price of the Class A shares of each Fund. The example assumes a purchase of
Class A shares of a Fund aggregating less than $100,000 subject to the schedule
of sales charges set forth in the Prospectus at a price based upon the net asset
value of Class A shares of each Fund at the end of each Fund's latest fiscal
year.
Net Per Share Offering
Asset Sales Price
Value Charge Date Per Share
Florida
Municipal
Bond $ 9.70 $.48 8/31/96 $10.18
Georgia
Municipal
Bond $ 9.57 $.48 8/31/96 $10.05
New Jersey $10.75 $.54 8/31/96 $ 11.29
Tax-Free
North Carolina
Municipal Bond $ 9.98 $.50 8/31/96 $10.48
South Carolina
Municipal Bond $ 9.69 $.48 8/31/96 $10.17
Virginia
Municipal
Bond $ 9.68 $.48 8/31/96 $10.16
Florida
High Income $10.42 $.52 8/31/96 $10.94
High Grade $10.72 $.53 8/31/96 $11.25
Short-
Intermediate $10.08 $.34 8/31/96 $10.42
Short-
Intermediate-
CA $ 9.98 $.34 8/31/96 $10.32
Prior to January 3, 1995, shares of Short-Intermediate and Short-
Intermediate-CA were offered exclusively on a no-load basis and, accordingly, no
underwriting commissions were paid in respect of sales of shares of the Funds or
retained by the Distributor. In addition, since Class B shares were not offered
prior to January 3, 1995, contingent deferred sales charges have been paid to
the Distributor with respect to Class B shares only since January
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3, 1995.
With respect to Florida Municipal Bond, Georgia Municipal Bond, North
Carolina Municipal Bond, South Carolina Municipal Bond, Virginia Municipal Bond
and High Grade for the periods indicated, the following commissions were paid to
and amounts were retained by Federated Securities Corp. through July 6, 1995,
which until such date was the principal underwriter of the portfolios of
Evergreen Investment Trust. For the period from July 7, 1995 through August 31,
1995, and the fiscal year ended August 31, 1996, commissions were paid to and
amounts were retained by the current Distributor as noted below :
Fiscal Year Period From Period From Year Ended
Ended 8/31/96 7/7/95-8/31/95 1/1/95-7/6/95 12/31/94
FLORIDA MUNICIPAL BOND
Commissions Received $49,589 $ 23,324 $ 64,431 $ 2,000
Commissions Retained 5,996 2,747 1,554 ___
GEORGIA MUNICIPAL BOND
Commissions Received $7,300 $ 9,947 $ 46,263 $103,000
Commissions Retained 875 1,747 2,473 6,000
VIRGINIA MUNICIPAL BOND
Commissions Received $20,400 $ 4,340 $ 41,373 $ 62,000
Commissions Retained 2,033 533 1,787 6,000
HIGH GRADE
Commissions Received $73,014.20 $ 5,767 $ 29,154 $ 82,000
Commissions Retained 9,050.09 712 1,515 5,000
NORTH CAROLINA MUNICIPAL
BOND
Commissions Received $16,557 $ 5,238 $117,937 $210,000
Commissions Retained 2,228 637 7,206 3,000
Fiscal Year Period From Period From Period From
Ended 8/31/96 7/7/95-8/31-95 1/1/95-7/6/95 1/3/94-
12/31/94
SOUTH CAROLINA MUNICIPAL
BOND
Commissions Received $1,447 $ 853 $ 34,388 $34,000
Commissions Retained 154 98 3,497 5,000
With respect to New Jersey Tax-Free, the following commissions were
paid to and amounts were retained by FFB Funds Distributor, Inc. through January
19, 1996, which until such date was the principal underwriter of portfolios of
Evergreen Tax Free Trust (formerly FFB Funds Trust). For the period from January
20, 1996, through August 31, 1996, commissions were paid to and amounts were
retained by the current Distributor as noted below:
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Period From Period From
3/1/96-8/31/96 1/20/96-2/29/96
New Jersey Tax-Free
Commissions Received $25,644 $ 5,982
Commissions Retained $ 2,316 $ 650
With respect to Florida High Income, for the period from June 30, 1995
(commencement of offering of Class A shares) through August 31, 1995, and the
fiscal year ended August 31, 1996, commissions were paid to and amounts were
retained by the current Distributor as noted below:
Fiscal Year Period From
Ended 8/31/96 6/30/95-8/31/95
FLORIDA HIGH INCOME
Commissions Received $276,615 $196,614
Commissions Retained $ 29,467 $ 24,672
With respect to Short-Intermediate and Short-Intermediate-CA, for the
period from January 3, 1995 (commencement of offering of Class A shares) through
August 31, 1995, and the fiscal year ended August 31, 1996, commissions were
paid to and amounts were retained by the current Distributor as noted below:
Fiscal Year Period From
Ended 8/31/96 1/5/95-8/31/95
SHORT-INTERMEDIATE
Commissions Received $33,816 $ 37,130
Commissions Retained 4,326 4,445
SHORT-INTERMEDIATE-CA
Commissions Received $ 0 $ 0
Commissions Retained $ 0 $ 0
Investors choosing the front-end sales charge alternative may under
certain circumstances be entitled to pay reduced sales charges. The
circumstances under which such investors may pay reduced sales charges are
described below.
Combined Purchase Privilege. Certain persons may qualify for the sales
charge reductions by combining purchases of shares of one or more Evergreen
mutual fund other than money market funds into a single "purchase", if the
resulting "purchase" totals at least $100,000. The term "purchase" refers to:
(i) a single purchase by an individual, or to concurrent purchases, which in the
aggregate are at least equal to the prescribed amounts, by an individual, his or
her spouse and their children under the age of 21 years purchasing shares for
his, her or their own account(s); (ii) a single purchase by a trustee or other
fiduciary purchasing shares for a single trust, estate or single fiduciary
account although more than one beneficiary is involved; or (iii) a single
purchase for the employee benefit plans of a single employer. The term
"purchase" also includes purchases by any "company", as the term is defined in
the 1940 Act, but does not include purchases by any such company which has not
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<PAGE>
been in existence for at least six months or which has no purpose other than the
purchase of shares of a Fund or shares of other registered investment companies
at a discount. The term "purchase" does not include purchases by any group of
individuals whose sole organizational nexus is that the participants therein are
credit card holders of a company, policy holders of an insurance company,
customers of either a bank or broker-dealer or clients of an investment adviser.
A "purchase" may also include shares, purchased at the same time through a
single selected dealer or agent, of any Evergreen mutual fund. Currently, the
Evergreen mutual funds include:
Evergreen Trust
Evergreen Fund
Evergreen Aggressive Growth Fund
Evergreen Equity Trust:
Evergreen Global Real Estate Equity Fund
Evergreen U.S. Real Estate Equity Fund
Evergreen Global Leaders Fund
The Evergreen Limited Market Fund, Inc.
Evergreen Growth and Income Fund
The Evergreen Total Return Fund
The Evergreen American Retirement Trust:
Evergreen American Retirement Fund
Evergreen Small Cap Equity Income Fund
Evergreen Foundation Trust:
Evergreen Foundation Fund
Evergreen Tax Strategic Foundation Fund
The Evergreen Municipal Trust:
Evergreen Short-Intermediate Municipal Fund
Evergreen Short-Intermediate Municipal Fund-CA
Evergreen Florida High Income Municipal Bond Fund
Evergreen Tax Exempt Money Market Fund
Evergreen Institutional Tax Exempt Money Market Fund
Evergreen Money Market Trust
Evergreen Money Market Fund
Evergreen Institutional Money Market Fund
Evergreen Institutional Treasury Money Market Fund
Evergreen Investment Trust Evergreen Emerging Markets Growth Fund Evergreen
International Equity Fund Evergreen Balanced Fund Evergreen Value Fund
Evergreen Utility Fund Evergreen Short-Intermediate Bond Fund Evergreen
U.S. Government Fund Evergreen Florida Municipal Bond Fund Evergreen
Georgia Municipal Bond Fund Evergreen North Carolina Municipal Bond Fund
Evergreen South Carolina Municipal Bond Fund Evergreen Virginia
Municipal Bond Fund Evergreen High Grade Tax Free Fund Evergreen
Treasury Money Market Fund
The Evergreen Lexicon Fund:
Evergreen Intermediate-Term Government Securities Fund
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Evergreen Intermediate-Term Bond Fund
Evergreen Tax Free Trust:
Evergreen Pennsylvania Tax Free Money Market Fund
Evergreen New Jersey Tax-Free Income Fund
Evergreen Variable Trust:
Evergreen VA Fund
Evergreen VA Growth and Income Fund
Evergreen VA Foundation Fund
Prospectuses for the Evergreen mutual funds may be obtained without
charge by contacting the Distributor or the Advisers at the telephone number
shown on the front cover of this Statement of Additional Information.
Cumulative Quantity Discount (Right of Accumulation). An investor's
purchase of additional Class A shares of a Fund may qualify for a Cumulative
Quantity Discount. The applicable sales charge will be based on the total of:
(i) the investor's current purchase;
(ii) the net asset value (at the close of business on the
previous day) of (a) all Class A and Class B shares of the
Fund held by the investor and (b) all such shares of any other
Evergreen mutual fund held by the investor; and
(iii) the net asset value of all shares described in
paragraph (ii) owned by another shareholder eligible
to combine his or
her purchase with that of the investor into a single
"purchase" (see above).
For example, if an investor owned Class A or B shares of an Evergreen
mutual fund worth $200,000 at their then current net asset value and
subsequently purchased Class A shares worth an additional $100,000, the sales
charge for the $100,000 purchase, in the case of any Evergreen Intermediate or
Short-Term Bond Fund (i.e., Short-Intermediate and Short-Intermediate-CA), would
be at the 2.00% rate applicable to a single $300,000 purchase rather than the
2.50% rate, or in the case of any Evergreen Equity or Long-term Bond Fund (i.e.,
Florida Municipal Bond, Georgia Municipal Bond, New Jersey Tax-Free, North
Carolina Municipal Bond, South Carolina Municipal Bond, Virginia Municipal Bond,
Florida High Income and High Grade) at the 2.50% rate applicable to a single
$300,000 purchase rather than the 3.75% rate.
To qualify for the Combined Purchase Privilege or to obtain the
Cumulative Quantity Discount on a purchase through a selected dealer or agent,
the investor or selected dealer or agent must provide the Distributor with
sufficient information to verify that each purchase qualifies for the privilege
or discount.
Statement of Intention. Class A investors may also obtain the reduced
sales charges shown in the Prospectus by means of a written Statement of
Intention, which expresses the investor's intention to invest not less than
$100,000 within a period of 13 months in Class A shares (or Class A and Class B
shares) of the Fund or any other Evergreen mutual fund. Each purchase of shares
under a Statement of Intention will be made at the public offering price or
prices applicable at the time of such purchase to a single transaction of the
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dollar amount indicated in the Statement of Intention. At the investor's option,
a Statement of Intention may include purchases of Class A or B shares of the
Fund or any other Evergreen mutual fund made not more than 90 days prior to the
date that the investor signs a Statement of Intention; however, the 13-month
period during which the Statement of Intention is in effect will begin on the
date of the earliest purchase to be included.
Investors qualifying for the Combined Purchase Privilege described
above may purchase shares of the Evergreen mutual funds under a single Statement
of Intention. For example, if at the time an investor signs a Statement of
Intention to invest at least $100,000 in Class A shares of the Fund, the
investor and the investor's spouse each purchase shares of the Fund worth
$20,000 (for a total of $40,000), it will only be necessary to invest a total of
$60,000 during the following 13 months in shares of the Fund or any other
Evergreen mutual fund, to qualify for the 3.75% sales charge applicable to
purchases in an Evergreen Equity or Long-Term Bond Fund, (i.e., Florida
Municipal Bond, Georgia Municipal Bond, New Jersey Tax-Free, North Carolina
Municipal Bond, South Carolina Municipal Bond, Virginia Municipal Bond, Florida
High Income and High Grade) or 2.50% applicable to purchases in an Evergreen
Intermediate or Short-Term Bond Fund (i.e., Short-Intermediate and
Short-Intermediate-CA) on the total amount being invested (the sales charge
applicable to an investment of $100,000).
The Statement of Intention is not a binding obligation upon the
investor to purchase the full amount indicated. The minimum initial investment
under a Statement of Intention is 5% of such amount. Shares purchased with the
first 5% of such amount will be held in escrow (while remaining registered in
the name of the investor) to secure payment of the higher sales charge
applicable to the shares actually purchased if the full amount indicated is not
purchased, and such escrowed shares will be involuntarily redeemed to pay the
additional sales charge, if necessary. Dividends on escrowed shares, whether
paid in cash or reinvested in additional Fund shares, are not subject to escrow.
When the full amount indicated has been purchased, the escrow will be released.
To the extent that an investor purchases more than the dollar amount indicated
on the Statement of Intention and qualifies for a further reduced sales charge,
the sales charge will be adjusted for the entire amount purchased at the end of
the 13-month period. The difference in sales charge will be used to purchase
additional shares of the Fund subject to the rate of sales charge applicable to
the actual amount of the aggregate purchases.
Investors wishing to enter into a Statement of Intention in conjunction
with their initial investment in Class A shares of the Fund should complete the
appropriate portion of the Subscription Application found in the Prospectus
while current Class A shareholders desiring to do so can obtain a form of
Statement of Intention by contacting a Fund at the address or telephone number
shown on the cover of this Statement of Additional Information.
Investments Through Employee Benefit and Savings Plans. Certain
qualified and non-qualified benefit and savings plans may make shares of the
Evergreen mutual funds available to their participants. Investments made by such
employee benefit plans may be exempt from any applicable front-end sales charges
if they meet the criteria set forth in the Prospectus under "Class A
Shares-Front End Sales Charge Alternative". The Advisers may provide
compensation to organizations providing administrative and record keeping
services to plans which make shares of the Evergreen mutual funds available to
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their participants.
Reinstatement Privilege. A Class A shareholder who has caused any or
all of his or her shares of the Fund to be redeemed or repurchased may reinvest
all or any portion of the redemption or repurchase proceeds in Class A shares of
the Fund at net asset value without any sales charge, provided that such
reinvestment is made within 30 calendar days after the redemption or repurchase
date. Shares are sold to a reinvesting shareholder at the net asset value next
determined as described above. A reinstatement pursuant to this privilege will
not cancel the redemption or repurchase transaction; therefore, any gain or loss
so realized will be recognized for Federal tax purposes except that no loss will
be recognized to the extent that the proceeds are reinvested in shares of the
Fund. The reinstatement privilege may be used by the shareholder only once,
irrespective of the number of shares redeemed or repurchased, except that the
privilege may be used without limit in connection with transactions whose sole
purpose is to transfer a shareholder's interest in the Fund to his or her
individual retirement account or other qualified retirement plan account.
Investors may exercise the reinstatement privilege by written request sent to
the Fund at the address shown on the cover of this Statement of Additional
Information.
Sales at Net Asset Value. In addition to the categories of investors
set forth in the Prospectus, each Fund may sell its Class A shares at net asset
value, i.e., without any sales charge, to: (i) certain investment advisory
clients of the Advisers or their affiliates; (ii) officers and present or former
Trustees of the Trusts; present or former trustees of other investment companies
managed by the Advisers; officers, directors and present or retired full-time
employees of the Adviser, the Distributor, and their affiliates; officers,
directors and present and full-time employees of selected dealers or agents; or
the spouse, sibling, direct ancestor or direct descendant (collectively
"relatives") of any such person; or any trust, individual retirement account or
retirement plan account for the benefit of any such person or relative; or the
estate of any such person or relative, if such shares are purchased for
investment purposes (such shares may not be resold except to the Fund); (iii)
certain employee benefit plans for employees of the Adviser, the Distributor.
and their affiliates; (iv) persons participating in a fee-based program,
sponsored and maintained by a registered broker-dealer and approved by the
Distributor, pursuant to which such persons pay an asset-based fee to such
broker-dealer, or its affiliate or agent, for service in the nature of
investment advisory or administrative services. These provisions are intended to
provide additional job-related incentives to persons who serve the Funds or work
for companies associated with the Funds and selected dealers and agents of the
Funds. Since these persons are in a position to have a basic understanding of
the nature of an investment company as well as a general familiarity with the
Fund, sales to these persons, as compared to sales in the normal channels of
distribution, require substantially less sales effort. Similarly, these
provisions extend the privilege of purchasing shares at net asset value to
certain classes of institutional investors who, because of their investment
sophistication, can be expected to require significantly less than normal sales
effort on the part of the Funds and the Distributor.
Deferred Sales Charge Alternative--Class B Shares
Investors choosing the deferred sales charge alternative purchase Class
B shares at the public offering price equal to the net asset value per share of
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the Class B shares on the date of purchase without the imposition of a sales
charge at the time of purchase. The Class B shares are sold without a front-end
sales charge so that the full amount of the investor's purchase payment is
invested in the Fund initially.
Proceeds from the contingent deferred sales charge are paid to the
Distributor and are used by the Distributor to defray the expenses of the
Distributor related to providing distribution-related services to the Fund in
connection with the sale of the Class B shares, such as the payment of
compensation to selected dealers and agents for selling Class B shares. The
combination of the contingent deferred sales charge and the distribution
services fee (and, with respect to Florida Municipal Bond, Georgia Municipal
Bond, New Jersey Tax-Free, North Carolina Municipal Bond, South Carolina
Municipal Bond, Virginia Municipal Bond and High Grade, the shareholder service
fee) enables the Fund to sell the Class B shares without a sales charge being
deducted at the time of purchase. The higher distribution services fee (and,
with respect to Florida Municipal Bond, Georgia Municipal Bond, New Jersey Tax-
Free, North Carolina Municipal Bond, South Carolina Municipal Bond, Virginia
Municipal Bond and High Grade, the shareholder service fee) incurred by Class B
shares will cause such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares.
Contingent Deferred Sales Charge. Class B shares which are redeemed
within seven years of purchase will be subject to a contingent deferred sales
charge at the rates set forth in the Prospectus charged as a percentage of the
dollar amount subject thereto. The charge will be assessed on an amount equal to
the lesser of the cost of the shares being redeemed or their net asset value at
the time of redemption. Accordingly, no sales charge will be imposed on
increases in net asset value above the initial purchase price. In addition, no
contingent deferred sales charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions. The amount of the
contingent deferred sales charge, if any, will vary depending on the number of
years from the time of payment for the purchase of Class B shares until the time
of redemption of such shares.
In determining the contingent deferred sales charge applicable to a
redemption, it will be assumed that the redemption is first of any Class A
shares in the shareholder's Fund account, second of Class B shares held for over
seven years or Class B shares acquired pursuant to reinvestment of dividends or
distributions and third of Class B shares held longest during the seven-year
period.
To illustrate, assume that an investor purchased 100 Class B shares at
$10 per share (at a cost of $1,000) and in the second year after purchase, the
net asset value per share is $12 and, during such time, the investor has
acquired 10 additional Class B shares upon dividend reinvestment. If at such
time the investor makes his or her first redemption of 50 Class B shares, 10
Class B shares will not be subject to charge because of dividend reinvestment.
With respect to the remaining 40 Class B shares, the charge is applied only to
the original cost of $10 per share and not to the increase in net asset value of
$2 per share. Therefore, of the $600 of the shares redeemed $400 of the
redemption proceeds (40 shares x $10 original purchase price) will be charged at
a rate of 4.0% (the applicable rate in the second year after purchase for a
contingent deferred sales charge of $16).
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The contingent deferred sales charge is waived on redemptions of shares
(i) following the death or disability, as defined in the Code, of a shareholder,
or (ii) to the extent that the redemption represents a minimum required
distribution from an individual retirement account or other retirement plan to a
shareholder who has attained the age of 70-1/2.
Conversion Feature. At the end of the period ending seven years after
the end of the calendar month in which the shareholder's purchase order was
accepted, Class B shares will automatically convert to Class A shares and will
no longer be subject to a higher distribution services fee and the applicable
shareholder service fee imposed on Class B shares. Such conversion will be on
the basis of the relative net asset values of the two classes, without the
imposition of any sales load, fee or other charge. The purpose of the conversion
feature is to reduce the distribution services fee paid by holders of Class B
shares that have been outstanding long enough for the Distributor to have been
compensated for the expenses associated with the sale of such shares.
For purposes of conversion to Class A, Class B shares purchased through
the reinvestment of dividends and distributions paid in respect of Class B
shares in a shareholder's account will be considered to be held in a separate
sub-account. Each time any Class B shares in the shareholder's account (other
than those in the sub-account) convert to Class A, an equal pro-rata portion of
the Class B shares in the sub-account will also convert to Class A.
The conversion of Class B shares to Class A shares is subject to the
continuing availability of an opinion of counsel to the effect that (i) the
assessment of the higher distribution services fee (and, with respect to Florida
Municipal Bond, Georgia Municipal Bond, New Jersey Tax-Free North Carolina
Municipal Bond, South Carolina Municipal Bond, Virginia Municipal Bond and High
Grade, shareholder service fee) and transfer agency costs with respect to Class
B shares does not result in the dividends or distributions payable with respect
to other Classes of a Fund's shares being deemed "preferential dividends" under
the Code, and (ii) the conversion of Class B shares to Class A shares does not
constitute a taxable event under Federal income tax law. The conversion of Class
B shares to Class A shares may be suspended if such an opinion is no longer
available at the time such conversion is to occur. In that event, no further
conversions of Class B shares would occur, and shares might continue to be
subject to the higher distribution services fee (and, with respect to Florida
Municipal Bond Fund, Georgia Municipal Bond Fund, New Jersey Tax-Free, North
Carolina Municipal Bond Fund, South Carolina Municipal Bond Fund, Virginia
Municipal Bond Fund and High Grade, the shareholder services fee) for an
indefinite period which may extend beyond the period ending seven years after
the end of the calendar month in which the shareholder's purchase order was
accepted.
Class Y Shares
Class Y shares are not offered to the general public and are available
only to (i) persons who at or prior to December 30, 1994 owned shares in a
mutual fund advised by Evergreen Asset, (ii) certain investment advisory clients
of the Advisers and their affiliates, and (iii) institutional investors. Class Y
shares do not bear any Rule 12b-1 distribution expenses and are not subject to
any front-end or contingent deferred sales charges.
GENERAL INFORMATION ABOUT THE FUNDS
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(See also "Other Information - General Information" in each Fund's Prospectus)
Capitalization and Organization
The Evergreen Florida High Income Municipal Bond, Evergreen
Short-Intermediate Municipal Fund and Evergreen Short-Intermediate Municipal
Fund-California are each separate series of The Evergreen Municipal Trust, a
Massachusetts business trust. Florida High Income, which is a newly created
series of The Evergreen Municipal Trust, acquired substantially all of the
assets of ABT Florida High Income Municipal Bond Fund (the"ABT Fund") on June
30, 1995. The Evergreen Florida Municipal Bond Fund, Evergreen Georgia Municipal
Bond Fund, Evergreen North Carolina Municipal Bond Fund, Evergreen South
Carolina Municipal Bond Fund, Evergreen Virginia Municipal Bond Fund and
Evergreen High Grade Tax Free Fund, are each separate series of Evergreen
Investment Trust, a Massachusetts business trust. On July 7, 1995, First Union
Funds changed its name to Evergreen Investment Trust. On December 14, 1992, The
Salem Funds changed its name to First Union Funds. The New Jersey Tax-Free
Income Fund is a separate series of Evergreen Tax Free Trust (formerly known as
FFB Funds Trust, a Massachusetts Business Trust organized on December 4, 1985.
The above-named Trusts are individually referred to in this Statement of
Additional Information as the "Trust" and collectively as the "Trusts". Each
Trust is governed by a board of trustees. Unless otherwise stated, references to
the "Board of Trustees" or "Trustees" in this Statement of Additional
Information refer to the Trustees of all the Trusts.
Each Fund, other than New Jersey Tax-Free, may issue an unlimited number of
shares of beneficial interest with a $0.0001 par value. New Jersey Tax-Free may
issue an unlimited number of shares of beneficial interest with a $0.001 par
value. All shares of these Funds have equal rights and privileges. Each share is
entitled to one vote, to participate equally in dividends and distributions
declared by the Funds and on liquidation to their proportionate share of the
assets remaining after satisfaction of outstanding liabilities. Shares of these
Funds are fully paid, nonassessable and fully transferable when issued and have
no pre-emptive, conversion or exchange rights. Fractional shares have
proportionally the same rights, including voting rights, as are provided for a
full share.
Under each Trust's Declaration of Trust, each Trustee will continue in
office until the termination of the Trust or his or her earlier death,
incapacity, resignation or removal. Shareholders can remove a Trustee upon a
vote of two-thirds of the outstanding shares of beneficial interest of the
Trust. Vacancies will be filled by a majority of the remaining Trustees, subject
to the 1940 Act. As a result, normally no annual or regular meetings of
shareholders will be held, unless otherwise required by the Declaration of Trust
of each Trust or the 1940 Act.
Shares have noncumulative voting rights, which means that the holders
of more than 50% of the shares voting for the election of Trustees can elect
100% of the Trustees if they choose to do so and in such event the holders of
the remaining shares so voting will not be able to elect any Trustees.
The Trustees of each Trust are authorized to reclassify and issue any
unissued shares to any number of additional series without shareholder approval.
Accordingly, in the future, for reasons such as the desire to establish one or
more additional portfolios of a Trust with different investment objectives,
policies or restrictions, additional series of shares may be created by one or
55
<PAGE>
more Trusts. Any issuance of shares of another series or class would be governed
by the 1940 Act and the law of the Commonwealth of Massachusetts. If shares of
another series of a Trust were issued in connection with the creation of
additional investment portfolios, each share of the newly created portfolio
would normally be entitled to one vote for all purposes. Generally, shares of
all portfolios would vote as a single series on matters, such as the election of
Trustees, that affected all portfolios in substantially the same manner. As to
matters affecting each portfolio differently, such as approval of the Investment
Advisory Agreement and changes in investment policy, shares of each portfolio
would vote separately.
In addition any Fund may, in the future, create additional classes of
shares which represent an interest in that same investment portfolio. Except for
the different distribution related and other specific costs borne by such
additional classes, they will have the same voting and other rights described
for the existing classes of each Fund.
Procedures for calling a shareholders meeting for the removal of the
Trustees of each Trust, similar to those set forth in Section 16(c) of the 1940
Act, will be available to shareholders of each Fund. The rights of the holders
of shares of a series of a Fund may not be modified except by the vote of a
majority of the outstanding shares of such series.
An order has been received from the Securities and Exchange Commission
permitting the issuance and sale of multiple classes of shares representing
interests in each Fund. In the event a Fund were to issue additional Classes of
shares other than those described herein, no further relief from the Securities
and Exchange Commission would be required.
Distributor
Evergreen Funds Distributor, Inc. (the "Distributor"), 230 Park Avenue,
New York, New York 10169, serves as each Fund's principal underwriter, and as
such may solicit orders from the public to purchase shares of any Fund. The
Distributor is not obligated to sell any specific amount of shares and will
purchase shares for resale only against orders for shares. Under the Agreement
between each Fund and the Distributor, each Fund has agreed to indemnify the
Distributor, in the absence of its willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations thereunder, against certain
civil liabilities, including liabilities under the Securities Act of 1933, as
amended.
Counsel
Sullivan & Worcester LLP, Washington, D.C., serves as counsel to the
Funds.
Independent Auditors
Price Waterhouse LLP has been selected to be the independent auditors of
Florida High Income, Short-Intermediate and Short-Intermediate-CA.
KPMG Peat Marwick LLP has been selected to be the independent auditors of
Florida Municipal Bond, Georgia Municipal Bond, New Jersey Tax-Free, North
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Carolina Municipal Bond, South Carolina Municipal Bond, Virginia Municipal
Bond, and High Grade.
PERFORMANCE INFORMATION
Total Return
From time to time a Fund may advertise its "total return". Computed
separately for each class, the Fund's "total return" is its average annual
compounded total return for recent one, five, and ten-year periods (or the
period since the Fund's inception). The Fund's total return for such a period is
computed by finding, through the use of a formula prescribed by the Securities
and Exchange Commission, the average annual compounded rate of return over the
period that would equate an assumed initial amount invested to the value of such
investment at the end of the period. For purposes of computing total return,
income dividends and capital gains distributions paid on shares of the Fund are
assumed to have been reinvested when paid and the maximum sales charge
applicable to purchases of Fund shares is assumed to have been paid. The Fund
will include performance data for Class A, Class B, and Class Y shares in any
advertisement or information including performance data of the Fund.
With respect to Short-Intermediate and Short-Intermediate-CA, the
shares of each Fund outstanding prior to January 3, 1995 have been reclassified
as Class Y shares. With respect to Florida High Income, the Fund is the
successor of the ABT Fund and the information presented is with respect to the
ABT Fund's Class A shares, the only outstanding class. The average annual
compounded total return for each Class of shares offered by the Funds for the
most recently completed one year fiscal periods and the period since each Fund's
inception is set forth in the table below.
1 Year Ended From Inception**
8/31/96 to 8/31/96
FLORIDA MUNICIPAL
BOND
Class A 5.15% 7.91%
Class B 4.17% 7.77%
Class Y 5.22% 7.92%
GEORGIA MUNICIPAL
BOND
Class A 6.22% 3.65%
Class B 5.44% 2.99%
Class Y 6.48% 4.45%
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NORTH CAROLINA
MUNICIPAL BOND
Class A 5.21% 5.02%
Class B 4.42% 4.37%
Class Y 5.40% 4.01%
SHORT-INTERMEDIATE
Class A .01% 4.23%
Class B (2.51%) 4.28%
Class Y 3.34% 4.94%
SHORT-INTERMEDIATE-
CA
Class A - -
Class B - -
Class Y 3.24% 4.23%
SOUTH CAROLINA
MUNICIPAL BOND
Class A 6.23% 4.03%
Class B 5.43% 3.33%
Class Y 6.49% 5.46%
VIRGINIA MUNICIPAL
BOND
Class A 5.12% 3.91%
Class B 4.34% 3.23%
Class Y 5.38% 4.79%
HIGH GRADE
Class A .21% 5.86%
Class B (.58%) 4.67%
Class Y 5.47% 4.51%
FLORIDA HIGH
INCOME
Class A 6.42% 7.78%
Class B 8.63% 7.56%
Class Y 6.68% 7.84%
NEW JERSEY TAX
FREE
Class A 5.24% 7.17%
Class B 4.83% 7.09%
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Class Y 5.25% 7.17%
** INCEPTION DATE
Florida Municipal Bond Class A May 11, 1988
Class B and Y July 1, 1995
Georgia Municipal Bond Class A and B June 1, 1993
Class Y February 28, 1994
North Carolina Municipal Class A and B January 12, 1993
Bond Class Y February 28, 1994
Short-Intermediate Class A and B January 3, 1995
Class Y November 18, 1991
Short-Intermediate-CA Class Y October 16, 1988
South Carolina Municipal Class A and B January 3, 1994
Bond Class Y February 28, 1994
Virginia Municipal Bond Class A and B June 1, 1993
Class Y February 28, 1994
High Grade Class A February 21, 1992
Class B January 11, 1993
Class Y February 28, 1994
Florida High Income Class A June 17, 1992
Class B July 10, 1995
Class Y September 20, 1995
New Jersey Tax-Free Class A July 16, 1991
Class B January 30, 1996
Class Y February 8, 1996
The performance numbers for Short-Intermediate and
Short-Intermediate-CA for the Class A, and Class B shares are hypothetical
numbers based on the performance for Class Y shares as adjusted for any
applicable front-end sales charge or contingent deferred sales charge. For
Florida High Income the performance numbers for the Class B and Class Y shares
are hypothetical numbers based upon the performance for the Class A shares as
adjusted for any applicable contingent deferred sales charge.
A Fund's total return is not fixed and will fluctuate in response to
prevailing market conditions or as a function of the type and quality of the
securities in a Fund's portfolio and its expenses. Total return information is
useful in reviewing a Fund's performance but such information may not provide a
basis for comparison with bank deposits or other investments which pay a fixed
yield for a stated period of time. An investor's principal invested in a Fund is
not fixed and will fluctuate in response to prevailing market conditions.
YIELD CALCULATIONS
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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 the Fund's interest income (as defined in the SEC 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+1)6-1]
cd
Where a = 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
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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 rate of distributions a Fund paid over the same
period, or the net investment income reported in a Fund's financial statements.
Tax Equivalent Yield
The Funds invest principally in obligations the interest from which is
exempt from Federal income tax other than the AMT. In addition, the securities
in which state-specific Funds invest will also, to the extent practicable, be
exempt from such state's income taxes. However, from time to time the Funds may
make investment which generate taxable income. A Fund's tax-equivalent yield is
the rate an investor would have to earn from a fully taxable investment in order
to equal the Fund's yield after taxes. Tax-equivalent yields are calculated by
dividing a Fund's yield by the result of one minus a stated Federal or combined
Federal and state tax rate. (If only a portion of the Fund's yield is
tax-exempt, only that portion is adjusted in the calculation.) Of course, no
assurance can be given that a Fund will achieve any specific tax-exempt yield.
If only a portion of the Fund's yield is tax-exempt, only that portion is
adjusted in the calculation. Of course, no assurance can be given that the Fund
will achieve any specific tax-exempt yield.
The following formula is used to calculate Tax Equivalent Yield without taking
into account state tax:
Fund's Yield
1 - Fed Tax Rate
The following formula is used to calculate Tax Equivalent Yield taking into
account state tax:
Fund's Yield
1 - Fed Tax Rate + (State Tax Rate - [State Tax Rate x Fed Tax Rate])
Yield information is useful in reviewing a Fund's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in a Fund's shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that yield
is a function of the kind and quality of the instruments in the Funds'
investment portfolios, portfolio maturity, operating expenses and market
conditions.
It should be recognized that in periods of declining interest rates the
yields will tend to be somewhat higher than prevailing market rates, and in
periods of rising interest rates the yields will tend to be somewhat lower.
Also, when interest rates are falling, the inflow of net new money to a Fund
from the continuous sale of its shares will likely be invested in instruments
producing lower yields than the balance of the Fund's investments, thereby
reducing the current yield of the Fund. In periods of rising interest rates, the
opposite can be expected to occur.
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The tax exempt and tax equivalent yields of each Fund for the
thirty-day period ended August 31, 1996 for each Class of shares offered by the
Funds is set forth in the table below. The table assumes the following combined
Federal and state tax rate: California - 36%; Florida - 28%; Georgia - 34%;
North Carolina - 28%; South Carolina - 35%; Virginia - 33.25%; New Jersey -
33.5%.
Yield Tax Equivalent Yield
Florida High Income
Class A 5.94% 8.25%
Class B 5.43% 7.54%
Class Y 6.50% 9.03%
Short-Intermediate
Class A 3.58% 4.97%
Class B 2.80% 3.89%
Class Y 3.81% 5.29%
Short-Intermediate-CA
Class A - -
Class B - -
Class Y 3.71% 5.80%
Florida Municipal Bond
Class A 5.23% 7.26%
Class B 4.55% 6.32%
Class Y 5.56% 7.72%
Georgia Municipal Bond
Class A 4.91% 7.25%
Class B 4.39% 6.49%
Class Y 5.41% 7.99%
New Jersey Tax-Free
Class A 4.87% 7.16%
Class B 4.17% 6.13%
Class Y 5.17% 7.60%
North Carolina
Municipal Bond
Class A 4.51% 6.26%
Class B 3.97% 5.51%
Class Y 4.99% 6.93%
South Carolina
Municipal Bond
Class A 4.90% 7.32%
Class B 4.38% 6.54%
Class Y 5.40% 8.06%
Virginia Municipal
Bond
Class A 4.76% 6.98%
Class B 4.23% 6.20%
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Class Y 5.24% 7.68%
High Grade
Class A 4.62% 6.42%
Class B 4.09% 5.68%
Class Y 5.11% 7.10%
Non-Standardized Performance
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, Lehman
Brothers General Obligations Municipal Bond Index or any other commonly quoted
index of common stock or municipal bond prices. The Standard & Poor's 500
Composite Stock Price Index and the Dow Jones Industrial Average are unmanaged
indices of selected common stock prices. The Lehman Brothers General Obligations
Municipal Bond Index is an unmanaged index of state general obligation debt
issues which are rated A or better and represent a variety of coupon ranges. 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.
Additional Information
Any shareholder inquiries may be directed to the shareholder's broker or to
each Adviser at the address or telephone number shown on the front cover of this
Statement of Additional Information. This Statement of Additional Information
does not contain all the information set forth in the Registration Statement
filed by the Trusts with the Securities and Exchange Commission under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the Securities and Exchange Commission or may be
examined, without charge, at the offices of the Securities and Exchange
Commission in Washington, D.C.
FINANCIAL STATEMENTS
The financial statements of Florida Municipal Bond, Georgia Municipal
Bond, New Jersey Tax-Free, North Carolina Municipal Bond, South Carolina
Municipal Bond, Virginia Municipal Bond and High Grade, appearing in their most
current fiscal year
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Annual Report to Shareholders and the report thereon of KPMG Peat Marwick LLP,
independent auditors, appearing therein are incorporated by reference in this
Statement of Additional Information. The financial statements of
Short-Intermediate, Short-Intermediate-CA and Florida High Income, appearing in
their most current fiscal year Annual Report to Shareholders and the report
thereon of Price Waterhouse LLP, independent auditors, appearing therein are
incorporated by reference in this Statement of Additional Information. The
Annual Reports to Shareholders for each Fund, which contain the referenced
statements, are available upon request and without charge.
APPENDIX "A"
DESCRIPTION OF BOND, MUNICIPAL NOTE AND COMMERCIAL PAPER RATINGS
Standard & Poor's Ratings Group. A Standard & Poor's corporate or
municipal bond rating is a current assessment of the credit worthiness of an
obligor with respect to a specific obligation. This assessment of credit
worthiness may take into consideration obligers such as guarantors, insurers or
lessees. The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform any audit in connection
with the ratings and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended or withdrawn as a result of changes in,
unavailability of such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with the
terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or their arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA - This is the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to pay interest and
repay any principal.
AA - Debt rated AA also qualifies as high quality debt obligations.
Capacity to pay interest and repay principal is very strong and in the majority
of instances they differ from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay
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principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than is higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on a
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and C the highest degree
of speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB - rating.
B - Debt rated B has greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC - Debt rated CCC has a currently indefinable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC - The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C - The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
C1 - The rating C1 is reserved for income bonds on which no interest is
being paid.
D - Debt rated D is in payment default. It is used when interest
payments or principal payments are not made on a due date even if the applicable
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grace period has not expired, unless Standard & Poor's believes that such
payments will be made during such grace periods; it will also be used upon a
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-) - To provide more detailed indications of credit
quality, the ratings from AA to CCC may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
NR - indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy. Debt
obligations of issuers outside the United States and its territories are rated
on the same basis as domestic corporate and municipal issues. The ratings
measure the credit worthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories (AAA, AA, A, BBB, commonly known as "Investment Grade" ratings)
are generally regarded as eligible for bank investment. In addition, the Legal
Investment Laws of various states may impose certain rating or other standards
for obligations eligible for investment by savings banks, trust companies,
insurance companies and fiduciaries generally.
Moody's Investors Service, Inc. A brief description of the applicable
Moody's Investors Service, Inc. rating symbols and their meanings follows:
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Some bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well. NOTE:
Bonds within the above categories which possess the strongest investment
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attributes are designated by the symbol "1" following the rating.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - bonds which are rated C are the lowest rated class of bonds and
issue so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Duff & Phelps, Inc.: AAA-- highest credit quality, with negligible
risk factors; AA -- high credit quality, with strong protection factors and
modest risk, which may vary very slightly form time to time because of economic
conditions; A--average credit quality with adequate protection factors, but with
greater and more variable risk factors in periods of economic stress. The
indicators "+" and "-" to the AA and A categories indicate the relative position
of a credit within those rating categories.
Fitch Investors Service, Inc.: AAA -- highest credit quality, with an
exceptionally strong ability to pay interest and repay principal; AA -- very
high credit quality, with very strong ability to pay interest and repay
principal; A -- high credit quality, considered strong as regards principal and
interest protection, but may be more vulnerable to adverse changes in economic
conditions and circumstances. The indicators "+" and "-" to the AA, A and BBB
categories indicate the relative position of credit within those rating
categories.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
A Standard & Poor's note rating reflects the liquidity concerns and
market access risks unique to notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
o Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
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o Source of Payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.)
Note rating symbols are as follows:
oSP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
o SP-2 Satisfactory capacity to pay principal and interest.
o SP-3 Speculative capacity to pay principal and interest.
Moody's Short-Term Loan Ratings - Moody's ratings for state and
municipal short-term obligations will be designated Moody's Investment Grade
(MIG). This distinction is in recognition of the differences between short-term
credit risk and long-term risk. Factors affecting the liquidity of the borrower
are uppermost in importance in short-term borrowing, while various factors of
major importance in bond risk are of lesser importance over the short run.
Rating symbols and their meanings follow:
o MIG 1 - This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
o MIG 2 - This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
o MIG 3 - This designation denotes favorable quality. All security
elements are accounted for but this is lacking the undeniable strength
of the preceding grades. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to be less well
established.
o MIG 4 - This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.: Commercial paper rated "Prime" carries the
smallest degree of investment risk. The modifiers 1, 2, and 3 are used to denote
relative strength within this highest classification.
Standard & Poor's Ratings Group: "A" is the highest commercial paper
rating category utilized by Standard & Poor's Ratings Group which uses the
numbers 1+, 1, 2 and 3 to denote relative strength within its "A"
classification.
Duff & Phelps, Inc.: Duff 1 is the highest commercial paper rating
category utilized by Duff & Phelps which uses + or - to denote relative strength
within this classification. Duff 2 represents good certainty of timely payment,
with minimal risk factors. Duff 3 represents satisfactory protection factors,
with risk factors larger and subject to more variation.
Fitch Investors Service, Inc.: F-1+ -- denotes exceptionally strong credit
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quality given to issues regarded as having strongest degree of assurance for
timely payment; F-1+ -- very strong credit quality, with only slightly less
degree of assurance for timely payment than F-1 -- very strong, with only
slightly less degree of assurance for timely payment than F-1+; F-2 -- good
credit quality, carrying a satisfactory degree of assurance for timely payment.
APPENDIX B - ADDITIONAL INFORMATION CONCERNING CALIFORNIA
The following information as to certain California risk factors is
given to investors in view of Short-Intermediate-CA's policy of investing
primarily in California state and municipal issuers. The information is based
primarily upon information derived from public documents relating to securities
offerings of California state and municipal issuers, from independent municipal
credit reports and historically reliable sources, but has not been independently
verified by the Fund
On June 6, 1978, California voters approved Proposition 13, which added
Article XIIIA to the California Constitution. The principal thrust of Article
XIIIA is to limit the amount of ad valorem taxes on real property to one percent
of the full cash value as determined by the county assessor. The assessed
valuation of all real property may be increased, but not in excess of two
percent per year, or decreased to reflect the rate of inflation or deflation as
shown by the consumer price index. Article XIIIA requires a vote of two thirds
of the qualified electorate to impose special taxes, and completely prohibits
the imposition of any additional ad valorem, sales or transaction tax on real
property (other than ad valorem taxes to repay general obligation bonds issued
to acquire or improve real property), and requires the approval of two-thirds of
all members of the State Legislature to change any state tax laws resulting in
increased tax revenues.
On November 6, 1979, California voters approved the initiative seeking
to amend the California Constitution entitled "Limitation of Government
Appropriations" which added Article XIIIB to the California Constitution. Under
Article XIIIB state and local governmental entities have an annual
appropriations limit and may not spend certain monies which are called
appropriations subject to limitations (consisting of tax revenues, state
subventions and certain other funds) in an amount higher than the appropriations
limit. Generally, the appropriations limit is to be based on certain 1978-79
expenditures, and is to be adjusted annually to reflect changes in consumer
prices, population and services provided by these entities.
Decreased in state and local revenues in future fiscal years as a
consequence of these initiatives may continue to result in reductions in
allocations of state revenues to California municipal issuers or reduce the
ability of such California issuers to pay their obligations.
With the apparent onset of recovery in California's economy, revenue
growth over the next few years could recommence at levels that would enable
California to restore fiscal stability. The political environment, however,
combined with pressures on the state's financial flexibility, may frustrate its
ability to reach this goal. Strong interests in long-established state programs
ranging from low-cost public higher education access to welfare and health
benefits join with the more recently emerging pressure for expanded prison
construction and a heightened awareness and concern over the state's business
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climate.
The fiscal 1994 budget, which was adopted on July 8, 1994 was
designed to address California'a accumulated deficit over a 22-month period. In
order to alleviate the California's cash needs the state issued $4 billion
revenue anticipation warrants that mature in April 1996 and $3 billion revenue
anticipation notes that matured in June 1995. The state's fiscal plan relies
upon aggressive assumptions of federal aid, projected at $2.8 billion in fiscal
year 1996, to compensate the state for its costs of providing service to illegal
immigrants. These assumptions, combined with fiscal year 1996 constitutionally
mandated increases in spending for K-14 education, and continued growth in
social services and corrections expenditures, are risky. To offset this risk,
the state has enacted a Budget Adjustment Law, known as the "trigger"
legislation, which established a set of backup budget adjustment mechanisms to
address potential shortfalls in cash. The trigger mechanism will be in effect
for both fiscal years 1995 and 1996. So far in fiscal 1996 state revenue
collections have been sufficiently strong so that no budget adjustments have
been required. However, the state is expected to issue another $2 billion of
notes for cash flow purposes prior to the maturity date of the revenue
anticipation warrants.
In July of 1994, S&P and Moody's lowered the general obligation bond
rating of the state of California. The rating agencies explained their actions
by citing the state's continuing deferral of substantial portions of its
estimated $3.8 billion accumulated deficit; continuing structural budgetary
constraints including a funding guarantee for K-14 education; overly optimistic
expectation of federal aid to balance fiscal year 1995's budget and fiscal year
1996's cash flow projections; and reliance upon a trigger mechanism to reduce
spending if the plan's federal aid assumptions prove to be inflated.
APPENDIX C - ADDITIONAL INFORMATION CONCERNING FLORIDA
Florida Municipal Bond and Florida High Income Fund invest in
obligations of Florida issuers, which results in each Fund's performance being
subject to risks associated with the overall conditions present within the
state. The following information is a brief summary of the recent prevailing
economic conditions and a general summary of the state's financial status. This
information is based on official statements relating to securities that have
been offered by Florida issuers and from other sources believed to be reliable,
but should not be relied upon as a complete description of all relevant
information.
Florida is the twenty-second largest state, with an area of 54,136
square miles and a water area of 4,424 square miles. The state is 447 miles long
and 361 miles wide with a tidal shoreline of almost 2,300 miles. According to
the U.S. Census Bureau, Florida moved past Illinois in 1986 to become the fourth
most populous state, and as of 1990, had an estimated population of 13.2
million.
Services and trade continue to be the largest components of the Florida
economy, reflecting the importance of tourism as well as the need to serve
Florida's rapidly growing population. Agriculture is also an important part of
the economy, particularly citrus fruits. Oranges have been the principal crop,
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accounting for 70% of the nation's output. Manufacturing, although of less
significance, is a rapidly growing component of the economy. The economy also
has substantial insurance, banking, and export participation. Unemployment rates
have historically been below national averages, but have recently risen above
the national rate.
Section 215.32 of the Florida Statutes provides that financial
operations of the State of Florida covering all receipts and expenditures be
maintained through the use of three funds - the General Revenue Fund, the Trust
Fund and the Working Capital Fund. The General Fund receives the majority of
state tax revenues. The Working Capital Fund receives revenues in excess of
appropriations and its balances are freely transferred to the General Revenue
Fund as necessary. In November, 1992, Florida voters approved a constitutional
amendment requiring the state to fund a Budget Stabilization Fund to 5% of
general revenues, with funding to be phased in over five years beginning in
fiscal 1995. The Working Capital Fund will become the Budget Stabilization Fund.
Major sources of tax revenues to the General Revenue Fund are the sales and use
tax, corporate income tax and beverage tax. The over- dependence on the
sensitive sales tax creates vulnerability to recession. Accordingly, financial
operations have been strained during the past few years, but the state has
responded in a timely manner to maintain budgetary control.
The state is highly vulnerable to hurricane damage. Hurricane Andrew
devastated portions of southern Florida in August, 1992, costing billions of
dollars in emergency relief, damage, and repair costs. However, the overall
financial condition of the major issuers of municipal bond debt in the state
were relatively unaffected by Hurricane Andrew, due to federal disaster
assistance payments and the over all level of private insurance. However, it is
possible that single revenue-based local bond issues could be severely impacted
by storm damage in certain circumstances.
Florida's debt structure is complex. Most state debt is payable from
specified taxes and additionally secured by the full faith and credit of the
state. Under the general obligation pledge, to the extent specified taxes are
insufficient, the state is unconditionally required to make payment on bonds
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from all non-dedicated taxes.
Each Fund's concentration in securities issued by the state and its
political subdivisions provides a greater level of risk than a fund which is
diversified across numerous states and municipal entities. The ability of the
state or its municipalities to meet their obligations will depend on the
availability of tax and other revenues; economic, political, and demographic
conditions within the state; and the underlying condition of the state, and its
municipalities.
APPENDIX D - ADDITIONAL INFORMATION CONCERNING GEORGIA
Because Georgia Municipal Bond will ordinarily invest 80% or more of
its net assets in Georgia obligations, it is more susceptible to factors
affecting Georgia issuers than is a comparable municipal bond fund not
concentrated in the obligations of issuers located in a single state.
Georgia's rating reflects the state's positive economic trends,
conservative financial management, improved financial position, and low debt
burden. The state's recovery from the recent economic recession has been steady;
the rate of recovery is better than regional trends, albeit half the rate of
earlier recoveries. While this recovery does not meet the explosive patterns set
in past cycles, recent state data reveal that Georgia ranks among the top five
states in the nation in employment and total population growth. Stronger
economic trends and conservative revenue forecasting resulted in the
continuation of improved financial results for the fiscal year ended June 30,
1994. The state's general fund closed fiscal 1994 with a total fund balance
position of $480.6 million, of which $249.5 million was in the revenue shortfall
reserve fund (3% of revenues), marking the second consecutive year of build-up
in that reserve. The mid-year adjustment reserve was fully funded at $89.1
million. The state's adopted budget fiscal 1995, called for an increase in state
spending to $9.8 billion, up 6.5% from the prior period. Estimating that
economic growth will be in the 6%-8% range for the second straight year, the
budget report forecasted general fund revenues to grow to $9.4 billion, an
increase of $490.0 million, or 5.5% above actual fiscal 1994 levels. Sales and
income taxes account for the majority of that increase, despite a $100 million
cut in personal income taxes. Additional revenues provided by lottery proceeds
($240 million) and indigent-care trust fund monies support the remaining
spending. Revenues for the first three months of the current year are running
nearly 8.4% above fiscal 1994 levels. Most of the increase is attributable to
the growth in personal and corporate income and sales taxes. As a result, the
state anticipates that fiscal 1995 will once again produce positive financial
results.
Except for the major building projects necessary for the 1996 Summer
Olympics, it appears unlikely that areas in and around metropolitan Atlanta will
experience the building construction rates of the mid to late 1980's. It further
appears that many of Georgia's other cities are poised to participate in the
recovery that inevitably will take place.
The classification of the Fund under the Investment Company Act of 1940
as a "non-diversified" investment company allows the Fund to invest more than 5%
of its assets in the securities of any issuer, subject to satisfaction of
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certain tax requirements. Because of the relatively small number of issues of
Georgia obligations, the Fund is likely to invest a greater percentage of its
assets in the securities of a single issuer than is an investment company which
invests in a broad range of municipal obligations. Therefore, the Fund would be
more susceptible than a diversified investment company to any single adverse
economic or political occurrence or development affecting Georgia issuers. The
Fund will also be subject to an increase risk of loss if the issuer is unable to
make interest or principal payments or if the market value of such securities
declines. It is also possible that there will not be sufficient availability of
suitable Georgia tax-exempt obligations for the Fund to achieve its objective of
providing income exempt from Georgia income tax.
APPENDIX E - ADDITIONAL INFORMATION CONCERNING NORTH CAROLINA
Because North Carolina Municipal Bond will ordinarily invest 80% or
more of its net assets in North Carolina obligations, it is more susceptible to
factors affecting North Carolina (or the "State") issuers than is a comparable
municipal bond fund not concentrated in the obligations of issuers located in a
single state.
North Carolina has an economy dependent on manufacturing and
agriculture; however, diversification into trade and service areas is occurring.
Historically, textiles and furniture dominated industry lines, but increased
activity in financial services, research, and high technology manufacturing is
now apparent. Tobacco remains the primary agricultural commodity. Economic
development continues, and long-term personal income trends indicate gains,
although wealth levels remain below those of the nation. Employment growth
accelerated over the past two years, and unemployment rates remain below those
of the nation.
North Carolina is characterized by moderate debt levels (albeit with
growing capital needs), favorable economic performance, and financial strengths
exhibited over the past several years. North Carolina is one of only several
states expected to sustain favorable economic expansion throughout the 1990s,
according to the U.S. Bureau of Economic Analysis indicators. Economic growth in
the State is bolstered by a lower-than-average cost of living, income levels at
about 90% of U.S. averages - though it is much higher in the metropolitan
centers - and a highly respected public and private higher education system,
including the University of North Carolina at Chapel Hill and Duke University in
Durham.
The North Carolina State Constitution requires that the total
expenditures of the State for a fiscal period shall not exceed the total of
receipts during the fiscal period and the surplus remaining in the State
Treasury at the beginning of the period. In certain of the past several years,
the State has had to restrict expenditures to comply with the State
Constitution. The State has long record of sound financial operations, and while
the revenue system is narrow, the budget balancing law is strong and appropriate
curbs are made when necessary.
The state's finances, which enjoyed surpluses and adequate reserves
throughout the 1980s, began reflecting economic downturn in fiscal 1990.
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Reserves were fully depleted during the recession, but through a combination of
tax and spending actions and more recently, with the aid of economic recovery,
have now been fully restored.
Financial operations have been restored to their historically healthy
position after a period of strain between fiscal years 1990 and 1992. Available
unreserved balances and budget stabilization reserve totaled $440 million at the
end of fiscal 1994 equivalent to 4.1% of annual expenditures. On a budgetary
basis, fiscal 1994 ended with an $887.5 million balance; however, a portion of
this balance has been appropriated for fiscal 1995 operations. Conservative
revenue assumptions and sound budgeting practices should result in a similar
balance at the end of 1995. The restoration of adequate reserve levels confirms
the state's longstanding commitment to a sound financial position.
Debt ratios are among the lowest in the country. State debt ratios will
remain below national medians even after all of the $300 million of currently
authorized debt is issued. Payout is rapid.
North Carolina ranks among the top ten states in terms of economic
growth, as measured by job and personal income growth. Diversification into
financial services, research, and high technology manufacturing is reducing
historical dependence on agriculture, textiles, and furniture manufacturing.
As of December 31, 1994, general obligations of the State of North
Carolina were rated Aaa/AAA/AAA by Moody's, S&P and Fitch Investors Service
("Fitch"), respectively. There can be no assurance that the economic conditions
on which these ratings are based will continue or that particular bond issues
may not be adversely affected by changes in economic, political or other
conditions.
North Carolina obligations also include obligations of the governments
of Puerto Rico, the Virgin Islands and Guam to the extent these obligations are
exempt from North Carolina State personal income taxes. The Fund will not invest
more than 5% of its net assets in the obligations of each of the Virgin Islands
and Guam, but may invest without limitation in the obligations of Puerto Rico.
Accordingly, the Fund may be adversely affected by local political and economic
conditions and developments within Puerto Rico affecting the issuers of such
obligations.
APPENDIX F - ADDITIONAL INFORMATION CONCERNING SOUTH CAROLINA
The State of South Carolina has an economy dominated from the early
1920s to the present by textile industry, with over one of every three
manufacturing workers directly or indirectly related to the textile industry.
However, since 1950 the economic bases of the State have become more
diversified, as the trade and service sectors and durable goods manufacturing
industries have developed. Currently, Moody's rates South Carolina general
obligations bonds "Aaa" and S&P rates such bonds "AAA". There can be no
assurance that the economic conditions on which those ratings are based will
continue or that particular bond issues may not be adversely affected by changes
in the economic or political conditions.
The South Carolina State Constitution mandates a balanced budget. If a
deficit occurs, the General Assembly must account for it in the succeeding
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fiscal year. In addition, if a deficit appears likely, the State Budget and
Control Board (the "State Board") may reduce appropriations during the current
fiscal year as necessary to prevent the deficit. The State Constitution limits
annual increases in State appropriations to the average growth rate of the
economy of the State and annual increases in the number of State employees to
the average growth of the population of the State.
The State Constitution requires a General Reserve Fund ("General Fund")
that equals three percent of General Fund revenue for the latest fiscal year.
When deficits have occurred, the State has funded them out of the General Fund.
The State Constitution also requires a Capital Reserve Fund ("Capital Fund")
equal to two percent of General Fund revenue. Before March 1st of each year, the
Capital Fund must be used to offset mid-year budget reductions before mandating
cuts in operating appropriations, and after March 1st, the Capital Fund may be
appropriated by a special vote of the General Assembly to finance previously
authorized capital improvements or other nonrecurring purposes. Monies in the
Capital Fund not appropriated or any appropriation for a particular project or
item that has been reduced due to application of the monies to a year-end
deficit must go back to the General Fund.
South Carolina Municipal Bond's concentration in securities issued by
the State or its subdivisions provides a greater level of risk than an
investment company which is diversified across a larger geographic area. For
example, the passage of the North American Free Trade Agreement could result in
increased competition for the State's textile industry due to the availability
of less-expensive foreign labor.
Presently, South Carolina subjects bonds issued by other states to its
income tax. If this tax was declared unconstitutional, the value of bonds in the
Fund could decline a small but measurable amount. Also, the Fund could become
slightly less attractive to potential future investors.
The Fund's investment adviser believes that the information summarized
above describes some of the more significant matters relating to the Fund. The
sources of the information are the official statements of issuers located in
South Carolina, other publicly available documents, and oral statements from
various State agencies. The Fund's investment adviser has not independently
verified any of the information contained in the official statement, other
publicly available documents, or oral statements from various State agencies.
APPENDIX G - ADDITIONAL INFORMATION CONCERNING VIRGINIA
Virginia Municipal Bond invests in obligations of Virginia issuers,
which results in the Fund's performance being subject to risks associated with
the overall conditions present within the State. The following information is a
brief summary of the recent prevailing economic conditions and a general summary
of the State's financial status. This information is based on official
statements relating to securities that have been offered by Virginia issuers and
from other sources believed to be reliable, but should not be relied upon as a
complete description of all relevant information.
Virginia's credit strength is derived from a diversified economy,
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relatively low unemployment rates, strong financial management, and low debt
burden. The State's economy benefits significantly from its proximity to
Washington D.C. Government is the State's third- largest employment sector,
comprising 21% of total employment. Other important sectors of the economy
include shipbuilding, tourism, construction, and agriculture.
Virginia is a very conservative debt issuer and has maintained debt
levels that are low in relation to its substantial resources. Conservative
policies also dominate the State's financial operations, and the State
administration continually demonstrates its ability and willingness to adjust
financial planning and budgeting to preserve financial balance. For example,
economic weakness in the State and the region caused personal income and sales
and corporate tax collections to fall below projected forecasts and placed the
State under budgetary strain. The State reacted by reducing its revenue
expectations for the 1990-92 biennium and preserved financial balance through a
series of transfers, appropriation reductions, and other budgetary revisions.
Management's actions resulted in a modest budget surplus for fiscal 1992, and
another modest surplus was reported for fiscal 1993, which ended June 30th. The
1994 Virginia budget experienced a significant surplus due to an improving
economy, including job growth of 3.0%/year overall. Overall, Virginia has a
stable credit outlook due mainly to its diverse economy and resource base, as
well as a conservative approach to financial operations. Revenue growth for 1994
was 6%. Budgets for 1995 and 1996 call for revenue growth of 6.1% and 5.8%,
respectively.
The Fund's concentration in securities issued by the State and its
political subdivisions provides a greater level of risk than a fund which is
diversified across numerous states and municipal entities. The ability of the
State or its municipalities to meet their obligations will depend on the
availability of tax and other revenues; economic, political, and demographic
conditions within the State; and the underlying fiscal condition of the State,
its countries, and its municipalities.
Virginia faces some economic uncertainties with respect to
defense-cutbacks. Although Virginia's unemployment rate of 4.9% (as of August,
1994) is well below the national rate of 5.9%, the State has been able to make
some gains in the services, government, and construction sectors when
manufacturing and trade were down slightly.
The effects of the most recent base-closing legislation were muted
because of consolidation from out-of-state bases to Virginia installations.
While military operations at the Pentagon are unlikely to be threatened, another
round of base-closings scheduled for 1995 may jeopardize a number of Virginia
installations.
<PAGE>
KEYSTONE STATE TAX FREE FUND
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
EVERGREEN KEYSTONE STATE TAX FREE FUNDS
STATEMENT OF ADDITIONAL INFORMATION
JULY 21, 1997
AS SUPPLEMENTED SEPTEMBER 18, 1997
Keystone California Tax Free Fund
Keystone Florida Tax Free Fund
Keystone Massachusetts Tax Free Fund
Keystone Missouri Tax Free Fund
Evergreen New Jersey Tax Free Income Fund
Keystone New York Tax Free Fund
Keystone Pennsylvania Tax Free Fund
This statement of additional information is not a prospectus, but relates
to, and should be read in conjunction with, the prospectus of the Evergreen
Keystone State Tax Free Funds comprised of the Keystone California Tax Free Fund
(the "California Fund"), the Keystone Florida Tax Free Fund (the "Florida
Fund"), the Keystone Massachusetts Tax Free Fund (the "Massachusetts Fund"), the
Keystone Missouri Tax Free Fund (the "Missouri Fund"), the Evergreen New Jersey
Tax Free Income Fund (the "New Jersey Fund"), the Keystone New York Tax Free
Fund (the "New York Fund"), and the Keystone Pennsylvania Tax Free Fund (the
"Pennsylvania Fund") (each a "Fund" and, collectively, the "Funds") dated July
21, 1997, as supplemented from time to time, relating to Class A, Class B and
Class C shares (Class A and Class B shares for the New Jersey Fund), the
separate prospectus of Pennsylvania Fund offering Class Y shares dated September
18, 1997 or the separate prospectus of the New Jersey Fund offering Class Y
shares dated July 21, 1997. You may obtain a copy of the prospectus from the
Funds' principal underwriter, Evergreen Keystone Distributor, Inc., or your
broker-dealer. See "Service Providers" below.
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TABLE OF CONTENTS
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Page
The Trusts and Their Funds....................................................2
Service Providers.............................................................2
Investment Policies...........................................................3
Investment Restrictions.......................................................5
Valuation of Securities.......................................................7
Brokerage.....................................................................7
Sales Charges................................................................ 9
Distribution Plans...........................................................11
Trustees and Officers........................................................13
Investment Advisers..........................................................16
Principal Underwriter........................................................18
Administrator................................................................19
Sub-administrator............................................................19
Declarations of Trust........................................................19
Expenses ....................................................................20
Standardized Total Return and Yield Quotations...............................22
Financial Statements.........................................................24
Additional Information.......................................................24
Appendix A..................................................................A-1
Appendix B..................................................................B-1
20445
<PAGE>
2
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THE TRUSTS AND THEIR FUNDS
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Each of the Funds is a series of an open-end, nondiversified management
investment company, commonly known as a mutual fund. The Florida, Massachusetts,
New York and Pennsylvania Funds are investment series evidencing interests in
different portfolios of securities of the Keystone State Tax Free Fund
("KSTFF"). The California and Missouri Funds are investment series evidencing
interests in different portfolios of securities of the Keystone State Tax Free
Fund - Series II ("KSTFFII"). The New Jersey Fund is an investment series of The
Evergreen Tax Free Trust (formerly FFB Funds Trust) ("TETFT"). KSTFF, KSTFFII
and TETFT were formed as Massachusetts business trusts in 1990, 1993 1985,
respectively.
The essential information about the Trusts and their Funds is contained in
their respective prospectuses. This statement of additional information (the
"SAI") provides additional information about each Trust and its Fund(s) that may
be of interest to some investors.
For special factors affecting each Fund, see Appendix A to this statement
of additional information.
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SERVICE PROVIDERS
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<TABLE>
<CAPTION>
Service Provider
- ----------------------------------------- -----------------------------------------------------------------------
<S> <C>
Investment adviser to the Keystone Investment Management Company, 200 Berkeley
Florida, Massachusetts, New Street, Boston, Massachusetts 02116. Keystone is a wholly-
York and Pennsylvania Funds owned subsidiary of First Union Keystone, Inc., (formerly
(referred to in this SAI as Keystone Investments, Inc.) ("First Union Keystone") also
"Keystone") located at 200 Berkeley Street, Boston, Massachusetts
02116.
Investment adviser to the New The Capital Management Group of First Union National
Jersey Fund (referred to Bank, located at 301 So. College Street,
in this SAI as "CMG") Charlotte, North Carolina 28288.
Principal underwriter ( referred Evergreen Keystone Distributor, Inc. (formerly Evergreen
to in this SAI as "EKD") Funds Distributor, Inc.), 125 W. 55th Street, New York,
New York 10019.
Marketing services agent and Evergreen Keystone Investment Services, Inc. (formerly
administrator to the New Jersey Keystone Investment Distributors Company and
Fund (referred to in this SAI as predecessor to EKD with regard to the California, Florida,
"EKIS") Massachusetts, Missouri, New York and Pennsylvania
Funds), 200 Berkeley Street, Boston, Massachusetts 02116.
Sub-administrator (referred to in BISYS Fund Services, Inc., 125 W. 55th Street, New York,
this SAI as "BISYS") New York 10019.
Transfer and dividend Evergreen Keystone Service Company, 200 Berkeley
disbursing agent (referred to in Street, Boston, Massachusetts 02116 (formerly Keystone
this SAI as "EKSC") Investor Resource Center, Inc.). (EKSC is a wholly-owned
subsidiary of First Union Keystone.)
Independent auditors KPMG Peat Marwick LLP, 99 High Street, Boston,
Massachusetts 02110, Certified Public Accountants
Custodian State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110.
</TABLE>
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INVESTMENT POLICIES
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Each Fund invests primarily in municipal obligations that are exempt
from federal income tax and are also exempt from certain specified taxes in the
state for which it is named. In addition, the Funds invest in certain other
securities as described below.
MUNICIPAL OBLIGATIONS
Municipal obligations include debt obligations issued by or on behalf of a
state, a territory or a possession of the United States ("U.S."), the District
of Columbia or any political subdivision, agency or instrumentality thereof (for
example, counties, cities, towns, villages, districts, authorities) to obtain
funds for various public purposes, including the construction of a wide range of
public facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which municipal obligations may be issued include the refunding of
outstanding obligations, obtaining funds for general operating expenses and
obtaining funds to lend to public or private institutions for the construction
of facilities, such as educational, hospital and housing facilities. In
addition, certain types of industrial development bonds have been or may be
issued by or on behalf of public authorities to finance certain
privately-operated facilities, and certain local facilities for water supply,
gas, electricity or sewage or solid waste disposal. Such obligations are
included within the term municipal obligations if the interest paid thereon
qualifies as fully exempt from federal income tax. The income of certain types
of industrial development bonds used to finance certain privately-operated
facilities (qualified private activity bonds) issued after August 7, 1986, while
exempt from federal income tax, is includable for the purposes of the
calculation of the alternative minimum tax. Other types of industrial
development bonds, the proceeds from which are used for the construction,
equipment, repair or improvement of privately operated industrial or commercial
facilities, may constitute municipal obligations, although the current federal
tax laws place substantial limitations on the size of such issues.
The two principal classifications of municipal obligations are "general
obligation" and limited obligation or "revenue" bonds. General obligation bonds
are obligations involving the credit of an issuer possessing taxing power and
are payable from the issuer's general unrestricted revenues and not from any
particular fund or revenue source. Their payment may be dependent upon an
appropriation by the issuer's legislative body and may be subject to
quantitative limitations on the issuer's taxing power. The characteristics and
methods of enforcement of general obligation bonds vary according to the law
applicable to the particular issuer. Limited obligation or revenue bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source, such as the user of the facility. Industrial
development bonds that are municipal obligations are, in most cases, revenue
bonds and generally are not payable from the unrestricted revenues of the
issuer. The credit quality of industrial development revenue bonds is usually
directly related to the credit standing of the owner or user of the facilities.
There are, of course, variations in the security of municipal obligations, both
within a particular classification and between classifications, depending on
numerous factors.
The yields on municipal obligations are dependent on a variety of factors,
including general money market conditions, the financial condition of the
issuer, general conditions of the municipal obligations market, size of a
particular offering, and the maturity of the obligation and rating of the issue.
The ratings of Standard & Poor's Ratings Group ("S&P"), Moody's Investors
Service ("Moody's") and Fitch Investor Services, L.P. ("Fitch"), as described
herein and in the prospectus, represent their opinions as to the quality of the
municipal obligations that they undertake to rate. It should be emphasized,
however, that ratings are general and not absolute standards of quality.
Consequently, municipal obligations with the same maturity, interest rate and
rating may have different yields while municipal obligations of the same
maturity and interest rate with different ratings may have the same yield. It
should also be noted that the standards of disclosure applicable to and the
amount of information relating to the financial condition of issuers of
municipal obligations are not generally as extensive as those generally relating
to corporations.
Subsequent to its purchase by a Fund, a municipal obligation or other
investment may cease to be rated or its rating may be reduced below the minimum
rating required for purchase by the Fund. Neither event requires a Fund to sell
such obligation from its portfolio, but its investment adviser will consider
such an event in its determination of whether the Fund should continue to hold
such obligation in its portfolio.
The ability of each Fund to achieve its investment objective depends upon
the continuing ability of issuers of municipal obligations to pay interest and
principal when due. Municipal obligations are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the federal Bankruptcy Act, and laws, if any, that may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations. There is also the possibility that the result of litigation
or other conditions may materially affect the power or ability of an issuer to
pay principal of and interest on its municipal obligations when due. In
addition, the market for municipal obligations is often thin and can be
temporarily affected by large purchases and sales, including those by a Fund.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal obligations, and similar proposals may well be introduced
in the future. The enactment of such a proposal could materially affect the
availability of municipal obligations for investment by the Funds and the value
of the Funds' portfolios. In which event, each Trust would reevaluate the
investment objectives and policies of its Fund(s) and consider changes in the
structure of the Fund(s) or dissolution.
The Tax Reform Act of 1986 made significant changes in the federal tax
status of certain obligations that were previously fully federally tax-exempt.
As a result, three categories of such obligations issued after August 7, 1986
now exist: (1)"public purpose" bonds, the income from which remains fully exempt
from federal income tax; (2) qualified "private activity" industrial development
bonds, the income from which, while exempt from federal income tax under Section
103 of the Internal Revenue Code of 1986, as amended (the "Code"), is includable
in the calculation of the federal alternative minimum tax; and (3) "private
activity" (private purpose) bonds, the income from which is not exempt from
federal income tax. A Fund will not invest in private purpose bonds and, except
as described under "Other Eligible Investments," will not invest in qualified
"private activity" industrial development bonds whose distributions are subject
to the alternative minimum tax.
OTHER ELIGIBLE INVESTMENTS
A Fund may invest up to 20% of its assets under ordinary circumstances,
and up to 100% of its assets for temporary defensive purposes in the following
types of instruments: (1) commercial paper, including master demand notes, that
at the date of investment is rated A-1 (the highest grade by S&P), Prime-1 (the
highest grade by Moody's) or, if not rated by such services, is issued by a
company that at the date of investment has an outstanding issue rated A or
better by S&P or Moody's; (2) obligations, including certificates of deposit and
bankers' acceptances, of banks, or savings and loan associations, that have at
least $1 billion in assets as of the date of their most recently published
financial statements that are members of the Federal Deposit Insurance
Corporation, including U.S. branches of foreign banks and foreign branches of
U.S. banks; (3) corporate obligations (maturing in 13 months or less) that at
the date of investment are rated A or better by S&P or Moody's; (4) obligations
issued or guaranteed by the U.S. government or by any agency or instrumentality
of the U.S.; (5) qualified "private activity" industrial development bonds the
income from which, while exempt from federal income tax under Section 103 of the
Code, is includable in the calculation of the federal alternative minimum tax;
and (6) municipal obligations, the income of which is exempt from federal income
tax, personal property tax or intangibles tax in a state for which a Fund is
named and where such taxes apply.
Each Fund may assume a temporary defensive position upon its investment
adviser's determination that market conditions so warrant. If a Fund is
investing defensively, it is not pursuing its investment objectives.
From time to time, the Massachusetts Fund and the New Jersey Fund may
invest in zero coupon bonds. The Funds do not expect to have enough zero coupon
bonds to have a material effect on dividends. Zero coupon securities pay no
interest to holders prior to maturity, and the interest on these securities is
reported as income to a Fund and distributed to its shareholders. These
distributions must be made from a Fund's cash assets or, if necessary, from the
proceeds of sales of portfolio securities. The Funds 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.
FUNDAMENTAL NATURE OF INVESTMENT OBJECTIVES
The investment objective of each Fund is fundamental and may not be changed
without approval of the holders of a majority of such Fund's outstanding voting
shares (as defined in the Investment Company Act of 1940, as amended (the "1940
Act") i.e., the lesser of (1) 67% of the shares represented at a meeting at
which more than 50% of the outstanding shares are represented or (2) more than
50% of the outstanding shares).
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INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The investment restrictions as summarized below are fundamental for each
Fund and may not be changed without the approval of a 1940 majority of such
Fund's outstanding shares. Unless otherwise stated, all references to the assets
of a Fund are in terms of current market value.
Each Fund may not do the following:
(1) purchase any security of any issuer (other than issues of the U.S.
government, its agencies or instrumentalities) if as a result more than 25% of
its total assets would be invested in a single industry, (for the California,
Florida, Massachusetts, Missouri, New York and Pennsylvania Funds) including
industrial development bonds from the same facility or similar types of
facilities; governmental issuers of municipal bonds are not regarded as members
of an industry and a Fund may invest more than 25% of its assets in industrial
development bonds and, for the New Jersey Fund, in certificates of deposit and
banker's acceptances issued by domestic branches of U.S. banks or New Jersey
municipal obligations;
(2) (for the California, Florida, Massachusetts, Missouri, New York and
Pennsylvania Funds only) invest more than 10% of its assets in securities with
legal or contractual restrictions on resale or in securities for which market
quotations are not readily available, or in repurchase agreements maturing in
more than seven days;
(3) issue senior securities; the purchase or sale of securities on a "when
issued" basis, or collateral arrangement with respect to the writing of options
on securities, are not deemed to be the issuance of a senior security;
(4) (for the California, Florida, Massachusetts, Missouri, New York and
Pennsylvania Funds only) borrow money or enter into reverse repurchase
agreements, except that a Fund may enter into reverse repurchase agreements or
borrow money from banks for temporary or emergency purposes in aggregate amounts
up to one-third of the value of the Fund's net assets; provided that while
borrowings from banks (not including reverse repurchase agreements) exceed 5% of
the Fund's net assets, any such borrowings will be repaid before additional
investments are made;
(5) purchase securities on margin except that it may obtain such
short-term credit as may be necessary for the clearance of purchases and sales
of securities;
(6) make loans, except that a Fund may purchase or hold debt securities
consistent with its investment objectives, lend portfolio securities valued at
not more than 15% of its total assets to broker-dealers and enter into
repurchase agreements;
(7) purchase securities of other investment companies (for the California,
Florida, Massachusetts, Missouri, New York and Pennsylvania Funds) except as
part of a merger, consolidation, purchase of assets or similar transaction; and,
for the New Jersey Fund, except to the extent such purchases are not prohibited
by applicable law.
(8) purchase or sell commodities or commodity contracts or real estate,
except that it may purchase and sell securities secured by real estate and
securities of companies which invest in real estate, and, with the exception of
the New Jersey Fund, may engage in currency or other financial futures contracts
and related options transactions; and
(9) underwrite securities of other issuers, except that the Fund may
purchase securities from the issuer or others and dispose of such securities in
a manner consistent with its investment objective.
For the New Jersey Fund only:
(10) issue senior securities, borrow money or pledge or mortgage its
assets, except that the Fund may borrow from banks up to 10% of the value of its
total net assets for temporary or emergency purposes only to meet anticipated
redemption requirements. The Fund will not purchase securities while any such
borrowings are outstanding.
(11) write, purchase or sell put or call options, or combinations thereof,
except that the Fund may purchase securities with rights to put securities to
the seller in accordance with its investment program.
(12) purchase restricted securities, which are securities that must be
registered under the Securities Act of 1933 before they may be offered or sold
to the public. This restriction does not apply to restricted securities which
are determined to be liquid by the Fund's investment adviser under supervision
of the Board of Trustees.
(13) purchase equity securities or securities convertible into equity
securities.
The Funds are nondiversified under the federal securities laws. The 1940
Act does not restrict the percentage of a nondiversified fund's assets that may
be invested at any time in the securities of any one issuer. The Funds intend to
comply, however, with the Code's diversification requirements and other
requirements applicable to "regulated investment companies" so that they will
not be subject to U.S. federal income tax on income and capital gain
distributions to shareholders. For this reason, each Fund, with the exception of
the New Jersey Fund, has adopted the additional investment restriction set forth
below, which may not be changed without the approval of shareholders.
Specifically, a Fund may not purchase a security if more than 25% of the Fund's
total assets would be invested in the securities of a single issuer (other than
the U.S. government, its agencies and instrumentalities); or, with respect to
50% of the Fund's total assets, if more than 5% of such assets would be invested
in the securities of a single issuer (other than the U.S. government, its
agencies and instrumentalities).
To the extent the Funds are not fully diversified, they may be more
susceptible to adverse economic, political or regulatory developments affecting
a single issuer than would be the case if the Funds were more broadly
diversified.
As a matter of practice, each Fund permitted to enter into repurchase
agreements treats reverse repurchase agreements as borrowings for purposes of
compliance with the limitations of the 1940 Act. Reverse repurchase agreements
will be taken into account along with borrowings from banks for purposes of the
5% limit set forth in the fourth fundamental investment restriction above.
None of the Funds presently intends to invest more than 25% of its total
assets in municipal obligations the payment of which depends on revenues derived
from a single facility or similar types of facilities. Since certain municipal
obligations may be related in such a way that an economic, business or political
development or change affecting one such security could likewise affect the
other securities, a change in this policy could result in increased investment
risk, but no change is presently contemplated.
For the purposes of the first and ninth fundamental investment restrictions
set forth above, each Fund will treat (1) each state, territory and possession
of the U.S., the District of Columbia and, if its assets and revenues are
separate from those of the entity or entities creating it, each political
subdivision, agency and instrumentality of any one (or more, as in the case of a
multi state authority or agency) of the foregoing as an issuer of all securities
that are backed primarily by its assets or revenues; (2) each company as an
issuer of all securities that are backed primarily by its assets or revenues;
and (3) each of the foregoing entities as an issuer of all securities that it
guarantees; provided, however, that for the purpose of the first fundamental
investment restriction no entity shall be deemed to be an issuer of a security
that it guarantees so long as no more than 10% of a Fund's total assets (taken
at current value) are invested in securities guaranteed by the entity and
securities of which it is otherwise deemed to be an issuer.
If a percentage limit is satisfied at the time of investment, a later
increase or decrease resulting from a change in asset value is not a violation
of the limit.
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VALUATION OF SECURITIES
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Current values for each Fund's portfolio securities may be determined in
the following manner:
1. short-term investments with maturities of sixty days or less when
purchased are valued at amortized cost (original purchase cost as adjusted for
amortization of premium or accretion of discount), which, when combined with
accrued interest, approximates market;
2. short-term investments having maturities of more than sixty days for
which market quotations are readily available are valued at current market
value; and
3. short-term investments having maturities of more than sixty days when
purchased that are held on the sixtieth day prior to maturity are valued at
amortized cost (market value on the sixtieth day adjusted for amortization of
premium or accretion of discount), which, when combined with accrued interest,
approximates market;
All other investments are valued at market value or, where market
quotations are not readily available, at fair value as determined in good faith
according to procedures established by a Trust's Board of Trustees.
The Trusts believe that reliable market quotations are generally not
readily available for purposes of valuing municipal obligations. As a result,
depending on the particular municipal obligations owned by a Fund, it is likely
that most of the valuations for such obligations will be based upon their fair
value determined under procedures approved by each respective Board of Trustees.
The Boards of Trustees have authorized the use of a pricing service to determine
the fair value of each Fund's municipal obligations and certain other
securities.
Taxable securities for which market quotations are readily available are
valued on a consistent basis at that price quoted that, in the opinion of the
Boards of Trustees or the person designated by the Boards of Trustees to make
the determination, most nearly represents the market value of the particular
security.
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BROKERAGE
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SELECTION OF BROKERS
In effecting transactions in portfolio securities for a Fund, Keystone or
CMG seeks the best execution of orders at the most favorable prices. Keystone or
CMG determines whether a broker-dealer has provided a Fund with best execution
and price in the execution of a securities transaction by evaluating, among
other things:
1. overall direct net economic result to such Fund;
2. the efficiency with which the transaction is effected;
3. the broker-dealer's ability to effect the transaction where a
large block is involved;
4. the broker-dealer's readiness to execute potentially difficult
transactions in the future;
5. the financial strength and stability of the broker-dealer; and
6. the receipt of research services, such as analyses and reports
concerning issuers, industries, securities, economic factors
and trends and other statistical and factual information.
The Funds' management weighs these considerations in determining the
overall reasonableness of the brokerage commissions paid.
Should a Fund, Keystone or CMG receive research and other statistical and
factual information from a broker, such Fund would consider such services to be
in addition to, and not in lieu of, the services Keystone or CMG is required to
perform under their respective Advisory Agreements (as defined below). Keystone
and CMG believe that the cost, value and specific application of such
information are indeterminable and cannot be practically allocated between a
Fund and its other clients who may indirectly benefit from the availability of
such information. Similarly, a Fund may indirectly benefit from information made
available as a result of transactions effected for Keystone or CMG's other
clients. Under the Advisory Agreements, Keystone and CMG are permitted to pay
higher brokerage commissions for brokerage and research services in accordance
with Section 28(e) of the Securities Exchange Act of 1934. In the event Keystone
and CMG follow such a practice, they will do so on a basis that is fair and
equitable to the Funds.
Each Trust's Board of Trustees has determined that a Fund may consider
sales of such Fund's shares as a factor in the selection of brokers to execute
portfolio transactions, subject to the requirements of best execution described
above.
BROKERAGE COMMISSIONS
Each Trust expects that purchases and sales of municipal obligations and
temporary instruments usually will be principal transactions. Municipal
obligations and temporary instruments are normally purchased directly from the
issuer or from an underwriter or market maker for the securities. There usually
will be no brokerage commissions paid by a Fund for such purchases. Purchases
from underwriters will include the underwriting commission or concession, and
purchases from broker-dealers serving as market makers will include a dealer's
mark up or reflect a dealer's mark down. Where transactions are made in the
over-the-counter market, each Fund will deal with primary market makers unless
more favorable prices are otherwise obtainable.
GENERAL BROKERAGE POLICIES
In order to take advantage of the availability of lower purchase prices, a
Fund may participate, if and when practicable, in group bidding for the direct
purchase from an issuer of certain securities.
Keystone and CMG make investment decisions for each Fund independently from
those of their other clients. It may frequently develop, however, that Keystone
or CMG will make the same investment decision for more than one client.
Simultaneous transactions are inevitable when the same security is suitable for
the investment objective of more than one account. When two or more of its
clients are engaged in the purchase or sale of the same security, Keystone or
CMG will allocate the transactions according to a formula that is equitable to
each of its clients. Although, in some cases, this system could have a
detrimental effect on the price or volume of a Fund's securities, each Trust
believes that in other cases its ability to participate in volume transactions
will produce better executions.
A Fund does not purchase portfolio securities from or sell portfolio
securities to Keystone, CMG, EKD or any of their affiliated persons, as defined
in the 1940 Act.
Each Board of Trustees will, from time to time, review that Trust's
brokerage policy. Because of the possibility of further regulatory developments
affecting the securities exchanges and brokerage practices generally, the
respective Board of Trustees may change, modify or eliminate any of the
foregoing practices.
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SALES CHARGES
- --------------------------------------------------------------------------------
Each Fund offers the classes of shares indicated below that differ
primarily with respect to sales charges and distribution fees. As described
below, depending upon the class of shares that you purchase, a Fund will impose
a sales charge when you purchase Fund shares, a contingent deferred sales charge
(a "CDSC") when you redeem Fund shares or no sales charges at all. A Fund
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"). If imposed, a Fund deducts CDSCs from the
redemption proceeds you would otherwise receive. CDSCs attributable to your
shares are, to the extent permitted by the National Association of Securities
Dealers, Inc. ("NASD"), paid to EKD or its predecessor. See the prospectus for
additional information on a particular class.
FUND CLASSES
California Fund A, B, C
Florida Fund A, B, C
Massachusetts Fund A, B, C
Missouri Fund A, B, C
New Jersey Fund A, B, Y
New York Fund A, B, C
Pennsylvania Fund A, B, C, Y
CLASS DISTINCTIONS
CLASS A SHARES
With certain exceptions, when you purchase Class A shares you will pay a
maximum sales charge of 4.75%, payable at the time of purchase. (The prospectus
contains a complete table of applicable sales charges and a discussion of sales
charge reductions or waivers that may apply to purchases.) If you purchase Class
A shares in the amount of $1 million or more, without an initial sales charge,
the Fund will charge a CDSC of 1.00% if you redeem during the month of your
purchase and the 12-month period following the month of your purchase. See
"Calculation of Contingent Deferred Sales Charge" below.
CLASS B SHARES
Each Fund offers Class B shares at net asset value (without an initial
sales charge). With respect to Class B shares, each Fund charges a CDSC on
shares redeemed as follows:
REDEMPTION TIMING CDSC RATE
Month of purchase and the first twelve-month
period following the month of purchase..................5.00%
Second twelve-month
period following the month of purchase..................4.00%
Third twelve-month
period following the month of purchase..................3.00%
Fourth twelve-month
period following the month of purchase..................3.00%
Fifth twelve-month
period following the month of purchase..................2.00%
Sixth twelve-month
period following the month of purchase..................1.00%
Thereafter...................................................0.00%
Class B shares that have been outstanding for seven years after the month
of purchase, will automatically convert to Class A shares without imposition of
a front-end sales charge or exchange fee. (Conversion of Class B shares
represented by stock certificates will require the return of the stock
certificate to Evergreen Keystone Service Company ("EKSC") each Trust's transfer
and dividend disbursing agent.)
CLASS C SHARES - CALIFORNIA, FLORIDA, MASSACHUSETTS, MISSOURI, NEW YORK AND
PENNSYLVANIA FUNDS ONLY
Class C shares are available only through broker-dealers who have entered
into special distribution agreements with the Underwriter. Each Fund offers
Class C shares at net asset value (without an initial sales charge). With
certain exceptions, however, a Fund will charge a CDSC of 1.00%, if you redeem
shares during the month of your purchase and the 12-month period following the
month of your purchase. See "Calculation of Contingent Deferred Sales Charge"
below.
CLASS Y SHARES - NEW JERSEY AND PENNSYLVANIA FUNDS ONLY
No CDSC is imposed on the redemption of class Y shares. Class Y shares are
not offered to the general public and are available only to (i) persons who at
or prior to December 31, 1994 owned shares in a mutual fund advised by Evergreen
Asset Management Corp. ("Evergreen Asset"), (ii) certain institutional
investors, and (iii) investment advisory clients of FUNB, 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.
CALCULATION OF CONTINGENT DEFERRED SALES CHARGE
Any CDSC imposed upon the redemption of Class A, Class B or Class C shares
is a percentage of the lesser of (1) the net asset value of the shares redeemed
or (2) the net cost of such shares. Upon request for redemption, a Fund will
redeem shares not subject to the CDSC first. Thereafter, a Fund will redeem
shares held the longest first.
SHARES THAT ARE NOT SUBJECT TO A SALES CHARGE OR CDSC
EXCHANGES
A Fund does not charge a CDSC when you exchange your shares for the shares
of the same class of another Evergreen Keystone Fund. However, if you are
exchanging shares that are still subject to a CDSC, the CDSC will carry over to
the shares you acquire by the exchange. Moreover, a Fund will compute any future
CDSC based upon the date you originally purchased the shares you tendered for
exchange.
WAIVER OF SALES CHARGES
Purchases of Class A (i) in the amount of $1 million or more; (ii) by 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"); or (iii) by (a) institutional investors,
which may include bank trust departments and registered investment advisers; (b)
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; (c) clients of investment
advisers or financial planners who place trades for their own accounts if the
accounts are linked to the master account of such investment advisers or
financial planners on the books of the broker-dealer through whom shares are
purchased; (d) 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;
and (e) employees of First Union National Bank of ("FUNB") and its affiliates,
EKD and any broker-dealer with whom EKD has entered into an agreement to sell
shares of a Fund, and members of the immediate families of such employees, will
be at net asset value without the imposition of a front-end sales charge.
Certain broker-dealers or other financial institutions may impose a fee on
transactions in shares of the Funds.
Shares of a Fund may also be sold, to the extent permitted by applicable
law, regulations, interpretations, or exemptions, at net asset value without the
imposition of an initial sales charge to (1) certain Directors, Trustees,
officers, full-time employees or sales representatives of the Fund, FUNB,
Keystone, EKD, and certain of their affiliates who have been such for not less
than ninety days, and to members of the immediate families of such persons; (2)
a pension and profit-sharing plan established by such companies, their
subsidiaries and affiliates, for the benefit of their Directors, Trustees,
officers, full-time employees, and sales representatives; or (3) a registered
representative of a firm with a dealer agreement with EKD; provided, however,
that all such sales are made upon the written assurance that the purchase is
made for investment purposes and that the securities will not be resold except
through redemption by a Fund.
No initial sales charge or CDSC is imposed on purchases or redemptions of
shares of a Fund by 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 shares of a
Fund or any fund in the Evergreen Keystone Funds, purchased pursuant to this
waiver is at least $500,000 and any commission paid at the time of such purchase
is not more than 1.00% of the amount invested.
With respect to Class C shares purchased by a Qualifying Plan, no CDSC will
be imposed on any redemptions made specifically by an individual participant in
the Qualifying Plan. This waiver is not available in the event a Qualifying
Plan, as a whole, redeems substantially all of its assets.
In addition, no CDSC is imposed on a redemption of shares of a Fund in the
event of (1) death or disability of the shareholder; (2) a lump-sum distribution
from a benefit plan qualified under the Employee Retirement Income Security Act
of 1974 ("ERISA"); (3) automatic withdrawals from ERISA plans if the shareholder
is at least 59 1/2 years old; (4) involuntary redemptions of an account having
an aggregate net asset value of less than $1,000; (5) automatic withdrawals
under a Systematic Income Plan of up to 1.0% per month of the shareholder's
initial account balance; (6) withdrawals consisting of loan proceeds to a
retirement plan participant; (7) financial hardship withdrawals made by a
retirement plan participant; or (8) withdrawals consisting of returns of excess
contributions or excess deferral amounts made to a retirement plan participant.
- --------------------------------------------------------------------------------
DISTRIBUTION PLANS
- --------------------------------------------------------------------------------
Rule 12b-1 under the 1940 Act permits investment companies, such as the
Funds, to use their assets to bear expenses of distributing their shares if they
comply with various conditions, including adoption of a distribution plan
containing certain provisions set forth in Rule 12b-1 (a "Distribution Plan").
The Funds' Class A, Class B, and Class C (as applicable) Distribution Plans
have been approved by the appropriate Trust's Board of Trustees, including a
majority of the Trustees who are not interested persons of each Trust, as
defined in the 1940 Act, and who have no direct or indirect financial interest
in the Distribution Plans or any agreement related thereto (the "Independent
Trustees").
The NASD limits the amount that a Fund may pay annually in distribution
costs for sale of its shares and shareholder service fees. The NASD limits
annual expenditures to 1.00% of the aggregate average daily net asset value of
its shares, of which 0.75% may be used to pay such distribution costs and 0.25%
may be used to pay shareholder service fees. The NASD also limits the aggregate
amount that a Fund may pay for such distribution costs to 6.25% of gross share
sales since the inception of the Distribution Plan, plus interest at the prime
rate plus 1% on such amounts (less any CDSCs paid by shareholders to EKD)
remaining unpaid from time to time.
CLASS A DISTRIBUTION PLAN
The Class A Distribution Plan provides that a Fund may expend daily amounts
at an annual rate, which is currently limited to 0.25% of such Fund's average
daily net asset value attributable to Class A shares, to finance any activity
that is primarily intended to result in the sale of Class A shares, including,
without limitation, expenditures consisting of payments to EKD to enable EKD to
pay or to have paid to others who sell Class A shares a service or other fee, at
any such intervals as EKD may determine, in respect of Class A shares maintained
by any such recipient and outstanding on the books of such Fund for specified
periods.
Amounts paid by a Fund under the Class A Distribution Plan are currently
used to pay others, such as broker-dealers, service fees at an annual rate of up
to 0.25% of the average net asset value of Class A shares maintained by such
others and outstanding on the books of such Fund for specified periods.
CLASS B DISTRIBUTION PLANS
The Class B Distribution Plans provide that a Fund may expend daily amounts
at an annual rate of up to 1.00% of such Fund's average daily net asset value
attributable to Class B shares to finance any activity that is primarily
intended to result in the sale of Class B shares, including, without limitation,
expenditures consisting of payments to EKD and/or, in the case of the
California, Florida, Massachusetts, Missouri, New York and Pennsylvania Funds,
its predecessor. Payments are made to EKD (1) to enable EKD to pay to others
(broker-dealers) commissions in respect of Class B shares sold since inception
of a Distribution Plan; (2) to enable EKD to pay or to have paid to others a
service fee, at such intervals as EKD may determine, in respect of Class B
shares maintained by any such recipient and outstanding on the books of such
Fund for specified periods; and (3) as interest.
