1933 Act No. 333-36033
1940 Act No. 811-08367
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 12 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 13 [X]
EVERGREEN MUNICIPAL TRUST
(Exact Name of Registrant as Specified in Charter)
200 Berkeley Street, Boston, Massachusetts 02116-5034
(Address of Principal Executive Offices)
(617) 210-3200
(Registrant's Telephone Number)
The Corporation Trust Company
1209 Orange Street
Wilmington, Delaware 19801
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
[x] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
<PAGE>
EVERGREEN MUNICIPAL TRUST
CONTENTS OF
POST-EFFECTIVE AMENDMENT NO. 12
to
REGISTRATION STATEMENT
This Post-Effective Amendment No. 12 to Registrant's Registration Statement
No. 333-36033/811-08367 consists of the following pages, items of information
and documents:
The Facing Sheet
The Contents Page
PART A
-------------
Prospectus for Evergreen Connecticut Municipal Bond Fund, Evergreen
New Jersey Municipal Bond Fund and Evergreen Pennsylvania Municipal Bond Fund
is contained herein.
Prospectuses for Evergreen High Grade Municipal Bond Fund, Evergreen
Short-Intermediate Municipal Fund and Evergreen Municipal Bond Fund contained in
Post-Effective Amendment No. 10 to Registration Statement No.
333-36033/811-08367 filed on April 1, 1999 are incorporated by reference herein.
Prospectuses for Evergreen Florida High Income Municipal Bond Fund,
Evergreen Florida Municipal Bond Fund, Evergreen Georgia Municipal Bond Fund,
Evergreen Maryland Municipal Bond Fund, Evergreen North Carolina Municipal Bond
Fund, Evergreen South Carolina Municipal Bond Fund and Evergreen Virginia
Municipal Bond Fund contained in Post-Effective Amendment No. 9 to
Registration Statement No.333-36033/811-08367
filed on October 30, 1998 are incorporated by
reference herein.
PART B
------
Statement of Additional Information for Evergreen Connecticut
Municipal Bond Fund, Evergreen New Jersey Municipal Bond Fund and Evergreen
Pennsylvania Municipal Bond Fund is contained herein.
Statement of Additional Information for Evergreen High Grade Municipal Bond
Fund, Evergreen Short-Intermediate Municipal Fund and Evergreen Municipal Bond
Fund contained in Post-Effective Amendment No. 10 to Registration Statement
No.333-36033/811-08367 filed on April 1, 1999 is incorporated by reference
herein.
Statement of Additional Information for Evergreen Florida High Income
Municipal Bond Fund, Evergreen Florida Municipal Bond Fund, Evergreen Georgia
Municipal Bond Fund, Evergreen Maryland Municipal Bond Fund, Evergreen North
Carolina Municipal Bond Fund, Evergreen South Carolina Municipal Bond Fund and
Evergreen Virginia Municipal Bond Fund contained in Post-Effective Amendment
No. 9 to Registration Statement No.333-36033/811-08367 filed on
October 30, 1998 is incorporated by reference herein.
PART C
------
Exhibits
Indemnification
Business and Other Connections of Investment Advisor
Principal Underwriter
Location of Accounts and Records
Undertakings
Signatures
<PAGE>
EVERGREEN MUNICIPAL TRUST
PART A
PROSPECTUSES
<PAGE>
[EVERGREEN STATE MUNICIPAL BOND FUNDS LOGO APPEARS HERE]
Evergreen Connecticut Municipal Bond Fund
Evergreen New Jersey Municipal Bond Fund
Evergreen Pennsylvania Municipal Bond Fund
Class A
Class B
Class C
Class Y
Prospectus, August 1, 1999
[EVERGREEN LOGO APPEARS HERE]
The Securities and Exchange Commission has not determined that the
information in this prospectus is accurate or complete, nor has it approved
or disapproved these securities. Anyone who tells you otherwise is committing
a crime.
<PAGE>
TABLE OF CONTENTS
FUND RISK/RETURN SUMMARIES:
<TABLE>
<S> <C>
Evergreen Connecticut Municipal Bond Fund................................... 2
Evergreen New Jersey Municipal Bond Fund.................................... 4
Evergreen Pennsylvania Municipal Bond Fund.................................. 6
GENERAL INFORMATION:
The Funds' Investment Advisors.............................................. 8
The Funds' Portfolio Managers............................................... 8
Calculating the Share Price................................................. 8
How to Choose an Evergreen Fund............................................. 9
How to Choose the Share Class That Best Suits You........................... 9
How to Buy Shares........................................................... 11
How to Redeem Shares........................................................ 12
Other Services.............................................................. 13
The Tax Consequences of Investing in the Funds.............................. 14
Fees and Expenses of the Funds.............................................. 15
Financial Highlights........................................................ 16
Other Fund Practices........................................................ 20
</TABLE>
In general, Funds included in this prospectus seek to provide investors with
current income exempt from federal income and certain state income taxes,
consistent with the preservation of capital. The Funds emphasize investments in
securities with higher yields and longer maturities.
Fund Summaries Key Each Fund's summary is organized around the following basic
topics and questions:
[GRAPHIC APPEARS HERE]
INVESTMENT GOAL
What is the Fund's financial objective? You can find clarification on how
the Fund seeks to achieve its objective by looking at the Fund's strategy and
investment policies. The Fund's Board of Trustees can change the investment
objective without a shareholder vote.
[GRAPHIC APPEARS HERE]
INVESTMENT STRATEGY
How does the fund go about trying to meet its goals? What types of
investments does it contain? What style of investing and investment philosophy
does it follow? Does it have limits on the amount invested in any particular
type of security?
[GRAPHIC APPEARS HERE]
RISK FACTORS
What are the specific risks for an investor in the Fund?
[GRAPHIC APPEARS HERE]
PERFORMANCE
How well has the Fund performed in the past year? The past five years? The
past ten years?
[GRAPHIC APPEARS HERE]
EXPENSES
How much does it cost to
invest in the Fund? What is the
difference between sales charges
and expenses?
<PAGE>
OVERVIEW OF FUND RISKS
[EVERGREEN WATERMARK LOGO APPEARS HERE]
Here are the most important factors that may affect the value of your
investment:
Interest Rate Risk
When interest rates go up, the value of debt securities tends to fall. Since
your Fund invests a significant portion of its portfolio in debt securities, if
interest rates rise, then the value of your investment may decline. When
interest rates go down, interest earned by your Fund on its debt securities may
also decline, which could cause the Fund to reduce the dividends it pays.
Credit Risk
The value of a debt security is directly affected by the issuer's ability to
repay principal and pay interest on time. Since your Fund invests in debt
securities, the value of your investment may decline if an issuer fails to pay
an obligation on a timely basis.
Below Investment Grade Bond Risk
Below investment grade bonds are commonly referred to 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 react to unfavorable news about issuers of below
investment grade bonds, causing sudden and steep declines in value.
Non-Diversification Risk
An investment in a Fund that is non-diversified entails greater risk than an
investment in a diversified fund. When a Fund is non-diversified, it may invest
up to 25% of its assets in a single issuer and up to 50% of its assets may
consist of securities of only two issuers. A higher percentage of investments
among fewer issuers may result in greater fluctuation in the total market value
of the Fund's portfolio.
Concentration Risk
An investment in a Fund that concentrates its investments in a single state
entails greater risk than an investment in a Fund that invests its assets in
numerous states. The Fund may be vulnerable to any development in its named
state's economy that may weaken or jeopardize the ability of the state's
municipal bond issuers to pay interest and principal on their bonds. As a
result, the Fund's shares may fluctuate more widely in value than those of a
Fund investing in municipal bonds from a number of different states.
State
Municipal
Bond Funds
typically rely on a combination of the following strategies:
. investing at least 80% of their assets in municipal securities that are
exempt from federal income tax, other than the alternative minimum tax;
. investing at least 65% of their assets in municipal securities that are
exempt from income taxes in the state for which the Fund is named;
. investing at least 80% of their assets in investment grade municipal
securities, which are bonds rated within the four highest ratings categories
by a nationally recognized statistical ratings organization, or unrated
securities determined to be of comparable quality by the investment advisor;
. purchasing municipal securities of any maturity, but maintaining an
average dollar weighted maturity of 10 to 20 years; and
. selling a portfolio investment when the issuer's investment fundamentals
begin to deteriorate, when the investment no longer appears to meet the
Fund's investment objective, when the Fund must meet redemptions, or for
other reasons which the portfolio manager deems necessary.
may be appropriate for investors who:
. seek a high quality portfolio of municipal bonds; and
. seek income which is exempt from federal and state income tax.
Following this overview, you will find information on each State Municipal Bond
Fund's specific investment strategies and risks, including state specific
risks. Municipal securities are affected by political and economic events of
the issuing state. Also, see the Statement of Additional Information for
further information on the state specific risks of your Fund.
................................................................................
Risk Factors For All Mutual Funds
Please remember that mutual fund investment shares are:
. not guaranteed to achieve their
investment goal
. not insured, endorsed or guaranteed
by the FDIC, a bank or any
governmental agency
. subject to investment risks,
including possible loss of your
original investment
Like most investments, your investment in an Evergreen State Municipal Bond
Fund could fluctuate significantly in value over time and could result in a
loss of money.
STATE MUNICIPAL BOND FUNDS
1
<PAGE>
EVERGREEN
Connecticut Municipal Bond Fund
FUND FACTS:
Goal:
. Tax Exempt Current Income
Principal Investment:
. Municipal Securities
Classes of Shares Offered in this Prospectus:
. Class A
. Class B
. Class Y
Investment Advisor:
. Evergreen Investment Management
Portfolio Managers:
. Jocelyn Thayer
. Joseph R. Baxter
NASDAQ Symbols:
ECTAX (Class A)
ECTBX (Class B)
ECTYX (Class Y)
Dividend Payment Schedule:
Monthly
................................................................................
[GRAPHIC APPEARS HERE]
INVESTMENT GOAL
The 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.
[GRAPHIC APPEARS HERE]
INVESTMENT STRATEGY
The following investment strategies are in addition to the investment strategies
discussed in the "Overview" on page 1.
The Fund normally invests at least 80% of its assets in municipal securities
that are exempt from federal income tax, other than the alternative minimum tax.
The Fund also invests at least 65% of its assets in Connecticut municipal
obligations. The Fund will invest at least 80% of its assets in bonds that, at
the date of investment, are rated within the four highest ratings categories by
a nationally recognized statistical ratings organization, or unrated securities
determined to be of comparable quality by the investment advisor. The Fund may
invest up to 20% of its assets in below investment grade bonds, but will not
invest in bonds rated below B. The Fund may also invest up to 20% of its assets
in high quality short-term obligations. In purchasing municipal securities, the
portfolio managers include in their analysis how well the securities fit into
the Fund's overall portfolio strategy, credit criteria, and established price
levels.
The Fund may invest up to 100% of its assets in high quality money market
instruments in response to adverse economic, political or market conditions.
This strategy is inconsistent with the Fund's principal investment strategy and
investment goal and, if employed, could result in a lower return and loss of
market opportunity.
[GRAPHIC APPEARS HERE]
RISK FACTORS
Your investment in the Fund is subject to the risks discussed in the "Overview"
on page 1 under the headings:
. Interest Rate Risk
. Credit Risk
. Below Investment Grade Bond Risk
. Non-Diversification Risk
. Concentration Risk
The performance of the Connecticut Municipal Bond Fund is influenced by the
political, economic and statutory environment within the State. The Fund invests
in obligations of Connecticut issuers, which results in the Fund's performance
being subject to risks associated with the most current conditions within the
State. Currently, Connecticut is experiencing a slight decline in population,
output growth and manufacturing employment. Defense related business is an
important component of the manufacturing sector in Connecticut. Due to the
scaling back of the national defense budget in the past decade, spending on
certain defense related areas has been dramatically reduced. These and other
factors discussed in the Statement of Additional Information may cause rating
agencies to downgrade the credit ratings on certain issues which can lessen the
value of the securities in which the Fund invests.
For more information on the factors that could affect the ability of the bond
issuers to pay interest and principal on securities acquired by the Fund, see
the Statement of Additional Information.
Generally, exempt-interest dividends paid by the Fund are not subject to the
Connecticut income tax on individuals, trusts and estates to the extent such
dividends are exempt from federal income tax and derived from securities issued
by the State or its political subdivisions. Distributions from the Fund to
shareholders subject to the state's business tax are included in gross income,
but a dividends received deduction may be available for a portion of such
distributions.
For further information regarding the Fund's investment strategy and risk
factors, see "Other Fund Practices." STATE MUNICIPAL BOND FUNDS
2
<PAGE>
EVERGREEN
................................................................................
................................................................................
[GRAPHIC APPEARS HERE]
PERFORMANCE
The following charts show how the Fund has performed in the past. Past
performance is not an indication of future results.
The chart below shows the percentage gain or loss for Class Y shares of the Fund
in the past ten calendar years. It should give you a general idea of how the
Fund's return has varied from year-to-year. This graph includes the effects of
Fund expenses.
Year-by-Year Total Return for Class Y Shares (%)*
[CHART APPEARS HERE]
1989 7.71
1990 6.32
1991 9.12
1992 5.86
1993 6.53
1994 -3.48
1995 11.06
1996 3.75
1997 7.26
1998 5.8
Best Quarter:1st Quarter 1995 +4.39%*
Worst Quarter:1st Quarter 1994 -3.32%*
Year to date total return through 6/30/1999 is -1.96%
The next table lists the Fund's average annual total return over the past one,
five and ten years and since inception (through 12/31/1998), including
applicable sales charges. This table is intended to provide you with some
indication of the risks of investing in the Fund. At the bottom of the table you
can compare this performance with the Lehman Brothers Municipal Bond Index,
which is a broad measure of the municipal bond market; it is not an actual
investment.
Average Annual Total Return
(for the period ended 12/31/1998)*
<TABLE>
<CAPTION>
Inception Performance
Date of Since
Class 1 year 5 year 10 year 1/31/1981
<S> <C> <C> <C> <C> <C>
Class A 12/30/1997 0.51% 3.50% 5.15% 6.36%
Class B 1/9/1998 -0.30% 3.39% 4.88% 5.86%
Class Y 1/31/1981 5.80% 4.76% 5.93% 6.92%
Lehman Brothers
Municipal Bond Index 6.54% 6.24% 8.22% 10.39%**
</TABLE>
* Historical performance shown for Class Y prior to its inception is based on
the Fund's predecessor common trust fund's (CTF) performance, adjusted for
estimated mutual fund expenses. The CTF was not registered under the
Investment Company Act of 1940 and was not subject to certain investment
restrictions. If the CTF had been registered, its performance might have been
adversely affected. Performance for the CTF has been adjusted to include the
effect of estimated mutual fund class gross expense ratios at the time the
Fund was converted to a mutual fund. If fee waivers and expense reimbursements
had been calculated into the mutual fund class expense ratio the total returns
would be as follows: Class A - 5 year = 3.72%, 10 year = 5.41% and since
1/31/81 = 6.63%; Class B - 5 year = 3.61%, 10 year = 5.13% and since 1/31/81 =
6.13%; Class Y - 5 year = 4.98%, 10 year = 6.18% and since 1/31/81 = 7.19%.
For Classes A and B prior to their inception, the historical performance shown
is based on the performance of Class Y and has not been adjusted to reflect
the effect of each Class' 12b-1 fees. This fee is 0.25% for Class A and 1.00%
for Class B. If these fees had been reflected, returns for Classes A and B
would have been lower.
**Performance since 12/30/1997 is 6.54% and since 1/9/1998 is 6.54%.
[GRAPHIC APPEARS HERE]
EXPENSES
This section describes the fees and expenses you would pay if you bought and
held shares of the Fund.
Shareholder Fees (fees paid directly from your investment)
Shareholder Transaction Expenses Class A Class B Class Y
Maximum deferred None* 5.00% None
sales charge
(as a % of
either the
redemption
amount or
initial
investment,
whichever is
lower)
* 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 of 1.00% upon
redemption within one year after the month of purchase.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)*
<TABLE>
<CAPTION>
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating Expenses**
Maximum sales 4.75% None None
charge imposed
on purchases (as
a % of offering
price)
<S> <C> <C> <C> <C>
Class A 0.60% 0.25% 0.14% 0.99%
Class B 0.60% 1.00% 0.14% 1.74%
Class Y 0.60% None 0.14% 0.74%
</TABLE>
* Restated for the fiscal year ended 3/31/1999 to reflect current fees.
** From time to time, the Fund's investment advisor may, at its discretion,
reduce or waive its fees or reimburse a Fund for certain of its expenses in
order to reduce expense ratios. The Fund's investment advisor may cease these
waivers or reimbursements at any time. The annual operating expenses do not
reflect fee waivers and expense reimbursements. Including current fee waivers
and expense reimbursements and restating to reflect current fees, Total Fund
Operating Expenses would have been 0.83% for Class A, 1.58% for Class B and
0.58% for Class Y.
The table below shows the total expenses you would pay on a $10,000 investment
over one-, three-, five- and ten-year periods. The example is intended to help
you compare the cost of investing in this Fund versus other mutual funds and is
for illustration only. The example assumes a 5% average annual return and that
you reinvest all of your dividends. Your actual costs may be higher or lower.
Example of Fund Expenses
<TABLE>
<CAPTION>
Assuming Redemption at Assuming
End of Period No Redemption
Class A Class B Class Y Class B
<S> <C> <C> <C> <C>
After 1 year $571 $677 $76 $177
After 3 years $775 $848 $237 $548
After 5 years $996 $1,144 $411 $944
After 10 years $1,631 $1,760 $918 $1,760
</TABLE>
STATE MUNICIPAL BOND FUNDS
3
<PAGE>
EVERGREEN
New Jersey Municipal Bond Fund
FUND FACTS:
Goal:
. Tax Exempt Current Income
Principal Investment:
. Municipal Securities
Classes of Shares Offered in this Prospectus:
.Class A
.Class B
.Class Y
Investment Advisor:
. Evergreen Investment Management
Portfolio Managers:
. Jocelyn Thayer
. Joseph R. Baxter
NASDAQ Symbols:
ENJAX (Class A)
ENJBX (Class B)
ENJYX (Class Y)
Dividend Payment Schedule:
Monthly
................................................................................
[GRAPHIC APPEARS HERE]
INVESTMENT GOAL
The Fund seeks the highest possible current income exempt from federal income
taxes, other than the alternative minimum tax, and state income taxes while
preserving capital.
[GRAPHIC APPEARS HERE]
INVESTMENT STRATEGY
The following investment strategies are in addition to the investment strategies
discussed in the "Overview" on page 1.
The Fund normally invests at least 80% of its assets in municipal securities
that are exempt from federal income tax, other than the alternative minimum tax.
The Fund also invests at least 65% of its assets in municipal securities that
are exempt from income taxes in the State of New Jersey. The Fund will invest at
least 80% of its assets in bonds that, at the date of investment, are rated
within the four highest ratings categories by a nationally recognized
statistical ratings organization, or unrated securities determined to be of
comparable quality by the investment advisor. The Fund may invest up to 20% of
its assets in below investment grade bonds, but will not invest in bonds rated
below B. The Fund may also invest up to 20% of its assets in high quality
short-term obligations. In purchasing municipal securities, the portfolio
managers include in their analysis how well the securities fit into the Fund's
overall portfolio strategy, credit criteria, and established price levels.
The Fund may invest up to 100% of its assets in high quality money market
instruments in response to adverse economic, political or market conditions.
This strategy is inconsistent with the Fund's principal investment strategy and
investment goal and, if employed, could result in a lower return and loss of
market opportunity.
[GRAPHIC APPEARS HERE]
RISK FACTORS
Your investment in the Fund is subject to the risks discussed in the "Overview"
on page 1 under the headings:
. Interest Rate Risk
. Credit Risk
. Below Investment Grade Bond Risk
. Non-Diversification Risk
. Concentration Risk
The performance of the New Jersey Municipal Bond Fund is influenced by the
political, economic and statutory environment within the State. The Fund invests
in obligations of New Jersey issuers, which results in the Fund's performance
being subject to risks associated with the most current conditions within the
State. Some of these conditions may include the State's slowing growth rate
since 1987 and the job losses experienced in the manufacturing sector of New
Jersey's economy. These and other factors discussed in the Statement of
Additional Information may cause rating agencies to downgrade the credit ratings
on certain issues which can lessen the value of the securities in which the Fund
invests.
For more information on the factors that could affect the ability of the bond
issuers to pay interest and principal on securities acquired by the Fund, see
the Statement of Additional Information.
Distributions of capital gains and other taxable income will be subject to tax
under the New Jersey Gross Income Tax. Corporations subject to the New Jersey
franchise tax will be subject to tax on all distributions of income from the
Fund. For more information on New Jersey tax consequences, see the Statement of
Additional Information.
For further information regarding the Fund's investment strategy and risk
factors, see "Other Fund Practices."
STATE MUNICIPAL BOND FUNDS
4
<PAGE>
EVERGREEN
[GRAPHIC APPEARS HERE]
PERFORMANCE
The following charts show how the Fund has performed in the past. Past
performance is not an indication of future results.
The chart below shows the percentage gain or loss for Class A shares of the Fund
in each calendar year since the Class A shares' inception on 7/16/1991. It
should give you a general idea of how the Fund's return has varied from
year-to-year. This graph includes the effects of Fund expenses, but not sales
charges. Returns would be lower if sales charges were included.
Year-by-Year Total Return for Class A Shares (%)
[CHART APPEARS HERE]
1992 8.77
1993 12.52
1994 -5.48
1995 15.9
1996 3.84
1997 8.02
1998 5.92
Best Quarter:1st Quarter 1995 +6.76%
Worst Quarter:1st Quarter 1994 -5.48%*
Year to date total return through 6/30/1999 is -1.37%.
The next table lists the Fund's average annual total return over the past one
and five years and since inception (through 12/31/1998), including applicable
sales charges. This table is intended to provide you with some indication of the
risks of investing in the Fund. At the bottom of the table you can compare this
performance with the Lehman Brothers Municipal Bond Index, which is a broad
measure of the municipal bond market; it is not an actual investment.
Average Annual Total Return
(for the period ended 12/31/1998)*
<TABLE>
<CAPTION>
Inception Performance
Date of Since
Class 1 year 5 year 10 year 7/16/1991
<S> <C> <C> <C> <C> <C>
Class A 7/16/1991 0.85% 4.39% N/A 6.55%
Class B 1/30/1996 -0.04% 4.56% N/A 6.89%
Class Y 2/8/1996 6.01% 5.46% N/A 7.28%
Lehman Brothers
Municipal Bond Index 6.54% 6.24% N/A 7.87%**
</TABLE>
* Historical performance shown for Classes B and Y prior to their inception is
based on the performance of Class A, the original class offered. These
historical returns for Classes B and Y have not been adjusted to reflect the
effect of each Class' 12b-1 fees. This fee is 0.25% for Class A and 1.00% for
Class B. Class Y does not pay a 12b-1 fee. If these fees had been reflected,
returns for Class B would have been lower while returns for Class Y would have
been higher.
**Performance since 1/30/1996 is 6.63% and since 2/8/1996 is 7.08%.
[GRAPHIC APPEARS HERE]
EXPENSES
This section describes the fees and expenses you would pay if you bought and
held shares of the Fund.
Shareholder Fees (fees paid directly from your investment)
<TABLE>
<CAPTION>
Shareholder Transaction Expenses Class A Class B Class Y
<S> <C> <C> <C>
Maximum sales 4.75% None None
charge imposed
on purchases (as
a % of offering
price)
Maximum deferred None* 5.00% None
sales charge
(as a % of
either the
redemption
amount or
initial
investment,
whichever is
lower)
</TABLE>
* 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 of 1.00% upon
redemption within one year after the month of purchase.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)*
<TABLE>
<CAPTION>
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating Expenses**
<S> <C> <C> <C> <C>
Class A 0.50% 0.25% 0.12% 0.87%
Class B 0.50% 1.00% 0.12% 1.62%
Class Y 0.50% None 0.12% 0.62%
</TABLE>
* Actual for the fiscal year ended 3/31/1999.
** From time to time, the Fund's investment advisor may, at its discretion,
reduce or waive its fees or reimburse a Fund for certain of its expenses in
order to reduce expense ratios. The Fund's investment advisor may cease these
waivers or reimbursements at any time. The annual operating expenses do not
reflect fee waivers and expense reimbursements. Including current fee waivers
and expense reimbursements Total Fund Operating Expenses were 0.50% for Class
A, 1.41% for Class B and 0.41% for Class Y.
The table below shows the total expenses you would pay on a $10,000 investment
over one-, three-, five- and ten-year periods. The example is intended to help
you compare the cost of investing in this Fund versus other mutual funds and is
for illustration only. The example assumes a 5% average annual return and that
you reinvest all of your dividends. Your actual costs may be higher or lower.
Example of Fund Expenses
<TABLE>
<CAPTION>
Assuming Redemption at Assuming
End of Period No Redemption
Class A Class B Class Y Class B
<S> <C> <C> <C> <C>
After 1 year $560 $665 $63 $165
After 3 years $739 $811 $199 $511
After 5 years $934 $1,081 $346 $881
After 10 years $1,497 $1,627 $774 $1,627
</TABLE>
STATE MUNICIPAL BOND FUNDS
5
<PAGE>
EVERGREEN
Pennsylvania Municipal Bond Fund
FUND FACTS:
Goal:
. Tax Exempt Current Income
Principal Investments:
.Municipal Securities
Classes of Shares Offered in this Prospectus:
.Class A
.Class B
.Class C
.Class Y
Investment Advisor:
. Evergreen Investment Management Company
Portfolio Manager:
.Jocelyn Thayer
.Joseph R. Baxter
NASDAQ Symbols:
EKVAX (Class A)
EKVBX (Class B)
EKVYX (Class C)
EKVYX (Class Y)
Dividend Payment Schedule:
Monthly
................................................................................
