1933 Act Registration No. 333-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-14AE
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
[ ] Pre-Effective [ ] Post-Effective
Amendment No. Amendment No.
EVERGREEN MUNICIPAL TRUST
(Evergreen Tax-Free High Income Fund)
[Exact Name of Registrant as Specified in Charter]
Area Code and Telephone Number: (617) 210-3200
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------
(Address of Principal Executive Offices)
Michael H. Koonce, Esq.
Evergreen Investment Management Company
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------------
(Name and Address of Agent for Service)
Copies of All Correspondence to:
Robert N. Hickey, Esq.
Sullivan & Worcester LLP
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036
Approximate date of proposed public offering: As soon as possible after
the effective date of this Registration Statement.
The Registrant has registered an indefinite amount of securities under
the Securities Act of 1933 pursuant to Section 24(f) under the Investment
Company Act of 1940 (File No. 333- 36033); accordingly, no fee is payable
herewith. Pursuant to Rule 429, this Registration Statement relates to the
aforementioned registration on Form N-1A. A Rule 24f-2 Notice for the
Registrant's fiscal year ended May 31, 1999 will be filed with the Commission on
or about August 31, 1999.
It is proposed that this filing will become effective on January 18,
2000 pursuant to Rule 488 of the Securities Act of 1933.
<PAGE>
DAVIS TAX-FREE HIGH INCOME FUND
124 EAST MARCY
SANTA FE, NEW MEXICO 87501
January 18, 2000
Dear Shareholder,
At a board meeting held December 7, 1999, the Board of Directors determined that
it is in the best interests of shareholders for Davis Tax-Free High Income Fund
to merge into Evergreen Tax-Free High Income Fund. I am writing to inform you of
a Special Shareholders' meeting to be held in the Fund's offices at 124 East
Marcy Street, Santa Fe New Mexico 87501 at 11:00 a.m. on March 10, 2000. Before
that meeting, I would like your vote on the important issues affecting your Fund
as described in the attached Prospectus/Proxy Statement.
The Prospectus/Proxy Statement includes a proposal requesting that shareholders
consider and act upon an Agreement and Plan of Reorganization whereby all of the
assets of the Fund would be acquired by Evergreen Tax-Free High Income Fund in
exchange for shares of Evergreen Tax-Free High Income Fund and the assumption by
Evergreen Tax-Free High Income Fund of the identified liabilities of the Fund.
You will receive Class A, B, C, or Y shares of Evergreen Tax-Free High Income
Fund having an aggregate net asset value equal to the aggregate net asset value
of your Davis Tax-Free High Income Fund's Class A, B, C, or Y shares. Details
about Evergreen Tax-Free High Income Fund's investment objective, performance,
and management team are contained in the attached Prospectus/Proxy Statement.
For federal income tax purposes, the transaction is a non-taxable event for
shareholders.
The Board of Directors has approved the proposal and recommends that you vote
FOR this proposal.
I realize that this Prospectus/Proxy Statement will take time to review, but
your vote is very important. Please take the time to familiarize yourself with
the proposal. If you attend the meeting, you may vote your shares in person. If
you do not expect to attend the meeting, either complete, date, sign and return
the enclosed proxy card in the enclosed postage-paid envelope, or vote by
calling toll free 1-800-769-4414, 24 hours a day. You may also fax your
completed and signed proxy card (both front and back sides) to us at
1-800-________. Instructions on how to complete the proxy card or vote by
telephone are included immediately after the Notice of Special Meeting.
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<PAGE>
If you have any questions about the proxy please call the Davis Funds at
1-800-279-0279 or our proxy solicitor, D.F. King & Co., Inc., at 1-800-769-4414.
If we do not receive your completed proxy card or your telephone vote within
several weeks, you may be contacted by D.F. King & Co., Inc., who will remind
you to vote your shares.
Thank you for taking this matter seriously and participating in this important
process.
Sincerely,
Shelby M.C. Davis
President
Davis Tax-Free High Income Fund, Inc.
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<PAGE>
DAVIS TAX-FREE HIGH INCOME FUND
124 EAST MARCY STREET
SANTA FE, NEW MEXICO 87501
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MARCH 10, 2000
Notice is hereby given that a Special Meeting (the "Meeting") of Shareholders of
Davis Tax-Free High Income Fund (the "Fund"), a series of Davis Tax-Free High
Income Fund, Inc., will be held at the Fund's offices at 124 East Marcy Street,
Santa Fe, New Mexico 87501, on March 10, 2000 at 11:00 a.m. for the following
purposes:
1. To consider and act upon the Agreement and Plan of Reorganization (the
"Plan") providing for the acquisition of all of the assets of the Fund by
Evergreen Tax-Free High Income Fund ("Evergreen Tax Free Fund"), a series of
Evergreen Municipal Trust, in exchange for shares of Evergreen Tax Free Fund and
the assumption by Evergreen Tax Free Fund of the identified liabilities of the
Fund. The Plan also provides for distribution of these shares of Evergreen Tax
Free Fund to shareholders of the Fund in liquidation and subsequent termination
of the Fund. A vote in favor of the Plan is a vote in favor of the liquidation
and termination of the Fund.
2. To transact any other business which may properly come before the Meeting or
any adjournment or adjournments thereof.
On behalf of the Fund, the Board of Directors has fixed the close of business on
January 10, 2000 as the record date for the determination of shareholders of the
Fund entitled to notice of and to vote at the Meeting or any adjournment
thereof.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO NOT
EXPECT TO ATTEND IN PERSON ARE URGED TO SIGN AND RETURN THE ENCLOSED PROXY IN
THE ENCLOSED ENVELOPE WITHOUT DELAY, WHICH REQUIRES NO POSTAGE, SO THAT THEIR
SHARES MAY BE REPRESENTED AT THE MEETING. YOUR PROMPT ATTENTION TO THE ENCLOSED
PROXY WILL HELP TO AVOID THE EXPENSE OF FURTHER SOLICITATION.
By Order of the Board of Directors
Thomas Tays
Secretary
January 18, 2000
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<PAGE>
INSTRUCTIONS FOR PROXY CARD ENDORSEMENT
Please review the following information regarding valid endorsement of your
proxy card. If your endorsement, or signature, does meet these guidelines, your
proxy card will be returned to you.
1. INDIVIDUAL ACCOUNTS: Sign your name exactly as it appears in the registration
on the proxy card.
2. JOINT ACCOUNTS: Either party may sign but the name of the party signing
should conform exactly to a name shown in the registration on the proxy card.
3. MINOR'S ACCOUNTS: The custodian listed in the registration must sign the
proxy card. If the minor has reached the age of majority in his or her state,
please contact the customer service department.
4. ALL OTHER ACCOUNTS: The capacity of the individual signing the proxy card
should be indicated unless it is reflected in the form of registration.
Please review the following example registrations and the corresponding
signature required:
<TABLE>
<CAPTION>
REGISTRATION EXAMPLE TYPE OF ACCOUNT/SIGNATURE
<S> <C>
1. AARON M. SMITH 1. "INDIVIDUAL ACCOUNT"
124 E. MARCY STREET
SANTA FE NM 87501-2019 Signature: Aaron M. Smith
2. ANDREA E. MALONEY 2. "JOINT TENANT ACCOUNT"
MICHAEL T MALONEY JT WROS
124 E. MARCY STREET Signature: Andrea E. Maloney
SANTA FE, NM 87501-2019 Or Michael T. Maloney
3. ALBERT N ANDERSON CUST 3. "MINOR'S ACCOUNT"
ASHLEY H ANDERSON
UNIF TRANSFER MIN ACT MD
124 E. MARCY STREET
MECHANICSVILLE MD 20659-3478 Signature: Albert N. Anderson, Custodian
4. NASOYA CORPORATION 4. "CORPORATE ACCOUNT"
TOMMY NAKIJIMA PRES.
FRED T. FARKLE TREAS.
124 E. MARCY STREET Signature: Tommy Nakijima, President
BROCKTON MA 02302-1901 Or Fred T. Farkle, Treasurer
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<PAGE>
REGISTRATION EXAMPLE TYPE OF ACCOUNT/SIGNATURE
5. H. WAGNER & J. GUMENICK TTEE 5. "TRUST ACCOUNT"
GEROME GUMENICK TRUST
U/A DTD JUL 09 91 Signature: H. Wagner, Trustee
124 EAST MARCY STREET Or J. Gumenick, Trustee
LAKE WORTH FL 33467-8852
</TABLE>
If you have a different registration type or you are unable to contact the legal
owner of the account, please contact our customer service department at
1-800-279-0279 during New York Stock Exchange business days between the hours of
7:00 a.m. and 4:00 p.m. Mountain Time.
INSTRUCTIONS FOR TELEPHONE VOTING
To vote by telephone follow the three easy steps below:
1. Call 1-800-769-4414.
2. Please have your Proxy Card at hand when you call.
3. Enter the twelve-digit "Control No." found on the card, then follow the
simple recorded instructions.
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<PAGE>
PROSPECTUS/PROXY STATEMENT
January 18, 2000
Acquisition of Assets of
DAVIS TAX-FREE HIGH INCOME FUND
a series of
Davis Tax-Free High Income Fund, Inc.
124 East Marcy Street
Santa Fe, New Mexico 87501
By and in Exchange for Shares of
EVERGREEN TAX-FREE HIGH INCOME FUND
a series of
Evergreen Municipal Trust
200 Berkeley Street
Boston, Massachusetts 02116
This Prospectus/Proxy Statement is being furnished to shareholders of Davis
Tax-Free High Income Fund ("Davis Tax Free Fund") in connection with the
Agreement and Plan of Reorganization (the "Plan") to be submitted to
shareholders of Davis Tax Free Fund for consideration at a Special Meeting of
Shareholders to be held on March 10, 2000 at 11:00 a.m. at the Fund's offices at
124 East Marcy Street, Santa Fe, New Mexico, 87501 and any adjournments thereof
(the "Meeting"). The Plan provides for all of the assets of Davis Tax Free Fund
to be acquired by Evergreen Tax-Free High Income Fund ("Evergreen Tax Free
Fund") in exchange for shares of Evergreen Tax Free Fund and the assumption by
Evergreen Tax Free Fund of the identified liabilities of Davis Tax Free Fund
(hereinafter referred to as the "Reorganization"). Evergreen Tax Free Fund is a
new fund organized specifically to receive all the assets of Davis Tax Free Fund
and to carry on the business of Davis Tax Free Fund. Evergreen Tax Free Fund and
Davis Tax Free Fund are sometimes hereinafter referred to individually as the
"Fund" and collectively as the "Funds."
The investment objectives and investment strategies of Evergreen Tax Free Fund
are substantially identical to those of Davis Tax Free Fund. Both Funds
primarily seek to provide current income free from federal income tax by
investing in municipal obligations. Both Funds pursue this objective by
investing primarily in tax-exempt securities issued by state and local
government entities, the most common form being municipal bonds and municipal
notes. During normal market conditions, at least 80% of the Funds' assets are
invested in tax-exempt securities. Both Funds may invest all of their assets in
securities rated below investment grade. B. Clark Stamper, President of Stamper
Capital and Investments, Inc., the Fund's sub-adviser, has served as the
portfolio manager of Davis Tax Free Fund since June 1990. Following the
Reorganization, Mr. Stamper will serve as the portfolio manager of the Evergreen
Tax Free Fund.
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<PAGE>
Following the Reorganization, shares of Evergreen Tax Free Fund will be
distributed to shareholders of Davis Tax Free Fund in liquidation of Davis Tax
Free Fund and such Fund will be terminated. Holders of Class A, B, C or Y shares
of Davis Tax Free Fund will receive the same number of full and fractional Class
A, B, C, or Y shares of Evergreen Tax Free Fund having an aggregate net asset
value equal to the aggregate net asset value of the shares they currently hold
of Davis Tax Free Fund. Each such class of shares of Evergreen Tax Free Fund has
substantially identical Rule 12b-1 distribution-related fees, if any, as the
shares of the respective class of Davis Tax Free Fund held by them prior to the
Reorganization. No sales charge will be imposed in connection with Class A
shares of Evergreen Tax Free Fund received by holders of Class A shares of Davis
Tax Free Fund. In addition, no contingent deferred sales charge ("CDSC") will be
deducted at the time of the Reorganization in connection with Class B or Class C
shares of Evergreen Tax Free Fund received by holders of Class B or Class C
shares of Davis Tax Free Fund. Holders of Class B shares of Evergreen Tax Free
Fund received in the Reorganization will be subject to the schedule of CDSCs
currently applicable to the Class B shares of Davis Tax Free Fund and not the
schedule of CDSCs applicable to Class B shares of Evergreen Tax Free Fund. The
CDSC schedule with respect to the Class C shares of each Fund is the same. The
Reorganization is being structured as a tax-free reorganization for federal
income tax purposes.
Evergreen Tax Free Fund is a separate series of Evergreen Municipal Trust, an
open-end management investment company registered under the Investment Company
Act of 1940, as amended (the "1940 Act"). Evergreen Tax Free Fund was recently
organized and has no operations to date.
This Prospectus/Proxy Statement, which should be retained for future reference,
sets forth concisely the information about Evergreen Tax Free Fund that
shareholders of Davis Tax Free Fund should know before voting on the
Reorganization. Certain relevant documents listed below, which have been filed
with the Securities and Exchange Commission ("SEC"), are incorporated in whole
or in part by reference. A Statement of Additional Information dated January 18,
2000, relating to this Prospectus/Proxy Statement and the Reorganization which
includes the financial statements of Davis Tax Free Fund dated September 30,
1999 (Evergreen Tax Free Fund is new and has not yet issued financial
statements), has been filed with the SEC and is incorporated by reference in its
entirety into this Prospectus/Proxy Statement. A copy of such Statement of
Additional Information is available upon request and without charge by writing
to Evergreen Tax Free Fund at 200 Berkeley Street, Boston, Massachusetts 02116
or by calling the Fund toll-free at 1-800-343-2898.
The Prospectus of Evergreen Tax Free Fund which pertains to Class A, B, C and
Class Y shares, dated January 10, 2000 is incorporated herein by reference in
its entirety. Shareholders of Davis Tax Free Fund will receive, with this
Prospectus/Proxy Statement, a copy of the Prospectus of Evergreen Tax Free Fund
. Additional information about Evergreen Tax Free Fund is contained in its
Statement of Additional Information also dated January 10, 2000 which has been
filed with
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<PAGE>
the SEC and which is available upon request and without charge by writing to or
calling Evergreen Tax Free Fund at the address or telephone number listed in the
preceding paragraph.
The two Prospectuses of Davis Tax Free Fund which pertain (i) to Class A, B, and
C shares and (ii) to Class Y shares, each dated February 1, 1999, are
incorporated herein in their entirety by reference. Copies of the Prospectuses,
related Statement of Additional Information dated February 1, 1999 and the
Annual Report for the fiscal year ended September 30, 1999, are available upon
request and without charge by writing to Davis Tax Free Fund at the address
listed on the cover page of this Prospectus/Proxy Statement or by calling the
Fund toll-free at 1-800-279-0279.
A copy of the Plan is included as Exhibit A to this Prospectus/Proxy Statement.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAVE THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The shares offered by this Prospectus/Proxy Statement are not deposits or
obligations of any bank and are not insured or otherwise protected by the U.S.
government, the Federal Deposit Insurance Corporation, the Federal Reserve Board
or any other government agency and involve investment risk, including possible
loss of capital.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
COMPARISON OF FEES AND EXPENSES......................................................................6
SUMMARY..............................................................................................11
Proposed Plan of Reorganization......................................................................12
Tax Consequences.....................................................................................13
Investment Objectives and Investment Strategies of the Funds.........................................13
Comparative Performance Information..................................................................14
Management of the Funds..............................................................................15
Investment Advisers and the Sub-Adviser..............................................................16
Administrator........................................................................................16
Portfolio Management.................................................................................17
Distribution of Shares...............................................................................17
Purchase and Redemption Procedures...................................................................20
Exchange Privileges..................................................................................20
Dividend Policy......................................................................................20
Risks................................................................................................21
REASONS FOR THE REORGANIZATION.......................................................................23
Agreement and Plan of Reorganization.................................................................26
Federal Income Tax Consequences......................................................................27
Pro-forma Capitalization.............................................................................28
Shareholder Information..............................................................................29
COMPARISON OF INVESTMENT OBJECTIVES AND STRATEGIES OF THE FUNDS......................................31
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS......................................................33
Forms of Organization................................................................................33
Capitalization.......................................................................................33
Shareholder Liability................................................................................34
Shareholder Meetings and Voting Rights...............................................................34
Liquidation..........................................................................................35
Liability and Indemnification of Trustees............................................................35
ADDITIONAL INFORMATION...............................................................................36
VOTING INFORMATION CONCERNING THE MEETING............................................................36
FINANCIAL STATEMENTS AND EXPERTS.....................................................................38
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<PAGE>
LEGAL MATTERS........................................................................................39
OTHER BUSINESS.......................................................................................39
EXHIBIT A: Agreement and Plan of Reorganization....................................................A-1
</TABLE>
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<PAGE>
COMPARISON OF FEES AND EXPENSES
The amounts for Class A, B, C and Y shares of Davis Tax Free Fund set forth in
the following tables and in the examples are based on the expenses for Davis Tax
Free Fund for the fiscal year ended September 30, 1999.
Evergreen Tax Free Fund is newly organized and has not had any operations to
date. The amounts for Class A, B, C, and Y shares of Evergreen Tax Free Fund set
forth in the following tables and in the examples are based on the estimated
expenses of Evergreen Tax Free Fund pro forma for the period ending May 31, 2000
as set forth in the current Prospectus of Evergreen Tax Free Fund.
The following tables show for Davis Tax Free Fund, Evergreen Tax Free Fund, and
Evergreen Tax Free Fund pro forma, assuming consummation of the Reorganization,
the shareholder transaction expenses and annual fund operating expenses
associated with an investment in the Class A, B, C, and Y shares of Evergreen
Tax Free Fund and Davis Tax Free Fund.
Comparison of
Evergreen Tax Free Fund's Class A, B, C, and Y shares
With
Davis Tax Free Fund's Class A, B, C, and Y shares
Shareholder Transaction Expenses
<TABLE>
<CAPTION>
Davis Tax Free Fund
Class A Class B Class C Class Y
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)..................... 4.75% None None None
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<PAGE>
Maximum Deferred Sales Charge (as a
percentage of original purchase price or
redemption proceeds, whichever is lower)................ None(1) 4.00% in 1.00% in None
the first the first
year year and
declining 0.00%
to 1.00% thereafter
in the
sixth
year and
0.00%
thereafter
Annual Fund Operating Expenses (as a
percentage of average daily net assets)
Management Fee.......................................... 0.63% 0.63% 0.63% 0.63%
12b-1 Fees.............................................. 0.25% 1.00% 1.00% None
Other Expenses.......................................... 0.18% 0.19% 0.20% 0.30%
---- ---- ---- ----
Annual Fund Operating Expenses.......................... 1.06% 1.82% 1.83% 0.93%
==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Evergreen Tax Free Fund
Class A Class B Class C Class Y
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)..................... 4.75% None None None
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<PAGE>
Maximum Deferred Sales Charge (as a
percentage of original purchase price or
redemption proceeds, whichever is lower)................ None(1) 5.00% in 1.00% in None
the first the first
year year and
declining 0.00%
to 1.00% thereafter
in the
sixth
year and
0.00%
thereafter
Annual Fund Operating Expenses (as a
percentage of average daily net assets)
Management Fee.......................................... 0.53% 0.53% 0.53% 0.53%
12b-1 Fees(2)........................................... 0.25% 1.00% 1.00% None
Other Expenses.......................................... 0.25% 0.25% 0.25% 0.25%
---- ---- ---- ----
Annual Fund Operating Expenses.......................... 1.03% 1.78% 1.78% 0.78%
==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Evergreen Tax Free Fund Pro Forma
Class A Class B Class C Class Y
(3)
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)..................... 4.75% None None None
-8-
<PAGE>
Maximum Deferred Sales Charge (as a
percentage of original purchase price or
redemption proceeds, whichever is lower)................ None(1) 5.00% in 1.00% in None
the first the first
year year and
declining 0.00%
to 1.00% thereafter
in the
sixth
year and
0.00%
thereafter
Annual Fund Operating Expenses (as a
percentage of average daily net assets)
Management Fee.......................................... 0.53% 0.53% 0.53% 0.53%
12b-1 Fees(2)........................................... 0.25% 1.00% 1.00% None
Other Expenses.......................................... 0.25% 0.25% 0.25% 0.25%
---- ---- ---- ----
Annual Fund Operating Expenses(4)....................... 1.03% 1.78% 1.78% 0.78%
==== ==== ==== ====
</TABLE>
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(1) Investments of $1 million or more are not subject to a front-end sales
charge, but may be subject to a contingent deferred sales charge of
1.00% (0.75% in the case of Davis Tax Free Fund) upon redemption within
one year after the month of purchase.