EKD generally reallows to broker-dealers or others a commission equal to
4.00% of the price paid for each Class B share sold. The broker-dealer or other
party may also receive service fees at an annual rate of 0.15% of the average
daily net asset value of such Class B share maintained by the recipient and
outstanding on the books of a Fund for specified periods.
EKD intends, but is not obligated, to continue to pay or accrue
distribution charges incurred in connection with the Class B Distribution Plans
that exceed current annual payments permitted to be received by EKD from a Fund
("Advances"). EKD intends to seek full reimbursement of such Advances from such
Fund (together with annual interest thereon at the prime rate plus 1.00%) at
such time in the future as, and to the extent that, payment thereof by such Fund
would be within the permitted limits. If a Trust's Independent Trustees
authorize such reimbursements of Advances, the effect would be to extend the
period of time during which such Fund incurs the maximum amount of costs allowed
by the Class B Distribution Plans.
In connection with financing its distribution costs relating to the
California, Florida, Massachusetts, Missouri, New York and Pennsylvania Funds,
including commission advances to broker-dealers and others, EKIS, the
predecessor to EKD, sold to a financial institution substantially all of its
12b-1 fee collection rights and CDSC collection rights in respect of Class B
shares sold during the period beginning approximately June 1, 1995 through
November 30, 1996. KSTFF and KSTFFII have agreed not to reduce the rate of
payment of 12b-1 fees in respect of such Class B shares unless it terminates
such shares' Distribution Plan completely. If it terminates such Distribution
Plans, the Funds may be subject to adverse distribution consequences.
The financing of payments made by EKD to compensate broker-dealers or other
persons for distributing shares of the Funds will be provided by FUNB or its
affiliates.
CLASS C DISTRIBUTION PLAN - CALIFORNIA, FLORIDA, MASSACHUSETTS, MISSOURI, NEW
YORK AND PENNSYLVANIA FUNDS ONLY
The Class C Distribution Plan provides that a Fund may expend daily amounts
at an annual rate of up to 1.00% of such Fund's average daily net asset value
attributable to Class C shares to finance any activity that is primarily
intended to result in the sale of Class C shares, including, without limitation,
expenditures consisting of payments to EKD and/or its predecessor. Payments are
made to EKD (1) to enable EKD to pay to others (broker-dealers) commissions in
respect of Class C shares sold since inception of the Distribution Plan; (2) to
enable EKD to pay or to have paid to others a service fee, at such intervals as
EKD may determine, in respect of Class C shares maintained by any such recipient
and outstanding on the books of such Fund for specified periods; and (3) as
interest.
EKD generally reallows to broker-dealers or others a commission in the
amount of 0.75% of the price paid for each Class C share sold plus the first
year's service fee in advance in the amount of 0.25% of the price paid for each
Class C share sold. Beginning approximately fifteen months after purchase,
broker-dealers or others receive a commission at an annual rate of 0.75%
(subject to NASD rules) plus service fees at the annual rate of 0.25%,
respectively, of the average daily net asset value of each Class C share
maintained by the recipient and outstanding on the books of a Fund for specified
periods.
DISTRIBUTION PLANS - GENERAL
The total amounts paid by a Fund under the foregoing arrangements may not
exceed the maximum Distribution Plan limits specified above. The amounts and
purposes of expenditures under a Distribution Plan must be reported to the
Independent Trustees quarterly. The Independent Trustees may require or approve
changes in the implementation or operation of a Distribution Plan, and may also
require that total expenditures by a Fund under a Distribution Plan be kept
within limits lower than the maximum amount permitted by such Distribution Plan
as stated above.
At March 31, 1997, total unpaid distribution costs were as follows:
CLASS B CLASS C
(% OF CLASS B NET ASSETS) (% OF CLASS C NET ASSETS)
- ------------------ -------------------------------- ----------------------------
California Fund $1,556,143 (7.14%) $ 130,741 (7.07%)
Florida Fund 3,352,712 (7.15%) 1,350,164 (13.99%)
Massachusetts Fund 446,206 (5.72%) 140,981 (6.83%)
Missouri Fund 1,287,330 (6.40%) 137,003 (10.49%)
New York Fund 1,184,099 (6.21%) 228,676 (12.22%)
Pennsylvania Fund 2,464,474 (6.62%) 831,646 (12.18%)
Broker-dealers or others may receive different levels of compensation
depending on which class of shares they sell. Payments pursuant to a
Distribution Plan are included in the operating expenses of the class.
Each of the Distribution Plans may be terminated at any time by a vote of
the Independent Trustees, or by vote of a majority of the outstanding voting
shares of the respective class of Fund shares. If the Class B Distribution Plan
is terminated, EKD and if appropriate, EKIS, will ask the Independent Trustees
to take whatever action they deem appropriate under the circumstances with
respect to payment of such Advances.
Any change in a Distribution Plan that would materially increase the
distribution expenses of a Fund provided for in a Distribution Plan requires
shareholder approval. Otherwise, a Distribution Plan may be amended by votes of
the majority of both (1) the Trust's Trustees and (2) the Independent Trustees
cast in person at a meeting called for the purpose of voting on each amendment.
While a Distribution Plan is in effect, the Trust will be required to
commit the selection and nomination of candidates for Independent Trustees to
the discretion of the Independent Trustees.
The Independent Trustees of each Trust have determined that the sales of
the Funds' shares resulting from payments under the Distribution Plans have
benefited the respective Fund.
- --------------------------------------------------------------------------------
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
Trustees and officers, their principal occupations and some of their
affiliations over the last five years are as follows:
<TABLE>
<CAPTION>
<S> <C>
FREDERICK AMLING: Trustee of the Trusts, other than TETFT; Trustee or Director of 28 other
Evergreen Keystone funds; Professor, Finance Department, George
Washington University; President, Amling & Company (investment
advice); and former Member, Board of Advisers, Credito Emilano (bank
ing).
LAURENCE B. ASHKIN: Trustee of the Trusts; Trustee or Director of all Evergreen Keystone
funds other than Evergreen Investment Trust; real estate developer and
construction consultant; and President of Centrum Equities and
Centrum Properties, Inc.
CHARLES A. AUSTIN III: Trustee of the Trusts, other than TETFT; Trustee or Director of 28 other
Evergreen Keystone funds; Investment Counselor to Appleton Partners,
Inc.; and former Managing Director, Seaward Management Corporation
(investment advice).
FOSTER BAM: Trustee of the Trusts; Trustee or Director of all other Evergreen
Keystone funds other than Evergreen Investment Trust; Partner in the
law firm of Cummings & Lockwood; Director, Symmetrix, Inc. (sulphur
company) and Pet Practice, Inc. (veterinary services); and former
Director, Chartwell Group Ltd. (Manufacturer of office furnishings and
accessories), Waste Disposal Equipment Acquisition Corporation and
Rehabilitation Corporation of America (rehabilitation hospitals).
*GEORGE S. BISSELL: Chairman of the Board and Chief Executive Officer and Trustee of,
other than TETFT, 28 other Evergreen Keystone funds; Chairman of the
Board and Trustee of Anatolia College; Trustee of University Hospital
(and Chairman of its Investment Committee); former Director and
Chairman of the Board of Hartwell Keystone Advisers, Inc.; and former
Chairman of the Board, Director and Chief Executive Officer of
Keystone Investments, Inc.
EDWIN D. CAMPBELL: Trustee of the Trusts, other than TETFT; Trustee or Director of 28 other
Evergreen Keystone funds; Principal, Padanaram Associates, Inc.; and
former Executive Director, Coalition of Essential Schools, Brown
University.
CHARLES F. CHAPIN: Trustee of the Trusts, other than TETFT; Trustee or Director of 28 other
Evergreen Keystone funds; and former Director, Peoples Bank
(Charlotte, NC).
K. DUN GIFFORD: Trustee of the Trusts, other than TETFT; Trustee or Director of 28 other
Evergreen Keystone funds; Trustee, Treasurer and Chairman of the
Finance Committee, Cambridge College; Chairman Emeritus and Direc
tor, American Institute of Food and Wine; Chairman and President,
Oldways Preservation and Exchange Trust (education); former
Chairman of the Board, Director, and Executive Vice President, The
London Harness Company; former Managing Partner, Roscommon
Capital Corp.; former Chief Executive Officer, Gifford Gifts of Fine
Foods; former Chairman, Gifford, Drescher & Associates (environmental
consulting); and former Director, Keystone Investments, Inc. and
Keystone.
JAMES S. HOWELL: Trustee of the Trusts; Chairman and Trustee or Director of 12 other
Evergreen Keystone funds; former Chairman of the Distribution
Foundation for the Carolinas; and former Vice President of Lance Inc.
(food manufacturing).
LEROY KEITH, JR.: Trustee of the Trusts, other than TETFT; Trustee or Director of 28 other
Evergreen Keystone funds; Chairman of the Board and Chief Executive
Officer, Carson 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.
F. RAY KEYSER, JR.: Trustee of the Trusts, other than TETFT; Trustee or Director of 28 other
Evergreen Keystone funds; Chairman and Of Counsel, Keyser, Crowley
& Meub, P.C.; Member, Governor's (VT) Council of Economic Advisers;
Chairman of the Board and Director, Central Vermont Public Service
Corporation and Lahey Hitchcock Clinic; Director, Vermont Yankee
Nuclear Power Corporation, Grand Trunk Corporation, Grand Trunk
Western Railroad, Union Mutual Fire Insurance Company, New
England Guaranty Insurance Company, Inc., and the Investment
Company Institute; former Director and President, Associated
Industries of Vermont; former Director of Keystone, Central Vermont
Railway, Inc., S.K.I. Ltd., and Arrow Financial Corp.; and former
Director and Chairman of the Board, Proctor Bank and Green Mountain
Bank.
GERALD M. MCDONNELL: Trustee of the Trusts; Trustee or Director of all other Evergreen
Keystone funds; Trustee or Director of all of the funds in the Evergreen
Family of Funds; and Sales Representative with Nucor-Yamoto, Inc.
(Steel producer).
THOMAS L. MCVERRY: Trustee of the Trusts; Trustee or Director of all other Evergreen
Keystone funds; former Vice President and Director of Rexham
Corporation; and former Director of Carolina Cooperative Federal Credit
Union.
*WILLIAM WALT PETTIT: Trustee of the Trusts; Trustee or Director of all other Evergreen
Keystone funds; and Partner in the law firm of Holcomb and Pettit, P.A.
DAVID M. RICHARDSON: Trustee of the Trusts, other than TETFT; Trustee or Director of 28 other
Evergreen Keystone funds; Vice Chair and former Executive Vice
President, DHR International, Inc. (executive recruitment); former
Senior Vice President, Boyden International Inc. (executive recruit
ment); and Director, Commerce and Industry Association of New Jersey,
411 International, Inc., and J&M Cumming Paper Co.
RUSSELL A.
SALTON, III MD: Trustee of the Trusts; Trustee or Director of all other Evergreen
Keystone funds; Medical Director, U.S. Health Care/Aetna Health
Services; and former Managed Health Care Consultant; former
President, Primary Physician Care.
MICHAEL S. SCOFIELD: Trustee of the Trusts; Trustee or Director of all other Evergreen
Keystone funds; and Attorney, Law Offices of Michael S. Scofield.
RICHARD J. SHIMA: Trustee of the Trusts, other than TETFT; Trustee or Director of 28 other
Evergreen Keystone funds; Chairman, Environmental Warranty, Inc.
(insurance agency); Executive Consultant, Drake Beam Morin, Inc.
(executive outplacement); Director of Connecticut Natural Gas Corpora
tion, 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.
ANDREW J. SIMONS: Trustee of the Trusts, other than TETFT; Trustee or Director of 28 other
Evergreen Keystone funds; Partner, Farrell, Fritz, Caemmerer, Cleary,
Barnosky & Armentano, P.C.; Adjunct Professor of Law and former
Associate Dean, St. John's University School of Law; Adjunct Professor
of Law, Touro College School of Law; and former President, Nassau
County Bar Association.
ROBERT J. JEFFRIES: Trustee Emeritus of 12 Evergreen Keystone Funds and Corporate
Consultant since 1967.
JOHN J. PILEGGI: President and Treasurer of the Trusts; President and Treasurer of all
other Evergreen Keystone funds; Senior Managing Director, Furman
Selz LLC since 1992; Managing Director from 1984 to 1992; Consultant
to BISYS Fund Services since 1996; 230 Park Avenue, Suite 910, New
York, NY.
GEORGE O. MARTINEZ: Secretary of the Trusts; Secretary of all other Evergreen Keystone
funds; Senior Vice President and Director of Administration and
Regulatory Services, BISYS Fund Services; Vice President/Assistant
General Counsel, Alliance Capital Management from 1988 to 1995;
3435 Stelzer Road, Columbus, Ohio.
</TABLE>
* This Trustee may be considered an "interested person" of the Funds within
the meaning of the 1940 Act.
For the fiscal year ended March 31, 1997, none of the Trustees or officers
of the Funds received any direct remuneration from the California, Florida,
Massachusetts, Missouri, New York and Pennsylvania Funds. For the fiscal period
ending March 31, 1997, Independent Trustees of the New Jersey Fund received
$2,148 in retainers and fees. For the year ending March 31, 1997, fees paid to
Independent Trustees on a fund complex wide basis (which included approximately
60 mutual funds) were approximately $846,350. With the exception of the
Massachsuetts Fund, on August 29, 1997, the Trustees and officers of the Trusts,
as a group, beneficially owned less than 1% of each Funds' then outstanding
shares. Trustees and officers of the Trusts, as a group, beneficially owned 2.8%
of the Massachsuetts Fund's outstanding shares as of August 29, 1997.
Except as set forth above, the address of all the Trusts' Trustees and
officers is 200 Berkeley Street, Boston, Massachusetts 02116-5034.
Set forth below for each of the Trustees receiving in excess of $60,000 for
the fiscal period of April 1, 1996 through March 31, 1997 is the aggregate
compensation paid to such Trustee by the EvergreenKeystone Funds:
Total Compensation
From Fund Complex
NAME PD. TO TRUSTEE
James S. Howell $66,000
Russell A Salton, III M.D. $61,000
Michael S. Scofield $61,000
- --------------------------------------------------------------------------------
INVESTMENT ADVISERS
- --------------------------------------------------------------------------------
Subject to the general supervision of each Trust's Board of Trustees, the
Funds' investment advisers provide investment advice, management and
administrative services to each Fund.
On December 11, 1996, the predecessor corporation to First Union Keystone,
Keystone Investments, Inc. ("Keystone Investments") and indirectly each
subsidiary of Keystone Investments, including Keystone, were acquired (the
"Acquisition") by FUNB, a wholly-owned subsidiary of First Union Corporation
("First Union"). Keystone Investments was acquired by FUNB by merger into a
wholly-owned subsidiary of FUNB, which entity then assumed the name "First Union
Keystone, Inc." and succeeded to the business of the predecessor corporation.
Contemporaneously with the Acquisition, each Fund other than the New Jersey Fund
entered into a new investment advisory agreement with Keystone and into a
principal underwriting agreement with EKD, a wholly-owned subsidiary of The
BYSIS Group, Inc. The new investment advisory agreements between KSTFF, KSTFFII
and Keystone were approved by the shareholders of each Fund on December 9, 1996,
and became effective on December 11, 1996.
First Union Keystone (and each of its subsidiaries, including Keystone) is
indirectly owned by First Union. First Union is headquartered in Charlotte,
North Carolina, and had $137 billion in consolidated assets as of March 31,
1997. First Union and its subsidiaries provide a broad range of financial
services to individuals and businesses throughout the United States. CMG,
Keystone and Evergreen Asset Management Corp., a wholly-owned subsidiary of
FUNB, manage or otherwise oversee the investment of over $62 billion in assets
as of March 31, 1997 belonging to a wide range of clients, including the
Evergreen Keystone funds.
Pursuant to the advisory agreements (the "Advisory Agreements") between the
Trusts and their respective investment advisers, and subject to the supervision
of the appropriate Trust's Board of Trustees, Keystone and CMG furnishes to each
Fund investment advisory, management and administrative services, office
facilities, and equipment in connection with its services for managing the
investment and reinvestment of each Fund's assets. Keystone and CMG pay 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 Keystone or CMG, including, but not limited to,
(1) custodian charges and expenses; (2) bookkeeping and auditors' charges and
expenses; (3) transfer agent charges and expenses; (4) fees and expenses of
Independent Trustees; (5) brokerage commissions, brokers' fees and expenses; (6)
issue and transfer taxes; (7) costs and expenses under the Distribution Plan;
(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, statements of
additional information, 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 all
extraordinary charges and expenses of such Fund.
The California, Florida, Massachusetts, Missouri, New York and Pennsylvania
Funds each pay Keystone a fee for its services at the annual rate of:
Aggregate Net Asset
Management Value of the
FEE SHARES OF THE FUND
0.55% of the first $ 50,000,000, plus
0.50% of the next $ 50,000,000, plus
0.45% of the next $ 100,000,000, plus
0.40% of the next $ 100,000,000, plus
0.35% of the next $ 100,000,000, plus
0.30% of the next $ 100,000,000, plus
0.25% of amounts over $ 500,000,000.
Keystone's fee is computed as of the close of business each business day
and payable monthly.
Under its Advisory Agreements, any liability of Keystone in connection with
rendering services thereunder is limited to situations involving its willful
misfeasance, bad faith, gross negligence or reckless disregard of its duties.
The New Jersey Fund pays CMG a fee for its services equal to 0.50 of 1% of
the average daily net asets up to $500 million, 0.45 of 1% of the next $500
million of assets, 0.40 of 1% of assets in excess of $1 billion but not
exceeding $1.5 billion, and 0.35 of 1% of assets in excess of $1.5 billion.
The Advisory Agreements continue in effect for two years from their
respective effective dates and, thereafter, from year to year only if approved
at least annually by the Board of Trustees of a Trust or by a vote of a majority
of a Fund's outstanding shares (as defined in the 1940 Act). In either case, the
terms of a 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. An Advisory Agreement may be
terminated, without penalty, on 60 days' written notice by the Trust's Board of
Trustees or by a vote of a majority of outstanding shares. An Advisory Agreement
will terminate automatically upon its "assignment" as that term is defined in
the 1940 Act.
Keystone has voluntarily limited the expenses of the Class A, Class B and
Class C shares of each Fund advised by it to 0.75%, 1.50%, and 1.50% of average
daily net assets, respectively. Keystone currently intends to continue the
foregoing expense limitations on a calendar month-by-month basis. Keystone will
periodically evaluate the expense limitations and may modify or terminate them
in the future. Keystone would not be required to make such reimbursement to any
Fund to the extent it would result in the Fund's inability to qualify as a
regulated investment company under the Code.
- --------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER
- --------------------------------------------------------------------------------
Each Trust has entered into Principal Underwriting Agreements (each an
"Underwriting Agreement") with EKD with respect to each class. EKD, which is not
affiliated with First Union, replaces EKIS as KSTFF's and KSTFFII's principal
underwriter. EKIS may no longer act as principal underwriter of such Trusts due
to regulatory restrictions imposed by the Glass-Steagall Act upon national banks
such as FUNB and their affiliates, that prohibit such entities from acting as
the underwriters of mutual fund shares. While EKIS may no longer act as
principal underwriter of the Trusts as discussed above, EKIS may continue to
receive compensation from KSTFF and KSTFFII or EKD in respect of underwriting
and distribution services performed prior to the termination of EKIS as
principal underwriter. In addition, EKIS may also be compensated by EKD for the
provision of certain marketing support services to EKD at an annual rate of up
to .75% of the average daily net assets of a Fund, subject to certain
restrictions.
EKD, as agent, has agreed to use its best efforts to find purchasers for
the shares. EKD may retain and employ representatives to promote distribution of
the shares and may obtain orders from broker-dealers, and others, acting as
principals, for sales of shares to them. The Underwriting Agreements provide
that EKD will bear the expense of preparing, printing, and distributing
advertising and sales literature and prospectuses used by it. EKD or EKIS, its
predecessor, may receive payments from the Trusts pursuant to the Distribution
Plans.
All subscriptions and sales of shares by EKD are at the public offering
price of the shares, which is determined in accordance with the provisions of
each Trust's Declaration of Trust, By-Laws, current prospectuses and statement
of additional information. All orders are subject to acceptance by the
respective Trust and each Trust reserves the right, in its sole discretion, to
reject any order received. Under the Underwriting Agreements, a Trust is not
liable to anyone for failure to accept any order.
Each Trust has agreed under the Underwriting Agreements to pay all expenses
in connection with the registration of its shares with the Securities and
Exchange Commission (the "Commission") and auditing and filing fees in
connection with the registration of its shares under the various state "blue-
sky" laws.
EKD has agreed that it will, in all respects, duly conform with all
state and federal laws applicable to the sale of the shares. EKD has also agreed
that it will indemnify and hold harmless each Trust and each person who has
been, is, or may be a Trustee or officer of a 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 EKD or any other person for whose acts EKD is responsible or is
alleged to be responsible, unless such misrepresentation or omission was made in
reliance upon written information furnished by the respective Trust.
Each 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 respective Trust's Independent Trustees, and (ii) by vote of a majority
of the respective Trust's Trustees, in each case, cast in person at a meeting
called for that purpose.
Each Underwriting Agreement may be terminated, without penalty, on 60 days'
written notice by the respective Board of Trustees or by a vote of a majority of
outstanding shares subject to such agreement. Each Underwriting Agreement will
terminate automatically upon its "assignment," as that term is defined in the
1940 Act.
From time to time, if, in EKD's judgment, it could benefit the sales of
shares, EKD may provide to selected broker-dealers promotional materials and
selling aids, including, but not limited to, personal computers, related
software, and data files.
- --------------------------------------------------------------------------------
ADMINISTRATOR
- --------------------------------------------------------------------------------
EKIS, a subsidiary of First Union Keystone, serves as administrator to the
New Jersey Fund and is entitled to receive a fee based on the average daily net
assets of the Fund at a rate based on the total assets of the mutual funds
administered by EKIS for which CMG, Keystone or Evergreen Asset also serve as
investment adviser, calculated in accordance with the following schedule: .050%
of the first $7 billion; .035% on the next $3 billion; .030% on the next $5
billion; .020% on the next $10 billion; .015% on the next $5 billion; and .010%
on assets in excess of $30 billion.
- --------------------------------------------------------------------------------
SUB-ADMINISTRATOR
- --------------------------------------------------------------------------------
BISYS provides personnel to serve as officers of the Funds, and provides
certain administrative services to the Funds pursuant to a sub-administrator
agreement. For its services under that agreement, BISYS receives a fee based on
the aggregate average daily net assets of the Funds. The subadministrator fee is
calculated in accordance with the following schedule:
Aggregate Average Daily Net Assets Of Funds For
Which Any Affiliate Of FUNB Serves As
Investment Adviser or Administrator
Sub-Administrator Fee And for Which BISYS Serves as Sub- Administrator
- --------------------------------------------------------------------------------
0.0100% on the first $7 billion
0.0075% on the next $3 billion
0.0050% on the next $15 billion
0.0040% on assets in excess of $25 billion
The total assets of the mutual funds for which FUNB affiliates also serve
as investment advisers were approximately $29 billion as of March 31, 1997.
- --------------------------------------------------------------------------------
DECLARATIONS OF TRUST
- -------------------------------------------------------------------------------
MASSACHUSETTS BUSINESS TRUST
Each Trust is a Massachusetts business trust established under a
Declaration of Trust (the "Declaration of Trust" or "Declarations of Trust"). A
Trust is similar in most respects to a business corporation. The principal
distinction between a Trust and a corporation relates to the shareholder
liability described below. A copy of each Trust's Declaration of Trust was filed
as an exhibit to the Trust's Registration Statement. This summary is qualified
in its entirety by reference to the Declarations of Trust.
DESCRIPTION OF SHARES
Each Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest of classes of shares. Each share of a Fund
represents an equal proportionate interest in such Fund with each other share of
the Fund. Upon liquidation, Fund shares are entitled to a pro rata share of the
Fund based on the relative net assets of each class.
SHAREHOLDER LIABILITY
Pursuant to certain decisions of the Supreme Judicial Court of
Massachusetts, shareholders of a Massachusetts business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
trust. If a Trust were held to be a partnership, the possibility of the
shareholders incurring financial loss for that reason appears remote because
each Trust's Declaration of Trust (1) contains an express disclaimer of
shareholder liability for obligations of the Trust; (2) requires that notice of
such disclaimer be given in each agreement, obligation or instrument entered
into or executed by the Trust or its Trustees; and (3) provides for
indemnification out of Trust property for any shareholder held personally liable
for the obligations of the Trust.
VOTING RIGHTS
Under the terms of its Declaration of Trust, a Trust does not hold annual
meetings. At meetings called for the initial election of Trustees or to consider
other matter, shares of a Fund are entitled to one vote per share. Shares
generally vote together as one class on all matters, except that each Fund has
exclusive voting rights with respect to matters which affect only that Fund.
Classes of shares of a Fund have equal voting rights except that each class of
shares has exclusive voting rights with respect to its respective Distribution
Plan. No amendment may be made to a Declaration of Trust that adversely affects
any class of shares without the approval of a majority of the shares of that
class. Shares have non-cumulative voting rights, which means that the holders of
more than 50% of the shares voting for the election of Trustees can elect 100%
of the Trustees to be elected at a meeting and, in such event, the holders of
the remaining 50% or less of the shares voting will not be able to elect any
Trustees.
After the initial meeting to elect Trustees no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law, unless and until such time as less than a majority of the Trustees
holding office have been elected by shareholders, at which time the Trustees
then in office will call a shareholders' meeting for election of Trustees.
Except as set forth above, the Trustees shall continue to hold office
indefinitely, unless otherwise required by law, and may appoint successor
Trustees. A Trustee may be removed from or cease to hold office (as the case may
be) (1) at any time by two-thirds vote of the remaining Trustees; (2) when such
Trustee becomes mentally or physically incapacitated; or (3) at a special
meeting of shareholders by a two-thirds vote of the outstanding shares. Any
Trustee may voluntarily resign from office.
LIMITATION OF TRUSTEES' LIABILITY
Each Declaration of Trust provides that a Trustee shall be liable only for
his own willful defaults and, if reasonable care has been exercised in the
selection of officers, agents, employees or investment advisers, shall not be
liable for any neglect or wrongdoing of any such person; provided, however, that
nothing in the Declaration of Trust shall protect a Trustee against any
liability for his willful misfeasance, bad faith, gross negligence or reckless
disregard of his duties.
The Trustees have absolute and exclusive control over the management and
disposition of all assets of the Funds and may perform such acts as in their
sole judgment and discretion are necessary and proper for conducting the
business and affairs of a Trust or promoting the interests of a Trust and its
Funds and the shareholders.
- --------------------------------------------------------------------------------
EXPENSES
- --------------------------------------------------------------------------------
The tables below list the total dollar amounts paid by the Funds for
services rendered for the periods specified. For more information on specific
expenses, see the "Investment Advisers", "Distribution Plans", "Principal
Underwriter" and "Sales Charges" sections of the SAI.
1997 FUND EXPENSES
<TABLE>
<CAPTION>
AGGREGATE DOLLAR
AMOUNT OF
AGGREGATE DOLLAR UNDERWRITING
PERCENTAGE OF AMOUNT OF COMMISSIONS
ADVISORY FUND AVERAGE CLASS A CLASS B CLASS C UNDERWRITING RETAINED BY EKIS
FEES NET ASSETS 12B-1 FEES 12B-1 FEES 12B-1 FEES COMMISSIONS OR EKD
========== ============== ============ ============== ========== ================= ==================
<S> <C> <C> <C> <C> <C> <C> <C>
CALIFORNIA FUND(1) $51,555 0.55% $2,121 $66,054 $4,972 $133,966 $60,931
FLORIDA FUND(2) $507,576 0.55% $46,410 $469,958 $97,209 $683,260 $452,797
MASSACHUSETTS FUND(2) $63,584 0.55% $2,689 $67,185 $19,460 $97,579 $29,745
MISSOURI FUND(1) $46,447 0.55% $1,259 $64,269 $3,949 $96,918 $55,982
NEW JERSEY FUND(3) $135,196 0.50% $47,320 $25,809 N/A N/A N/A
- ------------------------ ---------- -------------- ------------ -------------- ---------- ----------------- ------------------
NEW YORK FUND(2) $135,473 0.55% $5,586 $166,682 $19,837 $236,114 $20,175
PENNSYLVANIA FUND(2) $390,366 0.53% $39,570 $343,818 $71,610 $504,459 $106,694
======================== ========== ============== ============ ============== ========== ================= ==================
</TABLE>
(1) For fiscal period of December 1, 1996 to March 31, 1997
(2) For fiscal year ended March 31, 1997
(3) For fiscal period of September 1, 1996 to March 31, 1997
1996 FUND EXPENSES
AGGREGATE
DOLLAR AMOUNT
AGGREGATE OF
PERCENTAGE DOLLAR AMOUNT UNDERWRITING
OF FUND OF COMMISSIONS
ADVISORY AVERAGE NET UNDERWRITING RETAINED BY
FEES ASSETS COMMISSIONS EKIS OR EKD
============== ============= =============== ===============
CALIFORNIA FUND $163,334(1) 0.55% $341,589 $67,534
FLORIDA FUND $557,537(2) 0.52% $771,514 $213,167
MASSACHUSETTS
FUND $62,760(2) 0.55% $108,131 $18,234
MISSOURI FUND $146,922(1) 0.55% $230,925 $94,279
NEW JERSEY
FUND $107,212(3) 0.50% N/A N/A
- ----------------- -------------- ------------- --------------- ---------------
MASSACHUSETTS
FUND $62,760(2) 0.55% $108,131 $18,234
-------------- ------------- --------------- ---------------
NEW YORK FUND $118,589(2) 0.55% $201,162 $201,162
PENNSYLVANIA $402,467(2) 0.53% $482,423 $482,423
FUND
1995 FUND EXPENSES
AGGREGATE
DOLLAR AMOUNT
AGGREGATE OF
PERCENTAGE DOLLAR AMOUNT UNDERWRITING
OF FUND OF COMMISSIONS
ADVISORY AVERAGE NET UNDERWRITING RETAINED BY
FEES ASSETS COMMISSIONS EKIS OR EKD
============== ============= =============== =================
$113,353(4) 0.55% $170,600 $170,600
$515,205(5) 0.52% $740,118 $740,118
$43,636(5) 0.55% $88,538 $88,538
$120,166(4) 0.55% $165,772 $65,153
$190,195(6) 0.50% N/A N/A
-------------- ------------- --------------- -----------------
$43,636(5) 0.55% $88,538 $88,538
-------------- ------------- --------------- -----------------
$63,808(5) 0.55% $88,538 $88,538
$357,852(5) 0.54% $474,847 $353,409
(1) For fiscal year ended November 30, 1996
(2) For fiscal year ended March 31, 1996
(3) For fiscal period of March 1, 1996 to August 31, 1996
(4) For fiscal year ended November 30, 1995
(5) For fiscal year ended March 31, 1995
(6) For fiscal period of March 1, 1995 to February 28, 1996
In accordance with voluntary expense limitations in effect during the
fiscal year or period ended March 31, 1997, Keystone or CMG voluntarily
reimbursed or waived fees for the California, Florida, Massachusetts, Missouri,
New Jersey, New York, Pennsylvania and Funds in the amounts of $43,885,
$160,819, $97,150, $46,528, $135,196, $106,560, and $169,740, respectively.
BROKERAGE COMMISSIONS
The Funds paid no brokerage commissions during the fiscal years ended March
31, 1997 and 1996 and 1995.
- --------------------------------------------------------------------------------
STANDARDIZED TOTAL RETURN AND YIELD QUOTATIONS
- --------------------------------------------------------------------------------
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. To the initial
investment all dividends and distributions are added, and all recurring fees
charged to all shareholder accounts are deducted. The ending redeemable value
assumes a complete redemption at the end of the relevant periods.
The annual total returns for Class A shares of the Funds (including
applicable sales charge) are as follows for the periods indicated:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Commencement
Five Years Three Years One Year Of Operations
NAME OF FUND ended 03/31/97 ended 03/31/97 ended 03/31/97 to 03/31/97
- ------------ -------------- -------------- -------------- -----------
California Fund(1) N/A 4.28% (0.55)% 2.07%
Florida Fund(2) 5.19% 4.30% (1.41)% 6.35%
Massachusetts Fund(3) N/A 4.23% (0.07)% 1.51%
Missouri Fund(1) N/A 4.50% 0.22% 2.66%
New Jersey Fund(4) 5.74% 4.51% (0.29)% 6.03%
New York Fund(3) N/A 4.84% (0.11)% 2.60%
Pennsylvania Fund(5) 5.66% 4.25% 0.30% 7.14%
</TABLE>
<PAGE>
27
- -------------
(1) Commenced operations on February 1, 1994
(2) Commenced operations on December 28, 1990
(3) Commenced operations on February 4, 1994
(4) Commenced operations on July 16, 1991
(5) Commenced operations on December 27, 1990
The average annual total returns for Class B shares of the Funds are as
follows for the periods indicated:
Commencement
Three Years One Year Of Operations
NAME OF FUND ended 03/31/97 ended 03/31/97 to 03/31/97
- ------------ -------------- ---------------- -----------
California Fund(1) 4.33% (1.31)% 2.22%
Florida Fund(2) 4.35% (2.16)% 3.92%
Massachusetts Fund(3) 4.23% (0.72)% 1.59%
Missouri Fund(1) 4.45% (0.51)% 2.57%
New Jersey Fund(4) N/A (1.25)% (1.72)%
New York Fund(3) 4.87% (0.95)% 2.61%
Pennsylvania Fund(2) 4.24% (0.50)% 4.40%
- -------------
(1) Commenced operations on February 1, 1994
(2) Commenced operations on February 1, 1993
(3) Commenced operations on February 4, 1994
(4) Commenced operations on January 30, 1996
The average annual total returns for Class C shares of the Funds that
offer Class C are as follows for the periods indicated:
Commencement
Three Years One Year Of Operations
NAME OF FUND ended 03/31 97 ended 03/31/97 to 03/31/97
- ------------ ------------- ---------------- -----------
California Fund(1) 5.10% 2.55% 2.96%
Florida Fund(2) 5.26% 1.76% 4.31%
Massachusetts Fund(3) 5.07% 3.14% 2.36%
Missouri Fund(1) 5.33% 3.49% 3.39%
New York Fund(3) 5.77% 3.14% 3.42%
Pennsylvania Fund(2) 5.15% 3.49% 4.82%
- -------------
(1) Commenced operations on February 1, 1994
(2) Commenced operations on February 1, 1993
(3) Commenced operations on February 4, 1994
The average annual total return for Class Y shares of the New Jersey Fund
was 4.74% for the year ended March 31, 1997 and 2.31% for the period of February
8, 1996 (Commencement of Operations) to March 31, 1997.
CURRENT YIELD AND TAX EQUIVALENT YIELD
Current yield quotations as they may appear from time to time in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of a Fund, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. Such yield will include
income from sources other than municipal obligations, if any. For the 30-day
period ended March 31, 1997, the current and tax-equivalent yields of the Funds
are shown below. Tax equivalent yield is, in general, the current yield divided
by a factor equal to one minus a stated income tax rate and reflects the yield a
taxable investment would have to achieve in order to equal on an after-tax basis
a tax-exempt yield.
The tax equivalent yields for each class of the Funds for the an investor
in the 31% federal tax bracket are as follows:
<TABLE>
<CAPTION>
30-DAY YIELD TAX-EQUIVALENT YIELD
Class A Class B Class C Class A Class B Class C
=================== ============ ============= ============= =============== ============== ==============
<S> <C> <C> <C> <C> <C> <C>
California Fund 4.80% 4.28% 4.28% 6.96% 6.20% 6.20%
Florida Fund 5.06% 4.56% 4.56% 7.33% 6.61% 6.61%
Massachusetts 4.91% 4.38% 4.39% 7.12% 6.35% 6.36%
Fund
Missouri Fund 4.99% 4.48% 4.47% 7.23% 6.49% 6.48%
New Jersey Fund 4.94% 4.01% N/A 7.16% 5.81% N/A
New York Fund 4.80% 4.28% 4.27% 6.96% 6.20% 6.19%
Pennsylvania 4.96% 4.46% 4.46% 7.19% 6.46% 6.46%
Fund
=================== ============ ============= ============= =============== ============== ==============
</TABLE>
The 30-day yield and tax-equivalent yield for Class Y shares of the New
Jersey Fund were 5.07% and 7.35%, respectively.
Any given yield or total return quotation should not be considered
representative of the Fund's yield or total return for any future period.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Funds' financial statements for the fiscal year or period ended March
31, 1997, and the report thereon of KPMG Peat Marwick LLP, are incorporated by
reference herein from the Funds' Annual Report, as filed with the Commission
pursuant to Section 30(d) of the 1940 Act and Rule 30d-1 thereunder.
You may obtain a copy of each Fund's Annual Report without charge by
writing to EKSC, P.O. Box 2121, Boston, Massachusetts 02106-2121, or by calling
EKSC toll free at 1-800-343-2898.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
REDEMPTIONS IN KIND
If conditions arise that would make it undesirable for the Funds to pay for
all redemptions in cash, the Funds may authorized payment to be made in
portfolio securities or other property. The Funds have obligated themselves,
however, under the 1940 Act, to redeem for cash all shares presented for
redemption by any one shareholder up to the lesser of $250,000 or 1% of the
Fund's net assets in any 90-day period. Securities delivered in payment of
redemptions would be valued at the same value assigned to them in computing the
net asset value per share and would, to the extent permitted by law, be readily
marketable. Shareholders receiving such securities would incur brokerage costs
upon the securities' sale.
GENERAL
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the custodian (the "Custodian") of all securities and
cash of the Trusts. The Custodian performs no investment management functions
for the Trusts, but, in addition to its custodial services, is responsible for
accounting and related record keeping on behalf of the Trusts.
Except as otherwise stated in its prospectuses or required by law, each
Trust 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 each Trust's prospectuses,
statement of additional information or in supplemental sales literature issued
by the Trust or EKD, and no person is entitled to rely on any information or
representation not contained therein.
The Funds' prospectuses and statement of additional information omit
certain information contained in the registration statement filed with the
Commission, a copy of which may be obtained from the Commission's principal
office in Washington, D.C. upon payment of the fee prescribed by the rules and
regulations promulgated by the Commission.
Set forth below is information with respect to each person,who, to each
Fund's knowledge, owned beneficially or of record more than 5% of a class of
each Fund's total outstanding shares and their aggregate ownership of each
Class' total outstanding shares as of August 29, 1997.
Fund Name and Address Class % of Class
California MLPF & S for the Sole Benefit A 10.04%
of its Customers
Attn: Fund Administration
4800 Deer Lake Dr E 3rd Fl
Jacksonville, FL 32246-6484
California MLPF & S for the Sole Benefit B 15.51%
of its Customers
Attn: Fund Administration
4800 Deer Lake Dr E 3rd Fl
Jacksonville, FL 32246-6484
California MLPF & S for the Sole Benefit C 34.98%
of its Customers
Attn: Fund Administration
4800 Deer Lake Dr E 3rd Fl
Jacksonville, FL 32246-6484
California Victor Edward Rylander C 9.50%
Lucille Rylander Co-TTEES
Victor & Lucille Rylander Trust
U/A DTD 09-18-96
4102 Caflur Ave
San Diego, CA 92117
California Prudential Securities FBO C 6.11%
Rakesh C Gupta
Neelam Gupta CO-TTEES
FBO Gupta Family Living Trust 12/22/94
Hemet, CA 92544
California Alex Brown & Sons Incorporated C 5.79%
FBO 489-31533-14
PO Box 1346
Baltimore, MD 21203-1346
California Alex Brown & Sons Incorporated C 5.67%
FBO 489-30559-15
P O Box 1346
Baltimore, MD 21203-1346
California Smith Barney Inc. C 5.67%
00154933343
388 Greenwich Street
New York, NY 10013
California Richard B Smith C 5.48%
Doris M. Smith TTEE
Smith Trust
U/A DTD 4/8/93
4853 Mt Royal Court
San Diego, CA 92117-2917
Florida MLPF&S for the sole benefit A 10.20%
of it customers
Attn: Fund Administration
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
Florida MLPF&S for the sole benefit B 19.34%
of it customers
Attn: Fund Administration
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
Florida MLPF&S for the sole benefit C 32.48%
of it customers
Attn: Fund Administration
4800 Deer Lake Dr. E, 3rd Floor
Jacksonville, FL 32246-6484
Florida Painewebber for the benefit of C 6.96%
Betty J. Puskar Ttee
Betty J. Puskar Rev. Trust
708 Ocean Drive
Juno Beach, FL 33408-1911
Florida Painewebber for the benefit of C 5.14%
Wayne D. Rebertus Ttee
U/A/DTD 8/3/89
FBO Wayne D. Rebertus
720 NW 73 Terrace
Plantation, FL 33317-1028
Massachusetts Richard Nakashian A 9.89%
P O Box 3150
Pocasset, MA 02559-3150
Massachusetts Ida R Rodriguez A 7.62%
TR # 21528
Keystone Trust Company TTEE
58 Helen Rd
Needham, MA 02192-3934
Massachusetts Robert M. Buddington A 7.50%
P.O. Box 549
S. Orleans, MA 02662-0549
Massachusetts Bertha M. Beauchemin A 6.45%
TR #21843
Keystone Trust Company TTEE
299 Cambridge St.
Winchester, MA 0189-2389
Massachusetts Margaret Vogel A 8.08%
TR #21720
Keystone Trust Company TTEE
865 Central Ave H403
Needham, MA 02192-1341
Massachusetts Joann L. Lyndon B 6.73%
22 Glenbrook Rd.
Wellesley Hills, MA 02181-1428
Massachusetts Bear Stearns Securities Corp. C 11.03%
FBO 176-12556-19
1 Metrotech Center North
Brooklyn, NY 11201-3859
Massachusetts Salvatore M Moscariello C 7.51%
Irene A Moscariello JT TEN
24 Van Norden Road
Reading, MA 01867-1244
Massachusetts Malcolm F. Groves & Jean C 5.61%
N Groves Ttee Malcolm F
Groves Rev Liv Trust
U/A Dtd 05-18-94
80 Indian Hill Road.
Cummaquid, MA 02637
Missouri MLPF & S for the Sole Benefit A 10.99%
of its Customers
Attn: Fund Administration
4800 Deer Lake Dr E 3rd Fl
Jacksonville, FL 32246-6484
Missouri BHC Securities, Inc. A 7.54%
FAO 54356697
Attn: Mutual Funds Dept.
One Commerce Square
2005 Market STreet, Suite 1200
Philadelphia, PA 19103
Missouri MLPF & S for the Sole Benefit B 26.23%
of its Customers
Attn: Fund Administration
4800 Deer Lake Dr E 3rd Fl
Jacksonville, FL 32246-6484
Missouri Painewebber for the Benefit of C 16.01%
Dorothy K. Pruett Trustee
Dorothy K. Pruett Revocable
C/O Mid America Mortgage
8645 College Blvd
Overland Park, KS 66210
Missouri Edward D. Jones and Co. F/A/O/ C 17.09%
Ronald Ralph Wilder Ttee
U/A DTD 07/26/88 for
EDJ# 642-02131-1-4
P.O. Box 2500
Maryland Heights, MO 63043-8500
Missouri MLPF & S for the Sole Benefit C 12.36%
of its Customers
Attn: Fund Administration
4800 Deer Lake Dr E 3rd Fl
Jacksonville, FL 32246-6484
New Jersey First Union National Bank Y 81.08%
Trust Accounts
Attn: Ginny Batten CMG-1151-2
401 S. Tryon St., 3rd Floor
Charlotte, NC 28202-1911
New Jersey First Union National Bank Y 17.90%
Trust Accounts
Attn: Ginny Batten
11th Floor, CMG-1151
301 S. Tryon St.
Charlotte, NC 28288-0002
New York Prudential Securities Inc FBO A 5.10%
Ms. Sandra M. Franck
345 W. 70th St., Apt 6F
New York, NY 10023-3554
New York MLPF & S for the Sole Benefit B 12.49%
of its Customers
Attn: Fund Administration
4800 Deer Lake Dr E 3rd Fl
Jacksonville, FL 32246-6484
New York Bear Stearns Securities Corp. C 14.94%
FBO 626-60277-10
1 Metrotech Center North
Brooklyn, NY 11201-3857
New York Henry W. Demoy C 5.36%
Patricia K. Demoy JT WROS
Rd. 2 King Road
Cambridge, NY 12816-9802
New York Carol T Whitman C 11.40%
P O Box 43
Whippleville, NY 12995
New York Carol L Moore C 8.52%
Rt 2 Box 1055
Chateaugay, NY 12920-9522
New York MLPF&S for the sole C 5.96%
Benefit of its customers
Attn: Fund Administration
4800 Deer Lake Dr E, 3rd Fl.
Jacksonville, FL 32246-6484
New York Elizabeth Frost C 5.06%
9 Heathcote Road
Scarsdale, NY 10583-4413
Pennsylvania MLPF&S for the sole A 6.05%
benefit of its customers.
Attn: Fund Administration
4800 Deer Lake Dr E 3rd Fl
Jacksonville, FL 32246-6484
Pennsylvania MLPF&S for the sole B 10.11%
benefit of its customers.
Attn: Fund Administration
4800 Deer Lake Dr E 3rd Fl
Jacksonville, FL 32246-6484
Pennsylvania MLPF&S for the sole C 29.07%
benefit of its customers.
Attn: Fund Administration
4800 Deer Lake Dr E 3rd Fl
Jacksonville, FL 32246-6484
Pennsylvania Painewebber FBO C 6.22%
Robert Couble
Debra K. Couble JT WROS
10506 old 22
Kutztown, PA 19530-8551
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APPENDIX A
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KEYSTONE CALIFORNIA TAX FREE FUND
GENERAL
California's economy is the largest among the 50 states and one of the
largest in the world. The State's population of over 32 million represents over
12% of the total U.S. population and grew by 27% in the 1980's, and at about
half that rate in the first half of the 1990s. Total personal income in the
State, at an estimated $815 billion in 1996 -- a 13% increase in the last two
years -- accounts for more than 12% of all personal income in the nation. Total
civilian employment is over 14.3 million, the majority of which is in the
service, trade and manufacturing sectors.
From mid-1990 to late 1993, the State suffered a recession with the worst
economic, fiscal and budget conditions since the 1930's. Construction,
manufacturing (especially aerospace), and financial services, among others, were
all severely affected, particularly in Southern California. Job losses were the
worst of any post-war recession. Employment levels stabilized by late 1993 and
steady growth has occurred since the start of 1994; pre-recession job levels
were reached in 1996. Unemployment, while higher than the national average, has
come down significantly from the January, 1994 peak of 10% and is now at the
pre-recession level. Economic indicators show a steady recovery underway in
California since the start of 1994, with greatest strength in manufacturing,
high technology, exports, services, entertainment and tourism. However, the
residential housing sector has been weaker than in previous recoveries. Any
delay or reversal of the economic recovery may cause a recurrence of revenue
shortfalls for the State.
CONSTITUTIONAL LIMITATIONS ON TAXES, OTHER CHARGES AND APPROPRIATIONS
LIMITATION ON PROPERTY TAXES. Certain California municipal obligations may
be obligations of issuers that rely in whole or in part, directly or indirectly,
on ad valorem property taxes as a source of revenue. The taxing powers of
California local governments and districts are limited by Article XIIIA of the
California Constitution, enacted by the voters in 1978 and commonly known as
"Proposition 13." Briefly, Article XIIIA limits to 1% of full cash value the
rate of ad valorem property taxes on real property and generally restricts the
reassessment of property to 2% per year, except upon new construction or change
of ownership (subject to a number of exemptions). Taxing entities may, however,
raise ad valorem taxes above the 1% limit to pay debt service on voter-approved
bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied against
the assessed value of property as of the owner's date of acquisition (or as of
March 1, 1975, if acquired earlier), subject to certain adjustments. This system
has resulted in widely varying amounts of tax on similarly situated properties.
Several lawsuits have been filed challenging the acquisition-based assessment
system of Proposition 13, and on June 18, 1992 the U.S. Supreme Court announced
a decision upholding Proposition 13.
Article XIIIA prohibits local governments from raising revenues through ad
valorem property taxes above the 1% limit; it also requires voters of any
governmental unit to give two-thirds approval to levy any "special tax." Court
decisions, however, allowed non-voter approved levy of "general taxes" that were
not dedicated to a specific use.
LIMITATIONS ON OTHER TAXES, FEES AND CHARGES. On November 5, 1996, the
voters of the State approved Proposition 218, called the "Right to Vote on Taxes
Act." Proposition 218 added Articles XIIIC and XIIID to the State Constitution,
which contain a number of provisions affecting the ability of local agencies to
levy and collect both existing and future taxes, assessments, fees and charges.
Article XIIIC requires that all new or increased local taxes be submitted
to the electorate before they become effective. Taxes for general governmental
purposes require a majority vote and taxes for specific purposes require a
two-thirds vote. Further, any general purpose tax which was imposed, extended or
increased without voter approval after December 31, 1994 must be approved by a
majority vote within two years.
Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain "assessments" for municipal
services and programs. Article XIIID also contains several new provisions
affecting "fees" and "charges", defined for purposes of Article XIIID to mean
"any levy other than an ad valorem tax, a special tax, or an assessment, imposed
by a [local government] upon a parcel or upon a person as an incident of
property ownership, including a user fee or charge for a property related
service." All new and existing property related fees and charges must conform to
requirements prohibiting, among other things, fees and charges which generate
revenues exceeding the funds required to provide the property related service or
are used for unrelated purposes. There are new notice, hearing and protest
procedures for levying or increasing property related fees and charges, and,
except for fees or charges for sewer, water and refuse collection services (or
fees for electrical and gas service, which are not treated as "property related"
for purposes of Article XIIID), no property related fee or charge may be imposed
or increased without majority approval by the property owners subject to the fee
or charge or, at the option of the local agency, two-thirds voter approval by
the electorate residing in the affected area.
In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes, assessments, fees
and charges. Consequently, local voters could, by future initiative, repeal,
reduce or prohibit the future imposition or increase of any local tax,
assessment, fee or charge. It is unclear how this right of local initiative may
be used in cases where taxes or charges have been or will be specifically
pledged to secure debt issues.
The interpretation and application of Proposition 218 will ultimately
be determined by the courts with respect to a number of matters, and it is not
possible at this time to predict with certainly the outcome of such
determinations. Proposition 218 is generally viewed as restricting the fiscal
flexibility of local governments, and for this reason, some ratings of
California cities and counties have been, and others may be, reduced.
APPROPRIATION LIMITS. The State and its local governments are subject
to an annual "appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB prohibits
the State or any covered local government from spending "appropriations subject
to limitation" in excess of the appropriations limit imposed. "Appropriations
subject to limitation" are authorizations to spend "proceeds of taxes," which
consist of tax revenues and certain other funds, including proceeds from
regulatory licenses, user charges or other fees, to the extent that such
proceeds exceed the cost of providing the product or service, but "proceeds of
taxes" excludes most State subventions to local governments. No limit is imposed
on appropriations of funds that are not "proceeds of taxes," such as reasonable
user charges or fees, and certain other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations
arising from certain emergencies declared by the Governor, (3) appropriations
for certain capital outlay projects, (4) appropriations by the State of post
1989 increases in gasoline taxes and vehicle weight fees, and (5) appropriations
made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population and any transfers of service
responsibilities between governmental units. The definitions for such
adjustments were liberalized in 1990 to follow more closely growth in the
State's economy.
"Excess" revenues are measured over a two year cycle. Local governments
must return any excess to taxpayers by rate reductions. The State must refund
50% paid to schools and community colleges. With more liberal annual adjustment
factors since 1988, and depressed revenues for several years after 1990 because
of the recession, few governments, including the State, are currently operating
near their spending limits, but this condition may change over time. The State's
1996-97 Budget Act provides for State appropriations of more than $7 billion
under the Article XIIIB limit. Local governments may by voter approval exceed
their spending limits for up to four years.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and XIIID, of
the California Constitution, the ambiguities and possible inconsistencies of
their terms, and the impossibility of predicting future appropriations or
changes in population and cost of living, and the probability of continuing
legal challenges, it is not currently possible to determine fully the impact of
these articles on California municipal obligations. It is not presently possible
to predict the outcome of any pending litigation with respect to the ultimate
scope, impact or constitutionality of these articles, or the impact of any such
determinations upon State agencies or local governments, or upon their ability
to pay debt service on their obligations. Future initiatives or legislative
changes in laws or the California Constitution may also affect the ability of
the State or local issuers to repay their obligations.
OBLIGATIONS OF THE STATE OF CALIFORNIA
As of March 1, 1997, the State had approximately $17.7 billion of general
obligation bonds outstanding, and $8.4 billion remained authorized but unissued.
The State also had outstanding at March 1, 1997 $368 million of general
obligation commercial paper notes which will be refunded into long-term bonds at
a later date. In addition, at March 1, 1997, the State had lease-purchase
obligations, payable from the State's General Fund, of approximately $6.1
billion. State voters approve $7.1 billion of new bond authorizations during
1996. In fiscal year 1995-1996, debt service on general obligation bonds and
lease-purchase debt was approximately 5.2% of General Fund revenues. The State
has paid the principal of and interest on its general obligation bonds,
lease-purchase debt and short-term obligations when due.
RECENT FINANCIAL RESULTS
The principal sources of General Fund revenues in 1995-1996 were the
California personal income tax (45% of total revenues), the sales tax (34%),
bank and corporation taxes (13%), and the gross Fund for Economic Uncertainties
("SFEU"), derived from General Fund revenues, as a reserve to meet cash needs of
the General Fund. Because of the recession, the SFEU has not been funded for the
past four years.
GENERAL. Throughout the 1980's, State spending increased rapidly as the
State population and economy also grew rapidly, including increased spending for
many assistance programs to local governments, which were constrained by
Proposition 13 and other laws. The largest State program is assistance to local
public school districts. In 1988, an initiative (Proposition 98) was enacted
which (subject to suspension by a two-thirds vote of the Legislature and the
Governor) guarantees local school districts and community college districts a
minimum share of State General Fund revenues (currently 35%).
Since the start of 1990-91 Fiscal Year, the State has faced adverse
economic, fiscal, and budget conditions. The economic recession seriously
affected State tax revenues. It also caused increased expenditures for health
and welfare programs. The State is also facing a structural imbalance in its
budget with the largest programs supported by the General Fund (education,
health, welfare and corrections) growing at rates higher than the growth rates
for the principal revenue sources of the General Fund. These structural concerns
will continue in future years with the expected need to increase capital and
operating costs of the correctional system in response to a "Three Strikes" law
enacted in 1994 which mandates life imprisonment for certain felony offenders.
RECENT BUDGETS. As a result of these factors, among others, from the late
1980's until 1992-93, the State had a period of nearly chronic budget imbalance,
with expenditures exceeding revenues in four out of six years, and the State
accumulated and sustained a budget deficit in the budget reserve, the SFEU
approaching $2.8 billion at its peak at June 30, 1993. Starting in the 1990-91
Fiscal Year and for five years thereafter, each budget required multi-billion
dollar actions to bring projected revenues and expenditures into balance and to
close large "budget gaps" which were identified. The Legislature and Governor
eventually agreed on a number of different steps to produce Budget Acts in the
Years 1991-92 to 1995-96 (although not all these actions occurred in each year),
including:
* significant cuts in health and welfare program expenditures;
* transfers of program responsibilities and some funding sources from the
state to local governments, coupled with some reduction in mandates on local
government;
* transfer of about $3.6 billion in annual local property tax revenues from
cities, counties, redevelopment agencies and some other districts to local
school districts, thereby reducing state funding for schools;
* reduction in growth of support for higher education programs, coupled
with increases in student fees;
* revenue increases (particularly in the 1991-92 Fiscal Year budget), most
of which were for a short duration;
* increased reliance on aid from the federal government to offset the costs
of incarcerating, educating and providing health and welfare services to
undocumented aliens (although these efforts have produced much less federal aid
than the State Administration had requested); and
* various one-time adjustment and accounting changes.
Despite these budget actions, the effects of the recession led to large
unanticipated deficits in the SFEU, as compared to projected positive balances.
By the start of the 1993-94 Fiscal Year, the accumulated deficit was so large
(almost $2.8 billion) that it was impractical to budget to retire it in one
year, so a two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, to carry the final retirement
of the deficit into 1995-96.
The combination of stringent budget actions cutting State expenditures, and
the turnaround of the economy by late 1993, finally led to the restoration of
positive financial results. While General Fund revenues and expenditures were
essentially equal in FY 1992-93 (following two years of excess expenditures over
revenues), the General Fund had positive operating results in FY 1993-94 through
FY 1995-96, which have reduced the accumulated budget deficit to less than $100
million as of June 30, 1996.
The State Department of Finance estimated that the General Fund received
revenues of about $46.3 billion in FY 1995-96, more than $2 billion higher than
was originally expected, as a result of the strengthening economy. Expenditures
totaled about $45.4 billion, also about $2 billion higher than budgeted,
because, among other factors, the State Constitution requires disbursement of a
percentage of revenues to local school districts and federal actions to reduce
welfare costs and to pay for costs of illegal immigrants were not forthcoming to
the extent expected.
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the state's cash resources available to pay
its ongoing obligations. When the Legislature and the Governor failed to adopt a
budget for the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the
state to carry out its normal annual cash flow borrowing to replenish its cash
reserves, the State Controller was forced to issue approximately $3.8 billion of
registered warrants ("IOUs") over a 2-month period to pay a variety of
obligations representing prior years' or continuing appropriations, and mandates
from court orders. Available funds were used to make constitutionally-mandated
payments such as debt service on bonds and warrants.
The State's cash condition became so serious that from late spring 1992
until 1995, the State had to rely on issuance of short-term notes which matured
in a subsequent fiscal year to finance its ongoing deficit and pay current
obligations. With the repayment of the last of these deficit notes in April,
1996, the State does not plan to rely further on external borrowing across
fiscal years, but will continue its normal cash flow borrowing during a fiscal
year.
CURRENT BUDGET. The 1996-97 Budget Act was signed by the Governor on July
15, 1996, along with various implementing bills. The Legislature rejected the
Governor's proposed 15% cut in personal income taxes (to be phased over three
years), but did approve a 5% cut in bank and corporation taxes, to be effective
for income years starting on January 1, 1997. Revenues for the Fiscal Year were
estimated to total $47.643 billion, a 3.3 percent increase over the final
estimated 1995-96 revenues. The Budget Act contains General Fund appropriations
totaling $47.251 billion, a 4.0 percent increase over the final estimated
1995-96 expenditures.
The following are principal features of the 1996-97 Budget Act:
1. Funding for schools and community college districts increased by $1.65
billion total above revised 1995-96 levels. Almost half of this money was
budgeted to fund class-size reductions in kindergarten and grades 1-3. Also, for
the second year in a row, the full cost of living allowance (3.2 percent) was
funded. The funding increases have brought K-12 expenditures to almost $4,800
per pupil, an almost 15% increase over the level prevailing during the recession
years.
2. Proposed cuts in health and welfare totaling $660 million. All of these
cuts required federal law changes (including welfare reform, which was enacted),
federal waivers, or federal budget appropriations in order to be achieved.
Ultimate federal actions after enactment of the Budget Act will allow the State
to save only about $360 million of this amount.
3. A 4.9 percent increase in funding for the University of California and
the California State University system, with no increases in student fees for
the second consecutive year.
4. The Budget Act assumed the federal government would provide
approximately $700 million in new aid for incarceration and health care costs of
illegal immigrants. These funds reduce appropriations in these categories that
would otherwise have to be paid from the General Fund.
With signing of the Budget Act, the State implemented its regular cash flow
borrowing program with the issuance of $3.0 billion of Revenue Anticipation
Notes to mature on June 30, 1997. The Budget Act appropriated a modest budget
reserve in the SFEU of $305 million, as of June 30, 1997. The General Fund
balance, however, still reflects $1.6 billion of "loans" which the General Fund
made to local schools in the recession years, representing cash outlays above
the mandatory minimum funding level. Settlement of litigation over these
transactions in July 1996 calls for repayment of these loans over the period
ending in 2001-02, about equally split between outlays from the General Fund and
from schools' entitlements. The 1996-97 Budget Act contained a $150 million
appropriation from the General Fund toward this settlement.
The Department of Finance projected, when the Budget Act was passed, that,
on June 30, 1997, the State's available internal borrowable (cash) resources
will be $2.9 billion, after payment of all obligations due by that date, so that
no external cross-fiscal year borrowing will be needed. The State will continue
to rely on internal borrowing and intra-year external note borrowing to meet its
cash flow requirements.
The Department of Finance has reported that, based on stronger than
expected revenues during the first six months of the 1996-97 fiscal year,
reflecting the continued strength of the State's economic recovery, General Fund
revenues for the full 1996-97 fiscal year will be almost $1 billion above
projections, at about $48.4 billion. This is expected to be offset by required
increased payments to schools, and lower than expected savings resulting from
federal welfare reform actions and federal aid for illegal immigrants. As a
result, the expected balance of the SFEU at June 30, 1997 has been slightly
reduced to about $197 million, still the first positive balance in the decade of
the 90's. The State has not yet given any prediction of how the federal welfare
reform law will impact the State's finances, or those of its local agencies; the
State is in the midst of making many decisions concerning implementation of the
new welfare law.
PROPOSED 1997-98 BUDGET. On January 9, 1997, the Governor released his
proposed budget for FY 1997-98. Assuming continuing strength in the economy, the
Governor projects General Fund revenues of $50.7 billion, and proposes
expenditures of $50.3 billion, to leave a budget reserve in the SFEU of $550
million at June 30, 1998. The Governor proposed further programs to reduce class
size in lower primary grades, using excess revenues from FY 1996-97. He also
proposed a further cut in corporate taxes, and sweeping changes in public
assistance programs to respond to the new federal welfare reform law.
Although the State's strong economy is producing record revenues to the
State government, the State's budget continues to be under stress from mandated
spending on education, a rising prison population, and social needs of a growing
population with many immigrants. These factors which limit State spending growth
also put pressure on local governments. There can be no assurances that, if
economic conditions weaken, or other factors intercede, the State will not
experience budget gaps in the future.
BOND RATINGS
The ratings on California's long-term general obligation bonds were reduced
in the early 1990's from "AAA" levels which had existed prior to the recession.
In 1996, Fitch and Standard & Poor's raised their ratings of California's
general obligation bonds, which are currently assigned ratings of "A+" from
Standard & Poor's, "A1" from Moody's and "A+" from Fitch. There can be no
assurance that such ratings will be maintained in the future. It should be noted
that the creditworthiness of obligations issued by local California issuers may
be unrelated to the creditworthiness of obligations issued by the State of
California, and that there is no obligation on the part of the State to make
payment on such obligations in the event of default.
LEGAL PROCEEDINGS
The State is involved in certain legal proceedings (described in the
State's recent financial statements) that, if decided against the State, may
require the State to make significant future expenditures or may substantially
impair revenues.
OBLIGATIONS OF OTHER ISSUERS
OTHER ISSUERS OF CALIFORNIA MUNICIPAL OBLIGATIONS. There are a number of
state agencies, instrumentalities and political subdivisions of the State that
issue municipal obligations, some of which may be conduit revenue obligations
payable from payments from private borrowers. These entities are subject to
various economic risks and uncertainties, and the credit quality of the
securities issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the State.
STATE ASSISTANCE. Property tax revenues received by local governments
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of the
State's General Fund surplus to local agencies, the reallocation of certain
State revenues to local agencies and the assumption of certain governmental
functions by the State to assist municipal issuers to raise revenues. Through
1990-91, local assistance (including public schools) accounted for around 75% of
General Fund spending. To reduce State General Fund support for school
districts, the 1992-93 and 1993-94 Budget Acts caused local governments to
transfer a total of $3.9 billion of property tax revenues to school districts,
representing loss of all the post-Proposition 13 "bailout" aid. The largest
share of these transfers came from counties, and the balance from cities,
special districts and redevelopment agencies. In order to make up part of this
shortfall, the Legislature proposed, and voters approved, dedicating 0.5% of the
sales tax to counties and cities for public safety purposes. In addition, the
Legislature has changed laws to relieve local governments of certain mandates,
allowing them to reduce costs.
To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of State
assistance to local governments may continue to be reduced. Any such reductions
in State aid could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. A number of other counties
have indicated that their budgetary condition is extremely serious. In the
1995-96 and 1996-97 fiscal years, Los Angeles County, the largest in the State,
had to make significant cuts in services and personnel, particularly in the
health care system, in order to balance its budget. The County's debt was
downgraded by Moody's and S&P in the summer of 1995. Orange County, which
recently emerged from federal bankruptcy protection, has substantially reduced
services and personnel in order to live within much reduced means.
Counties and cities may face further budgetary pressures as a result of
changes in welfare and public assistance programs, which will have to be enacted
by June, 1997 in order to comply with the federal welfare reform law. It is now
yet known how the State's legislation will turn out and what its overall impact
will be on local government finances.
ASSESSMENT BONDS. California municipal obligations that are assessment
bonds may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are secured by
land that is undeveloped at the time of issuance, but anticipated to be
developed within a few years after issuance. In the event of such reduction or
slowdown, such development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special assessments or taxes
securing these bonds are not the personal liability of the owners of the
property assessed, the lien on the property is the only security for the bonds.
Moreover, in most cases the issuer of these bonds is not required to make
payments on the bonds in the event of delinquency in the payment of assessments
or taxes, except from amounts, if any, in a reserve fund established for the
bonds.
CALIFORNIA LONG-TERM LEASE OBLIGATIONS. Certain California long-term lease
obligations, though typically payable from the general fund of the municipality,
are subject to "abatement" in the event the facility being leased is unavailable
for beneficial use and occupancy by the municipality during the term of the
lease. Abatement is not a default, and there may be no remedies available to the
holders of the certificates evidencing the lease obligation in the event
abatement occurs. The most common cases of abatement are failure to complete
construction of the facility before the end of the period during which lease
payments have been capitalized and uninsured casualty losses to the facility
(e.g. due to earthquake). In the event abatement occurs with respect to a lease
obligation, lease payments may be interrupted (if all available insurance
proceeds and reserves are exhausted) and the certificates may not be paid when
due.
Several years ago the Richmond Unified School District (the "District")
entered into a lease transaction in which certain existing properties of the
District were sold and leased back in order to obtain funds to cover operating
deficits. Following a fiscal crisis in which the District's finances were taken
over by a State receiver (including a brief period under bankruptcy court
protection), the District failed to make rental payments on this lease,
resulting in a lawsuit by the Trustee for the Certificate of Participation
holders, in which the State was a named defendant (on the grounds that it
controlled the District's finances). One of the defenses raised in answer to
this lawsuit was the invalidity of the District's lease. The trial court upheld
the validity of the lease, and the case has subsequently been settled. Any
judgment in a similar case against the position taken by the Trustee may have
adverse implications for lease transactions of a similar nature by other
California entities.
OTHER CONSIDERATIONS
The repayment of industrial development securities secured by real property
may be affected by California laws limiting foreclosure rights of creditors.
Securities backed by health care and hospital revenues may be affected by
changes in State regulations governing cost reimbursements to health care
providers under Medi-Cal (the State's Medicaid program), including risks related
to the policy of awarding exclusive contracts to certain hospitals.
Limitations on AD VALOREM property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g. because of major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity that
increased such tax rate to repay that entity's general obligation indebtedness.
As a result, redevelopment agencies (which typically are the issuers of tax
allocation securities) no longer receive an increase in tax increment when taxes
on property in the project area are increased to repay voter-approved bonded
indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and principal
on their obligations remains unclear. Furthermore, other measures affecting the
taxing or spending authority of California or its political subdivisions may be
approved or enacted in the future. Legislation has been or may be introduced
that would modify existing taxes or other revenue raising measures or that
either would further limit or, alternatively, would increase the abilities of
state and local governments to impose new taxes or increase existing taxes. It
is not presently possible to predict the extent to which any such legislation
will be enacted. Nor is it presently possible to determine the impact of any
such legislation on California municipal obligations in which the Fund may
invest, future allocations of state revenues to local governments or the
abilities of state or local governments to pay the interest on, or repay the
principal of, such California municipal obligations.
Substantially all of California is within an active geologic region subject
to major seismic activity. Northern California in 1989 and Southern California
in 1994 experienced major earthquakes causing billions of dollars in damages.
The federal government provided more than $13 billion in aid for both
earthquakes, and neither event is expected to have any long-term negative
economic impact. Any security in the California Fund could be affected by an
interruption of revenues because of damaged facilities, or, consequently, income
tax deductions for casualty losses or property tax assessment reductions.
Compensatory financial assistance could be constrained by the inability of (i)
an issuer to have obtained earthquake insurance coverage at reasonable rates;
(ii) an insurer to perform on its contracts of insurance in the event of
widespread losses; or (iii) the federal or State governments to appropriate
sufficient funds within their respective budget limitations.
KEYSTONE FLORIDA TAX FREE FUND
REVENUES
The State accounts for its receipts using fund accounting. It has
established the General Revenue Fund, the Working Capital Fund and various other
trust funds, which are maintained for the receipt of monies which under law or
trust agreements must be maintained separately.
The General Revenue Fund consists of all monies received by the State from
every source whatsoever which are not allocable to the other funds. Major
sources of tax revenues for the General Revenue Fund are the sales and use tax,
the corporate income tax, and the intangible personal property tax, which are
projected for fiscal year 1997-98 to amount to 71%, 8% and 4%, respectively, of
the total receipts of that fund.
The Florida Constitution and its statutes mandate that the State budget as
a whole and each separate fund within the State budget be kept in balance from
currently available revenues for each fiscal year.
SALES AND USE TAX
The greatest single source of tax receipts in Florida is the sales and use
tax, which is projected to amount to $11.7 billion for fiscal year 1997-98. The
sales tax is 6% of the sales price of tangible personal property sold at retail
in the state. The use tax is 6% of the cash price or fair market value of
tangible personal property when it is not sold but is used, or stored for use,
in the State. In other words, the use tax applies to the use of tangible
personal property in Florida, which was purchased in another state but would
have been subject to the sales tax if purchased in Florida. Approximately 10% of
the sales tax is designated for local governments and is distributed to the
respective counties in which collected for use by such counties and
municipalities therein. In addition to this distribution, local governments may
(by referendum) assess a 1% sales surtax within their county. Proceeds from this
local option sales surtax can be earmarked for funding countywide bus and rapid
transit systems, local infrastructure construction and maintenance, medical care
for indigents and capital projects for county school districts as set forth in
Section 212.055(2), of the Florida Statutes.
The two taxes, sales and use, stand as complements to each other, and taken
together provide a uniform tax upon either the sale at retail or the use of all
tangible personal property irrespective of where it may have been purchased. The
sales tax also includes a levy on the following: (I) rentals on tangible
personal property and accommodations in hotels, motels, some apartments,
offices, real estate, parking and storage places in parking lots, garages and
marinas for motor vehicles or boats; (ii) admissions to places of amusements,
most sports and recreation events; (iii) utilities, except those used in homes;
and (iv) restaurant meals and expendables used in radio and television
broadcasting. Exemptions include: groceries; medicines; hospital rooms and
meals; seeds, feeds, fertilizers and farm crop protection materials; purchases
by religious, charitable and educational nonprofit institutions; professional
services, insurance and certain personal service transactions; newspapers;
apartments used as permanent dwellings; and kindergarten through community
college athletic contests or amateur plays.
OTHER STATE TAXES
Other taxes which Florida levies include the motor fuel tax, corporate
income tax, intangible property tax, documentary stamp tax, gross receipts
utilities tax and severance tax on the production of oil and gas and the mining
of solid minerals, such as phosphate and sulfur.
LOCAL GOVERNMENT DEBT
Numerous government units, counties, cities, school districts and special
taxing districts, issue general obligation bonds backed by their taxing power.
State and local government units may issue revenue obligations, which are
supported by the revenues generated from the particular projects or enterprises.
Examples include obligations issued to finance the construction of water and
sewer systems, health care facilities and educational facilities. In some cases,
sewer or water revenue obligations may be additionally secured by the full faith
and credit of the State.
OTHER FACTORS
The performance of the obligations issued by Florida, its municipalities,
subdivisions and instrumentalities are in part tied to state-wide, regional and
local conditions within Florida. Adverse changes to state-wide, regional or
local economies may adversely affect the creditworthiness of Florida, its
municipalities, etc. Also, some revenue obligations may be issued to finance
construction of capital projects which are leased to nongovernmental entities.
Adverse economic conditions might affect those lessees' ability to meet their
obligations to the respective governmental authority which in turn might
jeopardize the repayment of the principal of, or the interest on, the revenue
obligations.
KEYSTONE MASSACHUSETTS TAX FREE FUND
The Commonwealth of Massachusetts and certain of its cities and towns and
public bodies have experienced in the past, and may experience in the future,
financial difficulties that may adversely affect their credit standing. The
prolonged effects of such financial difficulties could adversely affect the
market value of the municipal securities held by the Massachusetts Fund. The
information summarized below describes some of the more significant factors that
could affect the Massachusetts Fund or the ability of the obligors to pay debt
service on certain of the securities. The sources of such information are the
official statement of issuers located in the Commonwealth of Massachusetts as
well as other publicly available documents, and statements of public officials.
The Massachusetts Fund has not independently verified any of the information
contained in such statements and documents but the Massachusetts Fund is not
aware of facts which would render such information inaccurate.
GENERAL
The Commonwealth's constitution requires, in effect, that its budget,
though not necessarily its operating expenditures and revenue, be balanced each
year. In addition, the Commonwealth has certain budgetary procedures and fiscal
controls in place that are designed to ensure that sufficient cash is available
to meet the Commonwealth's obligations, that state expenditures are consistent
with periodic allotments of annual appropriations and that funds are expended
consistent with statutory and public purposes. The condition of the three
principal operating funds (the General Fund, the Local Aid Fund and the Highway
Fund), viewed on a consolidated basis, is generally regarded as the principal
indicator of whether the Commonwealth's operating revenues and expenses are in
balance.
Although the Commonwealth experienced an economic slowdown during the
recession of 1990 to 1991, budgeted expenditures for fiscal 1992 were
approximately $13.416 billion, while budgeted revenues and other sources for
that year were approximately $13.728 billion, including tax revenues of
approximately $9.484 billion. Budgeted expenditures in fiscal 1992 were
approximately $300 million higher than July, 1991 estimates of budgeted
expenditures. The budgeted operating funds ended fiscal 1992 with a combined
balance of $549.4 million.
Budgeted revenues and other sources in fiscal 1993 were approximately
$14.710 billion, including tax revenues of approximately $9.930 billion.
Budgeted expenditures and other uses in fiscal 1993 were approximately $14.696
billion. Furthermore, total revenues and other sources for fiscal 1993 increased
approximately 6.9% from fiscal 1992, while tax revenues increased by 4.7% for
the same period. Budgeted expenditures and other uses in fiscal 1993 were
approximately 9.6% higher than fiscal 1992 expenditures and other uses. Fiscal
1993 budgeted expenditures were $23 million lower than estimated in July 1992.
As of 1993 fiscal year end, the Commonwealth had aggregated balances of
approximately $562.5 million in the budgeted operating funds, including a
combined balance of $452.1 million in the stabilization and undesignated general
funds.
In June 1993, new comprehensive education reform legislation was enacted.
This legislation required annual increases in expenditures for education
purposes above fiscal 1993 base spending of $1.289 billion, estimated at
approximately $175 million in fiscal 1994, $396 million in fiscal 1995, $629
million in fiscal 1996, and $881 million in fiscal 1997, with additional annual
increases anticipated in later years. The fiscal 1994, 1995, 1996 and 1997
budgets have fully funded the requirements imposed by this legislation.
Municipalities and agencies of the Commonwealth are experiencing the same
economic effects. Moreover, they are affected by the financial condition of the
Commonwealth, because they receive substantial funding from the Commonwealth.
The fiscal 1994 budget provided for expenditures and other uses of
approximately $15.523 billion, an increase of 5.6% over fiscal 1993 levels.
Budgeted revenues and other sources for fiscal 1994 were approximately $15.55
billion. This amount included tax revenues of approximately $10.607 billion,
which is 6.8% higher than fiscal 1993 tax revenues. 1994 tax revenues were
approximately $87 million below the Department of Revenue's estimate of $10.694
billion. Total revenues and other sources were approximately 5.7% higher than
fiscal 1993 levels. Fiscal 1994 ended with a combined balance of approximately
$589.3 million in the budgeted operating funds.
Fiscal 1995 tax revenue collections were approximately $11.163 billion,
approximately $12 million above the Department of Revenue's revised fiscal year
1995 tax revenue estimate of $11.151 billion and approximately $556 million, or
5.2%, above fiscal 1994 tax revenues of $10.607 billion. Budgeted revenues and
other sources, including non-tax revenues, collected in fiscal 1995 were
approximately $16.387 billion, approximately $837 million, or 5.4%, above the
fiscal 1994 budgeted revenues of $15.55 billion. Budgeted expenditures and other
uses of funds in fiscal 1995 were approximately $16.251 billion, approximately
$728 million, or 4.7%, above fiscal 1994 budgeted expenditures and uses of
$15.523 billion. The Commonwealth ended fiscal 1995 with a combined fund balance
of $726 million. As calculated by the Comptroller, the amount of surplus funds
(as so defined) for fiscal 1995 was approximately $94.9 million, of which $55.9
million was available to be carried forward as a beginning balance for fiscal
1996. Of the balance approximately $27.9 million was deposited in the
Stabilization Fund, and approximately $11.1 million was deposited in the Cost
Relief Fund.
Budgeted revenues and other sources for fiscal 1996 totaled approximately
$17.328 billion, including tax revenues of approximately $12.049 billion. From
fiscal 1995 to fiscal 1996, budgeted revenues and other sources increased by
approximately 5.7%, while tax revenues increased by approximately 7.9% for the
same period. The Department of Revenue believes that the strong tax revenue
growth in fiscal 1996 was due partly to one-time factors which may not recur in
fiscal 1997 and which have been incorporated into the Department's forecast for
fiscal 1997 tax revenues. Such factors include the rise in the stock and bond
markets in calendar 1995, which may have created unusually large capital gains
and corresponding increases in personal income tax payments in fiscal 1996.
Budgeted expenditures and other uses in fiscal 1996 were approximately $16.881
billion, an increase of approximately $630.6 million, or 3.9%, over fiscal 1995
budgeted expenditures and other uses of $16.251 billion. The Commonwealth ended
the 1996 fiscal year with a combined balance of approximately $1.172 billion in
the budgeted operating funds.
Approximately $177.4 million was transferred to the Stabilization Fund at
the end of fiscal 1996, bringing that Fund balance to approximately $625.0
million, which exceeded the amount of $543.3 million that can remain in the
Stabilization Fund by law. Under state law, year-end surplus amounts in excess
of the amount that can remain in the Stabilization Fund are transferred to the
Tax Reduction Fund, to be applied, subject to legislative appropriation, to the
reduction of personal income taxes. Of the $177.4 million transferred to the
Stabilization Fund in fiscal 1996, $81.7 million was subsequently transferred to
the Tax Reduction Fund and the 1996 balance in the Tax Reduction Fund as
calculated by the Comptroller, was approximately $231.7 million. Pursuant to
fiscal 1996 supplemental appropriations legislation signed by the Governor on
July 30, 1996, approximately $150 million was appropriated from the Tax
Reduction Fund for personal income tax reductions in fiscal 1997, to be
implemented by a temporary increase in the amount of the personal exemption
allowable for the 1996 taxable year. On September 15, 1996 the Governor filed
legislation proposing to use the full amount in the Tax Reduction Fund to
increase the personal income tax exemption for the 1996 tax year, but this
legislation was not enacted in the 1996 legislative session.
The final fiscal 1996 appropriation bills approved by the Governor on July
30, 1996 and August 10, 1996 contained approximately $246.9 million in fiscal
1996 appropriations, $38.2 million in fiscal 1997 appropriations and $221.7
million in fiscal 1996 appropriations continued for use in fiscal 1997. Amounts
carried forward from fiscal 1995 and deposited in the Cost Relief Fund were
appropriated in these bills for further subsidies to local government units.
The fiscal 1997 budget, as signed into law by the Governor on June 30,
1996, provides for estimated expenditures and other uses of approximately
$17.704 billion, an $823 million, or 4.9%, increase over fiscal 1996 spending.
The fiscal 1997 budget includes a spending increase of approximately $254
million to continue funding the comprehensive educational reform legislation
enacted in 1993. Budgeted revenues and other sources to be collected in fiscal
1997 are estimated to be approximately $17.394 billion. This amount includes a
revised estimate of fiscal 1997 tax revenues of $12.307 billion, which is
approximately $257 million, or 2.1%, higher than fiscal 1996 tax revenues, and
is $184 million higher than the October 1996 estimate of $12.123 billion. The
combined ending fund balances for fiscal year 1997 are estimated at
approximately $863 million, which is $309 million below the fiscal 1996 year-end
fund balance. Approximately $255 million of the $309 million is attributable to
non-recurring factors, the largest of which is the $150 million personal income
tax reduction.
On January 23, 1997, the Governor filed legislation to appropriate the
remaining balance of approximately $85 million in the Tax Reduction Fund for an
additional temporary personal exemption increase during the 1997 taxable year.
As a result, the $85 million in tax cuts initially proposed by the Governor for
fiscal 1997 are now estimated to occur in fiscal 1998. Based on preliminary
figures, through February 1997, fiscal 1997 tax revenue collections have totaled
approximately $7.903 billion, approximately $602 million, or 8.3%, greater than
tax revenue collections for the same period in fiscal 1996. Tax revenue
collections to date are approximately $227 million above the midpoint of the
benchmark range set by the Department of Revenue, based on the current fiscal
1997 tax collection estimate of $12.307 billion, and are approximately $155
million above the top of such benchmark range.
The Governor's fiscal 1998 budget recommendation, which was submitted to
the Legislature on January 22, 1997, calls for budgeted expenditures of
approximately $18.15 billion or total spending of $18.224 billion, which
represents a $520 million, or 2.9%, increase over estimated fiscal 1997
expenditures and other uses of $17.704 billion. Budgeted revenues for fiscal
1998 are estimated at $17.998 billion or total revenues of $18.072 billion,
which is a $219 million, or 1.2%, increase over the $17.853 total revenues and
other sources forecast for fiscal 1997. The budget recommendation is based on a
tax revenue estimate of $12.667 billion, a 2.9% increase over fiscal 1997
projected tax revenues of $12.307 billion. The fiscal 1998 tax revenue estimate
incorporates $82 million in personal and business tax cuts proposed by the
Governor and includes an $85 million income tax reduction for the taxable year
1997, the second consecutive tax cut of this kind. The Governor's proposal
projects a fiscal 1998 ending balance of approximately $711 million, including a
Stabilization Fund balance of $585.8 billion, assuming passage of legislation
filed on January 23, 1997 which would increase the statutory cap on the
Stabilization Fund from 5% of tax revenues (less debt service) to 5% of total
budgeted revenues. The budget proposal also recommends an increase of $259
million in local education aid to fund the 1993 education reform legislation.
The Governor has begun to phase in a plan to provide permanent passenger
vehicle registration and lifetime operating licenses. These proposals are not
estimated to affect revenues until fiscal 1998, when the elimination of vehicle
registration fees is estimated to reduce state revenues by approximately $13.75
million, and by approximately $55 million in fiscal 1999. Lifetime operating
licenses are estimated to reduce revenues by approximately $5 million in fiscal
2001 and by $31 million in fiscal 2002.
On November 28, 1995 the Governor approved a modified version of the
legislation he had filed in September to establish a "single sales factor"
apportionment formula for the business corporations tax. As finally enacted, the
legislation applies the new formula, effective January 1, 1996, to certain
federal defense contractors and phases the new formula in over five years to
manufacturing firms generally. The Department of Revenue estimates that the new
law reduced revenues by $44 million in fiscal 1996 and will reduce revenues by
$90 million in fiscal 1997. If the new formula were fully effective for all
covered businesses, the Department estimates that the annual revenue reduction
would be $100 million to $150 million. On August 8, 1996, the Governor approved
legislation changing the apportionment formula for the business corporations tax
payable by certain mutual fund service corporations. The legislation changes the
computation of the sales factor effective January 1, 1997 and adopts the "single
sales factor" formula effective July 1, 1997 with respect to these companies. It
also requires the affected corporations to increase their numbers of employees
by 5% per year for five years, subject to certain exceptions. The Department of
Revenue estimates that the changes will reduce revenues by $10 million in fiscal
1997 and by approximately $39 million to $53 million per year beginning in
fiscal 1998.
On January 7, 1997 the Governor filed legislation to abolish county
government on July 1, 1998. Most county functions and properties, including
jails, houses of correction and courts, would be transferred to the
Commonwealth, and all liabilities, debts, leases and contracts of any county
would become obligations of the Commonwealth. Under legislation enacted in 1996,
Franklin County government will terminate on July 1, 1997 in favor of a regional
council of governments. On December 13, 1996 Middlesex County defaulted on a
required payment of revenue anticipation notes. The legislature is currently
considering legislation that would abolish Middlesex County government on final
approval of the legislation and transfer its functions to the Commonwealth. The
county's debts and liabilities would be assumed by the Commonwealth.
The Commonwealth is evaluating the impact upon the Commonwealth of federal
welfare reform legislation enacted on August 22, 1996. Current estimates
indicate no fiscal 1997 spending impact associated with the federal legislation
and an increase of approximately $86 million in federal revenues for the
Commonwealth in fiscal 1997.
LIMITATIONS ON TAX REVENUES
In Massachusetts, efforts to limit and reduce levels of taxation have been
underway for several years. Limits were established on state tax revenues by
legislation enacted on October 25, 1986 and by an initiative petition approved
by the voters on November 4, 1986. The two measures are inconsistent in several
respects.
Chapter 62F, which was added to the General Laws by initiative petition in
November 1986, establishes a state tax revenue growth limit for each fiscal year
equal to the average positive rate of growth in total wages and salaries in the
Commonwealth, as reported by the federal government, during the three calendar
years immediately preceding the end of such fiscal year. Chapter 62F also
requires that allowable state tax revenues be reduced by the aggregate amount
received by local governmental units from any newly authorized or increased
local option taxes or excises. Any excess in state tax revenue collections for a
given fiscal year over the prescribed limit, as determined by the State Auditor,
is to be applied as a credit against the then current personal income tax
liability of all taxpayers in the Commonwealth in proportion to the personal
income tax liability of all taxpayers in the Commonwealth for the immediately
preceding tax year.
Unlike Chapter 29B, as described below, the initiative petition did not
exclude principal and interest payments on Commonwealth debt obligations from
the scope of its tax limit. However, the preamble contained in Chapter 62F
provides that "although not specifically required by anything contained in this
chapter, it is assumed that from allowable state tax revenues as defined herein
the Commonwealth will give priority attention to the funding of state financial
assistance to local governmental units, obligations under the state governmental
pension systems, and payment of principal and interest on debt and other
obligations of the Commonwealth."
The legislation enacted in October 1986, which added Chapter 29B to the
General Laws, also establishes an allowable state revenue growth factor by
reference to total wages and salaries in the Commonwealth. However, rather than
utilizing a three-year average wage and salary growth rate, as used by Chapter
62F, Chapter 29B utilizes an allowable state revenue growth factor equal to 1/3
of the positive percentage gain in Massachusetts wages and salaries, as reported
by the federal government during the three calendar years immediately preceding
the end of a given fiscal year. Additionally, unlike Chapter 62F, Chapter 29B
allows for an increase in maximum state tax revenues to fund the increase in
local aid and excludes from its definition of state tax revenues (i) income
derived from local option taxes and excises, and (ii) revenues needed to fund
debt service costs.
Tax revenues in fiscal 1992 through fiscal 1996 were lower than the limit
set by either Chapter 62F or Chapter 29B. The Executive Office for
Administration and Finance currently estimates that state tax revenues in fiscal
1997 will not reach the limit imposed by either of these statutes.
PROPOSITION 2 1/2
In November 1980, voters in the Commonwealth approved a statewide tax
limitation initiative petition, commonly known as Proposition 2 1/2, to
constrain levels of property taxation and to limit the charges and fees imposed
on cities and towns by certain governmental entities, including county
governments. Proposition 2 1/2 is not a provision of the state constitution and
accordingly is subject to amendment or repeal by the legislature. Proposition 2
1/2, as amended to date, limits the property taxes that may be levied by any
city or town in any fiscal year to the lesser of (i) 2.5% of the full and fair
cash valuation of the real estate and personal property therein, and (ii) 2.5%
over the previous year's levy limit plus any growth in the tax base from certain
new construction and parcel subdivisions. Proposition 2 1/2 also limits any
increase in the charges and fees assessed by certain governmental entities,
including county governments, on cities and towns to the sum of (i) 2.5% of the
total charges and fees imposed in the preceding fiscal year, and (ii) any
increase in charges for services customarily provided locally or services
obtained by the city or town at its option. The law contains certain override
provisions and, in addition, permits debt service on specific bonds and notes
and expenditures for identified capital projects to be excluded from the limits
by a majority vote at a general or special election.
Many communities have responded to the limitations imposed by Proposition 2
1/2 through statutorily permitted overrides and exclusions. Override activity
peaked in fiscal 1991 and decreased thereafter. In fiscal 1992, 65 communities
approved one of the three types of referenda questions (override of levy limit,
exclusion of debt service, or exclusion of capital expenditures), adding $31.0
million to their levy limits.
In fiscal 1993, 59 communities added $16.3 million through override votes
and in fiscal 1994, only 48 communities had successful override referenda which
added $8.4 million to their levy limits. In fiscal 1995, 32 communities added
$8.8 million, and in fiscal 1996, 30 communities added $5.8 million to their
levy limits. Although Proposition 2 1/2 will continue to constrain local
property tax revenues, significant capacity exists for overrides in nearly all
cities and towns.
In addition to overrides, Proposition 2 1/2 allows a community, through
voter approval, to assess taxes in excess of its levy limit for the payment of
certain capital projects (capital outlay expenditure exclusions) and for the
payment of specified debt service costs (debt exclusions). Capital exclusions
were passed by 19 communities in fiscal 1996 and totaled $1.5 million. In fiscal
1996, the impact of successful debt exclusion votes going back as far as fiscal
1983, was to raise the levy limits of 229 communities by $125.8 million.
LOCAL AID
During the 1980's, the Commonwealth increased payments to its cities,
towns, and regional school districts ("Local Aid") to mitigate the impact of
Proposition 2 1/2 on local programs and services. In fiscal 1997, approximately
20% of the Commonwealth's budget is estimated to be allocated to direct Local
Aid. Local Aid payments to cities, towns, and regional school districts take the
form of both direct and indirect assistance.
Direct Local Aid increased from $2.359 billion in fiscal 1992 to $2.547
billion in fiscal 1993 and increased to $2.727 billion in fiscal 1994. Fiscal
1995 expenditures for direct Local Aid were $2.976 billion, which was an
increase of approximately 9.1% above the fiscal 1994 level. Fiscal 1996
expenditures for direct Local Aid were $3.246 billion, an increase of
approximately 9.1% above the fiscal 1995 level. It is estimated that fiscal 1997
expenditures for direct Local Aid will be $3.538 billion, which is an increase
of approximately 9.0% above the fiscal 1996 level.
A statute adopted by voter initiative petition at the November 1990
statewide election regulates the distribution of Local Aid to cities and towns,
by requiring, subject to appropriation, that no less than 40% of collections
from personal income taxes, sales and use taxes, corporate excise taxes, and
lottery fund proceeds be distributed to cities and towns. Under the law, the
Local Aid distribution to each city or town would equal no less than 100% of the
total Local Aid received for fiscal 1989. Distributions in excess of fiscal 1989
levels would be based on new formulas. By its terms, the new formula would have
called for a substantial increase in direct Local Aid in fiscal 1992, and would
call for such an increase in fiscal 1993 and in subsequent years. However, Local
Aid payments expressly remain subject to annual appropriation, and fiscal 1992,
fiscal 1993, fiscal 1994, fiscal 1995 and fiscal 1996 appropriations for Local
Aid did not meet, and fiscal 1997 appropriations for Local Aid do not meet, the
levels set forth in the initiative law.
COMMONWEALTH EXPENDITURES
Fiscal 1992 budgeted expenditures were $13.416 billion. For fiscal 1993,
budgeted expenditures were $14.696 billion, representing a 9.6% increase from
fiscal 1992. Fiscal 1994 budgeted expenditures were $15.523 billion, an increase
of 5.6% from fiscal 1993. Fiscal 1995 budgeted expenditures were $16.251
billion, an increase of 4.7% from fiscal 1994. Fiscal 1996 budgeted expenditures
were $16.881 billion, an increase of 3.9% from fiscal 1995. It is estimated that
fiscal 1997 budgeted expenditures will be $17.704 billion, an increase of 4.9%
over fiscal 1996 levels.
Commonwealth expenditures since fiscal 1992 largely reflect significant
growth in several programs and services provided by the Commonwealth,
principally Local Aid, Medicaid and group health insurance, public assistance
programs, debt service, pensions, higher education and assistance to the
Massachusetts Bay Transportation Authority and regional transit authorities.
The Commonwealth is responsible for the payment of pension benefits for
state employees and for school teachers throughout the state. The Commonwealth
is also responsible for cost of living increases payable to local government
retirees. State pension expenditures have risen dramatically as the Commonwealth
has appropriated moneys to partially address the unfunded liabilities that had
accumulated over several decades of "pay-as-you-go" administration of the
pension systems for which it is responsible. For several years during the 1980s,
the Commonwealth made substantial direct appropriations to pension reserves, in
addition to paying current benefits. In 1988, the Commonwealth adopted a funding
schedule under which it is required to fund future pension liabilities currently
and to amortize the accumulated unfunded liabilities over 40 years. Total
pension expenditures increased at an average annual rate of 7.6% from $751.5
million in fiscal 1992 to $1.005 billion in fiscal 1996. Total pension
expenditures are estimated at $1.067 billion for fiscal 1997. In fiscal 1996, a
number of reform measures affecting pensions were enacted into law. Among the
most notable were a measure consolidating the assets of the state employees' and
teachers' retirement systems into a single investment fund and another that will
reform the disability pension system. On November 6, 1996 the Governor filed
with the legislature a proposed revised pension funding schedule under which the
Commonwealth's unfunded liability for its pension obligations would be amortized
more rapidly and would be eliminated by fiscal 2019, ten years earlier than
under the current schedule.