[GRAPHIC APPEARS HERE]
INVESTMENT GOAL
The Fund seeks the highest possible current income exempt from federal income
taxes, other than the alternative minimum tax, and state income taxes while
preserving capital.
[GRAPHIC APPEARS HERE]
INVESTMENT STRATEGY
The following investment strategies are in addition to the investment strategies
discussed in the "Overview" on page 1.
The Fund normally invests at least 80% of its assets in municipal securities
that are exempt from federal income tax, other than the alternative minimum tax.
The Fund also invests at least 65% of its assets in municipal securities that
are exempt from income taxes in the Commonwealth of Pennsylvania. The Fund will
invest at least 80% of its assets in bonds that, at the date of investment, are
rated within the four highest ratings categories by a nationally recognized
statistical ratings organization, or unrated securities determined to be of
comparable quality by the investment advisor. The Fund may invest up to 20% of
its assets in below investment grade bonds, but will not invest in bonds rated
below B. The Fund may also invest up to 20% of its assets in high quality
short-term obligations. In purchasing municipal securities, the portfolio
managers include in their analysis how well the securities fit into the Fund's
overall portfolio strategy, credit criteria, and established price levels.
The Fund may invest up to 100% of its assets in high quality money market
instruments in response to adverse economic, political or market conditions.
This strategy is inconsistent with the Fund's principal investment strategy and
investment goal and, if employed, could result in a lower return and loss of
market opportunity.
[GRAPHIC APPEARS HERE]
RISK FACTORS
Your investment in the Fund is subject to the risks discussed in the "Overview"
on page 1 under the headings:
.Interest Rate Risk
.Credit Risk
.Below Investment Grade Bond Risk
.Non-Diversification Risk
.Concentration Risk
The performance of the Pennsylvania Municipal Bond Fund is influenced by the
political, economic and statutory environment within the Commonwealth. The Fund
invests in obligations of Pennsylvania issuers, which results in the Fund's
performance being subject to risks associated with the most current conditions
within the State. Some of these conditions may include the uncertainty
associated with the shift occurring in the State's economy away from the coal,
steel and railroad industries and toward the service sectors of trade, medical
and health services, education and financial institutions. These and other
factors discussed in the Statement of Additional Information may cause rating
agencies to downgrade the credit ratings on certain issues which can lessen the
value of the securities in which the Fund invests.
For more information on the factors that could affect the ability of the bond
issuers to pay interest and principal on securities acquired by the Fund, see
the Statement of Additional formation.
For further information regarding the Fund's investment strategy and risk
factors, see "Other Fund Practices." STATE MUNICIPAL BOND FUNDS
6
<PAGE>
EVERGREEN
[GRAPHIC APPEARS HERE]
PERFORMANCE
The following charts show how the Fund has performed in the past. Past
performance is not an indication of future results.
The chart below shows the percentage gain or loss for Class A shares of the Fund
in each calendar year since the Class A shares' inception on 12/27/1990. It
should give you a general idea of how the Fund's return has varied from
year-to-year. This graph includes the effects of Fund expenses, but not sales
charges. Returns would be lower if sales charges were included.
Year-by-Year Total Return for Class A Shares (%)
[CHART APPEARS HERE]
1991 13.88
1992 9.27
1993 14.25
1994 -8.25
1995 18.23
1996 2.74
1997 9.16
1998 5.46
Best Quarter:1st Quarter 1995+7.09%
Worst Quarter:1st Quarter 1994-6.34%
Year to date total return through 6/30/1999 is -1.40%.
The next table lists the Fund's average annual total return over the one and
five years and since inception (through 12/31/1998), including applicable sales
charges. This table is intended to provide you with some indication of the risks
of investing in the Fund. At the bottom of the table you can compare this
performance with the Lehman Brothers Municipal Bond Index, which is a broad
measure of the municipal bond market; it is not an actual investment.
Average Annual Total Return
(for the period ended 12/31/98)*
<TABLE>
<CAPTION>
Inception Performance
Date of Since
Class 1 year 5 year 10 year 12/27/1990
<S> <C> <C> <C> <C> <C>
Class A 12/27/1990 0.41% 4.10% N/A 7.41%
Class B 2/1/1993 -0.22% 4.03% N/A 7.47%
Class C 2/1/1993 3.77% 4.35% N/A 7.47%
Class Y 11/24/1997 5.73% 5.17% N/A 8.11%
Lehman Brothers
Municipal Bond Index 6.54% 6.24% N/A 8.02%**
</TABLE>
* Historical performance shown for Classes B, C and Y prior to their inception
is based on the performance of Class A, the original class offered. These
historical returns for Classes B, C, and Y have not been adjusted to reflect
the effect of each Class' 12b-1 fees. This fee is 0.25% for Class A, 1.00% for
Class B and 1.00% for Class Y. Class Y does not pay a 12b-1 fee. If these fees
had been reflected, returns for Classes B and C would have been lower while
returns for Class Y would have been higher.
**Performance since 2/1/1993 is 7.12% and since 11/24/1997 is 7.45%.
[GRAPHIC APPEARS HERE]
EXPENSES
This section describes the fees and expenses you would pay if you bought and
held shares of the Fund.
Shareholder Fees (fees paid directly from your investment)
<TABLE>
<CAPTION>
Shareholder
Transaction
Expenses Class A Class B Class C Class Y
<S> <C> <C> <C> <C>
Maximum sales 4.75% None None None
charge imposed
on purchases (as
a % of offering
price)
Maximum deferred None* 5.00% 1.00% None
sales charge (as
a % of either
the redemption
amount or
initial
investment
whichever is
lower)
</TABLE>
* 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 of 1.00% upon
redemption within one year after the month of purchase.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)*
<TABLE>
<CAPTION>
Total Fund
Management 12b-1 Other Operating
Fees Fees Expenses Expenses
<S> <C> <C> <C> <C>
Class A 0.47% 0.25% 0.10% 0.82%
Class B 0.47% 1.00% 0.11% 1.58%
Class C 0.47% 1.00% 0.11% 1.58%
Class Y 0.47% None 0.10% 0.57%
</TABLE>
* Actual for the fiscal year ended 3/31/1999
The table below shows the total expenses you would pay on a $10,000 investment
over one-, three-, five- and ten-year periods. The example is intended to help
you compare the cost of investing in this Fund versus other mutual funds and is
for illustration only. The example assumes a 5% average annual return and that
you reinvest all of your dividends. Your actual costs may be higher or lower.
Example of Fund Expenses
<TABLE>
<CAPTION>
Assuming Redemption at Assuming
End of Period No Redemption
Class A Class B Class C Class Y Class B Class C
<S> <C> <C> <C> <C> <C> <C>
After 1 year $ 555 $ 661 $ 261 $ 58 $ 161 $ 161
After 3 years $ 724 $ 799 $ 499 $183 $ 499 $ 499
After 5 years $ 908 $1,060 $ 860 $318 $ 860 $ 860
After 10 years $1,441 $1,578 $1,879 $714 $1,578 $1,878
</TABLE>
STATE MUNICIPAL BOND FUNDS
7
<PAGE>
EVERGREEN
THE FUNDS' INVESTMENT ADVISORS
The investment advisor manages a Fund's investments and supervises its daily
business affairs. There are two investment advisors for the Evergreen State
Municipal Bond Funds. All investment advisors for the Evergreen Funds are
subsidiaries of First Union Corporation, the sixth largest bank holding company
in the United States, with over $230 billion in consolidated assets as of
6/30/1999. First Union Corporation is located at 301 South College Street,
Charlotte, North Carolina 28288-0630.
Evergreen Investment Management of First Union National Bank (EIM) is the
investment advisor to:
.Evergreen Connecticut Municipal Bond Fund
.Evergreen New Jersey Municipal Bond Fund
EIM (formerly known as Capital Management Group, or CMG), a division of First
Union National Bank, has been managing money for over 50 years and currently
manages $60.9 billion in assets for 45 of the Evergreen Funds. EIM is located at
201 South College Street, Charlotte, North Carolina 28288-0630.
For the fiscal year ended 3/31/1999, Evergreen Connecticut Municipal Bond Fund
paid EIM an aggregate advisory fee of 0.44% of the Fund's average daily net
assets and Evergreen New Jersey Municipal Bond Fund paid EIM an aggregate
advisory fee of 0.36% of the Fund's average daily net assets.
Evergreen Investment Management Company (EIMC) is the investment advisor to:
.Evergreen Pennsylvania Municipal Bond Fund
EIMC has been managing mutual funds and private accounts since 1932 and
currently manages over $9.5 billion in assets for 28 of the Evergreen Funds.
EIMC is located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
For the fiscal year ended 3/31/1999, Evergreen Pennsylvania Municipal Bond Fund
paid EIMC an aggregate advisory fee of 0.29% of the Fund's average daily net
assets.
Year 2000 Compliance
The investment advisors and other service providers for the Evergreen Funds are
taking steps to address any potential Year 2000-related computer problems.
However, there is some risk that these problems could disrupt the Funds'
operations or financial markets generally. In addition, issuers of securities,
especially foreign issuers, in which the Funds invest may be adversely affected
by Year 2000 problems. Such problems could negatively impact the value of the
Fund's securities.
THE FUNDS' PORTFOLIO MANAGERS
The Funds are co-managed by Jocelyn Thayer and Joseph R. Baxter. Ms. Thayer has
been a Vice President and municipal bond portfolio manager since joining First
Union National Bank in November 1992. Mr. Baxter has been a Vice President and
portfolio manager with Evergreen Funds since April 1998. Prior to that he was
Head of the Tax Advantage Unit at CoreStates Investment Advisers from 1990-
1998.
CALCULATING THE SHARE PRICE
The value of one share of a Fund, also known as the net asset value, or NAV, is
calculated on each day the New York Stock Exchange is open as of the time the
Exchange closes (normally 4:00 p.m. Eastern time). The Fund calculates its share
price for each share by adding up its total assets, subtracting all liabilities,
then dividing the result by the total number of shares outstanding. Each class
of shares is calculated separately. Each security held by a Fund is valued using
the most recent market data for that security. If no market data is available
for a given security, the Fund will price that security at fair value according
to policies established by the Funds' Board of Trustees. Short-term securities
with maturities of 60 days or less will be valued on the basis of amortized
cost.
The price per share you pay for a Fund purchase or the amount you receive for a
Fund redemption is based on the next price calculated after the order is
received and all required information is provided. The value of your account at
any given time is the latest share price multiplied by the number of shares you
own. Your account balance may change daily because the share price may change
daily.
STATE MUNICIPAL BOND FUNDS
8
<PAGE>
EVERGREEN
HOW TO CHOOSE AN EVERGREEN FUND
When choosing an Evergreen Fund, you should:
. Most importantly, read the prospectus to see if the Fund is suitable for
you.
. Consider talking to an investment professional. He or she is qualified to
give you investment advice based on your investment goals and financial
situation and will be able to answer questions you may have after reading
the Fund's prospectus. He or she can also assist you through all phases of
opening your account.
. Request any additional information you want about the Fund, such as the
Statement of Additional Information, Annual Report or Semi-annual Report by
calling 1-800-343-2898.
HOW TO CHOOSE THE SHARE CLASS THAT BEST SUITS YOU
After choosing a Fund, you select a share class. Each Evergreen State Municipal
Bond Fund offers up to four different share classes: Class A, Class B, Class C
and Class Y. Each class except Class Y has its own sales charge. Pay
particularly close attention to the fee structure of each class so you know how
much you will be paying before you invest.
Class A
If you select Class A shares, you may pay a front-end sales charge of up to
4.75%. This charge is deducted from your investment before it is invested. The
actual charge depends on the amount invested, as shown below:
<TABLE>
<CAPTION>
As a % of As a % Dealer
Your NAV excluding of your commission
Investment sales charge investment as a % of NAV
<S> <C> <C> <C>
Up to $49,999 4.75% 4.99% 4.25%
$50,000-$99,999 4.50% 4.71% 4.25%
$100,000-
$249,999 3.75% 3.90% 3.25%
$250,000-
$499,999 2.50% 2.56% 2.00%
$500,000-
$999,999 2.00% 2.04% 1.75%
$1,000,000 and
over 0% 0% 1.00 to .25%
</TABLE>
Although no front-end sales charge applies to purchases of $1,000,000 and over,
you will pay a 1% deferred sales charge if you redeem any such shares within 13
months of purchase.
Two ways you can reduce your
Class A sales charges:
1. Rights of Accumulation allow you to combine your investment with all
existing investments in all your Evergreen Fund accounts when determining
whether you meet the threshold for a reduced Class A sales charge.
2. Letter of Intent. If you agree to purchase at least $50,000 over a 13- month
period, you pay the same sales charge as if you had invested the full amount
all at once. The Fund will hold a certain portion of your investment in
escrow until your commitment is met.
Contact your broker or the Evergreen Service Company at 1-800-343-2898 if you
think you may qualify for either of these services.
Each Fund may also sell Class A shares at net asset value without any initial or
contingent sales charge to the Directors, Trustees, officers and employees of
the Fund and the advisory affiliates of First Union Corporation, and to members
of their immediate families, to registered representatives of firms with dealer
agreements with Evergreen Distributor, Inc. ("EDI"), and to a bank or trust
company acting as trustee for a single account.
Class B
If you select Class B shares, you do not pay a front-end sales charge, so the
entire amount of your purchase is invested in the Fund. However, your shares are
subject to an additional expense, known as the 12b-1 fee. In addition, you may
pay a deferred sales charge if you redeem your shares within six years after the
month of purchase. The amount of the deferred sales charge depends on the length
of time the shares were held, as shown below:
<TABLE>
<CAPTION>
Contingent Deferred
Time Held Sales Charge
<S> <C>
Month of Purchase +
First 12 Month Period 5.00%
Month of Purchase +
Second 12 Month Period 4.00%
Month of Purchase +
Third 12 Month Period 3.00%
Month of Purchase +
Fourth 12 Month Period 3.00%
Month of Purchase +
Fifth 12 Month Period 2.00%
Month of Purchase +
Sixth 12 Month Period 1.00%
Thereafter 0%
After 7 years Converts to Class A
Dealer Allowance 4.00%
</TABLE>
The deferred sales charge percentage is applied to the value of the shares when
purchased or when redeemed, whichever is less. No deferred sales charge is paid
on shares purchased through dividend or capital gains reinvestments or on any
gains in the value of your shares.
STATE MUNICIPAL BOND FUNDS
9
<PAGE>
EVERGREEN
Class C
Class C shares, which are offered only by Evergreen Pennsylvania Municipal Bond
Fund, are similar to Class B shares, except the deferred sales charge is less
and only applies if shares are redeemed within the first year after the month of
purchase. Also, these shares do not convert to Class A shares and so the higher
12b-1 fee continues for the life of the account.
<TABLE>
<CAPTION>
Time Held Deferred Sales Charge
<S> <C>
Month of Purchase +
Less Than 1 Year 1.00%
Month of Purchase + 1
Year or More 0%
</TABLE>
Waiver of Class B or Class C Sales Charges You will not be assessed a deferred
sales charge for Class B or Class C shares if you redeem shares in the
following situations: . When the shares were
purchased through
reinvestment of
dividends/capital gains
. Death or disability
. Lump-sum distribution from
a 401(k) plan or other
benefit plan qualified
under ERISA
. Automatic IRA withdrawals
if your age is at least 59
1/2
. Automatic withdrawals of
up to 1.0% of the account
balance per month
. Loan proceeds and
financial hardship
distributions from a
retirement plan
. Returns of excess
contributions or excess
deferral amounts made to a
retirement plan
participant
Class Y
Each Fund offers Class Y shares at net asset value without an initial sales
charge, deferred sales charge or 12b-1 fees. Class Y shares are only offered to
persons who owned shares in a Fund advised by Evergreen Asset Management Corp.
on or before December 31, 1994; certain institutional investors; and investment
advisory clients of an investment advisor of an Evergreen Fund (or the
investment advisor's affiliates).
STATE MUNICIPAL BOND FUNDS
10
<PAGE>
EVERGREEN
HOW TO BUY SHARES
Evergreen Funds' low investment minimums make investing easy. Once you decide on
an amount and a share class, simply fill out an application and send in your
payment, or talk to your investment professional.
Minimum Investments
<TABLE>
<CAPTION>
Initial Additional
<S> <C> <C>
Regular Accounts $1,000 None
IRAs $250 None
Systematic
Investment Plan $50 $25
</TABLE>
<TABLE>
<CAPTION>
Method Opening an Account Adding to an Account
<C> <S> <C>
By Mail or . Complete and sign the account . Make your check payable to
application Evergreen Funds
through an . Make the check payable to Evergreen . Write a note specifying:
Funds.
Investment . Mail the application and your check - the Fund name
to the address below: - share class
Professional Evergreen Service Company - your account number
P.O. Box 2121 - the name(s) in which the account is
Boston, MA 02106-2121 registered
Overnight Address:
Evergreen Service Company
200 Berkeley St.
Boston, MA 02116-5039
. Or deliver them to your investment . Mail to the address to the left or
representative (provided he or she deliver to your investment
has a broker/dealer arrangement with representative
EDI.)
By Phone . Call 1-800-343-2898 to set up an . Call the Evergreen Express Line at
account number and get wiring 1-800-346-3858 24 hours a day or 1-
instructions (call before 12 noon if 800-343-2898 between 8 a.m. and 6
you want wired funds to be credited p.m. Eastern time, on any business
that day). day.
. Instruct your bank to wire or . If your bank account is set up on
transfer your purchase (they may file, you can request either:
charge a wiring fee).
. Complete the account application and -Federal Funds Wire (offers immediate
mail to: access to funds) or
Evergreen Service Company -Electronic transfer through the
P.O. Box 2121 Automated
Boston, MA 02106-2121 Clearing House which avoids wiring
Overnight Address: fees.
Evergreen Service Company
200 Berkeley St.
Boston, MA 02116-5039
. Wires received after 4 p.m. Eastern
time on market trading days will
receive the next market day's closing
price.*
By Exchange . You can make an additional investment by exchange from an existing
Evergreen Funds account by contacting your investment representative or
calling the Evergreen Express Line at 1-800-346-3858.**
. You can only exchange shares within the same class.
. There is no sales charge or redemption fee when exchanging Funds within the
Evergreen Funds family.***
. Orders placed before 4 p.m. Eastern time on market trading days
will receive that day's closing share price (if not, you will
receive the next market day's closing price).*
. Exchanges are limited to three per calendar quarter, but in no event more
than five per calendar year.
. Exchanges between accounts which do not have identical
ownership must be made in writing with a signature guarantee
(see below).
Systematic . You can transfer money automatically . To establish automatic investing
Investment from your bank account for an existing account,
Plan (SIP) into your Fund on a monthly basis. call 1-800-343-2898 for
. Initial investment minimum is $50 if an application.
you invest at least $25 per . The minimum is $25 per month or $75
month with this service. per quarter.
. To enroll, check off the box on the . You can also establish an investing
account application and program through direct
provide: deposit from your paycheck.
- your bank account information Call 1-800-343-2898 for details.
- the amount and date of your monthly
investment
</TABLE>
*The Fund's shares may be made available through financial service firms which
are also investment dealers and which have a service agreement with EDI. The
Fund has approved the acceptance of purchase and repurchase request orders
effective as of the time of their receipt by certain authorized financial
intermediaries. **Once you have authorized either the telephone exchange or
redemption service, anyone with a Personal Identification Number (PIN) and the
required account information (including your broker) can request a telephone
transaction in your account. All calls are recorded or monitored for
verification, recordkeeping and quality-assurance purposes. The Evergreen Funds
reserve the right to terminate the exchange privilege of any shareholder who
exceeds the listed maximum number of exchanges, as well as to reject any large
dollar exchange if placing it would, in the judgment of the portfolio manager,
adversely affect the price of the Fund. ***This does not apply to exchanges
from Class A of an Evergreen Money Market Fund.
STATE MUNICIPAL BOND FUNDS
11
<PAGE>
EVERGREEN
HOW TO REDEEM SHARES
We offer you several convenient ways to redeem your shares in any of the
Evergreen Funds:
<TABLE>
<CAPTION>
Methods Requirements
<C> <S> <C> <C>
Call Us . Call the Evergreen Express Line at 1-800-346-3858 24 hours a day or 1-800-343-
2898 between 8 a.m. and 6 p.m. Eastern time, on any business day.
. This service must be authorized ahead of time, and is only available for
regular accounts.**
. All authorized requests made before 4 p.m. Eastern time on market trading days
will be processed at that day's closing price. Requests after 4 p.m. will be
processed the following business day.*
. We can either:
-wire the proceeds into your bank account (service charges may
apply) -electronically transmit the proceeds to your bank
account via the Automated
Clearing House service -mail you a check.
. All telephone calls are recorded for your protection. We are not responsible
for acting on telephone orders we believe are genuine.
. See exceptions list below for requests that must be made in writing.
Write Us . You can mail a Evergreen Service Company Overnight Address:
redemption request P.O. Box 2121 Evergreen Service Company
to: Boston, MA 02106-2121 200 Berkeley St.
Boston, MA 02116-5039
. Your letter of instructions must:
-list the Fund name and the account number
-indicate the number of shares of dollar value you wish to redeem
-be signed by the registered owner(s)
. See exceptions list below for requests that must be signature guaranteed.
. To redeem from an IRA or other retirement account, call 1-800-343-2898 for a
special application.
Redeem Your . You may also redeem your shares through participating
broker-dealers by Shares in delivering a letter as described above to your
broker-dealer.
Person . A fee may be charged for this service.
Systematic . You can transfer money automatically from your Fund account on a
monthly or Withdrawal quarterly basis--without redemption fees. Plan (SWP) .
The withdrawal can be mailed to you, or deposited directly to your bank
account.
. The minimum is $75 per month.
. The maximum is 1% of your account per month or 3% per quarter.
. To enroll, call 1-800-343-2898 for an application.
</TABLE>
Timing of Proceeds
Normally, we will send your redemption proceeds on the next business day after
we receive your request; however, we reserve the right to wait up to seven
business days to redeem any investments made by check and five business days for
investments made by Automated Clearing House transfer. We also reserve the right
to redeem in kind by paying you the proceeds of a redemption in securities
rather than cash, and to redeem the remaining amount in the account if your
redemption brings the account balance below the initial minimum of $1,000.
Exceptions: Redemption Requests That Require A Signature Guarantee To protect
you and Evergreen Funds against fraud, certain redemption requests must be made
in writing with your signature guaranteed. A signature guarantee can be obtained
at most banks and securities dealers. A notary public is not authorized to
provide a signature guarantee. The following circumstances require signature
guarantees:
Who Can Provide A
.You are redeeming more than $50,000. Signature Guarantee:
.You want the proceeds transmitted to a bank .Commercial Bank
account not listed on the account. .Trust Company
.You want the proceeds payable to anyone other than .Savings Association
the registered owner(s) of the account. .Credit Union
.Either your address or the address of your bank .Member of a U.S. stock
account has been changed within 30 days. exchange
.The account is registered in the name of a
fiduciary corporation or any other organization.
In these cases, additional documentation is required:
corporate accounts: certified copy of corporate
resolution
fiduciary accounts: copy of the power of attorney
or other governing document
STATE MUNICIPAL BOND FUNDS
12
<PAGE>
EVERGREEN
OTHER SERVICES
Evergreen Express Line
Use our automated, 24-hour service to check the value of your investment in a
Fund; purchase, redeem or exchange Fund shares; find a Fund's price, yield or
total return; order a statement or duplicate tax form; or hear market commentary
from Evergreen portfolio managers.
Automatic Reinvestment of Dividends
For the convenience of investors, all dividends and capital gains distributions
are automatically reinvested, unless you request otherwise. Distributions can be
made by check or electronic transfer through the Automated Clearing House to
your bank account. The details of your dividends and other distributions will be
included on your statement.
Payroll Deduction (Class A, Class B and Class C only)
If you want to invest automatically through your paycheck, call us to find out
how you can set up direct payroll deductions. The amounts deducted will be
invested in your Fund using the Electronic Funds Transfer System. We will
provide the Fund account number. Your payroll department will let you know the
date of the pay period when your investment begins.
Telephone Investment Plan
You may make additional investments electronically in an existing Fund account
at amounts of not less than $100 or more than $10,000 per investment. Telephone
requests received by 4:00 p.m. Eastern time will be invested the day the request
is received.
Dividend Exchange
You may elect on the application to reinvest capital gains and/or dividends
earned in one Evergreen Fund into an existing account in another Evergreen Fund
in the same share class--automatically. Please indicate on the application the
Evergreen Fund(s) into which you want to invest the distributions.
Reinvestment Privileges
Under certain circumstances, shareholders may, within one year of redemption,
reinstate their accounts at the current price. This is the Fund's net asset
value, also sometimes referred to as the Fund's "NAV."
STATE MUNICIPAL BOND FUNDS
13
<PAGE>
EVERGREEN
THE TAX CONSEQUENCES OF INVESTING IN THE FUND
You may be taxed in two ways:
. On Fund distributions (capital gains and dividends)
. On any profit you make when you sell any or all of your shares.