(2) Class A shares of Evergreen Tax Free Fund can pay up to 0.75% of
average daily net assets as a 12b-1 fee. For the foreseeable future,
the Class A 12b-1 fees will be limited to 0.25% of average daily net
assets.
(3) Class B shares of Evergreen Tax Free Fund received in the
Reorganization will be subject to the schedule of CDSCs currently
applicable to Class B shares of Davis Tax Free Fund and not to the
schedule of CDSCs applicable to Class B shares of Evergreen Tax Free
Fund.
(4) In connection with the Reorganization, the investment adviser to
Evergreen Tax Free Fund has contractually agreed for a period of at
least two years to limit the Fund's Annual Operating Expenses to the
pro forma amounts presented in the table.
Examples: The following tables show for Davis Tax Free Fund, for Evergreen Tax
Free Fund and for Evergreen Tax Free Fund pro forma, assuming consummation of
the Reorganization, examples of the cumulative effect of shareholder transaction
expenses and annual fund operating
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<PAGE>
expenses indicated above on a $10,000 investment in each class of shares for the
periods specified, assuming (i) a 5% annual return and (ii) redemption at the
end of such period. For Class B and C shares, the tables also show the effect if
the shares are not redeemed. In the case of Evergreen Tax Free pro forma, the
examples for Class B shares reflect, as described in footnote 3 above, the CDSC
schedule applicable to Class B shares of Davis Tax Free Fund and convert to
Class A shares after eight years. All tables assume reinvestment of dividends
and capital gain distributions.
<TABLE>
<CAPTION>
Davis Tax Free Fund
One Year Three Years Five Years Ten Years
<S> <C> <C> <C> <C>
Class A shares $578 $796 $1,032 $1,708
Class B shares (assuming $585 $873 $1,185 $1,938
redemption at the end of the period)
Class B shares (assuming no $185 $573 $985 $1,938
redemption at the end of the period)
Class C shares (assuming $286 $576 $990 $2,148
redemption at the end of the period)
Class C shares (assuming no $186 $576 $990 $2,148
redemption at the end of the period)
Class Y shares $95 $296 $515 $1,143
Evergreen Tax Free Fund
One Year Three Years Five Years Ten Years
Class A shares $575 $787 $1,017 $1,675
Class B shares (assuming $681 $860 $1,164 $1,804
redemption at the end of the period)
Class B shares (assuming no $181 $560 $964 $1,804
redemption at the end of the period)
Class C shares (assuming $281 $560 $964 $2,095
redemption at the end of the period)
Class C shares (assuming no $181 $560 $964 $2,095
redemption at the end of the period)
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<PAGE>
Class Y shares $80 $249 $433 $966
Evergreen Tax Free Fund
Pro Forma
One Year Three Years Five Years Ten Years
Class A shares $575 $787 $1,017 $1,675
Class B shares (assuming $581 $860 $1,164 $1,897
redemption at the end of the period)
Class B shares (assuming no $181 $560 $964 $1,897
redemption at the end of the period)
Class C shares (assuming $281 $560 $964 $2,095
redemption at the end of the period)
Class C shares (assuming no $181 $560 $964 $2,095
redemption at the end of the period)
Class Y shares $80 $249 $433 $966
</TABLE>
The purpose of the foregoing examples is to assist Davis Tax Free Fund
shareholders in understanding the various costs and expenses that an investor in
Evergreen Tax Free Fund, as a result of the Reorganization, would bear directly
and indirectly, as compared with the various direct and indirect expenses
currently borne by a shareholder in Davis Tax Free Fund. These examples should
not be considered a representation of past or future expenses or annual return.
Actual expenses may be greater or less than those shown.
SUMMARY
This summary is qualified in its entirety by reference to the additional
information contained elsewhere in this Prospectus/Proxy Statement, the
Prospectus of Evergreen Tax Free Fund dated January 10, 2000, the Prospectuses
of Davis Tax Free Fund dated February 1, 1999 (which are incorporated herein by
reference), and the Plan, the form of which is attached to this Prospectus/Proxy
Statement as Exhibit A.
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<PAGE>
Proposed Plan of Reorganization
The Plan provides for the transfer of all of the assets of Davis Tax Free Fund
in exchange for shares of Evergreen Tax Free Fund and the assumption by
Evergreen Tax Free Fund of the identified liabilities of Davis Tax Free Fund.
The identified liabilities consist only of those liabilities reflected on the
Fund's statement of assets and liabilities determined immediately preceding the
Reorganization. The Plan also calls for the distribution of shares of Evergreen
Tax Free Fund to Davis Tax Free Fund shareholders in liquidation of Davis Tax
Free Fund as part of the Reorganization. As a result of the Reorganization, the
holders of Davis Tax Free Fund Class A, B, C and Y shares will become the owners
of the same number of full and fractional Class A, B, C, and Y shares,
respectively, of Evergreen Tax Free Fund having an aggregate net asset value
equal to the aggregate net asset value of the shareholders' shares of Davis Tax
Free Fund as of the close of business immediately prior to the date that Davis
Tax Free Fund's assets are exchanged for shares of Evergreen Tax Free Fund. See
"Reasons for the Reorganization Agreement and Plan of Reorganization."
The Directors of Davis Tax-Free High Income Fund, Inc., including the Directors
who are not "interested persons," as such term is defined in the 1940 Act (the
"Independent Directors"), have concluded that the Reorganization would be in the
best interests of shareholders of Davis Tax Free Fund, and that the interests of
the shareholders of Davis Tax Free Fund will not be diluted as a result of the
transactions contemplated by the Reorganization. Accordingly, the Directors have
submitted the Plan for the approval of Davis Tax Free Fund's shareholders.
THE BOARD OF DIRECTORS RECOMMENDS APPROVAL BY SHAREHOLDERS OF DAVIS TAX FREE
FUND OF THE PLAN EFFECTING THE REORGANIZATION.
The Trustees of Evergreen Municipal Trust have also approved the Plan and
accordingly, Evergreen Tax Free Fund's participation in the Reorganization.
Approval of the Reorganization on the part of Davis Tax Free Fund will require
the affirmative vote of a majority of the dollar value (each dollar of net asset
value per share is entitled to one vote ) of Davis Tax Free Fund's shares
outstanding and entitled to vote. All classes will vote together as a single
class at a Meeting at which a quorum of the Fund's shares is present. Fifty
percent of the dollar value of the outstanding shares, represented in person or
by proxy, is required to constitute a quorum at the Meeting. See "Voting
Information Concerning the Meeting."
If approved by shareholders of the Fund, it is currently contemplated that the
Reorganization will become effective on or about the close of business on March
10, 2000. However, the Reorganization may become effective at another time and
date should the Meeting be adjourned to a later date or should any other
condition to the Reorganization not be satisfied at that time. Notwithstanding
prior shareholder approval, the Plan may be terminated at any time prior to its
implementation by the mutual agreement of the parties thereto.
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<PAGE>
If the shareholders of Davis Tax Free Fund do not vote to approve the
Reorganization, the Directors will consider other possible courses of action in
the best interests of shareholders.
Tax Consequences
Prior to or at the completion of the Reorganization, Davis Tax Free Fund will
have received an opinion of KPMG LLP that the Reorganization has been structured
so that no gain or loss will be recognized by the Fund or its shareholders for
federal income tax purposes as a result of the receipt of shares of Evergreen
Tax Free Fund in the Reorganization. The holding period and aggregate tax basis
of shares of Evergreen Tax Free Fund that are received by Davis Tax Free Fund's
shareholders will be the same as the holding period and aggregate tax basis of
shares of the Fund previously held by such shareholders, provided that shares of
the Fund are held as capital assets. In addition, the holding period and tax
basis of the assets of Davis Tax Free Fund in the hands of Evergreen Tax Free
Fund as a result of the Reorganization will be the same as in the hands of the
Fund immediately prior to the Reorganization, and no gain or loss will be
recognized by Evergreen Tax Free Fund upon the receipt of the assets of the Fund
in exchange for shares of Evergreen Tax Free Fund and the assumption by
Evergreen Tax Free Fund of the identified liabilities of Davis Tax Free Fund.
Investment Objectives and Investment Strategies of the Funds
The investment objectives and investment strategies of Evergreen Tax Free Fund
are substantially identical to those of Davis Tax Free Fund. Evergreen Tax Free
Fund seeks to provide current income free from federal income tax. Davis Tax
Free Fund's investment objective is to provide current income free from federal
income tax by investing in municipal obligations. Municipal obligations are debt
securities, such as municipal bonds and municipal notes, issued by state and
local governments or their agencies or instrumentalities.
Both Funds pursue their investment objective by investing primarily in
tax-exempt securities issued by state and local government entities, the most
common form being municipal bonds and municipal notes. During normal market
conditions, at least 80% of the Funds' assets are invested in tax-exempt
securities. Both Funds may invest up to 100% of their assets in below investment
grade, or high-yield high-risk, securities.
Following the Reorganization Evergreen Tax Free Fund will have the same
sub-adviser that has managed Davis Tax Free Fund since June 1990 and Mr. B.
Clark Stamper will continue to serve as portfolio manager.
See "Comparison of Investment Objectives and Strategies" below.
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<PAGE>
Comparative Performance Information
Discussions of the manner of calculation of total return are contained in the
respective Prospectuses and Statements of Additional Information of the Funds.
Past performance is not an indication of future results. The calculations of
total return assume the reinvestment of all dividends and capital gain
distributions on the reinvestment date.
Evergreen Tax Free Fund has been recently organized and has not yet engaged in
any operations; consequently, it does not have an investment performance record.
After the Reorganization Evergreen Tax Free Fund, as the successor to Davis Tax
Free Fund, will assume and publish Davis Tax Free Fund's investment performance
record.
The chart below shows the percentage gain or loss in each of the past ten
calendar years for Class B shares of Davis Tax Free Fund. It should give you a
general idea of how the Fund's return has varied from year-to-year. The graph
includes the effects of Fund expenses, but not sales charges. Returns would be
lower if any applicable sales charges were included. The return for the other
classes of shares offered by this Prospectus/Proxy Statement will differ from
the Class B returns shown in the chart, depending on the expenses of that class.
<TABLE>
<CAPTION>
Year-by-Year Total Return for Class B Shares of Davis Tax Free Fund
50%
45%
40%
35%
30%
25%
20%
15% 11.73%
10% 8.45% 8.32% 7.97% 5.54% 6.95%
5% 2.81% 2.18% 3.85% ___%
0%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
90 91 92 93 94 95 96 97 98 99
Best Quarter: _______ Quarter 199_ %
Worst Quarter: _______ Quarter 199_ %
</TABLE>
-14-
<PAGE>
Class B shares yield (as of December 31, 1999):
30-Day SEC Yield - %
Tax-Equivalent Yield - %
The next table lists the average year-by-year return of the Class A,
Class B, Class C and Class Y shares of Davis Tax Free Fund for the 1-year
period, 5-year period, 10 year period, if applicable, and since inception
(through 12/31/99), including any applicable sales charges for Class A, B and C
shares. 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 the Fund's
performance with the Lehman Brothers 10 Year Revenue Bond Index ("Lehman Revenue
Bond Index"). The Lehman Revenue Bond Index is an unmanaged index tracking the
performance of municipal bonds. An index does not include transaction costs
associated with buying and selling securities nor any management fees. It is not
possible to invest directly in an index.
<TABLE>
<CAPTION>
Average Annual Total Return
of Davis Tax Free Fund
1 Year 5 Years 10 Years From
Ended Ended Ended Inception to
December December December December Inception
31, 1999 31, 1999 31, 1999 31, 1999 Date
----------- ---------- ---------- ------------ ----
<S> <C> <C> <C> <C> <C>
Class A shares % N/A N/A % 12/1/94
Class B shares % % % % 3/21/85
Class C shares 8/18/97
% N/A N/A %
Class Y shares 10/6/97
% N/A N/A %
Lehman Brothers
Revenue Bond Index
% % % %*
* Performance since 8/31/97.
</TABLE>
Management of the Funds
The overall management of Evergreen Tax Free Fund and of Davis Tax Free Fund is
the responsibility of, and is supervised by the Board of Trustees of Evergreen
Municipal Trust and the Board of Directors of Davis Tax-Free High Income Fund,
Inc., respectively.
-15-
<PAGE>
Investment Advisers and the Sub-Adviser
Evergreen Investment Management Company ("EIMC") serves as the investment
adviser for Evergreen Tax Free Fund. EIMC is located at: 200 Berkeley Street,
Boston, Massachusetts 02116-5034. EIMC is an indirect subsidiary of First Union
National Bank ("FUNB") which is itself a subsidiary of First Union Corporation,
the sixth largest bank holding company in the United States based on total
assets as of September 30, 1999. FUNB and its affiliates manage the Evergreen
family of mutual funds with assets of approximately $___ billion as of December
31, 1999.
Davis Selected Advisers, LP ("DSA") serves as the investment adviser for Davis
Tax Free Fund. As investment adviser DSA has overall responsibility for
management of the Fund and its daily business affairs.
The investment adviser of Davis Tax Free Fund is entitled to a fee at the annual
rate based on average net assets, as follows: 0.65% on average net assets up to
$250 million, 0.60% on the next $250 million of average net assets and 0.55% on
average net assets over $500 million. The investment adviser of Evergreen Tax
Free Fund is entitled to a fee at the annual rate based on average net assets,
as follows: 0.55% on average net assets up to $250 million, 0.50% on the next
$250 million of average net assets and 0.45% on average net assets over $500
million. For each of the Funds, advisory fees are allocated among each class of
shares in proportion to each classes' relative total net assets.
Stamper Capital & Investments, Inc. ("Stamper"), 1101-A 41st Avenue, Santa Cruz,
California 95062 has served as the Davis Tax Free Fund's sub-adviser since June
1990 under a sub-advisory agreement with DSA. The sub-adviser manages the day to
day investment operations of the Fund, subject to DSA's overall supervision. All
the fees paid to Stamper are paid by DSA and not the Fund.
Effective on the date of the Reorganization, EIMC will enter into a sub-advisory
agreement with Stamper whereby the sub-adviser will manage the day-to-day
investment operations of Evergreen Tax Free Fund. As with its sub-advisory
arrangement with DSA, all fees paid to Stamper will be paid by EIMC and not the
Fund.
Administrator
Evergreen Investment Services, Inc. ("EIS") serves as administrator to Evergreen
Tax Free Fund, subject to the supervision and control of the Evergreen Municipal
Trust's Board of Trustees. EIS provides the Fund with facilities, equipment and
personnel and is entitled to receive an annual fee from the Fund at a rate of
0.10% of the Fund's average daily net assets.
DSA provides certain administrative services at cost to Davis Tax Free Fund for
which it is reimbursed by the Fund.
-16-
<PAGE>
Portfolio Management
B. Clark Stamper, President of Stamper, has served as the portfolio manager of
Davis Tax Free Fund since June, 1990. Mr. Stamper also served as portfolio
manager of Davis Intermediate Investment Grade Bond Fund (formerly Davis High
Income Fund) from June 1990 until October 1998; as portfolio manager of Davis
Government Bond Fund from June 1990 until April 1995, and as portfolio manager
of Selected Capital Preservation Trust's U.S. Government Income Fund from May
1993 until April 1995.
If the Reorganization is approved, Mr. Stamper will become portfolio manager of
Evergreen Tax Free Fund.
Distribution of Shares
Evergreen Distributor, Inc. ("EDI"), an affiliate of BISYS Fund Services, acts
as underwriter of Evergreen Tax Free Fund's shares. EDI distributes the Fund's
shares directly or through broker-dealers, banks (including FUNB), or other
financial intermediaries. Evergreen Tax Free Fund offers Class A, B, C and Y
shares. Each class has separate distribution arrangements. (See
"Distribution-Related and Shareholder Servicing-Related Expenses" below.) No
class bears the distribution expenses relating to the shares of any other class.
In the proposed Reorganization, Davis Tax Free Fund Class A, B, C and Y
shareholders will receive Evergreen Tax Free Fund Class, A, B, C, or Y shares,
respectively. Each Class of Evergreen Tax Free Fund shares has substantially
similar arrangements with respect to the imposition of Rule 12b-1 distribution
and service fees as the identically designated class of Davis Tax Free Fund
shares. Because the Reorganization will be effected at net asset value without
the imposition of a sales charge, Evergreen Tax Free Fund shares acquired by
shareholders of Davis Tax Free Fund pursuant to the proposed Reorganization will
not be subject to any new initial sales charges or CDSC as a result of the
Reorganization. However, Class B and C shares acquired as a result of the
Reorganization would continue to be subject to a CDSC upon subsequent redemption
to the same extent as if shareholders had continued to hold their shares of
Davis Tax Free Fund. The CDSC schedule applicable to the Class B shares of
Evergreen Tax Free Fund received in the Reorganization will be the CDSC schedule
of Class B shares of Davis Tax Free Fund in effect at the time Class B shares of
Davis Tax Free Fund were originally purchased. The CDSC schedule with respect to
the Class C shares of each Fund is the same.
The following is a summary description of charges and fees for Evergreen Tax
Free Fund Class A, B, C and Y shares which will be received by Davis Tax Free
Fund shareholders in the Reorganization. More detailed descriptions of the
distribution arrangements applicable to the classes of shares are contained in
the Evergreen Tax Free Fund Prospectus and the Davis Tax Free Fund Prospectuses
and in each Fund's Statement of Additional Information.
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<PAGE>
NO FRONT-END OR CONTINGENT DEFERRED SALES CHARGE WILL BE IMPOSED ON ANY OF THE
SHAREHOLDERS IN CONNECTION WITH THE REORGANIZATION.
Class A Shares. Class A Shares are sold at net asset value plus an initial sales
charge and, as indicated below, are subject to distribution-related fees. The
initial maximum sales charges applicable to purchases of Class A shares is
4.75%. No initial sales charge will be imposed on Class A shares of Evergreen
Tax Free Fund received by Davis Tax Free Fund's shareholders in the
Reorganization. Subsequent purchases of Class A shares will be subject to
initial sales charges. For further discussion of the initial sales charges
applicable to purchases of Class A shares, see "How to Choose the Share Class
that Best Suits You" in the Prospectus of Evergreen Tax Free Fund.