LITIGATION
There are pending in state and federal courts within the Commonwealth and
in the U.S. Supreme Court various suits in which the Commonwealth is a party. In
the opinion of the Attorney General, no litigation is pending or, to his
knowledge, threatened which is likely to result, either individually or in the
aggregate, in final judgments against the Commonwealth that would affect
materially its financial condition.
OTHER FACTORS
Many factors affect the financial condition of the Commonwealth, including
many social, environmental, and economic conditions, which are beyond the
control of the Commonwealth. As with most urban states, the continuation of many
of the Commonwealth's programs, particularly its human service programs, is, in
significant part, dependent upon continuing federal reimbursements, which are
expected to decline in fiscal 1997.
KEYSTONE MISSOURI TAX FREE FUND
GENERAL
Missouri's economy includes manufacturing, commerce, trade, services,
agriculture, tourism and mining. The State's economy is diversified and closely
resembles that of the nation's although growth prospects are less favorable than
in the past. It is the nation's fifteenth largest state. The State employment
sectors, services, trade and manufacturing, also account for the primary sources
of national employment. Recent growth in the manufacturing sector has outpaced
the nation as a whole. Labor force growth has remained steady, totaling 2.65
million in 1993, up from 2.3 million in 1980. Through the 1980's and early
1990's the State's unemployment rate essentially mirrored that of the nation;
however, adverse changes in military appropriations, which play an important
role in the State's economy, could contribute to a significant increase in
unemployment. In 1996, according to the Bureau of Labor Statistics, the State
ranked seventeenth among the states in unadjusted nonagricultural employment. In
November 1996, the State's unemployment rate was estimated to be 4.0% as against
the national rate of 5.3%. In recent years, Missouri's wealth indicators have
grown at a slower rate than national levels and in 1995 the State's per capita
personal income was approximately 94.0% of the average for the nation as a
whole.
Missouri displayed strong fiscal performance during most of the 1980's.
However, Missouri has recently experienced difficulties in balancing its budget
as a result of increased expenses and declining sources of revenues. Other
factors contributing to Missouri's weak fiscal position relate to the reduction
of large manufacturing companies, including those in aerospace and the auto
industry. The Missouri portions of the St. Louis and Kansas City metropolitan
areas together contain over 50% of Missouri's population. Economic reversals in
either of these two areas would have a major impact on the overall economic
condition of the State of Missouri. Additionally, the State of Missouri has a
significant agricultural sector, which may experience problems comparable to
those which are occurring in other states. To the extent that any such problems
intensify, there could possibly be an adverse impact on the overall economic
condition of the State.
Currently, general obligations of Missouri are rated "AAA," "Aaa" and
"AAA," by S&P, Moody's and Fitch, respectively. There can be no assurance that
the economic conditions on which these ratings are based will continue or that
particular bond issues may not be adversely affected by changes in economic,
political or other conditions.
REVENUE AND LIMITATIONS THEREON
Article X, Section 16-24 of the Constitution of Missouri (the "Hancock
Amendment"), imposes limitations on the amount of State taxes which may be
imposed by the General Assembly of Missouri (the "General Assembly") as well as
on the amount of local taxes, licenses and fees (including taxes, licenses and
fees used to meet debt service commitments on debt obligations) which may be
imposed by local governmental units (such as cities, counties, school districts,
fire protection districts and other similar bodies) in the State of Missouri in
any fiscal year.
The State limit on taxes is tied to total State revenues for fiscal year
1980-81, as defined in the Hancock Amendment, adjusted annually in accordance
with the formula set forth in the amendment, which adjusts the limit based on
increases in the average personal income of Missouri for certain designated
periods. The details of the Amendment are complex and clarification from
subsequent legislation and further judicial decisions may be necessary.
Generally, if the total State revenues exceed the State revenue limit imposed by
Section 18 of Article X by more than one percent, the State is required to
refund the excess. The State revenue limitation imposed by the Hancock Amendment
does not apply to taxes imposed for the payment of principal and interest on
bonds, approved by the voters and authorized by the Missouri constitution. The
revenue limit also can be exceeded by a constitutional amendment authorizing new
or increased taxes or revenue adopted by the voters of the State of Missouri.
The Hancock Amendment also limits new taxes, licenses and fees and
increases in taxes, licenses and fees by local governmental units in Missouri.
It prohibits counties and other political subdivisions (essentially all local
governmental units) from levying new taxes, licenses and fees or increasing the
current levy of an existing tax, license or fee without the approval of the
required majority of the qualified voters of that county or other political
subdivision voting thereon.
When a local government unit's tax base with respect to certain fees or
taxes is broadened, the Hancock Amendment requires the tax levy or fees to be
reduced to yield the same estimated gross revenue as on the prior base. It also
effectively limits any percentage increase in property tax revenues to the
percentage increase in the general price level (plus the value of new
construction and improvements), even if the assessed valuation of property in
the local governmental unit, excluding the value of new construction and
improvements, increases at a rate exceeding the increase in the general price
level.
INDUSTRY AND EMPLOYMENT
While Missouri has a diverse economy with a distribution of earnings and
employment among manufacturing, trade and service sectors closely approximating
the average national distribution, the national economic recession of the early
1980's had a disproportionately adverse impact on the economy of Missouri.
During the 1970's, Missouri characteristically had a pattern of unemployment
levels well below the national averages. However, since the 1980 to 1983
recession periods Missouri unemployment levels generally approximated or
slightly exceeded the national average. A return to a pattern of high
unemployment could adversely affect the Missouri debt obligations acquired by
the Missouri Fund and, consequently, the value of the shares of the Fund.
The Missouri portions of the St. Louis and Kansas City metropolitan areas
contain approximately 1,945,813 and 1,016,457 residents, respectively,
constituting over fifty percent of Missouri's 1995 population census of
approximately 5,339,041. St. Louis is an important site for banking and
manufacturing activity, as well as a distribution and transportation center,
with nine Fortune 500 industrial companies (as well as other major educational,
financial, insurance, retail, wholesale and transportation companies and
institutions) headquartered there. Kansas City is a major agribusiness center
and an important center for finance and industry. Economic reversals in either
of these two areas would have a major impact on the overall economic condition
of the State of Missouri. Additionally, the State of Missouri has a significant
agricultural sector which is experiencing farm-related problems comparable to
those which are occurring in other states. To the extent that these problems
were to intensify, there could possibly be an adverse impact on the overall
economic condition of the State of Missouri.
Defense related business plays an important role in Missouri's economy.
There are a large number of civilians employed at the various military
installations and training bases in the state and recent action of the Defense
Base Closure and Realignment Commission will result in the loss of a substantial
number of civilian jobs in the St. Louis Metropolitan area. Further, aircraft
and related businesses in Missouri are the recipients of substantial annual
dollar volumes of defense contract awards. The contractor receiving the second
largest dollar volume of defense contracts in the United States in 1995 was
McDonnell Douglas Corporation which lost the number one position it held in 1994
by reason of the merger of the Lockheed and Martin Companies. McDonnell Douglas
Corporation is the State's largest employer, currently employing approximately
20,000 employees in Missouri. Recent changes in the levels of military
appropriations and the cancellation of the A-12 program has affected McDonnell
Douglas Corporation in Missouri and over the last four years it has reduced its
Missouri work force by approximately 30%. There can be no assurances that there
will be further changes in the levels of military appropriations, and, to the
extent that further changes in military appropriations are enacted by the United
States Congress, Missouri could be disproportionately affected. On December 15,
1996, The Boeing Company and McDonnell Douglass Corporation announced that The
Boeing Company planned to acquire McDonnell Douglas Corporation. It is
impossible to determine what effect, if any, completion of the acquisition will
have on the operations of McDonnell Douglas Corporation. However, any shift or
loss of production now conducted in Missouri would have a negative impact on the
economy of the state and particularly the economy of the St. Louis metropolitan
area.
OTHER FACTORS
Desegregation lawsuits in St. Louis and Kansas City continue to require
significant levels of state funding and are sources of uncertainty. Litigation
continues on many issues, court orders are unpredictable, and school district
spending patterns have proven difficult to predict. A recent Supreme Court
decision favorable to the State may decrease the level of State funding required
in the future, but the impact of this decision is uncertain. The State paid $282
million for desegregation costs in fiscal 1994, $315 million for fiscal 1995 and
$274 million for fiscal 1996. This expense accounted for close to 7% of total
state General Revenue Fund spending in fiscal 1994 and 1995, and close to 5% in
fiscal 1996.
KEYSTONE NEW YORK TAX FREE FUND
As described in the prospectus, the New York Fund will generally invest in
New York municipal obligations. The New York Fund is therefore susceptible to
political, economical, or regulatory factors affecting New York State and
governmental bodies within New York State. Some of the more significant events
and conditions relating to the financial situation in New York are summarized
below. The following information provides only a brief summary of the complex
factors affecting the financial situation in New York, is derived from sources
that are generally available to investors and is believed to be accurate. It is
based on information drawn from official statements and prospectuses issued by,
and other information reported by, the State of New York by its various public
bodies, and by other entities located within the State, including the City of
New York, in connection with the issuance of their respective securities.
THE STATE
New York State (for purposes of this section of the Appendix, "the State")
historically has been one of the wealthiest states in the nation. For decades,
however, the State has grown more slowly than the nation as a whole, gradually
eroding its relative economic affluence. Statewide, urban centers have
experienced significate changes involving migration of the more affluent to the
suburbs and an influx of generally less affluent residents. Regionally, the
older Northeast cities have suffered because of the relative success that the
South and the West have had in attracting people and business. New York City
(for purposes of this section of the Appendix, "the City") has also had to face
great competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in the City.
During the 1982-83 recession, overall economic activity in the State
declined less than that of the nation as a whole. However, in calendar years
1984 through 1991, the State's rate of economic expansion was somewhat slower
than that of the nation. In the 1990-91 recession, the economy of the State, and
that of the rest of the Northeast, was more heavily damaged than that of the
nation as a whole and has been slower to recover. The total employment growth
rate in the State has been below the national average since 1984. The
unemployment rate in the State dipped below the national rate in the second half
of 1981 and remained lower until 1991; since then, it has been higher. According
to data published by the U.S. Bureau of Economic Analysis, during the past ten
years, total personal income in the State rose slightly faster than the national
average only from 1986 through 1988.
Between 1975 and 1990 total employment grew by 21.3 percent while the labor
force grew only by 15.7 percent, unemployment fell from 9.5 percent to 5.2
percent of the labor force. In 1991 and 1992, however, total employment in the
State fell by 457,000, or 5.5 percent. As a result, the unemployment rate rose
to 8.5 percent, reflecting a recession that has had a particularly strong impact
on the entire Northeast. Calendar years 1993 and 1994 saw only a partial
recovery.
Although the State ranks 22nd in the nation for its state tax burden, the
State has the second highest combined state and local tax burden in the United
States. The burden of State and local taxation, in combination with the many
other causes of regional economic dislocation, may have contributed to the
decisions of some businesses and individuals to relocate outside, or not locate
within, the State. To stimulate economic growth, the State has developed
programs, including the provision of direct financial assistance, designed to
assist businesses to expand existing operations located within the State and to
attract new businesses to the State. In addition, the State has provided various
tax incentives to encourage business relocation and expansion.
The 1995-96 budget reflected significant actions to reduce the burden of
State taxation, including adoption of a 3-year, 20 percent reduction in the
State's personal income tax and a variety of more modest changes in other
levies. In combination with business tax reductions enacted in 1994, these
actions will reduce State taxes by over $5.5 billion by the 1997-98 fiscal year,
when compared to the estimated yield in that year of the State tax structure as
it applied in 1993-94.
In recent years, State actions affecting the level of receipts and
disbursements, as well as the relative strength of the State and regional
economy, actions of the Federal government and other factors, have created
structural budget gaps for the State. These gaps resulted from a significant
disparity between recurring revenues and the costs of maintaining or increasing
the level of support for State programs. The 1995-96 enacted budget combined
significant tax and program reductions which will, in the current and future
years, lower both the recurring receipts base (before the effect of any economic
stimulus from such tax reductions) and the historical annual growth in State
program spending. Notwithstanding these changes, the State can expect to
continue to confront structural deficits in future years.
1997-98 FISCAL YEAR (EXECUTIVE BUDGET FORECAST)
The governor presented his 1997-98 Executive Budget to the Legislature on
January 14, 1997. The Executive Budget also contains financial projections for
the State's 1998-99 and 1999-2000 fiscal years, detailed estimates of receipts
and an updated Capital Plan. There can be no assurance that the Legislature will
enact the Executive Budget as proposed by the Governor into law, or that the
State's adopted budget projections will not differ materially and adversely from
the projections as set forth in the Update.
The 1997-98 Financial Plan projects balance on a cash basis in the General
Fund. It reflects a continuing strategy of substantially reduced State spending,
including program restructurings, reductions in social welfare spending, and
efficiency and productivity initiatives. Total General Fund receipts and
transfers to other funds are projected to be $32.88 billion, a decrease of $88
million from total receipts projected in the current fiscal year. Total General
Fund disbursements and transfers to other funds are projected to be $32.84
billion, a decrease of $56 million from spending totals projected for the
current fiscal year. As compared to the 1996-97 State Financial Plan, the
Executive Budget proposes a year-to-year decline in General Fund spending of 0.2
percent. State funds spending (i.e., General Fund plus other dedicated funds
with the exception of federal aid) is projected to grow by 1.2 percent. Spending
from All Governmental Funds (excluding transfers) is proposed to increase by 2.2
percent from the prior fiscal year.
The Executive Budget proposes $2.3 billion in actions to balance the
1997-98 Financial Plan. Before reflecting any actions proposed by the Governor
to restrain spending, General Fund disbursements for 1997-98 were projected to
grow by approximately 4 percent. This increase would have resulted from growth
in Medicaid, higher fixed costs such as pensions and debt service, collective
bargaining agreements, inflation, and the loss of non-recurring resources that
offset spending in 1996-97. General Fund receipts were projected to fall by
roughly 3 percent. This reduction would have been attributable to modest growth
in the State's economy and underlying tax base, the loss of non-recurring
revenues available in 1996-97 and implementation of previously enacted tax
reduction programs
The Executive Budget proposes to close this gap primarily though a series
of spending reductions and Medicaid cost containment measures, the use of a
portion of the 1996-97 projected budget surplus,and other actions. The 1997-98
Financial Plan projects receipts of the $32.88 billion and spending of $32.84
billion, allowing for a deposit of $24 million into the CRF and a year-ending
CRF reserve of $65 million, and a required repayment of $15 million to the TSRF.
Detailed explanations of the 1997-98 Financial Plan follow a discussion of the
economic outlook.
ECONOMIC OUTLOOK
U.S. Economy
The State has updated its mid-year forecast of national and State economic
activity through the end of calendar year 1998. The current projection is for
slightly slower growth than expected in the MidYear Update. The revised forecast
projects real Domestic Gross National Product (GDP) growth of 2.3 percent in
1997, which is the same rate now estimated for 1996, followed by a 2.4 percent
increase in 1998. The growth of nominal GDP is expected to rise from 4.3 percent
in 1996 to 4.5 percent in 1997 and 4.8 percent in 1998. The inflation rate is
expected to remain stable at 2.9 percent in 1997 and decrease to 2.8 percent in
1998. The annual rate of job growth is expected to slow to 1.6 percent in both
1997 and 1998, down from the 2.0 percent increase in 1996. Growth in personal
income and wages are expected to slow accordingly in 1997 and 1998.
State Economy
The State economic forecast has been changed only slightly from the one
formulated with the Mid-Year Update. Moderate growth is projected to continue in
1997 for employment, wages, and personal income, followed by a slight slowing in
1998. Personal income is estimated to have grown by 5.2 percent in 1996, fueled
in part by an unusually large increase in financial sector bonus payments, and
is projected to grow 4.5 percent in 1997 and 4.2 percent in 1998. Overall
employment growth will continue at a modest rate, reflecting the moderate growth
of the national economy, continued spending restraint in government, and
restructuring in the health care, social service, and banking sectors.
1996-97 FISCAL YEAR
The State is required to issue Financial Plan updates to the cash-basis
State Financial Plan in July, October, and January, respectively. These
quarterly updates reflect analysis of actual receipts and disbursements for each
respective period, and revise estimates of receipts and disbursements for the
then current fiscal year. The First Quarter Update was incorporated into the
cash-basis State Financial Plan of July 25, 1996.
The State issued its first update to the cash-basis 1996-97 State Financial
Plan (the "Mid-Year Update") on October 25, 1996. Revisions have been made to
estimates of both receipts and disbursements based on: (1) updated economic
forecasts for both the nation and the State, (2) an analysis of actual receipts
and disbursements through the first six months of the fiscal year, and (3) an
assessment of changing program requirements. The Mid-Year Update reflects a
balanced 1996=97 State Financial Plan, and a projected reserve in the General
Fund of $300 million.
The State also updated its forecast of national and State economic activity
through the end of calendar year 1997 to reflect the stronger-than-expected
growth in the first half of 1996. The national economic forecast has been
changed slightly from the initial forecast on which the original 1996-97 State
Financial Plan was based. The revised forecast projects real Gross Domestic
Product growth in the nation of 2.5 percent for 1996 and 2.4 percent in 1997.
The inflation rate is expected to be 3.0 percent in 1996 and 2.9 percent in
1997. The annual rate of job growth is expected to slow gradually to about 1.8
percent in 1997, down from 2.2 percent in 1996. Growth in personal income and
wages are expected to slow accordingly.
The State economic forecast haws been changed slightly from the one
formulated with the July 1996-97 State Financial Plan. Moderate growth is
projected to continue through the second half of 1996, with employment wages and
incomes continuing their modest rise. Personal income is projected to increase
by 5.2 percent in 1996 and 4.7 percent in 1997, reflecting robust projected wage
growth fueled in part by financial sector bonus payments. Overall employment
growth will continue at a modest rate, reflecting the slowdown in the national
economy, continued spending restraint in government, and restructuring in the
health care and financial sectors.
Actual receipts thought the first two quarters of the 1996-97 State fiscal
year reflected strongerthan-expected growth in most taxes, with actual receipts
exceeding expectations by $250 million. Based on the revised economic outlook
and actual receipts for the first six months of 1996-97, projected General Fund
receipts for the 1996-97 State fiscal years were increased by $420 million. Most
of this projected increase was in the yield of the personal income tax ($241
million), with additional increases expected in business taxes ($124 million)
and other tax receipts ($49 million). Projected collections from user taxes and
fees were revised downward slightly ($5 million). Revisions were also made to
both miscellaneous receipts and in transfers from other funds (an $11 million
combined projected increase).
The 1996-97 General Fund Financial Plan continues to be balanced. The
Division of the Budget projects that, prior to taking the actions described
below, the General Fund Financial Plan would have shown an operating surplus or
approximately $1.3 billion. These actions include implementing reduced personal
income tax withholding to reflect the impact of tax reduction actions which took
effect on January 1, 1997. This has the effect of raising taxpayer's current
take-home pay rather than requiring taxpayers to wait until the spring of 1998
for larger refunds. The Financial Plan assumes the use of $250 million for this
purpose. In addition, $943 million is projected to be used to pay tax refunds
during the 1996-97 fiscal year or reserved to pay refunds during the 1997-98
fiscal year, which produces a benefit for the 1997-98 Financial Plan. Finally,
$65 million is projected to be deposited into the TSRF (in addition to the
required deposit of $15 million), increasing the cash balance in that fund to
$317 million by the end of 1996-97.
Projected General Fund disbursements are reduced by a total of $348 million
from the Mid-Year Update, with changes made in most categories of the Financial
Plan. Most of this savings is attributable to reductions in local assistance
spending, primarily due to significant reestimates in social services spending
to reflect lower case load growth, yielding savings of $226 million. General
State Charges are reduced $76 million to reflect lower pension and fringe
benefit costs. The General State Charges estimate includes savings achieved from
the refinancing of certain pension liabilities through the issuance of long-term
debt as planned, and the payment of that liability to the State Retirement
System. Transfers for the Capital Projects Fund have been reduced $31 million to
reflect slower-than-expected capital disbursements for the balance of the fiscal
year. Reductions in debt service costs of $21 million reflect savings from
refundings undertaken in the current fiscal year, as well as savings from
improved interest rates in the financial markets.
The General Fund closing balance is expected to be $358 million at the end
of 1996-97. Of this amount, $317 million would be on deposit in the TSRF, while
another $41 million would remain on deposit in the CRF as a reserve for
litigation or other unbudgeted costs to the Financial Plan. The TSRF had an
opening balance of $237 million, to be supplemented by a required payment of $15
million and an extraordinary deposit of $645 million from surplus 1996-97
monies. The $9 million on deposit in the Review Accumulation fund will be drawn
down as planned. A planned deposit if $85 million to the CRF, projected to be
received from contractual efforts to maximize federal revenue, is no longer
expected to be deposited this year.
1995-96 FISCAL YEAR
The State's budget for the 1995-96 fiscal year was enacted by the
Legislature on June 7, 1995, more than two months after the start of the fiscal
year. Prior to adoption of the budget, the Legislature enacted appropriations
for disbursements considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt service. The State
Financial Plan for the 1995- 96 fiscal year was formulated on June 20, 1995 and
was based on the State's budget as enacted by the Legislature and signed into
law by the Governor. The State Financial Plan is updated quarterly pursuant to
law in July, October and January.
The 1995-96 budget was the first to be enacted in the administration of the
Governor, who assumed office on January 1, 1995. It was the first budget in over
half a century which proposed and, as enacted, projected an absolute
year-over-year decline in General Fund disbursements. Spending for State
operations was projected to drop even more sharply, by 4.6 percent. Nominal
spending from all State funding sources (I.E., excluding Federal aid) was
proposed to increase by only 2.5 percent from the prior fiscal year, in contrast
to the prior decade when such spending growth averaged more than 6.0 percent
annually.
In his Executive Budget, the Governor indicated that in the 1995-96 fiscal
year, the State Financial Plan, based on then-current law governing spending and
revenues, would be out of balance by almost $4.7 billion, as a result of the
projected structural deficit resulting from the ongoing disparity between
sluggish growth in receipts, the effect of prior-year tax changes, and the rapid
acceleration of spending growth; the impact of unfunded 1994-95 initiatives,
primarily for local aid programs; and the use of one-time solutions, primarily
surplus funds from the prior year, to fund recurring spending in the 1994-95
budget. The Governor proposed additional tax cuts, to spur economic growth and
provide relief for low and middle-income taxpayers, which were larger than those
ultimately adopted, and which added $240 million to the then projected imbalance
or budget gap, bringing the total to approximately $5 billion.
This gap was projected to be closed in the 1995-96 State Financial Plan
based on the enacted budget, through a series of actions, mainly spending
reductions and cost containment measures and certain reestimates that are
expected to be recurring, but also through the use of one-time solutions. The
State Financial Plan projected (I) nearly $1.6 billion in savings from cost
containment, disbursement reestimates, and other savings in social welfare
programs, including Medicaid, income maintenance and various child and family
care programs; (ii) $2.2 billion in savings from State agency actions to reduce
spending on the State workforce, SUNY and CUNY, mental hygiene programs, capital
projects, the prison system and fringe benefits; (iii) $300 million in savings
from local assistance reforms, including actions affecting school aid and
revenue sharing while proposing program legislation to provide relief from
certain mandates that increase local spending; (iv) over $400 million in revenue
measures, primarily a new Quick Draw Lottery game, changes to tax payment
schedules, and the sale of assets; and (v) $300 million from reestimates in
receipts.
There are risks and uncertainties concerning the future-year impact of tax
reductions and other measures in the 1995-96 budget.
The 1995-96 State Financial Plan included actions that will have an effect
on the budget outlook for State fiscal year 1996-97 and beyond. The DOB
estimated that the 1995-96 State Financial Plan contains actions that provide
nonrecurring resources or savings totaling approximately $900 million. These
included the use of balances set aside originally for mass transportation aid
($220 million), the use of a reserve established to fund pension supplementation
cost ($110 million) and the use of lottery balances ($62 million) The
Comptroller believed that the amount of nonrecurring resources or savings
exceeds $1.0 billion. The DOB also estimates that the 1995-96 State Financial
Plan contained nonrecurring expenditures totaling nearly $250 million. These
include the payment of social services litigation ($65 million), the deposit to
the Contingency Reserve Fund ($40 million), the payment of 1993- 94 pension
charges ($56 million) and aid for maintenance costs of local schools ($45
million). The net amount of nonrecurring resources used in the 1995-96 State
Financial Plan, accordingly, was estimated by the DOB at over $600 million.
In addition to this use of nonrecurring resources, the 1995-96 State
Financial Plan reflected actions that will directly affect the State' 1996-97
fiscal year baseline receipts and disbursements. The three-year plan to reduce
State personal income taxes will decrease State tax receipts by an estimated
$1.7 billion in State fiscal year 1996-97, in addition to the amount of
reduction in State fiscal year 1995- 96. Further significant reductions in the
personal income tax are scheduled for the 1997-98 State fiscal year. Other tax
reductions enacted in 1994 and 1995 are estimated to cause an additional
reduction in receipts of over $500 million in 1996-97, as compared to the level
of receipts in 1995-96. Similarly, many actions taken to reduce disbursements in
the State's 1995-96 fiscal year are expected to provide greater reductions in
State fiscal year 1996-97. These include actions to reduce the State workforce,
reduce Medicaid and welfare expenditures and slow community mental hygiene
program development. The net impact of these factors is expected to produce a
potential imbalance in receipts and disbursements in State fiscal year 1996-97
As part of the early release of the 1996-97 Executive Budget, the State
updated its 1995-96 cash-basis State Financial Plan (the "Financial Plan
Update") on December 15, 1995, as a part of the Governor's Executive Budget
presentation.
The State updated its forecast of national and State economic activity
through the end of calendar year 1996. The national economic forecast remained
basically unchanged from the initial forecast on which the original 1995-96
State Financial Plan was based, while the State economic forecast was marginally
weaker.
Actual receipts through the first two quarters of the 1995-96 State fiscal
year fell short of expectations by $101 million. Much of this shortfall was due
to timing-related delays in sources other than taxes. Based on the revised
economic outlook and actual receipts for the first six months of 1995- 96,
projected General Fund receipts for the 1995-96 State fiscal year were reduced
by $73 million, offset by $2 million in increased revenues and transfers
associated with actions taken in the Management Review Plan. Actual
disbursements through the first six months of the fiscal year were $89 million
less than projected, primarily because of delays in processing payments
following delayed enactment of the State budget. No savings were included in the
Mid-Year Update from this slower-than-expected spending. Projected disbursements
for the 1995-96 State fiscal year were reduced by $30 million because spending
increases in local assistance and State operations was more than offset by debt
service savings and the reductions from the Management Review Plan.
The 1995-96 General Fund Financial Plan continued to be balanced, with
reductions in projected receipts offset by an equivalent reduction in projected
disbursements. Modest changes were made to the Mid-Year Update, reflecting two
more months of actual results, deficiency requests by State agencies (the
largest of which is for school aid resulting from revisions to data submitted by
school districts), and administrative efficiencies achieved by State agencies.
Total General Fund receipts are expected to be approximately $73 million lower
than estimated at the time of the Mid-Year Update. Tax receipts were projected
to be $29.57 billion, $8 million less than in the earlier plan. Miscellaneous
receipts and transfers from other funds were estimated at $3.15 billion, $65
million lower than in the Mid-Year Update. The largest single change in these
estimates is attributable to the lag in achieving $50 million in proceeds from
sales of State assets, which are unlikely to be completed prior to the end of
the fiscal year.
Projected General Fund disbursements were reduced by a total of $73
million, with changes made in most major categories of the 1995-96 State
Financial Plan. The reduction in overall spending masks the impact of deficiency
requests totaling more than $140 million, primarily for school aid and tuition
assistance to college students. Offsetting reductions in spending are
attributable to the continued maintenance of strict controls on spending through
the fiscal year by State agencies, yielding savings of $50 million. Reductions
of $49 million in support for capital projects reflect a stringent review of all
capital spending. Reductions of $30 million in debt service costs reflect
savings from refundings undertaken in the current fiscal year, as well as
savings from lower interest rates in the financial market. Finally, the 1995-96
Financial Plan reflected reestimates based on actual results through November,
the largest of which is a reduction of $70 million in projected costs for income
maintenance. This reduction is consistent with declining caseload projections.
The balance in the General Fund at the close of the 1995-96 fiscal year was
expected to be $172 million, entirely attributable to monies in the Tax
Stabilization Reserve Fund following the required $15 million payment into that
Fund. A $40 million deposit to the Contingency Reserve Fund included as part of
the enacted 1995-96 budget will not be made, and the minor balance of $1 million
currently in the Fund will be transferred to the General Fund. These Contingency
Reserve Fund monies are expected to support payments from the General Fund for
litigation related to the State's Medicaid program, and for federal
disallowances.
Changes in federal aid programs currently pending in Congress were not
expected to have a material impact on the State's 1995-96 Financial Plan,
although prolonged interruptions in the receipt of federal grants could create
adverse developments, the scope of which can not be estimated at this time. The
major remaining uncertainties in the 1995-96 State Financial Plan continue to be
those related to the economy and tax collections, which could produce either
favorable or unfavorable variances during the balance of the year.
PAST YEARS
New York State's financial operations have improved during recent fiscal
years. During the period 1989-90 through 1991-92, the State incurred General
Fund operating deficits that were closed with receipts from the issuance of tax
and revenue anticipation notes ("TRANs"). First, the national recession, and
then the lingering economic slowdown in the New York and regional economy,
resulted in repeated shortfalls in receipts and three budget deficits. For its
1992-93, 1993-94 and 1994-95 fiscal years, the State recorded balanced budgets
on a cash basis, with substantial fund balances in 1992-93 and 1993-94, and a
smaller fund balance in 1994-95 as described below.
1994-95 FISCAL YEAR
New York State ended its 1994-95 fiscal year with the General Fund in
balance. The closing fund balance of $158 million reflects $157 million in the
Tax Stabilization Reserve Fund and $1 million in the Contingency Reserve Fund
("CRF"). The CRF was established in State fiscal year 1993-94, funded partly
with surplus moneys, to assist the State in financing the 1994-95 fiscal year
costs of extraordinary litigation known or anticipated at that time; the opening
fund balance in State fiscal year 1994-95 was $265 million. The $241 million
change in the fund balance reflects the use of $264 million in the CRF as
planned, as well as the required deposit of $23 million to the Tax Stabilization
Reserve Fund. In addition, $278 million was on deposit in the tax refund reserve
account, $250 million of which was deposited at the end of the State's 1994-95
fiscal year to continue the process of restructuring the State's cash flow as
part of the Local Governmental Assistance Corporation ("LGAC") program.
Compared to the State Financial Plan for 1994-95 as formulated on June 16,
1994, reported receipts fell short of original projections by $1.163 billion,
primarily in the categories of personal income and business taxes. Of this
amount, the personal income tax accounts for $800 million, reflecting weak
estimated tax collections and lower withholding due to reduced wage and salary
growth, more severe reductions in brokerage industry bonuses than projected
earlier, and deferral of capital gains realizations in anticipation of potential
Federal tax changes. Business taxes fell short by $373 million, primarily
reflecting lower payments from banks as substantial overpayments of 1993
liability depressed net collections in 1994-95 fiscal year. These shortfalls
were offset by better performance in the remaining taxes, particularly the user
taxes and fees, which exceeded projections by $210 million. Of this amount, $227
million was attributable to certain restatements for accounting treatment
purposes pertaining to the CRF and LGAC; these restatements had no impact on
balance in the General Fund.
Disbursements were also reduced from original projections by $848 million.
After adjusting for the net impact of restatements relating to the CRF and LGAC
which raised disbursements by $38 million, the variance is $886 million. Well
over two-thirds of this variance is in the category of grants to local
governments, primarily reflecting the conservative nature of the original
estimates of projected costs for social services and other programs. Lower
education costs are attributable to the availability of $110 million in
additional lottery proceeds and the use of LGAC bond proceeds.
The spending reductions also reflect $188 million in actions initiated in
January 1995 by the Governor to reduce spending to avert a potential gap in the
1994-95 State Financial Plan. These actions included savings from a hiring
freeze, halting the development of certain services, and the suspension of
non-essential capital projects. These actions, together with $71 million in
other measures comprised the Governor's $159 million gap-closing plan, submitted
to the Legislature in connection with the 1995- 96 Executive Budget.
1993-94 FISCAL YEAR
The State ended its 1993-94 fiscal year with a balance of $1.140 billion in
the tax refund reserve account, $265 million in the CRF and $134 million in its
Tax Stabilization Reserve Fund. These fund balances were primarily the result of
an improving national economy, State employment growth, tax collections that
exceeded earlier projections and disbursements that were below expectations.
Deposits to the personal income tax refund reserve have the effect of reducing
reported personal income tax receipts in the fiscal year when made and
withdrawals from such reserve increase receipts in the fiscal year when made.
The balance in the tax refund reserve account was used to pay taxpayer refunds.
Of the $1.140 billion deposited in the tax refund reserve account, $1.026
billion was available for budgetary planning purposes in the 1994-95 fiscal
year. The remaining $114 million was redeposited in the tax refund reserve
account at the end of the State's 1993-94 fiscal year to continue the process of
restructuring the State's cash flow as part of the LGAC program. The balance in
the CRF was reserved to meet the cost of litigation facing the State in its
1994-95 fiscal year.
Before the deposit of $1.140 billion in the tax refund reserve account,
General Fund receipts in 1993-94 exceeded those originally projected when the
State Financial Plan for that year was formulated on April 16, 1993 by $1.002
billion. Greater-than-expected receipts in the personal income tax, the bank
tax, the corporation franchise tax and the estate tax accounted for most of this
variance, and more than offset weaker-than-projected collections from the sales
and use tax and miscellaneous receipts. Collections from individual taxes were
affected by various factors including changes in Federal business laws,
sustained profitability of banks, strong performance of securities firms, and
higher-than-expected consumption of tobacco products following price cuts.
The higher receipts resulted, in part, because the New York economy
performed better than forecasted. Employment growth started in the first quarter
of the State's 1993-94 fiscal year, and, although this lagged behind the
national economic recovery, the growth in New York began earlier than
forecasted. The New York economy exhibited signs of strength in the service
sector, in construction, and in trade. Long Island and the Mid-Hudson Valley
continued to lag behind the rest of the State in economic growth. The DOB
believes that approximately 100,000 jobs were added during the 1993-94 fiscal
year.
Disbursements and transfers from the General Fund were $303 million below
the level projected in April 1993, an amount that would have been $423 million
had the State not accelerated the payment of Medicaid billings, which in the
April 1993 State Financial Plan were planned to be deferred into the 1994-95
fiscal year. Compared to the estimates included in the State Financial Plan
formulated in April 1993, lower disbursements resulted form lower spending for
Medicaid, capital projects, and debt service (due to refundings) and $114
million used to restructure the State's cash flow as part of the LGAC program.
Disbursements were higher than expected for general support for public schools,
the State share of income maintenance, overtime for prison guards, and highway
snow and ice removal. The State also made the first of six required payments to
the State of Delaware related to the settlement of Delaware's litigation against
the State regarding the disposition of abandoned property receipts.
During the 1993-94 fiscal year, the State also established and funded the
CRF as a way to assist the State in financing the cost of litigation affecting
the State. The CRF was initially funded with a transfer of $100 million
attributable to the positive margin recorded in the 1992-93 fiscal year. In
addition, the State augmented this initial deposit with $132 million in debt
service savings attributable to the refinancing of State and public authority
bonds during 1993-94. A year-end transfer of $36 million was also made to the
CRF, which, after a disbursement for authorized fund purposes, brought the CRF
balance a the end of 1993-94 to $265 million. This amount was $165 million
higher than the amount originally targeted for this reserve fund.
1992-93 FISCAL YEAR
The State ended its 1992-93 fiscal year with a balance of $671 million in
the tax refund reserve account and $67 million in the Tax Stabilization Reserve
Fund.
The State's 1992-93 fiscal year was characterized by performance that was
better than projected for the national and regional economies. National gross
domestic product, State personal income, and State employment and unemployment
performed better than originally projected in April 1992. This favorable
economic performance, particularly at year end, combined with a tax-induced
acceleration of income into 1992, was the primary cause of the General Fund
surplus. Personal income tax collections were more than $700 million higher than
originally projected (before reflecting the tax refund reserve account
transaction), primarily in the withholding and estimated payment components of
the tax.
There were large, but mainly offsetting, variances in other categories of
receipts. Significantly higher-than-projected business tax collections and the
receipt of unbudgeted payments from the Medical Malpractice Insurance
Association ("MMIA") and the New York Racing Association approximately offset
the loss of an anticipated $200 million Federal reimbursement, the loss of
certain budgeted hospital differential revenue as a result of unfavorable court
decisions, and shortfalls in certain miscellaneous revenues.
Disbursements and transfers to other funds were $45 million above
projections in April 1992, although this includes a $150 million payment to
health insurers (financed with a receipt from the MMIA made pursuant to
legislation passed in January 1992). All other disbursements were $105 million
lower than projected. This reduction primarily reflected lower costs in
virtually all categories of spending, including Medicaid, local health programs,
agency operations, fringe benefits, capital projects and debt service as
partially offset by higher-than-anticipated costs for education programs.
LOCAL GOVERNMENT ASSISTANCE CORPORATION
In 1990, as part of a State fiscal reform program, legislation was enacted
creating LGAC, a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments traditionally funded
through the State's annual seasonal borrowing. The legislation authorized LGAC
to issue its bonds and notes in an amount not in excess of $4.7 billion
(exclusive of certain refunding bonds) plus certain other amounts. Over a period
of years, the issuance of these long-term obligations, which are to be amortized
over no more than 30 years, was expected to eliminate the need for continued
short-term seasonal borrowing. The legislation also dedicated revenues equal to
one-quarter of the four cent State sales and use tax to pay debt service on
these bonds. The legislation also imposed a cap on the annual seasonal borrowing
of the State at $4.7 billion, less net proceeds of bonds issued by LGAC and
bonds issued to provide for capitalized interest, except as cases where the
Governor and the legislative leaders have certified the need for additional
borrowing and provided a schedule for reducing it to the cap. If borrowing above
the cap is thus permitted in any fiscal year, it is required by law to be
reduced to the cap by the fourth fiscal year after the limit was first exceeded.
This provision capping the seasonal borrowing was included as a covenant with
LGAC's bondholders in the resolution authorizing such bonds.
As of June 1995, LGAC had issued bonds and notes to provide net proceeds of
$4.7 billion, completing the program. The impact of LGAC's borrowing is that the
State is able to meet its cash flow needs in the first quarter of the fiscal
year without relying on short-term seasonal borrowings. The 1995- 96 State
Financial Plan includes no spring borrowing nor did the 1994-95 State Financial
Plan, which was the first time in 35 years there was no short-term seasonal
borrowing. This reflects the success of the LGAC program in permitting the State
to accelerate local aid payments form the first quarter of the current fiscal
year to the fourth quarter of the previous fiscal year.
In June 1994, the Legislature passed a proposed constitutional amendment
that would significantly change the long-term financing practices of the State
and its public authorities. The proposed amendment would permit the State,
within a formula-based cap, to issue revenue bonds, which would be debt of the
State secured solely by a pledge of certain State tax receipts (including those
allocated to State funds dedicated for transportation purposes), and not by the
full faith and credit of the State. In addition, the proposed constitutional
amendment would (i) permit multiple purpose general obligation bond proposals to
be proposed on the same ballot, (ii) require that State debt be incurred only
for capital projects included in a multi-year capital financing plan, and (iii)
prohibit, after its effective date, lease-purchase and contractual-obligation
financings mechanisms for State facilities.
The State anticipates that its capital programs will be financed, in part,
through borrowings by the State and public authorities in the 1995-96 fiscal
year. The State expects to issue $248 million in general obligation bonds
(including $70 million for purposes of redeeming outstanding BANs) and $186
million in general obligation commercial paper. The Legislature has also
authorized the issuance of up to $33 million in COPs during the State's 1995-96
fiscal year for equipment purchases and $14 million for capital purposes. The
projection of the State regarding its borrowings for the 1995-96 fiscal year may
change if circumstances require.
LGAC is authorized to provide net proceeds of up to $529 million during the
State's 1995-96 fiscal year, to redeem notes sold in June 1995, completing its
financing program as discussed above.
RATINGS
On July 13, 1995, Standard & Poor's confirmed its rating on the State's
general obligation bonds of A-. On July 3, 1995 Moody's confirmed its rating on
the State's general obligation long-term indebtedness of A.
THE CITY OF NEW YORK
The fiscal health of the State is closely related to the fiscal health of
its localities, particularly the City of New York, which has required and
continues to require significant financial assistance from the State. The City
depends on State Aid both to enable the City to balance its budget and to meet
its cash requirements. The City has achieved balanced operating results for each
of its fiscal years since 1981 as reported in accordance with the
then-applicable GAAP Standards. During the 1990 and 1991 fiscal years, the City
experienced significant shortfalls in almost all of its major tax sources and
increases in social service costs, and was required to take actions to close
substantial budget gaps in order to maintain balanced budgets in accordance with
its financial plan. For fiscal 1993, the City achieved balanced operating
results.
In response to the City's financial crisis in 1975, the State took action
to assist the City in returning to fiscal stability. Among these actions, the
State created the Municipal Assistance Corporation for the City of New York
("MAC") to provide financing assistance to the City. The State also enacted the
New York State Financial Emergency Act for the City of New York ( the "Financial
Emergency Act") which, among other things, established the New York State
Financial Control Board (the "Control Board") to oversee the City's financial
affairs, the Office of the State Deputy Comptroller for New York ("OSDC") in the
Office of the State Comptroller to assist the Control Board in exercising its
powers and responsibilities, and a "Control Period" which existed from 1975 to
1986 during which the City was subject to certain statutorily-prescribed fiscal
controls. Although the Control Board terminated the Control Period in 1986 when
certain statutory conditions were met, thus suspending certain Control Board
powers, the Control Board, MAC and OSDC continue to exercise various fiscal
monitoring functions over the City, and upon the occurrence or "substantial
likelihood and imminence" of the occurrence of certain events, including, but
not limited to, a City operating budget deficit of more than $100 million, the
Control Board is required by law to reimpose a "Control Period." Currently, the
City and its "Covered Organizations" (i.e., those which receive or may receive
monies from the City directly, indirectly or contingently) operate under a
four-year financial plan which the City prepares annually and periodically
updates. The City's Financial Plan includes its capital, revenue and expense
projections and outlines proposed gap-closing programs for years with projected
budget gaps.
The City submits its financial plans as well as the periodic updates to the
Control Board for its review. In August 1993, the City submitted to the Control
Board its 1994-1997 Financial Plan. The Financial Plan projected a balanced
budget in fiscal 1994, based on revenues of approximately $31.250 billion. The
Financial Plan also predicted budget gaps of approximately $1.3 billion in
fiscal year 1995, $1.8 billion in fiscal year 1996 and $2.0 billion in fiscal
year 1997.
Estimates of the City's revenues and expenditures are based on numerous
assumptions and are subject to various uncertainties. If expected federal or
State aid are not forthcoming, if unforeseen developments in the economy
significantly reduce revenues derived from economically sensitive taxes or
necessitate increased expenditures for public assistance, if the City should
negotiate wage increases for its employees greater than the amounts provided for
in the City's Financial Plan or if other uncertainties materialize that reduce
expected revenues or increase projected expenditures, then, to avoid operating
deficits, the City may be required to implement additional actions, including
increases in taxes and reductions in essential City services. The City might
also seek additional assistance from the State.
On July 10, 1995, Standard & Poor's revised downward its rating on City
general obligation bonds from A- to BBB+ and removed City bonds from
CreditWatch. Standard & Poor's stated that "structural budgetary balance remains
elusive because of persistent softness in the City's economy, highlighted by
weak job growth and a growing dependence on the historically volatile financial
services sector." Other factors identified by Standard & Poor's in lowering its
rating on City bonds included a trend of using one-time measures, including debt
refinancings, to close projected budget gaps, dependence on unratified labor
savings to help balance the Financial Plan, optimistic projections of additional
federal and State aid or mandate relief, a history of cash flow difficulties
caused by State budget delays and continued high debt levels. Fitch Investors
Service, Inc. continues to rate City general obligation bonds A-. Moody's rating
for City general obligation bonds is Baa1.
AUTHORITIES
New York State's authorities are generally responsible for financing,
constructing and operating revenue-producing public benefit facilities. The
fiscal stability of the State is related, in part, to the fiscal stability of
its public authorities. Public authorities are not subject to the constitutional
restrictions on the inccurrence of debt which applies to the State itself and
may issue bonds and notes within the amounts permitted by, and as otherwise
restricted by, their legislative authorization. The State's access to the public
credit markets could be impaired, and the market price of its outstanding debt
may be materially adversely affected, if any of its public authorities were to
default on their respective obligations, particularly those using the financing
techniques referred to as State-supported or State-related.
As of September 30, 1994, the date of the latest data available, there were
18 public authorities that had outstanding debt of $100 million or more, and the
aggregate outstanding debt including refunding bonds, of the these 18 public
authorities was $70.3 billion.
As of March 31, 1995, aggregate public authority debt outstanding as
State-supported debt was $27.9 billion and as State-related debt was $36.1
billion.
Public authority operating expenses and debt service costs are generally
paid by revenues generated by the projects financed or operated, such as tolls
charged for the use of highways, bridges or tunnels, rentals charged for housing
units, and charges for occupancy at medical care facilities. In addition, State
legislation authorizes several financing techniques for public authorities.
Also, there are statutory arrangements providing for state local assistance
payments, otherwise payable to localities, to be made under certain
circumstances to public authorities. Although the state has no obligation to
provide additional assistance to localities whose local assistance payments have
been paid to public authorities under those arrangements if local assistance
payments are so diverted, the affected localities could seek additional state
assistance. Some authorities also received monies from state appropriations to
pay for the operating costs of certain programs.
The Metropolitan Transportation Authority (the "MTA") oversees the
operation of New York City's bus and subway systems and, through its affiliates
and subsidiaries, operates certain commuter rail and bus lines and a rapid
transit line. Through an affiliate, the MTA operates certain intrastate toll
bridges and tunnels. The MTA has depended and will continue to depend upon
Federal, State, local government and agency support to operate the mass transit
portion of these operations because fare revenues are insufficient. If current
revenue projections are not realized and/or operating expenses exceed current
projections, the MTA may be required to seek additional state assistance, raise
fares or take other actions.
Since 1980, the State has enacted several taxes that provide revenues for
mass transit purposes, including assistance to the MTA. In addition, since 1987,
State law has required that the proceeds of 1/4 of 1% of mortgage recording tax
paid on certain mortgages in the Metropolitan Transportation Region served by
the MTA be deposited in a special MTA fund for operating or capital expenses.
Further, in 1993, the State dedicated a portion of certain additional state
petroleum business tax receipts to fund operating or capital assistance to the
MTA. For the 1995-1996 State Fiscal Year, total state assistance to the MTA is
estimated at approximately $1.1 billion.
In 1993, State legislation authorized the funding of a 5-year $9.56 billion
MTA Capital Plan for the 5-year period, 1993 through 1996 (the "1992-1996
Capital Program"). The MTA has received approval of the 1992-1996 Capital
Program based on this legislation from the MTA Capital Program Review Board, as
state law requires. This is the third 5-year plan since the legislature
authorized procedures for the adoption, approval and amendment of a 5-year plan
in 1981 for a capital program designed to upgrade the performance of the MTA's
transportation system and to supplement, replace and rehabilitate facilities and
equipment. The MTA and its affiliates are collectively authorized to issue an
aggregate of $3.1 billion of bonds (net of certain statutory exclusion) to
finance a portion of the 1992- 1996 Capital Program.
There can be no assurance that all the necessary governmental actions for
the 1992-1996 Capital Program or future capital programs will be taken, that
funding sources currently identified will not be decreased or eliminated, or
that the 1992-1996 Capital Program, or parts thereof, will not be delayed or
reduced. If the Capital Program is delayed or reduced, ridership and fair
revenues may decline, which could, among other things, impair the MTA's ability
to meet its operating expenses without additional state assistance.
AGENCIES AND LOCALITIES
Certain localities in addition to New York City could have financial
problems leading to requests for additional State assistance during the State's
1995-1996 fiscal year and thereafter. The potential impact on the State of such
requests by localities is not included in the projections of the State receipts
and disbursements in the State's 1995-1996 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted
in the creation of the Financial Control Board of the City of Yonkers (the
"Yonkers Board") by the State in 1984. The Yonkers Board is charged with
oversight of the fiscal affairs of Yonkers. Future actions taken by the State to
assist Yonkers could result in allocation of State resources in amounts that
cannot yet be determined.
Municipalities and school districts have engaged in substantial short term
and long term borrowing. In 1993, the total indebtedness of all localities in
the State other than New York City was approximately $17.7 billion. A small
portion of this indebtedness represented borrowing to finance budgetary deficits
and was issued pursuant to enabling State legislation. State law requires the
Comptroller to review and make recommendations concerning the budgets of these
local government units other than New York City authorized by State law to issue
debt to finance deficits during the period that such deficit financing is
outstanding. Fifteen localities had outstanding indebtedness for deficit
financing at the close of their fiscal year ending 1993.
From time to time, Federal expenditure reductions could reduce, or in some
cases eliminate, Federal funding of some local programs and accordingly might
impose substantial increased expenditure requirements on affected localities. If
the State, New York City or any of the Authorities were to suffer serious
financial difficulties jeopardizing their respective access to the public credit
markets, the marketability of notes and bonds issued by localities within the
State could be adversely affected. Localities face anticipated and potential
problems resulting from certain pending litigation, judicial decisions, and
long-range economic trends. Long range potential problems of declining urban
population, increasing expenditures and other economic trends could adversely
affect localities and require increasing State assistance in the future.
LITIGATION
Certain litigation pending against the State or its officers or employees
could affect adversely the financial condition of the State in the 1995-1996
fiscal year or thereafter. Adverse developments in these proceedings or the
initiation of new proceedings could affect the ability of the State to maintain
a balanced 1995-1996 State Financial Plan. The State believes that the 1995-1996
State Financial Plan includes sufficient reserves for the payment of judgments
that may be required during the 1995-1996 fiscal year. There can be no
assurance, however, that an adverse decision in any of these proceedings would
not exceed the amount of the 1995-1996 State Financial Plan reserves for the
payment of judgments and, thereby, affect the ability of the State to maintain a
balanced 1995-1996 State Financial Plan. Among the more significant of these
cases are those that involve: (1) the validity of agreements and treaties by
which various Indian tribes transferred title to the state of certain land in
central and upstate New York; (2) certain aspects of the State's Medicaid rates
and regulations; (3) treatment provided at several state mental health
facilities; (4)alleged responsibility of State officials to assist in remedying
racial segregation in the City of Yonkers;(5) the validity of certain surchages
on hospital bills and (6) the assessment of petroleum business taxes on fuel
purchased out of state.
KEYSTONE PENNSYLVANIA TAX FREE FUND
GENERAL
The Commonwealth of Pennsylvania, the fifth most populous state,
historically has been identified as a heavy industry state, although that
reputation has changed with the decline of the coal, steel and railroad
industries and the resulting diversification of the Commonwealth's industrial
composition. The major new sources of growth are in the service sector,
including trade, medical and health services, educational and financial
institutions. Manufacturing has fallen behind in both the service sector and the
trade sector as a source of employment in Pennsylvania. The Commonwealth is the
headquarters for 58 major corporations. Pennsylvania's average annual
unemployment rate for the years 1990 has generally not been more than one
percent greater or lesser than the nation's annual average unemployment rate.
The seasonally adjusted unemployment rate for Pennsylvania for March, 1997 was
5.1% and for the United States for March, 1997 was 5.2%. The population of
Pennsylvania, 12,056 million people in 1996 according to the U.S. Bureau of the
Census, represents an increase from the 1987 estimate of 11,811 million. Per
capita income in Pennsylvania for 1995 of $23,558 was higher than the per capita
income of the United States of $23,208. . The Commonwealth's General Fund, which
receives all tax receipts and most other revenues and through which debt service
on all general obligations of the Commonwealth are made, closed fiscal years
ended June 30, 1994, June 30, 1995 and June 30, 1996 with positive fund balances
of $892,940, $688,304 and $635,182, respectively.
DEBT
The Commonwealth may incur debt to rehabilitate areas affected by disaster,
debt approved by the electorate, debt for certain capital projects (for projects
such as highways, public improvements, transportation assistance, flood control,
redevelopment assistance, site development and industrial development) and tax
anticipation debt payable in the fiscal year of issuance. The Commonwealth had
outstanding general obligation debt of $5,054 million at June 30, 1996. The
Commonwealth is not permitted to fund deficits between fiscal years with any
form of debt. All year-end deficit balances must be funded within the succeeding
fiscal year's budget. At March 11, 1997, all outstanding general obligation
bonds of the Commonwealth were rated AA- by Standard & Poor's Corporation and
A-1 by Moody's Investors Service, Inc. (see Appendix A). There can be no
assurance that these ratings will remain in effect in the future. Over the
five-year period ending June 30, 2001, the Commonwealth has projected that it
will issue notes and bonds totaling $2,325 million and retire bonded debt in the
principal amount of $2,239 million.
Certain agencies created by the Commonwealth have statutory authorization
to incur debt for which Commonwealth appropriations to pay debt service thereon
are not required. As of December 31, 1996, total combined debt outstanding for
these agencies was $8,356 million. The debt of these agencies is supported by
assets of, or revenues derived from, the various projects financed and is not an
obligation of the Commonwealth. Some of these agencies, however, are indirectly
dependent on Commonwealth appropriations. The only obligations of agencies in
the Commonwealth that bear a moral obligation of the Commonwealth are those
issued by the Pennsylvania Housing Finance Agency ("PHFA"), a statecreated
agency which provides housing for lower and moderate income families, and The
Hospitals and Higher Education Facilities Authority of Philadelphia (the
"Hospital Authority"), an agency created by the City of Philadelphia to acquire
and prepare various sites for use as intermediate care facilities for the
mentally retarded.
LOCAL GOVERNMENT DEBT
Numerous local government units in Pennsylvania issue general obligation
(i.e., backed by taxing power) debt, including counties, cities, boroughs,
townships and school districts. School district obligations are supported
indirectly by the Commonwealth. The issuance of non-electoral general obligation
debt is limited by constitutional and statutory provisions. Electoral debt,
i.e., that approved by the voters, is unlimited. In addition, local government
units and municipal and other authorities may issue revenue obligations that are
supported by the revenues generated from particular projects or enterprises.
Examples include municipal authorities (frequently operating water and sewer
systems), municipal authorities formed to issue obligations benefitting
hospitals and educational institutions, and industrial development authorities,
whose obligations benefit industrial or commercial occupants. In some cases,
sewer or water revenue obligations are guaranteed by taxing bodies and have the
credit characteristics of general obligations debt.
LITIGATION
Pennsylvania is currently involved in certain litigation where adverse
decisions could have an adverse impact on its ability to pay debt service. For
example, in BABY NEAL V. COMMONWEALTH, the American Civil Liberties Union filed
a lawsuit against the Commonwealth seeking an order that would require the
Commonwealth to provide additional funding for child welfare services. COUNTY OF
ALLEGHENY V. COMMONWEALTH OF PENNSYLVANIA involves litigation regarding the
state constitutionality of the statutory scheme for county funding of the
judicial system. In PENNSYLVANIA ASSOCIATION OF RURAL AND SMALL SCHOOLS V.
CASEY, the constitutionality of Pennsylvania's system for funding local school
districts has been challenged. No estimates for the amount of these claims are
available.
OTHER FACTORS
The performance of the obligations held by the Fund issued by the
Commonwealth, its agencies, subdivisions and instrumentalities are in part tied
to state-wide, regional and local conditions within the Commonwealth and to the
creditworthiness of certain non-Commonwealth related obligers, depending upon
the Pennsylvania Fund's portfolio mix at any given time. Adverse changes to the
state-wide, regional or local economies or changes in government may adversely
affect the creditworthiness of the Commonwealth, its agencies and
municipalities, and certain other non-government related obligers of
Pennsylvania tax-free obligations (e.g., a university, a hospital or a corporate
obligor). The City of Philadelphia, for example, experienced severe financial
problems which impaired its ability to borrow money and adversely affected the
ratings of its obligations and their marketability. Conversely, some obligations
held by the Fund will be almost exclusively dependent on the creditworthiness of
one underlying obligor, such as a project occupant or provider of credit or
liquidity support.
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APPENDIX B
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CORPORATE AND MUNICIPAL BOND RATINGS
S&P CORPORATE AND MUNICIPAL BOND RATINGS
A. MUNICIPAL NOTES
An S&P note rating reflects the liquidity concerns and market access
risks unique to notes. Notes due in three years or less will likely receive a
note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating. The following criteria are used in making that
assessment:
a. Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note), and
b. Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note ratings are as follows:
1. SP-1 - Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
2. SP-2 - Satisfactory capacity to pay principal and interest.
3. SP-3 - Speculative capacity to pay principal and interest.
B. TAX EXEMPT DEMAND BONDS
S&P assigns "dual" ratings to all long-term debt issues that have as part
of their provisions a demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, "AAA/A-1+"). For the newer "demand notes," S&P note rating
symbols, combined with the commercial paper symbols, are used (for example,
"SP-1+/A-1+" ).
C. CORPORATE AND MUNICIPAL BOND RATINGS
An S&P corporate or municipal 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 as to
the timely payment of interest and repayment of principal in accordance with the
terms of the obligation;
b. Nature of and provisions of the obligation; and
c. Protection afforded by and relative position of the obligation in the
event of bankruptcy reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
PLUS (+) OR MINUS (-): To provide more detailed indications of credit
quality, ratings from "AA" to "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.
C. 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 prncipal in accordance with the terms of teh obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
D. MOODY'S CORPORATE AND MUNICIPAL BOND RATINGS
Moody's ratings are as follows:
1. AAA - Bonds which are rated AAA are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
2. AA - Bonds which are rated AA are judged to be of high quality by all
standards. Together with the AAA group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in AAA securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in AAA securities.
3. A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
4. BAA - Bonds which are rated BAA are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
5. BA - Bonds which are rated BA are judged to have speculative elements.
Their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
6. B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
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.
CON. (---) - Municipal bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Those municipal bonds in the AA, A, and BAA groups which Moody's believes
possess the strongest investment attributes are designated by the symbols AA 1,
A 1, and BAA 1.
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 Standard & Poor's Ratings Group (S&P), or PRIME-1 by Moody's Investors
Service, Inc., (Moody's) or F-1 by Fitch Investors Services, L.P. (Fitch's); or,
if not rated, 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 will be determined by a Fund's investment adviser 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 of 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:
1) leading market positions in well-established industries;
2) high rates of return on funds employed;
3) conservative capitalization structures with moderate reliance
on debt and ample asset protection;
4) broad margins in earnings coverage of fixed financial charges
and high internal cash generation; and
5) well established access to a range of financial markets and
assured sources of alternate liquidity.
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.
CERTIFICATES OF DEPOSIT
Certificates of deposit are receipts issued by a bank in exchange for the
deposit of funds. The issuer agrees to pay the amount deposited plus interest to
the bearer of the receipt on the date specified on the certificate. The
certificate usually can be traded in the secondary market prior to maturity.
Certificates of deposit will be limited to U.S. dollar-denominated
certificates of U.S. banks or of savings and loan associations, including their
branches abroad, and of U.S. branches of foreign banks, which are members of the
Federal Reserve System or the Federal Deposit Insurance Corporation, and have at
least $1 billion in deposits as of the date of their most recently published
financial statements.
The Funds will not acquire time deposits or obligations issued by the
International Bank for Reconstruction and Development, the Asian Development
Bank or the Inter-American Development Bank. Additionally, the Funds do not
currently intend to purchase foreign securities (except to the extent that
certificates of deposit of foreign branches of U.S. banks may be deemed foreign
securities) or purchase certificates of deposit, bankers' acceptances or other
similar obligations issued by foreign banks.
BANKERS' ACCEPTANCES
Bankers' acceptances typically arise from short-term credit arrangements
designed to enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by the bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or less.
Bankers' acceptances acquired by a Fund must have been accepted by U.S.
commercial banks, including foreign branches of U.S. commercial banks, having
total deposits at the time of purchase in excess of $1 billion and must be
payable in U.S. dollars.
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. government include a variety of
Treasury securities that differ only in their interest rates, maturities and
dates of issuance and securities issued by the Government National Mortgage
Association (GNMA). Treasury bills have maturities of one year or less. Treasury
notes have maturities of one to ten years and Treasury bonds generally have
maturities of greater than ten years at the date of issuance. GNMA securities
include GNMA mortgage pass-through certificates. Such securities are supported
by the full faith and credit of the U.S. government.
Securities issued or guaranteed by U.S. government agencies or
instrumentalities include securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the U.S.,
Small Business Administration, General Services Administration, Central Bank for
Cooperatives, Federal Home Loan Banks, Federal Loan Mortgage Corporation,
Federal Intermediate Credit Banks, Federal Land Banks, Maritime Administration,
The Tennessee Valley Authority, District of Columbia Armory Board and Federal
National Mortgage Association.
Some obligations of U.S. government agencies and instrumentalities, such as
securities of Federal Home Loan Banks, are supported by the right of the issuer
to borrow from the Treasury. Others, such as bonds issued by the Federal
National Mortgage Association, a private corporation, are supported only by the
credit of the instrumentality. Because the U.S. government is not obligated by
law to provide support to an instrumentality it sponsors, a Fund will invest in
the securities issued by such an instrumentality only when a Fund's investment
adviser determines under standards established by the Board of Trustees that the
credit risk with respect to the instrumentality does not make its securities
unsuitable investments. U.S. government securities do not include international
agencies or instrumentalities in which the U.S. government, its agencies or
instrumentalities participate, such as the World Bank, Asian Development Bank or
the Inter-American Development Bank, or issues insured by the Federal Deposit
Insurance Corporation.
MUNICIPAL LEASE OBLIGATIONS
Municipal lease obligations purchased primarily through Certificates of
Participation ("COPs") are used by state and local governments to finance the
purchase of property, and function much like installment purchase obligations.
The payments made by the municipality under the lease are used to repay interest
and principal on the bonds issued to purchase the property. Once these lease
payments are completed, the municipality gains ownership of the property for a
nominal sum. The lessor is, in effect, a lender secured by the property being
leased. A feature which distinguishes CPOs from municipal debt is that the lease
which is the subject of the transaction must contain a "nonappropriation" or
"abatement" clause. A nonappropriation clause provides that provides that, while
the municipality will use its best efforts to make lease payments, the
municipality may terminate the lease without penalty if the municipality's
appropriating body does not allocate the necessary funds. Local administrations,
being faced with increasingly tight budgets, therefore have more discretion to
curtail payments under COPs than they do to curtail payments on traditionally
funded debt obligations. If the government lessee does not appropriate
sufficient monies to make lease payments, the lessor or its agent is typically
entitled to repossess the property. In most cases, however, the private sector
value of the property will be less than the amount the government lessee was
paying.
Criteria considered by the rating agencies and a Fund's investment adviser
in assessing the risk of appropriation include the issuing municipality's credit
rating, evaluation of how essential the leased property is to the municipality
and term of the lease compared to the useful life of the leased property. The
Board of Trustees reviews the COPs held in each Fund's portfolio to assure that
they constitute liquid investments based on various factors reviewed by the
Fund's investment adviser and monitored by the Board. Such factors include (a)
the credit quality of such securities and the extent to which they are rated or,
if unrated, comply with existing criteria and procedures followed to ensure that
they are of quality comparable to the ratings required for each Fund's
investment, including an assessment of the likelihood that the leases will not
be cancelled; (b) the size of the municipal securities market, both in general
and with respect to COPs; and (c) the extent to which the type of COPs held by
each Fund trade on the same basis and with the same degree of dealer
participation as other municipal bonds of comparable credit rating or quality.
FUTURES CONTRACTS AND RELATED OPTIONS TRANSACTIONS
The Funds (with the exception of the New Jersey Fund) intend to 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
a Fund or as a hedge against changes in the prices of securities held by a Fund
or to be acquired by a 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 a Fund is not fully invested. The
purchase of a futures contract serves as a temporary substitute for the 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 the 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.
The Funds intend 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 the Funds' exposure to
interest rate and/or market fluctuations, the Funds may be able to hedge their
exposure more effectively and perhaps at a lower cost through using futures
contracts and related options transactions. While the Funds do not intend to
take delivery of the instruments underlying futures contracts they hold, the
Funds do not intend to engage in such futures contracts for speculation.
FUTURES CONTRACTS
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 commodity
specified 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, Government National Mortgage Association
(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
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
and U.S. Treasury notes are backed by the full faith and credit of the U.S.
government and GNMA certificates are guaranteed by a U.S. government agency, the
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, the Funds will sell interest rate index
and other index based futures contracts to hedge against changes which are
expected to affect the Funds' portfolios.
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
the 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.
Each 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 the Fund's gain or loss on any transaction
is reduced or increased, respectively, by the amount of 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
The Funds intend to 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 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.
The Funds intend to use options on financial futures contracts in
connection with hedging strategies. In the future the Funds 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
The Funds may employ new investment techniques involving financial futures
contracts and related options. The Funds intend 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. Each Trust believes that no
additional techniques have been identified for employment by the Funds in the
foreseeable future other than those described above.
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.
The Funds intend 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 a
Fund against an increase in the price of securities it intends to purchase. The
Funds do 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 with each Trust's custodian
and/or in a margin account with a Broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
FEDERAL INCOME TAX TREATMENT
For federal income tax purposes, a Fund is required to recognize as income
for each taxable year its net unrealized gains and losses on futures contracts
as of the end of the year as well as those actually realized during the year.
Any gain or loss recognized with respect to a futures contract is considered to
be 60% long term and 40% short term, without regard to the holding period of the
contract. In the case of a futures transaction classified as a "mixed straddle,"
the recognition of losses may be deferred to a later taxable year. The federal
income tax treatment of gains or losses from transactions in options on futures
is unclear.
In order for a Fund to continue to qualify for federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income. Any net gain realized from
the closing out of futures contracts, for purposes of the 90% requirement, will
be qualifying income. In addition, gains realized on the sale or other
disposition of securities held for less than three months must be limited to
less than 30% of a Fund's annual gross income. The 1986 Tax Act added a
provision which effectively treats both positions in certain hedging
transactions as a single transaction for the purpose of the 30% requirement. The
provision provides that, in the case of any "designated hedge," increases and
decreases in the value of positions of the hedge are to be netted for the
purposes of the 30% requirement. However, in certain situations, in order to
avoid realizing a gain within a three month period, a Fund may be required to
defer the closing out of a contract beyond the time when it would otherwise be
advantageous to do so.
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 circumstances, such as variations in
speculative market demand for futures contracts and for securities, including
technical influences in futures contracts trading; 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 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 were
then closed out, and a 15% decrease 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
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.
<PAGE>
EVERGREEN
STATE TAX-FREE
FUNDS
(Drawing of the state of Florida with a + beside it)
(Drawing of the state of Florida)
(Drawing of the state of Georgia)
(Drawing of the state of New Jersey)
(Drawing of the state of North Carolina)
(Drawing of the state of South Carolina)
(Drawing of the state of Virginia)
(Picture of mountain scene)
1996 ANNUAL REPORT
(Evergreen logo)
Evergreen(sm)
Funds
<PAGE>
EVERGREEN STATE TAX-FREE FUNDS
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
A Review of the Past Year and Prospects for the Future.................... 1
A Report From Your Portfolio Manager -- Florida High Income
Municipal Bond Fund....................................................... 3
A Report From Your Portfolio Manager -- New Jersey Tax-Free
Income Fund............................................................... 4
A Report From Your Portfolio Managers..................................... 5
(Drawing of the FLORIDA Results to Date........................................................... 7
state of Florida HIGH INCOME Statement of Investments.................................................. 8
with a + beside it) MUNICIPAL BOND FUND Statement of Assets and Liabilities....................................... 11
Statement of Operations................................................... 12
Statement of Changes in Net Assets........................................ 13
Financial Highlights...................................................... 14
(Drawing of the FLORIDA MUNICIPAL Results to Date........................................................... 16
state of Florida) BOND FUND Statement of Investments.................................................. 17
Statement of Assets and Liabilities....................................... 20
Statement of Operations................................................... 21
Statement of Changes in Net Assets........................................ 22
Financial Highlights...................................................... 23
(Drawing of the GEORGIA Results to Date........................................................... 25
state of Georgia) MUNICIPAL BOND Statement of Investments.................................................. 26
FUND Statement of Assets and Liabilities....................................... 27
Statement of Operations................................................... 28
Statement of Changes in Net Assets........................................ 29
Financial Highlights...................................................... 30
(Drawing of the NEW JERSEY Results to Date........................................................... 33
state of New Jersey) TAX FREE Statement of Investments.................................................. 34
INCOME FUND Statement of Assets and Liabilities....................................... 37
Statement of Operations................................................... 38
Statement of Changes in Net Assets........................................ 39
Financial Highlights...................................................... 40
(Drawing of the NORTH CAROLINA Results to Date........................................................... 42
state of North Carolina) MUNICIPAL BOND Statement of Investments.................................................. 43
FUND
Statement of Assets and Liabilities....................................... 45
Statement of Operations................................................... 46
Statement of Changes in Net Assets........................................ 47
Financial Highlights...................................................... 48
(Drawing of the SOUTH CAROLINA Results to Date........................................................... 50
state of South Carolina) MUNICIPAL BOND Statement of Investments.................................................. 51
FUND Statement of Assets and Liabilities....................................... 53
Statement of Operations................................................... 54
Statement of Changes in Net Assets........................................ 55
Financial Highlights...................................................... 56
(Drawing of the VIRGINIA Results to Date........................................................... 58
state of Virginia) MUNICIPAL BOND Statement of Investments.................................................. 59
FUND
Statement of Assets and Liabilities....................................... 61
Statement of Operations................................................... 62
Statement of Changes in Net Assets........................................ 63
Financial Highlights...................................................... 64
Combined Notes to Financial Statements.................................... 67
Report of Independent Accountants -- Price Waterhouse LLP................. 76
Independent Auditors' Report -- KPMG Peat Marwick LLP..................... 77
Trustees and Officers..........................................Inside Back Cover
</TABLE>
EVERGREEN(SM) is a Service Mark of Evergreen Asset Management Corp.
Copyright 1995, Evergreen Asset Management Corp.
<PAGE>
EVERGREEN STATE TAX-FREE FUNDS
A REVIEW OF THE PAST YEAR
AND PROSPECTS FOR THE FUTURE
BY STEPHEN A. LIEBER
The continued expansion of the United States (Picture of Stephen
economy and the persistence of inflation at 3% or A. Lieber appears
less, has evidently sent mixed signals to the here)
investment markets. The
equity market this year has gone from new high to new high. The willingness of
American savers to put money into the hands of equity mutual funds to buy stocks
in the United States and abroad is unprecedented. Even foreign investors, who
have long been skeptical of the rising prices of U.S. equities and the recent
relatively higher valuations than in many other industrial countries, have begun
to move heavily into U.S. equities. Only the bond market has suffered negative
trends this year. But, it showed no further losses when measured from the end of
the second calendar quarter to the end of the third.
In contrast, it yielded modest gains early in the third quarter. Evidence of
slowed final demand in many sectors of the economy has begun to reduce the fears
of many investors over inflationary pressures. While confidence increases that
both producer and consumer price indexes will remain in a narrow range, around
3%, apprehensions of possibly renewed inflation are now focused on the trend of
hourly wages. Hourly wages have moved up slightly in the last two months.
The apparent consensus among business economists currently is to expect a 2%
growth rate for the U.S. economy in the second half of 1996, with a similar
level to continue into 1997. These views are, in part, based on historical
trends, in which the late cycle characteristics of the U.S. economy typically
show economic deceleration. Such a deceleration is not widely feared, in view of
the fact that real income growth is likely to be sustained by a 2% to 2 1/2%
employment growth, plus a 3% to 3 1/2% earnings growth, before a 3% inflation.
The appearance of such decelerating trends and their continuation would likely
bring bond yields down, as the inflation premium would be removed from bond
market expectations. Many who dissent from the consensus view that the economy
will slow, argue that the European economies and Japan's economy are likely to
revive in 1997, which will create more export demand for U.S. products and,
therefore, increase our growth rate. More pessimistic observers of the American
economy believe that the American consumer has overspent, as evidenced by the
rising rate of credit card delinquencies, and by the "wealth effect" of a stock
market achieving record highs.
For the bond market, we expect that fairly stable, rather than rising,
inflation, and a somewhat declining overall business rate of growth, together
with a narrow range currency market, should enable a gradual decline in interest
rates.
Tax-exempt fixed income investment in 1996 has had comparatively better
returns than taxable bond investment. Much of this difference is due to the fact
that the flat tax, or sharply
1
<PAGE>
EVERGREEN STATE TAX-FREE FUNDS
A REVIEW OF THE PAST YEAR AND
PROSPECTS FOR THE FUTURE -- (CONTINUED)
reduced income tax, advocacies of presidential candidates earlier in the year,
were eliminated as concerns for tax-exempt investors. Therefore, tax-exempt
bonds have risen to a normal level of relationship to taxable bonds. Further
improving valuations has been the lack of major concerns over credit quality
issues. Orange County California's default has fallen into memory and its credit
is in the process of restoration. Other credit problems regarding certain public
power facilities and the rental of municipal buildings have also been overcome.
Correspondingly, the supply of new tax-exempt issues declined, especially as
interest rate increases cut down the number of new issues replacing refunded
bonds. The credit quality overall has been enhanced by further record gains for
the use of bond insurance, while the insurers themselves have had their credit
quality improved by record accumulations of earnings. In summary, the tax-exempt
securities market toward the end of 1996 appears to be in a healthy condition.
2
<PAGE>
FLORIDA HIGH INCOME MUNICIPAL BOND FUND
A REPORT FROM YOUR
PORTFOLIO MANAGER
RICHARD K. MARRONE
While interest rate movements have been volatile during the (Photo of
past year, Evergreen Florida High Income Municipal Bond Fund Richard K.
proved rewarding to its investors. The Fund's total return Marrone
(Class A shares) ranked #1 among all 36 other Florida Municipal appears
Debt Funds ranked by Lipper Analytical Services for the 12 here)
months ended August 31, 1996*.
The market for high yielding credits in the state of Florida
has been robust during most of the past year. Florida's economy
continues to remain strong, especially on the construction
front, as population growth continues to outpace the rest of the
nation. This rapid population growth has created a strong demand
for new community development districts (CDDs) throughout the state.
The residential construction part of the economy has become a
large part of the Florida high yield market. Numerous bond issues have come to
market over the past year to finance this growth. These CDDs assist in the
development of infrastructure built around new homes which are typically
centered around golf courses and various other amenities. The Fund has focused
on investing in the higher end developments that are built in affluent areas.
These type of developments are usually more stable and predictable and built by
large, well-known developers.
Spreads have continued to narrow between non-rated and higher rated credits
which has contributed to the favorable performance of our lower and non-rated
bonds. Investors appetite for yield has been one of the primary factors for this
narrowing. The strength of the economy has also contributed to strong
performance of our bonds, as several credits have exhibited improved economic
fundamentals. The outlook for lower and non-rated bonds will fluctuate more with
economic cycles than interest rate movements, versus higher rated bonds.
During a period of declining interest rates, this Fund will not participate as
fully as other funds may. However, in a rising rate environment, the Fund may
well outperform its competition and exhibit better total return numbers while
also providing a relatively high level of tax-exempt income. This philosophy of
limited participation on the upside but giving up less on the down side in an
attempt to preserve principal, while generating good income, is the main reason
we believe investors place their money into the Fund. Our focus has always been,
and will continue to be, to provide higher income than that available from an
investment grade portfolio while also striving to maintain relatively stable net
asset values.
At its fiscal year-end on August 31, 1996, Evergreen Florida High Income
Municipal Bond Fund's total net assets were $97.5 million. The Fund's yields at
that time are illustrated in the table below. (For additional performance
information, please see page 7.)
<TABLE>
<CAPTION>
CLASS Y SHARES CLASS A SHARES CLASS B SHARES
<S> <C> <C> <C>
30-Day SEC Yield 6.50% 5.94% 5.43%
Tax-Equivalent Yield** 10.16% 9.28% 8.48%
</TABLE>
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
* SOURCE: LANA -- LIPPER ANALYTICAL NEW APPLICATIONS. LIPPER ANALYTICAL
SERVICES, INC., IS AN INDEPENDENT MUTUAL FUNDS PERFORMANCE MONITOR. LIPPER
RANKINGS DO NOT INCLUDE SALES CHARGES. IF INCLUDED, RANKINGS MAY BE
DIFFERENT.
FUND'S INCEPTION DATES: CLASS Y SHARES: 9/20/95, CLASS A SHARES: 6/17/92,
CLASS B SHARES: 7/10/95
INVESTMENT RETURN, PRINCIPAL VALUE AND YIELDS WILL FLUCTUATE. INVESTORS'
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
THE FUND'S CLASS A SHARES ARE SUBJECT TO A MAXIMUM FRONT END SALES CHARGE OF
4.75% AND CLASS B SHARES ARE SUBJECT TO A MAXIMUM CONTINGENT DEFERRED SALES
CHARGE OF 5%.
**TAX-EQUIVALENT YIELDS ASSUMES A 36% FEDERAL TAX BRACKET. FLORIDA INTANGIBLES
TAX (WHICH IS NOT REFLECTED IN TAX-EQUIVALENT YIELDS ABOVE) ON PERSONAL
PROPERTY AFTER EXEMPTIONS OF $2 PER $1,000 IS GENERALLY IMPOSED ON THE VALUE
OF STOCKS, BONDS, OTHER EVIDENCES OF INDEBTEDNESS AND MUTUAL FUND SHARES.
DURING THE PERIOD UNDER REVIEW, THE ADVISER CONTINUED ITS POLICY OF WAIVING A
PORTION OF ITS ADVISORY FEE. HAD FEE NOT BEEN WAIVED, YIELDS WOULD HAVE BEEN
LOWER. FEE WAIVER MAY BE REVISED AT ANY TIME.
3
<PAGE>
EVERGREEN NEW JERSEY TAX FREE INCOME FUND
A REPORT FROM YOUR
PORTFOLIO MANAGER
JOCELYN TURNER
Fixed income markets took a roller coaster ride during the
period as economic reports continually surprised the consensus (Photo of
view. Bond prices took sharp drops after strong Gross Domestic Jocelyn
Product (GDP) and initial jobless claims numbers were released. Turner
Increases in durable goods orders and rebounds in retail demand appears
seemed to confirm that the economy was still growing at a here)
healthy pace. Commodity prices started to show some signs of
incipient inflation, but continued wage pressures kept it at
bay. Investors prepared for Fed intervention to raise rates at
any time, possibly at the upcoming November Federal Open Market
Committee Meeting. With elections approaching, the Fed seems in no
hurry to change course, believing that despite the upticks in economic reports,
underlying inflation is still in check and the economy is not yet overheating.
The market has taken some of the onus from the Fed by pricing a 25- to 50-basis
point rate increase into the yield curve in response to the economic data.
While bond prices dropped across the fixed income markets, municipals
continued their first quarter trend of relative outperformance to Treasuries,
though at the low end of the ranges. Long-term municipal bonds, as measured by
the Bond Buyer 20-Year Index*, were yielding approximately 88% of Treasuries at
the beginning of the Fund's fiscal year, at 5.57%. By July and August, the yield
had risen to 5.86%, and 82% of Treasuries thanks to the continued low new
issuance and large bond call redemptions that reduced the total outstanding
supply of municipals.
Municipals outperformed Treasuries due to a change in investor sentiment. Tax
reform fears subsided and rising rates led individual investors to chase
increased yields. This was in contrast to 1995 when investors suffered rate
shock from the low absolute levels. Investors re-focused asset allocations into
fixed income securities after the stock market became increasingly volatile and
sold off. Municipals, especially, became attractive to individual investors and
property and casualty insurance companies.
Supply of municipal bonds to satisfy the increased demand continued to be a
severe problem in the market. With interest rates rising, issuers were reluctant
to issue refunding bonds and many other interest rate sensitive deals that had
been in the pipeline. Specialty state funds, like this one, were especially
hard-pressed to find new issues. Of those issues, most were priced rich and few
were sizable enough for proper liquidity and diversification in mutual funds. As
a result, the Fund selectively sought higher coupon bonds with defensive call
protection to capture increased yields, maintain stable income, and reduce price
volatility. As always, the Fund is managed to maximize total return and
tax-exempt income while seeking to avoid unnecessary risk.
At its fiscal year-end on August 31, 1996, Evergreen New Jersey Tax-Free
Income Fund's total net assets were $44.2 million. The Fund's yields at that
time are illustrated in the table below. (For additional performance
information, please see page 33.)
<TABLE>
<CAPTION>
CLASS Y SHARES CLASS A SHARES CLASS B SHARES
<S> <C> <C> <C>
30-Day SEC Yield 5.17% 4.87% 4.17%
Tax-Equivalent Yield* 8.65% 8.15% 6.98%
</TABLE>
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
* UNMANAGED INDEXES OF SELECTED SECURITIES. AN INVESTMENT CAN NOT BE MADE IN AN
INDEX.
THE FUNDS' INVESTMENT RETURN, PRINCIPAL VALUE AND YIELDS WILL FLUCTUATE.
INVESTORS' SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST.
THE FUND'S CLASS A SHARES ARE SUBJECT TO A MAXIMUM FRONT END SALES CHARGE OF
4.75% AND CLASS B SHARES ARE SUBJECT TO A MAXIMUM CONTINGENT DEFERRED SALES
CHARGE OF 5%.
** TAX-EQUIVALENT YIELD ASSUMES A 36% FEDERAL TAX BRACKET AND A 6.65% NEW JERSEY
STATE TAX BRACKET. DURING THE PERIOD UNDER REVIEW, THE ADVISER CONTINUED ITS
POLICY OF WAIVING A PORTION OF ITS ADVISORY FEE. HAD FEE NOT BEEN WAIVED,
YIELD WOULD HAVE BEEN LOWER. FEE WAIVER MAY BE REVISED AT ANY TIME.
SOME OF THE FUND'S INCOME MAY BE SUBJECT TO THE FEDERAL ALTERNATIVE MINIMUM
TAX FOR CERTAIN INVESTORS.
4
<PAGE>
EVERGREEN STATE MUNICIPAL BOND FUNDS
A REPORT FROM YOUR
PORTFOLIO MANAGERS
ROBERT EVANS
RICHARD MARRONE
ROBERT S. DRYE
CHARLES JEANNE
As the Funds' fiscal year began, municipal bonds were in the (Photo of
midst of the bond rally of 1995. The yield on the Bond Buyer 20 Robert Evans
Year Government Obligation (GO) Index* dropped 54 basis points, appears
from 5.98% at the end of August, 1995, to 5.44% at 1995 here)
year-end. The new year brought no January effect to municipals
due to historically high levels of new issuance. Prices were
cheap but demand remained tepid with individual investors
suffering rate shock. Municipal yields continued their drop but
not as severely as with Treasuries because of an unusually flat
yield curve. There was little advantage to extending out into
longer maturities since 20-year bonds at 5.46% traded only 10 basis
points higher than 11-year bonds at 5.36% as measured by the
Bond Buyer 20-Year GO* and 11-Year GO* Index, respectively.
Investors demanded short-term paper or discount bonds that
provided good structure (i.e. call protection).
Fixed income markets reversed direction in the second quarter (Photo of
of 1996 as economic reports continually surprised consensus. Richard Marrone
Bond prices dropped after strong Gross Domestic Product (GDP) appears here)
and initial jobless claims numbers were released. Increases in
durable goods orders and rebounds in retail demand seemed to
confirm that the economy was still growing at a healthy pace.
Commodity prices started to show some signs of incipient
inflation, but continued wage pressures kept it at bay.
Investors remain prepared for Federal Reserve intervention to
raise rates at any time, possibly even at the upcoming November (Photo of
Federal Open Market Committee Meeting. With elections Robert S. Drye
approaching, the Fed seems in no hurry to change course, appears here)
believing that despite the upticks in economic reports,
underlying inflation is still in check and the economy is not
yet overheating. The market has taken some of the onus from the
Fed by pricing a 25- to 50-basis point rate increase into the
yield curve in response to the economic data.
While bond prices dropped across the fixed income markets, (Photo of
municipals continued their first quarter trend of relative Charles Jeanne
outperformance to Treasuries, though at the low end of the appears here)
ranges. Long-term municipals, as measured by the Bond Buyer
20-Year Index*, were yielding approximately 88% of Treasuries at
the beginning of the Fund's fiscal year, at 5.57%. By July and August,
the yield had risen to 5.86%, and 82% of Treasuries thanks to the continued
low new issuance, regular interest payments, and large bond call
redemptions that reduced the total outstanding supply of
municipals.
* UNMANAGED INDEXES OF SELECTED SECURITIES. AN INVESTMENT CAN NOT BE MADE IN AN
INDEX.
THE FUNDS' INVESTMENT RETURNS, PRINCIPAL VALUES AND YIELDS WILL FLUCTUATE.
INVESTORS' SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST.
SOME OF THE FUNDS' INCOME MAY BE SUBJECT TO THE FEDERAL ALTERNATIVE MINIMUM
TAX FOR CERTAIN INVESTORS.
5
<PAGE>
EVERGREEN STATE MUNICIPAL BOND FUNDS
A REPORT FROM YOUR
PORTFOLIO MANAGERS -- (CONTINUED)
Municipals' outperformance of Treasuries was due to a change in investor
sentiment. Tax reform fears subsided and rising rates led individual investors
to chase increased yields. This was in contrast to 1995 when investors suffered
rate shock from the low absolute levels. Investors re-focused asset allocations
into fixed income securities after the stock market became increasingly volatile
and sold off. Municipals, especially, became attractive to individual investors
as well as property and casualty insurance companies.
Supply of municipal bonds to satisfy the increased demand continued to be a
severe problem in the market. With interest rates rising, issuers were reluctant
to issue refunding bonds and many other interest rate sensitive deals that had
been in the pipeline. Specialty state funds were particularly hard-pressed to
find new issues. Of those issues, most were priced rich and few were sizable
enough for proper liquidity and diversification in mutual funds. As a result,
the Funds selectively sought higher coupon bonds with defensive call protection
to capture increased yields, maintain stable income, and reduce price
volatility. As always, the Funds are managed to maximize total return and
tax-exempt income while seeking to avoid unnecessary risk. (For fund-specific
performance information, please see the pages entitled "Results To Date".)
6
<PAGE>
EVERGREEN FLORIDA HIGH INCOME
MUNICIPAL BOND FUND
(Drawing of the state of Florida with a + beside it)
RESULTS TO DATE
PERFORMANCE OF $10,000 INVESTED IN THE
EVERGREEN FLORIDA HIGH INCOME MUNICIPAL BOND FUND
The graphs below compare a $10,000 investment in the Evergreen Florida High
Income Municipal Bond Fund (Class A, Class B and Class Y Shares) with a similar
investment in the Lehman Brothers Municipal Bond Index ("Index").
CLASS A
ONE YEAR TOTAL RETURN = 1.4%
AVERAGE ANNUAL COMPOUND
RETURN SINCE INCEPTION = 6.5%
(Class A chart appears here. Plot points are below.)
6/17/92* 8/31/92 8/31/93 8/31/94 8/31/95 8/31/96
(Customers to fill in plot points.)
CLASS B
ONE YEAR TOTAL RETURN = 0.6%
AVERAGE ANNUAL COMPOUND
RETURN SINCE INCEPTION = 3.2%
(Class B chart appears here. Plot points are below.)
7/10/95* 8/31/95 2/28/96 8/31/96
(Customers to fill in plot points.)
CLASS Y
AVERAGE ANNUAL COMPOUND
RETURN SINCE INCEPTION = 6.3%
(Class Y chart appears here. Plot points are below.)
9/20/95* 2/28/96 8/31/96
(Customers to fill in plot points.)
- - - EVERGREEN HIGH INCOME MUNICIPAL BOND FUND
______ LEHMAN BROTHERS MUNICIPAL BOND INDEX
* Commencement of class operations.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE RESULTS. MUTUAL FUNDS
ARE NOT OBLIGATIONS OF, OR GUARANTEED BY, ANY BANK AND ARE NOT FEDERALLY
INSURED.
For the purposes of the graphs and the accompanying tables, it has been
assumed that (a) the maximum sales charge of 4.75% was deducted from the initial
$10,000 investment in Class A Shares; (b) the maximum applicable contingent
deferred sales charge was deducted from the value of the investment in Class B
Shares, assuming full redemption on August 31, 1996; (c) all recurring fees
(including investment advisory fees) were deducted; and (d) all dividends and
distributions were reinvested.
The investment adviser is currently waiving a portion of the Fund's
expenses. Had expenses not been waived, returns would have been lower.
The Index is an unmanaged index and includes the reinvestment of income,
but does not reflect the payment of transaction costs and advisory fees
associated with an investment in the Fund.
7
<PAGE>
EVERGREEN FLORIDA HIGH INCOME
MUNICIPAL BOND FUND
STATEMENT OF INVESTMENTS
AUGUST 31, 1996
(Drawing of the state of Florida with a + beside it)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- 98.4%
FLORIDA -- 93.7%
$ 785 Alachua Cnty. Hlth. Facs. RB,
Beverly Enterprises Proj.,
10.125%, 4/1/10....................... $ 858,468
3,000 Alliance Arpt. Auth. Inc.
Federal Express Corp. Proj.,
6.375%, 4/1/21........................ 2,945,040
1,000 Bay Cnty. Hosp. Sys. RB,
Bay Med. Ctr. Proj.,
8.00%, 10/1/12........................ 1,094,620
200 Baytree Cmnty. Dev. Dist.
Spl. Assmt. RB,
8.75%, 5/1/12......................... 211,630
750 Boynton Beach Hsg. Mtg.
Clipper Cove Apts.,
6.35%, 7/1/16......................... 748,245
990 Brevard Cnty.
Hlth. Facs. Auth. RB,
Courtenay Springs Vlg.,
7.375%, 11/15/04...................... 1,000,019
1,875 Brevard Cnty.
Hlth. Facs. Auth. RB,
Courtenay Springs Vlg.,
7.50%, 11/15/12....................... 1,887,019
1,000 Brevard Cnty. Tourist Dev.
Tax RB, Marlins Spring,
6.875%, 3/1/13........................ 1,046,240
1,000 Broward Cnty. Hsg. Fin.
Auth. RB, (Ser. A),
7.35%, 3/1/23, (GNMA)................. 1,041,280
1,125 Crossings At Fleming Is.
Cmnty. Dev. Dist. Util. RB,
7.375%, 10/1/19....................... 1,107,743
2,310 Duval Cnty. Hsg. Fin. Auth.
RB, St. Augustine Apts. Proj.,
6.00%, 3/1/21......................... 2,246,498
1,500 Eastlake Oaks Cmnty. Dev. Dist.,
7.75%, 5/1/17......................... 1,516,500
505 Escambia Cnty. Hlth. Facs.
Auth. RB, Azalea Trace Inc.,
8.50%, 1/1/19......................... 518,074
535 Escambia Cnty. Hlth. Facs.
Auth. RB, Azalea Trace Inc.,
9.25%, 1/1/06......................... 566,383
235 Escambia Cnty. Hlth. Facs.
Auth. RB, Azalea Trace Inc.,
9.25%, 1/1/12......................... 248,785
1,500 Escambia Cnty. Hlth. Facs.
Auth. RB, Baptist Hosp. Inc.,
(Ser. B),
6.00%, 10/1/14........................ 1,418,205
PRINCIPAL
AMOUNT
(000) VALUE
$ 2,000 Escambia Cnty. PCR,
Champion Intl. Corp. Proj.,
6.90%, 8/1/22......................... $ 2,073,500
1,000 Florida Hsg. Fin. Agy. RB,
The Vinyards Proj., (Ser. H),
6.50%, 11/1/25........................ 998,580
2,580 Hernando Cnty. IDR,
Florida Crushed Stone Co.,
8.50%, 12/1/14........................ 2,811,890
1,545 Hialeah Gardens, IDR,
Waterford Convalscent-A,
7.875%, 12/1/07....................... 1,594,100
600 Hillsborough Cnty. Aviation
Auth. RB, US Air Proj. (Ser. 2),
8.60%, 1/15/22........................ 649,764
3,430 Homestead IDR, Cmnty.
Rehab. Providers Prog.-A,
7.95%, 11/1/18........................ 3,456,651
2,500 Indian Trace Cmnty. GO Wtr.
Mgmt. Spl. Benefit Sub-B,
8.25%, 5/1/11 (a)..................... 2,662,400
1,000 Jacksonville, Hlth. Facs.
Auth. IDR, Cypress Vlg. Proj.,
7.00%, 12/1/22........................ 1,017,560
750 Jacksonville, Hlth. Facs.
Auth. RB, Cypress Vlg. Proj.,
7.00%, 12/1/14........................ 765,548
2,500 Lake Bernadette Cmnty. Dev.
Dist. Florida Special (Ser. A),
8.00%, 5/1/17......................... 2,478,375
2,000 Lee Cnty. Hsg. Fin. Auth.
Multi-Cnty. Prog. (Ser. A),
7.50%, 9/1/27......................... 2,163,860
1,000 Lee Cnty. Hsg. Fin Auth.
Single Family Mtg. RB,
Multi-Cnty. Prog. (Ser. A),
7.45%, 9/1/27 -- WI................... 1,092,960
850 Lee Cnty. IDA, Encore
Nursing Center Partner,
8.125%, 12/1/07....................... 906,610
2,860 Leon Cnty. Ed. Facs.
Auth. RB, (Ser. A),
8.25%, 5/1/14......................... 2,862,660
1,000 Manatee Cnty. Hsg. Fin.