Fund Distributions
A mutual fund passes along to all of its shareholders the net income or profits
it receives from its investments. The shareholders of the fund then pay any
taxes due, whether they receive these distributions in cash or elect to have
them reinvested. The Evergreen State Municipal Bond Funds expect that
substantially all of their regular dividends will be exempt from federal income
tax. The Funds may also distribute two types of taxable income to you:
. Dividends. To the extent that regular dividends are derived from interest that
is not tax exempt, or from short term capital gains, you will have to include
them in your federal taxable income. The Evergreen State Municipal Bond Funds
pay a monthly dividend from the dividends, interest and other income on the
securities in which they invest.
. Capital Gains. When a mutual fund sells a security it owns for a profit, the
result is a capital gain. Evergreen State Municipal Bond Funds generally
distribute capital gains, if any, at least once a year, near the end of the
calendar year. Short-term capital gains reflect securities held by the Funds
for a year or less and are considered ordinary income just like dividends.
Profits on securities held longer than 12 months are considered long-term
capital gains and are taxed at a special tax rate (20% for most taxpayers, on
sales made after January 1, 1998).
Dividend and Capital Gain Reinvestment
Unless you choose otherwise on the account application, all dividend and capital
gain payments will be reinvested to buy additional shares. Distribution checks
that are returned and distribution checks that are uncashed when the shareholder
has failed to respond to mailings from the shareholder servicing agent will
automatically be reinvested to buy additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks.
We will send you a statement each January with the federal tax status of
dividends and distributions paid by each Fund during the previous calendar year.
Profits You Realize When You Redeem Shares
When you sell shares in a mutual fund, whether by redeeming or exchanging, you
have created a taxable event. You must report any gain or loss on your tax
return unless the transaction was entered into by a tax-deferred retirement
plan. Investments in money market funds typically do not generate capital gains.
It is your responsibility to keep accurate records of your mutual fund
transactions. You will need this information when you file your income tax
return, since you must report any capital gains or losses you incur when you
sell shares. Remember, an exchange is a purchase and a sale for tax purposes.
Tax Reporting
Evergreen Service Company provides you with a tax statement of your dividend and
capital gains distributions for each calendar year on Form 1099 DIV. Proceeds
from a sale are reported on Form 1099B. You must report these on your tax
return. Since the IRS receives a copy as well, you could pay a penalty if you
neglect to report them.
Evergreen Service Company will send you a tax information guide each year during
tax season, which may include a cost basis statement detailing the gain or loss
on taxable transactions you had during the year. Please consult your own tax
advisor for further information regarding the federal, state and local tax
consequences of an investment in the Funds.
Retirement Plans
You may invest in each Fund through various retirement plans, including IRAs,
401(k) plans, Simplified Employee Plans, (SEPs), IRAs, 403(b) plans, 457 plans
and others. For special rules concerning these plans, including applications,
restrictions, tax advantages, and potential sales charge waivers, contact your
broker-dealer. To determine if a retirement plan may be appropriate for you,
consult your tax advisor.
STATE MUNICIPAL BOND FUNDS
14
<PAGE>
EVERGREEN
FEES AND EXPENSES OF THE FUNDS
Every mutual fund has fees and expenses that are assessed either directly or
indirectly. This section describes each of those fees.
Management Fee
The management fee pays for the normal expenses of managing the fund, including
portfolio manager salaries, research costs, corporate overhead expenses and
related expenses.
12b-1 Fee
The Trustees of the Evergreen Funds have approved a policy to assess 12b-1 fees
for Class A, Class B and Class C shares. Up to 0.75% of Class A's daily net
assets and up to 1.00% of each of Class B's and Class C's daily net assets are
payable as a 12b-1 fee. However, currently the 12b-1 fee for Class A is limited
to 0.25% of the daily net assets of the class. These fees increase the cost of
your investment. The purpose of the 12b-1 fee is to promote the sale of more
shares of the Funds to the public. The Fund might use this fee for advertising
and marketing and as a "service fee" to the broker-dealer for additional
shareholder services.
Other Expenses
Other expenses include miscellaneous fees from affiliated and outside service
providers. These may include legal, audit, custodial and safekeeping fees, the
printing and mailing of reports and statements, automatic reinvestment of
distributions and other conveniences for which the shareholder pays no
transaction fees.
Total Fund Operating Expenses
The total cost of running the Fund is called the expense ratio. As a
shareholder, you are not charged these fees directly; instead they are taken out
before the Fund's net asset value is calculated, and are expressed as a
percentage of the Fund's average daily net assets. The effect of these fees is
reflected in the performance results for that share class. Because these fees
are "invisible," investors should examine them closely in the prospectus,
especially when comparing one fund with another fund in the same investment
category. There are three things to remember about expense ratios: 1) your total
return in the Fund is reduced in direct proportion to the fees; 2) expense
ratios can vary greatly between funds and fund families, from under 0.25% to
over 3.0%; and 3) a Fund's advisor may waive a portion of the Fund's expenses
for a period of time, reducing its expense ratio.
STATE MUNICIPAL BOND FUNDS
15
<PAGE>
EVERGREEN
FINANCIAL HIGHLIGHTS
This section looks in detail at the results for one share in each share class
of the Funds--how much income it earned, how much of this income was passed
along as a distribution and how much the return was reduced by expenses. The
tables have been derived from financial information audited by KPMG LLP, the
Funds' independent auditors. For a more complete picture of the Funds'
financial statements, please see the Funds' Annual Report as well as the
Statement of Additional Information.
- --------------------------------------------------------------------------------
CONNECTICUT MUNICIPAL BOND FUND CLASS A
<TABLE>
<CAPTION>
Year Ended
March 31,
----------------
1999 1998 (a)
- ------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period $ 6.38 $ 6.40
------ ------
..............................................................................
Income from investment operations
..............................................................................
Net investment income 0.26 0.07
..............................................................................
Net realized and unrealized gains or losses on securities 0.06 (0.02)
------ ------
..............................................................................
Total from investment operations 0.32 0.05
------ ------
..............................................................................
Less distributions to shareholders from
..............................................................................
Net investment income (0.26) (0.07)
..............................................................................
Net realized gains (0.06) 0
------ ------
..............................................................................
Total distributions to shareholders (0.32) (0.07)
------ ------
..............................................................................
Net asset value, end of period $ 6.38 $ 6.38
------ ------
..............................................................................
Total return* 5.14% 0.77%
..............................................................................
Ratios and supplemental data
.............................................................................
Net assets, end of period (thousands) $ 570 $ 146
..............................................................................
Ratios to average net assets
Expenses# 0.84% 0.86%+
..............................................................................
Net investment income 4.04% 4.38%+
..............................................................................
Portfolio turnover rate 42% 17%
..............................................................................
</TABLE>
(a) For the period from December 30, 1997 (commencement of class operations) to
March 31, 1998.
(b) For the period from January 9, 1998 (commencement of class operations) to
March 31, 1998.
(c) For the period from November 24, 1997 (commencement of class operations) to
March 31, 1998.
* Excluding applicable sales charges.
+ Annualized.
# The ratio of expenses to average net assets excludes fee credits and includes
fee waivers.
- --------------------------------------------------------------------------------
NEW JERSEY MUNICIPAL BOND FUND CLASS A
<TABLE>
<CAPTION>
Year Ended March 31, Year Ended February 28,
-------------------------- Period Ended ------------------------
1999 1998 1997 (a) August 31, 1996 (b) 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 11.11 $ 10.74 $ 10.75 $ 11.01 $ 10.53 $ 10.99
------- ------- ------- ------- ----------- -----------
...................................................................................................
Income from investment
operations
...................................................................................................
Net investment income 0.51 0.53 0.31 0.28 0.56 0.57
..................................................................................................
Net realized and
unrealized gains or
losses on securities 0.11 0.46 (0.01) (0.26) 0.48 (0.46)
------- ------- ------- ------- ----------- -----------
...................................................................................................
Total from investment
operations 0.62 0.99 0.30 0.02 1.04 0.11
------- ------- ------- ------- ----------- -----------
...................................................................................................
Less distributions to
shareholders from
...................................................................................................
Net realized gains (0.06) (0.09) 0 0 0 0
------- ------- ------- ------- ----------- -----------
...................................................................................................
Net investment income (0.51) (0.53) (0.31) (0.28) (0.56) (0.57)
...................................................................................................
Total distributions to
shareholders (0.57) (0.62) (0.31) (0.28) (0.56) (0.57)
------- ------- ------- ------- ----------- -----------
...................................................................................................
Net asset value, end of
period $ 11.16 $ 11.11 $ 10.74 $ 10.75 $ 11.01 $ 10.53
------- ------- ------- ------- ----------- -----------
...................................................................................................
Total return* 5.66% 9.34% 2.83% 0.19% 10.08% 1.41%
...................................................................................................
Ratios and supplemental
data
...................................................................................................
Net assets, end of
period (thousands) $33,657 $31,614 $31,434 $32,377 $ 41,762 $ 34,852
...................................................................................................
Ratios to average net
assets
Expenses# 0.50% 0.50% 0.44%+ 0.34%+ 0.36% 0.25%
..................................................................................................
Net investment income 4.52% 4.77% 5.02%+ 5.08%+ 5.15% 5.52%
...................................................................................................
Portfolio turnover rate 40% 37% 15% 0% 4% 8%
...................................................................................................
</TABLE>
(a) For the seven months ended March 31, 1997. The Fund changed its fiscal year
end from August 31 to March 31, effective March 31, 1997.
(b) For the six months ended August 31, 1996. The Fund changed its fiscal year
end from February 28 to August 31, effective August 31, 1996.
(c) For the period from February 8, 1996 (commencement of class operations) to
February 29, 1996.
(d) For the period from January 30, 1996 (commencement of class operations) to
February 29, 1996.
* Excluding applicable sales charges.
+ Annualized.
# The ratio of expenses to average net assets excludes fee credits and includes
fee waivers.
STATE MUNICIPAL BOND FUNDS II
16
<PAGE>
EVERGREEN
- --------------------------------------------------------------------------------
CLASS B CLASS Y
<TABLE>
<CAPTION>
Year Ended March 31, Year Ended March 31,
---------------------- --------------------
1999 1998 (b) 1999 1998 (c)
<S> <C> <C> <C>
$ 6.38 $ 6.44 $ 6.37 $ 6.32
========= ======== ======= =======
0.21 0.05 0.28 0.10
0.06 (0.06) 0.07 0.05
--------- -------- ------- -------
0.27 (0.01) 0.35 0.15
--------- -------- ------- -------
(0.21) (0.05) (0.28) (0.10)
(0.06) 0 (0.06) 0
--------- -------- ------- -------
(0.27) (0.05) (0.34) (0.10)
--------- -------- ------- -------
$ 6.38 $ 6.38 $ 6.38 $ 6.37
========= ======== ======= =======
4.35% (0.21%) 5.56% 2.39%
$ 1,180 $ 331 $73,890 $67,675
1.58% 1.61%+ 0.58% 0.61%+
3.25% 3.36%+ 4.33% 4.50%+
42% 17% 42% 17%
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B CLASS Y
Year Ended March 31, Period Ended Period Ended Year Ended March 31, Period Ended Period Ended
- -------------------------- August 31, February 29, ---------------------------- August 31, February 29,
1999 1998 1997 (a) 1996 (b) 1996 (d) 1999 1998 1997 (a) 1996 (b) 1996 (c)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 11.11 $ 10.74 $10.75 $11.01 $11.08 $ 11.11 $ 10.74 $10.75 $11.01 $11.14
======= ======= ====== ====== ====== ======== ======== ====== ====== ======
0.40 0.43 0.25 0.24 0.05 0.52 0.54 0.32 0.28 0.03
0.11 0.46 0 (0.26) (0.07) 0.11 0.46 (0.01) (0.26) (0.13)
- ------- ------- ------ ------ ------ -------- -------- ------ ------ ------
0.51 0.89 0.25 (0.02) (0.02) 0.63 1.00 0.31 0.02 (0.10)
- ------- ------- ------ ------ ------ -------- -------- ------ ------ ------
(0.40) (0.43) (0.26) (0.24) (0.05) (0.52) (0.54) (0.32) (0.28) (0.03)
(0.06) (0.09) 0 0 0 (0.06) (0.09) 0 0 0
- ------- ------- ------ ------ ------ -------- -------- ------ ------ ------
(0.46) (0.52) (0.26) (0.24) (0.05) (0.58) (0.63) (0.32) (0.28) (0.03)
- ------- ------- ------ ------ ------ -------- -------- ------ ------ ------
$ 11.16 $ 11.11 $10.74 $10.75 $11.01 $ 11.16 $ 11.11 $10.74 $10.75 $11.01
======= ======= ====== ====== ====== ======== ======== ====== ====== ======
4.71% 8.35% 2.29% (0.20%) (0.22%) 5.76% 9.44% 2.88% 0.20% (0.87%)
$20,199 $13,645 $7,847 $2,709 $ 186 $123,419 $105,331 $9,436 $9,076 $ 18
1.41% 1.41% 1.36%+ 1.28%+ 0.31%+ 0.41% 0.41% 0.36%+ 0.31%+ 0.31%+
3.59% 3.85% 4.07%+ 4.14%+ 5.23%+ 4.61% 4.79% 5.08%+ 5.12%+ 5.28%+
40% 37% 15% 0% 4% 40% 37% 15% 0% 4%
</TABLE>
STATE MUNICIPAL BOND FUNDS II 17
<PAGE>
EVERGREEN
- --------------------------------------------------------------------------------
PENNSYLVANIA MUNICIPAL BOND FUND CLASS A
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 11.70 $ 11.14 $ 11.15 $ 10.91 $ 11.01
------- ------- ------- ------- -------
...............................................................................
Income from investment
operations
...............................................................................
Net investment income 0.51 0.55 0.59 0.60 0.61
...............................................................................
Net realized and unrealized
gains or losses on securities 0.10 0.55 (0.01) 0.23 (0.09)
------- ------- ------- ------- -------
...............................................................................
Total from investment operations 0.61 1.10 0.58 0.83 0.52
------- ------- ------- ------- -------
...............................................................................
Less distributions to
shareholders from
...............................................................................
Net investment income (0.51) (0.54) (0.59) (0.59) (0.62)
...............................................................................
Net realized gains (0.14) 0 0 0 0
------- ------- ------- ------- -------
...............................................................................
Total distributions to
shareholders (0.65) (0.54) (0.59) (0.59) (0.62)
------- ------- ------- ------- -------
...............................................................................
Net asset value, end of period $ 11.66 $ 11.70 $ 11.14 $ 11.15 $ 10.91
------- ------- ------- ------- -------
...............................................................................
Total return* 5.36% 10.02% 5.30% 7.66% 4.91%
...............................................................................
Ratios and supplemental data
...............................................................................
Net assets, end of period
(thousands) $28,646 $24,119 $24,535 $28,710 $30,450
...............................................................................
Ratios to average net assets
Expenses# 0.82% 0.76% 0.76% 0.76% 0.75%
...............................................................................
Net investment income 4.36% 4.79% 5.26% 5.29% 5.65%
...............................................................................
Portfolio turnover rate 69% 54% 84% 55% 97%
...............................................................................
</TABLE>
(a) For the period from November 24, 1997 (commencement of class operations) to
March 31, 1998.
* Excluding applicable sales charges.
+ Annualized.
# The ratio of expenses to average net assets excludes fee credits and
includes fee waivers.
- --------------------------------------------------------------------------------
STATE MUNICIPAL BOND FUNDS
18
<PAGE>
EVERGREEN
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B CLASS C CLASS Y
Year Ended March 31, Year Ended March 31, Year Ended March 31,
- ------------------------------------------- -------------------------------------- --------------------
1999 1998 1997 1996 1995 1999 1998 1997 1996 1995 1999 1998 (a)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 11.55 $ 10.99 $ 11.00 $ 10.81 $ 10.98 $11.59 $11.02 $11.03 $10.83 $11.00 $ 11.70 $ 11.60
======= ======= ======= ======= ======= ====== ====== ====== ====== ====== ======== ========
0.42 0.46 0.49 0.51 0.54 0.42 0.45 0.47 0.51 0.53 0.54 0.19
0.11 0.54 (0.01) 0.22 (0.10) 0.10 0.57 0.01 0.23 (0.10) 0.10 0.10
- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ -------- --------
0.53 1.00 0.48 0.73 0.44 0.52 1.02 0.48 0.74 0.43 0.64 0.29
- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ -------- --------
(0.42) (0.44) (0.49) (0.54) (0.61) (0.42) (0.45) (0.49) (0.54) (0.60) (0.54) (0.19)
(0.14) 0 0 0 0 (0.14) 0 0 0 0 (0.14) 0
- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ -------- --------
(0.56) (0.44) (0.49) (0.54) (0.61) (0.56) (0.45) (0.49) (0.54) (0.60) (0.68) (0.19)
- ------- ------- ------- ------- ------- ------ ------ ------ ------ ------ -------- --------
$ 11.52 $ 11.55 $ 10.99 $ 11.00 $ 10.81 $11.55 $11.59 $11.02 $11.03 $10.83 $ 11.66 $ 11.70
======= ======= ======= ======= ======= ====== ====== ====== ====== ====== ======== ========
4.68% 9.27% 4.50% 6.84% 4.15% 4.59% 9.34% 4.49% 6.92% 4.05% 5.63% 2.54%
$37,823 $37,036 $37,215 $37,719 $30,657 $6,945 $6,414 $6,830 $9,675 $9,559 $181,919 $152,960
1.58% 1.52% 1.51% 1.48% 1.50% 1.58% 1.52% 1.51% 1.48% 1.50% 0.57% 0.59%+
3.60% 4.04% 4.50% 4.55% 4.89% 3.60% 4.05% 4.52% 4.57% 4.90% 4.61% 4.75%+
69% 54% 84% 55% 97% 69% 54% 84% 55% 97% 69% 54%
</TABLE>
- --------------------------------------------------------------------------------
STATE MUNICIPAL BOND FUNDS
19
<PAGE>
EVERGREEN
OTHER FUND PRACTICES
The Funds may invest in futures and options, which are forms of derivatives.
Such practices are used to hedge a Fund's portfolio to protect against changes
in interest rates and to adjust the portfolio's duration. Although this is
intended to increase returns, these practices may actually reduce returns or
increase volatility.
Please consult the Statement of Additional Information for more information
regarding these and other investment practices used by the Funds, including
risks.
STATE MUNICIPAL BOND FUNDS
20
<PAGE>
EVERGREEN
Notes
STATE MUNICIPAL BOND FUNDS
21
<PAGE>
EVERGREEN
Notes
STATE MUNICIPAL BOND FUNDS
22
<PAGE>
EVERGREEN
Notes
STATE MUNICIPAL BOND FUNDS
23
<PAGE>
EVERGREEN
Evergreen Funds
Money Market
Treasury Money Market Fund
Money Market Fund
Municipal Money Market Fund
Pennsylvania Municipal Money Market Fund
Florida Municipal Money Market Fund
New Jersey Municipal Money Market Fund
Municipal Bond Short-Intermediate Municipal Fund High Grade Municipal Bond Fund
Municipal Bond Fund Connecticut Municipal Bond Fund Florida High Income
Municipal Bond Fund Florida Municipal Bond Fund Georgia Municipal Bond Fund
Maryland Municipal Bond Fund New Jersey Municipal Bond Fund North Carolina
Municipal Bond Fund Pennsylvania Municipal Bond Fund South Carolina Municipal
Bond Fund Virginia Municipal Bond Fund
Income
Capital Preservation and Income Fund
Short Intermediate Bond Fund
Intermediate Term Bond Fund
U.S. Government Fund
Diversified Bond Fund
Strategic Income Fund
High Yield Bond Fund
Balanced
Balanced Fund
Tax Strategic Foundation Fund
Foundation Fund
Growth & Income
Utility Fund
Income and Growth Fund
Equity Income Fund
Value Fund
Blue Chip Fund
Growth and Income Fund
Small Cap Value Fund
Domestic Growth
Strategic Growth Fund
Stock Selector Fund
Evergreen Fund
Omega Fund
Small Company Growth Fund
Aggressive Growth Fund
Tax Strategic Equity Fund
Masters Fund
Select Equity Index Fund
Global International
Global Leaders Fund
International Growth Fund
Global Opportunities Fund
Precious Metals Fund
Emerging Markets Growth Fund
Latin America Fund
Express Line
800.346.3858
Investor Services
800.343.2898
STATE MUNICIPAL BOND FUNDS
24
<PAGE>
QUICK REFERENCE GUIDE
1 Evergreen Express Line
Call 1-800-346-3858
24 hours a day to
. check your account
. order a statement
. get a Fund's current price, yield and total return
. buy, redeem or exchange Fund shares
2 Non-retirement account holders Call 1-800-343-2898
Monday through Friday, 8 a.m. to 6 p.m. Eastern time to
. buy, redeem or exchange shares
. order applications
. get assistance with your account
3 Information Line for Hearing and Speech Impaired (TTY/TDD) Call
1-800-343-2888 Monday through Friday, 8 a.m. to 6 p.m. Eastern time
4 Write us a letter
Evergreen Service Company
P.O. Box 2121
Boston, MA 02106-2121
. to buy, redeem or exchange shares
. to change the registration on your account
. for general correspondence
5 For express, registered, certified mail:
Evergreen Service Company
200 Berkeley Street
Boston, MA 02116-5039
6 Visit us on-line:
www.evergreen-funds.com
7 Regular communications you will receive:
Account Statements -- You will receive quarterly statements for each Fund
you own.
Confirmation Notices -- We send a confirmation of any transaction you make
within five days of the transaction.
Annual and Semiannual reports -- You will receive a detailed financial
report on your Funds twice a year.
Tax Forms -- Each January you will receive any tax forms you need to file in
your taxes as well as the Evergreen Tax Information Guide.
<PAGE>
For More Information About the
Evergreen State Municipal Bond Funds, Ask for:
The Funds' most recent Annual or Semi-Annual Report, which contains a
complete financial accounting for each Fund and a complete list of the
Fund's holdings as of a specific date, as well as commentary from the Fund's
portfolio manager. This Report discusses the market conditions and
investment strategies that significantly affected the Fund's performance
during the most recent fiscal year or period.
The Statement of Additional Information (SAI), which contains more detailed
information about the policies and procedures of the Funds. The SAI has been
filed with the Securities and Exchange Commission (SEC) and its contents are
legally considered to be part of this prospectus.
For questions, other information, or to request a copy, without charge, of
any of the documents, call 1-800-343-2898 or ask your investment
representative. We will mail material within three business days.
Information about these Funds (including the SAI) is also available on the
SEC's Internet web site at http://www.sec.gov, or, for a duplication fee, by
writing the SEC Public Reference Section, Washington DC 20549-6009. This
material can also be reviewed and copied at the SEC's Public Reference Room
in Washington, DC. For more information, call the SEC at 1-800-SEC-0330.
Evergreen Distributor, Inc.
90 Park Avenue
New York, New York 10016
SEC File No.:811-08367
50252 542791 RV2
BULK RATE
U.S.POSTAGE
PAID
[EVERGREEN LOGO APPEARS HERE] PERMIT NO. 19
HUDSON, MA
201 South College St.
Charlotte, NC 28288
<PAGE>
EVERGREEN MUNICIPAL TRUST
PART C
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
EVERGREEN MUNICIPAL TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 633-2700
EVERGREEN STATE MUNICIPAL BOND FUNDS
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1999
Evergreen Connecticut Municipal Bond Fund ("Connecticut Fund")
Evergreen New Jersey Municipal Bond Fund ("New Jersey Fund")
Evergreen Pennsylvania Municipal Bond Fund ("Pennsylvania 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 but should
be read in conjunction with the prospectus dated August 1, 1999 offering Class A
and Class B shares of each Fund, Class C shares of Pennsylvania Fund and Class Y
shares of each Fund.
Certain information may be incorporated by reference to the Funds'
Annual Report dated March 31, 1999. You may obtain a copy of the Annual Report
without charge by calling (800) 343-2898.
P:ssdocs/public/gen/statesaiLIVINGdoc
<PAGE>
TABLE OF CONTENTS
PART 1
TRUST HISTORY................................................................1-1
INVESTMENT POLICIES..........................................................1-1
OTHER SECURITIES AND PRACTICES...............................................1-3
PRINCIPAL HOLDERS OF FUND SHARES.............................................1-3
EXPENSES....................................................................1-11
PERFORMANCE.................................................................1-15
COMPUTATION OF CLASS A OFFERING PRICE ......................................1-18
SERVICE PROVIDERS...........................................................1-18
FINANCIAL STATEMENTS........................................................1-20
ADDITIONAL INFORMATION CONCERNING CONNECTICUT, NEW JERSEY
AND PENNSYLVANIA........................................................... 1-21
PART 2
ADDITIONAL INFORMATION ON SECURITIES AND INVESTMENT PRACTICES................2-1
PURCHASE AND REDEMPTION OF SHARES...........................................2-14
SALES CHARGE WAIVERS AND REDUCTIONS.........................................2-16
PRICING OF SHARES...........................................................2-19
PERFORMANCE CALCULATIONS....................................................2-19
PRINCIPAL UNDERWRITER.......................................................2-21
DISTRIBUTION EXPENSES UNDER RULE 12b-1................................... ..2-22
TAX INFORMATION.............................................................2-25
BROKERAGE...................................................................2-28
ORGANIZATION................................................................2-29
INVESTMENT ADVISORY AGREEMENT...............................................2-30
MANAGEMENT OF THE TRUST.....................................................2-32
CORPORATE AND MUNICIPAL BOND RATINGS........................................2-34
ADDITIONAL INFORMATION......................................................2-46
<PAGE>
PART 1
TRUST HISTORY
The Evergreen Municipal Trust is an open-end management investment
company, which was organized as a Delaware business trust on September 18, 1997.