Class B Shares. Class B shares are sold without an initial sales charge but are
subject to a CDSC, which ranges from 5% to 1%, if shares are redeemed during the
first six years after the month of purchase. In addition, Class B shares are
subject to distribution-related fees and shareholder servicing-related fees as
described below. Class B shares issued in the Reorganization will automatically
convert to Class A shares after eight years after the month of initial purchase
in accordance with the terms of conversion applicable to Class B shares of Davis
Tax Free Fund rather than in seven years after the month of purchase in
accordance with the conversion terms applicable to Class B shares of Evergreen
Tax Free Fund. For purposes of determining when Class B shares issued in the
Reorganization to shareholders of Davis Tax Free Fund will convert to Class A
shares, such shares will be deemed to have been purchased as of the date Class B
shares of Davis Tax Free Fund were originally purchased.
Class B shares are subject to higher distribution-related fees than the
corresponding Class A shares on which a front-end sales charge is imposed (until
they convert to Class A shares). The higher fees mean a higher expense ratio, so
Class B shares pay correspondingly lower dividends and may have a lower net
asset value than Class A shares of the Fund.
Class C Shares. Class C shares are sold without initial sales charges and are
subject to distribution-related and shareholder servicing-related fees. Class C
shares are subject to a 1.00% CDSC if such shares are redeemed during the month
of purchase and the 12-month period following the month of purchase. No CDSC is
imposed on amounts redeemed thereafter. Class C shares incur higher
distribution-related and shareholder servicing-related fees than Class A shares,
and do not convert to any other class of shares.
-18-
<PAGE>
Class Y Shares. Class Y shares are sold at net asset value without any initial
or deferred sales charge and are not subject to distribution-related or
shareholder servicing-related fees. Class Y shares are only available to certain
classes of investors as is more fully described in the Prospectus of Evergreen
Tax Free Fund. Davis Tax Free Fund shareholders who receive Evergreen Tax Free
Fund Class Y shares in the Reorganization and who wish to make subsequent
purchases of Evergreen Tax Free Fund will be able to purchase Class Y shares.
Additional information regarding the classes of shares of the Funds are included
in their respective Prospectuses and Statements of Additional Information.
Distribution-Related and Shareholder Servicing-Related Expenses. Evergreen Tax
Free has adopted a Rule 12b-1 Plan with respect to their Class A shares under
which the Class may pay for distribution-related expenses at an annual rate
which may not exceed 0.75% of average daily net assets attributable to the
Class. Payments with respect to Class A shares are currently limited to 0.25% of
average daily net assets attributable to the Class. This amount may be increased
to the full plan rate for each Fund by the Trustees without shareholder approval
at any time, although there is no intention or expectation that the rate at
which payments are made under the plan will be increased.
Davis Tax Free Fund has adopted a Rule 12b-1 Plan with respect to its Class A
shares under which the Class may pay for distribution and shareholder
servicing-related expenses at an annual rate of 0.25% of the average daily net
assets attributable to the Class.
Both Funds have adopted a Rule 12b-1 Plan with respect to their Class B and
Class C shares, respectively, under which the Class may pay for
distribution-related and shareholder servicing- related expenses at an annual
rate which may not exceed 1.00% of average daily net assets attributable to the
Class.
The Class B and Class C Rule 12b-1 Plans of the Evergreen Tax Free Fund provide
that, of the total 1.00% 12b-1 fee, up to 0.25% may be for payment in respect of
shareholder services. Consistent with the requirements of Rule 12b-1 and the
applicable rules of the National Association of Securities Dealers, Inc.,
following the Reorganization the Evergreen Tax Free Fund may make
distribution-related and shareholder and shareholder servicing-related payments
with respect to Fund shares sold prior to the Reorganization including payments
to Davis Tax Free Fund's former underwriter.
Neither Evergreen Tax Free Fund nor Davis Tax Free Fund has adopted a Rule 12b-1
Plan or a shareholder servicing plan with respect to its Class Y shares. A Rule
12b-1 Plan can only be adopted with shareholder approval.
-19-
<PAGE>
Additional information regarding the Rule 12b-1 plans adopted by the Funds is
included in their respective Prospectuses and Statements of Additional
Information.
Purchase and Redemption Procedures
Information concerning applicable sales charges and distribution-related and
shareholder servicing-related fees is provided above. Investments in the Funds
are not insured. The minimum initial purchase requirement for regular accounts
for both Funds is $1,000. There is no minimum for subsequent purchases of shares
of Evergreen Tax Free Fund. The minimum for subsequent purchases of Davis Tax
Free Fund is $25. Each Fund provides for telephone, mail or wire redemption of
shares at net asset value as next determined after receipt of a redemption
request on each day the New York Stock Exchange ("NYSE") is open for trading.
Additional information concerning purchases and redemptions of shares, including
how each Fund's net asset value is determined, is contained in the respective
Prospectuses for each Fund. All funds invested in each Fund are invested in full
and fractional shares. Each Fund may involuntarily redeem shareholders' accounts
if less than $1,000 for Evergreen Tax Free Fund and if less than $250 for Davis
Tax Free Fund. The Funds reserve the right to reject any purchase order.
Exchange Privileges
Class A, B, C, and Y shares of either Fund generally may exchange their shares
for shares of the same class of any other Davis Fund or Evergreen Fund.
Evergreen Tax Free Fund limits exchanges to five per calendar year and three per
calendar quarter. No sales charge is imposed on an exchange. An exchange which
represents an initial investment in another Davis Fund or Evergreen Fund must
amount to at least $1,000. The Evergreen Fund family for which this exchange
privilege is available currently consists of approximately 60 funds including 24
equity funds, 20 fixed income funds and 16 money market funds. These funds have
different investment objectives and policies. The current exchange privileges,
and the requirements and limitations attendant thereto, are described in the
Funds' respective Prospectuses and Statements of Additional Information.
Dividend Policy
Davis Tax Free Fund declares and pays dividends monthly. Dividends are paid from
estimated net investment income and short-term capital gains on investments.
Evergreen Tax Free Fund distributes dividends from its net investment income
(the dividends, interest and other income on the securities in which it invests)
monthly and any short-term capital gains annually. Distributions of any net
realized long-term gains of each Fund will be made at least annually.
Shareholders begin to earn dividends on the first business day after shares are
purchased unless shares were not paid for, in which case dividends are not
earned until the next business day after payment is received. Dividends and
distributions are reinvested in additional shares of the same class of the
respective Fund, or paid in cash as a shareholder has elected. See the
respective Prospectuses of the Funds for further information concerning
dividends and distributions.
-20-
<PAGE>
After the Reorganization, shareholders of Davis Tax Free Fund who have elected
to have their dividends and/or distributions reinvested will have dividends
and/or distributions received from Evergreen Tax Free Fund reinvested in shares
of Evergreen Tax Free Fund. Shareholders of Davis Tax Free Fund who have elected
to receive dividends and/or distributions in cash will receive dividends and/or
distributions from Evergreen Tax Free Fund in cash after the Reorganization,
although they may, after the Reorganization, elect to have such dividends and/or
distributions reinvested in additional shares of Evergreen Tax Free Fund.
Evergreen Tax Free Fund intends to qualify, and Davis Tax Free Fund has
qualified, and intends to continue to qualify in the future, to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). While so qualified, so long as each Fund distributes all of its
net investment company taxable income and any net realized gains to
shareholders, it is expected that a Fund will not be required to pay any federal
income taxes on the amounts so distributed. A 4% nondeductible excise tax will
be imposed on amounts not distributed if a Fund does not meet certain
distribution requirements by the end of each calendar year. Each Fund
anticipates meeting such distribution requirements.
Risks
Because the investment objectives and investment strategies of Evergreen Tax
Free Fund are substantially identical to those of Davis Tax Free Fund, the risks
associated with the particular investment policies and strategies that each Fund
are authorized to employ also are substantially identical. There is no assurance
that investment performance will be positive and that the Funds will meet their
investment objectives. For a discussion of each Fund's objectives and policies,
see "Comparison of Investment Objectives and Strategies of the Funds."
The Funds both seek to provide current income free from federal income tax by
investing primarily in tax-exempt securities issued by state and local
government entities, the most common form being municipal bonds. During normal
market conditions, at least 80% of the Funds' assets are invested in tax-exempt
securities (up to 100% of their assets in may be invested in below investment
grade securities). Interest earned on tax-exempt securities may still be subject
to other forms of taxation, including state and local taxes and federal
alternative minimum taxes.
Risks of Municipal Bond Market. The Funds' ability to achieve their objective
depends partially on the prompt payment by issuers of the interest on and
principal of the municipal bonds held by the Funds. A moratorium, default, or
other non-payment of interest or principal when due on any municipal bond, in
addition to affecting the market value and liquidity of that particular
security, could affect the market value and liquidity of other municipal bonds
held by the Funds. In addition, the market for municipal bonds is often thin and
can be temporarily affected by large purchases and sales, including those by the
Funds.
The Funds invest primarily in debt securities. The risks of investing in debt
securities are:
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<PAGE>
Interest Rate Risk. When interest rates go up, the value of debt securities
tends to fall. Since the Funds both invest substantially all of their portfolios
in debt securities, if interest rates rise, then the value of a shareholder's
investment in the Funds may decline. When interest rates go down, interest
earned by the Funds on their debt securities may also decline, which could cause
the Funds to reduce the dividends they pay.
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 the Funds invest in
debt securities, the value of a shareholder's investment in the Funds may
decline if an issuer fails to pay an obligation on a timely basis.
Below Investment Grade Security Risk. Below investment grade securities are
commonly referred to as "junk bonds" or high-yield, high-risk securities 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 securities, causing sudden and steep declines in value.
In addition, issuers of below investment grade tax-exempt securities are likely
to have a substantial amount of other debt. Most, if not all, of this other debt
will be "senior" to the below investment grade tax-exempt securities; an issuer
must be current on its senior obligations before it can pay lower-ranking
obligations. In addition, some of the other debt may be secured by the issuer's
primary assets. If the issuer defaults on those other debts, the lenders may
seize their collateral -- possibly forcing the issuer into bankruptcy.
Furthermore, such securities may also be difficult to resell because many
investors do not want below investment grade tax-exempt securities, and others
are prohibited from buying them.
Below investment grade securities are also subject to call or income risk, which
is the possibility that securities with high interest rates will be prepaid (or
called) by the issuer prior to maturity during periods of falling interest
rates. This would require a Fund to invest the resulting proceeds elsewhere at
generally lower interest rates.
Changes in Debt Rating. If a rating agency gives a tax-exempt security a low
rating, the value of the security will decline because investors will demand a
higher rate of return. Neither Fund is required to sell or otherwise dispose of
any security that loses its rating or has its rating reduced after the Fund has
purchased it.
Legislative Risk. The special tax status of tax-exempt securities may be
undermined or changed by future federal or state legislation.
Portfolio Maturity. The Funds' portfolios are invested in long-term obligations
with an average maturity of 20 years or more since such securities generally
produce higher yields than shorter-term obligations. Prices of longer-term bonds
tend to be more volatile in periods of changing interest rates than prices of
shorter-term securities.
REASONS FOR THE REORGANIZATION
On November 19, 1999, EIMC, DSA, and Venture Advisors, Inc., DSA's sole general
partner, executed an Asset Purchase Agreement providing for the purchase by EIMC
of certain assets of DSA and Venture Advisors, Inc. relating to the Davis Tax
Free Fund (the "Asset Purchase Agreement"). Pursuant to the Asset Purchase
Agreement, EIMC agreed to purchase from DSA certain assets including books and
records, investment research reports and files, prepaid commissions relating to
Class B and C shares, and lists of brokers and financial advisers. For the
payment of assets other than deferred commissions, the purchase price will be
based on a formula, which when calculated, will total approximately $_________.
For deferred commission assets, the purchase price will be based on book value.
DSA also agreed not to engage in certain activities which might be detrimental
to EIMC's continued management of Evergreen Tax Free Fund after the
Reorganization.
If the Reorganization is approved by shareholders, the assets of Davis Tax Free
Fund will be transferred in exchange for shares of Evergreen Tax Free Fund. The
historical activities of the Davis Tax Free Fund will be carried out by the
newly created Evergreen Tax Free Fund, as a part of the larger Evergreen family
of funds (the "Evergreen Funds").
The Evergreen Funds trace their roots to 1932 and EIMC's predecessor launched
the first fixed-income mutual funds ever in 1935. Today, FUNB and its affiliates
manage over $75 billion in assets for more than 3 million shareholders in over
70 different mutual funds, including 33 bond funds with $12 billion in assets
(corporate bond-$5.9 billion, tax free bond-$5.0 billion, and specialty
income-$1.0 billion). Evergreen Funds offer a wide array of fixed-income funds,
from high quality to high yield, and from taxable to tax exempt, so investors
can find well-diversified income funds whatever their goals.
The Evergreen Funds name may be more successful in attracting continuing
shareholder investment in the former Davis Tax Free Fund. The resulting positive
cash flows and resulting increase in net assets from additional shareholders may
lead to greater economies of scale, lower expenses and improved investment
performance. A positive cash flow from continuing shareholder investments would
contribute to the Fund's investment performance by allowing the Fund to take
advantage of investment opportunities and invest for the long-term by meeting
routine shareholder redemptions from the sale of fund shares rather than by
liquidating portfolio securities.
The Reorganization is structured to comply with the safe harbor provided by
Section 15(f) of the 1940 Act which provides that in the event of a change of
control of an investment adviser, the investment adviser or any of its
affiliated persons may receive any amount or benefit in
-22-
<PAGE>
connection therewith under certain conditions. While the Reorganization does not
involve a change in control of DSA, following the Section 15(f) conditions
provides additional assurance that Davis Tax Free Fund shareholders will be
treated fairly.
One condition imposed by Section 15(f) of the 1940 Act is that for three years
thereafter, at least 75% of the board of directors of a surviving investment
company are not "interested persons" of the company's investment adviser or of
the investment adviser of the terminating investment company. The Board of
Trustees of Evergreen Municipal Trust currently complies with this condition and
intends to continue to comply with this condition for a period of three years
after the Reorganization.
Another condition is that no "unfair burden" is imposed on the investment
company as a result of the transactions or any terms, conditions or
understandings applicable to them. The term "unfair burden" is considered under
the 1940 Act to include any arrangement during the two-year period after the
transaction whereby the investment adviser (or predecessor or successor adviser)
or any "interested person" of any such adviser, receives or is entitled to
receive any compensation, directly or indirectly, from the investment company or
its security holders (other than fees for bona fide investment advisory or other
services) or from any person in connection with the purchase or sale of
securities or other property to, from or on behalf of the investment company
(other than fees for bona fide principal underwriting services). Davis Tax-Free
High Income Fund, Inc.'s Board of Directors have been informed by DSA and EIMC
that they were not aware of any circumstances relating to the Reorganization
that might result in the imposition of an "unfair burden" on Davis Tax Free
Fund.
Davis Tax-Free High Income Fund, Inc.'s Board of Directors considered the
proposed Reorganization at meetings held on September 24, 1999 and December 7,
1999 at which the Directors reviewed and discussed materials supplied by DSA and
EIMC, and met with representatives of EIMC. The Directors relied upon counsel to
the Independent Directors to assist them in their deliberations. The Board of
Directors gave final approval to the Reorganization at the December 7, 1999
meeting.
The Board of Directors, including the Independent Directors, determined that the
Reorganization is in the best interests of shareholders of Davis Tax Free Fund
and that the interests of existing shareholders of Davis Tax Free Fund will not
be diluted as a result of the transaction.
In approving the Plan, the Board of Directors of Davis Tax Free Fund (including
the Independent Directors voting separately) considered the following factors,
among others:
(i) The Asset Purchase arrangements;
(ii) The terms and conditions of the Reorganization;
(iii) The fact that shareholder interests will not be diluted as a result of the
Reorganization;
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<PAGE>
(iv) The expected federal income tax consequences of the Reorganization (the
Reorganization is structured to qualify as a tax-free exchange);
(v) The Reorganization provides continuity of money management for
shareholders due to the fact that Stamper will act as the sub-adviser
and Mr. Stamper will continue as portfolio manager of the Evergreen Tax
Free Fund;
(vi) The fact that the two Funds' investment objectives and
investment strategies are substantially identical;
(vii) The investment advisory and other fees and expenses of Evergreen Tax
Free Fund and Davis Tax Free Fund;
(viii) The investment experience, expertise and resources of EIMC, the
investment adviser for Evergreen Tax Free Fund;
(ix) The service and distribution resources available to the Evergreen Funds
and the broad array of investment alternatives available to
shareholders of the Evergreen Funds;
(x) The personnel and financial resources of First Union Corporation
(the parent of EIMC) and its affiliates;
(xi) The fact that EIMC has contractually agreed for a period of two years
to limit the Fund's Annual Operating Expenses (see "Comparison of Fees
and Expenses");
(xii) The fact that Evergreen Tax Free Fund will assume the identified
liabilities of Davis Tax Free Fund; and
(xiii) The fact that DSA will bear the expenses incurred by Davis Tax Free
Fund in connection with the Reorganization and that FUNB will bear the
expenses incurred by Evergreen Tax Free Fund in the Reorganization.
After consideration of the factors listed above, together with other factors and
information considered to be relevant, Davis Tax-Free High Income Fund, Inc.'s
Board of Directors unanimously approved the Plan and directed that the Plan be
submitted to the shareholders of Davis Tax Free Fund for approval.
THE DIRECTORS OF DAVIS TAX-FREE HIGH INCOME FUND, INC. RECOMMEND
THAT THE SHAREHOLDERS OF THE FUND APPROVE THE PROPOSED
REORGANIZATION.
The Trustees of Evergreen Municipal Trust also concluded at a meeting on
December 6, 1999 that the proposed Reorganization would be in the best interests
of shareholders of Evergreen Tax
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<PAGE>
Free Fund and that the interests of the shareholders of Evergreen Tax Free Fund
would not be diluted as a result of the transactions contemplated by the
Reorganization.
Agreement and Plan of Reorganization
The following summary is qualified in its entirety by reference to the Plan
(Exhibit A hereto).
The Plan provides that Evergreen Tax Free Fund will acquire all of the assets of
Davis Tax Free Fund in exchange for shares of Evergreen Tax Free Fund and the
assumption by Evergreen Tax Free Fund of the identified liabilities of Davis Tax
Free Fund on or about March 10, 2000 or such other date as may be agreed upon by
the parties (the "Closing Date"). Prior to the Closing Date, Davis Tax Free Fund
will endeavor to discharge all of its known liabilities and obligations.
Evergreen Tax Free Fund will not assume any liabilities or obligations of Davis
Tax Free Fund other than those reflected in an unaudited statement of assets and
liabilities of Davis Tax Free Fund prepared as of the close of regular trading
on the NYSE, currently 4:00 p.m. Eastern time, on the business day immediately
prior to the Closing Date. Shareholders of Davis Tax Free Fund will receive the
number of full and fractional shares of each class of Evergreen Tax Free Fund
equal to the number of shares of each corresponding class as they currently hold
of Davis Tax Free Fund. The aggregate net asset value of the Evergreen Tax Free
Fund shares received will equal the aggregate net asset value of each
shareholder's Davis Tax Free Fund shares. Such computations will take place as
of the close of regular trading on the NYSE on the business day immediately
prior to the Closing Date. The net asset value per share of each class will be
determined by dividing assets, less liabilities, in each case attributable to
the respective class, by the total number of outstanding shares.
State Street Bank and Trust Company, the custodian for both Funds , will compute
the value of Davis Tax Free Fund's portfolio securities. The method of valuation
employed will be consistent with the procedures set forth in the Prospectus and
Statement of Additional Information of Evergreen Tax Free Fund, Rule 22c-1 under
the 1940 Act, and with the interpretations of such Rule by the SEC's Division of
Investment Management.
