- -------------------------------------------------------------------------------
PROSPECTUS August 1, 1998
- -------------------------------------------------------------------------------
EVERGREENSM STATE MUNICIPAL BOND FUNDS [LOGO OF EVERGREEN
FUNDS(SM) APPEARS HERE]
- -------------------------------------------------------------------------------
EVERGREEN CALIFORNIA TAX FREE FUND (CLASS A, B AND C SHARES)
EVERGREEN MASSACHUSETTS TAX FREE FUND (CLASS A, B AND C SHARES)
EVERGREEN MISSOURI TAX FREE FUND (CLASS A, B AND C SHARES)
EVERGREEN NEW YORK TAX FREE FUND (CLASS A, B AND C SHARES)
EVERGREEN PENNSYLVANIA TAX FREE FUND (CLASS A, B AND C SHARES)
EVERGREEN CONNECTICUT MUNICIPAL BOND FUND (CLASS A AND B SHARES)
EVERGREEN NEW JERSEY TAX FREE INCOME FUND (CLASS A AND B SHARES)
(EACH A "FUND", TOGETHER THE "FUNDS")
The Funds seek current income exempt from federal income taxes including
the alternative minimum tax, except in the case of EVERGREEN CONNECTICUT
MUNICIPAL BOND FUND, and personal income taxes of the state for which each
Fund is named. The Funds also seek to preserve capital. Each Fund looks to
achieve its objective by investing primarily in municipal obligations that are
issued by the state for which a Fund is named.
This prospectus provides information regarding the Class A, Class B and,
where applicable, Class C, shares offered by the Funds. The Funds are
nondiversified series of an open-end management investment company. This
prospectus sets forth concise information about the Funds that a prospective
investor should know before investing. The address of the Funds is 200
Berkeley Street, Boston, Massachusetts 02116.
A Statement of Additional Information ("SAI") for the Funds dated August
1, 1998, as supplemented from time to time, has been filed with the Securities
and Exchange Commission and is incorporated by reference herein. The SAI
provides information regarding certain matters discussed in this prospectus
and other matters which may be of interest to investors, and may be obtained
without charge by calling the Funds at (800) 343-2898. There can be no
assurance that the investment objective of the Funds will be achieved.
Investors are advised to read this prospectus carefully.
AN INVESTMENT IN THE FUNDS IS NOT A DEPOSIT OR AN OBLIGATION OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK, AND SHARES 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. AN INVESTMENT IN THE FUNDS
INVOLVES RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Keep This Prospectus For Future Reference
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
EXPENSE INFORMATION................................................... 3
FINANCIAL HIGHLIGHTS.................................................. 6
DESCRIPTION OF THE FUNDS.............................................. 16
Investment Objectives and Policies................................. 16
Investment Practices and Restrictions.............................. 17
ORGANIZATION AND SERVICE PROVIDERS.................................... 21
Organization....................................................... 21
Service Providers.................................................. 21
Distribution Plans and Agreements.................................. 22
PURCHASE AND REDEMPTION OF SHARES...................................... 23
How to Buy Shares................................................... 23
How to Redeem Shares................................................ 26
Exchange Privilege.................................................. 27
Shareholder Services................................................ 28
Banking Laws........................................................ 29
OTHER INFORMATION...................................................... 29
Dividends, Distributions and Taxes.................................. 29
General Information................................................. 33
</TABLE>
2
<PAGE>
- --------------------------------------------------------------------------------
EXPENSE INFORMATION
- --------------------------------------------------------------------------------
The table and examples below are designed to help you understand the
various expenses that you will bear, directly or indirectly, when you invest in
the Funds. Shareholder transaction expenses are fees paid directly from your
account when you buy or sell shares of a Fund.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A SHARES CLASS B SHARES CLASS C SHARES(3)
- -------------------------------- -------------- -------------- -----------------
<S> <C> <C> <C>
Maximum Sales Charge Imposed
on Purchases (as a % of
offering price)............ 4.75%(1) None None
Maximum Contingent Deferred
Sales Charge (as a % of
original purchase price or
redemption proceeds,
whichever is lower)........ None 5.00%(2)(4) 1.00%(2)
</TABLE>
- -------
(1) Investments of $1 million or more are not subject to a front-end sales
charge, but may be subject to a contingent deferred sales charge upon
redemption within one year after the month of purchase.
(2) The deferred sales charge on Class B shares declines from 5.00% to 1.00% on
amounts redeemed within six years after the month of purchase. The deferred
sales charge on Class C shares is 1.00% on amounts redeemed within one year
after the month of purchase. No sales charge is imposed on redemptions made
thereafter. See "Purchase and Redemption of Shares" for more information.
(3) Class C shares are currently offered only by EVERGREEN CALIFORNIA TAX FREE
FUND, EVERGREEN MASSACHUSETTS TAX FREE FUND, EVERGREEN MISSOURI TAX FREE
FUND, EVERGREEN NEW YORK TAX FREE FUND and EVERGREEN PENNSYLVANIA TAX FREE
FUND and are available only through broker-dealers who have entered into
special distribution agreements with Evergreen Distributor, Inc., each
Fund's principal underwriter.
(4) Long-term shareholders may pay more than the economic equivalent front-end
sales charges permitted by the National Association of Securities Dealers,
Inc.
Annual operating expenses reflect the normal operating expenses of the
Funds, and include costs such as management, distribution and other fees. The
tables below show each Fund's estimated annual operating expenses for the fiscal
year ending March 31, 1999. The examples show what you would pay if you invested
$1,000 over the periods indicated, assuming that you reinvest all of your
dividends and that a Fund's average annual return will be 5%. THE EXAMPLES ARE
FOR ILLUSTRATION PURPOSES ONLY AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR ANNUAL RETURN. EACH FUND'S ACTUAL EXPENSES AND
RETURNS WILL VARY. For a more complete description of the various costs and
expenses borne by a Fund see "Organization and Service Providers."
EVERGREEN CALIFORNIA TAX FREE FUND
EXAMPLES
<TABLE>
<CAPTION>
ASSUMING REDEMPTION AT
ANNUAL OPERATING EXPENSES (AFTER WAIVERS)(1) END OF PERIOD ASSUMING NO REDEMPTION
- -------------------------------------------- ----------------------- -----------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management
Fees........... 0.30% 0.30% 0.30% After 1 Year.... $ 56 $ 66 $ 26 $ 56 $ 16 $ 16
12b-1 Fees...... 0.25% 1.00% 1.00% After 3 Years... $ 73 $ 80 $ 50 $ 73 $ 50 $ 50
Other Expenses.. 0.30% 0.30% 0.30% After 5 Years... $ 92 $107 $ 87 $ 92 $ 87 $ 87
---- ---- ---- After 10 Years.. $147 $160 $190 $147 $160 $160
Total........... 0.85% 1.60% 1.60%
==== ==== ====
</TABLE>
EVERGREEN MASSACHUSETTS TAX FREE FUND
EXAMPLES
<TABLE>
<CAPTION>
ASSUMING REDEMPTION AT
ANNUAL OPERATING EXPENSES (AFTER WAIVERS)(1) END OF PERIOD ASSUMING NO REDEMPTION
- -------------------------------------------- ----------------------- -----------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management
Fees........... 0.60% 0.60% 0.60% After 1 Year.... $ 56 $ 66 $ 26 $ 56 $ 16 $ 16
12b-1 Fees...... 0.25% 1.00% 1.00% After 3 Years... $ 73 $ 80 $ 50 $ 73 $ 50 $ 50
Other Expenses.. 0.54% 0.54% 0.54% After 5 Years... $ 92 $107 $ 87 $ 92 $ 87 $ 87
---- ---- ---- After 10 Years.. $147 $160 $190 $147 $160 $160
Total........... 0.85% 1.60% 1.60%
==== ==== ====
</TABLE>
3
<PAGE>
EVERGREEN MISSOURI TAX FREE FUND
EXAMPLES
<TABLE>
<CAPTION>
ASSUMING REDEMPTION AT
ANNUAL OPERATING EXPENSES (AFTER WAIVERS)(1) END OF PERIOD ASSUMING NO REDEMPTION
- -------------------------------------------- ----------------------- -----------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management
Fees........... 0.19% 0.19% 0.19% After 1 Year.... $ 56 $ 66 $ 26 $ 56 $ 16 $ 16
12b-1 Fees...... 0.25% 1.00% 1.00% After 3 Years... $ 73 $ 80 $ 50 $ 73 $ 50 $ 50
Other Expenses.. 0.41% 0.41% 0.41% After 5 Years... $ 92 $107 $ 87 $ 92 $ 87 $ 87
---- ---- ---- After 10 Years.. $147 $160 $190 $147 $160 $160
Total........... 0.85% 1.60% 1.60%
==== ==== ====
</TABLE>
EVERGREEN NEW YORK TAX FREE FUND
EXAMPLES
<TABLE>
<CAPTION>
ASSUMING REDEMPTION AT
ANNUAL OPERATING EXPENSES (AFTER WAIVERS)(1) END OF PERIOD ASSUMING NO REDEMPTION
- -------------------------------------------- ----------------------- -----------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management
Fees........... 0.30% 0.30% 0.30% After 1 Year.... $ 56 $ 66 $ 26 $ 56 $ 16 $ 16
12b-1 Fees...... 0.25% 1.00% 1.00% After 3 Years... $ 73 $ 80 $ 50 $ 73 $ 50 $ 50
Other Expenses.. 0.30% 0.30% 0.30% After 5 Years... $ 92 $107 $ 87 $ 92 $ 87 $ 87
---- ---- ---- After 10 Years.. $147 $160 $190 $147 $160 $160
Total........... 0.85% 1.60% 1.60%
==== ==== ====
</TABLE>
EVERGREEN PENNSYLVANIA TAX FREE FUND
EXAMPLES
<TABLE>
<CAPTION>
ASSUMING REDEMPTION AT
ANNUAL OPERATING EXPENSES (AFTER WAIVERS)(1) END OF PERIOD ASSUMING NO REDEMPTION
- -------------------------------------------- ----------------------- -----------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management
Fees........... 0.34% 0.34% 0.34% After 1 Year.... $ 56 $ 66 $ 26 $ 56 $ 16 $ 16
12b-1 Fees...... 0.25% 1.00% 1.00% After 3 Years... $ 73 $ 80 $ 50 $ 73 $ 50 $ 50
Other Expenses.. 0.24% 0.24% 0.24% After 5 Years... $ 91 $106 $ 86 $ 91 $ 86 $ 86
---- ---- ---- After 10 Years.. $145 $158 $188 $145 $158 $188
Total........... 0.83% 1.58% 1.58%
==== ==== ====
</TABLE>
EVERGREEN CONNECTICUT MUNICIPAL BOND FUND
EXAMPLES
<TABLE>
<CAPTION>
ASSUMING
REDEMPTION ASSUMING NO
ANNUAL OPERATING EXPENSES (AFTER WAIVERS)(2) AT END OF PERIOD REDEMPTION
- -------------------------------------------- ----------------- ---------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
------------------------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees..... 0.33% 0.33% After 1 Year....... $56 $66 $ 56 $ 16
12b-1 Fees.......... 0.25% 1.00% After 3 Years...... $73 $80 $ 73 $ 50
Other Expenses...... 0.27% 0.27% After 5 years...... $91 $106 $ 91 $ 86
-------- -------- After 10 years..... $145 $158 $145 $158
Total............... 0.85% 1.60%
======== ========
</TABLE>
EVERGREEN NEW JERSEY TAX FREE INCOME FUND
EXAMPLES
<TABLE>
<CAPTION>
ASSUMING
REDEMPTION AT ASSUMING NO
ANNUAL OPERATING EXPENSES (AFTER WAIVERS)(3) END OF PERIOD REDEMPTION
- -------------------------------------------- --------------- ---------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees..... 0.15% 0.15% After 1 Year......... $ 52 $ 64 $ 52 $ 14
12b-1 Fees.......... 0.09% 1.00% After 3 Years........ $ 63 $ 75 $ 63 $ 45
Other Expenses...... 0.26% 0.26% After 5 Years........ $ 74 $ 97 $ 74 $ 77
-------- -------- After 10 Years....... $107 $132 $107 $132
Total............... 0.50% 1.41%
======== ========
</TABLE>
4
<PAGE>
- -------
(1) Expense ratios for EVERGREEN CALIFORNIA TAX FREE FUND, EVERGREEN
MASSACHUSETTS TAX FREE FUND, EVERGREEN MISSOURI TAX FREE FUND, EVERGREEN
NEW YORK TAX FREE FUND and EVERGREEN PENNSYLVANIA TAX FREE FUND are
estimated for the fiscal year ending March 31, 1999, and reflect the waiver
by their investment adviser of fees in accordance with certain voluntary
expense limitations. Currently, the Investment Adviser to the Funds has
voluntarily limited annual expenses excluding indirectly paid expenses of
Class A, B and C shares to 0.85%, 1.60% and 1.60%, respectively, of
average daily net assets of each such class. Absent such waiver of fees,
expense ratios for the fiscal year ending March 31, 1999, are estimated to
be:
<TABLE>
<CAPTION>
TOTAL FUND OPERATING
EXPENSES (WITHOUT WAIVERS)
--------------------------------
CLASS A CLASS B CLASS C
-------- -------- --------
<S> <C> <C> <C>
California Fund...... 1.08% 1.85% 1.85%
Massachusetts Fund... 1.32% 2.09% 2.11%
Missouri Fund........ 1.22% 1.98% 1.99%
New York Fund........ 1.10% 1.85% 1.85%
Pennsylvania Fund.... 1.00% 1.75% 1.76%
</TABLE>
(2) Expense ratios for EVERGREEN CONNECTICUT MUNICIPAL BOND FUND are estimated
for the period ending March 31, 1999 and reflect the waiver of investment
advisory fees. Absent such waivers, the Fund's Total Operating Expenses are
estimated to be:
<TABLE>
<CAPTION>
TOTAL FUND
OPERATING EXPENSES
(WITHOUT WAIVERS)
--------------------
CLASS A CLASS B
--------- ---------
<S> <C> <C>
Connecticut Fund............. 1.15% 1.87%
</TABLE>
(3) Expense ratios are estimated for the fiscal year ending March 31, 1999, and
reflect the reimbursement or waiver of certain expenses by the Fund's
investment adviser and distributor. Absent such reimbursements Total
Operating Expenses are estimated to be 1.04% and 1.77% of average daily net
assets of Class A and Class B shares, respectively.
5
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
The following tables contain important financial information relating to
each of the Funds and have been audited by KPMG Peat Marwick LLP, the Funds'
independent auditor of the Funds. The information in the table for EVERGREEN
NEW JERSEY TAX FREE INCOME FUND for the year ended February 28, 1993, and the
period July 16, 1991 to February 29, 1992, was audited by other auditors. The
tables appear in the Funds' Annual Report and should be read in conjunction
with the Funds' financial statements and related notes, which also appear,
together with the independent auditors' report, in the Funds' Annual Report.
The Funds' financial statements, related notes, and independent auditors'
report thereon are incorporated by reference into the SAI. Additional
information about the Funds' performance is contained in the Funds' Annual
Report, which will be made available upon request and without charge.
(For a share outstanding throughout each year)
EVERGREEN CALIFORNIA TAX FREE FUND -- CLASS A SHARES
<TABLE>
<CAPTION>
FEBRUARY 1, 1994
FOUR MONTHS YEAR ENDED (COMMENCEMENT OF
YEAR ENDED ENDED NOVEMBER 30, CLASS OPERATIONS) TO
MARCH 31, MARCH 31, -------------- NOVEMBER 30,
1998 1997* 1996 1995 1994
---------- ----------- ------ ------ --------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
BEGINNING OF YEAR...... $9.44 $9.73 $9.86 $8.70 $10.00
------ ------ ------ ------ ------
Income from investment
operations
Net investment income.. 0.45 0.16 0.48 0.49 0.44
Net realized and
unrealized gain (loss)
on investments and
futures contracts..... 0.53 (0.28) (0.11) 1.17 (1.30)
------ ------ ------ ------ ------
Total from investment
operations............. 0.98 (0.12) 0.37 1.66 (0.86)
------ ------ ------ ------ ------
Less distributions from
Net investment income.. (0.44) (0.16) (0.48) (0.47) (0.44)
In excess of net
investment income..... 0 (0.01) (0.02) (0.03) 0
------ ------ ------ ------ ------
Total distributions..... (0.44) (0.17) (0.50) (0.50) (0.44)
------ ------ ------ ------ ------
Net asset value end of
year................... $9.98 $9.44 $9.73 $9.86 $8.70
====== ====== ====== ====== ======
TOTAL RETURN(B)......... 10.55% (1.29%) 3.99% 19.63% (8.78%)
RATIOS/SUPPLEMENTAL DATA
Ratios to average net
assets
Expenses............... 0.78% 0.77%(a) 0.77% 0.72% 0.41%(a)
Expenses excluding
indirectly paid
expenses.............. 0.78% 0.75%(a) 0.75% 0.69% --
Expenses excluding
waivers and/or
reimbursements........ 1.03% 1.24%(a) 1.19% 1.31% 1.66%(a)
Net investment income.. 4.60% 4.91%(a) 5.06% 5.37% 5.53%(a)
Portfolio turnover
rate................... 74% 39% 120% 119% 104%
NET ASSETS END OF YEAR
(THOUSANDS)............ $6,420 $4,192 $4,759 $4,555 $3,006
</TABLE>
EVERGREEN CALIFORNIA TAX FREE FUND -- CLASS B SHARES
<TABLE>
<CAPTION>
FEBRUARY 1, 1994
FOUR MONTHS YEAR ENDED (COMMENCEMENT OF
YEAR ENDED ENDED NOVEMBER 30, CLASS OPERATIONS)
MARCH 31, MARCH 31, ---------------- TO NOVEMBER 30,
1998 1997* 1996 1995 1994
---------- ----------- ------- ------- ------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
BEGINNING OF YEAR...... $9.40 $9.69 $9.82 $8.68 $10.00
------- ------- ------- ------- -------
Income from investment
operations
Net investment income.. 0.37 0.13 0.41 0.44 0.40
Net realized and
unrealized gain (loss)
on investments and
futures contracts..... 0.53 (0.28) (0.11) 1.17 (1.28)
------- ------- ------- ------- -------
Total from investment
operations............. 0.90 (0.15) 0.30 1.61 (0.88)
------- ------- ------- ------- -------
Less distributions from
Net investment income.. (0.36) (0.13) (0.41) (0.44) (0.40)
In excess of net
investment income..... 0 (0.01) (0.02) (0.03) (0.04)
------- ------- ------- ------- -------
Total distributions..... (0.36) (0.14) (0.43) (0.47) (0.44)
------- ------- ------- ------- -------
Net asset value end of
year................... $9.94 $9.40 $9.69 $9.82 $8.68
======= ======= ======= ======= =======
TOTAL RETURN(B)......... 9.75% (1.54%) 3.23% 18.95% (9.00%)
RATIOS/SUPPLEMENTAL DATA
Ratios to average net
assets
Expenses............... 1.52% 1.52%(a) 1.52% 1.48% 1.16%(a)
Expenses excluding
indirectly paid
expenses.............. 1.52% 1.50%(a) 1.50% 1.45% --
Expenses excluding
waivers and/or
reimbursements........ 1.77% 1.99%(a) 1.94% 2.07% 2.36%(a)
Net investment income.. 3.87% 4.16%(a) 4.31% 4.57% 4.83%(a)
Portfolio turnover
rate................... 74% 39% 120% 119% 104%
NET ASSETS END OF YEAR
(THOUSANDS)............ $18,967 $21,794 $22,719 $22,743 $11,415
</TABLE>
- -------
(a) Annualized.
(b) Excluding applicable sales charges.
* The Fund changed its fiscal year end from November 30 to March 31.
6
<PAGE>
(For a share outstanding throughout each year)
EVERGREEN CALIFORNIA TAX FREE FUND -- CLASS C SHARES
<TABLE>
<CAPTION>
FEBRUARY 1, 1994
FOUR MONTHS YEAR ENDED (COMMENCEMENT OF
YEAR ENDED ENDED NOVEMBER 30, CLASS OPERATIONS)
MARCH 31, MARCH 31, -------------- TO NOVEMBER 30,
1998 1997* 1996 1995 1994
---------- ----------- ------ ------ -----------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
BEGINNING OF YEAR...... $9.38 $9.68 $9.80 $8.68 $10.00
------ ------ ------ ------ ------
Income from investment
operations
Net investment income.. 0.37 0.14 0.41 0.43 0.39
Net realized and
unrealized gain (loss)
on investments and
futures contracts..... 0.53 (0.30) (0.10) 1.15 (1.29)
------ ------ ------ ------ ------
Total from investment
operations............. 0.90 (0.16) 0.31 1.58 (0.90)
------ ------ ------ ------ ------
Less distributions from
Net investment income.. (0.36) (0.13) (0.41) (0.43) (0.39)
In excess of net
investment income..... 0 (0.01) (0.02) (0.03) (0.03)
------ ------ ------ ------ ------
Total distributions..... (0.36) (0.14) (0.43) (0.46) (0.42)
------ ------ ------ ------ ------
Net asset value end of
year................... $9.92 $9.38 $9.68 $9.80 $8.68
====== ====== ====== ====== ======
TOTAL RETURN(B)......... 9.77% (1.64%) 3.34% 18.69% (9.08%)
RATIOS/SUPPLEMENTAL DATA
Ratios to average net
assets
Expenses............... 1.52% 1.52%(a) 1.52% 1.49% 1.16%(a)
Expenses excluding
indirectly paid
expenses.............. 1.52% 1.50%(a) 1.50% 1.46% --
Expenses excluding
waivers and/or
reimbursements........ 1.77% 1.99%(a) 1.94% 2.07% 2.38%(a)
Net investment income.. 3.87% 4.16%(a) 4.31% 4.51% 4.96%(a)
Portfolio turnover
rate................... 74% 39% 120% 119% 104%
NET ASSETS END OF YEAR
(THOUSANDS)............ $1,735 $1,849 $1,521 $1,535 $624
</TABLE>
- -------
(a) Annualized.
(b) Excluding applicable sales charges.
* The Fund changed its fiscal year end from November 30 to March 31.
EVERGREEN MASSACHUSETTS TAX FREE FUND -- CLASS A SHARES
<TABLE>
<CAPTION>
FEBRUARY 4, 1994
(COMMENCEMENT OF
YEAR ENDED MARCH 31, CLASS OPERATIONS)
------------------------------ TO MARCH 31,
1998 1997 1996 1995 1994
------ ------ ------ ------ -----------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING OF
YEAR........................ $9.23 $9.29 $9.19 $9.17 $10.00
------ ------ ------ ------ ------
Income from investment
operations
Net investment income....... 0.45 0.47 0.51 0.53 0.08
Net realized and unrealized
gain (loss) on investments
and futures contracts...... 0.50 (0.03) 0.09 0.02 (0.82)
------ ------ ------ ------ ------
Total from investment
operations.................. 0.95 0.44 0.60 0.55 (0.74)
------ ------ ------ ------ ------
Less distributions from
Net investment income....... (0.42) (0.47) (0.48) (0.53) (0.08)
In excess of net investment
income..................... 0 (0.03) (0.02) 0 (0.01)
------ ------ ------ ------ ------
Total distributions.......... (0.42) (0.50) (0.50) (0.53) (0.09)
Net asset value end of year.. $9.76 $9.23 $9.29 $9.19 $9.17
====== ====== ====== ====== ======
TOTAL RETURN(B).............. 10.50% 4.92% 6.64% 6.23% (7.40%)
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets
Expenses.................... 0.77% 0.76% 0.75% 0.46% 0.35%(a)
Expenses excluding
indirectly paid expenses... 0.77% 0.75% 0.74% -- --
Expenses excluding waivers
and/or reimbursements...... 1.26% 1.58% 1.59% 1.93% 3.22%(a)
Net investment income....... 4.64% 5.19% 5.36% 5.90% 5.07%(a)
Portfolio turnover rate...... 97% 110% 165% 77% 7%
NET ASSETS END OF YEAR
(THOUSANDS)................. $2,076 $2,063 $1,786 $1,974 $1,472
</TABLE>
- -------
(a) Annualized.
(b) Excluding applicable sales charges.
7
<PAGE>
(For a share outstanding throughout each year)
EVERGREEN MASSACHUSETTS TAX FREE FUND -- CLASS B SHARES
<TABLE>
<CAPTION>
FEBRUARY 4, 1994
(COMMENCEMENT OF
YEAR ENDED MARCH 31, CLASS OPERATIONS) TO
------------------------------ MARCH 31,
1998 1997 1996 1995 1994
------ ------ ------ ------ --------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING
OF YEAR.................. $9.17 $9.22 $9.15 $9.19 $10.00
------ ------ ------ ------ ------
Income from investment
operations
Net investment income.... 0.36 0.41 0.43 0.48 0.08
Net realized and
unrealized gain (loss)
on investments and
futures contracts....... 0.51 (0.03) 0.09 (0.01) (0.80)
------ ------ ------ ------ ------
Total from investment
operations............... 0.87 0.38 0.52 0.47 (0.72)
------ ------ ------ ------ ------
Less distributions from
Net investment income.... (0.35) (0.41) (0.43) (0.47) (0.07)
In excess of net
investment income....... 0 (0.02) (0.02) (0.04) (0.02)
------ ------ ------ ------ ------
Total distributions....... (0.35) (0.43) (0.45) (0.51) (0.09)
------ ------ ------ ------ ------
Net asset value end of
year..................... $9.69 $9.17 $9.22 $9.15 $9.19
====== ====== ====== ====== ======
TOTAL RETURN(B)........... 9.60% 4.25% 5.77% 5.41% (7.20%)
RATIOS/SUPPLEMENTAL DATA
Ratios to average net
assets
Expenses................. 1.52% 1.51% 1.49% 1.24% 1.10%(a)
Expenses excluding
indirectly paid
expenses................ 1.52% 1.50% 1.48% -- --
Expenses excluding
waivers and/or
reimbursements.......... 2.01% 2.35% 2.38% 2.68% 4.60%(a)
Net investment income.... 3.89% 4.45% 4.60% 5.15% 3.23%(a)
Portfolio turnover rate... 97% 110% 165% 77% 7%
NET ASSETS END OF YEAR
(THOUSANDS).............. $6,384 $7,803 $7,274 $6,169 $1,817
</TABLE>
EVERGREEN MASSACHUSETTS TAX FREE FUND -- CLASS C SHARES
<TABLE>
<CAPTION>
FEBRUARY 4, 1994
(COMMENCEMENT OF
YEAR ENDED MARCH 31, CLASS OPERATIONS) TO
------------------------------ MARCH 31,
1998 1997 1996 1995 1994
------ ------ ------ ------ --------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING
OF YEAR.................. $9.16 $9.22 $9.14 $9.19 $10.00
------ ------ ------ ------ ------
Income from investment
operations
Net investment income.... 0.36 0.41 0.43 0.48 0.08
Net realized and
unrealized gain (loss)
on investments and
futures contracts....... 0.51 (0.04) 0.10 (0.02) (0.80)
------ ------ ------ ------ ------
Total from investment
operations............... 0.87 0.37 0.53 0.46 (0.72)
------ ------ ------ ------ ------
Less distributions from
Net investment income.... (0.35) (0.41) (0.43) (0.47) (0.07)
In excess of net
investment income....... 0 (0.02) (0.02) (0.04) (0.02)
------ ------ ------ ------ ------
Total distributions....... (0.35) (0.43) (0.45) (0.51) (0.09)
------ ------ ------ ------ ------
Net asset value end of
year..................... $9.68 $9.16 $9.22 $9.14 $9.19
====== ====== ====== ====== ======
TOTAL RETURN(B)........... 9.62% 4.14% 5.89% 5.20% (7.21%)
RATIOS/SUPPLEMENTAL DATA
Ratios to average net
assets
Expenses................. 1.54% 1.51% 1.49% 1.23% 1.10%(a)
Expenses excluding
indirectly paid
expenses................ 1.53% 1.50% 1.48% -- --
Expenses excluding
waivers and/or
reimbursements.......... 2.02% 2.36% 2.39% 2.68% 4.91%(a)
Net investment income.... 3.94% 4.46% 4.60% 5.11% 4.28%(a)
Portfolio turnover rate... 97% 110% 165% 77% 7%
NET ASSETS END OF YEAR
(THOUSANDS).............. $1,639 $2,066 $2,303 $1,971 $369
</TABLE>
- -------
(a) Annualized.
(b) Excluding applicable sales charges.
8
<PAGE>
(For a share outstanding throughout each year)
EVERGREEN MISSOURI TAX FREE FUND -- CLASS A SHARES
<TABLE>
<CAPTION>
FEBRUARY 1, 1994
FOUR MONTHS YEAR ENDED (COMMENCEMENT OF
YEAR ENDED ENDED NOVEMBER 30, CLASS OPERATIONS) TO
MARCH 31, MARCH 31, -------------- NOVEMBER 30,
1998 1997* 1996 1995 1994
---------- ----------- ------ ------ --------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
BEGINNING OF YEAR...... $9.64 $9.86 $9.91 $8.72 $10.00
------ ------ ------ ------ ------
Income from investment
operations
Net investment income.. 0.46 0.16 0.50 0.50 0.44
Net realized and
unrealized gain (loss)
on investments and
futures contracts..... 0.58 (0.22) (0.06) 1.19 (1.28)
------ ------ ------ ------ ------
Total from investment
operations............. 1.04 (0.06) 0.44 1.69 (0.84)
------ ------ ------ ------ ------
Less distributions from
Net investment income.. (0.47) (0.16) (0.47) (0.47) (0.44)
In excess of net
investment income..... 0 0(c) (0.02) (0.03) 0(c)
------ ------ ------ ------ ------
Total distributions..... (0.47) (0.16) (0.49) (0.50) (0.44)
------ ------ ------ ------ ------
Net asset value end of
year................... $10.21 $9.64 $9.86 $9.91 $8.72
====== ====== ====== ====== ======
TOTAL RETURN(B)......... 11.01% (0.57%) 4.66% 19.86% (8.55%)
RATIOS/SUPPLEMENTAL DATA
Ratios to average net
assets
Expenses............... 0.78% 0.76%(a) 0.76% 0.72% 0.43%(a)
Expenses excluding
indirectly paid
expenses.............. 0.78% 0.75%(a) 0.75% 0.69% --
Expenses excluding
waivers and/or
reimbursements........ 1.16% 1.31%(a) 1.22% 1.32% 1.54%(a)
Net investment income.. 4.83% 5.05%(a) 4.93% 5.26% 5.38%(a)
Portfolio turnover
rate................... 42% 12% 126% 74% 25%
NET ASSETS END OF YEAR
(THOUSANDS)............ $4,897 $2,627 $2,610 $4,848 $3,581
</TABLE>
EVERGREEN MISSOURI TAX FREE FUND -- CLASS B SHARES
<TABLE>
<CAPTION>
FEBRUARY 1, 1994
FOUR MONTHS YEAR ENDED (COMMENCEMENT OF
YEAR ENDED ENDED NOVEMBER 30, CLASS OPERATIONS) TO
MARCH 31, MARCH 31, ---------------- NOVEMBER 30,
1998 1997* 1996 1995 1994
---------- ----------- ------- ------- --------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
BEGINNING OF YEAR...... $9.52 $9.74 $9.80 $8.67 $10.00
------- ------- ------- ------- -------
Income from investment
operations
Net investment income.. 0.40 0.13 0.40 0.44 0.40
Net realized and
unrealized gain (loss)
on investments and
futures contracts..... 0.56 (0.21) (0.04) 1.15 (1.29)
------- ------- ------- ------- -------
Total from investment
operations............. 0.96 (0.08) 0.36 1.59 (0.89)
------- ------- ------- ------- -------
Less distributions from
Net investment income.. (0.39) (0.14) (0.40) (0.43) (0.40)
In excess of net
investment income..... 0 0(c) (0.02) (0.03) (0.04)
------- ------- ------- ------- -------
Total distributions..... (0.39) (0.14) (0.42) (0.46) (0.44)
------- ------- ------- ------- -------
Net asset value end of
year................... $10.09 $9.52 $9.74 $9.80 $8.67
======= ======= ======= ======= =======
TOTAL RETURN(B)......... 10.26% (0.83%) 3.83% 18.79% (9.06%)
RATIOS/SUPPLEMENTAL DATA
Ratios to average net
assets
Expenses............... 1.53% 1.51%(a) 1.52% 1.47% 1.16%(a)
Expenses excluding
indirectly paid
expenses.............. 1.52% 1.50%(a) 1.50% 1.44% --
Expenses excluding
waivers and/or
reimbursements........ 1.90% 2.06%(a) 2.00% 2.08% 2.49%(a)
Net investment income.. 4.12% 4.31%(a) 4.20% 4.56% 4.70%(a)
Portfolio turnover
rate................... 42% 12% 126% 74% 25%
NET ASSETS END OF YEAR
(THOUSANDS)............ $19,552 $20,127 $21,925 $21,231 $12,906
</TABLE>
- -------
(a) Annualized.
(b) Excluding applicable sales charges.
(c) Amount represents less than $0.01 per share.
* The Fund changed its fiscal year end from November 30 to March 31.
9
<PAGE>
(For a share outstanding throughout each year)
EVERGREEN MISSOURI TAX FREE FUND -- CLASS C SHARES
<TABLE>
<CAPTION>
FEBRUARY 1, 1994
FOUR MONTHS YEAR ENDED (COMMENCEMENT OF
YEAR ENDED ENDED NOVEMBER 30, CLASS OPERATIONS) TO
MARCH 31, MARCH 31, -------------- NOVEMBER 30,
1998 1997* 1996 1995 1994
---------- ----------- ------ ------ --------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
BEGINNING OF YEAR...... $9.52 $9.73 $9.79 $8.66 $10.00
------ ------ ------ ------ ------
Income from investment
operations
Net investment income.. 0.38 0.13 0.39 0.43 0.39
Net realized and
unrealized gain (loss)
on investments and
futures contracts..... 0.57 (0.20) (0.03) 1.16 (1.29)
------ ------ ------ ------ ------
Total from investment
operations............. 0.95 (0.07) 0.36 1.59 (0.90)
------ ------ ------ ------ ------
Less distributions from
Net investment income.. (0.39) (0.14) (0.40) (0.43) (0.39)
In excess of net
investment income..... 0 0(c) (0.02) (0.03) (0.05)
------ ------ ------ ------ ------
Total distributions..... (0.39) (0.14) (0.42) (0.46) (0.44)
------ ------ ------ ------ ------
Net asset value end of
year................... $10.08 $9.52 $9.73 $9.79 $ 8.66
====== ====== ====== ====== ======
TOTAL RETURN(B)......... 10.15% (0.73%) 3.83% 18.78% (9.25%)
RATIOS/SUPPLEMENTAL DATA
Ratios to average net
assets
Expenses............... 1.52% 1.51%(a) 1.52% 1.46% 1.15%(a)
Expenses excluding
indirectly paid
expenses.............. 1.51% 1.50%(a) 1.50% 1.44% --
Expenses excluding
waivers and/or
reimbursements........ 1.90% 2.06%(a) 1.99% 2.07% 2.60%(a)
Net investment income.. 4.10% 4.30%(a) 4.18% 4.56% 4.72%(a)
Portfolio turnover
rate................... 42% 12% 126% 74% 25%
NET ASSETS END OF YEAR
(THOUSANDS)............ $990 $1,306 $1,387 $1,788 $1,045
</TABLE>
- -------
(a) Annualized.
(b) Excluding applicable sales charges.
(c) Amount represents less than $0.01 per share.
* The Fund changed its fiscal year end from November 30 to March 31.
EVERGREEN NEW YORK TAX FREE FUND -- CLASS A SHARES
<TABLE>
<CAPTION>
FEBRUARY 4, 1994
(COMMENCEMENT OF
YEAR ENDED MARCH 31, CLASS OPERATIONS) TO
------------------------------ MARCH 31,
1998 1997 1996 1995 1994
------ ------ ------ ------ --------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING
OF YEAR.................. $9.64 $9.67 $9.44 $9.32 $10.00
------ ------ ------ ------ ------
Income from investment
operations
Net investment income.... 0.48 0.49 0.48 0.52 0.09
Net realized and
unrealized gain (loss)
on investments and
futures contracts....... 0.52 (0.03) 0.24 0.12 (0.68)
------ ------ ------ ------ ------
Total from investment
operations............... 1.00 0.46 0.72 0.64 (0.59)
------ ------ ------ ------ ------
Less distributions from
Net investment income.... (0.46) (0.48) (0.47) (0.52) (0.08)
In excess of net
investment income....... 0 (0.01) (0.02) 0 (0.01)
Net realized gain on
investments............. (0.06) 0 0 0 0
------ ------ ------ ------ ------
Total distributions....... (0.52) (0.49) (0.49) (0.52) (0.09)
------ ------ ------ ------ ------
Net asset value end of
year..................... $10.12 $9.64 $9.67 $9.44 $9.32
====== ====== ====== ====== ======
TOTAL RETURN(B)........... 10.56% 4.87% 7.73% 7.08% (5.91%)
RATIOS/SUPPLEMENTAL DATA
Ratios to average net
assets
Expenses................. 0.77% 0.76% 0.75% 0.50% 0.35%(a)
Expenses excluding
indirectly paid
expenses................ 0.77% 0.75% 0.74% -- --
Expenses excluding
waivers and/or
reimbursements.......... 1.01% 1.19% 1.31% 1.59% 4.44%(a)
Net investment income.... 4.78% 5.00% 4.95% 5.48% 3.85%(a)
Portfolio turnover rate... 41% 62% 53% 77% 14%
NET ASSETS END OF YEAR
(THOUSANDS).............. $3,559 $3,693 $3,947 $3,323 $680
</TABLE>
- -------
(a) Annualized.
(b) Excluding applicable sales charges.
10
<PAGE>
(For a share outstanding throughout each year)
EVERGREEN NEW YORK TAX FREE FUND -- CLASS B SHARES
<TABLE>
<CAPTION>
FEBRUARY 4, 1994
(COMMENCEMENT OF
YEAR ENDED MARCH 31, CLASS OPERATIONS) TO
---------------------------------- MARCH 31,
1998 1997 1996 1995 1994
------- ------- ------- ------- --------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
BEGINNING OF YEAR...... $9.55 $9.59 $9.38 $9.32 $10.00
------- ------- ------- ------- ------
Income from investment
operations
Net investment income.. 0.40 0.41 0.41 0.47 0.08
Net realized and
unrealized gain (loss)
on investments and
futures contracts..... 0.52 (0.03) 0.24 0.09 (0.67)
------- ------- ------- ------- ------
Total from investment
operations............. 0.92 0.38 0.65 0.56 (0.59)
------- ------- ------- ------- ------
Less distributions from
Net investment income.. (0.38) (0.41) (0.42) (0.45) (0.06)
In excess of net
investment income..... 0 (0.01) (0.02) (0.05) (0.03)
Net realized gain on
investments........... (0.06) 0 0 0 0
------- ------- ------- ------- ------
Total distributions..... (0.44) (0.42) (0.44) (0.50) (0.09)
------- ------- ------- ------- ------
Net asset value end of
year................... $10.03 $9.55 $9.59 $9.38 $9.32
======= ======= ======= ======= ======
TOTAL RETURN(B)......... 9.80% 4.03% 7.02% 6.28% (5.91%)
RATIOS/SUPPLEMENTAL DATA
Ratios to average net
assets
Expenses............... 1.52% 1.51% 1.50% 1.25% 1.10%(a)
Expenses excluding
indirectly paid
expenses.............. 1.52% 1.50% 1.49% -- --
Expenses excluding
waivers and/or
reimbursements........ 1.76% 1.94% 2.05% 2.35% 5.60%(a)
Net investment income.. 4.04% 4.25% 4.19% 4.78% 3.01%(a)
Portfolio turnover
rate................... 41% 62% 53% 77% 14%
NET ASSETS END OF YEAR
(THOUSANDS)............ $17,245 $19,064 $17,151 $11,907 $2,276
</TABLE>
EVERGREEN NEW YORK TAX FREE FUND -- CLASS C SHARES
<TABLE>
<CAPTION>
FEBRUARY 4, 1994
(COMMENCEMENT OF
YEAR ENDED MARCH 31, CLASS OPERATIONS) TO
------------------------------ MARCH 31,
1998 1997 1996 1995 1994
------ ------ ------ ------ --------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING
OF YEAR.................. $9.55 $9.58 $9.37 $9.31 $10.00
------ ------ ------ ------ ------
Income from investment
operations
Net investment income.... 0.39 0.40 0.41 0.48 0.07
Net realized and
unrealized gain (loss)
on investments and
futures contracts....... 0.52 (0.01) 0.24 0.07 (0.67)
------ ------ ------ ------ ------
Total from investment
operations............... 0.91 0.39 0.65 0.55 (0.60)
------ ------ ------ ------ ------
Less distributions from
Net investment income.... (0.38) (0.41) (0.42) (0.46) (0.07)
In excess of net
investment income....... 0 (0.01) (0.02) (0.03) (0.02)
Net realized gain on
investments............. (0.06) 0 0 0 0
------ ------ ------ ------ ------
Total distributions....... (0.44) (0.42) (0.44) (0.49) (0.09)
------ ------ ------ ------ ------
Net asset value end of
year..................... $10.02 $9.55 $9.58 $9.37 $9.31
====== ====== ====== ====== ======
TOTAL RETURN(B) 9.69% 4.14% 7.02% 6.18% (6.02%)
RATIOS/SUPPLEMENTAL DATA
Ratios to average net
assets
Expenses................. 1.52% 1.51% 1.50% 1.26% 1.10%(a)
Expenses excluding
indirectly paid
expenses................ 1.52% 1.50% 1.48% -- --
Expenses excluding
waivers and/or
reimbursements.......... 1.77% 1.93% 2.07% 2.32% 5.13%(a)
Net investment income.... 4.05% 4.25% 4.24% 4.88% 3.71%(a)
Portfolio turnover rate... 41% 62% 53% 77% 14%
NET ASSETS END OF YEAR
(THOUSANDS).............. $1,465 $1,871 $2,296 $2,890 $255
</TABLE>
- -------
(a) Annualized.
(b) Excluding applicable sales charges.
11
<PAGE>
(For a share outstanding throughout each year)
EVERGREEN PENNSYLVANIA TAX FREE FUND -- CLASS A SHARES
<TABLE>
<CAPTION>
DECEMBER 27, 1990
(COMMENCEMENT OF
YEAR ENDED MARCH 31, CLASS OPERATIONS) TO
------------------------------------------------------------- MARCH 31,
1998 1997 1996 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- ------- ------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
BEGINNING OF YEAR...... $11.14 $11.15 $10.91 $11.01 $11.42 $10.71 $10.25 $10.00
------- ------- ------- ------- ------- ------- ------- ------
Income from investment
operations
Net investment income.. 0.55 0.59 0.60 0.61 0.62 0.63 0.74 0.18
Net realized and
unrealized gain (loss)
on investments and
futures contracts..... 0.55 (0.01) 0.23 (0.09) (0.30) 0.75 0.46 0.25
------- ------- ------- ------- ------- ------- ------- ------
Total from investment
operations............. 1.10 0.58 0.83 0.52 0.32 1.38 1.20 0.43
------- ------- ------- ------- ------- ------- ------- ------
Less distributions from
Net investment income.. (0.54) (0.59) (0.57) (0.61) (0.62) (0.63) (0.74) (0.18)
In excess of net
investment income..... 0 0 (0.02) (0.01) (0.04) (0.02) 0 0
Net realized gain on
investments........... 0 0 0 0 (0.06) (0.02) 0 0
In excess of net
realized gain on
investments........... 0 0 0 0 (0.01) 0 0 0
------- ------- ------- ------- ------- ------- ------- ------
Total distributions..... (0.54) (0.59) (0.59) (0.62) (0.73) (0.67) (0.74) (0.18)
------- ------- ------- ------- ------- ------- ------- ------
Net asset value end of
year................... $11.70 $11.14 $11.15 $10.91 $11.01 $11.42 $10.71 $10.25
======= ======= ======= ======= ======= ======= ======= ======
TOTAL RETURN(B)......... 10.02% 5.30% 7.66% 4.91% 2.58% 13.30% 12.07% 4.37%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net
assets
Expenses............... 0.76% 0.76% 0.76% 0.75% 0.75% 0.68% 0.65% 0.65%(a)
Expenses excluding
indirectly paid
expenses.............. 0.76% 0.75% 0.75% -- -- -- -- --
Expenses excluding
waivers and/or
reimbursements........ 0.96% 0.99% 0.99% 1.05% 1.06% 1.16% 1.68% 3.19%(a)
Net investment income.. 4.79% 5.26% 5.29% 5.65% 5.27% 5.66% 6.92% 6.84%(a)
Portfolio turnover
rate................... 54% 84% 55% 97% 37% 20% 13% 8%
NET ASSETS END OF YEAR
(THOUSANDS)............ $24,119 $24,535 $28,710 $30,450 $30,560 $35,502 $12,914 $2,979
</TABLE>
EVERGREEN PENNSYLVANIA TAX FREE FUND -- CLASS B SHARES
<TABLE>
<CAPTION>
FEBRUARY 1, 1993
(COMMENCEMENT OF
YEAR ENDED MARCH 31, CLASS OPERATIONS) TO
------------------------------------------- MARCH 31,
1998 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- --------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
BEGINNING OF YEAR...... $10.99 $11.00 $10.81 $10.98 $11.42 $11.20
------- ------- ------- ------- ------- ------
Income from investment
operations
Net investment income.. 0.46 0.49 0.51 0.54 0.56 0.08
Net realized and
unrealized gain (loss)
on investments and
futures contracts..... 0.54 (0.01) 0.22 (0.10) (0.34) 0.24
------- ------- ------- ------- ------- ------
Total from investment
operations............. 1.00 0.48 0.73 0.44 0.22 0.32
------- ------- ------- ------- ------- ------
Less distributions from
Net investment income.. (0.44) (0.49) (0.52) (0.53) (0.52) (0.08)
In excess of net
investment income..... 0 0 (0.02) (0.08) (0.07) (0.02)
Net realized gain on
investments........... 0 0 0 0 (0.03) 0
In excess of net
realized gain on
investments........... 0 0 0 0 (0.04) 0
------- ------- ------- ------- ------- ------
Total distributions..... (0.44) (0.49) (0.54) (0.61) (0.66) (0.10)
------- ------- ------- ------- ------- ------
Net asset value end of
year................... $11.55 $10.99 $11.00 $10.81 $10.98 $11.42
======= ======= ======= ======= ======= ======
TOTAL RETURN(B)......... 9.27% 4.50% 6.84% 4.15% 1.70% 2.82%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net
assets
Expenses............... 1.52% 1.51% 1.48% 1.50% 1.50% 1.50%(a)
Expenses excluding
indirectly paid
expenses.............. 1.51% 1.50% 1.47% -- -- --
Expenses excluding
waivers and/or
reimbursements........ 1.71% 1.74% 1.74% 1.80% 1.81% 1.69%(a)
Net investment income.. 4.04% 4.50% 4.55% 4.89% 4.32% 3.44%(a)
Portfolio turnover
rate................... 54% 84% 55% 97% 37% 20%
NET ASSETS END OF YEAR
(THOUSANDS)............ $37,036 $37,215 $37,719 $30,657 $21,958 $2,543
</TABLE>
- -------
(a) Annualized.