Each Fund is a non-diversified series of Evergreen Municipal Trust. A copy of
the Declaration of Trust is on file as an exhibit to the Trust's Registration
Statement, of which this SAI is a part. The foregoing is qualified in its
entirety by reference to the Declaration of Trust.
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
the Fund's practices with respect to that policy, as allowed by current law. If
the law governing a policy changes, the Fund's practices may change accordingly
without a shareholder vote. Unless otherwise stated, all references to the
assets of the Fund are in terms of current market value.
1. Non-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:
A non-diversified management investment company may have no more than
25% of its total assets invested in the securities (other that 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.
2. Concentration
Each Fund may not concentrate its investments in the securities of
issuers primarily engaged in any particular industry (other than securities that
are issued or guaranteed by the U.S. government or its agencies or
instrumentalities).
Further Explanation of Concentration Policy:.
Each Fund may not invest more than 25% of its total assets, taken at
market value, in the securities of issuers primarily engaged in any particular
industry (other than securities issued or guaranteed by the U.S. government or
its agencies or instrumentalities).
3. Issuing Senior Securities
Except as permitted under the 1940 Act, each Fund may not issue senior
securities.
4. Borrowing
Each Fund may not borrow money, except to the extent permitted by
applicable law.
Further Explanation of Borrowing Policy:
Each Fund may borrow from banks and enter into reverse repurchase
agreements in an amount up to 33 1/3% of its total assets, taken at market
value. Each Fund may also borrow up to an additional 5% of its total assets from
banks or others. A Fund may borrow only as a temporary measure for extraordinary
or emergency purposes such as the redemption of Fund shares. A Fund may purchase
additional securities so long as borrowings do not exceed 5% of its total
assets. 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 a 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, a 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 a 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 a 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, a 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 the Fund any income accruing on the security. The
Fund may invest any collateral it receives in additional portfolio securities,
such as U.S. Treasury notes, certificates of deposit, other high-grade,
short-term obligations or interest bearing cash equivalents. Gains or losses in
the market value of a security lent will affect the Fund and its shareholders.
When a Fund lends its securities, it will require the borrower to give
the Fund collateral in cash or government securities. The Fund will require
collateral in an amount equal to at least 100% of the current market value of
the securities lent, including accrued interest. The Fund has the right to call
a loan and obtain the securities lent any time on notice of not more than five
business days. The Fund may pay reasonable fees in connection with such loans.
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.
OTHER SECURITIES AND PRACTICES
For information regarding securities the Funds may purchase and investment
practices the Funds may use, see the following sections in Part 2 of this SAI
under "Additional Information on Securities and Investment Practices."
Information provided in the sections listed below expands upon and supplements
information provided in the Funds' prospectus. The list below applies to all
Funds unless otherwise noted.
Defensive Investments
U.S. Government Securities
When-Issued, Delayed-Delivery and Forward Commitment Transactions
Repurchase Agreements
Reverse Repurchase Agreements
Securities Lending
Options
Futures Transactions
High Yield, High Risk Bonds
Illiquid and Restricted Securities
Investment in Other Investment Companies
Short Sales
Municipal Bonds
Virgin Islands, Guam and Puerto Rico
Zero Coupon "Stripped" Bonds
PRINCIPAL HOLDERS OF FUND SHARES
As of June 30, 1999, 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, 1999.
------------------------------------------------------
Connecticut Municipal Bond Fund Class A
------------------------------------------------------
----------------------------------------- ------------
Fiduciary Trust Co. International 25.93%
For Eileen M. Clark Rev. Tr.
2 World Trade Center
New York, NY 10048
----------------------------------------- ------------
----------------------------------------- ------------
First Union Brokerage Services 17.32%
Sarah Allin
10 Sandgate Road
Madison, CT 06443-3453
----------------------------------------- ------------
----------------------------------------- ------------
First Union Brokerage Services 11.02%
Dominic R. Spera
21Milano Pond Drive
Madison, CT 06443
----------------------------------------- ------------
----------------------------------------- ------------
First Clearing Corporation 9.01%
Beatrice M. Wright
C/o Duncaster - #P216
60 Loeffler Road
Bloomfield, CT 06002-2279
----------------------------------------- ------------
----------------------------------------- ------------
Fiduciary Trust Co. International for 8.55%
David B. Clark Family Rev Tr.
2 World Trade Center
New York, NY 10048
----------------------------------------- ------------
----------------------------------------- ------------
Rose Santoro 8.21%
Bruce A McEntee JTWROS
19 Mitchell Avenue
Waterbury, CT 06710-2416
----------------------------------------- ------------
----------------------------------------- ------------
First Union Brokerage Services 5.14%
Marc Riccio and
Kendra J. Riccio JTWROS
34 Valley Brook Road S.
Brandford, CT 06405
----------------------------------------- ------------
------------------------------------------------------
Connecticut Municipal Bond Fund Class B
------------------------------------------------------
----------------------------------------- ------------
First Union Brokerage Services 12.93%
Stuart Monroe Jr.
Avalon Springs
25 River Road #7208
Wilton, CT 06897-4085
----------------------------------------- ------------
<PAGE>
----------------------------------------- ------------
First Union Brokerage Services 11.12%
Rosemary C. Juan
14 Lafayette Court
Greenwich, CT 06830
----------------------------------------- ------------
----------------------------------------- ------------
First Union Brokerage Services 9.21%
Edith B. White
50 Ledge Road, Apt. #219
Darien, CT 06820-4441
----------------------------------------- ------------
----------------------------------------- ------------
First Union Brokerage Services 7.01%
David E. Fendler and
Sylvia Fendler
72 Brinkerhoff Avenue
Stamford, CT 06905-3203
----------------------------------------- ------------
----------------------------------------- ------------
First Union Brokerage Services 5.84%
Kathleen K. Delaney
14 Smoke Hill Drive
Stamford, CT 06903-3817
----------------------------------------- ------------
------------------------------------------------------
Connecticut Municipal Bond Fund Class Y
------------------------------------------------------
----------------------------------------- ------------
First Union National Bank BK/EB/INT 99.13%
Cash Account
Attn Trust Operations Fund Group
401 S Tryon Street, 3rd Floor
CMG -1151
Charlotte, NC 28202-1911
----------------------------------------- ------------
------------------------------------------------------
New Jersey Municipal Bond Fund Class A
------------------------------------------------------
----------------------------------------- ------------
None
----------------------------------------- ------------
------------------------------------------------------
New Jersey Municipal Bond Fund Class B
------------------------------------------------------
----------------------------------------- ------------
None
----------------------------------------- ------------
------------------------------------------------------
New Jersey Municipal Bond Fund Class Y
------------------------------------------------------
----------------------------------------- ------------
First Union National Bank 96.78%
Trust Accounts
Attn Ginny Batten
CMG-1151-2
401 S. Tryon Street, 3rd Floor
Charlotte, NC 28202-1911
----------------------------------------- ------------
<PAGE>
------------------------------------------------------
Pennsylvania Municipal Bond Fund Class A
------------------------------------------------------
----------------------------------------- ------------
None
----------------------------------------- ------------
------------------------------------------------------
Pennsylvania Municipal Bond Fund Class B
------------------------------------------------------
----------------------------------------- ------------
MPLF&S for the Sole Benefit of 8.70%
Its Customers
Attn: Fund Administration #97A06
4800 Deer Lake Drive, E 2nd Floor
Jacksonville, FL 32246-6484
----------------------------------------- ------------
------------------------------------------------------
Pennsylvania Municipal Bond Fund Class C
------------------------------------------------------
----------------------------------------- ------------
MPLF&S for the Sole Benefit of 18.58%
Its Customers
Attn: Fund Administration #97A07
4800 Deer Lake Drive, E 2nd Floor
Jacksonville, FL 32246-6484
----------------------------------------- ------------
------------------------------------------------------
Pennsylvania Municipal Bond Fund Class Y
------------------------------------------------------
----------------------------------------- ------------
First Union National Bank 99.35%
BK/EB/INT
Cash Account
Attn: Trust Operations Fund Group
401 S. Tryon Street 3rd Floor
CMG 1151
Charlotte, NC 28202-1911
----------------------------------------- ------------
EXPENSES
Advisory Fees
Each Fund has its own investment advisor. For more information, see
"Investment Advisory Agreements" in Part 2 of this SAI.
Evergreen Investment Management ("EIM") (formerly known as Capital
Management Group, or CMG), a division of First Union National Bank, is the
investment advisor to the Connecticut Fund. EIM is entitled to receive a fee
from the Connecticut Fund at the annual rate of 0.60% of the Fund's average
daily net assets. EIM 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%. EIM may change or
stop this waiver at any time.
EIM is also the advisor to the New Jersey Fund. EIM is entitled to
receive a fee from the New Jersey Fund at the annual rates below:
---------------------- ---------------------
Average Daily Net Fee
Assets
---------------------- ---------------------
---------------------- ---------------------
First $500 million 0.50%
---------------------- ---------------------
---------------------- ---------------------
Next $500 million 0.45%
---------------------- ---------------------
---------------------- ---------------------
next $1 billion 0.40%
---------------------- ---------------------
---------------------- ---------------------
Over $1.5 billion 0.35%
---------------------- ---------------------
Evergreen Investment Management Company ("EIMC") is the investment
advisor to the Pennsylvania Fund. EIMC is entitled to receive a fee from the
Fund at the annual rates below:
-------------------------- -----------------
Average Daily Net Assets Fee
-------------------------- -----------------
-------------------------- -----------------
First $50 million 0.55%
-------------------------- -----------------
-------------------------- -----------------
Next $50 million 0.50%
-------------------------- -----------------
-------------------------- -----------------
Next $100 million 0.45%
-------------------------- -----------------
-------------------------- -----------------
Next $100 million 0.40%
-------------------------- -----------------
-------------------------- -----------------
Next $100 million 0.35%
-------------------------- -----------------
-------------------------- -----------------
Next $100 million 0.30%
-------------------------- -----------------
-------------------------- -----------------
Over $500 million 0.25%
-------------------------- -----------------
Advisory Fees Paid
Below are the advisory fees paid by each Fund for the last three fiscal
periods.
<TABLE>
<CAPTION>
------------------------------------------ ----------------------- =======================
<S> <C> <C>
Fund/Fiscal Year or Period Advisory Fee Paid Advisory Fees Waived
------------------------------------------- ---------------------- -----------------------
==========================================================================================
Year Ended 1999
==========================================================================================
-------------------------------------------- ----------------------- =====================
Connecticut Fund $425,935 $116,474
-------------------------------------------- ----------------------- =====================
-------------------------------------------- ----------------------- =====================
New Jersey Fund $825,018 $396,701
-------------------------------------------- ----------------------- =====================
-------------------------------------------- ----------------------- =====================
Pennsylvania Fund $1,135,581 $0
-------------------------------------------- ----------------------- =====================
==========================================================================================
Year or Period Ended 1998
==========================================================================================
-------------------------------------------- ----------------------- =====================
Connecticut Fund (a) $141,059 $64,322
-------------------------------------------- ----------------------- =====================
-------------------------------------------- ----------------------- =====================
New Jersey Fund $429,995 $296,793
-------------------------------------------- ----------------------- =====================
-------------------------------------------- ----------------------- =====================
Pennsylvania Fund $610,824 $174,928
-------------------------------------------- ----------------------- =====================
==========================================================================================
Year or Period Ended 1997
==========================================================================================
-------------------------------------------- ----------------------- =====================
New Jersey Fund (b) $135,196 $0
-------------------------------------------- ----------------------- =====================
-------------------------------------------- ----------------------- =====================
Pennsylvania Fund $390,366 $0
-------------------------------------------- ----------------------- =====================
(a) The Fund commenced operations on November 24, 1997.
(b) Seven months ended March 31, 1997. During the period, New Jersey Fund changed its fiscal year end from August 31 to March 31.
</TABLE>
Brokerage Commissions
The Funds paid no brokerage commissions during fiscal years 1999, 1998 and
1997.
Underwriting Commissions
Below are the underwriting commissions paid by each Fund and the
amounts retained by the principal underwriter for the last three fiscal periods.
For more information, see "Principal Underwriter" in Part 2 of this SAI.
- ----------------------------------- -------------------- ==================
Fund/Fiscal Year or Period Total Underwriting Underwriting
Commissions Commissions
Retained
- ----------------------------------- -------------------- ==================
===========================================================================
Year Ended 1999
===========================================================================
- ----------------------------------- -------------------- ==================
Connecticut Fund $52,550 $0
- ----------------------------------- -------------------- ==================
- ----------------------------------- -------------------- ==================
New Jersey Fund $340,407 $0
- ----------------------------------- -------------------- ==================
- ----------------------------------- -------------------- ==================
Pennsylvania Fund $363,030 $10,125
- ----------------------------------- -------------------- ==================
===========================================================================
Year or Period Ended 1998
===========================================================================
- ----------------------------------- -------------------- ==================
Connecticut Fund(a) $3,194 $476
- ----------------------------------- -------------------- ==================
- ----------------------------------- -------------------- ==================
New Jersey Fund $44,432 $4,471
- ----------------------------------- -------------------- ==================
- ----------------------------------- -------------------- ==================
Pennsylvania Fund $65,672 $6,605
- ----------------------------------- -------------------- ==================
===========================================================================
Year or Period Ended 1997
===========================================================================
- ----------------------------------- -------------------- ==================
New Jersey Fund (b) $0 $0
- ----------------------------------- -------------------- ==================
- ----------------------------------- -------------------- ==================
Pennsylvania Fund $504,459 $106,694
- ----------------------------------- -------------------- ==================
(a) The Fund commenced operations on November 24, 1997.
(b) Seven months ended March 31, 1997. During the period, the New Jersey
Fund changed its fiscal year end from August 31 to March 31.
12b-1 Fees
Below are the 12b-1 fees paid by each Fund for the fiscal year or
period ended March 31, 1999. For more information, see "Distribution Expenses
Under Rule 12b-1" in Part 2 of this SAI.
<TABLE>
<CAPTION>
- ------------------- ================================== =================================== ===============================
<S> <C> <C> <C>
Class A Class B Class C
Fund
================================== =================================== ===============================
--------------- ------------------ ----------------- ----------------- ---------------- ==============
Distribution Service Fees Distribution Service Fees Distribution Service Fees
Fees Fees Fees
- ------------------- --------------- ------------------ ----------------- ----------------- ---------------- ==============
- ------------------- --------------- ------------------ ----------------- ----------------- ---------------- ==============
Connecticut Fund N/A $897 $4,715 $1,572 N/A N/A
- ------------------- --------------- ------------------ ----------------- ----------------- ---------------- ==============
- ------------------- --------------- ------------------ ----------------- ----------------- ---------------- ==============
New Jersey Fund* N/A $83,206 $125,167 $41,722 N/A N/A
- ------------------- --------------- ------------------ ----------------- ----------------- ---------------- ==============
- ------------------- --------------- ------------------ ----------------- ----------------- ---------------- ==============
Pennsylvania Fund N/A $67,908 $279,530 $93,177 $48,440 $16,147
- ------------------- --------------- ------------------ ----------------- ----------------- ---------------- ==============
</TABLE>
*The Fund waived $53,252 in Class A service fees.
Trustee Compensation
Listed below is the Trustee compensation paid by the Trust
individually and by the Trust and the eight other trusts in the Evergreen Fund
Complex for the twelve months ended March 31, 1999. The Trustees do not receive
pension or retirement benefits from the Funds. For more information, see
"Management of the Trust" in Part 2 of this SAI.
<TABLE>
<CAPTION>
------------------------------- ------------------------------ =============================
<S> <C> <C>
Trustee Aggregate Compensation from Total Compensation from
Trust Trust and Fund Complex Paid
to Trustees*
------------------------------- ------------------------------ =============================
------------------------------- ------------------------------ =============================
$5,489 $75,000
Laurence B. Ashkin
------------------------------- ------------------------------ =============================
------------------------------- ------------------------------ =============================
$5,489 $75,000
Charles A. Austin, III
------------------------------- ------------------------------ =============================
------------------------------- ------------------------------ =============================
$5,292 $72,500
K. Dun Gifford
------------------------------- ------------------------------ =============================
------------------------------- ------------------------------ =============================
$7,061 $97,500
James S. Howell
------------------------------- ------------------------------ =============================
------------------------------- ------------------------------ =============================
$5,292 $72,500
Leroy Keith Jr.
------------------------------- ------------------------------ =============================
------------------------------- ------------------------------ =============================
$5,489 $75,000
Gerald M. McDonnell
------------------------------- ------------------------------ =============================
------------------------------- ------------------------------ =============================
$6,353 $86,000
Thomas L. McVerry
------------------------------- ------------------------------ =============================
------------------------------- ------------------------------ =============================
$5,292 $72,500
William Walt Pettit
------------------------------- ------------------------------ =============================
------------------------------- ------------------------------ =============================
$5,240 $71,875
David M. Richardson
------------------------------- ------------------------------ =============================
------------------------------- ------------------------------ =============================
$5,489 $77,500
Russell A. Salton, III
------------------------------- ------------------------------ =============================
------------------------------- ------------------------------ =============================
$5,489 $77,500
Michael S. Scofield
------------------------------- ------------------------------ =============================
------------------------------- ------------------------------ =============================
$5,292 $72,500
Richard J. Shima
------------------------------- ------------------------------ =============================
</TABLE>
*Certain Trustees have elected to defer all or part of their
total compensation for the twelve months ended March 31, 1999.
The amounts listed below will be payable in later years to the
respective Trustees:
Austin $11,250
Howell $77,600
McDonnell $75,000
McVerry $86,000
Pettit $72,500
Salton $77,000
Scofield $11,250
PERFORMANCE
Total Return
Below are the annual total returns for each class of shares of the
Funds (including applicable sales charges) as of March 31, 1999. For more
information, see "Total Return" under "Performance Calculations" in Part 2 of
this SAI.
<TABLE>
<CAPTION>
- ----------------------- -------------------- --------------------- -------------------- ==================
<S> <C> <C> <C> <C>
Fund/Class One Year Five Years Ten Years or Since Inception Date of
Inception Class
- ----------------------- -------------------- --------------------- -------------------- ==================
==========================================================================================================
Connecticut Fund (a)
==========================================================================================================
- ----------------------- -------------------- --------------------- -------------------- ==================
0.11% 4.27% 5.20%
Class A 12/30/97
- ----------------------- -------------------- --------------------- -------------------- ==================
- ----------------------- -------------------- --------------------- -------------------- ==================
-0.65% 4.19% 4.92%
Class B 1/9/98
- ----------------------- -------------------- --------------------- -------------------- ==================
- ----------------------- -------------------- --------------------- -------------------- ==================
5.56% 5.56% 5.97%
Class Y 11/24/97
- ----------------------- -------------------- --------------------- -------------------- ==================
==========================================================================================================
New Jersey Fund (b)
==========================================================================================================
- ----------------------- -------------------- --------------------- -------------------- ==================
0.68% 5.70% 6.41%
Class A 7/16/91
- ----------------------- -------------------- --------------------- -------------------- ==================
- ----------------------- -------------------- --------------------- -------------------- ==================
-0.29% 5.83% 6.71%
Class B 1/30/96
- ----------------------- -------------------- --------------------- -------------------- ==================
- ----------------------- -------------------- --------------------- -------------------- ==================
5.76% 6.78% 7.12%
Class Y 2/8/96
- ----------------------- -------------------- --------------------- -------------------- ==================
==========================================================================================================
Pennsylvania Fund (c)
==========================================================================================================
- ----------------------- -------------------- --------------------- -------------------- ==================
0.39% 5.60% 7.27%
Class A 12/27/90
- ----------------------- -------------------- --------------------- -------------------- ==================
- ----------------------- -------------------- --------------------- -------------------- ==================
-0.31% 5.55% 7.30%
Class B 2/1/93
- ----------------------- -------------------- --------------------- -------------------- ==================
- ----------------------- -------------------- --------------------- -------------------- ==================
3.59% 5.86% 7.30%
Class C 2/1/93
- ----------------------- -------------------- --------------------- -------------------- ==================
- ----------------------- -------------------- --------------------- -------------------- ==================
Class Y 5.63% 6.71% 7.95% 11/24/97
- ----------------------- -------------------- --------------------- -------------------- ==================
</TABLE>
(a) Historical performance shown for Class Y prior to its inception is based on
the Fund's predecessor common trust fund's (CTF) performance, adjusted for
estimated mutual fund expenses. The CTF was not registered under the 1940 Act
and was not subject to certain investment restrictions. If the CTF had been
registered, its performance might have been adversely affected. Performance for
the CTF has been adjusted to include the effect of estimated mutual fund class
gross expense ratios at the time the Fund was converted to a mutual fund. If fee
waivers and expense reimbursements had been calculated into the mutual fund
expense ratio the total returns would be as follows: Class A - 5 year = 4.48%,
10 year = 5.45% and since 1/31/81 = 6.56%; Class B - 5 year = 4.40%, 10 year =
5.17% and since 1/31/81 = 6.05%; Class Y - 5 year = 5.77%, 10 year = 6.22% and
since 1/31/ 81 = 7.11% For Classes A and B prior to their inception, the
historical performance shown is based on the performance of Class Y and has not
been adjusted to reflect the effect of each Class' 12b-1 fees. This fee is 0.25%
for Class A and 1.00% for Class B. If these fees had been reflected, returns for
Classes A and B would have been lower.
(b) Historical performance shown for Classes B and Y prior to their inception is
based on the performance of Class A, the original class offered. These
historical returns for Classes B and Y have not been adjusted to reflect the
effect of each Class' 12b-1 fees. This fee is 0.25% for Class A and 1.00% for
Class B. Class Y does not pay a 12b-1 fee. If these fees had been reflected,
returns for Class B would have been lower while returns for Class Y would have
been higher.
(c) Historical performance shown for Classes B, C, and Y prior to their
inception is based on the performance of Class A, the original class offered.
These historical returns for Classes B, C, and Y have not been adjusted to
reflect the effect of each Class' 12b-1 fees. This fee is 0.25% for Class A,
1.00% for Class B and 1.00% for Class C. Class Y does not pay a 12b-1 fee. If
these fees had been reflected, returns for Classes B and C would have been lower
while returns for Class Y would have been higher.
Yields
Below are the current and tax equivalent yields of the Funds for the
30-day period ended March 31, 1999. For more information, see "30-Day Yield" and
"Tax Equivalent Yield" under "Performance Calculations" in Part 2 of this SAI.
<TABLE>
<CAPTION>
========================================== ============================================ =========================================
30-Day Yield Tax-Equivalent Yield
========================================== ============================================ =========================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Combined
Federal &
State Tax
Fund Rate (1) Class A Class B Class C Class Y Class A Class B Class C Class Y
- ----------------------------- ============ ----------- ---------- ---------- ========== ---------- ---------- ---------- ========
- ----------------------------- ============ ----------- ---------- ---------- ========== ---------- ---------- ---------- ========
Connecticut Fund 43.45% 3.55% 2.97% N/A 3.98% 6.28% 5.25% N/A 7.04%
- ----------------------------- ============ ----------- ---------- ---------- ========== ---------- ---------- ---------- ========
- ----------------------------- ============ ----------- ---------- ---------- ========== ---------- ---------- ---------- ========
New Jersey Fund 44.56% 4.09% 3.38% N/A 4.39% 7.38% 6.10% N/A 7.92%
- ----------------------------- ============ ----------- ---------- ---------- ========== ---------- ---------- ---------- ========
- ----------------------------- ============ ----------- ---------- ---------- ========== ---------- ---------- ---------- ========
Pennsylvania Fund 42.45% 4.11% 3.56% 3.56% 4.57% 7.14% 6.19% 6.19% 7.94%
- ----------------------------- ============ ----------- ---------- ---------- ========== ---------- ---------- ---------- ========
</TABLE>
(1) Assumed for purposes of this chart. Your tax may vary.
COMPUTATION OF CLASS A OFFERING PRICE
Class A shares are sold at the NAV plus a sales charge. Below is an
example of the method of computing the offering price of Class A shares of each
Fund. The example assumes a purchase of Class A shares of each Fund aggregating
less than $100,000 based upon the NAV of each Fund' Class A shares at the end of
March 31, 1999. For more information, see "Purchase, Redemption and Pricing of
Shares."