As soon after the Closing Date as conveniently practicable, Davis Tax Free Fund
will liquidate and distribute pro rata to shareholders of record as of the close
of business on the Closing Date the full and fractional shares of Evergreen Tax
Free Fund received by Davis Tax Free Fund. Such liquidation and distribution
will be accomplished by the establishment of accounts in the names of the Fund's
shareholders on Evergreen Tax Free Fund's share records of its transfer agent.
Each account will represent the respective pro rata number of full and
fractional shares of Evergreen Tax Free Fund due to the Fund's shareholders. All
issued and outstanding shares of Davis Tax Free Fund, including those
represented by certificates, will be canceled. The shares of Evergreen Tax Free
Fund to be issued will have no preemptive or conversion rights. After these
distributions and the winding up of its affairs, Davis Tax Free Fund will be
terminated.
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<PAGE>
The consummation of the Reorganization is subject to the conditions set forth in
the Plan, including approval by Davis Tax Free Fund's shareholders, accuracy of
various representations and warranties and receipt of opinions of counsel,
including opinions with respect to those matters referred to in "Federal Income
Tax Consequences" below. Notwithstanding approval of Davis Tax Free Fund's
shareholders, the Plan may be terminated (a) by the mutual agreement of Davis
Tax Free Fund and Evergreen Tax Free Fund; or (b) at or prior to the Closing
Date by either party (i) because of a breach by the other party of any
representation, warranty, or agreement contained therein to be performed at or
prior to the Closing Date if not cured within 30 days, or (ii) because a
condition to the obligation of the terminating party has not been met and it
reasonably appears that it cannot be met.
The expenses of Davis Tax Free Fund and Evergreen Tax Free Fund in connection
with the Reorganization (including the cost of any proxy soliciting agent) will
be borne by DSA and FUNB, respectively, whether or not the Reorganization is
consummated. No portion of such expenses will be borne directly or indirectly by
Davis Tax Free Fund, or Evergreen Tax Free Fund or their shareholders.
If the Reorganization is not approved by shareholders of Davis Tax Free Fund,
Davis Tax-Free High Income Fund, Inc.'s Board of Directors will consider other
possible courses of action in the best interests of shareholders.
Federal Income Tax Consequences
The Reorganization is intended to qualify for federal income tax purposes as a
tax-free reorganization under section 368(a) of the Code. As a condition to the
closing of the Reorganization, Davis Tax Free Fund will receive an opinion of
KPMG LLP to the effect that, on the basis of the existing provisions of the
Code, U.S. Treasury regulations issued thereunder, current administrative rules,
pronouncements and court decisions, for federal income tax purposes, upon
consummation of the Reorganization:
(1) The transfer of all of the assets of Davis Tax Free Fund solely in exchange
for shares of Evergreen Tax Free Fund and the assumption by Evergreen Tax Free
Fund of the identified liabilities of Davis Tax Free Fund, followed by the
distribution of Evergreen Tax Free Fund's shares by Davis Tax Free Fund in
dissolution and liquidation of Davis Tax Free Fund , will constitute a
"reorganization" within the meaning of section 368(a)(1)(F) of the Code, and
Evergreen Tax Free Fund and Davis Tax Free Fund will each be a "party to a
reorganization" within the meaning of section 368(b) of the Code;
(2) No gain or loss will be recognized by Davis Tax Free Fund on the transfer of
all of its assets to Evergreen Tax Free Fund solely in exchange for Evergreen
Tax Free Fund shares and the assumption by Evergreen Tax Free Fund of the
identified liabilities of Davis Tax Free Fund or upon the distribution of
Evergreen Tax Free Fund's shares to Davis Tax Free Fund's shareholders in
exchange for their shares of Davis Tax Free Fund;
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<PAGE>
(3) The tax basis of the assets transferred will be the same to Evergreen Tax
Free Fund as the tax basis of such assets to Davis Tax Free Fund immediately
prior to the Reorganization, and the holding period of such assets in the hands
of Evergreen Tax Free Fund will include the period during which the assets were
held by Davis Tax Free Fund;
(4) No gain or loss will be recognized by Evergreen Tax Free Fund upon the
receipt of the assets from Davis Tax Free Fund solely in exchange for the shares
of Evergreen Tax Free Fund and the assumption by Evergreen Tax Free Fund of the
identified liabilities of Davis Tax Free Fund;
(5) No gain or loss will be recognized by Davis Tax Free Fund's shareholders
upon the issuance of the shares of Evergreen Tax Free Fund to them, provided
they receive solely such shares (including fractional shares) in exchange for
their shares of Davis Tax Free Fund; and
(6) The aggregate tax basis of the shares of Evergreen Tax Free Fund , including
any fractional shares, received by each of the shareholders of Davis Tax Free
Fund pursuant to the Reorganization will be the same as the aggregate tax basis
of the shares of Davis Tax Free Fund held by such shareholder immediately prior
to the Reorganization. The holding period of the shares of Evergreen Tax Free
Fund , including fractional shares, received by each such shareholder will
include the period during which the shares of Davis Tax Free Fund exchanged
therefor were held by such shareholder (provided that the shares of Davis Tax
Free Fund were held as a capital asset on the Closing Date).
Opinions of counsel are not binding upon the Internal Revenue Service or the
courts. If the Reorganization is consummated but does not qualify as a tax-free
reorganization under the Code, a shareholder of Davis Tax Free Fund would
recognize a taxable gain or loss equal to the difference between his or her tax
basis in his or her Fund shares and the fair market value of Evergreen Tax Free
Fund shares he or she received. Shareholders of Davis Tax Free Fund should
consult their tax advisers regarding the effect, if any, of the proposed
Reorganization in light of their individual circumstances. Since the foregoing
discussion relates only to the federal income tax consequences of the
Reorganization, shareholders of Davis Tax Free Fund should also consult their
tax advisers as to the state and local tax consequences, if any, of the
Reorganization.
Pro-forma Capitalization
The following table sets forth the capitalization of Davis Tax Free Fund as of
September 30, 1999, and the capitalization of Evergreen Tax Free Fund on a pro
forma basis as of that date, giving effect to the proposed acquisition of assets
at net asset value. The pro forma data reflects an exchange ratio of 1.00 for
each Class A, B, C, and Y share of Evergreen Tax Free Fund issued for each
corresponding Class A, B, C, and Y share, respectively, of Davis Tax Free Fund.
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<PAGE>
Capitalization of Davis Tax Free Fund
and Evergreen Tax Free Fund (Pro Forma)
Evergreen Tax Free
Davis Tax Free Fund (After
Fund Reorganization)
Net Assets
Class A shares: 174,440,651 174,440,651
Class B shares: 228,440,224 228,440,224
Class C shares: 41,642,045 41,642,045
Class Y shares: 1,291,881 1,291,881
--------------- ---------------
Total Net Assets $445,814,801 $445,814,801
Net Asset Value Per
Share
Class A shares: 8.66 8.66
Class B shares: 8.63 8.63
Class C shares: 8.69 8.69
Class Y shares: 8.66 8.66
Shares Outstanding
Class A shares: 20,139,569 20,139,569
Class B shares: 26,470,666 26,470,666
Class C shares: 4,794,090 4,794,090
Class Y shares: 149,099 149,099
-------------- --------------
All Classes 51,553,424 51,553,424
The table set forth above should not be relied upon to reflect the number of
shares to be received in the Reorganization; the actual number of shares to be
received will depend upon the net asset value and number of shares outstanding
of each Fund at the time of the Reorganization.
Shareholder Information
As of January 10, 2000 (the "Record Date"), the following number of each class
of shares of Davis Tax Free Fund was outstanding:
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<PAGE>
<TABLE>
<CAPTION>
Voting Power (one
Number of Net Asset vote for each $ of
Class of Shares Shares Value Per Share NAV)
<S> <C> <C> <C>
Class A shares:
Class B shares:
Class C shares:
Class Y shares: _______ _______ _______
All Classes
</TABLE>
As of November 30, 1999, the officers and Directors of Davis Tax-Free High
Income Fund, Inc. beneficially owned as a group less than 1% of the outstanding
shares of Davis Tax Free Fund. To Davis Tax Free Fund's knowledge, the following
persons owned beneficially or of record more than 5% of any class of Davis Tax
Free Fund's outstanding shares as of November 30, 1999:
<TABLE>
<CAPTION>
Percentage of Percentage of
Shares of Class Shares of
Before Class After
Name and Address No. of Shares Reorganization Reorganization
<S> <C> <C> <C>
Class A shares
Merrill Lynch Pierce Fenner & Smith 5.28% 5.28%
Mutual Fund Operations
4800 Deerlake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
Charles Schwab & Co. Inc. 6.34% 6.34%
Special Custody Account
For the Benefits of its Customers
101 Montgomery Street
San Francisco, CA 94104-4122
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<PAGE>
Class B shares
Merrill Lynch Pierce Fenner & Smith 22.19% 22.19%
Mutual Fund Operations
4800 Deerlake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
Class C shares
Merrill Lynch Pierce Fenner & Smith 41.82% 41.82%
Mutual Fund Operations
4800 Deerlake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
Class Y shares
Merrill Lynch Pierce Fenner & Smith 29.70% 29.70%
Mutual Fund Operations
4800 Deerlake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
National Investor Services FBO 70.29% 70.29%
511-10935-21
55 Water Street, 32nd Floor
New York, NY 10041-3299
</TABLE>
COMPARISON OF INVESTMENT OBJECTIVES AND STRATEGIES OF THE FUNDS
The following discussion is based upon and qualified in its entirety by the
descriptions of the respective investment objectives, strategies, policies and
restrictions set forth in the respective Prospectuses and Statement of
Additional Information of the Funds.
The investment objective, strategies, policies and restrictions of Evergreen Tax
Free Fund can be found in the Prospectus of Evergreen Tax Free Fund under the
captions "Investment Goal", "Investment Strategy" and in the Statement of
Additional Information under the captions "Investment Policies" and "Other
Securities and Practices".
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<PAGE>
The investment objective, policies and restrictions of Davis Tax Free Fund can
be found in the Prospectus of the Fund under the caption "Investment Objectives
and Strategy" and in the Statement of Additional Information under the captions
"Investment Objectives and Policies, " "Other Investment Policies," and
"Investment Restrictions".
The investment objective of Davis Tax Free Fund is fundamental and may only be
changed by a vote of shareholders. The investment objective of Evergreen Tax
Free Fund is non- fundamental and can be changed by the Board of Trustees
without shareholder approval.
The investment objectives and investment strategies of Evergreen Tax Free Fund
are substantially identical to those of Davis Tax Free Fund. Evergreen Tax Free
Fund seeks to provide current income free from federal income tax. Davis Tax
Free Fund's investment objective is to provide current income free from federal
income tax by investing in municipal obligations. Following the Reorganization
Evergreen Tax Free Fund will have the same sub-adviser and portfolio manager
that has managed Davis Tax Free Fund since June 1990.
The Funds pursue their investment objectives by investing principally in a
diversified portfolio of municipal obligations which are debt securities, such
as municipal bonds and municipal notes, issued by state and local governments or
their agencies or instrumentalities. During normal market conditions, at least
80% of the Funds' assets are invested in tax-exempt securities . Interest earned
on tax-exempt securities may still be subject to other forms of taxation,
including state and local taxes and federal alternative minimum taxes. Each Fund
will normally have at least 80% of its net assets invested in municipal
obligations without limitation as to quality ratings or types of issuers. Each
Fund's portfolio will be invested in long-term obligations with an average
maturity of 20 years or more since such securities generally produce higher
yields than shorter-term obligations. The Funds' portfolio manager seeks
tax-exempt securities which offer yields which fully compensate for the risk of
owning the securities. The Funds may invest up to 100% of their assets in
high-yield, high-risk tax-exempt securities. The Funds' portfolio manager
purchases high-yield, high-risk tax-exempt securities with the belief that the
potential earnings justify holding a security that is not investment grade.
In choosing the Fund's investments, the portfolio manager uses research which
focuses on factors effecting the creditworthiness of the issuing municipality,
including the economic vitality of the region, and the collateral and revenues
supporting the tax-exempt security.
Each Fund may temporarily 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 Funds' principal investment
strategies and investment goals and, if employed, could result in a lower return
and loss of market opportunity. Many short-term investments do not earn interest
free from federal income tax.
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<PAGE>
Because the two Funds have substantially similar investment objectives and
investment strategies, it is not anticipated that the securities of Davis Tax
Free Fund will be sold in significant amounts in order to comply with the
policies and investment practices of Evergreen Tax Free Fund.
The characteristics of each investment policy and the associated risks are
described in the Funds' respective Prospectuses and Statements of Additional
Information. The Funds have other investment policies and restrictions which are
also set forth in the Prospectuses and Statements of Additional Information of
the Funds.
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS
Forms of Organization
Evergreen Tax Free Fund is a series of Evergreen Municipal Trust, a Delaware
business trust. Davis Tax Free Fund is the only series of Davis Tax-Free High
Income Fund, Inc., a Maryland corporation. Both Evergreen Municipal Trust and
Davis Tax-Free High Income Fund, Inc. are open-end management investment
companies registered with the SEC under the 1940 Act, which continuously offer
shares to the public. Evergreen Municipal Trust is governed by its Declaration
of Trust, By-Laws and a Board of Trustees. Davis Tax-Free High Income Fund, Inc.
is governed by its Articles of Incorporation, By-Laws, and a Board of Directors.
Each entity is also governed by applicable Delaware or Maryland and federal law.
Capitalization
The beneficial interests in Evergreen Tax Free Fund are represented by an
unlimited number of transferable shares of beneficial interest, $.001 par value
per share. The beneficial interests in Davis Tax Free Fund are represented by 1
billion authorized shares with a par value of $0.01. Both Evergreen Municipal
Trust's Agreement and Declaration of Trust and Davis Tax-Free High Income Fund,
Inc.'s Articles of Incorporation permit the respective Boards to allocate shares
into an unlimited number of series, and classes thereof, with rights determined
by the respective Boards, all without shareholder approval. Fractional shares
may be issued by either Fund. Each Fund's shares represent equal proportionate
interests in the assets belonging to the Fund. Shareholders of each Fund are
entitled to receive dividends and other amounts as determined by the respective
Boards. Shareholders of each Fund vote separately, by class as to matters, such
as approval of or amendments to Rule 12b-1 distribution plans, that affect only
their particular class. Shareholders of each Fund vote by Fund as to matters,
such as approval of or amendments to investment advisory agreements or proposed
reorganizations, that affect only their particular Fund.
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<PAGE>
Shareholder Liability
Under Delaware law, shareholders of a Delaware business trust are entitled to
the same limitation of personal liability extended to stockholders of Delaware
corporations. Other than Ohio, no similar statutory or other authority limiting
business trust shareholder liability exists in any other state. As a result, to
the extent that Evergreen Municipal Trust or a shareholder is subject to the
jurisdiction of courts in those states, it is possible that a court may not
apply Delaware law, and may thereby subject shareholders of Evergreen Municipal
Trust to liability. To guard against this risk, the Declaration of Trust of
Evergreen Municipal Trust (a) provides that any written obligation of the Trust
may contain a statement that such obligation may only be enforced against the
assets of the Trust or the particular series in question and the obligation is
not binding upon the shareholders of the Trust; however, the omission of such a
disclaimer will not operate to create personal liability for any shareholder;
and (b) provides for indemnification out of Trust property of any shareholder
held personally liable for the obligations of the Trust. Accordingly, the risk
of a shareholder of Evergreen Municipal Trust incurring financial loss beyond
that shareholder's investment because of shareholder liability is limited to
circumstances in which: (i) the court refuses to apply Delaware law; (ii) no
contractual limitation of liability was in effect; and (iii) the Trust itself is
unable to meet its obligations. In light of Delaware law, the nature of the
Trust's business, and the nature of its assets, the risk of personal liability
to a shareholder of Evergreen Municipal Trust is remote.
Under Maryland corporate law shareholders are not held personally liable for the
obligations of the corporation. Similar statutory authority limiting corporate
shareholder liability exists in every state within the United States. As a
result, shareholders in every jurisdiction should be protected against being
held personally liable for the corporation's liabilities. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered remote.
Shareholder Meetings and Voting Rights
Neither Evergreen Municipal Trust on behalf of Evergreen Tax Free Fund nor Davis
Tax-Free High Income Fund, Inc. on behalf of Davis Tax Free Fund is required to
hold annual meetings of shareholders. However, each is required to call a
meeting of shareholders for the purpose of electing Trustees or Directors if, at
any time, less than a majority of the Trustees or Directors then holding office
were elected by shareholders. Neither Fund permits cumulative voting, therefore,
the holders of more than 50% of the voting power of the Fund can elect all of
the Trustees or Directors of the Trust or Fund, respectively. Neither Evergreen
Municipal Trust nor Davis Tax-Free High Income Fund, Inc. currently intends to
hold regular shareholder meetings.
Except when a larger quorum is required by applicable law, with respect to
Evergreen Tax Free Fund, twenty-five percent (25%) of the outstanding shares
entitled to vote, and with respect to Davis Tax Free Fund, fifty percent (50%)
of the outstanding voting shares entitled to vote constitutes a quorum for
consideration of such matter. For either Fund, a majority of the votes
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<PAGE>
cast and entitled to vote is sufficient to act on a matter (unless otherwise
specifically required by the applicable governing documents or other law,
including the 1940 Act).
Both Funds provide that each share of the respective Fund will be entitled to
one vote for each dollar of net asset value applicable to each share.
Liquidation
In the event of the liquidation of Davis Tax Free Fund or Evergreen Tax Free
Fund, the shareholders are entitled to receive, when and as declared by the
respective Boards, the excess of the assets belonging to such Fund or
attributable to the class over the liabilities belonging to the Fund or
attributable to the class. In either case, the assets so distributable to
shareholders of the Fund will be distributed among the shareholders in
proportion to the number of shares of a class of the Fund held by them and
recorded on the books of the Fund.
Liability and Indemnification of Directors or Trustees
Davis Tax-Free High Income Fund Inc.'s Articles of Incorporation provides that a
Director shall be liable only for his own willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office, and shall not be liable for errors of judgment or mistakes of fact or
law. Davis Tax-Free High Income Fund Inc.'s Articles of Incorporation also
provide that Directors and officers are entitled to indemnification against
liabilities and expenses with respect to claims related to their position with
the corporation unless it has been determined that such Director or officer
acted with willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
Under the Declaration of Trust of Evergreen Municipal Trust, a Trustee is liable
to the Trust and its shareholders only for such Trustee's own willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of the office of Trustee or the discharge of such
Trustee's functions. As provided in the Declaration of Trust, each Trustee of
the Trust is entitled to be indemnified against all liabilities against him or
her, including the costs of litigation, unless it is determined that the Trustee
(i) did not act in good faith in the reasonable belief that such Trustee's
action was in or not opposed to the best interests of the Trust; (ii) had acted
with willful misfeasance, bad faith, gross negligence or reckless disregard of
such Trustee's duties; and (iii) in a criminal proceeding, had reasonable cause
to believe that such Trustee's conduct was unlawful (collectively, "disabling
conduct"). A determination that the Trustee did not engage in disabling conduct
and is, therefore, entitled to indemnification may be based upon the outcome of
a court action or administrative proceeding or by (a) a vote of a majority of
those Trustees who are neither "interested persons" within the meaning of the
1940 Act nor parties to the proceeding or (b) an independent legal counsel in a
written opinion. The Trust may also advance money for such litigation expenses
provided that the Trustee undertakes to repay the Trust if his or her conduct is
later determined to preclude indemnification and certain other conditions are
met.
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<PAGE>
The foregoing is only a summary of certain characteristics of the operations of
the Declaration of Trust of Evergreen Municipal Trust, the Articles of
Incorporation of Davis Tax-Free High Income Fund, Inc., Delaware and Maryland
law and is not a complete description of those documents or law. Shareholders
should refer to the provisions of the Agreement and Declaration of Trust,
Articles of Incorporation, Delaware and Maryland law directly for more complete
information.