(b) Excluding applicable sales charges.
12
<PAGE>
(For a share outstanding throughout each year)
EVERGREEN PENNSYLVANIA TAX FREE FUND -- CLASS C SHARES
<TABLE>
<CAPTION>
FEBRUARY 1, 1993
(COMMENCEMENT OF
YEAR ENDED MARCH 31, CLASS OPERATIONS) TO
-------------------------------------- MARCH 31,
1998 1997 1996 1995 1994 1993
------ ------ ------ ------ ------ --------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
BEGINNING OF YEAR...... $11.02 $11.03 $10.83 $11.00 $11.42 $11.20
------ ------ ------ ------ ------ ------
Income from investment
operations
Net investment income.. 0.45 0.47 0.51 0.53 0.54 0.07
Net realized and
unrealized gain (loss)
on investments and
futures contracts..... 0.57 0.01 0.23 (0.10) (0.32) 0.24
------ ------ ------ ------ ------ ------
Total from investment
operations............. 1.02 0.48 0.74 0.43 0.22 0.31
------ ------ ------ ------ ------ ------
Less distributions from
Net investment income.. (0.45) (0.49) (0.52) (0.53) (0.52) (0.07)
In excess of net
investment income..... 0 0 (0.02) (0.07) (0.05) (0.02)
Net realized gain on
investments........... 0 0 0 0 (0.03) 0
In excess of net
realized gain on
investments........... 0 0 0 0 (0.04) 0
------ ------ ------ ------ ------ ------
Total distributions..... (0.45) (0.49) (0.54) (0.60) (0.64) (0.09)
------ ------ ------ ------ ------ ------
Net asset value end of
year................... $11.59 $11.02 $11.03 $10.83 $11.00 $11.42
====== ====== ====== ====== ====== ======
TOTAL RETURN(B)......... 9.34% 4.49% 6.92% 4.05% 1.78% 2.81%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net
assets
Expenses............... 1.52% 1.51% 1.48% 1.50% 1.50% 1.50%(a)
Expenses excluding
indirectly paid
expenses.............. 1.51% 1.50% 1.47% -- -- --
Expenses excluding
waivers and/or
reimbursements........ 1.71% 1.74% 1.74% 1.80% 1.90% 1.60%(a)
Net investment income.. 4.05% 4.52% 4.57% 4.90% 4.33% 2.50%(a)
Portfolio turnover
rate................... 54% 84% 55% 97% 37% 20%
NET ASSETS END OF YEAR
(THOUSANDS)............ $6,414 $6,830 $9,675 $9,559 $9,385 $952
</TABLE>
- -------
(a) Annualized.
(b) Excluding applicable sales charges.
EVERGREEN CONNECTICUT MUNICIPAL BOND FUND -- CLASS A SHARES
<TABLE>
<CAPTION>
DECEMBER 30, 1997
(COMMENCEMENT OF
CLASS OPERATIONS)
THROUGH
MARCH 31, 1998
-----------------
<S> <C>
NET ASSET VALUE BEGINNING OF PERIOD........................... $6.40
-----
Income from investment operations
Net investment income........................................ 0.07
Net realized and unrealized loss on investments.............. (0.02)
-----
Total from investment operations.............................. 0.05
-----
Less distributions from
Net investment income........................................ (0.07)
-----
Net asset value end of period................................. $6.38
=====
TOTAL RETURN(B)............................................... 0.77%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets
Total expenses............................................... 0.86%(a)
Total expenses excluding indirectly paid expenses............ 0.85%(a)
Total expenses excluding waivers and/or reimbursement........ 1.13%(a)
Net investment income........................................ 4.38%(a)
Portfolio turnover rate....................................... 17%
NET ASSETS END OF PERIOD (THOUSANDS).......................... $146
</TABLE>
- -------
(a) Annualized.
(b) Excluding applicable sales charges.
13
<PAGE>
(For a share outstanding throughout the period)
EVERGREEN CONNECTICUT MUNICIPAL BOND FUND -- CLASS B SHARES
<TABLE>
<CAPTION>
JANUARY 9, 1998
(COMMENCEMENT OF
CLASS OPERATIONS)
THROUGH
MARCH 31, 1998
-----------------
<S> <C>
NET ASSET VALUE BEGINNING OF PERIOD........................... $6.44
------
Income from investment operations
Net investment income........................................ 0.05
Net realized and unrealized loss on investments.............. (0.06)
------
Total from investment operations.............................. (0.01)
------
Less distributions from net investment income................. (0.05)
------
Net asset value end of period................................. $6.38
======
TOTAL RETURN(B)............................................... (0.21%)
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets
Total expenses............................................... 1.61%(a)
Total expenses excluding indirectly paid expenses............ 1.60%(a)
Total expenses excluding waivers and/or reimbursement........ 1.89%(a)
Net investment income........................................ 3.36%(a)
Portfolio turnover rate....................................... 17%
NET ASSETS END OF PERIOD (THOUSANDS).......................... $331
</TABLE>
- -------
(a) Annualized.
(b) Excluding applicable sales charges.
EVERGREEN NEW JERSEY TAX FREE INCOME FUND -- CLASS A SHARES
<TABLE>
<CAPTION>
JULY 16, 1991
SEVEN MONTHS SIX MONTHS (COMMENCEMENT OF
YEAR ENDED ENDED ENDED YEAR ENDED YEAR ENDED FEBRUARY 28, CLASS OPERATIONS)
MARCH 31, MARCH 31, AUGUST 31, FEBRUARY 29, ------------------------- TO FEBRUARY 29,
1998 1997** 1996* 1996 1995 1994 1993 1992
---------- ------------ ---------- ------------ ------- ------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE
BEGINNING OF YEAR...... $10.74 $10.75 $11.01 $10.53 $10.99 $11.01 $10.22 $10.00
------- ------- ------- ------- ------- ------- ------- -------
Income from investment
operations
Net investment income.. 0.53 0.31 0.28 0.56 0.57 0.60 0.63 0.38
Net realized and
unrealized gain (loss)
on investments........ 0.46 (0.01) (0.26) 0.48 (0.46) (0.02) 0.79 0.22
------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations............. 0.99 0.30 0.02 1.04 0.11 0.58 1.42 0.60
------- ------- ------- ------- ------- ------- ------- -------
Less distributions from
Net investment income.. (0.53) (0.31) (0.28) (0.56) (0.57) (0.60) (0.63) (0.38)
Net realized gain on
investments........... (0.09) 0 0 0 0 0 0 0
------- ------- ------- ------- ------- ------- ------- -------
Total distributions.... (0.62) (0.31) (0.28) (0.56) (0.57) (0.60) (0.63) (0.38)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value end of
year................... $11.11 $10.74 $10.75 $11.01 $10.53 $10.99 $11.01 $10.22
------- ------- ------- ------- ------- ------- ------- -------
TOTAL RETURN(B)......... 9.34% 2.83% 0.19% 10.08% 1.41% 5.30% 14.39% 6.03%
======= ======= ======= ======= ======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA
Ratios to average net
assets
Expenses............... 0.50% 0.44%(a) 0.34%(a) 0.36% 0.25% 0.14% 0.00% 0.01%(a)
Expenses excluding
indirectly
paid expenses......... 0.50% 0.44%(a) -- -- -- -- -- --
Expenses excluding
waivers and/or
reimbursements........ 1.01% 1.13%(a) 1.11%(a) 1.03% 1.04% 1.05% 1.16% 1.20%(a)
Net investment income.. 4.77% 5.02%(a) 5.08%(a) 5.15% 5.52% 5.31% 5.97% 5.89%(a)
Portfolio turnover
rate................... 37% 15% 0% 4% 8% 2% 5% 5%
NET ASSETS END OF YEAR
(THOUSANDS)............ $31,614 $31,434 $32,377 $41,762 $34,852 $42,783 $30,863 $13,129
</TABLE>
- -------
(a) Annualized.
(b) Excluding applicable sales charges.
* The Fund changed its fiscal year end from February 28 to August 31.
** The Fund changed its fiscal year end from August 31 to March 31.
14
<PAGE>
(For a share outstanding throughout each year)
EVERGREEN NEW JERSEY TAX FREE INCOME FUND -- CLASS B SHARES
<TABLE>
<CAPTION>
JANUARY 30, 1996
SEVEN MONTHS SIX MONTHS (COMMENCEMENT OF
YEAR ENDED ENDED ENDED CLASS OPERATIONS)
MARCH 31, MARCH 31, AUGUST 31, TO FEBRUARY 29,
1998 1997** 1996* 1996
---------- ------------ ---------- -----------------
<S> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING
OF YEAR................. $ 10.74 $10.75 $11.01 $11.08
------- ------ ------ ------
Income from investment
operations
Net investment income... 0.43 0.25 0.24 0.05
Net realized and
unrealized gain (loss)
on investments......... 0.46 0 (0.26) (0.07)
------- ------ ------ ------
Total from investment
operations.............. 0.89 0.25 (0.02) (0.02)
------- ------ ------ ------
Less distributions from
Net investment income... (0.43) (0.26) (0.24) (0.05)
Net realized gain on
investments............ (0.09) 0 0 0
------- ------ ------ ------
Total distributions...... (0.52) (0.26) (0.24) (0.05)
------- ------ ------ ------
Net asset value end of
year.................... $ 11.11 $10.74 $10.75 $11.01
======= ====== ====== ======
TOTAL RETURN (B)......... 8.35% 2.29% (0.20%) (0.22%)
RATIOS/SUPPLEMENTAL DATA
Ratios to average net
assets
Expenses................ 1.41% 1.36%(a) 1.28%(a) 0.31%(a)
Expenses excluding
indirectly paid
expenses............... 1.41% 1.36%(a) -- --
Expenses excluding
waivers and/or
reimbursements......... 1.76% 1.88%(a) 1.85%(a) 1.66%(a)
Net investment income... 3.85% 4.07%(a) 4.14%(a) 5.23%(a)
Portfolio turnover rate.. 37% 15% 0% 4%
NET ASSETS END OF YEAR
(THOUSANDS)............. $13,645 $7,847 $2,709 $ 186
</TABLE>
- -------
(a) Annualized.
(b) Excluding applicable sales charges.
* The Fund changed its fiscal year end from February 28 to August 31.
** The Fund changed its fiscal year end from August 31 to March 31.
15
<PAGE>
- -------------------------------------------------------------------------------
DESCRIPTION OF THE FUNDS
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objective(s) is nonfundamental; as a result a Fund
may change its objective(s) without a shareholder vote. Each Fund has also
adopted certain fundamental investment policies which are mainly designed to
limit a Fund's exposure to risk. Each Fund's fundamental policies cannot be
changed without a shareholder vote. See the SAI for more information regarding
the Funds' fundamental investment policies or other related investment
policies. There can be no assurance that a Fund's investment objective(s) will
be achieved.
In addition to the investment policies detailed below each Fund may
employ certain additional investment strategies which are discussed in
"Investment Practices and Restrictions" below.
Each Fund, other than EVERGREEN CONNECTICUT MUNICIPAL BOND FUND, seeks
the highest possible current income exempt from federal income taxes
(including the alternative minimum tax), while preserving capital. These Funds
normally invest their assets in accordance with applicable standards issued by
the Securities and Exchange Commission ("SEC") concerning investments in tax
free securities. The Funds cannot change this policy without shareholder
approval. The SEC currently requires the Funds to invest at least 80% of their
assets in federally tax exempt municipal securities. Each Fund also invests at
least 65% of its assets in municipal obligations that are exempt from income
taxes in the state for which the Fund is named. The Funds are permitted to
make taxable investments, and may from time to time generate income subject to
federal regular income tax.
In addition, EVERGREEN CALIFORNIA TAX FREE FUND and EVERGREEN NEW YORK
TAX FREE FUND will invest at least 80% of their assets in municipal securities
that at all times are fully insured as to timely payment of all principal and
interest when due ("Insured Securities"). Insurance does not cover against
market risk and therefore does not guarantee the market value of the
securities in either Fund's portfolio. Similarly, because the net asset value
of each Fund's portfolio is based upon the market value of the securities in
its portfolio, such insurance does not cover or guarantee the net asset value
of the Fund's shares.
Insured Securities will be covered by at least one of three policies. New
issue insurance is obtained by municipal securities issuers, who pay all
premiums for such policies in advance. Since new issue insurance remains in
effect as long as the securities are outstanding, the insurance may protect
the resale value of the Insured Securities. Portfolio insurance remains
effective only while a Fund and the issuer are still in business and the Fund
still holds the securities described in the policy. The premium on a portfolio
insurance policy is a Fund expense. The EVERGREEN CALIFORNIA TAX FREE FUND and
the EVERGREEN NEW YORK TAX FREE FUND may also purchase secondary insurance
when it believes the potential market value or net proceeds of the sale of a
security by a Fund exceeds the current uninsured value of the security plus
the cost of such insurance. Premiums for secondary insurance are added to the
cost basis of the security and are not Fund expense items.
EVERGREEN CONNECTICUT MUNICIPAL BOND FUND seeks current income exempt
from federal income taxes other than the alternative minimum tax and
Connecticut personal income taxes. In addition, the Fund seeks to preserve
capital. The Fund normally invests at least 80% of its assets in securities
that are exempt from federal income taxes (other than the alternative minimum
tax) and at least 65% of its assets in Connecticut municipal obligations. The
EVERGREEN CONNECTICUT MUNICIPAL BOND FUND may change either of these policies
without shareholder approval.
Each Fund 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
and Poor's Ratings Group ("S&P") (AAA, AA, A or BBB), by Moody's Investors
Service ("Moody's") (Aaa, Aa, A or Baa), by Fitch IBCA, Inc. ("Fitch") (AAA,
AA, A or 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 (an "SRO") or by a Fund's
investment adviser. The Funds may invest the remaining 20% of their assets in
lower rated bonds, but they will not invest in bonds rated below B.
16
<PAGE>
INVESTMENT PRACTICES AND RESTRICTIONS
Risk Factors. Bond yields are dependent on several factors including market
conditions, the size of an offering, the maturity of the bond, ratings of the
bond and the ability of issuers to meet their obligations. There is no limit
on the maturity of the bonds purchased by a Fund. Because bond prices
fluctuate inversely in relation to the direction of interest rates, the prices
of longer term bonds fluctuate more widely in response to market interest rate
changes. A Fund's concentration in securities issued by a particular state and
its political subdivisions provides a greater level of risk than a fund which
is diversified across numerous states and municipal entities.
A Fund is not required to dispose of securities that have been downgraded
subsequent to their purchase. If the municipal obligations held by a Fund are
downgraded (because of adverse economic conditions in the state for which it
is named, for example), a Fund's concentration in the state's securities may
cause a Fund to be subject to the risks inherent in holding material amounts
of low-rated debt securities in its portfolio.
Municipal Securities. The Funds invest in municipal bonds, notes and
commercial paper issued by or for states, territories and possessions of the
United States ("U.S.") including the District of Columbia and their political
subdivisions, agencies and instrumentalities. Municipal bonds include fixed,
variable or floating rate general obligation and revenue bonds. General
obligation bonds are used to support the government's general financial needs
and are supported by the full faith and credit of the municipality. General
obligation bonds are repaid from the issuer's general unrestricted revenues.
Payment, however, may be dependent upon legislative approval and may be
subject to limitations on the issuer's taxing power. Revenue bonds are used to
finance public works and certain private facilities. In contrast to general
obligation bonds, revenue bonds are repaid only with the revenue generated by
the project financed.
Municipal notes include tax anticipation notes, bond anticipation notes
and revenue anticipation notes. Municipal commercial paper obligations are
unsecured promissory notes issued by municipalities to meet short-term credit
needs.
Since the Funds invest primarily in municipal securities, you should be
aware of the risks associated with investing in such securities. The values of
municipal bonds tend to go up when interest rates go down and vice versa. An
issuer's failure to make such payment due to political development or fiscal
mismanagement could affect its ability to make prompt payments of interest and
principal. Those events could also affect the market value of the security.
Moreover, the market for municipal bonds is often thin and can be temporarily
affected by large purchases and sales, including those by a Fund.
Non-Diversification. The Funds are nondiversified portfolios of an investment
company and, as such, there is no limit on the percentage of assets which can
be invested in any single issuer. An investment in a Fund, therefore, will
entail greater risk than would exist in an investment in a diversified
investment company because the higher percentage of investments among fewer
issuers may result in greater fluctuation in the total market value of the
Fund's portfolio. Each of the Funds intends to comply with Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code") which requires that at
the end of each quarter of each taxable year, with regard to at least 50% of
each Fund's total assets, no more than 5% of the total assets may be invested
in the securities of a single issuer and that with respect to the remainder of
each Fund's total assets, no more than 25% of its total assets are invested in
the securities of a single issuer.
Defensive Investments. The Funds may invest up to 20% or, for temporary
defensive purposes, up to 100% of their assets in high quality short-term
obligations, such as notes, commercial paper, certificates of deposit,
bankers' acceptances, bank deposits or U.S. government securities.
Below Investment Grade Bonds. Below investment grade bonds are commonly known
as "junk bonds" because they are usually backed by issuers of less proven or
questionable financial strength. Such issuers are more vulnerable to financial
setbacks and less certain to pay interest and principal than issuers of bonds
offering lower yields and risk. Markets may overreact to unfavorable news
about issuers of below investment grade bonds, causing sudden and steep
declines in value.
Repurchase Agreements. The Funds may invest in repurchase agreements.
Repurchase agreements are agreements by which a Fund purchases a security
(usually U.S. government securities) for cash and obtains a simultaneous
commitment from the seller (usually a bank or broker/dealer) to repurchase the
security at an agreed-upon price and specified future date. The repurchase
price reflects an agreed-upon interest rate for the time period of the
agreement. The Funds' risk is the inability of the seller to pay the agreed-
upon price on the delivery date. However, this risk is tempered by the ability
of the Funds to sell the security in the open market in
17
<PAGE>
the case of a default. In such a case, the Funds may incur costs in disposing
of the security which would increase Fund expenses. Each Fund's investment
adviser will monitor the creditworthiness of the firms with which the Fund
enters into repurchase agreements.
Reverse Repurchase Agreements. Each Fund may enter into reverse repurchase
agreements. A reverse repurchase agreement is an agreement by a Fund to sell a
security and repurchase it at a specified time and price. A Fund could lose
money if the market values of the securities it sold decline below their
repurchase prices. Reverse repurchase agreements may be considered a form of
borrowing, and, therefore, a form of leverage. Leverage may magnify gains or
losses of the Fund.
When-Issued, Delayed-Delivery and Forward Commitment Transactions. Each Fund
may enter into transactions whereby it commits to buying a security, but does
not pay for or take delivery of the security until some specified date in the
future. The values of these securities are subject to market fluctuations
during this period and no income accrues to a Fund until settlement. At the
time of settlement, a when-issued security may be valued at less than its
purchase price. When entering into these transactions, a Fund relies on the
other party to consummate the transaction; if the other party fails to do so,
the Fund may be disadvantaged. Each Fund does not intend to purchase when-
issued securities for speculative purposes, but only in furtherance of its
investment objective.
Securities Lending. To generate income and offset expenses, the Funds may lend
securities to broker-dealers and other financial institutions. Loans of
securities by a Fund may not exceed 33 1/3% of the value of the Fund's total
assets. While securities are on loan, the borrower will pay the Fund any
income accruing on the security. Also, the Fund may invest any collateral it
receives in additional securities. Gains or losses in the market value of a
lent security will affect a Fund and its shareholders. When a Fund lends its
securities, it runs the risk that it could not retrieve the securities on a
timely basis, possibly losing the opportunity to sell the securities at a
desirable price. Also, if the borrower files for bankruptcy or becomes
insolvent, a Fund's ability to dispose of the securities may be delayed.
Investing In Securities Of Other Investment Companies. Each Fund may invest in
the securities of other investment companies. As a shareholder of another
investment company, a Fund would pay its portion of the other investment
company's expenses. These expenses would be in addition to the expenses that a
Fund currently bears concerning its own operations and may result in some
duplication of fees.
Borrowing. Each Fund may borrow from banks in an amount up to 33 1/3% of its
total assets, taken at market value. Each Fund may also borrow an additional
5% of its total assets from banks and others. A Fund may only borrow as a
temporary measure for extraordinary or emergency purposes such as the
redemption of Fund shares. A Fund will not purchase securities while
borrowings are outstanding except to exercise prior commitments and to
exercise subscription rights.
Zero Coupon Debt Securities. A Fund may purchase zero coupon debt securities.
These securities do not make regular interest payments. Instead, they are sold
at a deep discount from their face value. In calculating their daily
dividends, each day a Fund takes into account as income a portion of the
difference between these securities' purchase price and their face value.
Because they do not pay current income, the prices of zero coupon debt
securities can be very volatile when interest rates change. Values of zero
coupon securities are affected to a greater extent by interest rate changes
and may be more volatile than securities which pay interest periodically and
in cash.
Securities with Put or Demand Rights. The Funds have the ability to enter into
put transactions, sometimes referred to as stand-by commitments, with respect
to municipal obligations held in their portfolios or to purchase securities
which carry a demand feature or put option which permit a Fund, as holder, to
tender them back to the issuer or a third party prior to maturity and receive
payment within seven days. Segregated accounts will be maintained by each Fund
for all such transactions.
The amount payable to a Fund by the seller upon its exercise of a put
will normally be (i) a Fund's acquisition cost of the securities (excluding
any accrued interest which a Fund paid on their acquisition), less any
amortized market premium plus any amortized market or original issue discount
during the period the Fund owned the securities, plus (ii) all interest
accrued on the securities since the last interest payment date during the
period the securities were owned by the Fund. Accordingly, the amount payable
by a broker-dealer or bank during the time a put is exercisable will be
substantially the same as the value of the underlying securities.
18
<PAGE>
A Fund's right to exercise a put is unconditional and unqualified. A put
is not transferable by a Fund, although a Fund may sell the underlying
securities to a third party at any time. Each Fund expects that puts will
generally be available without any additional direct or indirect cost.
However, if necessary and advisable, a Fund may pay for certain puts either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to such a put (thus reducing the yield to maturity
otherwise available to the same securities). Thus, the aggregate price paid
for securities with put rights may be higher than the price that would
otherwise be paid.
The Funds may enter into put transactions only with broker-dealers (in
accordance with the rules of the SEC) and banks which, in the opinion of each
Fund's investment adviser, present minimal credit risks. A Fund's investment
adviser will monitor periodically the creditworthiness of issuers of such
obligations held by a Fund. A Fund's ability to exercise a put will depend on
the ability of the broker-dealer or bank to pay for the underlying securities
at the time the put is exercised. In the event that a broker-dealer should
default on its obligation to purchase an underlying security, a Fund might be
unable to recover all or a portion of any loss sustained from having to sell
the security elsewhere. Each Fund intends to enter into put transactions
solely to maintain portfolio liquidity and does not intend to exercise its
rights thereunder for trading purposes.
Options and Futures. The Funds may engage in options and futures transactions.
Options and futures transactions are intended to enable a Fund to manage
market or interest rate risk. The Funds do not use these transactions for
speculation or leverage.
The Funds may attempt to hedge all or a portion of their portfolios
through the purchase of both put and call options on their portfolio
securities and listed put options on financial futures contracts for portfolio
securities. The Funds may also write covered call options on their portfolio
securities to attempt to increase their current income. The Funds will
maintain their positions in securities, option rights, and segregated cash
subject to puts and calls until the options are exercised, closed, or have
expired. An option position may be closed out only on an exchange which
provides a secondary market for an option of the same series.
The Funds may write (i.e., sell) covered call and put options. By writing
a call option, a Fund becomes obligated during the term of the option to
deliver the securities underlying the option upon payment of the exercise
price. By writing a put option, a Fund becomes obligated during the term of
the option to purchase the securities underlying the option at the exercise
price if the option is exercised. The Funds also may write straddles
(combinations of covered puts and calls on the same underlying security). The
Funds may only write "covered" options. This means that so long as a Fund is
obligated as the writer of a call option, it will own the underlying
securities subject to the option or, in the case of call options on U.S.
Treasury bills, a Fund might own substantially similar U.S. Treasury bills. A
Fund will be considered "covered" with respect to a put option it writes if,
so long as it is obligated as the writer of the put option, it deposits and
maintains with its custodian in a segregated account liquid assets having a
value equal to or greater than the exercise price of the option.
The principal reason for writing call or put options is to obtain,
through a receipt of premiums, a greater current return than would be realized
on the underlying securities alone. The Funds receive a premium from writing a
call or put option which they retain whether or not the option is exercised.
By writing a call option, the Funds might lose the potential for gain on the
underlying security while the option is open, and by writing a put option the
Funds might become obligated to purchase the underlying securities for more
than their current market price upon exercise.
A futures contract is a firm commitment by two parties: the seller, who
agrees to make delivery of the specific type of instrument called for in the
contract ("going short"), and the buyer, who agrees to take delivery of the
instrument ("going long") at a certain time in the future. Financial futures
contracts call for the delivery of particular debt instruments issued or
guaranteed by the U.S. Treasury or by specified agencies or instrumentalities
of the U.S. government. If a Fund enters into financial futures contracts
directly to hedge its holdings of fixed income securities, it would enter into
contracts to deliver securities at an undetermined price (i.e., "go short") to
protect itself against the possibility that the prices of its fixed income
securities may decline during a Fund's anticipated holding period. A Fund
would "go long" (agree to purchase securities in the future at a predetermined
price) to hedge against a decline in market interest rates.
The Funds may also enter into financial futures contracts and write
options on such contracts. The Funds intend to enter into such contracts and
related options for hedging purposes. The Funds will enter into futures on
securities or index-based futures contracts in order to hedge against changes
in interest rates or securities prices. A futures contract on securities is an
agreement to buy or sell securities during a designated month at whatever
price exists at that time. A futures contract on a securities index does not
involve the actual delivery of securities,
19
<PAGE>
but merely requires the payment of a cash settlement based on changes in the
securities index. The Funds do not make payment or deliver securities upon
entering into a futures contract. Instead, they put down a margin deposit,
which is adjusted to reflect changes in the value of the contract and which
remains in effect until the contract is terminated.
The Funds may sell or purchase other financial futures contracts. When a
futures contract is sold by a Fund, the profit on the contract will tend to
rise when the value of the underlying securities declines and to fall when the
value of such securities increases. Thus, the Funds sell futures contracts in
order to offset a possible decline in the profit on their securities. If a
futures contract is purchased by a Fund, the value of the contract will tend
to rise when the value of the underlying securities increases and to fall when
the value of such securities declines.
The Funds may enter into closing purchase and sale transactions in order
to terminate a futures contract and may buy or sell put and call options for
the purpose of closing out their options positions. 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, in which case it would continue to bear market risk on
the transaction.
Risk Characteristics of Options and Futures. Although options and futures
transactions are intended to enable the Funds to manage market or interest
rate risks, these investment devices can be highly volatile, and the Funds'
use of them can result in poorer performance (i.e., the Funds' return may be
reduced). The Funds' attempt to use such investment devices for hedging
purposes may not be successful. Successful futures strategies require the
ability to predict future movements in securities prices, interest rates and
other economic factors. When the Funds use financial futures contracts and
options on financial futures contracts as hedging devices, there is a risk
that the prices of the securities subject to the financial futures contracts
and options on financial futures contracts may not correlate perfectly with
the prices of the securities in the Funds' portfolios. This may cause the
financial futures contracts and any related options to react to market changes
differently than the portfolio securities. In addition, a Fund's investment
adviser could be incorrect in its expectations and forecasts about the
direction or extent of market factors, such as interest rates, securities
price movements, and other economic factors. Even if a Fund's investment
adviser correctly predicts interest rate movements, a hedge could be
unsuccessful if changes in the value of a Fund's futures position did not
correspond to changes in the value of its investments. In these events, a Fund
may lose money on the financial futures contracts or the options on financial
futures contracts. It is not certain that a secondary market for positions in
financial futures contracts or for options on financial futures contracts will
exist at all times. Although a Fund's investment adviser will consider
liquidity before entering into financial futures contracts or options on
financial futures contracts transactions, there is no assurance that a liquid
secondary market on an exchange will exist for any particular financial
futures contract or option on a financial futures contract at any particular
time. A Fund's ability to establish and close out financial futures contracts
and options on financial futures contract positions depends on this secondary
market. If a Fund is unable to close out its position due to disruptions in
the market or lack of liquidity, the Fund may lose money on the futures
contract or option, and the losses to the Fund could be significant.
Derivatives. Derivatives are financial contracts whose value is based on an
underlying asset, such as a stock or a bond, or an underlying economic factor,
such as an index or an interest rate.
The Funds may invest in derivatives only if the expected risks and
rewards are consistent with their investment objectives and policies.
Losses from derivatives can sometimes be substantial. This is true partly
because small price movements in the underlying asset can result in immediate
and substantial gains or losses in the value of the derivative. Derivatives
can also cause a Fund to lose money if the Fund fails to correctly predict the
direction in which the underlying asset or economic factor will move.
Other Investment Restrictions. Each Fund has adopted additional investment
restrictions that are set forth in the SAI.
20
<PAGE>
- -------------------------------------------------------------------------------
ORGANIZATION AND SERVICE PROVIDERS
- -------------------------------------------------------------------------------
ORGANIZATION
Fund Structure. Each Fund is an investment pool, which invests shareholders'
money towards a specified goal. In technical terms, each Fund is a non-
diversified series of an open-end, management investment company called
Evergreen Municipal Trust (the "Trust"). The Trust is a Delaware business
trust organized on September 18, 1997.
Board of Trustees. The Trust is supervised by a Board of Trustees that is
responsible for representing the interests of shareholders. The Trustees meet
periodically throughout the year to oversee the Funds' activities, reviewing,
among other things, each Fund's performance and its contractual arrangements
with various service providers.
Shareholder Rights. All shareholders have equal voting, liquidation and other
rights. Each share is entitled to one vote for each dollar of net asset value
applicable to such share. Shareholders may exchange shares as described under
"Exchanges," but will have no other preference, conversion, exchange or
preemptive rights. When issued and paid for, shares will be fully paid and
nonassessable. Shares of the Funds are redeemable, transferable and freely
assignable as collateral. The Trust may establish additional classes or series
of shares.
The Funds do not hold annual shareholder meetings; a Fund may, however,
hold special meetings for such purposes as electing or removing Trustees,
changing fundamental policies and approving investment advisory agreements or
12b-1 plans. In addition, a Fund is prepared to assist shareholders in
communicating with one another for the purpose of convening a meeting to elect
Trustees.
SERVICE PROVIDERS
Investment Advisers. The investment adviser to EVERGREEN CALIFORNIA TAX FREE
FUND, EVERGREEN MASSACHUSETTS TAX FREE FUND, EVERGREEN MISSOURI TAX FREE FUND,
EVERGREEN NEW YORK TAX FREE FUND and EVERGREEN PENNSYLVANIA TAX FREE FUND is
Keystone Investment Management Company ("Keystone"), a subsidiary of First
Union National Bank ("FUNB") which is a subsidiary of First Union Corporation
("First Union"). Keystone has provided investment advisory and management
services to investment companies and private accounts since 1932. Keystone is
located at 200 Berkeley Street, Boston, Massachusetts 02116-5034. FUNB is
located at 201 South College Street, and First Union is located at 301 South
College Street, Charlotte, North Carolina 28288-0630. First Union and its
subsidiaries provide a broad range of financial services to individuals and
businesses throughout the U.S.
EVERGREEN CALIFORNIA TAX FREE FUND, EVERGREEN MASSACHUSETTS TAX FREE
FUND, EVERGREEN MISSOURI TAX FREE FUND, EVERGREEN NEW YORK TAX FREE FUND and
EVERGREEN PENNSYLVANIA TAX FREE FUND pay Keystone an annual fee for its
services as set forth below:
<TABLE>
<CAPTION>
AGGREGATE NET
ASSET VALUE
OF SHARES OF THE
MANAGEMENT FEE FUND
-------------- ------------------
<S> <C>
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
</TABLE>
computed as of the close of business on each business day.
The investment adviser to EVERGREEN CONNECTICUT MUNICIPAL BOND FUND and
EVERGREEN NEW JERSEY TAX FREE INCOME FUND is the Capital Management Group
("CMG") of FUNB.
EVERGREEN CONNECTICUT MUNICIPAL BOND FUND pays FUNB an annual fee for its
services equal to 0.60% of average daily net assets. FUNB has voluntarily
agreed to reduce or waive a portion of its fee equal to 0.10%, resulting in a
net advisory fee of 0.50%. FUNB may change or stop this waiver at any time.
21
<PAGE>
EVERGREEN NEW JERSEY TAX FREE INCOME FUND pays FUNB an annual fee for its
services as set forth below:
<TABLE>
<CAPTION>
AGGREGATE NET ASSET
VALUE OF SHARES
MANAGEMENT FEE OF THE FUND
-------------- --------------------
<S> <C>
0.50 of 1% of the first $ 500,000,000, plus
0.45 of 1% of the next $ 500,000,000, plus
0.40 of 1% of amounts over $1,000,000,000, plus
0.35 of 1% of amounts over $1,500,000,000
</TABLE>
computed as of the close of business on each business day.
The total expenses as a percentage of average daily net assets on an
annual basis of the Funds for the fiscal year or period ended March 31, 1998,
are set forth in the sections entitled "Expense Information" and "Financial
Highlights." Such expenses reflect all voluntary advisory fee waivers and
expense reimbursements, which may be revised or terminated at any time.
Portfolio Managers. George J. Kimball is responsible for the day-to-day
management of EVERGREEN CALIFORNIA TAX FREE FUND, EVERGREEN MASSACHUSETTS TAX
FREE FUND, EVERGREEN MISSOURI TAX FREE FUND and EVERGREEN NEW YORK TAX FREE
FUND. Mr. Kimball has been employed by Keystone or one of its affiliates since
1991, and was an Analyst prior to becoming a Vice President and Portfolio
Manager. He has more than 10 years of investment experience.
Jocelyn Turner is the Portfolio Manager for the EVERGREEN PENNSYLVANIA
TAX FREE FUND, EVERGREEN CONNECTICUT MUNICIPAL BOND FUND AND EVERGREEN NEW
JERSEY TAX FREE INCOME FUND. Since joining First Union in 1992, Ms. Turner has
been a Vice President and Municipal Bond Portfolio Manager for CMG. Ms. Turner
was previously employed as a Vice President and Municipal Bond Portfolio
Manager at One Federal Asset Management, Boston, Massachusetts from 1987-1991.
Transfer Agent and Dividend Disbursing Agent. Evergreen Service Company
("ESC"), 200 Berkeley Street, Boston, Massachusetts 02116-5034, acts as the
Funds' transfer agent and dividend disbursing agent. ESC is an indirect,
wholly-owned subsidiary of First Union.
Custodian. State Street Bank and Trust Company, P.O. Box 9021, Boston,
Massachusetts 02205-9827, acts as the Funds' custodian.
Principal Underwriter. Evergreen Distributor, Inc. ("EDI"), a subsidiary of
The BISYS Group, Inc., located at 125 West 55th Street, New York, New York
10019, is the principal underwriter of the Funds. EDI is not affiliated with
First Union.
Administrator. Evergreen Investment Services, Inc. ("EIS"), 200 Berkeley
Street, Boston, Massachusetts 02116-5034, serves as administrator to EVERGREEN
CONNECTICUT MUNICIPAL BOND FUND and EVERGREEN NEW JERSEY TAX FREE INCOME FUND.
As administrator, and subject to the supervision and control of the Trust's
Board of Trustees, EIS provides the Funds with facilities, equipment and
personnel. For its services as administrator, EIS is entitled to receive a fee
based on the aggregate average daily net assets of the Funds at a rate based
on the total assets of all mutual funds advised by First Union subsidiaries
and administered by EIS. The administration fee is calculated in accordance
with the following schedule.
<TABLE>
<CAPTION>
ADMINISTRATION FEE
------------------
<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, and
0.010% on assets in excess of $30 billion
</TABLE>
EIS also provides facilities, equipment and personnel to all of the Funds
on behalf of the investment advisers and is reimbursed by the Funds for its
services.
DISTRIBUTION PLANS AND AGREEMENTS
Distribution Plans. Each Fund's Class A, Class B and, where applicable, Class
C shares pay for the expenses associated with the distribution of such shares
according to distribution plans adopted pursuant to Rule 12b-1 under the
Investment Company Act of 1940 (the "1940 Act") (each a "Plan" or collectively
the "Plans"). Under the Plans, each Fund may incur distribution-related and
shareholder servicing-related expenses which are based
22
<PAGE>
upon a maximum annual rate as a percentage of each Fund's average daily net
assets attributable to a class, as follows:
<TABLE>
<S> <C>
Class A shares 0.75% (currently limited to 0.25%)
Class B shares 1.00%
Class C shares 1.00%
Of the amount that each class may pay under its respective Plan, up to
0.25% may constitute a service fee to be used to compensate organizations,
which may include a Fund's investment adviser or its affiliates, for personal
services rendered to shareholders and/or the maintenance of shareholder
accounts. The Funds may not pay any distribution or service fees during any
fiscal period in excess of the amounts set forth above. Amounts paid under the
Plans are used to compensate the Funds' distributor pursuant to the
Distribution Agreements entered into by each Fund.
Distribution Agreements. Each Fund has also entered into distribution
agreements (each a "Distribution Agreement" or collectively the "Distribution
Agreements") with EDI. Pursuant to the Distribution Agreements, each Fund will
compensate EDI for its services as distributor based upon the maximum annual
rate as a percentage of each Fund's average daily net assets attributable to
the class, as follows:
Class A shares 0.25%
Class B shares 1.00%
Class C shares 1.00%
</TABLE>
The Distribution Agreements provide that EDI will use the distribution
fee received from each Fund for payments (1) to compensate broker-dealers or
other persons for distributing shares of a Fund, including interest and
principal payments made in respect of amounts paid to broker-dealers or other
persons that have been financed (EDI may assign its rights to receive
compensation under the Plans to secure such financings), (2) to otherwise
promote the sale of shares of a Fund, and (3) to compensate broker-dealers,
depository institutions and other financial intermediaries for providing
administrative, accounting and other services with respect to a Fund's
shareholders. FUNB or its affiliates may finance the payments made by EDI to
compensate broker-dealers or other persons for distributing shares of a Fund.
In the event a Fund acquires the assets of other mutual funds,
compensation paid to EDI under the Distribution Agreements may be paid by EDI
to the distributors of the acquired funds or their predecessors.
Since EDI's compensation under the Distribution Agreements is not
directly tied to the expenses incurred by EDI, the amount of compensation
received by EDI under the Distribution Agreements during any year may be more
or less than its actual expenses and may result in a profit to EDI.
Distribution expenses incurred by EDI in one fiscal year that exceed the level
of compensation paid to EDI for that year may be paid from distribution fees
received from a Fund in subsequent fiscal years.
- -------------------------------------------------------------------------------
PURCHASE AND REDEMPTION OF SHARES
- -------------------------------------------------------------------------------
HOW TO BUY SHARES
You may purchase shares of the Funds through broker-dealers, banks or
other financial intermediaries, or directly through EDI. In addition, you may
purchase shares of a Fund by mailing to that Fund, c/o ESC, P.O. Box 2121,
Boston, Massachusetts 02106-2121, a completed application and a check payable
to the applicable Fund. You may also telephone 1-800-343-2898 to obtain the
number of an account to which you can wire or electronically transfer funds
and then send in a completed application. Subsequent investments in any amount
may be made by check, by wiring federal funds, by direct deposit or by an
electronic funds transfer.
The minimum initial investment is $1,000, which may be waived in certain
situations. There is no minimum amount for subsequent investments. Investments
of $25 or more are allowed under the Systematic Investment Plan. See the
application for more information.
23
<PAGE>
Class A Shares--Front-End Sales Charge Alternative. You may purchase Class A
shares at net asset value plus an initial sales charge on purchases under
$1,000,000. You may purchase $1,000,000 or more of Class A shares without a
front-end sales charge; however, a contingent deferred sales charge ("CDSC")
equal to the lesser of 1% of the purchase price or the redemption value will
be imposed on shares redeemed during the month of purchase and the 12-month
period following the month of purchase. The schedule of charges for Class A
shares is as follows:
INITIAL SALES CHARGE
<TABLE>
<CAPTION>
AS A % OF THE NET AS A % OF THE COMMISSION TO DEALER/AGENT
AMOUNT OF PURCHASE AMOUNT INVESTED OFFERING PRICE AS A % OF OFFERING PRICE
------------------ ----------------- -------------- --------------------------
<S> <C> <C> <C>
Less than
$50,000 4.99% 4.75% 4.25%
$ 50,000--
$ 99,999 4.71% 4.50% 4.25%
$100,000--
$249,999 3.90% 3.75% 3.25%
$250,000--
$499,999 2.56% 2.50% 2.00%
$500,000--
$999,999 2.04% 2.00% 1.75%
</TABLE>
No front-end sales charges are imposed on Class A shares purchased 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; (e) shareholders of record on
October 12, 1990 in any series of Evergreen Investment Trust in existence on
that date, and the members of their immediate families; (f) current and
retired employees of FUNB and its affiliates, EDI and any broker-dealer with
whom EDI has entered into an agreement to sell shares of the Funds, and
members of the immediate families of such employees; (g) upon the initial
purchase of an Evergreen fund by investors reinvesting the proceeds from a
redemption within the preceding 30 days of shares of other mutual funds,
provided such shares were initially purchased with a front-end sales charge or
subject to a CDSC, and (h) all qualified plan customers holding Evergreen
Class Y shares in connection with a rollover into an individual retirement
account. Certain broker-dealers or other financial institutions may impose a
fee on transactions in shares of the Funds.
Class A shares may also be purchased at net asset value by corporate or
certain other qualified retirement plans or a non-qualified deferred
compensation, plan or a Title I tax sheltered annuity or TSA plan sponsored by
an organization having 100 or more eligible employees, or a TSA plan sponsored
by a public education entity having 5,000 or more eligible employees.
In connection with sales made to plans of the type described in the
preceding sentence, EDI will pay broker-dealers and others concessions at the
rate of 0.50% of the net asset value of the shares purchased. These payments
are subject to reclaim in the event the shares are redeemed within 12 months
after purchase.
When Class A shares are sold, EDI will normally retain a portion of the
applicable sales charge and pay the balance to the broker-dealer or other
financial intermediary through whom the sale was made. EDI may also pay fees
to banks from sales charges for services performed on behalf of the customers
of such banks in connection with the purchase of shares of a Fund. In addition
to compensation paid at the time of sale, entities whose clients have
purchased Class A shares may receive a service fee equal to 0.25% of the
average daily net asset value on an annual basis of Class A shares held by
their clients. Certain purchases of Class A shares may qualify for reduced
sales charges in accordance with a Fund's Concurrent Purchases, Rights of
Accumulation, Letters of Intent, certain Retirement Plans and Reinstatement
Privilege. Consult the application for additional information concerning these
reduced sales charges.
Class B Shares--Deferred Sales Charge Alternative. You may purchase Class B
shares at net asset value without an initial sales charge. However, you may
pay a CDSC if you redeem shares within six years after the month of purchase.
The amount of the CDSC (expressed as a percentage of the lesser of the current
net asset value or original cost) will vary according to the number of years
from the month of purchase of Class B shares as set forth below.