Auth. Mtg. RB,
7.45%, 5/1/27......................... 1,090,620
1,175 Martin Cnty. IDR, Indiantown
Cogeneration PJ-A,
7.875%, 12/15/25...................... 1,313,638
</TABLE>
8
<PAGE>
EVERGREEN FLORIDA HIGH INCOME
MUNICIPAL BOND FUND
STATEMENT OF INVESTMENTS -- (CONTINUED)
AUGUST 31, 1996
(Drawing of the state of Florida with a + beside it)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
FLORIDA -- CONTINUED
<S> <C> <C>
$ 1,245 Meadow Point II, Cmnty. Dev.
Dist. Cap. Impt. RB,
7.75%, 5/1/18 (a)..................... $ 1,266,526
1,000 Miami Beach City Center
Historic Convention,
6.25%, 12/1/16........................ 976,340
500 Miami Beach City Center
Historic Convention,
6.35%, 12/1/22........................ 486,870
1,300 North Springs, Impt. Dist.
Wtr. Mgmt. Spl. Assmt. (Ser. A),
8.20%, 5/1/24......................... 1,366,235
2,500 Northern Palm Beach Cnty.
Wtr. Ctl. & Impt. Unit Dev.,
7.20%, 8/1/16 -- WI................... 2,500,000
500 Northern Palm Beach Cnty.
Wtr. Ctl. Dist. Spl. Assmt.,
6.875%, 11/1/13....................... 526,495
500 Northern Palm Beach Cnty.
Wtr. Ctl. Dist. Spl. Assmt.,
7.00%, 8/1/15......................... 529,160
1,500 Northwood Cmnty. Dev. Dist.,
7.60%, 5/1/17......................... 1,499,955
1,040 Orange Cnty. Hlth Facs.
Auth. RB, Lakeside Alts. Inc.,
6.50%, 7/1/13......................... 1,027,634
395 Orange Cnty.
Hlth. Facs. Auth. RB,
Orlando Lutheran Tower,
8.40%, 7/1/14......................... 387,183
2,000 Osceola Cnty. IDA, Cmnty.
Provider Pooled Ln. Proj. A,
7.75%, 7/1/17......................... 2,017,840
565 Overoaks Cmnty. Dev. Dist.
Cap. Impt. RB,
8.25%, 5/1/17......................... 566,571
1,500 Palm Beach Cnty. IDR,
Geriatric Care Inc. Proj.,
6.55%, 12/1/16........................ 1,514,910
685 Pinellas Cnty. Edl. Facs.
Auth. RB, Eckerd College,
7.75%, 7/1/14......................... 731,005
5,000 Polk Cnty. IDA,
7.525%, 1/1/15........................ 5,237,000
1,000 Port Everglades, RB, (Ser. A),
7.50%, 9/1/12......................... 1,053,460
1,710 Quantum Cmnty. Dev. Dist.
Spl. Assmt.
7.75%, 3/1/14......................... 1,727,699
PRINCIPAL
AMOUNT
(000) VALUE
$ 2,100 Riverwood Cmnty. Sys. RB,
7.75%, 10/1/14........................ $ 2,134,251
1,000 Sarasota Cnty. Hlth. Fac. Auth.
RB, Jewish Housing Council,
7.375%, 7/1/16........................ 980,890
1,500 Sarasota Cnty. Hlth. Fac.
Auth. RB, Manatee Jewish
Housing Council,
6.70%, 7/1/25......................... 1,387,560
1,000 Sarosota Cnty. Hlth. Fac.
Auth. RB, Sunnyside Pptys.,
6.00%, 5/15/10........................ 935,190
1,500 South Indian River,
Wtr. Ctl. Dist. RB,
Egret Landing Phase I,
7.50%, 11/1/18........................ 1,538,805
2,500 St. Johns Ctny. IDA, Vicars
Landing Proj. (Ser. A),
6.75%, 2/15/12........................ 2,432,925
3,000 Tampa, RB, Aquarium Inc. Proj.,
7.75%, 5/1/27......................... 3,213,990
1,000 Tarpon Springs, Hlth. Facs.
Auth. RB, Helen Ellis Mem.
Hosp. Proj.,
7.50%, 5/1/11......................... 1,031,130
500 Volusia Cnty.
Edl. Facs. Auth. RB,
6.125%,10/15/16....................... 492,855
4,000 Volusia Cnty.
Edl. Facs. Auth. RB,
6.125%, 10/15/26...................... 3,945,520
1,775 Westchase East Cmnty. Dev.
Dist. Cap. Impt. RB,
7.50%, 5/1/17......................... 1,759,096
1,000 Winter Garden, IDR,
Beverly Enterprises,
8.75%, 7/1/12......................... 1,093,650
250 Winter Haven Hsg. Auth.
Abbey Lane Apts. (Ser. C),
7.00%, 7/1/12, (FNMA)................. 262,870
250 Winter Haven Hsg. Auth.
Abbey Lane Apts. (Ser. C),
7.00%, 7/1/24, (FNMA)................. 259,412
91,276,492
PUERTO RICO -- 2.5%
1,475 Puerto Rico Ports. Auth. RB,
American Airlines Proj.,
(Ser. A),
6.25%, 6/1/26......................... 1,463,392
</TABLE>
9
<PAGE>
EVERGREEN FLORIDA HIGH INCOME
MUNICIPAL BOND FUND
STATEMENT OF INVESTMENTS -- (CONTINUED)
AUGUST 31, 1996
(Drawing of the state of Florida with a + beside it)
PRINCIPAL
AMOUNT
(000) VALUE
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
PUERTO RICO -- CONTINUED
<TABLE>
<CAPTION>
<S> <C> <C>
$ 1,000 Puerto Rico Indl. Tourist
Edl. Med. & Envir. Ctl. Facs.
RB, Mennonite Gen. Hosp.
Proj. (Ser. A),
6.50%, 7/1/12......................... $ 995,290
2,458,682
VIRGIN ISLANDS -- 2.2%
2,000 Virgin Islands, Wtr. & Pwr.
Auth. RB, (Ser. B),
7.60%, 1/1/12......................... 2,143,800
TOTAL LONG-TERM MUNICIPAL SECURITIES
(COST $94,915,484).................... 95,878,974
SHARES VALUE
MUTUAL FUND SHARES -- 1.9%
1,863,000 Lehman Municipal Money
Market Fund
(COST $1,863,000).................... $ 1,863,000
TOTAL INVESTMENTS --
(COST $96,778,484)............. 100.3% 97,741,974
OTHER ASSETS AND
LIABILITIES -- NET............. (.3) (286,813)
NET ASSETS --.................. 100.0% $97,455,161
</TABLE>
Summary of Abbreviations:
FNMA -- Insured by Federal National Mortgage Association
GNMA -- Insured by Government National Mortgage
Association
GO -- General Obligation Bond
IDA -- Industrial Development Authority
IDR -- Industrial Development Revenue Bond
PCR -- Pollution Control Revenue Bond
RB -- Revenue Bond
WI -- When Issued
(a) Security which was segregated as collateral for When Issued securities.
See accompanying notes to financial statements.
10
<PAGE>
EVERGREEN FLORIDA HIGH INCOME
MUNICIPAL BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1996
(Drawing of the state of Florida with a + beside it)
<TABLE>
<S> <C>
ASSETS:
Investments at value (identified cost $96,778,484)............................................................ $ 97,741,974
Cash.......................................................................................................... 97
Interest receivable........................................................................................... 1,963,955
Receivable for Fund shares sold............................................................................... 1,850,767
Deferred organization expenses and other assets............................................................... 17,987
Total assets............................................................................................ 101,574,780
LIABILITIES:
Payable for securities purchased.............................................................................. 3,616,400
Dividends payable............................................................................................. 271,014
Payable for Fund shares redeemed.............................................................................. 101,964
Accrued expenses.............................................................................................. 58,548
Distribution fee payable...................................................................................... 46,039
Accrued advisory fee.......................................................................................... 25,654
Total liabilities....................................................................................... 4,119,619
NET ASSETS....................................................................................................... $ 97,455,161
NET ASSETS CONSIST OF:
Paid-in capital............................................................................................... $ 97,923,777
Distributions in excess of net investment income.............................................................. (7,223)
Accumulated net realized loss on investment transactions...................................................... (1,424,883)
Net unrealized appreciation of investments.................................................................... 963,490
Net assets.............................................................................................. $ 97,455,161
CALCULATION OF NET ASSET VALUE AND MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares ($76,266,753 (division sign) 7,318,419 shares of beneficial interest outstanding).............. $ 10.42
Sales charge -- 4.75% of offering price....................................................................... .52
Maximum offering price.................................................................................. $ 10.94
Class B Shares ($19,218,795 (division sign) 1,844,017 shares of beneficial interest outstanding).............. $ 10.42
Class Y Shares ($1,969,613 (division sign) 189,005 shares of beneficial interest outstanding)................. $ 10.42
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
EVERGREEN FLORIDA HIGH INCOME
MUNICIPAL BOND FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1996
(Drawing of the state of Florida with a + beside it)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest........................................................................................... $5,460,025
EXPENSES:
Advisory fee....................................................................................... $477,128
Administrative personnel and service fees.......................................................... 40,295
Distribution fee -- Class A Shares................................................................. 169,651
Distribution fee -- Class B Shares................................................................. 80,050
Shareholder services fee -- Class B Shares......................................................... 26,683
Custodian fee...................................................................................... 57,131
Transfer agent fee................................................................................. 55,460
Registration and filing fees....................................................................... 30,624
Reports and notices to shareholders................................................................ 23,722
Professional fees.................................................................................. 18,493
Amortization of organizational expense............................................................. 3,543
Trustees' fees and expenses........................................................................ 2,763
Insurance.......................................................................................... 1,958
Miscellaneous...................................................................................... 2,950
990,451
Less: Fee waivers..................................................................................... (238,564)
Net Expenses....................................................................................... 751,887
Net investment income................................................................................. 4,708,138
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on investment transactions....................................................... (67,136)
Net change in unrealized appreciation of investments............................................... (42,880)
Net loss on investments............................................................................ (110,016)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................................................. $4,598,122
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
EVERGREEN FLORIDA HIGH INCOME
MUNICIPAL BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
(Drawing of the state of Florida with a + beside it)
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED ENDED
AUGUST 31, AUGUST 31,
1996 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income....................................................................... $ 4,708,138 $ 1,225,081
Net realized gain (loss) on investment transactions......................................... (67,136) 150,049
Net change in unrealized appreciation (depreciation) of investments......................... (42,880) 1,449,591
Net increase in net assets resulting from operations..................................... 4,598,122 2,824,721
DISTRIBUTIONS TO SHAREHOLDERS:
FROM NET INVESTMENT INCOME:
Class A Shares.............................................................................. (4,083,337) (1,214,190)
Class B Shares.............................................................................. (562,849) (10,891)
Class Y Shares.............................................................................. (61,952) --
Total distributions to shareholders from net investment income.............................. (4,708,138) (1,225,081)
IN EXCESS OF NET INVESTMENT INCOME:
Class A Shares.............................................................................. -- (8,411)
Class B Shares.............................................................................. -- (76)
Total distributions to shareholders in excess of net investment income...................... -- (8,487)
Total distributions to shareholders...................................................... (4,708,138) (1,233,568)
FUND SHARE TRANSACTIONS:
Proceeds from shares sold................................................................... 51,887,683 10,600,090
Proceeds from reinvestment of distributions................................................. 1,815,929 307,200
Payment for shares redeemed................................................................. (18,826,666) (14,853,087)
Net increase (decrease) from Fund share transactions..................................... 34,876,946 (3,945,797)
Net increase (decrease) in net assets.................................................... 34,766,930 (2,354,644)
NET ASSETS:
Beginning of period......................................................................... 62,688,231 65,042,875
End of period (includes distributions in excess of net investment income of $7,223 for the
periods ending August 31, 1996 and August 31, 1995)....................................... $ 97,455,161 $ 62,688,231
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
EVERGREEN FLORIDA HIGH INCOME
MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
(Drawing of the state of Florida with a + beside it)
<TABLE>
<CAPTION>
CLASS A SHARES
FOUR MONTHS
ENDED YEAR ENDED
YEAR ENDED AUGUST 31, APRIL 30,
AUGUST 31, 1996 1995# 1995 1994
<S> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period............................ $10.40 $10.16 $10.08 $10.36
Income (loss) from investment operations:
Net investment income......................................... .63 .21 .65 .68
Net realized and unrealized gain (loss) on investments........ .02 .24 .08 (.26)
Total from investment operations............................ .65 .45 .73 .42
Less distributions to shareholders from:
Net investment income......................................... (.63) (.21) (.65) (.68)
Net realized gain on investments.............................. -- -- -- (.02)
Total distributions......................................... (.63) (.21) (.65) (.70)
Net asset value, end of period.................................. $10.42 $10.40 $10.16 $10.08
TOTAL RETURN+................................................... 6.4% 4.4% 7.6% 3.3%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)....................... $76,267 $59,551 $65,043 $72,683
Ratios to average net assets:
Expenses**.................................................... .85% 1.07%++ .60% .14%
Net investment income**....................................... 6.02% 5.92%++ 6.52% 6.16%
Portfolio turnover rate......................................... 42% 14% 28% 31%
<CAPTION>
JUNE 17, 1992*
THROUGH
APRIL 30, 1993
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period............................ $10.00
Income (loss) from investment operations:
Net investment income......................................... .61
Net realized and unrealized gain (loss) on investments........ .39
Total from investment operations............................ 1.00
Less distributions to shareholders from:
Net investment income......................................... (.61)
Net realized gain on investments.............................. (.03)
Total distributions......................................... (.64)
Net asset value, end of period.................................. $10.36
TOTAL RETURN+................................................... 10.3%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)....................... $33,541
Ratios to average net assets:
Expenses**.................................................... .00%
Net investment income**....................................... 5.92%++
Portfolio turnover rate......................................... 50%
</TABLE>
# The Fund changed its fiscal year end from April 30 to August 31.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge is not reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income to average net assets would have
been the following:
<TABLE>
<CAPTION>
CLASS A SHARES
FOUR MONTHS
ENDED YEAR ENDED
YEAR ENDED AUGUST 31, APRIL 30,
AUGUST 31, 1996 1995# 1995 1994
<S> <C> <C> <C> <C>
Expenses....................................................... 1.15% 1.42% 1.26% 1.12%
Net investment income.......................................... 5.72% 5.57% 5.86% 5.18%
JUNE 17, 1992*
THROUGH
APRIL 30, 1993
Expenses....................................................... 1.12%
Net investment income.......................................... 4.80%
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
EVERGREEN FLORIDA HIGH INCOME
MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS -- (CONTINUED)
(Drawing of the state of Florida with a + beside it)
<TABLE>
<CAPTION>
CLASS B SHARES
JULY 10, 1995*
YEAR ENDED THROUGH
AUGUST 31, 1996 AUGUST 31, 1995
<S> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period................................................. $10.40 $10.41
Income (loss) from investment operations:
Net investment income.............................................................. .55 .08
Net realized and unrealized gain (loss) on investments............................. .02 (.01)
Total from investment operations................................................. .57 .07
Less distributions to shareholders from net investment income........................ (.55) (.08)
Net asset value, end of period....................................................... $10.42 $10.40
TOTAL RETURN+........................................................................ 5.6% .6%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............................................ $19,219 $3,137
Ratios to average net assets:
Expenses........................................................................... 1.59%** 1.09%++
Net investment income.............................................................. 5.27%** 3.40%++
Portfolio turnover rate.............................................................. 42% 14%
CLASS Y SHARES
SEPTEMBER 20, 1995*
THROUGH
AUGUST 31, 1996
PER SHARE DATA:
Net asset value, beginning of period................................................. $10.48
Income (loss) from investment operations:
Net investment income.............................................................. .63
Net realized and unrealized gain (loss) on investments............................. (.06)
Total from investment operations................................................. .57
Less distributions to shareholders from net investment income........................ (.63)
Net asset value, end of period....................................................... $10.42
TOTAL RETURN+........................................................................ 6.3%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............................................ $1,970
Ratios to average net assets:
Expenses........................................................................... .59%++**
Net investment income.............................................................. 6.27%++**
Portfolio turnover rate.............................................................. 42%
</TABLE>
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Contingent deferred sales charge is not
reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income to average net assets would have
been the following:
<TABLE>
<CAPTION>
CLASS Y SHARES
CLASS B SHARES SEPTEMBER 20, 1995*
YEAR ENDED THROUGH
AUGUST 31, 1996 AUGUST 31, 1996
<S> <C> <C>
Expenses............................................................................... 1.89% .89%
Net investment income.................................................................. 4.97% 5.97%
</TABLE>
See accompanying notes to financial statements.
15
<PAGE>
EVERGREEN FLORIDA MUNICIPAL BOND FUND
(Drawing of the state of Florida)
RESULTS TO DATE
PERFORMANCE OF $10,000 INVESTED IN THE
EVERGREEN FLORIDA MUNICIPAL BOND FUND
The graphs below compare a $10,000 investment in the Evergreen Florida
Municipal Bond Fund (Class A, Class B and Class Y Shares) with a similar
investment in the Lehman Brothers Municipal Bond Index ("Index").
CLASS A
ONE YEAR TOTAL RETURN = 0.2%
FIVE YEAR TOTAL RETURN = 6.4%
AVERAGE ANNUAL COMPOUND
RETURN SINCE INCEPTION = 7.3%
(Class A chart appears here. Plot points are below.)
5/1/88* 8/31/88 8/31/89 8/31/90 8/31/91 8/31/92 8/31/93 8/31/94 8/31/95 8/31/96
(Customer to fill in plot points.)
CLASS B
ONE YEAR TOTAL RETURN = 0.8%
AVERAGE ANNUAL COMPOUND
RETURN SINCE INCEPTION = 1.5%
(Class B chart appears here. Plot points are below.)
6/30/95* 8/31/95 2/29/96 8/31/96
(Customer to fill in plot points.)
CLASS Y
ONE YEAR TOTAL RETURN = 5.2%
AVERAGE ANNUAL COMPOUND
RETURN SINCE INCEPTION = 5.9%
(Class Y chart appears here. Plot points are below.)
6/30/95* 8/31/95 2/29/96 8/31/96
(Customer to fill in plot points.)
- - - EVERGREEN FLORIDA MUNICIPAL BOND FUND
______ LEHMAN BROTHERS MUNICIPAL BOND INDEX
*Commencement of class operations.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE RESULTS. MUTUAL FUNDS
ARE NOT OBLIGATIONS OF, OR GUARANTEED BY, ANY BANK AND ARE NOT FEDERALLY
INSURED.
For the purposes of the graphs and the accompanying tables, it has been
assumed that (a) the maximum sales charge of 4.75% was deducted from the initial
$10,000 investment in Class A Shares; (b) the maximum applicable contingent
deferred sales charge was deducted from the value of the investment in Class B
Shares, assuming full redemption on August 31, 1996; (c) all recurring fees
(including investment advisory fees) were deducted; and (d) all dividends and
distributions were reinvested.
The investment adviser is currently waving a portion of the Fund's
expenses. Had expenses not been waived, returns would have been lower.
The Index is an unmanaged index and includes the reinvestment of income,
but does not reflect the payment of transaction costs and advisory fees
associated with an investment in the Fund.
16
<PAGE>
EVERGREEN FLORIDA MUNICIPAL BOND FUND
STATEMENT OF INVESTMENTS
AUGUST 31, 1996
(Drawing of the state of Florida)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- 97.0%
FLORIDA -- 97.0%
$ 1,500 Alachua Cnty. Hlth. Fac. RB, Mental
Hlth. Svcs. Proj. A,
7.75%, 7/1/10 (FSA)................... $ 1,664,265
2,000 Altamonte Springs Hlth. Fac. Auth.
Hosp. RB, Adventist Hlth./Sunbelt
(Ser. B),
5.125%, 11/15/18 (AMBAC).............. 1,804,760
750 Brevard Cnty. Hsg. Fin. Auth. RB,
(Ser. B),
7.00%, 3/1/13 (FSA)................... 788,003
2,925 Broward Cnty. Hlth. Care Facs. RB,
North Beach Hosp. Proj.,
7.00%, 8/15/11 (MBIA)................. 3,224,813
1,375 Broward Cnty. Hsg. Fin. Auth. RB, GNMA
Coll Home Mtg. (Ser. B),
7.125%, 3/1/17 (GNMA)................. 1,442,966
200 Broward Cnty. Hsg. Fin. Auth. RB, GNMA
Coll Home Mtg. (Ser. B),
7.55%, 3/1/15 (GNMA).................. 210,632
1,000 Charlotte Cnty. Util. RB, Prefunded @
$102,
7.00%, 10/1/14 (FGIC)................. 1,120,650
105 Charlotte Cnty Spec. Assessment RB,
Peachland mun. Svc. Tax & Ben. Unit,
7.25%, 10/1/10 (MBIA)................. 116,084
500 Collier Cnty. Hlth. Facs. Auth. RB
(The Moorings, Inc. Proj.,)
7.00%, 12/1/19........................ 517,410
1,000 Cooper City Sales Tax RB,
7.25%, 10/1/11........................ 1,095,010
1,000 Dade Cnty.
Spec. Oblig. RB,
Courthouse Ctr. Proj.,
6.25%, 4/1/09......................... 1,043,880
2,070 Dade Cnty. Edl. Facs. Auth. RB,
Florida Intl. Univ. (N. Miami Proj.),
7.10%, 10/1/16 (MBIA)................. 2,329,019
2,000 Dade Cnty. Edl. Facs. Auth. RB,
St. Thomas Univ.,
6.00%, 1/1/14
(LOC: Sun Bank Miami)................. 1,978,580
1,000 Dade Cnty. Edl. Facs. Auth. RB,
St. Thomas Univ.,
6.125%, 1/1/19
(LOC: Sun Bank Miami)................. 1,002,360
5,280 Dade Cnty. Gtd. Entitlement RB, Cap
Apprec. (Ser. A),
Zero Coupon, 2/1/08 (MBIA)............ 2,825,750
PRINCIPAL
AMOUNT
(000) VALUE
$ 240 Dade Cnty. Hlth. Fac. Auth. Hosp. RB,
South Shore Hosp. & Med. Center (Ser.
A) (FHA),
7.60%, 8/1/24......................... $ 259,644
135 Dade Cnty. Hsg. Fin. Auth. Sngl. Fam.
Mtg. RB, (Ser. A),
7.10%, 3/1/17 (GNMA).................. 141,502
255 Dade Cnty. Hsg. Fin. Auth. Sngl. Fam.
Mtg. RB, (Ser. A),
7.50%, 9/1/13 (GNMA).................. 268,750
455 Dade Cnty. Hsg. Fin. Auth. Sngl. Fam.
Mtg. RB, (Ser. D),
6.95%, 12/15/12 (FSA)................. 478,255
4,000 Dade Cnty. Prof. Sports, Franchise
Fac. Tax RB,
Zero Coupon, 10/1/27 (MBIA)........... 636,720
3,815 Dade Cnty. Pub. Fac. RB, Jackson Mem.
Hosp. Proj. (Ser. A),
4.875%, 6/1/15 (MBIA)................. 3,354,949
4,000 Dade Cnty. Seaport, Fitch Light Rtg.,
5.125%, 10/1/21 (MBIA)................ 3,620,760
840 Duval Cnty. Hsg. Fin. Auth. Sngl. Fam.
Mtg. RB,
7.35%, 7/1/24 (GNMA).................. 884,528
215 Duval Cnty. Hsg. Fin. Auth. Sngl. Fam.
Mtg. RB,
7.50%, 6/1/15 (FGIC).................. 226,563
1,000 Escambia Cnty. Hlth. Facs. Auth. RB,
Baptist Hosp. Inc. (Ser. B),
6.00%, 10/1/14........................ 945,470
5,230 Escambia Cnty. PCR
Champion Intl. Corp. Proj.,
5.875%, 6/1/22........................ 4,882,571
3,000 Escambia Cnty. PCR,
Gulf Pwr. Co. Proj.,
8.25%, 6/1/17......................... 3,131,460
1,925 Florida Hsg. Fin. Agcy. RB,
Multi. Fam. Hsg.
6.35%, 5/1/26......................... 1,924,788
3,260 Florida Hsg. Fin. Agcy. RB,
8.00%, 12/1/20 (GNMA)................. 3,448,069
1,895 Florida Hsg. Fin. Agcy. RB, (Ser. A),
6.875%, 10/1/12....................... 1,959,923
2,000 Florida St. Muni. Pwr. Agcy. RB,
Stanton II Proj.,
4.50%, 10/1/27 (AMBAC)................ 1,577,160
2,000 Florida St. Brd. of Ed. Cap. Outlay,
(Ser. E),
5.25%, 6/1/23......................... 1,806,140
</TABLE>
17
<PAGE>
EVERGREEN FLORIDA MUNICIPAL BOND FUND
STATEMENT OF INVESTMENTS -- (CONTINUED)
AUGUST 31, 1996
(Drawing of the state of Florida)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
FLORIDA -- CONTINUED
<S> <C> <C>
$ 2,500 Florida St. Brd. of Regt. Univ.
Sys. RB,
6.70%, 7/1/12 (AMBAC)................. $ 2,715,225
2,000 Florida St. Div. Bd. Fin. Dept. RB,
6.75%, 7/1/13 (AMBAC)................. 2,185,460
2,000 FSU Finl. Assist., Inc. Edl. &
Athletic Facs. RB, (Ser. A),
6.75%, 10/1/16
(LOC: Sun Bank Orlando)............... 2,214,080
1,235 Hialeah, Cap. Impt. RB,
5.50%, 10/1/13........................ 1,149,538
1,000 Hillsborough Cnty. Aviation Auth. RB,
Tampa Intl. Airport, (Ser. A),
6.90%, 10/1/11 (FGIC)................. 1,073,510
3,250 Hillsborough Cnty. Indl. Dev. Auth.
IDR, Univ. Cmnty. Hosp.
(Ser. 1994),
6.50%, 8/15/19 (MBIA)................. 3,532,230
1,000 Homestead Excise Tax RB,
7.15%, 10/1/11 (MBIA)................. 1,101,110
1,500 Jacksonville Hlth. Facs. Auth. Hosp.
RB, St. Lukes Hosp. Assn. Proj.,
6.75%, 11/15/13....................... 1,601,445
1,500 Jacksonville Hlth. Facs. Auth. Hosp.
RB, St. Lukes Hosp. Assn. Proj.,
7.125%, 11/15/20...................... 1,623,015
2,000 Jacksonville Hlth. Facs. Auth. RB,
7.50%, 11/1/15........................ 2,252,320
4,370 Lee Cnty. Hsg. Fin. Auth. Multi-Cnty.
Prog., (Ser. A),
7.50%, 9/1/27......................... 4,728,034
1,700 Lee Cnty. Hsg. Fin. Auth. Sngl. Fam.
Mtg. RB, Multi-Cnty. Prog. (Ser. A),
7.45%, 9/1/27......................... 1,858,032
1,025 Leon Cnty. Hsg. Fin. Auth. Sngl. Fam.
Mtg. RB, Multi-Cnty. Prog. (Ser. B),
6.25%, 7/1/19 (GNMA).................. 1,021,187
1,000 Manatee Cnty. Cmnty. Redev. RB, Admin.
Center Proj.,
7.00%, 4/1/08 (MBIA).................. 1,088,500
1,510 Manatee Cnty. GO,
4.75%, 10/1/13 (FGIC)................. 1,321,628
1,500 Manatee Cnty. Hsg. Fin. Auth. Mtg. RB,
7.45%, 5/1/27......................... 1,635,930
3,500 Manatee Cnty. Pub. Utils. RB,
(Ser. 1991A),
6.75%, 10/1/13 (MBIA)................. 3,883,075
PRINCIPAL
AMOUNT
(000) VALUE
$ 1,500 Martin Cnty. Hlth. Fac. Auth. Hosp.
RB, Martin Mem. Hosp. South Proj.
(Ser. B),
7.10%, 11/15/20 (MBIA)................ $ 1,637,040
2,000 Miami Beach Redev. Agcy. Tax Increment
RB, City Center-Historic Convention
Vlg.,
5.625%, 12/1/09....................... 1,928,360
3,000 Miami Beach Redev. Agcy. Tax Increment
RB, City Center-Historic Convention
Vlg.,
5.80%, 12/1/13........................ 2,837,190
2,000 Miami Beach Redev. Agcy., Tax
Increment, RB, City Center-Historic
Convention Vlg.,
5.875%, 12/1/22....................... 1,862,300
1,500 North Miami Hlth. Fac. Auth. RB,
Catholic Hlth. Svc. Oblig. Group,
6.00%, 8/15/16
(LOC: Suntrust Bank).................. 1,469,220
1,000 North Tampa Hsg. Dev. Corp. RB, Cnty
Oaks Apts. (Ser. A),
6.90%, 1/1/24 (FNMA).................. 1,034,480
1,300 Northern Palm Beach Cnty. Impt. RB,
Wtr. Ctl. &
Impt. Unit Dev. 9A-A,
7.20%, 8/1/16......................... 1,300,000
1,000 Okaloosa Cnty. Wtr. & Swr. RB,
6.00%, 7/1/11 (AMBAC)................. 1,054,340
3,000 Orange Cnty. Hlth. Facs. Auth. RB,
Lakeside Alts. Inc.,
6.50%, 7/1/13......................... 2,964,330
3,000 Palm Beach Cnty.
Criminal Justice Facs. RB,
7.20%, 6/1/15 (FGIC).................. 3,521,580
3,695 Palm Beach Cnty. Hlth. Facs. Auth. RB,
Good Samaritan Hlth. Sys.,
6.20%, 10/1/11........................ 3,740,781
6,000 Palm Beach Cnty. Hlth. Facs. Auth.
Sngl. Fam. Mtg. RB, Good Samaritan
Hlth. Sys.,
6.30%, 10/1/22........................ 6,086,520
1,000 Palm Beach Cnty. Hsg. Fin. Auth. Sngl.
Fam. Mtg. RB, (Ser. A),
6.50%, 10/1/21 (GNMA)................. 1,018,910
4,440 Palm Beach Cnty. Hsg. Fin. Auth.
RB, (Ser. B),
7.60%, 3/1/23 (GNMA).................. 4,678,162
</TABLE>
18
<PAGE>
EVERGREEN FLORIDA MUNICIPAL BOND FUND
STATEMENT OF INVESTMENTS -- (CONTINUED)
AUGUST 31, 1996
(Drawing of the state of Florida)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
FLORIDA -- CONTINUED
<S> <C> <C>
$ 2,000 Palm Beach Cnty. IDR, Geriatric Care
Inc. Proj.,
6.55%, 12/1/16
(LOC: Allied Irish Banks)............. $ 2,019,880
5,000 Pensacola Hlth. Facs. Auth. RB,
Daughters Charity Natl. Hlth.,
5.25%, 1/1/11......................... 4,771,800
860 Polk Cnty Hsg. Fin. Auth. Sngl. Fam.
Mtg. RB,
(Ser. A),
7.00%, 9/1/15......................... 887,554
1,500 Reedy Creek Impt. Dist. Util., RB,
(Ser. 1),
5.00%, 10/1/19 (MBIA)................. 1,336,065
1,955 Sanford Wtr. & Swr. RB,
4.50%, 10/1/21 (AMBAC)................ 1,592,308
1,740 Sanford Wtr. & Swr. RB,
4.75%, 10/1/18 (AMBAC)................ 1,488,918
1,800 Sarasota Cnty. Hlth. Fac. Auth. RB,
Sunnyside Pptys.,
6.00%, 5/15/10........................ 1,683,342
1,000 Sarasota Cnty. Util. Sys. RB,
6.50%, 10/1/14 (FGIC)................. 1,121,380
3,590 Seacoast Util. Auth. Wtr. & Swr. RB,
(Ser. A),
5.50%, 3/1/18 (FGIC).................. 3,488,654
750 St. Johns Cnty. Solid
Waste Disp. RB,
7.25%, 11/1/10 (FGIC)................. 829,725
1,000 St. Petersburg Hlth. Facs. Auth. RB,
St. Mary's Allegheny Hlth. Sys.,
7.00%, 12/1/21 (MBIA)................. 1,088,780
750 Tampa Gtd. Entitlement RB,,
7.05%, 10/1/07 (AMBAC)................ 830,640
1,500 Tampa Sports Auth. RB, Sales
Tax Tampa Bay Arena Proj.,
5.75%, 10/1/25 (MBIA)................. 1,499,910
3,500 Volusia Cnty. Edl. Facs. Auth. RB,
Embry-Riddle Aero-A
6.125%, 10/15/16...................... 3,449,985
2,600 Volusia Cnty. Edl. Facs. Auth. RB,
Embry-Riddle Aero-A
6.125%, 10/15/26...................... 2,564,588
PRINCIPAL
AMOUNT
(000) VALUE
$ 850 Winter Haven Hsg. Auth.
Multi-Fam. Mtg. RB,
Abbey Lane Apts. (Ser. C),
7.00%, 7/1/12 (FNMA).................. $ 893,758
1,750 Winter Haven Hsg. Auth. Multi-Fam.
Mtg. RB, Abbey Lane Apts. (Ser. C),
7.00%, 7/1/24 (FNMA).................. 1,815,887
TOTAL LONG-TERM MUNICIPAL SECURITIES
(COST $145,336,387).............. 152,192,140
</TABLE>
<TABLE>
<CAPTION>
SHARES
<C> <S> <C> <C>
MUTUAL FUND SHARES -- 2.7%
4,249,000 Lehman Municipal Money
Market Fund
(cost $4,249,000)........... 4,249,000
TOTAL INVESTMENTS --
(COST $149,585,387).... 99.7% 156,441,140
OTHER ASSETS AND
LIABILITIES -- NET..... .3 389,582
NET ASSETS --............. 100.0% $156,830,722
</TABLE>
Summary of Abbreviations:
AMBAC -- Insured by American Municipal Bond Assurance Corporation
FGIC -- Insured by Financial Guaranty Insurance Company
FNMA -- Insured by Federal National Mortgage Association
FHA -- Insured by Federal Housing Authority
FSA -- Insured by Financial Security Assurance
GNMA -- Insured by Government National Mortgage
Association
GO -- General Obligation Bond
IDR -- Industrial Development Revenue Bond
LOC -- Letter of Credit
MBIA -- Insured by Municipal Bond Investors Assurance
PCR -- Pollution Control Revenue Bond
RB -- Revenue Bond
See accompanying notes to financial statements.
19
<PAGE>
EVERGREEN FLORIDA MUNICIPAL BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1996
(Drawing of the state of Florida)
<TABLE>
<S> <C>
ASSETS:
Investments at value (identified cost $149,585,387)........................................................... $156,441,140
Cash.......................................................................................................... 709
Interest receivable........................................................................................... 2,801,347
Receivable for securities sold................................................................................ 1,611,060
Receivable for Fund shares sold............................................................................... 70,289
Prepaid expenses.............................................................................................. 5,237
Total assets............................................................................................ 160,929,782
LIABILITIES:
Payable for securities purchased.............................................................................. 3,170,740
Dividends payable............................................................................................. 483,495
Payable for Fund shares redeemed.............................................................................. 279,924
Accrued advisory fee.......................................................................................... 95,440
Distribution fee payable...................................................................................... 42,042
Accrued expenses.............................................................................................. 27,419
Total liabilities....................................................................................... 4,099,060
NET ASSETS....................................................................................................... $156,830,722
NET ASSETS CONSIST OF:
Paid-in capital............................................................................................... $149,709,292
Undistributed net investment income........................................................................... 98,832
Accumulated net realized gain on investment transactions...................................................... 166,845
Net unrealized appreciation of investments.................................................................... 6,855,753
Net assets.............................................................................................. $156,830,722
CALCULATION OF NET ASSET VALUE AND MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares ($115,723,258 (division sign) 11,934,283 shares of beneficial interest outstanding)............ $ 9.70
Sales charge -- 4.75% of offering price....................................................................... .48
Maximum offering price.................................................................................. $ 10.18
Class B Shares ($28,848,699 (division sign) 2,975,000 shares of beneficial interest outstanding).............. $ 9.70
Class Y Shares ($12,258,765 (division sign) 1,264,156 shares of beneficial interest outstanding).............. $ 9.70
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
EVERGREEN FLORIDA MUNICIPAL BOND FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1996
(Drawing of the state of Florida)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest........................................................................................ $9,791,218
EXPENSES:
Advisory fee.................................................................................... $ 803,741
Administrative personnel and service fees....................................................... 81,881
Distribution fee -- Class A Shares.............................................................. 240,978
Distribution fee -- Class B Shares.............................................................. 215,869
Shareholder services fee -- Class B Shares...................................................... 71,956
Transfer agent fee.............................................................................. 78,665
Custodian fee................................................................................... 71,899
Registration and filing fees.................................................................... 68,201
Reports and notices to shareholders............................................................. 56,346
Professional fees............................................................................... 33,347
Insurance expense............................................................................... 5,503
Trustees' fees and expenses..................................................................... 3,941
Miscellaneous................................................................................... 22,740
1,755,067
Less: Fee waivers and expense reimbursements.................................................... (473,830)
Net expenses.............................................................................. 1,281,237
Net investment income.............................................................................. 8,509,981
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investment transactions.................................................... 1,550,230
Net change in unrealized appreciation of investments............................................ (2,163,335)
Net loss on investments......................................................................... (613,105)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................................... $7,896,876
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
EVERGREEN FLORIDA MUNICIPAL BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
(Drawing of the state of Florida)
<TABLE>
<CAPTION>
YEAR FOUR MONTHS
ENDED ENDED
AUGUST 31, AUGUST 31,
1996 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income.................................................................... $ 8,509,981 $ 2,976,370
Net realized gain on investment transactions............................................. 1,550,230 865,584
Net change in unrealized appreciation of investments..................................... (2,163,335) 2,620,594
Net increase in net assets resulting from operations.................................. 7,896,876 6,462,548
DISTRIBUTIONS TO SHAREHOLDERS:
FROM NET INVESTMENT INCOME:
Class A Shares........................................................................... (6,726,492) (2,733,700)
Class B Shares........................................................................... (1,290,196) (211,396)
Class Y Shares........................................................................... (417,123) (31,274)
Total distributions from net investment income..................................... (8,433,811) (2,976,370)
IN EXCESS OF NET INVESTMENT INCOME:
Class A Shares........................................................................... -- (210,099)
FROM NET REALIZED GAINS:
Class A Shares........................................................................... -- (820,461)
Total distributions to shareholders................................................... (8,433,811) (4,006,930)
FUND SHARE TRANSACTIONS:
Proceeds from shares sold................................................................ 23,857,675 4,227,591
Proceeds from shares issued in acquisition of First Union
Florida Municipal Bond Portfolio...................................................... -- 38,045,323
Proceeds from reinvestment of distributions.............................................. 2,678,816 1,604,983
Payment for shares redeemed.............................................................. (36,571,005) (47,473,841)
Net decrease resulting from Fund share transactions................................... (10,034,514) (3,595,944)
Net decrease in net assets............................................................ (10,571,449) (1,140,326)
NET ASSETS:
Beginning of period...................................................................... 167,402,171 168,542,497
End of period (includes undistributed net investment income of $98,832 and $22,662,
respectively).......................................................................... $ 156,830,722 $ 167,402,171
</TABLE>
See accompanying notes to financial statements.
22
<PAGE>
EVERGREEN FLORIDA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
(Drawing of the state of Florida)
<TABLE>
<CAPTION>
CLASS A SHARES
YEAR FOUR MONTHS
ENDED ENDED
AUGUST 31, AUGUST 31, YEAR ENDED APRIL 30,
1996 1995*|| 1995|| 1994||
<S> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period................................. $9.74 $9.61 $9.52 $9.95
Income (loss) from investment operations:
Net investment income.............................................. .54 .19 .54 .56
Net realized and unrealized gain (loss) on investments............. (.04) .22 .11 (.36)
Total from investment operations................................. .50 .41 .65 .20
Less distributions to shareholders from:
Net investment income.............................................. (.54) (.19) (.54) (.56)
In excess of net investment income................................. -- (.03) -- --
Net realized gain on investments................................... -- (.06) (.02) (.07)
Paid-in capital.................................................... -- -- -- --
Total distributions.............................................. (.54) (.28) (.56) (.63)
Net asset value, end of period....................................... $9.70 $9.74 $9.61 $9.52
TOTAL RETURN+........................................................ 5.1% 4.2% 7.1% 1.9%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............................ $115,723 $136,449 $168,542 $199,612
Ratios to average net assets:
Expenses........................................................... .63%** .82%++** .61% .56%
Net investment income.............................................. 5.46%** 4.89%++** 5.73% 5.37%
Portfolio turnover rate.............................................. 30% 29% 53% 32%
<CAPTION>
1993||
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period................................. $9.35
Income (loss) from investment operations:
Net investment income.............................................. .56
Net realized and unrealized gain (loss) on investments............. .67
Total from investment operations................................. 1.23
Less distributions to shareholders from:
Net investment income.............................................. (.56)
In excess of net investment income................................. --
Net realized gain on investments................................... (.07)
Paid-in capital.................................................... --
Total distributions.............................................. (.63)
Net asset value, end of period....................................... $9.95
TOTAL RETURN+........................................................ 13.6%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............................ $198,286
Ratios to average net assets:
Expenses........................................................... .58%
Net investment income.............................................. 5.66%
Portfolio turnover rate.............................................. 24%
</TABLE>
* The Fund changed its fiscal year end from April 30 to August 31.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sale charge is not reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income to average net assets would have
been the following:
<TABLE>
<CAPTION>
CLASS A SHARES
YEAR FOUR MONTHS
ENDED ENDED
AUGUST 31, AUGUST 31,
1996 1995
<S> <C> <C>
Expenses.......................................................................... .95% 1.05%
Net investment income............................................................. 5.14% 4.66%
</TABLE>
|| On June 30, 1995, ABT Florida Tax-Free Fund sold its net assets to First
Union Florida Municipal Bond Portfolio which was subsequently renamed
Evergreen Florida Municipal Bond Fund. ABT Florida Tax-Free Fund was the
accounting survivor in the combination. Accordingly, the information stated
in the above table prior to the combination reflects the results of ABT
Florida Tax-Free Fund. The net asset values per share and related per share
data have been restated to reflect the conversion of shares.
See accompanying notes to financial statements.
23
<PAGE>
EVERGREEN FLORIDA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS -- (CONTINUED)
(Drawing of the state of Florida)
<TABLE>
<CAPTION>
CLASS Y
CLASS B SHARES SHARES
YEAR JUNE 30, 1995* YEAR
ENDED THROUGH ENDED
AUGUST 31, AUGUST 31, AUGUST 31,
1996 1995 1996
<S> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period.................................... $9.74 $9.67 $9.74
Income from investment operations:
Net investment income................................................. .44 .07 .53
Net realized and unrealized gain (loss) on investments................ (.04) .10 (.03)
Total from investment operations.................................... .40 .17 .50
Less distributions to shareholders from:
Net investment income................................................. (.44) (.07) (.54)
In excess of net investment income.................................... -- (.03) --
Total distributions................................................. (.44) (.10) (.54)
Net asset value, end of period.......................................... $9.70 $9.74 $9.70
TOTAL RETURN+........................................................... 4.2% 1.5% 5.2%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............................... $28,849 $27,351 $12,259
Ratios to average net assets:
Expenses**............................................................ 1.56% 1.44%++ .57%
Net investment income**............................................... 4.52% 3.22%++ 5.55%
Portfolio turnover rate................................................. 30% 29% 30%
JUNE 30, 1995*
THROUGH
AUGUST 31,
1995
PER SHARE DATA:
Net asset value, beginning of period.................................... $9.67
Income from investment operations:
Net investment income................................................. .09
Net realized and unrealized gain (loss) on investments................ .10
Total from investment operations.................................... .19
Less distributions to shareholders from:
Net investment income................................................. (.09)
In excess of net investment income.................................... (.03)
Total distributions................................................. (.12)
Net asset value, end of period.......................................... $9.74
TOTAL RETURN+........................................................... 1.7%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............................... $3,602
Ratios to average net assets:
Expenses**............................................................ .59%++
Net investment income**............................................... 4.93%++
Portfolio turnover rate................................................. 29%
</TABLE>
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Contingent deferred sales charge is not
reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income to average net assets would have
been the following:
<TABLE>
<CAPTION>
CLASS B SHARES CLASS Y SHARES
YEAR JUNE 30, 1995* YEAR JUNE 30, 1995*
ENDED THROUGH ENDED THROUGH
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Expenses............................................................. 1.76% 1.64% .77% .79%
Net investment income................................................ 4.32% 3.02% 5.35% 4.73%
</TABLE>
See accompanying notes to financial statements.
24
<PAGE>
EVERGREEN GEORGIA MUNICIPAL BOND FUND
(Drawing of the state of Georgia)
RESULTS TO DATE
PERFORMANCE OF $10,000 INVESTED IN THE
EVERGREEN GEORGIA MUNICIPAL BOND FUND
The graphs below compare a $10,000 investment in the Evergreen Georgia
Municipal Bond Fund (Class A, Class B and Class Y Shares) with a similar
investment in the Lehman Brothers Georgia Municipal Bond Index ("Index").
CLASS A
ONE YEAR TOTAL RETURN = 1.2%
AVERAGE ANNUAL COMPOUND
RETURN SINCE INCEPTION = 2.1%
(Class A chart appears here. Plot points are below.)
7/2/93* 8/31/93 8/31/94 8/31/95 8/31/96
(Customer to fill in plot points.)
CLASS B
ONE YEAR TOTAL RETURN = 0.4%
AVERAGE ANNUAL COMPOUND
RETURN SINCE INCEPTION = 2.1%
(Class B chart appears here. Plot points are below.)
7/2/93* 8/31/93 8/31/94 8/31/95 8/31/96
(Customer to fill in plot points.)
CLASS Y
ONE YEAR TOTAL RETURN = 6.5%
AVERAGE ANNUAL COMPOUND
RETURN SINCE INCEPTION = 4.5%
(Class Y chart appears here. Plot points are below.)
2/28/94* 8/31/94 8/31/95 8/31/96
(Customer to fill in plot points.)
- - EVERGREEN GEORGIA MUNICIPAL BOND FUND
_____ LEHMAN BROTHERS GEORGIA MUNICIPAL BOND INDEX
*Commencement of class operations.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE RESULTS. MUTUAL FUNDS
ARE NOT OBLIGATIONS OF, OR GUARANTEED BY, ANY BANK AND ARE NOT FEDERALLY
INSURED.
For the purposes of the graphs and the accompanying tables, it has been
assumed that (a) the maximum sales charge of 4.75% was deducted from the initial
$10,000 investment in Class A Shares; (b) the maximum applicable contingent
deferred sales charge was deducted from the value of the investment in Class B
Shares, assuming full redemption on August 31, 1996; (c) all recurring fees
(including investment advisory fees) were deducted; and (d) all dividends and
distributions were reinvested.
The investment adviser is currently waiving a portion of the Fund's
expenses. Had expenses not been waived, returns would have been lower.
The Index is an unmanaged index and includes the reinvestment of income,
but does not reflect the payment of transaction costs and advisory fees
associated with an investment in the Fund.
25
<PAGE>
EVERGREEN GEORGIA MUNICIPAL BOND FUND
STATEMENT OF INVESTMENTS
AUGUST 31, 1996
(Drawing of the state of Georgia)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- 98.4%
GEORGIA -- 96.2%
$500 Appling Cnty. Dev. Auth. PCR,
7.15%, 1/1/21, (MBIA)................. $ 557,365
160 Atlanta, Arpt. Facs. RB,
7.25%, 1/1/17, (AMBAC)................ 172,990
500 Burke Cnty. Dev. Auth. PCR,
8.00%, 1/1/22, (MBIA)................. 593,935
300 Butts Cnty. COP,
6.75%, 12/1/14, (MBIA)................ 331,152
350 Cartersville, Dev. Auth. RB,
Wtr. & Waste Facs.,
7.40%, 11/1/10........................ 407,719
120 Cartersville, GO,
6.70%, 1/1/12......................... 133,324
500 Cherokee Cnty. Wtr. & Swr.
Auth. Ref. & Impt. RB,
5.50%, 8/1/18, (MBIA)................. 484,510
500 Clayton Cnty.
Hsg. Auth. Mtg. RB,
7.125%, 12/1/25, (FHA/VA)............. 522,675
500 Columbia Cnty.
Wtr. & Swr. RB,
6.25%, 6/1/12......................... 522,010
500 DeKalb Cnty.
Sch. Dist. (Ser. A),
6.25%, 7/1/11......................... 539,765
500 DeKalb Cnty. Hsg. Auth. RB,
The Lakes at Indian Creek Proj.,
7.15%, 1/1/25, (FSA).................. 519,925
345 Douglasville Cnty.
Wtr. & Swr. Auth. RB,
5.625%, 6/1/15, (AMBAC)............... 342,795
600 Fayette Cnty. Sch. Dist.,
6.125%, 3/1/15........................ 616,296
500 Forsyth Cnty. Sch. Dist. GO,
6.75%, 7/1/16......................... 561,205
400 Fulton Cnty. Wtr. & Swr. RB,
6.375%, 1/1/14, (FGIC)................ 430,368
500 George L. Smith II, World
Congress Ctr. Auth. RB,
Domed Stadium Proj.,
7.875%, 7/1/20........................ 546,090
400 Georgia State, Hsg. & Fin.
Auth. RB, (Ser. A),
6.55%, 12/1/27........................ 406,064
400 Georgia State, Muni. Elec.
Auth. Pwr. RB, (Ser. EE),
7.25%, 1/1/24, (AMBAC)................ 480,884
500 Glynn-Brunswick
Mem. Hosp. Auth. RB
6.00%, 8/1/16, (MBIA)................. 499,970
500 Hall Cnty. Sch. Dist. GO,
6.70%, 12/1/14........................ 548,510
PRINCIPAL
AMOUNT
(000) VALUE
$ 330 Metro Atlanta Rapid Tran.
Auth. Sales Tax RB,
7.00%, 7/1/11, (FGIC)................. $ 377,190
500 Putnam Cnty. Sch. Dist. GO,
6.90%, 2/1/14 (AMBAC)................. 558,365
800 Savannah, Eco. Dev. Auth. IDR,
Hershey Foods Corp. Proj.,
6.60%, 6/1/12......................... 864,408
500 Savannah, Hosp. Auth. RB,
St. Josephs Hosp. Proj.,
6.125%, 7/1/12........................ 508,300
500 Savannah, Hosp. Auth. RB,
St. Josephs Hosp. Proj.,
6.20%, 7/1/23......................... 488,455
300 Washington Cnty. Sch. Dist. GO,
6.875%, 1/1/14, (AMBAC)............... 334,281
12,348,551
PUERTO RICO -- 2.2%
265 Puerto Rico Commonwealth, GO,
6.25%, 7/1/11, (MBIA)................. 286,356
TOTAL LONG-TERM MUNICIPAL SECURITIES
(COST $12,157,736).................... 12,634,907
</TABLE>
<TABLE>
<CAPTION>
SHARES
<C> <S> <C> <C>
MUTUAL FUND SHARES -- .8%
101,000 Lehman Municipal Money
Market Fund
(COST $101,000)...................... 101,000
TOTAL INVESTMENTS --
(COST $12,258,736)............ 99.2% 12,735,907
OTHER ASSETS AND
LIABILITIES -- NET............ .8 108,481
NET ASSETS --................. 100.0% $12,844,388
</TABLE>
Summary of Abbreviations:
AMBAC -- Insured by American Municipal Bond Assurance Corporation
COP -- Certificate of Participation
FGIC -- Insured by Financial Guaranty Insurance Company
FHA/VA -- Insured by Federal Housing Authority/Veteran Administration
FSA -- Insured by Financial Security Assurance
GO -- General Obligation Bond
IDR -- Industrial Development Revenue Bond
MBIA -- Insured by Municipal Bond Investors Assurance
PCR -- Pollution Control Revenue Bond
RB -- Revenue Bond
See accompanying notes to financial statements.
26
<PAGE>
EVERGREEN GEORGIA MUNICIPAL BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1996
(Drawing of the state of Georgia)
<TABLE>
<S> <C>
ASSETS:
Investments at value (identified cost $12,258,736)............................................................. $12,735,907
Cash........................................................................................................... 421
Interest receivable............................................................................................ 158,152
Receivable for Fund shares sold................................................................................ 84,959
Prepaid expenses............................................................................................... 4,589
Total assets............................................................................................. 12,984,028
LIABILITIES:
Accrued expenses............................................................................................... 114,556
Dividends payable.............................................................................................. 14,325
Distribution fee payable....................................................................................... 7,059
Payable for Funds shares repurchased........................................................................... 3,700
Total liabilities........................................................................................ 139,640
NET ASSETS........................................................................................................ $12,844,388
NET ASSETS CONSIST OF:
Paid-in capital................................................................................................ $13,049,634
Undistributed net investment income............................................................................ 1,349
Accumulated net realized loss on investment transactions....................................................... (683,766)
Net unrealized appreciation of investments..................................................................... 477,171
Net assets............................................................................................... $12,844,388
CALCULATION OF NET ASSET VALUE AND MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares ($1,953,549 (division sign) 204,081 shares of beneficial interest outstanding).................. $ 9.57
Sales charge -- 4.75% of offering price........................................................................ .48
Maximum offering price................................................................................... $ 10.05
Class B Shares ($9,271,159 (division sign) 968,330 shares of beneficial interest outstanding).................. $ 9.57
Class Y Shares ($1,619,680 (division sign) 169,158 shares of beneficial interest outstanding).................. $ 9.57
</TABLE>
See accompanying notes to financial statements.
27
<PAGE>
EVERGREEN GEORGIA MUNICIPAL BOND FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1996
(Drawing of the state of Georgia)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest............................................................................................ $734,247
EXPENSES:
Advisory fee........................................................................................ $ 63,102
Administrative personnel and services fees.......................................................... 4,159
Distribution fee -- Class A Shares.................................................................. 5,047
Distribution fee -- Class B Shares.................................................................. 63,447
Shareholder services fee -- Class B Shares.......................................................... 21,149
Transfer agent fee.................................................................................. 72,480
Registration and filing fees........................................................................ 64,358
Custodian fee....................................................................................... 56,623
Professional fees................................................................................... 25,128
Reports and notices to shareholders................................................................. 19,578
Insurance expense................................................................................... 3,956
Miscellaneous....................................................................................... 9,632
408,659
Less: Fee waivers and expense reimbursements........................................................ (239,934)
Net expenses.................................................................................. 168,725
Net investment income.................................................................................. 565,522
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investment transactions........................................................ 28,904
Net change in unrealized appreciation of investments................................................ 57,035
Net gain on investments................................................................................ 85,939
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................................... $651,461
</TABLE>
See accompanying notes to financial statements.
28
<PAGE>
EVERGREEN GEORGIA MUNICIPAL BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
(Drawing of the state of Georgia)
<TABLE>
<CAPTION>
EIGHT MONTHS
YEAR ENDED ENDED
AUGUST 31, AUGUST 31,
1996 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income........................................................................ $ 565,522 $ 315,309
Net realized gain on investment transactions................................................. 28,904 178,194
Net change in unrealized appreciation of investments......................................... 57,035 571,056
Net increase in net assets resulting from operations...................................... 651,461 1,064,559
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A Shares............................................................................... (100,626) (61,558)
Class B Shares............................................................................... (357,853) (232,039)
Class Y Shares............................................................................... (109,101) (21,712)
Total distributions to shareholders....................................................... (567,580) (315,309)
FUND SHARE TRANSACTIONS:
Proceeds from shares sold.................................................................... 5,651,629 2,941,604
Proceeds from reinvestment of distributions.................................................. 366,974 212,632
Payment for shares redeemed.................................................................. (4,232,687) (1,511,506)
Net increase resulting from Fund share transactions....................................... 1,785,916 1,642,730
Net increase in net assets................................................................ 1,869,797 2,391,980
NET ASSETS:
Beginning of period.......................................................................... 10,974,591 8,582,611
End of period (includes undistributed net investment income of $1,349 and $3,407,
respectively).............................................................................. $12,844,388 $ 10,974,591
</TABLE>
See accompanying notes to financial statements.
29
<PAGE>
EVERGREEN GEORGIA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
(Drawing of the state of Georgia)
<TABLE>
<CAPTION>
CLASS A SHARES
EIGHT MONTHS YEAR
YEAR ENDED ENDED ENDED
AUGUST 31, AUGUST 31, DECEMBER 31,
1996 1995# 1994
<S> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period............................................... $9.47 $8.74 $10.19
Income (loss) from investment operations:
Net investment income............................................................ .48 .33 .48
Net realized and unrealized gain (loss) on investments........................... .10 .73 (1.45)
Total from investment operations............................................... .58 1.06 (.97)
Less distributions to shareholders from net investment income...................... (.48) (.33) (.48)
Net asset value, end of period..................................................... $9.57 $9.47 $8.74
TOTAL RETURN+...................................................................... 6.2% 12.3% (9.6%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted).......................................... $1,954 $2,098 $1,387
Ratios to average net assets:
Expenses**....................................................................... .88% .71%++ .53%
Net investment income**.......................................................... 4.96% 5.39%++ 5.26%
Portfolio turnover rate............................................................ 21% 91% 147%
JULY 2,
1993*
THROUGH
DECEMBER 31,
1993
PER SHARE DATA:
Net asset value, beginning of period............................................... $10.00
Income (loss) from investment operations:
Net investment income............................................................ .20
Net realized and unrealized gain (loss) on investments........................... .19
Total from investment operations............................................... .39
Less distributions to shareholders from net investment income...................... (.20)
Net asset value, end of period..................................................... $10.19
TOTAL RETURN+...................................................................... 4.0%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted).......................................... $817
Ratios to average net assets:
Expenses**....................................................................... .25%++
Net investment income**.......................................................... 4.71%++
Portfolio turnover rate............................................................ 15%
</TABLE>
# The Fund changed its fiscal year end from December 31 to August 31.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge is not reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income (loss) to average net assets,
exclusive of any applicable state expense limitations, would have been the
following:
<TABLE>
<CAPTION>
CLASS A SHARES
JULY 2,
EIGHT MONTHS YEAR 1993*
YEAR ENDED ENDED ENDED THROUGH
AUGUST 31, AUGUST 31, DECEMBER 31, DECEMBER 31,
1996 1995# 1994 1993
<S> <C> <C> <C> <C>
Expenses............................................................... 2.82% 2.83% 3.61% 6.82%
Net investment income (loss)........................................... 3.02% 3.27% 2.18% (1.86%)
</TABLE>
See accompanying notes to financial statements.
30
<PAGE>
EVERGREEN GEORGIA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS -- (CONTINUED)
(Drawing of the state of Georgia)
<TABLE>
<CAPTION>
CLASS B SHARES
EIGHT MONTHS YEAR
YEAR ENDED ENDED ENDED
AUGUST 31, AUGUST 31, DECEMBER 31,
1996 1995# 1994
<S> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period........................................ $9.47 $8.74 $10.19
Income (loss) from investment operations:
Net investment income..................................................... .41 .28 .43
Net realized and unrealized gain (loss) on investments.................... .10 .73 (1.45)
Total from investment operations........................................ .51 1.01 (1.02)
Less distributions to shareholders from net investment income............... (.41) (.28) (.43)
Net asset value, end of period.............................................. $9.57 $9.47 $8.74
TOTAL RETURN+............................................................... 5.4% 11.7% (10.2%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)................................... $9,271 $7,538 $6,912
Ratios to average net assets:
Expenses**................................................................ 1.63% 1.46%++ 1.13%
Net investment income**................................................... 4.21% 4.64%++ 4.66%
Portfolio turnover rate..................................................... 21% 91% 147%
JULY 2,
1993*
THROUGH
DECEMBER 31,
1993
PER SHARE DATA:
Net asset value, beginning of period........................................ $10.00
Income (loss) from investment operations:
Net investment income..................................................... .18
Net realized and unrealized gain (loss) on investments.................... .19
Total from investment operations........................................ .37
Less distributions to shareholders from net investment income............... (.18)
Net asset value, end of period.............................................. $10.19
TOTAL RETURN+............................................................... 3.7%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)................................... $3,692
Ratios to average net assets:
Expenses**................................................................ .75%++
Net investment income**................................................... 4.15%++
Portfolio turnover rate..................................................... 15%
</TABLE>
# The Fund changed its fiscal year end from December 31 to August 31.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Contingent deferred sales charge is not
reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income (loss) to average net assets,
exclusive of any applicable state expense limitations, would have been the
following:
<TABLE>
<CAPTION>
CLASS B SHARES
JULY 2,
EIGHT MONTHS YEAR 1993*
YEAR ENDED ENDED ENDED THROUGH
AUGUST 31, AUGUST 31, DECEMBER 31, DECEMBER 31,
1996 1995# 1994 1993
<S> <C> <C> <C> <C>
Expenses............................................................... 3.54% 3.58% 4.21% 7.32%
Net investment income (loss)........................................... 2.30% 2.52% 1.58% (2.42%)
</TABLE>
See accompanying notes to financial statements.
31
<PAGE>
EVERGREEN GEORGIA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS -- (CONTINUED)
(Drawing of the state of Georgia)
<TABLE>
<CAPTION>
CLASS Y SHARES
EIGHT MONTHS
YEAR ENDED ENDED
AUGUST 31, AUGUST 31,
1996 1995#
<S> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period.................................................. $9.47 $8.74
Income (loss) from investment operations:
Net investment income............................................................... .50 .35
Net realized and unrealized gain (loss) on investments.............................. .10 .73
Total from investment operations.................................................. .60 1.08
Less distributions to shareholders from net investment income......................... (.50) (.35)
Net asset value, end of period........................................................ $9.57 $9.47
TOTAL RETURN+......................................................................... 6.5% 12.5%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............................................. $1,620 $1,339
Ratios to average net assets:
Expenses**.......................................................................... .63% .46%++
Net investment income**............................................................. 5.21% 5.64%++
Portfolio turnover rate............................................................... 21% 91%
FEBRUARY 28, 1994*
THROUGH
DECEMBER 31, 1994
PER SHARE DATA:
Net asset value, beginning of period.................................................. $9.83
Income (loss) from investment operations:
Net investment income............................................................... .42
Net realized and unrealized gain (loss) on investments.............................. (1.09)
Total from investment operations.................................................. (.67)
Less distributions to shareholders from net investment income......................... (.42)
Net asset value, end of period........................................................ $8.74
TOTAL RETURN+......................................................................... (6.9%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............................................. $284
Ratios to average net assets:
Expenses**.......................................................................... .31%++
Net investment income**............................................................. 5.68%++
Portfolio turnover rate............................................................... 147%
</TABLE>
# The Fund changed its fiscal year end from December 31 to August 31.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income to average net assets, exclusive
of any applicable state expense limitations, would have been the following:
<TABLE>
<CAPTION>
CLASS Y SHARES
EIGHT MONTHS FEBRUARY 28, 1994*
YEAR ENDED ENDED THROUGH
AUGUST 31, AUGUST 31, DECEMBER 31,
1996 1995# 1994
<S> <C> <C> <C>
Expenses........................................................................ 2.51% 2.58% 3.39%
Net investment income........................................................... 3.33% 3.52% 2.60%
</TABLE>
See accompanying notes to financial statements.
32
<PAGE>
EVERGREEN NEW JERSEY TAX FREE INCOME FUND
(Drawing of the state of New Jersey)
RESULTS TO DATE
PERFORMANCE OF $10,000 INVESTED IN THE
EVERGREEN NEW JERSEY TAX FREE INCOME FUND
The graphs below compare a $10,000 investment in the Evergreen New Jersey
Tax Free Income Fund (Class A, Class B and Class Y Shares) with a similar
investment in the Lehman Brothers Municipal Bond Index ("Index").
CLASS A
ONE YEAR TOTAL RETURN = 0.2%
FIVE YEAR TOTAL RETURN = 6.0%
AVERAGE ANNUAL COMPOUND
RETURN SINCE INCEPTION = 6.2%
(Class A chart appears here. Plot points are below.)
7/16/91* 2/29/92 2/28/93 2/28/94 2/28/95 2/29/96 8/31/96*
(Customer to fill in plot points.)
CLASS B
AVERAGE ANNUAL COMPOUND
RETURN SINCE INCEPTION = 5.2%
(Class B chart appears here. Plot points are below.)
1/30/96* 2/28/96 5/31/96 8/31/96
(Customer to fill in plot points.)
CLASS Y
AVERAGE ANNUAL COMPOUND
RETURN SINCE INCEPTION = 0.2%
(Class Y chart appears here. Plot points are below.)
2/8/96* 2/28/96 5/31/96 8/31/96
(Customer to fill in plot points.)
- - EVERGREEN NEW JERSEY TAX FREE INCOME FUND
____ LEHMAN BROTHERS MUNICIPAL BOND INDEX
*Commencement of class operations.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE RESULTS. MUTUAL FUNDS
ARE NOT OBLIGATIONS OF, OR GUARANTEED BY, ANY BANK AND ARE NOT FEDERALLY
INSURED.
For the purposes of the graphs and the accompanying tables, it has been
assumed that (a) the maximum sales charge of 4.75% was deducted from the initial
$10,000 investment in Class A Shares; (b) the maximum applicable contingent
deferred sales charge was deducted from the value of the investment in Class B
Shares, assuming full redemption on August 31, 1996; (c) all recurring fees
(including investment advisory fees) were deducted; and (d) all dividends and
distributions were reinvested.
The investment adviser is currently waiving a portion of the Fund's
expenses. Had expenses not been waived, returns would have been lower.
The Index is an unmanaged index and includes the reinvestment of income,
but does not reflect the payment of transaction costs and advisory fees
associated with an investment in the Fund.
33
<PAGE>
EVERGREEN NEW JERSEY TAX FREE INCOME
STATEMENT OF INVESTMENTS
AUGUST 31, 1996
(Drawing of the state of New Jersey)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- 93.3%
NEW JERSEY -- 86.8%
$250 Bayshore Regional Swr. Auth.
RB, Subordinated Swr.,
5.50%, 4/1/12 (MBIA)................... $ 246,388
1,000 Bergen Cnty. Utils. Auth.
Wtr., (Ser. B),
5.75%, 12/15/05........................ 1,053,590
500 Burlington Cnty. Bridge
Commission Sys. RB,
5.30%, 10/1/13......................... 484,145
750 Burlington Cnty. GO, (Ser. A),
4.40%, 3/15/01......................... 742,688
500 Burlington Cnty. GO,
4.875%, 11/15/09....................... 469,105
1,000 Burlington Cnty. GO,
6.95%, 9/15/97......................... 1,029,620
500 Camden Cnty. Impt.
Auth. Lease RB,
5.625%, 10/1/15 (MBIA)................. 490,515
500 Camden Cnty. Impt.
Auth. Lease RB,
6.00%, 12/1/12......................... 502,950
500 Camden Cnty. Muni. Utils.
Auth. Swr. RB,
5.125%, 7/15/17 (FGIC)................. 461,690
500 Cape May Cnty. Muni. Utils.
Auth. Swr. RB, (Ser. A),
5.75%, 1/1/16 (MBIA)................... 494,780
1,000 Delaware River & Bay Auth. RB,
5.00%, 1/1/17 (MBIA)................... 901,800
475 Delaware River Joint Toll
Bridge Commission RB,
6.25%, 7/1/12.......................... 492,775
500 Delaware River Port
Auth. of PA & NJ, RB,
5.40%, 1/1/15 (FGIC)................... 478,650
200 Edison Township, GO,
6.50%, 6/1/09.......................... 218,522
250 Essex Cnty. Utils. Auth.
Solid Waste,
5.50%, 4/1/11 (FSA).................... 246,050
250 Essex Cnty. Utils. Auth.
Solid Waste,
5.60%, 4/1/16 (FSA).................... 244,178
600 Gloucester Cnty. GO,
6.30%, 2/1/12 (MBIA)................... 626,658
500 Gloucester Cnty. Utils.
Auth. Swr. RB,
6.50%, 1/1/21.......................... 517,490
PRINCIPAL
AMOUNT
(000) VALUE
$200 Hoboken, GO,
6.65%, 8/1/11.......................... $ 217,128
250 Hudson Cnty. GO,
5.125%, 8/1/08, (AMBAC)................ 244,863
685 Jersey City Swr. Auth. GO,
7.00%, 1/1/19.......................... 702,392
400 Lakewood Township,
School District, GO,
6.25%, 2/15/12, (AMBAC)................ 430,520
500 Manalapan Regl. Brd. Ed. GO,
5.00%, 5/1/05.......................... 500,665
305 Mercer Cnty. Imp. Auth. RB,
6.05%, 1/1/11.......................... 304,973
500 Middlesex Cnty. GO,
5.80%, 10/1/10......................... 511,100
150 Millburn Township, GO,
6.00%, 7/15/99......................... 156,819
800 Monmouth Cnty. Impt. Auth. GO,
Correctional Facs. Monmouth Proj.,
6.40%, 8/1/08.......................... 848,568
500 New Jersey Bldg. Auth. RB,
5.00%, 6/15/13......................... 458,905
500 New Jersey Bldg. Auth. RB,
5.00%, 6/15/18......................... 445,730
300 New Jersey Bldg. Auth. RB,
6.25%, 6/15/13......................... 318,984
225 New Jersey Bldg. Auth. RB,
7.20%, 6/15/13......................... 238,862
300 New Jersey Eco. Dev. Auth.
RB, (Ser. A),
6.60%, 8/1/21.......................... 310,911
400 New Jersey Eco. Dev.
Auth. RB, NJ American
Wtr. Co. Proj.-A,
5.35%, 6/1/23, (FGIC).................. 375,136
500 New Jersey Eco. Dev.
Auth. RB, NJ Performing
Arts Ctr. Proj.,
5.50%, 6/15/13, (AMBAC)................ 489,235
1,000 New Jersey Eco. Dev. Auth. RB,
Public Schs. Small Proj. Loan Prog.,
5.40%, 8/15/13......................... 972,500
400 New Jersey Edl. Facs. Auth. RB,
6.375%, 7/1/11, (MBIA)................. 417,724
325 New Jersey Edl. Facs.
Auth. RB, (Ser. A),
5.70%, 7/1/97.......................... 329,927
</TABLE>
34
<PAGE>
EVERGREEN NEW JERSEY TAX FREE INCOME
STATEMENT OF INVESTMENTS -- (CONTINUED)
AUGUST 31, 1996
(Drawing of the state of New Jersey)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
NEW JERSEY -- CONTINUED
<S> <C> <C>
$250 New Jersey Edl. Facs. Auth.
RB, (Ser. B),
6.50%, 7/1/11.......................... $ 267,065
500 New Jersey Edl. Facs. Auth.
RB, (Ser. C),
6.375%, 7/1/22......................... 522,005
300 New Jersey Edl. Facs. Auth.
RB, (Ser. C),
6.50%, 7/1/11, (MBIA).................. 328,023
500 New Jersey Edl. Facs. Auth.
RB, (Ser. D),
6.20%, 7/1/17, (AMBAC)................. 517,170
600 New Jersey Edl. Facs. Auth.
RB, Seton Hall Proj., (Ser. A),
6.25%, 7/1/10.......................... 628,428
400 New Jersey Health Care Facs.
Financing Auth. RB,
6.50%, 7/1/12.......................... 425,888
750 New Jersey Health Care Facs.
Financing Auth. Atlantic
City Med. Center RB,
6.80%, 7/1/05.......................... 806,243
750 New Jersey Health Care Facs.
Financing Auth. RB
Hackensack Medical Center,
6.625%, 7/1/17, (FGIC)................. 797,858
300 New Jersey Health Care Facs.
Financing Auth. RB, Mercer
Medical Center, (Ser. E),
6.45%, 7/1/05, (MBIA).................. 322,110
500 New Jersey Health Care Facs.
Financing Auth. RB, Overlook
Hosp. Assn. Robert Wood
Johnson Univ. Hosp., (Ser E),
6.70%, 7/1/13, (MBIA).................. 519,110
185 New Jersey Health Care Facs.
Financing Auth. Robert Wood
Johnson Univ. Hosp.,
6.625%, 7/1/16......................... 196,805
500 New Jersey Health Care Facs.
Financing Auth. Shore Mem.
Hosp. Health Care Sys. RB,
5.00%, 7/1/12, (MBIA).................. 462,790
500 New Jersey Hwy. Auth. RB,
6.25%, 1/1/14.......................... 515,950
1,000 New Jersey Sports & Exposition
RB, (Ser. A),
6.00%, 3/1/21.......................... 1,006,040
190 New Jersey State Turnpike RB,
6.75%, 1/1/09.......................... 213,505
PRINCIPAL
AMOUNT
(000) VALUE
$200 New Jersey Trans.
Trust Fund Auth.,
4.40%, 6/15/99......................... $ 200,040
300 New Jersey Transit Corp. COP,
6.50%, 10/1/16, (FSA).................. 323,247
300 New Jersey Turnpike Auth.
RB, (Ser. A),
6.40%, 1/1/02.......................... 316,989
200 New Jersey St. (Ser. A) GO,
6.80%, 9/15/10......................... 221,218
500 New Jersey St. (Ser. D) GO,
5.25%, 2/15/01......................... 513,360
400 New Jersey St. (Ser. E) GO,
6.00%, 7/15/07......................... 427,328
350 North Jersey Dist. Wtr.
Supply RB, Wanaque North
Proj., (Ser. B),
6.25%, 11/15/17, (MBIA)................ 362,047
500 North Jersey Dist. Wtr.
Supply RB, Wanque South Proj.,
6.00%, 7/1/12, (MBIA).................. 515,150
400 North Jersey Dist. Wtr.
Supply RB, Wanque South Proj.,
6.50%, 7/1/21, (MBIA).................. 433,624
500 Ocean Cnty. GO Utils. Auth. (Ser. A),
5.75%, 1/1/18.......................... 495,710
500 Ocean Cnty. GO,
5.80%, 9/1/10.......................... 510,385
200 Old Bridge Township GO,
6.55%, 7/15/09, (FGIC)................. 217,590
500 Old Bridge Township Muni.
Utils. Auth. RB,
6.25%, 11/1/16, (FGIC)................. 522,695
500 Passaic Valley Sewage
Commissioners RB, (Ser. D),
5.75%, 12/1/13, (AMBAC)................ 501,905
500 Pennsauken Township,
School Dist. GO,
5.00%, 3/1/10.......................... 467,790
500 Port Auth. NY & NJ, RB,
5.00%, 7/15/11, (AMBAC)................ 469,955
500 Port Auth. NY & NJ, RB, (Ser. 102),
5.625%, 10/15/13, (MBIA)............... 493,480
900 Port Auth. NY & NJ, RB, (Ser. 102),
6.75%, 8/1/26.......................... 961,560
500 Rutgers St University RB, (Ser. 1),
5.25%, 5/1/12.......................... 480,350
100 South Plainfield GO,
6.625%, 8/1/12, (AMBAC)................ 107,004
</TABLE>
35
<PAGE>
EVERGREEN NEW JERSEY TAX FREE INCOME
STATEMENT OF INVESTMENTS -- (CONTINUED)
AUGUST 31, 1996
(Drawing of the state of New Jersey)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
NEW JERSEY -- CONTINUED
<S> <C> <C>
$500 Stafford Muni. Utils. Auth.
Wtr. & Swr. RB,
6.25%, 6/1/14, (MBIA).................. $ 521,755
500 Stony Brook Regional Sewage
Auth. RB, (Ser. B),
5.45%, 12/1/12......................... 487,644
500 Trenton GO,
6.55%, 8/15/09, (MBIA)................. 543,974
400 University Medicine &
Dentistry RB, (Ser. E),
5.75%, 12/1/21......................... 419,127
500 University Medicine &
Dentistry RB, (Ser. E),
6.50%, 12/1/18......................... 549,494
200 Washington Township Muni.
Utils. Auth. Sys. RB, (Ser. A),
6.70%, 2/1/11, (AMBAC)................. 216,455
1,000 West Windsor, GO,
5.50%, 12/1/10, (FGIC)................. 996,000
500 Winslow Township GO,
6.50%, 10/1/18, (FGIC)................. 537,300
38,318,702
PUERTO RICO -- 6.5%
500 Puerto Rico Commonwealth GO,
5.50%, 7/1/13.......................... 474,195
300 Puerto Rico Commonwealth GO,
6.80%, 7/1/21.......................... 335,727
500 Puerto Rico Commonwealth GO,
(Ser. A),
6.00%, 7/1/14.......................... 497,785
275 Puerto Rico Elec.
Pwr. Auth. RB,
6.50%, 7/1/05, (MBIA).................. 306,020
500 Puerto Rico Elec. Pwr.
Auth. RB, (Ser. P),
7.00%, 7/1/21.......................... 559,485
400 Puerto Rico Pub. Bldgs. Auth.
Gtd. Hlth. Facs. RB, (Ser. J),
7.00%, 7/1/19.......................... 426,000
PRINCIPAL
AMOUNT
(000) VALUE
$250 Puerto Rico Pub. Bldgs. Auth.
Gtd. RB,
6.25%, 7/1/09, (AMBAC)................. $ 271,163
2,870,375
TOTAL LONG-TERM MUNICIPAL SECURITIES
(COST $40,146,982)................ 41,189,077
</TABLE>
<TABLE>
<CAPTION>
SHARES
<S> <C> <C>
MUTUAL FUND SHARES -- 5.9%
773,051 Dreyfus New Jersey Municipal
Money Market Fund...................... 773,051
1,810,178 Federated New Jersey
Municipal Cash Trust................... 1,810,178
TOTAL MUTUAL FUND SHARES
(COST $2,583,229)......... 2,583,229
TOTAL INVESTMENTS --
(COST $42,730,211)........ 99.1% 43,772,306
OTHER ASSETS AND
LIABILITIES -- NET........ .9 390,065
NET ASSETS --................ 100.0% $44,162,371
</TABLE>
Summary of Abbreviations:
AMBAC -- Insured by American Municipal Bond Assurance
Corporation
COP -- Certificate of Participation
FGIC -- Insured by Federal Guaranty Insurance Corporation
FSA -- Insured by Financial Security Assurance
GO -- General Obligation Bond
MBIA -- Insured by Municipal Bond Investors Assurance
RB -- Revenue Bond
See accompanying notes to financial statements.
36
<PAGE>
EVERGREEN NEW JERSEY TAX FREE INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1996
(Drawing of the state of New Jersey)
<TABLE>
<S> <C>
ASSETS:
Investments at value (identified cost $42,730,211)............................................................. $43,772,306
Interest receivable............................................................................................ 544,652
Receivable for Fund shares sold................................................................................ 11,476
Prepaid expenses............................................................................................... 1,292
Total assets............................................................................................. 44,329,726
LIABILITIES:
Dividends payable.............................................................................................. 93,696
Accrued expenses............................................................................................... 68,070
Distribution fee payable....................................................................................... 5,589
Total liabilities........................................................................................ 167,355
NET ASSETS........................................................................................................ $44,162,371
NET ASSETS CONSIST OF:
Paid-in capital................................................................................................ $43,505,944
Undistributed net investment income............................................................................ 15,515
Accumulated net realized loss on investment transactions....................................................... (401,183)
Net unrealized appreciation of investments..................................................................... 1,042,095
Net assets............................................................................................... $44,162,371
CALCULATION OF NET ASSET VALUE AND MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares ($32,377,124 (division sign) 3,010,604 shares of beneficial interest outstanding)............... $ 10.75
Sales charge -- 4.75% of offering price........................................................................ .54
Maximum offering price................................................................................... $ 11.29
Class B Shares ($2,709,358 (division sign) 251,931 shares of beneficial interest outstanding).................. $ 10.75
Class Y Shares ($9,075,889 (division sign) 843,932 shares of beneficial interest outstanding).................. $ 10.75
</TABLE>
See accompanying notes to financial statements.
37
<PAGE>
EVERGREEN NEW JERSEY TAX FREE INCOME FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED AUGUST 31, 1996
(Drawing of the state of New Jersey)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest.......................................................................................... $1,158,964
EXPENSES:
Advisory fee...................................................................................... $ 107,212
Administrative personnel and service fees......................................................... 9,468
Distribution fee -- Class A Shares................................................................ 42,308
Distribution fee -- Class B Shares................................................................ 5,856
Shareholder services fee -- Class B Shares........................................................ 1,949
Custodian fee..................................................................................... 28,357
Transfer agent fee................................................................................ 12,666
Reports and notices to shareholders............................................................... 9,453
Professional fees................................................................................. 6,238
Insurance expense................................................................................. 5,511
Trustees' fees and expenses....................................................................... 3,592
Miscellaneous..................................................................................... 1,323
233,933
Less: Fee waivers and expense reimbursements...................................................... (154,885)
Net expenses................................................................................... 79,048
Net investment income................................................................................ 1,079,916
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investment transactions...................................................... 56
Net change in unrealized appreciation of investments.............................................. (955,855)
Net loss on investments.............................................................................. (955,799)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................................. $ 124,117
</TABLE>
See accompanying notes to financial statements.
38
<PAGE>
EVERGREEN NEW JERSEY TAX FREE INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
(Drawing of the state of New Jersey)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
AUGUST 31, FEBRUARY 29,
1996 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income........................................................................ $ 1,079,916 $ 1,964,872
Net realized gain on investment transactions................................................. 56 10,000
Net change in unrealized appreciation of investments......................................... (955,855) 1,701,539
Net increase in net assets resulting from operations...................................... 124,117 3,676,411
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A Shares............................................................................... (862,288) (1,964,372)
Class B Shares............................................................................... (32,289) (451)
Class Y Shares............................................................................... (185,339) (56)
Total distributions to shareholders....................................................... (1,079,916) (1,964,879)
FUND SHARE TRANSACTIONS:
Proceeds from shares sold.................................................................... 13,167,830 11,064,767
Proceeds from reinvestment of distributions.................................................. 522,912 959,013
Payment for shares redeemed.................................................................. (10,539,031) (6,620,815)
Net increase resulting from Fund share transactions....................................... 3,151,711 5,402,965
Net increase in net assets................................................................ 2,195,912 7,114,497
NET ASSETS:
Beginning of period.......................................................................... 41,966,459 34,851,962
End of period (includes undistributed net investment income of $15,515 at August 31, 1996 and
February 29, 1996.)........................................................................ $ 44,162,371 $ 41,966,459
</TABLE>
See accompanying notes to financial statements.
39
<PAGE>
EVERGREEN NEW JERSEY TAX FREE INCOME FUND
FINANCIAL HIGHLIGHTS
(Drawing of the state of New Jersey)
<TABLE>
<CAPTION>
CLASS A SHARES
SIX MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED
AUGUST 31, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996# 1996 1995 1994
<S> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period............................. $11.01 $10.53 $10.99 $11.01
Income (loss) from investment operations:
Net investment income.......................................... .28 .56 .57 .60
Net realized and unrealized gain (loss) on investments......... (.26) .48 (.46) (.02)
Total from investment operations............................. .02 1.04 .11 .58
Less distributions to shareholders from net investment income.... (.28) (.56) (.57) (.60)
Net asset value, end of period................................... $10.75 $11.01 $10.53 $10.99
TOTAL RETURN+.................................................... .2% 10.1% 1.4% 5.3%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)........................ $32,377 $41,762 $34,852 $42,783
Ratios to average net assets:
Expenses**..................................................... .34%++ .36% .25% .14%
Net investment income**........................................ 5.08%++ 5.15% 5.52% 5.31%
Portfolio turnover rate.......................................... 0% 4% 8% 2%
YEAR ENDED
FEBRUARY 28,
1993
PER SHARE DATA:
Net asset value, beginning of period............................. $10.22
Income (loss) from investment operations:
Net investment income.......................................... .63
Net realized and unrealized gain (loss) on investments......... .79
Total from investment operations............................. 1.42
Less distributions to shareholders from net investment income.... (.63)
Net asset value, end of period................................... $11.01
TOTAL RETURN+.................................................... 14.5%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)........................ $30,863
Ratios to average net assets:
Expenses**..................................................... .00%
Net investment income**........................................ 5.97%
Portfolio turnover rate.......................................... 5%
</TABLE>
# The Fund changed its fiscal year end from February 28 to August 31.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge is not reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income to average net assets would have
been the following:
<TABLE>
<CAPTION>
CLASS A SHARES
SIX MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED
AUGUST 31, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996# 1996 1995 1994
<S> <C> <C> <C> <C>
Expenses......................................................... 1.11% 1.03% 1.04% 1.05%
Net investment income............................................ 4.31% 4.48% 4.73% 4.40%
YEAR ENDED
FEBRUARY 28,
1993
Expenses......................................................... 1.16%
Net investment income............................................ 4.81%
</TABLE>
See accompanying notes to financial statements.
40
<PAGE>
EVERGREEN NEW JERSEY TAX FREE INCOME FUND
FINANCIAL HIGHLIGHTS -- (CONTINUED)
(Drawing of the state of New Jersey)
<TABLE>
<CAPTION>
CLASS B SHARES CLASS Y SHARES
JANUARY 30, 1996*
SIX MONTHS ENDED THROUGH SIX MONTHS ENDED
AUGUST 31, 1996# FEBRUARY 29, 1996 AUGUST 31, 1996#
<S> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period........................ $11.01 $11.08 $11.01
Income (loss) from investment operations:
Net investment income..................................... .24 .05 .28
Net realized and unrealized gain (loss) on investments.... (.26) (.07) (.26)
Total from investment operations........................ (.02) (.02) .02
Less distributions to shareholders from net investment
income.................................................... (.24) (.05) (.28)
Net asset value, end of period.............................. $10.75 $11.01 $10.75
TOTAL RETURN+............................................... (.2%) (.2%) .2%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)................... $2,709 $186 $9,076
Ratios to average net assets:
Expenses**++.............................................. 1.28% .31% .31%
Net investment income**++................................. 4.14% 5.23% 5.12%
Portfolio turnover rate..................................... 0% 4% 0%
FEBRUARY 8, 1996*
THROUGH
FEBRUARY 29, 1996
PER SHARE DATA:
Net asset value, beginning of period........................ $11.14
Income (loss) from investment operations:
Net investment income..................................... .03
Net realized and unrealized gain (loss) on investments.... (.13)
Total from investment operations........................ (.10)
Less distributions to shareholders from net investment
income.................................................... (.03)
Net asset value, end of period.............................. $11.01
TOTAL RETURN+............................................... (.9%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)................... $18
Ratios to average net assets:
Expenses**++.............................................. .31%
Net investment income**++................................. 5.28%
Portfolio turnover rate..................................... 4%
</TABLE>
# The Fund changed its fiscal year end from February 28 to August 31.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Contingent deferred sales charge is not
reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income to average net assets would have
been the following:
<TABLE>
<CAPTION>
CLASS B SHARES CLASS Y SHARES
JANUARY 30, 1996*
SIX MONTHS ENDED THROUGH SIX MONTHS ENDED
AUGUST 31, 1996# FEBRUARY 29, 1996 AUGUST 31, 1996#
<S> <C> <C> <C>
Expenses.......................................................... 1.85% 1.66% .87%
Net investment income............................................. 3.57% 3.88% 4.56%
FEBRUARY 8, 1996*
THROUGH
FEBRUARY 29, 1996
Expenses.......................................................... .88%
Net investment income............................................. 4.71%
</TABLE>
See accompanying notes to financial statements.
41
<PAGE>
EVERGREEN NORTH CAROLINA MUNICIPAL BOND FUND
(Drawing of the state of North Carolina)
RESULTS TO DATE
PERFORMANCE OF $10,000 INVESTED IN THE
EVERGREEN NORTH CAROLINA MUNICIPAL BOND FUND
The graphs below compare a $10,000 investment in the Evergreen North
Carolina Municipal Bond Fund (Class A, Class B and Class Y Shares) with a
similar investment in the Lehman Brothers State General Obligation Bond Index
("Index").
CLASS A
ONE YEAR TOTAL RETURN = 0.2%
AVERAGE ANNUAL COMPOUND
RETURN SINCE INCEPTION = 3.6%
(Class A chart appears here. Plot points are below.)
1/11/93* 8/31/93 8/31/94 8/31/95 8/31/96
(Customer to fill in plot points.)
CLASS B
ONE YEAR TOTAL RETURN = 0.6%
AVERAGE ANNUAL COMPOUND
RETURN SINCE INCEPTION = 3.6%
(Class B chart appears here. Plot points are below.)
1/11/93* 8/31/93 8/31/94 8/31/95 8/31/96
(Customer to fill in plot points.)
CLASS Y
ONE YEAR TOTAL RETURN = 5.4%
AVERAGE ANNUAL COMPOUND
RETURN SINCE INCEPTION = 4.0%
(Class Y chart appears here. Plot points are below.)
2/28/94* 8/31/94 8/31/95 8/31/96
(Customer to fill in plot points.)
- - - EVERGREEN NORTH CAROLINA MUNICIPAL BOND FUND
____ LEHMAN BROTHERS STATE GENERAL OBLIGATION BOND INDEX
*Commencement of class operations.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE RESULTS. MUTUAL FUNDS
ARE NOT OBLIGATIONS OF, OR GUARANTEED BY, ANY BANK AND ARE NOT FEDERALLY
INSURED.
For the purposes of the graphs and the accompanying tables, it has been
assumed that (a) the maximum sales charge of 4.75% was deducted from the initial
$10,000 investment in Class A Shares; (b) the maximum applicable contingent
deferred sales charge was deducted from the value of the investment in Class B
Shares, assuming full redemption on August 31, 1996; (c) all recurring fees
(including investment advisory fees) were deducted; and (d) all dividends and
distributions were reinvested.
The investment adviser is currently waiving a portion of the Fund's
expenses. Had expenses not been waived, returns would have been lower.
The Index is an unmanaged index and includes the reinvestment of income,
but does not reflect the payment of transaction costs and advisory fees
associated with an investment in the Fund.
42
<PAGE>
EVERGREEN NORTH CAROLINA MUNICIPAL BOND FUND
STATEMENT OF INVESTMENTS
AUGUST 31, 1996
(Drawing of the state of North Carolina)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- 96.0%
NORTH CAROLINA -- 89.0%
$1,380 Burlington Hsg. Auth. Mtg. RB,
Burlington Homes, Sec. 8-A,
6.00%, 8/1/09......................... $ 1,373,914
1,000 Chapel Hill Parking Fac., COP,
6.35%, 12/1/18........................ 1,025,170
1,470 Charlotte Hsg. Dev. Corp. Mtg. RB,
Vantage 78 Apts.,
6.60%, 7/15/21 (FHA).................. 1,490,683
1,000 Coastal Regional Solid Waste Mgmt.
Auth. RB, Disp. Sys.,
6.50%, 6/1/08......................... 1,041,830
2,000 Craven Cnty. Indl. Facs. &
Poll. Ctrl. Fing. Auth. RB,
Weyerhaeuser Co. Proj.,
6.35%, 1/1/10......................... 2,083,780
2,390 Cumberland Cnty., Civic Center Proj.,
COP (Ser. A),
6.40%, 12/1/24 (AMBAC)................ 2,533,519
930 Fremont Hsg. Dev. Corp. First Lien RB,
Torhunta Apts.,
6.75%, 7/15/22 (FHA).................. 951,409
1,000 Gastonia Combined Util. Sys. RB,
6.00%, 5/1/14 (MBIA).................. 1,014,550
1,000 Harnett Cnty., COP,
6.40%, 12/1/14 (AMBAC)................ 1,060,850
1,000 Haywood Cnty. Indl. Facs. &
Poll. Ctrl. Fin. Auth. RB,
Champion Intl. Corp. Proj.,
6.25%, 9/1/25......................... 983,960
4,750 Martin Cnty. Indl. Facs. &
Poll. Ctrl. Fin. Auth. RB,
Solid Waste Disp. Weyerhaeuser Co.,
6.80%, 5/1/24......................... 5,055,710
4,000 North Carolina Eastn. Muni. Pwr. Sys.
Agcy. RB (Ser. A),
5.00%, 1/1/21......................... 3,594,800
3,750 North Carolina Eastn. Muni. Pwr. Sys.
Agcy. RB (Ser. A),
6.50%, 1/1/18 (ETM)................... 3,877,200
2,500 North Carolina Eastn. Muni. Pwr. Sys.
Agcy., RB
6.00%, 1/1/18 (AMBAC)................. 2,569,800
1,300 North Carolina Eastn. Muni. Pwr. Sys.
Agcy. RB (Ser. A),
7.00%, 1/1/24......................... 1,348,152
PRINCIPAL
AMOUNT
(000) VALUE
$ 1,000 North Carolina Hsg. Fin. & Dev. Auth.
RB, Single Family (Ser. HH),
6.20%, 3/1/18......................... $ 996,470
3,950 North Carolina Hsg. Fin. & Dev. Auth.
RB, Single Family (Ser. JJ),
6.15%, 3/1/11 (FHA)................... 4,005,261
1,440 North Carolina Hsg. Fin. & Dev. Auth.
RB, Single Family (Ser. T),
7.05%, 9/1/20 (FHA)................... 1,496,030
500 North Carolina Med. Care Cmnty. Hlth.
Care Fac. RB,
1st Mtg Southminster,
6.875%, 10/1/09....................... 513,285
1,000 North Carolina Med. Care Cmnty. Hosp.
RB, Alamance Health
Svcs. Inc.,
6.375%, 8/15/12 (FSA)................. 1,056,410
2,000 North Carolina Med. Care Cmnty. Hosp.
RB, Rex Hosp. Proj.,
6.25%, 6/1/17......................... 2,013,140
1,500 North Carolina Med. Care Cmnty.
Hosp. RB, Gaston Mem. Hosp. Proj.,
5.50%, 2/15/19........................ 1,397,610
3,000 North Carolina Med. Care Cmnty. Hosp.
RB, Grace Hosp. Inc.,
5.25%, 10/1/13........................ 2,779,530
3,000 North Carolina Muni. Pwr. Agcy. RB,
No. 1 Catawba Elec. (Ser. B),
5.00%, 1/1/20......................... 2,691,420
1,000 North Carolina Stud.
Ed. Assist. Auth. RB,
1st Mtg. Southminster (Ser. A),
6.05%, 7/1/10......................... 998,970
2,000 North Carolina Stud. Ed. Assist. Auth.
RB (Ser. A),
6.30%, 7/1/15......................... 2,001,340
2,375 North Carolina Stud. Ed. Assist. Auth.