ADDITIONAL INFORMATION
Evergreen Tax Free Fund. Information concerning the operation and management of
Evergreen Tax Free Fund is incorporated herein by reference from the Prospectus
dated January 10, 2000 a copy of which is enclosed, and Statement of Additional
Information of the same date. A copy of such Statement of Additional Information
is available upon request and without charge by writing to Evergreen Tax Free
Fund at the address listed on the cover page of this Prospectus/Proxy Statement
or by calling the Fund toll-free at 1- 800-343-2898.
Davis Tax Free Fund. Information about the Fund is included in its current
Prospectuses dated February 1, 1999, and in the Statement of Additional
Information of the same date, that have been filed with the SEC, all of which
are incorporated herein by reference. Copies of the Prospectuses and Statement
of Additional Information are available upon request and without charge by
writing to Davis Tax Free Fund at the address listed on the cover page of this
Prospectus/Proxy Statement or by calling the Fund toll-free at 1-800-279-0279.
Evergreen Tax Free Fund and Davis Tax Free Fund are each subject to the
informational requirements of the Securities Exchange Act of 1934 and the 1940
Act, and in accordance therewith file reports and other information including
proxy material, and charter documents with the SEC. These items can be inspected
and copies obtained at the Public Reference Room maintained by the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's Regional offices
located at Northwest Atrium Center, 500 West Madison Street, Chicago, Illinois
60661-2511 and Seven World Trade Center, Suite 1300, New York, New York 10048.
The SEC maintains a Web site (http://www.sec.gov) that contains each Fund's
Statement of Additional Information and other material incorporated by reference
herein together with other information regarding Evergreen Tax Free Fund and
Davis Tax Free Fund.
VOTING INFORMATION CONCERNING THE MEETING
This Prospectus/Proxy Statement is furnished in connection with a solicitation
of proxies by the Directors of Davis Tax-Free High Income Fund, Inc. to be used
at the Special Meeting of Shareholders to be held at 11:00 a.m., March 10, 2000,
at the Fund's offices, 124 East Marcy Street, Santa Fe, New Mexico, 87501, and
at any adjournments thereof. This Prospectus/Proxy Statement, along with a
Notice of the Meeting and a proxy card, is first being mailed to shareholders of
Davis Tax Free Fund on or about January 24, 2000. Only shareholders of record
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<PAGE>
as of the close of business on the Record Date will be entitled to notice of,
and to vote at, the Meeting or any adjournment thereof. The holders of 50% of
the outstanding voting power (each eligible outstanding share is entitled to one
vote for each dollar of net asset value) at the close of business on the Record
Date present in person or represented by proxy will constitute a quorum for the
Meeting.
If the enclosed form of proxy is properly executed and returned in time to be
voted at the Meeting, the proxies named therein will vote the shares represented
by the proxy in accordance with the instructions marked thereon. Unmarked
proxies will be voted FOR the proposed Reorganization and FOR any other matters
deemed appropriate. Proxies that reflect abstentions and "broker non-votes"
(i.e., shares held by brokers or nominees as to which (i) instructions have not
been received from the beneficial owners or the persons entitled to vote and
(ii) the broker or nominee does not have discretionary voting power on a
particular matter) will be counted as shares that are present and entitled to
vote for purposes of determining the presence of a quorum, but will have the
effect of being counted as votes against the Plan which must be approved by a
majority of the outstanding voting power entitled to vote.
Each share present and entitled to vote shall be accorded one vote for each
dollar of net asset value and each fractional share is entitled to a
proportionate share of one vote. A proxy may be revoked at any time on or before
the Meeting by written notice to the Secretary of Davis Tax-Free High Income
Fund, Inc. at the address set forth on the cover of this Prospectus/Proxy
Statement. Unless revoked, all valid proxies will be voted in accordance with
the specifications thereon or, in the absence of such specifications, FOR
approval of the Plan and the Reorganization contemplated thereby.
Approval of the Plan will require the affirmative vote of a majority of the
outstanding voting power entitled to vote, with all classes voting together as a
single class at the Meeting at which a quorum of the Fund's shares is present.
Proxy solicitations will be made primarily by mail, but proxy solicitations may
also be made by telephone or personal solicitations conducted by officers and
employees of EIMC or DSA, their affiliates or other representatives of Davis Tax
Free Fund (who will not be paid for their solicitation activities). D.F. King &
Co., Inc. and its agents have been engaged by Davis Tax Free Fund to assist in
soliciting proxies. DSA (and not the Funds) will pay for their proxy soliciting
activities.
If you wish to participate in the Meeting, you may submit the proxy card
included with this Prospectus/Proxy Statement, vote by fax, vote by telephone or
attend in person. Any proxy given by you is revocable.
In the event that sufficient votes to approve the Reorganization are not
received by March 10, 2000, the persons named as proxies may propose one or more
adjournments of the Meeting to permit further solicitation of proxies. In
determining whether to adjourn the Meeting, the
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<PAGE>
following factors may be considered: the percentage of votes actually cast, the
percentage of negative votes actually cast, the nature of any further
solicitation and the information to be provided to shareholders with respect to
the reasons for the solicitation. Any such adjournment will require an
affirmative vote by the holders of a majority of the shares present in person or
by proxy and entitled to vote at the Meeting. The persons named as proxies will
vote upon such adjournment after consideration of all circumstances which may
bear upon a decision to adjourn the Meeting.
A shareholder who objects to the proposed Reorganization will not be entitled
under either Maryland law or the Articles of Incorporation of Davis Tax-Free
High Income Fund, Inc. to demand payment for, or an appraisal of, his or her
shares. However, shareholders should be aware that the Reorganization as
proposed is not expected to result in recognition of gain or loss to
shareholders for federal income tax purposes and that, if the Reorganization is
consummated, shareholders will be free to redeem the shares of Evergreen Tax
Free Fund which they receive in the transaction at their then-current net asset
value. Shares of Davis Tax Free Fund may be redeemed at any time prior to the
consummation of the Reorganization. Shareholders of Davis Tax Free Fund may wish
to consult their tax advisers as to any differing consequences of redeeming Fund
shares prior to the Reorganization or exchanging such shares in the
Reorganization.
Davis Tax Free Fund does not hold annual shareholder meetings. If the
Reorganization is not approved, shareholders wishing to submit proposals for
consideration for inclusion in a proxy statement for a subsequent shareholder
meeting should send their written proposals to the Secretary of Davis Tax-Free
High Income Fund, Inc. at the address set forth on the cover of this
Prospectus/Proxy Statement such that they will be received by the Fund in a
reasonable period of time prior to any such meeting.
The votes of the shareholders of Evergreen Tax Free Fund are not being solicited
by this Prospectus/Proxy Statement and are not required to carry out the
Reorganization.
NOTICE TO BANKS, BROKER-DEALERS AND VOTING TRUSTEES AND THEIR
NOMINEES.
Please advise Davis Tax Free Fund whether other persons are beneficial owners of
shares for which proxies are being solicited and, if so, the number of copies of
this Prospectus/Proxy Statement needed to supply copies to the beneficial owners
of the respective shares.
FINANCIAL STATEMENTS AND EXPERTS
The Annual Report of Davis Tax Free Fund as of September 30, 1999 and the
financial highlights and financial statements for the two years then ended, have
been incorporated by reference herein and in the Registration Statement in
reliance upon the report of KPMG LLP,
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independent certified public accountants, incorporated by reference herein, and
upon the authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of Evergreen Tax Free
Fund will be passed upon by Sullivan & Worcester LLP, Washington, D.C.
OTHER BUSINESS
The Directors of Davis Tax-Free High Income Fund, Inc. do not intend to present
any other business at the Meeting. If, however, any other matters are properly
brought before the Meeting, the persons named in the accompanying form of proxy
will vote thereon in accordance with their judgment.
THE DIRECTORS OF DAVIS TAX-FREE HIGH INCOME FUND, INC. RECOMMEND APPROVAL OF THE
PLAN, AND ANY UNMARKED PROXIES WITHOUT INSTRUCTIONS TO THE CONTRARY WILL BE
VOTED IN FAVOR OF APPROVAL OF THE PLAN.
January 18, 2000
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EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this ____ day of ________, 1999, by and between Evergreen Municipal Trust, a
Delaware business trust, with its principal place of business at 200 Berkeley
Street, Boston, Massachusetts 02116 (the "Trust"), with respect to its Evergreen
Tax-Free High Income Fund series (the "Acquiring Fund"), and Davis Tax-Free High
Income Fund, Inc., a Maryland corporation with its principal place of business
at 124 East Marcy Street, Santa Fe, New Mexico 87501 ("Davis"), with respect to
its Davis Tax-Free High Income Fund series (the "Selling Fund").
This Agreement is intended to be, and is adopted as, a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(F) of the
United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of (i) the transfer of all of
the assets of the Selling Fund in exchange solely for Class A, Class B, Class C
and Class Y shares of beneficial interest, $.001 par value per share, of the
Acquiring Fund (the "Acquiring Fund Shares"); (ii) the assumption by the
Acquiring Fund of the identified liabilities of the Selling Fund; and (iii) the
distribution, after the Closing Date hereinafter referred to, of the Acquiring
Fund Shares to the shareholders of the Selling Fund in liquidation of the
Selling Fund as provided herein, all upon the terms and conditions hereinafter
set forth in this Agreement.
WHEREAS, the Selling Fund and the Acquiring Fund are each a separate
investment series of an open-end, registered investment company of the
management type and the Selling Fund owns securities that generally are assets
of the character in which the Acquiring Fund is permitted to invest;
WHEREAS, both Funds are authorized to issue their shares of beneficial
interest or shares of common stock, as the case may be;
WHEREAS, the Trustees of the Trust have determined that the exchange of
all of the assets of the Selling Fund for Acquiring Fund Shares and the
assumption of the identified liabilities of the Selling Fund by the Acquiring
Fund on the terms and conditions hereinafter set forth are in the best interests
of the Acquiring Fund's shareholders;
WHEREAS, the Directors of Davis have determined that the Selling Fund
should exchange all of its assets and the identified liabilities for Acquiring
Fund Shares and that the interests of
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the existing shareholders of the Selling Fund will not be diluted
as a result of the transactions contemplated herein;
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
ARTICLE I
TRANSFER OF ASSETS OF THE SELLING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES AND ASSUMPTION OF SELLING FUND
LIABILITIES AND LIQUIDATION OF THE SELLING FUND
1.1 THE EXCHANGE. Subject to the terms and conditions herein set forth
and on the basis of the representations and warranties contained herein, the
Selling Fund agrees to transfer all of the Selling Fund's assets as set forth in
paragraph 1.2 to the Acquiring Fund. The Acquiring Fund agrees in exchange
therefor (i) to deliver to the Selling Fund the number of Acquiring Fund Shares,
including fractional Acquiring Fund Shares, computed in the manner and as of the
time and date set forth in paragraphs 2.2 and 2.3; and (ii) to assume the
identified liabilities of the Selling Fund, as set forth in paragraph 1.3. Such
transactions shall take place on the Closing Date provided for in paragraph 3.1.
1.2 ASSETS TO BE ACQUIRED. The assets of the Selling Fund to be
acquired by the Acquiring Fund shall consist of all property, including, without
limitation, all cash, securities, commodities, interests in futures and
dividends or interest receivables, that is owned by the Selling Fund and any
deferred or prepaid expenses shown as an asset on the books of the Selling Fund
on the Closing Date.
The Selling Fund has provided the Acquiring Fund with its most recent
audited financial statements, which contain a list of all of Selling Fund's
assets as of the date thereof. The Selling Fund hereby represents that as of the
date of the execution of this Agreement there have been no changes in its
financial position as reflected in said financial statements other than those
occurring in the ordinary course of its business in connection with the purchase
and sale of securities and the payment of its normal operating expenses. The
Selling Fund reserves the right to sell any of such securities, but will not,
without the prior written approval of the Acquiring Fund, acquire any additional
securities other than securities of the type in which the Acquiring Fund is
permitted to invest.
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The Acquiring Fund will, within a reasonable time prior to the Closing
Date, furnish the Selling Fund with a list of the securities, if any, on the
Selling Fund's list referred to in the second sentence of this paragraph that do
not conform to the Acquiring Fund's investment objectives, policies, and
restrictions. The Selling Fund will, within a reasonable period of time (not
less than 30 days) prior to the Closing Date, furnish the Acquiring Fund with a
list of its portfolio securities and other investments. In the event that the
Selling Fund holds any investments that the Acquiring Fund may not hold, the
Selling Fund, if requested by the Acquiring Fund, will dispose of such
securities prior to the Closing Date. In addition, if it is determined that the
Selling Fund and the Acquiring Fund portfolios, when aggregated, would contain
investments exceeding certain percentage limitations imposed upon the Acquiring
Fund with respect to such investments, the Selling Fund if requested by the
Acquiring Fund will dispose of a sufficient amount of such investments as may be
necessary to avoid violating such limitations as of the Closing Date.
Notwithstanding the foregoing, nothing herein will require the Selling Fund to
dispose of any investments or securities if, in the reasonable judgment of the
Selling Fund, such disposition would adversely affect the tax-free nature of the
Reorganization or would violate the Selling Fund's fiduciary duty to its
shareholders.
1.3 LIABILITIES TO BE ASSUMED. The Selling Fund will endeavor to
discharge all of its known liabilities and obligations prior to the Closing
Date. The Acquiring Fund shall assume only those liabilities, expenses, costs,
charges and reserves reflected on a Statement of Assets and Liabilities of the
Selling Fund prepared on behalf of the Selling Fund, as of the Valuation Date
(as defined in paragraph 2.1), in accordance with generally accepted accounting
principles consistently applied from the prior audited period. The Acquiring
Fund shall assume only those liabilities of the Selling Fund reflected in such
Statement of Assets and Liabilities and shall not assume any other liabilities,
whether absolute or contingent, known or unknown, accrued or unaccrued, all of
which shall remain the obligation of the Selling Fund.
In addition, upon completion of the Reorganization, for purposes of
calculating the maximum amount of sales charges (including asset based sales
charges) permitted to be imposed by the Acquiring Fund under the National
Association of Securities Dealers, Inc. Conduct Rule 2830 ("Aggregate NASD
Cap"), the Acquiring Fund will add to its Aggregate NASD Cap immediately prior
to the Reorganization the Aggregate NASD Cap of the Selling
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Fund immediately prior to the Reorganization, in each case calculated in
accordance with such Rule 2830.
1.4 LIQUIDATION AND DISTRIBUTION. On or as soon after the Closing Date
as is conveniently practicable (the "Liquidation Date"), (a) the Selling Fund
will liquidate and distribute pro rata to the Selling Fund's shareholders of
record, determined as of the close of business on the Valuation Date (the
"Selling Fund Shareholders"), the Acquiring Fund Shares received by the Selling
Fund pursuant to paragraph 1.1; and (b) the Selling Fund will thereupon proceed
to dissolve as set forth in paragraph 1.8 below. Such liquidation and
distribution will be accomplished by the transfer of the Acquiring Fund Shares
then credited to the account of the Selling Fund on the books of the Acquiring
Fund to open accounts on the share records of the Acquiring Fund in the names of
the Selling Fund Shareholders and representing the respective pro rata number of
the Acquiring Fund Shares due such shareholders. All issued and outstanding
shares of the Selling Fund will simultaneously be canceled on the books of the
Selling Fund. The Acquiring Fund shall not issue certificates representing the
Acquiring Fund Shares in connection with such exchange.
1.5 OWNERSHIP OF SHARES. Ownership of Acquiring Fund Shares will be
shown on the books of the Acquiring Fund's transfer agent. Shares of the
Acquiring Fund will be issued in the manner described in the Prospectus/Proxy
Statement on Form N-14 which has been distributed to shareholders of the Selling
Fund as described in paragraph 4.1(o).
1.6 TRANSFER TAXES. Any transfer taxes payable upon issuance of the
Acquiring Fund Shares in a name other than the registered holder of the Selling
Fund shares on the books of the Selling Fund as of that time shall, as a
condition of such issuance and transfer, be paid by the person to whom such
Acquiring Fund Shares are to be issued and transferred.
1.7 REPORTING RESPONSIBILITY. Any reporting responsibility of the
Selling Fund is and shall remain the responsibility of the Selling Fund up to
and including the Closing Date and such later date on which the Selling Fund is
terminated.
1.8 TERMINATION. The Selling Fund shall be terminated promptly
following the Closing Date and the making of all distributions pursuant to
paragraph 1.4.
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ARTICLE II
VALUATION
2.1 VALUATION OF ASSETS. The value of the Selling Fund's assets to be
acquired by the Acquiring Fund hereunder shall be the value of such assets
computed as of the close of business on the New York Stock Exchange on the
business day next preceding the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in the Trust's Declaration of Trust and the Acquiring Fund's then current
prospectuses and statement of additional information or such other valuation
procedures as shall be mutually agreed upon by the parties.
2.2 VALUATION OF SHARES. The net asset value per share of the Acquiring
Fund Shares shall be the net asset value per share computed as of the close of
business on the New York Stock Exchange on the Valuation Date, using the
valuation procedures set forth in the Trust's Declaration of Trust and the
Acquiring Fund's then current prospectuses and statement of additional
information.
2.3 SHARES TO BE ISSUED. The number of the Acquiring Fund Shares of
each class to be issued (including fractional shares, if any) in exchange for
the Selling Fund's assets shall be determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of the Selling Fund attributable to each of its
classes by the net asset value per share of the respective classes of the
Acquiring Fund determined in accordance with paragraph 2.2. Holders of Class A,
Class B, Class C and Class Y shares of the Selling Fund will receive Class A,
Class B, Class C and Class Y shares, respectively, of the Acquiring Fund.
2.4 DETERMINATION OF VALUE. All computations of value shall be made by
State Street Bank and Trust Company in accordance with its regular practice in
pricing the shares and assets of the Acquiring Fund.
ARTICLE III
CLOSING AND CLOSING DATE
3.1 CLOSING DATE. The closing of the Reorganization (the "Closing")
shall take place on or about March 10, 2000 or such other date as the parties
may agree to in writing (the "Closing Date"). All acts taking place at the
Closing shall be deemed to
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take place simultaneously immediately prior to the opening of business on the
Closing Date unless otherwise provided. The Closing shall be held as of 9:00
a.m. at the offices of the Evergreen Funds, 200 Berkeley Street, Boston, MA
02116, or at such other time and/or place as the parties may agree.
3.2 CUSTODIAN'S CERTIFICATE. State Street Bank and Trust Company, as
custodian for the Selling Fund (the "Custodian"), shall deliver at the Closing a
certificate of an authorized officer stating that (a) the Selling Fund's
portfolio securities, cash, and any other assets have been delivered in proper
form to the Acquiring Fund on the Closing Date; and (b) all necessary taxes
including all applicable federal and state stock transfer stamps, if any, have
been paid, or provision for payment have been made, in conjunction with the
delivery of portfolio securities by the Selling Fund.
3.3 EFFECT OF SUSPENSION IN TRADING. In the event that on the Valuation
Date (a) the New York Stock Exchange or another primary trading market for
portfolio securities of the Acquiring Fund or the Selling Fund shall be closed
to trading or trading thereon shall be restricted; or (b) trading or the
reporting of trading on said Exchange or elsewhere shall be disrupted so that
accurate appraisal of the value of the net assets of the Acquiring Fund or the
Selling Fund is impracticable, the Valuation Date shall be postponed until the
first business day after the day when trading shall have been fully resumed and
reporting shall have been restored.