- ---------------------- ------------------- ------------------- ===============
Fund Net Asset Value Sales Charge Offering Price
Per Share Per Share
- ---------------------- ------------------- ------------------- ===============
- ---------------------- ------------------- ------------------- ===============
Connecticut Fund $6.38 4.75% $6.70
- ---------------------- ------------------- ------------------- ===============
- ---------------------- ------------------- ------------------- ===============
New Jersey Fund $11.16 4.75% $11.72
- ---------------------- ------------------- ------------------- ===============
- ---------------------- ------------------- ------------------- ===============
Pennsylvania Fund $11.66 4.75% $12.24
- ---------------------- ------------------- ------------------- ===============
SERVICE PROVIDERS
Administrator
Evergreen Investment Services, Inc. ("EIS") serves as administrator to
Connecticut Fund and 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 from the Fund based on the total
assets of all mutual funds for which EIS serves as administrator and a First
Union Corporation subsidiary serves as investment advisor. The fee paid to EIS
is calculated in accordance with the following schedule:
---------------------- =================
Assets Fee
---------------------- =================
---------------------- =================
First $7 billion 0.050%
---------------------- =================
---------------------- =================
Next $3 billion 0.035%
---------------------- =================
---------------------- =================
Next $5 billion 0.030%
---------------------- =================
---------------------- =================
Next $10 billion 0.020%
---------------------- =================
---------------------- =================
Next $5 billion 0.015%
---------------------- =================
---------------------- =================
Over $30 billion 0.010%
---------------------- =================
EIS also provides facilities, equipment and personnel to Pennsylvania
Fund on behalf the investment advisor. Pennsylvania Fund reimburses EIS for the
cost of providing such services.
Transfer Agent
Evergreen Service Company ("ESC"), a subsidiary of First Union
Corporation, is the Funds' transfer agent. ESC issues and redeems shares, pays
dividends and performs other duties in connection with the maintenance of
shareholder accounts. The transfer agent's address is P.O. Box 2121, Boston,
Massachusetts 02106-2121. Each Fund pays ESC annual fees as follows:
----------------------------- --------------- ==============
Fund Type Annual Fee Annual Fee
Per Open Per Closed
Account* Account**
----------------------------- --------------- ==============
----------------------------- --------------- ==============
Monthly Dividend Funds $25.50 $9.00
----------------------------- --------------- ==============
----------------------------- --------------- ==============
Quarterly Dividend Funds $24.50 $9.00
----------------------------- --------------- ==============
----------------------------- --------------- ==============
Semiannual Dividend Funds $23.50 $9.00
----------------------------- --------------- ==============
----------------------------- --------------- ==============
Annual Dividend Funds $23.50 $9.00
----------------------------- --------------- ==============
----------------------------- --------------- ==============
Money Market Funds $25.50 $9.00
----------------------------- --------------- ==============
*For shareholder accounts only. The Fund pays ESC cost plus 15% for broker
accounts.
**Closed account are maintained on the system in order to facilitate
historical and tax information.
Distributor
Evergreen Distributor, Inc. markets the Funds through broker-dealers
and other financial representatives. Its address is 90 Park Avenue, New York,
NY 10016.
Independent Auditors
KPMG LLP, 99 High Street, Boston, Massachusetts 02110, audits the
financial statements of each Fund.
Custodian
State Street Bank and Trust Company keeps custody of each Fund's
securities and cash and performs other related duties. The custodian's address
is 225 Franklin Street, Boston, Massachusetts 02110.
Legal Counsel
Sullivan & Worcester LLP provides legal advice to the Funds. Its
address is 1025 Connecticut Avenue, N.W., Washington, D.C. 20036.
FINANCIAL STATEMENTS
The audited financial statements and the reports thereon are hereby
incorporated by reference to the Funds' Annual Report, a copy of which may be
obtained without charge from ESC, P.O. Box 2121, Boston, Massachusetts
02106-2121.
ADDITIONAL INFORMATION CONCERNING CONNECTICUT
As described in the prospectus, the Fund will generally invest in
Connecticut municipal obligations. The performance of the Fund is therefore
susceptible to political, economic and regulatory factors affecting the State of
Connecticut and governmental bodies within the State of Connecticut. The
financial condition of a state, its public 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 a Fund, or result in the default of
existing obligations, including obligations which may be held by the Fund. 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. The creditworthiness of obligations
issued by local issuers may be unrelated to the creditworthiness of Connecticut.
There is no obligation on the part of Connecticut to make payment on such local
obligations in the event of default in the absence of a specific guarantee or
pledge provided by Connecticut.
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. The 1997
estimated population increased slightly from 1996, but remained below the figure
recorded in the 1990 Federal Census.
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 1997, Connecticut received $2,536 million
of prime contract awards. This accounted for 2.4% of national total awards and
ranked thirteenth in total defense dollars awarded and sixth in per capita
dollars awarded among the 50 states. In fiscal year 1997, Connecticut had $776
in per capita defense awards, compared to the national average of $398. As
measured by a three-year moving average of defense contract awards as a percent
of Gross State Product (GSP), awards to Connecticut based firms have fallen to
2.0% of GSP in fiscal year 1997, down from 9.8% of GSP in fiscal year 1982.
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 budget document, as finally developed by
the Governor with the assistance of the Office of Policy Management, is
published and transmitted to the General Assembly in February of each
odd-numbered year. A report summarizing recommended adjustments or revisions is
submitted by the Governor to the General Assembly in even-numbered years. The
Governor or a representative then appears before the appropriate committee of
the General Assembly to explain and address questions concerning the budget
document or reports. 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.
1997-98 Operations. The Comptroller's 1998 annual report indicated
1997-98 General Fund expenditures of $9,829.3 million, General Fund revenues of
$10,142.2 million and a surplus of $312.9 million. Any unappropriated surplus,
up to five percent of General Fund expenditures, will be deposited into the
Budget Reserve Fund. After the transfer of $161.7 million, as required to meet
the five percent of General Fund expenditures, the balance of $151.2 million
will be used to reduce bonded indebtedness.
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.
1998-99 Operations. The Comptroller's monthly report for the period
ending October 31, 1998 estimates 1998-99 fiscal year General Fund expenditures
of $9,993.5 million, General Fund revenues of $10,164.2 million and an estimated
operating surplus of $170.7 million, as a result of an increase in estimated
revenue that more than offset the increase in estimated expenditures. No
assurances can be given that subsequent estimates will not indicate changes in
the final result of the fiscal year 1998-99 operations of the General Fund.
The December 1998 Special Session of the Legislature increased budgeted
appropriations for the 1998-99 fiscal year by $80 million. (See additional
information below.)
Proposed Budget 1999-2001. On February 10, 1999, the Governor proposed
a budget for fiscal years 2000 and 2001. The budget calls for General Fund
expenditures of $10,542.1 million in the fiscal year that ends June 30, 2000 and
$11,057.2 million in the fiscal year that ends June 30, 2001.
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 Direct
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 Statutes, 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 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, 1998, there was
legislatively authorized direct general obligation bond indebtedness in the
aggregate amount of $12,398,200,000 of which $11,057,371,000 had been approved
for issuance and $9,814,857,000 had been issued. As of December 1, 1998,
$6,951,626,000 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 for State Direct General Obligation Debt. 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 or in which such indebtedness is issued, 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, all authorized debt to fund
the Connecticut Development Authority's tax increment bond program under Section
32-285 of the Connecticut General Statutes, and any indebtedness represented by
agreements entered into pursuant to subsection (b) or (c) of Section 3-20a of
the General Statutes, provided the indebtedness in connection with which such
agreements were entered into shall be included in such aggregate amount of
indebtedness. For purposes 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 addition, under Public Act No. 95-230, the amount of authorized but
unissued debt under that Act for UConn 2000 is limited to the amount permitted
to be issued under the cap.
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 December 15, 1998, the most recent general obligation
bonds of the State were rated Aa3 by Moody's, AA by S&P, and AA by Fitch. There
can be no assurance that 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, the State is contingently liable or has limited liability,
from the resources of the General Fund, for payment of debt service on certain
obligations of quasi-public state agencies and municipalities of the State. The
State has also made commitments to municipalities to make future grant payments
for school construction projects, payable over a period of years. In addition,
the State has committed to apply moneys for debt service on loans to finance
child care facilities and has certain contingent liabilities for future
payments.
Future Issuance of Direct General Obligation Debt. On November 19,
1998, the Governor entered into a memorandum of understanding on behalf of the
State with the New England Patriots football team for the relocation of the team
to the City of Hartford and for the development and financing of a new football
stadium and related facilities. The open air stadium would provide seating for
68,000, including 150 luxury suites, 6000 club seats and 61,000 general
admission seats. The target date for the stadium's completion would be 2001. The
stadium would be used primarily for Patriots and University of Connecticut
football games.
The State legislature approved the project and its financing at a
December 1998 Special Session. The State legislature approved the financing by
transferring $20 million from 1998-99 budgeted appropriations, appropriating an
additional $80 million from the General Fund, and authorizing general obligation
bonds in an amount up to $250 million (plus issuance costs and an inflation
factor) to fund the costs of the stadium and related facilities, including site
preparation, infrastructure improvements and a $15 million training facility.
Subject to allotment by the Governor and several conditions precedent, including
approvals by the National Football League and satisfactory parking, insurance
and other arrangements, the Treasurer is authorized to issue the bonds. The
State expects to generate additional revenues from the 10% admission tax and
other existing taxes on activities and income generated by the stadium's use and
the relocation of the Patriots to Connecticut.
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. In 1998, the
Superior Court ordered the State to show cause as to whether there has been
compliance with the Supreme Court's ruling. On March 3, 1999, the Superior Court
found that the State had complied 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 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 class of plaintiffs has been expanded to include
persons who are in the custody of the Department of Mental Health and Addiction
Services. The Court in 1998 expanded the class of plaintiffs to include persons
who are or have been in the custody of the Department of Mental Health and
Addiction Services at any time during the pendency of the case without reference
to a particular facility.
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. There may be additional suits filed by other alleged Indian Tribes
claiming ownership of land located in the State, but to which the State is not a
party. One claim includes the alleged Schaghticoke Indian Tribe claiming
privately held lands in the Town of Kent.
Local Government Debt
General. Numerous governmental units, cities, school districts and
special taxing districts, issue general obligation bonds backed by their taxing
power. Under the 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:
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
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 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 1,075 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 and the Department of Labor, the population
of New Jersey was 7,170,000 in 1970, 7,365,000 in 1980, 7,730,000 in 1990 and
8,053,000 in 1997. Historically, New Jersey's average per capita income has been
well above the national average, and in 1997 the State ranked second among the
states in per capita personal income ($32,233).
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,
according to the U.S. Dept. of Labor, from a peak of 3.69 million in 1989 to a
low of 3.46 million in 1992. This low has been followed by an employment gain,
reaching 3.72 million at year-end 1997. The New Jersey Dept. of Labor reports
that employment growth continued at 2.1 percent in 1998, to 3.82 million.
The annual average jobless rate has fallen from 8.5 percent in 1992, to
6.2 percent in 1996, to 5.1 percent in 1997, reaching 4.8 percent in 1998. In
November 1998, the State's unemployment level of 184,000 and its unemployment
rate of 4.5 percent were the lowest since the first calendar quarter of 1990.
The New Jersey Department of Labor reports that from January 1998 to
January 1999, on a seasonally adjusted basis, private nonfarm employment climbed
to 3.26 million, an increase of 58,200 or 1.8 percent. Nongovernment services
employment increased to 2.64 million, an increase of 64,400 or 2.5 percent.
Manufacturing declined to 474,600, a reduction of 10,000 or slightly less than
one percent.
The U.S. Department of Labor reports that non-manufacturing employment
has increased 4.1 percent over the ten-year period 1987-97 and comprises 88.5
percent of employment in New Jersey at year-end 1997. Total non-manufacturing
employment, including contract construction, was 3.576 million in 1987, 3.458
million in 1992, and 3.724 million in 1997.
Conditions have slowly improved in the construction industry, where
employment has risen by 21,100 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 early 1997, public works projects and
homebuilding became the growth segments while nonresidential construction
lessened but remained positive. Construction employment, after falling from
163,400 in 1987 to 110,200 in 1992, has recovered to a level of 131,300 in 1997.
In the manufacturing sector, employment losses have continued during
the past ten years. Total manufacturing employment in New Jersey was 672,200 in
1987, 530,400 in 1992, and 482,100 in 1997, a ten-year reduction of 28 percent.
Manufacturing employment comprised 11.5 percent of employment in 1997.
Manufacturing durable goods employment is down 38 percent over the ten years,
while non-durable goods employment is down 20 percent.
Total employment in New Jersey has changed from 4.248 million in 1987,
to 3.988 million in 1992, to 4.207 million in 1997. Looking forward, the New
Jersey Department of Labor projects that the State's non-farm employment growth
will occur almost exclusively in the service industries, such as transportation,
communications, utilities, wholesale and retail trade, financial services,
insurance, real estate and public education. The State projects continuing slow
decline in manufactured goods employment.
State Finances
The State operates on a fiscal year beginning July 1 and ending June
30. For example, "Fiscal Year 2000" refers to the State's fiscal year beginning
July 1, 1999 and ending June 30, 2000.
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 1999 and
Fiscal Year 2000 reflect the amounts contained in the Governor's Fiscal Year
2000 Budget Message delivered on January 25, 1999.
Actual General Fund balances in Fiscal Years 1997 and 1998 were $280.5
million and $228.3 million, respectively, and for Fiscal Years 1999 and 2000,
they are projected to be be $311.3 million and $112.9 million. Total
Undesignated Fund balances in Fiscal Years 1997 and 1998 were $1,107.9 million
and $1,257.3 million, respectively, and for Fiscal Years 1999 and 2000 they are
projected to be $1,051.5 million and $750.1 million.
In July 1991, S&P lowered the State's general obligation bond rating
from AAA to AA.
The State sold $2.75 billion in taxable bonds in 1997 to balance the
budget and finance an underfunded pension fund. The source of revenue for these
bonds depends on annual State appropriations.
Fiscal Years 1999 and 2000 State Revenue Estimates
The January 1999 estimate of total fiscal year 1999 revenue is $18
billion. The three largest taxes, Gross Income, Sales and Use, and Corporation
Business, account for 70 percent of total revenues.
Sales and Use Tax. The revised estimate forecasts Sales and Use tax
collections for Fiscal Year 1999 as $5.02 billion, a 6.25 percent increase from
the Fiscal Year 1998 revenue. The Fiscal Year 2000 estimate of $5.26 billion, is
a 4.8 percent increase from the Fiscal Year 1999 estimate.
Gross Income Tax. The revised estimate forecasts Gross Income Tax
collections for Fiscal Year 1999 of $6.1 billion, a 5.5 percent increase from
Fiscal Year 1998. The Fiscal Year 2000 estimate of $6.5 billion is a 6.8 percent
increase from the Fiscal Year 1999 estimate. Included in the Fiscal Year 1999
estimate and the Fiscal Year 2000 estimate is the second year 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 1999 as $1.5 billion, a 20 percent
increase from Fiscal Year 1998 revenue. The Fiscal Year 2000 estimate of $1.6
billion, is a 5.3 percent increase from the Fiscal Year 1999 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.
ADDITIONAL INFORMATION CONCERNING PENNSYLVANIA
The financial condition of the Commonwealth of Pennsylvania, its public
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 the Pennsylvania 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 that may affect the
financial situation in Pennsylvania and is based on information obtained from
Pennsylvania, certain of its public authorities and certain other localities
within each state 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. The creditworthiness of
obligations issued by local issuers may be unrelated to the creditworthiness
Pennsylvania. There is no obligation on the part of Pennsylvania to make payment
on such local obligations in the event of default in the absence of a specific
guarantee or pledge provided by Pennsylvania.
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 December, 1998 was
4.4% and for the United States for December, 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 1997 of $25,678 was higher than the per capita
income of the United States of $25,298. 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 $4,724.5 million at
June 30, 1998. 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 December 1, 1998, all outstanding
general obligation bonds of the Commonwealth were rated AA by S&P and Aa3 by
Moody's (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, 1998, the Combined total debt
outstanding for all these agencies was $8,518 million. The debt of these
agencies is supported by assets of, or revenues derived from, the various
projects financed and is not an obligation of the Commonwealth. Some of these
agencies, however, are indirectly dependent on Commonwealth appropriations. The
only obligations of agencies in the Commonwealth that bear a moral obligation of
the Commonwealth are those issued by the Pennsylvania Housing Finance Agency
("PHFA"), a 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 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, County of Allegheny v. Commonwealth of Pennsylvania involves litigation
regarding the state constitutionality of the statutory scheme for county funding
of the judicial system and 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.
<PAGE>
EVERGREEN FUNDS
Statement of Additional Information ("SAI")
PART 2
ADDITIONAL INFORMATION ON SECURITIES
AND INVESTMENT PRACTICES
The prospectus describes the Fund's investment objective and the
securities in which it primarily invests. The following describes other
securities the Fund may purchase and investment strategies it may use. Some of
the information below will not apply to the Fund in which you are interested.
See the list under Other Securities and Practices in Part 1 of this SAI to
determine which of the sections below are applicable.
Defensive Investments
The Fund may invest up to 100% of its assets in high quality money
market instruments, such as notes, certificates of deposit, commercial paper,
banker's acceptances, bank deposits or U.S. government securities if, in the
opinion of the investment advisor, market conditions warrant a temporary
defensive investment strategy. Evergreen Equity Income Fund (formerly Evergreen
Fund for Total Return) may also invest in debt securities and high grade
preferred stocks for defensive purposes when its investment advisor determines a
temporary defensive strategy is warranted.
U.S. Government Securities
The 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 Fund may invest in securities issued by the GNMA, a corporation
wholly-owned by the U.S. Government. GNMA securities or "certificates" represent
ownership in a pool of underlying mortgages. The timely payment of principal and
interest due on these securities is guaranteed.
Unlike conventional bonds, the principal on GNMA certificates is not
paid at maturity but over the life of the security in scheduled monthly
payments. While mortgages pooled in a GNMA certificate may have maturities of up
to 30 years, the certificate itself will have a shorter average maturity and
less principal volatility than a comparable 30-year bond.
The market value and interest yield of GNMA certificates can vary due
not only to market fluctuations, but also to early prepayments of mortgages
within the pool. Since prepayment rates vary widely, it is impossible to
accurately predict the average maturity of a GNMA pool. In addition to the
guaranteed principal payments, GNMA certificates may also make unscheduled
principal payments resulting from prepayments on the underlying mortgages.
Although GNMA certificates may offer yields higher than those available
from other types of U.S. Government securities, they may be less effective as a
means of locking in attractive long-term rates because of the prepayment
feature. For instance, when interest rates decline, prepayments are likely to
increase as the holders of the underlying mortgages seek refinancing. As a
result, the value of a GNMA certificate is not likely to rise as much as the
value of a comparable debt security would in response to same decline. In
addition, these prepayments can cause 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.
When-Issued, Delayed-Delivery and Forward Commitment Transactions
The Fund may purchase securities on a when-issued or delayed delivery
basis and may purchase or sell securities on a forward commitment basis.
Settlement of such transactions normally occurs within a month or more after the
purchase or sale commitment is made.
The Fund 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, the 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 the 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 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 the Fund. In
addition, when the Fund engages in such purchases, it relies on the other party
to consummate the sale. If the other party fails to perform its obligations, the
Fund may miss the opportunity to obtain a security at a favorable price or
yield.
Repurchase Agreements
The Fund may enter into repurchase agreements with entities that are
registered as U.S. Government securities dealers, including member banks of the
Federal Reserve System having at least $1 billion in assets, primary dealers in
U.S. government securities or other financial institutions believed by the
investment advisor to be creditworthy. In a repurchase agreement the 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 Fund's custodian or a third party will take possession of the
securities subject to repurchase agreements, and these securities will be marked
to market daily. To the extent that the original seller does not repurchase the
securities from the Fund, the Fund could receive less than the repurchase price
on any sale of such securities. In the event that such a defaulting seller filed
for bankruptcy or became insolvent, disposition of such securities by the Fund
might be delayed pending court action. The Fund's investment advisor believes
that under the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or disposition
of such securities. The Fund will only enter into repurchase agreements with
banks and other recognized financial institutions, such as broker-dealers, which
are deemed by the investment advisor to be creditworthy pursuant to guidelines
established by the Board of Trustees.
Reverse Repurchase Agreements
As described herein, the Fund may also enter into reverse repurchase
agreements. These transactions are similar to borrowing cash. In a reverse
repurchase agreement, the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker, or dealer, in return
for a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed upon rate.
The use of reverse repurchase agreements may enable the Fund to avoid
selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse repurchase agreements
does not ensure that the Fund will be able to avoid selling portfolio
instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the
Fund, in a dollar amount sufficient to make payment for the obligations to be
purchased, are segregated at the trade date. These securities are marked to
market daily and maintained until the transaction is settled.
Options
An option is a right to buy or sell a security for a specified price
within a limited time period. The option buyer pays the option seller (known as
the "writer") for the right to buy, which is a "call" option, or the right to
sell, which is a "put" option. Unless the option is terminated, the option
seller must then buy or sell the security at the agreed-upon price when asked to
do so by the option buyer.
The Fund may buy or sell put and call options on securities it holds or
intends to acquire, and may purchase put and call options for the purpose of
offsetting previously written put and call options of the same series. The Fund
may also buy and sell options on financial futures contracts. The Fund will use
options as a hedge against decreases or increases in the value of securities it
holds or intends to acquire.
The Fund may write only covered options. With regard to a call option,
this means that the Fund will own, for the life of the option, the securities
subject to the call option. The Fund will cover put options by holding, in a
segregated account, liquid assets having a value equal to or greater than the
price of securities subject to the put option. If the Fund is unable to effect a
closing purchase transaction with respect to the covered options it has sold, it
will not be able to sell the underlying securities or dispose of assets held in
a segregated account until the options expire or are exercised, resulting in a
potential loss of value to the Fund.
Futures Transactions
The Fund may enter into financial futures contracts and write options
on such contracts. The Fund intends to enter into such contracts and related
options for hedging purposes. The Fund will enter into futures 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. The 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.
The Fund may sell or purchase futures contracts. When a futures
contract is sold by the 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, the Fund sells futures contracts in order to
offset a possible decline in the value of its securities. If a futures contract
is purchased by the 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 Fund intends to purchase futures contracts in order to
establish what is believed by the investment advisor to be a favorable price or
rate of return for securities the Fund intends to purchase.
The Fund also intends to purchase put and call options on futures
contracts for hedging purposes. A put option purchased by the Fund would give it
the right to assume a position as the seller of a futures contract. A call
option purchased by the 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 the Fund to pay a premium. In exchange for the premium, the 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, the Fund's loss will be
limited to the amount of the premium and any transaction costs.
The 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. The 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 the Fund will be able to enter into an offsetting
transaction with respect to a particular contract at a particular time. If the
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.
Although futures and options transactions are intended to enable the
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 investment
advisor correctly predicts interest rate movements, a hedge could be
unsuccessful if changes in the value of the Fund's futures position did not
correspond to changes in the value of its investments. This lack of correlation
between the Fund's futures and securities positions may be caused by differences
between the futures and securities markets or by differences between the
securities underlying the Fund's futures position and the securities held by or
to be purchased for the Fund. The Fund's investment advisor will attempt to
minimize these risks through careful selection and monitoring of the Fund's
futures and options positions.
The Fund does not intend to use futures transactions for speculation or
leverage. The 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.
The Fund will not change these policies without supplementing the information in
the prospectus and SAI.
The Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the aggregate,
the value of the open positions (marked to market) exceeds the current market
value of its securities portfolio plus or minus the unrealized gain or loss on
those open positions, adjusted for the correlation of volatility between the
hedged securities and the futures contracts. If this limitation is exceeded at
any time, the Fund will take prompt action to close out a sufficient number of
open contracts to bring its open futures and options positions within this
limitation.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, the Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather the Fund
is required to deposit an amount of "initial margin" in cash or U.S. Treasury
bills with its custodian (or the broker, if legally permitted). The nature of
initial margin in futures transactions is different from that of margin in
securities transactions in that futures contract initial margin does not involve
the borrowing of funds by the Fund to finance the transactions. Initial margin
is in the nature of a performance bond or good faith deposit on the contract
which is returned to the Fund upon termination of the futures contract, assuming
all contractual obligations have been satisfied.
A futures contract held by the Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund pays
or receives cash, called "variation margin," equal to the daily change in value
of the futures contract. This process is known as "marking to market". Variation
margin does not represent a borrowing or loan by the Fund but is instead
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing its daily net asset value the Fund
will mark-to-market its open futures positions. The Fund is also required to
deposit and maintain margin when it writes call options on futures contracts.
Foreign Securities
The Fund may invest in foreign securities or U.S. securities traded in
foreign markets. In addition to securities issued by foreign companies,
permissible investments may also consist of obligations of foreign branches of
U.S. banks and of foreign banks, including European certificates of deposit,
European time deposits, Canadian time deposits and Yankee certificates of
deposit. The Fund may also invest in Canadian commercial paper and Europaper.
These instruments may subject the Fund to investment risks that differ in some
respects from those related to investments in obligations of U.S. issuers. Such
risks include the possibility of adverse political and economic developments;
imposition of withholding taxes on interest or other income; seizure,
nationalization, or expropriation of foreign deposits; establishment of exchange
controls or taxation at the source; greater fluctuations in value due to changes
in exchange rates, or the adoption of other foreign governmental restrictions
which might adversely affect the payment of principal and interest on such
obligations. Such investments may also entail higher custodial fees and sales
commissions than domestic investments. Foreign issuers of securities or
obligations are often subject to accounting treatment and engage in business
practices different from those respecting domestic issuers of similar securities
or obligations. Foreign branches of U.S. banks and foreign banks may be subject
to less stringent reserve requirements than those applicable to domestic
branches of U.S. banks.