24
<PAGE>
<TABLE>
<CAPTION>
CDSC
REDEMPTION TIMING IMPOSED
- ----------------- -------
<S> <C>
Month of purchase and the first twelve-month period following the
month of purchase. 5.00%
Second twelve-month period following the month of purchase. 4.00%
Third twelve-month period following the month of purchase. 3.00%
Fourth twelve-month period following the month of purchase. 3.00%
Fifth twelve-month period following the month of purchase. 2.00%
Sixth twelve-month period following the month of purchase. 1.00%
</TABLE>
No CDSC is imposed on amounts redeemed thereafter.
The CDSC is deducted from the amount of the redemption and is paid to
EDI. In the event a Fund acquires the assets of other mutual funds, the CDSC
may be paid by EDI to the distributors of the acquired funds. Class B shares
are subject to higher distribution and/or shareholder service fees than Class
A shares for a period of seven years after the month of purchase (after which
it is expected that they will convert to Class A shares without imposition of
a front-end sales charge). 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. The Funds will not normally accept any
purchase of Class B shares in the amount of $250,000 or more.
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
the higher distribution services 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 service fee
paid by holders of Class B shares that have been outstanding long enough for
EDI to have been compensated for the expenses associated with the sale of such
shares.
The CDSC on Class B shares is waived on redemptions of shares of certain
employer-sponsored retirement or savings plans, including eligible 401(k)
plans.
Class C Shares -- Level-Load Alternative. (EVERGREEN CALIFORNIA TAX FREE FUND,
EVERGREEN MASSACHUSETTS TAX FREE FUND, EVERGREEN MISSOURI TAX FREE FUND,
EVERGREEN NEW YORK TAX FREE FUND and EVERGREEN PENNSYLVANIA TAX FREE FUND
only). Class C shares are only offered through broker-dealers who have special
distribution agreements with EDI. You may purchase Class C shares at net asset
value without any initial sales charge and, therefore, the full amount of your
investment will be used to purchase Fund shares. However, you will pay a 1.00%
CDSC if you redeem shares 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/or shareholder
service fees than Class A shares but, unlike Class B shares, do not convert to
any other class of shares of the Fund. The higher fees mean a higher expense
ratio, so Class C shares pay correspondingly lower dividends and may have a
lower net asset value than Class A shares. A Fund will not normally accept any
purchase of Class C shares in the amount of $500,000 or more. No CDSC will be
imposed on Class C shares purchased by institutional investors and through
employee benefit and savings plans eligible for the exemption from front-end
sales charges described under "Class A Shares -- Front-End Sales Charge
Alternative" above. Broker-dealers and other financial intermediaries whose
clients have purchased Class C shares may receive a trailing commission equal
to 0.75% of the average daily net asset value of such shares on an annual
basis held by their clients more than one year from the date of purchase.
Service fees will commence immediately with respect to shares eligible for
exemption from the CDSC normally applicable to Class C shares.
Contingent Deferred Sales Charge. Certain shares with respect to which a Fund
did not pay a commission on issuance, including shares obtained from dividend
or distribution reinvestment, are not subject to a CDSC. 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 asset
value at the time of purchase of such shares.
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
401(k) plan or other 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 accounts having an aggregate net asset value of less than
$1,000; (5) automatic withdrawals under the Systematic Withdrawal Plan of up
to 1.00% 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.
25
<PAGE>
The Funds may also sell Class A, Class B or, where applicable, Class C
shares at net asset value without any initial sales charge or a CDSC to
certain Directors, Trustees, officers and employees of the Funds, Keystone,
FUNB, Evergreen Asset Management Corp. ("Evergreen Asset"), EDI and certain of
their affiliates, and to members of the immediate families of such persons, to
registered representatives of firms with dealer agreements with EDI, and to a
bank or trust company acting as a trustee for a single account.
How the Funds Value Their Shares. The net asset value of each class of shares
of a Fund is calculated by dividing the value of the amount of the Fund's net
assets attributable to that class by the outstanding shares of that class.
Shares are valued each day the New York Stock Exchange (the "Exchange") is
open as of the close of regular trading (currently 4:00 p.m. eastern time).
The Exchange is closed on New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. The securities in a Fund are valued at
their current market values determined on the basis of market quotations or,
if such quotations are not readily available, such other methods as the
Trustees believe would accurately reflect fair value.
General. The decision as to which class of shares is more beneficial to you
depends on the amount of your investment and the length of time you will hold
it. If you are making a large investment, thus qualifying for a reduced sales
charge, you might consider Class A shares. If you are making a smaller
investment, you might consider Class B shares since 100% of your purchase is
invested immediately and since such shares will convert to Class A shares,
which incur lower ongoing distribution and/or shareholder service fees, after
seven years. If you are unsure of the time period of your investment, you
might consider Class C shares since there are no initial sales charges and,
although there is no conversion feature, the CDSC only applies to redemptions
made during the first year after the month of purchase. Consult your financial
intermediary for further information. The compensation received by broker-
dealers and agents may differ depending on whether they sell Class A, Class B
or Class C shares. There is no size limit on purchases of Class A shares.
In addition to the discount or commission paid to broker-dealers, EDI may
from time to time pay to broker-dealers additional cash or other incentives
that are conditioned upon the sale of a specified minimum dollar amount of
shares of a Fund and/or other Evergreen funds. Such incentives will take the
form of payment for attendance at seminars, lunches, dinners, sporting events
or theater performances, or payment for travel, lodging and entertainment
incurred in connection with travel by persons associated with a broker-dealer
and their immediate family members to urban or resort locations within or
outside the U.S. Such a dealer may elect to receive cash incentives of
equivalent amount in lieu of such payments. EDI may also limit the
availability of such incentives to certain specified dealers. EDI from time to
time sponsors promotions involving First Union Brokerage Services, Inc., an
affiliate of each Fund's investment adviser, and select broker-dealers,
pursuant to which incentives are paid, including gift certificates and
payments in amounts up to 1% of the dollar amount of shares of a Fund sold.
Awards may also be made based on the opening of a minimum number of accounts.
Such promotions are not being made available to all broker-dealers. Certain
broker-dealers may also receive payments from EDI or a Fund's investment
adviser over and above the usual trail commissions or shareholder servicing
payments applicable to a given class of shares.
Additional Purchase Information. As a condition of this offering, if a
purchase is canceled due to nonpayment or because an investor's check does not
clear, the investor will be responsible for any loss a Fund or its investment
adviser incurs. If such investor is an existing shareholder, a Fund may redeem
shares from an investor's account to reimburse the Fund or its investment
adviser for any loss. In addition, such investors may be prohibited or
restricted from making further purchases in any of the Evergreen funds. A Fund
will not accept third party checks other than those payable directly to a
shareholder whose account has been in existence at least 30 days.
HOW TO REDEEM SHARES
You may redeem (i.e., sell) your shares in a Fund to the Fund for cash at
the net redemption value on any day the Exchange is open, either directly by
writing to the Fund, c/o ESC, or through your financial intermediary. The
amount you will receive is the net asset value adjusted for fractions of a
cent (less any applicable CDSC) next calculated after the Fund receives your
request in proper form. Proceeds generally will be sent to you within seven
days. However, for shares recently purchased by check, the Fund will not send
proceeds until it is reasonably satisfied that the check has been collected
(which may take up to 15 days). Once a redemption request has been telephoned
or mailed, it is irrevocable and may not be modified or canceled.
Redeeming Shares Through Your Financial Intermediary. A Fund must receive
instructions from your financial intermediary before 4:00 p.m. (eastern time)
for you to receive that day's net asset value (less any applicable
26
<PAGE>
CDSC). Your financial intermediary is responsible for furnishing all necessary
documentation to the Fund and may charge you for this service. Certain
financial intermediaries may require that you give instructions earlier than
4:00 p.m. (eastern time).
Redeeming Shares Directly by Mail or Telephone. You may redeem by mail by
sending a signed letter of instruction or stock power form to a Fund, c/o ESC
(the registrar, transfer agent and dividend-disbursing agent for the Funds.)
Stock power forms are available from your financial intermediary, ESC, and
many commercial banks. Additional documentation is required for the sale of
shares by corporations, financial intermediaries, fiduciaries and surviving
joint owners. Signature guarantees are required for all redemption requests
for shares with a value of more than $50,000. Currently, the requirement for a
signature guarantee has been waived on redemptions of $50,000 or less when the
account address of record has been the same for a minimum period of 30 days.
The Funds and ESC reserve the right to withdraw this waiver at any time. A
signature guarantee must be provided by a bank or trust company (not a Notary
Public), a member firm of a domestic stock exchange or by other financial
institutions whose guarantees are acceptable under the Securities Exchange Act
of 1934 and ESC's policies.
Shareholders may redeem amounts of $1,000 or more (up to $50,000) from
their accounts by calling the telephone number on the front page of this
prospectus between the hours of 8:00 a.m. and 6:00 p.m. (eastern time) each
business day (i.e., any weekday exclusive of days on which the Exchange or
ESC's offices are closed). Redemption requests received after 4:00 p.m.
(eastern time) will be processed using the net asset value determined on the
next business day. Such redemption requests must include the shareholder's
account name, as registered with a Fund, and the account number. During
periods of drastic economic or market changes, shareholders may experience
difficulty in effecting telephone redemptions. If you cannot reach a Fund by
telephone, you should follow the procedures for redeeming by mail or through a
broker-dealer as set forth herein. The telephone redemption service is not
made available to shareholders automatically. Shareholders wishing to use the
telephone redemption service must complete the appropriate sections on the
application and choose how the redemption proceeds are to be paid. Redemption
proceeds will either (i) be mailed by check to the shareholder at the address
in which the account is registered or (ii) be wired to an account with the
same registration as the shareholder's account in the Fund at a designated
commercial bank.
In order to insure that instructions received by ESC are genuine when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation
of your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if
the address and bank account of record have been the same for a minimum period
of 30 days. A Fund reserves the right at any time to terminate, suspend, or
change the terms of any redemption method described in this prospectus, except
redemption by mail, and to impose fees.
Except as otherwise noted, the Funds, ESC, and EDI will not assume
responsibility for the authenticity of any instructions received by any of
them from a shareholder in writing, over the Evergreen Express Line (described
below), or by telephone. ESC will employ reasonable procedures to confirm that
instructions received over the Evergreen Express Line or by telephone are
genuine. The Funds, ESC, and EDI will not be liable when following
instructions received over the Evergreen Express Line or by telephone that ESC
reasonably believes are genuine.
Evergreen Express Line. The Evergreen Express Line offers you specific fund
account information and price and yield quotations as well as the ability to
do account transactions, including investments, exchanges and redemptions. You
may access the Evergreen Express Line by dialing toll free 1-800-346-3858 on
any touch-tone telephone, 24 hours a day, seven days a week.
General. The sale of shares is a taxable transaction for federal income tax
purposes. The Funds may temporarily suspend the right to redeem shares when
(1) the Exchange is closed, other than customary weekend and holiday closings;
(2) trading on the Exchange is restricted; (3) an emergency exists and the
Funds cannot dispose of their investments or fairly determine their value; or
(4) the SEC so orders. The Funds reserve the right to close an account that
through redemption has fallen below $1,000 and has remained so for 30 days.
Shareholders will receive 60 days' written notice to increase the account
value to at least $1,000 before the account is closed. The Funds have elected
to be governed by Rule 18f-1 under the 1940 Act pursuant to which each Fund is
obligated to redeem shares solely in cash, up to the lesser of $250,000 or 1%
of a Fund's total net assets, during any 90-day period for any one
shareholder.
EXCHANGE PRIVILEGE
How to Exchange Shares. You may exchange some or all of your shares for shares
of the same class in other Evergreen funds through your financial
intermediary, by calling or writing to ESC, or by using the Evergreen Express
Line as described above. If the shares being tendered for exchange are still
subject to a CDSC or are
27
<PAGE>
eligible for conversion in a specified time, such remaining charge or
remaining time will carry over to the shares being acquired in the exchange
transaction. Once an exchange request has been telephoned or mailed, it is
irrevocable and may not be modified or canceled. Exchanges will be made on the
basis of the relative net asset values of the shares exchanged next determined
after an exchange request is received. An exchange which represents an initial
investment in another Evergreen fund is subject to the minimum investment and
suitability requirements of the Fund.
Each of the Evergreen funds has different investment objectives and
policies. For more complete information, a prospectus of the fund into which
an exchange will be made should be read prior to the exchange. An exchange
order must comply with the requirement for a redemption or repurchase order
and must specify the dollar value or number of shares to be exchanged. An
exchange is treated for federal income tax purposes as a redemption and
purchase of shares and may result in the realization of a capital gain or
loss. Shareholders are limited to five exchanges per calendar year, with a
maximum of three per calendar quarter. This exchange privilege may be modified
or discontinued at any time by a Fund upon 60 days' notice to shareholders and
is only available in states in which shares of the fund being acquired may
lawfully be sold.
No CDSC will be imposed in the event shares are exchanged for shares of
the same class of other Evergreen funds. If you redeem shares, the CDSC
applicable to the Class B shares of the Evergreen fund originally purchased
for cash is applied. Also, Class B shares will continue to age following an
exchange for the purpose of conversion to Class A shares and for the purpose
of determining the amount of the applicable CDSC.
Exchanges Through Your Financial Intermediary. A Fund must receive exchange
instructions from your financial intermediary before 4:00 p.m. (eastern time)
for you to receive that day's net asset value. Your financial intermediary is
responsible for furnishing all necessary documentation to a Fund and may
charge you for this service.
Exchanges by Telephone and Mail. Exchange requests received by a Fund after
4:00 p.m. (eastern time) will be processed using the net asset value
determined at the close of the next business day. During periods of drastic
economic or market changes, shareholders may experience difficulty in
effecting telephone exchanges. You should follow the procedures outlined below
for exchanges by mail if you are unable to reach ESC by telephone. If you wish
to use the telephone exchange service you should indicate this on the
application. As noted above, the Funds will employ reasonable procedures to
confirm that instructions for the redemption or exchange of shares
communicated by telephone are genuine. A telephone exchange may be refused by
a Fund or ESC if it is believed advisable to do so. Procedures for exchanging
Fund shares may be modified or terminated at any time. Written requests for
exchanges should follow the same procedures outlined for written redemption
requests in the section entitled "How to Redeem Shares"; however, no signature
guarantee is required.
SHAREHOLDER SERVICES
The Funds offer the following shareholder services. For more information
about these services or your account, contact your financial intermediary, ESC
or call the toll-free number on the front page of this prospectus. Some
services are described in more detail in the application.
Systematic Investment Plan. Under a Systematic Investment Plan, you may invest
as little as $25 per month to purchase shares of a Fund with no minimum
initial investment required.
Telephone Investment Plan. You may make investments into an existing account
electronically in amounts of not less than $100 or more than $10,000 per
investment. Telephone investment requests received by 4:00 p.m. (eastern time)
will be credited to a shareholder's account the day the request is received.
Systematic Withdrawal Plan. When an account of $10,000 or more is opened or
when an existing account reaches that size, you may participate in the
Systematic Withdrawal Plan (the "Withdrawal Plan") by filling out the
appropriate part of the application. Under this Withdrawal Plan, you may
receive (or designate a third party to receive) a monthly or quarterly fixed-
withdrawal payment in a stated amount of at least $75 and as much as 1.0% per
month or 3.0% per quarter of the total net asset value of the Fund shares in
your account when the Withdrawal Plan was opened. Fund shares will be redeemed
as necessary to meet withdrawal payments. All participants must elect to have
their dividends and capital gains distributions reinvested automatically.
Investments Through Employee Benefit and Savings Plans. Certain qualified and
non-qualified employee benefit and savings plans may make shares of the Funds
and other Evergreen funds available to their participants. Investments made by
such employee benefit plans may be exempt from front-end sales charges if
28
<PAGE>
they meet the criteria set forth under "Class A Shares--Front-End Sales Charge
Alternative." Keystone or FUNB may provide compensation to organizations
providing administrative and recordkeeping services to plans which make shares
of the Evergreen funds available to their participants.
Automatic Reinvestment Plan. For the convenience of investors, all dividends
and distributions are automatically reinvested in full and fractional shares
of a Fund at the net asset value per share at the close of business on the
record date, unless otherwise requested by a shareholder in writing. If the
transfer agent does not receive a written request for subsequent dividends
and/or distributions to be paid in cash at least three full business days
prior to a given record date, the dividends and/or distributions to be paid to
a shareholder will be reinvested.
Dollar Cost Averaging. Through dollar cost averaging you can invest a fixed
dollar amount each month or each quarter in any Evergreen fund. This results
in more shares being purchased when the selected fund's net asset value is
relatively low and fewer shares being purchased when the fund's net asset
value is relatively high and may result in a lower average cost per share than
a less systematic investment approach.
Prior to participating in dollar cost averaging, you must establish an
account in an Evergreen fund. You should designate on the application (1) the
dollar amount of each monthly or quarterly investment you wish to make and (2)
the fund in which the investment is to be made. Thereafter, on the first day
of the designated month, an amount equal to the specified monthly or quarterly
investment will automatically be redeemed from your initial account and
invested in shares of the designated fund.
Two Dimensional Investing. You may elect to have income and capital gains
distributions from any class of Evergreen fund shares you may own
automatically invested to purchase the same class of shares of any other
Evergreen fund. You may select this service on your application and indicate
the Evergreen fund(s) into which distributions are to be invested.
Tax Sheltered Retirement Plans. The Funds have various retirement plans
available to eligible investors, including Individual Retirement Accounts
(IRAs); Rollover IRAs; Simplified Employee Pension Plans (SEPs); Salary
Incentive Match Plan for Employees (SIMPLEs); Tax Sheltered Annuity Plans;
403(b)(7) Plans; 401(k) Plans; Keogh Plans; Profit-Sharing Plans; Medical
Savings Accounts; Pension and Target Benefit and Money Purchase Plans. For
details, including fees and application forms, call toll free 1-800-247-4075
or write to ESC.
BANKING LAWS
The Glass-Steagall Act and other banking laws and regulations presently
prohibit member banks of the Federal Reserve System ("Member Banks") or their
non-bank affiliates from sponsoring, organizing, controlling, or distributing
the shares of registered open-end investment companies such as the Funds. Such
laws and regulations also prohibit banks from issuing, underwriting or
distributing securities in general. However, under the Glass-Steagall Act and
such other laws and regulations, a Member Bank or an affiliate thereof may act
as investment adviser, transfer agent or custodian to a registered open-end
investment company and may also act as agent in connection with the purchase
of shares of such an investment company upon the order of its customer. FUNB
and its affiliates are subject to and in compliance with the aforementioned
laws and regulations.
Changes to applicable laws and regulations or future judicial or
administrative decisions could result in FUNB and its affiliates being
prevented from continuing to perform the services required under the
investment advisory contract or from acting as agent in connection with the
purchase of shares of the Funds by their customers. If FUNB and its affiliates
were prevented from continuing to provide the services called for under the
investment advisory agreement, it is expected that the Trustees would
identify, and call upon the Funds' shareholders to approve, a new investment
adviser. If this were to occur, it is not anticipated that the shareholders of
the Funds would suffer any adverse financial consequences.
- -------------------------------------------------------------------------------
OTHER INFORMATION
- -------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
Income dividends will be declared daily and paid monthly. Distributions
of any net realized gains of the Funds will be made at least annually.
Shareholders will 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. The
Funds have qualified as regulated investment companies under the Code. While
so qualified, so long as a Fund distributes all of its investment company
taxable income and any net realized gains to shareholders, it is expected that
the Fund will not be required to pay any federal income taxes. A 4%
nondeductible excise tax will be imposed on a Fund if it does not meet certain
distribution requirements by the end of each calendar year. Each Fund
anticipates meeting such distribution requirements.
29
<PAGE>
Because Class A shares bear most of the costs of distribution of such
shares through payment of a front-end sales charge, while Class B and Class C
shares bear such expenses through a higher annual distribution fee, expenses
attributable to Class B shares and Class C shares will generally be higher
than those of Class A shares, and income distributions paid by a Fund with
respect to Class B and Class C shares, will be lower than those paid with
respect to Class A shares.
Account statements and/or checks, as appropriate, will be mailed within
seven days after a Fund pays a distribution. Unless a Fund receives
instructions to the contrary before the record or payable date, as the case
may be, it will assume that a shareholder wishes to receive that distribution
and future capital gains and income distributions in shares. Instructions
continue in effect until changed in writing.
The Funds will designate and pay exempt-interest dividends derived from
interest earned on qualifying tax-exempt obligations. Such exempt-interest
dividends may be excluded by shareholders of a Fund from their gross income
for federal income tax purposes; however (1) all or a portion of such exempt-
interest dividends may be a specific preference item for purposes of the
federal individual and corporate alternative minimum taxes to the extent that
they are derived from certain types of private activity bonds issued after
August 7, 1986, and (2) all exempt-interest dividends will be a component of
the "adjusted current earnings" for purposes of the federal corporate
alternative minimum tax.
Dividends paid from taxable income, if any, and distributions of any net
realized short-term capital gains (whether from tax-exempt or taxable
obligations) are taxable as ordinary dividend income and capital gain
dividends are taxable as net long-term capital gains, even though received in
additional shares of the Fund, and regardless of the investor's holding period
relating to the shares with respect to which such gains are distributed.
Market discount recognized on taxable and tax-exempt bonds is taxable as
ordinary income, not as excludable income. Under current law, net long-term
capital gains realized by an individual on assets held for more than 12 months
will generally be taxed at a maximum rate of 20%. The rate applicable to
corporations is 35%.
Since each Fund's gross income is ordinarily expected to be tax-exempt
interest income, it is not expected that the 70% dividends-received deduction
for corporations will be applicable. Specific questions should be addressed to
the investor's own tax adviser.
Each Fund is required by federal law to withhold 31% of reportable
payments (which may include dividends, capital gains distributions (if any)
and redemptions) paid to certain shareholders. In order to avoid this backup
withholding requirement, each investor must certify on the application, or on
a separate form supplied by the Funds' transfer agent, that the investor's
social security number or taxpayer identification number is correct and that
the investor is not currently subject to backup withholding or is exempt from
backup withholding.
A shareholder who acquires Class A shares of a Fund and sells or
otherwise disposes of such shares within 90 days of acquisition may not be
allowed to include certain sales charges incurred in acquiring such shares for
purposes of calculating gain and loss realized upon a sale or exchange of
shares of the Fund.
Set forth below are brief descriptions of the personal income tax status
of an investment in each of the Funds under California, Massachusetts,
Missouri, New York, Pennsylvania, Connecticut and New Jersey tax laws
currently in effect. Income from a Fund is not necessarily free from state
income taxes in states other than its designated state. State laws differ on
this issue, and shareholders are urged to consult their own tax advisers
regarding the status of their accounts under state and local laws.
EVERGREEN CALIFORNIA TAX FREE FUND. Dividends paid by the Fund that are
derived from interest on debt obligations that is exempt from California
personal income tax will not be subject to California personal income tax when
received by the Fund's shareholders assuming that the Fund qualifies as a
regulated investment Company ("RIC") for federal income tax purposes. The pass
through of exempt-interest dividends is allowed only if the Fund meets its
federal and California requirements that at least 50% of its total assets are
invested in such exempt obligations at the end of each quarter of its fiscal
year. Distributions to individual shareholders derived from interest on state
or municipal obligations issued by governmental authorities in states other
than California, short term capital gains and other taxable income will be
taxed as dividends for purposes of California personal income taxation. The
Fund's long term capital gains distributed to shareholders will be taxed as
long term capital gains to individual shareholders of the Fund for purposes of
California personal income taxation. Present California law taxes both long
term and short term capital gains at the rates applicable to ordinary income.
Generally, for corporate taxpayers subject to the California franchise tax,
all distributions will be fully taxable.
30
<PAGE>
EVERGREEN MASSACHUSETTS TAX FREE FUND. Under Massachusetts Law,
shareholders of the Fund who are subject to Massachusetts personal income tax
will not be subject to Massachusetts personal income tax on dividends paid by
the Fund to the extent such dividends are exempt from federal income tax and
are derived from interest payments on Massachusetts municipal securities. Long
term capital gains distributions are taxable as long term capital gains,
except that such distributions derived from the sale of certain Massachusetts
obligations are exempt from Massachusetts personal income tax. These
obligations, which are few in number, are those issued pursuant to legislation
that specifically exempts gain on their sale from Massachusetts income
taxation. Dividends and other distributions are not exempt from Massachusetts
corporate excise tax.
EVERGREEN MISSOURI TAX FREE FUND. Dividends paid by the Fund that qualify
as tax exempt dividends under Section 852(b)(5) of the Code will be exempt
from Missouri income tax to the extent that such dividends are derived from
interest on obligations issued by the State of Missouri or any of its
political subdivisions. Dividends paid by the Fund that are derived from
interest on obligations of the U.S. and its territories and possessions will
be exempt from Missouri income tax.
Dividends paid by the Fund, if any, that do not qualify as tax exempt
dividends under Section 852(b)(5) of the Code, will be exempt from Missouri
income tax only to the extent that such dividends are derived from interest on
certain U.S. obligations that the State of Missouri is expressly prohibited
from taxing under the laws of the U.S. The portion of such dividends that is
not subject to taxation by the State of Missouri may be reduced by interest,
or other expenses, in excess of $500 paid or incurred by a shareholder in any
taxable year to purchase or carry shares of the Fund or other investments
producing income that is includable in federal gross income, but exempt from
Missouri income tax.
Dividends and distributions derived from the Fund's other investment
income and its capital gains, to the extent includable in federal adjusted
gross income, will be subject to Missouri income tax. Dividends and
distributions paid by the Fund, including dividends that are exempt from
Missouri income tax as described above, may be subject to state taxes in
states other than Missouri or to local taxes. Shares in the Fund are not
subject to Missouri personal property taxes.
EVERGREEN NEW YORK TAX FREE FUND. Individual shareholders of the Fund who
are subject to New York State and New York City personal income tax will not
be subject to New York State and New York City personal income tax on
dividends paid by the Fund to the extent that they are derived from interest
on obligations of the State of New York and its political subdivisions that is
exempt from federal income tax, provided that the Fund continues to qualify as
a RIC under the Code and at the end of each quarter at least 50% of the value
of its total assets consists of obligations that are exempt from federal
income tax. In addition, dividends derived from interest on debt obligations
issued by certain other governmental entities (for example, U.S. territories)
will be similarly exempt.
For New York State and New York City personal income tax purposes, long-
term capital gain distributions are taxable as long-term capital gains
regardless of the length of time shareholders have owned their shares in the
Fund. Short-term capital gains and any other taxable distributions of income
are taxable as ordinary income. Shareholders of the Fund may not deduct
interest on indebtedness they incur or continue in order to purchase or carry
shares of the Fund for New York State or New York City personal income tax
purposes.
To the extent that investors are obligated to pay state or local taxes
outside the State of New York, dividends earned by an investment in the Fund
may represent taxable income. Distributions from investment income and capital
gains, including exempt-interest dividends, may be subject to New York State
corporate franchise taxes and to the New York City general corporation tax, if
received by a corporation subject to those taxes, to state taxes in states
other than New York and to local taxes in cities other than New York City. The
interest income that is distributed by the Fund will generally not be taxable
to the Fund for purposes of the New York State corporate franchise tax or the
New York City general corporation tax.
Evergreen Pennsylvania Tax Free Fund. Individual shareholders of the Fund
who are subject to the Pennsylvania personal income tax, as either residents
or non-residents of the Commonwealth of Pennsylvania, will not be subject to
Pennsylvania personal income tax on distributions of interest made by the Fund
that are attributable to (1) obligations issued by the Commonwealth of
Pennsylvania, any public authority, commission, board or agency created by the
Commonwealth of Pennsylvania, any political subdivision of the Commonwealth of
Pennsylvania or any public authority created by any such political subdivision
(collectively, "Pennsylvania
31
<PAGE>
Obligations"); and (2) obligations of the U.S. and certain qualifying
agencies, instrumentalities, territories and possessions of the U.S., the
interest from which are statutorily free from state taxation in the
Commonwealth of Pennsylvania under the laws of the Commonwealth or the U.S.
(collectively, "U.S. Obligations"). Distributions attributable to most other
sources will not be exempt from Pennsylvania personal income tax.
Distributions of gains attributable to Pennsylvania Obligations and U.S.
Obligations (collectively "Exempt Obligations") will be subject to the
Pennsylvania personal income tax.
Shares of the Fund that are held by individual shareholders who are
Pennsylvania residents subject to the Pennsylvania county personal property
tax will be exempt from such tax to the extent that the Fund's portfolio
consists of Exempt Obligations on the annual assessment date. Nonresidents of
the Commonwealth of Pennsylvania are not subject to the Pennsylvania county
personal property tax. Corporations are not subject to Pennsylvania personal
property taxes. For shareholders who are residents of the City of
Philadelphia, distributions of interest derived from Exempt Obligations are
not taxable for purposes of the Philadelphia School District investment income
tax provided that the Fund reports to its investors the percentage of Exempt
Obligations held by it for the year. The Fund will report such percentage to
its shareholders.
Distributions of interest, but not gains, realized on Exempt Obligations
are not subject to the Pennsylvania corporate net income tax. The Pennsylvania
Department of Revenue also takes the position that shares of funds similar to
the Fund are not considered exempt assets of a corporation for the purpose of
determining its capital stock value subject to the Commonwealth's capital
stock and franchise taxes.
EVERGREEN CONNECTICUT TAX FREE FUND. Exempt-interest dividends paid by
the Fund, to the extent such dividends are exempt from federal income tax and
are derived from interest payments on municipal securities of the State of
Connecticut and its political subdivisions, instrumentalities, state or local
authorities, districts or similar public entities created under Connecticut
law, are not subject to the Connecticut income tax on individuals, trusts and
estates. Long-term capital gain dividends are also not subject to the
Connecticut income tax to the extent derived from securities issued by such
entities. Ordinary income dividends are subject to the Connecticut income tax.
Distributions from the Fund to shareholders subject to the Connecticut
corporation business tax are included in gross income for purposes of the
corporation business tax, but a dividends received deduction may be available
for a portion thereof except to the extent such distributions constitute
exempt-interest dividends or capital gain dividends for federal income tax
purposes.
EVERGREEN NEW JERSEY TAX FREE INCOME FUND. For individual shareholders in
any year in which the Fund satisfies the requirements for treatment as a
"qualified investment fund" under New Jersey law, distributions from the Fund
will be exempt from the New Jersey Gross Income Tax to the extent such
distributions are attributable to interest or gains from (i) obligations
issued by or on behalf of the State of New Jersey or any county, municipality,
school or other district, agency, authority, commission, instrumentality,
public corporation, corporate body or political subdivision of New Jersey or
(ii) obligations that are otherwise statutorily exempt from state or local
taxation or under the laws of the United States. To be classified as a
qualified investment fund, at least 80% of the Fund's investments must consist
of such obligations. Distributions by a qualified investment fund that are
attributable to most other sources will be subject to the New Jersey gross
income tax. If the New Jersey Fund continues to qualify as a qualified
investment fund, any gain realized on the redemption or sale of its shares
will not be subject to the New Jersey gross income tax. Corporate shareholders
will be subject to a corporate franchise tax on distributions from and on
gains from sales of the shares in the Fund. The Fund shares are not subject to
property taxation by New Jersey or its political subdivisions.
Statements describing the tax status of shareholders' dividends and
distributions will be mailed annually by the Funds. These statements will set
forth the amount of income exempt from federal and if applicable, state
taxation, and the amount, if any, subject to federal and state taxation.
Moreover, to the extent necessary, these statements will indicate the amount
of exempt-interest dividends which are a specific preference item for purposes
of the federal individual and corporate alternative minimum taxes. The
exemption of interest income for federal income tax purposes does not
necessarily result in exemption under the income or other tax law of any state
or local taxing authority.
The foregoing discussion of federal and certain state income tax
consequences is based on tax laws and regulations in effect on the date of
this prospectus and is subject to change by legislative or administrative
action. As the foregoing discussion is for general information only, you
should also review the discussion of "Additional Tax Information" contained in
the SAI.
32
<PAGE>
GENERAL INFORMATION
Portfolio Turnover. The portfolio turnover rates for each Fund are set forth
under "Financial Highlights."
Portfolio Transactions. Consistent with the Conduct Rules of the National
Association of Securities Dealers, Inc., and subject to seeking best price and
execution, a Fund may consider sales of its shares as a factor in the
selection of broker-dealers to enter into portfolio transactions with the
Fund.
Other Classes of Shares. The Funds currently offer four classes of shares,
Class A and Class B, Class C and Class Y, where applicable, and may in the
future offer additional classes. Class Y shares are not offered by this
prospectus and are only available to (i) persons who at or prior to December
31, 1994, owned shares in a mutual fund advised by Evergreen Asset Management
Corporation, (ii) certain institutional investors, and (iii) investment
advisory clients of FUNB or their affiliates. The dividends payable with
respect to Class A, Class B and Class C shares will be less than those payable
with respect to Class Y shares due to the distribution and shareholder
servicing related expenses borne by Class A, Class B and Class C shares and
the fact that such expenses are not borne by Class Y shares. Investors should
telephone (800) 343-2898 to obtain more information on other classes of
shares.
Performance Information. From time to time, a Fund may quote its "total
return" or "yield" for specified periods in advertisements, reports, or other
communications to shareholders. Total return and yield are computed separately
for each class of shares. Performance data for one or more classes may be
included in any advertisement or sales literature using performance data of a
Fund. A Fund's total return for each such period is computed by finding,
through the use of a formula prescribed by the SEC, the average annual
compounded rate of return over the period that would equate an assumed initial
amount invested to the value of the investment at the end of the period. For
purposes of computing total return, dividends and capital gains distributions
paid on shares of a Fund are assumed to have been reinvested when paid and the
maximum sales charges applicable to purchases of the Fund's shares are assumed
to have been paid.
Yield is a way of showing the rate of income a Fund earns on its
investments as a percentage of the Fund's share price. A Fund's yield is
calculated according to accounting methods that are standardized by the SEC
for all stock and bond funds. Because yield accounting methods differ from the
method used for other accounting purposes, a Fund's yield may not equal its
distribution rate, the income paid to your account or the income reported in
the Fund's financial statements. To calculate yield, a Fund takes the interest
income it earned from its portfolio of investments (as defined by the SEC
formula) for a 30-day period (net of expenses), divides it by the average
number of shares entitled to receive dividends, and expresses the result as an
annualized percentage rate based on the Fund's share price at the end of the
30-day period. This yield does not reflect gains or losses from selling
securities.
Total returns are based on the overall dollar or percentage change in the
value of a hypothetical investment in a Fund. A Fund's total return shows its
overall change in value including changes in share prices and assumes all of a
Fund's distributions are reinvested. A cumulative total return reflects a
Fund's performance over a stated period of time. An average annual total
return reflects the hypothetical annually compounded return that would have
produced the same cumulative total return if a Fund's performance had been
constant over the entire period. Because average annual total returns tend to
smooth out variations in a Fund's return, you should recognize that they are
not the same as actual year-by-year results. To illustrate the components of
overall performance, the Fund may separate its cumulative and average annual
total returns into income results and realized and unrealized gain or loss.
A Fund may also quote tax-equivalent yields, which show the taxable
yields an investor would have to earn before taxes to equal the Fund's tax-
free yields. A tax-equivalent yield is calculated by dividing a Fund's tax-
exempt yield by the result of one minus a stated federal tax rate. If only a
portion of a Fund's income was tax-exempt, only that portion is adjusted in
the calculation.
Performance data may be included in any advertisement or sales literature
of a Fund. These advertisements may quote performance rankings or ratings of a
Fund by financial publications or independent organizations such as Lipper
Analytical Services, Inc. and Morningstar, Inc. or may compare a Fund's
performance to various indices. A Fund may also advertise in items of sales
literature an "actual distribution rate" which is computed by dividing the
total ordinary income distributed (which may include the excess of short-term
capital gains over losses) to shareholders for the latest 12-month period by
the maximum public offering price per share on the last day of the period.
Investors should be aware that past performance may not be indicative of
future results.
33
<PAGE>
In marketing the Funds' shares, information may be provided that is
designed to help individuals understand their investment goals and explore
various financial strategies. Such information may include publications
describing general principles of investing, such as asset allocation,
diversification, risk tolerance, and goal setting; a questionnaire designed to
help create a personal financial profile; and an action plan offering
investment alternatives. The information provided to investors may also
include discussions of other Evergreen funds, products, and services, which
may include: retirement investing; brokerage products and services; the
effects of periodic investment plans and dollar cost averaging; saving for
college; and charitable giving. In addition, the information provided to
investors may quote financial or business publications and periodicals,
including model portfolios or allocations, as they relate to fund management,
investment philosophy, and investment techniques. EDI may also reprint, and
use as advertising and sales literature, articles from Evergreen Events, a
quarterly magazine provided to Evergreen fund shareholders.
Year 2000 Risks. Like other investment companies, financial and business
organizations and individuals around the world, the Funds could be adversely
affected if the computer systems used by the Funds' investment advisers and
the Funds' other service providers do not properly process and calculate date-
related information and data from and after January 1, 2000. This is commonly
known as the "Year 2000 Problem." The Funds' investment advisers are taking
steps to address the Year 2000 Problem with respect to the computer systems
that they use and to obtain assurances that comparable steps are being taken
by the Funds' other major service providers. At this time, however, there can
be no assurance that these steps will be sufficient to avoid any adverse
impact on the Funds.
Additional Information. This prospectus and the SAI, which has been
incorporated by reference herein, do not contain all the information set forth
in the Registration Statement filed by the Trust with the SEC under the
Securities Act of 1933, as amended. Copies of the Registration Statement may
be obtained at a reasonable charge from the SEC or may be examined, without
charge, at the offices of the SEC in Washington, D.C.
34
<PAGE>
INVESTMENT ADVISER
First Union National Bank, 201 South College Street, Charlotte, North Carolina
28288
Keystone Investment Management Company, 200 Berkeley Street, Boston,
Massachusetts 02116-5034
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 9021, Boston, Massachusetts
02205-9827
TRANSFER AGENT
Evergreen Service Company, P.O. Box 2121, Boston, Massachusetts, 02116-5034
LEGAL COUNSEL
Sullivan & Worcester LLP, 1025 Connecticut Avenue, N.W., Washington, D.C. 20036
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110
DISTRIBUTOR
Evergreen Distributor, Inc., 125 West 55th Street, New York, New York 10019
<PAGE>
- -------------------------------------------------------------------------------
PROSPECTUS August 1, 1998
- -------------------------------------------------------------------------------
EVERGREENSM STATE MUNICIPAL BOND FUNDS [LOGO OF EVERGREEN
FUNDS(SM) APPEARS HERE]
- -------------------------------------------------------------------------------
EVERGREEN NEW YORK TAX FREE FUND
EVERGREEN PENNSYLVANIA TAX FREE FUND
EVERGREEN CONNECTICUT MUNICIPAL BOND FUND
EVERGREEN NEW JERSEY TAX FREE INCOME FUND
(EACH A "FUND", TOGETHER THE "FUNDS")
CLASS Y SHARES
The Funds seek current income exempt from federal income taxes including
the alternative minimum tax, except in the case of EVERGREEN CONNECTICUT
MUNICIPAL BOND FUND, and personal income taxes of the state for which each
Fund is named. The Funds also seek to preserve capital. Each Fund looks to
achieve its objective by investing primarily in municipal obligations that are
issued by the state for which a Fund is named.
This prospectus provides information regarding the Class Y shares offered
by the Funds. The Funds are nondiversified series of an open-end management
investment company. This prospectus sets forth concise information about the
Funds that a prospective investor should know before investing. The address of
the Funds is 200 Berkeley Street, Boston, Massachusetts 02116.
A Statement of Additional Information ("SAI") for the Funds dated August
1, 1998, as supplemented from time to time, has been filed with the Securities
and Exchange Commission and is incorporated by reference herein. The SAI
provides information regarding certain matters discussed in this prospectus
and other matters which may be of interest to investors, and may be obtained
without charge by calling the Funds at (800) 343-2898. There can be no
assurance that the investment objective of the Funds will be achieved.
Investors are advised to read this prospectus carefully.
AN INVESTMENT IN THE FUNDS IS NOT A DEPOSIT OR AN OBLIGATION OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK, AND SHARES 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. AN INVESTMENT IN THE FUNDS
INVOLVES RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Keep This Prospectus For Future Reference
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
EXPENSE INFORMATION.................................................... 3
FINANCIAL HIGHLIGHTS................................................... 4
DESCRIPTION OF THE FUNDS............................................... 6
Investment Objectives and Policies.................................. 6
Investment Practices and Restrictions............................... 7
ORGANIZATION AND SERVICE PROVIDERS..................................... 11
Organization........................................................ 11
Service Providers................................................... 11
PURCHASE AND REDEMPTION OF SHARES...................................... 13
How to Buy Shares................................................... 13
How to Redeem Shares................................................ 13
Exchange Privilege.................................................. 14
Shareholder Services................................................ 15
Banking Laws........................................................ 16
OTHER INFORMATION...................................................... 16
Dividends, Distributions and Taxes.................................. 16
General Information................................................. 18
</TABLE>
2
<PAGE>
- -------------------------------------------------------------------------------
EXPENSE INFORMATION
- -------------------------------------------------------------------------------
The table and examples below are designed to help you understand the
various expenses that you will bear, directly or indirectly, when you invest
in the Funds. Shareholder transaction expenses are fees paid directly from
your account when you buy or sell shares of a Fund.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------
<S> <C>
Sales Charge Imposed on Purchases.......................................... None
Sales Charge on Dividend Reinvestments..................................... None
Contingent Deferred Sales Charge........................................... None
</TABLE>
Annual operating expenses reflect the normal operating expenses of the
Funds, and include costs such as management and other fees. For each Fund,
other than EVERGREEN NEW YORK TAX FREE FUND, the tables below show actual
annual operating expenses for the fiscal year or period ended March 31, 1998.
For EVERGREEN NEW YORK TAX FREE FUND, the tables reflect estimated annual
operating expenses for the fiscal year ending March 31, 1999. The examples
show what you would pay if you invested $1,000 over periods indicated,
assuming that you reinvest all of your dividends and that a Fund's average
annual return will be 5%. THE EXAMPLES ARE FOR ILLUSTRATION PURPOSES ONLY AND
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR ANNUAL
RETURN. EACH FUND'S ACTUAL EXPENSES AND RETURNS WILL VARY. For a more complete
description of the various costs and expenses borne by a Fund see
"Organization and Service Providers."
EVERGREEN NEW YORK TAX FREE FUND
<TABLE>
<CAPTION>
EXAMPLE
ANNUAL OPERATING -------
EXPENSES(4) CLASS Y
---------------- -------
<S> <C> <C> <C>
Management Fees..... 0.30% After 1 Year................................... $ 6
12b-1 Fees.......... None After 3 Years.................................. $19
Other Expenses...... 0.30% After 5 Years.................................. $33
---- After 10 Years................................. $75
Total............... 0.60%
====
</TABLE>
EVERGREEN CONNECTICUT MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
EXAMPLE
ANNUAL OPERATING -------
EXPENSES(1) CLASS Y
---------------- -------
<S> <C> <C> <C>
Management Fees..... 0.33% After 1 Year................................... $ 6
12b-1 Fees.......... None After 3 Years.................................. $20
Other Expenses...... 0.27% After 5 Years.................................. $34
---- After 10 Years................................. $76
Total............... 0.60%
====
</TABLE>
EVERGREEN NEW JERSEY TAX FREE INCOME FUND
<TABLE>
<CAPTION>
EXAMPLE
ANNUAL OPERATING -------
EXPENSES(2) CLASS Y
---------------- -------
<S> <C> <C> <C>
Management Fees..... 0.15% After 1 Year................................... $ 4
12b-1 Fees.......... None After 3 Years.................................. $13
Other Expenses...... 0.26% After 5 Years.................................. $23
---- After 10 Years................................. $52
Total............... 0.41%
====
</TABLE>
EVERGREEN PENNSYLVANIA TAX FREE FUND
<TABLE>
<CAPTION>
EXAMPLE
ANNUAL OPERATING -------
EXPENSES(3) CLASS Y
---------------- -------
<S> <C> <C> <C>
Management Fees..... 0.34% After 1 Year................................... $ 6
12b-1 Fees.......... None After 3 Years.................................. $19
Other Expenses...... 0.24% After 5 Years.................................. $33
---- After 10 Years................................. $74
Total............... 0.58%
====
</TABLE>
Amounts shown in the examples should not be considered a representation
of past or future expenses. Actual expenses may be greater or less than those
shown.
- -------
(1) The Fund's investment adviser has voluntarily agreed to waive 0.10% of the
Fund's investment advisory fee. The investment adviser currently intends
to continue this expense waiver through the fiscal period ending March 31,
1999; however, it may modify or cancel its expense waiver at any time.
Without such waiver, the Fund's management fee would be 0.60%. See
"Organization and Service Providers" for more information. Absent expense
waivers and/or reimbursements, the Total Operating Expenses for the Fund
would be 0.88%.
(2) The annual operating expenses and examples reflect fee waivers and
reimbursements for the most recent fiscal period. Actual expenses for
Class Y Shares of the Fund, absent fee waivers and expense reimbursements
for the period ended March 31, 1998 would have been 0.76%. Total Fund
Operating Expenses include indirectly paid expenses.