RB (Ser. C),
6.35%, 7/1/16......................... 2,388,490
1,000 Onslow Cnty. Combined
Enterprise Sys. RB,
6.00%, 6/1/15 (MBIA).................. 1,010,920
1,000 Rowan Cnty. Justice Center
Proj., COP,
6.25%, 12/1/07 (FSA).................. 1,071,750
54,425,953
</TABLE>
43
<PAGE>
EVERGREEN NORTH CAROLINA MUNICIPAL BOND FUND
STATEMENT OF INVESTMENTS -- (CONTINUED)
AUGUST 31, 1996
(Drawing of the state of North Carolina)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
<S> <C> <C>
PUERTO RICO -- 7.0%
$2,000 Puerto Rico Commonwealth GO,
6.25%, 7/1/11 (MBIA).................. $ 2,161,180
1,000 Puerto Rico Ports Auth. RB, American
Airlines Proj. (Ser. A),
6.25%, 6/1/26......................... 992,130
1,000 Puerto Rico Univ. RB (Ser. N),
6.25%, 6/1/06......................... 1,093,850
4,247,160
TOTAL LONG-TERM MUNICIPAL SECURITIES
(COST $57,150,541)............... 58,673,113
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
MUTUAL FUND SHARES -- 6.1%
3,000,000 Lehman Municipal Money
Market Fund......................... $ 3,000,000
755,000 Lehman Tax Free Money
Market Fund......................... 755,000
TOTAL MUTUAL FUND SHARES
(COST $3,755,000).............. 3,755,000
TOTAL INVESTMENTS --
(COST $60,905,541).... 102.1% 62,428,113
OTHER ASSETS AND
LIABILITIES -- NET.... (2.1) (1,285,712)
NET ASSETS --............ 100.0% $61,142,401
</TABLE>
Summary of Abbreviations:
AMBAC -- Insured by American Municipal Bond Assurance Corporation
COP -- Certificates of Participation
ETM -- Escrowed to Maturity
FHA -- Insured by Federal Housing Authority
FSA -- Insured by Financial Security Assurance
GO -- General Obligation Bond
MBIA -- Insured by Municipal Bond Investors Assurance
RB -- Revenue Bond
See accompanying notes to financial statements.
44
<PAGE>
EVERGREEN NORTH CAROLINA MUNICIPAL BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1996
(Drawing of the state of North Carolina)
<TABLE>
<S> <C>
ASSETS:
Investments at value (identified cost $60,905,541)............................................................. $62,428,113
Cash........................................................................................................... 69
Receivable for securities sold................................................................................. 967,861
Interest receivable............................................................................................ 763,574
Receivable for Fund shares sold................................................................................ 98,736
Prepaid expenses............................................................................................... 11,237
Total assets............................................................................................. 64,269,590
LIABILITIES:
Payable for securities purchased............................................................................... 2,842,908
Accrued expenses............................................................................................... 130,904
Dividends payable.............................................................................................. 67,884
Distribution fee payable....................................................................................... 54,187
Payable for Fund shares redeemed............................................................................... 18,663
Accrued advisory fee........................................................................................... 12,643
Total liabilities........................................................................................ 3,127,189
NET ASSETS........................................................................................................ $61,142,401
NET ASSETS CONSIST OF:
Paid-in capital................................................................................................ $63,343,738
Undistributed net investment income............................................................................ 88,212
Accumulated net realized loss on investment transactions....................................................... (3,812,121)
Net unrealized appreciation of investments..................................................................... 1,522,572
Net assets............................................................................................... $61,142,401
CALCULATION OF NET ASSET VALUE AND MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares ($7,989,384 (division sign) 800,876 shares of beneficial interest outstanding).................. $ 9.98
Sales charge -- 4.75% of offering price........................................................................ .50
Maximum offering price................................................................................... $ 10.48
Class B Shares ($49,382,186 (division sign) 4,950,160 shares of beneficial interest outstanding)............... $ 9.98
Class Y Shares ($3,770,831 (division sign) 377,749 shares of beneficial interest outstanding).................. $ 9.98
</TABLE>
See accompanying notes to financial statements.
45
<PAGE>
EVERGREEN NORTH CAROLINA MUNICIPAL BOND FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1996
(Drawing of the state of North Carolina)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest.......................................................................................... $3,613,797
EXPENSES:
Advisory fee...................................................................................... $ 306,892
Administrative personnel and service fees......................................................... 31,447
Distribution fee -- Class A Shares................................................................ 20,833
Distribution fee -- Class B Shares................................................................ 375,352
Shareholder services fee -- Class B Shares........................................................ 125,117
Custodian fee..................................................................................... 75,846
Reports and notices to shareholders............................................................... 63,428
Registration and filing fees...................................................................... 62,826
Transfer agent fee................................................................................ 50,839
Professional fees................................................................................. 35,599
Insurance expense................................................................................. 5,479
Trustees' fees and expenses....................................................................... 2,446
Miscellaneous..................................................................................... 35,952
1,192,056
Less: Fee waivers................................................................................. (164,001)
Net expenses................................................................................... 1,028,055
Net investment income................................................................................ 2,585,742
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investment transactions...................................................... 483,051
Net change in unrealized appreciation of investments.............................................. (416,432)
Net gain on investments.............................................................................. 66,619
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................................. $2,652,361
</TABLE>
See accompanying notes to financial statements.
46
<PAGE>
EVERGREEN NORTH CAROLINA MUNICIPAL BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
(Drawing of the state of North Carolina)
<TABLE>
<CAPTION>
EIGHT MONTHS
YEAR ENDED ENDED
AUGUST 31, AUGUST 31,
1996 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income........................................................................ $ 2,585,742 $ 1,697,080
Net realized gain on investment transactions................................................. 483,051 668,311
Net change in unrealized appreciation of investments......................................... (416,432) 3,902,872
Net increase in net assets resulting from operations...................................... 2,652,361 6,268,263
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A Shares............................................................................... (396,192) (279,937)
Class B Shares............................................................................... (2,003,550) (1,389,260)
Class Y Shares............................................................................... (147,923) (27,883)
Total distributions to shareholders....................................................... (2,547,665) (1,697,080)
FUND SHARE TRANSACTIONS:
Proceeds from shares sold.................................................................... 10,964,230 6,832,112
Proceeds from reinvestment of distributions.................................................. 1,752,076 1,191,861
Payment for shares redeemed.................................................................. (10,003,099) (7,507,588)
Net increase resulting from Fund share transactions....................................... 2,713,207 516,385
Net increase in net assets................................................................ 2,817,903 5,087,568
NET ASSETS:
Beginning of period.......................................................................... 58,324,498 53,236,930
End of period (includes undistributed net investment income of $88,212 and $50,135,
respectively).............................................................................. $61,142,401 $ 58,324,498
</TABLE>
See accompanying notes to financial statements.
47
<PAGE>
EVERGREEN NORTH CAROLINA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
(Drawing of the state of North Carolina)
<TABLE>
<CAPTION>
CLASS A SHARES
EIGHT MONTHS YEAR
YEAR ENDED ENDED ENDED
AUGUST 31, AUGUST 31, DECEMBER 31,
1996 1995# 1994
<S> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period....................................... $9.95 $9.16 $10.61
Income (loss) from investment operations:
Net investment income.................................................... .49 .33 .49
Net realized and unrealized gain (loss) on investments................... .02 .79 (1.45)
Total from investment operations....................................... .51 1.12 (.96)
Less distributions to shareholders from:
Net investment income.................................................... (.48) (.33) (.49)
Net realized gain on investments......................................... -- -- --
Total distributions.................................................... (.48) (.33) (.49)
Net asset value, end of period............................................. $9.98 $9.95 $9.16
TOTAL RETURN+.............................................................. 5.2% 12.3% (9.1%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted).................................. $7,989 $8,279 $7,979
Ratios to average net assets:
Expenses**............................................................... 1.08% .92%++ .79%
Net investment income**.................................................. 4.81% 5.09%++ 5.11%
Portfolio turnover rate.................................................... 86% 117% 126%
JANUARY 11,
1993* THROUGH
DECEMBER 31,
1993
PER SHARE DATA:
Net asset value, beginning of period....................................... $10.00
Income (loss) from investment operations:
Net investment income.................................................... .46
Net realized and unrealized gain (loss) on investments................... .64
Total from investment operations....................................... 1.10
Less distributions to shareholders from:
Net investment income.................................................... (.46)
Net realized gain on investments......................................... (.03)
Total distributions.................................................... (.49)
Net asset value, end of period............................................. $10.61
TOTAL RETURN+.............................................................. 11.3%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted).................................. $12,739
Ratios to average net assets:
Expenses**............................................................... .32%++
Net investment income**.................................................. 4.91%++
Portfolio turnover rate.................................................... 57%
</TABLE>
# The Fund changed its fiscal year end from December 31 to August 31.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge is not reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income to average net assets would have
been the following:
<TABLE>
<CAPTION>
CLASS A SHARES
EIGHT MONTHS YEAR
YEAR ENDED ENDED ENDED
AUGUST 31, AUGUST 31, DECEMBER 31,
1996 1995# 1994
<S> <C> <C> <C>
Expenses................................................................... 1.35% 1.27% 1.18%
Net investment income...................................................... 4.54% 4.74% 4.72%
JANUARY 11,
1993* THROUGH
DECEMBER 31,
1993
Expenses................................................................... 1.25%
Net investment income...................................................... 3.98%
</TABLE>
See accompanying notes to financial statements.
48
<PAGE>
EVERGREEN NORTH CAROLINA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS -- (CONTINUED)
(Drawing of the state of North Carolina)
<TABLE>
<CAPTION>
CLASS B SHARES CLASS Y SHARES
EIGHT MONTHS YEAR JANUARY 11, YEAR EIGHT MONTHS
YEAR ENDED ENDED ENDED 1993* THROUGH ENDED ENDED
AUGUST 31, AUGUST 31, DECEMBER 31, DECEMBER 31, AUGUST 31, AUGUST 31,
1996 1995# 1994 1993 1996 1995#
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period.......... $9.95 $9.16 $10.61 $10.00 $9.95 $9.16
Income (loss) from investment operations:
Net investment income....................... .42 .28 .44 .42 .51 .35
Net realized and unrealized gain (loss) on
investments............................... .02 .79 (1.45) .64 .03 .79
Total from investment operations.......... .44 1.07 (1.01) 1.06 .54 1.14
Less distributions to shareholders from:
Net investment income....................... (.41) (.28) (.44) (.42) (.51) (.35)
Net realized gain on investments............ -- -- -- (.03) -- --
Total distributions....................... (.41) (.28) (.44) (.45) (.51) (.35)
Net asset value, end of period................ $9.98 $9.95 $9.16 $10.61 $9.98 $9.95
TOTAL RETURN+................................. 4.4% 11.8% (9.6%) 10.8% 5.4% 12.5%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)..... $49,382 $49,040 $44,616 $45,168 $3,771 $1,006
Ratios to average net assets:
Expenses**.................................. 1.83% 1.67%++ 1.37% .79%++ .84% .67%++
Net investment income**..................... 4.06% 4.34%++ 4.53% 4.47%++ 5.05% 5.34%++
Portfolio turnover rate....................... 86% 117% 126% 57% 86% 117%
FEBRUARY 28,
1994* THROUGH
DECEMBER 31,
1994
PER SHARE DATA:
Net asset value, beginning of period.......... $10.31
Income (loss) from investment operations:
Net investment income....................... .43
Net realized and unrealized gain (loss) on
investments............................... (1.15)
Total from investment operations.......... (.72)
Less distributions to shareholders from:
Net investment income....................... (.43)
Net realized gain on investments............ --
Total distributions....................... (.43)
Net asset value, end of period................ $9.16
TOTAL RETURN+................................. (7.0%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)..... $642
Ratios to average net assets:
Expenses**.................................. .59%++
Net investment income**..................... 5.58%++
Portfolio turnover rate....................... 126%
</TABLE>
# The Fund changed its fiscal year end from December 31 to August 31.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Contingent deferred sales charge is not
reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income to average net assets would have
been the following:
<TABLE>
<CAPTION>
CLASS B SHARES CLASS Y SHARES
EIGHT MONTHS YEAR JANUARY 11, YEAR EIGHT MONTHS
YEAR ENDED ENDED ENDED 1993* THROUGH ENDED ENDED
AUGUST 31, AUGUST 31, DECEMBER 31, DECEMBER 31, AUGUST 31, AUGUST 31,
1996 1995# 1994 1993 1996 1995#
<S> <C> <C> <C> <C> <C> <C>
Expenses................................... 2.10% 2.02% 1.76% 1.74% 1.07% 1.02%
Net investment income...................... 3.79% 3.99% 4.14% 3.52% 4.82% 4.99%
FEBRUARY 28,
1994* THROUGH
DECEMBER 31,
1994
Expenses................................... .98%
Net investment income...................... 5.19%
</TABLE>
See accompanying notes to financial statements.
49
<PAGE>
EVERGREEN SOUTH CAROLINA MUNICIPAL BOND FUND
(Drawing of the state of South Carolina)
RESULTS TO DATE
PERFORMANCE OF $10,000 INVESTED IN THE
EVERGREEN SOUTH CAROLINA MUNICIPAL BOND FUND
The graphs below compare a $10,000 investment in the Evergreen South
Carolina Municipal Bond Fund (Class A, Class B and Class Y Shares) with a
similar investment in the Lehman Brothers South Carolina Municipal Bond Index
("Index").
CLASS A
ONE YEAR TOTAL RETURN = 1.2%
AVERAGE ANNUAL COMPOUND
RETURN SINCE INCEPTION = 2.2%
(Class A chart appears here. Plot points are below.)
1/3/94* 8/31/94 8/31/95 8/31/96
(Customer to fill in plot points.)
CLASS B
ONE YEAR TOTAL RETURN = 0.4%
AVERAGE ANNUAL COMPOUND
RETURN SINCE INCEPTION = 2.3%
(Class B chart appears here. Plot points are below.)
1/3/94* 8/31/94 8/31/95 8/31/96
(Customer to fill in plot points.)
CLASS Y
ONE YEAR TOTAL RETURN = 6.5%
AVERAGE ANNUAL COMPOUND
RETURN SINCE INCEPTION = 5.5%
(Class Y chart appears here. Plot points are below.)
2/28/94* 8/31/94 8/31/95 8/31/96
(Customer to fill in plot points.)
__ EVERGREEN SOUTH CAROLINA MUNICIPAL BOND FUND
______ LEHMAN BROTHERS SOUTH CAROLINA MUNICIPAL BOND INDEX
*COMMENCEMENT OF CLASS OPERATIONS
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE RESULTS. MUTUAL FUNDS
ARE NOT OBLIGATIONS OF, OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY
INSURED.
For the purposes of the graphs and the accompanying tables, it has been
assumed that: (a) the maximum sales charge of 4.75% was deducted from the
initial $10,000 investment in Class A Shares; (b) the maximum applicable
contingent deferred sales charge was deducted from the value of the investment
in Class B Shares, assuming full redemption on August 31, 1996; (c) all
recurring fees, (including, investment advisory fees) were deducted; and (d) all
dividends and distributions were reinvested.
The investment adviser is currently waiving a portion of the Fund's
expenses. Had expenses not been waived, returns would have been lower.
The Index is an unmanaged index and includes the reinvestment of income,
but does not reflect the payment of transaction costs and advisory fees
associated with an investment in the Fund.
50
<PAGE>
EVERGREEN SOUTH CAROLINA MUNICIPAL BOND FUND
STATEMENT OF INVESTMENTS
AUGUST 31, 1996
(Drawing of the state of South Carolina)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- 96.7%
SOUTH CAROLINA -- 96.7%
$540 Aiken Cnty. IDR, Beloit Corp. Proj.,
6.00%, 12/1/11......................... $ 537,808
200 Bennettsville Combined.
Util. Sys. RB, (Ser. B),
6.00%, 7/1/09 (MBIA)................... 207,964
400 Calhoun Cnty. Solid Waste
Disp. Facs. RB, Eastman Kodak
Co. Proj.,
6.75%, 5/1/17.......................... 438,740
300 Charleston Cnty. Hlth Facs. RB,
First Mtg. Episcopal Church,
7.125%, 4/1/20......................... 306,243
200 Citadel Military College RB,
Stud. & Fac. Hsg.,
5.50%, 10/1/14......................... 193,758
100 Coastal Carolina Univ. RB,
6.80%, 6/1/19 (MBIA)................... 109,285
100 Colleton Cnty. GO,
5.60%, 3/1/09.......................... 97,029
100 Columbia Wtr. & Swr. Sys. RB,
5.375%, 2/1/12......................... 97,239
500 Darlington Cnty. IDR,
Nucor Corp. Proj. (Ser. A),
5.75%, 8/1/23.......................... 479,970
300 Darlington Cnty. IDR,
Sonoco Products Co. Proj.,
6.00%, 4/1/26.......................... 293,562
200 Georgetown Cnty. Wtr. & Swr.
Dist. RB,
6.50%, 6/1/1........................... 199,748
600 Greenville Hosp. Sys. RB,
Hosp. Facs. (Ser. B),
5.70%, 5/1/12.......................... 590,070
400 Greenville Memorial Auditorium Dist.
GO, Bi Lo Center Proj.,
5.75%, 4/1/18 (AMBAC).................. 394,144
250 Laurens Pub. Util. Sys. RB,
5.00%, 1/1/18 (FGIC)................... 221,213
650 Marion Cnty. RB, Hosp. Dist.,
5.50%, 11/1/15......................... 613,918
100 Medical Univ. Hosp.
Facs. RB (Ser. A),
7.00%, 7/1/01.......................... 108,310
200 Oconee Cnty. Sch. Dist. GO,
5.10%, 9/1/12 (MBIA)................... 187,054
100 Piedmont Muni. Pwr. Agcy.
Elec. RB,
5.50%, 1/1/12 (MBIA)................... 98,366
PRINCIPAL
AMOUNT
(000) VALUE
$350 Piedmont Muni. Pwr. Agcy.
Elec. RB,
6.05%, 1/1/04.......................... $ 355,551
350 Richland Cnty. Solid Waste
Disp. Facs. RB, Union Camp
Corp. Proj. (Ser. A),
6.75%, 5/1/22.......................... 365,911
300 South Carolina Jobs Eco. Dev.
Auth. Hosp. Facs. RB,
Anderson Area Med. Center Inc.,
5.25%, 2/1/15 (MBIA)................... 280,173
200 South Carolina Jobs Eco. Dev.
Auth. Hosp. Facs. RB, Oconee
Mem. Hosp.,
6.15%, 3/1/15.......................... 202,002
200 South Carolina Jobs Eco. Dev.
Auth. Hosp. Facs. RB, Tuomey
Regl. Med. Center (Ser. A),
5.75%, 11/1/15 (MBIA).................. 195,890
250 South Carolina St. Ed. Assist.
Auth. RB, Gtd.
Stud. Ln.-Sub Lien (Ser. C),
5.875%, 9/1/07......................... 249,700
400 South Carolina St. Hsg. Fin.
& Dev. Auth. Mtg. RB, (Ser. A),
6.35%, 7/1/25 (FHA).................... 403,236
100 South Carolina St. Hsg. Fin.
& Dev. Auth. Mtg. RB, (Ser. A),
6.55%, 7/1/15.......................... 102,213
595 South Carolina St. Hsg. Fin.
& Dev. Auth. Mtg. RB,
Heritage Crt. Apt. (Ser. A),
6.15%, 7/1/25 (FHA).................... 594,941
100 South Carolina St. Hsg. Fin.
& Dev. Auth. RB, (Ser. A),
6.80%, 11/15/11........................ 104,304
200 South Carolina St. Hsg. Fin.
& Dev. Auth. RB,
Homeownership Mtg. (Ser. A),
7.55%, 7/1/11.......................... 209,696
265 South Carolina St. Hsg. Fin.
& Dev. Auth. RB, Hunting
Ridge Apts.,
6.75%, 6/1/25.......................... 272,107
300 South Carolina St. Hsg. Fin.
& Dev. Auth. RB, Runaway
Bay Apts. Proj.,
6.125%, 12/1/15........................ 297,789
</TABLE>
51
<PAGE>
EVERGREEN SOUTH CAROLINA MUNICIPAL BOND FUND
STATEMENT OF INVESTMENTS -- (CONTINUED)
AUGUST 31, 1996
(Drawing of the state of South Carolina)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
SOUTH CAROLINA -- CONTINUED
<S> <C> <C>
$585 York Cnty. IDR, Exempt
Fac. Hoechst Celanese,
5.70%, 1/1/24.......................... $ 552,895
TOTAL LONG-TERM MUNICIPAL SECURITIES
(COST $9,230,684)................. 9,360,829
SHARES
MUTUAL FUND SHARES -- 3.0%
293,000 Lehman Municipal Money
Market Fund
(COST $293,000)........................ 293,000
TOTAL INVESTMENTS --
(COST $9,523,684).......... 99.7% 9,653,829
OTHER ASSETS AND
LIABILITIES -- NET......... .3 23,802
NET ASSETS --................. 100.0% $9,677,631
</TABLE>
Summary of abbreviations:
AMBAC -- Insured by American Municipal Bond Assurance Corporation
FGIC -- Insured by Financial Guaranty Insurance Co.
FHA -- Insured by Federal Housing Authority
GO -- General Obligation Bond
IDR -- Industrial Development Revenue Bond
MBIA -- Insured by Municipal Bond Investors Assurance
RB -- Revenue Bond
See accompanying notes to financial statements.
52
<PAGE>
EVERGREEN SOUTH CAROLINA MUNICIPAL BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1996
(Drawing of the state of South Carolina)
<TABLE>
<S> <C>
ASSETS:
Investments at value (identified cost $9,523,684)................................................................ $9,653,829
Cash............................................................................................................. 760
Interest receivable.............................................................................................. 151,840
Receivable for Fund shares sold.................................................................................. 310
Prepaid expenses................................................................................................. 9,491
Total assets............................................................................................... 9,816,230
LIABILITIES:
Accrued expenses................................................................................................. 120,601
Dividends payable................................................................................................ 13,091
Distribution fee payable......................................................................................... 4,907
Total liabilities.......................................................................................... 138,599
NET ASSETS.......................................................................................................... $9,677,631
NET ASSETS CONSIST OF:
Paid-in capital.................................................................................................. $9,541,880
Undistributed net investment income.............................................................................. 477
Accumulated net realized gain on investment transactions......................................................... 5,129
Net unrealized appreciation of investments....................................................................... 130,145
Net assets................................................................................................. $9,677,631
CALCULATION OF NET ASSET VALUE AND MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares ($840,823 (division sign) 86,817 shares of beneficial interest outstanding)....................... $ 9.69
Sales charge -- 4.75% of offering price.......................................................................... .48
Maximum offering price..................................................................................... $ 10.17
Class B Shares ($4,282,239 (division sign) 442,011 shares of beneficial interest outstanding).................... $ 9.69
Class Y Shares ($4,554,569 (division sign) 470,121 shares of beneficial interest outstanding).................... $ 9.69
</TABLE>
See accompanying notes to financial statements.
53
<PAGE>
EVERGREEN SOUTH CAROLINA MUNICIPAL BOND FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1996
(Drawing of the state of South Carolina)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest............................................................................................ $476,083
EXPENSES:
Advisory fee........................................................................................ $ 40,781
Administrative personnel and service fees........................................................... 4,123
Distribution fee -- Class A Shares.................................................................. 1,917
Distribution fee -- Class B Shares.................................................................. 29,922
Shareholder services fee -- Class B Shares.......................................................... 9,974
Custodian fee....................................................................................... 84,241
Transfer agent fee.................................................................................. 64,328
Professional fees................................................................................... 39,767
Registration and filing fees........................................................................ 32,506
Reports and notices to shareholders................................................................. 19,747
Insurance expense................................................................................... 1,735
Trustees' fees and expenses......................................................................... 516
Miscellaneous....................................................................................... 16,672
346,229
Less: Fee waivers and expense reimbursements........................................................ (254,601)
Net expenses.................................................................................. 91,628
Net investment income.................................................................................. 384,455
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investment transactions........................................................ 10,377
Net change in unrealized appreciation of investments................................................ 19,665
Net gain on investments................................................................................ 30,042
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................................... $414,497
</TABLE>
See accompanying notes to financial statements.
54
<PAGE>
EVERGREEN SOUTH CAROLINA MUNICIPAL BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
(Drawing of the state of South Carolina)
<TABLE>
<CAPTION>
EIGHT MONTHS
YEAR ENDED ENDED
AUGUST 31, AUGUST 31,
1996 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income....................................................................... $ 384,455 $ 128,517
Net realized gain on investment transactions................................................ 10,377 29,060
Net change in unrealized appreciation of investments........................................ 19,665 330,261
Net increase in net assets resulting from operations..................................... 414,497 487,838
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A Shares.............................................................................. (38,206) (17,293)
Class B Shares.............................................................................. (168,950) (94,373)
Class Y Shares.............................................................................. (177,721) (16,851)
Total distributions to shareholders...................................................... (384,877) (128,517)
FUND SHARE TRANSACTIONS:
Proceeds from shares sold................................................................... 4,780,175 2,853,928
Proceeds from reinvestment of distributions................................................. 251,384 83,256
Payment for shares redeemed................................................................. (1,208,640) (332,153)
Net increase resulting from Fund share transactions................................... 3,822,919 2,605,031
Net increase in net assets............................................................ 3,852,539 2,964,352
NET ASSETS:
Beginning of period......................................................................... 5,825,092 2,860,740
End of period (includes undistributed net investment income of $477 and $899,
respectively)............................................................................. $9,677,631 $ 5,825,092
</TABLE>
See accompanying notes to financial statements.
55
<PAGE>
EVERGREEN SOUTH CAROLINA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
(Drawing of the state of South Carolina)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
EIGHT MONTHS JANUARY 3, EIGHT MONTHS
YEAR ENDED ENDED 1994* THROUGH YEAR ENDED ENDED
AUGUST 31, AUGUST 31, DECEMBER 31, AUGUST 31, AUGUST 31,
1996 1995# 1994 1996 1995#
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period......................... $9.59 $8.62 $10.00 $9.59 $8.62
Income (loss) from investment operations:
Net investment income...................................... .49 .34 .46 .41 .29
Net realized and unrealized gain (loss) on investments..... .10 .97 (1.38) .10 .97
Total from investment operations......................... .59 1.31 (.92) .51 1.26
Less distributions to shareholders from net investment
income..................................................... (.49) (.34) (.46) (.41) (.29)
Net asset value, end of period............................... $9.69 $9.59 $8.62 $9.69 $9.59
TOTAL RETURN+................................................ 6.2% 15.4% (9.3%) 5.4% 14.8%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted).................... $841 $610 $312 $4,282 $3,542
Ratios to average net assets:
Expenses**................................................. .86% .53%++ .25%++ 1.61% 1.28%++
Net investment income**.................................... 4.98% 5.41%++ 5.57%++ 4.23% 4.66%++
Portfolio turnover rate...................................... 37% 66% 23% 37% 66%
JANUARY 3,
1994* THROUGH
DECEMBER 31,
1994
PER SHARE DATA:
Net asset value, beginning of period......................... $10.00
Income (loss) from investment operations:
Net investment income...................................... .41
Net realized and unrealized gain (loss) on investments..... (1.38)
Total from investment operations......................... (.97)
Less distributions to shareholders from net investment
income..................................................... (.41)
Net asset value, end of period............................... $8.62
TOTAL RETURN+................................................ (9.8%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted).................... $2,456
Ratios to average net assets:
Expenses**................................................. .87%++
Net investment income**.................................... 4.88%++
Portfolio turnover rate...................................... 23%
</TABLE>
# The Fund changed its fiscal year end from December 31 to August 31.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge or contingent deferred
sales charge is not reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income (loss) to average net assets,
exclusive of any applicable state expense limitations, would have been the
following:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
EIGHT MONTHS JANUARY 3, EIGHT MONTHS
YEAR ENDED ENDED 1994* THROUGH YEAR ENDED ENDED
AUGUST 31, AUGUST 31, DECEMBER 31, AUGUST 31, AUGUST 31,
1996 1995# 1994 1996 1995#
<S> <C> <C> <C> <C> <C>
Expenses.................................................. 4.00% 6.50% 10.71% 4.76% 7.25%
Net investment income (loss).............................. 1.84% (.56%) (4.89%) 1.08% (1.31%)
JANUARY 3,
1994* THROUGH
DECEMBER 31,
1994
Expenses.................................................. 11.33%
Net investment income (loss).............................. (5.58%)
</TABLE>
See accompanying notes to financial statements.
56
<PAGE>
EVERGREEN SOUTH CAROLINA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS -- (CONTINUED)
(Drawing of the state of South Carolina)
<TABLE>
<CAPTION>
CLASS Y SHARES
YEAR ENDED EIGHT MONTHS
AUGUST 31, ENDED
1996 AUGUST 31, 1995#
<S> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period............................................... $9.59 $8.62
Income (loss) from investment operations:
Net investment income............................................................ .51 .35
Net realized and unrealized gain (loss) on investments........................... .10 .97
Total from investment operations............................................... .61 1.32
Less distributions to shareholders from net investment income...................... (.51) (.35)
Net asset value, end of period..................................................... $9.69 $9.59
TOTAL RETURN+...................................................................... 6.5% 15.5%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted).......................................... $4,555 $1,673
Ratios to average net assets:
Expenses**....................................................................... .62% .28%++
Net investment income**.......................................................... 5.22% 5.66%++
Portfolio turnover rate............................................................ 37% 66%
FEBRUARY 28,
1994* THROUGH
DECEMBER 31, 1994
PER SHARE DATA:
Net asset value, beginning of period............................................... $9.74
Income (loss) from investment operations:
Net investment income............................................................ .43
Net realized and unrealized gain (loss) on investments........................... (1.12)
Total from investment operations............................................... (.69)
Less distributions to shareholders from net investment income...................... (.43)
Net asset value, end of period..................................................... $8.62
TOTAL RETURN+...................................................................... (7.1%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted).......................................... $92
Ratios to average net assets:
Expenses**....................................................................... .00%++
Net investment income**.......................................................... 5.92%++
Portfolio turnover rate............................................................ 23%
</TABLE>
# The Fund changed its fiscal year end from December 31 to August 31.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income (loss) to average net assets,
exclusive of any applicable state expense limitations, would have been the
following:
<TABLE>
<CAPTION>
CLASS Y SHARES
YEAR ENDED EIGHT MONTHS
AUGUST 31, ENDED
1996 AUGUST 31, 1995#
<S> <C> <C>
Expenses.............................................................................. 3.70% 6.25%
Net investment income (loss).......................................................... 2.14% (.31%)
FEBRUARY 28,
1994* THROUGH
DECEMBER 31, 1994
Expenses.............................................................................. 10.46%
Net investment income (loss).......................................................... (4.54%)
</TABLE>
See accompanying notes to financial statements.
57
<PAGE>
EVERGREEN VIRGINIA MUNICIPAL BOND FUND
(Drawing of the state of Virginia)
RESULTS TO DATE
PERFORMANCE OF $10,000 INVESTED IN THE
EVERGREEN VIRGINIA MUNICIPAL BOND FUND
The graphs below compare a $10,000 investment in the Evergreen Virginia
Municipal Bond Fund (Class A, Class B and Class Y Shares) with a similar
investment in the Lehman Brothers Virginia Municipal Bond Index ("Index").
CLASS A
ONE YEAR TOTAL RETURN = 0.1%
AVERAGE ANNUAL COMPOUND
RETURN SINCE INCEPTION = 2.3%
(Class A chart appears here. Plot points are below.)
7/2/93* 8/31/93 8/31/94 8/31/95 8/31/96
(Customer to fill in plot points.)
CLASS B
ONE YEAR TOTAL RETURN = 0.7%
AVERAGE ANNUAL COMPOUND
RETURN SINCE INCEPTION = 2.4%
(Class B chart appears here. Plot points are below.)
7/2/93* 8/31/93 8/31/94 8/31/95 8/31/96
(Customer to fill in plot points.)
CLASS Y
ONE YEAR TOTAL RETURN = 5.4%
AVERAGE ANNUAL COMPOUND
RETURN SINCE INCEPTION = 4.8%
(Class Y chart appears here. Plot points are below.)
2/28/94* 8/31/94 8/31/95 8/31/96
(Customer to fill in plot points.)
- - - EVERGREEN VIRGINIA MUNICIPAL BOND FUND
_____ LEHMAN BROTHERS VIRGINIA MUNICIPAL BOND INDEX
*Commencement of class operations.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE RESULTS. MUTUAL FUNDS
ARE NOT OBLIGATIONS OF, OR GUARANTEED BY, ANY BANK AND ARE NOT FEDERALLY
INSURED.
For the purposes of the graphs and the accompanying tables, it has been
assumed that (a) the maximum sales charge of 4.75% was deducted from the initial
$10,000 investment in Class A Shares; (b) the maximum applicable contingent
deferred sales charge was deducted from the value of the investment in Class B
Shares, assuming full redemption on August 31, 1996; (c) all recurring fees
(including investment advisory fees) were deducted; and (d) all dividends and
distributions were reinvested.
The investment adviser is currently waiving a portion of the Fund's
expenses. Had expenses not been waived, returns would have been lower.
The Index is an unmanaged index and includes the reinvestment of income,
but does not reflect the payment of transaction costs and advisory fees
associated with an investment in the Fund.
58
<PAGE>
EVERGREEN VIRGINIA MUNICIPAL BOND FUND
STATEMENT OF INVESTMENTS
AUGUST 31, 1996
(Drawing of the state of Virginia)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES -- 97.7%
VIRGINIA -- 94.0%
$ 100 Albemarle Cnty. Res. Care
Fac. IDA,
6.45%, 7/1/15....................... $ 97,995
145 Albemarle Cnty. Res. Care
Fac. IDA,
6.625%, 7/1/21...................... 141,840
465 Brunswick Cnty. IDA
5.65%, 7/1/09, (MBIA)............... 466,953
390 Buena Vista,
Wtr. & Swr. Fac. RB
6.25%, 7/15/11...................... 378,230
250 Charlottesville Albemarle,
Arpt. Auth. RB,
6.125%, 12/1/13..................... 242,090
500 Chesapeake Redev. & Hsg.
Auth. Multi-Family Hsg. RB,
7.75%, 6/1/20....................... 498,830
370 Fairfax Cnty. IDA, RB,
Health Care Inova Sys. Proj.,
5.875%, 8/15/16..................... 367,625
250 Fairfax Cnty. Inova Health
Sys. Proj. IDA,
5.25%, 8/15/19...................... 231,175
500 Fairfax Cnty. Redev. & Hsg.
Auth. Mtg. RB,
6.00%, 9/1/16, (FHA)................ 492,565
200 Fairfax Cnty. Redev. & Hsg.
Auth. Multi-Family Hsg. RB,
6.625%, 9/20/20, (GNMA)............. 207,130
700 Fairfax Cnty. Wtr. Auth. RB,
6.00%, 4/1/22....................... 692,734
500 Giles Cnty. IDA, RB,
6.45%, 5/1/26....................... 503,900
500 Hanover Cnty. IDA,
Bon Secours Health Sys. Proj.,
6.00%, 8/15/08, (MBIA).............. 527,520
500 Hanover Cnty, IDA, RB,
Mem. Regl. Med. Center Proj., (Ser.
1995),
6.375%, 8/15/18, (MBIA)............. 534,135
500 Henrico Cnty. IDA, RB,
Solid Waste Browning Ferris Proj.,
5.30%, 12/1/11...................... 494,345
400 Henrico Cnty.
Pub. Fac. Lease IDA,
7.00%, 8/1/13....................... 439,308
350 Isle Wright Cnty.
Solid Waste Disp. Facs. IDA,
6.55%, 4/1/24....................... 362,695
PRINCIPAL
AMOUNT
(000) VALUE
$ 500 King George Cnty. IDA Lease
King George Cnty. School Proj.,
6.40%, 8/1/16....................... $ 485,740
300 Metropolitan Washington D.C.
Arpts. Auth. RB, (Ser. A),
7.60%, 10/1/14...................... 325,494
500 Prince William Cnty. IDA,
6.00%, 2/1/14....................... 496,665
250 Prince William Cnty.
Park Auth. RB,
6.875%, 10/15/16.................... 265,035
300 Prince William Cnty.
6.75%, 10/1/15...................... 310,149
400 Riverside, Regl. Jail
Auth. Fac. RB,
6.00%, 7/1/25, (MBIA)............... 403,768
500 Suffolk Virginia, GO,
5.90%, 6/1/13, (AMBAC).............. 510,925
175 Virginia Beach, Dev.
Auth. Hosp. Fac. RB,
6.00%, 2/15/09, (AMBAC)............. 184,590
100 Virginia Beach, Dev.
Auth. Hosp. Fac. RB,
6.00%, 2/15/12, (AMBAC)............. 104,521
100 Virginia College, Bldg. Auth.
Edl. Facs. RB,
5.75%, 1/1/14....................... 98,057
200 Virginia College, Bldg. Auth.
Edl. Facs. RB,
5.75%, 4/1/14....................... 192,710
100 Virginia St. Hsg. Dev. Auth.
Commonwealth Mtg. RB, (Ser. A),
6.95%, 1/1/10....................... 103,215
100 Virginia St. Hsg. Dev. Auth.
Commonwealth Mtg. RB, (Ser. A),
7.10%, 1/1/17....................... 105,470
300 Virginia St. Hsg. Dev. Auth.
RB, (Ser. D),
6.10%, 1/1/19....................... 299,970
300 Virginia St. Hsg. Dev. Auth.
RB, (Ser. F),
6.25%, 7/1/12....................... 302,877
255 Virginia St. Hsg. Dev. Auth.
RB Multi-Family Hsg. (Ser. K),
5.90%, 5/1/11....................... 254,727
300 Virginia St. Multi-Family
Hsg. RB, (Ser. H),
6.35%, 11/1/11...................... 306,501
</TABLE>
59
<PAGE>
EVERGREEN VIRGINIA MUNICIPAL BOND FUND
STATEMENT OF INVESTMENTS -- (CONTINUED)
AUGUST 31, 1996
(Drawing of the state of Virginia)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
VIRGINIA -- CONTINUED
<S> <C> <C>
$ 300 Virginia St. Pub. School
Auth. RB, (Ser. A),
6.20%, 8/1/13....................... $ 312,150
100 Virginia St. Pub. School
Auth. RB, (Ser. B),
6.50%, 8/1/15....................... 105,759
200 Virginia St. Res. Auth. Wtr.
& Swr. Sys. RB
5.25%, 10/1/14...................... 188,622
300 West Point Solid Waste Disp.
IDA, (Ser. B),
6.25%, 3/1/19....................... 298,028
12,334,043
PUERTO RICO -- 3.7%
300 Puerto Rico Commonwealth GO,
6.25%, 7/1/13, (MBIA)............... 322,755
150 Puerto Rico Commonwealth GO,
6.45%, 7/1/17....................... 157,790
480,545
TOTAL LONG-TERM MUNICIPAL SECURITIES
(COST $12,609,510).................. 12,814,588
SHARES VALUE
MUTUAL FUND SHARES -- 4.4%
486,000 Lehman Municipal Money Market
Fund............................... $ 486,000
100,000 Lehman Tax Free Money Market
Fund............................... 100,000
TOTAL MUTUAL FUND SHARES
(COST $586,000).................... 586,000
TOTAL INVESTMENTS
(COST $13,195,510)............. 102.1% 13,400,588
OTHER ASSETS AND
LIABILITIES -- NET............. (2.1) (279,261)
NET ASSETS --.................. 100.0% $13,121,327
</TABLE>
Summary of Abbreviations:
AMBAC -- Insured by American Municipal Bond Assurance Corporation
FHA -- Insured by Federal Housing Authority
GNMA -- Insured by Government National Mortgage
Association
GO -- General Obligations Bond
IDA -- Industrial Development Authority
MBIA -- Insured by Municipal Bond Investors Assurance
RB -- Revenue Bond
See accompanying notes to financial statements.
60
<PAGE>
EVERGREEN VIRGINIA MUNICIPAL BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1996
(Drawing of the state of Virginia)
<TABLE>
<S> <C>
ASSETS:
Investments at value (identified cost $13,195,510)............................................................. $13,400,588
Cash........................................................................................................... 553
Interest receivable............................................................................................ 176,701
Receivable for securities sold................................................................................. 149,192
Receivable for Fund shares sold................................................................................ 5,478
Prepaid expenses............................................................................................... 7,291
Total assets............................................................................................. 13,739,803
LIABILITIES:
Payable for securities purchased............................................................................... 448,752
Accrued expenses............................................................................................... 137,942
Dividends payable.............................................................................................. 21,587
Distribution fee payable....................................................................................... 8,482
Payable for Fund shares redeemed............................................................................... 1,713
Total liabilities........................................................................................ 618,476
NET ASSETS........................................................................................................ $13,121,327
NET ASSETS CONSIST OF:
Paid-in capital................................................................................................ $13,290,721
Undistributed net investment income............................................................................ 1,382
Accumulated net realized loss on investment transactions....................................................... (375,854)
Net unrealized appreciation of investments..................................................................... 205,078
Net assets............................................................................................... $13,121,327
CALCULATION OF NET ASSET VALUE AND MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares ($2,892,094 (division sign) 298,718 shares of beneficial interest outstanding).................. $ 9.68
Sales charge -- 4.75% of offering price........................................................................ .48
Maximum offering price................................................................................... $ 10.16
Class B Shares ($5,963,332 (division sign) 615,947 shares of beneficial interest outstanding).................. $ 9.68
Class Y Shares ($4,265,901 (division sign) 440,615 shares of beneficial interest outstanding).................. $ 9.68
</TABLE>
See accompanying notes to financial statements.
61
<PAGE>
EVERGREEN VIRGINIA MUNICIPAL BOND FUND
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1996
(Drawing of the state of Virginia)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest............................................................................................. $592,490
EXPENSES:
Advisory fee......................................................................................... $ 51,952
Administrative personnel and service fees............................................................ 5,136
Distribution fee -- Class A Shares................................................................... 6,048
Distribution fee -- Class B Shares................................................................... 43,430
Shareholder services fee -- Class B Shares........................................................... 14,476
Registration and filing fees......................................................................... 71,759
Transfer agent fee................................................................................... 61,548
Custodian fee........................................................................................ 61,305
Professional fees.................................................................................... 35,558
Reports and notices to shareholders.................................................................. 24,425
Trustees' fees and expenses.......................................................................... 802
Insurance expense.................................................................................... 762
Miscellaneous........................................................................................ 18,628
395,829
Less: Fee waivers and expense reimbursements......................................................... (261,619)
Net expenses................................................................................... 134,210
Net investment income................................................................................... 458,280
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investment transactions......................................................... (98,854)
Net change in unrealized appreciation of investments................................................. 47,564
Net loss on investments................................................................................. (51,290)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................................................... $406,990
</TABLE>
See accompanying notes to financial statements.
62
<PAGE>
EVERGREEN VIRGINIA MUNICIPAL BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
(Drawing of the state of Virginia)
<TABLE>
<CAPTION>
EIGHT MONTHS
YEAR ENDED ENDED
AUGUST 31, AUGUST 31,
1996 1995
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income......................................................................... $ 458,280 $ 218,052
Net realized loss on investment transactions.................................................. (98,854) (13,951)
Net change in unrealized appreciation of investments.......................................... 47,564 567,181
Net increase in net assets resulting from operations....................................... 406,990 771,282
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A Shares................................................................................ (117,625) (64,808)
Class B Shares................................................................................ (238,415) (133,946)
Class Y Shares................................................................................ (105,354) (19,298)
Total distributions to shareholders........................................................ (461,394) (218,052)
FUND SHARE TRANSACTIONS:
Proceeds from shares sold..................................................................... 6,625,000 2,276,843
Proceeds from reinvestment of distributions................................................... 309,870 172,095
Payment for shares redeemed................................................................... (1,791,146) (737,002)
Net increase resulting from Fund share transactions..................................... 5,143,724 1,711,936
Net increase in net assets.............................................................. 5,089,320 2,265,166
NET ASSETS:
Beginning of period........................................................................... 8,032,007 5,766,841
End of period (includes undistributed net investment income of $1,382 and $4,496,
respectively................................................................................ $13,121,327 $8,032,007
</TABLE>
See accompanying notes to financial statements.
63
<PAGE>
EVERGREEN VIRGINIA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
(Drawing of the state of Virginia)
<TABLE>
<CAPTION>
CLASS A SHARES
EIGHT MONTHS
YEAR ENDED ENDED YEAR ENDED
AUGUST 31, AUGUST 31, DECEMBER 31,
1996 1995# 1994
<S> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period.............................................. $9.67 $8.85 $10.19
Income (loss) from investment operations:
Net investment income........................................................... .48 .33 .47
Net realized and unrealized gain (loss) on investments.......................... .01 .82 (1.34)
Total from investment operations.............................................. .49 1.15 (.87)
Less distributions to shareholders from net investment income..................... (.48) (.33) (.47)
Net asset value, end of period.................................................... $9.68 $9.67 $8.85
TOTAL RETURN+..................................................................... 5.1% 13.1% (8.6%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)......................................... $2,892 $1,983 $1,606
Ratios to average net assets:
Expenses**...................................................................... .93% .72%++ .53%
Net investment income**......................................................... 4.83% 5.17%++ 5.11%
Portfolio turnover rate........................................................... 68% 87% 59%
1993*
THROUGH
DECEMBER 31,
1993
PER SHARE DATA:
Net asset value, beginning of period.............................................. $10.00
Income (loss) from investment operations:
Net investment income........................................................... .20
Net realized and unrealized gain (loss) on investments.......................... .19
Total from investment operations.............................................. .39
Less distributions to shareholders from net investment income..................... (.20)
Net asset value, end of period.................................................... $10.19
TOTAL RETURN+..................................................................... 3.9%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)......................................... $1,306
Ratios to average net assets:
Expenses**...................................................................... .25%++
Net investment income**......................................................... 4.64%++
Portfolio turnover rate........................................................... 0%
<CAPTION>
JULY 2,
</TABLE>
# The Fund changed its fiscal year end from December 31 to August 31.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge is not reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income (loss) to average net assets,
exclusive of any applicable state expense limitations, would have been the
following:
<TABLE>
<CAPTION>
CLASS A SHARES
JULY 2,
EIGHT MONTHS 1993*
YEAR ENDED ENDED YEAR ENDED THROUGH
AUGUST 31, AUGUST 31, DECEMBER 31, DECEMBER 31,
1996 1995# 1994 1993
<S> <C> <C> <C> <C>
Expenses................................................................ 3.47% 3.83% 5.14% 7.75%
Net investment income (loss)............................................ 2.29% 2.06% .50% (2.86%)
</TABLE>
See accompanying notes to financial statements.
64
<PAGE>
EVERGREEN VIRGINIA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS -- (CONTINUED)
(Drawing of the state of Virginia)
<TABLE>
<CAPTION>
CLASS B SHARES
EIGHT MONTHS YEAR
YEAR ENDED ENDED ENDED
AUGUST 31, AUGUST 31, DECEMBER 31,
1996 1995# 1994
<S> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period.............................................. $9.67 $8.85 $10.19
Income (loss) from investment operations:
Net investment income........................................................... .41 .28 .42
Net realized and unrealized gain (loss) on investments.......................... .01 .82 (1.34)
Total from investment operations.............................................. .42 1.10 (.92)
Less distributions to shareholders from net investment income..................... (.41) (.28) (.42)
Net asset value, end of period.................................................... $9.68 $9.67 $8.85
TOTAL RETURN+..................................................................... 4.3% 12.5% (9.1%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)......................................... $5,963 $5,083 $3,817
Ratios to average net assets:
Expenses**...................................................................... 1.68% 1.47%++ 1.12%
Net investment income**......................................................... 4.09% 4.42%++ 4.54%
Portfolio turnover rate........................................................... 68% 87% 59%
1993*
THROUGH
DECEMBER 31,
1993
PER SHARE DATA:
Net asset value, beginning of period.............................................. $10.00
Income (loss) from investment operations:
Net investment income........................................................... .17
Net realized and unrealized gain (loss) on investments.......................... .19
Total from investment operations.............................................. .36
Less distributions to shareholders from net investment income..................... (.17)
Net asset value, end of period.................................................... $10.19
TOTAL RETURN+..................................................................... 3.7%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)......................................... $2,235
Ratios to average net assets:
Expenses**...................................................................... .75%++
Net investment income**......................................................... 4.25%++
Portfolio turnover rate........................................................... 0%
</TABLE>
# The Fund changed its fiscal year end from December 31 to August 31.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Contingent deferred sales charge is not
reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income (loss) to average net assets,
exclusive of any applicable state expense limitations, would have been the
following:
<TABLE>
<CAPTION>
CLASS B SHARES
JULY 2,
EIGHT MONTHS YEAR 1993*
YEAR ENDED ENDED ENDED THROUGH
AUGUST 31, AUGUST 31, DECEMBER 31, DECEMBER 31,
1996 1995# 1994 1993
<S> <C> <C> <C> <C>
Expenses................................................................ 4.23% 4.58% 5.73% 8.25%
Net investment income (loss)............................................ 1.54% 1.31% (.07%) (3.25%)
</TABLE>
See accompanying notes to financial statements.
65
<PAGE>
EVERGREEN VIRGINIA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS -- (CONTINUED)
(Drawing of the state of Virginia)
<TABLE>
<CAPTION>
CLASS Y SHARES
EIGHT MONTHS
YEAR ENDED ENDED
AUGUST 31, AUGUST 31,
1996 1995#
<S> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period........................................................... $9.67 $8.85
Income (loss) from investment operations:
Net investment income........................................................................ .50 .34
Net realized and unrealized gain (loss) on investments....................................... .01 .82
Total from investment operations........................................................... .51 1.16
Less distributions to shareholders from net investment income.................................. (.50) (.34)
Net asset value, end of period................................................................. $9.68 $9.67
TOTAL RETURN+.................................................................................. 5.4% 13.3%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)...................................................... $4,266 $965
Ratios to average net assets:
Expenses**................................................................................... .70% .47%++
Net investment income**...................................................................... 5.05% 5.42%++
Portfolio turnover rate........................................................................ 68% 87%
FEBRUARY 28,
1994*
THROUGH
DECEMBER 31,
1994
PER SHARE DATA:
Net asset value, beginning of period........................................................... $9.83
Income (loss) from investment operations:
Net investment income........................................................................ .41
Net realized and unrealized gain (loss) on investments....................................... (.98)
Total from investment operations........................................................... (.57)
Less distributions to shareholders from net investment income.................................. (.41)
Net asset value, end of period................................................................. $8.85
TOTAL RETURN+.................................................................................. (5.8%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)...................................................... $344
Ratios to average net assets:
Expenses**................................................................................... .28%++
Net investment income**...................................................................... 5.54%++
Portfolio turnover rate........................................................................ 59%
<CAPTION>
</TABLE>
# The Fund changed its fiscal year end from December 31 to August 31.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income to average net assets, exclusive
of any applicable state expense limitations, would have been the following:
<TABLE>
<CAPTION>
CLASS Y SHARES
FEBRUARY 28,
EIGHT MONTHS 1994*
YEAR ENDED ENDED THROUGH
AUGUST 31, AUGUST 31, DECEMBER 31,
1996 1995# 1994
<S> <C> <C> <C>
Expenses............................................................................ 3.24% 3.58% 4.89%
Net investment income............................................................... 2.51% 2.31% .93%
</TABLE>
See accompanying notes to financial statements.
66
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND NATURE OF OPERATIONS
The Evergreen State Tax-Free Funds (the "Funds") are separate series of
Evergreen Investment Trust except for Evergreen Florida High Income Municipal
Bond Fund, which is a series of Evergreen Municipal Trust, both open-end
management companies registered under the Investment Company Act of 1940, as
amended (the "Act"). The Evergreen State Tax-Free Funds included herein consist
of Evergreen Florida Municipal Bond Fund ("Florida"), Evergreen Florida High
Income Municipal Bond Fund ("Florida High Income"), Evergreen Georgia Municipal
Bond Fund ("Georgia"), Evergreen New Jersey Tax Free Income Fund ("New Jersey"),
Evergreen North Carolina Municipal Bond Fund ("North Carolina"), Evergreen South
Carolina Municipal Bond Fund ("South Carolina") and Evergreen Virginia Municipal
Bond Fund ("Virginia"), known collectively as the Funds.
The investment objective of Florida, Georgia, New Jersey, North Carolina,
South Carolina and Virginia is to seek current income exempt from federal income
tax and where applicable, state income taxes, consistent with the preservation
of capital. Florida High Income seeks to provide a high level of current income
which is exempt from federal income tax.
Effective January 1, 1996, First Union Corporation, the corporate parent of
First Union National Bank of North Carolina ("First Union"), the Funds' current
investment adviser, consummated a merger (the "Bank Merger") with First Fidelity
Bancorporation, the corporate parent of First Fidelity Bank, N.A. ("FFB"), New
Jersey's prior investment adviser. Effective January 19, 1996, each of the funds
in FFB Funds Trust, an open-end management company registered under the Act,
including the FFB New Jersey Tax-Free Income Fund (the "FFB Fund"), joined the
Evergreen Funds (the "Fund Combinations"). The FFB Fund was renamed Evergreen
New Jersey Tax Free Income Fund. Shares of the FFB Fund were redesignated the
New Jersey's Class A Shares. New Jersey subsequently changed its fiscal year end
to August 31.
ACQUISITION INFORMATION -- Effective June 30, 1995, Florida acquired
substantially all of the net assets of ABT Florida Tax-Free Fund ("ABT Florida's
net assets") through the issuance of 15,518,259 of its Class A shares in
exchange for ABT Florida's net assets valued at $150,061,560. The aggregate net
assets immediately after the acquisition was $188,106,883. The acquired net
assets, in this non-taxable transaction, consisted primarily of portfolio
securities with unrealized appreciation of $8,245,724. ABT Florida Tax-Free
Fund's fiscal year ended April 30. Since both Florida and ABT Florida Tax-Free
Fund were similar funds, and ABT Florida Tax-Free Fund contributed the majority
of the net assets and shareholders, its basis of accounting for assets and
liabilities and its operating results for prior periods have been carried
forward as the accounting survivor.
Effective June 30, 1995, Florida High Income, a new series of the Evergreen
Municipal Trust formed for the purpose of acquiring substantially all of ABT
Florida High Income Municipal Bond Fund's net assets ("ABT's net assets"),
issued 5,728,125 of its Class A shares at $10.30 per share in exchange for ABT's
net assets valued at $59,053,062. The acquired net assets, in this nontaxable
transaction, primarily consisted of portfolio securities with an identified cost
basis of $58,111,824 and unrealized appreciation of $367,404. ABT Florida High
Income Municipal Bond Fund's fiscal year ended April 30. Because ABT Florida
High Income Municipal Bond Fund contributed substantially all of Florida High
Income's net assets and shareholders, its basis of accounting for assets and
liabilities and its operating results for prior periods are carried forward as
the accounting survivor.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Funds in the preparation of their financial statements. These policies are
in conformity with generally accepted accounting principles.
SECURITY VALUATIONS -- Municipal bonds are valued by an independent pricing
service taking into consideration yield, liquidity, risk, credit quality,
coupon, maturity, type of issue and any other factors or market data it deems
relevant in determining valuations for normal institutional size trading units
of debt securities which it believes to reflect the current
67
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES -- continued
value of securities. The independent pricing service does not rely exclusively
on quoted prices. Short-term securities purchased with remaining maturities of
sixty days or less are stated at amortized cost which approximates market value.
SECURITY TRANSACTIONS -- Security transactions are accounted for on the
date purchased or sold. Net realized gains or losses are determined on the
identified cost basis.
INVESTMENT INCOME AND EXPENSES -- Interest income and expenses are accrued
daily. Premiums and discounts paid on securities are amortized or accreted into
interest income.
WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS -- The Funds record
when-issued or delayed delivery transactions on the trade date and maintain
security positions such that sufficient liquid assets will be available to make
payment for the securities purchased. Securities purchased on a when-issued or
delayed delivery basis are marked to market daily and begin earning interest on
the settlement date.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions from net investment income
are declared daily and paid monthly. Distributions from net realized capital
gains on investments, if any, will be distributed at least annually. Income
distributions and capital gain distributions are determined in accordance with
income tax regulations which may differ from the amounts available for
distribution under generally accepted accounting principles. To the extent these
differences are permanent in nature, such amounts are reclassified within the
components of net assets.
INCOME TAXES -- It is each Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable and other net income to its
shareholders. Accordingly, no provisions for Federal income or excise taxes are
necessary. To the extent that realized net capital gains can be offset by
capital loss carryforwards, it is each Fund's policy not to distribute such
gains.
At August 31, 1996, the Funds had capital loss carryforwards as follows:
<TABLE>
<CAPTION>
EXPIRATION
2002 2003 2004
<S> <C> <C> <C>
Florida High Income $ 723,137 $634,610 $64,454
Georgia 683,766 -- --
New Jersey 266,381 134,802 --
North Carolina 3,812,121 -- --
Virginia 258,553 -- 30,043
</TABLE>
Capital losses incurred after October 31, within each Fund's fiscal year,
are deemed to arise on the first business day of the following fiscal year. The
Fund's incurred and have selected to defer the following capital losses at
August 31, 1996:
<TABLE>
<S> <C>
Florida High Income $ 2,682
South Carolina 7,144
Virginia 87,258
</TABLE>
ALLOCATION OF EXPENSES -- Expenses specifically identifiable to a class of
shares or a specific fund are charged to that class or fund. Expenses common to
a Trust as a whole are allocated to the funds in that Trust. Net investment
income (other than class specific expenses) and realized and unrealized gains
and losses are allocated daily to each class of shares based upon the relative
proportion of net assets of each class.
DEFERRED ORGANIZATION EXPENSES -- The expenses of Florida High Income
incurred in connection with its organization are being deferred and amortized
over a period of benefit not to exceed 60 months from June 30, 1995.
68
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES -- continued
USE OF ESTIMATES -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
NOTE 3 -- INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
First Union is each Fund's investment adviser and accordingly is entitled
to an annual fee as a percentage of each Fund's average daily net assets.
Florida's, Georgia's, North Carolina's, South Carolina's and Virginia's
investment advisory fee is .50 of 1% of average daily net assets. Florida High
Income's annual fee is .60 of 1% of average daily net assets. New Jersey's
annual fee is based on the following schedule:
<TABLE>
<CAPTION>
ADVISORY FEE AVERAGE DAILY NET ASSETS
<S> <C>
0.500% on the first $500 million
0.450% on the next $500 million
0.400% on the next $500 million
0.350% in excess of $1.5 billion
</TABLE>
First Union voluntarily waived the advisory fee and reimbursed expenses for
the period end August 31, 1996 as described below:
<TABLE>
<CAPTION>
ADVISORY FEE EXPENSE
WAIVERS REIMBURSEMENTS
<S> <C> <C>
Florida High Income $238,564 $ 0
Florida 321,496 152,334
Georgia 63,102 176,832
New Jersey 107,212 47,673
North Carolina 164,001 0
South Carolina 40,781 213,820
Virginia 51,952 209,667
</TABLE>
First Union may discontinue these voluntary waivers and reimbursements at
any time.
ADMINISTRATION AGREEMENT -- Evergreen Asset Management Corp. ("Evergreen
Asset"), a wholly owned subsidiary of First Union, is the Funds' Administrator
and Furman Selz LLC ("Furman Selz") is the sub-administrator. Officers of Furman
Selz are officers of the Funds. Evergreen Asset's and Furman Selz' fees are
based on the average daily net assets of all the funds administered by Evergreen
Asset for which First Union or Evergreen Asset is also investment adviser. These
fees are calculated at the following annual rates:
<TABLE>
<CAPTION>
ADMINISTRATION FEE AVERAGE DAILY NET ASSETS
<S> <C>
0.050% on the first $7 billion
0.035% on the next $3 billion
0.030% on the next $5 billion
0.020% on the next $10 billion
0.015% on the next $5 billion
0.010% in excess of $30 billion
</TABLE>
<TABLE>
<CAPTION>
SUB-ADMINISTRATION FEE AVERAGE DAILY NET ASSETS
<S> <C>
0.0100% on the first $7 billion
0.0075% on the next $3 billion
0.0050% on the next $15 billion
0.0040% in excess of $25 billion
</TABLE>
69
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 3 -- INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH
AFFILIATES -- continued
At August 31, 1996, assets for which Evergreen Asset was the administrator
for which either Evergreen Asset or First Union was investment adviser totaled
approximately $15.7 billion.
For the Funds listed below, Evergreen Asset waived the following amounts of
its administration fee for the period ended August 31, 1996:
<TABLE>
<S> <C>
Georgia $3,139
New Jersey 9,181
South Carolina 3,441
Virginia 4,333
</TABLE>
PLANS OF DISTRIBUTION -- The Funds have adopted for their Class A shares
and Class B Shares, Distribution Plans (the "Plans") pursuant to Rule 12b-1
under the Act. Under the terms of the Plans, the Funds may incur
distribution-related and shareholder servicing expenses which may not exceed an
annual fee of .75 of 1% for Class A and Class B Shares. For each of the Funds
except Florida and New Jersey, the payments for Class A were voluntarily limited
to an annual fee of .25 of 1% of average daily net assets. For the period ended
August 31, 1996, Rule 12b-1 fees, net of reimbursement, charged to Florida and
New Jersey were approximately an annual fee of .07 and .02 of 1%, respectively,
of average daily net assets. The Funds have entered into distribution agreements
with Evergreen Funds Distributor ("EFD"), a subsidiary of Furman Selz, whereby
they will compensate EFD for its services at a rate which may not exceed an
annual fee of .25 of 1% of Class A average daily net assets and an annual fee of
.75 of 1% of Class B average daily net assets.
The Funds have entered into a Shareholder Services Agreement with First
Union Brokerage Services ("FUBS"), an affiliate of First Union, whereby they
will compensate FUBS up to an annual fee of .25 of 1% for certain services
provided to shareholders and/or maintenance of shareholder accounts relating to
each of the Fund's Class B Shares.
ORGANIZATIONAL EXPENSES -- Organizational expenses of Florida, Georgia,
North Carolina, South Carolina and Virginia were initially borne by the Funds'
prior administrator. These Funds agreed to reimburse such expenses during the
five-year period following each Funds' commencement of operations. As a result
of a change in the administration agreement, First Union purchased the remaining
unreimbursed organizational expenses from the prior administrator. As of, and
for the year end August 31, 1996, the Funds paid and have a remaining liability
to First Union as follows:
<TABLE>
<CAPTION>
REMAINING
PAYMENTS LIABILITY
<S> <C> <C>
Florida $ 4,754 $21,394
Georgia 4,291 19,311
North Carolina 16,992 26,702
South Carolina 11,425 57,124
Virginia 4,101 18,455
</TABLE>
SALES CHARGES -- EFD has advised the Funds that it has retained the
following amounts from front-end sales charges resulting from sales of Class A
Shares during the period ended August 31, 1996:
<TABLE>
<CAPTION>
Florida High Income $29,467
<S> <C>
Florida 5,996
Georgia 875
New Jersey 2,316
North Carolina 154
South Carolina 2,228
Virginia 2,033
</TABLE>
70
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 4 -- SHARES OF BENEFICIAL INTEREST
Each of the Funds has an unlimited number of $0.0001 par shares authorized.
Each of the Funds' shares are divided into classes which are designated Class A,
Class B and Class Y Shares. Class Y Shares are available only to investment
advisory clients of First Union and its affiliates, certain institutional
investors or Class Y shareholders of record of certain other funds managed by
First Union and its affiliates as of December 30, 1994. The classes have
identical voting, dividend, liquidation and other rights, except that Class A
and Class B Shares bear distribution expenses (see Note 3) and have exclusive
voting rights with respect to their distribution plans.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS ENDED
AUGUST 31, 1996 AUGUST 31, 1995
SHARES AMOUNT SHARES DOLLARS
<S> <C> <C> <C> <C>
FLORIDA HIGH INCOME
CLASS A
Shares sold................................................ 3,124,792 $ 32,820,683 730,828 $ 7,497,799
Shares issued on reinvestment of distributions............. 141,897 1,492,720 29,262 301,952
Shares redeemed............................................ (1,673,161) (17,673,622) (1,434,175) (14,852,986)
Net increase (decrease).................................... 1,593,528 16,639,781 (674,085) (7,053,235)
CLASS B*
Shares sold................................................ 1,606,756 16,929,901 301,146 3,102,089
Shares issued on reinvestment of distributions............. 29,466 309,488 505 5,248
Shares redeemed............................................ (93,856) (985,765) -- --
Net increase............................................... 1,542,366 16,253,624 301,651 3,107,337
CLASS Y**
Shares sold................................................ 203,571 2,137,099 10 101
Shares issued on reinvestment of distributions............. 1,303 13,721 -- --
Shares redeemed............................................ (15,879) (167,279) -- --
Net increase............................................... 188,995 1,983,541 10 101
Total net increase (decrease) resulting from Fund share
transactions............................................. 3,324,889 $ 34,876,946 (372,424) ($ 3,945,797)
</TABLE>
*For Class B shares, the Fund share transaction activity is for the period July
10, 1995 (commencement of operations) through August 31, 1995.
**For Class Y shares, the Fund share transaction activity is for the period
September 20, 1995 (commencement of operations) through August 31, 1996. For
the four months ended August 31, 1995, the Fund share transaction activity
reflects the initial purchase of 10 shares.
71
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 4 -- SHARES OF BENEFICIAL INTEREST -- continued
<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS ENDED
AUGUST 31, 1996 AUGUST 31, 1995*
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
FLORIDA
CLASS A
Shares sold....................................................... 647,176 $ 6,349,216 148,921 $ 1,551,451
Shares issued in acquisition of First Union Florida Municipal Bond
Portfolio....................................................... -- -- 876,413 8,475,749
Shares issued on reinvestment of distributions.................... 198,575 1,954,093 136,011 1,447,315
Shares redeemed................................................... (2,919,201) (28,758,982) (4,679,881) (45,809,078)
Net decrease...................................................... (2,073,450) (20,455,673) (3,518,536) (34,334,563)
CLASS B
Shares sold....................................................... 720,789 7,109,005 179,340 1,737,203
Shares issued in acquisition of First Union Florida Municipal Bond
Portfolio....................................................... -- -- 2,722,202 26,328,175
Shares issued on reinvestment of distributions.................... 67,958 668,617 15,662 151,941
Shares redeemed................................................... (621,849) (6,110,433) (109,102) (1,054,568)
Net increase...................................................... 166,898 1,667,189 2,808,102 27,162,751
CLASS Y
Shares sold....................................................... 1,061,203 10,399,454 97,604 938,937
Shares issued in acquisition of First Union Florida Municipal Bond
Portfolio....................................................... -- -- 335,151 3,241,399
Shares issued on reinvestment of distributions.................... 5,711 56,106 591 5,727
Shares redeemed................................................... (172,594) (1,701,590) (63,509) (610,195)
Net increase...................................................... 894,320 8,753,970 369,837 3,575,868
Total net decrease resulting from Fund share transactions......... (1,012,232) ($10,034,514) (340,597) ($ 3,595,944)
</TABLE>
*For Class B and Y shares, the Fund share transaction activity is for the period
June 30, 1995 (commencement of class operations) through August 31, 1995.
<TABLE>
<CAPTION>
YEAR ENDED EIGHT MONTHS ENDED
AUGUST 31, 1996 AUGUST 31, 1995
SHARES AMOUNT SHARES DOLLARS
<S> <C> <C> <C> <C>
GEORGIA
CLASS A
Shares sold.......................................................... 37,924 $ 365,163 76,707 $ 721,680
Shares issued on reinvestment of distributions....................... 7,779 75,126 4,524 42,316
Shares redeemed...................................................... (63,160) (605,087) (18,364) (172,931)
Net increase (decrease).............................................. (17,457) (164,798) 62,867 591,065
CLASS B
Shares sold.......................................................... 268,620 2,600,226 128,136 1,196,824
Shares issued on reinvestment of distributions....................... 26,313 253,826 17,586 164,250
Shares redeemed...................................................... (122,257) (1,183,493) (140,930) (1,336,278)
Net increase......................................................... 172,676 1,670,559 4,792 24,796
CLASS Y
Shares sold.......................................................... 280,783 2,686,240 108,389 1,023,100
Shares issued on reinvestment of distributions....................... 3,963 38,022 647 6,066
Shares redeemed...................................................... (256,913) (2,444,107) (244) (2,297)
Net increase......................................................... 27,833 280,155 108,792 1,026,869
Total net increase resulting from Fund share transactions............ 183,052 $ 1,785,916 176,451 $ 1,642,730
</TABLE>
72
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 4 -- SHARES OF BENEFICIAL INTEREST -- continued
<TABLE>
<CAPTION>
SIX-MONTHS ENDED YEAR ENDED
AUGUST 31, 1996 FEBRUARY 29, 1996*
SHARES AMOUNT SHARES DOLLARS
<S> <C> <C> <C> <C>
NEW JERSEY
CLASS A
Shares sold............................................................ 124,249 $ 1,339,667 1,008,145 $ 10,858,775
Shares issued on reinvestment of distributions......................... 42,586 457,685 88,801 958,593
Shares redeemed........................................................ (949,514) (10,244,991) (614,448) (6,620,815)
Net increase (decrease)................................................ (782,679) (8,447,639) 482,498 5,196,553
CLASS B
Shares sold............................................................ 234,035 2,509,436 16,868 187,450
Shares issued on reinvestment of distributions......................... 2,234 24,017 33 364
Shares redeemed........................................................ (1,239) (13,260) -- --
Net increase........................................................... 235,030 2,520,193 16,901 187,814
CLASS Y
Shares sold............................................................ 864,470 9,318,727 1,664 18,542
Shares issued on reinvestment of distributions......................... 3,838 41,210 5 56
Shares redeemed........................................................ (26,045) (280,780) -- --
Net increase........................................................... 842,263 9,079,157 1,669 18,598
Total net increase resulting from Fund share transactions.............. 294,614 $ 3,151,711 501,068 $ 5,402,965
</TABLE>
*For Class B shares, the Fund share transaction is for the period January 30,
1996 (commencement of operations) through February 29, 1996. For Class Y
shares, the Fund share transaction is for the period February 8, 1996
(commencement of operations) through February 29, 1996.
<TABLE>
<CAPTION>
YEAR ENDED EIGHT MONTHS ENDED
AUGUST 31, 1996 AUGUST 31, 1995
SHARES AMOUNT SHARES DOLLARS
<S> <C> <C> <C> <C>
NORTH CAROLINA
CLASS A
Shares sold............................................................ 118,007 $ 1,198,058 125,332 $ 1,232,452
Shares issued on reinvestment of distributions......................... 27,147 275,346 19,270 189,699
Shares redeemed........................................................ (176,511) (1,780,168) (183,513) (1,800,044)
Net increase (decrease)................................................ (31,357) (306,764) (38,911) (377,893)
CLASS B
Shares sold............................................................ 635,229 6,447,862 521,981 5,146,189
Shares issued on reinvestment of distributions......................... 144,603 1,466,473 101,358 997,747
Shares redeemed........................................................ (759,219) (7,700,019) (565,861) (5,555,413)
Net increase........................................................... 20,613 214,316 57,478 588,523
CLASS Y
Shares sold............................................................ 327,111 3,318,310 45,992 453,471
Shares issued on reinvestment of distributions......................... 1,016 10,257 448 4,415
Shares redeemed........................................................ (51,457) (522,912) (15,523) (152,131)
Net increase........................................................... 276,670 2,805,655 30,917 305,755
Total net increase resulting from Fund share transactions.............. 265,926 $ 2,713,207 49,484 $ 516,385
</TABLE>
73
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 4 -- SHARES OF BENEFICIAL INTEREST -- continued
<TABLE>
<CAPTION>
YEAR ENDED EIGHT MONTHS ENDED
AUGUST 31, 1996 AUGUST 31, 1995
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SOUTH CAROLINA
CLASS A
Shares sold............................................................. 31,170 $ 305,932 28,494 $ 267,216
Shares issued on reinvestment of distributions.......................... 1,829 17,842 754 7,119
Shares redeemed......................................................... (9,800) (95,582) (1,851) (17,235)
Net increase............................................................ 23,199 228,192 27,397 257,100
CLASS B
Shares sold............................................................. 109,335 1,062,828 100,143 941,168
Shares issued on reinvestment of distributions.......................... 12,969 126,461 7,356 69,043
Shares redeemed......................................................... (49,850) (485,446) (22,831) (214,174)
Net increase............................................................ 72,454 703,843 84,668 796,037
CLASS Y
Shares sold............................................................. 349,743 3,411,415 173,778 1,645,544
Shares issued on reinvestment of distributions.......................... 10,998 107,081 745 7,094
Shares redeemed......................................................... (65,167) (627,612) (10,674) (100,744)
Net increase............................................................ 295,574 2,890,884 163,849 1,551,894
Total net increase resulting from Fund share transactions............... 391,227 $3,822,919 275,914 $2,605,031
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED EIGHT MONTHS ENDED
AUGUST 31, 1996 AUGUST 31, 1995
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
VIRGINIA
CLASS A
Shares sold............................................................. 105,025 $1,032,730 48,742 $ 465,071
Shares issued on reinvestment of distributions.......................... 10,186 99,877 5,890 56,155
Shares redeemed......................................................... (21,674) (211,176) (30,945) (295,864)
Net increase............................................................ 93,537 921,431 23,687 225,362
CLASS B
Shares sold............................................................. 145,062 1,427,003 105,642 1,013,607
Shares issued on reinvestment of distributions.......................... 19,108 187,592 11,096 105,855
Shares redeemed......................................................... (74,064) (721,093) (22,448) (212,617)
Net increase............................................................ 90,106 893,502 94,290 906,845
CLASS Y
Shares sold............................................................. 425,577 4,165,267 83,741 798,165
Shares issued on reinvestment of distributions.......................... 2,286 22,401 1,057 10,084
Shares redeemed......................................................... (87,094) (858,877) (23,858) (228,520)
Net increase............................................................ 340,769 3,328,791 60,940 579,729
Total net increase resulting from Fund share transactions............... 524,412 $5,143,724 178,917 $1,711,936
</TABLE>
74
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 5 -- INVESTMENT TRANSACTIONS
The cost of purchases and proceeds from sales of investments, excluding
short-term securities for the period ended August 31, 1996 were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
<S> <C> <C>
Florida High Income...................................... $67,704,133 $32,652,951
Florida.................................................. 46,368,105 57,651,332
Georgia.................................................. 4,459,364 2,618,439
New Jersey............................................... 3,582,124 15,000
North Carolina........................................... 53,236,380 51,769,071
South Carolina........................................... 6,660,242 2,935,667
Virginia................................................. 11,224,250 6,105,707
</TABLE>
On August 31, 1996, the aggregate cost of investments for federal tax
purposes was the same as for financial reporting purposes. The composition of
unrealized appreciation and depreciation of investment securities was as
follows:
<TABLE>
<CAPTION>
APPRECIATION DEPRECIATION NET
<S> <C> <C> <C>
Florida High Income................. $1,468,023 $504,533 $ 963,490
Florida............................. 7,337,598 481,845 6,855,753
Georgia............................. 481,737 4,566 477,171
New Jersey.......................... 1,403,155 361,061 1,042,094
North Carolina...................... 1,683,434 160,622 1,522,812
South Carolina...................... 185,255 55,110 130,145
Virginia............................ 236,589 31,511 205,078
</TABLE>
NOTE 6 -- CONCENTRATION OF CREDIT RISK
Since the Funds invest a substantial portion of their assets in issuers
located in a single state, they may be more affected by economic and political
developments in a specific state or region than would be a comparable general
tax-exempt mutual fund. Certain debt obligations held by each of the Funds are
entitled to the benefit of insurance, standby letters of credit or other
guarantees of banks or other financial institutions.
NOTE 7 -- FINANCING AGREEMENT
Effective July 3, 1996, a financing agreement was put in place with all of
the Evergreen Funds and the custodian, State Street Bank and Trust Company (the
"Bank"). Under the agreement, the Bank is providing an unsecured line of credit
facility, in the aggregate amount of $100 million ($50 million committed and $50
million uncommitted), to be accessed by the Funds for temporary or emergency
purposes only and is subject to each participating Fund's borrowing
restrictions. Borrowings under this facility bear interest at .75% per annum
above the Bank's cost of funds as set periodically by the Bank. A commitment fee
of .10% per annum will be incurred on the unused portion of the committed
facility which will be allocated to all participating funds. During the year
ended August 31, 1996, the Funds had no borrowings outstanding.
75
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES AND SHAREHOLDERS OF
EVERGREEN FLORIDA HIGH INCOME MUNICIPAL BOND FUND
In our opinion, the accompanying Statement of Assets and Liabilities,
including the Statement of Investments, and the related Statements of Operations
and of Changes in Net Assets and the Financial Highlights present fairly, in all
material respects, the financial position of Evergreen Florida High Income
Municipal Bond Fund (the "Fund"), one of the Evergreen Municipal Trust
Portfolios, at August 31, 1996, the results of its operations for the year
ended, and the changes in its net assets and the financial highlights for the
year then ended and for the four month period ended August 31, 1995, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at August 31, 1996 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above. The financial highlights for each of the two years
in the period ended April 30, 1995 and the financial highlights for the period
June 17, 1992 (commencement of operations) through April 30, 1993 were audited
by other independent accountants, whose opinion thereon, dated June 2, 1995 was
unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
October 18, 1996
76
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE TRUSTEES AND SHAREHOLDERS OF
EVERGREEN FLORIDA MUNICIPAL BOND FUND
EVERGREEN GEORGIA MUNICIPAL BOND FUND
EVERGREEN NEW JERSEY TAX FREE INCOME FUND
EVERGREEN NORTH CAROLINA MUNICIPAL BOND FUND
EVERGREEN SOUTH CAROLINA MUNICIPAL BOND FUND
EVERGREEN VIRGINIA MUNICIPAL BOND FUND
We have audited the accompanying statements of assets and liabilities,
including the statements of investments, for the Evergreen State Tax-Free Funds
listed below, as of August 31, 1996 and the related statements of operations,
the changes in net assets, and the financial highlights for each of the periods
listed below:
EVERGREEN FLORIDA MUNICIPAL BOND FUND -- statement of operations for the
year ended August 31, 1996, statements of changes in net assets and the
financial highlights for the year ended August 31, 1996 and the four month
period ended August 31, 1995. The financial highlights for each of the
years or periods in the three-year period ended April 30, 1995 were audited
by other auditors, whose report thereon, dated June 2, 1995 was
unqualified;
EVERGREEN GEORGIA MUNICIPAL BOND FUND -- statement of operations for the
year ended August 31, 1996, statements of changes in net assets for the
year ended August 31, 1996 and the eight-month period ended August 31, 1995
and the financial highlights for each of the years or periods from July 2,
1993 (commencement of operations) through August 31, 1996;
EVERGREEN NEW JERSEY TAX FREE INCOME FUND -- statement of operations for
the six-month period ended August 31, 1996, statements of changes in net
assets for the six-month period ended August 31, 1996 and the year ended
February 29, 1996, and the financial highlights for each of the years or
periods from March 1, 1993 through August 31, 1996. The financial
highlights for the year ended February 28, 1993 were audited by other
auditors whose reports expressed unqualified opinions on those financial
highlights;
EVERGREEN NORTH CAROLINA MUNICIPAL BOND FUND -- statement of operations for
the year ended August 31, 1996, statements of changes in net assets for the
year ended August 31, 1996 and the eight-month period ended August 31, 1995
and the financial highlights for each of the years or periods from January
11, 1993 (commencement of operations) through August 31, 1996;
EVERGREEN SOUTH CAROLINA MUNICIPAL BOND FUND -- statement of operations for
the year ended August 31, 1996, statements of changes in net assets for the
year ended August 31, 1996 and the eight-month period ended August 31, 1995
and the financial highlights for each of the years or periods from January
3, 1994 (commencement of operations) through August 31, 1996;
EVERGREEN VIRGINIA MUNICIPAL BOND FUND -- statement of operations for the
year ended August 31, 1996, statements of changes in net assets for the
year ended August 31, 1996 and the eight-month period ended August 31, 1995
and the financial highlights for each of the years or periods from July 2,
1993 (commencement of operations) through August 31, 1996.
KPMG PEAT MARWICK LLP
Pittsburgh, Pennsylvania
October 16, 1996
77
<PAGE>
(This Page Left Blank Intentionally)
78
<PAGE>
(This Page Left Blank Intentionally)
79
<PAGE>
(This Page Left Blank Intentionally)
80
<PAGE>
TRUSTEES AND OFFICERS
TRUSTEES:
Laurence B. Ashkin*
Foster Bam*
James S. Howell, Chairman
Robert J. Jeffries*+
Gerald M. McDonnell
Thomas L. McVerry
William W. Pettit
Russell A. Salton, III M.D.
Michael S. Scofield
OFFICERS:
John J. Pileggi
President and Treasurer
Joan V. Fiore
Secretary
Sheryl Hirschfeld
Assistant Secretary
Donald E. Brostrom
Assistant Treasurer
Stephen W. St. Clair
Assistant Treasurer
* Trustees for Evergreen Florida High Income
Municipal Bond Fund and Evergreen New Jersey Tax
Free Income Fund only.
+ Trustee Emeritus
FEDERAL INCOME TAX STATUS OF DIVIDENDS (UNAUDITED)
100% of the dividends distributed by Florida, Florida High Income, Georgia, New
Jersey, North Carolina, South Carolina and Virginia for the year ended August
31, 1996 are exempt from federal income tax, other than alternative minimum tax.
At August 31, 1996, Florida had long term capital gains of $166,845. These
capital gains will be paid before August 31, 1997.
<PAGE>
This brochure must be preceeded or accompanied by a prospectus of an
Evergreen fund contained herein. The prospectus contains more complete
information, including fees and expenses, and should be read carefully
before investing or sending money.
NOT May lose value
FDIC No bank guarantee
INSURED
Evergreen Funds Distributor, Inc.
Evergreen(sm) is a Service Mark of Evergreen Asset Management Corp.
Copyright 1996, Evergreen Asset Management Corp.
<PAGE>
EVERGREEN
STATE TAX-FREE FUNDS
(Graphics of Florida+, Florida, Georgia, New Jersey
North Carolina, South Carolina, Virginia)
SEMIANNUAL
REPORT
FEBRUARY 28, 1997
Evergreen Keystone Funds SM
logos appear here
<PAGE>
EVERGREEN STATE TAX-FREE FUNDS
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
Economic Overview......................................................... 1
A Report From Your Portfolio Manager -- Florida High Income
Municipal Bond Fund....................................................... 2
A Report From Your Portfolio Manager -- New Jersey Tax-Free
Income Fund............................................................... 3
A Report From Your Portfolio Managers..................................... 4
(Flordia+ logo FLORIDA Statement of Investments.................................................. 5
appears here) HIGH INCOME Statement of Assets and Liabilities....................................... 8
MUNICIPAL BOND FUND Statement of Operations................................................... 9
Statement of Changes in Net Assets........................................ 10
Financial Highlights...................................................... 11
</TABLE>
<TABLE>
<C> <S> <C>
(Florida logo FLORIDA MUNICIPAL Statement of Investments.................................................. 13
appears here) BOND FUND Statement of Assets and Liabilities....................................... 16
Statement of Operations................................................... 17
Statement of Changes in Net Assets........................................ 18
Financial Highlights...................................................... 19
</TABLE>
<TABLE>
<C> <S> <C>
(Georgia logo GEORGIA Statement of Investments.................................................. 21
appears here) MUNICIPAL BOND Statement of Assets and Liabilities....................................... 22
FUND Statement of Operations................................................... 23
Statement of Changes in Net Assets........................................ 24
Financial Highlights...................................................... 25
</TABLE>
<TABLE>
<C> <S> <C>
(New Jersey logo NEW JERSEY Statement of Investments.................................................. 28
appears here) TAX FREE Statement of Assets and Liabilities....................................... 31
INCOME FUND Statement of Operations................................................... 32
Statement of Changes in Net Assets........................................ 33
Financial Highlights...................................................... 34
</TABLE>
<TABLE>
<C> <S> <C>
(North Carolina logo NORTH CAROLINA Statement of Investments.................................................. 36
appears here) MUNICIPAL BOND Statement of Assets and Liabilities....................................... 38
FUND Statement of Operations................................................... 39
Statement of Changes in Net Assets........................................ 40
Financial Highlights...................................................... 41
</TABLE>
<TABLE>
<C> <S> <C>
(South Carolina logo SOUTH CAROLINA Statement of Investments.................................................. 44
appears here) MUNICIPAL BOND Statement of Assets and Liabilities....................................... 46
FUND Statement of Operations................................................... 47
Statement of Changes in Net Assets........................................ 48
Financial Highlights...................................................... 49
</TABLE>
<TABLE>
<C> <S> <C>
(Virginia logo VIRGINIA Statement of Investments.................................................. 51
appears here) MUNICIPAL BOND Statement of Assets and Liabilities....................................... 53
FUND Statement of Operations................................................... 54
Statement of Changes in Net Assets........................................ 55
Financial Highlights...................................................... 56
Combined Notes to Financial Statements.................................... 59
Trustees and Officers..........................................Inside Back Cover
</TABLE>
<PAGE>
EVERGREEN STATE TAX-FREE FUNDS
ECONOMIC OVERVIEW
BY STEPHEN A. LIEBER, CHAIRMAN
EVERGREEN ASSET MANAGEMENT CORP.
The strong momentum of the United States economy (Photo of Stephen A.
at the end of 1996 was well sustained through the Lieber appears here)
first quarter of 1997. Industrial production rose in
each month of the first quarter, 0.10% in Janu-
ary, 0.60% in February, and 0.90% in March.
Industrial capacity utilization reflected the dynamic economy, rising to 84.1%,
the highest level since March 1995. Despite the sustained growth in the U.S.
economy, the rate of inflation continues to be moderate. The Consumer Price
Index increase was 1.8% on an annual rate basis during the first quarter, well
below the moderate 3.3% rise during 1996. These recent economic figures combine
to offset the fearful expectations of many economists and participants in the
fixed income markets that the economy might not be capable of significant
overall growth without inciting inflation. Most observers, however, are very
reluctant to assume that the major driving force of inflation, rising wages, is
unlikely to appear. They point to record low inventory-to-sales ratios, low
level of inventories on the retailing and wholesaling level, and the rising
operating rate of industrial production. While arguing over whether the recent
6% growth in consumer spending is sustainable, and whether consumer credit card
debt is over-extended, there are few who would project any near-term significant
decline in overall domestic demand.
The many aspects of domestic economic growth have led to an intense watch on
the trends of wage levels. The rise in average hours worked, some gradual creep
in compensation, and the sustained jobless level at just over 5%, have led many
key observers to conclude that any further acceleration in the economy's
momentum will lead to some breakout in wage compensation, especially in areas of
labor shortage. The Federal Reserve has clearly concluded that this risk
justifies the slowing effort of the recent 0.25% increase in the discount rate.
The majority of observers expect that the economic figures published through
April will probably lead to another 0.25% rise in May. There is widespread
discussion about whether there will be more increases of 0.25%, or even a rise
of 0.50% over the next few months. In initiating the recent discount rate
increase, Federal Reserve Chairman, Alan Greenspan, described the move as
"pre-emptive". Consequently, most observers conclude that the Federal Reserve
policy is going to be one of pre-emptive moves when inflationary signs appear
in the economy. Higher short-term interest rates will be the Fed's first line
of defense. The real return in long-term fixed income investments today is in
the area of 5%. This is strikingly higher than the "normal" real return of
3% to 4%, and well above the 3.6% yield of the new ten-year U.S. Treasury
Inflation Indexed Bonds, which are an appropriate proxy for the real return.
This extremely high rate of real return suggests either that the long-term
interest rate structure in the United States is forecasting a much higher
rate of inflation than presently seen, or is at a level which discounts
expectations of a higher rate of inflation. Many bond market observers believe
that the discounting has been done and, therefore, has provided the better than
7% yields now available in long-term United States Treasuries.
The fixed income markets currently provide a combination of short-term
uncertainty, and increased long-term confidence. Over the short-term, the data
on economic strength and trends are being read with anxiety as indicators of
whether or not interest rates will rise. Over the longer term, the demonstrated
readiness of the Federal Reserve Open Market Committee to act "pre-emptively" to
ensure the longer term control of inflation, and to maintain stability in the
economy, is highly encouraging for fixed income investment.
1
<PAGE>
EVERGREEN FLORIDA HIGH INCOME
MUNICIPAL BOND FUND
A REPORT FROM YOUR
PORTFOLIO MANAGER (Photo of Richard K.
RICHARD K. MARRONE Marrone appears here)
We are pleased to present the Semiannual Report for Evergreen
Florida High Income Municipal Bond Fund for the six-month period
ended February 28, 1997. The Fund's total return (Class Y,
no-load shares) for the six-month period was 5.5%* as compared
with 4.6% for the Lipper Florida Municipal Debt Funds average of
the 79 Florida Municipal Debt funds tracked by Lipper Analytical
Services** during that time. The six-month total return at net
asset value for the Fund's Class A shares was 5.4%*. The Fund's
30-day SEC and tax-equivalent yields as of February 28, were
6.35% and 9.92%, respectively, for Class Y shares, and 5.81% and
9.08%, respectively, for Class A shares***.
The past six months has been an up-an-down market for fixed
income securities. Most of the latter half of 1996 produced positive gains until
December arrived and returns "went south". The first two months of 1997
continued with poor performance for bonds, especially during the month of
February.
The main culprit in February was Federal Reserve Chairman, Alan Greenspan, who
suggested in an appearance before Congress that a strong stock market and
continued economic growth combined with strong employment levels could lead to
upward inflationary pressure. Greenspan further spooked the financial markets
(particularly the bond market) by suggesting there may be the need for a
"pre-emptive strike" against inflation by raising interest rates before
inflation actually presents itself. This caused a sharp sell-off in the bond
markets during February and has caused a shift in investors' future
expectations. The Fed indeed raised rates at its March 25 Federal Open Market
Committee meeting.
This turmoil in the markets has actually been a positive factor for the
relative performance of the Florida High Municipal Bond Income Fund. As stated
numerous times in these writings, a climate of rising interest rates is the best
scenario for the performance of your Fund. This Fund can outperform its
competition in such an environment. As of March 31, 1997, the 12-month total
returns for Evergreen Florida High Income Municipal Bond Fund's Class Y shares
and Class A shares ranked number one and number three, respectively, among the
78 Florida municipal debt funds tracked by Lipper Analytical Services, Inc.,
during that time. The three-year average annual compound return ended March 31,
for the Fund's Class A shares ranked number two among the 49 Florida municipal
debt funds tracked by Lipper during that time.
Several factors contributed to the Fund's performance. One constant through
all the up-and-down movements in interest rates recently, has been the narrowing
of spreads between higher and lower quality bonds. Most of the Fund is comprised
of lower rated and non-rated bonds, hence their performance was helped along
dramatically by this tightening of spreads as investors searched for more yield.
The supply of higher-yielding bonds picked up during the fourth quarter of 1996,
so we were able to purchase several as cash continued to flow into the Fund. The
Fund has increased in size by approximately 69% since February 1996, and 12%
since December. Another contributing factor to Fund outperformance was the fact
that several bonds were refunded by new issues which increased the value of our
bonds dramatically.
We are expecting several new issues to come to market in the next few months
and look to increase the yield and income of the Fund with these purchases.
Thank you for your investment in Evergreen Florida High Income Municipal Bond
Fund.
FIGURES REPRESENT PAST PERFORMANCE WHICH IS NO GUARANTEE OF FUTURE RESULTS.
* PERFORMANCE FIGURES INCLUDE REINVESTMENT OF INCOME DIVIDEND AND CAPITAL GAIN
DISTRIBUTIONS. INVESTMENT RETURN, PRINCIPAL VALUE AND YIELDS WILL FLUCTUATE.
INVESTORS' SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST.
.4% WAS THE 6-MONTH TOTAL RETURN ENDED 2/28/97, FOR THE FUND'S CLASS A WITH
THE 4.75% FRONT-END SALES CHARGE. THE FUND ALSO OFFERS CLASS B SHARES, WHICH
ARE SUBJECT TO A MAXIMUM 5% CONTINGENT DEFERRED SALES CHARGE. PERFORMANCE
FOR CLASS B SHARES MAY BE DIFFERENT.
DURING THE PERIOD UNDER REVIEW, THE ADVISER CONTINUED TO VOLUNTARILY WAIVE A
PORTION OF ITS ADVISORY FEE. HAD THE FEE NOT BEEN WAIVED, PERFORMANCE AND
YIELDS WOULD HAVE BEEN LOWER. FEE WAIVER MAY BE REVISED AT ANY TIME.
SOME OF THE FUND'S INCOME MAY BE SUBJECT TO THE FEDERAL ALTERNATIVE MINIMUM
TAX FOR CERTAIN INVESTORS.
** SOURCE: LANA (LIPPER ANALYTICAL NEW APPLICATIONS) LIPPER ANALYTICAL SERVICES
INC., IS AN INDEPENDENT MUTUAL FUNDS PERFORMANCE MONITOR. LIPPER AVERAGE
DOES NOT INCLUDE SALES CHARGES, AND IF INCLUDED PERFORMANCE MAY BE LOWER AND
THE FUND'S RANKINGS MAY BE DIFFERENT.
*** TAX-EQUIVALENT YIELDS ASSUME A 36% FEDERAL TAX BRACKET. FLORIDA INTANGIBLES
TAX (WHICH IS NOT REFLECTED IN TAX-EQUIVALENT YIELDS ABOVE) ON PERSONAL
PROPERTY AFTER EXEMPTIONS OF $2 PER $1,000 IS GENERALLY IMPOSED ON THE VALUE
OF STOCKS, BONDS, OR OTHER EVIDENCES OF INDEBTEDNESS AND MUTUAL FUND SHARES.