3.4 TRANSFER AGENT'S CERTIFICATE. Evergreen Service Company, as
transfer agent for the Selling Fund at the Closing Date, shall deliver at the
Closing a certificate of an authorized officer stating that its records contain
the names and addresses of the Selling Fund Shareholders and the number and
percentage ownership of outstanding shares owned by each such shareholder
immediately prior to the Closing. The Acquiring Fund shall issue and deliver or
cause Evergreen Service Company, its transfer agent, to issue and deliver a
confirmation evidencing the Acquiring Fund Shares to be credited on the Closing
Date to the Secretary of Davis or provide evidence satisfactory to the Selling
Fund that such Acquiring Fund Shares have been credited to the Selling Fund's
account on the books of the Acquiring Fund. At the Closing, each party shall
deliver to the other such bills of sale, checks, assignments, share
certificates, if any, receipts and other documents as such other party or its
counsel may reasonably request.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS OF THE SELLING FUND. The Selling Fund represents
and warrants to the Acquiring Fund as follows:
(a) The Selling Fund is a separate investment series of a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Maryland.
(b) The Selling Fund is a separate investment series of a
Maryland corporation that is registered as an investment company classified as a
management company of the open-end type, and its registration with the
Securities and Exchange Commission (the "Commission") as an investment company
under the Investment Company Act of 1940, as amended (the "1940 Act"), is in
full force and effect.
(c) The current prospectuses and statement of additional
information of the Selling Fund conform in all material respects to the
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), and the 1940 Act and the rules and regulations of the Commission
thereunder and do not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(d) The Selling Fund is not, and the execution, delivery, and
performance of this Agreement (subject to shareholder approval) will not result,
in violation of any provision of Davis' Articles of Incorporation or By-Laws or
of any material agreement, indenture, instrument, contract, lease, or other
undertaking to which the Selling Fund is a party or by which it is bound.
(e) The Selling Fund has no material contracts or other
commitments (other than this Agreement) that will be terminated with liability
to it prior to the Closing Date, except for liabilities, if any, to be
discharged or reflected in the Statement of Assets and Liabilities as provided
in paragraph 1.3 hereof.
(f) Except as otherwise disclosed in writing to and accepted
by the Acquiring Fund, no litigation, administrative proceeding, or
investigation of or before any court or governmental body is presently pending
or to its knowledge
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threatened against the Selling Fund or any of its properties or assets, which,
if adversely determined, would materially and adversely affect its financial
condition, the conduct of its business, or the ability of the Selling Fund to
carry out the transactions contemplated by this Agreement. The Selling Fund
knows of no facts that might form the basis for the institution of such
proceedings and is not a party to or subject to the provisions of any order,
decree, or judgment of any court or governmental body that materially and
adversely affects its business or its ability to consummate the transactions
herein contemplated.
(g) The financial statements of the Selling Fund at September
30, 1999 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Acquiring Fund) fairly reflect the financial condition of the Selling
Fund as of such date, and there are no known contingent liabilities of the
Selling Fund as of such date not disclosed therein.
(h) Since September 30, 1999 there has not been any material
adverse change in the Selling Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Selling Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Acquiring Fund. For the purposes of this subparagraph (h), a
decline in the net asset value of the Selling Fund shall not constitute a
material adverse change.
(i) At the Closing Date, all federal and other tax returns and
reports of the Selling Fund required by law to have been filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid, or provision shall have been made for the
payment thereof. To the best of the Selling Fund's knowledge, no such return is
currently under audit, and no assessment has been asserted with respect to such
returns.
(j) For each fiscal year of its operation, the Selling Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains.
(k) All issued and outstanding shares of the Selling Fund are,
and at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable by the
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Selling Fund. All of the issued and outstanding shares of the Selling Fund will,
at the time of the Closing Date, be held by the persons and in the amounts set
forth in the records of the transfer agent as provided in paragraph 3.4. The
Selling Fund does not have outstanding any options, warrants, or other rights to
subscribe for or purchase any of the Selling Fund shares, nor is there
outstanding any security convertible into any of the Selling Fund shares.
(l) At the Closing Date, the Selling Fund will have good and
marketable title to the Selling Fund's assets to be transferred to the Acquiring
Fund pursuant to paragraph 1.2 and full right, power, and authority to sell,
assign, transfer, and deliver such assets hereunder, and, upon delivery and
payment for such assets, the Acquiring Fund will acquire good and marketable
title thereto, subject to no restrictions on the full transfer thereof,
including such restrictions as might arise under the 1933 Act, other than as
disclosed to the Acquiring Fund and accepted by the Acquiring Fund.
(m) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Selling
Fund and, subject to approval by the Selling Fund's shareholders, this Agreement
constitutes a valid and binding obligation of the Selling Fund, enforceable in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights and to general equity principles.
(n) The information furnished by the Selling Fund for use in
no-action letters, applications for orders, registration statements, proxy
materials, and other documents that may be necessary in connection with the
transactions contemplated hereby is accurate and complete in all material
respects and complies in all material respects with federal securities and other
laws and regulations thereunder applicable thereto.
(o) The Selling Fund has provided the Acquiring Fund with
information reasonably necessary for the preparation of a prospectus, which
included the proxy statement of the Selling Fund (the "Prospectus/Proxy
Statement"), all of which was included in a Registration Statement on Form N-14
of the Acquiring Fund (the "Registration Statement"), in compliance with the
1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act") and
the 1940 Act in connection with the meeting of the shareholders of the Selling
Fund to approve this Agreement and the transactions contemplated hereby. The
Prospectus/Proxy
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Statement included in the Registration Statement (other than information therein
that relates to the Acquiring Fund) does not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not misleading.
4.2 REPRESENTATIONS OF THE ACQUIRING FUND. The Acquiring
Fund represents and warrants to the Selling Fund as follows:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust that is registered as an investment company classified
as a management company of the open-end type, and its registration with the
Commission as an investment company under the 1940 Act is in full force and
effect.
(c) The current prospectuses and statement of additional
information of the Acquiring Fund conform in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder and do not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(d) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of the Trust's
Declaration of Trust or By-Laws or of any material agreement, indenture,
instrument, contract, lease, or other undertaking to which the Acquiring Fund is
a party or by which it is bound.
(e) Except as otherwise disclosed in writing to the Selling
Fund and accepted by the Selling Fund, no litigation, administrative proceeding
or investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquiring Fund or any of its
properties or assets, which, if adversely determined, would materially and
adversely affect its financial condition and the conduct of its business or the
ability of the Acquiring Fund to carry out the transactions contemplated by this
Agreement. The Acquiring Fund knows of no facts that might form the basis for
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the institution of such proceedings and is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental body
that materially and adversely affects its business or its ability to consummate
the transactions contemplated herein.
(f) The Acquiring Fund has no known liabilities of a material
amount, contingent or otherwise.
(g) At the Closing Date, there will not be any material
adverse change in the Acquiring Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Selling Fund. For the purposes of this subparagraph (g), a
decline in the net asset value of the Acquiring Fund shall not constitute a
material adverse change.
(h) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law then to be filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid or provision shall have been made for the
payment thereof. To the best of the Acquiring Fund's knowledge, no such return
is currently under audit, and no assessment has been asserted with respect to
such returns.
(i) All issued and outstanding Acquiring Fund Shares are, and
at the Closing Date will be, duly and validly issued and outstanding, fully paid
and non-assessable. The Acquiring Fund does not have outstanding any options,
warrants, or other rights to subscribe for or purchase any Acquiring Fund
Shares, nor is there outstanding any security convertible into any Acquiring
Fund Shares.
(j) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Acquiring
Fund, and this Agreement constitutes a valid and binding obligation of the
Acquiring Fund enforceable in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium, and other
laws relating to or affecting creditors' rights and to general equity
principles.
(k) The Acquiring Fund Shares to be issued and delivered to
the Selling Fund, for the account of the Selling Fund Shareholders, pursuant to
the terms of this Agreement will,
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at the Closing Date, have been duly authorized and, when so issued and
delivered, will be duly and validly issued Acquiring Fund Shares, and will be
fully paid and non-assessable.
(l) The information furnished by the Acquiring Fund for use in
no-action letters, applications for orders, registration statements, proxy
materials, and other documents that may be necessary in connection with the
transactions contemplated hereby is accurate and complete in all material
respects and complies in all material respects with federal securities and other
laws and regulations applicable thereto.
(m) The Prospectus/Proxy Statement included in the
Registration Statement (only insofar as it relates to the Acquiring Fund) does
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which such statements were made, not
misleading.
(n) The Acquiring Fund agrees to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the 1940 Act,
and such of the state Blue Sky or securities laws as it may deem appropriate in
order to continue its operations after the Closing Date.
ARTICLE V
COVENANTS OF THE ACQUIRING FUND AND THE SELLING FUND
5.1 OPERATION IN ORDINARY COURSE. The Acquiring Fund and the Selling
Fund each will operate its business in the ordinary course between the date
hereof and the Closing Date, it being understood that such ordinary course of
business will include customary dividends and distributions.
5.2 APPROVAL BY SHAREHOLDERS. Davis will call a meeting of the
shareholders of the Selling Fund to consider and act upon this Agreement and to
take all other action necessary to obtain approval of the transactions
contemplated herein.
5.3 INVESTMENT REPRESENTATION. The Selling Fund covenants that the
Acquiring Fund Shares to be issued hereunder are not being acquired for the
purpose of making any distribution thereof other than in accordance with the
terms of this Agreement.
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5.4 ADDITIONAL INFORMATION. The Selling Fund will assist the Acquiring
Fund in obtaining such information as the Acquiring Fund reasonably requests
concerning the beneficial ownership of the Selling Fund shares.
5.5 FURTHER ACTION. Subject to the provisions of this Agreement, the
Acquiring Fund and the Selling Fund will each take, or cause to be taken, all
action, and do or cause to be done, all things reasonably necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement, including any actions required to be taken after the Closing Date.
5.6 STATEMENT OF EARNINGS AND PROFITS. As promptly as practicable, but
in any case within sixty days after the Closing Date, the Selling Fund shall
furnish the Acquiring Fund, in such form as is reasonably satisfactory to the
Acquiring Fund, a statement of the earnings and profits of the Selling Fund for
federal income tax purposes that will be carried over by the Acquiring Fund as a
result of Section 381 of the Code, and which will be reviewed by KPMG LLP and
certified by Davis' President or Vice President and Treasurer.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLING FUND
The obligations of the Selling Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations, covenants, and warranties of the Acquiring
Fund contained in this Agreement shall be true and correct as of the date hereof
and as of the Closing Date with the same force and effect as if made on and as
of the Closing Date, and the Acquiring Fund shall have delivered to the Selling
Fund a certificate executed in its name by the Trust's President or Vice
President and its Treasurer or Assistant Treasurer, in form and substance
reasonably satisfactory to the Selling Fund and dated as of the Closing Date, to
such effect and as to such other matters as the Selling Fund shall reasonably
request.
6.2 The Selling Fund shall have received on the Closing Date an opinion
from Sullivan & Worcester LLP, counsel to the Acquiring Fund, dated as of the
Closing Date, in a form
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reasonably satisfactory to the Selling Fund, covering the
following points:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the power to own all of its
properties and assets and to carry on its business as presently conducted.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust registered as an investment company under the 1940 Act,
and, to such counsel's knowledge, such registration with the Commission as an
investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed, and
delivered by the Acquiring Fund and, assuming due authorization, execution and
delivery of this Agreement by the Selling Fund, is a valid and binding
obligation of the Acquiring Fund enforceable against the Acquiring Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights generally and to general equity principles.
(d) Assuming that a consideration therefor not less than the
net asset value thereof has been paid, the Acquiring Fund Shares to be issued
and delivered to the Selling Fund on behalf of the Selling Fund Shareholders as
provided by this Agreement are duly authorized and upon such delivery will be
legally issued and outstanding and fully paid and non-assessable, and no
shareholder of the Acquiring Fund has any preemptive rights in respect thereof.
(e) The Registration Statement, to such counsel's knowledge,
has been declared effective by the Commission and no stop order under the 1933
Act pertaining thereto has been issued, and to the knowledge of such counsel, no
consent, approval, authorization or order of any court or governmental authority
of the United States or the State of Delaware is required for consummation by
the Acquiring Fund of the transactions contemplated herein, except such as have
been obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
(f) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of the Trust's Declaration of
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Trust or By-Laws or any provision of any material agreement, indenture,
instrument, contract, lease or other undertaking (in each case known to such
counsel) to which the Acquiring Fund is a party or by which it or any of its
properties may be bound or to the knowledge of such counsel, result in the
acceleration of any obligation or the imposition of any penalty, under any
agreement, judgment, or decree to which the Acquiring Fund is a party or by
which it is bound.
(g) Only insofar as they relate to the Acquiring Fund, the
descriptions in the Prospectus/Proxy Statement of statutes, legal and
governmental proceedings and material contracts, if any, are accurate and fairly
present the information required to be shown.
(h) Such counsel does not know of any legal or governmental
proceedings, only insofar as they relate to the Acquiring Fund, existing on or
before the effective date of the Registration Statement or the Closing Date
required to be described in the Registration Statement or to be filed as
exhibits to the Registration Statement which are not described or filed as
required.
(i) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Acquiring Fund or
any of its properties or assets and the Acquiring Fund is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body, which materially and adversely affects its business, other
than as previously disclosed in the Registration Statement.
Such counsel shall also state that they have participated in
conferences with officers and other representatives of the Acquiring Fund at
which the contents of the Prospectus/Proxy Statement and related matters were
discussed and, although they are not passing upon and do not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Prospectus/Proxy Statement (except to the extent indicated in
paragraph (g) of their above opinion), on the basis of the foregoing (relying as
to materiality to a large extent upon the opinions of the Trust's officers and
other representatives of the Acquiring Fund), no facts have come to their
attention that lead them to believe that the Prospectus/Proxy Statement as of
its date, as of the date of the meeting of the shareholders of the Selling Fund,
and as of the Closing Date, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein regarding the
Acquiring Fund or
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necessary, in the light of the circumstances under which they were made, to make
the statements therein regarding the Acquiring Fund not misleading. Such opinion
may state that such counsel does not express any opinion or belief as to the
financial statements or any financial or statistical data, or as to the
information relating to the Selling Fund, contained in the Prospectus/Proxy
Statement or the Registration Statement, and that such opinion is solely for the
benefit of Davis and the Selling Fund.
Such opinion shall contain such assumptions and limitations as shall be
in the opinion of Sullivan & Worcester LLP appropriate to render the opinions
expressed therein.
In this paragraph 6.2, references to the Prospectus/Proxy Statement
include and relate to only the text of such Prospectus/Proxy Statement and not
to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by the
Selling Fund of all the obligations to be performed by it hereunder on or before
the Closing Date and, in addition thereto, the following conditions:
7.1 All representations, covenants, and warranties of the Selling Fund
contained in this Agreement shall be true and correct as of the date hereof and
as of the Closing Date with the same force and effect as if made on and as of
the Closing Date, and the Selling Fund shall have delivered to the Acquiring
Fund on the Closing Date a certificate executed in its name by Davis' President
or Vice President and the Treasurer or Assistant Treasurer, in form and
substance satisfactory to the Acquiring Fund and dated as of the Closing Date,
to such effect and as to such other matters as the Acquiring Fund shall
reasonably request.
7.2 The Selling Fund shall have delivered to the Acquiring Fund a
statement of the Selling Fund's assets and liabilities, together with a list of
the Selling Fund's portfolio securities showing the tax costs of such securities
by lot and the holding periods of such securities, as of the Closing Date,
certified by the Treasurer of Davis.
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7.3 The Acquiring Fund shall have received on the Closing Date an
opinion of D'Ancona & Pflaum, LLC, counsel to the Selling Fund, in a form
satisfactory to the Acquiring Fund covering the following points:
(a) The Selling Fund is a corporation duly organized, validly
existing and in good standing under the laws of the State of Maryland and has
the power to own all of its properties and assets and to carry on its business
as presently conducted.
(b) The Selling Fund is registered as an investment company
under the 1940 Act, and, to such counsel's knowledge, such registration with the
Commission as an investment company under the 1940 Act is in full force and
effect.
(c) This Agreement has been duly authorized, executed and
delivered by the Selling Fund and, assuming due authorization, execution, and
delivery of this Agreement by the Acquiring Fund, is a valid and binding
obligation of the Selling Fund enforceable against the Selling Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and to general equity principles.
(d) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority of the United
States or the State of Maryland is required for consummation by the Selling Fund
of the transactions contemplated herein, except such as have been obtained under
the 1933 Act, the 1934 Act and the 1940 Act, and as may be required under state
securities laws.
(e) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of the Davis' Articles of Incorporation or By-laws, or any provision
of any material agreement, indenture, instrument, contract, lease or other
undertaking (in each case known to such counsel) to which the Selling Fund is a
party or by which it or any of its properties may be bound or, to the knowledge
of such counsel, result in the acceleration of any obligation or the imposition
of any penalty, under any agreement, judgment, or decree to which the Selling
Fund is a party or by which it is bound.
(f) Only insofar as they relate to the Selling Fund, the
descriptions in the Prospectus/Proxy Statement of statutes, legal and government
proceedings and material contracts, if any,
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are accurate and fairly present the information required to be
shown.
(g) Such counsel does not know of any legal or governmental
proceedings, only insofar as they relate to the Selling Fund existing on or
before the effective date of the Registration Statement or the Closing Date,
required to be described in the Registration Statement or to be filed as
exhibits to the Registration Statement which are not described or filed as
required.
(h) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Selling Fund or
any of its respective properties or assets and the Selling Fund is neither a
party to nor subject to the provisions of any order, decree or judgment of any
court or governmental body, which materially and adversely affects its business
other than as previously disclosed in the Prospectus/Proxy Statement.
(i) Assuming that a consideration therefor of not less than
the net asset value thereof has been paid, and assuming that such shares were
issued in accordance with the terms of the Selling Fund's registration
statement, or any amendment thereto, in effect at the time of such issuance, all
issued and outstanding shares of the Selling Fund are legally issued and fully
paid and non-assessable.
Such counsel shall also state that they have participated in
conferences with officers and other representatives of the Selling Fund at which
the contents of the Prospectus/Proxy Statement and related matters were
discussed and, although they are not passing upon and do not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Prospectus/Proxy Statement (except to the extent indicated in
paragraph (f) of their above opinion), on the basis of the foregoing (relying as
to materiality to a large extent upon the opinions of Davis' officers and other
representatives of the Selling Fund), no facts have come to their attention that
lead them to believe that the Prospectus/Proxy Statement as of its date, as of
the date of the meeting of the shareholders of the Selling Fund, and as of the
Closing Date, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein regarding the Selling Fund
or necessary, in the light of the circumstances under which they were made, to
make the statements therein regarding the Selling Fund not misleading. Such
opinion may state that such counsel
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does not express any opinion or belief as to the financial statements or any
financial or statistical data, or as to information relating to the Acquiring
Fund, contained in the Prospectus/Proxy Statement or Registration Statement, and
that such opinion is solely for the benefit of the Trust and the
Acquiring Fund.
Such opinion shall contain such other assumptions and limitations as
shall be in the opinion of D'Ancona & Pflaum, LLC appropriate to render the
opinions expressed therein, and shall indicate, with respect to matters of
Maryland law that as D'Ancona & Pflaum, LLC are not admitted to the bar of
Maryland, such opinions are based either upon the review of published statutes,
cases and rules and regulations of the State of Maryland or upon an opinion of
Maryland counsel.
In this paragraph 7.3, references to the Prospectus/Proxy Statement
include and relate to only the text of such Prospectus/Proxy Statement and not
to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND AND THE SELLING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Selling Fund or the Acquiring Fund, the other
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
the Selling Fund in accordance with the provisions of Davis' Articles of
Incorporation and By-Laws and certified copies of the resolutions evidencing
such approval shall have been delivered to the Acquiring Fund. Notwithstanding
anything herein to the contrary, neither the Acquiring Fund or the Selling Fund
may waive the conditions set forth in this paragraph 8.1.