(3) The estimated annual operating expenses and examples reflect fee waivers
and reimbursements for the Fund's Class Y shares for the fiscal year
ended March 31, 1998. Actual expenses for Class Y shares of the Fund for
the same period are estimated to be 0.66%. Total Fund Operating Expenses
include indirectly paid expenses.
(4) The estimated annual operating expenses and examples reflect fee waivers
and reimbursements for the Fund's Class Y shares for the fiscal year
ending March 31, 1999. Actual expenses for the Class Y shares of the Fund
for the same period are estimated to be 0.76%.
3
<PAGE>
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
The following table contains important financial information relating to
the Funds and has been audited by KPMG Peat Marwick LLP, the independent
auditors of the Fund. (No financial highlights are currently available for the
Class Y shares of EVERGREEN NEW YORK TAX FREE FUND as such shares were not
offered until April 1, 1998.) The table appears in the Funds' Annual Report
and should be read in conjunction with the Funds' financial statements and
related notes, which also appear, together with the independent auditors'
report, in the Funds' Annual Report. The Funds' financial statements, related
notes, and independent auditors' report thereon are incorporated by reference
into the SAI. Additional information about the Funds' performance is contained
in the Funds' Annual Report, which will be made available upon request and
without charge.
(For a share outstanding throughout the period)
EVERGREEN PENNSYLVANIA TAX FREE FUND -- CLASS Y SHARES
<TABLE>
<CAPTION>
NOVEMBER 24, 1997
(COMMENCEMENT OF
CLASS OPERATIONS) TO
MARCH 31, 1998
--------------------
<S> <C>
NET ASSET VALUE BEGINNING OF PERIOD....................... $11.60
--------
Income from investment operations
Net investment income.................................... 0.19
Net realized and unrealized gain on investments and
futures contracts....................................... 0.10
--------
Total from investment operations.......................... 0.29
--------
Less distributions from net investment income............. (0.19)
--------
Net asset value end of period............................. $11.70
========
TOTAL RETURN.............................................. 2.54%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets
Expenses................................................. 0.59%(a)
Expenses excluding indirectly paid expenses.............. 0.58%(a)
Expenses excluding waivers and/or reimbursements......... 0.66%(a)
Net investment income.................................... 4.75%(a)
Portfolio turnover rate................................... 54%
NET ASSETS END OF PERIOD (THOUSANDS)...................... $152,960
</TABLE>
EVERGREEN CONNECTICUT MUNICIPAL BOND FUND -- CLASS Y SHARES
<TABLE>
<CAPTION>
NOVEMBER 24, 1997
(COMMENCEMENT OF
CLASS OPERATIONS)
THROUGH
MARCH 31, 1998
-----------------
<S> <C>
NET ASSET VALUE BEGINNING OF PERIOD........................... $6.32
-------
Income from investment operations
Net investment income........................................ 0.10
Net realized and unrealized gain on investments.............. 0.05
-------
Total from investment operations.............................. 0.15
-------
Less distributions from net investment income................. (0.10)
-------
Net asset value end of period................................. $6.37
=======
TOTAL RETURN.................................................. 2.39%
RATIOS/SUPPLEMENTAL DATA
Ratios to average net assets
Total expenses............................................... 0.61%(a)
Total expenses excluding indirectly paid expenses............ 0.60%(a)
Total expenses excluding waivers and/or reimbursements....... 0.88%(a)
Net investment income........................................ 4.50%(a)
Portfolio turnover rate....................................... 17%
NET ASSETS END OF PERIOD (THOUSANDS).......................... $67,675
</TABLE>
- -------
(a) Annualized.
4
<PAGE>
(For a share outstanding throughout each year)
EVERGREEN NEW JERSEY TAX FREE INCOME FUND -- CLASS Y SHARES
<TABLE>
<CAPTION>
FEBRUARY 8, 1996
SEVEN MONTHS SIX MONTHS (COMMENCEMENT OF
YEAR ENDED ENDED ENDED CLASS OPERATIONS)
MARCH 31, MARCH 31, AUGUST 31, TO FEBRUARY 29,
1998 1997** 1996* 1996
---------- ------------ ---------- -----------------
<S> <C> <C> <C> <C>
NET ASSET VALUE BEGINNING
OF YEAR................. $10.74 $10.75 $11.01 $11.14
-------- ------ ------ ------
Income from investment
operations
Net investment income... 0.54 0.32 0.28 0.03
Net realized and
unrealized gain (loss)
on investments......... 0.46 (0.01) (0.26) (0.13)
-------- ------ ------ ------
Total from investment
operations.............. 1.00 0.31 0.02 (0.10)
-------- ------ ------ ------
Less distributions from
Net investment income... (0.54) (0.32) (0.28) (0.03)
Net realized gain on
investments............ (0.09) 0 0 0
-------- ------ ------ ------
Total distributions...... (0.63) (0.32) (0.28) (0.03)
-------- ------ ------ ------
Net asset value end of
year.................... $11.11 $10.74 $10.75 $11.01
======== ====== ====== ======
TOTAL RETURN............. 9.44% 2.88% 0.20% (0.87%)
RATIOS/SUPPLEMENTAL DATA
Ratios to average net
assets
Expenses................ 0.41% 0.36%(a) 0.31%(a) 0.31%(a)
Expenses excluding
indirectly paid
expenses............... 0.41% 0.36%(a) -- --
Expenses excluding
waivers and/or
reimbursements......... 0.76% 0.88%(a) 0.87%(a) 0.88%(a)
Net investment income... 4.79% 5.08%(a) 5.12%(a) 5.28%(a)
Portfolio turnover rate.. 37% 15% 0% 4%
NET ASSETS END OF YEAR
(THOUSANDS)............. $105,331 $9,436 $9,076 $18
</TABLE>
- -------
(a) Annualized.
(b) Excluding applicable sales charges.
* The Fund changed its fiscal year end from February 28 to August 31.
** The Fund changed its fiscal year end from August 31 to March 31.
5
<PAGE>
- -------------------------------------------------------------------------------
DESCRIPTION OF THE FUNDS
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
Each Fund's investment objective(s) is nonfundamental; as a result a Fund
may change its objective(s) without a shareholder vote. Each Fund has also
adopted certain fundamental investment policies which are mainly designed to
limit a Fund's exposure to risk. Each Fund's fundamental policies cannot be
changed without a shareholder vote. See the SAI for more information regarding
the Funds' fundamental investment policies or other related investment
policies. There can be no assurance that a Fund's investment objective(s) will
be achieved.
In addition to the investment policies detailed below each Fund may
employ certain additional investment strategies which are discussed in
"Investment Practices and Restrictions" below.
Each Fund, other than EVERGREEN CONNECTICUT MUNICIPAL BOND FUND, seeks
the highest possible current income exempt from federal income taxes
(including the alternative minimum tax), while preserving capital. These Funds
normally invest their assets in accordance with applicable standards issued by
the Securities and Exchange Commission ("SEC") concerning investments in tax
free securities. The Funds cannot change this policy without shareholder
approval. The SEC currently requires the Funds to invest at least 80% of their
assets in federally tax exempt municipal securities. Each Fund also invests at
least 65% of its assets in municipal obligations that are exempt from income
taxes in the state for which the Fund is named. The Funds are permitted to
make taxable investments, and may from time to time generate income subject to
federal regular income tax.
In addition, EVERGREEN NEW YORK TAX FREE FUND will invest at least 80% of
their assets in municipal securities that at all times are fully insured as to
timely payment of all principal and interest when due ("Insured Securities").
Insurance does not cover against market risk and therefore does not guarantee
the market value of the securities in either Fund's portfolio. Similarly,
because the net asset value of each Fund's portfolio is based upon the market
value of the securities in its portfolio, such insurance does not cover or
guarantee the net asset value of the Fund's shares.
Insured Securities will be covered by at least one of three policies. New
issue insurance is obtained by municipal securities issuers, who pay all
premiums for such policies in advance. Since new issue insurance remains in
effect as long as the securities are outstanding, the insurance may protect
the resale value of the Insured Securities. Portfolio insurance remains
effective only while a Fund and the issuer are still in business and the Fund
still holds the securities described in the policy. The premium on a portfolio
insurance policy is a Fund expense. The EVERGREEN NEW YORK TAX FREE FUND may
also purchase secondary insurance when it believes the potential market value
or net proceeds of the sale of a security by a Fund exceeds the current
uninsured value of the security plus the cost of such insurance. Premiums for
secondary insurance are added to the cost basis of the security and are not
Fund expense items.
EVERGREEN CONNECTICUT MUNICIPAL BOND FUND seeks current income exempt
from federal income taxes other than the alternative minimum tax and
Connecticut personal income taxes. In addition, the Fund seeks to preserve
capital. The Fund normally invests at least 80% of its assets in securities
that are exempt from federal income taxes (other than the alternative minimum
tax) and at least 65% of its assets in Connecticut municipal obligations. The
EVERGREEN CONNECTICUT MUNICIPAL BOND FUND may change either of these policies
without shareholder approval.
Each Fund 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
and Poor's Ratings Group ("S&P") (AAA, AA, A or BBB), by Moody's Investors
Service ("Moody's") (Aaa, Aa, A or Baa), by Fitch IBCA, Inc. ("Fitch") (AAA,
AA, A or 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 (an "SRO") or by a Fund's
investment adviser. The Funds may invest the remaining 20% of their assets in
lower rated bonds, but they will not invest in bonds rated below B.
6
<PAGE>
INVESTMENT PRACTICES AND RESTRICTIONS
Risk Factors. Bond yields are dependent on several factors including market
conditions, the size of an offering, the maturity of the bond, ratings of the
bond and the ability of issuers to meet their obligations. There is no limit
on the maturity of the bonds purchased by a Fund. Because bond prices
fluctuate inversely in relation to the direction of interest rates, the prices
of longer term bonds fluctuate more widely in response to market interest rate
changes. A Fund's concentration in securities issued by a particular state and
its political subdivisions provides a greater level of risk than a fund which
is diversified across numerous states and municipal entities.
A Fund is not required to dispose of securities that have been downgraded
subsequent to their purchase. If the municipal obligations held by a Fund are
downgraded (because of adverse economic conditions in the state for which it
is named, for example), a Fund's concentration in the state's securities may
cause a Fund to be subject to the risks inherent in holding material amounts
of low-rated debt securities in its portfolio.
Municipal Securities. The Funds invest in municipal bonds, notes and
commercial paper issued by or for states, territories and possessions of the
United States ("U.S.") including the District of Columbia and their political
subdivisions, agencies and instrumentalities. Municipal bonds include fixed,
variable or floating rate general obligation and revenue bonds. General
obligation bonds are used to support the government's general financial needs
and are supported by the full faith and credit of the municipality. General
obligation bonds are repaid from the issuer's general unrestricted revenues.
Payment, however, may be dependent upon legislative approval and may be
subject to limitations on the issuer's taxing power. Revenue bonds are used to
finance public works and certain private facilities. In contrast to general
obligation bonds, revenue bonds are repaid only with the revenue generated by
the project financed.
Municipal notes include tax anticipation notes, bond anticipation notes
and revenue anticipation notes. Municipal commercial paper obligations are
unsecured promissory notes issued by municipalities to meet short-term credit
needs.
Since the Funds invest primarily in municipal securities, you should be
aware of the risks associated with investing in such securities. The values of
municipal bonds tend to go up when interest rates go down and vice versa. An
issuer's failure to make such payment due to political development or fiscal
mismanagement could affect its ability to make prompt payments of interest and
principal. Those events could also affect the market value of the security.
Moreover, the market for municipal bonds is often thin and can be temporarily
affected by large purchases and sales, including those by a Fund.
Non-Diversification. The Funds are nondiversified portfolios of an investment
company and, as such, there is no limit on the percentage of assets which can
be invested in any single issuer. An investment in a Fund, therefore, will
entail greater risk than would exist in an investment in a diversified
investment company because the higher percentage of investments among fewer
issuers may result in greater fluctuation in the total market value of the
Fund's portfolio. Each of the Funds intends to comply with Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code") which requires that at
the end of each quarter of each taxable year, with regard to at least 50% of
each Fund's total assets, no more than 5% of the total assets may be invested
in the securities of a single issuer and that with respect to the remainder of
each Fund's total assets, no more than 25% of its total assets are invested in
the securities of a single issuer.
Defensive Investments. The Funds may invest up to 20% or, for temporary
defensive purposes, up to 100% of their assets in high quality short-term
obligations, such as notes, commercial paper, certificates of deposit,
bankers' acceptances, bank deposits or U.S. government securities.
Below Investment Grade Bonds. Below investment grade bonds are commonly known
as "junk bonds" because they are usually backed by issuers of less proven or
questionable financial strength. Such issuers are more vulnerable to financial
setbacks and less certain to pay interest and principal than issuers of bonds
offering lower yields and risk. Markets may overreact to unfavorable news
about issuers of below investment grade bonds, causing sudden and steep
declines in value.
Repurchase Agreements. The Funds may invest in repurchase agreements.
Repurchase agreements are agreements by which a Fund purchases a security
(usually U.S. government securities) for cash and obtains a simultaneous
commitment from the seller (usually a bank or broker/dealer) to repurchase the
security at an agreed-upon price and specified future date. The repurchase
price reflects an agreed-upon interest rate for the time period of the
agreement. The Funds' risk is the inability of the seller to pay the agreed-
upon price on the delivery date. However, this risk is tempered by the ability
of the Funds to sell the security in the open market in
7
<PAGE>
the case of a default. In such a case, the Funds may incur costs in disposing
of the security which would increase Fund expenses. Each Funds' investment
adviser will monitor the creditworthiness of the firms with which the Fund
enters into repurchase agreements.
Reverse Repurchase Agreements. Each Fund may enter into reverse repurchase
agreements. A reverse repurchase agreement is an agreement by a Fund to sell a
security and repurchase it at a specified time and price. A Fund could lose
money if the market values of the securities it sold decline below their
repurchase prices. Reverse repurchase agreements may be considered a form of
borrowing, and, therefore, a form of leverage. Leverage may magnify gains or
losses of the Fund.
When-Issued, Delayed-Delivery and Forward Commitment Transactions. Each Fund
may enter into transactions whereby it commits to buying a security, but does
not pay for or take delivery of the security until some specified date in the
future. The values of these securities are subject to market fluctuations
during this period and no income accrues to a Fund until settlement. At the
time of settlement, a when-issued security may be valued at less than its
purchase price. When entering into these transactions, a Fund relies on the
other party to consummate the transaction; if the other party fails to do so,
the Fund may be disadvantaged. Each Fund does not intend to purchase when-
issued securities for speculative purposes, but only in furtherance of its
investment objective.
Securities Lending. To generate income and offset expenses, the Funds may lend
securities to broker-dealers and other financial institutions. Loans of
securities by a Fund may not exceed 33 1/3% of the value of the Fund's total
assets. While securities are on loan, the borrower will pay the Fund any
income accruing on the security. Also, the Fund may invest any collateral it
receives in additional securities. Gains or losses in the market value of a
lent security will affect a Fund and its shareholders. When a Fund lends its
securities, it runs the risk that it could not retrieve the securities on a
timely basis, possibly losing the opportunity to sell the securities at a
desirable price. Also, if the borrower files for bankruptcy or becomes
insolvent, a Fund's ability to dispose of the securities may be delayed.
Investing In Securities Of Other Investment Companies. Each Fund may invest in
the securities of other investment companies. As a shareholder of another
investment company, a Fund would pay its portion of the other investment
company's expenses. These expenses would be in addition to the expenses that a
Fund currently bears concerning its own operations and may result in some
duplication of fees.
Borrowing. Each Fund may borrow from banks in an amount up to 33 1/3% of its
total assets, taken at market value. Each Fund may also borrow an additional
5% of its total assets from banks and others. A Fund may only borrow as a
temporary measure for extraordinary or emergency purposes such as the
redemption of Fund shares. A Fund will not purchase securities while
borrowings are outstanding except to exercise prior commitments and to
exercise subscription rights.
Zero Coupon Debt Securities. A Fund may purchase zero coupon debt securities.
These securities do not make regular interest payments. Instead, they are sold
at a deep discount from their face value. In calculating their daily
dividends, each day a Fund takes into account as income a portion of the
difference between these securities' purchase price and their face value.
Because they do not pay current income, the prices of zero coupon debt
securities can be very volatile when interest rates change. Values of zero
coupon securities are affected to a greater extent by interest rate changes
and may be more volatile than securities which pay interest periodically and
in cash.
Securities with Put or Demand Rights. The Funds have the ability to enter into
put transactions, sometimes referred to as stand-by commitments, with respect
to municipal obligations held in their portfolios or to purchase securities
which carry a demand feature or put option which permit a Fund, as holder, to
tender them back to the issuer or a third party prior to maturity and receive
payment within seven days. Segregated accounts will be maintained by each Fund
for all such transactions.
The amount payable to a Fund by the seller upon its exercise of a put
will normally be (i) a Fund's acquisition cost of the securities (excluding
any accrued interest which a Fund paid on their acquisition), less any
amortized market premium plus any amortized market or original issue discount
during the period the Fund owned the securities, plus (ii) all interest
accrued on the securities since the last interest payment date during the
period the securities were owned by the Fund. Accordingly, the amount payable
by a broker-dealer or bank during the time a put is exercisable will be
substantially the same as the value of the underlying securities.
8
<PAGE>
A Fund's right to exercise a put is unconditional and unqualified. A put
is not transferable by a Fund, although a Fund may sell the underlying
securities to a third party at any time. Each Fund expects that puts will
generally be available without any additional direct or indirect cost.
However, if necessary and advisable, a Fund may pay for certain puts either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to such a put (thus reducing the yield to maturity
otherwise available to the same securities). Thus, the aggregate price paid
for securities with put rights may be higher than the price that would
otherwise be paid.
The Funds may enter into put transactions only with broker-dealers (in
accordance with the rules of the SEC) and banks which, in the opinion of each
Fund's investment adviser, present minimal credit risks. A Fund's investment
adviser will monitor periodically the creditworthiness of issuers of such
obligations held by a Fund. A Fund's ability to exercise a put will depend on
the ability of the broker-dealer or bank to pay for the underlying securities
at the time the put is exercised. In the event that a broker-dealer should
default on its obligation to purchase an underlying security, a Fund might be
unable to recover all or a portion of any loss sustained from having to sell
the security elsewhere. Each Fund intends to enter into put transactions
solely to maintain portfolio liquidity and does not intend to exercise its
rights thereunder for trading purposes.
Options and Futures. The Funds may engage in options and futures transactions.
Options and futures transactions are intended to enable a Fund to manage
market or interest rate risk. The Funds do not use these transactions for
speculation or leverage.
The Funds may attempt to hedge all or a portion of their portfolios
through the purchase of both put and call options on their portfolio
securities and listed put options on financial futures contracts for portfolio
securities. The Funds may also write covered call options on their portfolio
securities to attempt to increase their current income. The Funds will
maintain their positions in securities, option rights, and segregated cash
subject to puts and calls until the options are exercised, closed, or have
expired. An option position may be closed out only on an exchange which
provides a secondary market for an option of the same series.
The Funds may write (i.e., sell) covered call and put options. By writing
a call option, a Fund becomes obligated during the term of the option to
deliver the securities underlying the option upon payment of the exercise
price. By writing a put option, a Fund becomes obligated during the term of
the option to purchase the securities underlying the option at the exercise
price if the option is exercised. The Funds also may write straddles
(combinations of covered puts and calls on the same underlying security). The
Funds may only write "covered" options. This means that so long as a Fund is
obligated as the writer of a call option, it will own the underlying
securities subject to the option or, in the case of call options on U.S.
Treasury bills, a Fund might own substantially similar U.S. Treasury bills. A
Fund will be considered "covered" with respect to a put option it writes if,
so long as it is obligated as the writer of the put option, it deposits and
maintains with its custodian in a segregated account liquid assets having a
value equal to or greater than the exercise price of the option.
The principal reason for writing call or put options is to obtain,
through a receipt of premiums, a greater current return than would be realized
on the underlying securities alone. The Funds receive a premium from writing a
call or put option which they retain whether or not the option is exercised.
By writing a call option, the Funds might lose the potential for gain on the
underlying security while the option is open, and by writing a put option the
Funds might become obligated to purchase the underlying securities for more
than their current market price upon exercise.
A futures contract is a firm commitment by two parties: the seller, who
agrees to make delivery of the specific type of instrument called for in the
contract ("going short"), and the buyer, who agrees to take delivery of the
instrument ("going long") at a certain time in the future. Financial futures
contracts call for the delivery of particular debt instruments issued or
guaranteed by the U.S. Treasury or by specified agencies or instrumentalities
of the U.S. government. If a Fund enters into financial futures contracts
directly to hedge its holdings of fixed income securities, it would enter into
contracts to deliver securities at an undetermined price (i.e., "go short") to
protect itself against the possibility that the prices of its fixed income
securities may decline during a Fund's anticipated holding period. A Fund
would "go long" (agree to purchase securities in the future at a predetermined
price) to hedge against a decline in market interest rates.
The Funds may also enter into financial futures contracts and write
options on such contracts. The Funds intend to enter into such contracts and
related options for hedging purposes. The Funds will enter into futures on
securities or index-based futures contracts in order to hedge against changes
in interest rates or securities prices. A futures contract on securities is an
agreement to buy or sell securities during a designated month at whatever
price exists at that time. A futures contract on a securities index does not
involve the actual delivery of securities,
9
<PAGE>
but merely requires the payment of a cash settlement based on changes in the
securities index. The Funds do not make payment or deliver securities upon
entering into a futures contract. Instead, they put down a margin deposit,
which is adjusted to reflect changes in the value of the contract and which
remains in effect until the contract is terminated.
The Funds may sell or purchase other financial futures contracts. When a
futures contract is sold by a Fund, the profit on the contract will tend to
rise when the value of the underlying securities declines and to fall when the
value of such securities increases. Thus, the Funds sell futures contracts in
order to offset a possible decline in the profit on their securities. If a
futures contract is purchased by a Fund, the value of the contract will tend
to rise when the value of the underlying securities increases and to fall when
the value of such securities declines.
The Funds may enter into closing purchase and sale transactions in order
to terminate a futures contract and may buy or sell put and call options for
the purpose of closing out their options positions. 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, in which case it would continue to bear market risk on
the transaction.
Risk Characteristics of Options and Futures. Although options and futures
transactions are intended to enable the Funds to manage market or interest
rate risks, these investment devices can be highly volatile, and the Funds'
use of them can result in poorer performance (i.e., the Funds' return may be
reduced). The Funds' attempt to use such investment devices for hedging
purposes may not be successful. Successful futures strategies require the
ability to predict future movements in securities prices, interest rates and
other economic factors. When the Funds use financial futures contracts and
options on financial futures contracts as hedging devices, there is a risk
that the prices of the securities subject to the financial futures contracts
and options on financial futures contracts may not correlate perfectly with
the prices of the securities in the Funds' portfolios. This may cause the
financial futures contracts and any related options to react to market changes
differently than the portfolio securities. In addition, a Fund's investment
adviser could be incorrect in its expectations and forecasts about the
direction or extent of market factors, such as interest rates, securities
price movements, and other economic factors. Even if a Fund's investment
adviser correctly predicts interest rate movements, a hedge could be
unsuccessful if changes in the value of a Fund's futures position did not
correspond to changes in the value of its investments. In these events, a Fund
may lose money on the financial futures contracts or the options on financial
futures contracts. It is not certain that a secondary market for positions in
financial futures contracts or for options on financial futures contracts will
exist at all times. Although a Fund's investment adviser will consider
liquidity before entering into financial futures contracts or options on
financial futures contracts transactions, there is no assurance that a liquid
secondary market on an exchange will exist for any particular financial
futures contract or option on a financial futures contract at any particular
time. A Fund's ability to establish and close out financial futures contracts
and options on financial futures contract positions depends on this secondary
market. If a Fund is unable to close out its position due to disruptions in
the market or lack of liquidity, the Fund may lose money on the futures
contract or option, and the losses to the Fund could be significant.
Derivatives. Derivatives are financial contracts whose value is based on an
underlying asset, such as a stock or a bond, or an underlying economic factor,
such as an index or an interest rate.
The Funds may invest in derivatives only if the expected risks and
rewards are consistent with their investment objectives and policies.
Losses from derivatives can sometimes be substantial. This is true partly
because small price movements in the underlying asset can result in immediate
and substantial gains or losses in the value of the derivative. Derivatives
can also cause a Fund to lose money if the Fund fails to correctly predict the
direction in which the underlying asset or economic factor will move.
Other Investment Restrictions. Each Fund has adopted additional investment
restrictions that are set forth in the SAI.
10
<PAGE>
- -------------------------------------------------------------------------------
ORGANIZATION AND SERVICE PROVIDERS
- -------------------------------------------------------------------------------
ORGANIZATION
Fund Structure. Each Fund is an investment pool, which invests shareholders'
money towards a specified goal. In technical terms, each Fund is a non-
diversified series of an open-end, management investment company called
Evergreen Municipal Trust (the "Trust"). The Trust is a Delaware business
trust organized on September 18, 1997.
Board of Trustees. The Trust is supervised by a Board of Trustees that is
responsible for representing the interests of shareholders. The Trustees meet
periodically throughout the year to oversee the Funds' activities, reviewing,
among other things, each Fund's performance and its contractual arrangements
with various service providers.
Shareholder Rights. All shareholders have equal voting, liquidation and other
rights. Each share is entitled to one vote for each dollar of net asset value
applicable to such share. Shareholders may exchange shares as described under
"Exchanges," but will have no other preference, conversion, exchange or
preemptive rights. When issued and paid for, shares will be fully paid and
nonassessable. Shares of the Funds are redeemable, transferable and freely
assignable as collateral. The Trust may establish additional classes or series
of shares.
The Funds do not hold annual shareholder meetings; a Fund may, however,
hold special meetings for such purposes as electing or removing Trustees,
changing fundamental policies and approving investment advisory agreements or
12b-1 plans. In addition, a Fund is prepared to assist shareholders in
communicating with one another for the purpose of convening a meeting to elect
Trustees.
SERVICE PROVIDERS
Investment Advisers. The investment adviser to EVERGREEN NEW YORK TAX FREE
FUND and EVERGREEN PENNSYLVANIA TAX FREE FUND is Keystone Investment
Management Company ("Keystone"), a subsidiary of First Union National Bank
("FUNB") which is a subsidiary of First Union Corporation ("First Union").
Keystone has provided investment advisory and management services to
investment companies and private accounts since 1932. Keystone is located at
200 Berkeley Street, Boston, Massachusetts 02116-5034. FUNB is located at 201
South College Street, and First Union is located at 301 South College Street,
Charlotte, North Carolina 28288-0630. First Union and its subsidiaries provide
a broad range of financial services to individuals and businesses throughout
the U.S.
EVERGREEN NEW YORK TAX FREE FUND and EVERGREEN PENNSYLVANIA TAX FREE FUND
pay Keystone an annual fee for its services as set forth below:
<TABLE>
<CAPTION>
AGGREGATE NET
ASSET VALUE
OF SHARES OF THE
MANAGEMENT FEE FUND
-------------- ------------------
<S> <C>
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
</TABLE>
computed as of the close of business on each business day.
The investment adviser to EVERGREEN CONNECTICUT MUNICIPAL BOND FUND and
EVERGREEN NEW JERSEY TAX FREE INCOME FUND is the Capital Management Group
("CMG") of FUNB.
EVERGREEN CONNECTICUT MUNICIPAL BOND FUND pays FUNB an annual fee for its
services equal to 0.60% of average daily net assets. FUNB has voluntarily
agreed to reduce or waive a portion of its fee equal to 0.10%, resulting in a
net advisory fee of 0.50%. FUNB may change or stop this waiver at any time.
11
<PAGE>
EVERGREEN NEW JERSEY TAX FREE INCOME FUND pays FUNB an annual fee for its
services as set forth below:
<TABLE>
<CAPTION>
AGGREGATE NET ASSET
VALUE OF SHARES
MANAGEMENT FEE OF THE FUND
-------------- --------------------
<S> <C>
0.50 of 1% of the first $ 500,000,000, plus
0.45 of 1% of the next $ 500,000,000, plus
0.40 of 1% of amounts over $1,000,000,000, plus
0.35 of 1% of amounts over $1,500,000,000
</TABLE>
computed as of the close of business on each business day.
The total expenses as a percentage of average daily net assets on an
annual basis of the Funds for the fiscal year or period ended March 31, 1998,
are set forth in the sections entitled "Expense Information" and "Financial
Highlights." Such expenses reflect all voluntary advisory fee waivers and
expense reimbursements, which may be revised or terminated at any time.
Portfolio Managers. George J. Kimball is responsible for the day-to-day
management of EVERGREEN NEW YORK TAX FREE FUND. Mr. Kimball has been employed
by Keystone or one of its affiliates since 1991, and was an Analyst prior to
becoming a Vice President and Portfolio Manager. He has more than 10 years of
investment experience.
Jocelyn Turner is the Portfolio Manager for the EVERGREEN PENNSYLVANIA
TAX FREE FUND, EVERGREEN CONNECTICUT MUNICIPAL BOND FUND and EVERGREEN NEW
JERSEY TAX FREE INCOME FUND. Since joining First Union in 1992, Ms. Turner has
been a Vice President and Municipal Bond Portfolio Manager for CMG. Ms. Turner
is currently responsible for the portfolio management of the EVERGREEN NEW
JERSEY TAX FREE INCOME FUND. Ms. Turner was previously employed as a Vice
President and Municipal Bond Portfolio Manager at One Federal Asset
Management, Boston, Massachusetts from 1987-1991.
Transfer Agent and Dividend Disbursing Agent. Evergreen Service Company
("ESC"), 200 Berkeley Street, Boston, Massachusetts 02116-5034, acts as the
Funds' transfer agent and dividend disbursing agent. ESC is an indirect,
wholly-owned subsidiary of First Union.
Custodian. State Street Bank and Trust Company, P.O. Box 9021, Boston,
Massachusetts 02205-9827, acts as the Funds' custodian.
Principal Underwriter. Evergreen Distributor, Inc. ("EDI"), a subsidiary of
The BISYS Group, Inc., located at 125 West 55th Street, New York, New York
10019, is the principal underwriter of the Funds. EDI is not affiliated with
First Union.
Administrator. Evergreen Investment Services, Inc. ("EIS"), 200 Berkeley
Street, Boston, Massachusetts 02116-5034, serves as administrator to EVERGREEN
CONNECTICUT MUNICIPAL BOND FUND and EVERGREEN NEW JERSEY TAX FREE INCOME FUND.
As administrator, and subject to the supervision and control of the Trust's
Board of Trustees, EIS provides the Funds with facilities, equipment and
personnel. For its services as administrator, EIS is entitled to receive a fee
based on the aggregate average daily net assets of the Funds at a rate based
on the total assets of all mutual funds advised by First Union subsidiaries
and administered by EIS. The administration fee is calculated in accordance
with the following schedule.
<TABLE>
<CAPTION>
ADMINISTRATION FEE
------------------
<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, and
0.010% on assets in excess of $30 billion
</TABLE>
EIS also provides facilities, equipment and personnel to all of the Funds
on behalf of the investment advisers and is reimbursed by the Funds for its
services.
12
<PAGE>
- -------------------------------------------------------------------------------
PURCHASE AND REDEMPTION OF SHARES
- -------------------------------------------------------------------------------
HOW TO BUY SHARES
Class Y shares are offered at net asset value without a front-end sales
charge or a contingent deferred sales load. Class Y shares are only offered to
(1) persons who at or prior to December 31, 1994 owned shares in a mutual fund
advised by Evergreen Asset Management Corp. ("Evergreen Asset"), (2) certain
institutional investors and (3) investment advisory clients of FUNB, Evergreen
Asset, Keystone or their affiliates.
Eligible investors may purchase Class Y shares of any Fund through
broker-dealers, banks or other financial intermediaries, or directly through
EDI. In addition, you may purchase Class Y shares of a Fund by mailing to the
Fund, c/o ESC, P.O. Box 2121, Boston, Massachusetts 02106-2121, a completed
application and a check payable to the Fund. You may also telephone 1-800-343-
2898 to obtain the number of an account to which you can wire or
electronically transfer funds and then send in a completed application.
Subsequent investments in any amount may be made by check, by wiring federal
funds, by direct deposit or by an electronic funds transfer.
There is no minimum amount for subsequent investments. Investments of $25
or more are allowed under the Systematic Investment Plan. See the application
for more information.
How the Funds Value Their Shares. The net asset value of each class of shares
of a Fund is calculated by dividing the value of the amount of the Fund's net
assets attributable to that class by the outstanding shares of that class.
Shares are valued each day the New York Stock Exchange (the "Exchange") is
open as of the close of regular trading (currently 4:00 p.m. eastern time).
The Exchange is closed on New Year's Day, Martin Luther King, Jr. Day,
Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. The securities in a Fund are valued at
their current market values determined on the basis of market quotations or,
if such quotations are not readily available, such other methods as the
Trustees believe would accurately reflect fair value.
Additional Purchase Information. As a condition of this offering, if a
purchase is canceled due to nonpayment or because an investor's check does not
clear, the investor will be responsible for any loss a Fund or the Fund's
investment adviser incurs. If such investor is an existing shareholder, a Fund
may redeem shares from an investor's account to reimburse the Fund or its
investment adviser for any loss. In addition such investors may be prohibited
or restricted from making further purchases in any of the Evergreen Funds. The
Funds will not accept third party checks other than those payable directly to
a shareholder whose account has been in existence at least 30 days.
HOW TO REDEEM SHARES
You may "redeem" (i.e., sell) your Class Y shares in a Fund to the Fund
for cash at their net redemption value on any day the Exchange is open, either
directly by writing to the Fund, c/o ESC, or through your financial
intermediary. The amount you will receive is the net asset value adjusted for
fractions of a cent next calculated after the Fund receives your request in
proper form. Proceeds generally will be sent to you within seven days.
However, for shares recently purchased by check, the Fund will not send
proceeds until it is reasonably satisfied that the check has been collected
(which may take up to 15 days). Once a redemption request has been telephoned
or mailed, it is irrevocable and may not be modified or canceled.
Redeeming Shares Through Your Financial Intermediary. A Fund must receive
instructions from your financial intermediary before 4:00 p.m. (eastern time)
for you to receive that day's net asset value. Your financial intermediary is
responsible for furnishing all necessary documentation to the Fund and may
charge you for this service. Certain financial intermediaries may require that
you give instructions earlier than 4:00 p.m. (eastern time).
Redeeming Shares Directly by Mail or Telephone. You may redeem by mail by
sending a signed letter of instruction or stock power form to a Fund, c/o ESC
(the registrar, transfer agent and dividend-disbursing agent for each Fund.)
Stock power forms are available from your financial intermediary, ESC, and
many commercial banks. Additional documentation is required for the sale of
shares by corporations, financial intermediaries, fiduciaries and surviving
joint owners. Signature guarantees are required for all redemption requests
for shares with a value of more than $50,000. Currently, the requirement for a
signature guarantee has been waived on
13
<PAGE>
redemptions of $50,000 or less when the account address of record has been the
same or a minimum period of 30 days. The Funds and ESC reserve the right to
withdraw this wavier at any time. A signature guarantee must be provided by a
bank or trust company (not a Notary Public), a member firm of a domestic stock
exchange or by other financial institutions whose guarantees are acceptable
under the Securities Exchange Act of 1934 and ESC's policies.
Shareholders may redeem amounts of $1,000 or more (up to $50,000) from
their accounts by calling the telephone number on the front page of this
prospectus between the hours of 8:00 a.m. and 6:00 p.m. (eastern time) each
business day (i.e., any weekday exclusive of days on which the Exchange or
ESC's offices are closed). Redemption requests received after 4:00 p.m.
(eastern time) will be processed using the net asset value determined on the
next business day. Such redemption requests must include the shareholder's
account name, as registered with a Fund, and the account number. During
periods of drastic economic or market changes, shareholders may experience
difficulty in effecting telephone redemptions. If you cannot reach the Fund by
telephone, you should follow the procedures for redeeming by mail or through a
broker-dealer as set forth herein. The telephone redemption service is not
made available to shareholders automatically. Shareholders wishing to use the
telephone redemption service must complete the appropriate sections on the
application and choose how the redemption proceeds are to be paid. Redemption
proceeds will either (i) be mailed by check to the shareholder at the address
in which the account is registered or (ii) be wired to an account with the
same registration as the shareholder's account in the Fund at a designated
commercial bank.
In order to insure that instructions received by ESC are genuine when you
initiate a telephone transaction, you will be asked to verify certain criteria
specific to your account. At the conclusion of the transaction, you will be
given a transaction number confirming your request, and written confirmation
of your transaction will be mailed the next business day. Your telephone
instructions will be recorded. Redemptions by telephone are allowed only if
the address and bank account of record have been the same for a minimum period
of 30 days. A Fund reserves the right at any time to terminate, suspend, or
change the terms of any redemption method described in this prospectus, except
redemption by mail, and to impose fees.
Except as otherwise noted, the Funds, ESC, and EDI will not assume
responsibility for the authenticity of any instructions received by any of
them from a shareholder in writing, over the Evergreen Express Line (described
below), or by telephone. ESC will employ reasonable procedures to confirm that
instructions received over the Evergreen Express Line or by telephone are
genuine. The Funds, ESC, and EDI will not be liable when following
instructions received over the Evergreen Express Line or by telephone that ESC
reasonably believes are genuine.
Evergreen Express Line. Evergreen Express Line offers you specific fund
account information and price and yield quotations as well as the ability to
do account transactions, including investments, exchanges and redemptions. You
may access the Evergreen Express Line by dialing toll free 1-800-346-3858 on
any touch-tone telephone, 24 hours a day, seven days a week.
General. The sale of shares is a taxable transaction for federal income tax
purposes. The Funds may temporarily suspend the right to redeem their shares
when (1) the Exchange is closed, other than customary weekend and holiday
closings; (2) trading on the Exchange is restricted; (3) an emergency exists
and the Funds cannot dispose of their investments or fairly determine their
value; or (4) the SEC so orders. The Funds serve the right to close an account
that through redemption has fallen below $1,000 and has remained so for 30
days. Shareholders will receive 60 days' written notice to increase the
account value to at least $1,000 before the account is closed. The Funds have
elected to be governed by Rule 18f-1 under the 1940 Act pursuant to which each
Fund is obligated to redeem shares solely in cash, up to the lesser of
$250,000 or 1% of a Fund's total net assets, during any 90-day period for any
one shareholder.
EXCHANGE PRIVILEGE
How to Exchange Shares. You may exchange some or all of your Class Y shares
for shares of the same class in other Evergreen funds through your financial
intermediary, by calling or writing to ESC or by using the Evergreen Express
Line as described above. Once an exchange request has been telephoned or
mailed, it is irrevocable and may not be modified or canceled. Exchanges will
be made on the basis of the relative net asset values of the shares exchanged
next determined after an exchange request is received. An exchange which
represents an initial investment in another Evergreen fund, is subject to the
minimum investment and suitability requirements of the Fund.
Each of the Evergreen funds has different investment objectives and
policies. For more complete information, a prospectus of the fund into which
an exchange will be made should be read prior to the exchange.
14
<PAGE>
An exchange order must comply with the requirement for a redemption or
repurchase order and must specify the dollar value or number of shares to be
exchanged. An exchange is treated for federal income tax purposes as a
redemption and purchase of shares and may result in the realization of a
capital gain or loss. Shareholders are limited to five exchanges per calendar
year, with a maximum of three per calendar quarter. This exchange privilege
may be modified or discontinued at any time by a Fund upon 60 days' notice to
shareholders and is only available in states in which shares of the fund being
acquired may lawfully be sold.
Exchanges Through Your Financial Intermediary. A Fund must receive exchange
instructions from your financial intermediary before 4:00 p.m. (eastern time)
for you to receive that day's net asset value. Your financial intermediary is
responsible for furnishing all necessary documentation to a Fund and may
harge you for this service.
Exchanges by Telephone and Mail. Exchange requests received by a Fund after
4:00 p.m. (eastern time) will be processed using the net asset value
determined at the close of the next business day. During periods of drastic
economic or market changes, shareholders may experience difficulty in
effecting telephone exchanges. You should follow the procedures outlined below
for exchanges by mail if you are unable to reach ESC by telephone. If you wish
to use the telephone exchange service you should indicate this on the
application. As noted above, a Fund will employ reasonable procedures to
confirm that instructions for the redemption or exchange of shares
communicated by telephone are genuine. A telephone exchange may be refused by
a Fund or ESC if it is believed advisable to do so. Procedures for exchanging
Fund shares by telephone may be modified or terminated at any time. Written
requests for exchanges should follow the same procedures outlined for written
redemption requests in the section entitled "How to Redeem Shares"; however,
no signature guarantee is required.
SHAREHOLDER SERVICES
The Funds offer the following shareholder services. For more information
about these services or your account, contact your financial intermediary, ESC
or call the toll-free number on the front page of this prospectus. Some
services are described in more detail in the application.
Systematic Investment Plan. Under a Systematic Investment Plan, you may invest
as little as $25 per month to purchase shares of a Fund with no minimum
initial investment required.
Telephone Investment Plan. You may make investments into an existing account
electronically in amounts of not less than $100 or more than $10,000 per
investment. Telephone investment requests received by 4:00 p.m. (eastern time)
will be credited to a shareholder's account the day the request is received.
Systematic Withdrawal Plan. When an account of $10,000 or more is opened or
when an existing account reaches that size, you may participate in the
Systematic Withdrawal Plan (the "Withdrawal Plan") by filling out the
appropriate part of the application. Under this Withdrawal Plan, you may
receive (or designate a third party to receive) a monthly or quarterly fixed-
withdrawal payment in a stated amount of at least $75 and may be as much as
1.0% per month or 3.0% per quarter of the total net asset value of the Fund
shares in your account when the Withdrawal Plan was opened. Fund shares will
be redeemed as necessary to meet withdrawal payments. All participants must
elect to have their dividends and capital gains distributions reinvested
automatically.
Automatic Reinvestment Plan. For the convenience of investors, all dividends
and distributions are automatically reinvested in full and fractional shares
of a Fund at the net asset value per share at the close of business on the
record date, unless otherwise requested by a shareholder in writing. If the
transfer agent does not receive a written request for subsequent dividends
and/or distributions to be paid in cash at least three full business days
prior to a given record date, the dividends and/or distributions to be paid to
a shareholder will be reinvested.
Dollar Cost Averaging. Through dollar cost averaging you can invest a fixed
dollar amount each month or each quarter in any Evergreen fund. This results
in more shares being purchased when the selected fund's net asset value is
relatively low and fewer shares being purchased when the fund's net asset
value is relatively high and may result in a lower average cost per share than
a less systematic investment approach.
Prior to participating in dollar cost averaging, you must establish an
account in an Evergreen Fund. You should designate on the application (1) the
dollar amount of each monthly or quarterly investment you wish to make, and
(2) the fund in which the investment is to be made. Thereafter, on the first
day of the designated month, an amount equal to the specified monthly or
quarterly investment will automatically be redeemed from your initial account
and invested in shares of the designated fund.
15
<PAGE>
Two Dimensional Investing. You may elect to have income and capital gains
distributions from any Evergreen fund shares you own automatically invested to
purchase the same class of shares of any other Evergreen fund. You may select
this service on your application and indicate the Evergreen Fund(s) into which
distributions are to be invested.
Tax Sheltered Retirement Plans. The Funds have various retirement plans
available to eligible investors, including Individual Retirement Accounts
(IRAs); Rollover IRAs; Simplified Employee Pension Plans (SEPs); Salary
Incentive Match Plan for Employees (SIMPLEs); Tax Sheltered Annuity Plans;
403(b)(7) Plans; 401(k) Plans; Keogh Plans; Profit-Sharing Plans; Medical
Savings Accounts; Pension and Target Benefit and Money Purchase Plans. For
details, including fees and application forms, call toll free 1-800-247-4075
or write to ESC.
BANKING LAWS
The Glass-Steagall Act and other banking laws and regulations presently
prohibit member banks of the Federal Reserve System ("Member Banks") or their
non-bank affiliates from sponsoring, organizing, controlling, or distributing
the shares of registered open-end investment companies such as the Funds. Such
laws and regulations also prohibit banks from issuing, underwriting or
distributing securities in general. However, under the Glass-Steagall Act and
such other laws and regulations, a Member Bank or an affiliate thereof may act
as investment adviser, transfer agent or custodian to a registered open-end
investment company and may also act as agent in connection with the purchase
of shares of such an investment company upon the order of its customer. FUNB
and its affiliates are subject to and in compliance with the aforementioned
laws and regulations.
Changes to applicable laws and regulations or future judicial or
administrative decisions could result in FUNB and its affiliates being
prevented from continuing to perform the services required under the
investment advisory contract or from acting as agent in connection with the
purchase of shares of the Funds by their customers. If FUNB and its affiliates
were prevented from continuing to provide the services called for under the
investment advisory agreement, it is expected that the Trustees would
identify, and call upon the Funds' shareholders to approve a new investment
adviser. If this were to occur, it is not anticipated that the shareholders of
the Funds would suffer any adverse financial consequences.
- -------------------------------------------------------------------------------
OTHER INFORMATION
- -------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
Income dividends will be declared daily and paid monthly. Distributions
of any net realized gains of the Funds will be made at least annually.