2
<PAGE>
EVERGREEN NEW JERSEY TAX FREE INCOME FUND
A REPORT FROM YOUR
PORTFOLIO MANAGER (Photo of Jocelyn Turner
JOCELYN TURNER appears here)
We are pleased to present the Semiannual Report for the
Evergreen New Jersey Tax-Free Income Fund for the six-month
period ended February 28, 1997. The Fund's total return (Class
Y, no-load shares) for the six-month period was 4.2%* as
compared with 4.5% for the Lipper New Jersey Municipal Debt
Funds average of the 55 New Jersey municipal debt funds tracked
by Lipper Analytical Services, Inc.,** during that time. The
six-month total returns at net asset value for the Fund's Class
A shares was 4.2%*. The Fund's 30-day SEC and tax-equivalent
yields*** as of February 28, were 4.98% and 8.31% respectively,
for Class Y shares, and 4.64% and 7.74%, respectively, for Class A
shares.
These first six months of our fiscal year witnessed a rather
erratic bond market. Bond prices rebounded throughout the second half of 1996 as
interest rates declined. A subsequent jump in rates in December caused the bond
market to stumble and rates continued to climb modestly throughout the first two
months of 1997. The yield on the benchmark thirty-year treasury bond began the
six-month period at 7.1%, declined, then rebounded, and settled at 6.8% on
February 28.
Throughout the period under review, fundamentals within the economy remained
positive as corporate earnings remained strong in an environment of low interest
rates and modest inflation. In this healthy economic environment, the Federal
Reserve Board has become a mere onlooker as it has neither raised nor lowered
rates in over a year. However, the financial markets received a jolt when
Federal Reserve Chairman, Alan Greenspan, made comments regarding the economy
and markets. In December, he commented that "irrational exuberance" has led to a
possibly overpriced stock market and in February suggested that interest rates
would be raised as a "pre-emptive strike" against inflation. In both instances,
financial markets reacted negatively and interest rates rose.
Trading activity in the first six months of the Fund's fiscal year has been
relatively light due to the shortage in state-supply issuance. We have sold
shorter-call bonds (five years or fewer) and purchased some higher coupon bonds
with longer calls to help maintain income. Our outlook for the remainder of the
fiscal year is cautious. Until the direction of interest rates becomes more
clear, we will stay neutral to our benchmark duration of 7.87 years. The Fund
continues to maintain its high quality rating of just below "AA".
Thank you for your investment in the Evergreen New Jersey Tax-Free Income
Fund.
FIGURES REPRESENT PAST PERFORMANCE WHICH IS NO GUARANTEE OF FUTURE RESULTS.
* PERFORMANCE FIGURES INCLUDE REINVESTMENT OF INCOME DIVIDEND AND CAPITAL GAIN
DISTRIBUTIONS. INVESTMENT RETURN, PRINCIPAL VALUE AND YIELD WILL FLUCTUATE.
INVESTORS' SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. DURING THE PERIOD UNDER REVIEW, THE ADVISER CONTINUED ITS
POLICY OF VOLUNTARILY WAIVING ITS ENTIRE ADVISORY FEE AND ABSORBING A
PORTION OF THE FUND'S OTHER EXPENSES. HAD FEE NOT BEEN WAIVED OR EXPENSES
ABSORBED, PERFORMANCE AND YIELDS WOULD HAVE BEEN LOWER. FEE WAIVER MAY BE
REVISED AT ANY TIME.
-0.8% WAS THE 6-MONTH TOTAL RETURN ENDED 2/28/97 FOR THE FUND'S CLASS A
SHARES WITH THE 4.75% FRONT-END SALES CHARGE. THE FUND ALSO OFFERS CLASS B
SHARES, WHICH ARE SUBJECT TO A MAXIMUM 5% CONTINGENT DEFERRED SALES CHARGE.
PERFORMANCE FOR CLASS B SHARES MAY BE DIFFERENT. SOME OF THE FUND'S INCOME
MAY BE SUBJECT TO THE FEDERAL ALTERNATIVE MINIMUM TAX FOR CERTAIN INVESTORS.
** SOURCE: LANA (LIPPER ANALYTICAL NEW APPLICATIONS) LIPPER ANALYTICAL SERVICES
INC., IS AN INDEPENDENT MUTUAL FUNDS PERFORMANCE MONITOR. LIPPER AVERAGE
DOES NOT INCLUDE SALES CHARGES, AND IF INCLUDED PERFORMANCE MAY BE LOWER.
*** TAX-EQUIVALENT YIELDS ASSUME A 36% FEDERAL TAX BRACKET AND A 6.37% NEW
JERSEY STATE TAX BRACKET. TAX-EQUIVALENT YIELDS WOULD BE LOWER FOR INVESTORS
IN LOWER TAX BRACKETS AND HIGHER FOR INVESTORS IN HIGHER TAX BRACKETS.
3
<PAGE>
EVERGREEN STATE TAX-FREE FUNDS
A REPORT FROM YOUR
PORTFOLIO MANAGERS
ROBERT EVANS
RICHARD MARRONE
ROBERT S. DRYE
CHARLES JEANNE
The past six months have provided an up-an-down market for
fixed income investors. Most of the latter half of 1996 produced
positive gains until December arrived and returns "went south". (Photo of Robert
The first two months of 1997 continued with poor performance for Evans appears
bonds, especially during the month of February. However, here)
municipals did outperform Treasuries during this period as the
supply of new municipal bond issues declined by 15% compared
with the same time last year. This decline in supply, no doubt,
contributed to the relatively rich levels of municipal bond
yields compared with Treasury bond yields. As February ended,
however, there were several important indications that
municipal yields will return to a more normal level of value.
These included an increase in scheduled issuance of bonds, (Photo of Richard
outflows from bond mutual funds, and traditional seasonal Marrone appears
patterns of market pressure in March. here)
The main culprit in February was Federal Reserve Chairman,
Alan Greenspan, who suggested in an appearance before Congress
that a strong stock market and continued economic growth
combined with strong employment levels could lead to upward
inflationary pressure. Greenspan further spooked the financial
markets (particularly the bond market) by suggesting there may
be the need for a "pre-emptive strike" against inflation by
raising interest rates before inflation actually presents
itself. This caused a sharp sell-off in the bond markets during
February and has caused a shift in investors' future (Photo of Robert
expectations. The Fed indeed raised rates at their March 25 S. Drye appears
Federal Open Market Committee meeting. here)
Within these tax exempt funds, we have continued to implement
an income-oriented approach and have sought to maintain a
higher-coupon structure which allows our funds to provide
tax-free income and, longer term, produce a solid total return
with reduced volatility. A substantial portion of the total
return in our tax-free portfolios is produced by the portfolio's
higher coupon structure. To help ensure credit quality, our municipal
credit analysts work in conjunction with portfolio managers to
carefully monitor existing holdings and seek out new investment
opportunities.
Thank you for your investment in the Evergreen State (Photo of Charles
Tax-Free Funds. Jeanne appears here)
SOME OF THE FUNDS' INCOME MAY BE SUBJECT TO THE FEDERAL ALTERNATIVE MINIMUM TAX
FOR CERTAIN INVESTORS.
INVESTMENT RETURN, PRINCIPAL VALUE AND YIELDS WILL FLUCTUATE. INVESTORS' SHARES,
WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
4
<PAGE>
EVERGREEN FLORIDA HIGH INCOME
MUNICIPAL BOND FUND
STATEMENT OF INVESTMENTS
FEBRUARY 28, 1997
(UNAUDITED)
(Florida+ logo appears here)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<C> <S> <C>
LONG-TERM MUNICIPAL SECURITIES -- 100.5%
CALIFORNIA -- 2.7%
$ 3,500 Valley Hlth. Sys. Hosp. RB,
(Ser. A),
6.50%, 5/15/25....................... $ 3,527,265
FLORIDA -- 84.9%
785 Alachua Cnty. Hlth. Facs. RB,
Beverly Enterprises Proj.,
10.125%, 4/1/10...................... 854,237
1,000 Bay Cnty. Hosp. Sys. RB,
Bay Med. Ctr. Proj.,
8.00%, 10/1/12....................... 1,195,360
100 Baytree Cmnty. Dev. Dist.
Spl. Assmt. RB,
8.75%, 5/1/12........................ 106,903
750 Boynton Beach Hsg. Mtg.
Clipper Cove Apts.,
6.35%, 7/1/16........................ 764,040
Brevard Cnty. Hlth. Facs.
Auth. RB, Courtenay Springs Vlg.,
910 7.375%, 11/15/04..................... 963,799
1,875 7.50%, 11/15/12...................... 1,953,394
1,000 Brevard Cnty. Tourist Dev.
Tax RB, Marlins Spring,
6.875%, 3/1/13....................... 1,060,920
1,000 Broward Cnty. Hsg. Fin.
Auth. RB, (Ser. A),
7.35%, 3/1/23 (GNMA)................. 1,047,270
2,850 Cory Lakes Florida
Cmnty. Dev. Dist. RB
8.375%, 5/1/17....................... 2,832,985
1,080 Crossings At Fleming Is.
Cmnty. Dev. Dist. Util. RB,
7.375%, 10/1/19...................... 1,094,580
2,310 Duval Cnty. Hsg. Fin. Auth.
RB, St. Augustine Apts. Proj.,
6.00%, 3/1/21........................ 2,283,920
1,500 Eastlake Oaks Cmnty. Dev. Dist.
7.75%, 5/1/17........................ 1,534,275
Escambia Cnty. Hlth. Facs.
Auth. RB, Azalea Trace Inc.,
515 8.50%, 1/1/19........................ 554,650
535 9.25%, 1/1/06........................ 593,042
235 9.25%, 1/1/12........................ 260,495
1,500 Escambia Cnty. Hlth. Facs.
Auth. RB, Baptist Hosp. Inc.,
(Ser. B),
6.00%, 10/1/14....................... 1,494,585
1,750 Escambia Cnty. Hlth Facs. RB,
6.00%, 1/1/15........................ 1,701,350
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<C> <S> <C>
FLORIDA -- CONTINUED
Escambia Cnty. PCR
Champion Intl Corp. Proj.,
$ 2,000 6.40%, 9/1/30........................ $ 2,046,920
2,000 6.90%, 8/1/22........................ 2,133,520
1,000 Florida Hsg. Fin. Agy. RB,
The Vinyards Proj., (Ser. H),
6.50%, 11/1/25....................... 1,010,610
3,580 Hernando Cnty. IDR,
Florida Crushed Stone Co.,
8.50%, 12/1/14....................... 3,980,244
1,545 Hialeah Gardens, IDR,
Waterford Convalescent-A,
7.875%, 12/1/07...................... 1,620,257
600 Hillsborough Cnty. Aviation
Auth. RB US Air Proj., (Ser. 2),
8.60%, 1/15/22....................... 647,586
3,245 Homestead IDR, Cmnty.
Rehab. Providers Prog-A,
7.95%, 11/1/18....................... 3,296,725
2,500 Indian Trace Cmnty. GO Wtr.
Mgmt. Spl. Benefit Sub-B,
8.25%, 5/1/11........................ 2,718,750
500 Jacksonville Hlth. Facs.
Auth. IDR,
8.00%, 12/1/15....................... 558,785
1,000 Jacksonville, Hlth. Facs.
Auth. IDR, Cypress Vlg. Proj.,
7.00%, 12/1/22....................... 1,044,490
750 Jacksonville, Hlth. Facs.
Auth. RB, Cypress Vlg. Proj.,
7.00%, 12/1/14....................... 785,243
2,500 Lake Bernadette Cmnty. Dev.
Dist. Florida Special, (Ser. A),
8.00%, 5/1/17........................ 2,531,900
2,000 Lee Cnty. Hsg. Fin. Auth.
Multi-Cnty. Prog., (Ser. A),
7.50%, 9/1/27........................ 2,212,020
1,000 Lee Cnty. Hsg. Fin. Auth.
Single Family Mtg. RB,
Multi-Cnty. Prog., (Ser. A),
7.45%, 9/1/27........................ 1,106,460
1,000 Lee Cnty. Hsg. Fin. Auth.,
7.20%, 3/1/27........................ 1,094,480
850 Lee Cnty. IDA, Encore
Nursing Center Partner,
8.125%, 12/1/07...................... 929,832
2,860 Leon Cnty. Ed. Facs.
Auth. RB, (Ser. A),
8.25%, 5/1/14........................ 2,893,748
</TABLE>
5
<PAGE>
EVERGREEN FLORIDA HIGH INCOME
MUNICIPAL BOND FUND
STATEMENT OF INVESTMENTS -- (CONTINUED)
FEBRUARY 28, 1997
(UNAUDITED)
(Florida+ logo appears here)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<C> <S> <C>
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
FLORIDA -- CONTINUED
$ 950 Manatee Cnty. Hsg. Fin.
Auth. Mtg. RB,
7.45%, 5/1/27........................ $ 1,049,228
1,175 Martin Cnty. IDR Indiantown
Cogeneration PJ-A,
7.875%, 12/15/25..................... 1,345,645
1,245 Meadow Point II, Cmnty. Dev.
Dist. Cap. Impt. RB,
7.75%, 5/1/18........................ 1,278,839
1,000 Miami Beach City Center
Historic Convention,
6.25%, 12/1/16....................... 1,008,170
500 6.35%, 12/1/22....................... 504,475
1,300 North Springs, Impt. Dist.
Wtr. Mgmt. Spl. Assmt., (Ser. A),
8.20%, 5/1/24........................ 1,385,982
Northern Palm Beach Cnty.
Wtr. Ctl. Dist. Spl. Assmt.,
500 6.875%, 11/1/13...................... 539,640
500 7.00%, 8/1/15........................ 541,500
2,500 Northern Palm Beach Cnty.
Wtr. Ctl. & Impt. Unit Dev.,
7.20%, 8/1/16........................ 2,580,375
1,500 Northwood Cmnty. Dev. Dist.,
7.60%, 5/1/17........................ 1,527,105
1,040 Orange Cnty. Hlth. Facs.
Auth. RB, Lakeside Alts. Inc.,
6.50%, 7/1/13........................ 1,066,520
395 Orange Cnty. Hlth. Facs.
Auth. RB Orlando Lutheran Tower,
8.40%, 7/1/14........................ 409,374
2,385 Orange Cnty. Hsg. Finance
Auth. Mtg. RB, (Ser. B),
8.10%, 11/1/21....................... 2,536,710
2,000 Osceola Cnty. IDA, Cmnty.
Provider Pooled Ln. Proj. A,
7.75%, 7/1/17........................ 2,065,260
565 Overoaks Cmnty. Dev. Dist.
Cap. Impt. RB,
8.25%, 5/1/17........................ 573,537
1,500 Palm Beach Cnty. IDR,
Geriatric Care Inc. Proj.,
6.55%, 12/1/16....................... 1,564,845
Pinellas Cnty. Hlth. Facs.
Auth. RB, 144A
150 6.75%, 10/1/00....................... 150,602
100 7.00%, 10/1/01....................... 100,496
200 7.25%, 10/1/02....................... 201,164
685 7.75%, 7/1/14........................ 738,012
1,100 8.00%, 10/1/08....................... 1,107,931
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<C> <S> <C>
</TABLE>
FLORIDA -- CONTINUED
$ 3,100 8.00%, 2/1/11........................ $ 3,103,968
5,000 Polk Cnty. IDA
7.525%, 1/1/15....................... 5,333,200
1,000 Port Everglades, RB, (Ser. A),
7.50%, 9/1/12........................ 1,058,640
1,710 Quantum Cmnty. Dev. Dist.
Spl. Assmt.
7.75%, 3/1/14........................ 1,771,543
2,045 Riverwood Cmnty. Sys. RB,
7.75%, 10/1/14....................... 2,094,755
Sarasota Cnty. Hlth. Fac.
Auth. RB, Manatee Jewish Housing.
Council,
1,500 6.70%, 7/1/25........................ 1,429,635
1,000 7.375%, 7/1/16....................... 1,017,700
1,000 Sarasota Cnty. Hlth. Fac.
Auth. RB, Sunnyside Pptys.,
6.00%, 5/15/10....................... 988,230
1,830 Seminole Wtr. Ctl. Unit of
Dev. No. 2,
7.25%, 8/1/22........................ 1,836,899
1,500 South Indian River,
Wtr. Ctl. Dist. RB,
Egret Landing Phase I,
7.50%, 11/1/18....................... 1,552,860
2,500 St Johns Ctny. IDA, Vicars
Landing Proj., (Ser. A),
6.75%, 2/15/12....................... 2,500,400
3,000 Tampa, RB Aquarium Inc. Proj.,
7.75%, 5/1/27........................ 3,495,540
1,000 Tarpon Springs, Hlth. Facs.
Auth. RB, Helen Ellis Mem.
Hosp. Proj.,
7.50%, 5/1/11........................ 1,044,030
2,000 Virgin Islands, Wtr. & Pwr.
Auth. RB, (Ser. B),
7.60%, 1/1/12........................ 2,152,420
Volusia Cnty.
Edl. Facs. Auth. RB,
1,025 6.125%, 10/15/16..................... 1,041,533
3,000 6.125%, 10/15/26..................... 3,038,340
2,000 Volusia Cnty. IDA, RB,
7.625%, 11/1/26...................... 2,002,120
1,775 Westchase East Cmnty. Dev.
Dist. Cap. Impt. RB,
7.50%, 5/1/17........................ 1,796,300
1,000 Winter Garden, IDR,
Beverly Enterprises,
8.75%, 7/1/12........................ 1,117,830
6
<PAGE>
EVERGREEN FLORIDA HIGH INCOME
MUNICIPAL BOND FUND
STATEMENT OF INVESTMENTS -- (CONTINUED)
FEBRUARY 28, 1997
(UNAUDITED)
(Florida+ logo appears here)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<C> <S> <C>
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
FLORIDA -- CONTINUED
Winter Haven Hsg. Auth.
Abbey Lane Apts., (Ser. C),
$ 250 7.00%, 7/1/12 (FNMA)................. $ 264,643
250 7.00%, 7/1/24 (FNMA)................. 261,325
112,084,696
GEORGIA -- 1.9%
Coffee Cnty. Hosp. Auth. RB,
1,110 6.75%, 12/1/16....................... 1,075,239
1,500 6.75%, 12/1/26....................... 1,442,265
2,517,504
KANSAS -- 1.7%
2,045 Shawnee Cnty., (Ser B),
7.375%, 9/1/09....................... 2,291,341
NEW YORK -- 4.1%
3,000 Port Auth. NY & NJ
6.75%, 10/1/11....................... 3,091,470
2,000 Urban Dev. Corp. RB
7.875%, 1/1/10....................... 2,283,360
5,374,830
PUERTO RICO -- 1.9%
1,000 Puerto Rico Indl. Tourist Edl.
Med. & Envir. Ctl. Facs. RB,
Mennonite Gen. Hosp. Proj., (Ser. A),
6.50%, 7/1/12........................ 1,025,300
1,475 Puerto Rico Ports Auth. RB
American Airlines Proj., (Ser. A),
6.25%, 6/1/26........................ 1,515,282
2,540,582
TEXAS -- 3.3%
1,400 Dallas Fort Worth Intl. Arpt.
Fac. Impt. Corp. RB, American
Airlines Inc.,
6.00%, 11/1/14....................... 1,390,368
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<C> <S> <C>
TEXAS -- CONTINUED
$ 2,860 Lufkin Hlth. Facs. Dev. Corp. RB,
6.875%, 2/15/26...................... $ 2,975,601
4,365,969
TOTAL LONG-TERM MUNICIPAL
SECURITIES
(COST $129,366,800)............. 132,702,187
</TABLE>
<TABLE>
<CAPTION>
SHARES
<C> <S> <C> <C>
MUTUAL FUND SHARES -- 2.9%
3,869,000 Federated Municipal Obligations Fund
(COST $3,869,000)..................... 3,869,000
TOTAL INVESTMENTS
(COST $133,235,800)..... 103.4% 136,571,187
OTHER ASSETS AND
LIABILITIES -- NET...... (3.4) (4,549,849)
NET ASSETS................. 100.0% $132,021,338
</TABLE>
Summary of Abbreviations:
FNMA -- Insured by Federal National Mortgage Association
GNMA -- Insured by Government National Mortgage
Association
GO -- General Obligation Bond
IDA -- Industrial Development Authority Bond
IDR -- Industrial Development Revenue Bond
PCR -- Pollution Control Revenue Bond
RB -- Revenue Bond
Rule 144A securities are restricted as to resale to qualified institutional
investors.
See accompanying notes to financial statements.
7
<PAGE>
EVERGREEN FLORIDA HIGH INCOME
MUNICIPAL BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1997
(UNAUDITED)
(Florida+ logo appears here)
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments at value (identified cost $133,235,800)........................................................... $136,571,187
Cash.......................................................................................................... 448
Interest receivable........................................................................................... 2,669,996
Receivable for Fund shares sold............................................................................... 910,384
Prepaid expenses.............................................................................................. 13,543
Deferred organization expenses................................................................................ 11,767
Total assets............................................................................................ 140,177,325
LIABILITIES:
Payable for securities purchased.............................................................................. 7,664,669
Dividends payable............................................................................................. 292,713
Distribution fee payable...................................................................................... 65,493
Payable for Fund shares redeemed.............................................................................. 55,838
Accrued expenses.............................................................................................. 46,093
Accrued advisory fee.......................................................................................... 31,181
Total liabilities....................................................................................... 8,155,987
NET ASSETS....................................................................................................... $132,021,338
NET ASSETS CONSIST OF:
Paid-in capital............................................................................................... $130,088,095
Distributions in excess of net investment income.............................................................. (7,223)
Accumulated net realized loss on investment transactions...................................................... (1,394,921)
Net unrealized appreciation of investments.................................................................... 3,335,387
Net assets.............................................................................................. $132,021,338
CALCULATION OF NET ASSET VALUE AND MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares ($90,794,217)(8,518,968 shares of beneficial interest outstanding).............................. $ 10.66
Sales charge -- 4.75% of offering price....................................................................... .53
Maximum offering price.................................................................................. $ 11.19
Class B Shares ($37,931,297)(3,559,072 shares of beneficial interest outstanding).............................. $ 10.66
Class Y Shares ($3,295,824)(309,220 shares of beneficial interest outstanding)................................. $ 10.66
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
EVERGREEN FLORIDA HIGH INCOME
MUNICIPAL BOND FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1997
(UNAUDITED)
(Florida+ logo appears here)
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Interest........................................................................................... $3,823,184
EXPENSES:
Advisory fee....................................................................................... $342,302
Administrative personnel and service fees.......................................................... 24,489
Distribution fee -- Class A Shares................................................................. 102,925
Distribution fee -- Class B Shares................................................................. 101,360
Shareholder services fee -- Class B Shares......................................................... 33,787
Custodian fee...................................................................................... 41,162
Transfer agent fee................................................................................. 40,073
Registration and filing fees....................................................................... 26,017
Reports and notices to shareholders................................................................ 14,719
Professional fees.................................................................................. 11,274
Insurance.......................................................................................... 10,119
Trustees' fees and expenses........................................................................ 2,439
Amortization of organizational expense............................................................. 1,766
Miscellaneous...................................................................................... 1,171
753,603
Less: Fee waivers..................................................................................... (171,151)
Net expenses....................................................................................... 582,452
Net investment income................................................................................. 3,240,732
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investment transactions....................................................... 29,962
Net increase in unrealized appreciation of investments............................................. 2,371,897
Net gain on investments............................................................................ 2,401,859
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................................................. $5,642,591
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
EVERGREEN FLORIDA HIGH INCOME
MUNICIPAL BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
(Florida+ logo appears here)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FEBRUARY 28, YEAR ENDED
1997 AUGUST 31,
(UNAUDITED) 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income...................................................................... $ 3,240,732 $ 4,708,138
Net realized gain (loss) on investment transactions........................................ 29,962 (67,136)
Net change in unrealized appreciation of investments....................................... 2,371,897 (42,880)
Net increase in net assets resulting from operations.................................... 5,642,591 4,598,122
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A Shares............................................................................. (2,458,667) (4,083,337)
Class B Shares............................................................................. (706,712) (562,849)
Class Y Shares............................................................................. (75,353) (61,952)
Total distributions to shareholders from net investment income.......................... (3,240,732) (4,708,138)
FUND SHARE TRANSACTIONS:
Proceeds from shares sold.................................................................. 39,270,563 51,887,683
Proceeds from reinvestment of distributions................................................ 1,379,627 1,815,929
Payment for shares redeemed................................................................ (8,485,872) (18,826,666)
Net increase from Fund share transactions............................................... 32,164,318 34,876,946
Net increase in net assets.............................................................. 34,566,177 34,766,930
NET ASSETS:
Beginning of period........................................................................ 97,455,161 62,688,231
End of period (includes distributions in excess of net investment income of $7,223 at
February 28, 1997 and August 31, 1996)................................................... $132,021,338 $ 97,455,161
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
EVERGREEN FLORIDA HIGH INCOME
MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
(Florida+ logo appears here)
<TABLE>
<CAPTION>
CLASS A SHARES
SIX MONTHS
ENDED FOUR MONTHS
FEBRUARY 28, ENDED YEAR ENDED
1997 YEAR ENDED AUGUST 31, APRIL 30,
(UNAUDITED) AUGUST 31, 1996 1995# 1995 1994
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period............... $10.42 $10.40 $10.16 $10.08 $10.36
Income from investment operations:
Net investment income............................ .31 .63 .21 .65 .68
Net realized and unrealized gain (loss) on
investments.................................... .24 .02 .24 .08 (.26)
Total from investment operations............... .55 .65 .45 .73 .42
Less distributions to shareholders from:
Net investment income............................ (.31) (.63) (.21) (.65) (.68)
Net realized gain on investments................. -- -- -- -- (.02)
Total distributions............................ (.31) (.63) (.21) (.65) (.70)
Net asset value, end of period..................... $10.66 $10.42 $10.40 $10.16 $10.08
TOTAL RETURN+...................................... 5.4% 6.4% 4.4% 7.6% 3.3%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted).......... $ 90,794 $76,267 $59,551 $65,043 $72,683
Ratios to average net assets:
Expenses**....................................... .87%++ .85% 1.07%++ .60% .14%
Net investment income**.......................... 5.97%++ 6.02% 5.92%++ 6.52% 6.16%
Portfolio turnover rate............................ 18% 42% 14% 28% 31%
<CAPTION>
CLASS A SHARES
JUNE 17, 1992*
THROUGH
APRIL 30, 1993
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period............... $10.00
Income from investment operations:
Net investment income............................ .61
Net realized and unrealized gain (loss) on
investments.................................... .39
Total from investment operations............... 1.00
Less distributions to shareholders from:
Net investment income............................ (.61)
Net realized gain on investments................. (.03)
Total distributions............................ (.64)
Net asset value, end of period..................... $10.36
TOTAL RETURN+...................................... .3%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted).......... $33,541
Ratios to average net assets:
Expenses**....................................... .00%
Net investment income**.......................... 5.92%++
Portfolio turnover rate............................ 50%
</TABLE>
# The Fund changed its fiscal year end from April 30 to August 31.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge is not reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income to average net assets would have
been the following:
<TABLE>
<CAPTION>
CLASS A SHARES
SIX MONTHS
ENDED FOUR MONTHS
FEBRUARY 28, ENDED YEAR ENDED
1997 YEAR ENDED AUGUST 31, APRIL 30,
(UNAUDITED) AUGUST 31, 1996 1995# 1995 1994
<S> <C> <C> <C> <C> <C>
Expenses........................................... 1.18% 1.15% 1.42% 1.26% 1.12%
Net investment income.............................. 5.66% 5.72% 5.57% 5.86% 5.18%
<CAPTION>
CLASS A SHARES
JUNE 17, 1992*
THROUGH
APRIL 30, 1993
<S> <C>
Expenses........................................... 1.12%
Net investment income.............................. 4.80%
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
EVERGREEN FLORIDA HIGH INCOME
MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS -- (CONTINUED)
(Florida+ logo appears here)
<TABLE>
<CAPTION>
CLASS Y
CLASS B SHARES SHARES
SIX MONTHS SIX MONTHS
ENDED ENDED
FEBRUARY 28, JULY 10, 1995* FEBRUARY 28,
1997 YEAR ENDED THROUGH 1997
(UNAUDITED) AUGUST 31, 1996 AUGUST 31, 1995 (UNAUDITED)
<S> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period...................... $10.42 $10.40 $10.41 $10.42
Income from investment operations:
Net investment income................................... .27 .55 .08 .33
Net realized and unrealized gain (loss) on
investments........................................... .24 .02 (.01) .24
Total from investment operations...................... .51 .57 .07 .57
Less distributions to shareholders from net investment
income.................................................. (.27) (.55) (.08) (.33)
Net asset value, end of period............................ $10.66 $10.42 $10.40 $10.66
TOTAL RETURN+............................................. 5.0% 5.6% .6% 5.5%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)................. $ 37,931 $19,219 $3,137 $3,296
Ratios to average net assets:
Expenses................................................ 1.62%++** 1.59%** 1.09%++ .62%++**
Net investment income................................... 5.23%++** 5.27%** 3.40%++ 6.23%++**
Portfolio turnover rate................................... 18% 42% 14% 18%
<CAPTION>
CLASS Y SHARES
SEPTEMBER 20, 1995*
THROUGH
AUGUST 31, 1996
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period...................... $10.48
Income from investment operations:
Net investment income................................... .63
Net realized and unrealized gain (loss) on
investments........................................... (.06)
Total from investment operations...................... .57
Less distributions to shareholders from net investment
income.................................................. (.63)
Net asset value, end of period............................ $10.42
TOTAL RETURN+............................................. 6.3%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)................. $1,970
Ratios to average net assets:
Expenses................................................ .59%++**
Net investment income................................... 6.27%++**
Portfolio turnover rate................................... 42%
</TABLE>
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Contingent deferred sales charge is not
reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income to average net assets would have
been the following:
<TABLE>
<CAPTION>
CLASS Y
CLASS B SHARES SHARES
SIX MONTHS SIX MONTHS
ENDED ENDED
FEBRUARY 28, YEAR ENDED FEBRUARY 28,
1997 AUGUST 31, 1997
(UNAUDITED) 1996 (UNAUDITED)
<S> <C> <C> <C>
Expenses.............................................................. 1.92% 1.89% .92%
Net investment income................................................. 4.93% 4.97% 5.93%
<CAPTION>
CLASS Y SHARES
SEPTEMBER 20,
1995*
THROUGH
AUGUST 31, 1996
<S> <C>
Expenses.............................................................. .89%
Net investment income................................................. 5.97%
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
EVERGREEN FLORIDA MUNICIPAL BOND FUND
STATEMENT OF INVESTMENTS
FEBRUARY 28, 1997
(UNAUDITED)
(Florida logo appears here)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<C> <S> <C>
LONG-TERM MUNICIPAL SECURITIES -- 96.8%
FLORIDA -- 96.8%
$ 2,000 Altamonte Springs Hlth. Fac.
Auth. Hosp. RB, Adventist
Hlth./Sunbelt (Ser. B),
5.125%, 11/15/18 (AMBAC)............. $ 1,845,920
665 Brevard Cnty. Hsg. Fin.
Auth. RB (Ser. B),
7.00%, 3/1/13 (FSA).................. 701,489
3,750 Brevard Cnty. Hsg. Fin. Auth.
Multifamily Hsg. RB,
Windover Oaks (Ser. A),
6.90%, 2/1/27 (FNMA)................. 4,158,900
2,925 Broward Cnty. Hlth. Care Facs.
RB, North Beach Hosp. Proj.,
7.00%, 8/15/11 (MBIA)................ 3,240,549
Broward Cnty. Hsg. Fin.,
Auth. RB (Ser. B),
1,375 7.125%, 3/1/17 (GNMA)................ 1,449,566
195 7.55%, 3/1/15 (GNMA)................. 205,413
105 Charlotte Cnty., Peachland
Muni. Svc. Tax & Ben. Unit,
7.25%, 10/1/10 (MBIA)................ 115,819
500 Collier Cnty. Hlth. Facs.
Auth. RB (The Moorings, Inc. Proj.),
7.00%, 12/1/19....................... 532,095
Dade Cnty. Edl. Facs. Auth.
RB, St. Thomas Univ.,
(LOC: Sun Bank Miami)
2,000 6.00%, 1/1/14........................ 2,032,720
1,000 6.125%, 1/1/19....................... 1,027,710
5,280 Dade Cnty. Gtd. Entitlement
RB, Cap Apprec. (Ser. A),
Zero coupon, 2/1/08 (MBIA)........... 3,019,896
235 Dade Cnty. Hlth. Fac. Auth.
Hosp. RB, South Shore Hosp.
& Med. Center (Ser. A),
7.60%, 8/1/24 (FHA).................. 252,956
3,815 Dade Cnty. Pub. Fac. RB,
Jackson Mem. Hosp. Proj.
(Ser. A),
4.875%, 6/1/15 (MBIA)................ 3,472,489
2,000 Dade Cnty. Seaport,
Fitch Light Rtg.,
5.125%, 10/1/21 (MBIA)............... 1,866,300
Dade Cnty. Sngl. Fam. Mtg.
RB (Ser. A),
135 7.10%, 3/1/17........................ 141,796
245 7.50%, 9/1/13........................ 258,556
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<C> <S> <C>
$ 385 Dade Cnty. Sngl. Fam. Mtg.
RB (Ser. D),
6.95%, 12/15/12...................... $ 407,103
1,000 Dade Cnty. Spec. Oblig. RB,
Courthouse Ctr. Proj.,
6.25%, 4/1/09........................ 1,068,520
Duval Cnty. Hsg. Fin. Auth.
Sngl. Fam. Mtg. RB,
840 7.35%, 7/1/24 (GNMA)................. 896,557
210 7.50%, 6/1/15 (FGIC)................. 221,464
2,000 Escambia Cnty. Hlth. Facs.
Auth. RB, Baptist Hosp. Inc. (Ser.
B),
6.00%, 10/1/14....................... 1,992,780
Escambia Cnty. Hlth. Fac. RB,
2,000 6.00%, 1/1/15........................ 1,944,400
1,250 6.10%, 1/1/19........................ 1,220,425
Escambia Cnty. PCR Champion
Intl Corp. Proj.,
5,230 5.875%, 6/1/22....................... 5,060,496
1,650 6.40%, 9/1/30........................ 1,688,709
Florida Hsg. Fin. Agcy. RB,
1,925 6.35%, 5/1/26 (GNMA)................. 1,958,688
1,895 6.875%, 10/1/12 (GNMA)............... 1,968,242
3,105 8.00%, 12/1/20 (GNMA)................ 3,274,719
Florida Hsg. Fin. Agcy RB,
Landings At Sea Forest,
560 5.85%, 12/1/18 (AMBAC)............... 555,856
805 6.05%, 12/1/36 (AMBAC)............... 798,914
2,000 Florida Ports Fin. Commission Rev. St
Trans. Trust Fund,
5.375%, 6/1/16 (MBIA)................ 1,919,900
2,500 Florida St. Brd. of Regt.
Univ. Sys. RB,
6.70%, 7/1/12 (AMBAC)................ 2,742,225
1,235 Hialeah, Cap. Impt. RB,,
5.50%, 10/1/13....................... 1,190,688
3,250 Hillsborough Cnty. Indl. Dev. Auth.
IDR Univ. Cmnty. Hosp.
(Ser. 1994),
6.50%, 8/15/19 (MBIA)................ 3,657,095
5,000 Jacksonville Excise Taxes (Ser. B),
5.50%, 10/1/07 (FGIC)................ 5,127,400
Jacksonville Hlth. Facs. Auth. Hosp.
RB, St. Lukes Hosp. Assn. Proj.,
1,500 6.75%, 11/15/13...................... 1,619,490
1,500 7.125%, 11/15/20..................... 1,643,400
</TABLE>
13
<PAGE>
EVERGREEN FLORIDA MUNICIPAL BOND FUND
STATEMENT OF INVESTMENTS -- (CONTINUED)
FEBRUARY 28, 1997
(UNAUDITED)
(Florida logo appears here)
PRINCIPAL
AMOUNT
(000) VALUE
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
FLORIDA -- CONTINUED
Jacksonville Natl. Benevolent
Cypress Vlg A Hlth. Indl. Dev.,
$ 345 6.125%, 12/1/16...................... $ 345,535
1,245 6.25%, 12/1/26....................... 1,251,548
1,250 Lee Cnty. Hsg. Fin. Auth.,
7.20%, 3/1/27........................ 1,368,100
Lee Cnty. Hsg. Fin. Auth. Sngl. Fam.
Mtg. RB, Multi-Cnty. Prog. (Ser. A),
1,025 6.25%, 7/1/19 (GNMA)................. 1,040,703
1,700 7.45%, 9/1/27........................ 1,880,982
4,370 7.50%, 9/1/27........................ 4,833,264
1,510 Manatee Cnty. GO.
4.75%, 10/1/13 (FGIC)................ 1,383,100
1,425 Manatee Cnty. Hsg. Fin. Auth.
Mtg. RB,
7.45%, 5/1/27........................ 1,573,841
Miami Beach Redev. Agcy. Tax
Increment RB, City Center-Historic
Convention Vlg.,
2,000 5.625%, 12/1/09...................... 1,935,320
3,000 5.80%, 12/1/13....................... 2,902,980
2,000 5.875%, 12/1/22...................... 1,911,740
5,000 Miami Hlth. Fac. Auth. RB,
5.16%, 8/15/15 (AMBAC)............... 4,734,150
1,500 North Miami Hlth. Fac. Auth. RB,
Catholic Hlth. Svc. Oblig. Group,
6.00%, 8/15/16 (LOC: Suntrust
Bank)................................ 1,512,330
1,000 North Tampa Hsg. Dev. Corp. RB, Cnty
Oaks Apts.( Ser. A),
6.90%, 1/1/24 (FNMA)................. 1,040,910
1,300 Northern Palm Beach Cnty. Impt. RB,
Wtr. Ctl. & Impt. Unit Dev. 9A-A,
7.20%, 8/1/16........................ 1,341,795
1,000 Okaloosa Cnty. Wtr. & Swr. RB,
6.00%, 7/1/11 (AMBAC)................ 1,081,140
3,000 Orange Cnty. Hlth. Facs. Auth. RB,
Lakeside Alts. Inc.,
6.50%, 7/1/13........................ 3,076,500
3,000 Palm Beach Cnty. Criminal Justice
Facs. RB,
7.20%, 6/1/15 (FGIC)................. 3,625,590
Palm Beach Cnty. Hlth. Facs. Auth.
RB, Good Samaritan Hlth. Sys.,
3,695 6.20%, 10/1/11....................... 3,811,319
6,000 6.30%, 10/1/22....................... 6,192,180
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<C> <S> <C>
$ 4,440 Palm Beach Cnty. Hsg. Fin. Auth. RB,
Daughters Charity (Ser. A),
7.60%, 3/1/23 (GNMA)................. $ 4,705,778
1,000 Palm Beach Cnty. Hsg. Fin. Auth.
Sngl. Fam. Mtg. RB (Ser. A),
6.50%, 10/1/21 (GNMA)................ 1,030,010
2,000 Palm Beach Cnty. IDR,
Geriatric Care Inc. Proj.,
6.55%, 12/1/16 (LOC: Allied Irish
Banks)............................... 2,086,460
5,000 Pensacola Hlth. Facs. Auth. RB,
Daughters Charity Natl. Hlth.,
5.25%, 1/1/11........................ 4,879,600
860 Polk Cnty Hsg. Fin. Auth. Sngl. Fam.
Mtg. RB (Ser. A),
7.00%, 9/1/15........................ 891,889
8,350 Polk Cnty. Tampa Elec. Co. Proj.,
5.85%, 12/1/30....................... 8,194,773
1,500 Reedy Creek Impt. Dist. Util., RB
(Ser. 1),
5.00%, 10/1/19 (MBIA)................ 1,374,585
Sanford Wtr. & Swr. RB, Dist.,
1,955 4.50%, 10/1/21....................... 1,630,841
1,740 4.75%, 10/1/18 (AMBAC)...............
1,800 Sarasota Cnty. Hlth. Fac. Auth. RB,
Sunnyside Pptys.,
6.00%, 5/15/10....................... 1,778,814
1,000 Sarasota Cnty. Util. Sys. RB,
6.50%, 10/1/14 (FGIC)................ 1,135,390
3,590 Seacoast Util. Auth. Wtr. & Swr. RB,
(Ser. A),
5.50%, 3/1/18 (FGIC)................. 3,603,319
Volusia Cnty. Edl. Facs. Auth. RB,
Embry-Riddle Aero-A,
3,500 6.125%, 10/15/16..................... 3,556,455
2,600 6.125%, 10/15/26..................... 2,633,228
Winter Haven Hsg. Auth. Multi-Fam.
Mtg. RB, Abbey Lane Apts. (Ser. C),
850 7.00%, 7/1/12 (FNMA)................. 899,785
1,750 7.00%, 7/1/24 (FNMA)................. 1,829,275
TOTAL LONG-TERM MUNICIPAL SECURITIES
(COST $146,796,490)................ 153,876,801
</TABLE>
14
<PAGE>
EVERGREEN FLORIDA MUNICIPAL BOND FUND
STATEMENT OF INVESTMENTS -- (CONTINUED)
FEBRUARY 28, 1997
(UNAUDITED)
(Florida logo appears here)
<TABLE>
<CAPTION>
SHARES VALUE
<C> <S> <C>
MUTUAL FUND SHARES -- .9%
1,501,000 Federated Municipal Obligations Fund
(COST $1,501,000).................... $ 1,501,000
</TABLE>
<TABLE>
<C> <S> <C> <C>
TOTAL INVESTMENTS --
(COST $148,297,490)........ 97.7% 155,377,801
OTHER ASSETS AND
LIABILITIES -- NET......... 2.3 3,616,625
NET ASSETS --................ 100.0% $158,994,426
</TABLE>
Summary of Abbreviations:
AMBAC -- Insured by American Municipal Bond Assurance Corporation
FGIC -- Insured by Financial Guaranty Insurance Company
FHA -- Insured by Federal Housing Authority
FNMA -- Insured by Federal National Mortgage Association
FSA -- Insured by Financial Security Assurance
GNMA -- Insured by Government National Mortgage
Association
GO -- General Obligation Bond
IDR -- Industrial Development Revenue Bond
LOC -- Letter of Credit
MBIA -- Insured by Municipal Bond Investors Assurance
PCR -- Pollution Control Revenue Bond
RB -- Revenue Bond
See accompanying notes to financial statements.
15
<PAGE>
EVERGREEN FLORIDA MUNICIPAL BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1997
(UNAUDITED)
(Florida logo appears here)
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments at value (identified cost $148,297,490)........................................................... $155,377,801
Receivable for securities sold................................................................................ 5,718,289
Interest receivable........................................................................................... 2,721,071
Receivable for Fund shares sold............................................................................... 367,402
Prepaid expenses.............................................................................................. 1,979
Total assets............................................................................................ 164,186,542
LIABILITIES:
Due to custodian bank......................................................................................... 318
Payable for securities purchased.............................................................................. 4,574,606
Dividends payable............................................................................................. 411,980
Accrued expenses.............................................................................................. 92,433
Accrued advisory fee.......................................................................................... 46,424
Distribution fee payable...................................................................................... 40,809
Payable for Fund shares redeemed.............................................................................. 25,546
Total liabilities....................................................................................... 5,192,116
NET ASSETS....................................................................................................... $158,994,426
NET ASSETS CONSIST OF:
Paid-in capital............................................................................................... $149,891,408
Undistributed net investment income........................................................................... 79,387
Undistributed net realized gain on investment transactions.................................................... 1,943,320
Net unrealized appreciation of investments.................................................................... 7,080,311
Net assets.............................................................................................. $158,994,426
CALCULATION OF NET ASSET VALUE AND MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares ($111,099,192)(11,314,287 shares of beneficial interest outstanding)............................ $ 9.82
Sales charge -- 4.75% of offering price....................................................................... .49
Maximum offering price.................................................................................. $ 10.31
Class B Shares ($29,810,900)(3,036,093 shares of beneficial interest outstanding).............................. $ 9.82
Class Y Shares ($18,084,334)(1,841,748 shares of beneficial interest outstanding).............................. $ 9.82
</TABLE>
See accompanying notes to financial statements.
16
<PAGE>
EVERGREEN FLORIDA MUNICIPAL BOND FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1997
(UNAUDITED)
(Florida logo appears here)
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Interest........................................................................................ $4,752,542
EXPENSES:
Advisory fee.................................................................................... $ 388,750
Administrative personnel and service fees....................................................... 34,042
Distribution fee -- Class A Shares.............................................................. 140,340
Distribution fee -- Class B Shares.............................................................. 108,461
Shareholder services fee -- Class B Shares...................................................... 36,154
Transfer agent fee.............................................................................. 60,588
Custodian fee................................................................................... 41,492
Reports and notices to shareholders............................................................. 34,872
Registration and filing fees.................................................................... 32,556
Professional fees............................................................................... 11,484
Insurance expense............................................................................... 6,583
Trustees' fees and expenses..................................................................... 1,979
Miscellaneous................................................................................... 7,394
904,695
Less: Fee waivers and expense reimbursements.................................................... (213,305)
Net expenses.............................................................................. 691,390
Net investment income.............................................................................. 4,061,152
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investment transactions.................................................... 2,695,333
Net increase in unrealized appreciation of investments.......................................... 224,558
Net gain on investments......................................................................... 2,919,891
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................................... $6,981,043
</TABLE>
See accompanying notes to financial statements.
17
<PAGE>
EVERGREEN FLORIDA MUNICIPAL BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
(Florida logo appears here)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
FEBRUARY 28, ENDED
1997 AUGUST 31,
(UNAUDITED) 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income.................................................................... $ 4,061,152 $ 8,509,981
Net realized gain on investment transactions............................................. 2,695,333 1,550,230
Net change in unrealized appreciation of investments..................................... 224,558 (2,163,335)
Net increase in net assets resulting from operations.................................. 6,981,043 7,896,876
DISTRIBUTIONS TO SHAREHOLDERS:
FROM NET INVESTMENT INCOME:
Class A Shares........................................................................... (3,038,445) (6,726,492)
Class B Shares........................................................................... (648,985) (1,290,196)
Class Y Shares........................................................................... (393,167) (417,123)
Total distributions from net investment income..................................... (4,080,597) (8,433,811)
FROM NET REALIZED GAINS:
Class A Shares........................................................................... (665,344) --
Class B Shares........................................................................... (171,649) --
Class Y Shares........................................................................... (81,865) --
Total distributions from net realized gains........................................ (918,858) --
Total distributions to shareholders................................................... (4,999,455) (8,433,811)
FUND SHARE TRANSACTIONS:
Proceeds from shares sold................................................................ 13,815,493 23,857,675
Proceeds from reinvestment of distributions.............................................. 1,629,597 2,678,816
Payment for shares redeemed.............................................................. (15,262,974) (36,571,005)
Net increase (decrease) resulting from Fund share transactions........................ 182,116 (10,034,514)
Net increase (decrease) in net assets................................................. 2,163,704 (10,571,449)
NET ASSETS:
Beginning of period...................................................................... 156,830,722 167,402,171
End of period (includes undistributed net investment income of $79,387 and $98,832,
respectively).......................................................................... $ 158,994,426 $ 156,830,722
</TABLE>
See accompanying notes to financial statements.
18
<PAGE>
EVERGREEN FLORIDA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
(Florida logo appears here)
<TABLE>
<CAPTION>
CLASS A SHARES
SIX MONTHS YEAR FOUR MONTHS
ENDED ENDED ENDED
FEBRUARY 28, 1997 AUGUST 31, AUGUST 31, YEAR ENDED APRIL 30,
(UNAUDITED) 1996 1995*| 1995| 1994|
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period............... $9.70 $9.74 $9.61 $9.52 $9.95
Income from investment operations:
Net investment income............................ .26 .54 .19 .54 .56
Net realized and unrealized gain (loss) on
investments.................................... .18 (.04) .22 .11 (.36)
Total from investment operations............... .44 .50 .41 .65 .20
Less distributions to shareholders from:
Net investment income............................ (.26) (.54) (.19) (.54) (.56)
In excess of net investment income............... -- -- (.03) -- --
Net realized gain on investments................. (.06) -- (.06) (.02) (.07)
Total distributions............................ (.32) (.54) (.28) (.56) (.63)
Net asset value, end of period..................... $9.82 $9.70 $9.74 $9.61 $9.52
TOTAL RETURN+...................................... 4.6% 5.1% 4.2% 7.1% 1.9%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted).......... $111,099 $115,723 $136,449 $168,542 $199,612
Ratios to average net assets:
Expenses......................................... .73%++** .63%** .82%++** .61% .56%
Net investment income............................ 5.39%++** 5.46%** 4.89%++** 5.73% 5.37%
Portfolio turnover rate............................ 7% 30% 29% 53% 32%
<CAPTION>
CLASS A SHARES
YEAR ENDED
APRIL 30,
1993|
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period............... $9.35
Income from investment operations:
Net investment income............................ .56
Net realized and unrealized gain (loss) on
investments.................................... .67
Total from investment operations............... 1.23
Less distributions to shareholders from:
Net investment income............................ (.56)
In excess of net investment income............... --
Net realized gain on investments................. (.07)
Total distributions............................ (.63)
Net asset value, end of period..................... $9.95
TOTAL RETURN+...................................... 13.6%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted).......... $198,286
Ratios to average net assets:
Expenses......................................... .58%
Net investment income............................ 5.66%
Portfolio turnover rate............................ 24%
</TABLE>
* The Fund changed its fiscal year end from April 30 to August 31.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sale charge is not reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income to average net assets would have
been the following:
<TABLE>
<CAPTION>
CLASS A SHARES
SIX MONTHS
ENDED YEAR FOUR MONTHS
FEBRUARY 28, ENDED ENDED
1997 AUGUST 31, AUGUST 31,
(UNAUDITED) 1996 1995*
<S> <C> <C> <C>
Expenses........................................................ 1.05% .95% 1.05%
Net investment income........................................... 5.07% 5.14% 4.66%
</TABLE>
| On June 30, 1995, ABT Florida Tax-Free Fund sold its net assets to First Union
Florida Municipal Bond Portfolio which was subsequently renamed Evergreen
Florida Municipal Bond Fund. ABT Florida Tax-Free Fund was the accounting
survivor in the combination. Accordingly, the information stated in the above
table prior to the combination reflects the results of ABT Florida Tax-Free
Fund. The net asset values per share and related per share data have been
restated to reflect the conversion of shares.
See accompanying notes to financial statements.
19
<PAGE>
EVERGREEN FLORIDA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS -- (CONTINUED)
(Florida logo appears here)
<TABLE>
<CAPTION>
CLASS B SHARES CLASS Y SHARES
SIX MONTHS SIX MONTHS
ENDED YEAR JUNE 30, 1995* ENDED YEAR
FEBRUARY 28, ENDED THROUGH FEBRUARY 28, ENDED
1997 AUGUST 31, AUGUST 31, 1997 AUGUST 31,
(UNAUDITED) 1996 1995 (UNAUDITED) 1996
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of
period............................ $9.70 $9.74 $9.67 $9.70 $9.74
Income from investment operations:
Net investment income............. .22 .44 .07 .26 .53
Net realized and unrealized gain
(loss) on investments........... .18 (.04) .10 .18 (.03)
Total from investment
operations.................... .40 .40 .17 .44 .50
Less distributions to shareholders
from:
Net investment income............. (.22) (.44) (.07) (.26) (.54)
In excess of net investment
income.......................... -- -- (.03) -- --
Net realized gain on
investments..................... (.06) -- -- (.06) --
Total distributions............. (.28) (.44) (.10) (.32) (.54)
Net asset value, end of period...... $9.82 $9.70 $9.74 $9.82 $9.70
TOTAL RETURN+....................... 4.1% 4.2% 1.5% 4.6% 5.2%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's
omitted).......................... $29,811 $28,849 $27,351 $18,084 $12,259
Ratios to average net assets:
Expenses**........................ 1.65%++ 1.56% 1.44%++ .65%++ .57%
Net investment income**........... 4.45%++ 4.52% 3.22%++ 5.46%++ 5.55%
Portfolio turnover rate............. 7% 30% 29% 7% 30%
<CAPTION>
CLASS Y SHARES
JUNE 30, 1995*
THROUGH
AUGUST 31,
1995
<S> <C>
PER SHARE DATA:
Net asset value, beginning of
period............................ $9.67
Income from investment operations:
Net investment income............. .09
Net realized and unrealized gain
(loss) on investments........... .10
Total from investment
operations.................... .19
Less distributions to shareholders
from:
Net investment income............. (.09)
In excess of net investment
income.......................... (.03)
Net realized gain on
investments..................... --
Total distributions............. (.12)
Net asset value, end of period...... $9.74
TOTAL RETURN+....................... 1.7%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's
omitted).......................... $3,602
Ratios to average net assets:
Expenses**........................ .59%++
Net investment income**........... 4.93%++
Portfolio turnover rate............. 29%
</TABLE>
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Contingent deferred sales charge is not
reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income to average net assets would have
been the following:
<TABLE>
<CAPTION>
CLASS B SHARES CLASS Y SHARES
SIX MONTHS YEAR JUNE 30, 1995* SIX MONTHS YEAR
ENDED ENDED THROUGH ENDED ENDED
FEBRUARY 28, 1997 AUGUST 31, AUGUST 31, FEBRUARY 28, 1997 AUGUST 31,
(UNAUDITED) 1996* 1995 (UNAUDITED) 1996
<S> <C> <C> <C> <C> <C>
Expenses........................... 1.80% 1.76% 1.64% .80% .77%
Net investment income.............. 4.30% 4.32% 3.02% 5.31% 5.35%
<CAPTION>
CLASS Y SHARES
JUNE 30, 1995*
THROUGH
AUGUST 31,
1995
<S> <C>
Expenses........................... .79%
Net investment income.............. 4.73%
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
EVERGREEN GEORGIA MUNICIPAL BOND FUND
STATEMENT OF INVESTMENTS
FEBRUARY 28, 1997
(UNAUDITED)
(Georgia logo appears here)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<C> <S> <C>
<CAPTION>
LONG-TERM MUNICIPAL SECURITIES -- 103.9%
GEORGIA -- 97.7%
$ 500 Appling Cnty. Dev. Auth. PCR,
7.15%, 1/1/21, (MBIA)................. $ 562,380
300 Butts Cnty. COP,
6.75%, 12/1/14, (MBIA)................ 336,240
1,100 Cartersville, Dev. Auth. RB,
Wtr. & Waste Facs.,
7.40%, 11/1/10........................ 1,297,405
120 Cartersville, GO,
6.70%, 1/1/12......................... 137,639
500 Cherokee Cnty. Wtr. & Swr.
Auth. Ref. & Impt. RB,
5.50%, 8/1/18, (MBIA)................. 499,975
500 Clayton Cnty.
Hsg. Auth. Mtg. RB,
7.125%, 12/1/25, (FHA/VA)............. 528,545
1,000 Coffee Cnty. Hosp. Auth. RB,
6.75%, 12/1/16........................ 977,490
500 DeKalb Cnty. Hsg. Auth. RB,
The Lakes at Indian Creek Proj.,
7.15%, 1/1/25, (FSA).................. 525,150
500 DeKalb Cnty.
Sch. Dist., (Ser. A),
6.25%, 7/1/11......................... 554,175
600 Fayette Cnty. Sch. Dist.,
6.125%, 3/1/15........................ 628,962
500 Forsyth Cnty. Sch. Dist. GO,
6.75%, 7/1/16......................... 579,035
600 Fulton Cnty. Hsg. Auth. RB,
(Ser. C),
6.90%, 1/1/28......................... 599,922
400 Fulton Cnty. Wtr. & Swr. RB
6.375%, 1/1/14, (FGIC)................ 447,952
500 George L. Smith II, World
Congress Ctr. Auth. RB,
Domed Stadium Proj.,
7.875%, 7/1/20........................ 548,755
395 Georgia State, Hsg. & Fin.
Auth. RB, (Ser. A),
6.55%, 12/1/27........................ 406,973
400 Georgia State, Muni. Elec.
Auth. Pwr. RB, (Ser. EE),
7.25%, 1/1/24, (AMBAC)................ 493,640
500 Glynn-Brunswick
Mem. Hosp. Auth. RB,
6.00%, 8/1/16, (MBIA)................. 515,835
500 Hall Cnty. Sch. Dist. GO,
6.70%, 12/1/14........................ 561,565
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<C> <S> <C>
$330 Metro Atlanta Rapid Tran.
Auth. Sales Tax RB,
7.00%, 7/1/11, (FGIC)................. $ 387,654
500 Putnam Cnty. Sch. Dist. GO,
6.90%, 2/1/14, (AMBAC)................ 563,005
Savannah, Hosp. Auth. RB
St. Josephs Hosp. Proj.,
800 6.125%, 7/1/12........................ 833,024
500 6.20%, 7/1/23......................... 505,460
300 Washington Cnty. Sch. Dist. GO,
6.875%, 1/1/14, (AMBAC)............... 337,041
12,827,822
TEXAS -- 6.2%
300 Dallas Fort Worth Intl. Arpt.
Fac. Impt. Corp. RB,
American Airlines Inc.,
6.00%, 11/1/14........................ 297,936
500 Lufkin Hlth. Facs. Dev. Corp. RB,
6.875%, 2/15/26....................... 520,210
818,146
TOTAL LONG-TERM MUNICIPAL SECURITIES
(COST $12,974,911)............... 13,645,968
</TABLE>
[CAPTION]
<TABLE>
<CAPTION>
SHARES
<C> <S> <C>
MUTUAL FUND SHARES -- 3.3%
438,000 Federated Municipal Obligations Fund
(COST $438,000)....................... 438,000
</TABLE>
<TABLE>
<C> <S> <C> <C>
TOTAL INVESTMENTS --
(COST $13,412,911)........ 107.2% 14,083,968
OTHER ASSETS AND
LIABILITIES -- NET........ (7.2) (946,081)
NET ASSETS --................ 100.0% $13,137,887
</TABLE>
Summary of Abbreviations:
AMBAC -- Insured by American Municipal Bond Assurance
Corporation
COP -- Certificate of Participation
FGIC -- Insured by Financial Guaranty Insurance Company
FHA/VA -- Insured by Federal Housing Authority/Veteran
Administration
FSA -- Insured by Financial Security Assurance Company
GO -- General Obligation Bond
MBIA -- Insured by Municipal Bond Investors Assurance
Company
PCR -- Pollution Control Revenue Bond
RB -- Revenue Bond
See accompanying notes to financial statements.
21
<PAGE>
EVERGREEN GEORGIA MUNICIPAL BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1997
(UNAUDITED)
(Georgia logo appears here)
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments at value (identified cost $13,412,911)............................................................. $14,083,968
Cash........................................................................................................... 935
Interest receivable............................................................................................ 167,837
Receivable for Fund shares sold................................................................................ 12,120
Prepaid expenses............................................................................................... 4,178
Total assets............................................................................................. 14,269,038
LIABILITIES:
Payable for securities purchased............................................................................... 983,820
Accrued expenses............................................................................................... 122,324
Dividends payable.............................................................................................. 13,452
Distribution fee payable....................................................................................... 6,502
Payable for Funds shares repurchased........................................................................... 5,053
Total liabilities........................................................................................ 1,131,151
NET ASSETS........................................................................................................ $13,137,887
NET ASSETS CONSIST OF:
Paid-in capital................................................................................................ $13,100,249
Accumulated net realized loss on investment transactions....................................................... (633,419)
Net unrealized appreciation of investments..................................................................... 671,057
Net assets............................................................................................... $13,137,887
CALCULATION OF NET ASSET VALUE AND MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares ($2,186,062)(224,162 shares of beneficial interest outstanding).................................. $ 9.75
Sales charge -- 4.75% of offering price........................................................................ .49
Maximum offering price................................................................................... $ 10.24
Class B Shares ($9,560,901)(980,367 shares of beneficial interest outstanding).................................. $ 9.75
Class Y Shares ($1,390,924)(142,608 shares of beneficial interest outstanding).................................. $ 9.75
</TABLE>
See accompanying notes to financial statements.
22
<PAGE>
EVERGREEN GEORGIA MUNICIPAL BOND FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1997
(UNAUDITED)
(Georgia logo appears here)
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Interest............................................................................................ $387,294
EXPENSES:
Advisory fee........................................................................................ $ 32,760
Administrative personnel and services fees.......................................................... 1,631
Distribution fee -- Class A Shares.................................................................. 2,695
Distribution fee -- Class B Shares.................................................................. 34,567
Shareholder services fee -- Class B Shares.......................................................... 11,522
Custodian fee....................................................................................... 29,877
Registration and filing fees........................................................................ 19,747
Transfer agent fee.................................................................................. 19,072
Professional fees................................................................................... 10,093
Insurance expense................................................................................... 4,488
Reports and notices to shareholders................................................................. 3,120
Trustees' fees and expenses......................................................................... 342
Miscellaneous....................................................................................... 4,670
174,584
Less: Fee waivers and expense reimbursements........................................................ (80,731)
Net expenses.................................................................................. 93,853
Net investment income.................................................................................. 293,441
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investment transactions........................................................ 50,347
Net increase in unrealized appreciation of investments.............................................. 193,886
Net gain on investments................................................................................ 244,233
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................................... $537,674
</TABLE>
See accompanying notes to financial statements.
23
<PAGE>
EVERGREEN GEORGIA MUNICIPAL BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
(Georgia logo appears here)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FEBRUARY 28, YEAR ENDED
1997 AUGUST 31,
(UNAUDITED) 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income........................................................................ $ 293,441 $ 565,522
Net realized gain on investment transactions................................................. 50,347 28,904
Net change in unrealized appreciation of investments......................................... 193,886 57,035
Net increase in net assets resulting from operations...................................... 537,674 651,461
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A Shares............................................................................... (54,054) (100,626)
Class B Shares............................................................................... (196,710) (357,853)
Class Y Shares............................................................................... (44,026) (109,101)
Total distributions to shareholders....................................................... (294,790) (567,580)
FUND SHARE TRANSACTIONS:
Proceeds from shares sold.................................................................... 1,368,881 5,651,629
Proceeds from reinvestment of distributions.................................................. 212,394 366,974
Payment for shares redeemed.................................................................. (1,530,660) (4,232,687)
Net increase resulting from Fund share transactions....................................... 50,615 1,785,916
Net increase in net assets................................................................ 293,499 1,869,797
NET ASSETS:
Beginning of period.......................................................................... 12,844,388 10,974,591
End of period (includes undistributed net investment income of $1,349 at August 31, 1996).... $ 13,137,887 $12,844,388
</TABLE>
See accompanying notes to financial statements.
24
<PAGE>
EVERGREEN GEORGIA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
(Georgia logo appears here)
<TABLE>
<CAPTION>
CLASS A SHARES
SIX MONTHS
ENDED EIGHT MONTHS YEAR
FEBRUARY 28, YEAR ENDED ENDED ENDED
1997 AUGUST 31, AUGUST 31, DECEMBER 31,
(UNAUDITED) 1996 1995# 1994
<S> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period.................................... $9.57 $9.47 $8.74 $10.19
Income (loss) from investment operations:
Net investment income................................................. .24 .48 .33 .48
Net realized and unrealized gain (loss) on investments................ .18 .10 .73 (1.45)
Total from investment operations.................................... .42 .58 1.06 (.97)
Less distributions to shareholders from net investment income........... (.24) (.48) (.33) (.48)
Net asset value, end of period.......................................... $9.75 $9.57 $9.47 $8.74
TOTAL RETURN+........................................................... 4.4% 6.2% 12.3% (9.6%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............................... $2,186 $1,954 $2,098 $1,387
Ratios to average net assets:
Expenses**............................................................ .94%++ .88% .71%++ .53%
Net investment income**............................................... 4.99%++ 4.96% 5.39%++ 5.26%
Portfolio turnover rate................................................. 26% 21% 91% 147%
<CAPTION>
CLASS A SHARES
JULY 2,
1993*
THROUGH
DECEMBER 31,
1993
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period.................................... $10.00
Income (loss) from investment operations:
Net investment income................................................. .20
Net realized and unrealized gain (loss) on investments................ .19
Total from investment operations.................................... .39
Less distributions to shareholders from net investment income........... (.20)
Net asset value, end of period.......................................... $10.19
TOTAL RETURN+........................................................... 4.0%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............................... $817
Ratios to average net assets:
Expenses**............................................................ .25%++
Net investment income**............................................... 4.71%++
Portfolio turnover rate................................................. 15%
</TABLE>
# The Fund changed its fiscal year end from December 31 to August 31.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge is not reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income (loss) to average net assets,
exclusive of any applicable state expense limitations, would have been the
following:
<TABLE>
<CAPTION>
CLASS A SHARES
SIX MONTHS JULY 2,
ENDED EIGHT MONTHS YEAR 1993*
FEBRUARY 28, YEAR ENDED ENDED ENDED THROUGH
1997 AUGUST 31, AUGUST 31, DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1996 1995# 1994 1993
<S> <C> <C> <C> <C> <C>
Expenses.................................................... 2.32% 2.82% 2.83% 3.61% 6.82%
Net investment income (loss)................................ 3.61% 3.02% 3.27% 2.18% (1.86%)
</TABLE>
See accompanying notes to financial statements.
25
<PAGE>
EVERGREEN GEORGIA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS -- (CONTINUED)
(Georgia logo appears here)
<TABLE>
<CAPTION>
CLASS B SHARES
SIX MONTHS
ENDED EIGHT MONTHS YEAR
FEBRUARY 28, YEAR ENDED ENDED ENDED
1997 AUGUST 31, AUGUST 31, DECEMBER 31,
(UNAUDITED) 1996 1995# 1994
<S> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period............................ $9.57 $9.47 $8.74 $10.19
Income (loss) from investment operations:
Net investment income......................................... .20 .41 .28 .43
Net realized and unrealized gain (loss) on investments........ .18 .10 .73 (1.45)
Total from investment operations............................ .38 .51 1.01 (1.02)
Less distributions to shareholders from net investment income... (.20) (.41) (.28) (.43)
Net asset value, end of period.................................. $9.75 $9.57 $9.47 $8.74
TOTAL RETURN+................................................... 4.1% 5.4% 11.7% (10.2%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)....................... $9,561 $9,271 $7,538 $6,912
Ratios to average net assets:
Expenses**.................................................... 1.69%++ 1.63% 1.46%++ 1.13%
Net investment income**....................................... 4.25%++ 4.21% 4.64%++ 4.66%
Portfolio turnover rate......................................... 26% 21% 91% 147%
<CAPTION>
JULY 2,
1993*
THROUGH
DECEMBER 31,
1993
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period............................ $10.00
Income (loss) from investment operations:
Net investment income......................................... .18
Net realized and unrealized gain (loss) on investments........ .19
Total from investment operations............................ .37
Less distributions to shareholders from net investment income... (.18)
Net asset value, end of period.................................. $10.19
TOTAL RETURN+................................................... 3.7%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)....................... $3,692
Ratios to average net assets:
Expenses**.................................................... .75%++
Net investment income**....................................... 4.15%++
Portfolio turnover rate......................................... 15%
</TABLE>
# The Fund changed its fiscal year end from December 31 to August 31.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Contingent deferred sales charge is not
reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income (loss) to average net assets,
exclusive of any applicable state expense limitations, would have been the
following:
<TABLE>
<CAPTION>
CLASS B SHARES
SIX MONTHS JULY 2,
ENDED EIGHT MONTHS YEAR 1993*
FEBRUARY 28, YEAR ENDED ENDED ENDED THROUGH
1997 AUGUST 31, AUGUST 31, DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1996 1995# 1994 1993
<S> <C> <C> <C> <C> <C>
Expenses.................................................... 3.08% 3.54% 3.58% 4.21% 7.32%
Net investment income (loss)................................ 2.86% 2.30% 2.52% 1.58% (2.42%)
</TABLE>
See accompanying notes to financial statements.
26
<PAGE>
EVERGREEN GEORGIA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS -- (CONTINUED)
(Georgia logo appears here)
<TABLE>
<CAPTION>
CLASS Y SHARES
SIX MONTHS
ENDED EIGHT MONTHS
FEBRUARY 28, YEAR ENDED ENDED
1997 AUGUST 31, AUGUST 31,
(UNAUDITED) 1996 1995#
<S> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period...................................... $9.57 $9.47 $8.74
Income (loss) from investment operations:
Net investment income................................................... .25 .50 .35
Net realized and unrealized gain (loss) on investments.................. .18 .10 .73
Total from investment operations...................................... .43 .60 1.08
Less distributions to shareholders from net investment income............. (.25) (.50) (.35)
Net asset value, end of period............................................ $9.75 $9.57 $9.47
TOTAL RETURN+............................................................. 4.6% 6.5% 12.5%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)................................. $1,391 $1,620 $1,339
Ratios to average net assets:
Expenses**.............................................................. .69%++ .63% .46%++
Net investment income**................................................. 5.24%++ 5.21% 5.64%++
Portfolio turnover rate................................................... 26% 21% 91%
<CAPTION>
CLASS Y SHARES
FEBRUARY 28, 1994*
THROUGH
DECEMBER 31, 1994
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period...................................... $9.83
Income (loss) from investment operations:
Net investment income................................................... .42
Net realized and unrealized gain (loss) on investments.................. (1.09)
Total from investment operations...................................... (.67)
Less distributions to shareholders from net investment income............. (.42)
Net asset value, end of period............................................ $8.74
TOTAL RETURN+............................................................. (6.9%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)................................. $284
Ratios to average net assets:
Expenses**.............................................................. .31%++
Net investment income**................................................. 5.68%++
Portfolio turnover rate................................................... 147%
</TABLE>
# The Fund changed its fiscal year end from December 31 to August 31.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income to average net assets, exclusive
of any applicable state expense limitations, would have been the following:
<TABLE>
<CAPTION>
CLASS Y SHARES
SIX MONTHS
ENDED EIGHT MONTHS FEBRUARY 28, 1994*
FEBRUARY 28, YEAR ENDED ENDED THROUGH
1997 AUGUST 31, AUGUST 31, DECEMBER 31,
(UNAUDITED) 1996 1995# 1994
<S> <C> <C> <C> <C>
Expenses............................................................ 2.09% 2.51% 2.58% 3.39%
Net investment income............................................... 3.84% 3.33% 3.52% 2.60%
</TABLE>
See accompanying notes to financial statements.
27
<PAGE>
EVERGREEN NEW JERSEY TAX FREE INCOME FUND
STATEMENT OF INVESTMENTS
FEBRUARY 28, 1997
(UNAUDITED)
(New Jersey logo appears here)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<C> <S> <C>
<CAPTION>
LONG-TERM MUNICIPAL SECURITIES -- 95.0%
NEW JERSEY -- 84.2%
$250 Bayshore Regional Swr. Auth.
RB, Subordinated Swr.,
5.50%, 4/1/12, (MBIA)................. $ 252,885
1,000 Bergen Cnty. GO,
5.25%, 10/1/10........................ 1,005,600
1,000 Bergen Cnty. Utils. PCR,
(Ser. A),
5.50%, 12/15/06, (FGIC)............... 1,048,550
Burlington Cnty. Bridge
Commission Sys. RB,
500 5.30%, 10/1/13........................ 497,790
Burlington Cnty. GO,
750 4.40%, 3/15/01........................ 751,140
500 4.875%, 11/15/09...................... 484,530
1,000 6.95%, 9/15/97........................ 1,018,200
500 Camden Cnty. Impt.
Auth. Lease RB,
5.625%, 10/1/15, (MBIA)............... 503,740
500 Camden Cnty. Impt.
Auth. Lease RB,
6.00%, 12/1/12........................ 505,285
500 Camden Cnty. Muni Utils.
Auth. Swr. RB,
5.125%, 7/15/17, (FGIC)............... 475,395
500 Cape May Cnty. Muni Utils.
Auth. Swr. RB, (Ser. A),
5.75%, 1/1/16, (MBIA)................. 503,405
1,000 Delaware River & Bay Auth. RB,
5.00%, 1/1/17, (MBIA)................. 924,090
475 Delaware River Joint Toll
Bridge Commission RB,
6.25%, 7/1/12......................... 504,094
500 Delaware River Port
Auth. of PA & NJ RB,
5.40%, 1/1/15, (FGIC)................. 494,770
200 Edison Township, GO,
6.50%, 6/1/09......................... 224,296
Essex Cnty. Utils. Auth.
Solid Waste RB,
250 5.50%, 4/1/11, (FSA).................. 253,092
250 5.60%, 4/1/16, (FSA).................. 247,960
1,000 Gloucester Cnty. Solid
Waste RB, (Ser. A),
6.20%, 9/1/07......................... 1,059,620
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<C> <S> <C>
$500 Gloucester Cnty. Utils.
Auth. Swr. RB,
6.50%, 1/1/21......................... $ 541,305
200 Hoboken, GO,
6.65%, 8/1/11......................... 220,572
250 Hudson Cnty. GO
5.125%, 8/1/08, (AMBAC)............... 250,955
400 Lakewood Township
School District GO,
6.25%, 2/15/12, (AMBAC)............... 441,972
500 Manalapan Regl. Brd. Ed. GO,
5.00%, 5/1/05......................... 508,355
305 Mercer Cnty. Imp. Auth. RB,
6.05%, 1/1/11......................... 304,991
150 Millburn Township, GO,
6.00%, 7/15/99........................ 156,983
800 Monmouth Cnty. Impt. Auth. GO,
Correctional Facs. Monmouth Proj.,
6.40%, 8/1/08......................... 854,816
New Jersey Bldg. Auth. RB,
500 5.00%, 6/15/13........................ 476,900
500 5.00%, 6/15/18........................ 458,835
300 6.25%, 6/15/13........................ 319,380
300 New Jersey Eco. Dev. Auth.
RB, (Ser. A),
6.60%, 8/1/21......................... 318,969
400 New Jersey Eco. Dev.
Auth. RB, NJ American
Wtr. Co. Proj. A,
5.35%, 6/1/23, (FGIC)................. 375,844
500 New Jersey Eco. Dev.
Auth. RB, NJ Performing
Arts Ctr. Proj.,
5.50%, 6/15/13, (AMBAC)............... 501,730
1,000 New Jersey Eco. Dev. Auth. RB,
Public Schs. Small Proj. Loan Prog.,
5.40%, 8/15/13........................ 994,370
400 New Jersey Edl. Facs. Auth. RB,
6.375%, 7/1/11, (MBIA)................ 423,620
325 New Jersey Edl. Facs. Auth. RB, (Ser.
A),
5.70%, 7/1/97......................... 327,379
250 New Jersey Edl. Facs. Auth.
RB, (Ser. B),
6.50%, 7/1/11......................... 272,278
</TABLE>
28
<PAGE>
EVERGREEN NEW JERSEY TAX FREE INCOME FUND
STATEMENT OF INVESTMENTS -- (CONTINUED)
FEBRUARY 28, 1997
(UNAUDITED)
(New Jersey logo appears here)
PRINCIPAL
AMOUNT
(000) VALUE
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
<TABLE>
<C> <S> <C>
NEW JERSEY -- CONTINUED
$500 New Jersey Edl. Facs. Auth.
RB, (Ser. C),
6.375%, 7/1/22........................ $ 534,410
500 New Jersey Edl. Facs. Auth.
RB, (Ser. D),
6.20%, 7/1/17, (AMBAC)................ 527,030
500 New Jersey Edl. Facs. Auth.
RB, Seton Hall Univ. Proj., (Ser. E),
5.625%, 7/1/19, (MBIA)................ 494,630
185 New Jersey Health Care Facs.
Financing Auth. Robert Wood
Johnson Univ. Hosp., (Ser. E),
6.625%, 7/1/16........................ 199,648
750 New Jersey Health Care Facs.
Financing Auth. Atlantic
City Med. Center RB,
6.80%, 7/1/05......................... 813,015
400 New Jersey Health Care Facs.
Financing Auth. RB,
6.50%, 7/1/12......................... 432,680
750 New Jersey Health Care Facs.
Financing Auth. RB
Hackensack Medical Center,
6.625%, 7/1/17, (FGIC)................ 809,385
300 New Jersey Health Care Facs.
Financing Auth. RB, Mercer
Medical Center, (Ser. E),
6.45%, 7/1/05, (MBIA)................. 324,051
500 New Jersey Health Care Facs.
Financing Auth. Shore Mem.
Hosp. Health Care Sys. RB,
5.00%, 7/1/12, (MBIA)................. 482,820
500 New Jersey Hwy. Auth. RB,
6.25%, 1/1/14......................... 532,190
1,000 New Jersey Sports & Exposition
RB, (Ser. A),
6.00%, 3/1/21......................... 1,026,460
190 New Jersey State Turnpike RB,
6.75%, 1/1/09......................... 212,173
300 New Jersey Transit Corp. COP,
6.50%, 10/1/16, (FSA)................. 331,593
200 New Jersey Trans.
Trust Fund Auth., RB,
4.40%, 6/15/99........................ 201,694
1,000 New Jersey Trans.
Trust Fund Auth., (Ser. B),
6.50%, 6/15/10, (MBIA)................ 1,129,750
300 New Jersey Turnpike Auth.
RB, (Ser. A),
6.40%, 1/1/02......................... 321,699
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<C> <S> <C>
$ 2,000 New Jersey Turnpike Auth.
RB, (Ser. C),
6.50%, 1/1/16, (FSA).................. $ 2,237,660
200 New Jersey St. (Ser. A), GO,
6.80%, 9/15/10........................ 222,392
500 New Jersey St. (Ser. D), GO,
5.25%, 2/15/01........................ 517,135
400 New Jersey St. (Ser. E), GO,
6.00%, 7/15/07........................ 436,464
350 North Jersey Dist. Wtr.
Supply RB, Wanaque North
Proj., (Ser. B),
6.25%, 11/15/17, (MBIA)............... 370,366
North Jersey Dist. Wtr.
Supply RB, Wanque South Proj.,
500 6.00%, 7/1/12, (MBIA)................. 524,340
400 6.50%, 7/1/21, (MBIA)................. 444,636
500 Ocean Cnty. GO Utils. Auth., (Ser. A),
5.75%, 1/1/18......................... 503,325
200 Old Bridge Township GO,
6.55%, 7/15/09, (FGIC)................ 218,754
500 Old Bridge Township Muni.
Utils. Auth. RB,
6.25%, 11/1/16, (FGIC)................ 531,210
500 Passaic Valley Sewage
Commisioners RB, (Ser. D),
5.75%, 12/1/13, (AMBAC)............... 510,290
500 Pennsauken Township School
Dist. GO,
5.00%, 3/1/10......................... 487,400
500 Port Auth. NY & NJ RB,
5.00%, 7/15/11, (AMBAC)............... 487,955
Port Auth. NY & NJ RB, (Ser. 102),
500 5.625%, 10/15/13, (MBIA).............. 505,055
900 6.75%, 8/1/26......................... 970,875
500 Rutgers St University RB, (Ser. 1),
5.25%, 5/1/12......................... 493,785
500 Sparta Township GO,
5.80%, 9/1/23, (MBIA)................. 505,455
500 Stafford Muni. Utils. Auth.
Wtr. & Swr. RB,
6.25%, 6/1/14, (MBIA)................. 530,735
500 Stony Brook Regional Sewage
Auth. RB, (Ser. B),
5.45%, 12/1/12........................ 501,845
500 Trenton GO,
6.55%, 8/15/09, (MBIA)................ 549,320
</TABLE>
29
<PAGE>
EVERGREEN NEW JERSEY TAX FREE INCOME FUND
STATEMENT OF INVESTMENTS -- (CONTINUED)
FEBRUARY 28, 1997
(UNAUDITED)
(New Jersey logo appears here)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<C> <S> <C>
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
NEW JERSEY -- CONTINUED
University Medicine &
Dentistry RB, (Ser. E),
$ 400 5.75%, 12/1/21........................ $ 422,224
500 6.50%, 12/1/18........................ 552,270
200 Washington Township Muni.
Utils. Auth. Sys. RB, (Ser. A),
6.70%, 2/1/11, (AMBAC)................ 220,176
1,000 West Windsor, GO,
5.50%, 12/1/10, (FGIC)................ 1,018,620
500 Winslow Township GO,
6.50%, 10/1/18, (FGIC)................ 548,895
41,188,106
NEW YORK -- 1.7%
1,000 Port Auth. NY & NJ
Consolidated Ninety Second,
4.75%, 1/15/29........................ 855,860
PENNSYLVANIA -- 2.0%
1,000 Delaware River Port Auth. PA
& NJ, RB, (Ser. 1995),
5.40%, 1/1/16, (FGIC)................. 977,960
PUERTO RICO -- 7.1%
Puerto Rico Commonwealth GO,
500 5.50%, 7/1/13......................... 489,415
300 6.80%, 7/1/21......................... 338,406
500 6.00%, 7/1/14......................... 508,850
500 Puerto Rico Commonwealth Hwy.
& Trans. Auth., (Ser. Z),
6.00%, 7/1/18, (FSA).................. 537,035
Puerto Rico Elec. Pwr. Auth. RB,
275 6.50%, 7/1/05, (MBIA)................. 310,027
500 7.00%, 7/1/21 (MBIA).................. 562,285
400 Puerto Rico Pub. Bldgs. Auth.
Gtd. Hlth. Facs. RB, (Ser. J),
7.00%, 7/1/19......................... 423,352
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<C> <S> <C>
PUERTO RICO -- CONTINUED
$250 Puerto Rico Pub. Bldgs. Auth.
Gtd. RB,
6.25%, 7/1/09, (AMBAC)................ $ 278,747
3,448,117
TOTAL LONG-TERM MUNICIPAL SECURITIES
(COST $44,941,547).................... 46,470,043
</TABLE>
<TABLE>
<CAPTION>
SHARES
<C> <S> <C>
MUTUAL FUND SHARES -- 5.9%
451,791 Dreyfus New Jersey Municipal Money
Market Fund........................... 451,791
2,430,660 Federated New Jersey
Municipal Cash Trust.................. 2,430,660
</TABLE>
<TABLE>
<C> <S> <C> <C>
TOTAL MUTUAL FUND SHARES
(COST $2,882,451)......... 2,882,451
TOTAL INVESTMENTS
(COST $47,823,998)........ 100.9 % 49,352,494
OTHER ASSETS AND
LIABILITIES -- NET........ (.9) (448,909)
NET ASSETS.................. 100.0 % $48,903,585
</TABLE>
Summary of Abbreviations:
AMBAC -- Insured by American Municipal Bond Assurance
Corporation
COP -- Certificate of Participation
FGIC -- Insured by Federal Guaranty Insurance Corporation
FSA -- Insured by Financial Security Assurance
GO -- General Obligation Bond
MBIA -- Insured by Municipal Bond Investors Assurance
PCR -- Pollution Control Revenue Bond
RB -- Revenue Bond
See accompanying notes to financial statements.
30
<PAGE>
EVERGREEN NEW JERSEY TAX FREE INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1997
(UNAUDITED)
(New Jersey logo appears here)
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments at value (identified cost $47,823,998)............................................................. $49,352,494
Interest receivable............................................................................................ 605,962
Receivable for Fund shares sold................................................................................ 187,050
Prepaid expenses............................................................................................... 5,250
Total assets............................................................................................. 50,150,756
LIABILITIES:
Payable for securities purchased............................................................................... 1,058,218
Dividends payable.............................................................................................. 83,298
Payable for Fund shares redeemed............................................................................... 54,899
Accrued expenses............................................................................................... 40,075
Distribution fee payable....................................................................................... 10,681
Total liabilities........................................................................................ 1,247,171
NET ASSETS........................................................................................................ $48,903,585
NET ASSETS CONSIST OF:
Paid-in capital................................................................................................ $47,558,856
Undistributed net investment income............................................................................ 11,462
Accumulated net realized loss on investment transactions....................................................... (195,229)
Net unrealized appreciation of investments..................................................................... 1,528,496
Net assets............................................................................................... $48,903,585
CALCULATION OF NET ASSET VALUE AND MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares ($31,926,616)(2,923,345 shares of beneficial interest outstanding)............................... $ 10.92
Sales charge -- 4.75% of offering price........................................................................ .54
Maximum offering price................................................................................... $ 11.46
Class B Shares ($7,159,116)(655,466 shares of beneficial interest outstanding).................................. $ 10.92
Class Y Shares ($9,817,853)(898,962 shares of beneficial interest outstanding).................................. $ 10.92
</TABLE>
See accompanying notes to financial statements.
31
<PAGE>
EVERGREEN NEW JERSEY TAX FREE INCOME FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1997
(UNAUDITED)
(New Jersey logo appears here)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest.......................................................................................... $1,252,848
EXPENSES:
Advisory fee...................................................................................... $ 114,542
Administrative personnel and service fees......................................................... 9,818
Distribution fee -- Class A Shares................................................................ 40,599
Distribution fee -- Class B Shares................................................................ 14,690
Shareholder services fee -- Class B Shares........................................................ 4,897
Custodian fee..................................................................................... 29,162
Transfer agent fee................................................................................ 21,927
Professional fees................................................................................. 14,006
Insurance expense................................................................................. 3,926
Registration and filing fees...................................................................... 3,414
Reports and notices to shareholders............................................................... 2,111
Trustees' fees and expenses....................................................................... 1,893
Miscellaneous..................................................................................... 151
261,136
Less: Fee waivers and expense reimbursements...................................................... (148,489)
Net expenses................................................................................... 112,647
Net investment income................................................................................ 1,140,201
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investment transactions...................................................... 205,954
Net increase in unrealized appreciation of investments............................................ 486,401
Net gain on investments.............................................................................. 692,355
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................................. $1,832,556
</TABLE>
See accompanying notes to financial statements.
32
<PAGE>
EVERGREEN NEW JERSEY TAX FREE INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
(New Jersey logo appears here)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FEBRUARY SIX MONTHS
28, ENDED
1997 AUGUST 31,
(UNAUDITED) 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income........................................................................ $ 1,140,201 $ 1,079,916
Net realized gain on investment transactions................................................. 205,954 56
Net change in unrealized appreciation of investments......................................... 486,401 (955,855)
Net increase in net assets resulting from operations...................................... 1,832,556 124,117
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A Shares............................................................................... (820,871) (862,288)
Class B Shares............................................................................... (81,434) (32,289)
Class Y Shares............................................................................... (241,949) (185,339)
Total distributions to shareholders....................................................... (1,144,254) (1,079,916)
FUND SHARE TRANSACTIONS:
Proceeds from shares sold.................................................................... 6,662,242 13,167,830
Proceeds from reinvestment of distributions.................................................. 573,015 522,912
Payment for shares redeemed.................................................................. (3,182,345) (10,539,031)
Net increase resulting from Fund share transactions....................................... 4,052,912 3,151,711
Net increase in net assets................................................................ 4,741,214 2,195,912
NET ASSETS:
Beginning of period.......................................................................... 44,162,371 41,966,459
End of period (includes undistributed net investment income of $11,462 and $15,515,
respectively).............................................................................. $48,903,585 $ 44,162,371
</TABLE>
See accompanying notes to financial statements.
33
<PAGE>
EVERGREEN NEW JERSEY TAX FREE INCOME FUND
FINANCIAL HIGHLIGHTS
(New Jersey logo appears here)
<TABLE>
<CAPTION>
CLASS A SHARES
SIX MONTHS
ENDED SIX MONTHS
FEBRUARY 28, ENDED YEAR ENDED
YEAR ENDED YEAR ENDED
1997 AUGUST 31, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
(UNAUDITED) 1996# 1996 1995 1994
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period............... $10.75 $11.01 $10.53 $10.99 $11.01
Income from investment operations:
Net investment income............................ .27 .28 .56 .57 .60
Net realized and unrealized gain (loss) on
investments.................................... .17 (.26) .48 (.46) (.02)
Total from investment operations............... .44 .02 1.04 .11 .58
Less distributions to shareholders from net
investment income................................ (.27) (.28) (.56) (.57) (.60)
Net asset value, end of period..................... $10.92 $10.75 $11.01 $10.53 $10.99
TOTAL RETURN+...................................... 4.2% .2% 10.1% 1.4% 5.3%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted).......... $31,927 $32,377 $41,762 $30,863 $42,783
Ratios to average net assets:
Expenses**....................................... .43%++ .34%++ .36% .25% .14%
Net investment income**.......................... 5.04%++ 5.08%++ 5.15% 5.52% 5.31%
Portfolio turnover rate............................ 12% 0% 4% 8% 2%
<CAPTION>
CLASS A SHARES
YEAR ENDED
FEBRUARY 28,
1993
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period............... $10.22
Income from investment operations:
Net investment income............................ .63
Net realized and unrealized gain (loss) on
investments.................................... .79
Total from investment operations............... 1.42
Less distributions to shareholders from net
investment income................................ (.63)
Net asset value, end of period..................... $11.01
TOTAL RETURN+...................................... 14.5%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted).......... $30,863
Ratios to average net assets:
Expenses**....................................... .00%
Net investment income**.......................... 5.97%
Portfolio turnover rate............................ 5%
</TABLE>
# The Fund changed its fiscal year end from February 28 to August 31.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge is not reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income to average net assets would have
been the following:
<TABLE>
<CAPTION>
CLASS A SHARES
SIX MONTHS
ENDED SIX MONTHS
FEBRUARY 28, ENDED YEAR ENDED YEAR ENDED YEAR ENDED
1997 AUGUST 31, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
(UNAUDITED) 1996# 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Expenses........................................... 1.13% 1.11% 1.03% 1.04% 1.05%
Net investment income.............................. 4.34% 4.31% 4.48% 4.73% 4.40%
<CAPTION>
CLASS A SHARES
YEAR ENDED
FEBRUARY 28,
1993
<S> <C>
Expenses........................................... 1.16%
Net investment income.............................. 4.81%
</TABLE>
See accompanying notes to financial statements.
34
<PAGE>
EVERGREEN NEW JERSEY TAX FREE INCOME FUND
FINANCIAL HIGHLIGHTS -- (CONTINUED)
(New Jersey logo appears here)
<TABLE>
<CAPTION>
CLASS B SHARES CLASS Y SHARES
SIX MONTHS JANUARY 30, SIX MONTHS
ENDED SIX MONTHS 1996* ENDED SIX MONTHS
FEBRUARY 28, ENDED THROUGH FEBRUARY 28, ENDED
1997 AUGUST 31, FEBRUARY 29, 1997 AUGUST 31,
(UNAUDITED) 1996# 1996 (UNAUDITED) 1996#
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period............... $10.75 $11.01 $11.08 $10.75 $11.01
Income (loss) from investment operations:
Net investment income............................ .22 .24 .05 .28 .28
Net realized and unrealized gain (loss) on
investments.................................... .17 (.26) (.07) .17 (.26)
Total from investment operations............... .39 (.02) (.02) .45 .02
Less distributions to shareholders from net
investment income................................ (.22) (.24) (.05) (.28) (.28)
Net asset value, end of period..................... $10.92 $10.75 $11.01 $10.92 $10.75
TOTAL RETURN+...................................... 3.7% (.2%) (.2%) 4.2% .2%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted).......... $7,159 $2,709 $186 $9,818 $9,076
Ratios to average net assets:
Expenses**++..................................... 1.35% 1.28% .31% .35% .31%
Net investment income**++........................ 4.11% 4.14% 5.23% 5.12% 5.12%
Portfolio turnover rate............................ 12% 0% 4% 12% 0%
<CAPTION>
CLASS Y SHARES
FEBRUARY 8,
1996*
THROUGH
FEBRUARY 29,
1996
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period............... $11.14
Income (loss) from investment operations:
Net investment income............................ .03
Net realized and unrealized gain (loss) on
investments.................................... (.13)
Total from investment operations............... (.10)
Less distributions to shareholders from net
investment income................................ (.03)
Net asset value, end of period..................... $11.01
TOTAL RETURN+...................................... (.9%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted).......... $18
Ratios to average net assets:
Expenses**++..................................... .31%
Net investment income**++........................ 5.28%
Portfolio turnover rate............................ 4%
</TABLE>
# The Fund changed its fiscal year end from February 28 to August 31.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Contingent deferred sales charge is not
reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income to average net assets would have
been the following:
<TABLE>
<CAPTION>
CLASS B SHARES CLASS Y SHARES
<S> <C> <C> <C> <C> <C>
SIX MONTHS JANUARY 30, SIX MONTHS
ENDED SIX MONTHS 1996* ENDED SIX MONTHS
FEBRUARY 28, ENDED THROUGH FEBRUARY 28, ENDED
1997 AUGUST 31, FEBRUARY 29, 1997 AUGUST 31,
(UNAUDITED) 1996# 1996 (UNAUDITED) 1996#
Expenses.................................................... 1.87% 1.85% 1.66% .88% .87%
Net investment income....................................... 3.59% 3.57% 3.88% 4.59% 4.56%
<CAPTION>
<S> <C>
CLASS Y SHARES
FEBRUARY 8,
1996*
THROUGH
FEBRUARY 29,
1996
Expenses.................................................... .88%
Net investment income....................................... 4.71%
</TABLE>
See accompanying notes to financial statements.
35
<PAGE>
EVERGREEN NORTH CAROLINA MUNICIPAL BOND FUND
STATEMENT OF INVESTMENTS
FEBRUARY 28, 1997
(UNAUDITED)
(North Carolina logo appears here)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<C> <S> <C>
<CAPTION>
LONG-TERM MUNICIPAL SECURITIES -- 95.6%
<C> <S> <C>
FLORIDA -- 1.2%
$ 650 Martin Cnty. Indl. Dev. Auth.
RB, Indiantown Cogeneration
Proj. B,
8.05%, 12/15/25....................... $ 739,076
NORTH CAROLINA -- 79.7%
1,350 Burlington Hsg. Auth. Mtg.
RB, Burlington Homes, Sec. 8-A,
6.00%, 8/1/09......................... 1,367,753
1,000 Chapel Hill Parking Fac., COP,
6.35%, 12/1/18........................ 1,038,630
1,460 Charlotte Hsg. Dev. Corp.