Foreign Currency Transactions
As one way of managing exchange rate risk, the Fund may enter into
forward currency exchange contracts (agreements to purchase or sell currencies
at a specified price and date). The exchange rate for the transaction (the
amount of currency the Fund will deliver and receive when the contract is
completed) is fixed when the Fund enters into the contract. The Fund usually
will enter into these contracts to stabilize the U.S. dollar value of a security
it has agreed to buy or sell. The Fund intends to use these contracts to hedge
the U.S. dollar value of a security it already owns, particularly if the Fund
expects a decrease in the value of the currency in which the foreign security is
denominated. Although the Fund will attempt to benefit from using forward
contracts, the success of its hedging strategy will depend on the investment
advisor's ability to predict accurately the future exchange rates between
foreign currencies and the U.S. dollar. The value of the Fund's investments
denominated in foreign currencies will depend on the relative strengths of those
currencies and the U.S. dollar, and the Fund may be affected favorably or
unfavorably by changes in the exchange rates or exchange control regulations
between foreign currencies and the U.S. dollar. Changes in foreign currency
exchange rates also may affect the value of dividends and interest earned, gains
and losses realized on the sale of securities and net investment income and
gains, if any, to be distributed to shareholders by the Fund. The Fund may also
purchase and sell options related to foreign currencies in connection with
hedging strategies.
High Yield, High Risk Bonds
The Fund may invest a portion of its assets in lower rated bonds. Bonds
rated below BBB by Standard & Poor's Ratings Services ("S&P") or Fitch IBCA,
Inc. ("Fitch") or below Baa by Moody's Investors Service, Inc. ("Moody's"),
commonly known as "junk bonds," offer high yields, but also high risk. While
investment in junk bonds provides 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 bonds.
(3) The value of junk bonds, like those of other fixed income
securities, fluctuates in response to changes in interest rates, generally
rising when interest rates decline and falling when interest rates rise. For
example, if interest rates increase after a fixed income security is purchased,
the security, if sold prior to maturity, may return less than its cost. The
prices of 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) the Fund's ability to sell the bond and
the Fund's ability to obtain accurate market quotations for purposes of valuing
its assets.
For bond ratings descriptions, see "Corporate and Municipal Bond
Ratings" below.
Illiquid and Restricted Securities
The Fund may not invest more than 15% of its net assets in securities
that are illiquid. A security is illiquid when the Fund 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.
The Fund may invest in "restricted" securities, i.e., securities
subject to restrictions on resale under federal securities laws. Rule 144A under
the Securities Act of 1933 ("Rule 144A") allows certain restricted securities to
trade freely among qualified institutional investors. Since Rule 144A securities
may have limited markets, the Board of Trustees will determine whether such
securities should be considered illiquid for the purpose of determining the
Fund's compliance with the limit on illiquid securities indicated above. In
determine 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.
Investment in Other Investment Companies
The Fund may purchase the shares of other investment companies to the
extent permitted under the 1940 Act. Currently, the Fund may not (1) own more
than 3% of the outstanding voting stocks of another investment company, (2)
invest more than 5% of its assets in any single investment company, and (3)
invest more than 10% of its assets in investment companies. However, the Fund
may invest all of its investable assets in securities of a single open-end
management investment company with substantially the same fundamental investment
objectives, policies and limitations as the Fund. Investing in other investment
companies may expose a Fund to duplicate expenses and lower its value.
Short Sales
A short sale is the sale of a security the Fund has borrowed. The Fund
expects to profit from a short sale by selling the borrowed security for more
than the cost of buying it to repay the lender. After a short sale is completed,
the value of the security sold short may rise. If that happens, the cost of
buying it to repay the lender may exceed the amount originally received for the
sale by the Fund.
The Fund may engage in short sales, but it may not make short sales of
securities or maintain a short position unless, at all times when a short
position is open, it owns an equal amount of such securities or of securities
which, without payment of any further consideration, are convertible into or
exchangeable for securities of the same issue as, and equal in amount to, the
securities sold short. The Fund may effect a short sale in connection with an
underwriting in which the Fund is a participant.
Municipal Bonds
The Fund may invest in municipal bonds of any state, territory or
possession of the United States ("U.S."), including the District of Columbia.
The Fund 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 may 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 Fund 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 S&P, Moody's and Fitch. Such
ratings, however, are opinions, not absolute standards of quality. Municipal
bonds with the same maturity, interest rates 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 the Fund, a
municipal bond may cease to be rated or receive a new rating below the minimum
required for purchase by the Fund. Neither event would require the Fund to sell
the bond, but the Fund's investment advisor would consider such events in
determining whether the Fund should continue to hold it.
The ability of the 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 the 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, the
Fund's investment advisor 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 the 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 the Fund. If such legislation were passed, the Trust's
Board of Trustees may recommend changes in the Fund's investment objectives and
policies or dissolution of the Fund.
Virgin Islands, Guam and Puerto Rico
The 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 the Fund is
named. The Fund does not presently intend to invest more than (a) 10% 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, the 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.
Master Demand Notes
The Fund may invest in master demand notes. These are unsecured
obligations that permit the investment of fluctuating amounts by the Fund at
varying rates of interest pursuant to direct arrangements between the Fund, as
lender, and the issuer, as borrower. Master demand notes may permit daily
fluctuations in the interest rate and daily changes in the amounts borrowed. The
Fund has the right to increase the amount under the note at any time up to the
full amount provided by the note agreement, or to decrease the amount. The
borrower may repay up to the full amount of the note without penalty. Master
demand notes permit the Fund to demand payment of principal and accrued interest
at any time (on not more than seven days' notice). Notes acquired by the Fund
may have maturities of more than one year, provided that (1) the Fund is
entitled to payment of principal and accrued interest upon not more than seven
days' notice, and (2) the rate of interest on such notes is adjusted
automatically at periodic intervals, which normally will not exceed 31 days, but
may extend up to one year. The notes are deemed to have a maturity equal to the
longer of the period remaining to the next interest rate adjustment or the
demand notice period. Because these types of notes are direct lending
arrangements between the lender and borrower, such instruments are not normally
traded and there is no secondary market for these notes, although they are
redeemable and thus repayable by the borrower at face value plus accrued
interest at any time. Accordingly, the Fund's right to redeem is dependent on
the ability of the borrower to pay principal and interest on demand. In
connection with master demand note arrangements, the Fund`s investment advisor
considers, under standards established by the Board of Trustees, earning power,
cash flow and other liquidity ratios of the borrower and will monitor the
ability of the borrower to pay principal and interest on demand. These notes are
not typically rated by credit rating agencies. Unless rated, the Fund may invest
in them only if at the time of an investment the issuer meets the criteria
established for high quality commercial paper, i.e., rated A-1 by S&P, Prime-1
by Moody's or F-1 by Fitch.
Brady Bonds
The Fund may also invest in Brady Bonds. Brady Bonds are created
through the exchange of existing commercial bank loans to foreign entities for
new obligations in connection with debt restructurings under a plan introduced
by former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Bonds have been issued only recently, and, accordingly, do not have a long
payment history. They may be collateralized or uncollateralized and issued in
various currencies (although most are U.S. dollar-denominated) and they are
actively traded in the over-the-counter secondary market.
U.S. dollar-denominated, collateralized Brady Bonds, which may be
fixed-rate par bonds or floating rate discount bonds, are generally
collateralized in full as to principal due at maturity by U.S. Treasury zero
coupon obligations that have the same maturity as the Brady Bonds. Interest
payments on these Brady Bonds generally are collateralized by cash or securities
in an amount that, in the case of fixed rate bonds, is equal to at least one
year of rolling interest payments based on the applicable interest rate at that
time and is adjusted at regular intervals thereafter. Certain Brady Bonds are
entitled to "value recovery payments" in certain circumstances, which in effect
constitute supplemental interest payments, but generally are not collateralized.
Brady Bonds are often viewed as having up to four valuation components: (1)
collateralized repayment of principal at final maturity, (2) collateralized
interest payments, (3) uncollateralized interest payments, and (4) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk"). In the event of a default with respect
to collateralized Brady Bonds as a result of which the payment obligations of
the issuer are accelerated, the U.S. Treasury zero coupon obligations held as
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held by the collateral agent to the scheduled maturity of the defaulted
Brady Bonds, which will continue to be outstanding, at which time the face
amount of the collateral will equal the principal payments that would have then
been due on the Brady Bonds in the normal course. In addition, in light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are to be viewed as
speculative.
Obligations of Foreign Branches of United States Banks
The Fund may invest in obligations of foreign branches of U.S. banks.
These may be general obligations of the parent bank in addition to the issuing
branch, or may be limited by the terms of a specific obligation and by
government regulation. Payment of interest and principal upon these obligations
may also be affected by governmental action in the country of domicile of the
branch (generally referred to as sovereign risk). In addition, evidences of
ownership of such securities may be held outside the U.S. and the Fund may be
subject to the risks associated with the holding of such property overseas.
Examples of governmental actions would be the imposition of currency controls,
interest limitations, withholding taxes, seizure of assets or the declaration of
a moratorium. Various provisions of federal law governing domestic branches do
not apply to foreign branches of domestic banks.
Obligations of United States Branches of Foreign Banks
The Fund may invest in obligations of U.S. branches of foreign banks.
These may be general obligations of the parent bank in addition to the issuing
branch, or may be limited by the terms of a specific obligation and by federal
and state regulation as well as by governmental action in the country in which
the foreign bank has its head office. In addition, there may be less publicly
available information about a U.S. branch of a foreign bank than about a
domestic bank.
Payment-in-kind Securities
The Fund may invest in payment-in-kind ("PIK") securities. PIKs pay
interest in either cash or additional securities, at the issuer's option, for a
specified period. The issuer's option to pay in additional securities typically
ranges from one to six years, compared to an average maturity for all PIK
securities of eleven years. Call protection and sinking fund features are
comparable to those offered on traditional debt issues.
PIKs, like zero coupon bonds, are designed to give an issuer
flexibility in managing cash flow. Several PIKs are senior debt. In other cases,
where PIKs are subordinated, most senior lenders view them as equity
equivalents.
An advantage of PIKs for the issuer -- as with zero coupon securities
- -- is that interest payments are automatically compounded (reinvested) at the
stated coupon rate, which is not the case with cash-paying securities. However,
PIKs are gaining popularity over zeros since interest payments in additional
securities can be monetized and are more tangible than accretion of a discount.
As a group, PIK bonds trade flat (i.e., without accrued interest).
Their price is expected to reflect an amount representing accredit interest
since the last payment. PIKs generally trade at higher yields than comparable
cash-paying securities of the same issuer. Their premium yield is the result of
the lesser desirability of non-cash interest, the more limited audience for
non-cash paying securities, and the fact that many PIKs have been issued to
equity investors who do not normally own or hold such securities.
Calculating the true yield on a PIK security requires a discounted cash
flow analysis if the security (ex interest) is trading at a premium or a
discount because the realizable value of additional payments is equal to the
current market value of the underlying security, not par.
Regardless of whether PIK securities are senior or deeply subordinated,
issuers are highly motivated to retire them because they are usually their most
costly form of capital.
Zero Coupon "Stripped" Bonds
The Fund may invest in zero coupon "stripped" bonds. These represent
ownership in serially maturing interest payments or principal payments on
specific underlying notes and bonds, including coupons relating to such notes
and bonds. The interest and principal payments are direct obligations of the
issuer. Interest zero coupon bonds of any series mature periodically from the
date of issue of such series through the maturity date of the securities related
to such series. Principal zero coupon bonds mature on the date specified
therein, which is the final maturity date of the related securities. Each zero
coupon bond entitles the holder to receive a single payment at maturity. There
are no periodic interest payments on a zero coupon bond. Zero coupon bonds are
offered at discounts from their face amounts.
In general, owners of zero coupon bonds have substantially all the
rights and privileges of owners of the underlying coupon obligations or
principal obligations. Owners of zero coupon bonds have the right upon default
on the underlying coupon obligations or principal obligations to proceed
directly and individually against the issuer and are not required to act in
concert with other holders of zero coupon bonds.
For federal income tax purposes, a purchaser of principal zero coupon
bonds or interest zero coupon bonds (either initially or in the secondary
market) is treated as if the buyer had purchased a corporate obligation issued
on the purchase date with an original issue discount equal to the excess of the
amount payable at maturity over the purchase price. The purchaser is required to
take into income each year as ordinary income an allocable portion of such
discounts determined on a "constant yield" method. Any such income increases the
holder's tax basis for the zero coupon bond, and any gain or loss on a sale of
the zero coupon bonds relative to the holder's basis, as so adjusted, is a
capital gain or loss. If the holder owns both principal zero coupon bonds and
interest zero coupon bonds representing interest in the same underlying issue of
securities, a special basis allocation rule (requiring the aggregate basis to be
allocated among the items sold and retained based on their relative fair market
value at the time of sale) may apply to determine the gain or loss on a sale of
any such zero coupon bonds.
Mortgage-Backed or Asset-Backed Securities
The Fund may invest in mortgage-backed securities and asset-backed
securities. Two principal types of mortgage-backed securities are collateralized
mortgage obligations ("CMOs") and real estate mortgage investment conduits
("REMICs"). CMOs are securities collateralized by mortgages, mortgage
pass-throughs, mortgage pay-through bonds (bonds representing an interest in a
pool of mortgages where the cash flow generated from the mortgage collateral
pool is dedicated to bond repayment), and mortgage-backed bonds (general
obligations of the issuers payable out of the issuers' general funds and
additionally secured by a first lien on a pool of single family detached
properties). Many CMOs are issued with a number of classes or series which have
different maturities and are retired in sequence.
Investors purchasing CMOs in the shortest maturities receive or are
credited with their pro rata portion of the scheduled payments of interest and
principal on the underlying mortgages plus all unscheduled prepayments of
principal up to a predetermined portion of the total CMO obligation. Until that
portion of such CMO obligation is repaid, investors in the longer maturities
receive interest only. Accordingly, the CMOs in the longer maturity series are
less likely than other mortgage pass-throughs to be prepaid prior to their
stated maturity. Although some of the mortgages underlying CMOs may be supported
by various types of insurance, and some CMOs may be backed by GNMA certificates
or other mortgage pass-throughs issued or guaranteed by U.S. government agencies
or instrumentalities, the CMOs themselves are not generally guaranteed.
REMICs, which were authorized under the Tax Reform Act of 1986, are
private entities formed for the purpose of holding a fixed pool of mortgages
secured by an interest in real property. REMICs are similar to CMOs in that they
issue multiple classes of securities.
In addition to mortgage-backed securities, the Fund may invest in
securities secured by other assets including company receivables, truck and auto
loans, leases, and credit card receivables. These issues may be traded
over-the-counter and typically have a short-intermediate maturity structure
depending on the pay down characteristics of the underlying financial assets
which are passed through to the security holder.
Credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain amounts owed
on the credit cards, thereby reducing the balance due. Most issuers of
asset-backed securities backed by automobile receivables permit the servicers of
such receivables to retain possession of the underlying obligations. If the
servicers were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
rated asset-backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of asset-backed securities backed by
automobile receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.
In general, issues of asset-backed securities are structured to include
additional collateral and/or additional credit support to protect against the
risk that a portion of the collateral supporting the asset-backed securities may
default and/or may suffer from these defects. In evaluating the strength of
particular issues of asset-backed securities, the investment advisor considers
the financial strength of the guarantor or other provider of credit support, the
type and extent of credit enhancement provided as well as the documentation and
structure of the issue itself and the credit support.
Variable or Floating Rate Instruments
The Fund may invest in variable or floating rate instruments which may
involve a demand feature and may include variable amount master demand notes
which may or may not be backed by bank letters of credit. Variable or floating
rate instruments bear interest at a rate which varies with changes in market
rates. The holder of an instrument with a demand feature may tender the
instrument back to the issuer at par prior to maturity. A variable amount master
demand note is issued pursuant to a written agreement between the issuer and the
holder, its amount may be increased by the holder or decreased by the holder or
issuer, it is payable on demand, and the rate -of interest varies based upon an
agreed formula. The quality of the underlying credit must, in the opinion of the
investment advisor, be equivalent to the long-term bond or commercial paper
ratings applicable to permitted investments for the Fund. The investment advisor
will monitor, on an ongoing basis, the earning power, cash flow, and liquidity
ratios of the issuers of such instruments and will similarly monitor the ability
of an issuer of a demand instrument to pay principal and interest on demand.
Limited Partnerships
The Fund may invest in limited and master limited partnerships. A
limited partnership is a partnership consisting of one or more general partners,
jointly and severally responsible as ordinary partners, and by whom the business
is conducted, and one or more limited partners who contribute cash as capital to
the partnership and who generally are not liable for the debts of the
partnership beyond the amounts contributed. Limited partners are not involved in
the day-to-day management of the partnership. They receive income, capital gains
and other tax benefits associated with the partnership project in accordance
with terms established in the partnership agreement. Typical limited
partnerships are in real estate, oil and gas and equipment leasing, but they
also finance movies, research and development, and other projects.
For an organization classified as a partnership under the Internal
Revenue Code of 1986, as amended (the "Code"), each item of income, gain, loss,
deduction, and credit is not taxed at the partnership level but flows through to
the holder of the partnership unit. This allows the partnership to avoid double
taxation and to pass through income to the holder of the partnership unit at
lower individual rates.
A master limited partnership is a publicly traded limited partnership.
The partnership units are registered with the Securities and Exchange Commission
and are freely exchanged on a securities exchange or in the over-the-counter
market.
PURCHASE AND REDEMPTION OF SHARES
You may buy shares of the Fund through Evergreen Distributor, Inc.
("EDI"), broker-dealers that have entered into special agreements with EDI or
certain other financial institutions. The Fund may offer up to four different
classes of shares that differ primarily with respect to sales charges and
distribution fees. Depending upon the class of shares, you will pay an initial
sales charge when you buy the Fund's shares, a contingent deferred sales charge
(a "CDSC") when you redeem the Fund's shares or no sales charges at all. Each
Fund offers different classes of shares. Refer to the prospectus to determine
which classes of shares are offered by each Fund.
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. If you purchase Class A shares in the amount of $1
million or more, without an initial sales charge, the Fund will charge a CDSC of
1.00% if you redeem during the month of your purchase or the 12-month period
following the month of your purchase (see "Contingent Deferred Sales Charge"
below).
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 advisors; (b) investment advisors, 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 advisors or financial planners who place
trades for their own accounts if the accounts are linked to the master account
of such investment advisors 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 the 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 First Union National Bank ("FUNB") and its affiliates, EDI and any
broker-dealer with whom EDI has entered into an agreement to sell shares of the
Fund, and members of the immediate families of such employees; and (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.
Class B Shares
The Fund offers Class B shares at net asset value without an initial
sales charge. With certain exceptions, however, the Fund will charge a CDSC on
shares you redeem within 72 months after the month of your purchase, in
accordance with the following schedule:
REDEMPTION TIME CDSC RATE
Month of purchase and the first 12-month
period following the month of purchase. ........................5.00%
Second 12-month period following the month of purchase..........4.00%
Third 12-month period following the month of purchase...........3.00%
Fourth 12-month period following the month of purchase..........3.00%
Fifth 12-month period following the month of purchase...........2.00%
Sixth 12-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
Class C shares are available only through broker-dealers who have
entered into special distribution agreements with EDI. The Fund offers Class C
shares at net asset value without an initial sales charge. With certain
exceptions, however, the Fund will charge a CDSC of 1.00% on shares you redeem
within 12-months after the month of your purchase. See "Contingent Deferred
Sales Charge" below.
Class Y Shares
No CDSC is imposed on the redemption of Class Y shares. Class Y shares
are not offered to the general public and are available only to (1) persons who
at or prior to December 31, 1994 owned shares in a mutual fund advised by (2)
certain institutional investors and (3) investment advisory clients of an
investment advisor of an Evergreen Fund or the advisor's 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.
INSTITUTIONAL SHARES, INSTITUTIONAL SERVICE SHARES
Each institutional class of shares is sold without a front-end sales
charge or contingent deferred sales charge. Institutional Service shares pay an
ongoing service fee. The minimum initial investment in any institutional class
of shares is $1 million, which may be waived in certain circumstances. There is
no minimum amount required for subsequent purchases.
<PAGE>
Contingent Deferred Sales Charge
The Fund charges a CDSC as reimbursement for certain expenses, such as
commissions or shareholder servicing fees, that it has incurred in connection
with the sale of its shares (see "Distribution Expenses Under Rule 12b-1,"
below). Institutional, Institutional Service and Charitable shares do not charge
a CDSC. If imposed, the Fund deducts the CDSC from the redemption proceeds you
would otherwise receive. The CDSC is a percentage of the lesser of (1) the net
asset value of the shares at the time of redemption or (2) the shareholder's
original net cost for such shares. Upon request for redemption, to keep the CDSC
a shareholder must pay as low as possible, the Fund will first seek to redeem
shares not subject to the CDSC and/or shares held the longest, in that order.
The CDSC on any redemption is, to the extent permitted by the National
Association of Securities Dealers, Inc., paid to EDI or its predecessor.
SALES CHARGE WAIVERS AND REDUCTIONS
The following information is not applicable to Institutional,
Institutional Service and Charitable shares.
If you making a large purchase, there are several ways you can combine
multiple purchases of Class A shares in Evergreen Funds and take advantage of
lower sales charges. These are described below.
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%.
Your account, and therefore your rights of accumulation, can be linked
to immediate family members which includes father and mother, brothers and
sisters, and sons and daughters. The same rule applies with respect to
individual retirement plans. Please note, however, that retirement plans
involving employees stand alone and do not pass on rights of accumulation.
Letter of Intent
You can, by completing the "Letter of Intent" section of the
application, purchase Class A shares over a 13-month period and receive the same
sales charge as if you had invested all the money at once. All purchases of
Class A shares of an Evergreen Fund during the period will qualify as Letter of
Intent purchases.
Waiver of Initial Sales Charges
The Fund may sell its 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 advisors;
4. investment advisors, 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 advisors or financial planners who place
trades for their own accounts if the accounts are linked to a
master account of such investment advisors or financial
planners on the books of the broker-dealer through whom shares
are purchased;
6. institutional clients of broker-dealers, including retirement
and deferred compensation plans and the trusts used to fund
these plans, which place trades through an omnibus account
maintained with the Fund by the broker-dealer;
7. employees of FUNB, its affiliates, EDI, any broker-dealer with
whom EDI, has entered into an agreement to sell shares of the
Fund, and members of the immediate families of such employees;
8. certain Directors, Trustees, officers and employees of the
Evergreen Funds, EDI or their affiliates and to the immediate
families of such persons; or
9. a bank or trust company in a single account in the name of
such bank or in or any of the Evergreen Funds trust company as
Trustee if the initial investment made pursuant to this waiver
is at least $500,000 and any commission paid at the time of
such purchase is not more than 1% of the amount invested.
With respect to items 8 and 9 above, the Fund will only sell shares to
these parties upon the purchasers written assurance that the purchase is for
their personal investment purposes only. Such purchasers may not resell the
securities except through redemption by the Fund. The Fund will not charge any
CDSC on redemptions by such purchasers.
<PAGE>
Waiver of CDSCS
The Fund does not impose a CDSC when the shares you are redeeming
represent:
1. an increase in the share value above the net cost of such shares;
2. certain shares for which the Fund did not pay a commission on
issuance, including shares acquired through reinvestment of
dividend income and capital gains distributions;
3. shares that are in the accounts of a shareholder who has died or
become disabled;
4. a lump-sum distribution from a 401(k) plan or other benefit
plan qualified under the Employee Retirement Income Security
Act of 1974 ("ERISA");
5. an automatic withdrawal from the ERISA plan of a shareholder who is
a least 59 years old;
6. shares in an account that we have closed because the account has an
aggregate net asset value of less than $1,000;
7. an automatic withdrawal under a Systematic Income Plan of up to
1.0% per month of your initial account balance;
8. a withdrawal consisting of loan proceeds to a retirement plan
participant;
9. a financial hardship withdrawal made by a retirement plan
participant;
10. a withdrawal consisting of returns of excess contributions or
excess deferral amounts made to a retirement plan; or
11. a redemption by an individual participant in a Qualifying Plan
that purchased Class C shares (this waiver is not available in
the event a Qualifying Plan, as a whole, redeems substantially
all of its assets).
Exchanges
Investors may exchange shares of the Fund for shares of the same class
of any other Evergreen fund which offers the same class of shares. Shares of any
class of the Evergreen Select Funds may be exchanged for the same class of
shares of any other Evergreen Select Fund. See "By Exchange" under "How to Buy
Shares" in the 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.
<PAGE>
Automatic Reinvestment
As described in the prospectus, a shareholder may elect to receive
dividends and capital gains distributions in cash instead of shares. However,
ESC will automatically reinvest 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. When a check is returned, the Fund will hold the check amount in a
no-interest account in the shareholder's name until the shareholder updates his
or her address or automatic reinvestment begins. Uncashed or returned redemption
checks will also be handled in the manner described above.
PRICING OF SHARES
Calculation of Net Asset Value
The Fund calculates its net asset value ("NAV") once daily on Monday
through Friday, as described in the prospectus. The Fund will not compute its
NAV on the days the New York Stock Exchange is closed: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
The NAV of the Fund is calculated by dividing the value of the Fund's
net assets attributable to that class by all of the shares issued for that
class.
Valuation of Portfolio Securities
Current values for the Fund's portfolio securities are determined as
follows:
(1) Securities that are traded on an established securities exchange or
the over-the-counter National Market System ("NMS") are valued on the
basis of the last sales price on the exchange where primarily traded or
on the NMS prior to the time of the valuation, provided that a sale has
occurred.
(2) Securities traded on an established securities exchange or in the
over-the-counter market for which there has been no sale and other
securities traded in the over-the-counter market are valued at the mean
of the bid and asked prices at the time of valuation.