Shareholders will 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. The
Funds have qualified as regulated investment companies under the Code. While
so qualified, so long as a Fund distributes all of its investment company
taxable income and any net realized gains to shareholders, it is expected that
the Fund will not be required to pay any federal income taxes. A 4%
nondeductible excise tax will be imposed on a Fund if it does not meet certain
distribution requirements by the end of each calendar year. Each Fund
anticipates meeting such distribution requirements.
Account statements and/or checks, as appropriate, will be mailed within
seven days after a Fund pays a distribution. Unless a Fund receives
instructions to the contrary before the record or payable date, as the case
may be, it will assume that a shareholder wishes to receive that distribution
and future capital gains and income distributions in shares. Instructions
continue in effect until changed in writing.
The Funds will designate and pay exempt-interest dividends derived from
interest earned on qualifying tax-exempt obligations. Such exempt-interest
dividends may be excluded by shareholders of a Fund from their gross income
for federal income tax purposes; however (1) all or a portion of such exempt-
interest dividends may be a specific preference item for purposes of the
federal individual and corporate alternative minimum taxes to the extent that
they are derived from certain types of private activity bonds issued after
August 7, 1986, and (2) all exempt-interest dividends will be a component of
the "adjusted current earnings" for purposes of the federal corporate
alternative minimum tax.
16
<PAGE>
Dividends paid from taxable income, if any, and distributions of any net
realized short-term capital gains (whether from tax-exempt or taxable
obligations) are taxable as ordinary dividend income and capital gain
dividends are taxable as net long-term capital gains, even though received in
additional shares of the Fund, and regardless of the investor's holding period
relating to the shares with respect to which such gains are distributed.
Market discount recognized on taxable and tax-exempt bonds is taxable as
ordinary income, not as excludable income. Under current law, net long-term
capital gains realized by an individual on assets held for more than 12 months
will generally be taxed at a maximum rate of 20%. The rate applicable to
corporations is 35%.
Since each Fund's gross income is ordinarily expected to be tax-exempt
interest income, it is not expected that the 70% dividends-received deduction
for corporations will be applicable. Specific questions should be addressed to
the investor's own tax adviser.
Each Fund is required by federal law to withhold 31% of reportable
payments (which may include dividends, capital gains distributions (if any)
and redemptions) paid to certain shareholders. In order to avoid this backup
withholding requirement, each investor must certify on the application, or on
a separate form supplied by the Funds' transfer agent, that the investor's
social security number or taxpayer identification number is correct and that
the investor is not currently subject to backup withholding or is exempt from
backup withholding.
Set forth below are brief descriptions of the personal income tax status
of an investment in each of the Funds under New York, Pennsylvania,
Connecticut and New Jersey tax laws currently in effect. Income from a Fund is
not necessarily free from state income taxes in states other than its
designated state. State laws differ on this issue, and shareholders are urged
to consult their own tax advisers regarding the status of their accounts under
state and local laws.
EVERGREEN NEW YORK TAX FREE FUND. Individual shareholders of the Fund who
are subject to New York State and New York City personal income tax will not
be subject to New York State and New York City personal income tax on
dividends paid by the Fund to the extent that they are derived from interest
on obligations of the State of New York and its political subdivisions that is
exempt from federal income tax, provided that the Fund continues to qualify as
a regulated investment company ("RIC") under the Code and at the end of each
quarter at least 50% of the value of its total assets consists of obligations
that are exempt from federal income tax. In addition, dividends derived from
interest on debt obligations issued by certain other governmental entities
(for example, U.S. territories) will be similarly exempt.
For New York State and New York City personal income tax purposes, long-
term capital gain distributions are taxable as long-term capital gains
regardless of the length of time shareholders have owned their shares in the
Fund. Short-term capital gains and any other taxable distributions of income
are taxable as ordinary income. Shareholders of the Fund may not deduct
interest on indebtedness they incur or continue in order to purchase or carry
shares of the Fund for New York State or New York City personal income tax
purposes.
To the extent that investors are obligated to pay state or local taxes
outside the State of New York, dividends earned by an investment in the Fund
may represent taxable income. Distributions from investment income and capital
gains, including exempt-interest dividends, may be subject to New York State
corporate franchise taxes and to the New York City general corporation tax, if
received by a corporation subject to those taxes, to state taxes in states
other than New York and to local taxes in cities other than New York City. The
interest income that is distributed by the Fund will generally not be taxable
to the Fund for purposes of the New York State corporate franchise tax or the
New York City general corporation tax.
EVERGREEN PENNSYLVANIA TAX FREE FUND. Individual shareholders of the Fund
who are subject to the Pennsylvania personal income tax, as either residents
or non-residents of the Commonwealth of Pennsylvania, will not be subject to
Pennsylvania personal income tax on distributions of interest made by the Fund
that are attributable to (1) obligations issued by the Commonwealth of
Pennsylvania, any public authority, commission, board or agency created by the
Commonwealth of Pennsylvania, any political subdivision of the Commonwealth of
Pennsylvania or any public authority created by any such political subdivision
(collectively, "Pennsylvania Obligations"); and (2) obligations of the U.S.
and certain qualifying agencies, instrumentalities, territories and
possessions of the U.S., the interest from which are statutorily free from
state taxation in the Commonwealth of Pennsylvania under the laws of the
Commonwealth or the U.S. (collectively, "U.S. Obligations"). Distributions
attributable to most other sources will not be exempt from Pennsylvania
personal income tax. Distributions of gains attributable to Pennsylvania
Obligations and U.S. Obligations (collectively "Exempt Obligations") will be
subject to the Pennsylvania personal income tax.
17
<PAGE>
Shares of the Fund that are held by individual shareholders who are
Pennsylvania residents subject to the Pennsylvania county personal property
tax will be exempt from such tax to the extent that the Fund's portfolio
consists of Exempt Obligations on the annual assessment date. Nonresidents of
the Commonwealth of Pennsylvania are not subject to the Pennsylvania county
personal property tax. Corporations are not subject to Pennsylvania personal
property taxes. For shareholders who are residents of the City of
Philadelphia, distributions of interest derived from Exempt Obligations are
not taxable for purposes of the Philadelphia School District investment income
tax provided that the Fund reports to its investors the percentage of Exempt
Obligations held by it for the year. The Fund will report such percentage to
its shareholders.
Distributions of interest, but not gains, realized on Exempt Obligations
are not subject to the Pennsylvania corporate net income tax. The Pennsylvania
Department of Revenue also takes the position that shares of funds similar to
the Fund are not considered exempt assets of a corporation for the purpose of
determining its capital stock value subject to the Commonwealth's capital
stock and franchise taxes.
EVERGREEN CONNECTICUT TAX FREE FUND. Exempt-interest dividends paid by
the Fund, to the extent such dividends are exempt from federal income tax and
are derived from interest payments on municipal securities of the State of
Connecticut and its political subdivisions, instrumentalities, state or local
authorities, districts or similar public entities created under Connecticut
law, are not subject to the Connecticut income tax on individuals, trusts and
estates. Long-term capital gain dividends are also not subject to the
Connecticut income tax to the extent derived from securities issued by such
entities. Ordinary income dividends are subject to the Connecticut income tax.
Distributions from the Fund to shareholders subject to the Connecticut
corporation business tax are included in gross income for purposes of the
corporation business tax, but a dividends received deduction may be available
for a portion thereof except to the extent such distributions constitute
exempt-interest dividends or capital gain dividends for federal income tax
purposes.
EVERGREEN NEW JERSEY TAX FREE INCOME FUND. For individual shareholders in
any year in which the Fund satisfies the requirements for treatment as a
"qualified investment fund" under New Jersey law, distributions from the Fund
will be exempt from the New Jersey Gross Income Tax to the extent such
distributions are attributable to interest or gains from (i) obligations
issued by or on behalf of the State of New Jersey or any county, municipality,
school or other district, agency, authority, commission, instrumentality,
public corporation, corporate body or political subdivision of New Jersey or
(ii) obligations that are otherwise statutorily exempt from state or local
taxation or under the laws of the United States. To be classified as a
qualified investment fund, at least 80% of the Fund's investments must consist
of such obligations. Distributions by a qualified investment fund that are
attributable to most other sources will be subject to the New Jersey gross
income tax. If the Fund continues to qualify as a qualified investment fund,
any gain realized on the redemption or sale of its shares will not be subject
to the New Jersey gross income tax. Corporate shareholders will be subject to
a corporate franchise tax on distributions from and on gains from sales of the
shares in the Fund. The Fund shares are not subject to property taxation by
New Jersey or its political subdivisions.
Statements describing the tax status of shareholders' dividends and
distributions will be mailed annually by the Funds. These statements will set
forth the amount of income exempt from federal and if applicable, state
taxation, and the amount, if any, subject to federal and state taxation.
Moreover, to the extent necessary, these statements will indicate the amount
of exempt-interest dividends which are a specific preference item for purposes
of the federal individual and corporate alternative minimum taxes. The
exemption of interest income for federal income tax purposes does not
necessarily result in exemption under the income or other tax law of any state
or local taxing authority.
The foregoing discussion of federal and certain state income tax
consequences is based on tax laws and regulations in effect on the date of
this prospectus and is subject to change by legislative or administrative
action. As the foregoing discussion is for general information only, you
should also review the discussion of "Additional Tax Information" contained in
the SAI.
GENERAL INFORMATION
Portfolio Turnover. The portfolio turnover rates for each Fund are set forth
under "Financial Highlights."
Portfolio Transactions. Consistent with the Conduct Rules of the National
Association of Securities Dealers, Inc., and subject to seeking best price and
execution, a Fund may consider sales of its shares as a factor in the
selection of broker-dealers to enter into portfolio transactions with the
Fund.
18
<PAGE>
Other Classes of Shares. EVERGREEN CONNECTICUT MUNICIPAL BOND FUND and
EVERGREEN NEW JERSEY TAX FREE INCOME FUND each offer three classes of shares,
Class A, Class B and Class Y. EVERGREEN NEW YORK TAX FREE FUND and EVERGREEN
PENNSYLVANIA TAX FREE FUND each offer four classes of shares, Class A, Class
B, Class C and Class Y shares and may in the future offer additional classes.
Class Y shares are the only class of shares offered by this prospectus and are
only available to (i) persons who at or prior to December 31, 1994, owned
shares in a mutual fund advised by Evergreen Asset Management Corporation,
(ii) certain institutional investors and (iii) investment advisory clients of
FUNB or their affiliates. The dividends payable with respect to Class A, Class
B and Class C shares will be less than those payable with respect to Class Y
shares due to the distribution and distribution related expenses borne by
Class A, Class B and Class C shares and the fact that such expenses are not
borne by Class Y shares. Investors should telephone (800) 343-2898 to obtain
more information on other classes of shares.
Performance Information. From time to time, a Fund may quote its "total
return" or "yield" for specified periods in advertisements, reports, or other
communications to shareholders. Total return and yield are computed separately
for each class of shares. Performance data for one or more classes may be
included in any advertisement or sales literature using performance data of a
Fund. A Fund's total return for each such period is computed by finding,
through the use of a formula prescribed by the SEC, the average annual
compounded rate of return over the period that would equate an assumed initial
amount invested to the value of the investment at the end of the period. For
purposes of computing total return, dividends and capital gains distributions
paid on shares of a Fund are assumed to have been reinvested when paid and the
maximum sales charges applicable to purchases of the Fund's shares are assumed
to have been paid.
Yield is a way of showing the rate of income a Fund earns on its
investments as a percentage of the Fund's share price. A Fund's yield is
calculated according to accounting methods that are standardized by the SEC
for all stock and bond funds. Because yield accounting methods differ from the
method used for other accounting purposes, a Fund's yield may not equal its
distribution rate, the income paid to your account or the income reported in
the Fund's financial statements. To calculate yield, a Fund takes the interest
income it earned from its portfolio of investments (as defined by the SEC
formula) for a 30-day period (net of expenses), divides it by the average
number of shares entitled to receive dividends, and expresses the result as an
annualized percentage rate based on the Fund's share price at the end of the
30-day period. This yield does not reflect gains or losses from selling
securities.
Total returns are based on the overall dollar or percentage change in the
value of a hypothetical investment in a Fund. A Fund's total return shows its
overall change in value including changes in share prices and assumes all of a
Fund's distributions are reinvested. A cumulative total return reflects a
Fund's performance over a stated period of time. An average annual total
return reflects the hypothetical annually compounded return that would have
produced the same cumulative total return if a Fund's performance had been
constant over the entire period. Because average annual total returns tend to
smooth out variations in a Fund's return, you should recognize that they are
not the same as actual year-by-year results. To illustrate the components of
overall performance, the Fund may separate its cumulative and average annual
total returns into income results and realized and unrealized gain or loss.
A Fund may also quote tax-equivalent yields, which show the taxable
yields an investor would have to earn before taxes to equal the Fund's tax-
free yields. A tax-equivalent yield is calculated by dividing a Fund's tax-
exempt yield by the result of one minus a stated federal tax rate. If only a
portion of a Fund's income was tax-exempt, only that portion is adjusted in
the calculation.
Performance data may be included in any advertisement or sales literature
of a Fund. These advertisements may quote performance rankings or ratings of a
Fund by financial publications or independent organizations such as Lipper
Analytical Services, Inc. and Morningstar, Inc. or may compare a Fund's
performance to various indices. A Fund may also advertise in items of sales
literature an "actual distribution rate" which is computed by dividing the
total ordinary income distributed (which may include the excess of short-term
capital gains over losses) to shareholders for the latest 12-month period by
the maximum public offering price per share on the last day of the period.
Investors should be aware that past performance may not be indicative of
future results.
In marketing the Funds' shares, information may be provided that is
designed to help individuals understand their investment goals and explore
various financial strategies. Such information may include publications
describing general principles of investing, such as asset allocation,
diversification, risk tolerance, and goal setting; a questionnaire designed to
help create a personal financial profile; and an action plan offering
investment alternatives. The information provided to investors may also
include discussions of other Evergreen
19
<PAGE>
funds, products, and services, which may include: retirement investing;
brokerage products and services; the effects of periodic investment plans and
dollar cost averaging; saving for college; and charitable giving. In addition,
the information provided to investors may quote financial or business
publications and periodicals, including model portfolios or allocations, as
they relate to fund management, investment philosophy, and investment
techniques. EDI may also reprint, and use as advertising and sales literature,
articles from Evergreen Events, a quarterly magazine provided to Evergreen
fund shareholders.
Year 2000 Risks. Like other investment companies, financial and business
organizations and individuals around the world, the Funds could be adversely
affected if the computer systems used by the Funds' investment advisers and
the Funds' other service providers do not properly process and calculate date-
related information and data from and after January 1, 2000. This is commonly
known as the "Year 2000 Problem." The Funds' investment advisers are taking
steps to address the Year 2000 Problem with respect to the computer systems
that they use and to obtain assurances that comparable steps are being taken
by the Funds' other major service providers. At this time, however, there can
be no assurance that these steps will be sufficient to avoid any adverse
impact on the Funds.
Additional Information. This prospectus and the SAI, which has been
incorporated by reference herein, do not contain all the information set forth
in the Registration Statement filed by the Trust with the SEC under the
Securities Act of 1933, as amended. Copies of the Registration Statement may
be obtained at a reasonable charge from the SEC or may be examined, without
charge, at the offices of the SEC in Washington, D.C.
20
<PAGE>
INVESTMENT ADVISER
First Union National Bank, 201 South College Street, Charlotte, North Carolina
28288
Keystone Investment Management Company, 200 Berkeley Street, Boston,
Massachusetts 02116-5034
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 9021, Boston, Massachusetts
02205-9827
TRANSFER AGENT
Evergreen Service Company, P.O. Box 2121, Boston, Massachusetts, 02116-5034
LEGAL COUNSEL
Sullivan & Worcester LLP, 1025 Connecticut Avenue, N.W., Washington, D.C. 20036
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110
DISTRIBUTOR
Evergreen Distributor, Inc., 125 West 55th Street, New York, New York 10019
<PAGE>
EVERGREEN MUNICIPAL TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 633-2700
EVERGREEN STATE MUNICIPAL BOND FUNDS
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1998
Evergreen California Tax Free Fund (the "California Fund")
Evergreen Massachusetts Tax Free Fund (the "Massachusetts Fund")
Evergreen Missouri Tax Free Fund (the "Missouri Fund")
Evergreen New York Tax Free Fund (the "New York Fund")
Evergreen Pennsylvania Tax Free Fund (the "Pennsylvania Fund")
Evergreen Connecticut Municipal Bond Fund (the "Connecticut Fund")
Evergreen New Jersey Tax Free Income Fund (the "New Jersey Fund")
(Each a "Fund"; together, the "Funds")
Each Fund is a series of an open-end management
investment company known as Evergreen
Municipal Trust (the "Trust").
This Statement of Additional Information ("SAI") pertains to all classes of
shares of the Funds listed above. It is not a prospectus and should be read in
conjunction with the prospectuses dated August 1, 1998 for the Fund in which you
are making or contemplating an investment. The Funds are offered through two
separate prospectuses: one offering Class A and Class B shares of each Fund and
Class C shares of each Fund except the Connecticut Fund and the New Jersey Fund,
and one offering Class Y shares of the New York Fund, the Pennsylvania Fund, the
Connecticut Fund and the New Jersey Fund. You may obtain either of these
prospectuses from Evergreen Distributor, Inc.
<PAGE>
TABLE OF CONTENTS
INVESTMENT POLICIES..........................................................3..
Fundamental Investment Policies.....................................3..
Additional Information on Securities and Investment Practices.......5
MANAGEMENT OF THE TRUST......................................................12
PRINCIPAL HOLDERS OF FUND SHARES.............................................15
INVESTMENT ADVISORY AND OTHER SERVICES.......................................21
Investment Advisers.................................................21.
Investment Advisory Agreements......................................22
Distributor.........................................................22.
Distribution Plans and Agreements...................................23
Additional Service Providers........................................24
BROKERAGE....................................................................25
Selection of Brokers..............................................25
Brokerage Commissions...............................................25.
General Brokerage Policies..........................................26.
TRUST ORGANIZATION...........................................................26.
Form of Organization................................................26.
Description of Shares...............................................26
Voting Rights.......................................................26.
Limitation of Trustees' Liability...................................27.
PURCHASE, REDEMPTION AND PRICING OF SHARES...................................27
How the Funds Offer Shares to the Public............................27
Contingent Deferred Sales Charge....................................28.
Sales Charge Waivers or Reductions..................................29.
Exchanges...........................................................31.
Calculation of Net Asset Value Per Share ("NAV") ...................31
Valuation of Portfolio Securities...................................31
Shareholder Services................................................31.
PRINCIPAL UNDERWRITER........................................................32.
ADDITIONAL TAX INFORMATION...................................................33
Requirements for Qualification as a Regulated Investment Company....33
Taxes on Distributions..............................................33.
Taxes on the Sale or Exchange of Fund Shares........................34
Other Tax Considerations............................................35.
FINANCIAL INFORMATION........................................................36.
ADDITIONAL INFORMATION.......................................................40.
APPENDIX A...................................................................A-1
APPENDIX B...................................................................B-1
APPENDIX C...................................................................C-1
APPENDIX D...................................................................D-1
APPENDIX E...................................................................E-1
APPENDIX F...................................................................F-1
APPENDIX G...................................................................G-5
APPENDIX H...................................................................H-1
APPENDIX I...................................................................I-1
3
<PAGE>
INVESTMENT POLICIES
FUNDAMENTAL INVESTMENT POLICIES
Each Fund has adopted the fundamental investment restrictions set forth
below which may not be changed without the vote of a majority of the Fund's
outstanding shares, as defined in the Investment Company Act of 1940 (the"1940
Act"). Where necessary, an explanation beneath a fundamental policy describes a
Fund's practices with respect to that policy, as allowed by current law. If the
law governing a policy change, the Fund's practices may change accordingly
without a shareholder vote. Unless otherwise stated, all references to the
assets of a Fund are in terms of current market value.
1. Diversification
Each Fund may not make any investment that is inconsistent with its
classification as a non-diversified investment company under the 1940 Act.
Further Explanation of Non-Diversified Funds:
All of the Funds are classified as "non-diversified". A non-diversified
management investment company may have no more than 25% of its total assets
invested in the securities (other than United States ("U.S.") government
securities or the shares of other regulated investment companies) of any one
issuer and must invest 50% of its total assets under the 5% of its assets and
10% of outstanding voting securities tests applicable to diversified Funds. The
test for diversified Funds requires that Fund cannot purchase securities of an
issuer if the purchase would cause more than 5% of the Fund's total assets taken
at market value to be invested in the securities of such issuer, except U.S.
government securities, or if the purchase would cause more than 10% of
outstanding voting securities of any one issuer to be held in the Fund's
portfolio. Most Funds apply this limitation to 75% of their total assets.
2. Concentration
Each Fund may not concentrate its investments in the securities of issuers
primarily engaged in any particular industry (other than securities that are
issued or guaranteed by the U.S. government or its agencies or
instrumentalities).
Further Explanation of Concentration Policy:
Each Fund may not invest more than 25% of its total assets, taken at market
value , in the securities of issuers primarily engaged in any particular
industry (other than securities issued or guaranteed by the U.S. government or
its agencies or instrumentalities).
3. Issuing Senior Securities
Except as permitted under the 1940 Act, each Fund may not issue senior
securities.
4. Borrowing
Each Fund may not borrow money, except to the extent permitted by
applicable law.
4
<PAGE>
Further Explanation of Borrowing Policy:
Each Fund may borrow from banks in an amount up to 33 1/3% of its total
assets, taken at market value. Each Fund may also borrow up to an additional 5%
of its total assets from banks or others. Each Fund may borrow only as a
temporary measure for extraordinary or emergency purposes such as the redemption
of Fund shares. A Fund will not purchase securities while borrowings are
outstanding except to exercise prior commitments and to exercise subscription
rights (as defined in the 1940 Act) or enter into reverse repurchase agreements,
in amounts up to 33 1/3% of its total assets (including the amount borrowed).
Each Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities. Each Fund may purchase
securities on margin and engage in short sales to the extent permitted by
applicable law.
5. Underwriting
Each Fund may not underwrite securities of other issuers, except insofar as
each Fund may be deemed to be an underwriter in connection with the disposition
of its portfolio securities.
6. Real Estate
Each Fund may not purchase or sell real estate, except that, to the extent
permitted by applicable law, each Fund may invest in (a) securities that are
directly or indirectly secured by real estate, or (b) securities issued by
issuers that invest in real estate.
7. Commodities
Each Fund may not purchase or sell commodities or contracts on commodities,
except to the extent that each Fund may engage in financial futures contracts
and related options and currency contracts and related options and may otherwise
do so in accordance with applicable law and without registering as a commodity
pool operator under the Commodity Exchange Act.
8. Lending
Each Fund may not make loans to other persons, except that each Fund may
lend its portfolio securities in accordance with applicable law. The acquisition
of investment securities or other investment instruments shall not be deemed to
be the making of a loan.
Further Explanation of Lending Policy:
To generate income and offset expenses, each Fund may lend portfolio
securities to broker-dealers and other financial institutions in an amount up to
33 1/3% of its total assets, taken at market value. While securities are on
loan, the borrower will pay each Fund any income accruing on the security. Each
Fund may invest any collateral it receives in additional portfolio securities,
such as U.S. Treasury notes, certificates of deposit, other high-grade,
short-term obligations or interest bearing cash equivalents. Gains or losses in
the market value of a security lent will affect each Fund and its shareholders.
When a Fund lends its securities, it will require the borrower to give the
Fund collateral in cash or government securities. Each Fund will require
collateral in an amount equal to at least 100% of the current market value of
the securities lent, including accrued interest. Each Fund has the right to call
a loan and obtain the securities lent any time on notice of not more than five
business days. Each Fund may pay reasonable fees in connection with such loans.
5
<PAGE>
9. Investment in Federally Tax Exempt Securities
Each Fund will, during periods of normal market conditions, invest its
assets in accordance with applicable guidelines issued by the Securities and
Exchange Commission or its staff concerning investment in tax-exempt securities
for funds with the words tax exempt, tax free or municipal in their names.
ADDITIONAL INFORMATION ON SECURITIES AND INVESTMENT PRACTICES
The investment objective of each Fund and a description of the securities
in which each Fund may invest is set forth in the Funds' prospectuses. The
following expands upon the discussion in the prospectuses regarding certain
investments of each Fund.
Municipal Bonds
The Funds may invest in municipal bonds of any state, territory or
possession of the U.S. including the District of Columbia. The Funds may also
invest in municipal bonds of any political subdivision, agency or
instrumentality (e.g., counties, cities, towns, villages, districts,
authorities) of the U.S. or its possessions. Municipal bonds are debt
instruments issued by or for a state or local government to support its general
financial needs or to pay for special projects such as airports, bridges,
highways, public transit, schools, hospitals, housing and water and sewer works.
Municipal bonds may also be issued to refinance public debt.
Municipal bonds are mainly divided between "general obligation" and
"revenue" bonds. General obligation bonds are backed by the full faith and
credit of governmental issuers with the power to tax. They are repaid from the
issuer's general revenues. Payment, however, may be dependent upon legislative
approval and may be subject to limitations on the issuer's taxing power.
Enforcement of payments due under general obligation bonds varies according to
the law applicable to the issuer. In contrast, revenue bonds are supported only
by the revenues generated by the project or facility.
The Funds may also invest in industrial development bonds. Such bonds are
usually revenue bonds issued to pay for facilities with a public purpose
operated by private corporations. The credit quality of industrial development
bonds is usually directly related to the credit standing of the owner or user of
the facilities. To qualify as a municipal bond, the interest paid on an
industrial development bond must qualify as fully exempt from federal income
tax. However, the interest paid on an industrial development bond may be subject
to the federal alternative minimum tax.
The yields on municipal bonds depend on such factors as market conditions,
the financial condition of the issuer and the issue's size, maturity date and
rating. Municipal bonds are rated by Standard & Poor's Ratings Group ("S&P"),
Moody's Investors Service ("Moody's") and Fitch IBCA, Inc. ("Fitch"). Such
ratings, however, are opinions, not absolute standards of quality. Municipal
bonds with the same maturity, interest rate and rating may have different
yields, while municipal bonds with the same maturity and interest rate, but
different ratings, may have the same yield. Once purchased by a Fund, a
municipal bond may cease to be rated or receive a new rating below the minimum
required for purchase by a Fund. Neither event would require a Fund to sell the
bond, but a Fund's Adviser (as defined later) would consider such events in
determining whether a Fund should continue to hold it.
6
<PAGE>
The ability of a Fund to achieve its investment objective depends upon the
continuing ability of issuers of municipal bonds to pay interest and principal
when due. Municipal bonds are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors. Such
laws extend the time for payment of principal and/or interest, and may otherwise
restrict a Fund's ability to enforce its rights in the event of default. Since
there is generally less information available on the financial condition of
municipal bond issuers compared to other domestic issuers of securities, a
Fund's investment adviser may lack sufficient knowledge of an issue's
weaknesses. Other influences, such as litigation, may also materially affect the
ability of an issuer to pay principal and interest when due. In addition, the
market for municipal bonds is often thin and can be temporarily affected by
large purchases and sales, including those by a Fund.
From time to time, Congress has considered restricting or eliminating the
federal income tax exemption for interest on municipal bonds. Such actions could
materially affect the availability of municipal bonds and the value of those
already owned by a Fund. If such legislation were passed, the Trust's Board of
Trustees may recommend changes in a Fund's investment objectives and policies or
dissolution of a Fund.
U.S. Government Securities
Each Fund may invest in securities issued or guaranteed by U.S. government
agencies or instrumentalities.
These securities are backed by (1) the discretionary authority of the U.S.
government to purchase certain obligations of agencies or instrumentalities or
(2) the credit of the agency or instrumentality issuing the obligations.
Some government agencies and instrumentalities may not receive financial
support from the U.S. government. Examples of such agencies are:
(i) Farm Credit System, including the National Bank for
Cooperatives, Farm Credit Banks and Banks for Cooperatives;
(ii) Farmers Home Administration;
(iii) Federal Home Loan Banks;
(iv) Federal Home Loan Mortgage Corporation;
(v) Federal National Mortgage Association; and
(vi) Student Loan Marketing Association.
Securities Issued by the Government National Mortgage Association ("GNMA")
The Funds may invest in securities issued by the GNMA, a corporation
wholly-owned by the U.S. government. GNMA securities or "certificates" represent
ownership in a pool of underlying mortgages. The timely payment of principal and
interest due on these securities is guaranteed.
7
<PAGE>
Unlike conventional bonds, the principal on GNMA certificates is not paid
at maturity but over the life of the security in scheduled monthly payments.
While mortgages pooled in a GNMA certificate may have maturities of up to 30
years, the certificate itself will have a shorter average maturity and less
principal volatility than a comparable 30-year bond.
The market value and interest yield of GNMA certificates can vary due not
only to market fluctuations, but also to early prepayments of mortgages within
the pool. Since prepayment rates vary widely, it is impossible to accurately
predict the average maturity of a GNMA pool. In addition to the guaranteed
principal payments, GNMA certificates may also make unscheduled principal
payments resulting from prepayments on the underlying mortgages.
Although GNMA certificates may offer yields higher than those available
from other types of U.S. government securities, they may be less effective as a
means of locking in attractive long-term rates because of the prepayment
feature. For instance, when interest rates decline, prepayments are likely to
increase as the holders of the underlying mortgages seek refinancing. As a
result, the value of a GNMA certificate is not likely to rise as much as the
value of a comparable debt security would in response to the same decline. In
addition, these prepayments can cause the price of a GNMA certificate originally
purchased at a premium to decline in price compared to its par value, which may
result in a loss.
Virgin Islands, Guam and Puerto Rico
Each Fund may invest in obligations of the governments of the Virgin
Islands, Guam and Puerto Rico to the extent such obligations are exempt from the
income or intangibles taxes, as applicable, of the state for which a Fund is
named. Each Fund does not presently intend to invest more than (a) 5% of its net
assets in the obligations of each of the Virgin Islands and Guam or (b) 25% of
its net assets in the obligations of Puerto Rico. Accordingly, a Fund may be
adversely affected by local political and economic conditions and developments
within the Virgin Islands, Guam and Puerto Rico affecting the issuers of such
obligations.
When-Issued, Delayed-Delivery and Forward Commitment Transactions
The Funds may purchase securities on a when-issued or delayed delivery
basis and may purchase or sell securities on a forward commitment basis.
Settlement of such transactions normally occurs within a month or more after the
purchase or sale commitment is made.
The Funds may purchase securities under such conditions only with the
intention of actually acquiring them, but may enter into a separate agreement to
sell the securities before the settlement date. Since the value of securities
purchased may fluctuate prior to settlement, a Fund may be required to pay more
at settlement than the security is worth. In addition, the purchaser is not
entitled to any of the interest earned prior to settlement.
Upon making a commitment to purchase a security on a when-issued, delayed
delivery or forward commitment basis, a Fund will hold liquid assets worth at
least the equivalent of the amount due. The liquid assets will be monitored on a
daily basis and adjusted as necessary to maintain the necessary value.
Purchases made under such conditions are a form of leveraging and may
involve the risk that yields secured at the time of commitment may be lower than
otherwise available by the time settlement takes place, causing an unrealized
loss to a Fund. In addition, when a Fund engages in such purchases, it relies on
the other party to consummate the sale. If the other party fails to
8
<PAGE>
perform its obligations, a Fund may miss the opportunity to obtain a security at
a favorable price or yield.
Repurchase Agreements
The Funds may enter into repurchase agreements with entities that are
registered as U.S. government securities dealers, including member banks of the
Federal Reserve System having at least $1 billion in assets, primary dealers in
U.S. government securities or other financial institutions believed by the
Adviser to be creditworthy. In a repurchase agreement, a Fund obtains a security
and simultaneously commits to return the security to the seller at a set price
(including principal and interest) within a period of time usually not exceeding
seven days. The resale price reflects the purchase price plus an agreed upon
market rate of interest which is unrelated to the coupon rate or maturity of the
underlying security. A repurchase agreement involves the obligation of the
seller to pay the agreed upon price, which obligation is in effect secured by
the value of the underlying security.
The Funds' custodian or a third party will take possession of the
securities subject to repurchase agreements, and these securities will be marked
to market daily. To the extent that the original seller does not repurchase the
securities from a Fund, a Fund could receive less than the repurchase price on
any sale of such securities. In the event that such a defaulting seller filed
for bankruptcy or became insolvent, disposition of such securities by a Fund
might be delayed pending court action. Each Fund's Adviser believes that under
the regular procedures normally in effect for custody of a Fund's portfolio
securities subject to repurchase agreements, a court of competent jurisdiction
would rule in favor of a Fund and allow retention or disposition of such
securities. The Funds will only enter into repurchase agreements with banks and
other recognized financial institutions, such as broker-dealers, which are
deemed by the Adviser to be creditworthy pursuant to guidelines established by
the Board of Trustees.
Reverse Repurchase Agreements
As described herein, the Funds may also enter into reverse repurchase
agreements. These transactions are similar to borrowing cash. In a reverse
repurchase agreement, a Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in return
for a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed upon rate.
The use of reverse repurchase agreements may enable a Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not ensure that
the Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of a Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
Options
Each Fund may buy or sell (i.e., write) put and call options on securities
it holds or intends to acquire. The Funds may also buy and sell options on
financial futures contracts. Each Fund will use options as a hedge against
decreases or increases in the value of securities it holds or intends
9
<PAGE>
to acquire. The Funds may purchase put and call options for the purpose of
offsetting previously written put and call options of the same series.
The Funds may write only covered options. With regard to a call option,
this means that a Fund will own, for the life of the option, the securities
subject to the call option. Each Fund will cover put options by holding, in a
segregated account, liquid assets having a value equal to or greater than the
price of securities subject to the put option. If a Fund is unable to effect a
closing purchase transaction with respect to the covered options it has sold, it
will not be able to sell the underlying securities or dispose of assets held in
a segregated account until the options expire or are exercised.
Futures Transactions
Each Fund may enter into financial futures contracts and write options on
such contracts. Each Fund intends to enter into such contracts and related
options for hedging purposes. Each Fund will enter into futures contracts on
securities or index-based futures contracts in order to hedge against changes in
interest or exchange rates or securities prices. A futures contract on
securities is an agreement to buy or sell securities at a specified price during
a designated month. A futures contract on a securities index does not involve
the actual delivery of securities, but merely requires the payment of a cash
settlement based on changes in the securities index. A Fund does not make
payment or deliver securities upon entering into a futures contract. Instead, it
puts down a margin deposit, which is adjusted to reflect changes in the value of
the contract and which continues until the contract is terminated.
Each Fund may sell or purchase futures contracts. When a futures contract
is sold by a Fund, the value of the contract will tend to rise when the value of
the underlying securities declines and to fall when the value of such securities
increases. Thus, each Fund would sell futures contracts in order to offset a
possible decline in the value of its securities. If a futures contract is
purchased by a Fund, the value of the contract will tend to rise when the value
of the underlying securities increases and to fall when the value of such
securities declines. Each Fund intends to purchase futures contracts in order to
establish what is believed by the Adviser to be a favorable price and rate of
return for securities a Fund intends to purchase.
Each Fund also intends to purchase put and call options on futures
contracts for hedging purposes. A put option purchased by a Fund would give it
the right to assume a position as the seller of a futures contract. A call
option purchased by a Fund would give it the right to assume a position as the
purchaser of a futures contract. The purchase of an option on a futures contract
requires a Fund to pay a premium. In exchange for the premium, a Fund becomes
entitled to exercise the benefits, if any, provided by the futures contract, but
is not required to take any action under the contract. If the option cannot be
exercised profitably before it expires, a Fund's loss will be limited to the
amount of the premium and any transaction costs.
Each Fund may enter into closing purchase and sale transactions in order to
terminate a futures contract and may sell put and call options for the purpose
of closing out its options positions. A Fund's ability to enter into closing
transactions depends on 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. As a result, there can be no
assurance 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, in which case it would continue to bear market risk on
the transaction.
10
<PAGE>
Although futures and options transactions are intended to enable a Fund to
manage market, interest rate or exchange rate risk, unanticipated changes in
interest rates or market prices could result in poorer performance than if it
had not entered into these transactions. Even if the Adviser correctly predicts
interest rate movements, a hedge could be unsuccessful if changes in the value
of a Fund's futures position did not correspond to changes in the value of its
investments. This lack of correlation between a Fund's futures and securities
positions may be caused by differences between the futures and securities
markets or by differences between the securities underlying a Fund's futures
position and the securities held by or to be purchased for a Fund. Each Fund's
Adviser will attempt to minimize these risks through careful selection and
monitoring of the Fund's futures and options positions.
The Funds do not intend to use futures transactions for speculation or
leverage. Each Fund has the ability to write options on futures, but currently
intends to write such options only to close out options purchased by the Fund.
Each Fund will not change these policies without supplementing the information
in the prospectuses and SAI.
Each 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, each 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, the Funds do not pay or receive
money upon the purchase or sale of a futures contract. Rather, each 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 a Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
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, a 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 a
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, a Fund
will mark-to-market its open futures positions. Each Fund is also required to
deposit and maintain margin when it writes call options on futures contracts.
Below Investment Grade Bonds
Each Fund may invest up to 20% of its assets in lower rated bonds but will
not invest in bonds rated below B. (For more information about bond ratings, see
Appendices H and I.) Bonds rated below BBB by S&P or Fitch or below Baa by
Moody's, commonly known as "junk bonds,"
11
<PAGE>
offer high yield, but also high risk. While investments in junk bonds provide
opportunities to maximize return over time, they are considered predominantly
speculative with respect to the ability of the issuer to meet principal and
interest payments. Investors should be aware of the following risks:
(1) The lower ratings of junk bonds reflect a greater possibility that
adverse changes in the financial condition of the issuer or in general economic
conditions, or both, or an unanticipated rise in interest rates may impair the
ability of the issuer to make payments of interest and principal, especially if
the issuer is highly leveraged. Such issuer's ability to meet its debt
obligations may also be adversely affected by the issuer's inability to meet
specific forecasts or the unavailability of additional financing. Also, an
economic downturn or an increase in interest rates may increase the potential
for default by the issuers of these securities.
(2) The value of junk bonds may be more susceptible to real or perceived
adverse economic or political events than is the case for higher quality
municipal bonds.
(3) The value of junk bonds, like that of other fixed income securities,
fluctuates in response to changes in interest rates, generally rising when
interest rates decline and falling when interest rates rise. For example, if
interest rates increase after a fixed income security is purchased, the
security, if sold prior to maturity, may return less than its cost. The prices
of junk bonds, however, are generally less sensitive to interest rate changes
than the prices of higher-rated bonds, but are more sensitive to news about an
issuer or the economy which is, or investors perceive as, negative.
(4) The secondary market for junk bonds may be less liquid at certain times
than the secondary market for higher quality bonds, which may adversely effect
(a) the bond's market price, (b) a Fund's ability to sell the bond, and (c) a
Fund's ability to obtain accurate market quotations for purposes of valuing its
assets.
Illiquid and Restricted Securities
Each Fund may not invest more than 15% of its net assets in securities that
are illiquid. A security is illiquid when a Fund cannot dispose of it in the
ordinary course of business within seven days at approximately the value at
which the Fund has the investment on its books.
Each Fund may invest in "restricted" securities, i.e., securities subject
to restrictions on resale under federal securities laws. Rule 144A under the
Securities Act of 1933 ("Rule 144A") allows certain restricted securities to be
traded freely among qualified institutional investors. Since Rule 144A
securities may have limited markets, the Board of Trustees will determine
whether such securities should be considered illiquid for the purpose of
determining a Fund's compliance with the limit on illiquid securities indicated
above. In determining the liquidity of Rule 144A securities, the Trustees will
consider: (1) the frequency of trades and quotes for the security; (2) the
number of dealers willing to purchase or sell the security and the number of
other potential buyers; (3) dealer undertakings to make a market in the
security; and (4) the nature of the security and the nature of the marketplace
trades.
12
<PAGE>
Investment in Other Investment Companies
Each Fund may purchase the shares of other investment companies to the
extent permitted under the 1940 Act. Currently, each Fund may not: (1) own more
than 3% of the outstanding voting stock of another investment company; (2)
invest more than 5% of its assets in any single investment company; and (3)
invest more than 10% of its assets in investment companies. However, each Fund
may invest all of its investable assets in securities of a single open-end
management investment company with substantially the same fundamental investment
objectives, policies and limitations as the Fund.
Short Sales
Each Fund may not make short sales of securities or maintain a short
position unless, at all times when a short position is open, it owns an equal
amount of such securities or of securities which, without payment of any further
consideration, are convertible into or exchangeable for securities of the same
issue as, and equal in amount to, the securities sold short. Each Fund may
effect a short sale in connection with an underwriting in which a Fund is the
participant.
MANAGEMENT OF THE TRUST
Set forth below are the Trustees and officers of the Trust and their
principal occupations and some of their affiliations over the last five years.
Unless otherwise indicated, the address for each Trustee and officer is 200
Berkeley Street, Boston, Massachusetts 02116. Each Trustee is also a Trustee of
each of the other Trusts in the Evergreen Fund complex.
<TABLE>
<CAPTION>
<S> <C> <C>
Name Position with Trust Principal Occupations for Last Five Years
- ------------------------------- -------------------------- -------------------------------------------------------------
Laurence B. Ashkin Trustee Real estate developer and construction consultant;
(DOB: 2/2/28) and President of Centrum Equities and Centrum
Properties, Inc.
Charles A. Austin III Trustee Investment Counselor to Appleton Partners, Inc.;
(DOB: 10/23/34) and former Managing Director, Seaward
Management
Company (investment advice).
K. Dun Gifford Trustee Trustee, Treasurer and Chairman of the Finance
(DOB: 10/12/38) Committee, Cambridge College; Chairman Emeritus
and Director, American Institute of Food and Wine; Chairman
and President, Oldways Preservation and Exchange Trust
(education); former Chairman of the Board, Director,and
Executive Vice President, The London Harness Company; former
Managing Partner, Roscommon Capital Corp.; former Chief
Executive Officer, Gifford Gifts of Fine Foods; and former
Chairman, Gifford, Drescher & Associates (environmental
consulting).
James S. Howell Chairman of the Former Chairman of the Distribution Foundation for
(DOB: 8/13/24) Board of Trustees the Carolinas; and former Vice President of Lance
Inc. (food manufacturing).
12
<PAGE>
Name Position with Trust Principal Occupations for Last Five Years
- ------------------------------- -------------------------- -------------------------------------------------------------
Leroy Keith, Jr. Trustee 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.
Gerald M. McDonnell Trustee Sales Representative with Nucor-Yamoto, Inc.
(DOB: 7/14/39) (steel producer).
Thomas L. McVerry Trustee Former Vice President and Director of Rexham
(DOB: 8/2/39) Corporation; and former Director of Carolina
Cooperative Federal Credit Union.
William Walt Pettit Trustee Partner in the law firm of William Walt Pettit, P.A.
(DOB: 8/26/55)
David M. Richardson Trustee Vice Chair and former Executive Vice President,
(DOB: 9/14/41) DHR International, Inc. (executive recruitment);
former Senior Vice President, Boyden International
Inc. (executive recruitment); and Director,
Commerce and Industry Association of New
Jersey, 411 International, Inc., and J&M Cumming Paper Co.
Russell A. Salton, III MD Trustee Medical Director, U.S. Health Care/Aetna Health
(DOB: 6/2/47) Services; former Managed Health Care Consultant;
and former President, Primary Physician Care.
Michael S. Scofield Trustee Attorney, Law Offices of Michael S. Scofield.
(DOB: 2/20/43)
Richard J. Shima Trustee Former Chairman, Environmental Warranty, Inc.
(DOB: 8/11/39) (insurance agency); Executive Consultant, Drake
Beam Morin, Inc. (executive outplacement); Director of
Connecticut Natural Gas Corporation, Hartford Hospital, Old
State House Association, Middlesex Mutual Assurance Company,
and Enhance Financial Services, Inc.; Chairman, Board of
Trustees, Hartford Graduate Center; Trustee, Greater Hartford
YMCA; former Director, Vice Chairman and Chief Investment
Officer, The Travelers Corporation; former Trustee, Kingswood-0
Oxford School; and former Managing Director and Consultant,
Russell Miller, Inc.
William J. Tomko* President and Senior Vice President and Operations Executive,
(DOB:8/30/58) Treasurer BISYS Fund Services.
13
<PAGE>
Name Position with Trust Principal Occupations for Last Five Years
- ------------------------------- -------------------------- -------------------------------------------------------------
Nimish S. Bhatt* Vice President and Vice President, Tax, BISYS Fund Services; former
(DOB: 6/6/63) Assistant Treasurer Assistant Vice President, Evergreen Asset Management
Corp./First Union Bank; former Senior Tax Consulting/Acting
Manager, Investment Companies Group, Price Waterhouse LLP, NY.