8.2 On the Closing Date, the Commission shall not have issued an
unfavorable report under Section 25(b) of the 1940 Act, nor instituted any
proceeding seeking to enjoin the consummation of the transactions contemplated
by this Agreement under Section 25(c) of the 1940 Act and no action, suit or
other proceeding shall be threatened or pending before any court or governmental
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<PAGE>
agency in which it is sought to restrain or prohibit, or obtain damages or other
relief in connection with, this Agreement or the transactions contemplated
herein.
8.3 All required consents of other parties and all other consents,
orders, and permits of federal, state and local regulatory authorities
(including those of the Commission and of state Blue Sky securities authorities,
including any necessary "no-action" positions of and exemptive orders from such
federal and state authorities) to permit consummation of the transactions
contemplated hereby shall have been obtained, except where failure to obtain any
such consent, order, or permit would not involve a risk of a material adverse
effect on the assets or properties of the Acquiring Fund or the Selling Fund,
provided that either party hereto may for itself waive any of such conditions.
8.4 The Registration Statement shall have become effective under the
1933 Act, and no stop orders suspending the effectiveness of the Registration
Statement shall have been issued and, to the best knowledge of the parties
hereto, no investigation or proceeding for that purpose shall have been
instituted or be pending, threatened or contemplated under the 1933 Act.
8.5 The transactions contemplated by the Asset Purchase Agreement
by and among Evergreen Asset Management Company, Davis Selected Advisers,
L.P. and Venture Advisers, Inc. shall be completed prior to or on the Closing
Date.
8.6 The parties shall have received a favorable opinion of KPMG LLP
addressed to the Acquiring Fund and the Selling Fund substantially to the effect
that for federal income tax purposes:
(a) The transfer of all of the Selling Fund assets in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of the
identified liabilities of the Selling Fund followed by the distribution of the
Acquiring Fund Shares to the Selling Fund Shareholders in dissolution and
liquidation of the Selling Fund will constitute a "reorganization" within the
meaning of Section 368(a)(1)(F) of the Code and the Acquiring Fund and the
Selling Fund will each be a "party to a reorganization" within the meaning of
Section 368(b) of the Code.
(b) No gain or loss will be recognized by the Acquiring Fund
upon the receipt of the assets of the Selling Fund solely in exchange for the
Acquiring Fund Shares and the
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assumption by the Acquiring Fund of the identified liabilities of
the Selling Fund.
(c) No gain or loss will be recognized by the Selling Fund
upon the transfer of the Selling Fund assets to the Acquiring Fund in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of the
identified liabilities of the Selling Fund or upon the distribution (whether
actual or constructive) of the Acquiring Fund Shares to Selling Fund
Shareholders in exchange for their shares of the Selling Fund.
(d) No gain or loss will be recognized by the Selling Fund
Shareholders upon the exchange of their Selling Fund shares for the Acquiring
Fund Shares in liquidation of the Selling Fund.
(e) The aggregate tax basis for the Acquiring Fund Shares
received by each Selling Fund Shareholder pursuant to the Reorganization will be
the same as the aggregate tax basis of the Selling Fund shares held by such
shareholder immediately prior to the Reorganization, and the holding period of
the Acquiring Fund Shares to be received by each Selling Fund Shareholder will
include the period during which the Selling Fund shares exchanged therefor were
held by such shareholder (provided the Selling Fund shares were held as capital
assets on the date of the Reorganization).
(f) The tax basis of the Selling Fund assets acquired by the
Acquiring Fund will be the same as the tax basis of such assets to the Selling
Fund immediately prior to the Reorganization, and the holding period of the
assets of the Selling Fund in the hands of the Acquiring Fund will include the
period during which those assets were held by the Selling Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring
Fund nor the Selling Fund may waive the conditions set forth in this paragraph
8.6.
8.7 The Acquiring Fund shall have received from KPMG LLP a letter
addressed to the Acquiring Fund, in form and substance satisfactory to the
Acquiring Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Selling Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an
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examination in accordance with generally accepted auditing standards), the
Capitalization Table appearing in the Registration Statement and
Prospectus/Proxy Statement has been obtained from and is consistent with the
accounting records of the Selling Fund; and
(c) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the data utilized in the
calculations of the pro forma expense ratios appearing in the Registration
Statement and Prospectus/Proxy Statement agree with underlying accounting
records of the Selling Fund or with written estimates by the Selling Fund's
management and were found to be mathematically correct.
In addition, unless waived by the Acquiring Fund, the Acquiring Fund
shall have received from KPMG LLP a letter addressed to the Acquiring Fund dated
on the Closing Date, in form and substance satisfactory to the Acquiring Fund,
to the effect that on the basis of limited procedures agreed upon by the
Acquiring Fund (but not an examination in accordance with generally accepted
auditing standards), the net asset value per share of the Selling Fund as of the
Valuation Date was computed and the valuation of the portfolio was consistent
with the valuation practices of the Acquiring Fund.
8.8 The Selling Fund shall have received from KPMG LLP a letter
addressed to the Selling Fund, in form and substance satisfactory to the Selling
Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Acquiring Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards), the Capitalization Table appearing
in the Registration Statement and Prospectus/Proxy Statement has been obtained
from and is consistent with the accounting records of the Acquiring Fund; and
(c) on the basis of limited procedures agreed upon by the
Selling Fund (but not an examination in accordance with generally accepted
auditing standards), the data utilized in the calculations of the pro forma
expense ratios appearing in the
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Registration Statement and Prospectus/Proxy Statement agree with written
estimates by each Fund's management and were found to be mathematically correct.
ARTICLE IX
EXPENSES
9.1 Except as otherwise provided for herein, all expenses of the
transactions contemplated by this Agreement incurred by the Selling Fund and the
Acquiring Fund, whether incurred before or after the date of this Agreement,
will be borne by Davis Selected Advisers, LP (in the case of the Selling Fund)
and First Union National Bank (in the case of the Acquiring Fund). Such expenses
include, without limitation, (a) expenses incurred in connection with the
entering into and the carrying out of the provisions of this Agreement; (b)
expenses associated with the preparation and filing of the Registration
Statement under the 1933 Act covering the Acquiring Fund Shares to be issued
pursuant to the provisions of this Agreement; (c) registration or qualification
fees and expenses of preparing and filing such forms as are necessary under
applicable state securities laws to qualify the Acquiring Fund Shares to be
issued in connection herewith in each state in which the Selling Fund
Shareholders are resident as of the date of the mailing of the Prospectus/Proxy
Statement to such shareholders; (d) postage; (e) printing; (f) accounting fees;
(g) legal fees; and (h) solicitation costs of the transaction. Notwithstanding
the foregoing, the Acquiring Fund shall pay its own federal and state
registration fees. In the event that the transactions contemplated by the Asset
Purchase Agreement referred to in paragraph 8.5 hereof are not completed, this
Agreement shall terminate. In such event, all expenses of the transactions
contemplated by this Agreement incurred by the Acquiring Fund shall be borne by
First Union National Bank and all expenses of the transactions contemplated by
this Agreement incurred by the Selling Fund shall be borne by Davis Selected
Advisers, LP.
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Selling Fund agree that neither party
has made any representation, warranty or covenant not set forth herein and that
this Agreement constitutes the entire agreement between the parties.
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10.2 The representations, warranties, and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall not survive the consummation of the transactions contemplated hereunder.
ARTICLE XI
TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the
Acquiring Fund and the Selling Fund. In addition, either the Acquiring Fund or
the Selling Fund may at its option terminate this Agreement at or prior to the
Closing Date because:
(a) of a breach by the other of any representation, warranty,
or agreement contained herein to be performed at or prior to the Closing Date,
if not cured within 30 days; or
(b) a condition herein expressed to be precedent to the
obligations of the terminating party has not been met and it reasonably appears
that it will not or cannot be met.
11.2 In the event of any such termination, in the absence of willful
default, there shall be no liability for damages on the part of either the
Acquiring Fund, the Selling Fund, the Trust, Davis, the respective Trustees,
Directors or officers, to the other party or its Trustees, Directors or
officers, but each shall bear the expenses incurred by it incidental to the
preparation and carrying out of this Agreement as provided in paragraph 9.1.
ARTICLE XII
AMENDMENTS
12.1 This Agreement may be amended, modified, or supplemented in such
manner as may be mutually agreed upon in writing by the authorized officers of
the Selling Fund and the Acquiring Fund; provided, however, that following the
meeting of shareholders of the Selling Fund pursuant to paragraph 5.2 of this
Agreement, no such amendment may have the effect of changing the provisions for
determining the number of the Acquiring Fund Shares to be issued to the Selling
Fund Shareholders under this Agreement to the detriment of such Shareholders
without their further approval.
ARTICLE XIII
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HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
13.1 The Article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original.
13.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without giving effect to the conflicts
of laws provisions thereof; provided, however, that the due authorization,
execution and delivery of this Agreement, in the case of the Selling Fund, shall
be governed and construed in accordance with the laws of the State of Maryland,
without giving effect to the conflicts of laws provisions thereof.
13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but, except as provided in
this paragraph, no assignment or transfer hereof or of any rights or obligations
hereunder shall be made by any party without the written consent of the other
party. Nothing herein expressed or implied is intended or shall be construed to
confer upon or give any person, firm, or corporation, other than the parties
hereto and their respective successors and assigns, any rights or remedies under
or by reason of this Agreement.
13.5 It is expressly agreed that the obligations of the Acquiring Fund
hereunder shall not be binding upon any of the Trustees, shareholders, nominees,
officers, agents, or employees of the Trust personally, but shall bind only the
trust property of the Acquiring Fund, as provided in the Declaration of Trust of
the Trust. The execution and delivery of this Agreement have been authorized by
the Trustees of the Trust on behalf of the Acquiring Fund and signed by
authorized officers of the Trust, acting as such, and neither such authorization
by such Trustees nor such execution and delivery by such officers shall be
deemed to have been made by any of them individually or to impose any liability
on any of them personally, but shall bind only the Trust property of the
Acquiring Fund as provided in the Declaration of Trust of the Trust.
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IN WITNESS WHEREOF, the parties have duly executed this Agreement, all
as of the date first written above.
DAVIS TAX-FREE HIGH INCOME
FUND, INC. ON BEHALF OF DAVIS
TAX-FREE HIGH INCOME FUND
By:
Name:
Title:
EVERGREEN MUNICIPAL TRUST ON
BEHALF OF EVERGREEN TAX-FREE
HIGH INCOME FUND
By:
Name:
Title:
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<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
ACQUISITION OF ASSETS OF
DAVIS TAX-FREE HIGH INCOME FUND
a series of
DAVIS TAX-FREE HIGH INCOME FUND, INC.
124 East Marcy Street
Santa Fe, New Mexico 87501
(800) 279-0279
By and In Exchange For Shares of
EVERGREEN TAX-FREE HIGH INCOME FUND
a series of
EVERGREEN MUNICIPAL TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 343-2898
This Statement of Additional Information, relating specifically to the
proposed transfer of the assets and liabilities of Davis Tax-Free High Income
Fund ("Davis Tax Free Fund"), a series of Davis Tax-Free High Income Fund, Inc.,
to Evergreen Tax-Free High Income Fund ("Evergreen Tax Free Fund"), a series of
Evergreen Municipal Trust, in exchange for Class A, B, C and Y shares (to be
issued to holders of Class A, B, C and Y shares of Davis Tax Free Fund,
respectively,) of beneficial interest, $.001 par value per share, of Evergreen
Tax Free Fund, consists of this cover page and the following described
documents, each of which is attached hereto and incorporated by reference
herein:
(1) The Statement of Additional Information of Davis Tax
Free Fund dated February 1, 1999;
(2) The Statement of Additional Information of Evergreen
Tax Free Fund dated January 10, 2000; and
(3) Annual Report of Davis Tax Free Fund for the year ended
September 30, 1999.
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<PAGE>
This Statement of Additional Information, which is not a prospectus,
supplements, and should be read in conjunction with, the Prospectus/Proxy
Statement of Evergreen Tax Free Fund and Davis Tax Free Fund dated January 18,
2000. A copy of the Prospectus/Proxy Statement may be obtained without charge by
writing to Evergreen Tax Free Fund or Davis Tax Free Fund at the addresses set
forth above or by calling toll free 1-800-645- 7816.
The date of this Statement of Additional Information is January 18,
2000.
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<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 1, 1999
DAVIS TAX-FREE HIGH INCOME FUND, INC.
124 EAST MARCY STREET
SANTA FE, NEW MEXICO 87501
1-800-279-0279
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE READ
IN CONJUNCTION WITH THE CLASS A, CLASS B AND CLASS C PROSPECTUS DATED FEBRUARY
1, 1999 AND THE CLASS Y PROSPECTUS DATED FEBRUARY 1, 1999. THE PROSPECTUSES MAY
BE OBTAINED FROM THE FUND.
THE FUND'S MOST RECENT ANNUAL REPORT AND SEMI-ANNUAL REPORT TO SHAREHOLDERS ARE
SEPARATE DOCUMENTS SUPPLIED WITH THIS STATEMENT OF ADDITIONAL INFORMATION. THE
ANNUAL REPORT, ACCOMPANYING NOTES AND REPORT OF INDEPENDENT AUDITORS APPEARING
IN THE ANNUAL REPORT ARE INCORPORATED BY REFERENCE IN THIS STATEMENT OF
ADDITIONAL INFORMATION.
<PAGE>
TABLE OF CONTENTS
PAGE
Section I: Investment Strategies and Restrictions..........................4
Investment Objective and Policies...............................4
Portfolio Securities............................................4
Other Investment Policies.......................................8
Portfolio Transactions.........................................10
Investment Restrictions........................................11
Section II: Key Persons....................................................13
Organization of the Company....................................13
Directors and Officers.........................................13
Directors Compensation Schedule................................16
Certain Shareholders of the Fund...............................16
Investment Advisory Services...................................17
Distribution of Company Shares.................................18
Other Important Service Providers..............................21
Section III: Purchase, Exchange and Redemption of Shares....................22
Purchase of Shares.............................................22
Alternative Purchase Arrangements.....................23
Class A Shares........................................23
Class B Shares........................................25
Class C Shares........................................26
Class Y Shares........................................27
Special Services...............................................27
Automatic Investment Plan.............................27
Dividend Diversification Program......................27
Telephone Privilege...................................27
Exchange of Shares.............................................28
General...............................................28
By Telephone..........................................28
Automatic Exchange Program............................28
Redemption of Shares...........................................29
General...............................................29
Expedited Redemption Privilege........................29
By Telephone..........................................30
Automatic Withdrawals Plan............................30
Involuntary Redemptions...............................30
Subsequent Repurchases................................30
2
<PAGE>
Section IV: General Information............................................31
Determining the Price of Shares................................31
Year 2000 Issues...............................................31
Dividends and Distributions....................................32
Federal Income Taxes...........................................32
Performance Data...............................................33
Non-Standard Distribution Rates................................35
Appendix A: Quality Ratings of Debt Securities..............................37
Appendix B: Term and Conditions for a Statement of Intention................39
3
<PAGE>
Section I: Investment Strategies and Restrictions
INVESTMENT OBJECTIVES AND POLICIES
Davis Tax-Free High Income Fund's ("Fund") investment objective is to
provide current income free from federal income tax by investing in municipal
obligations. In seeking to achieve this investment objective, the Fund will
normally have at least 80% of its net assets invested in municipal obligations
without limitation as to quality ratings, maturity ranges or types of issuers.
Davis Selected Adviser L.P. ("Adviser") and or Stamper Capital & Investments,
Inc. ("Sub-Adviser") will select particular municipal obligations for the Fund
if, in their view after analysis, the increased yield offered, regardless of
published ratings, is sufficient to compensate for the level of assumed risk.
The Fund may invest up to 100% of its assets in high yield, high-risk
obligations. The average maturity of the Fund's portfolio will vary; however,
it is anticipated that a significant portion of the portfolio will be invested
in long-term obligations of 20 years or more since such securities generally
produce higher yields than shorter-term obligations. A more complete
description of bond ratings is contained in Appendix A. The Fund may invest in
shares of investment companies primarily investing in short-term municipal
obligations, but will not do so if it would cause more than 10% of its total
assets to be invested in such shares. Such other investment companies usually
have their own management costs or fees and the Fund's Adviser earns its
regular fee on such assets.
If you are subject to the Federal alternative minimum tax, you should
note that the Fund may invest up to 20% of its total assets in municipal
obligations issued to finance private activities. The interest from these
investments is a tax preference item for purposes of the alternative minimum
tax. As of September 30, 1998, 9% of the Fund's net assets were subject to the
Federal alternative minimum tax.
PORTFOLIO SECURITIES
MUNICIPAL OBLIGATIONS. Municipal obligations are bonds or notes issued
by a state or local governmental entity to obtain funds for various public
purposes or facilities such as airports, bridges, highways, housing, hospitals,
schools, streets, water and sewer systems, mass transit and utility and power
facilities. They are also used to refund outstanding obligations or for general
operating expenses. In addition, they may be used for the construction or
purchase of privately operated facilities deemed to be of public purpose and
benefit. The various types of municipal obligation which the Fund purchases are
discussed below.
Yields on municipal obligations are dependent on many factors,
including interest rate conditions, general conditions of the municipal bond
market, size of a particular offering, maturity of the obligation and rating of
the issue, if any. The value of outstanding obligations will vary as a result
of changing evaluations of the ability of their issuers (or other revenue
source) to meet the interest and principal payments, which can also result in
rating changes. Such values will also change in response to changes in the
interest rates payable on new issues. As discussed below, portfolio values will
also change in response to changes in the level of interest rates.
Municipal obligations, like other marketable obligations, fluctuate in
price. Payments of interest and principal are dependent upon the ability of the
issuers (or other revenue source) to meet their obligations. Payments on
general obligation bonds are dependent on the tax base of the issuing
governmental entity. Payments on revenue bonds, unless guaranteed by a taxing
authority, are dependent upon the revenues from a specific project or facility
or payments from a private company which operates the facility.
The Fund may purchase up to 50% of the outstanding debt obligations of
an issuer. Some of the securities which the Fund may hold may not have an
established market and such lack of liquidity could cause the Fund difficulty
at times in selling these securities at favorable prices.
The market value of fixed income securities will generally be affected
by changes in the level of rates. Increases in interest rates tend to reduce
the market value of fixed income investments and declines in interest rates
tend to increase their value. Moreover, debt issues with longer maturities,
which tend to produce higher yields, are subject to potentially greater capital
appreciation or depreciation than securities with shorter maturities.
Fluctuations
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<PAGE>
in the market value of the Fund's portfolio securities subsequent to their
acquisition will not affect cash income from such securities but will be
reflected in the Fund's net asset value. In addition, the future earning power
of an obligor and its ability to service debt may affect the market price of
higher yielding debt.
There are market and investment risks with any security and the value
of an investment in the Fund will fluctuate over time. In seeking to achieve
its investment objective, the Fund will invest in fixed income securities based
on the Adviser's and/or Sub-Adviser's analysis without relying on any published
ratings. The Fund will invest in a particular security if, in the Adviser's
and/or Sub-Adviser's view, the increased yield offered, regardless of published
ratings, is sufficient to compensate for the assumed risk. Since many
investments will be based upon the Adviser's and/or Sub-Adviser's analysis
rather than on the basis of published ratings, achievement of the Fund's goals
may depend more upon the abilities of the Adviser and Sub-Adviser than would
otherwise be the case. Investments in lower rated or non-rated securities,
while generally providing greater income and opportunity for gain than
investments in higher rated securities, entail greater risk of loss of income
and principal.