(3) Short-term investments maturing in more than 60 days, for which
market quotations are readily available, are valued at current market
value.
(4) Short-term investments maturing in sixty days or less are valued at
amortized cost, which approximates market.
(5) Securities, including restricted securities, for which market
quotations are not readily available; listed securities or those on NMS
if, in the investment advisor's opinion, the last sales price does not
reflect an accurate current market value; and other assets are valued
at prices deemed in good faith to be fair under procedures established
by the Board of Trustees.
(6) Municipal bonds are valued by an independent pricing service at
fair value using a variety of factors which may include yield,
liquidity, interest rate risk, credit quality, coupon, maturity and
type of issue.
PERFORMANCE CALCULATIONS
Total Return
Total return quotations for a class of shares of the Fund as they may
appear from time to time in advertisements are calculated by finding the average
annual compounded rates of return over one, five and ten year periods, or the
time periods for which such class of shares has been effective, whichever is
relevant, on a hypothetical $1,000 investment that would equate the initial
amount invested in the class to the ending redeemable value. To the initial
investment all dividends and distributions are added, and all recurring fees
charged to all shareholder accounts are deducted. The ending redeemable value
assumes a complete redemption at the end of the relevant periods.
The following is the formula used to calculate average annual total
return:
n
P(1+T) = ERV
P = initial payment of $1,000
T = average total return
N = number of years
ERV = ending redeemable value of the initial $1,000
Yield
Described below are yield calculations the Fund may use. Yield
quotations are expressed in annualized terms and may be quoted on a compounded
basis. Yields based on these calculations do not represent the Fund's yield for
any future period.
30-Day Yield
If the Fund invests primarily in bonds, it may quote its 30-day yield
in advertisements or in reports or other communications to shareholders. It is
calculated 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 period,
according to the following formula:
6
yield = 2[(a-b/cd + 1) - 1]
Where:
a = Dividends and interest earned during the period
b = Expenses accrued for the period (net of reimbursements)
c = The average daily number of shares outstanding during the period
that were entitled to receive dividends
d = The maximum offering price per share on the last day of the period
7-Day Current and Effective Yield
If the Fund invests primarily in money market instruments, it may
quote its 7-day current yield or effective yield in advertisements or in reports
or other communications to shareholders.
The current yield is calculated by determining the net change,
excluding capital changes and income other than investment income, in the value
of a hypothetical, pre-existing account having a balance of one share at the
beginning of the 7-day base period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, and dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return, and then multiplying the base period return by (365/7).
The effective yield is based on a compounding of the current yield,
according to the following formula:
365/7
Effective Yield = [(base period return)] + 1) ]-1
Tax Equivalent Yield
If the Fund invests primarily in municipal bonds, it may quote in
advertisements or in reports or other communications to shareholders a tax
equivalent yield, which is what an investor would generally need to earn from a
fully taxable investment in order to realize, after income taxes, a benefit
equal to the tax free yield provided by the Fund. Tax equivalent yield is
calculated using the following formula:
Tax Equivalent Yield = Yield/1 - Income Tax Rate
The quotient is then added to that portion, if any, of the Fund's
yield that is not tax exempt. Depending on the Fund's objective, the income tax
rate used in the formula above may be federal or a combination of federal and
state.
PRINCIPAL UNDERWRITER
EDI is the principal underwriter for the Trust and with respect to each
class of shares of the Fund. The Trust has entered into a Principal Underwriting
Agreement ("Underwriting Agreement") with EDI with respect to each class of the
Fund. EDI is a subsidiary of The BISYS Group, Inc.
EDI, as agent, has agreed to use its best efforts to find purchasers
for the shares. EDI 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 EDI 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 EDI 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 Fund and the Fund reserves the right, in
its sole discretion, to reject any order received. Under the Underwriting
Agreement, the Fund is not liable to anyone for failure to accept any order.
EDI has agreed that it will, in all respects, duly conform with all
state and federal laws applicable to the sale of the shares. EDI 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 EDI or any other person for whose acts EDI 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 Trustees who are not interested persons of the Fund, as
defined in the 1940 Act (the "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 EDI's judgment, it could benefit the sales of
shares, EDI may provide to selected broker-dealers promotional materials and
selling aids, including, but not limited to, personal computers, related
software, and data files.
DISTRIBUTION EXPENSES UNDER RULE 12b-1
The Fund bears some of the costs of selling its Class A, Class B, Class
C and Institutional Service shares, as applicable, including certain
advertising, marketing and shareholder service expenses, pursuant to Rule 12b-1
of the 1940 Act. These 12b-1 fees are indirectly paid by the shareholder, as
shown by the Fund's expense table in the prospectus.
Under the Distribution Plans (each a "Plan," together, the "Plans")
that the Fund has adopted for its Class A, Class B, Class C and Institutional
Service shares, as applicable, the Fund may incur expenses for 12b-1 fees up to
a maximum annual percentage of the average daily net assets attributable to a
class, as follows:
------------------------------- ---------------
Class A 0.75%*
------------------------------- ---------------
------------------------------- ---------------
Class B 1.00%
------------------------------- ---------------
------------------------------- ---------------
Class C 1.00%
------------------------------- ---------------
------------------------------- ---------------
Institutional Service 0.75%*
------------------------------- ---------------
*Currently limited to 0.25% or less to be used exclusively as a
shareholder service fee. See the expense table in the prospectus of the Fund in
which you are interested.
Of the amounts above, each class may pay under its Plan a maximum
service fee of 0.25% to compensate organizations, which may include the Fund's
investment advisor or its affiliates, for personal services provided to
shareholders and the maintenance of shareholder accounts. The Fund may not,
during any fiscal period, pay distribution or service fees greater than the
amounts above.
Amounts paid under the Plans are used to compensate EDI pursuant to
Distribution Agreements (each an "Agreement," together, the "Agreements") that
the Fund has entered into with respect to its Class A, Class B, Class C and
Institutional Service shares, as applicable. The compensation is based on a
maximum annual percentage of the average daily net assets attributable to a
class, as follows:
----------------------------- -------------
Class A 0.25%*
----------------------------- -------------
----------------------------- -------------
Class B 1.00%
----------------------------- -------------
----------------------------- -------------
Class C 1.00%
----------------------------- -------------
----------------------------- -------------
Institutional Service 0.25%*
----------------------------- -------------
*May be lower. See the expense table in the prospectus of the Fund in
which you are interested.
The Agreements provide that EDI will use the distribution fees received
from the Fund for the following purposes:
(1) to compensate broker-dealers or other persons for distributing
Fund shares;
(2) to compensate broker-dealers, depository institutions and
other financial intermediaries for providing administrative,
accounting and other services with respect to the Fund's
shareholders; and
(3) to otherwise promote the sale of Fund shares.
The Agreements also provide that EDI may use distribution fees to make
interest and principal payments in respect of amounts that have been financed to
pay broker-dealers or other persons for distributing Fund shares. EDI may assign
its rights to receive compensation under the Plans to secure such financings.
FUNB or its affiliates may finance payments made by EDI to compensate
broker-dealers or other persons for distributing shares of the Fund.
In the event the Fund acquires the assets of another mutual fund,
compensation paid to EDI under the Agreements may be paid by the Fund's
Distributor to the acquired fund's distributor or its predecessor.
Since EDI's compensation under the Agreements is not directly tied to
the expenses incurred by EDI, the compensation received by it under the
Agreements during any fiscal 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 compensation paid to EDI for that year may be paid
from distribution fees received from the Fund in subsequent fiscal years.
Distribution fees are accrued daily and paid at least 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 EDI to
compensate broker-dealers in connection with the sale of such shares.
Under the Plans, the Treasurer of the Trust 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.
The investment advisor may from time to time from its own funds or such
other resources as may be permitted by rules of the SEC make payments for
distribution services to EDI; the latter may in turn pay part or all of such
compensation to brokers or other persons for their distribution assistance.
Each Plan and the Agreement will continue in effect for successive
12-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.
The Plans permit the payment of fees to brokers and others for
distribution and shareholder-related administrative services and to
broker-dealers, depository institutions, financial intermediaries and
administrators for administrative services as to Class A, Class B, Class C and
Institutional Service shares. The Plans are designed to (i) stimulate brokers to
provide distribution and administrative support services to the Fund and holders
of Class A, Class B, Class C and Institutional Service shares and (ii) stimulate
administrators to render administrative support services to the Fund and holders
of Class A, Class B, Class C and Institutional Service shares. The
administrative services are provided by a representative who has knowledge of
the shareholder's particular circumstances and goals, and include, but are not
limited to providing office space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding Class
A, Class B, Class C and Institutional Service shares; assisting clients in
changing dividend options, account designations, and addresses; and providing
such other services as the Fund reasonably requests for its Class A, Class B,
Class C and Institutional Service shares.
In the event that the Plan or Distribution Agreement is terminated or
not continued with respect to one or more classes of the Fund, (i) no
distribution fees (other than current amounts accrued but not yet paid) would be
owed by the Fund to EDI with respect to that class or classes, and (ii) the Fund
would not be obligated to pay EDI for any amounts expended under the
Distribution Agreement not previously recovered by the EDI from distribution
services fees in respect of shares of such class or classes through deferred
sales charges.
All material amendments to any Plan or Agreement must be approved by a
vote of the Trustees of the Trust or the holders of the Fund's outstanding
voting securities, voting separately by class, and in either case, by a majority
of the Independent Trustees, cast in person at a meeting called for the purpose
of voting on such approval; and any Plan or Distribution Agreement may not be
amended in order to increase materially the costs that a particular class of
shares of the Fund may bear pursuant to the Plan or Distribution Agreement
without the approval of a majority of the holders of the outstanding voting
shares of the class affected. Any Plan or Distribution Agreement may be
terminated (I) by the Fund without penalty at any time by a majority vote of the
holders of the outstanding voting securities of the Fund, voting separately by
class or by a majority vote of the Independent Trustees, or (ii) by EDI. To
terminate any Distribution Agreement, any party must give the other parties 60
days' written notice; to terminate a Plan only, the Fund need give no notice to
EDI. Any Distribution Agreement will terminate automatically in the event of its
assignment. For more information about 12b-1 fees, see "Expenses" in the
prospectus and "12b-1 Fees" under "Expenses" in Part 1 of this SAI.
TAX INFORMATION
Requirements for Qualifications as a Regulated Investment Company
The Fund intends to qualify for and elect the tax treatment applicable
to regulated investment companies ("RIC") under Subchapter M of the Code. (Such
qualification does not involve supervision of management or investment practices
or policies by the Internal Revenue Service.) In order to qualify as a RIC, the
Fund must, among other things, (i) derive at least 90% of its gross income from
dividends, interest, payments with respect to proceeds from securities loans,
gains from the sale or other disposition of securities or foreign currencies and
other income (including gains from options, futures or forward contracts)
derived with respect to its business of investing in such securities; and (ii)
diversify its holdings so that, at the end of each quarter of its taxable year,
(a) at least 50% of the market value of the Fund's total assets is represented
by cash, U.S. government securities and other securities limited in respect of
any one issuer, to an amount not greater than 5% of the Fund's total assets and
10% of the outstanding voting securities of such issuer, and (b) not more than
25% of the value of its total assets is invested in the securities of any one
issuer (other than U.S. government securities and securities of other regulated
investment companies). By so qualifying, the Fund is not subject to federal
income tax if it timely distributes its investment company taxable income and
any net realized capital gains. A 4% nondeductible excise tax will be imposed on
the Fund to the extent it does not meet certain distribution requirements by the
end of each calendar year. The Fund anticipates meeting such distribution
requirements.
Taxes on Distributions
Unless the Fund is a municipal bond fund, distributions will be taxable
to shareholders whether made in shares or in cash. Shareholders electing to
receive distributions in the form of additional shares will have a cost basis
for federal income tax purposes in each share so received equal to the net asset
value of a share of the Fund on the reinvestment date.
To calculate ordinary income for federal income tax purposes,
shareholders must generally include dividends paid by the Fund from its
investment company taxable income (net taxable investment income plus net
realized short-term capital gains, if any). The Fund will include dividends it
receives from domestic corporations when the Fund calculates its gross
investment income. Unless the Fund is a municipal bond fund or U.S. Treasury
money market fund, it anticipates that all or a portion of the ordinary
dividends which it pays will qualify for the 70% dividends-received deduction
for corporations. The Fund will inform shareholders of the amounts that so
qualify. If the Fund is a municipal bond fund or U.S. Treasury money market
fund, none of its income will consist of corporate dividends; therefore, none of
its distributions will qualify for the 70% dividends-received deduction for
corporations.
From time to time, the Fund will distribute the excess of its net
long-term capital gains over its short-term capital loss to shareholders (i.e.,
capital gain dividends). For federal tax purposes, shareholders must include
such capital gain dividends when calculating their net long-term capital gains.
Capital gain dividends are taxable as net long-term capital gains to a
shareholder, no matter how long the shareholder has held the shares.
Distributions by the Fund reduce its NAV. A distribution that reduces
the Fund's NAV below a shareholder's cost basis is taxable as described above,
although from an investment standpoint, it is a return of capital. In
particular, if a shareholder buys Fund shares just before the Fund makes a
distribution, when the Fund makes the distribution the shareholder will receive
what is in effect a return of capital. Nevertheless, the shareholder may incur
taxes on the distribution. Therefore, shareholders should carefully consider the
tax consequences of buying Fund shares just before a distribution.
All distributions, whether received in shares or cash, must be reported
by each shareholder on his or her federal income tax return. Each shareholder
should consult a tax advisor to determine the state and local tax implications
of Fund distributions.
If more than 50% of the value of the Fund's total assets at the end of
a fiscal year is represented by securities of foreign corporations and the Fund
elects to make foreign tax credits available to its shareholders, a shareholder
will be required to include in his gross income both cash dividends and the
amount the Fund advises him is his pro rata portion of income taxes withheld by
foreign governments from interest and dividends paid on the Fund's investments.
The shareholder may be entitled, however, to take the amount of such foreign
taxes withheld as a credit against his U.S. income tax, or to treat the foreign
tax withheld as an itemized deduction from his gross income, if that should be
to his advantage. In substance, this policy enables the shareholder to benefit
from the same foreign tax credit or deduction that he would have received if he
had been the individual owner of foreign securities and had paid foreign income
tax on the income therefrom. As in the case of individuals receiving income
directly from foreign sources, the credit or deduction is subject to a number of
limitations.
Special Tax Information for Municipal Bond Fund Shareholders
The 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 the Fund's assets must consist of federally tax-exempt obligations at
the close of each quarter. An exempt interest dividend is any dividend or part
thereof (other than a capital gain dividend) paid by the Fund with 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 the 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 the Fund who may be a "substantial user" (as defined
by the Code) of a facility financed with an issue of tax-exempt obligations or a
"related person" to such a user should consult his tax advisor 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, the 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").
Interest on indebtedness incurred or continued by shareholders to
purchase or carry shares of the 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 12
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 61-day period
beginning 30 days before and ending 30 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 the Fund and to certify as to its correctness and certain other shareholders
may be subject to a 31% federal income tax backup withholding requirement on
dividends, distributions of capital gains and redemption proceeds paid to them
by the Fund. If the withholding provisions are applicable, any such dividends or
capital gain distributions to these shareholders, whether taken in cash or
reinvested in additional shares, and any redemption proceeds will be reduced by
the amounts required to be withheld. Investors may wish to consult their own tax
advisors about the applicability of the backup withholding provisions.
Other Tax Considerations
The foregoing discussion relates solely to U.S. federal income tax law
as applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates). It does not reflect
the special tax consequences to certain taxpayers (e.g., banks, insurance
companies, tax exempt organizations and foreign persons). Shareholders are
encouraged to consult their own tax advisors regarding specific questions
relating to federal, state and local tax consequences of investing in shares of
the Fund.
<PAGE>
Each shareholder who is not a U.S. person should consult his or her tax advisor
regarding the U.S. and foreign tax consequences of ownership of shares of the
Fund, including the possibility that such a shareholder may be subject to a U.S.
withholding tax at a rate of 30% (or at a lower rate under a tax treaty) on
amounts treated as income from U.S. sources under the Code.
BROKERAGE
Brokerage Commissions
If the Fund invests in equity securities, it expects to buy and sell
them through brokerage transactions for which commissions are payable. Purchases
from underwriters will include the underwriting commission or concession, and
purchases from dealers serving as market makers will include a dealer's mark-up
or reflect a dealer's mark-down. Where transactions are made in the
over-the-counter market, the Fund will deal with primary market makers unless
more favorable prices are otherwise obtainable.
If the Fund invests in fixed income securities, it expects to buy and
sell them directly from the issuer or an underwriter or market maker for the
securities. Generally, the Fund will not pay brokerage commissions for such
purchases. When the Fund buys a security from an underwriter, the purchase price
will usually include an underwriting commission or concession. The purchase
price for securities bought from dealers serving as market makers will similarly
include the dealer's mark up or reflect a dealer's mark down. When the Fund
executes transactions in the over-the-counter market, it will deal with primary
market makers unless more favorable prices are otherwise obtainable.
Selection of Brokers
When buying and selling portfolio securities, the advisor seeks brokers
who can provide the most benefit to the Fund. When selecting a broker, the
investment advisor will primarily look for the best price at the lowest
commission, but in the context of the broker's:
1. ability to provide the best net financial result to the Fund;
2. efficiency in handling trades;
3. ability to trade large blocks of securities;
4. readiness to handle difficult trades;
5. financial strength and stability; and
6. provision of "research services," defined as (a) reports and
analyses concerning issuers, industries, securities and economic
factors and (b) other information useful in making investment
decisions.
The Fund may pay higher brokerage commissions to a broker providing it
with research services, as defined in item 6, above. Pursuant to Section 28(e)
of the Securities Exchange Act of 1934, this practice is permitted if the
commission is reasonable in relation to the brokerage and research services
provided. Research services provided by a broker to the investment advisor do
not replace, but supplement, the services the investment advisor is required to
deliver to the Fund. It is impracticable for the investment advisor to allocate
the cost, value and specific application of such research services among its
clients because research services intended for one client may indirectly benefit
another.
When selecting a broker for portfolio trades, the investment advisor
may also consider the amount of Fund shares a broker has sold, subject to the
other requirements described above.
If the Fund is advised by EAMC, Lieber & Company, an affiliate of EAMC
and a member of the New York and American Stock Exchanges, will to the extent
practicable effect substantially all of the portfolio transactions effected on
those exchanges for the Fund.
Simultaneous Transactions
The investment advisor makes investment decisions for the Fund
independently of decisions made for its other clients. When a security is
suitable for the investment objective of more than one client, it may be prudent
for the investment advisor to engage in a simultaneous transaction, that is, buy
or sell the same security for more than one client. The investment advisor
strives for an equitable result in such transactions by using an allocation
formula. The high volume involved in some simultaneous transactions can result
in greater value to the Fund, but the ideal price or trading volume may not
always be achieved for the Fund.
ORGANIZATION
Description of Shares
The Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest of series and classes of shares. Each share of
the Fund represents an equal proportionate interest with each other share of
that series and/or class. Upon liquidation, shares are entitled to a pro rata
share of the Trust based on the relative net assets of each series and/or class.
Shareholders have no preemptive or conversion rights. Shares are redeemable and
transferable.
Voting Rights
Under the terms of the Declaration of Trust, the Trust is not required
to hold annual meetings. 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 "NAV"applicable to such share. Shares generally vote together as one class on
all matters. Classes of shares of the Fund have equal voting rights. No
amendment may be made to the Declaration of Trust that adversely affects any
class of shares without the approval of a majority of the votes applicable to
the shares of that class. Shares have non-cumulative voting rights, which means
that the holders of more than 50% of the votes applicable to shares voting for
the election of Trustees can elect 100% of the Trustees to be elected at a
meeting and, in such event, the holders of the remaining 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 (for such reasons as electing or removing Trustees, changing fundamental
policies, and approving advisory agreements or 12b-1 plans), 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.
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 Trust. 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 advisor, 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 Fund by its customers. If FUNB and its affiliates were prevented from
continuing to provide for services called for under the investment advisory
agreement, it is expected that the Trustees would identify, and call upon the
Fund's shareholders to approve a new investment advisor. If this were to occur,
it is not anticipated that the shareholders of the Fund would suffer any adverse
financial consequences.
INVESTMENT ADVISORY AGREEMENT
On behalf of the Fund, the Trust has entered into an investment
advisory agreement with the Fund's investment advisor (the "Advisory
Agreement"). Under the Advisory Agreement, and subject to the supervision of the
Trust's Board of Trustees, the investment advisor furnishes to the Fund (unless
the Fund is Evergreen Masters 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
investment advisor pays for all of the expenses incurred in connection with the
provision of its services.
If the Fund is Evergreen Masters Fund, the Advisory Agreement is
similar to the above except that the investment advisor selects sub-advisors
(hereinafter referred to as "Managers") for the Fund and monitors each Manager's
investment program and results. The investment advisor has primary
responsibility under the multi-manager strategy to oversee the Managers,
including making recommendations to the Trust regarding the hiring, termination
and replacement of Managers.
The Fund pays for all charges and expenses, other than those
specifically referred to as being borne by the investment advisor, including,
but not limited to, (1) custodian charges and expenses; (2) bookkeeping and
auditors' charges and expenses; (3) transfer agent charges and expenses; (4)
fees and expenses of Independent Trustees; (5) brokerage commissions, brokers'
fees and expenses; (6) issue and transfer taxes; (7) applicable costs and
expenses under the Distribution Plan (as described above) (8) taxes and trust
fees payable to governmental agencies; (9) the cost of share certificates; (10)
fees and expenses of the registration and qualification of the Fund and its
shares with the 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 the Fund; (12) expenses of shareholders' and
Trustees' meetings; (13) charges and expenses of legal counsel for the Fund and
for the Independent Trustees on matters relating to the 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 the Fund. For information on
advisory fees paid by the Fund, see "Expenses" in Part 1 of this SAI.
The Advisory Agreement continues in effect for two years from its
effective date and, thereafter, from year to year only if approved at least
annually by the Board of Trustees of the Trust or by a vote of a majority of the
Fund's outstanding shares. In either case, the terms of the Advisory Agreement
and continuance thereof must be approved by the vote of a majority of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such approval. The Advisory Agreement may be terminated, without
penalty, on 60 days' written notice by the Trust's Board of Trustees or by a
vote of a majority of outstanding shares. The Advisory Agreement will terminate
automatically upon its "assignment" as that term is defined in the 1940 Act.
Managers (Evergreen Masters Fund only)
Evergreen Masters Fund's investment program is based upon the
investment advisor's multi-manager concept. The investment advisor allocates the
Fund's portfolio assets on an equal basis among a number of investment
management organizations - currently four in number - each of which employs a
different investment style, and periodically rebalances the Fund's portfolio
among the Managers so as to maintain an approximate equal allocation of the
portfolio among them throughout all market cycles. Each Manager provides these
services under a Portfolio Management Agreement. Each Manager has discretion,
subject to oversight by the Trustees and the investment advisor, to purchase and
sell portfolio assets consistent with the Fund's investment objectives, policies
and restrictions and specific investment strategies developed by the investment
advisor. The Fund's current Managers are EAMC, MFS Institutional Advisors, Inc.,
Oppenheimer Funds, Inc. and Putnam Investment Management, Inc.
The Trust and FUNB have received an order from the SEC that permits the
investment advisor to employ a "manager of managers" strategy in connection with
its management of the Fund. The exemptive order permits the investment advisor,
subject to certain conditions, and without shareholder approval, to: (a) select
new Managers who are unaffiliated with the investment advisor with the approval
of the Trust's Board of Trustees; (b) change the material terms of the Portfolio
Management Agreements with the Managers; and (c) continue the employment of a
Manager after an event which would otherwise cause the automatic termination of
a Portfolio Management Agreement. Shareholders would be notified of any Manager
changes. Shareholders have the right to terminate arrangements with a Manager by
vote of a majority of the outstanding shares of the Fund. The order also permits
the Fund to disclose the Managers' fees only in the aggregate.
<PAGE>
Transactions Among Advisory Affiliates
The Trust has adopted procedures pursuant to Rule 17a-7 of the 1940 Act
("Rule 17a-7 Procedures"). The Rule 17a-7 Procedures permit the Fund to buy or
sell securities from another investment company for which a subsidiary of First
Union Corporation is an investment advisor. The Rule 17a-7 Procedures also allow
the Fund to buy or sell securities from other advisory clients for whom a
subsidiary of First Union Corporation is an investment advisor. The Fund may
engage in such transaction if it is equitable to each participant and consistent
with each participant's investment objective.
MANAGEMENT OF THE TRUST
The Trust is supervised by a Board of Trustees that is responsible for
representing the interest of the shareholders. The Trustees meet periodically
throughout the year to oversee the Fund's activities, reviewing, among other
things, the Fund's performance and its contractual arrangements with various
service providers. Each Trustee is paid a fee for his or her services.
See "Expenses-Trustee Compensation" in Part 1 of this SAI.
The Trust has an Executive Committee which consists of the Chairman of
the Board, James Howell, the Vice Chairman of the Board, Michael Scofield, and
Russell Salton, each of whom is an Independent Trustee. The Executive Committee
recommends Trustees to fill vacancies, prepares the agenda for Board Meetings
and acts on routine matters between scheduled Board meetings.