Bryan Haft* Vice President Team Leader, Fund Administration, BISYS Fund
(DOB: 1/23/65) Services
D'Ray Moore* Secretary Vice President, Client Services, BISYS Fund
(DOB: 3/30/59) Services
*Address: BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio 43219-8001
</TABLE>
Trustee Compensation
Listed below is the Trustee compensation for the fiscal year ended March
31, 1998.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Trustee Aggregate Total Compensation from Deferred
Compensation Trust and Fund Complex Paid Compensation of
from Trust to Trustees Trustees
Laurence B. Ashkin $719.99 $72,681.15 N/A
Charles A. Austin, III $515.24 $49,296.64 $7,394.50
K. Dun Gifford $470.40 $46,060.91 N/A
James S. Howell $819.17 $109,570.07 N/A
Leroy Keith Jr. $498.25 $46,461.22 N/A
Gerald M. McDonnell $767.65 $94,500.33 $94,500.33
Thomas L. McVerry $774.27 $96,804.62 $96,804.62
William Walt Pettit $712.41 $86,612.76 $86,612.76
David M. Richardson $509.42 $48,673.36 N/A
Russell A. Salton, III $738.01 $95,030.64 $95,030.64
Michael S. Scofield $760.29 $97,793.88 N/A
Richard J. Shima $525.80 $67,324.78 N/A
Robert J. Jeffries* $143.04 $18,222.42 N/A
Foster Bam* $435.65 $53,235.54 N/A
</TABLE>
*Former Trustee; retired as of December 31, 1997
14
<PAGE>
PRINCIPAL HOLDERS OF FUND SHARES
As of the date of this SAI, the officers and Trustees of the Trust owned as
a group less than 1% of the outstanding shares of any class of each Fund.
Set forth below is information with respect to each person who, to each
Fund's knowledge, owned beneficially or of record more than 5% of the
outstanding shares of any class of each fund as of June 30, 1998.
California Fund Class A
Peter Bodman and Frances 14.927%
Bodman Ttees
Bodman Family Trust
1325 Pinetree Drive
Frazier Park, CA 93225
MLPF&S for the Sole Benefit of 6.142%
its Customers
4800 Deer Lake Drive E 2nd Flr
Jacksonville, FL 32246
Billie Cheek and Irmgard Cheek 5.769%
Ttees
Cheek Family Trust
PO Box1041
Palm Desert, CA 92261
California Fund Class B
MLPF&S for the Sole Benefit of 17.533%
its Customers
4800 Deer Lake Drive E 2nd Flr
Jacksonville, FL 32246
California Fund Class C
MLPF&S for the Sole Benefit of 36.825%
its Customers
4800 Deer Lake Drive E 2nd Flr
Jacksonville, FL 32246
Victor Edward Rylander 10.525%
Lucille Rylander Co-ttees
Victor & Lucille Rylander Trust
4102 Caflur Ave
San Diego, CA 92117
15
<PAGE>
Prudential Securities FBO 6.961%
Rakesh C Gupta
Neelam Gupta Co-ttees
FBO Gupta Family Living Trust
Hemet, CA 92544
NFSC FEBO # OKS-714674 6.460%
Rozene L Kretz
776 Lawrence Drive
Gilroy, GA 95020
Smith Barney Inc 6.268%
388 Greenwich Street
New York, NY 10013
Richard B Smith 5.89%
Mary L Smith JT WROS
4853 MT Royal Court
San Diego, CA 92117
Massachusetts Fund Class A
Richard Nakashian 10.208%
PO Box 3150
Pocasset, MA 02559
Margaret Vogel 9.027%
Keystone Trust Company Trustee
c/o Youville Place
10 Pelham Road #306
Lexington, MA 02173
Ida R. Rodriguez 7.931%
Keystone Trust Company Trustee
58 Helen Road
Needham, MA 02192
Bertha M Beauchemin 6.924%
Keystone Trust Company Trustee
c/o Youville Place
10 Pelham Road #306
Lexington, MA 02173
Frank J. Pusateri and Helen C 6.016%
Pusateri Ttees
Pusateri Family Trust
1682 Dawes Road NE
Palm Bay, FL 32905
Ralph J Spuehler Jr and Sarah E 5.987%
Spuehler JT TEN
36 Bridle Path
Sudbury, MA 01776
Marion E Taylor Ttee 5.603%
Marion E Taylor Trust
10 Longwood Drive Apt 305
Westwood, MA 02090
16
<PAGE>
Massachusetts Fund Class C
Salvatore M Moscarello 8.65%
Irene A Moscarello JT TEN
24 Van Norden Road
Reading, MA 01867
Malcolm F Groves & Jean N 6.652%
Groves Ttees Malcolm F Groves
Rev Living Trust
80 Indian Hill Road
Cummaquid, MA 02367
William Ripley c/o Eastern 5.588%
Environmental Services Inc
45 Accord Park Drive
Norell, MA 02061
Jean J Shaughnessey & Paul F 5.371%
Shaughnessey JT TEN
76 Parkhurst Drive
Westford, MA 01886
John Pierce and Marie Pierce 5.357%
JT TEN
424 King's Town Way
Duxbury, MA 02332
Missouri Fund Class A
MLPF&S for the Sole Benefit of 47.973%
its Customers
4800 Deer Lake Drive E 2nd Flr
Jacksonville, FL 32246
Missouri Fund Class B
MLPF&S for the Sole Benefit of 29.178%
its Customers
4800 Deer Lake Drive E 2nd Flr
Jacksonville, FL 32246
Missouri Fund Class C
MLPF&S for the Sole Benefit of 23.222%
its Customers
4800 Deer Lake Drive E 2nd Flr
Jacksonville, FL 32246
Painewebber for the benefit of 20.266%
Dorothy K Pruett Trustee
Dorothy K Pruett Revocable
c/o Mid America Mortgage
8645 College Blvd
Overland Park, KS 66210
17
<PAGE>
Felicia L Bart 5.862%
Vern E Alexander JT WROS
6501 Twin Springs Road
Parkville, MO 64152
Robert L Beckmann 5.776%
Carol A Beckmann JT TEN
940 Sherman Lane
Florissant , MO 63031
Painewebber for the benefit of 5.031%
Joseph Henry Children Trust
Edwin C Hogueland Ttee
Donnelly Meiners Jordan Kline
4600 Madison Suite 1100
Kansas City, MO 64112
New York Fund Class A
MLPF&S for the Sole Benefit of 6.889%
its Customers
4800 Deer Lake Drive E 2nd Flr
Jacksonville, FL 32246
Prudential Securities Inc FBO 5.524%
Ms Sandra M Franck
c/o Ragtime #3
214 W 43rd ST
New York, NY 10036
New York Fund Class B
MLPF&S for the Sole Benefit of 13.138%
its Customers
4800 Deer Lake Drive E 2nd Flr
Jacksonville, FL 32246
New York Fund Class C
Bear Stearns Securities Corp 16.729%
FBO 626 60277 10
1 Metrotech Center North
Brooklyn, NY 11201
Carol T Whitman 13.250%
PO Box 43
Whippleville, NY 12995
Carol L Moore 9.903%
Rt 2 Box 1055
Chateaugay, NY 12920
MLPF&S for the Sole Benefit of 6.933%
its Customers
4800 Deer Lake Drive E 2nd Flr
Jacksonville, FL 32246
18
<PAGE>
Henry W Demoy JT WROS 6.231%
Patricia K Demoy JT WROS
Rd 2 King Road
Cambridge, NY 12816
Pennsylvania Fund Class A
MLPF&S for the Sole Benefit of 5.061%
its Customers
4800 Deer Lake Drive E 2nd Flr
Jacksonville, FL 32246
Pennsylvania Fund Class B
MLPF&S for the Sole Benefit of 10.003%
its Customers
4800 Deer Lake Drive E 2nd Flr
Jacksonville, FL 32246
Pennsylvania Fund Class C
MLPF&S for the Sole Benefit of 23.082%
its Customers
4800 Deer Lake Drive E 2nd Flr
Jacksonville, FL 32246
Pennsylvania Fund Class Y
First Union Natl Bank 98.730%
BK/EB/INT Cash Acct
Attn Trust Oper Fd Grp
401 S Tryon Street 3rd flr
CMG 1151
Charlotte, NC 28202
Connecticut Fund Class A
First Union Brokerage Services 38.615%
Crown Realty LLC
PO Box 2-224 Devon Station
Milford, CT 06460
Rose Santoro 26.660%
Bruce A McEntee JTWROS
19 Mitchell Ave
Waterbury, CT 06460
First Union Brokerage Services 16.179%
FBO Catharina Vandestadt
201 S College 5th floor
Charlotte, NC 28202
Bertram M Metter 13.251%
41 Nutmeg Drive
Greenwich, CT 06831
19
<PAGE>
Connecticut Fund Class B
First Union Brokerage Services 54.115%
Stewart Monroe Jr
92 Silver Spring Road
Wilton, CT 06897
First Union Brokerage Services 19.733%
Kathleen K Delaney
14 Smoke Hill Road
Stamford, CT 06903
First Union Brokerage Services 10.950%
FBO Henry F Goetz
201 S College 5th floor
Charlotte, NC 28202
First Union Brokerage Services 6.833%
William A Cotter
68 St Andrews Ave
East Haven, CT 06512
Connecticut Fund Class Y
First Union Natl Bank 99.834%
BK/EB/INT Cash Acct
Attn Trust Oper Fd Grp
401 S Tryon Street 3rd flr
CMG 1151
Charlotte, NC 28202
New Jersey Fund Class Y
First Union Natl Bank 96.536%
Trust Accounts
Attn Ginny Batten
401 S Tryon Street 3rd flr
CMG 1151
Charlotte, NC 28202
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISERS
The investment adviser (an "Adviser") to the California Fund, the
Massachusetts Fund, the Missouri Fund, the New York Fund, and the Pennsylvania
Fund is Keystone Investment Management Company ("Keystone"), 200 Berkeley
Street, Boston, Massachusetts, 02116-5034, a subsidiary of First Union National
Bank ("FUNB"), 201 South College Street, Charlotte, North Carolina 28288-0630.
FUNB is a subsidiary of First Union Corporation ("First Union"), a bank holding
company headquartered at 301 South College Street, Charlotte, North Carolina
28288- 0630. First Union and its subsidiaries provide a broad range of financial
services to individuals and businesses throughout the United States. Each Fund
pays Keystone a fee for its services at the
20
<PAGE>
annual rate set forth 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 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.
The Adviser's fee is computed as of the close of business each business day and
payable monthly.
The investment adviser (also an "Adviser") to the Connecticut Fund and
to the New Jersey Fund is the Capital Management Group ("CMG") of FUNB. The
Connecticut Fund pays CMG a fee for its services at the annual rate of 0.60% of
the average daily net assets. The New Jersey Fund pays CMG a fee for its
services at the annual rate set forth below:
Aggregate Net
Asset Value
of the Shares
Management Fee of the Fund
- ------------------------------- ------------------------------
0.50 of 1% the first $ 500,000,000, plus
0.45 of 1% the next $ 500,000,000, plus
0.40 of 1% of amounts over $1,000,000,000, plus
0.35 of 1% of amounts over $1,500,000,000
computed as of the close of business on each business day.
INVESTMENT ADVISORY AGREEMENTS
On behalf of each of its Funds, the Trust has entered into an investment
advisory agreement with each Adviser (the "Advisory Agreements"). Under the
Advisory Agreements, and subject to the supervision of the Trust's Board of
Trustees, each Adviser furnishes to the appropriate Fund investment advisory,
management and administrative services, office facilities, and equipment in
connection with its services for managing the investment and reinvestment of the
Fund's assets. The Adviser pays for all of the expenses incurred in connection
with the provision of its services. Each Fund pays for all charges and expenses,
other than those specifically referred to as being borne by the Adviser,
including, but not limited to: (1) custodian charges and expenses; (2)
bookkeeping and auditors' charges and expenses; (3) transfer agent charges and
expenses; (4) fees and expenses of Independent Trustees (Trustees who are not
interested persons of a Fund as defined in the 1940 Act); (5) brokerage
commissions, brokers' fees and expenses; (6) issue and transfer taxes; (7) costs
and expenses under the Distribution Plan (as applicable); (8) taxes and trust
fees payable to governmental agencies; (9) the cost of share certificates; (10)
fees and expenses of the registration and qualification of such Fund and its
shares with the Securities and
21
<PAGE>
Exchange Commission ("SEC") or under state or other securities laws; (11)
expenses of preparing, printing and mailing prospectuses, SAIs, notices, reports
and proxy materials to shareholders of such Fund; (12) expenses of shareholders'
and Trustees' meetings; (13) charges and expenses of legal counsel for such Fund
and for the Independent Trustees of the Trust on matters relating to such Fund;
(14) charges and expenses of filing annual and other reports with the SEC and
other authorities; and (15) all extraordinary charges and expenses of such Fund.
(See also the section entitled "Financial Information.")
Each Advisory Agreement continues in effect for two years from its
effective date and, thereafter, from year to year only if approved at least
annually by the Board of Trustees of the Trust or by a vote of a majority of
each Fund's outstanding shares. In either case, the terms of the Advisory
Agreement and continuance thereof must be approved by the vote of a majority of
the Independent Trustees cast in person at a meeting called for the purpose of
voting on such approval. The Advisory Agreements may be terminated, without
penalty, on 60 days' written notice by the Trust's Board of Trustees or by a
vote of a majority of outstanding shares. Each Advisory Agreement will terminate
automatically upon its "assignment" as that term is defined in the 1940 Act.
Transactions Among Advisory Affiliates
The Trust has adopted procedures pursuant to Rule 17a-7 under the 1940 Act
("Rule 17a-7 Procedures"). The Rule 17a-7 Procedures permit a Fund to buy or
sell securities from another investment company for which a subsidiary of First
Union is an investment adviser. The Rule 17a-7 Procedures also allow the Funds
to buy or sell securities from other advisory clients for whom a subsidiary of
First Union is an investment adviser. The Funds may engage in such transactions
if they are equitable to each participant and consistent with each participant's
investment objective.
DISTRIBUTOR
Evergreen Distributor, Inc. (the "Distributor") markets the Funds through
broker-dealers and other financial representatives. Its address is 125 W. 55th
Street, New York, NY 10019.
DISTRIBUTION PLANS AND AGREEMENTS
Distribution fees are accrued daily and paid monthly on Class A, Class B
and Class C shares and are charged as class expenses, as accrued. The
distribution fees attributable to the Class B and Class C shares are designed to
permit an investor to purchase such shares through broker-dealers without the
assessment of a front-end sales charge, while at the same time permitting the
Distributor to compensate broker-dealers in connection with the sale of such
shares. In this regard, the purpose and function of the combined contingent
deferred sales charge and distribution services fee on the Class B shares are
the same as those of the front-end sales charge and distribution fee with
respect to the Class A shares in that in each case the sales charge and/or
distribution fee provide for the financing of the distribution of the Fund's
shares.
The National Association of Securities Dealers, Inc. ("NASD") limits the
amount that a mutual 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 services 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
22
<PAGE>
distribution plan, plus interest at the prime rate plus 1.00% on such amounts
remaining unpaid from time to time.
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, as well as Class C
shares (except in the case of the Connecticut Fund and the New Jersey Fund,
(each a "Plan" and collectively, the "Plans"), the Treasurer of each Fund
reports the amounts expended under the Plans and the purposes for which such
expenditures were made to the Trustees of the Trust for their review on a
quarterly basis. Also, each Plan provides that the selection and nomination of
the Independent Trustees are committed to the discretion of such Independent
Trustees then in office.
Each Adviser may from time to time from its own funds or such other
resources as may be permitted by rules of the SEC make payments for distribution
services to the Distributor; the latter may in turn pay part or all of such
compensation to brokers or other persons for their distribution assistance.
Each Plan and Distribution Agreement will continue in effect for successive
twelve-month periods provided, however, that such continuance is specifically
approved at least annually by the Trustees of the Trust or by vote of the
holders of a majority of the outstanding voting securities of that class and, in
either case, by a majority of the Independent Trustees of the Trust who have no
direct or indirect financial interest in the operation of the Plan or any
agreement related thereto.
The Plans permit the payment of fees to brokers and others for distribution
and shareholder-related administrative service and to broker-dealers, depository
institutions, financial intermediaries and administrators for administrative
services as to Class A, Class B and Class C shares (as applicable). The Plans
are designed to (i) stimulate brokers to provide distribution and administrative
support services to each Fund and holders of such Class A, Class B and Class C
shares and (ii) stimulate administrators to render administrative support
services to a Fund and holders of such Class A, Class B and Class C shares. The
administrative services are provided by a representative who has knowledge of
the shareholder's particular circumstances and goals, and include, but are not
limited to, providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding such
Class A, Class B and Class C shares; assisting clients in changing dividend
options, account designations, and addresses; and providing such other services
as a Fund reasonably requests for its Class A, Class B and Class C shares, as
applicable.
FUNB or its affiliates may finance the payments made by the Distributor to
compensate broker/dealers or other persons for distributing shares of a 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 a Fund to the
Distributor with respect to that Class or Classes, and (ii) a 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 service
fees in respect of shares of such Class or Classes through deferred sales
charges.
All material amendments to any Plan or Distribution Agreement must be
approved by a vote of the Trustees of the Trust or the holders of a Fund's
outstanding voting securities, voting separately by Class, and in either case,
by a majority of the Independent Trustees, cast in person at a meeting called
for the purpose of voting on such approval; and any Plan or Distribution
23
<PAGE>
Agreement may not be amended in order to increase materially the costs that a
particular Class of shares of a Fund may bear pursuant to the Plan or
Distribution Agreement without the approval of a majority of the holders of the
outstanding voting shares of the Class affected. Any Plan or Distribution
Agreement may be terminated (i) 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 Independent Trustees, or
(ii) by the Distributor. To terminate any Distribution Agreement, any party must
give the other parties 60 days' written notice; to terminate a Plan only, a Fund
need give no notice to the Distributor. Any Distribution Agreement will
terminate automatically in the event of its assignment. (See also the section
entitled "Financial Information.")
ADDITIONAL SERVICE PROVIDERS
Administrator
Evergreen Investment Services, Inc. ("EIS"), 200 Berkeley Street, Boston,
Massachusetts 02116-5034, serves as administrator to the Connecticut Fund and
the New Jersey Fund, subject to the supervision and control of the Trust's Board
of Trustees. EIS provides the Funds with facilities, equipment and personnel and
is entitled to receive a fee based on the aggregate average daily net assets of
the Funds at a rate based on the total assets of all mutual funds advised by
First Union subsidiaries and administered by EIS. The fee paid to EIS is
calculated in accordance with the following schedule:
Administration Fee
0.050% on the first $7 billion
0.035% on the next $3 billion
0.030% on the next $5 billion
0.020% on the next $10 billion
0.015% on the next $5 billion, and
0.010% on assets in excess of $30 billion.
Transfer Agent
Evergreen Service Company ("ESC") a subsidiary of First Union, is the
Funds' transfer agent. The transfer agent issues and redeems shares, pays
dividends and performs other duties in connection with the maintenance of
shareholder accounts. The transfer agent's address is 200 Berkeley Street,
Boston, Massachusetts 02116-5034.
Independent Auditors
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110, audits
the financial statements of each Fund.
Custodian
State Street Bank and Trust Company is the Funds' custodian. The bank keeps
custody of each Fund's securities and cash and performs other related duties.
The custodian's address is P.O. Box 9021, Boston, Massachusetts 02205-9827.
24
<PAGE>
Legal Counsel
Sullivan & Worcester LLP provides legal advice to the Funds. Its address is
1025 Connecticut Avenue, N.W., Washington, D.C. 20036.
BROKERAGE
SELECTION OF BROKERS
In effecting transactions in portfolio securities for a Fund, each Adviser
seeks the best execution of orders at the most favorable prices. Each Adviser
determines whether a broker has provided a Fund with best execution and price in
the execution of a securities transaction by evaluating, among other things, the
broker's ability to execute large or potentially difficult transactions, and the
financial strength and stability of the broker.
BROKERAGE COMMISSIONS
Each Fund expects to buy and sell its fixed-income securities through
principal transactions, that is, directly from the issuer or from an underwriter
or market maker for the securities. Generally, a Fund will not pay brokerage
commissions for such purchases. Usually, when a Fund buys a security from an
underwriter, the purchase price will include an underwriting commission or
concession. The purchase price for securities bought from dealers serving as
market makers will similarly include the dealer's mark up or reflect a dealer's
mark down. When a Fund executes transactions in the over-the-counter market, it
will deal with primary market makers unless more favorable prices are otherwise
obtainable.
GENERAL BROKERAGE POLICIES
Each Adviser makes investment decisions for a Fund independently from those
of its other clients. It may frequently develop, however, that an Adviser will
make the same investment decision for more than one client. Simultaneous
transactions are inevitable when the same security is suitable for the
investment objective of more than one account. When two or more of its clients
are engaged in the purchase or sale of the same security, an Adviser will
allocate the transactions according to a formula that is equitable to each of
its clients. Although, in some cases, this system could have a detrimental
effect on the price or volume of a Fund's securities, each Fund believes that in
other cases its ability to participate in volume transactions will produce
better executions. In order to take advantage of the availability of lower
purchase prices, the Funds may occasionally participate in group bidding for the
direct purchase from an issuer of certain securities.
The Board of Trustees periodically reviews each Fund's brokerage policy.
Because of the possibility of further regulatory developments affecting the
securities exchanges and brokerage practices generally, the Board of Trustees
may change, modify or eliminate any of the foregoing practices.
25
<PAGE>
TRUST ORGANIZATION
FORM OF ORGANIZATION
Each Fund is a series of an open-end management investment company known as
"Evergreen Municipal Trust" (the "Trust"). The Trust was formed as a Delaware
business trust on September 18, 1997 (the "Declaration of Trust"). A copy of the
Declaration of Trust is on file at the SEC as an exhibit to the Trust's
Registration Statement, of which this SAI is a part. This summary is qualified
in its entirety by reference to the Declaration of Trust.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of beneficial interest of series and classes of shares. Each share of
each Fund represents an equal proportionate interest with each other share of
that series and/or class. Upon liquidation, shares are entitled to a pro rata
share of the Trust based on the relative net assets of each series and/or class.
Shareholders have no preemptive or conversion rights. Shares are redeemable and
transferable.
VOTING RIGHTS
Under the terms of the Declaration of Trust, the Trust is not required to
hold annual meetings. At meetings called for the initial election of Trustees or
to consider other matters, each share is entitled to one vote for each dollar of
net asset value applicable to such share. Shares generally vote together as one
class on all matters. Classes of shares of each Fund have equal voting rights.
No amendment may be made to the Declaration of Trust that adversely affects any
class of shares without the approval of a majority of the votes applicable to
the shares of that class. Shares have non-cumulative voting rights, which means
that the holders of more than 50% of the votes applicable to shares voting for
the election of Trustees can elect 100% of the Trustees to be elected at a
meeting and, in such event, the holders of the remaining shares voting will not
be able to elect any Trustees.
After the initial meeting as described above, no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law, unless and until such time as less than a majority of the Trustees
holding office have been elected by shareholders, at which time, the Trustees
then in office will call a shareholders' meeting for the election of Trustees.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his duties involved in the conduct of his office.
26
<PAGE>
PURCHASE, REDEMPTION AND PRICING OF SHARES
HOW THE FUNDS OFFER SHARES TO THE PUBLIC
You may buy shares of a Fund through the Distributor, broker-dealers that
have entered into special agreements with the Distributor or certain other
financial institutions. Each Fund offers three or four classes of shares that
differ primarily with respect to sales charges and distribution fees. Depending
upon the class of shares, you will pay an initial sales charge when you buy a
Fund's shares, a contingent deferred sales charge (a "CDSC") when you redeem a
Fund's shares or no sales charges at all.
Class A Shares
With certain exceptions, when you purchase Class A shares you will pay a
maximum sales charge of 4.75%. (The prospectus contains a complete table of
applicable sales charges and a discussion of sales charge reductions or waivers
that may apply to purchases. See also the section in this SAI entitled
"Financial Information" for an example of the method of computing the offering
price of Class A shares.) If you purchase Class A shares in the amount of $1
million or more, without an initial sales charge, the Funds will charge a CDSC
of 1.00% if you redeem during the month of your purchase and the 12-month period
following the month of your purchase (see "Contingent Deferred Sales Charge,"
below).
Class B Shares
The Funds offer Class B shares at net asset value without an initial sales
charge. With certain exceptions, however, the Funds will charge a CDSC on shares
you redeem within 72 months after the month of your purchase, in accordance with
the following schedule:
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 ESC).
Class C Shares (excluding the Connecticut and New Jersey Funds)
Class C shares are available only through broker-dealers who have entered
into special distribution agreements with the Distributor. The Funds offer Class
C shares at net asset value without an initial sales charge. With certain
exceptions, however, the Fund will charge a CDSC of
27
<PAGE>
1.00% on shares you redeem within 12-months after the month of your purchase.
(See "Contingent Deferred Sales Charge" below).
Class Y Shares (excluding the California, Massachusetts and Missouri Funds)
No CDSC is imposed on the redemption of Class Y shares. Class Y shares are
not offered to the general public and are available only to (1) persons who at
or prior to December 31, 1994 owned shares in a mutual fund advised by Evergreen
Asset Management Corp. ("Evergreen Asset"), (2) certain institutional investors
and (3) investment advisory clients of CMG, Evergreen Asset, Keystone, or their
affiliates. Class Y shares are offered at net asset value without a front-end or
back-end sales charge and do not bear any Rule 12b-1 distribution expenses.
CONTINGENT DEFERRED SALES CHARGE
The Funds charge a CDSC as reimbursement for certain expenses, such as
commissions or shareholder servicing fees, that it has incurred in connection
with the sale of its shares (see "Distribution Plans and Agreements," above). If
imposed, the Funds deduct the CDSC from the redemption proceeds you would
otherwise receive. The CDSC is a percentage of the lesser of (1) the net asset
value of the shares at the time of redemption or (2) the shareholder's original
net cost for such shares. If a shareholder requests a redemption, the Fund will
seek to minimize the CDSC the shareholder is required to pay by first redeeming
shares not subject to a CDSC and, thereafter, redeeming shares held the longest.
The CDSC on any redemption is, to the extent permitted by the NASD, paid to the
Distributor or its predecessor.
SALES CHARGE WAIVERS OR REDUCTIONS
Reducing Class A Front-end Loads
With a larger purchase, there are several ways that you can combine
multiple purchases of Class A shares in Evergreen funds and take advantage of
lower sales charges.
Combined Purchases
You can reduce your sales charge by combining purchases of Class A shares
of multiple Evergreen funds. For example, if you invested $75,000 in each of two
different Evergreen funds, you would pay a sales charge based on a $150,000
purchase (i.e., 3.75% of the offering price, rather than 4.75%).
Rights of Accumulation
You can reduce your sales charge by adding the value of Class A shares of
Evergreen funds you already own to the amount of your next Class A investment.
For example, if you hold Class A shares valued at $99,999 and purchase an
additional $5,000, the sales charge for the $5,000 purchase would be at the next
lower sales charge of 3.75%, rather than 4.75%.
Letter of Intent
You can, by completing the "Letter of Intent" section of the application,
purchase Class A shares over a 13-month period and receive the same sales charge
as if you had invested all the money at once. All purchases of Class A shares of
an Evergreen fund during the period will qualify
28
<PAGE>
as Letter of Intent purchases.
Waiver of Initial Sales Charges
The Funds may sell their shares at net asset value without an initial sales
charge to:
1. purchasers of shares in the amount of $1 million or more;
2. a corporate or certain other qualified retirement plan or a
non-qualified deferred compensation plan or a Title 1 tax
sheltered annuity or TSA plan sponsored by an organization
having 100 or more eligible employees (a "Qualifying Plan") or
a TSA plan sponsored by a public educational entity having
5,000 or more eligible employees (an "Educational TSA Plan");
3. institutional investors, which may include bank trust
departments and registered investment advisers;
4. investment advisers, consultants or financial planners who
place trades for their own accounts or the accounts of their
clients and who charge such clients a management, consulting,
advisory or other fee;
5. clients of investment advisers or financial planners who place
trades for their own accounts if the accounts are linked to a
master account of such investment advisers or financial
planners on the books of the broker-dealer through whom shares
are purchased;
6. institutional clients of broker-dealers, including retirement
and deferred compensation plans and the trusts used to fund
these plans, which place trades through an omnibus account
maintained with a Fund by the broker-dealer;
7. employees of FUNB, its affiliates, the Distributor, any
broker-dealer with whom the Distributor, has entered into an
agreement to sell shares of the Funds, and members of the
immediate families of such employees;
8. certain Directors, Trustees, officers and employees of the
Evergreen funds, the Distributor or their affiliates and the
immediate families of such persons; or
9. a bank or trust company in a single account in the name of
such bank or trust company as trustee if the initial
investment in or any Evergreen fund made pursuant to this
waiver is at least $500,000 and any commission paid at the
time of such purchase is not more than 1% of the amount
invested.
With respect to items 8 and 9 above, each Fund will only sell shares to
these parties upon the purchasers' written assurance that the purchase is for
their personal investment purposes only. Such purchasers may not resell the
securities except through redemption by a Fund. The Funds will not charge any
CDSC on redemptions by such purchasers.
29
<PAGE>
Waiver of CDSC
The Funds do not impose a CDSC when the shares you are redeeming represent:
1. an increase in the share value above the net cost of such shares;
2. certain shares for which a Fund did not pay a commission on
issuance, including shares acquired through reinvestment of
dividend income and capital gains distributions;
3. shares that are in the accounts of a shareholder who has died or
become disabled;
4. a lump-sum distribution from a 401(k) plan or other benefit
plan qualified under the Employee Retirement Income Security
Act of 1974 ("ERISA");
5. an automatic withdrawal from the ERISA plan of a shareholder
who is a least 59 1/2 years old;
6. shares in an account that a Fund has closed because the
account has an aggregate net asset value of less than $1,000;
7. an automatic withdrawal under a Systematic Withdrawal Plan of
up to 1.0% per month of your initial account balance;
8. a withdrawal consisting of loan proceeds to a retirement plan
participant;
9. a financial hardship withdrawal made by a retirement plan
participant;
10. a withdrawal consisting of returns of excess contributions or
excess deferral amounts made to a retirement plan; or
11. a redemption by an individual participant in a Qualifying Plan
that purchased Class C shares (this waiver is not available in
the event a Qualifying Plan, as a whole, redeems substantially
all of its assets).
EXCHANGES
Investors may exchange shares of a Fund for shares of the same class of any
other Evergreen fund, as described under the section entitled "Exchanges" in a
Fund's prospectus. Before you make an exchange, you should read the prospectus
of the Evergreen fund into which you want to exchange. The Trust's Board of
Trustees reserves the right to discontinue, alter or limit the exchange
privilege at any time.
CALCULATION OF NET ASSET VALUE PER SHARE ("NAV")
Each Fund computes its NAV once daily on Monday through Friday, as
described in the prospectuses. A Fund will not compute its NAV on the day the
following legal holidays are observed: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
30
<PAGE>
The NAV of each Fund is calculated by dividing the value of a Fund's net
assets attributable to that class by all of the shares issued for that class.
VALUATION OF PORTFOLIO SECURITIES
Current values for a Fund's portfolio securities are determined as follows:
(1) An independent pricing service values each Fund's municipal bonds
at fair value using a variety of factors which may include yield, liquidity,
interest rate risk, credit quality, coupon, maturity and type of issue.
(2) Short-term investments with remaining maturities of sixty days or
less are carried at amortized cost, which approximates market value.
(3) Securities for which valuations are not available from an
independent pricing service, including restricted securities, are valued at fair
value according to procedures established by the Trust's Board of Trustees.
SHAREHOLDER SERVICES
As described in the prospectuses, a shareholder may elect to receive
dividends and capital gains distributions in cash instead of shares. However,
ESC will automatically convert a shareholder's distribution option so that the
shareholder reinvests all dividends and distributions in additional shares when
it learns that the postal or other delivery service is unable to deliver checks
or transaction confirmations to the shareholder's address of record. The Funds
will hold the returned distribution or redemption proceeds in a non-interest
bearing account in the shareholder's name until the shareholder updates his or
her address. No interest will accrue on amounts represented by uncashed
distribution or redemption checks.
PRINCIPAL UNDERWRITER
The Distributor is the principal underwriter for the Trust and with respect
to each class of each Fund. The Trust has entered into a Principal Underwriting
Agreement ("Underwriting Agreement") with the Distributor with respect to each
class of each Fund. The Distributor is a subsidiary of The BISYS Group, Inc.
The Distributor, as agent, has agreed to use its best efforts to find
purchasers for the shares. The Distributor may retain and employ representatives
to promote distribution of the shares and may obtain orders from broker-dealers,
and others, acting as principals, for sales of shares to them. The Underwriting
Agreement provides that the Distributor will bear the expense of preparing,
printing, and distributing advertising and sales literature and prospectuses
used by it.
All subscriptions and sales of shares by the Distributor are at the public
offering price of the shares, which is determined in accordance with the
provisions of the Trust's Declaration of Trust, By-Laws, current prospectuses
and SAI. All orders are subject to acceptance by the Trust and the Trust
reserves the right, in its sole discretion, to reject any order received. Under
the Underwriting Agreement, the Trust is not liable to anyone for failure to
accept any order.
31
<PAGE>
The Distributor has agreed that it will, in all respects, duly comply with
all state and federal laws applicable to the sale of the shares. The Distributor
has also agreed that it will indemnify and hold harmless the Trust and each
person who has been, is, or may be a Trustee or officer of the Trust against
expenses reasonably incurred by any of them in connection with any claim,
action, suit, or proceeding to which any of them may be a party that arises out
of or is alleged to arise out of any misrepresentation or omission to state a
material fact on the part of the Distributor or any other person for whose acts
the Distributor is responsible or is alleged to be responsible, unless such
misrepresentation or omission was made in reliance upon written information
furnished by the Trust.
The Underwriting Agreement provides that it will remain in effect as long
as its terms and continuance are approved annually (i) by a vote of a majority
of the Trust's Independent Trustees, and (ii) by vote of a majority of the
Trust's Trustees, in each case, cast in person at a meeting called for that
purpose.
The Underwriting Agreement may be terminated, without penalty, on 60 days'
written notice by the Board of Trustees or by a vote of a majority of
outstanding shares subject to such agreement. The Underwriting Agreement will
terminate automatically upon its "assignment," as that term is defined in the
1940 Act.
From time to time, if, in the Distributor's judgment, it could benefit the
sales of shares, the Distributor may provide to selected broker-dealers
promotional materials and selling aids, including, but not limited to, personal
computers, related software, and data files.
ADDITIONAL TAX INFORMATION
REQUIREMENTS FOR QUALIFICATION AS A REGULATED INVESTMENT COMPANY
Each Fund has qualified and intends to continue to qualify for and elect
the tax treatment applicable to a regulated investment company ("RIC") under
Subchapter M of the Internal Revenue Code ("the Code"). (Such qualification does
not involve supervision of management or investment practices or policies by the
Internal Revenue Service.) In order to qualify as a RIC, a Fund must, among
other things, (i) derive at least 90% of its gross income from dividends,
interest, payments with respect to proceeds from securities loans, gains from
the sale or other disposition of securities or foreign currencies and other
income (including gains from options, futures or forward contracts) derived with
respect to its business of investing in such securities; (ii) diversify its
holdings so that, at the end of each quarter of its taxable year, (a) at least
50% of the market value of the Fund's total assets is represented by cash, U.S.
government securities and other securities limited in respect of any one issuer,
to an amount not greater than 5% of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (b) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than U.S. government securities and securities of other regulated investment
companies). By so qualifying, a Fund is not subject to federal income tax if it
timely distributes its investment company taxable income and any net realized
capital gains. A 4% nondeductible excise tax will be imposed on a Fund to the
extent it does not meet certain distribution requirements by the end of each
calendar year. Each Fund anticipates meeting such distribution requirements.
TAXES ON DISTRIBUTIONS
32
<PAGE>
Distributions out of taxable income or capital gains will be taxable to
shareholders whether made in shares or in cash. Shareholders electing to receive
distributions in the form of additional shares will have a cost basis for
federal income tax purposes in each share so received equal to the net asset
value of a share of a Fund on the reinvestment date.
To calculate ordinary income for federal income tax purposes, shareholders
must generally include dividends paid by a Fund from its investment company
taxable income (net investment income plus net realized short-term capital
gains, if any).
From time to time, a Fund will distribute the excess of its net long-term
capital gains over its short-term capital losses to shareholders. For federal
tax purposes, shareholders must include such distributions when calculating
their long-term capital gains. Each Fund will inform its shareholders of the
portion, if any, of a long-term capital gain distribution which is subject to
tax at the maximum 28% rate and the portion, if any, of a long term capital gain
distribution which is subject to tax at the maximum 20% rate. Distributions of
long-term capital gains are taxable as such to a shareholder, no matter how long
the shareholder has held the shares.
Distributions by a Fund reduce its NAV. A distribution that reduces a
Fund's NAV below a shareholder's cost basis is taxable as described above,
although from an investment standpoint, it is a return of capital. In
particular, if a shareholder buys Fund shares just before a Fund makes a
distribution, when the Fund makes the distribution the shareholder will receive
what is in effect a return of capital. Nevertheless, the shareholder must pay
taxes on the distribution. Therefore, shareholders should carefully consider the
tax consequences of buying Fund shares just before a distribution.
Each Fund expects that substantially all of its dividends will be
"exempt-interest dividends," which should be treated as excludable from federal
gross income. In order to pay exempt-interest dividends, at least 50% of the
value of a Fund's assets must consist of federally tax-exempt obligations at the
close of each quarter. An exempt-interest respect to its net federally
excludable municipal obligation interest and designated as an exempt-interest
dividend in a written notice mailed to each shareholder not later than 60 days
after the close of its taxable year. 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.
Any shareholder of a Fund who may be a "substantial user" of a facility
financed with an issue of tax-exempt obligations or a "related person" to such a
user should consult his tax adviser concerning his qualification to receive
exempt-interest dividends should the Fund hold obligations financing such
facility.
Under regulations to be promulgated, to the extent attributable to interest
paid on certain private activity bonds, a Fund's exempt-interest dividends,
while otherwise tax-exempt, will be treated as a tax preference item for
alternative minimum tax purposes. Corporate shareholders should also be aware
that the receipt of exempt-interest dividends could subject them to alternative
minimum tax under the provisions of Section 56(g) of the Code (relating to
"adjusted current earnings").
Under particularly unusual circumstances, such as when a Fund is in a
prolonged defensive
33
<PAGE>
investment position, it is possible that no portion of a Fund's distributions of
income to its shareholders for a fiscal year would be exempt from federal income
tax. The Funds do not presently anticipate, however, that such unusual
circumstances will occur.
Each Fund intends to distribute its net capital gains as capital gains
dividends. Shareholders should treat such dividends as long-term capital gains.
Each Fund will designate capital gains distributions as such by a written notice
mailed to each shareholder no later than 60 days after the close of the Fund's
taxable year. If a shareholder receives a capital gain dividend and holds his
shares for six months or less, then any allowable loss on disposition of such
shares will be treated as a long-term capital loss to the extent of such capital
gain dividend.
Interest on indebtedness incurred or continued by shareholders to purchase
or carry shares of a Fund will not be deductible for federal income tax purposes
to the extent of the portion of the interest expense relating to exempt-interest
dividends. Such portion is determined by multiplying the total amount of
interest paid or accrued on the indebtedness by a fraction, the numerator of
which is the exempt-interest dividends received by a shareholder in his taxable
year and the denominator of which is the sum of the exempt-interest dividends
and the taxable distributions out of the Fund's investment income and long-term
capital gains received by the shareholder.
TAXES ON THE SALE OR EXCHANGE OF FUND SHARES
Upon a sale or exchange of Fund shares, a shareholder will realize a
taxable gain or loss depending on his or her basis in the shares. A shareholder
must treat such gains or losses as a capital gain or loss if the shareholder
held the shares as capital assets. Capital gain on assets held for more than
twelve months is generally subject to a maximum federal income tax rate of 20%
for an individual. Generally, the Code will not allow a shareholder to realize a
loss on shares he or she has sold or exchanged and replaced within a
sixty-one-day period beginning thirty days before and ending thirty days after
he or she sold or exchanged the shares. The Code will not allow a shareholder to
realize a loss on the sale of Fund shares held by the shareholder for six months
or less to the extent the shareholder received exempt-interest dividends on such
shares. Moreover, the Code will treat a shareholder's loss on shares held for
six months or less as a long-term capital loss to the extent the shareholder
received distributions of net capital gains on such shares.
Shareholders who fail to furnish their taxpayer identification numbers to 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.
OTHER TAX CONSIDERATIONS
The foregoing discussion relates solely to U.S. federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates). It does not reflect the special
tax consequences to certain taxpayers (e.g., banks, insurance companies, tax
exempt organizations and foreign persons). Shareholders are encouraged to
consult their own tax 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
34
<PAGE>
shares of a Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30% (or at a lower rate under a
tax treaty) on amounts treated as income from U.S. sources under the Code.
35
<PAGE>
FINANCIAL INFORMATION
Expenses
The table below shows the total dollar amounts paid by each Fund for
services rendered during the fiscal periods specified. For more information on
specific expenses, see "Investment Advisory and Other Services," "Distribution
Plans and Agreements," "Principal Underwriter" and "Purchase, Redemption and
Pricing of Shares."
<TABLE>
<CAPTION>
Total Underwriting
Advisory Class A Class B Class C Underwriting Commissions
Fees 12b-1 Fees 12b-1 Fees 12b-1 Fees Commissions Retained
============================ =========== ============= ============ =========== ============== ===================
1998 Fund Expenses
<S> <C> <C> <C> <C> <C> <C>
California $150,177. $8,075 $191,945 $16,932 $46,632 $3,029
Massachusetts $62,171 $3,513 $67,467 $16,883 $22,859 $1,771
Missouri $138,262 $7,025 $183,796 $11,123 $138,428 $8,737
New York $132,245 $6,072 $173,914 $14,416 $62,317 $4,131
Pennsylvania $610,824 $41,755 $351,011 $61,038 $65,672 $6,605
Connecticut (a) $141,059 $51 $415 N/A $3,194 $476
New Jersey $429,995 $79,247* $108,770 N/A $44,432 $4,471
1997 Fund Expenses
California (b) $51,555 $2,121 $66,054 $4,972 $133,966 $60,931
Massachusetts $63,584 $2,689 $67,185 $19,460 $97,579 $29,745
Missouri (b) $46,447 $1,259 $64,269 $3,949 $96,918 $55,982
New York $135,473 $5,586 $166,682 $19,837 $236,114 $20,175
Pennsylvania $390,366 $39,570 $343,818 $71,610 $504,459 $106,694
Connecticut (a) N/A N/A N/A N/A N/A N/A
New Jersey (c) $135,196 $47,320 $25,809 N/A N/A N/A
1996 Fund Expenses
California (d) $163,334 $6,390 $178,969 $12,179 $341,589 $67,534
Massachusetts $62,760 $2,268 $64,033 $19,322 $108,131 $18,234
Missouri (d) $146,922 $12,309 $175,942 $15,518 $230,925 $94,279
New York $118,589 $5,471 $139,881 $21,378 $201,162 $201,162
Pennsylvania $402,467 $44,555 $321,061 $202,901 $482,423 $482,423
Connecticut (a) N/A N/A N/A N/A N/A N/A
New Jersey (e) $107,212 $42,750 $22,310 N/A N/A N/A
</TABLE>
*Of this amount, $50,718 was waived by the Distributor.
(a) The Fund commenced operations on November 24, 1997.
(b) Four months ended March 31, 1997. During the period, the California Fund
and the Missouri Fund changed their fiscal year end from November 30 to
March 31.
(c) Seven months ended March 31, 1997. During the period, the New Jersey Fund
changed its fiscal year end from August 31 to March 31.
(d) Year ended November 30, 1996.
(e) Six months ended August 31, 1996. The Fund changed its fiscal year end from
February 29 to August 31.
36
<PAGE>
Advisory Fee Waivers
In accordance with voluntary expense limitations in effect during the
fiscal year ended March 31, 1998, each Fund's Adviser voluntarily reimbursed or
waived advisory fees, as follows:
California $67,381
Massachusetts $54,590
Missouri $94,233
New York $58,744
Pennsylvania $174,928
Connecticut $64,322
New Jersey $296,793
Brokerage Commissions
The Funds paid no brokerage commissions during 1998, 1997 and 1996.
Total Return
Total return quotations for a class of shares of a Fund as they may appear
from time to time in advertisements are calculated by finding the average annual
compounded rates of return over one, five and ten year periods, or the time
periods for which such class of shares has been effective, whichever is
relevant, on a hypothetical $1,000 investment that would equate the initial
amount invested in the class to the ending redeemable value. All dividends and
distributions are added to the initial investment, and all recurring fees
charged to all shareholder accounts are deducted. The ending redeemable value
assumes a complete redemption at the end of the relevant periods.