Mtg. RB, Vantage 78 Apts.,
6.60%, 7/15/21 (FHA).................. 1,491,171
1,475 Charlotte Stadium Parking
Facility Proj., COP (Series C),
6.00%, 6/1/14......................... 1,517,023
1,000 Coastal Regional Solid Waste
Mgmt. Auth. RB, Disp. Sys.,
6.50%, 6/1/08......................... 1,049,320
2,000 Craven Cnty. Indl. Facs. &
Poll. Ctrl. Fing. Auth. RB,
Weyerhaeuser Co. Proj.,
6.35%, 1/1/10......................... 2,118,940
2,390 Cumberland Cnty., Civic
Center Proj., COP (Ser. A),
6.40%, 12/1/24 (AMBAC)................ 2,590,258
925 Fremont Hsg. Dev. Corp. First
Lien RB, Torhunta Apts.,
6.75%, 7/15/22 (FHA).................. 954,332
1,000 Gastonia Combined Util. Sys. RB,
6.00%, 5/1/14 (MBIA).................. 1,048,030
1,000 Harnett Cnty., COP,
6.40%, 12/1/14 (AMBAC)................ 1,084,460
1,000 Haywood Cnty. Indl. Facs. &
Poll. Ctrl. Fin. Auth. RB,
Champion Int'l. Corp. Proj.,
6.25%, 9/1/25......................... 1,013,440
4,750 Martin Cnty. Indl. Facs. &
Poll. Ctrl. Fin. Auth. RB,
Solid Waste Disp. Weyerhauser Co.,
6.80%, 5/1/24......................... 5,127,672
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<C> <S> <C>
NORTH CAROLINA -- CONTINUED
North Carolina Eastn. Muni.
Pwr. Sys. Agcy. RB (Ser. A),
$ 4,000 5.00%, 1/1/21......................... $ 3,829,480
2,500 6.00%, 1/1/18 (AMBAC)................. 2,647,275
3,750 6.50%, 1/1/18 (ETM)................... 3,975,562
North Carolina Hsg. Fin. &
Dev. Auth. RB, Single Family,
(Ser. HH),
3,890 6.15%, 3/1/11 (FHA)................... 4,002,810
1,000 6.20%, 3/1/18......................... 1,011,120
1,390 7.05%, 9/1/20 (FHA)................... 1,456,331
500 North Carolina Med. Care
Comnty. Hlth. Care Fac. RB,
1st Mtg. Southminster,
6.875%, 10/1/09....................... 521,475
1,000 North Carolina Med. Care
Cmnty. Hosp. RB, Grace
Hosp., Inc.,
5.25%, 10/1/13........................ 960,360
2,000 North Carolina Med. Care
Cmnty. Hosp. RB, Rex Hosp.
Proj.,
6.25%, 6/1/17......................... 2,060,820
3,000 North Carolina Muni. Pwr.
Agcy. RB, No. 1 Catawba
Elec. (Ser. B),
5.00%, 1/1/20......................... 2,892,150
North Carolina Stud. Ed.
Assist. Auth. RB (Ser. A),
2,000 6.30%, 7/1/15......................... 2,037,820
2,375 6.35%, 7/1/16......................... 2,422,856
1,000 North Carolina Stud. Ed.
Assist. Auth. RB, 1st Mtg.
Southminster (Ser. A),
6.05%, 7/1/10......................... 1,011,390
49,230,478
TEXAS -- 7.1%
1,500 Dallas Fort Worth Intl. Arpt.
Fac. Impt. Corp. RB, American
Airlines Inc.,
6.00%, 11/1/14........................ 1,489,680
2,750 Lufkin Hlth. Facs. Dev. Corp. RB,
6.875%, 2/15/26....................... 2,861,155
4,350,835
</TABLE>
36
<PAGE>
EVERGREEN NORTH CAROLINA MUNICIPAL BOND FUND
STATEMENT OF INVESTMENTS -- (CONTINUED)
FEBRUARY 28, 1997
(UNAUDITED)
(North Carolina logo appears here)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
<C> <S> <C>
VIRGINIA -- 5.3%
$ 1,500 James City Cnty. Indl. Dev.
Auth. RB, Residential Care
Fac., 1st Mtg. Williamsburg
Landing,
1,750 6.625%, 3/1/19........................ $ 1,767,518
6.625%, 3/1/23........................ 1,511,670
3,279,188
PUERTO RICO -- 2.3%
1,400 Puerto Rico Ports Auth. RB
American Airlines Proj.,
(Ser. A),
6.25%, 6/1/26......................... 1,438,234
TOTAL LONG-TERM MUNICIPAL SECURITIES
(COST $56,087,802).................... $59,037,811
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
MUTUAL FUND SHARES -- 2.5%
<C> <S> <C>
1,532,000 Federated Municipal Obligations Fund
(COST $1,532,000).................... $ 1,532,000
</TABLE>
<TABLE>
<C> <S> <C> <C>
TOTAL INVESTMENTS
(COST $57,619,802).......... 98.1% 60,569,811
OTHER ASSETS AND
LIABILITIES -- NET.......... 1.9 1,192,468
NET ASSETS.................... 100.0% $61,762,279
</TABLE>
Summary of Abbreviations:
AMBAC -- Insured by American Municipal Bond Assurance Corporation
COP -- Certificates of Participation
ETM -- Escrowed to Maturity
FHA -- Insured by Federal Housing Authority
MBIA -- Insured by Municipal Bond Investors Assurance
RB -- Revenue Bond
See accompanying notes to financial statements.
37
<PAGE>
EVERGREEN NORTH CAROLINA MUNICIPAL BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1997
(UNAUDITED)
(North Carolina logo appears here)
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments at value (identified cost $57,619,802)............................................................. $60,569,811
Cash........................................................................................................... 109
Receivable for securities sold................................................................................. 1,965,385
Interest receivable............................................................................................ 966,931
Receivable for Fund shares sold................................................................................ 99,972
Prepaid expenses............................................................................................... 1,632
Total assets............................................................................................. 63,603,840
LIABILITIES:
Payable for securities purchased............................................................................... 1,523,852
Accrued expenses............................................................................................... 115,345
Payable for Fund shares redeemed............................................................................... 67,702
Dividends payable.............................................................................................. 60,360
Distribution fee payable....................................................................................... 50,524
Accrued advisory fee........................................................................................... 23,778
Total liabilities........................................................................................ 1,841,561
NET ASSETS........................................................................................................ $61,762,279
NET ASSETS CONSIST OF:
Paid-in capital................................................................................................ $62,632,718
Undistributed net investment income............................................................................ 37,424
Accumulated net realized loss on investment transactions....................................................... (3,857,872)
Net unrealized appreciation of investments..................................................................... 2,950,009
Net assets............................................................................................... $61,762,279
CALCULATION OF NET ASSET VALUE AND MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares ($8,506,957)(834,464 shares of beneficial interest outstanding).................................. $ 10.19
Sales charge -- 4.75% of offering price........................................................................ .51
Maximum offering price................................................................................... $ 10.70
Class B Shares ($49,413,982)(4,846,990 shares of beneficial interest outstanding)............................... $ 10.19
Class Y Shares ($3,841,340)(376,790 shares of beneficial interest outstanding).................................. $ 10.19
</TABLE>
See accompanying notes to financial statements.
38
<PAGE>
EVERGREEN NORTH CAROLINA MUNICIPAL BOND FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1997
(UNAUDITED)
(North Carolina logo appears here)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest.......................................................................................... $1,816,898
EXPENSES:
Advisory fee...................................................................................... $ 153,237
Administrative personnel and service fees......................................................... 13,495
Distribution fee -- Class A Shares................................................................ 10,131
Distribution fee -- Class B Shares................................................................ 185,229
Shareholder services fee -- Class B Shares........................................................ 61,743
Custodian fee..................................................................................... 32,056
Transfer agent fee................................................................................ 28,809
Registration and filing fees...................................................................... 14,988
Professional fees................................................................................. 10,726
Insurance expense................................................................................. 4,904
Reports and notices to shareholders............................................................... 3,678
Trustees' fees and expenses....................................................................... 919
Miscellaneous..................................................................................... 17,236
537,151
Less: Fee waivers................................................................................. (20,295)
Net expenses................................................................................... 516,856
Net investment income................................................................................ 1,300,042
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investment transactions...................................................... (45,751)
Net increase in unrealized appreciation of investments............................................ 1,427,437
Net gain on investments.............................................................................. 1,381,686
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................................. $2,681,728
</TABLE>
See accompanying notes to financial statements.
39
<PAGE>
EVERGREEN NORTH CAROLINA MUNICIPAL BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
(North Carolina logo appears here)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FEBRUARY
28, YEAR ENDED
1997 AUGUST 31,
(UNAUDITED) 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income........................................................................ $ 1,300,042 $ 2,585,742
Net realized gain (loss) on investment transactions.......................................... (45,751) 483,051
Net change in unrealized appreciation of investments......................................... 1,427,437 (416,432)
Net increase in net assets resulting from operations...................................... 2,681,728 2,652,361
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A Shares............................................................................... (202,610) (396,192)
Class B Shares............................................................................... (1,048,665) (2,003,550)
Class Y Shares............................................................................... (99,555) (147,923)
Total distributions to shareholders....................................................... (1,350,830) (2,547,665)
FUND SHARE TRANSACTIONS:
Proceeds from shares sold.................................................................... 3,102,954 10,964,230
Proceeds from reinvestment of distributions.................................................. 929,388 1,752,076
Payment for shares redeemed.................................................................. (4,743,362) (10,003,099)
Net increase (decrease) resulting from Fund share transactions............................ (711,020) 2,713,207
Net increase in net assets................................................................ 619,878 2,817,903
NET ASSETS:
Beginning of period.......................................................................... 61,142,401 58,324,498
End of period (includes undistributed net investment income of $37,424 and $88,212,
respectively).............................................................................. $61,762,279 $ 61,142,401
</TABLE>
See accompanying notes to financial statements.
40
<PAGE>
EVERGREEN NORTH CAROLINA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
(North Carolina logo appears here)
<TABLE>
<CAPTION>
CLASS A SHARES
SIX MONTHS
ENDED EIGHT MONTHS YEAR
FEBRUARY 28, YEAR ENDED ENDED ENDED
1997 AUGUST 31, AUGUST 31, DECEMBER 31,
(UNAUDITED) 1996 1995# 1994
<S> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period.......................... $9.98 $9.95 $9.16 $10.61
Income (loss) from investment operations:
Net investment income....................................... .25 .49 .33 .49
Net realized and unrealized gain (loss) on investments...... .21 .02 .79 (1.45)
Total from investment operations.......................... .46 .51 1.12 (.96)
Less distributions to shareholders from:
Net investment income....................................... (.25) (.48) (.33) (.49)
Net realized gain on investments............................ -- -- -- --
Total distributions....................................... (.25) (.48) (.33) (.49)
Net asset value, end of period................................ $10.19 $9.98 $9.95 $9.16
TOTAL RETURN+................................................. 4.7% 5.2% 12.3% (9.1%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)..................... $8,507 $7,989 $8,279 $7,979
Ratios to average net assets:
Expenses**.................................................. 1.10%++ 1.08% .92%++ .79%
Net investment income**..................................... 4.83%++ 4.81% 5.09%++ 5.11%
Portfolio turnover rate....................................... 28% 86% 117% 126%
<CAPTION>
CLASS A SHARES
JANUARY 11,
1993* THROUGH
DECEMBER 31,
1993
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period.......................... $10.00
Income (loss) from investment operations:
Net investment income....................................... .46
Net realized and unrealized gain (loss) on investments...... .64
Total from investment operations.......................... 1.10
Less distributions to shareholders from:
Net investment income....................................... (.46)
Net realized gain on investments............................ (.03)
Total distributions....................................... (.49)
Net asset value, end of period................................ $10.61
TOTAL RETURN+................................................. 11.3%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)..................... $12,739
Ratios to average net assets:
Expenses**.................................................. .32%++
Net investment income**..................................... 4.91%++
Portfolio turnover rate....................................... 57%
</TABLE>
# The Fund changed its fiscal year end from December 31 to August 31.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge is not reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income to average net assets would have
been the following:
<TABLE>
<CAPTION>
CLASS A SHARES
SIX MONTHS
ENDED EIGHT MONTHS YEAR
FEBRUARY 28, YEAR ENDED ENDED ENDED
1997 AUGUST 31, AUGUST 31, DECEMBER 31,
(UNAUDITED) 1996 1995# 1994
<S> <C> <C> <C> <C>
Expenses...................................................... 1.26% 1.35% 1.27% 1.18%
Net investment income......................................... 4.67% 4.54% 4.74% 4.72%
<CAPTION>
CLASS A SHARES
JANUARY 11,
1993* THROUGH
DECEMBER 31,
1993
<S> <C>
Expenses...................................................... 1.25%
Net investment income......................................... 3.98%
</TABLE>
See accompanying notes to financial statements.
41
<PAGE>
EVERGREEN NORTH CAROLINA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS -- (CONTINUED)
(North Carolina logo appears here)
<TABLE>
<CAPTION>
CLASS B SHARES
SIX MONTHS
ENDED EIGHT MONTHS YEAR
FEBRUARY 28, YEAR ENDED ENDED ENDED
1997 AUGUST 31, AUGUST 31, DECEMBER 31,
(UNAUDITED) 1996 1995# 1994
<S> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period.......................... $9.98 $9.95 $9.16 $10.61
Income (loss) from investment operations:
Net investment income....................................... .21 .42 .28 .44
Net realized and unrealized gain (loss) on investments...... .21 .02 .79 (1.45)
Total from investment operations.......................... .42 .44 1.07 (1.01)
Less distributions to shareholders from:
Net investment income....................................... (.21) (.41) (.28) (.44)
Net realized gain on investments............................ -- -- -- --
Total distributions....................................... (.21) (.41) (.28) (.44)
Net asset value, end of period................................ $10.19 $9.98 $9.95 $9.16
TOTAL RETURN+................................................. 4.3% 4.4% 11.8% (9.6%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)..................... $49,414 $49,382 $49,040 $44,616
Ratios to average net assets:
Expenses**.................................................. 1.85%++ 1.83% 1.67%++ 1.37%
Net investment income**..................................... 4.08%++ 4.06% 4.34%++ 4.53%
Portfolio turnover rate....................................... 28% 86% 117% 126%
<CAPTION>
JANUARY 11,
1993* THROUGH
DECEMBER 31,
1993
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period.......................... $10.00
Income (loss) from investment operations:
Net investment income....................................... .42
Net realized and unrealized gain (loss) on investments...... .64
Total from investment operations.......................... 1.06
Less distributions to shareholders from:
Net investment income....................................... (.42)
Net realized gain on investments............................ (.03)
Total distributions....................................... (.45)
Net asset value, end of period................................ $10.61
TOTAL RETURN+................................................. 10.8%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)..................... $45,168
Ratios to average net assets:
Expenses**.................................................. .79%++
Net investment income**..................................... 4.47%++
Portfolio turnover rate....................................... 57%
</TABLE>
# The Fund changed its fiscal year end from December 31 to August 31.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Contingent deferred sales charge is not
reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income to average net assets would have
been the following:
<TABLE>
<CAPTION>
CLASS B SHARES
SIX MONTHS
ENDED EIGHT MONTHS YEAR
FEBRUARY 28, YEAR ENDED ENDED ENDED
1997 AUGUST 31, AUGUST 31, DECEMBER 31,
(UNAUDITED) 1996 1995# 1994
<S> <C> <C> <C> <C>
Expenses...................................................... 2.01% 2.10% 2.02% 1.76%
Net investment income......................................... 3.92% 3.79% 3.99% 4.14%
<CAPTION>
CLASS B SHARES
JANUARY 11,
1993* THROUGH
DECEMBER 31,
1993
<S> <C>
Expenses...................................................... 1.74%
Net investment income......................................... 3.52%
</TABLE>
See accompanying notes to financial statements.
42
<PAGE>
EVERGREEN NORTH CAROLINA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS -- (CONTINUED)
(North Carolina logo appears here)
<TABLE>
<CAPTION>
CLASS Y SHARES
SIX MONTHS
ENDED EIGHT MONTHS
FEBRUARY 28, YEAR ENDED ENDED
1997 AUGUST 31, AUGUST 31,
(UNAUDITED) 1996 1995#
<S> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period........................................ $9.98 $9.95 $9.16
Income (loss) from investment operations:
Net investment income..................................................... .26 .51 .35
Net realized and unrealized gain (loss) on investments.................... .21 .03 .79
Total from investment operations........................................ .47 .54 1.14
Less distributions to shareholders from net investment income............... (.26) (.51) (.35)
Net asset value, end of period.............................................. $10.19 $9.98 $9.95
TOTAL RETURN+............................................................... 4.8% 5.4% 12.5%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)................................... $3,841 $3,771 $1,006
Ratios to average net assets:
Expenses**................................................................ .85%++ .84% .67%++
Net investment income**................................................... 5.08%++ 5.05% 5.34%++
Portfolio turnover rate..................................................... 28% 86% 117%
<CAPTION>
FEBRUARY 28,
1994* THROUGH
DECEMBER 31,
1994
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period........................................ $10.31
Income (loss) from investment operations:
Net investment income..................................................... .43
Net realized and unrealized gain (loss) on investments.................... (1.15)
Total from investment operations........................................ (.72)
Less distributions to shareholders from net investment income............... (.43)
Net asset value, end of period.............................................. $9.16
TOTAL RETURN+............................................................... (7.0%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)................................... $642
Ratios to average net assets:
Expenses**................................................................ .59%++
Net investment income**................................................... 5.58%++
Portfolio turnover rate..................................................... 126%
</TABLE>
# The Fund changed its fiscal year end from December 31 to August 31.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge is not reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income to average net assets would have
been the following:
<TABLE>
<CAPTION>
CLASS Y SHARES
SIX MONTHS
ENDED EIGHT MONTHS
FEBRUARY 28, YEAR ENDED ENDED
1997 AUGUST 31, AUGUST 31,
(UNAUDITED) 1996 1995#
<S> <C> <C> <C>
Expenses.................................................................... 1.01% 1.07% 1.02%
Net investment income....................................................... 4.92% 4.82% 4.99%
<CAPTION>
CLASS Y SHARES
FEBRUARY 28,
1994* THROUGH
DECEMBER 31,
1994
<S> <C>
Expenses.................................................................... .98%
Net investment income....................................................... 5.19%
</TABLE>
See accompanying notes to financial statements.
43
<PAGE>
EVERGREEN SOUTH CAROLINA MUNICIPAL BOND FUND
STATEMENT OF INVESTMENTS
FEBRUARY 28, 1997
(UNAUDITED)
(South Carolina logo appears here)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<C> <S> <C>
LONG-TERM MUNICIPAL SECURITIES -- 97.3%
SOUTH CAROLINA -- 94.8%
$ 540 Aiken Cnty. IDR, Beloit Corp. Proj.,
6.00%, 12/1/11........................ $ 553,900
400 Calhoun Cnty. Solid Waste
Disp. Facs. RB, Eastman Kodak
Co. Proj.,
6.75%, 5/1/17......................... 454,096
400 Camden SC Pub. Util. Revenue,
Ref. & Imp. Comb,
5.50%, 3/1/17 (MBIA).................. 394,652
300 Charleston Cnty. Hlth Facs. RB,
First Mtg. Episcopal Church,
7.125%, 4/1/20........................ 310,242
100 Colleton Cnty. GO,
5.60%, 3/1/09......................... 99,826
500 Darlington Cnty. IDR,
Nucor Corp. Proj. (Ser. A),
5.75%, 8/1/23......................... 500,535
750 Darlington Cnty. IDR,
Sonoco Products. Co. Proj.,
6.00%, 4/1/26......................... 756,232
200 Georgetown Cnty. Wtr. & Swr.
Dist. RB, Ref. & Imp.-Jr. Lien,
6.50%, 6/1/17......................... 202,060
600 Greenville Hosp. Sys. RB,
Hosp. Facs. (Ser. B),
5.70%, 5/1/12......................... 604,878
400 Greenville Memorial Auditorium
Dist. GO, Bi Lo Center Proj.,
5.75%, 4/1/18 (AMBAC)................. 402,584
250 Laurens, Pub. Util. Sys. RB,
5.00%, 1/1/18 (FGIC).................. 228,228
400 Marion Cnty. RB Hosp. Dist.,
5.375%, 11/1/25 (CL).................. 373,704
Piedmont Muni. Pwr. Agcy.
Elec. RB,
45 5.50%, 1/1/12 (MBIA) (Ser. A)......... 46,193
55 5.50%, 1/1/12 (MBIA) (Ser. B)......... 55,440
1,400 Piedmont Muni. Pwr. Agcy.
Elec. RB (Ser. A),
6.55%, 1/1/16......................... 1,408,358
100 Piedmont Muni., Pwr. Agcy.
Elec. RB, Fitch Light Rtg,
6.75%, 1/1/20 (FGIC).................. 115,277
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<C> <S> <C>
$ 150 Richland Cnty. Solid Waste
Disp. Facs. RB, Union Camp
Corp. Proj. (Ser. A),
6.75%, 5/1/22......................... $ 158,675
320 South Carolina Jobs Eco. Dev.
Auth. Hosp. Facs. RB,
Anderson Area Med. Center Inc.,
5.25%, 2/1/15 (MBIA).................. 306,720
200 South Carolina Jobs Eco. Dev.
Auth. Hosp. Facs. RB, Oconee
Mem. Hosp.,
6.15%, 3/1/15 (CL).................... 206,268
525 South Carolina Jobs Eco. Dev.
Auth. Hosp. Facs. RB, Tuomey
Regl. Med. Center (Ser. A),
5.75%, 11/1/15 (MBIA)................. 529,536
250 South Carolina St. Ed.
Assist. Auth. RB, Gtd. Stud.
Ln.-Sub Lien (Ser. C),
5.875%, 9/1/07........................ 257,427
250 South Carolina St. Ed. Facs.
Auth. RB, Furman Univ. Proj.
(Ser. A),
5.50%, 10/1/16 (MBIA)................. 246,743
South Carolina St. Hsg. Fin.
& Dev. Auth. Mtg. RB (Ser. A),
675 6.35%, 7/1/25 (FHA)................... 689,553
100 6.55%, 7/1/15......................... 103,575
595 South Carolina St. Hsg. Fin.
& Dev. Auth. Mtg. RB,
Heritage Crt. Apt. (Ser. A),
6.15%, 7/1/25 (FHA)................... 600,998
100 South Carolina St. Hsg. Fin.
& Dev. Auth. RB (Ser. A),
6.80%, 11/15/11 (FNMA)................ 105,034
200 South Carolina St. Hsg. Fin.
& Dev. Auth. RB,
Homeownership Mtg. (Ser. A),
7.55%, 7/1/11......................... 209,732
265 South Carolina St. Hsg. Fin.
& Dev. Auth. RB, Hunting
Ridge Apts.,
6.75%, 6/1/25......................... 273,893
</TABLE>
44
<PAGE>
EVERGREEN SOUTH CAROLINA MUNICIPAL BOND FUND
STATEMENT OF INVESTMENTS -- (CONTINUED)
FEBRUARY 28, 1997
(UNAUDITED)
(South Carolina logo appears here)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
<C> <S> <C>
SOUTH CAROLINA -- CONTINUED
$ 300 South Carolina St. Hsg. Fin.
& Dev. Auth. RB, Runaway Bay Apts.
Proj.,
6.125%, 12/1/15....................... $ 301,725
500 South Carolina St. Pub. Svc.
Auth. RB,
5.75%, 1/1/22 (MBIA).................. 500,755
585 York Cnty. IDR, Exempt Fac.
Hoechst Celanese,
5.70%, 1/1/24......................... 572,908
11,569,747
PUERTO RICO -- 2.5%
1,000 Puerto Rico Elec. Pwr. Auth.
RB (Ser. N),
Zero coupon, 7/1/17................... 310,320
TOTAL LONG-TERM MUNICIPAL SECURITIES
(COST $11,545,079).................. 11,880,067
<CAPTION>
SHARES
MUTUAL FUND SHARES -- 2.7%
<C> <S> <C>
332,000 Federated Municipal Obligations Fund
(COST $332,000)....................... 332,000
TOTAL INVESTMENTS
(COST $11,877,079).......... 100.0% 12,212,067
OTHER ASSETS AND
LIABILITIES -- NET.......... (0.0) (5,567)
NET ASSETS.................... 100.0% $12,206,500
</TABLE>
Summary of Abbreviations:
AMBAC -- Insured by American Municipal Bond Assurance Corporation
CL -- Guaranteed by Connie Lee
FGIC -- Insured by Financial Guaranty Insurance Co.
FHA -- Insured by Federal Housing Authority
FNMA -- Insured by Federal National Mortgage Association
GO -- General Obligation Bond
IDR -- Industrial Development Revenue Bond
MBIA -- Insured by Municipal Bond Investors Assurance
RB -- Revenue Bond
See accompanying notes to financial statements.
45
<PAGE>
EVERGREEN SOUTH CAROLINA MUNICIPAL BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1997
(UNAUDITED)
(South Carolina logo appears here)
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments at value (identified cost $11,877,079)............................................................. $12,212,067
Cash........................................................................................................... 414
Interest receivable............................................................................................ 181,895
Prepaid expenses............................................................................................... 4,773
Total assets............................................................................................. 12,399,149
LIABILITIES:
Accrued expenses............................................................................................... 143,693
Accrued advisory fee........................................................................................... 23,277
Dividends payable.............................................................................................. 16,274
Distribution fee payable....................................................................................... 4,896
Payable for fund shares repurchased............................................................................ 4,509
Total liabilities........................................................................................ 192,649
NET ASSETS........................................................................................................ $12,206,500
NET ASSETS CONSIST OF:
Paid-in capital................................................................................................ $11,863,475
Undistributed net investment income............................................................................ 1,265
Accumulated net realized gain on investment transactions....................................................... 6,772
Net unrealized appreciation of investments..................................................................... 334,988
Net assets............................................................................................... $12,206,500
CALCULATION OF NET ASSET VALUE AND MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares ($937,353)(94,729 shares of beneficial interest outstanding)..................................... $ 9.90
Sales charge -- 4.75% of offering price........................................................................ .49
Maximum offering price................................................................................... $ 10.39
Class B Shares ($4,691,904)(474,140 shares of beneficial interest outstanding).................................. $ 9.90
Class Y Shares ($6,577,243)(664,699 shares of beneficial interest outstanding).................................. $ 9.90
</TABLE>
See accompanying notes to financial statements.
46
<PAGE>
EVERGREEN SOUTH CAROLINA MUNICIPAL BOND FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1997
(UNAUDITED)
(South Carolina logo appears here)
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Interest............................................................................................. $320,995
EXPENSES:
Advisory fee......................................................................................... $ 26,916
Administrative personnel and service fees............................................................ 2,379
Distribution fee -- Class A Shares................................................................... 1,102
Distribution fee -- Class B Shares................................................................... 16,377
Shareholder services fee -- Class B Shares........................................................... 5,459
Custodian fee........................................................................................ 34,379
Transfer agent fee................................................................................... 18,506
Registration and filing fees......................................................................... 11,151
Professional fees.................................................................................... 10,858
Reports and notices to shareholders.................................................................. 5,228
Insurance expense.................................................................................... 4,092
Trustees' fees and expenses.......................................................................... 323
Miscellaneous........................................................................................ 11,638
148,408
Less: Fee waivers and expense reimbursements......................................................... (87,019)
Net expenses................................................................................... 61,389
Net investment income................................................................................... 259,606
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investment transactions......................................................... 15,605
Net increase in unrealized appreciation of investments............................................... 204,843
Net gain on investments................................................................................. 220,448
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................................................... $480,054
</TABLE>
See accompanying notes to financial statements.
47
<PAGE>
EVERGREEN SOUTH CAROLINA MUNICIPAL BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
(South Carolina logo appears here)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FEBRUARY 28, YEAR ENDED
1997 AUGUST 31,
(UNAUDITED) 1996
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income..................................................................... $ 259,606 $ 384,455
Net realized gain on investment transactions.............................................. 15,605 10,377
Net change in unrealized appreciation of investments...................................... 204,843 19,665
Net increase in net assets resulting from operations................................... 480,054 414,497
DISTRIBUTIONS TO SHAREHOLDERS:
FROM NET INVESTMENT INCOME:
Class A Shares............................................................................ (21,955) (38,206)
Class B Shares............................................................................ (92,458) (168,950)
Class Y Shares............................................................................ (144,405) (177,721)
Total distributions to shareholders from net investment income......................... (258,818) (384,877)
FROM REALIZED GAINS ON INVESTMENTS:
Class A Shares............................................................................ (1,178) --
Class B Shares............................................................................ (5,778) --
Class Y Shares............................................................................ (7,006) --
Total distributions from net realized gain on investments.............................. (13,962) --
Total distributions to shareholders.................................................... (272,780) (384,877)
FUND SHARE TRANSACTIONS:
Proceeds from shares sold................................................................. 3,061,332 4,780,175
Proceeds from reinvestment of distributions............................................... 171,905 251,384
Payment for shares redeemed............................................................... (911,642) (1,208,640)
Net increase resulting from Fund share transactions.................................... 2,321,595 3,822,919
Net increase in net assets............................................................. 2,528,869 3,852,539
NET ASSETS:
Beginning of period....................................................................... 9,677,631 5,825,092
End of period (includes undistributed net investment income of $1,265 and $477,
respectively)........................................................................... $ 12,206,500 $9,677,631
</TABLE>
See accompanying notes to financial statements.
48
<PAGE>
EVERGREEN SOUTH CAROLINA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
(South Carolina logo appears here)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
SIX MONTHS SIX MONTHS
ENDED EIGHT MONTHS JANUARY 3, ENDED
FEBRUARY 28, YEAR ENDED ENDED 1994* THROUGH FEBRUARY 28, YEAR ENDED
1997 AUGUST 31, AUGUST 31, DECEMBER 31, 1997 AUGUST 31,
(UNAUDITED) 1996 1995# 1994 (UNAUDITED) 1996
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of
period.............................. $9.69 $9.59 $8.62 $10.00 $9.69 $9.59
Income (loss) from investment
operations:
Net investment income............... .24 .49 .34 .46 .21 .41
Net realized and unrealized gain
(loss) on investments............. .22 .10 .97 (1.38) .22 .10
Total from investment
operations...................... .46 .59 1.31 (.92) .43 .51
Less distributions to shareholders
from:
Net investment income............... (.24) (.49) (.34) (.46) (.21) (.41)
Net realized gain on investments.... (.01) -- -- -- (.01) --
Total distributions............... (.25) (.49) (.34) (.46) (.22) (.41)
Net asset value, end of period........ $9.90 $9.69 $9.59 $8.62 $9.90 $9.69
TOTAL RETURN+......................... 4.8% 6.2% 15.4% (9.3%) 4.5% 5.4%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's
omitted)............................ $937 $841 $610 $312 $4,692 $4,282
Ratios to average net assets:
Expenses**.......................... .97%++ .86% .53%++ .25%++ 1.72%++ 1.61%
Net investment income**............. 5.00%++ 4.98% 5.41%++ 5.57%++ 4.25%++ 4.23%
Portfolio turnover rate............... 23% 37% 66% 23% 23% 37%
<CAPTION>
CLASS B SHARES
EIGHT MONTHS JANUARY 3,
ENDED 1994* THROUGH
AUGUST 31, DECEMBER 31,
1995# 1994
<S> <C> <C>
PER SHARE DATA:
Net asset value, beginning of
period.............................. $8.62 $10.00
Income (loss) from investment
operations:
Net investment income............... .29 .41
Net realized and unrealized gain
(loss) on investments............. .97 (1.38)
Total from investment
operations...................... 1.26 (.97)
Less distributions to shareholders
from:
Net investment income............... (.29) (.41)
Net realized gain on investments.... -- --
Total distributions............... (.29) (.41)
Net asset value, end of period........ $9.59 $8.62
TOTAL RETURN+......................... 14.8% (9.8%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's
omitted)............................ $3,542 $2,456
Ratios to average net assets:
Expenses**.......................... 1.28%++ .87%++
Net investment income**............. 4.66%++ 4.88%++
Portfolio turnover rate............... 66% 23%
</TABLE>
# The Fund changed its fiscal year end from December 31 to August 31.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge or contingent deferred
sales charge is not reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income (loss) to average net assets,
exclusive of any applicable state expense limitations, would have been the
following:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
SIX MONTHS SIX MONTHS
ENDED EIGHT MONTHS JANUARY 3, ENDED
FEBRUARY 28, YEAR ENDED ENDED 1994* THROUGH FEBRUARY 28, YEAR ENDED
1997 AUGUST 31, AUGUST 31, DECEMBER 31, 1997 AUGUST 31,
(UNAUDITED) 1996 1995# 1994 (UNAUDITED) 1996
<S> <C> <C> <C> <C> <C> <C>
Expenses........................... 3.34% 4.00% 6.50% 10.71% 4.09% 4.76%
Net investment income (loss)....... 2.63% 1.84% (.56%) (4.89%) 1.88% 1.08%
<CAPTION>
CLASS B SHARES
EIGHT MONTHS JANUARY 3,
ENDED 1994* THROUGH
AUGUST 31, DECEMBER 31,
1995# 1994
<S> <C> <C>
Expenses........................... 7.25% 11.33%
Net investment income (loss)....... (1.31%) (5.58%)
</TABLE>
See accompanying notes to financial statements.
49
<PAGE>
EVERGREEN SOUTH CAROLINA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS -- (CONTINUED)
(South Carolina logo appears here)
<TABLE>
<CAPTION>
CLASS Y SHARES
SIX MONTHS
ENDED
FEBRUARY 28, YEAR ENDED EIGHT MONTHS
1997 AUGUST 31, ENDED
(UNAUDITED) 1996 AUGUST 31, 1995#
<S> <C> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period................................. $9.69 $9.59 $8.62
Income (loss) from investment operations:
Net investment income.............................................. .25 .51 .35
Net realized and unrealized gain (loss) on investments............. .22 .10 .97
Total from investment operations................................. .47 .61 1.32
Less distributions to shareholders from:
Net investment income.............................................. (.25) (.51) (.35)
Net realized gain on investments................................... (.01) -- --
Total distributions.............................................. (.26) (.51) (.35)
Net asset value, end of period....................................... $9.90 $9.69 $9.59
TOTAL RETURN+........................................................ 5.0% 6.5% 15.5%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............................ $6,577 $4,555 $1,673
Ratios to average net assets:
Expenses**......................................................... .72%++ .62% .28%++
Net investment income**............................................ 5.25%++ 5.22% 5.66%++
Portfolio turnover rate.............................................. 23% 37% 66%
<CAPTION>
CLASS Y SHARES
FEBRUARY 28,
1994* THROUGH
DECEMBER 31, 1994
<S> <C>
PER SHARE DATA:
Net asset value, beginning of period................................. $9.74
Income (loss) from investment operations:
Net investment income.............................................. .43
Net realized and unrealized gain (loss) on investments............. (1.12)
Total from investment operations................................. (.69)
Less distributions to shareholders from:
Net investment income.............................................. (.43)
Net realized gain on investments................................... --
Total distributions.............................................. (.43)
Net asset value, end of period....................................... $8.62
TOTAL RETURN+........................................................ (7.1%)
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............................ $92
Ratios to average net assets:
Expenses**......................................................... .00%++
Net investment income**............................................ 5.92%++
Portfolio turnover rate.............................................. 23%
</TABLE>
# The Fund changed its fiscal year end from December 31 to August 31.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income (loss) to average net assets,
exclusive of any applicable state expense limitations, would have been the
following:
<TABLE>
<CAPTION>
CLASS Y SHARES
SIX MONTHS
ENDED
FEBRUARY 28, YEAR ENDED EIGHT MONTHS
1997 AUGUST 31, ENDED
(UNAUDITED) 1996 AUGUST 31, 1995#
<S> <C> <C> <C>
Expenses................................................................. 3.09% 3.70% 6.25 %
Net investment income (loss)............................................. 2.88% 2.14% (.31%)
<CAPTION>
CLASS Y SHARES
FEBRUARY 28,
1994* THROUGH
DECEMBER 31, 1994
<S> <C>
Expenses................................................................. 10.46%
Net investment income (loss)............................................. (4.54%)
</TABLE>
See accompanying notes to financial statements.
50
<PAGE>
EVERGREEN VIRGINIA MUNICIPAL BOND FUND
STATEMENT OF INVESTMENTS
FEBRUARY 28, 1997
(UNAUDITED)
(Virginia logo appears here)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<C> <S> <C>
LONG-TERM MUNICIPAL SECURITIES -- 99.3%
VIRGINIA -- 98.2%
Albemarle Cnty. Res. Care Fac. IDA,
$ 100 6.45%, 7/1/15......................... $ 100,762
145 6.625%, 7/1/21........................ 146,148
390 Buena Vista
Wtr. & Swr. Fac. RB,
6.25%, 7/15/11........................ 386,322
250 Charlottesville Albemarle, Arpt. Auth.
RB,
6.125%, 12/1/13....................... 245,735
500 Chesapeake Redev. & Hsg. Auth.
Multi-Family Hsg. RB,
7.75%, 6/1/20......................... 502,515
500 Chesterfield Cnty. Hlth. Ctr.
Commission Mtg. RB,
5.875%, 12/1/21....................... 501,420
370 Fairfax Cnty. IDA, RB,
Health Care Inova Health Sys. Proj.,
5.875%, 8/15/16....................... 375,383
750 Fairfax Cnty. Inova Health Sys. Proj.
IDA,
5.25%, 8/15/19........................ 710,250
500 Fairfax Cnty. Redev. & Hsg. Auth. Mtg.
RB,
6.00%, 9/1/16, (FHA).................. 503,300
250 Giles Cnty. IDA,
Hoechst Celanese Proj.,
5.95%, 12/1/25........................ 253,183
500 Giles Cnty. IDA, RB,
6.45%, 5/1/26......................... 522,220
500 Hanover Cnty. IDA,
Mem. Regl. Med. Center Proj.,
6.375%, 8/15/18 (MBIA)................ 547,375
400 Henrico Cnty.
Pub. Fac. Lease IDA,
7.00%, 8/1/13......................... 451,148
350 Isle Wright Cnty.
Solid Waste Disp. Facs. IDA,
6.55%, 4/1/24......................... 370,020
600 James City Cnty. Res. Care Fac.,
6.625%, 3/1/23........................ 604,668
700 King George Cnty. IDA Lease
King George Cnty. School Proj.,
6.40%, 8/1/16......................... 706,846
640 Portsmouth Redev. & Hsg. Auth. RB,
(Ser. A),
6.30%, 9/1/26......................... 661,165
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<C> <S> <C>
$ 500 Prince William Cnty.
6.75%, 10/1/15........................ $ 533,900
500 Prince William Cnty. IDA,
6.00%, 2/1/14......................... 507,980
250 Prince William Cnty.
Park Auth. RB,
6.875%, 10/15/16...................... 269,753
400 Riverside, Regl. Jail
Auth. Fac. RB,
6.00%, 7/1/25, (MBIA)................. 412,396
100 Virginia Beach, Dev.
Auth. Hosp. Fac. RB,
6.00%, 2/15/12, (AMBAC)............... 107,597
Virginia College, Bldg. Auth.
Edl. Facs. RB,
100 5.75%, 1/1/14......................... 100,749
700 5.75%, 4/1/14......................... 702,653
750 Virginia Port Auth. Commmonwealth RB,
5.90%, 7/1/16......................... 757,965
Virginia St. Hsg. Dev. Auth.
Commonwealth Mtg. RB, (Ser. A),
100 6.95%, 1/1/10......................... 103,718
100 7.10%, 1/1/17......................... 104,244
300 Virginia St. Hsg. Dev. Auth.
RB, (Ser. D),
6.10%, 1/1/19......................... 305,265
Virginia St. Hsg. Dev. Auth.
RB, (Ser. F),
300 6.25%, 7/1/12......................... 308,571
500 6.65%, 1/1/13......................... 532,555
500 Virginia St. Hsg. Dev. Auth.
RB, (Ser. O),
6.05%, 11/1/17........................ 498,195
255 Virginia St. Hsg. Dev. Auth.
RB Multi-Family Hsg. (Ser. K),
5.90%, 5/1/11......................... 259,218
300 Virginia St. Multi-Family
Hsg. RB, (Ser. H),
6.35%, 11/1/11........................ 311,607
100 Virginia St. Pub. School
Auth. RB, (Ser. B),
6.50%, 8/1/15......................... 107,654
</TABLE>
51
<PAGE>
EVERGREEN VIRGINIA MUNICIPAL BOND FUND
STATEMENT OF INVESTMENTS -- (CONTINUED)
FEBRUARY 28, 1997
(UNAUDITED)
(Virginia logo appears here)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) VALUE
<C> <S> <C>
LONG-TERM MUNICIPAL SECURITIES -- CONTINUED
VIRGINIA -- CONTINUED
$ 200 Virginia St. Res. Auth. Wtr. & Swr.
Sys. RB, 5.25%,
10/1/14............................... $ 195,942
300 West Point Solid Waste Disp. IDA,
(Ser. B),
6.25%, 3/1/19......................... 306,330
14,014,752
PUERTO RICO -- 1.1%
150 Puerto Rico Commonwealth GO, 6.45%,
7/1/17................................ 159,915
TOTAL LONG-TERM MUNICIPAL SECURITIES
(COST $13,748,403).................. 14,174,667
<CAPTION>
SHARES
MUTUAL FUND SHARES -- .4%
</TABLE>
<TABLE>
<C> <S> <C>
56,000 Federated Municipal Obligations Fund
(COST $56,000)........................ 56,000
</TABLE>
<TABLE>
<C> <S> <C> <C>
TOTAL INVESTMENTS --
(COST $13,804,403).......... 99.7 % 14,230,667
OTHER ASSETS AND
LIABILITIES -- NET.......... .3 35,679
NET ASSETS --................. 100.0 % $14,266,346
</TABLE>
Summary of Abbreviations:
AMBAC -- Insured by American Municipal Bond Assurance
Corporation
FHA -- Insured by Federal Housing Authority
GO -- General Obligation Bond
IDA -- Industrial Development Authority Bond
IDR -- Industrial Development Revenue Bond
MBIA -- Insured by Municipal Bond Investors Assurance
RB -- Revenue Bond
See accompanying notes to financial statements.
52
<PAGE>
EVERGREEN VIRGINIA MUNICIPAL BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1997
(UNAUDITED)
(Virginia logo appears here)
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments at value (identified cost $13,804,403)............................................................. $14,230,667
Cash........................................................................................................... 436
Interest receivable............................................................................................ 228,393
Receivable for Fund shares sold................................................................................ 28,998
Prepaid expenses............................................................................................... 1,356
Total assets............................................................................................. 14,489,850
LIABILITIES:
Accrued expenses............................................................................................... 184,267
Dividends payable.............................................................................................. 21,429
Payable for Fund shares redeemed............................................................................... 9,844
Distribution fee payable....................................................................................... 7,964
Total liabilities........................................................................................ 223,504
NET ASSETS........................................................................................................ $14,266,346
NET ASSETS CONSIST OF:
Paid-in capital................................................................................................ $14,121,794
Accumulated net realized loss on investment transactions....................................................... (281,712)
Net unrealized appreciation of investments..................................................................... 426,264
Net assets............................................................................................... $14,266,346
CALCULATION OF NET ASSET VALUE AND MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares ($2,912,378)(293,912 shares of beneficial interest outstanding).................................. $ 9.91
Sales charge -- 4.75% of offering price........................................................................ .49
Maximum offering price................................................................................... $ 10.40
Class B Shares ($6,019,027)(607,467 shares of beneficial interest outstanding).................................. $ 9.91
Class Y Shares ($5,334,941)(538,445 shares of beneficial interest outstanding).................................. $ 9.91
</TABLE>
See accompanying notes to financial statements.
53
<PAGE>
EVERGREEN VIRGINIA MUNICIPAL BOND FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1997
(UNAUDITED)
(Virginia logo appears here)
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Interest............................................................................................. $406,270
EXPENSES:
Advisory fee......................................................................................... $ 33,807
Administrative personnel and service fees............................................................ 2,944
Distribution fee -- Class A Shares................................................................... 3,589
Distribution fee -- Class B Shares................................................................... 22,339
Shareholder services fee -- Class B Shares........................................................... 7,446
Custodian fee........................................................................................ 31,785
Transfer agent fee................................................................................... 19,372
Registration and filing fees......................................................................... 12,499
Professional fees.................................................................................... 9,263
Insurance expense.................................................................................... 3,433
Reports and notices to shareholders.................................................................. 2,413
Trustees' fees and expenses.......................................................................... 541
Miscellaneous........................................................................................ 7,101
156,532
Less: Fee waivers and expense reimbursements......................................................... (70,511)
Net expenses................................................................................... 86,021
Net investment income................................................................................... 320,249
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investment transactions......................................................... 94,142
Net increase in unrealized appreciation of investments............................................... 221,186
Net gain on investments................................................................................. 315,328
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................................................... $635,577
</TABLE>
See accompanying notes to financial statements.
54
<PAGE>
EVERGREEN VIRGINIA MUNICIPAL BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
(Virginia logo appears here)
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS
ENDED
FEBRUARY 28, YEAR ENDED
1997 AUGUST 31,
(UNAUDITED) 1996
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income........................................................................ $ 320,249 $ 458,280
Net realized gain (loss) on investment transactions.......................................... 94,142 (98,854)
Net change in unrealized appreciation of investments......................................... 221,186 47,564
Net increase in net assets resulting from operations...................................... 635,577 406,990
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A Shares............................................................................... (71,744) (117,625)
Class B Shares............................................................................... (126,500) (238,415)
Class Y Shares............................................................................... (123,387) (105,354)
Total distributions to shareholders....................................................... (321,631) (461,394)
FUND SHARE TRANSACTIONS:
Proceeds from shares sold.................................................................... 1,576,799 6,625,000
Proceeds from reinvestment of distributions.................................................. 180,687 309,870
Payment for shares redeemed.................................................................. (926,413) (1,791,146)
Net increase resulting from Fund share transactions....................................... 831,073 5,143,724
Net increase in net assets................................................................ 1,145,019 5,089,320
NET ASSETS:
Beginning of period.......................................................................... 13,121,327 8,032,007
End of period (includes undistributed net investment income of $1,382 at August 31, 1996).... $ 14,266,346 $13,121,327
</TABLE>
See accompanying notes to financial statements.
55
<PAGE>
EVERGREEN VIRGINIA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
(Virginia logo appears here)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
CLASS A SHARES
SIX MONTHS
ENDED EIGHT MONTHS
FEBRUARY 28, YEAR ENDED ENDED YEAR ENDED
1997 AUGUST 31, AUGUST 31, DECEMBER 31,
(UNAUDITED) 1996 1995# 1994
PER SHARE DATA:
Net asset value, beginning of period.................................. $9.68 $9.67 $8.85 $10.19
Income (loss) from investment operations:
Net investment income............................................... .24 .48 .33 .47
Net realized and unrealized gain (loss) on investments.............. .23 .01 .82 (1.34 )
Total from investment operations.................................. .47 .49 1.15 (.87 )
Less distributions to shareholders from net investment income......... (.24 ) (.48 ) (.33 ) (.47 )
Net asset value, end of period........................................ $9.91 $9.68 $9.67 $8.85
TOTAL RETURN+......................................................... 4.9% 5.1% 13.1% (8.6% )
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............................. $2,912 $2,892 $1,983 $1,606
Ratios to average net assets:
Expenses**.......................................................... 1.03% ++ .93% .72% ++ .53%
Net investment income**............................................. 4.98% ++ 4.83% 5.17% ++ 5.11%
Portfolio turnover rate............................................... 44% 68% 87% 59%
<CAPTION>
CLASS A SHARES
1993*
JULY 2 THROUGH
DECEMBER 31,
1993
PER SHARE DATA:
Net asset value, beginning of period.................................. $10.00
Income (loss) from investment operations:
Net investment income............................................... .20
Net realized and unrealized gain (loss) on investments.............. .19
Total from investment operations.................................. .39
Less distributions to shareholders from net investment income......... (.20 )
Net asset value, end of period........................................ $10.19
TOTAL RETURN+......................................................... 3.9%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............................. $1,306
Ratios to average net assets:
Expenses**.......................................................... .25% ++
Net investment income**............................................. 4.64% ++
Portfolio turnover rate............................................... 0%
</TABLE>
# The Fund changed its fiscal year end from December 31 to August 31.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Initial sales charge is not reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income (loss) to average net assets,
exclusive of any applicable state expense limitations, would have been the
following:
<TABLE>
<CAPTION>
CLASS A SHARES
SIX MONTHS JULY 2,
ENDED EIGHT MONTHS 1993*
FEBRUARY 28, YEAR ENDED ENDED YEAR ENDED THROUGH
1997 AUGUST 31, AUGUST 31, DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1996 1995# 1994 1993
<S> <C> <C> <C> <C> <C>
Expenses.................................................... 2.93% 3.47% 3.83% 5.14% 7.75%
Net investment income (loss)................................ 3.08% 2.29% 2.06% .50% (2.86%)
</TABLE>
See accompanying notes to financial statements.
56
<PAGE>
EVERGREEN VIRGINIA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS -- (CONTINUED)
(Virginia logo appears here)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
CLASS B SHARES
SIX MONTHS
ENDED EIGHT MONTHS YEAR
FEBRUARY 28, YEAR ENDED ENDED ENDED
1997 AUGUST 31, AUGUST 31, DECEMBER 31,
(UNAUDITED) 1996 1995# 1994
PER SHARE DATA:
Net asset value, beginning of period.................................. $9.68 $9.67 $8.85 $10.19
Income (loss) from investment operations:
Net investment income............................................... .21 .41 .28 .42
Net realized and unrealized gain (loss) on investments.............. .23 .01 .82 (1.34 )
Total from investment operations.................................. .44 .42 1.10 (.92 )
Less distributions to shareholders from net investment income......... (.21 ) (.41 ) (.28 ) (.42 )
Net asset value, end of period........................................ $9.91 $9.68 $9.67 $8.85
TOTAL RETURN+......................................................... 4.5% 4.3% 12.5% (9.1% )
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............................. $6,019 $5,963 $5,083 $3,817
Ratios to average net assets:
Expenses**.......................................................... 1.78% ++ 1.68% 1.47% ++ 1.12%
Net investment income**............................................. 4.23% ++ 4.09% 4.42% ++ 4.54%
Portfolio turnover rate............................................... 44% 68% 87% 59%
<CAPTION>
CLASS B SHARES
1993*
JULY 2 THROUGH
DECEMBER 31,
1993
PER SHARE DATA:
Net asset value, beginning of period.................................. $10.00
Income (loss) from investment operations:
Net investment income............................................... .17
Net realized and unrealized gain (loss) on investments.............. .19
Total from investment operations.................................. .36
Less distributions to shareholders from net investment income......... (.17 )
Net asset value, end of period........................................ $10.19
TOTAL RETURN+......................................................... 3.7%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted)............................. $2,235
Ratios to average net assets:
Expenses**.......................................................... .75% ++
Net investment income**............................................. 4.25% ++
Portfolio turnover rate............................................... 0%
<CAPTION>
JULY 2,
</TABLE>
# The Fund changed its fiscal year end from December 31 to August 31.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized. Contingent deferred sales charge is not
reflected.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income (loss) to average net assets,
exclusive of any applicable state expense limitations, would have been the
following:
<TABLE>
<CAPTION>
CLASS B SHARES
SIX MONTHS JULY 2,
ENDED EIGHT MONTHS YEAR 1993*
FEBRUARY 28, YEAR ENDED ENDED ENDED THROUGH
1997 AUGUST 31, AUGUST 31, DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1996 1995# 1994 1993
<S> <C> <C> <C> <C> <C>
Expenses.................................................... 3.68% 4.23% 4.58% 5.73% 8.25%
Net investment income (loss)................................ 2.33% 1.54% 1.31% (.07%) (3.25%)
</TABLE>
See accompanying notes to financial statements.
57
<PAGE>
EVERGREEN VIRGINIA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS -- (CONTINUED)
(Virginia logo appears here)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
CLASS Y SHARES
SIX MONTHS
ENDED EIGHT MONTHS
FEBRUARY 28, YEAR ENDED ENDED
1997 AUGUST 31, AUGUST 31,
(UNAUDITED) 1996 1995#
PER SHARE DATA:
Net asset value, beginning of period............................................... $9.68 $9.67 $8.85
Income (loss) from investment operations:
Net investment income............................................................ .25 .50 .34
Net realized and unrealized gain (loss) on investments........................... .23 .01 .82
Total from investment operations............................................... .48 .51 1.16
Less distributions to shareholders from net investment income...................... (.25 ) (.50 ) (.34 )
Net asset value, end of period..................................................... $9.91 $9.68 $9.67
TOTAL RETURN+...................................................................... 5.1% 5.4% 13.3%
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted).......................................... $5,335 $4,266 $965
Ratios to average net assets:
Expenses**....................................................................... .78% ++ .70% .47% ++
Net investment income**.......................................................... 5.24% ++ 5.05% 5.42% ++
Portfolio turnover rate............................................................ 44% 68% 87%
<CAPTION>
CLASS Y SHARES
1994*
FEBRUARY 28 THROUGH
DECEMBER 31,
1994
PER SHARE DATA:
Net asset value, beginning of period............................................... $9.83
Income (loss) from investment operations:
Net investment income............................................................ .41
Net realized and unrealized gain (loss) on investments........................... (.98 )
Total from investment operations............................................... (.57 )
Less distributions to shareholders from net investment income...................... (.41 )
Net asset value, end of period..................................................... $8.85
TOTAL RETURN+...................................................................... (5.8% )
RATIOS & SUPPLEMENTAL DATA:
Net assets, end of period (000's omitted).......................................... $344
Ratios to average net assets:
Expenses**....................................................................... .28% ++
Net investment income**.......................................................... 5.54% ++
Portfolio turnover rate............................................................ 59%
<CAPTION>
FEBRUARY 28,
</TABLE>
# The Fund changed its fiscal year end from December 31 to August 31.
* Commencement of class operations.
+ Total return is calculated on net asset value per share for the periods
indicated and is not annualized.
++ Annualized.
** Net of expense waivers and reimbursements. If the Fund had borne all expenses
that were reimbursed or waived by the investment adviser, the annualized
ratios of expenses and net investment income to average net assets, exclusive
of any applicable state expense limitations, would have been the following:
<TABLE>
<CAPTION>
CLASS Y SHARES
SIX MONTHS FEBRUARY 28,
ENDED EIGHT MONTHS 1994*
FEBRUARY 28, YEAR ENDED ENDED THROUGH
1997 AUGUST 31, AUGUST 31, DECEMBER 31,
(UNAUDITED) 1996 1995# 1994
<S> <C> <C> <C> <C>
Expenses................................................................ 2.68% 3.24% 3.58% 4.89%
Net investment income................................................... 3.34% 2.51% 2.31% .93%
</TABLE>
See accompanying notes to financial statements.
58
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND NATURE OF OPERATIONS
The Evergreen State Tax-Free Funds (the "Funds") are separate series of
Evergreen Investment Trust except for Evergreen Florida High Income Municipal
Bond Fund, which is a series of Evergreen Municipal Trust, both open-end
management companies registered under the Investment Company Act of 1940, as
amended (the "Act"). The Evergreen State Tax-Free Funds consist of Evergreen
Florida High Income Municipal Bond Fund ("Florida High Income"), Evergreen
Florida Municipal Bond Fund ("Florida"), Evergreen Georgia Municipal Bond Fund
("Georgia"), Evergreen New Jersey Tax Free Income Fund ("New Jersey"), Evergreen
North Carolina Municipal Bond Fund ("North Carolina"), Evergreen South Carolina
Municipal Bond Fund ("South Carolina") and Evergreen Virginia Municipal Bond
Fund ("Virginia"), known collectively as the Funds.
The investment objective of Florida, Georgia, New Jersey, North Carolina,
South Carolina and Virginia is to seek current income exempt from federal income
tax and where applicable, state income taxes, consistent with the preservation
of capital. Florida High Income seeks to provide a high level of current income
which is exempt from federal income tax.
Effective January 1, 1996, First Union Corporation, the corporate parent of
First Union National Bank of North Carolina ("First Union"), the Funds'
investment adviser, consummated a merger with First Fidelity Bancorporation, the
corporate parent of First Fidelity Bank, N.A., New Jersey's prior investment
adviser. Effective January 19, 1996, each of the funds in FFB Funds Trust, an
open-end management company registered under the Act, including the FFB New
Jersey Tax-Free Income Fund, joined the Evergreen Funds. The FFB Fund was
renamed Evergreen New Jersey Tax Free Income Fund. Shares of FFB New Jersey
Tax-Free Income Fund were redesignated New Jersey's Class A Shares.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Funds in the preparation of their financial statements. These policies are
in conformity with generally accepted accounting principles.
SECURITY VALUATIONS -- Municipal bonds are valued by an independent pricing
service taking into consideration yield, liquidity, risk, credit quality,
coupon, maturity, type of issue and any other factors or market data it deems
relevant in determining valuations for normal institutional size trading units
of debt securities which it believes to reflect the current value of securities.
The independent pricing service does not rely exclusively on quoted prices.
Short-term securities purchased with remaining maturities of sixty days or less
are stated at amortized cost which approximates market value.
SECURITY TRANSACTIONS -- Security transactions are accounted for on the
date purchased or sold. Net realized gains or losses are determined on the
identified cost basis.
INVESTMENT INCOME AND EXPENSES -- Interest income and expenses are accrued
daily. Premiums and discounts paid on securities are amortized or accreted into
interest income.
WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS -- The Funds record
when-issued or delayed delivery transactions on the trade date and maintain
security positions such that sufficient liquid assets will be available to make
payment for the securities purchased. Securities purchased on a when-issued or
delayed delivery basis are marked to market daily and begin earning interest on
the settlement date.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions from net investment income
are declared daily and paid monthly. Distributions from net realized capital
gains on investments, if any, will be distributed at least annually. Income
distributions and capital gain distributions are determined in accordance with
income tax regulations which may differ from the amounts available for
distribution under generally accepted accounting principles. To the extent these
differences are permanent in nature, such amounts are reclassified within the
components of net assets.
INCOME TAXES -- It is each Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable and other net income to its
shareholders. Accordingly,
59
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES -- continued
no provisions for Federal income or excise taxes are necessary. To the extent
that realized net capital gains can be offset by capital loss carryforwards, it
is each Fund's policy not to distribute such gains.
At August 31, 1996, the Funds' most recent fiscal year end, the Funds had
capital loss carryforwards as follows:
<TABLE>
<CAPTION>
EXPIRATION
2002 2003 2004
<S> <C> <C> <C>
Florida High Income $ 723,137 $634,610 $64,454
Georgia 683,766 -- --
New Jersey 266,381 134,802 --
North Carolina 3,812,121 -- --
Virginia 258,553 -- 30,043
</TABLE>
Capital losses incurred after October 31, within each Fund's fiscal year,
are deemed to arise on the first business day of the following fiscal year. The
Fund's incurred and have selected to defer the following capital losses to the
current fiscal year:
<TABLE>
<S> <C>
Florida High Income $2,682
South Carolina 7,144
Virginia 87,258
</TABLE>
ALLOCATION OF EXPENSES -- Expenses specifically identifiable to a class of
shares or a specific fund are charged to that class or fund. Expenses common to
a Trust as a whole are allocated to the funds in that Trust. Net investment
income (other than class specific expenses) and realized and unrealized gains
and losses are allocated daily to each class of shares based upon the relative
proportion of net assets of each class.
DEFERRED ORGANIZATION EXPENSES -- The expenses of Florida High Income
incurred in connection with its organization are being deferred and amortized
over a period of benefit not to exceed 60 months from June 30, 1995.
USE OF ESTIMATES -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
NOTE 3 -- INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY AND ADMINISTRATIVE AGREEMENTS -- First Union is each
Fund's investment adviser and accordingly is entitled to an annual fee as a
percentage of each Fund's average daily net assets. Florida's, Georgia's, North
Carolina's, South Carolina's and Virginia's investment advisory fee is .50 of 1%
of average daily net assets. Florida High Income's annual fee is .60 of 1% of
average daily net assets. New Jersey's annual fee is based on the following
schedule:
<TABLE>
<CAPTION>
ADVISORY FEE AVERAGE DAILY NET ASSETS
<C> <S>
0.500% on the first $500 million
0.450% on the next $500 million
0.400% on the next $500 million
0.350% in excess of $1.5 billion
</TABLE>
Evergreen Asset Management Corp. ("Evergreen Asset"), a wholly owned
subsidiary of First Union, is the Funds' administrator and through December 31,
1996, Furman Selz LLC ("Furman Selz") was the sub-administrator. Effective
January 1, 1997, BISYS Group, Inc. ("BISYS") acquired Furman Selz' mutual fund
unit and accordingly, BISYS Fund Services became sub-administrator. As
sub-administrator, Furman Selz/BISYS provided the officers of the Funds.
Evergreen Asset's, Furman Selz'/BISYS' fees are based on the average daily net
assets of all the funds administered by Evergreen Asset or
60
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 3 -- INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH
AFFILIATES -- continued
Evergreen Keystone Investment Services ("EKIS"), a wholly owned subsidiary of
First Union, for which First Union or its investment advisory subsidiaries is
also investment adviser. These fees are calculated at the following annual
rates:
<TABLE>
<CAPTION>
ADMINISTRATION FEE AVERAGE DAILY NET ASSETS
<C> <S>
0.050% on the first $7 billion
0.035% on the next $3 billion
0.030% on the next $5 billion
0.020% on the next $10 billion
0.015% on the next $5 billion
0.010% in excess of $30 billion
</TABLE>
<TABLE>
<CAPTION>
SUB-ADMINISTRATION FEE AVERAGE DAILY NET ASSETS
<C> <S>
0.0100% on the first $7 billion
0.0075% on the next $3 billion
0.0050% on the next $15 billion
0.0040% in excess of $25 billion
</TABLE>
At February 28, 1997, assets for which Evergreen Asset or EKIS was the
administrator for which First Union or its investment advisory subsidiaries was
investment adviser totaled approximately $29.2 billion.
First Union voluntarily waived the advisory fee and reimbursed expenses for
the period ended February 28, 1997 as described below:
<TABLE>
<CAPTION>
ADMINISTRATION
ADVISORY FEE FEE EXPENSE
WAIVERS WAIVERS REIMBURSEMENTS
<S> <C> <C> <C>
Florida High Income $171,151 $ -- $ --
Florida 114,001 -- 99,304
Georgia 32,760 1,159 46,812
New Jersey 114,542 6,127 27,820
North Carolina 20,295 -- --
South Carolina 26,916 1,985 58,118
Virginia 33,807 2,458 34,246
</TABLE>
First Union may discontinue these voluntary waivers and reimbursements at
any time.
Effective March 11, 1997, EKIS, began providing the administrative services
to Funds that were formerly provided by Evergreen Asset. The administration fees
remain unchanged from those under Evergreen Asset.
61
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 3 -- INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH
AFFILIATES -- continued
PLANS OF DISTRIBUTION -- The Funds have adopted for their Class A shares
and Class B Shares, Distribution Plans (the "Plans") pursuant to Rule 12b-1
under the Act. Under the terms of the Plans, the Funds may incur
distribution-related and shareholder servicing expenses which may not exceed an
annual fee of .75 of 1% for Class A and Class B Shares. For each of the Funds
except Florida and New Jersey, the payments for Class A were voluntarily limited
to an annual fee of .25 of 1% of average daily net assets. For the six months
ended February 28, 1997, Rule 12b-1 fees, net of reimbursement, charged to
Florida and New Jersey were approximately an annual fee of .07 and .08 of 1%,
respectively, of average daily net assets. The Funds have entered into
distribution agreements with Evergreen Keystone Distributor ("EKD"), formerly
Evergreen Funds Distributor, a subsidiary of BISYS, whereby they will compensate
EKD for its services at a rate which may not exceed an annual fee of .25 of 1%
of Class A average daily net assets and an annual fee of .75 of 1% of Class B
average daily net assets.
The Funds have entered into a Shareholder Services Agreement with First
Union Brokerage Services ("FUBS"), an affiliate of First Union, whereby they
will compensate FUBS up to an annual fee of .25 of 1% for certain services
provided to shareholders and/or maintenance of shareholder accounts relating to
each of the Fund's Class B Shares.
ORGANIZATIONAL EXPENSES -- Organizational expenses of Florida, Georgia,
North Carolina, South Carolina and Virginia were initially borne by the Funds'
prior administrator. These Funds agreed to reimburse such expenses during the
five-year period following each Funds' commencement of operations. As a result
of a change in the administration agreement, First Union purchased the remaining
unreimbursed organizational expenses from the prior administrator. As of and for
the six months ended February 28, 1997, the Funds paid and have a remaining
liability to First Union as follows:
<TABLE>
<CAPTION>
REMAINING
PAYMENTS LIABILITY
<S> <C> <C>
Florida $ 4,358 $17,036
Georgia 3,934 15,378
North Carolina 11,530 12,137
South Carolina 10,949 46,175
Virginia 3,759 14,696
</TABLE>
SALES CHARGES -- EFD has advised the Funds that it has retained the
following amounts from front-end sales charges resulting from sales of Class A
Shares during the six months ended February 28, 1997:
<TABLE>
<CAPTION>
Florida High Income $38,082
<S> <C>
Florida 5,328
Georgia 1,773
New Jersey 5,073
North Carolina 2,314
South Carolina 463
Virginia 1,227
</TABLE>
62
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 4 -- SHARES OF BENEFICIAL INTEREST
Each of the Funds has an unlimited number of $0.0001 par shares authorized.
Each of the Funds' shares are divided into classes which are designated Class A,
Class B and Class Y Shares. Class A shares are sold with a front-end sales
charge of up to 4.75%. Class B shares are sold with a contingent deferred sales
charge which declines from 5% to zero depending on the period of time the shares
are held. Class B shares will automatically convert to Class A shares after
seven years from the date of purchase. Class Y Shares are available only to
investment advisory clients of First Union and its affiliates, certain
institutional investors or Class Y shareholders of record of certain other funds
managed by First Union and its affiliates as of December 30, 1994. The classes
have identical voting, dividend, liquidation and other rights, except that Class
A and Class B Shares bear distribution expenses (see Note 3) and have exclusive
voting rights with respect to their distribution plans.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FEBRUARY 28, 1997 YEAR ENDED
(UNAUDITED) AUGUST 31, 1996*
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
FLORIDA HIGH INCOME
CLASS A
Shares sold................................................ 1,722,895 $ 18,245,694 3,124,792 $ 32,820,683
Shares issued on reinvestment of distributions............. 95,224 1,011,328 141,897 1,492,720
Shares redeemed............................................ (617,570) (6,540,931) (1,673,161) (17,673,622)
Net increase............................................... 1,200,549 12,716,091 1,593,528 16,639,781
CLASS B
Shares sold................................................ 1,851,209 19,610,445 1,606,756 16,929,901
Shares issued on reinvestment of distributions............. 33,153 352,225 29,466 309,488
Shares redeemed............................................ (169,307) (1,790,824) (93,856) (985,765)
Net increase............................................... 1,715,055 18,171,846 1,542,366 16,253,624
CLASS Y
Shares sold................................................ 133,144 1,414,424 203,571 2,137,099
Shares issued on reinvestment of distributions............. 1,513 16,074 1,303 13,721
Shares redeemed............................................ (14,442) (154,117) (15,879) (167,279)
Net increase............................................... 120,215 1,276,381 188,995 1,983,541
Total net increase resulting from Fund share
transactions............................................. 3,035,819 $ 32,164,318 3,324,889 $ 34,876,946
</TABLE>
*For Class Y shares, the Fund share transaction activity is for the period
September 20, 1995 (commencement of class operations) through August 31, 1996.
63
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 4 -- SHARES OF BENEFICIAL INTEREST -- continued
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FEBRUARY 28, 1997 YEAR ENDED
(UNAUDITED) AUGUST 31, 1996
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
FLORIDA
CLASS A
Shares sold....................................................... 454,462 $ 4,454,198 647,176 $ 6,349,216
Shares issued on reinvestment of distributions.................... 115,251 1,135,279 198,575 1,954,093
Shares redeemed................................................... (1,189,709) (11,667,915) (2,919,201) (28,758,982)
Net decrease...................................................... (619,996) (6,078,438) (2,073,450) (20,455,673)
CLASS B
Shares sold....................................................... 273,203 2,677,667 720,789 7,109,005
Shares issued on reinvestment of distributions.................... 43,860 432,006 67,958 668,617
Shares redeemed................................................... (255,970) (2,510,258) (621,849) (6,110,433)
Net increase...................................................... 61,093 599,415 166,898 1,667,189
CLASS Y
Shares sold....................................................... 681,817 6,683,628 1,061,203 10,399,454
Shares issued on reinvestment of distributions.................... 6,328 62,312 5,711 56,106
Shares redeemed................................................... (110,553) (1,084,801) (172,594) (1,701,590)
Net increase...................................................... 577,592 5,667,139 894,320 8,753,970
Total net increase (decrease) resulting from Fund share
transactions.................................................... 18,689 $ 182,116 (1,012,232) ($10,034,514)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FEBRUARY 28, 1997 YEAR ENDED
(UNAUDITED) AUGUST 31, 1996
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
GEORGIA
CLASS A
Shares sold............................................................. 44,622 $ 431,477 37,924 $ 365,163
Shares issued on reinvestment of distributions.......................... 3,511 34,200 7,779 75,126
Shares redeemed......................................................... (28,052) (271,612) (63,160) (605,087)
Net increase (decrease)................................................. 20,081 194,065 (17,457) (164,798)
CLASS B
Shares sold............................................................. 71,145 691,772 268,620 2,600,226
Shares issued on reinvestment of distributions.......................... 14,643 142,668 26,313 253,826
Shares redeemed......................................................... (73,751) (717,426) (122,257) (1,183,493)
Net increase............................................................ 12,037 117,014 172,676 1,670,559
CLASS Y
Shares sold............................................................. 25,350 245,632 280,783 2,686,240
Shares issued on reinvestment of distributions.......................... 3,646 35,526 3,963 38,022
Shares redeemed......................................................... (55,546) (541,622) (256,913) (2,444,107)
Net increase (decrease)................................................. (26,550) (260,464) 27,833 280,155
Total net increase resulting from Fund share transactions............... 5,568 $ 50,615 183,052 $ 1,785,916
</TABLE>
64
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 4 -- SHARES OF BENEFICIAL INTEREST -- continued
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FEBRUARY 28, 1997 SIX MONTHS ENDED
(UNAUDITED) AUGUST 31, 1996
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
NEW JERSEY
CLASS A
Shares sold.............................................................. 132,892 $ 1,446,998 124,249 $ 1,339,667
Shares issued on reinvestment of distributions........................... 43,351 472,628 42,586 457,685
Shares redeemed.......................................................... (263,502) (2,866,104) (949,514) (10,244,991)
Net decrease............................................................. (87,259) (946,478) (782,679) (8,447,639)
CLASS B
Shares sold.............................................................. 413,838 4,512,940 234,035 2,509,436
Shares issued on reinvestment of distributions........................... 5,724 62,420 2,234 24,017
Shares redeemed.......................................................... (16,027) (175,302) (1,239) (13,260)
Net increase............................................................. 403,535 4,400,058 235,030 2,520,193
CLASS Y
Shares sold.............................................................. 64,474 702,304 864,470 9,318,727
Shares issued on reinvestment of distributions........................... 3,486 37,967 3,838 41,210
Shares redeemed.......................................................... (12,930) (140,939) (26,045) (280,780)
Net increase............................................................. 55,030 599,332 842,263 9,079,157
Total net increase resulting from Fund share transactions................ 371,306 $ 4,052,912 294,614 $ 3,151,711
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FEBRUARY 28, 1997 YEAR ENDED
(UNAUDITED) AUGUST 31, 1996
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
NORTH CAROLINA
CLASS A
Shares sold.............................................................. 70,021 $ 710,741 118,007 $ 1,198,058
Shares issued on reinvestment of distributions........................... 14,137 143,728 27,147 275,346
Shares redeemed.......................................................... (50,570) (511,285) (176,511) (1,780,168)
Net increase (decrease).................................................. 33,588 343,184 (31,357) (306,764)
CLASS B
Shares sold.............................................................. 199,913 2,023,516 635,229 6,447,862
Shares issued on reinvestment of distributions........................... 76,437 777,176 144,603 1,466,473
Shares redeemed.......................................................... (379,520) (3,844,786) (759,219) (7,700,019)
Net increase (decrease).................................................. (103,170) (1,044,094) 20,613 214,316
CLASS Y
Shares sold.............................................................. 36,355 368,697 327,111 3,318,310
Shares issued on reinvestment of distributions........................... 835 8,484 1,016 10,257
Shares redeemed.......................................................... (38,149) (387,291) (51,457) (522,912)
Net increase (decrease).................................................. (959) (10,110) 276,670 2,805,655
Total net increase (decrease) resulting from Fund share transactions..... (70,541) ($ 711,020) 265,926 $ 2,713,207
</TABLE>
65
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 4 -- SHARES OF BENEFICIAL INTEREST -- continued
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FEBRUARY 28, 1997 YEAR ENDED
(UNAUDITED) AUGUST 31, 1996
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
SOUTH CAROLINA
CLASS A
Shares sold............................................................. 12,510 $ 123,899 31,170 $ 305,932
Shares issued on reinvestment of distributions.......................... 11,034 10,226 1,829 17,842
Shares redeemed......................................................... (5,632) (55,478) (9,800) (95,582)
Net increase............................................................ 7,912 78,647 23,199 228,192
CLASS B
Shares sold............................................................. 39,221 386,803 109,335 1,062,828
Shares issued on reinvestment of distributions.......................... 7,413 73,297 12,969 126,461
Shares redeemed......................................................... (14,505) (141,741) (49,850) (485,446)
Net increase............................................................ 32,129 318,359 72,454 703,843
CLASS Y
Shares sold............................................................. 258,092 2,550,630 349,743 3,411,415
Shares issued on reinvestment of distributions.......................... 8,942 88,382 10,998 107,081
Shares redeemed......................................................... (72,456) (714,423) (65,167) (627,612)
Net increase............................................................ 194,578 1,924,589 295,574 2,890,884
Total net increase resulting from Fund share transactions............... 234,619 $2,321,595 391,227 $3,822,919
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FEBRUARY 28, 1997 YEAR ENDED
(UNAUDITED) AUGUST 31, 1996
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
VIRGINIA
CLASS A
Shares sold............................................................. 38,020 $ 374,042 105,025 $1,032,730
Shares issued on reinvestment of distributions.......................... 6,312 62,433 10,186 99,877
Shares redeemed......................................................... (49,138) (484,147) (21,674) (211,176)
Net increase (decrease)................................................. (4,806) (47,672) 93,537 921,431
CLASS B
Shares sold............................................................. 16,411 162,529 145,062 1,427,003
Shares issued on reinvestment of distributions.......................... 8,955 88,563 19,108 187,592
Shares redeemed......................................................... (33,846) (335,157) (74,064) (721,093)
Net increase (decrease)................................................. (8,480) (84,065) 90,106 893,502
CLASS Y
Shares sold............................................................. 105,662 1,040,228 425,577 4,165,267
Shares issued on reinvestment of distributions.......................... 3,002 29,691 2,286 22,401
Shares redeemed......................................................... (10,834) (107,109) (87,094) (858,877)
Net increase............................................................ 97,830 962,810 340,769 3,328,791
Total net increase resulting from Fund share transactions............... 84,544 $ 831,073 524,412 $5,143,724
</TABLE>
66
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 5 -- INVESTMENT TRANSACTIONS
The cost of purchases and proceeds from sales of investments, excluding
short-term securities for the period ended February 28, 1997 were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
<S> <C> <C>
Florida High Income...................................... $54,729,727 $20,238,338
Florida.................................................. 34,717,737 36,078,007
Georgia.................................................. 4,188,615 3,410,962
New Jersey............................................... 9,845,195 5,230,405
North Carolina........................................... 16,841,916 17,878,650
South Carolina........................................... 4,687,933 2,391,619
Virginia................................................. 6,986,383 5,941,005
</TABLE>
On February 28, 1997, the aggregate cost of investments for federal tax
purposes was the same as for financial reporting purposes. The composition of
unrealized appreciation and depreciation of investment securities was as
follows:
<TABLE>
<CAPTION>
APPRECIATION DEPRECIATION NET
<S> <C> <C> <C>
Florida High Income................. $3,477,705 $ (142,318) $3,335,387
Florida............................. 7,252,801 (172,490) 7,080,311
Georgia............................. 677,392 (6,335) 671,057
New Jersey.......................... 1,693,772 (165,276) 1,528,496
North Carolina...................... 2,950,009 -- 2,950,009
South Carolina...................... 343,372 (8,384) 334,988
Virginia............................ 426,264 -- 426,264
</TABLE>
NOTE 6 -- CONCENTRATION OF CREDIT RISK
Since the Funds invest a substantial portion of their assets in issuers
located in a single state, they may be more affected by economic and political
developments in a specific state or region than would be a comparable general
tax-exempt mutual fund. Certain debt obligations held by each of the Funds are
entitled to the benefit of insurance, standby letters of credit or other
guarantees of banks or other financial institutions.
NOTE 7 -- FINANCING AGREEMENT
A financing agreement was in place with all of the Evergreen Funds
("Evergreen") and State Street Bank and Trust Company ("State Street"). Under
this agreement, State Street provided an unsecured line of credit facility, in
the aggregate amount of $100 million ($50 million committed and $50 million
uncommitted), to be accessed by Evergreen for temporary or emergency purposes
only and is subject to each participating Fund's borrowing restrictions.
Effective October 31, 1996, a new financing agreement was put in place with
Evergreen and State Street, Societe Generale and ABN AMRO Bank N.V.
(collectively, the "Banks"). Under this agreement, the Banks provide an
unsecured credit facility in the aggregate amount of $225 million ($112.5
million committed and $112.5 million uncommitted) allocated evenly between the
Banks. Borrowings under the facilities bore interest at .75% per annum above the
Federal Funds rate. A commitment fee of .10% per annum was incurred on the
unused portion of the committed facility which was allocated to all
participating funds. State Street acts as agent for the Banks, and as agent is
entitled to a fee of $15,000 which is allocated to all of the Evergreen Funds.
During the period ended February 28, 1997, the Funds had no borrowings
outstanding.
67
<PAGE>
COMBINED NOTES TO FINANCIAL STATEMENTS
NOTE 8 -- DEFERRED TRUSTEE'S FEES
Each Trustee may defer any or all compensation related to performance of
duties as a Trustee of the Fund. Each Trustees' deferred balances are allocated
to deferral accounts which are included in the Fund's accrued expenses. Any
gains or losses incurred in the deferral accounts are reported in the Trustees'
fees and expenses. Trustees will be paid either in one lump sum or in quarterly
installments for up to ten years at their election, not earlier than either the
year in which the Trustee ceases to be a member of the Board of Trustees or
January 1, 2000. As of February 28, 1997, Trustees had deferred the following
fees:
<TABLE>
<S> <C>
Florida High Income...................... $3,745
Florida.................................. 3,997
Georgia.................................. 324
New Jersey............................... 2,975
North Carolina........................... 1,550
South Carolina........................... 221
Virginia................................. 284
</TABLE>
68
<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
TRUSTEES AND OFFICERS
TRUSTEES:
Laurence B. Ashkin*
Foster Bam*
James S. Howell, Chairman
Robert J. Jeffries*+
Gerald M. McDonnell
Thomas L. McVerry
William W. Pettit
Russell A. Salton, III M.D.
Michael S. Scofield
OFFICERS:
John J. Pileggi
President and Treasurer
George O. Martinez
Secretary
Sheryl Hirschfeld
Assistant Secretary
Stephen W. St. Clair
Assistant Treasurer
* Trustees for Evergreen Florida High Income
Municipal Bond Fund and Evergreen New Jersey Tax
Free Income Fund only.
+ Trustee Emeritus
<PAGE>
THIS BROCHURE MUST BE PRECEEDED OR ACCOMPANIED BY A PROSPECTUS OF AN EVERGREEN
FUND CONTAINED HEREIN. THE PROSPECTUS CONTAINS MORE COMPLETE INFORMATION,
INCLUDING FEES AND EXPENSES, AND SHOULD BE READ CAREFULLY BEFORE INVESTING OR
SENDING MONEY.
NOT May lose value
FDIC
INSURED No bank guarantee
Evergreen Keystone Distributor, Inc.
Evergreen Keystone(SM) is a Service Mark of Evergreen Keystone Investment
Services, Inc. Copyright 1997.
<PAGE>
KEYSTONE
(Photo of building)
FLORIDA
TAX FREE FUND
Evergreen Keystone
(Logo) FUNDS (Logo)
ANNUAL REPORT
MARCH 31, 1997
<PAGE>
PAGE 1
KEYSTONE FLORIDA TAX FREE FUND
SEEKS GENEROUS TAX-FREE INCOME FROM HIGH-QUALITY MUNICIPAL BONDS.
Dear Shareholders:
We are pleased to report to you on the activities of Keystone Florida Tax Free
Fund for the 12-month period which ended March 31, 1997. Following our letter to
you, we have included a discussion with your Fund's manager and complete
financial information.
PERFORMANCE
Your Fund provided a positive total return for the twelve-month period, with the
following investment results:
Class A shares returned 3.50%.
Class B shares returned 2.75%.
Class C shares returned 2.74%.
The total return of the benchmark Lehman Municipal Bond Index was 5.46% for
the 12-month period. The Fund's results reflected the overall underperformance
of higher-quality municipal bonds, as well as the Fund's overweighting in longer
maturity bonds at the beginning of the fiscal year. Your Fund's performance was
hurt when interest rates rose in April and May 1996, and prices of bonds,
especially long-term bonds, fell.
A YEAR OF CONTRASTS
The 12-month period covered a number of contrasting environments in the
fixed-income markets, with interest rates rising in the spring and summer of
1996, then declining in the fourth quarter of the calendar year, and going up
again in the first three months of 1997. The volatility in the market occurred
despite the fact that the economy was growing moderately and inflation was
benign, corporate earnings were strong, and there were no serious credit
problems. Despite these solid fundamentals, the dominant emotion among investors
was that of uncertainty.
During most of the fiscal year, your Fund was positioned for a favorable
municipal-bond market, with a heavy weighting of longer-maturity bonds. That
strategy held back our results in the first six months of the fiscal year, when
interest rates unexpectedly rose. Generally, the values of long-term bonds
decline more than those of shorter-term bonds when interest rates rise. However,
the reverse is also true, and when rates declined, the Fund was in a good
position to take profits by selling its long-term bonds into a strong market.
POSITIVE LOCAL ECONOMY
The local economic climate was kind to investors. Florida's economy continued to
outperform the national economy, due to the state's population growth and
low-cost business environment. Although tourism and agriculture are still key
contributors to Florida's fiscal health, international trade and service sectors
have become increasingly important.
OUTLOOK
At this writing, the Federal Reserve has started to raise short-term interest
rates in an effort to contain inflationary pressures. It is possible that
interest rates may rise further before they stabilize or start moving down. This
would contribute to some short-term price fluctuations. However, the longer-term
outlook at Evergreen Keystone is that inflation is not likely to get out of
control, and the bond market should stabilize. In this environment investors in
Keystone Florida Tax Free Fund should continue to have opportunities for
attractive, real returns on an after-tax, after-inflation basis.
-- CONTINUED--
<PAGE>
PAGE 2
KEYSTONE FLORIDA TAX FREE FUND
We believe it makes sense for investors-- particularly those in higher income
tax brackets-- to maintain a portion of their portfolios in municipal bond funds
as part of an overall asset allocation plan. At the close of April 1997, long-
term tax exempt bonds yielded 5.88%. For a married couple in the 36% federal
income tax bracket, a 5.88% tax-free yield is equivalent to a taxable bond
paying a 9.19% yield.
We appreciate your continued support of the Evergreen Keystone funds. If you
have any questions or comments, please feel free to write to us.
Sincerely,
/s/ Albert H. Elfner, III (photo of Albert H. Elfner, III)
Albert H. Elfner, III ALBERT H. ELFNER, III
CHAIRMAN (photo of George S. Bissell)
KEYSTONE INVESTMENT MANAGEMENT COMPANY GEORGE S. BISSELL
/s/ George S. Bissell
George S. Bissell
CHAIRMAN OF THE BOARD
KEYSTONE FUNDS
May 1997
<PAGE>
PAGE 3
A Discussion with
Your Fund's Manager
(Photo of George J. Kimball)
YOUR FUND IS MANAGED BY GEORGE J. KIMBALL, A KEYSTONE VICE PRESIDENT AND
PORTFOLIO MANAGER. AN INVESTMENT PROFESSIONAL WITH 11 YEARS' EXPERIENCE,
MR. KIMBALL IS A CHARTERED FINANCIAL ANALYST, AND HOLDS A B.A. FROM
HAMILTON COLLEGE AND AN M.B.A. FROM DUKE UNIVERSITY. HE IS SUPPORTED BY
THE MUNICIPAL BOND TEAM OF KEYSTONE INVESTMENT MANAGEMENT COMPANY. THE
TEAM MANAGES MORE THAN $2 BILLION IN MUNICIPAL BOND ASSETS IN A
VARIETY OF PORTFOLIOS.
Q WHAT WAS THE ENVIRONMENT LIKE FOR MUNICIPAL BONDS DURING THE PAST FISCAL YEAR?
A The municipal market experienced both ups and downs during the 12-month period
ended on March 31, 1997. The initial period, from April to August, was very
difficult. Fears of excessive growth and potentially higher inflation caused
interest rates to rise and bond prices to decline. The erosion in values was
more pronounced among taxable bonds, but municipal securities were also
affected. However, the market rebounded within a few months, and by September,
bond investors were enjoying a strong rally in which municipal bonds did
particularly well. The market rotation came full circle during the first three
months of 1997, when renewed fears of rising rates brought yields up and prices
down.
Q HOW DID THE FUND PERFORM IN THIS ENVIRONMENT?
A The performance was mixed, consistent with the market. During most of 1996,
the portfolio reflected our fundamentally favorable outlook on the municipal
market. That means we had a heavy weighting in longer maturity bonds, which held
back our performance when interest rates rose unexpectedly in the spring and
summer of 1996. On the other hand, when rates declined in the fall, we were able
to take profits from selling our long bonds and boost returns.
Q HOW DID YOU POSITION THE FUND GOING INTO 1997?
A Early in January of 1997, the Fund began structuring the portfolio more
defensively by replacing the 25- and 30-year bonds with shorter-maturity bonds,
which are generally not as sensitive to interest rate moves as long bonds. At
the close of the fiscal year, the average maturity of the bonds in the portfolio
was 17.5 years, slightly less than the Fund's peer group. We felt that with a
high likelihood of a tighter interest rate policy, a more conservative posture
was appropriate.
Q WHAT WAS THE QUALITY OF THE PORTFOLIO?
A The Fund maintained a high overall quality. By far the heaviest weighting was
in top-rated AAA bonds, at 42.46% of net assets. However, we were mindful of the
shareholders' need for competitive current income. To maximize the Fund's income
potential, we bought bonds with a lower credit rating, but no lower than BBB. At
the close of the fiscal year, the average credit quality of the portfolio was
AA.
<PAGE>
PAGE 4
KEYSTONE FLORIDA TAX FREE FUND
Q HOW DID FLORIDA'S MUNICIPAL-BONDS RESPOND TO GENERAL MARKET'S EVENTS?
A The state of Florida was just recently upgraded from an AA to AA+ by the
Standard & Poor's, as a result of budget stabilization, sound financial
position, and strong economic growth. Florida is a good place for new
businesses, because of relatively low business costs. Moreover, a large senior
population creates solid demand for municipal bonds. So the overall economic
backdrop is favorable for municipal bonds in Florida.
Q THERE HAVE BEEN SERIOUS CONCERNS ABOUT CREDITWORTHINESS OF MIAMI. WHAT'S THE
CURRENT SITUATION THERE?
A The Fund did not hold any debt issued by Miami, as the city has had financial
difficulties. Miami has $130 million of bonds outstanding. Most of these bonds
are insured, but the large shortfall in Miami's budget prompted alarm among
investors. The state of Florida has appointed an oversight board to help manage
that shortfall.
Q WHAT IS YOUR OUTLOOK?
A Short term, we believe the fixed-income markets will continue to experience
volatility, because of the recent tightening of interest rates by the Federal
Reserve and the possibility of another hike in the near future. However, the
state of the economy bodes well for the long-term performance of municipal
bonds. Despite the Fed's ongoing concerns about inflation, there have been no
real indications that inflation is heating up. Economic growth is within a
moderate range. Corporate earnings continue to meet or even exceed expectations.
These are favorable fundamentals for municipal bonds.
PORTFOLIO QUALITY SUMMARY
AS OF MARCH 31, 1997
(Pie chart appears here with the following plot points.)
AAA AA A BBB Not rated
42.5% 24.8% 9.3% 21.0% 2.4%
Average portfolio quality: AA
For investors in certain tax situations, a portion of income may be subject to
the federal alternative minimum tax (AMT).
Where Standard & Poor's ratings were not available, we used ratings from Moody's
Investor Service, Inc., Fitch Investors' Service, LLP, or ratings assigned by
another nationally recognized statistical rating organization.
<TABLE>
<CAPTION>
THE BENEFITS OF TAX-FREE INVESTING
FEDERAL TAX BRACKET
<S> <C>
31% 36% 39.6%
TAXABLE EQUIVALENT
Yield YIELD
4.5% 6.5% 7.0% 7.5%
5.0% 7.2% 7.8% 8.3%
5.5% 8.0% 8.6% 9.1%
</TABLE>
The yields shown are for illustrative purposes only. They are not intended to
represent actual performance of the Fund.
(diamond)
THIS COLUMN IS INTENDED TO ANSWER
QUESTIONS ABOUT YOUR FUND.
IF YOU HAVE A QUESTION YOU WOULD LIKE ANSWERED, PLEASE WRITE TO:
EVERGREEN KEYSTONE INVESTMENT SERVICES, INC.
ATTN: SHAREHOLDER COMMUNICATIONS
200 BERKELEY STREET, 22ND FLOOR,
BOSTON, MASSACHUSETTS 02116-5034.
<PAGE>
PAGE 5
Growth of an Investment
Growth of an investment in
Keystone Florida Tax Free Fund Class A
In Thousands
12/90 3/91 3/93 3/95 3/97
Reinvested Distributions (PLEASE FILL IN)
Initial Investment (PLEASE FILL IN)
Total Value: $14,708
A $10,000 investment in Keystone Florida Tax Free Fund Class A made on
December 28, 1990 with all distributions reinvested was worth $14,708 on
March 31, 1997. Past performance is no guarantee of future results.
Performance for each class will differ. The investment return and principal
value will fluctuate so that your shares, when redeemed, may be worth more or
less than the original cost.
You may exchange your shares for another Keystone fund by phone or in writing.
You may also exchange funds through the Evergreen Keystone Express Line,
800-346-3858. The Fund reserves the right to change or terminate the exchange
offer.
[CAPTION]
<TABLE>
<CAPTION>
TWELVE-MONTH PERFORMANCE AS OF MARCH 31, 1997
<S> <C> <C> <C> <C>
CLASS A CLASS B CLASS C
<S> <C> <C> <C> <C>
Total returns* 3.50 % 2.75 % 2.74 %
Net asset value 3/31/96 $10.60 $10.48 $10.50
3/31/97 10.40 10.28 10.30
Dividends 0.56 0.48 0.48
Capital gains None None None
</TABLE>
* BEFORE DEDUCTION OF FRONT-END OR CONTINGENT DEFERRED SALES CHARGE (CDSC), IF
APPLICABLE.
[CAPTION]
<TABLE>
<CAPTION>
HISTORICAL RECORD AS OF MARCH 31, 1997
<S> <C> <C> <C>
CUMULATIVE TOTAL RETURNS CLASS A CLASS B CLASS C
<S> <C> <C> <C>
1-year w/o sales charge 3.50% 2.75% 2.74%
1-year -1.41 -2.16 1.76
5-year 28.77 N/A N/A
Life of Class 47.08 17.35 19.21
AVERAGE ANNUAL RETURNS
1-year w/o sales charge 3.50% 2.75% 2.74%
1-year -1.41 -2.16 1.76
5-year 5.19 N/A N/A
Life of Class 6.35 3.92 4.31
</TABLE>
Class A shares were introduced on December 28, 1990. Performance is reported at
the current maximum front-end sales charge of 4.75%.
Class B shares were introduced on February 1, 1993. Shares purchased after
January 1, 1997 are subject to a contingent deferred sales charge (CDSC) that
declines from 5% to 1% over six years after the month purchased. Performance
assumes that shares were redeemed after the end of a one-year holding period and
reflects the deduction of a 5% CDSC.
Class C shares were introduced on February 1, 1993. Shares purchased after
January 1, 1997 are subject to a 1% CDSC during the twelve month period
following the month of purchase. Performance reflects the return you would have
received after holding shares for one year or more and redeeming after the end
of that period.
<PAGE>
PAGE 6
KEYSTONE FLORIDA TAX FREE FUND
Your Fund's Performance
Comparison of change in value of a $10,000 investment in Keystone Florida
Tax Free Fund Class A, the Lehman Municipal Bond Index and the
Consumer Price Index.
In Thousands December 28, 1990 through March 31, 1997
Average Annual Total Return
1 Year 5 Year Life of Class LMBI $15,905
Class A -1.41% 5.19% 6.35% Class A $14,708
Class B -2.16% -- 3.92%
Class C 1.76 -- 4.31%
CPI $11,928
(Bar graph appears here with the following plot points.)
12/90 3/91 3/93 3/95 3/97
Class A (PLEASE FILL IN)
Lehman Municipal Bond
Index (LMBI) (PLEASE FILL IN)
Consumer Price Index
(CPI) (PLEASE FILL IN)
Past performance is no guarantee of future results. The performance of Class B
or Class C shares may be greater or less than the line shown based on
differences in loads and fees paid by the shareholder investing in the
different classes. The Consumer Price Index is through February 28, 1997.
This chart graphically compares your Fund's total return performance to certain
investment indexes. It is the result of fund performance guidelines issued by
the Securities and Exchange Commission. The intent is to provide investors with
more information about their investment.
COMPONENTS OF THE CHART
The chart is composed of several lines that represent the accumulated value of
an initial $10,000 investment for the period indicated. The lines illustrate a
hypothetical investment in:
1. KEYSTONE FLORIDA TAX FREE FUND
The Fund seeks generous tax-free income from high-quality municipal bonds. Total
return quotations are stated after deducting sales charges (if applicable), fund
expenses and transaction costs, and assumes reinvestment of all distributions.