Set forth below are the Trustees and officers of the Trust and their
principal occupations and 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>
<S> <C> <C>
Name Position with Trust Principal Occupations for Last Five Years
Laurence B. Ashkin Trustee Real estate developer and construction consultant; and
(DOB: 2/2/28) President of Centrum Equities and Centrum Properties, Inc.
Charles A. Austin III Trustee Investment Counselor to Appleton Partners, Inc.; former
(DOB: 10/23/34) Director, Executive Vice President and Treasurer, State
Street Research & Management Company (investment advice);
Director, The Andover Companies (Insurance); and Trustee,
Arthritis Foundation of New England
K. Dun Gifford Trustee Trustee, Treasurer and Chairman of the Finance Committee,
(DOB: 10/12/38) Cambridge College; Chairman Emeritus and Director, American
Institute of Food and Wine; Chairman and President, Oldways
Preservation and Exchange Trust (education); former Chairman
of the Board, Director, and Executive Vice President, The
London Harness Company; former Managing Partner, Roscommon
Capital Corp.; former Chief Executive Officer, Gifford Gifts
of Fine Foods; former Chairman, Gifford, Drescher & Associates
(environmental consulting)
James S. Howell Chairman of the Board Former Chairman of the Distribution Foundation for the
(DOB: 8/13/24) of Trustees Carolinas; and former Vice President of Lance Inc. (food
manufacturing).
Leroy Keith, Jr. Trustee Chairman of the Board and Chief Executive Officer, Carson
(DOB: 2/14/39) Products Company; Director of Phoenix Total Return Fund and
Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix
Multi-Portfolio Fund, and The Phoenix Big Edge Series Fund; and
former President, Morehouse College.
Gerald M. McDonnell Trustee Sales Representative with Nucor-Yamoto, Inc. (steel
(DOB: 7/14/39) producer).
Thomas L. McVerry Trustee Former Vice President and Director of Rexham Corporation
(DOB: 8/2/39) (manufacturing); and former Director of Carolina
Cooperative Federal Credit Union.
William Walt Pettit Trustee Partner in the law firm of William Walt Pettit, P.A.
(DOB: 8/26/55)
David M. Richardson Trustee Vice Chair and former Executive Vice President, DHR
(DOB: 9/14/41) International, Inc. (executive recruitment); former Senior
Vice President, Boyden International Inc. (executive
recruitment); and Director, Commerce and Industry
Association of New Jersey, 411 International, Inc., and J&M
Cumming Paper Co.
Russell A. Salton, III MD Trustee Medical Director, U.S. Health Care/Aetna Health Services;
(DOB: 6/2/47) former Managed Health Care Consultant; and former
President, Primary Physician Care.
Michael S. Scofield Vice Chairman of the Attorney, Law Offices of Michael S. Scofield.
(DOB: 2/20/43) Board of Trustees
Richard J. Shima Trustee Former Chairman, Environmental Warranty, Inc. (insurance
(DOB: 8/11/39) agency); Executive Consultant, Drake Beam Morin, Inc.
(executive outplacement); Director of Connecticut Natural Gas
Corporation, Hartford Hospital, Old State House Association,
Middlesex Mutual Assurance Company, and Enhance Financial
Services, Inc.; Chairman, Board of Trustees, Hartford Graduate
Center; Trustee, Greater Hartford YMCA; former Director, Vice
Chairman and Chief Investment Officer, The Travelers Corporation;
former Trustee, Kingswood-Oxford School; and former Managing
Director and Consultant, Russell Miller, Inc.
<PAGE>
Anthony J. Fischer* President and Treasurer Vice President/Client Services, BISYS Fund Services.
(DOB:2/10/59)
Nimish S. Bhatt** Vice President and Vice President, Tax, BISYS Fund Services; former Assistant
(DOB: 6/6/63) Assistant Treasurer Vice President, EAMC/First Union Bank; former Senior Tax
Consulting/Acting Manager, Investment Companies Group,
PricewaterhouseCoopers LLP, New York.
Bryan Haft** Vice President Team Leader, Fund Administration, BISYS Fund Services.
(DOB: 1/23/65)
Senior Vice President and Assistant General Counsel, First
Michael H. Koonce Secretary Union Corporation; former Senior Vice President and General
(DOB: 4/20/60) Counsel, Colonial Management Associates, Inc.
</TABLE>
*Address: BISYS Fund Services, 90 Park Avenue, New York, New York 10016
**Address: BISYS, 3435 Stelzer Road, Columbus, Ohio 43219-8001
CORPORATE AND MUNICIPAL BOND RATINGS
The Fund relies on ratings provided by independent rating services to
help determine the credit quality of bonds and other obligations the Fund
intends to purchase or already owns. A rating is an opinion of an issuer's
ability to pay interest and/or principal when due. Ratings reflect an issuer's
overall financial strength and whether it can meet its financial commitments
under various economic conditions.
If a security held by the Fund loses its rating or has its rating
reduced after the Fund has purchased it, the Fund is not required to sell or
otherwise dispose of the security, but may consider doing so.
The principal rating services, commonly used by the Fund and investors
generally, are S&P and Moody's. The Fund may also rely on ratings provided by
Fitch. Rating systems are similar among the different services. As an example,
the chart below compares basic ratings for long-term bonds. The "Credit Quality"
terms in the chart are for quick reference only. Following the chart are the
specific definitions each service provides for its ratings.
<TABLE>
<CAPTION>
COMPARISON OF LONG-TERM BOND RATINGS
- ----------------- ---------------- --------------- ==========================================
<S> <C> <C> <C>
MOODY'S S&P FITCH Credit Quality
- ----------------- ---------------- --------------- ==========================================
- ----------------- ---------------- --------------- ==========================================
Aaa AAA AAA Excellent Quality (lowest risk)
- ----------------- ---------------- --------------- ==========================================
- ----------------- ---------------- --------------- ==========================================
Aa AA AA Almost Excellent Quality (very low risk)
- ----------------- ---------------- --------------- ==========================================
- ----------------- ---------------- --------------- ==========================================
A A A Good Quality (low risk)
- ----------------- ---------------- --------------- ==========================================
- ----------------- ---------------- --------------- ==========================================
Baa BBB BBB Satisfactory Quality (some risk)
- ----------------- ---------------- --------------- ==========================================
- ----------------- ---------------- --------------- ==========================================
Ba BB BB Questionable Quality (definite risk)
- ----------------- ---------------- --------------- ==========================================
- ----------------- ---------------- --------------- ==========================================
B B B Low Quality (high risk)
- ----------------- ---------------- --------------- ==========================================
- ----------------- ---------------- --------------- ==========================================
Caa/Ca/C CCC/CC/C CCC/CC/C In or Near Default
- ----------------- ---------------- --------------- ==========================================
- ----------------- ---------------- --------------- ==========================================
D DDD/DD/D In Default
- ----------------- ---------------- --------------- ==========================================
</TABLE>
CORPORATE BONDS
LONG-TERM RATINGS
Moody's Corporate Long-Term Bond Ratings
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
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations, (i.e.
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
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.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa to Caa. The modifier 1 indicates that the company ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range raking and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
S&P Corporate Long-Term Bond Ratings
AAA An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA An obligation rated AA differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
BB, B, CCC, CC and C: As described below, obligations rated BB, B, CCC, CC, and
C are regarded as having significant speculative characteristics. BB indicates
the least degree of speculation and C the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
BB An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions, which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B An obligation rated B is more vulnerable to nonpayment than obligations rated
BB, but the obligor currently has the capacity to meet its financial commitment
on the obligation. Adverse business, financial, or economic conditions will
likely impair the obligor's capacity or willingness to meet it financial
commitment on the obligation.
CCC An obligation rated CCC is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C The C rating may be used to cover a situation where a bankruptcy petition has
been filed or similar action has been taken, but payments on this obligation are
being continued.
D The D rating, unlike other ratings, is not prospective; rather, it is used
only where a default has actually occurred--and not where a default is only
expected. S&P changes ratings to D either:
! On the day an interest and/or principal payment is due and is not paid. An
exception is made if there is a grace period and S&P believes that a
payment will be made, in which case the rating can be maintained; or
! Upon voluntary bankruptcy filing or similar action. An exception is
made if S&P expects that debt service payments will continue to be made
on a specific issue. In the absence of a payment default or bankruptcy
filing, a technical default (i.e., covenant violation) is not
sufficient for assigning a D rating.
Plus (+) or minus (-) The ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
Fitch Corporate Long-Term Bond Ratings
Investment Grade
AAA Highest credit quality. AAA ratings denote the lowest expectation of credit
risk. They are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA Very high credit quality. AA ratings denote a very low expectation of credit
risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A High credit quality. A ratings denote a lower expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB Speculative. BB ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met.
Securities rated in this category are not investment grade.
B Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
CCC, CC, C High default risk. Default is a real possibility. Capacity for
meeting financial commitment is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of some
kind appears probable. C ratings signal imminent default.
DDD, DD, D Default. Securities are not meeting current obligations and are
extremely speculative. DDD designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, DD indicates expected recovery of 50%-90% of such outstandings, and D
the lowest recovery potential, i.e. below 50%.
+ or - may be appended to a rating to denote relative status within major rating
categories. Such suffixes are not added to the AAA rating category or to
categories below CCC.
CORPORATE SHORT-TERM RATINGS
Moody's Corporate Short-Term Issuer Ratings
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics.
- -- Leading market positions in well-established industries.
- -- High rates of return on funds employed.
- -- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- -- Broad margins in earnings coverage of fixed financial changes and high
internal cash generation.
- -- Well-established access to a range of financial markets and assured sources
of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Not Prime Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P Corporate Short-Term Obligation Ratings
A-1 A short-term obligation rated A-1 is rated in the highest category by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category certain obligations are designated with a plus sign
(+). This indicates that the obligor's capacity to meet its financial commitment
on these obligations is extremely strong.
A-2 A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated A-3 exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
B A short-term obligation rated B is regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
C A short-term obligation rated C is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D The D rating, unlike other ratings, is not prospective; rather, it is used
only where a default has actually occurred--and not where a default is only
expected. S&P changes ratings to D either:
! On the day an interest and/or principal payment is due and is not paid. An
exception is made if there is a grace period and S&P believes that a payment
will be made, in which case the rating can be maintained; or
! Upon voluntary bankruptcy filing or similar action, An exception is
made if S&P expects that debt service payments will continue to be made
on a specific issue. In the absence of a payment default or bankruptcy
filing, a technical default (i.e., covenant violation) is not
sufficient for assigning a D rating.
Fitch Corporate Short-Term Obligation Ratings
F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added "+" to denote any exceptionally
strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial commitments
is adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D Default. Denotes actual or imminent payment default.
MUNICIPAL BONDS
LONG-TERM RATINGS
Moody's Municipal Long-Term Bond Ratings
Aaa Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds 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 risk appear somewhat larger than the Aaa securities.
A Bonds 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 some time in the future.
Baa Bonds 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.
Ba Bonds 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.
B Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa Bonds rated Caa are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest.
Ca Bonds rated Ca represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
C Bonds rated 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.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range raking and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
S&P Municipal Long-Term Bond Ratings
AAA An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA An obligation rated AA differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
BB, B, CCC, CC and C: As described below, obligations rated BB, B, CCC,
CC, and C are regarded as having significant speculative characteristics. BB
indicates the least degree of speculation and C the highest. While such
obligations will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major exposures to adverse
conditions.
BB An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions, which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B An obligation rated B is more vulnerable to nonpayment than obligations rated
BB, but the obligor currently has the capacity to meet its financial commitment
on the obligation. Adverse business, financial, or economic conditions will
likely impair the obligor's capacity or willingness to meet it financial
commitment on the obligation.
CCC An obligation rated CCC is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C The C rating may be used to cover a situation where a bankruptcy petition has
been filed or similar action has been taken, but payments on this obligation are
being continued.
D An obligation rated D is in payment default. The D rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Plus (+) or minus (-) The ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
Fitch Municipal Long-Term Bond Ratings
Investment Grade
AAA Highest credit quality. AAA ratings denote the lowest expectation of credit
risk. They are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA Very high credit quality. AA ratings denote a very low expectation of credit
risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A High credit quality. A ratings denote a lower expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB Speculative. BB ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met.
Securities rated in this category are not investment grade.
B Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
CCC, CC, C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of some
kind appears probable. C ratings signal imminent default.
DDD, DD, D Default. Securities are not meeting current obligations and are
extremely speculative. DDD designates the highest potential for recovery of
amounts outstanding on any securities involved. DD designates lower recovery
potential and D the lowest.
+ or - may be appended to a rating to denote relative status within major rating
categories. Such suffixes are not added to the AAA rating category or to
categories below CCC.
SHORT-TERM MUNICIPAL RATINGS
Moody's Municipal Short-Term Issuer Ratings
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidence by many of the following characteristics.
- -- Leading market positions in well-established industries.
- -- High rates of return on funds employed.
- -- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- -- Broad margins in earnings coverage of fixed financial changes and high
internal cash generation.
- -- Well-established access to a range of financial markets and assured sources
of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Not Prime Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Moody's Municipal Short-Term Loan Ratings
MIG 1 This designation denotes best quality. There is strong protection by
established cash flows, superior liquidity support, or demonstrated broad-based
access to the market for refinancing.
MIG 2 This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
MIG 3 This designation denotes favorable quality. Liquidity and cash-flow
protection may be narrow and market access for refinancing is likely to be less
well established.
SG This designation denotes speculative quality. Debt instruments in this
category may lack margins of protection.
S&P Commercial Paper Ratings
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
A-1.
A-3 Issues carrying this designation have an adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B Issues rated B are regarded as having only speculative capacity for timely
payment.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes such payments
will be made during such grace period.
S&P Municipal Short-Term Obligation Ratings
SP-1 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3 Speculative capacity to pay principal and interest.
Fitch Municipal Short-Term Obligation Ratings
F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added "+" to denote any exceptionally
strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial commitments
is adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D Default. Denotes actual or imminent payment default.
ADDITIONAL INFORMATION
Except as otherwise stated in its prospectus or required by law, the
Fund reserves the right to change the terms of the offer stated in its
prospectus without shareholder approval, including the right to impose or change
fees for services provided.
No dealer, salesman or other person is authorized to give any
information or to make any representation not contained in the Fund's
prospectus, SAI or in supplemental sales literature issued by the Fund or EDI,
and no person is entitled to rely on any information or representation not
contained therein.
The Fund's prospectus 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.
<PAGE>
EVERGREEN MUNICIPAL TRUST
PART C
OTHER INFORMATION
<PAGE>
Item 23. Exhibits
Unless otherwise noted, the exhibits listed below are contained herein.
<TABLE>
<CAPTION>
Exhibit
Number Description Location
- ------- ----------- -----------
<S> <C> <C>
(a) Declaration of Trust Incorporated by reference to
Registrant's Pre-Effective Amendment No. 1
Filed on October 8, 1997
(b) By-laws Incorporated by reference to
Registrant's Pre-Effective Amendment No. 1
Filed on October 8, 1997
(c) Provisions of instruments defining the rights Incorporated by reference to
of holders of the securities being registered Registrant's Post-Effective Amendment No. 1
are contained in the Declaration of Trust Filed on July 31, 1998
Articles II, III.(6)(c), VI.(3), IV.(8), V, VI,
VII, VIII and By-laws Articles II, III and VIII
included as part of Exhibits 1 and 2, above.
(d)(1) Investment Advisory and Management Incorporated by reference to
Agreement between the Registrant and First Registrant's Post-Effective Amendment No. 7
Union National Bank Filed on July 31, 1998
(d)(2) Investment Advisory and Management Incorporated by reference to
Agreement between the Registrant and Evergreen Registrant's Post-Effective Amendment No. 7
Asset Management Corp. Filed on July 31, 1998
(d)(3) Investment Advisory and Management Incorporated by reference to
Agreement between the Registrant and Evergreen Registrant's Post-Effective Amendment No. 7
Investment Management Company Filed on July 31, 1998.
(formerly Keystone Investment Management Company)
(e)(1) Class A and Class C Principal Underwriting Incorporated by reference to
Agreement between the Registrant and Evergreen Registrant's Post-Effecive Amendment No. 7
Distributor, Inc. Filed on July 31, 1998.
(e)(2) Class B Principal Underwriting Agreement Incorporated by reference to
between the Registrant and Evergreen Distributor Registrant's Post-Effective Amendment No. 7
Inc. (B-1) Filed on July 31, 1998.
(e)(3) Class B Principal Underwriting Agreement Incorporated by reference to
between the Registrant and Evergreen Distributor, Registrant's Post-Effective Amendment No. 7
Inc. (B-2) Filed on July 31, 1998.
(e)(4) Class B Principal Underwriting Agreement Incorporated by reference to
between the Registrant and Evergreen Distributor, Registrant's Post-Effective Amendment No. 7
Inc. (Evergreen/KCF) Filed on July 31, 1998.
(e)(5) Class Y Principal Underwriting Agreement Incorporated by reference to
between the Registrant and Evergreen Distributor, Registrant's Post-Effective Amendment No. 7
Inc. Filed on July 31, 1998.
(e)(6) Specimen copy of Dealer Agreement used by Incorporated by reference to
Evergreen Distributor, Inc. Registrant's Pre-Effective Amendment No. 1
Filed November 12, 1997
(f) Form of Deferred Compensation Plan Incorporated by reference to
Registrant's Pre-Effective Amendment No. 2
Filed on November 10, 1997
(g) Custodian Agreement between the Registrant Incorporated by reference to
and State Street Bank and Trust Company Registrant's Post-Effective Amendment No. 7
Filed on July 31, 1998
(h)(1) Administration Agreement between Evergreen Incorporated by reference to
Investment Services, Inc. and the Registrant Registrant's Post-Effective Amendment No. 7
Filed on July 31, 1998.
(h)(2) Transfer Agent Agreement between the Incorporated by reference to
Registrant and Evergreen Service Company Registrant's Post-Effective Amendment No. 7
Filed on July 31, 1998.
(i) Opinion and Consent of Sullivan & Worcester LLP Incorporated by reference to
Registrant's Post-Effective Amendment No. 2
Filed on December 12, 1997
(j) Consent of KPMG LLP
(k) Not applicable
(l) Not applicable
(m)(1) 12b-1 Distribution Plan for Class A Incorporated by reference to
Registrant's Post-Effective Amendment No. 7
Filed on July 31, 1998.
(m)(2) 12b-1 Distribution Plan for Class B Incorporated by reference to
Registrant's Post-Effective Amendment No. 7
Filed on July 31, 1998
(m)(3) 12b-1 Distribution Plan for Class B Incorporated by reference to
(KAF B-1) Registrant's Post-Effective Amendment No. 7
Filed on July 31, 1998.
(m)(4) 12b-1 Distribution Plan for Class B Incorporated by reference to
(KAF B-2) Registrant's Post-Effective Amendment No. 7
Filed on July 31, 1998
(m)(5) 12b-1 Distribution Plan for Class B Incorporated by reference to
(KCF/Evergreen) Registrant's Post-Effective Amendment No. 7
Filed on July 31, 1998.
(m)(6) 12b-1 Distribution Plan for Class C Incorporated by reference to
Registrant's Post-Effective Amendment No. 7
Filed on July 31, 1998
(n) Not applicable
(o) Multiple Class Plan Incorporated by reference to
Registrant's Post-Effective Amendment No. 10
filed on April 1, 1999.
</TABLE>
Item 24. Persons Controlled by or Under Common Control with Registrant.
None
Item 25. Indemnification.
Registrant has obtained from a major insurance carrier a trustees and
officers liability policy covering certain types of errors and omissions.
Provisions for the indemnification of the Registrant's Trustees and
officers are also contained the Registrant's Declaration of Trust.
Provisions for the indemnification of Registrant's Investment Advisors are
contained in their respective Investment Advisory and Management Agreements.
Provisions for the indemnification of Evergreen Distributor, Inc., the
Registrant's principal underwriter, are contained in each Principal Underwriting
Agreement between Evergreen Distributor, Inc. and the Registrant.
Provisions for the indemnification of Evergreen Service Company, the
Registrant's transfer agent, are contained in the Master Transfer and
Recordkeeping Agreement between Evergreen Service Company and the Registrant.
Provisions for the indemnification of State Street Bank and Trust Company,
the Registrant's custodian, are contained in the Custodian Agreement between
State Street Bank and Trust Company and the Registrant.
Item 26. Business or Other Connections of Investment Adviser.
The Directors and principal executive officers of First Union National Bank
are:
Edward E. Crutchfield, Jr. Chairman and Chief Executive Officer,
First Union Corporation; Chief Executive
Officer and Chairman, First Union National
Bank
John R. Georgius President, First Union Corporation; Vice
Chairman and President, First Union National
Bank
Marion A. Cowell, Jr. Executive Vice President, Secretary &
General Counsel, First Union Corporation;
Secretary and Executive Vice President,
First Union National Bank
Robert T. Atwood Executive Vice President and Chief Financial
Officer, First Union Corporation; Chief
Financial Officer and Executive Vice
President
All of the above persons are located at the following address: First Union
National Bank, One First Union Center, Charlotte, NC 28288.
The information required by this item with respect to Evergreen Asset
Management Corp. is incorporated by reference to the Form ADV (File No.
801-46522) of Evergreen Asset Management Corp.
The information required by this item with respect to Evergreen Investment
Management Company (formerly Keystone Investment Management Company) is
incorporated by reference to the Form ADV (File No. 801-8327) of Evergreen
Investment Management Company.
Item 27. Principal Underwriters.
Evergreen Distributor, Inc. acts as principal underwriter for each
registered investment company or series thereof that is a part of the Evergreen
"fund complex" as such term is defined in Item 22(a) of Schedule 14A under the
Securities Exchange Act of 1934.
The Directors and principal executive officers of Evergreen Distributor,
Inc. are:
Lynn C. Mangum Director, Chairman and Chief Executive
Officer
Dennis Sheehan Director, Chief Financial Officer
J. David Huber President
Kevin J. Dell Vice President, General Counsel and Secretary
All of the above persons are located at the following address: Evergreen
Distributor, Inc., 90 Park Avenue, New York, New York 10016.
Evergreen Distributor, Inc. acts as principal underwriter for each
registered investment company or series thereof that is a part of the Evergreen
"fund complex" as such term is defined in Item 22(a) of Schedule 14A
under the Securities Exchange Act of 1934.
Item 28. Location of Accounts and Records.
All accounts and records required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and the Rules 31a-1 through 31a-3 promulgated
thereunder are maintained at one of the following locations:
Evergreen Investment Services, Inc., Evergreen Service Company and
Evergreen Investment Management Company, all located at 200 Berkeley
Street, Boston, Massachusetts 02110
First Union National Bank, One First Union Center, 301 S. College Street,
Charlotte, North Carolina 28288
Evergreen Asset Management Corp., 2500 Westchester Avenue, Purchase,
New York 10577
Iron Mountain, 3431 Sharp Slot Road, Swansea, Massachusetts 02777
State Street Bank and Trust Company, 2 Heritage Drive, North Quincy,
Massachusetts 02171
Item 29. Management Services.
Not Applicable
Item 30. Undertakings.
The Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual
report to shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940 the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of New York, and State of New York,on the 29th day of
July, 1999.
EVERGREEN MUNICIPAL TRUST
By: /s/ Anthony J. Fischer
-----------------------------
Name: Anthony J. Fischer
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 29th day of July, 1999.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/Anthony J. Fischer /s/ Laurence B. Ashkin /s/ Charles A. Austin, III
- ------------------------- ----------------------------- --------------------------------
Anthony J. Fischer Laurence B. Ashkin* Charles A. Austin III*
President and Treasurer (Principal Trustee Trustee
Financial and Accounting Officer)
/s/ K. Dun Gifford /s/ James S. Howell /s/ William Walt Pettit
- ---------------------------- ---------------------------- --------------------------------
K. Dun Gifford* James S. Howell* William Walt Pettit*
Trustee Chairman of the Board Trustee
and Trustee
/s/Gerald M. McDonnell /s/ Thomas L. McVerry /s/ Michael S. Scofield
- ------------------------------- ----------------------------- --------------------------------
Gerald M. McDonell* Thomas L. McVerry* Michael S. Scofield*
Trustee Trustee Vice Chairman of the Board
and Trustee
/s/ David M. Richardson /s/ Russell A. Salton, III MD /s/ Leroy Keith, Jr.
- ------------------------------ ------------------------------- --------------------------------
David M. Richardson* Russell A. Salton, III MD* Leroy Keith, Jr.
Trustee Trustee Trustee
/s/ Richard J. Shima
- ------------------------------
Richard J. Shima*
Trustee
</TABLE>
*By: /s/ Catherine Foley
- -------------------------------
Catherine Foley
Attorney-in-Fact
*Catherine Foley, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named individuals pursuant to powers of
attorney duly executed by such persons and incorporated by reference to
Registrant's Registration Statement filed on September 19, 1997.
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Exhibit
- -------------- -------
(j) Consent of KPMG LLP
CONSENT OF INDEPENDENT AUDITORS
The Trustees and Shareholders
Evergreen Municipal Trust:
We consent to the use of our report dated April 30, 1999 for Evergreen
Connecticut Municipal Bond Fund, Evergreen New Jersey Municipal Bond Fund and
Evergreen Pennsylvania Municipal Bond Fund incorporated herein by reference and
to the references to our firm under the captions "FINANCIAL HIGHLIGHTS" in the
prospectus and "Independent Auditors" in the Statement of Additional
Information.
/s/ KPMG LLP
KPMG LLP
Boston, Massachusetts
July 29, 1999