37
<PAGE>
The annual total returns for each class of shares of the Funds (including
applicable sales charges) as of March 31, 1998 are as follows:
Since Inception
One Year Five Years Inception Date
California
Class A 5.30% -- 4.05% 2/1/94
Class B 4.75% -- 4.22% 2/1/94
Class C 8.77% -- 4.56% 2/1/94
Massachusetts
Class A 5.25% -- 3.60% 2/4/94
Class B 4.60% -- 3.69% 2/4/94
Class C 8.62% -- 4.06% 2/4/94
Missouri
Class A 5.73% -- 4.60% 2/1/94
Class B 5.26% -- 4.61% 2/1/94
Class C 9.15% -- 4.97% 2/1/94
New York
Class A 5.31% -- 4.46% 2/4/94
Class B 4.80% -- 4.53% 2/4/94
Class C 8.69% -- 4.90% 2/4/94
Class Y -- -- -- --
Pennsylvania
Class A 4.80% 5.04% 7.53% 12/27/90
Class B 4.27% 4.93% 5.50% 2/1/93
Class C 8.34% 5.28% 5.68% 2/1/93
Class Y -- -- 2.54% 11/24/97
Connecticut
Class A -- -- 0.77% 12/30/97
Class B -- -- (0.21%) 1/9/98
Class Y -- -- 2.39% 11/24/97
- ------------------------------------------- ------------------- ----------------
New Jersey
Class A 4.15% 4.98% 6.52% 7/16/91
- ------------------------------------------- ------------------- ----------------
Class B 3.35% -- 3.34% 1/30/96
- ------------------------------------------- ------------------- ----------------
Class Y 9.44% -- 5.36% 2/8/96
=========================================== =================== ================
38
<PAGE>
Current and Tax Equivalent Yields
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. 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. For the
30-day period ended March 31, 1998, the current and tax-equivalent yields of the
Funds are shown below. Any given yield or total return quotation should not be
considered representative of the Fund's yield or total return for any future
period.
<TABLE>
<CAPTION>
30-Day Yield Tax-Equivalent Yield
================================== ===============================================
Fund Combined Class A Class B Class C Class Y Class A Class B Class C Class Y
Federal &
State Tax
Rate (1)
===================== ========== ======== ======== ===================== ============ ============ ============ ============
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California 39.6% 4.11% 3.56% 3.56% -- 6.80% 5.89% 5.89% --
Massachusetts 39.6% 3.85% 3.31% 3.31% -- 6.37% 5.48% 5.48% --
Missouri 39.6% 4.33% 3.80% 3.79% -- 7.17% 6.29% 6.27% --
New York 39.6% 4.20% 3.66% 3.66% -- 6.95% 6.06% 6.06% --
Pennsylvania 39.6% 4.07% 3.52% 3.52% 4.52% 6.74% 5.83% 5.83% 7.48%
Connecticut 39.6% -- -- -- 4.11% -- -- -- 6.80%
New Jersey 39.6% 4.27% 3.57% -- 4.58% 7.07% 5.91% -- 7.58%
</TABLE>
(1) Assumed for purposes of this chart. Your tax may vary.
39
<PAGE>
Method of Computing Offering Price for Class A Shares
Class A shares are sold at the NAV plus a sales charge. Below is an example
of the method of computing the offering price of the Class A shares of each
Fund. The example assumes a purchase aggregating less than $50,000 based upon
the NAV of each Fund's Class A shares as of March 31, 1998.
Fund Net Asset Value Maximum Per Offering Price
Share Sales Per Share
Charge
California $9.98 4.75% $10.48
Massachusetts $9.76 4.75% $10.25
Missouri $10.21 4.75% $10.72
New York $10.12 4.75% $10.62
Pennsylvania $11.70 4.75% $12.28
Connecticu $6.38 4.75% $6.70
New Jersey $11.11 4.75% $11.66
Financial Statements
The audited financial statements and the independent auditors' report
thereon are hereby incorporated by reference to each Fund's Annual Report, a
copy of which may be obtained without charge by writing to ESC, P.O. Box 2121,
Boston, Massachusetts 02106-2121, or by calling ESC toll-free at 1-800-343-2898.
ADDITIONAL INFORMATION
Except as otherwise stated in its prospectuses or required by law, each
Fund reserves the right to change the terms of the offer stated in its
prospectuses without shareholder approval, including the right to impose or
change fees for services provided.
No dealer, salesman or other person is authorized to give any information
or to make any representation not contained in a Fund's prospectuses, SAI or in
supplemental sales literature issued by such Fund or the Distributor, and no
person is entitled to rely on any information or representation not contained
therein.
Each Fund's prospectuses and SAI omit certain information contained in the
Trust's registration statement, which you may obtain for a fee from the SEC in
Washington, D.C.
40
<PAGE>
APPENDIX A
EVERGREEN 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 almost 33 million represents
over 12% of the total U.S. population and grew by 27% in the 1980's. Population
growth slowed to less than 1% annually in 1994 and 1995, but rose to 1.9% in
1996. During the early 1990's, net population growth in the State was due to
births and foreign immigration, but more recently net in-migration from the
other states has resumed. Total personal income in the State, at an estimated
$867 billion in 1997 accounts for more than 12% of all personal income in the
nation. Total civilian employment is over 14 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, tourism, and construction.
The Asian economic crisis starting in mid-1997 is expected to have a moderate
dampening effect on the State's economy. 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
A-1
<PAGE>
"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 certainty 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
A-2
<PAGE>
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
1997-98 Budget Act provides for State appropriations of more than $6.3 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 April 1, 1998, the State had approximately $18.4 billion of long-term
general obligation bonds outstanding, plus $1.3 billion of general obligation
commercial paper which is planned to be refunded by long-term bonds in the
future ($600 million was so converted on April 30, 1998) and $6.5 billion of
lease-purchase debt supported by the General Fund. The State also had about $8.2
billion of authorized but unissued long-term general obligation bonds and
lease-purchase debt. In fiscal year 1996-1997, debt service on general
obligation bonds and lease-purchase debt was approximately 5.0% 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 1996-1997 were the
California personal income tax (47% of total revenues), the sales tax (34%),
bank and corporation taxes (12%), and
A-3
<PAGE>
the gross premium tax on insurance (2%). The State maintains a Special 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 and an
accumulated budget deficit, no reserve was budgeted in the SFEU from 1992-93 to
1995-96.
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.
Recent Budgets. As a result of the recession and other factors, the State
experienced substantial revenue shortfalls and greater than anticipated social
service costs in the early 1990's. The State accumulated and sustained a budget
deficit in the SFEU approaching $2.8 billion at its peak at June 30, 1993. The
Legislature and Governor agreed on a number of different steps to respond to
these adverse financial conditions produce Budget Acts in the Years 1991-92 to
1994- 95 (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.
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, with revenues equaling or exceeding expenditures
starting in FY 1992-93. As a result, the accumulated budget deficit of about
$2.8 billion was eliminated by June 30, 1997, when the State showed a positive
balance of about $408 million, on a budgetary basis, in the SFEU.
A-4
<PAGE>
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. 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. The last of these deficit notes was repaid in
April, 1996.
The 1995-96 and 1996-97 Budget Acts reflected significantly improved
financial conditions, as the State's economy recovered and tax revenues soared
above projections. Over the two years, revenues averaged about $2 billion higher
than initially estimated. Most of the additional revenues were allocated to
school funding, as required by Proposition 98, and to make up shortfalls in
federal aid for health and welfare costs and costs of illegal aliens. The
budgets for both these years showed strong increases in funding for K-14 public
education, including implementation of initiatives to reduce class sizes for
lower elementary grades to not more than 20 pupils. Higher education funding
also increased. Spending for health and welfare programs was kept in check, as
previously implemented cuts in benefit levels were retained.
Fiscal Year 1997-98 Budget. With continued strong economic recovery and
surging tax receipts, the State entered the 1997-98 Fiscal Year in the strongest
financial position in the decade. However, in May 1997, the California Supreme
Court ruled that the State had acted illegally in 1993 and 1994 by using a
deferral of payments to the Public Employees Retirement Fund to help balance
earlier budgets. In response to this court decision, the Governor ordered an
immediate repayment to the Retirement Fund of about $1.235 billion, which was
made in late July, 1997, and substantially used up the expected additional
revenues for the fiscal year. The Budget Act as signed provided for about $52.8
billion of General Fund expenditures, and assumed about $52.5 billion of
revenues.
The 1997-98 Budget Act provided another year of rapidly increasing funding
for K-14 public education. Total General Fund support was targeted to reach
$5,150 per pupil, more than 20% higher than the recession-period levels which
were in effect as late as FY 1993-94. The $1.75 billion in new funding was
budgeted to be spent on class size reduction and other initiatives, as well as
fully funding growth and cost of living increases. Support for higher education
units in the State also increased by about 6 percent. Because of the pension
payment, most other State programs were funded at levels consistent with prior
years, and several initiatives had to be dropped. These included additional
assistance to local governments, state employee raises, and funding of a bond
bank.
Part of the 1997-98 Budget Act was completion of State welfare reform
legislation to implement the new federal law passed in 1996. The new State
program, called CalWORKs, became effective January 1, 1998, and emphasizes
programs to bring aid recipients into the workforce. As required by federal law,
new time limits were placed on receipt of welfare aid. Grant levels for 1997-98
remained at the reduced, prior years' levels.
The Department of Finance released updated budget estimates in May, 1998,
which showed that revenues for the 1997-98 Fiscal Year would be $54.6 billion,
almost $2 billion higher than initial budget estimates, as a result of the
strong economy. Expenditures were expected to increase to about $53.0 billion,
resulting in a significant balance in the SFEU at June 30, 1998.
Proposed 1998-99 Fiscal Year Budget. The Governor released his proposed FY
1998-99 Budget on January 9, 1998, and updated his revenue projections and
budgetary proposals on May 13, 1998 (the May Revision). The May Revision
projected General Fund revenues and transfers of
A-5
<PAGE>
$57.8 billion. Revenue losses due to tax cuts enacted in late 1997 were expected
to be offset by higher capital gains realizations. These revenue estimates were
$2.5 billion higher than the Governor had projected with the January Budget
proposal. The Governor proposed expenditures of $58.3 billion. The Governor
proposed significant additional funding for K-12 schools under Proposition 98,
as well as additional funding for higher education, with a proposed reduction of
college student fees. State and federal funds will be used in the new CalWORKS
welfare program, with projections of a fourth consecutive year of caseload
decline. The Governor proposed a large capital expenditure program, focusing on
schools and universities, but also including corrections, environmental and
general government projects. These proposals would require approval of almost $
10 billion of new general obligation bonds over the next six years. No agreement
was reached with the Legislature to place any bond measures on the June, 1998
ballot, but negotiations will continue for bonds at the November, 1998 election.
With the significantly increased revenue projection for both 1997-98 and
1998-99, the Governor proposed in the May Revision that the State reduce its
Vehicle License Fee (a personal property tax on the value of automobiles, the
VLF) by 75% over four years. Under current law, the VLF is entirely dedicated to
city and county government, and the Governor proposed to use the State's
burgeoning General Fund to offset the loss of VLF funds to local government. All
of the Governor's proposals must be negotiated with the Legislature as part of
the annual budget process.
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 and 1997, the ratings of California's general obligation bonds were
raised by the three major rating agencies, which as of June 1997 assigned
ratings of A+ from Standard & Poor's, Al from Moody's and AA- 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 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 local 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. Trial courts have recently entered tentative decisions or
injunctions which would overturn several parts of the State's recent budget
compromises. The matters covered by these lawsuits include reductions in welfare
payments and the use of certain cigarette tax funds for health costs. All of
these cases are subject to further proceedings and appeals, and if California
eventually loses, the final remedies may not have to be implemented in one year.
Obligations of Other Issuers
Other Issuers of California Municipal Obligations. There are a number of
state agencies,
A-6
<PAGE>
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. Local
assistance (including public schools) has historically 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. Local governments have in return
received greater revenues and greater flexibility to operate health and welfare
programs.
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 were enacted in August,
1997 in order to comply with the federal welfare reform law. Generally, counties
play a large role in the new system, and are given substantial flexibility to
develop and administer programs to bring aid recipients into the workforce.
Counties are also given financial incentives if either at the county or
statewide level, the welfare-to- work programs exceed minimum targets; counties
are also responsible to provide general assistance for able-bodied indigents who
are ineligible for other welfare programs. The long-term financial impact of the
new CalWORKS system on local governments is still unknown.
Legislation enacted in late 1997 provides for the State to take over
financial responsibility for funding trial courts throughout the State. This is
estimated to save counties and cities a total of over $350 million annually.
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 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
A-7
<PAGE>
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. Based on a series of court
decisions, certain California long-term lease obligations, though payable from
the general fund of the municipality, are not considered indebtedness requiring
voter approval. Such leases are, however, 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. Litigation is brought from time to time
which challenges the constitutionality of such lease arrangements.
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.
A-8
<PAGE>
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.
A-9
<PAGE>
APPENDIX B
EVERGREEN 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.
1998 FISCAL YEAR
The budget for fiscal 1998 was enacted by the Legislature on June 30, 1997
and approved by Governor Weld on July 10, 1997. (Appropriations covering the
first two weeks of the fiscal year were enacted and approved on June 30, 1997.)
The budget was based on a consensus tax revenue forecast of $12.85 billion, as
agreed by both houses of the Legislature in March. The Executive Office for
Administration and Finance revised the fiscal 1998 tax forecast to $13.06
billion on July 30, 1997 and, after a review of first quarter fiscal 1998 tax
receipts, to $13.20 billion on October 15, 1997. The fiscal 1998 tax revenue
estimates were revised again on January 16, 1998 to reflect an increase of $100
million in tax revenues. Tax law changes effective in fiscal 1998 have (I)
increased anticipated revenues by $19.0 million from miscellaneous fees to be
collected as a result of the convention center legislation approved on November
17, 1997, (ii) reduced tax revenues by an estimated $25.0 million as a result of
the exemption of military pensions from state income tax, effective January 1,
1998, which was approved by Acting Governor Cellucci on November 6, 1997, and
(iii) reduced tax revenues by an estimated $140 million as a result of a change
in the sales tax payment schedule. After taking into account such tax law
changes, the January 16, 1998 estimate was $13.154 billion. On May 5, 1998, the
tax revenue estimate was further revised upward to $13.3 billion. On June 1,
1998, Revenue Commissioner Mitchell Adams announced that year-to-date revenue
collections totaled $12.364 billion, which he found to be in line with revenue
estimates.
B-1
<PAGE>
The fiscal 1998 budget provides for total appropriations of approximately
$18.4 billion, a 2.8% increase over fiscal 1997 expenditures. The budget
incorporates tax cuts valued by the Department of Revenue at $61 million and
provides for an accelerated pension funding schedule. Supplemental
appropriations have been approved for fiscal 1998 in the amount of approximately
$210.4 million, including the transfer of approximately $34.8 million to the
Massachusetts Water Pollution Abatement Trust for state revolving fund programs.
In addition, on November 26, 1997, Acting Governor Cellucci approved legislation
transferring off-budget the $206.3 million Department of Medical Assistance
reserve to indemnify certain medical facilities against losses that might result
from providing uncompensated care. On January 30, 1998, Acting Governor Cellucci
filed two bills recommending supplemental appropriations for fiscal 1998
totaling $211.8 million. The bills incorporated most of the supplemental
appropriations recommended in bills filed by the Administration on October 6,
1997 and October 17, 1997 which were not enacted by the Legislature. The first
bill totaled $44.6 million in proposed spending to provide to certain
unanticipated obligations of the Commonwealth. The second bill recommended
$167.1 million in proposed spending to provide for one-time expenditures,
matching grants and capital initiatives, including $50 million for the
construction and repair of local roads and bridges, $20 million for the
development of a new human resource compensation management system and $10
million in additional funding for the upgrade of the Commonwealth's information
technology systems in preparation for the year 2000 conversion. On April 29,
1998, Acting Governor Cellucci approved a supplemental appropriations bill for
$116.4 million, of which $56.3 million is for expenditures contained in the
bills filed by the Acting Governor on January 30, 1998. The bill includes $21.1
million for snow and ice costs at the Massachusetts Highway Department, $15.4
million for child care services relating to welfare reform and $11 million at
the Department of Social Services for residential group care and adoption.
Projected Total fiscal 1998 expenditures are approximately $18.930 billion.
Cash Flow
The most recent cash flow projections for fiscal 1998 and fiscal 1999 were
released by the State Treasurer and the Secretary of Administration and Finance
on March 25, 1998. The forecast for fiscal 1998 is based on the fiscal 1998
budget signed by Governor Weld on July 10, 1997, and includes the value of all
fiscal 1998 supplemental budgets enacted by the Legislature. The fiscal 1999
forecast is based on the proposed fiscal 1999 budget submitted by the Acting
Governor on January 27, 1998. Both projections are based on revenue and spending
estimates prepared by the Executive Office for Administration and Finance and
incorporate actual results through January, 1998 and monthly projections through
June, 1999.
Fiscal 1998 is projected to end with a cash balance of $477.9 million,
without regard to any fiscal 1998 activity that may occur after June 30, 1998.
Such balance does not include the balance in the Stabilization Fund ($799.0
million at June 30, 1997) or interest earnings thereon expected during fiscal
1998; it does reflect the required Stabilization Fund transfer related to fiscal
1997 of $234.0 million during fiscal 1998. The cash flow statement notes that
general obligation bonds were issued for capital projects in August, 1997 in the
amount of $250 million and in January, 1998 in the amount of $250 million and
projects that an additional $428 million of general obligation bonds will be
issued for such purposes during the remainder of the fiscal year. The statement
also notes that $105 million of special obligation bonds were issued in October,
1997.
The cash flow statement notes that the Massachusetts Turnpike Authority and
the Massachusetts Port Authority are required to make payments to the
Commonwealth in connection with the Central Artery/Ted Williams Tunnel project
and forecasts that the Commonwealth will receive $430 million in the aggregate
during fiscal 1998 from such authorities or from the issuance
B-2
<PAGE>
of Commonwealth notes in anticipation of payments from such authorities. (The
statement also notes that the Commonwealth has the statutory authority to issue
bonds to pay any such notes.) The statement further forecasts, in connection
with the Central Artery/Ted Williams Tunnel project, that the Commonwealth will
issue $350 million of notes in anticipation of future federal highway grants,
noting that federal funding for such purposes has been extended on an interim
basis through March 31, 1998, and that successor federal funding legislation is
expected to be enacted by late 1998.
1999 FISCAL YEAR
On January 27, 1998, Acting Governor Cellucci filed his fiscal 1999 budget
recommendations with the House of Representatives. The proposal calls for
budgeted expenditures of approximately $19.06 billion, or total fiscal 1999
spending of $19.49 billion after adjusting for shifts to and from off-budget
accounts. The proposed fiscal 1999 spending level represents a $559 million, or
3.0%, increase over projected total fiscal 1998 expenditures of $18.930 billion.
Budgeted revenues for fiscal 1999 are projected to be $18.961 billion, or
$19.291 billion after adjusting for shifts to and from off-budget accounts. This
represents a $53.0 million, or 0.3%, increase over the $18.908 billion forecast
for fiscal 1998. (The $18.908 billion revenue estimate for fiscal 1998 reflects
the addition of $100 million in tax revenue incorporated into the forecast by
the Secretary of Administration and Finance on January 16, 1998 and the addition
of $146 million in tax revenue incorporated into the forecast by the Secretary
of Administration and Finance on May 5, 1998.) The Governor's proposal projects
a fiscal 1999 ending balance in the budgeted funds of $906.3 million, including
a Stabilization Fund balance of $878.1 million.
The Governor's budget recommendation is based on a tax revenue estimate of
$13.665 billion, a $365.0 million, or 2.7%, increase over fiscal 1998 projected
tax revenues of $13.300 billion. The projection incorporates $244.8 million in
income tax cuts proposed by the Governor, including a reduction of the Part B
("earned income') tax rate from 5.95% to 5% over three years ($205.8 million), a
reduction of the Part A ("unearned income"; i.e., interest from non-
Massachusetts banks, dividends, and short-term capital gains) tax rate from 12%
to 5% over five years ($30 million), credits and exemptions to encourage saving
for children's higher education ($3 million), an exemption from capital gains
taxes on the sale of a house ($2 million) and an exemption for providing care to
an elderly relative ($4 million). The recommendation also proposes moving $92.5
million in tax revenue in the Children's and Seniors Health Protection Fund off-
budget.
The proposed budget assumes non-tax revenues of $5.297 billion, or $5.624
billion when adjusted for the shifts to and from off-budget accounts, and
represents an increase of $15.4 million from fiscal 1998. Of the three classes
of non-tax revenue, federal reimbursements, including those for Medicaid, and
block grants for Temporary Assistance to Needy Families and Child Care programs
most affect the Commonwealth's budgetary considerations. These payments are
projected to total $3.216 billion in fiscal 1999, or $3.426 billion after the
impact of shifts to and from off-budget accounts is removed. This level of
federal payments represents an increase of $41.0 million, or 1.2%, from fiscal
1998, the result primarily of changes in federal reimbursement for Medicaid
programs. Fiscal 1999 departmental revenues of $1.130 billion, or $1.158 billion
after adjusting for shifts to and from off-budget accounts, represent a decrease
of approximately $127 million from fiscal 1998 projections, due primarily to the
implementation of free, lifetime driver licensing and vehicle registration and a
decrease of $29.3 million from fiscal 1998 in the revenue generated by the
revenue optimization program. Consolidated transfers, the third category of
non-tax revenue, consists primarily of state lottery profits which are
distributed to cities and towns. Consolidated transfers are projected to
increase by $1.8 million from fiscal 1998 levels.
B-3
<PAGE>
Lottery profits are expected to remain constant in fiscal 1999.
The Governor's budget proposal generally provides for maintaining current
levels of service for most state programs but recommends increased spending for
certain priority areas, including a $357 million increase in funding for the
Department of Education, $309.7 million in additional local aid to cities and
towns, $69 million for Medicaid program medical inflation and $34 million in
additional local aid funded by the State Lottery.
The Governor's fiscal 1999 budget recommendations call for appropriations
of $945.3 million for pension funding, $85.2 million less than the amount
appropriated for fiscal 1998 and $113.9 million less than the amount called for
in the most recent adopted funding schedule. The recommended amount reflects the
elimination in 1997 of the Commonwealth's responsibility for funding
cost-of-living adjustments incurred by local pension systems and assumes the
adoption of a revised funding schedule in the spring of 1998. The proposed
budget also includes a $20 million reserve to meet the Commonwealth's obligation
to reduce the unfunded pension liabilities attributable to former employees of
Franklin, Hampden, Middlesex and Worcester counties and certain incremental
benefit costs associated with legislation enacted in 1996; any expenditures from
the reserve are contingent upon the adoption of a new funding schedule.
On April 27, 1998, the House Committee on Ways and Means released its
proposed budget for fiscal 1999. Debate in the full House of Representatives
began on May 4, 1998. The House Committee's budget provides for total spending
of $19.592 billion and assumes total revenues of $19.446 billion. The House
Committee's budget is based on the consensus tax revenue estimate of $14.4
billion, less approximately $534 million from tax cuts proposed in such budget.
The Committee's budget includes the income tax provisions approved by the House
of Representatives on March 12, 1998. It would raise the statutory ceiling on
amounts in the Stabilization Fund from 5% to 7.5% of budgeted revenues and other
financial resources pertaining to the budgeted funds. The committee's budget
would add $18 million in appropriations for building maintenance and $21 million
in appropriations for debt service related to the "forward funding" of the
Massachusetts Bay Transportation Authority. The committee's budget would also
appropriate approximately $965.3 million for the Commonwealth's pension
liabilities.
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.
B-4
<PAGE>
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.
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
B-5
<PAGE>
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.
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.
B-6
<PAGE>
APPENDIX C
EVERGREEN 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
C-1
<PAGE>
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 1,949,956 and 1,039,241 residents, respectively,
constituting over fifty percent of Missouri's 1997 population census of
approximately 5,387,753. 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
C-2
<PAGE>
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, which was acquired by The Boeing Company on August 1, 1997,
is the State's largest employer, currently employing approximately 22,900
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 such company 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. It is
impossible to determine what effect, if any, completion of the acquisition of
all McDonnell Douglas Corporation by The Boeing Company will have on the
operations conducted in Missouri by the former McDonnel 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, notwithstanding a 1995 U.S. Supreme Court favorable to
the State in the Kansas City desegregation litigation; court orders are
unpredictable, and school district spending patterns have proven difficult to
predict. 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.
C-3
<PAGE>
APPENDIX D
EVERGREEN NEW YORK TAX FREE FUND
Special Considerations Relating to New York Municipal Securities
The financial condition of the State of New York ("New York State" or the
"State"), its public authorities and public benefit corporations (the
"Authorities") and its local governments, particularly the City of New York (the
"City"), could affect the market values and marketability of, and therefore the
net asset value per share and the interest income of a Fund, or result in the
default of existing obligations, including obligations which may be held by the
Fund. The following section provides only a brief summary of the complex factors
affecting the financial situation in New York and is based on information
obtained from New York State, certain of its Authorities, the City and certain
other localities as publicly available on the date of this Annual Information
Statement. The information contained in such publicly available documents has
not been independently verified. It should be noted that the creditworthiness of
obligations issued by local issuers may be unrelated to the creditworthiness of
New York State, and that there is no obligation on the part of New York State to
make payment on such local obligations in the event of default in the absence of
a specific guarantee or pledge provided by New York State.
Economic Factors. New York is the third most populous state in the nation
and has a relatively high level of personal wealth. The State's economy is
diverse, with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. The State's location and its
excellent air transport facilities and natural harbors have made it an important
link in international commerce. Travel and tourism constitute an important part
of the economy. Like the rest of the nation, New York has a declining proportion
of its workforce engaged in manufacturing, and an increasing proportion engaged
in service industries.
Both the State and the City experienced substantial revenue increases in
the mid-1980s attributable directly (corporate income and financial corporations
taxes) and, indirectly (personal income and a variety of other taxes) to growth
in new jobs, rising profits and capital appreciation derived from the finance
sector of the City's economy. Economic activity in the City has experienced
periods of growth and recession and can be expected to experience periods of
growth and recession in the future. In recent years, the City has experienced
increases in employment. Real per capita personal income (i.e., per capita
personal income adjusted for the effects of inflation and the differential in
living costs) has generally experienced fewer fluctuations than employment in
the City. Although the City periodically experienced declines in real per capita
personal income between 1969 and 1981, real per capita personal income in the
City has generally increased from the mid-1980s until the present. In nearly all
of the years between 1969 and 1988 the City experienced strong increases in
retail sales. However, from 1989 to 1993, the City experienced a weak period of
retail sales. Since 1994, the City has returned to a period of growth in retail
sales. Overall, the City's economic improvement accelerated significantly, in
fiscal year 1997. Much of the increase can be traced to the performance of the
securities industry, but the City's economy also produced gains in the retail
trade sector, the hotel and tourism industry, and business services, with
private sector employment higher than previously forecasted. The City's current
Financial Plan assumes that, after strong growth in 1997- 1998, moderate
economic growth will exist through calendar year 2002, with moderating job
growth and wage increases. However, there can be no assurance that the economic
projections assumed in the Financial Plan will occur or that the tax revenues
projected in the Financial Plan to be received will be received in the amounts
anticipated.
D-1
<PAGE>
During the calendar years 1984 through 1991, the State's rate of economic
expansion was somewhat slower than that of the nation as a whole. In the
1990-1991 national recession, the economy of the Northeast region in general and
the State in particular was more heavily damaged than that of the rest of the
nation and has been slower to recover.
Although the national economy began to expand in 1991, the State economy
remained in recession until 1993, when employment growth resumed. Currently the
State economy continues to expand, but growth remains somewhat slower than in
the nation. Although the State has added over 400,000 jobs since late 1992,
employment growth has been hindered during recent years by significant cutbacks
in the computer and instrument manufacturing, utility, defense and banking
industries. Government downsizing has also moderated these job gains. Personal
income increased substantially in 1992 and 1993. The State's economy entered
into the fourth year of a slow recovery in 1996. Most of the growth occurred in
the trade, construction and service industries, with business, social services
and health sectors accounting for most of the service industry growth.
The State has released information regarding the national and state
economic activity in its Annual Information Statement of the State of New York
dated June 26, 1998 ("Annual Information Statement"). At the State level, the
Annual Information Statement projects continued expansion during the 1998
calendar year, with employment growth gradually slowing as the year progresses.
The financial and business service sectors are expected to continue to do well,
while employment in the manufacturing and government sectors will post only
small, if any, declines. On an average annual basis, the employment growth rate
in the State is expected to be higher than in 1997 and the unemployment rate is
expected to drop further to 6.1 percent. Personal income is expected to record
moderate gains in 1998. Wage growth in 1998 is expected to be slower than in the
previous year as the recent robust growth in bonus payments moderates.
Personal income tax collections for 1998-99 are projected to reach $21.24
billion, or $3.5 billion above the reported 1997-98 collection total. Total
business tax collections in 1998-99 are now projected to be $4.96 billion, $91
million less than received in the prior fiscal year. Receipts from user taxes
and fees are projected to total $7.14 billion, an increase of $107 million from
reported collections in the prior year. Other tax receipts are projected to
total $1.02 billion-$75 million below last year's amount. Total miscellaneous
receipts are projected to reach $1.40 billion, down almost $200 million from the
prior year. Transfers from other funds are expected to total $1.8 billion, or
$222 million less than total receipts from this category during 1997-98.
General Fund disbursements in 1998-99, including transfers to support
capital projects, debt service and other funds are estimated at $36.78 billion.
This represents an increase of $2.43 billion or 7.1 percent from 1997-98. Nearly
one-half of the growth is for educational purposes, reflecting increased support
for public schools, special education programs and the State and City university
systems. The remaining increase is primarily for Medicaid, mental hygiene, and
other health and social welfare programs, including children and family
services. The 1998-99 Financial Plan also includes funds for the current
negotiated salary increases for State employees, as well as increased transfers
for debt service. Grants to local governments is the largest category of General
Fund disbursements and includes financial assistance to local governments and
not-for-profit corporations, as well as entitlement benefits to individuals. The
1998-99 Financial Plan projects spending of $25.14 billion in this category, an
increase of $1.88 billion or 8.1 percent over the prior year. The largest annual
increases are for educational programs, Medicaid, other health and social
welfare programs, and community projects grants. The 1998-99 budget provides
$9.65 billion in support of public schools. The year-to-year increase of $769
million is comprised of partial funding for a 1998-99 school year increase of
$847 million as well as the remainder of the 1997-98 school year increase that
occurs in State fiscal year 1998-99. Spending for all other educational
programs, which includes the State and City university systems, the Tuition
Assistance Program, and handicapped programs, is estimated at
D-2
<PAGE>
$3.00 billion, an increase of $270 million over 1997-98 levels. Medicaid costs
are estimated at $5.60 billion, an increase of $144 million from the prior year.
The 1998-99 Financial Plan projects a closing fund balance in the General
Fund of $1.42 billion. This fund balance is composed of a reserve of $761
million available for future needs, a $400 million balance in the TSRF, a $158
million in the CPF, and a balance of $100 million in the CRF, after a projected
deposit of $32 million in 1998-99.
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. These factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the federal government, that
are not under the control of the State. Because of the uncertainty and
unpredictability of these factors, their impact cannot, as a practical matter,
be included in the assumptions underlying the State's projections at this time.
As a result, there can be no assurance that the State economy will not
experience results in the current fiscal year that are worse than predicted,
with corresponding material and adverse effects on the State's projections of
receipts and disbursements.
The State Financial Plan is based upon forecasts of national and State
economic activity developed through both internal analysis and review of State
and national economic forecasts prepared by commercial forecasting services and
other public and private forecasters. Economic forecasts have frequently failed
to predict accurately the timing and magnitude of changes in the national and
the State economies, including consumer attitudes toward spending, the extent of
corporate and governmental restructuring, the condition of the financial sector,
federal fiscal and monetary policies, the level of interest rates, and the
condition of the world economy, which could have an adverse effect on the
State's projections of receipts and disbursements.
The State. Owing to the factors mentioned above and other factors, the
State may, in future years, face substantial potential budget gaps resulting
from a significant disparity between tax revenues projected from a lower
recurring receipts base and the future costs of maintaining State programs at
current levels.
Total General Fund receipts in 1998-99 are projected to be $37.56 billion,
an increase of over $3 billion from the $34.55 billion recorded in 1997-98. This
total included $34.36 billion in tax receipts, $1.40 billion in miscellaneous
receipts, and $1.80 billion in transfers from other funds. However, many complex
political, social and economic forces influence the State's economy and
finances, which may in turn affect the State's Financial Plan. These forces may
affect the State unpredictably from fiscal year to fiscal year and are
influenced by governments, institutions, and organizations that are not subject
to the State's control. The State Financial Plan is also necessarily based upon
forecasts of national and State economic activity. Economic forecasts have
frequently failed to predict accurately the timing and magnitude of changes in
the national and the State economies. Because of the uncertainty and
unpredictability of changes in these factors, their impact cannot be fully
included in the assumptions underlying the State's projections.
An additional risk to the State Financial Plan arises from the potential
impact of certain litigation and of federal disallowances now pending against
the State, which could adversely affect the States projections of receipts and
disbursements. The State Financial Plan assumes no significant litigation or
federal disallowance or other federal actions that could affect State finances,
but has significant reserves in the event of such an action.
Revenue Base. The State's principal revenue sources are economically
sensitive, and include the personal income tax, user taxes and fees and business
taxes. The 1998-99 Financial
D-3
<PAGE>
Plan projects General Fund receipts (including transfers from other funds) of
$37.56 billion, an increase of over 3 billion from the $34.55 billion recorded
in 1997-98. This total includes $34.36 billion in tax receipts, $1.40 billion in
miscellaneous receipts, and $1.80 billion in transfers from other funds.
The transfer of a portion of the surplus recorded in 1997-98 to 1998-99
exaggerates the "real" growth in State receipts from year to year by depressing
reported 1997-98 figures and inflating 1998-99 projections. Conversely, the
incremental cost of tax reductions newly effective in 1998-99 and the impact of
statutes earmarking certain tax receipts to other funds work to depress apparent
growth below the underlying growth in receipts attributable to expansion of the
State's economy. On an adjusted basis, State tax revenues in the 1998-99 fiscal
year are projected to grow at approximately 7.5 percent, following an adjusted
growth of roughly nine percent in the 1997-98 fiscal year. On an adjusted basis,
State tax revenues in the 1998-99 fiscal year are projected to grow at
approximately 7.5 percent, following an adjusted growth of roughly nine percent
in the 1997-98 fiscal year.
The Personal Income Tax is imposed on the income of individuals, estates
and trusts and is based on federal definitions of income and deductions with
certain modifications. This tax continues to account for over half of the
State's General Fund receipts base. Net personal income tax collections are
projected to reach $21.24 billion, nearly $3.5 billion above the reported
1997-98 collection total. Since 1997 represented the completion of the 20
percent income tax reduction program enacted in 1995, growth from 1997 to 1998
will be unaffected by major income tax reductions. Adding to the projected
annual growth is the net impact of the transfer of the surplus from 1997-98 to
the current year which affects reported collections by over $2.4 billion on a
year- over-year basis, as partially offset by the diversion of slightly over
$700 million in income tax receipts to the STAR fund to finance the initial year
of the school tax reduction program. The STAR program was enacted in 1997 to
increase the State share of school funding and reduce residential school taxes.
Adjusted for these transactions, the growth in net income tax receipts is
roughly $1.7 billion, an increase of over 9 percent. This growth is largely a
function of over 8 percent growth in income tax liability projected for 1998 as
well as the impact of the 1997 tax year settlement on 1998-99 net collections.
User taxes and fees comprised of three quarters of the State four percent
sales and use tax (the balance, one percent, flows to support Government
Assistance Corporation ("LGAC") debt service requirements), cigarette, alcoholic
beverage container, and auto rental taxes, and a portion of the motor fuel
excise levies. Also included in this category are receipts from the motor
vehicle registration fees and alcoholic beverage license fees. A portion of the
motor fuel tax and motor vehicle registration fees and all of the highway use
tax are earmarked for dedicated transportation funds.
Receipts from user taxes and fees receipts are projected to total $7.14
billion, an increase of $107 million from reported collections in the prior
year. The sales tax component of this category accounts for all of the 1998-99
growth, as receipts from all other sources decline $100 million. The growth in
yield of the sales tax in 1998-99, after adjusting for tax law and other
changes, is projected at 4.7 percent. The yields of most of the excise taxes in
this category show a long-term declining trend, particularly cigarette and
alcoholic beverage taxes. These General Fund declines are exacerbated in 1998-99
by revenue losses from scheduled and newly enacted tax reductions, and by an
increase in earmarking of motor vehicle registration fees to the Dedicated
Highway and Bridge Trust Fund.
Business taxes include franchise taxes based generally on net income of
general business, bank and insurance corporations, as well as gross receipt
taxes on utilities and galling-based
D-4
<PAGE>
petroleum business taxes. Beginning in 1994, a 15 percent surcharge on these
levies began to be phased out and, for most taxpayers, there is no surcharge
liability for taxable periods ending in 1997 and thereafter.
Total business tax collections in 1998-99 are now projected to be $4.96
billion, $91 million less than received in the prior fiscal year. The category
includes receipts from the largely income- based levies on general business
corporations, banks and insurance companies, gross receipts taxes on energy and
telecommunication service providers and a per-gallon imposition on petroleum
business. The year-over-year decline in projected receipts in this category is
largely attributable to statutory changes between the two years. These include
the first year of utility-tax rate cuts and the Power for Jobs tax reduction
program for energy providers, and the scheduled additional diversion of General
Fund petroleum business and utility tax receipts to other funds. In addition,
profit growth is also expected to slow in 1998.
Other taxes include estate, gift and real estate transfer taxes, a tax on
gains from the sale or transfer of certain real estate (this tax was repealed in
1996), a pari-mutuel tax and other minor levies. They are now projected to total
$1.02 billion-$75 million below last year's amount. Two factors account for a
significant part of the expected decline in collections from this category.
First, the effects of the elimination of the real property gains tax
collections; second, a decline in estate tax receipts, following the explosive
growth recorded in 1997-98, when receipts expanded by over 16 percent.
Miscellaneous receipts include investment income, abandoned property
receipts, medical provider assessments, minor federal grants, receipts from
public authorities, and certain other license and fee revenues. Total
miscellaneous receipts are projected to reach $1.40 billion, down almost $200
million from the prior year, reflecting the loss of non-recurring receipts in
1997-98 and the growing effects of the phase-out of the medical provider
assessments.
Transfers from other funds to the General Fund consist primarily of tax
revenues in excess of debt service requirements, particularly the one percent
sales tax used to support payments to LGAC. Transfers from other funds are
expected to total $1.8 billion, or $222 million less than total receipts from
this category during 1997-98. Total transfers of sales taxes in excess of LGAC
debt service requirements are expected to increase by approximately $51 million,
while transfers from all other funds are expected to fall by $273 million,
primarily reflecting the absence, in 1998-99, of a one-time transfer of nearly
$200 million for retroactive reimbursement of certain social services claims
from the federal government.
State Debt. General Fund disbursements in 1998-99, including transfers to
support capital projects, debt service and other funds are estimated at $36.78
billion. This represents an increase of $2.43 billion or 7.1 percent from
1997-98. Nearly one-half of the growth is for educational purposes, reflecting
increased support for public schools, special education programs and the State
and City university systems. The remaining increase is primarily for Medicaid,
mental hygiene and other health and social welfare programs, including children
and family services. The 1998-99 Financial Plan also includes funds for the
current negotiated salary increase for State employees, as well as increased
transfers for debt service.
Nonrecurring Sources. The Division of the Budget estimates that the 1998-99
State Financial Plan contains actions that provide nonrecurring resources or
savings totaling approximately $64 million, the largest of which is a
retroactive reimbursement of federal welfare claims.
D-5
<PAGE>
Outyear Projections of Receipts and Disbursements
State law requires the Governor to propose a balanced budget each year. In
recent years, the State has closed projected budget gaps of $5.0 billion
(1995-96), $3.9 billion (1996-97), $2.3 billion (1997-98), and less than $1
billion (1998-99). The State, as a part of the 1998-99 Executive Budget
projections submitted to the Legislature in February 1998, projected a 1999-00
General Fund budget gap of approximately $1.7 billion and a 2000-01 gap of $3.7
billion. As a result of changes made in the 1998-99 enacted budget, the 1999-00
gap is now expected to be roughly $1.3 billion, or about $400 million less than
previously projected, after application of reserves created as part of the
1998-99 budget process. Such reserves would not be available against subsequent
year imbalances.
Sustained growth in the State's economy could contribute to closing
projected budget gaps over the next several years, both in terms of
higher-than-projected tax receipts and in lower-than- expected entitlement
spending. However, the States projections in 1999-00 currently assume actions to
achieve $600 million in lower disbursements and $250 million in additional
receipts from the settlement of State claims against the tobacco industry.
Consistent with past practice, the projections do not include any costs
associated with new collective bargaining agreements after the expiration of the
current round of contracts at the end of the 1998-99 fiscal year. The State
expects that the 1999- 00 Financial Plan will achieve savings from initiatives
by State agencies to deliver services more efficiently, workforce management
efforts, maximization of federal and non-General Fund spending offsets, and
other actions necessary to bring projected disbursements and receipts into
balance.
The State will formally update its outyear projections of receipts and
disbursements for the 2000-01 and 2001-02 fiscal years as a part of the 1999-00
Executive Budget process, as required by law. The revised expectations for years
2000-01 and 2001-02 will reflect the cumulative impact of tax reductions and
spending commitments enacted over the last several years as well as new 1999-00
Executive Budget recommendations. The STAR program, which dedicates a portion of
person income tax receipts to fund school tax reductions, has a significant
impact on General Fund receipts. STAR is projected to reduce personal income tax
revenues available to the General Fund by an estimated $1.3 billion in 2000-01.
Measured from the 1998-99 base, scheduled reductions to estate and gift, sales
and other taxes, reflecting tax cuts enacted in 1997-98 and 1998-99, will lower
General Fund taxes and fees by an estimated $1.8 billion in 2000-01.
Disbursement projections for the outyears currently assume additional outlays
for school aid, Medicaid, welfare reform, mental health community reinvestment,
and other multi-year spending commitments in law.
Labor Costs. The State government workforce is mostly unionized, subject to
the Taylor- Law which authorizes collective bargaining and prohibits (but has
not, historically, prevented) strikes and work slowdowns. Costs for employee
health benefits have increased substantially, and can be expected to further
increase. The State has a substantial unfunded liability for future pension
benefits, and has utilized changes in its pension fund investment return
assumptions to reduce current contribution requirements. If such investment
earnings assumptions are not sustained by actual results, additional State
contributions will be required in future years to meet the State's contractual
obligations. The State's change in actuarial method from the aggregate cost
method to a modified projected unit credit in FY1990-91 created a substantial
surplus that was amortized and applied to offset the State's contribution
through FY1993-94. This change in actuarial method was ruled unconstitutional by
the State's highest court and the State returned to the aggregate cost method in
FY1994-95 using a four year phase in. Employer contributions, including the
State's, are expected to increase over the next five to ten years. Since January
1995, the State's workforce has been reduced by about 10 percent, and is
projected to remain at its current level of approximately 191,000 persons in
1998-99 year. The State is currently preparing for negotiations with various
unions to establish new agreements since most of the
D-6
<PAGE>
existing contracts will expire on March 31, 1999.
On August 22, 1996, the President signed into law the Personal
Responsibility and Work Opportunity Reconciliation Act of 1996. This federal
legislation fundamentally changed the programmatic and fiscal responsibilities
for administration of welfare programs at the federal, state and local levels.
The new law abolishes the federal Aid to Families with Dependent Children
program (AFDC), and creates a new Temporary Assistance to Needy Families with
Dependent Children program (AFDC), and creates a new Temporary Assistance to
Needy Families program (TANF) funded with a fixed federal block grant to states.
The new law also imposes (with certain exceptions) a five era durational limit
on TANF recipients, requires that virtually all recipients be engaged in work or
community service activities within two years of receipt benefits, and limits
assistance provided to certain immigrants and other classes of individuals.
States are required to meet work activity participation targets for their TANF
caseload; these requirements are phased in over time. States that fail to meet
these federally mandated job participation rates, or that fail to conform with
certain other federal standards, face potential sanctions in the form of a
reduced federal block grant.
Proposed legislation that includes both provisions necessary to implement
the State's TANF plan to conform with federal law and implement the Governor's
welfare reform proposal is still pending before the Legislature. There can be no
assurances of timely enactment of certain conforming provisions required under
the federal law. Further delay increases the risk that the State could incur
fiscal penalties for failure to comply with federal law.
Medicaid. New York participates in the federal Medicaid program under a
state plan approved by the Health Care Financing Administration. The federal
government provides a substantial portion of eligible program costs, with the
remainder shared by the State and its counties (including the City). Basic
program eligibility and benefits are determined by federal guidelines, but the
State provides a number of optional benefits and expanded eligibility. Program
costs have increased substantially in recent years, and account for a rising
share of the State budget. Federal law requires that the State adopt
reimbursement rates for hospitals and nursing homes that are reasonable and
adequate to meet the costs that must be incurred by efficiently and economically
operated facilities in providing patient care, a standard that has led to past
litigation by hospitals and nursing homes seeking higher reimbursement from the
State. General Fund payments for Medicaid are projected to be $5.60 billion, an
increase of $144 million from the prior year. After adjusting 1997-98 for the
$116 million prepayment of an additional Medicaid cycle, Medicaid spending is
projected to increase $260 million or 4.9 percent. Disbursements for all other
health and social welfare programs are projected to total $3.63 billion, an
increase of $131 million from 1997-98. This includes an increase in support for
children and families and local public health programs, offset by a decline in
welfare spending of $75 million that reflects continuing State and local efforts
to reduce welfare fraud, declining caseloads, and the impact of State and
federal welfare reform legislation.