2. LEHMAN MUNICIPAL BOND INDEX (LMBI)
The LMBI is a broad-based, unmanaged market index of securities issued by state
and local governments. It represents the price change and coupon income of
several thousand securities of various credit qualities and maturities.
Securities are selected and compiled by Lehman Brothers, Inc. according to
criteria that may be unrelated to your Fund's investment objective.
3. CONSUMER PRICE INDEX (CPI)
This index is a widely recognized measure of the cost of goods and services
produced in the U.S.. The index contains factors such as prices of services,
housing, food, transportation and electricity which are compiled by the U.S.
Bureau of Labor Statistics. The CPI is generally considered a valuable benchmark
for investors who seek to outperform increases in the cost of living.
These indexes do not include transaction costs associated with buying and
selling securities, and do not hold cash to meet redemptions. It would be
difficult for most individual investors to duplicate these indexes.
UNDERSTANDING WHAT THE CHART MEANS
The chart demonstrates your Fund's total return performance in relation to a
well known investment index and to increases in the cost of living. It is
important to understand what the chart shows and does not show.
This illustration is useful because it charts Fund and index performance over
the same time frame and over a long period. Long-term performance is a more
reliable and useful measure of performance than measurements of short-term
returns or temporary swings in the market. Your financial adviser can help you
evaluate fund performance in conjunction with the other important financial
considerations such as safety, stability and consistency.
<PAGE>
PAGE 7
LIMITATIONS OF THE CHART
The chart, however, limits the evaluation of Fund performance in several ways.
Because the measurement is based on total returns over an extended period of
time, the comparison often favors those funds which emphasize capital
appreciation when the market is rising. Likewise, when the market is declining,
the comparison usually favors those funds which take less risk.
PERFORMANCE CAN BE DISTORTED
Funds which are more conservative in their orientation and which place an
emphasis on capital preservation will tend to compare less favorably when the
market is rising. In addition, funds which have income as one of their
objectives also will tend to compare less favorably to relevant indexes.
Indexes may also reflect the performance of some securities which a fund may
be prohibited from buying. A bond fund, for example, may be limited to
investments in only high quality bonds, or a stock fund may only be able to buy
stocks that have been traded on a stock exchange for a minimum number of years
or stocks that have a certain market capitalization. Indexes usually do not have
the same investment restrictions as your Fund.
INDEXES DO NOT INCLUDE COSTS OF INVESTING
The comparison is further limited in its utility because the indexes do not take
into account any deductions for sales charges, transaction costs or other fund
expenses. Your Fund's performance figures do reflect such deductions. Sales
charges-- whether up-front or deferred-- pay for the cost of the investment
advice of your financial adviser. Transaction costs pay for the costs of buying
and selling securities for your Fund's portfolio. Fund expenses pay for the
costs of investment management and various shareholder services. None of these
costs are reflected in index total returns. The comparison is not completely
realistic because an index cannot be duplicated by an investor-- even an
unmanaged index-- without incurring some charges and expenses.
ONE OF SEVERAL MEASURES
The chart is one of several tools you can use to understand your investment. It
should be read in conjunction with the Fund's prospectus, and annual and
semiannual reports. Also, your financial adviser, who understands your personal
financial situation, can best explain the features of your Keystone fund and how
it applies to your financial needs.
FUTURE RETURNS MAY BE DIFFERENT
Shareholders also should be mindful that the long-run performance of either the
Fund or the indexes is not representative of what shareholders should expect to
receive from their Fund investment in the future; it is presented to illustrate
only past performance and is not a guarantee of future returns.
<PAGE>
PAGE 8
KEYSTONE FLORIDA TAX FREE FUND
SCHEDULE OF INVESTMENTS
MARCH 31, 1997
<TABLE>
<CAPTION>
COUPON MATURITY PRINCIPAL MARKET
RATE DATE AMOUNT VALUE
<S> <C> <C> <C> <C>
MUNICIPAL BONDS-- 97.8%
Alliance Airport Authority, Texas, Federal Express Project 6.375 % 04/01/2021 $ 1,500,000 $ 1,477,185
Bay County, Florida, Hospital Systems Revenue Refunding, Bay Medical
Center Project 8.000 10/01/2019 2,500,000 2,993,300
Brevard County, Florida, Health Facilities Authority Revenue Refunding,
Wuesthoff Memorial Hospital (MBIA) 7.200 04/01/2013 2,000,000 2,244,380
Broward County, Florida, Collateralized Home Mortgage, Series B 7.125 03/01/2017 195,000 203,506
Broward County, Florida, Resource Recovery, South Project 7.950 12/01/2008 2,405,000 2,611,806
Charlotte County, Florida, Utility Revenue (FGIC) 6.750 10/01/2013 1,000,000 1,120,610
City of Tarpon Springs Health Facilities Authority, Florida, Hospital
Refunding, Helen Ellis Hospital 7.625 05/01/2021 1,000,000 1,070,780
Commonwealth of Puerto Rico, Aqueduct and Sewer Authority Revenue 6.250 07/01/2012 2,000,000 2,140,040
Commonwealth of Puerto Rico, Highway Authority & Transportation Authority,
Series Y 5.000 07/01/2036 1,000,000 852,320
Commonwealth of Puerto Rico, General Obligation, Linked Bond Payment
Obligation (MBIA)(d) 7.000 07/01/2010 500,000 573,980
Dade County, Florida, Educational Facilities Authority Revenue (St. Thomas
University) 6.000 01/01/2010 2,000,000 2,026,020
Dade County, Florida, Housing Finance Agency, Single Family Mortgage,
Series E 7.000 03/01/2024 185,000 192,124
Dade County, Florida, School District, General Obligation 7.375 07/01/2008 40,000 43,212
Dade County, Florida, School District, General Obligation (MBIA) 5.000 02/15/2010 1,000,000 962,470
Duval County, Florida, Single Family Mortgage Refunding (FGIC) 7.300 07/01/2011 80,000 83,950
Escambia County, Florida, Pollution Control, Champion International Corp.
Project 6.900 08/01/2022 4,000,000 4,171,200
Florida Housing Finance Agency, Home Ownership Mortgage 7.500 09/01/2014 150,000 158,574
Florida Housing Finance Agency, Multi-Family Housing, Series C 6.200 08/01/2016 2,000,000 2,022,400
Florida State Board of Education Capital Outlay Refunding, Public
Education, Series D 4.750 06/01/2016 1,000,000 865,440
Florida State Transportation, Jacksonville Transportation Authority 9.000 01/01/2000 1,000,000 1,056,160
Gainesville, Florida, Utilities System Revenue, Series B 7.500 10/01/2008 3,435,000 4,116,813
Gainesville, Florida, Utilities System Revenue, Series B 7.500 10/01/2009 3,695,000 4,436,734
Georgia State, General Obligation, Series C 5.250 04/01/2011 1,000,000 981,930
Halifax Hospital Medical Center, Florida, Hospital Revenue, Series A
(MBIA) 5.200 10/01/2013 1,000,000 950,650
Hillsborough County, Florida, Hospital Authority, Hospital Revenue, Tampa
General Hospital Project (FSA) 6.375 10/01/2013 2,000,000 2,100,040
Jacksonville, Florida, Health Facilities Authority, St. Luke's Hospital
Association 7.125 11/15/2020 3,000,000 3,232,770
Martin County, Florida, Industrial Development Authority, Industrial
Development Revenue, Indiantown Cogeneration Project A 7.875 12/15/2025 1,500,000 1,703,445
McKeesport, Pennsylvania, Hospital Authority Revenue,
McKeesport Hospital Project 6.500 07/01/2008 875,000 886,121
Miami Beach, Florida, Resort Tax Revenue (AMBAC) 6.250 10/01/2022 1,470,000 1,549,762
Miramar, Florida, Wastewater Improvement Assessment Revenue (FGIC) 6.750 10/01/2016 1,000,000 1,085,220
</TABLE>
(CONTINUED ON NEXT PAGE)
<PAGE>
PAGE 9
<TABLE>
<CAPTION>
COUPON MATURITY PRINCIPAL MARKET
RATE DATE AMOUNT VALUE
<S> <C> <C> <C> <C>
MUNICIPAL BONDS-- CONTINUED
New York, New York, General Obligation, Series H 6.000 % 08/01/2013 $ 3,300,000 $ 3,192,189
New York, New York, General Obligation, Series I 5.875 03/15/2011 1,000,000 967,740
North Broward County, Florida, Hospital District Revenue (MBIA) 5.375 01/15/2012 1,945,000 1,879,259
North Broward County, Florida, Hospital District Revenue (MBIA) 5.375 01/15/2013 1,000,000 959,840
North Broward County, Florida, Hospital District Revenue (MBIA) 5.250 01/15/2017 1,250,000 1,162,288
North Springs Improvement District, Florida, Water and Sewer Revenue,
Series B (MBIA) 6.500 12/01/2016 1,335,000 1,445,124
Okaloosa County, Florida, Gas District, Refunding and Improvement (MBIA) 6.850 10/01/2014 2,550,000 2,851,946
Orange County, Florida, Health Facilities Authority, Hospital Revenue,
Adventist Health (AMBAC) 5.250 11/15/2020 1,000,000 922,340
Orange County, Florida, Health Facilities Authority, Hospital Revenue,
Orlando Regional Healthcare, Series C (MBIA) 6.250 10/01/2021 2,000,000 2,109,200
Orlando, Florida, Utilities Commission, Water and Electric Revenue 6.000 10/01/2010 4,000,000 4,233,640
Orlando-Orange County, Florida, Expressway Authority (FGIC) 8.250 07/01/2015 40,000 51,803
Palm Beach County, Florida, General Obligation, Series B 6.500 07/01/2010 1,880,000 2,052,152
Palm Beach County, Florida, Solid Waste Authority, Revenue Improvement,
Series B (AMBAC) 5.375 10/01/2011 1,000,000 971,490
Palm Beach County, Florida, Solid Waste Industrial Development, Osceola
Power Limited Partnership, Project A (AMT)(c) 6.850 01/01/2014 2,500,000 1,934,650
Panama City, Florida, Water and Sewer Revenue 5.625 10/01/2016 1,000,000 984,100
Puerto Rico Electric Power Authority, Power Revenue, Series X 6.000 07/01/2015 2,200,000 2,208,690
Puerto Rico Industrial Tourist, Educational, Medical and Environmental
Control Facilities, Hospital Auxilio Mutuo Group, Series A (MBIA) 6.250 07/01/2024 2,000,000 2,072,600
Sunrise, Florida, Utility System Revenue, Capital Appreciation, Series A
(AMBAC)(effective yield 5.65%)(b) 0.000 10/01/2009 1,000,000 503,340
Sunrise, Florida, Utility System Revenue, Capital Appreciation, Series A
(AMBAC)(effective yield 5.75%)(b) 0.000 10/01/2010 1,000,000 470,230
Tallahassee, Florida, Health Facilities, Tallahassee Memorial Regional
Medical Project (MBIA) 6.625 12/01/2013 2,000,000 2,193,340
Tampa, Florida, Capital Improvement Program Revenue, Series B 8.375 10/01/2018 1,250,000 1,307,088
Tampa, Florida, Subordinate Guaranteed Entitlement Revenue, Series B (ETM) 8.500 10/01/2018 45,000 47,754
Texas Municipal Power Agency Revenue, Capital Appreciation (AMBAC)
(effective yield 7.30%)(b) 0.000 09/01/2006 750,000 457,057
West Melbourne, Florida, Water and Sewer Revenue (FGIC) 6.750 10/01/2014 1,000,000 1,098,190
TOTAL MUNICIPAL BONDS (COST-- $82,078,191) 83,988,992
TEMPORARY TAX-EXEMPT INVESTMENTS (0.6%) (COST-- $480,000)
Dade County, Florida, Water and Sewer System Revenue Bond, Series 1994 (a) 3.350 10/05/2022 480,000 480,000
TOTAL INVESTMENTS (COST-- $82,558,191) (E) (98.4%) 84,468,992
OTHER ASSETS AND LIABILITIES-- NET (1.6%) 1,402,889
NET ASSETS (100.0%) $85,871,881
</TABLE>
(CONTINUED ON NEXT PAGE)
<PAGE>
PAGE 10
KEYSTONE FLORIDA TAX FREE FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
(a) Variable or floating rate instruments with periodic demand features. The
Fund is entitled to full payment of principal and accrued interest upon
surrendering the security to the issuing agent according to the terms of
the demand features.
(b) Effective yield (calculated at the date of purchase) is the yield at which
the bond accretes on an annual basis until maturity.
(c) Securities that may be resold to "qualified institutional buyers" under
Rule 144A or securities offered pursuant to Section 4(2) of the Securities
Act of 1933, as amended. These securities have been determined to be liquid
under guidelines established by the Board of Trustees.
(d) At the discretion of the portfolio manager, these securities may be
separated into securities with interest or principal payments that are
linked to another rate or index and therefore would be considered derivative
securities.
(e) The cost of investments for federal income tax purposes amounted to
$82,816,143. Gross unrealized appreciation and depreciation of investments,
based on identified tax cost, at March 31, 1997 are as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation $2,624,177
Gross unrealized depreciation (971,328)
Net unrealized appreciation $1,652,849
</TABLE>
Legend of Portfolio Abbreviations:
AMBAC-- American Municipal Bond Assurance Corporation
AMT-- Subject to Alternative Minimum Tax
ETM-- Escrowed to Maturity
FGIC-- Federal Guaranty Insurance Company
FSA-- Federal Security Assistance
MBIA-- Municipal Bond Investors Assurance
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 11
FINANCIAL HIGHLIGHTS-- CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
DECEMBER 28,
1990
(COMMENCEMENT OF
YEAR ENDED MARCH 31, OPERATIONS) TO
1997 1996 1995 1994 1993 1992 MARCH 31, 1991
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR $10.60 $10.33 $10.29 $10.94 $10.43 $10.17 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.55 0.56 0.56 0.58 0.61 0.72 0.18
Net realized and unrealized gain (loss)
on investments and closed futures contracts (0.19) 0.27 0.07 (0.44) 0.64 0.30 0.17
Total from investment operations 0.36 0.83 0.63 0.14 1.25 1.02 0.35
LESS DISTRIBUTIONS FROM:
Net investment income (0.55) (0.54) (0.56) (0.58) (0.61) (0.72) (0.18)
In excess of net investment income (0.01) (0.02) (0.03) (0.05) (0.03) 0 0
Net realized gain on investments 0 0 0 (0.16) (0.10) (0.04) 0
Total distributions (0.56) (0.56) (0.59) (0.79) (0.74) (0.76) (0.18)
NET ASSET VALUE END OF YEAR $10.40 $10.60 $10.33 $10.29 $10.94 $10.43 $10.17
TOTAL RETURN (C) 3.50% 8.16% 6.42% 1.01% 12.32% 10.34% 3.52%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Total expenses 0.76%(b) 0.76%(b) 0.75% 0.75% 0.68% 0.65% 0.65%(a)
Total expenses excluding reimbursement and
waivers 0.92% 0.92% 0.95% 1.00% 1.13% 1.21% 2.06%(a)
Net investment income 5.26% 5.32% 5.60% 5.16% 5.60% 6.82% 6.33%(a)
Portfolio turnover rate 104% 89% 129% 113% 95% 63% 5%
NET ASSETS END OF YEAR (THOUSANDS) $29,305 $37,286 $42,239 $45,150 $42,997 $29,258 $ 6,922
</TABLE>
(a) Annualized.
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 0.75% and 0.75% for the years ended March 31, 1997 and 1996,
respectively.
(c) Excluding applicable sales charges.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 12
KEYSTONE FLORIDA TAX FREE FUND
FINANCIAL HIGHLIGHTS-- CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
FEBRUARY 1, 1993
(DATE OF INITIAL
YEAR ENDED MARCH 31, PUBLIC OFFERING) TO
1997 1996 1995 1994 MARCH 31, 1993
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR $10.48 $10.24 $10.27 $10.94 $10.81
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.46 0.48 0.53 0.52 0.08
Net realized and unrealized gain (loss) on investments
and closed futures contracts (0.18) 0.28 0.02 (0.47) 0.14
Total from investment operations 0.28 0.76 0.55 0.05 0.22
LESS DISTRIBUTIONS FROM:
Net investment income (0.47) (0.50) (0.49) (0.48) (0.08)
In excess of net investment income (0.01) (0.02) (0.09) (0.08) (0.01)
Net realized gain on investments 0 0 0 (0.16) 0
Total distributions (0.48) (0.52) (0.58) (0.72) (0.09)
NET ASSET VALUE END OF YEAR $10.28 $10.48 $10.24 $10.27 $10.94
TOTAL RETURN (C) 2.75% 7.48% 5.61% 0.19% 2.06%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Total expenses 1.51%(b) 1.48%(b) 1.50% 1.50% 1.50%(a)
Total expenses excluding reimbursement and waivers 1.68% 1.68% 1.68% 1.74% 1.73%(a)
Net investment income 4.51% 4.58% 4.81% 4.21% 4.00%(a)
Portfolio turnover rate 104% 89% 129% 113% 95%
NET ASSETS END OF YEAR (THOUSANDS) $46,918 $54,433 $51,083 $19,984 $ 1,704
</TABLE>
(a) Annualized.
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 1.50% and 1.47% for the years ended March 31, 1997 and 1996,
respectively.
(c) Excluding applicable sales charges.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 13
FINANCIAL HIGHLIGHTS-- CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
FEBRUARY 1, 1993
(DATE OF INITIAL
YEAR ENDED MARCH 31, PUBLIC OFFERING) TO
1997 1996 1995 1994 MARCH 31, 1993
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF YEAR $10.50 $10.26 $10.28 $10.93 $10.81
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.45 0.48 0.47 0.51 0.07
Net realized and unrealized gain (loss) on investments and closed
futures contracts (0.17) 0.28 0.08 (0.45) 0.14
Total from investment operations 0.28 0.76 0.55 0.06 0.21
LESS DISTRIBUTIONS FROM:
Net investment income (0.47) (0.50) (0.49) (0.49) (0.07)
In excess of net investment income (0.01) (0.02) (0.08) (0.06) (0.02)
Net realized gain on investments 0 0 0 (0.16) 0
Total distributions (0.48) (0.52) (0.57) (0.71) (0.09)
NET ASSET VALUE END OF YEAR $10.30 $10.50 $10.26 $10.28 $10.93
TOTAL RETURN (C) 2.74% 7.47% 5.61% 0.27% 1.95%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets:
Total expenses 1.51%(b) 1.48%(b) 1.50% 1.50% 1.50%(a)
Total expenses excluding reimbursement and waivers 1.68% 1.68% 1.70% 1.84% 1.63%(a)
Net investment income 4.51% 4.60% 4.86% 4.26% 2.95%(a)
Portfolio turnover rate 104% 89% 129% 113% 95%
NET ASSETS END OF YEAR (THOUSANDS) $9,650 $11,795 $12,831 $13,096 $ 1,987
</TABLE>
(a) Annualized.
(b) Ratio of total expenses to average net assets includes indirectly paid
expenses. Excluding indirectly paid expenses, the expense ratio would have
been 1.50% and 1.47% for the years ended March 31, 1997 and 1996,
respectively.
(c) Excluding applicable sales charges.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 14
KEYSTONE FLORIDA TAX FREE FUND
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments at market value
(identified cost-- $82,558,191) $84,468,992
Cash 978
Interest receivable 1,885,531
Receivable for investments sold 980,853
Prepaid expenses 5,491
Total assets 87,341,845
LIABILITIES
Payable for investments purchased 986,303
Distributions to shareholders 353,652
Payable for Fund shares redeemed 75,010
Distribution fee payable 24,167
Due to related parties 4,010
Other accrued expenses 26,822
Total liabilities 1,469,964
NET ASSETS $85,871,881
NET ASSETS REPRESENTED BY
Paid-in capital $87,506,452
Accumulated distributions in excess of net
investment income (352,869)
Accumulated net realized loss on investments (3,192,503)
Net unrealized appreciation on investments 1,910,801
TOTAL NET ASSETS $85,871,881
NET ASSET VALUE PER SHARE
Class A Shares
Net assets of $29,304,555/2,816,405 shares
outstanding $10.40
Offering price per share
($10.40/0.9525)(based on a sales charge of H
4.75% of the offering price at March 31,
1997) $10.92
Class B Shares
Net assets of $46,917,530/4,562,101 shares
outstanding $10.28
Class C Shares
Net assets of $9,649,796/936,597 shares
outstanding $10.30
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Interest $5,809,797
EXPENSES
Distribution Plan expenses $613,577
Management fee 507,576
Transfer agent fees 103,813
Custodian fees 64,048
Professional fees 23,459
Reimburseable accounting 18,143
Other 35,294
Fees waived by Investment Manager (160,819)
Total expenses 1,205,091
Less: Expenses paid indirectly (8,966)
Net expenses 1,196,125
Net investment income 4,613,672
Net realized and unrealized loss on
investments and closed futures
contracts (Note 3)
Net realized loss on:
Investments (872,314)
Closed futures contracts (81,932)
Realized loss on investments and
closed futures contracts (954,246)
Net change in unrealized
appreciation (depreciation) on
investments (593,956)
Net realized and unrealized loss on
investments and closed futures
contracts (1,548,202)
Net increase in net assets
resulting from operations $3,065,470
</TABLE>
<PAGE>
PAGE 15
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1997 1996
<S> <C> <C>
OPERATIONS
Net investment income $ 4,613,672 $ 5,235,282
Net realized gain (loss) on investments and closed futures contracts (954,246) 3,334,947
Net change in unrealized appreciation (depreciation) on investments (593,956) (479,647)
Net increase in net assets resulting from operations 3,065,470 8,090,582
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A (1,760,650) (2,068,359)
Class B (2,363,748) (2,582,018)
Class C (489,274) (584,905)
In excess of net investment income:
Class A (46,750) (81,365)
Class B (62,764) (101,572)
Class C (12,992) (23,009)
Total distributions to shareholders (4,736,178) (5,441,228)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold:
Class A 1,516,596 2,637,449
Class B 3,171,407 10,874,867
Class C 362,937 980,649
Payment for shares redeemed:
Class A (9,405,525) (9,315,509)
Class B (10,685,777) (9,762,560)
Class C (2,508,025) (2,573,632)
Net asset value of shares issued in reinvestment of distributions:
Class A 497,684 564,333
Class B 896,419 1,035,196
Class C 182,889 271,631
Net decrease in net assets resulting from capital share transactions (15,971,395) (5,287,576)
Total decrease in net assets (17,642,103) (2,638,222)
NET ASSETS:
Beginning of year 103,513,984 106,152,206
End of year [Including accumulated distributions in excess of net investment income as
follows: 1996-- ($352,869) and 1996-- ($436,130)] $ 85,871,881 $103,513,984
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
PAGE 16
KEYSTONE FLORIDA TAX FREE FUND
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Keystone Florida Tax Free Fund (the "Fund") is a separate series of the Keystone
State Tax Free Fund, a Massachusetts business trust for which Keystone
Investment Management Company ("Keystone") is the Investment Adviser and
Manager. Keystone was formerly a wholly-owned subsidiary of Keystone
Investments, Inc. ("KII") and is currently a subsidiary of First Union Keystone,
Inc. First Union Keystone, Inc. is a wholly-owned subsidiary of First Union
National Bank of North Carolina which in turn is a wholly-owned subsidiary of
First Union Corporation ("First Union"). The Fund is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as a
non-diversified, open-end investment company. The Fund offers several classes of
shares. The Fund's investment objective is to achieve the highest possible
current income exempt from federal income taxes, while preserving capital.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect amounts
reported herein. Although actual results could differ from these estimates, any
such differences are expected to be immaterial to the net assets of the Fund.
A. VALUATION OF SECURITIES
Securities held by the Fund are valued by an independent pricing service. In
determining value for normal institutional-size transactions, the pricing
service uses methods based on market transactions for comparable securities and
various relationships between securities which are generally recognized by
institutional traders. Securities for which valuations are not available from an
independent pricing service (including restricted securities) are valued at fair
value as determined in good faith according to procedures established by the
Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are
carried at amortized cost, which approximates market value. Short-term
investments with greater than 60 days to maturity are valued at market value.
B. FUTURES CONTRACTS
In order to gain exposure to or protect against changes in security values, the
Fund may buy and sell futures contracts.
The initial margin deposited with a broker when entering into a futures
transaction is subsequently adjusted by daily payments or receipts as the value
of the contract changes. Such changes are recorded as unrealized gains or
losses. Realized gains or losses are recognized on closing the contract.
Risks of entering into futures contracts include (i) the possibility of an
illiquid market for the contract, (ii) the possibility that a change in the
value of the contract may not correlate with changes in the value of the
underlying instrument or index, and (iii) the credit risk that the other party
will not fulfill their obligations under the contract. Futures contracts also
involve elements of market risk in excess of the amount reflected in the
statement of assets and liabilities.
C. SECURITY TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Interest income is recorded on the accrual basis and includes
amortization of discounts and premiums.
D. FEDERAL INCOME TAXES
The Fund has qualified and intends to qualify in the future as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Fund is relieved of any federal income tax liability by
distributing all of its net taxable investment income and net taxable capital
gains, if any, to its shareholders. The Fund also intends to avoid excise tax
liability by making the required distributions under the Code. Accordingly, no
provision for federal income taxes is required.
<PAGE>
PAGE 17
E. DISTRIBUTIONS
Distributions from net investment income are declared and paid monthly. The Fund
distributes net capital gains, if any, at least, annually.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. These differences are primarily due to the differing
treatment of market discount on securities.
F. CLASS ALLOCATIONS
Class A shares are offered at a public offering price which includes a maximum
sales charge of 4.75% payable at the time of purchase.
Class B shares are sold subject to a contingent deferred sales charge that is
payable upon redemption and decreases depending on how long the shares have been
held. Class B shares purchased after January 1, 1997 will automatically convert
to Class A shares after seven years. Class B shares purchased prior to January
1, 1997 retain their existing conversion features.
Class C shares are sold subject to a contingent deferred sales charge payable
on shares redeemed within one year after the month of purchase.
Income, expenses (other than class specific expenses) and realized and
unrealized gains and losses are prorated among the classes based on the relative
net assets of each class. Currently, class specific expenses are limited to
expenses incurred under the Distribution Plans for each class.
2. CAPITAL SHARE TRANSACTIONS
The Fund's Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest with no par value. Shares of beneficial
interest of the Fund are currently divided into Class A, Class B and Class C.
Transactions in shares of the Fund were as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
<S> <C> <C>
1997 1996
CLASS A
Shares sold 143,758 247,533
Shares redeemed (892,684) (873,200)
Shares issued in reinvestment of
dividends and distributions 47,237 53,198
Net decrease (701,689) (572,469)
CLASS B
Shares sold 306,536 1,027,017
Shares redeemed (1,025,655) (918,380)
Shares issued in reinvestment of
dividends and distributions 86,179 98,392
Net increase (decrease) (632,940) 207,029
CLASS C
Shares sold 35,183 92,047
Shares redeemed (239,822) (244,752)
Shares issued in reinvestment of
dividends and distributions 17,534 25,773
Net decrease (187,105) (126,932)
</TABLE>
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) for the year ended March 31, 1997 were $98,820,748 and
$114,559,136, respectively.
As of March 31, 1997, the Fund has a capital loss carryover for federal income
tax purposes of approximately $2,934,000 which expires as follows:
$1,845,000-- 2002 and $1,089,000-- 2005.
4. DISTRIBUTION PLANS
The Fund bears some of the costs of selling its shares under Distribution Plans
adopted for its Class A, B and C shares pursuant to Rule 12b-1 under the 1940
Act. Under the Distribution Plans, the Fund pays its principal underwriter
amounts which are calculated and paid monthly.
On December 11, 1996, the Fund entered into a principal underwriting agreement
with Evergreen Keystone Distributor, Inc. (formerly, Evergreen Funds
<PAGE>
PAGE 18
KEYSTONE FLORIDA TAX FREE FUND
Distributor, Inc.) ("EKD"), a wholly-owned subsidiary of The BISYS Group Inc.
Prior to December 11, 1996, Evergreen Keystone Investment Services, Inc.
(formerly, Keystone Investment Distributors Company) ("EKIS"), a wholly-owned
subsidiary of Keystone, served as the Fund's principal underwriter.
The Class A Distribution Plan provides for expenditures, which are currently
limited to 0.15% annually of the average daily net assets of the Class A shares,
to pay expenses related to the distribution of Class A shares.
Pursuant to the Fund's Class B and Class C Distribution Plans, the Fund pays a
distribution fee which may not exceed 0.90% annually of the average daily net
assets of Class B and Class C shares, respectively. Of that amount, 0.75% is
used to pay distribution expenses and 0.15% is used to pay service fees.
During the year ended March 31, 1997, amounts paid to EKD and/or EKIS pursuant
to the Fund's Class A, Class B and Class C Distribution Plans were $46,410,
$469,958 and $97,209, respectively.
Each of the Distribution Plans may be terminated at any time by vote of the
Independent Trustees or by vote of a majority of the outstanding voting shares
of the respective class. However, after the termination of any Distribution
Plan, and subject to the discretion of the Independent Trustees, payments to
EKIS and/or EKD may continue as compensation for services which had been earned
while the Distribution Plan was in effect.
EKD intends, but is not obligated, to continue to pay distribution costs that
exceed the current annual payments from the Fund. EKD intends to seek full
payment of such distribution costs from the Fund at such time in the future as,
and to the extent that, payment thereof by the Class B or Class C shares would
be within permitted limits.
At March 31, 1997 total unpaid distribution costs were $3,352,712 for Class B
shares and $1,350,164 for Class C shares.
EKD has advised the Fund that it has retained $4,353 from front-end sales
charges resulting from the sales of Class A shares during the year ended March
31, 1997.
Contingent deferred sales charges paid by redeeming shareholders are paid to
EKD or its predecessor.
5. INVESTMENT MANAGEMENT AGREEMENT AND OTHER AFFILIATED TRANSACTIONS
Under the terms of an investment advisory agreement, Keystone serves as the
Investment Adviser and Manager to the Fund. Keystone provides the Fund with
investment advisory and management services. In return, Keystone is paid a
management fee, computed and paid daily, at an amount determined by applying
percentage rates starting at 0.55% and declining as net assets increase to 0.25%
per annum, to the average daily net asset value of the Fund.
Keystone has voluntarily limited the expenses, excluding indirectly paid
expenses, of Class A shares to 0.75% of its average daily net assets and has
limited the expenses, excluding indirectly paid expenses, of Class B and C to
1.50% of the average daily net assets of each respective class. For the year
ended March 31, 1997, Keystone waived $160,819 of its fee.
During the year ended March 31, 1997, the Fund paid or accrued $18,143 to
Keystone for certain accounting services. Evergreen Keystone Service Company
(formerly, Keystone Investor Resource Center, Inc.), a wholly-owned subsidiary
of Keystone, serves as the Fund's transfer and dividend disbursing agent.
Officers of the Fund and affiliated Trustees receive no compensation directly
from the Fund. Currently the Independent Trustees of the Fund receive no
compensation for their services.
<PAGE>
PAGE 19
6. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an expense offset arrangement with its custodian. For
the year ended March 31, 1997, the Fund incurred total custody fees of $64,048
and received a credit of $8,966 pursuant to this expense offset arrangement,
resulting in a net custody expense of $55,082. The assets deposited with the
custodian under this expense offset arrangement could have been invested in
income-producing assets.
7. CONCENTRATION OF CREDIT RISK
The Fund invests a substantial portion of its assets in issuers located in the
state of Florida and, therefore, may be more affected by economic and political
developments in Florida than would be a comparable general tax-exempt mutual
fund.
<PAGE>
PAGE 20
KEYSTONE FLORIDA TAX FREE FUND
INDEPENDENT AUDITORS' REPORT
THE TRUSTEES AND SHAREHOLDERS
KEYSTONE STATE TAX FREE FUND
We have audited the accompanying statement of assets and liabilities of Keystone
Florida Tax Free Fund (one of the portfolios constituting Keystone State Tax
Free Fund), including the schedule of investments, as of March 31, 1997, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the six-year period then
ended and the period from December 28, 1990 (commencement of operations) to
March 31, 1991 for Class A shares and for each of the years in the four-year
period ended March 31, 1997 and the period from February 1, 1993 (date of
initial public offering) to March 31, 1993 for Class B and Class C shares. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Keystone Florida Tax Free Fund as of March 31, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years or periods specified in the first paragraph above in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
May 2, 1997
<PAGE>
PAGE 21
ADDITIONAL INFORMATION
(UNAUDITED)
Shareholders of the Fund considered and acted upon the proposals listed below at
a special meeting of shareholders held Monday December 9, 1996. In addition,
below each proposal are the results of that vote.
1. TO ELECT THE FOLLOWING TRUSTEES:
<TABLE>
<CAPTION>
AFFIRMATIVE WITHHELD
<S> <C> <C>
Laurence B. Ashkin 7,632,639 134,730
Frederick Amling 7,637,980 129,389
Charles A. Austin III 7,637,980 129,389
Foster Bam 7,634,470 132,899
George S. Bissell 7,637,980 129,389
Edwin D. Campbell 7,637,980 129,389
Charles F. Chapin 7,634,563 132,806
K. Dun Gifford 7,637,980 129,389
James S. Howell 7,634,225 133,144
Leroy Keith, Jr. 7,636,394 130,975
F. Ray Keyser 7,637,980 129,389
Gerald M. McDonnell 7,636,056 131,313
Thomas L. McVerry 7,636,394 130,975
William Walt Pettit 7,636,056 131,313
David M. Richardson 7,637,980 129,389
Russell A. Salton, III M.D. 7,634,470 132,899
Michael S. Scofield 7,636,056 131,313
Richard J. Shima 7,637,980 129,389
Andrew J. Simons 7,636,394 130,975
</TABLE>
2. TO APPROVE AN INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT BETWEEN THE FUND
AND KEYSTONE INVESTMENT MANAGEMENT COMPANY:
<TABLE>
<S> <C>
Affirmative 7,425,501
Against 111,920
Abstain 229,947
</TABLE>
FEDERAL TAX STATUS-- 1997
FISCAL YEAR DISTRIBUTIONS (UNAUDITED)
96.04% of the dividends distributed by the Fund for the year ended March 31,
1997 are exempt from federal income tax.
<PAGE>
(This Page Left Blank Intentionally)
<PAGE>
(This Page Left Blank Intentionally)
<PAGE>
KEYSTONE AMERICA
FAMILY OF FUNDS
(diamond)
Capital Preservation and Income Fund
Government Securities Fund
Intermediate Term Bond Fund
Strategic Income Fund
World Bond Fund
Tax Free Income Fund
California Tax Free Fund
Florida Tax Free Fund
Massachusetts Tax Free Fund
Missouri Tax Free Fund
New York Tax Free Fund
Pennsylvania Tax Free Fund
Fund for Total Return
Global Opportunities Fund
Hartwell Emerging Growth Fund, Inc.
Omega Fund
Fund of the Americas
Small Company Growth Fund II
Strategic Development Fund
This report was prepared primarily for the information of the Fund's
shareholders. It is authorized for distribution if preceded or accompanied by
the Fund's current prospectus. The prospectus contains important information
about the Fund including fees and expenses. Read it carefully before you invest
or send money. For a free prospectus on other Keystone funds, contact your
financial adviser or call Keystone.
Evergreen Keystone
(Logo) FUNDS (Logo)
P.O. Box 2121
Boston, Massachusetts 02106-2121
(recycled logo)
<PAGE>
Evergreen Florida Municipal Bond Fund
PRO FORMA COMBINING FINANCIAL STATEMENTS (UNAUDITED)
PORTFOLIO OF INVESTMENTS (000's omitted)
February 28, 1997
<TABLE>
<CAPTION>
Evergreen Florida
Municipal Bond Fund
------------------------
Maturity Market
Coupon Date Principal Value
--------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (97.8%)
Alliance Airport Authority, Texas, Federal Express Project 6.375% 4/1/21
Altamonte Springs, Hlth. Fac. Auth. Hosp. RB, Adventist Hlth./Sunbelt (Ser. B) 5.125 11/15/18 $2,000 $1,846
Bay County, Florida, Hospital Systems Revenue Refunding,
Bay Medical Center Project 8.000 10/1/19
Bay County, Florida, Medical Center, Hospital Revenue 5.500 10/1/15
Brevard County, Florida, Health Facilities Authority Revenue Refunding,
Wuesthoff Memorial Hospital (MBIA) 7.200 4/1/13
Brevard Cnty., Hsg. Fin. Auth. RB (Ser. B) 7.000 3/1/13 665 701
Brevard Cnty., Hsg. Fin. Auth. Multifamily Hsg. RB, Windover Oaks (Ser. A), (FNMA) 6.900 2/1/27 3,750 4,159
Broward Cnty., Hlth. Care Facs. RB, North Beach Hosp. Proj. 7.000 8/15/11 2,925 3,241
Broward Cnty., Hsg. Fin., Auth. RB (GNMA) 7.125 3/1/17 1,375 1,450
Broward Cnty., Hsg. Fin., Auth. RB (GNMA) 7.550 3/1/15 195 205
Broward County, Florida, Resource Recovery, South Project 7.950 12/1/08
Charlotte County, Florida, Utility Revenue (FGIC) 6.750 10/1/13
Charlotte Cnty., Peachland Muni. Ser. Tax & Ben. Unit (MBIA) 7.250 10/1/10 105 116
Collier Cnty., Hlth. Facs. Auth. RB,(The Moorings, Inc. Proj.) 7.000 12/1/19 500 532
Dade Cnty., Seaport, Fitch Light Rtg. (MBIA) 5.125 10/1/21 2,000 1,866
Dade County, Florida, Educational Facilities Authority Revenue
(St. Thomas University) 6.000 1/1/10
Dade Cnty., Edl. Facs. Auth. RB, St. Thomas Univ. (LOC: Sun Bank Miami) 6.000 1/1/14 2,000 2,033
Dade Cnty., Edl. Facs. Auth. RB, St. Thomas Univ. (LOC: Sun Bank Miami) 6.125 1/1/19 1,000 1,028
Dade Cnty., Gtd. Entitlement RB, Cap Apprec. (Ser. A), Zero Coupon
(MBIA) 0.000 2/1/08 5,280 3,020
Dade Cnty., Sngl. Fam. Mtg. RB (Ser. A) 7.500 9/1/13 245 259
Dade Cnty., Sngl. Fam. Mtg. RB (Ser. A) 7.100 3/1/17 135 142
Dade Cnty., Sngl. Fam. Mtg. RB (Ser. D) 6.950 12/15/12 385 407
Dade County, Florida, Housing Finance Agency,
Single Family Mortgage (FGIC) 7.000 3/1/24
Dade County, Florida, School District, (MBIA) 5.000 2/15/10
Dade Cnty., Pub. Fac. RB, Jackson Mem. Hosp. Proj., (Ser. A), (MBIA) 4.875 6/1/15 3,815 3,472
Dade County, Florida, School District, General Obligation 7.375 7/1/08
Dade Cnty. Spec. Oblig. RB, Courthouse Ctr. Proj. 6.250 4/1/09 1,000 1,069
Dade Cnty., Hlth. Fac. Auth. Hosp. RB, (South Shore Hosp.
& Med. Center) 7.600 8/1/24 235 253
Duval County, Florida, Single Family Mortgage Refunding (FGIC) 7.300 7/1/11
Duval Cnty., Hsg. Fin. Auth. Sngl. Fam. Mtg. RB, (GNMA) 7.500 6/1/15 210 221
Duval Cnty., Hsg. Fin. Auth. Sngl. Fam. Mtg. RB, (GNMA) 7.350 7/1/24 840 897
Escambia Cnty., Hlth. Facs. Auth. RB, Baptist Hosp. Inc. (Ser. B) 6.000 10/1/14 2,000 1,993
Escambia Cnty., Hlth. Facs. Auth. RB 6.000 1/1/15 2,000 1,944
Escambia Cnty., Hlth. Facs. Auth. RB 6.100 1/1/19 1,250 1,220
Escambia Cnty. PCR Champion Intl Corp. Proj. 5.875 6/1/22 5,230 5,060
Escambia Cnty. PCR Champion Intl Corp. Proj. 6.400 9/1/30 1,650 1,689
Escambia Cnty. PCR Champion Intl Corp. Proj. 6.900 8/1/22
Florida, Hsg. Fin. Agcy. RB (GNMA) 6.875 10/1/12 1,895 1,968
Florida Housing Finance Agency, Home Ownership Mortgage 7.500 9/1/14
Florida Housing Finance Agency, Multi-Family Housing, Series C 6.200 8/1/16
Florida, Hsg. Fin. Agcy. RB (GNMA) 6.350 5/1/26 1,925 1,959
Florida, Hsg. Fin. Agcy. RB (GNMA) 8.000 12/1/20 3,105 3,275
Florida, Hsg. Fin. Agcy. RB, Landings At Sea Forest, (AMBAC) 5.850 12/1/18 560 556
Florida, Hsg. Fin. Agcy. RB, Landings At Sea Forest, (AMBAC) 6.050 12/1/36 805 799
Florida Ports Fin. Commission Rev. St Trans. Trust Fund (MBIA) 5.375 6/1/16 2,000 1,920
Florida St. RB, Brd. of Ed. Cap. Outlay 4.750 6/1/16
Florida St. RB, Brd. of Regt. Univ. Sys. RB, (AMBAC) 6.700 7/1/12 2,500 2,742
Florida St. Trans., Jacksonville Transportation Authority 9.000 1/1/00
Gainesville, Florida, Utilities System Revenue, Series B 7.500 10/1/08
Gainesville, Florida, Utilities System Revenue, Series B 7.500 10/1/09
Halifax Hospital Medical Center, Florida, Hospital Revenue,
Series A (MBIA) 5.200 10/1/13
Hialeah, Cap. Impt. RB, 5.500 10/1/13 1,235 1,191
Hillsborough Cnty., Indl. Dev. Auth. Indl. Dev. RB
(Univ. Cmnty. Hosp.) (MBIA) 6.500 8/15/19 3,250 3,657
Jacksonville Excise Taxes (Ser. B), (FGIC) 5.500 10/1/07 5,000 5,127
Jacksonville, Hlth. Facs. Auth. RB, St. Lukes Hosp. Assn. Proj. 6.750 11/15/13 1,500 1,619
Jacksonville, Hlth. Facs. Hosp. RB, St. Lukes Hosp. Assn. Proj. 7.125 11/15/20 1,500 1,643
Jacksonville Fl Hlth Indl Dev, Natl Benevolent Cypress Vlg A 6.125 12/1/16 345 346
Jacksonville Fl Hlth Indl Dev, Natl Benevolent Cypress Vlg A 6.250 12/1/26 1,245 1,252
Lakeland Fla. Electric and Water Rev. 5.625 10/1/19
Lee Cnty., Hsg. Fin. Auth. 7.200 3/1/27 1,250 1,368
Lee Cnty., Hsg. Fin. Auth. Single Family Mtg. RB, Multi-Cnty. Prog. (Ser. A) 6.250 7/1/19 1,025 1,041
Lee Cnty., Hsg. Fin. Auth. Single Family Mtg. RB, Multi-Cnty. Prog. (Ser. A) 7.450 9/1/27 1,700 1,881
Lee Cnty., Hsg. Fin. Auth. Single Family Mtg. RB, Multi-Cnty. Prog. (Ser. A) 7.500 9/1/27 4,370 4,833
Manatee Cnty., General Obligation (FGIC) 4.750 10/1/13 1,510 1,383
Manatee Cnty., Hsg. Fin. Auth. Mtg. RB 7.450 5/1/27 1,425 1,574
Martin County, Florida, Industrial Development Authority 7.875 12/15/25
Miami Beach, Redev. Agcy. Tax Increment RB, City Center-Historic
Convention Vlg. 5.625 12/1/09 2,000 1,935
Miami Beach, Redev. Agcy. Tax Increment RB, City Center-Historic
Convention Vlg. 5.800 12/1/13 3,000 2,903
Miami Beach, Redev. Agcy., Tax Increment, RB, (City Center-Historic
Convention Vlg.) 5.875 12/1/22 2,000 1,912
Miami Hlth. Fac. Auth. RB (AMBAC) 5.160 8/15/15 5,000 4,734
Miami Beach, Florida, Resort Tax Revenue 6.250 10/1/22
Miramar, Florida, Wastewater Improvement Assessment Revenue (FGIC) 6.750 10/1/16
Naples, Florida, Hospital Revenue 5.500 10/1/16
New York, New York, General Obligation, (Ser. H) 6.000 8/1/13
New York, New York, General Obligation, (Ser. I) 5.875 3/15/11
North Broward, Florida, Hospital District Revenue 5.375 1/15/12
North Broward, Florida, Hospital District Revenue 5.375 1/15/13
North Miami, Hlth. Fac. Auth. RB, Catholic Hlth. Svc. Oblig. Group (LOC: Suntrust Bank) 6.000 8/15/16 1,500 1,512
<CAPTION>
Keystone Florida Pro Forma
Tax Free Fund Combined
------------------- ------------------
Market Market
Principal Value Adjustments Principal Value
----------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS (97.8%)
Alliance Airport Authority, Texas, Federal Express Project $1,500 $1,504 $1,500 $1,504
Altamonte Springs, Hlth. Fac. Auth. Hosp. RB, Adventist Hlth./Sunbelt (Ser. B) 2,000 1,846
Bay County, Florida, Hospital Systems Revenue Refunding,
Bay Medical Center Project 2,500 3,056 2,500 3,056
Bay County, Florida, Medical Center, Hospital Revenue 1,000 999 1,000 999
Brevard County, Florida, Health Facilities Authority Revenue Refunding,
Wuesthoff Memorial Hospital (MBIA) 2,000 2,284 2,000 2,284
Brevard Cnty., Hsg. Fin. Auth. RB (Ser. B) 665 701
Brevard Cnty., Hsg. Fin. Auth. Multifamily Hsg. RB, Windover Oaks (Ser. A),
(FNMA) 3,750 4,159
Broward Cnty., Hlth. Care Facs. RB, North Beach Hosp. Proj. 2,925 3,241
Broward Cnty., Hsg. Fin., Auth. RB (GNMA) 195 205 1,570 1,655
Broward Cnty., Hsg. Fin., Auth. RB (GNMA) 195 205
Broward County, Florida, Resource Recovery, South Project 2,405 2,633 2,405 2,633
Charlotte County, Florida, Utility Revenue (FGIC) 1,000 1,142 1,000 1,142
Charlotte Cnty., Peachland Muni. Ser. Tax & Ben. Unit (MBIA) 105 116
Collier Cnty., Hlth. Facs. Auth. RB,(The Moorings, Inc. Proj.) 500 532
Dade Cnty., Seaport, Fitch Light Rtg. (MBIA) 2,000 1,866
Dade County, Florida, Educational Facilities Authority Revenue
(St. Thomas University) 2,000 2,058 2,000 2,058
Dade Cnty., Edl. Facs. Auth. RB, St. Thomas Univ. (LOC: Sun Bank Miami) 2,000 2,033
Dade Cnty., Edl. Facs. Auth. RB, St. Thomas Univ. (LOC: Sun Bank Miami) 1,000 1,028
Dade Cnty., Gtd. Entitlement RB, Cap Apprec. (Ser. A), Zero Coupon
(MBIA) 5,280 3,020
Dade Cnty., Sngl. Fam. Mtg. RB (Ser. A) 245 259
Dade Cnty., Sngl. Fam. Mtg. RB (Ser. A) 135 142
Dade Cnty., Sngl. Fam. Mtg. RB (Ser. D) 385 407
Dade County, Florida, Housing Finance Agency,
Single Family Mortgage (FGIC) 185 193 185 193
Dade County, Florida, School District, (MBIA) 1,000 983 1,000 983
Dade Cnty., Pub. Fac. RB, Jackson Mem. Hosp. Proj., (Ser. A), (MBIA) 3,815 3,472
Dade County, Florida, School District, General Obligation 40 44 40 44
Dade Cnty. Spec. Oblig. RB, Courthouse Ctr. Proj. 1,000 1,069
Dade Cnty., Hlth. Fac. Auth. Hosp. RB, (South Shore Hosp.
& Med. Center) 235 253
Duval County, Florida, Single Family Mortgage Refunding (FGIC) 80 85 80 85
Duval Cnty., Hsg. Fin. Auth. Sngl. Fam. Mtg. RB, (GNMA) 210 221
Duval Cnty., Hsg. Fin. Auth. Sngl. Fam. Mtg. RB, (GNMA) 840 897
Escambia Cnty., Hlth. Facs. Auth. RB, Baptist Hosp. Inc. (Ser. B) 2,000 1,993
Escambia Cnty., Hlth. Facs. Auth. RB 2,000 1,944
Escambia Cnty., Hlth. Facs. Auth. RB 1,250 1,220
Escambia Cnty. PCR Champion Intl Corp. Proj. 5,230 5,060
Escambia Cnty. PCR Champion Intl Corp. Proj. 1,000 1,015 2,650 2,704
Escambia Cnty. PCR Champion Intl Corp. Proj. 4,000 4,240 4,000 4,240
Florida, Hsg. Fin. Agcy. RB (GNMA) 1,895 1,968
Florida Housing Finance Agency, Home Ownership Mortgage 160 170 160 170
Florida Housing Finance Agency, Multi-Family Housing, Series C 2,000 2,042 2,000 2,042
Florida, Hsg. Fin. Agcy. RB (GNMA) 1,925 1,959
Florida, Hsg. Fin. Agcy. RB (GNMA) 3,105 3,275
Florida, Hsg. Fin. Agcy. RB, Landings At Sea Forest, (AMBAC) 560 556
Florida, Hsg. Fin. Agcy. RB, Landings At Sea Forest, (AMBAC) 805 799
Florida Ports Fin. Commission Rev. St Trans. Trust Fund (MBIA) 2,000 1,920
Florida St. RB, Brd. of Ed. Cap. Outlay 1,000 891 1,000 891
Florida St. RB, Brd. of Regt. Univ. Sys. RB, (AMBAC) 2,500 2,742
Florida St. Trans., Jacksonville Transportation Authority 1,000 1,063 1,000 1,063
Gainesville, Florida, Utilities System Revenue, Series B 3,435 4,198 3,435 4,198
Gainesville, Florida, Utilities System Revenue, Series B 3,695 4,528 3,695 4,528
Halifax Hospital Medical Center, Florida, Hospital Revenue,
Series A (MBIA) 2,000 1,949 2,000 1,949
Hialeah, Cap. Impt. RB, 1,235 1,191
Hillsborough Cnty., Indl. Dev. Auth. Indl. Dev. RB
(Univ. Cmnty. Hosp.) (MBIA) 3,250 3,657
Jacksonville Excise Taxes (Ser. B), (FGIC) 5,000 5,127
Jacksonville, Hlth. Facs. Auth. RB, St. Lukes Hosp. Assn. Proj. 1,500 1,619
Jacksonville, Hlth. Facs. Hosp. RB, St. Lukes Hosp. Assn. Proj. 3,000 3,265 4,500 4,908
Jacksonville Fl Hlth Indl Dev, Natl Benevolent Cypress Vlg A 345 346
Jacksonville Fl Hlth Indl Dev, Natl Benevolent Cypress Vlg A 1,245 1,252
Lakeland Fla. Electric and Water Rev. 2,000 1,986 2,000 1,986
Lee Cnty., Hsg. Fin. Auth. 1,250 1,368
Lee Cnty., Hsg. Fin. Auth. Single Family Mtg. RB, Multi-Cnty. Prog. (Ser. A) 1,025 1,041
Lee Cnty., Hsg. Fin. Auth. Single Family Mtg. RB, Multi-Cnty. Prog. (Ser. A) 1,700 1,881
Lee Cnty., Hsg. Fin. Auth. Single Family Mtg. RB, Multi-Cnty. Prog. (Ser. A) 4,370 4,833
Manatee Cnty., General Obligation (FGIC) 1,510 1,383
Manatee Cnty., Hsg. Fin. Auth. Mtg. RB 1,425 1,574
Martin County, Florida, Industrial Development Authority 1,500 1,728 1,500 1,728
Miami Beach, Redev. Agcy. Tax Increment RB, City Center-Historic
Convention Vlg. 2,000 1,935
Miami Beach, Redev. Agcy. Tax Increment RB, City Center-Historic
Convention Vlg. 3,000 2,903
Miami Beach, Redev. Agcy., Tax Increment, RB, (City Center-Historic
Convention Vlg.) 2,000 1,912
Miami Hlth. Fac. Auth. RB (AMBAC) 5,000 4,734
Miami Beach, Florida, Resort Tax Revenue 1,470 1,597 1,470 1,597
Miramar, Florida, Wastewater Improvement Assessment Revenue (FGIC) 1,000 1,100 1,000 1,100
Naples, Florida, Hospital Revenue 1,250 1,231 1,250 1,231
New York, New York, General Obligation, (Ser. H) 3,300 3,268 3,300 3,268
New York, New York, General Obligation, (Ser. I) 1,000 989 1,000 989
North Broward, Florida, Hospital District Revenue 1,945 1,917 1,945 1,917
North Broward, Florida, Hospital District Revenue 1,700 1,666 1,700 1,666
North Miami, Hlth. Fac. Auth. RB, Catholic Hlth. Svc. Oblig. Group (LOC:
Suntrust Bank) 1,500 1,512
</TABLE>
<PAGE>
Evergreen Florida Municipal Bond Fund
PRO FORMA COMBINING FINANCIAL STATEMENTS (UNAUDITED)
PORTFOLIO OF INVESTMENTS (000's omitted)
February 28, 1997
<TABLE>
<CAPTION>
Evergreen Floida
Municipal Bond Fund
-----------------------
Maturity Market
Coupon Date Principal Value
---------------------------------------------
<S> <C> <C> <C> <C>
North Springs Improvement District, Florida, Water and Sewer Revenue,
Series B (MBIA) 6.500 12/1/16
North Tampa, Hsg. Dev. Corp. RB, Cnty Oaks Apts. (Ser. A), (FNMA) 6.900 1/1/24 1,000 1,041
Northern Palm Beach Cnty. Impt. RB, Wtr. Ctl. & Impt. Unit Dev. 9A-A 7.200 8/1/16 1,300 1,342
Ocoee, Florida, Water and Sewer Systems Revenue 5.375 10/1/16
Okaloosa County, Florida, Gas District, Refunding and Improvement (MBIA) 6.850 10/1/14
Okaloosa Cnty., Wtr. & Swr. RB (AMBAC) 6.000 7/1/11 1,000 1,081
Orange County, Florida, Health Facilities Authority, Hospital Revenue,
Adventist Health (AMBAC) 5.250 11/15/20
Orange Cnty., Hlth. Facs. Auth. RB, Lakeside Alts. Inc. 6.500 7/1/13 3,000 3,077
Orange County, Florida, Health Facilities Authority, Hospital Revenue,
Orlando Regional Healthcare, Series C (MBIA) 6.250 10/1/21
Orlando, Florida, Utilities Commission, Water and Electric 6.000 10/1/10
Orlando-Orange County, Florida, Expressway Authority (FGIC) 8.250 7/1/15
Palm Beach County, Florida, General Obligation 6.500 7/1/10
Palm Beach Cnty., Criminal Justice Facs. RB, (FGIC) 7.200 6/1/15 3,000 3,626
Palm Beach Cnty., Hlth. Facs. Auth. RB, Good Samaritan Hlth. Sys. 6.200 10/1/11 3,695 3,811
Palm Beach Cnty., Hlth. Facs. Auth. RB, Good Samaritan Hlth. Sys. 6.300 10/1/22 6,000 6,192
Palm Beach Cnty., Hsg. Fin. Auth. RB, Daughters Charity (Ser. A), (GNMA) 7.600 3/1/23 4,440 4,706
Palm Beach Cnty., Hsg. Fin. Auth. Sing. Fam. Mtg. RB (Ser. A) (GNMA) 6.500 10/1/21 1,000 1,030
Palm Beach Cnty. IDR, Geriatric Care Inc. Proj. (LOC: Allied Irish Banks) 6.550 12/1/16 2,000 2,086
Palm Beach County, Florida, Solid Waste Industrial Development,
Osceola Power Project (AMT)(b) 6.850 1/1/14
Panama City, Florida, Water and Sewer Revenue 5.625 10/1/16
Pensacola, Hlth. Facs. Auth. RB, Daughters Charity Natl. Hlth. 5.250 1/1/11 5,000 4,880
Polk Cnty, Hsg. Fin. Auth. Sing. Fam. Mtg. RB (Ser. A) 7.000 9/1/15 860 892
Polk Cnty. Tampa Elec. Co. Proj., 5.850 12/1/30 8,350 8,195
Commonwealth of Puerto Rico, Aqueduct and Sewer Authority Revenue 6.250 7/1/12
Commonwealth of Puerto Rico, Highway Authority & Transportation
Authority, Series Y 5.000 7/1/36
Puerto Rico Electric Power Authority, Power Revenue, Series X 6.000 7/1/15
Puerto Rico Industrial Tourist, Educational, Medical and Environmental Control
Facilities, Hospital Auxilio Mutuo Group, Ser. A (MBIA) 6.250 7/1/24
Reedy Creek, Impt. Dist. Util., RB (Ser. 1) (MBIA) 5.000 10/1/19 1,500 1,375
Sanford, Wtr. & Swr. RB, Dist. 4.750 10/1/18 1,740 1,524
Sanford, Wtr. & Swr. RB, Dist. 4.500 10/1/21 1,955 1,631
Sarasota Cnty., Hlth. Fac. Auth. RB, Sunnyside Pptys. 6.000 5/15/10 1,800 1,779
Sarasota Cnty., Util. Sys. RB (FGIC) 6.500 10/1/14 1,000 1,135
Seacoast, Util. Auth. Wtr. & Swr. RB (Ser. A), (FGIC) 5.500 3/1/18 3,590 3,603
Sunrise, Florida, Utility System Revenue, Capital Appreciation, Series A
Zero Coupon (AMBAC) 0.000 10/1/09
Sunrise, Florida, Utility System Revenue, Capital Appreciation, Series A
Zero Coupon (AMBAC) 0.000 10/1/10
Tallahassee, Florida, Health Facilities, Tallahassee Memorial Regional
Medical Project (MBIA) 6.625 12/1/13
Tampa, Florida, Capital Improvement Program Revenue, Series B 8.375 10/1/18
Tampa, Florida, Subordinate Guaranteed Entitlement Revenue, Series B
(ETM) 8.500 10/1/18
Tampa, Florida, Utility System Tax, Zero Coupon 0.000 4/1/16
City of Tarpon Springs Health Facilities Authority, Florida, Hospital
Refunding, Helen Ellis Hospital 7.625 5/1/21
Volusia Cnty., Edl. Facs. Auth. RB, Embry-Riddle Aero-A 6.125 10/15/16 3,500 3,556
Volusia Cnty., Edl. Facs. Auth. RB, Embry-Riddle Aero-A 6.125 10/15/26 2,600 2,633
West Melbourne, Florida, Water and Sewer Revenue (FGIC) 6.750 10/1/14
Winter Haven, Hsg. Auth. Multi-Fam. Mtg. RB, Abbey Lane Apts. (Ser. C) (FNMA) 7.000 7/1/12 850 900
Winter Haven, Hsg. Auth. Multi-Fam. Mtg. RB, Abbey Lane Apts. (Ser. C) (FNMA) 7.000 7/1/24 1,750 1,829
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS (Cost - $232,469) 153,877
====================================================================================================================================
TEMPORARY TAX-EXEMPT INVESTMENTS (0.7%)
Dade County, Florida, Water and Sewer System Revenue Bond,
Series 1994 (a) 3.250 10/5/22
<CAPTION>
Shares
<S> <C> <C>
Federated Municipal Obligations Fund 1,501 1,501
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY TAX-EXEMPT INVESTMENTS (Cost - $1,546) 1,501
TOTAL INVESTMENTS (98.5%) (Cost - $234,015) 155,378
OTHER ASSETS AND LIABILITIES (1.5%) 3,616
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS (100.0%) $158,994
====================================================================================================================================
<CAPTION>
Keystone Florida Pro Forma
Tax Free Fund Combined
------------------- ------------------
Market Market
Principal Value Adjustments Principal Value
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
North Springs Improvement District, Florida, Water and Sewer Revenue,
Series B (MBIA) 1,335 1,466 1,335 1,466
North Tampa, Hsg. Dev. Corp. RB, Cnty Oaks Apts. (Ser. A), (FNMA) 1,000 1,041
Northern Palm Beach Cnty. Impt. RB, Wtr. Ctl. & Impt. Unit Dev. 9A-A 1,300 1,342
Ocoee, Florida, Water and Sewer Systems Revenue 750 734 750 734
Okaloosa County, Florida, Gas District, Refunding and Improvement (MBIA) 2,550 2,894 2,550 2,894
Okaloosa Cnty., Wtr. & Swr. RB (AMBAC) 1,000 1,081
Orange County, Florida, Health Facilities Authority, Hospital Revenue,
Adventist Health (AMBAC) 4,000 3,802 4,000 3,802
Orange Cnty., Hlth. Facs. Auth. RB, Lakeside Alts. Inc. 3,000 3,077
Orange County, Florida, Health Facilities Authority, Hospital Revenue,
Orlando Regional Healthcare, Series C (MBIA) 2,000 2,173 2,000 2,173
Orlando, Florida, Utilities Commission, Water and Electric 4,000 4,327 4,000 4,327
Orlando-Orange County, Florida, Expressway Authority (FGIC) 40 53 40 53
Palm Beach County, Florida, General Obligation 1,880 2,098 1,880 2,098
Palm Beach Cnty., Criminal Justice Facs. RB, (FGIC) 3,000 3,626
Palm Beach Cnty., Hlth. Facs. Auth. RB, Good Samaritan Hlth. Sys. 3,695 3,811
Palm Beach Cnty., Hlth. Facs. Auth. RB, Good Samaritan Hlth. Sys. 6,000 6,192
Palm Beach Cnty., Hsg. Fin. Auth. RB, Daughters Charity (Ser. A), (GNMA) 4,440 4,706
Palm Beach Cnty., Hsg. Fin. Auth. Sing. Fam. Mtg. RB (Ser. A) (GNMA) 1,000 1,030
Palm Beach Cnty. IDR, Geriatric Care Inc. Proj. (LOC: Allied Irish Banks) 2,000 2,086
Palm Beach County, Florida, Solid Waste Industrial Development,
Osceola Power Project (AMT)(b) 2,500 2,162 2,500 2,162
Panama City, Florida, Water and Sewer Revenue 1,000 1,007 1,000 1,007
Pensacola, Hlth. Facs. Auth. RB, Daughters Charity Natl. Hlth. 5,000 4,880
Polk Cnty, Hsg. Fin. Auth. Sing. Fam. Mtg. RB (Ser. A) 860 892
Polk Cnty. Tampa Elec. Co. Proj., 8,350 8,195
Commonwealth of Puerto Rico, Aqueduct and Sewer Authority Revenue 2,000 2,191 2,000 2,191
Commonwealth of Puerto Rico, Highway Authority & Transportation
Authority, Series Y 1,000 895 1,000 895
Puerto Rico Electric Power Authority, Power Revenue, Series X 2,200 2,248 2,200 2,248
Puerto Rico Industrial Tourist, Educational, Medical and Environmental Control
Facilities, Hospital Auxilio Mutuo Group, Ser. A (MBIA) 2,000 2,101 2,000 2,101
Reedy Creek, Impt. Dist. Util., RB (Ser. 1) (MBIA) 1,500 1,375
Sanford, Wtr. & Swr. RB, Dist. 1,740 1,524
Sanford, Wtr. & Swr. RB, Dist. 1,955 1,631
Sarasota Cnty., Hlth. Fac. Auth. RB, Sunnyside Pptys. 1,800 1,779
Sarasota Cnty., Util. Sys. RB (FGIC) 1,000 1,135
Seacoast, Util. Auth. Wtr. & Swr. RB (Ser. A), (FGIC) 3,590 3,603
Sunrise, Florida, Utility System Revenue, Capital Appreciation, Series A
Zero Coupon (AMBAC) 1,000 516 1,000 516
Sunrise, Florida, Utility System Revenue, Capital Appreciation, Series A
Zero Coupon (AMBAC) 1,000 483 1,000 483
Tallahassee, Florida, Health Facilities, Tallahassee Memorial Regional
Medical Project (MBIA) 2,000 2,226 2,000 2,226
Tampa, Florida, Capital Improvement Program Revenue, Series B 1,250 1,314 1,250 1,314
Tampa, Florida, Subordinate Guaranteed Entitlement Revenue, Series B
(ETM) 45 48 45 48
Tampa, Florida, Utility System Tax, Zero Coupon 1,500 505 1,500 505
City of Tarpon Springs Health Facilities Authority, Florida, Hospital
Refunding, Helen Ellis Hospital 1,000 1,076 1,000 1,076
Volusia Cnty., Edl. Facs. Auth. RB, Embry-Riddle Aero-A 3,500 3,556
Volusia Cnty., Edl. Facs. Auth. RB, Embry-Riddle Aero-A 2,600 2,633
West Melbourne, Florida, Water and Sewer Revenue (FGIC) 1,000 1,114 1,000 1,114
Winter Haven, Hsg. Auth. Multi-Fam. Mtg. RB, Abbey Lane Apts. (Ser. C) (FNMA) 850 900
Winter Haven, Hsg. Auth. Multi-Fam. Mtg. RB, Abbey Lane Apts. (Ser. C) (FNMA) 1,750 1,829
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS (Cost - $232,469) 89,462 243,339
====================================================================================================================================
TEMPORARY TAX-EXEMPT INVESTMENTS (0.7%)
Dade County, Florida, Water and Sewer System Revenue Bond,
Series 1994 (a) 45 45 45 45
<CAPTION>
Shares
<S> <C> <C>
Federated Municipal Obligations Fund 1,501 1,501
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY TAX-EXEMPT INVESTMENTS (Cost - $1,546) 45 1,546
TOTAL INVESTMENTS (98.5%) (Cost - $234,015) 89,507 244,885
OTHER ASSETS AND LIABILITIES (1.5%) 194 3,810
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS (100.0%) $89,701 $248,695
====================================================================================================================================
</TABLE>
(a) Variable or floating rate instruments with periodic demand features. The
Fund is entitled to full payment of principal and accrued interest upon
surrendering the security to the issuing agent according to the terms of
the demand features.
(b) Securities that may be resold to "qualified institutional buyers" under
Rule 144A of the Securities Act of 1933, as amended. These securities have
been determined to be liquid under guidelines established by the Board of
Trustees.
LEGEND OF PORTFOLIO ABBREVIATIONS:
AMBAC - AMBAC Indemnity Corporation
AMT - Subject to Alternative Minimum Tax
ETM - Escrowed to Maturity
FNMA - Federal National Mortgage Association
FGIC - Federal Guaranty Insurance Company
GNMA - Government National Mortgage Association
LOC - Line of Credit
MBIA - Municipal Bond Investors Assurance
RB - Revenue Bond
PCR - Pollution Control Revenue Bond
IDR - Industrial Development Revenue Bond
See Notes to Pro Forma Combining Financial Statements.
Page 7
<PAGE>
EVERGREEN FLORIDA MUNICIPAL BOND FUND
Pro Forma Combining Financial Statements (unaudited)
Statement of Assets and Liabilities (000's)
February 28, 1997
<TABLE>
<CAPTION>
Evergreen Keystone
Florida Municipal Florida Tax Pro Forma
Bond Fund Free Fund Adjustments Combined
------------------------------------------------ ---------------
<S> <C> <C> <C> <C>
Assets:
Investments at value (cost $234,015) $155,378 $89,507 $244,885
Cash 0 36 36
Interest receivable 2,721 1,606 4,327
Receivable for investment sold 5,718 0 5,718
Receivable for Fund shares sold 367 57 424
Prepaid expenses 2 5 7
Due from Investment Advisor 0 13 13
------------------------------------------------ ---------------
Total Assets 164,186 91,224 255,410
Liabilities:
Payable for investments purchased 4,575 991 5,566
Distributions to shareholders 412 358 770
Payable for Fund shares redeemed 26 57 83
Due to related parties 87 61 148
Accrued expenses 92 56 148
----------------------------------------------------------------------
Total Liabilities 5,192 1,523 6,715
Net Assets $158,994 $89,701 $248,695
======================================================================
Net assets are comprised of:
Paid-in capital 149,892 89,627 239,519
Undistributed net investment income (accumulated 0
distributions in excess of investment income) 79 (519) (440)
Accumulated net realized gain (loss) on investments 1,943 (3,222) (1,279)
Net unrealized appreciation on investments 7,080 3,815 10,895
----------------------------------------------------------------------
Net Assets $158,994 $89,701 $248,695
======================================================================
Class A Shares
Net Assets $111,099 $30,648 $141,747
Shares of Beneficial Interest Outstanding 11,314 2,882 238 14,434
Net Asset Value $9.82 $10.63 $9.82
Maximum Offering Price (4.75%) $10.31 $11.16 $10.31
Class B Shares
Net Assets $29,811 $49,179 $78,990
Shares of Beneficial Interest Outstanding 3,036 4,680 329 8,045
Net Asset Value $9.82 $10.51 $9.82
Class C Shares
Net Assets - $9,874 $9,874
Shares of Beneficial Interest Outstanding - 938 68 1,006
Net Asset Value - $10.53 $9.82
Class Y Shares
Net Assets $18,084 - $18,084
Shares of Beneficial Interest Outstanding 1,842 - 1,842
Net Asset Value $9.82 - $9.82
</TABLE>
See Notes to Pro Forma Combining Financial Statements.
<PAGE>
EVERGREEN FLORIDA MUNICIPAL BOND FUND
Pro Forma Combining Financial Statements (unaudited)
Statement of Operations (000's) February 28, 1997
<TABLE>
<CAPTION>
Evergreen Keystone
Florida Municipal Florida Tax Pro Forma
Bond Fund Free Fund Adjustments Combined
------------------------------------------------------ ------------
<S> <C> <C> <C> <C>
Investment Income:
Interest income $9,614 $5,925 $15,539
Expenses:
Advisory fee 786 518 (26)a 1,278
Administrative services fees 73 25 21 b 119
Distribution fee 522 625 158 f 1,305
Transfer agent fee 85 106 (40)c 151
Custodian fee 78 63 (15)d 126
Reports and notices to shareholders 77 11 (6)e 82
Registration and filing fees 72 18 (18)e 72
Professional fees 23 24 (20)e 27
Insurance expense 11 3 0 14
Trustees fees 3 0 1 4
Miscellaneous 19 3 (2)e 20
-----------------------------------------------------------------
Total Expenses 1,749 1,396 53 3,198
Less: Fee waivers and/or reimbursements (408) (178) 110 (476)
-----------------------------------------------------------------
Net expenses 1,341 1,218 163 2,722
-----------------------------------------------------------------
Net investment income 8,273 4,707 (163) 12,817
Net realized and unrealized gain (loss) on investments:
Net realized gain (loss) on investments 3,142 (1,427) 1,715
Net change in unrealized appreciation
(depreciation) on investments (4,287) (457) (4,744)
-----------------------------------------------------------------
Net realized and unrealized loss on investments (1,145) (1,884) 0 (3,029)
Net increase in net assets resulting from operations $7,128 $2,823 $163 $9,788
=================================================================
</TABLE>
a Reflects a decrease based on the surviving fund's fee schedule.
b Reflects an increase based on the surviving fund's administrative rate of
4.65bp.
c Reflects a decrease due to the surviving fund's less costly transfer agent
contract.
d Reflects a savings resulting from the elimination of duplicate out-of-pocket
and trading costs.
e Reflects expected cost savings when the funds are combined.
f Reflects an increase due to higher 12b-1 fees of the surviving fund and
additional fees relating to Class C.
See notes to Pro Forma Combining Financial Statements.
<PAGE>
Evergreen Florida Municipal Bond Fund
Notes to Pro Forma Combining Financial Statements (Unaudited)
February 28, 1997
1. Basis of Combination - The Pro Forma Statement of Assets and Liabilities,
including the Pro Forma Portfolio of Investments, and the related Pro Forma
Statement of Operations ("Pro Forma Statements") reflect the accounts of
Evergreen Florida Municipal Bond Fund ("Evergreen") and Keystone Florida Tax
Free Fund ("Keystone") at February 28, 1997 and for the year then ended.
The Pro Forma Statements give effect to the proposed Agreement and Plan of
Reorganizations (the "Reorganizations") to be submitted to shareholders of each
of Evergreen and Keystone. The Reorganizations provide for the acquisition of
all assets and liabilities of Evergreen and Keystone by Evergreen Florida
Municipal Bond Fund ("Evergreen Florida"), a series of Evergreen municipal
Trust, in exchange for shares of Evergreen Florida. Thereafter, there will be a
distribution of such shares of Evergreen Florida to shareholders of Evergreen
and Keystone in liquidation and subsequent termination thereof. As a result of
the Reorganizations, the shareholders of Evergreen and Keystone will become the
owners of that number of full and fractional shares of Evergreen Florida having
an aggregate net asset value of their shares of Evergreen and Keystone as of the
close of business immediately prior to the date that such Fund's assets are
exchanged for shares of Evergreen Florida.
The Pro Forma Statements reflect the expenses of each Fund in carrying out its
obligations under the Reorganizations as though the merger occurred at the
beginning of the period presented. The information contained herein is based on
the experience of each Fund for the period ended February 28, 1997 and is
designed to permit shareholders of the consolidating mutual funds to evaluate
the financial effect of the proposed Reorganizations. The expenses of Evergreen
and Keystone in connection with the Reorganizations (including the cost of any
proxy soliciting agents) will be borne by First Union National Bank of North
Carolina.
The Pro Forma Statements should be read in conjunction with the historical
financial statements of each Fund incorporated by reference in the Statement of
Additional Information.
2. Shares of Beneficial Interest - The Pro Forma net asset values per share
assume the issuance of shares of Evergreen Florida Class A, Class B, Class C and
Class Y which would have been issued at February 28, 1997 in connection with the
proposed Reorganizations. Shareholders of Evergreen would receive the same
number of shares of each class as they held on February 28, 1997. Shareholders
of Keystone would receive shares of Evergreen Florida based on a conversion
ratio determined on February 28, 1997. The number of such shares issued is
calculated by applying the conversion ratio, which is calculated by dividing the
net asset value per share of each class of Keystone by the net asset value per
share of the respective class of Evergreen, to the outstanding shares of
Keystone. The conversion ratio for Keystone Class C was determined by dividing
the net asset value per share of Keystone Class C by the net asset value per
share of Evergreen Class B.
<PAGE>
3. Pro Forma Operations - The Pro Forma Statement of Operations assumes similar
rates of gross investment income for the investments of each Fund. Accordingly,
the combined gross investment income is equal to the sum of the Funds' gross
investment income. Pro Forma operating expenses include the actual expenses of
each Fund adjusted to reflect the expected expenses of the combined entity. The
investment advisory and distribution fees have been charged to the combined Fund
based on the fee schedule in effect for Evergreen at the combined level of
average net assets for the year ended February 28, 1997.
EVERGREEN MUNICIPAL TRUST
PART C
OTHER INFORMATION
Item 15. Indemnification.
The response to this item is incorporated by reference to "Liability
and Indemnification of Trustees" under the caption "Comparative Information on
Shareholders' Rights" in Part A of this Registration Statement.
Item 16. Exhibits:
Number Description
1 Declaration of Trust (1)
2 By-Laws (1)
3 Not applicable
4 Agreements and Plans of Reorganization (included as
Exhibits A-1 and A-2 to the Prospectus contained in
Part A to this registration statement)
5 Declaration of Trust Articles II, III.(6)(c), IV.(3),
IV.(8), V, VI, VII, VIII and By-Laws Articles II,
III, and VIII
6 Investment Advisory Agreement between First Union
National Bank and the Registrant (1)
7(A) Distribution Agreement between Evergreen Keystone
Distributor, Inc. and the Registrant (1)
(B) Form of Dealer Agreement for Class A, Class B and Class C shares
used by Evergreen Keystone Distributor, Inc. (1)
8 Deferred Compensation Plan (3)
9 Custody Agreement between State Street Bank and Trust
Company and Registrant (1)
10(A) Rule 12b-1 Distribution Plan (1)
(B) Multiple Class Plan (1)
11 Opinion and consent of counsel as to the legality of
the shares being issued (2)
12 Tax opinion and consent of counsel (3)
13 Not applicable
14 Consent of KPMG Peat Marwick LLP (2)
15 Not applicable
16 Powers of Attorney (2)
17(A) Forms of Proxy Card (2)
(B) Registrant's Rule 24f-2 Declaration (1)
- ----------------------
<PAGE>
(1) Incorporated by reference to Registrant's registration statement (File
Nos. 333-36033/811-08367) (the "Registration Statement") dated October
8, 1997.
(2) Filed herewith.
(3) To be filed by amendment.
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus that is
a part of this Registration Statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933,
the reoffering prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new Registration Statement for
the securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
(3) The undersigned Registrant agrees to file, by post-effective
amendment, opinions of counsel or copies of an Internal Revenue Service ruling
supporting the tax consequences of the proposed Reorganizations within a
reasonable time after receipt of such opinions or rulings.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement
has been signed on behalf of the Registrant, in the City of New York and State
of New York, on the 9th day of October, 1997.
EVERGREEN MUNICIPAL TRUST
By: /s/ John J. Pileggi
----------------------
Name: John J. Pileggi
Title: President
As required by the Securities Act of 1933, the following persons have
signed this Registration Statement in the capacities on the 9th day of October,
1997.
Signatures Title
- ---------- -----
/s/John J. Pileggi President and
- ------------------ Treasurer
John J. Pileggi
/s/Laurence B. Ashkin* Trustee
- ---------------------
Laurence B. Ashkin
/s/Charles A. Austin III* Trustee
- -------------------------
Charles A. Austin III
/s/K. Dun Gifford* Trustee
- -----------------
K. Dun Gifford
/s/James S. Howell* Trustee
- ------------------
James S. Howell
/s/Leroy Keith, Jr.* Trustee
- -------------------
Leroy Keith, Jr.
/s/Gerald M. McDonnell* Trustee
- ----------------------
Gerald M. McDonnell
<PAGE>
/s/Thomas L. McVerry* Trustee
- --------------------
Thomas L. McVerry
/s/William Walt Pettit* Trustee
- ---------------------
William Walt Pettit
/s/David M. Richardson* Trustee
- ----------------------
David M. Richardson
/s/Russell A. Salton III* Trustee
- -------------------------
Russell A. Salton III
/s/Michael S. Scofield* Trustee
- ----------------------
Michael S. Scofield
/s/Richard J. Shima* Trustee
- -------------------
Richard J. Shima
* By: /s/Martin J. Wolin
------------------
Martin J. Wolin
Attorney-in-Fact
Martin J. Wolin, by signing his name hereto, does hereby sign this
document on behalf of each of the above-named individuals pursuant to powers of
attorney duly executed by such persons and included as Exhibit 16 to this
Registration Statement.
<PAGE>
INDEX TO EXHIBITS
N-14
EXHIBIT NO.
11 Opinion and Consent of Sullivan & Worcester LLP
14 Consent of KPMG Peat Marwick LLP
16 Powers of Attorney
17(a) Forms of Proxy
- --------------------
<PAGE>
SULLIVAN & WORCESTER LLP
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: 202-775-8190
FACSIMILE: 202-293-2275
767 THIRD AVENUE ONE POST OFFICE SQUARE
NEW YORK, NEW YORK 10017 BOSTON, MASSACHUSETTS 02109
TELEPHONE: 212-486-8200 TELEPHONE: 617-338-2800
FACSIMILE: 212-758-2151 FACSIMILE: 617-338-2880
October 9, 1997
Evergreen Municipal Trust
200 Berkeley Street
Boston, Massachusetts 02116
Ladies and Gentlemen:
We have been requested by the Evergreen Municipal Trust, a Delaware
business trust with transferable shares and currently consisting of two series
(the "Trust") established under an Agreement and Declaration of Trust dated
September 17, 1997 as amended (the "Declaration"), for our opinion with respect
to certain matters relating to Evergreen Florida Municipal Bond Fund (the
"Acquiring Fund"), a series of the Trust. We understand that the Trust is about
to file a Registration Statement on Form N-14 for the purpose of registering
shares of the Trust under the Securities Act of 1933, as amended (the "1933
Act"), in connection with the proposed acquisition by the Acquiring Fund of all
of the assets of Evergreen Florida Municipal Bond Fund and Keystone Florida Tax
Free Fund (the "Acquired Funds"), each a series of a Massachusetts business
trust with transferable shares, in exchange solely for shares of the Acquiring
Fund and the assumption by the Acquiring Fund of certain identified liabilities
of the Acquired Funds pursuant to Agreements and Plans of Reorganization, forms
of which are included in the Form N-1A Registration Statement (the "Plans").
We have, as counsel, participated in various business and other
proceedings relating to the Trust. We have examined copies, either certified or
otherwise proved to be genuine to our satisfaction, of the Trust's Declaration
and By-Laws, and other documents relating to its organization, operation, and
proposed operation, including the proposed Plans and we have made such other
investigations as, in our judgment, are necessary or appropriate to enable us to
render the opinion expressed below.
<PAGE>
Evergreen Tax Free Trust
October 9, 1997
Page 2
Based upon the foregoing, and assuming the approval by shareholders of
each Acquired Fund of certain matters scheduled for their consideration at a
meeting presently anticipated to be held on January 6, 1998, it is our opinion
that the shares of the Acquiring Fund currently being registered, when issued in
accordance with the Plans and the Trust's Declaration and By-Laws, will be
legally issued, fully paid and non-assessable by the Trust, subject to
compliance with the 1933 Act, the Investment Company Act of 1940, as amended and
applicable state laws regulating the offer and sale of securities.
We hereby consent to the filing of this opinion with and as a part of
the Registration Statement on Form N-14 and to the reference to our firm under
the caption "Legal Matters" in the Prospectus/Proxy Statement filed as part of
the Registration Statement. In giving such consent, we do not thereby admit that
we come within the category of persons whose consent is required under Section 7
of the 1933 Act or the rules and regulations promulgated thereunder.
Very truly yours,
/s/SULLIVAN & WORCESTER LLP
---------------------------
SULLIVAN & WORCESTER LLP
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Trustees and Shareholders
Evergreen Municipal Trust
We consent to:
1) the use of our report dated October 16, 1996 for
Evergreen Florida Municipal Bond Fund incorporated by
reference herein;
2) the use of our report dated May 2, 1997 for Keystone Florida Tax Free
Fund incorporated by reference herein; and
3) the reference to our firm under the caption "FINANCIAL
STATEMENTS AND EXPERTS" in the prospectus/proxy
statement.
/s/KPMG Peat Marwick LLP
------------------------
KPMG Peat Marwick LLP
Boston, Massachusetts
October 9, 1997
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Dorothy E. Bourassa, Terrence J.
Cullen, Rosemary D. Van Antwerp, James P. Wallin, Martin J. Wolin and John J.
Pileggi, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-14 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Investment
Management Company, Evergreen Asset Management Corp. or First Union National
Bank of North Carolina serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and on my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
In Witness Whereof, I have executed this Power of Attorney as of June
18, 1997.
Signature Title
- --------- -----
/s/Laurence B. Ashkin Director/Trustee
- ---------------------
Laurence B. Ashkin
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Dorothy E. Bourassa, Terrence J.
Cullen, Rosemary D. Van Antwerp, James P. Wallin, Martin J. Wolin and John J.
Pileggi, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-14 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Investment
Management Company, Evergreen Asset Management Corp. or First Union National
Bank of North Carolina serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and on my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
In Witness Whereof, I have executed this Power of Attorney as of June
18, 1997.
Signature Title
- --------- -----
/s/Charles A. Austin, III Director/Trustee
- -------------------------
Charles A. Austin, III
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Dorothy E. Bourassa, Terrence J.
Cullen, Rosemary D. Van Antwerp, James P. Wallin, Martin J. Wolin and John J.
Pileggi, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-14 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Investment
Management Company, Evergreen Asset Management Corp. or First Union National
Bank of North Carolina serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and on my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
In Witness Whereof, I have executed this Power of Attorney as of June
18, 1997.
Signature Title
- --------- -----
/s/K. Dun Gifford Director/Trustee
- -----------------
K. Dun Gifford
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Dorothy E. Bourassa, Terrence J.
Cullen, Rosemary D. Van Antwerp, James P. Wallin, Martin J. Wolin and John J.
Pileggi, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-14 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Investment
Management Company, Evergreen Asset Management Corp. or First Union National
Bank of North Carolina serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and on my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
In Witness Whereof, I have executed this Power of Attorney as of June
18, 1997.
Signature Title
- --------- -----
/s/James S. Howell Director/Trustee
- ------------------
James S. Howell
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Dorothy E. Bourassa, Terrence J.
Cullen, Rosemary D. Van Antwerp, James P. Wallin, Martin J. Wolin and John J.
Pileggi, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-14 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Investment
Management Company, Evergreen Asset Management Corp. or First Union National
Bank of North Carolina serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and on my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
In Witness Whereof, I have executed this Power of Attorney as of June
18, 1997.
Signature Title
- --------- -----
/s/Leroy Keith, Jr. Director/Trustee
- -------------------
Leroy Keith, Jr.
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Dorothy E. Bourassa, Terrence J.
Cullen, Rosemary D. Van Antwerp, James P. Wallin, Martin J. Wolin and John J.
Pileggi, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-14 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Investment
Management Company, Evergreen Asset Management Corp. or First Union National
Bank of North Carolina serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and on my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
In Witness Whereof, I have executed this Power of Attorney as of June
18, 1997.
Signature Title
- --------- -----
/s/Gerald M. McDonnell Director/Trustee
- ----------------------
Gerald M. McDonnell
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Dorothy E. Bourassa, Terrence J.
Cullen, Rosemary D. Van Antwerp, James P. Wallin, Martin J. Wolin and John J.
Pileggi, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-14 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Investment
Management Company, Evergreen Asset Management Corp. or First Union National
Bank of North Carolina serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and on my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
In Witness Whereof, I have executed this Power of Attorney as of June
18, 1997.
Signature Title
- --------- -----
/s/Thomas L. McVerry Director/Trustee
- --------------------
Thomas L. McVerry
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Dorothy E. Bourassa, Terrence J.
Cullen, Rosemary D. Van Antwerp, James P. Wallin, Martin J. Wolin and John J.
Pileggi, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-14 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Investment
Management Company, Evergreen Asset Management Corp. or First Union National
Bank of North Carolina serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and on my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
In Witness Whereof, I have executed this Power of Attorney as of June
18, 1997.
Signature Title
- --------- -----
/s/William Walt Pettit Director/Trustee
- ----------------------
William Walt Pettit
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Dorothy E. Bourassa, Terrence J.
Cullen, Rosemary D. Van Antwerp, James P. Wallin, Martin J. Wolin and John J.
Pileggi, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-14 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Investment
Management Company, Evergreen Asset Management Corp. or First Union National
Bank of North Carolina serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and on my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
In Witness Whereof, I have executed this Power of Attorney as of June
18, 1997.
Signature Title
- --------- -----
/s/David M. Richardson Director/Trustee
- ----------------------
David M. Richardson
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Dorothy E. Bourassa, Terrence J.
Cullen, Rosemary D. Van Antwerp, James P. Wallin, Martin J. Wolin and John J.
Pileggi, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-14 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Investment
Management Company, Evergreen Asset Management Corp. or First Union National
Bank of North Carolina serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and on my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
In Witness Whereof, I have executed this Power of Attorney as of June
18, 1997.
Signature Title
- --------- -----
/s/Russell A. Salton, III MD Director/Trustee
- ----------------------------
Russell A. Salton, III MD
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Dorothy E. Bourassa, Terrence J.
Cullen, Rosemary D. Van Antwerp, James P. Wallin, Martin J. Wolin and John J.
Pileggi, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-14 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Investment
Management Company, Evergreen Asset Management Corp. or First Union National
Bank of North Carolina serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and on my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
In Witness Whereof, I have executed this Power of Attorney as of June
18, 1997.
Signature Title
- --------- -----
/s/Michael S. Scofield Director/Trustee
- ----------------------
Michael S. Scofield
<PAGE>
POWER OF ATTORNEY
I, the undersigned, hereby constitute Dorothy E. Bourassa, Terrence J.
Cullen, Rosemary D. Van Antwerp, James P. Wallin, Martin J. Wolin and John J.
Pileggi, each of them singly, my true and lawful attorneys, with full power to
them and each of them to sign for me and in my name in the capacity indicated
below any and all registration statements, including, but not limited to, Forms
N-8A, N-8B-1, S-5, N-14 and N-1A, as amended from time to time, and any and all
amendments thereto to be filed with the Securities and Exchange Commission for
the purpose of registering from time to time all investment companies of which I
am now or hereafter a Director or Trustee and for which Keystone Investment
Management Company, Evergreen Asset Management Corp. or First Union National
Bank of North Carolina serves as Adviser or Manager and registering from time to
time the shares of such companies, and generally to do all such things in my
name and on my behalf to enable such investment companies to comply with the
provisions of the Securities Act of 1933, as amended, the Investment Company Act
of 1940, as amended, and all requirements and regulations of the Securities and
Exchange Commission thereunder, hereby ratifying and confirming my signature as
it may be signed by my said attorneys to any and all registration statements and
amendments thereto.
In Witness Whereof, I have executed this Power of Attorney as of June
18, 1997.
Signature Title
- --------- -----
/s/Richard J. Shima Director/Trustee
- -------------------
Richard J. Shima
EVERGREEN FLORIDA MUNICIPAL BOND FUND
PROXY FOR THE MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 6, 1998
The undersigned, revoking all Proxies heretofore given, hereby appoints
Dorothy E. Bourassa, Terrence J. Cullen, Martin Wolin or Rosemary Van Antwerp or
any of them as Proxies of the undersigned, with full power of substitution, to
vote on behalf of the undersigned all shares of Evergreen Florida Municipal Bond
Fund ("Evergreen Florida") that the undersigned is entitled to vote at the
special meeting of shareholders of Evergreen Florida to be held at 3:00 p.m. on
Tuesday, January 6, 1998 at the offices of the Evergreen Keystone Funds, 26th
Floor, 200 Berkeley Street, Boston, Massachusetts 02116 and at any adjournments
thereof, as fully as the undersigned would be entitled to vote if personally
present, as follows:
1. To approve an Agreement and Plan of Reorganization whereby Evergreen
Florida Municipal Bond Fund, a series of Evergreen Municipal Trust, will (i)
acquire all of the assets of Evergreen Florida in exchange for shares of
Evergreen Florida Municipal Bond Fund; and (ii) assume certain identified
liabilities of Evergreen Florida, as substantially described in the accompanying
Prospectus/Proxy Statement.
---- FOR ---- AGAINST ---- ABSTAIN
2. To consider and vote upon such other matters as may properly come
before said meeting or any adjournments thereof.
---- FOR ---- AGAINST ---- ABSTAIN
PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
OF EVERGREEN INVESTMENT TRUST
THE BOARD OF TRUSTEES OF EVERGREEN INVESTMENT
TRUST RECOMMENDS A VOTE FOR THE PROPOSALS.
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS
INDICATED OR FOR THE PROPOSALS IF NO CHOICE IS
INDICATED.
-1-
<PAGE>
NOTE: PLEASE SIGN EXACTLY AS YOUR
NAME(S) APPEAR ON THIS CARD.
Dated: , 199
----------------- --
Signature(s):
Signature (of joint owner, if any):
NOTE: When signing as attorney, executor, administrator, trustee, guardian, or
as custodian for a minor, please sign your name and give your full title as
such. If signing on behalf of a corporation, please sign the full corporate name
and your name and indicate your title. If you are a partner signing for a
partnership, please sign the partnership name and your name. Joint owners should
each sign this proxy.
Please sign, date and return.
-2-
<PAGE>
KEYSTONE FLORIDA TAX FREE FUND
PROXY FOR THE MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 6, 1998
The undersigned, revoking all Proxies heretofore given, hereby appoints
Dorothy E. Bourassa, Terrence J. Cullen, Martin Wolin or Rosemary Van Antwerp or
any of them as Proxies of the undersigned, with full power of substitution, to
vote on behalf of the undersigned all shares of Keystone Florida Tax Free Fund
("Keystone Florida") that the undersigned is entitled to vote at the special
meeting of shareholders of Keystone Florida to be held at 3:00 p.m. on Tuesday,
January 6, 1998 at the offices of the Evergreen Keystone Funds, 26th Floor, 200
Berkeley Street, Boston, Massachusetts 02116 and at any adjournments thereof, as
fully as the undersigned would be entitled to vote if personally present, as
follows:
1. To approve an Agreement and Plan of Reorganization whereby Evergreen
Florida Municipal Bond Fund, a series of Evergreen Municipal Trust, will (i)
acquire all of the assets of Keystone Florida in exchange for shares of
Evergreen Florida Municipal Bond Fund; and (ii) assume certain identified
liabilities of Keystone Florida, as substantially described in the accompanying
Prospectus/Proxy Statement.
---- FOR ---- AGAINST ---- ABSTAIN
2. To consider and vote upon such other matters as may properly come
before said meeting or any adjournments thereof.
---- FOR ---- AGAINST ---- ABSTAIN
PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
OF KEYSTONE STATE TAX FREE FUND
THE BOARD OF TRUSTEES OF KEYSTONE STATE TAX
FREE FUND RECOMMENDS A VOTE FOR THE
PROPOSALS.
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS INDICATED
-3-
<PAGE>
OR FOR THE PROPOSALS IF NO CHOICE IS INDICATED.
NOTE: PLEASE SIGN EXACTLY AS YOUR
NAME(S) APPEAR ON THIS CARD.
Dated: , 199
---------------- --
Signature(s):
Signature (of joint owner, if any):
NOTE: When signing as attorney, executor, administrator, trustee, guardian, or
as custodian for a minor, please sign your name and give your full title as
such. If signing on behalf of a corporation, please sign the full corporate name
and your name and indicate your title. If you are a partner signing for a
partnership, please sign the partnership name and your name. Joint owners should
each sign this proxy.
Please sign, date and return.
-4-
<PAGE>