The State Authorities. 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 incurrence of debt which apply
to the State itself and may issue bonds and notes within the amounts and
restrictions set forth in 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 and 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 debt.
D-7
<PAGE>
The State has numerous public authorities with various responsibilities,
including those which finance, construct and/or operate revenue producing public
facilities. 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, charges for public
power, electric and gas utility services, 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 these arrangements, the affected localities may seek
additional State assistance if local assistance payments are diverted. Some
authorities also receive moneys from State appropriations to pay for the
operating costs of certain of their programs. The MTA receives the bulk of this
money in order to provide transit and commuter services.
Beginning in 1998, the Long Island Power Authority (LIPA) assumed
responsibility for the provision of electric utility services previously
provided by Long Island Lighting Company for Nassau, Suffolk and a portion of
Queen Counties, as part of an estimated $7 billion financing plan.
Metropolitan Transportation Authority
Since 1980, the State has enacted several taxes including a surcharge on
the profits of banks, insurance corporations and general business corporations
doing business in the 12 county Metropolitan Transportation Region served by the
MTA and a special one quarter of 1 percent regional sales and use tax that
provide revenues for mass transit purposes, including assistance to the MTA.
Since 1987 State law has required that the proceeds of a one quarter of 1
percent mortgage recording tax paid on certain mortgages in the Metropolitan
Transportation Region be deposited in a special MTA fund for operating or
capital expenses. 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 1998-99 fiscal year, State assistance to the MTA is projected
to total approximately $1.3 billion, an increase of $133 million over the
1997-98 fiscal year.
State legislation accompanying the 1996-97 adopted State budget authorized
the MTA, Triborough Bridge and Tunnel Authority and Transit Authority to issue
an aggregate of $6.5 billion in bonds to finance a portion of the $12.17 billion
MTA capital plan for the 1995 through 1999 calendar years (the "1995-99 Capital
Program"). In July 1997, the Capital Program Review Board (CPRB) approved the
1995-99 Capital Program (subsequently amended in August 1997), which supersedes
the overlapping portion of the MTA's 1992-96 Capital Program. The 1995-99
Capital Program is the fourth capital plan since the Legislature authorized
procedures for the adoption, approval and amendment of MTA capital programs and
is designed to upgrade the performance of the MTA's transportation systems by
investing in new rolling stock, maintaining replacement schedules for existing
assets and bringing the MTA system into a state of good repair. The 1995- 99
Capital Program assumes the issuance of an estimated $5.2 billion in bonds under
this $6.5 billion aggregate bonding authority. The remainder of the plan is
projected to be financed through assistance from the State, the federal
government, and the City of New York, and from various other revenues generated
from actions taken the MTA.
There can be no assurance that all the necessary governmental actions for
the 1995-99 Capital Program or future capital programs will be taken, that
funding sources currently identified will not be decreased or eliminated, or
that the 1995-99 Capital Program, or parts thereof, will not be delayed or
reduced. Should funding levels fall below current projections, the MTA would
have to revise its 1995-99 Capital Program accordingly. If the 1995-99 Capital
Program is delayed or
D-8
<PAGE>
reduced, ridership and Fare revenues may decline, which could, among other
things, impair the MTA's ability to meet its operating expenses without
additional assistance.
The City
The fiscal health of the State may also be affected by the fiscal health of
New York City (City), which continues to receive significant financial
assistance from the State. State aid contributes to the City's ability to
balance its budget and meet its cash requirements. The State may also be
affected by the ability of the City and certain entities issuing debt for the
benefit of the City to market their securities successfully in the public credit
markets.
The City has achieved balanced operating results for each of its fiscal
years since 1981 as measured by the GAAP standards in force at that time.
However, in the early 1970s, the City incurred substantial operating deficits,
and its financial controls, accounting practices and disclosure policies were
widely criticized. In response to the City's fiscal crisis in 1975, the State
took action to assist the City in returning to fiscal stability. Among these
actions, the State established the Municipal Assistance Corporation For The City
of New York ("MAC") to provide financing assistance for the City; the New York
State Financial Control Board (the Control Board) to oversee the City's
financial affairs; and the Office of the State Deputy Comptroller for the City
of New York (OSDC) to assist the Control Board in exercising its powers and
responsibilities. A "control period" existed from 1975 to 1986, during which the
City was subject to certain statutorily conditions were met. State law requires
the Control Board to reimpose a control period 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 or impaired access to the public credit markets.
The City provides services usually undertaken by counties, school districts
or special districts in other large urban areas, including the provision of
social services such as day care, foster care, health care, family planning,
services for the elderly and special employment services for needy individuals
and families who qualify for such assistance. State law requires the City to
allocate a large portion of its total budget to Board of Education operations,
and mandates that the City assume the local share of public assistance and
Medicaid costs. For each of the 1981 through 1996 fiscal years, the City
achieved balanced operating results as reported in accordance with then
applicable generally accepted accounting principles ("GAAP"). The City was
required to close substantial budget gaps in recent years in order to maintain
balanced operating results. There can be no assurance that the City will
continue to maintain a balanced budget as required by State law without
additional tax or other revenue increases or additional reductions in. City
services or entitlement programs, which could adversely affect the City's
economic base.
Pursuant to the New York State Financial Emergency Act for The City of New
York (the "Financial Emergency Act" or the "Act"), the City prepares a four year
annual financial plan, which is reviewed and revised on a quarterly basis and
which includes the City's capital, revenue and expense projections and outlines
proposed gap closing programs for years with projected budget gaps. The City's
projections set forth in the 1999-2002 Financial Plan are based on various
assumptions and contingencies which are uncertain and which may not materialize.
Changes in major assumptions could significantly effect the City's ability to
balance its budget and to meet its annual cash flow and financing requirements.
Such assumptions and contingencies include the timing and pace of a regional and
local economic recovery, increases in tax revenues, employment growth, the
ability to implement proposed reductions in City personnel and other cost
reduction initiatives which may require in certain cases the cooperation of the
City's municipal unions, the ability of New York City Health and Hospitals
Corporation and the Board of Education to take actions to offset reduced
revenues, the ability to complete revenue generating transactions,
D-9
<PAGE>
provision of State and federal aid and mandate relief, and the impact on City
revenues of proposals for federal and State welfare reform. No assurance can be
given that the assumptions used by the City in the 1999-2002 Financial Plan will
be realized. Due to the uncertainty existing on the federal and state levels,
the ultimate adoption of the State budget for FY 1997-98 may result in
substantial reductions in projected expenditures for social spending programs.
Cost containment assumptions contained in the 1997-2000 Financial Plan and the
City FY 1997-98 Budget may therefore be significantly adversely affected upon
the final adoption of the State budget for FY 1997-98. Furthermore, actions
taken in recent fiscal years to avert deficits may have reduced the City's
flexibility in responding to future budgetary imbalances, and have deferred
certain expenditures to later fiscal year.
The 1999-2002 Financial Plan projects revenues and expenditures for the
1999 fiscal year balanced in accordance with GAAP, and projects gaps of $1.5
billion, $2.1 billion and $1.6 billion for the 2000, 2001 and 2002 fiscal years,
respectively.
On April 24, 1998, the City released the Financial Plan for the 1999
through 2002 fiscal years, which relates to the City and certain entities which
receive funds from the City, and which is based on the Executive Budget and
Budget Message for the City's 1999 fiscal year (the "Executive Budget"). The
Executive Budget and Financial Plan project revenues and expenditures for the
1999 fiscal year balanced in accordance with GAAP, and project gaps of $1.5
billion, $2.1 billion and $1.6 billion for the 2000, 2001 and 2002 fiscal years,
respectively.
Changes since the June Financial Plan include: (I) an increase in projected
tax revenues of $1.3 billion, $1.1 billion, $955 million, $897 million and $1.7
billion in the 1998 through 2002 fiscal years, respectively; (ii) a reduction in
assumed State aid of $283 million in the 1998 fiscal year and of between $134
million and $142 million in each of the 1999 through 2002 fiscal years,
reflecting the adopted budget for the State's 1998 fiscal year; (iii) a delay in
the assumed collection of $350 million of projected rent payments for the City's
airports in the 1999 fiscal year to fiscal years 2000 through 2002; (iv) a
reduction in projected debt service expenditures totaling $197 million, $361
million, $204 million and $226 million in the 1998 through 2001 fiscal years,
respectively; (v) an increase in the Board of Education (the "BOE") spending of
$266 million, $26 million, $58 million and $193 million in the 1999 through 2002
fiscal years, respectively; (vi) an increase in expenditures for the City's
proposed drug initiatives totaling $68 million in the 1998 fiscal year and of
between $167 million and $193 million in each of the 1999 through 2002 fiscal
years; (vii) other agency net spending initiatives totaling $112 million, $443
million, $281 million, $273 million and $677 million in fiscal years 1998
through 2002, respectively; and (viii) reduced pension costs of $116 million,
$168 million and $404 million in fiscal years 2000 through 2002, respectively.
The Financial Plan also sets forth gap closing actions for the 1998 through 2002
fiscal years, which include: (I) additional agency actions totaling $176
million, $595 million, $516 million, $494 million and $552 million in fiscal
years 1998 through 2002, respectively, and (ii) assumed additional Federal and
State aid of $100 million in each of fiscal years 1999 through 2002.
The 1998 Modification and the 1999-2002 Financial Plan include a proposed
discretionary transfer in the 1998 fiscal year of approximately $2.0 billion to
pay debt service due in the 1999 fiscal year, and a proposed discretionary
transfer in the 1999 fiscal year of $416 million to pay debt service due in
fiscal year 2000, included in the Budget Stabilization Plan for the 1998 and
1999 fiscal years, respectively. In addition, the Financial Plan reflects
proposed tax reduction programs totaling $237 million, $537 million, $657
million and $666 million in fiscal years 1999 through 2002, respectively,
including the elimination of the City
D-10
<PAGE>
sales tax on all clothing as of December 1, 1999, a City funded acceleration of
the State funded personal income tax reduction for the 1999 through 2001 fiscal
years, the extension of current tax reductions for owners of cooperative and
condominium apartments starting in fiscal year 2000 and a personal income tax
credit for child care and for residential holders of Subchapter S corporations,
which are subject to State legislative approval, and reduction of the commercial
rent tax commencing in fiscal year 2000.
Although the City has maintained balanced budgets in each of its last
sixteen fiscal years and is projected to achieve balanced operating results for
the 1998 fiscal year, there can be no assurance that the gap closing actions
proposed in the Financial Plan can be successfully implemented or that the City
will maintain a balanced budget in future years without additional State aid,
revenue increases or expenditure reductions. Additional tax increases and
reductions in essential City services could adversely affect the City's economic
base.
The City derives its revenues from a variety of local taxes, user charges
and miscellaneous revenues, as well as from Federal and State unrestricted and
categorical grants. State aid as a percentage of the City's revenues has
remained relatively constant over the period from 1980 to 1997, while
unrestricted Federal aid has been sharply reduced. The City projects that local
revenues will provide approximately 66.9% of total revenues in the 1998 fiscal
year while Federal aid, including categorical grants, will provide 13.2%, and
State aid, including unrestricted aid and categorical grants, will provide
19.7%.
The City since 1981 has fully satisfied its seasonal financing needs in the
public credit markets, repaying all short term obligations within their fiscal
year of issuance. The City has issued $1.075 billion of short term obligations
in fiscal year 1998 to finance the City's projected cash flow needs for the 1998
fiscal year. The City issued $2.4 billion of short term obligations in fiscal
year 1997. Seasonal financing requirements for the 1996 fiscal year increased to
$2.4 billion from $2.2 billion and $1.75 billion in the 1995 and 1994 fiscal
years, respectively. The delay in the adoption of the State's budget in certain
past fiscal years has required the city to issue short term notes in amounts
exceeding those expected early in such fiscal years.
The City makes substantial capital expenditures to reconstruct and
rehabilitate the city's infrastructure and physical assets, including City mass
transit facilities, sewers, streets, bridges and tunnels, and to make capital
investments that will improve productivity in City operations.
The City utilizes a three tiered capital planning process consisting of the
Ten Year Capital Strategy, the Four Year Capital Plan and the current year
Capital Budget. The Ten Year Capital Strategy is a long term planning tool
designed to reflect fundamental allocation choices and basic policy objectives.
The Four Year Capital Program translates mid-range policy goals into specific
projects. The Capital Budget defines specific projects and the timing of their
initiation, design, construction and completion.
This City's projection of its capital financing need pursuant to the
Mayor's Declaration of Need and Proposed Transitional Capital Plan of June 30,
1997 indicates additional projected debt and contract liabilities of
approximately $3 billion for fiscal year 1998. To provide for the City's capital
program, State legislation was enacted which created the Finance Authority, the
debt of which is not subject to the general debt limit. Without the Finance
Authority or other legislative relief, new contractual commitments for the
City's general obligation financed capital program would have been virtually
brought to a halt during
D-11
<PAGE>
the Financial Plan period beginning early in the 1998 fiscal year. By
utilizing projected Finance Authority borrowing and including the Finance
Authority's projected borrowing as part of the total debt incurring power set
forth in the following table, the City's total debt incurring power has been
increased. Even with the increase, the City may reach the limit of its capacity
to enter into new contractual commitments in fiscal year 2000.
Other Localities. Certain localities outside New York City have experienced
financial problems and have requested and received additional State assistance
during the last several State fiscal years. The cities of Yonkers and Troy
continue to operate under State-ordered control agencies. The potential impact
on the State of any future requests by localities for additional oversight or
financial assistance is not included in the projections of the State's receipts
and disbursements for the State's 1998-99 fiscal year.
Eighteen municipalities received extraordinary assistance during the 1996
legislative session through $50 million in special appropriations targeted for
distressed cities, and twenty-eight municipalities received more than $32
million in targeted unrestricted aid in the 1997-98 budget. Both of these
emergency aid packages were largely continued through the 1998-99 budget. The
State also dispersed an additional $21 million among all cities, towns and
villages after enacting a 3.9 percent increase in General Purpose State Aid in
1997-98 and continued this increase in 1998- 99.
The 1998-99 budget includes an additional $29.4 million in unrestricted aid
targeted to 57 municipalities across the State. Other assistance for
municipalities with special needs totals more than $25.6 million. Twelve upstate
cities will receive $24.2 million in one-time assistance from a cash flow
acceleration of State aid.
Municipalities and school districts have engaged in substantial short term
and long term borrowings. In 1996, the total indebtedness of all localities in
the State other than New York City was approximately $20.0 billion. A small
portion (approximately $77.2 million) of that indebtedness represented borrowing
to finance budgetary deficits and was issued pursuant to State enabling
legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those 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. Twenty-one
localities had outstanding indebtedness for deficit financing at the close of
their fiscal year ending in 1996.
D-12
<PAGE>
APPENDIX E
EVERGREEN 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 year 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 May, 1998 was 4.3%
and for the United States for May, 1998 was 4.3%. The population of
Pennsylvania,12.02 million people in 1997 according to the U.S. Bureau of the
Census, represents an increase from the 1988 estimate of 11.846 million. Per
capita income in Pennsylvania for 1996 of $24, 803 was higher than the per
capita income of the United States of $24,426. 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, 1995, June 30, 1996 and June 30, 1997 with positive fund
balances of $688.304 million, $635.182 million and $1,364.9 million
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 $4.795 million at June 30, 1997. 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
Aa3 by Moody's Investors Service, Inc. (see Appendix H). There can be no
assurance that these ratings will remain in effect in the future. Over the
five-year period ending June 30, 2003, the Commonwealth has projected that it
will issue notes and bonds totaling $2,984.5 million and retire bonded debt in
the principal amount of $2,350.9 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 June 30, 1997, one of these agencies, the Pennsylvania
Turnpike Commission, had total outstanding indebtedness of $1,177.6 million. The
Combined total debt outstanding for all other above mentioned agencies as of
December 31, 1997 was $7,047.4. 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 state-created
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
E-1
<PAGE>
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.
E-2
<PAGE>
APPENDIX F
EVERGREEN CONNECTICUT MUNICIPAL BOND FUND
As described in the prospectus, the Fund will generally invest in
Connecticut municipal obligations. The performance of the Fund is therefore
susceptible to political, economical and regulatory factors affecting the State
of Connecticut and governmental bodies within the State of Connecticut. The
information summarized below briefly describes some of the more significant
factors that could affect the performance of the Fund or the ability of the
obligors to pay debt service on certain of the securities. Such information is
derived from sources that are generally available to investors and is believed
to be accurate. It is based on information from official statements of issuers
located in the State of Connecticut as well as other publicly available
documents. The Fund has not independently verified any of the information
contained in such statements and documents.
State Economy
General. Connecticut, the southernmost of the New England States, is
located on the northeast coast and is bordered by Long Island Sound, New York,
Massachusetts and Rhode Island. Connecticut is situated directly between the
financial centers of Boston and New York and is a highly developed and urbanized
state. More than one-quarter of the total population of the United States and
approximately 60% of the Canadian population live within 500 miles of the State.
The State's population grew at a rate which exceeded the United States' rate of
population growth during the period 1940 to 1970, slowed substantially during
the 1970s and 1980s, and declined in the years 1992 through 1995.
Connecticut's economic performance is measured by personal income which has
been and is expected to remain among the highest in the nation; gross state
product (the current market value of all final goods and services produced by
labor and property located within the State) which demonstrated stronger output
growth than the nation in general during the 1980s and a lower growth in the
1990s; and employment which, although rising, still remains below the levels
achieved in the late 1980s as manufacturing employment has declined and
non-manufacturing employment has recovered most of its losses.
Defense Industry. One important component of the manufacturing sector in
Connecticut is defense related business. Approximately one-quarter of
manufacturing establishments and total manufacturing employees in Connecticut
are involved in defense related businesses. Nonetheless, its significance in the
state economy has declined considerably due to the scaling back of the national
defense budget in the past decade, spending on defense procurement as well as
outlays for personnel, research and development and construction has been
dramatically reduced. In fiscal year 1996, Connecticut received $2,638 million
of prime contact awards. This accounted for 2.4% of national total awards and
ranked thirteenth in total defense dollars awarded and fifth in per capita
dollars awarded among the 50 states. As measured by defense contract awards as a
percent of Gross State Product (GSP), awards to Connecticut based firms has
fallen to 2.1% of GSP in fiscal year 1996, down from over 12% of GSP as recently
as fiscal year 1982.
Similar to other states with a dependence on the defense budget, these cuts
not only negatively affect Connecticut's defense employment but also other
sectors that provide "support" activities to defense related businesses. These
budget cuts ultimately impact other industries in the manufacturing sector and
further extend to the nonmanufacturing sector such as grocery stores,
F-1
<PAGE>
gas stations, and real estate, etc.
State Budgetary Process
Balanced Budget Requirement. In November 1992, State electors approved an
amendment to the State Constitution providing that the amount of general budget
expenditures authorized for any fiscal year shall not exceed the estimated
amount of revenue for such fiscal year. This amendment also provides for a cap
on budget expenditures. The General Assembly is precluded from authorizing an
increase in general budget expenditures for any fiscal year above the amount of
general budget expenditures authorized for the previous fiscal year by a
percentage which exceeds the greater of the percentage increase in personal
income or the percentage increase in inflation, unless the Governor declares an
emergency or the existence of extraordinary circumstances and at least
three-fifths of the members of each house of the General Assembly vote to exceed
such limit for the purposes of such emergency or extraordinary circumstances.
The limitation on general budget expenditures does not include expenditures for
the payment of bonds, notes or other evidences of indebtedness. There is no
statutory or constitutional prohibition against bonding for general budget
expenditures.
Biennium Budget. The State's fiscal year begins on July 1 and ends June 30.
The Connecticut General Statutes require that the budgetary process be on a
biennium basis. The Governor is required to transmit a budget document in
February of each odd-numbered year setting forth the financial program for the
ensuing biennium with a separate budget for each of the two fiscal years and a
report which sets forth estimated revenues and expenditures for the three fiscal
years after the biennium to which the budget document relates. In each
even-numbered year, the Governor must prepare a report on the status of the
budget enacted in the previous year with any recommendations for adjustments and
revisions, and a report, with revisions, if any, which sets forth estimated
revenues and expenditures for the three fiscal years after the biennium in
progress.
Adoption of the Budget. The Governor or a representative appeals before the
appropriate committee of the General Assembly to explain and address questions
concerning the budget document. Prior to June 30 of each odd-numbered year, the
General Assembly generally enacts one bill making all appropriations for the
next two fiscal years and setting forth revenue estimates for those years.
Subsequent appropriations of revenue bills are occasionally passed.
Line Item Veto. Under the State Constitution, the Governor has the power to
veto any line of any itemized appropriations bill while at the same time
approving the remainder of the bill. A statement identifying the items so
disapproved and explaining the reasons therefore must be transmitted with the
bill to the Secretary of the State and, when in session, the General Assembly.
The General Assembly may separately reconsider and re-pass such disapproved
appropriation items by a two-thirds vote of each house.
State General Fund
The State finances most of its operations through the General Fund.
However, certain State functions are financed through other State funds.
1996-97 Operations. The Comptroller's August 29, 1997 annual report
indicated a 1996-97 General Fund surplus of $262.6 million. This surplus was
primarily the result of higher than anticipated revenue collections, the most
significant of which was an increase in personal income tax collections. The
improved revenue results are offset somewhat by Medicaid expenditures higher
than appropriations, and the prepayment of expenditures for the 1997-98 fiscal
year.
F-2
<PAGE>
1997-98 Operations. The adopted budget for fiscal 1997-98 anticipated
General Fund revenues of $9,342.4 million and General Fund expenditures of
$9,342.2 million resulting in a projected surplus of $0.3 million.
The Comptroller's monthly report for the period ending April 30, 1998,
indicated a projected General Fund surplus of $191.9 million. This surplus is
primarily the result of revenue collections which exceeded the original
estimates adopted by the General Assembly by $691.2 million. Expenditures for
the fiscal year were also increased, including $115.0 million for a one time tax
rebate program and $79.5 million for Year 200 conversions.
No assurance can be given that the final year-end report of the Comptroller
will not indicate changes in the anticipated General Fund result. Any
unappropriated surplus will be deposited into the Budget Reserve Fund, pursuant
to the limits set forth in the Connecticut General Statutes, and the balance
will be used to reduce bonded indebtedness. The Budget Reserve Fund contains a
balance of $336.9 million prior to any transfer for fiscal year 1997-98.
Adopted Budget 1998-99. On February 4, 1998, the Governor submitted to the
legislature a status report including proposed Midterm Budget Adjustments for
the 1998-99 fiscal year. After consideration of the Governor's proposal, the
legislature adopted budget adjustments for fiscal year 1998-99 in Special Act
No. 98-6. The adopted Midterm Budget Adjustments for fiscal year 1998- 99
anticipate General Fund expenditures of $9,972.4 million, General Fund revenues
of $9,992.0 million and an estimated General Fund surplus of $19.6 million.
The enacted Midterm Budget Adjustments for fiscal year 1998-99 are within
the limits imposed by the expenditure cap. For fiscal year 1998-99, permitted
growth in capped expenditures is estimated at 4.86%. The enacted Midterm Budget
Adjustments would result in a fiscal 1998-99 budget that is $82.3 million below
the expenditure cap.
State Debt
Constitutional Provisions. The State has no constitutional limit on its
power to issue obligations or incur debt other than it may borrow only for
public purposes. There are no reported court decisions relating to State bonded
debt other than two cases validating the legislative determination of the public
purpose for improving employment opportunities and related activities. The State
Constitution has never required a public referendum on the question of incurring
debt. Therefore, the authorization and issuance of State debt, including the
purpose, amount and nature thereof, the method and manner of the incidence of
such debt, the maturity and terms of repayment thereof, and other related
matters are statutory.
Types of State Debt. Pursuant to various public and special acts the State
has authorized a variety of types of debt. These types fall generally into the
following categories: direct general obligation debt, which is payable from the
State's General Fund; special tax obligation debt, which is payable from
specified taxes and other funds which are maintained outside the State's General
Fund; and special obligation and revenue debt, which is payable from specified
revenues or other funds which are maintained outside the State's General Fund.
In addition, the State has a number of programs under which the State is
contingently liable on the debt of certain State quasi-public agencies and
political subdivisions.
Statutory Authorization and Security Provisions for State General
Obligation Debt. In general the State issues general obligation bonds pursuant
to specific statutory bond acts and Section 3-20 of the Connecticut General
Statues, the State general obligation bond procedure act. That act provides that
such bonds shall be general obligations of the State and that the full faith
F-3
<PAGE>
and credit of the State of Connecticut are pledged for the payment of the
principal of an interest on such bonds as the same become due. Such act further
provides that, as a part of the contract of the State with the owners of such
bonds, appropriation of all amounts necessary for the punctual payment of such
principal and interest is made, and the Treasurer shall pay such principal and
interest as the same become due. As of December 1, 1997, there was legislatively
authorized general obligation bond indebtedness in the aggregate amount of
$11,460,239,000, of which $10,159,950,000 had been approved for issuance and
$9,181,272,000 had been issued. As of December 1, 1997, $6,877,330,000 was
outstanding.
There are no State Constitutional provisions precluding the exercise of
State power by statute to impose any taxes, including taxes on taxable property
in the State or on income, in order to pay debt service on bonded debt now or
thereafter incurred. The constitutional limit on increases in general fund
expenditures for any fiscal year does not include expenditures for the payment
of bonds, notes or other evidences of indebtedness. There are also no
constitutional or statutory provisions requiring or precluding the enactment of
liens on or pledges of State general fund revenues or taxes, or the
establishment of priorities for payment of debt service on the State's general
obligation bonds. There are no express statutory provisions establishing any
priorities in favor of general obligation bondholders over other valid claims
against the State.
Statutory Debt Limit. Section 3-21 of the Connecticut General Statutes
provides that no bonds, notes or other evidences of indebtedness for borrowed
money payable from General Fund tax receipts of the State shall be authorized by
the General Assembly except to the extent such authorization shall cause the
aggregate amount of (1) the total amount of bonds, notes or other evidences of
indebtedness payable from General Fund tax receipts authorized by the General
Assembly but which have not been issued and (2) the total amount of such
indebtedness which has been issued and remains outstanding, to exceed 1.6 times
the total estimated General Fund tax receipts of the State for the fiscal year
in which any such authorization will become effective, as estimated for such
fiscal year by the joint standing committee of the General Assembly having
cognizance of finance, revenue and bonding. However, in computing the aggregate
amount of indebtedness at any time, there shall be excluded or deducted revenue
anticipation notes having a maturity of one year or less, refunded indebtedness,
bond anticipation notes, borrowings payable solely from the revenues of a
particular project, the balances of debt retirement funds associated with
indebtedness subject to the debt limit as certified by the Treasurer, the amount
of federal grants certified by the Secretary of the Office of Policy and
Management as receivable to meet the principal of certain indebtedness, all
authorized and issued indebtedness to fund any budget deficits of the State for
any fiscal year ending on or before June 30, 1991, and all authorized debt to
fund the Connecticut Development Authority's tax increment bond program under
Section 32-285 of the Connecticut General Statutes. For purpose of the debt
limit statute, all bonds and notes issued or guaranteed by the State and payable
from General Fund tax receipts are counted against the limit, except for the
exclusions or deductions described above.
In accordance with Section 2-27b of the Connecticut General Statutes, the
Treasurer shall compute the aggregate amount of indebtedness as of January 1 and
July 1 of each year and shall certify the results of such computation to the
Governor and the General Assembly. If the aggregate amount of indebtedness
reaches 90% of the statutory debt limit, the Governor shall review each bond act
for which no bonds, notes or other evidences of indebtedness have been issued,
and recommend to the General Assembly priorities for repealing authorizations
for remaining projects.
Ratings. As of March 18, 1998, all outstanding general obligation bonds of
the State were rated AA3 by Moody's Investors Service, Inc., AA- by Standard &
Poor's Rating Service, a division of the McGraw-Hill Companies, Inc., and AA by
Fitch IBCA, Inc. There can be no assurance that
F-4
<PAGE>
these ratings will remain in effect in the future.
Obligations of Other State Issuers. The State conducts certain of its
operations through State funds other than the General Fund and pursuant to
legislation may issue debt secured by special taxes or revenues pledged to such
funds. In addition, there are a number of state agencies and instrumentalities
of the State that issue conduit revenue obligations payable from payments by
private borrowers. These entities are subject to various economic risks
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.
Litigation
The State, its officers and employees are defendants in numerous lawsuits.
The ultimate disposition and fiscal consequences of these lawsuits are not
presently determinable. In the cases described below the fiscal impact of an
adverse decision might be significant but is not determinable at this time. The
cases described in this section generally do not include any individual case
where the fiscal impact of an adverse judgment is expected to be less than $15
million, but adverse judgments in a number of such cases could, in the aggregate
and in certain circumstances, have a significant impact.
Connecticut Criminal Defense Lawyers Association v. Forst is an action
brought in 1989 in Federal Court alleging a pervasive campaign by the State and
various State Police officials of illegal electronic surveillance, wiretapping
and bugging for a number of years at Connecticut State Police facilities. The
plaintiffs seek compensatory damages, punitive damages, as well as other damages
and costs and attorneys fees, as well as temporary and permanent injunctive
relief. In November 1991, the court issued an order which will allow the
plaintiffs to represent a class of all persons who participated in wire or oral
communications to, from, or within State Police facilities between January 1,
1974 and November 9, 1989 and whose communications were intercepted, recorded
and/or used by the defendants in violation of the law. This class includes a
sub-class of the Connecticut State Police Union, current and former Connecticut
State Police officers who are not defendants in this or any consolidated case,
and other persons acting on behalf of the State Police who participated in oral
or wire communications to, from or within State Police facilities between such
dates.
Sheff v. O'Neill is a Superior Court action brought in 1989 on behalf of
black and Hispanic school children in the Hartford school district. The
plaintiffs sought a declaratory judgment that the public schools in the greater
Hartford metropolitan area are segregated de facto by race and ethnicity and are
inherently unequal to their detriment. They also sought injunctive relief
against state officials to provide them with an "integrated education." On April
12, 1995, the Superior Court entered judgment for the State. On July 9, 1996,
the State Supreme Court reversed the Superior Court judgment and remanded the
case with direction to render a declaratory judgment in favor of the plaintiffs.
The Court directed the legislature to develop appropriate measures to remedy the
racial and ethnic segregation in the Hartford public schools. The Supreme Court
also directed the Superior Court to retain jurisdiction of this matter. In
response to the Supreme Court decision, the 1997 General Assembly enacted P.A.
97-290, an Act Enhancing Educational Choices and Opportunities. Plaintiffs, the
Supreme Court recently ordered the State to show cause as to whether there has
been compliance with the Supreme Court's ruling.
The Connecticut Traumatic Brain Injury Association, Inc. v. Hogan is a
Federal District Court civil rights action brought in 1990 on behalf of all
persons with retardation or traumatic brain injury who have been, or may be,
placed in Norwich, Fairfield Hills or Connecticut Valley Hospitals. The
plaintiffs claim that the treatment and training they need is unavailable in
state hospitals for the
F-5
<PAGE>
mentally ill and that placement in those hospitals violates their constitutional
rights. The plaintiffs seek relief which would require that the plaintiff class
members be transferred to community residential settings with appropriate
support services. This case has been settled as to all persons with mental
retardation by their eventual discharge from Norwich and Fairfield Hills
Hospital. The case is still proceeding as to those persons with traumatic brain
injury. The Court recently expanded the class of plaintiffs to include persons
who are in the custody of the Department of Mental Health and Addiction Services
at any time during the pendency of the case for treatment or benefits in any
program which is provided by or is the responsibility of the State, by reason of
being diagnosed with acquired brain injury (which includes traumatic and other
brain injuries).
Johnson v. Rowland is a Superior Court action brought in 1998 in the name
of several public school students and the Connecticut municipalities in which
the students reside, seeking a declaratory judgement that the State's current
system of financing public education through local property taxes and State
payments to municipalities determined under a statutory Education Cost Sharing
("ECS") formula violates the Connecticut Constitution. Additionally, the suit
seeks various injunctive orders requiring the State to, among other things cease
implementation of the present system, modify the ECS formula, and fund the ECS
formula at the level contemplated in the original 1988 public act which
established the ECS.
Several suits have been filed since 1977 in the Federal District Court and
the Connecticut Superior Court on behalf of alleged Indian Tribes in various
parts of the State, claiming monetary recovery as well as ownership to land in
issue. Some of these suits have been settled or dismissed. The plaintiff group
in the remaining suits is the alleged Golden Hill Paugussett Tribe and the lands
involved are generally located in Bridgeport, Trumbull, Orange, Shelton and
Seymour.
Local Government Debt
General. Numerous governmental units, cities, school districts and special
taxing districts, issue general obligation bonds backed by their taxing power.
Under Connecticut statutes, such entities have the power to levy ad valorem
taxes on all taxable property without limit as to rate or amount, except as to
certain classified property such as certified forest land taxable at a limited
rate and dwelling houses of qualified elderly persons of low income or qualified
disabled persons taxable at limited amounts. Under existing statutes, the State
is obligated to pay to such entities the amount of tax revenue which it would
have received except for the limitation on its power to tax such dwelling
houses.
Payment of principal and interest on such general obligations is not
limited to property tax revenues or any other revenue source, but certain
revenues may be restricted as to use and therefore may not be available to pay
debt service on such general obligations.
Local government units may also issue revenue obligations, which are
supported by the revenues generated from particular projects or enterprises.
Debt Limit. Pursuant to the Connecticut General Statutes, local
governmental units are prohibited from incurring indebtedness in any of the
following categories if such indebtedness would cause the aggregate indebtedness
in that category to exceed, excluding sinking fund contributions, the multiple
for such category times the aggregate annual tax receipts of such local
governmental unit for the most recent fiscal year ending prior to the date of
issue:
F-6
<PAGE>
DEBT CATEGORY MULTIPLE
(I) all debt other than urban renewal projects,
water pollution control projects and school
building projects............................................2 1/4
(ii) urban renewal projects.......................................3 1/4
(iii) water pollution control projects.............................3 3/4
(iv) school building projects.....................................4 1/2
(v) total debt, including (I), (ii), (iii) and (iv)
above........................................................7
F-7
<PAGE>
APPENDIX G
EVERGREEN NEW JERSEY TAX FREE INCOME FUND
New Jersey Municipal Securities
The financial condition of the State of New Jersey, its public authorities
(the "Authorities") and its local governments, could affect the market values
and marketability of, and therefore the net asset value per share and the
interest income of New Jersey Tax Free Income Fund, or result in the default of
existing obligations, including obligations which may be held by the Fund. The
following section provides only a brief summary of the complex factors affecting
the financial situation in New Jersey and is based on information obtained from
New Jersey, certain of its Authorities and certain other localities, as publicly
available on the date of this Statement of Additional Information. The
information contained in such publicly available documents has not been
independently verified. It should be noted that the creditworthiness of
obligations issued by local issuers may be unrelated to the creditworthiness of
New Jersey, and that there is no obligation on the part of New Jersey to make
payment on such local obligations in the event of default in the absence of a
specific guarantee or pledge provided by New Jersey.
Economic Factors
New Jersey is the ninth largest state in population and the fifth smallest
in land area. With an average of 1,077 people per square mile, it is the most
densely populated of all the states. The State's economic base is diversified,
consisting of a variety of manufacturing, construction and service industries,
supplemented by rural areas with selective commercial agriculture. The extensive
facilities of the Port Authority of New York and New Jersey, the Delaware River
Port Authority and the South Jersey Port Corporation across the Delaware River
from Philadelphia augment the air, land and water transportation complex which
has influenced much of the State's economy. The State's central location in the
northeastern corridor, the transportation and port facilities and proximity to
New York City make the State an attractive location for corporate headquarters
and international business offices. According to the United States Bureau of the
Census, the population of New Jersey was 7,170,000 in 1970, 7,365,000 in 1980,
7,730,000 in 1990 and 7,988,000 in 1996. Historically, New Jersey's average per
capita income has been well above the national average, and in 1996 the State
ranked second among the states in per capita personal income ($31,053).
While New Jersey's economy continued to expand during the late 1980s, the
level of growth slowed considerably after 1987. By the beginning of the national
recession in July 1990 (according to the National Bureau of Economic Research),
construction activity had already been declining in New Jersey for nearly two
years, growth had tapered off markedly in the service sectors and the long-term
downward trend of factory employment had accelerated, partly because of a
leveling off of industrial demand nationally. The onset of recession caused an
acceleration of New Jersey's job losses in construction and manufacturing, as
well as an employment downturn in such previously growing sectors as wholesale
trade, retail trade, finance, utilities and trucking and warehousing. The net
effect was a decline in the State's total nonfarm wage and salary employment
from a peak of 3,689,800 in 1989 to a low of 3,457,900 in 1992. This loss has
been followed by an employment gain of 255,600 from May 1992 to June 1997, a
recovery of 97.5% of the jobs lost during the recession. In July 1991, S&P
lowered the State's general obligation bond rating from AAA to AA+.
G-1
<PAGE>
Reflecting the downturn, the rate of unemployment in the State rose from a
low of 3.6% during the first quarter of 1989 to a recessionary peak of 8.5%
during 1992. Since then, the unemployment rate fell to 6.2% during 1996 and 5.5%
for the six month period from January 1997 through June 1997.
For the recovery period as a whole, May 1992 to June 1997,
service-producing employment in New Jersey has expanded by 283,500 jobs. Hiring
has been reported by food stores, wholesale distributors, trucking and
warehousing firms, security and commodity brokers, business and
engineering/management service firms, hotels/hotel-casinos, social service
agencies and health care providers other than hospitals. Employment growth was
particularly strong in business services and its personnel supply component with
increases of 17,300 and 7,500, respectively, in the 12-month period ending June
1997.
In the manufacturing sector, employment losses slowed between 1992 and
1994. After an average annual job loss of 33,500 from 1989 through 1992, New
Jersey's factory job losses fell to 13,300 during 1993 and 7,300 during 1994.
During 1995 and 1996, however, manufacturing job losses increased slightly to
10,100 and 13,900 respectively, reflecting a slowdown in national manufacturing
production activity. While experiencing growth in the number of production
workers in 1994, the number declined in 1995 at the same time that managerial
and office staff were also reduced as part of nationwide downsizing. Through
August 1996, layoffs of white collar workers and corporate downsizing appear to
be abating.
Conditions have slowly improved in the construction industry, where
employment has risen by 18,600 since its low in May 1992. Between 1992 and 1996,
this sector's hiring rebound was driven primarily by increased homebuilding and
nonresidential projects. During 1996 and the first five months of 1997, public
works projects and homebuilding became the growth segments while nonresidential
construction lessened but remained positive.
State Finances
The State operates on a fiscal year beginning July 1 and ending June 30.
For example, "Fiscal Year 1999" refers to the State's fiscal year beginning July
1, 1998 and ending June 30, 1999.
The General Fund is the fund into which all State revenues not otherwise
restricted by statute are deposited and from which appropriations are made. The
largest part of the total financial operations of the State is accounted for in
the General Fund. Revenues received from taxes and unrestricted by statute, most
federal revenue and certain miscellaneous revenue items are recorded in the
General Fund. The appropriations act provides the basic framework for the
operation of the General Fund. Undesignated Fund Balances are available for
appropriation in succeeding fiscal years. There have been positive Undesignated
Fund Balances in the General Fund at the end of each year since the State
Constitution was adopted in 1947. The estimates for Fiscal Year 1998 and Fiscal
Year 1999 reflect the amounts contained in the Governor's Fiscal Year 1999
Budget Message delivered on February 10, 1998.
In Fiscal Years 1996 and 1997, the actual General Fund balances were $442.0
million and $280.5 million, respectively, and total Undesignated Fund Balances
were $882.2 million and $1,106.4 million. For Fiscal Years 1998 and 1999 General
Fund balances are estimated to be $268.7 million and $144.0 million,
respectively, and total Undesignated Fund Balances are estimated to be $1,021.3
million and $6750.0 million.
G-2
<PAGE>
Fiscal Years 1998 and 1999 State Revenue Estimates
Sales and Use Tax. The revised estimate forecasts Sales and Use tax
collections for Fiscal Year 1998 as $4,720.0 million, a 6.9% increase from the
Fiscal Year 1997 revenue. The Fiscal Year 1999 estimate of $4,928.0 million, is
a 4.4% increase from the Fiscal Year 1998 estimate.
Gross Income Tax. The revised estimate forecasts Gross Income Tax
collections for Fiscal Year 1998 of $5,340.0 million, a 10.7% increase from
Fiscal Year 1997 revenue. The Fiscal Year 1999 estimate of $5,860.0 million, is
a 9.7% increase from the Fiscal Year 1998 estimate. Included in the Fiscal Year
1998 estimate and the Fiscal Year 1999 estimate is the enactment of a property
tax deduction, to be phased in over a three-year period, permitting a deduction
by resident taxpayers against gross income tax of a percentage of their property
taxes.
Corporation Business Tax. The revised estimate forecasts Corporation
Business Tax collection for Fiscal Year 1998 as $1,315.1 million, a 2.2%
decrease from Fiscal Year 1997 revenue. The Fiscal Year 1999 estimate of
$1,431.0 million, is an 8.8% increase from the Fiscal Year 1998 estimate.
General Considerations. Estimated receipts from State taxes and revenues,
including the three principal taxes set forth above, are forecasts based on the
best information available at the time of such forecasts. Changes in economic
activity in the State and the nation, consumption of durable goods, corporate
financial performance and other factors that are difficult to predict may result
in actual collections being more or less than forecasted.
Should revenues be less than the amount anticipated in the budget for a
fiscal year, the Governor may, pursuant to statutory authority, prevent any
expenditure under any appropriation. There are additional means by which the
Governor may ensure that the State is operated efficiently and does not incur a
deficit. No supplemental appropriation may be enacted after adoption of an
appropriations act except where there are sufficient revenues on hand or
anticipated, as certified by the Governor, to meet such appropriation. In the
past when actual revenues have been less than the amount anticipated in the
budget, the Governor has exercised her plenary powers leading to, among other
actions, implementation of a hiring freeze for all State departments and the
discontinuation of programs for which appropriations were budgeted but not yet
spent. Under the State Constitution, no general appropriations law or other law
appropriating money for any State purpose may be enacted if the amount of money
appropriated therein, together with all other prior appropriations made for the
same fiscal year, exceeds the total amount of revenue on hand and anticipated to
be available for such fiscal year, as certified by the Governor.
G-3
<PAGE>
APPENDIX H
S&P AND MOODY'S 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.
H-1
<PAGE>
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:
1. AAA - Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
2. AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in
small degree.
3. A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
4. BBB - Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
5. BB, B, CCC, CC and C - Debt rated BB, B, CCC, CC and C is
regarded, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with
the terms of the obligation. BB indicates the lowest degree of
speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
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.
7. Caa - Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with
respect to principal or interest.
8. Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other market shortcomings.
9. C - Bonds which are rated as C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through 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.
H-2
<PAGE>
10. 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 S&P, or Prime-1 by Moody's or F-1 by Fitch; 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 Fitch, 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.
H-3
<PAGE>
APPENDIX I
FITCH BOND RATINGS
Investment Grade Bond Ratings
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA". Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+".
A: Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than debt securities with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these securities and,
therefore, impair timely payment. The likelihood that the ratings of these bonds
will fall below investment grade is higher than for securities with higher
ratings.
Plus (+) Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "AAA" category.
NR: Indicates that Fitch does not rate the specific issue.
Conditional: A conditional rating is premised on the successful
completion of a project or the occurrence of a specific event.
Suspended: A rating is suspended when Fitch deems the amount of
information available from the issuer to be inadequate for rating purposes.
Withdrawn: A rating will be withdrawn when an issue matures or is
called or refinanced, and, at Fitch's discretion, when an issuer fails to
furnish proper and timely information.
FitchAlert: Ratings are placed on FitchAlert to notify investors of an
occurrence that is likely to result in a rating change and the likely direction
of such change. These are designated as "Positive," indicating a potential
upgrade, "Negative," for potential downgrade, or "Evolving," where ratings may
be raise or lowered. FitchAlert is relatively short-term and should be resolved
within 12 months.
Rating Outlook: An outlook is used to describe the most likely
direction of any rating change over the intermediate term. It is described as
"Positive" or "Negative." The absence of a designation indicates a stable
outlook.
Speculative Grade Bond Ratings BB: Bonds are considered speculative.
The obligor's ability to pay interest and repay principal may be affected over
time by adverse economic changes.
I-1
<PAGE>
However, business and financial alternatives can be identified, which could
assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While securities in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Bonds have certain identifiable characteristics that, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D: Bonds are in default on interest and/or principal
payments. Such securities are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or reorganization of the
obligor. "DDD" represents the highest potential for recovery on these
securities, and "D" represents the lowest potential for recovery.
Plus (+) Minus (-): Plus and minus signs are used with a rating symbol
to indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD", "DD", or "D" categories.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating
on the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of assurance for timely
payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than issues rated
"F-1+."
F-2: Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned "F-1+" and "F-1" ratings.
F-3: Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely payment is
adequate; however, near-term adverse changes could cause these securities to be
rated below investment grade.
F-5: Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely payment and
are vulnerable to near-term adverse changes in financial and economic
conditions.
I-2
<PAGE>
D: Default. Issues assigned this rating are in actual or imminent
payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
I-3
<PAGE>