TYPES OF MUNICIPAL OBLIGATIONS. The two general classifications of
municipal bonds are "general obligation" bonds and "revenue" bonds. General
obligation bonds are secured by the issuer's pledge of its faith, credit and
taxing power for the payment of principal and interest. They are usually paid
from general revenues of the issuing governmental entity. Revenue bonds are
usually payable only out of a specific revenue source rather than from general
revenues and ordinarily are not backed by the faith, credit or general taxing
power of the issuing governmental entity.
Revenue Bonds. The principal and interest on revenue bonds for private
facilities are typically paid out of rents or other specified payments made to
the issuing governmental entity by the company using or operating the
facilities. The most common type of these obligations are industrial revenue
bonds and pollution control revenue bonds. Industrial revenue bonds are issued
by governmental entities to provide financing aid to communities to locate
privately operated industrial plants or community facilities such as hospitals,
hotels, business or residential complexes, convention halls or sport complexes.
Pollution control revenue bonds are issued to provide funding for air, water
and solids pollution control systems for privately operated industrial or
commercial facilities. Sometimes, the funds for payment of such obligations
come solely from revenue generated by operation of the facility. Absent a
guarantee by the issuing governmental entity, revenue bonds for private
facilities do not represent a pledge of credit, general revenues, or taxing
powers of the issuing governmental entity and the private company operating the
facility is the sole source of payment of the obligation. This type of revenue
bond frequently provides a higher rate of return than other municipal
obligations but may entail greater risk than an obligation which is guaranteed
by a governmental unit with taxing power. Federal income tax laws place
substantial limitations on industrial revenue bonds, and particularly those
"specified private activity bonds" issued after August 7, 1986. However, the
Fund's management does not believe that these limitations will impair the
Fund's ability to purchase or sell bonds in accordance with the Fund's
objectives and policies.
Occasionally, an issuing state or local governmental entity may
guarantee the payment of a revenue bond obligation, backing payment with its
taxing power. Normally, revenue bonds are paid solely from a particular revenue
source. The revenue source may be earnings from a public project such as tolls
from roads or bridges, airport revenues, earnings of publicly owned utilities
or special excises such as special improvement levies. The revenue source may
also be a private company which is utilizing a facility constructed through
monies obtained through a governmental agency or fund. There are two principal
types of revenue bonds for private facilities, industrial development bonds and
pollution control bonds. Occasionally, such bonds are also issued by
governmental entities to obtain funds for a privately operated general
community facility such as a hospital, convention hall or sports stadium.
Industrial development bonds are issued by a governmental entity to
obtain funds to finance a facility, typically an industrial plant or factory,
which is leased to or operated by a private (non-governmental) company. State
and local governments have the power in most states to permit the issuance of
industrial development bonds to provide financing aid to such companies in
order to encourage them to locate facilities within their communities.
Pollution control bonds are issued to provide funding for air or water
pollution control systems for privately operated industrial or commercial
facilities.
5
<PAGE>
Municipal Lease Obligations. The Fund may invest in municipal bonds
and certificates of participation that constitute investment in lease
obligations or installment purchase contract obligations (hereafter
collectively called "lease obligations") of municipal authorities or entities.
Although lease obligations do not constitute general obligations of the
municipality for which the municipality's taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide
that the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. Although "non-appropriation" lease obligations are secured by the
leased property, the disposition of the property in the event of foreclosure
might prove difficult. The Fund will seek to minimize these risks by not
investing more than 10% of its investment assets in lease obligations that
contain "non-appropriation" clauses.
Municipal Notes, Hybrid, and Special Types of Municipal Obligations.
Municipal notes include tax, revenue and bond anticipation obligations or
general or revenue obligations of shorter maturities than municipal bonds,
generally five years or less, which are issued to obtain funds for various
public purposes. There are, in addition, a variety of hybrid and special types
of municipal obligations as well as numerous differences in security, quality
and risk both within and among the classifications described above. Obligations
of a special governmental authority may, for instance, constitute a pledge of
the full credit and taxing power of the authority, and yet have somewhat less
security than a general state or city obligation in view of the limitations on
the authority's taxing power compared to the broader taxing power of a state or
a city.
Due to the increasing needs of state and local governments and their
widening view of public purpose, a variety of types of federal tax-exempt
financing obligations have been developed over the years and new types of
obligations may be expected in the future.
The ratings of Moody's Investors Services Inc. ("Moody's") and
Standard and Poor's Corporation ("S&P") represent their opinions as to the
quality of the municipal obligations which they undertake to rate. It should be
emphasized, however, that ratings are general and are not absolute standards of
quality. Consequently, municipal bonds with the same maturity, coupon and
rating may have different yields while bonds of the same maturity and coupon
with different ratings may have the same yield.
From time to time, proposals have been introduced in Congress for the
purposes of restricting or eliminating the federal income tax exemption for
interest on municipal obligations. Similar proposals may be introduced in the
future. If such a proposal were to be enacted, the availability of municipal
obligations for investment by the Fund and the value of the Fund's portfolio
would be affected. In such event, the Fund would re-evaluate its investment
objective and policies in view of such developments.
GEOGRAPHIC AND INDUSTRY CONCENTRATION. Subject to the restrictions
described herein, the Fund's portfolio may be invested in bonds whose interest
payments are from revenues of similar projects (such as utilities or hospitals)
or whose issuers share the same geographic location. As a result, the Fund's
portfolio may be more susceptible to similar economic, political or regulatory
developments than would a portfolio of bonds with a greater variety of issuers.
This may result in greater market fluctuations in the Fund's share price. The
Fund may purchase up to 50% of the outstanding debt obligations of an issuer.
Some of the securities which the Fund may hold may not have an established
market and such lack of liquidity could cause the Fund difficulty at times in
selling these securities at favorable prices.
HIGH YIELD, HIGH-RISK DEBT SECURITIES. As discussed above, the Fund
may invest in low rated securities offering high current income. Such
securities will ordinarily be in the lower rating categories of recognized
rating agencies, including securities rated BBB or lower by Standard & Poor's
Corporation ("S&P") or Baa or lower by Moody's Investors Service, Inc.
("Moody's") or, if unrated, deemed by the Adviser or Sub-Adviser to be of an
equivalent rating. These lower-rated securities are considered speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation and generally will involve more credit risk than
securities in the higher rating categories. Securities rated BB or lower by S&P
or Ba or lower by Moody's are below investment grade and are referred to in the
financial community as "junk bonds." A brief description of the bond ratings of
these two services is contained herein under "Portfolio Composition." A more
complete description is contained in the Appendix.
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<PAGE>
The investment philosophy of the Fund with respect to high yield,
high-risk bonds is based on the premise that over the long term a diversified
portfolio of high yield fixed income securities should, even taking into
account possible losses, provide a higher net return than that achievable on a
portfolio of higher rated securities. The Fund seeks to achieve a high yield
while reducing relative risk through (a) diversification, (b) credit analysis
of the obligors by the Adviser and/or Sub-Adviser, and (c) monitoring and
seeking to anticipate changes and trends in the economy and financial markets
that might affect the prices of portfolio securities. Ratings assigned by
credit agencies do not evaluate market risks. The Adviser and/or Sub-Adviser's
judgment as to the "reasonableness" of the risk involved in any particular
investment will be a function of its experience in managing fixed income
investments and its evaluation of general economic and financial conditions.
This includes analysis and evaluations of a specific guaranteeing entity's
business and management, cash flow, earnings coverage of interest and
dividends, ability to operate under adverse economic conditions, fair market
value of the obligor's assets; and of such other considerations as the Adviser
and/or Sub-Adviser may deem appropriate. The Adviser and/or Sub-Adviser, while
seeking to maximize current yield, will monitor current developments with
respect to portfolio securities, potential investments and broad trends in the
economy. Achievement of the Fund's investment objective will be more dependent
upon the Adviser and/or Sub-Adviser's credit analysis than would be the case
for funds predominantly investing in higher rated bonds. In some circumstances,
defensive strategies may be implemented to preserve or enhance capital even at
the sacrifice of current yield. There is, however, no assurance that the Fund's
objectives will be achieved or that the Fund's approach to risk management will
protect the shareholders against loss.
The market values of such high yield, high-risk municipal securities
tend to reflect individual developments of the guaranteeing entity underlying
the issue to a greater extent than do higher rated securities, which react to a
greater extent to fluctuations in the general level of interest rates. Such
securities also tend to be more sensitive to economic and industry conditions
than are higher rated securities. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis regarding individual lower rated
bonds or the high yield market, may depress the prices for such securities.
Factors such as the aforementioned may adversely impact the market value of
high yield, high-risk securities and could adversely impact the Fund's net
asset value.
An economic downturn or significant increase in interest rates is
likely to have a negative effect on the high yield, high-risk bond market and
consequently on the value of these bonds. In an economic downturn, issuers may
not have sufficient revenues to meet their principal and interest payment
obligations.
The risk of loss due to default is significantly greater for the
holders of high yield, high-risk bonds. The costs associated with recovering
principal and interest once a security has defaulted may impact the return to
holders of the security. If the Fund experiences unexpectedly large net
redemptions, it may be forced to sell such bonds without regard to the
investment merits of such sales. This could decrease the Fund's rate of return.
The Fund has not experienced this problem to date.
The Fund may have difficulty disposing of certain high yield,
high-risk bonds because there may be a thin trading market for such bonds.
Because not all dealers maintain markets in all high yield, high-risk bonds,
the Fund anticipates that such bonds could be sold only to a limited number of
dealers or institutional investors. The lack of a liquid secondary market may
have an adverse impact on market price and the Fund's ability to dispose of
particular issues and may also make it more difficult for the Fund to obtain
accurate market quotations or valuations for purposes of valuing the Fund's
assets. The Fund has a policy of utilizing a professional pricing service which
has experience in pricing such securities which are difficult to price so as to
obtain prices reflecting the market as accurately as possible. To the extent
that the Fund purchases illiquid or restricted bonds, it may incur special
securities registration responsibilities, liabilities and costs, and liquidity
and valuation difficulties relating to such bonds.
Bonds may be subject to redemption or call provisions. If an issuer
exercises these provisions when investment rates are declining, the Fund would
be likely to replace the bond with a lower yielding bond, resulting in a
decreased return. Zero coupon and pay-in-kind bonds involve special
considerations. The market prices of these securities are generally more
volatile than the market prices of securities that pay interest periodically
and are likely to respond to changes in interest rates to a greater degree than
do securities paying interest currently that have similar maturities and credit
quality. There is the additional risk in that, unlike bonds which pay interest
in cash throughout the period to maturity, the Fund will realize no cash until
the cash payment date unless a portion of such
7
<PAGE>
securities are sold. If the issuer defaults, the Fund may obtain no return at
all on its investment. Zero coupon bonds generate interest income before
receipt of actual cash payments. In order to distribute such income, the Fund
may have to sell portfolio securities under disadvantageous circumstances.
PORTFOLIO COMPOSITION. The table below reflects the Fund's portfolio
composition by quality rating calculated on the basis of the average weighted
ratings of all bonds held at September 30, 1998. The table reflects the
percentage of total assets represented by fixed income securities rated by
Moody's or S&P, by unrated fixed income securities and by other assets. The
percentages shown reflect the higher of the Moody's or S&P rating. Other assets
may include money market instruments, repurchase agreements, equity securities,
net payables and receivables and cash. The allocations in the table are not
necessarily representative of the composition of the Fund's portfolio at other
times. Portfolio quality ratings will change over time.
COMPOSITION OF THE FUND'S PORTFOLIO BY QUALITY RATING AS A PERCENTAGE OF
TOTAL NET ASSETS AT SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
FUND'S ASSESSMENT OF GENERAL DEFINITION
MOODY'S/S&P RATING CATEGORY PERCENTAGE NON-RATED SECURITIES OF BOND QUALITY
- - --------------------------- ---------- -------------------- ---------------
<S> <C> <C> <C>
Aaa/AAA ............................ 48.01% 0.12% Highest quality
Aa/AA ............................ 11.76% 0.00% High quality
A/A ............................ 16.07% 0.45% Upper medium grade
Baa/BBB ............................ 6.75% 2.97% Medium grade
Ba/BB ............................ 3.77% 3.86% Some speculative elements
B/B ............................ 1.31% 1.71% Speculative
Caa/CCC ............................ 0.00% 0.00% More speculative
Ca, C/CC, C, D...................... 0.00% 0.00% Very speculative, may be in default
Not Rated........................... 9.11% 0.00% Not rated by Moody's or S&P
Short-term Investments.............. 3.22% 0.00%
----- -----
100.00% 9.11%
</TABLE>
The description of each bond quality category set forth in the table
above is intended to be a general guide and not a definitive statement as to
how Moody's and S&P define such rating category. A more complete description of
the rating categories is set forth in the Appendix. The ratings of Moody's and
S&P represent their opinions as to the quality of the securities that they
undertake to rate. It should be emphasized, however, that ratings are relative
and subjective and are not absolute standards of quality. There is no assurance
that a rating assigned initially will not change. The Fund may retain a
security whose rating has changed or has become unrated.
OTHER INVESTMENT POLICIES
TEMPORARY DEFENSIVE INVESTMENTS. At various times the Fund may hold
cash or invest in securities other than municipal obligations. Income from such
securities may be taxable as ordinary income. For defensive purposes or to
accommodate inflows of cash awaiting more permanent investment, the Funds may
temporarily and without limitation hold high-grade short-term money market
instruments, cash and cash equivalents, including repurchase agreements.
During periods of adverse markets when it is deemed advisable and
practicable to take a temporary defensive position to protect capital, the Fund
may have more than 20% of its assets invested in temporary investments and
cash. While reserving this freedom to act for defensive purposes, the Fund
intends to limit its holdings of temporary taxable investments and cash to meet
the requirements for federal income tax exemption on the dividends which the
Fund pays from its municipal obligation or other income exempt from federal
income tax.
Although on occasion the Fund may purchase temporary investments, it
is the Fund's intention to be invested primarily in municipal obligations.
Temporary investments will be made only under the conditions specified herein.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements,
but normally will not enter into repurchase agreements maturing in more than
seven days. A repurchase agreement, as referred to herein,
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<PAGE>
involves a sale of securities to a Fund, with the concurrent agreement of the
seller (a bank or securities dealer which the Adviser or Sub-Adviser determines
to be financially sound at the time of the transaction) to repurchase the
securities at the same price plus an amount equal to accrued interest at an
agreed-upon interest rate, within a specified time, usually less than one week,
but, on occasion, at a later time. The repurchase obligation of the seller is,
in effect, secured by the underlying securities. In the event of a bankruptcy
or other default of a seller of a repurchase agreement, the Fund could
experience both delays in liquidating the underlying securities and losses,
including (a) possible decline in the value of the collateral during the period
while the Fund seek to enforce their rights thereto; (b) possible loss of all
or a part of the income during this period; and (c) expenses of enforcing its
rights.
The Fund will enter into repurchase agreements only when the seller
agrees that the value of the underlying securities, including accrued interest
(if any), will at all times be equal to or exceed the value of the repurchase
agreement. The Fund will not enter into a repurchase agreement maturing in more
than seven days if it would cause more than 15% of the value of its net assets
to be invested in such transactions. Repurchase agreements maturing in less
than seven days are not deemed illiquid securities for the purpose of the
Fund's 15% limitation on illiquid securities.
INVESTMENT IN OTHER INVESTMENT COMPANIES. The Fund may invest up to
10% of its total assets through other listed and unlisted investment companies.
The Fund will comply with applicable investment limitations imposed by the
Investment Company Act of 1940. Such investments may involve the payment of
premiums above the value of the portfolio securities held by such other
investment companies. The return on such investment may be reduced both by the
Fund's own expenses, including its Advisory fees, and the management fees and
expenses of the other investment company. However, due to legal currency,
liquidity or other restrictions, investments in some countries may be currently
limited and marketable investments may be made more readily by investing in
investment companies primarily investing in securities of these countries.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in restricted
securities which are subject to contractual restrictions on resale. The Fund's
policy is to not purchase or hold illiquid securities (which may include
restricted securities) if more than 15% of the Fund's net assets would then be
illiquid.
The restricted securities which the Fund may purchase include
securities which have not been registered under the 1933 Act but are eligible
for purchase and sale pursuant to Rule 144A ("Rule 144A Securities"). This Rule
permits certain qualified institutional buyers, such as the Fund, to trade in
privately placed securities even though such securities are not registered
under the 1933 Act. The Adviser or Sub-Adviser under criteria established by
the Fund's Board of Directors, will consider whether Rule 144A securities being
purchased or held by the Fund are illiquid and thus subject to the Fund's
policy limiting investments in illiquid securities. In making this
determination, the Adviser or Sub-Adviser will consider the frequency of trades
and quotes, the number of dealers and potential purchasers, dealer undertakings
to make a market, and the nature of the security and the market place trades
(for example, the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer). The liquidity of Rule 144A
Securities will also be monitored by the Adviser or Sub-Adviser and, if as a
result of changed conditions, it is determined that a Rule 144A Security is no
longer liquid, the Fund's holding of illiquid securities will be reviewed to
determine what, if any, action is required in light of the policy limiting
investments in such securities. Investing in Rule 144A Securities could have
the effect of increasing the amount of investments in illiquid securities if
qualified institutional buyers are unwilling to purchase such securities.
BORROWING. The Fund may borrow money for temporary or emergency
purposes. The Fund will not borrow money with the intent of leveraging its
investments. Borrowing activities are strictly limited as described in the
section entitled, "Investment Restrictions."
"WHEN ISSUED" SECURITIES. Municipal obligations may at times be
purchased or sold on a delayed delivery basis or on a when-issued basis. These
transactions arise when securities are purchased or sold by the Fund with
payment and delivery taking place in the future. No payment is made until
delivery is made which may be up to 60 days after purchase. If delivery of the
obligation does not take place, no purchase will result and the transaction
will be terminated. Such transactions are considered to involve more risk than
immediate cash transactions. As a matter of non-fundamental policy, any
investment on a when issued or delayed delivery basis will not be made if such
investment would cause more than 5% of the value of the Fund's total assets to
be invested in this type of investment.
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<PAGE>
PORTFOLIO TRANSACTIONS.
The Adviser and Sub-Adviser are responsible for the placement of
portfolio transactions, subject to the supervision of the Board of Directors.
The Fund has adopted a policy to seek to place portfolio transactions with
brokers or dealers who will execute transactions as efficiently as possible and
at the most favorable price. Subject to this policy, research services and
placement of orders by securities firms for Fund shares may be taken into
account as a factor in placement of portfolio transactions. In seeking the
Fund's investment objectives, the Fund may trade to some degree in securities
for the short term if the Adviser or Sub-Adviser believe that such trading is
advisable.
In placing executions and paying brokerage commissions, the Adviser or
Sub-Adviser consider the financial responsibility and reputation of the broker
or dealer, the range and quality of the services made available to the Fund and
the professional services rendered, including execution, clearance procedures,
wire service quotations and ability to provide supplemental performance,
statistical and other research information for consideration, analysis and
evaluation by the Adviser or Sub-Adviser's staff. In accordance with this
policy, brokerage transactions may not be executed solely on the basis of the
lowest commission rate available for a particular transaction. Research
services provided to the Adviser or Sub-Adviser by or through brokers who
effect portfolio transactions for the Fund may be used in servicing other
accounts managed by the Adviser or Sub-Adviser and likewise research services
provided by brokers used for transactions of other accounts may be utilized by
the Adviser or Sub-Adviser in performing services for the Fund. Subject to the
requirements of best execution, the placement of orders by securities firms for
shares of the Fund may be taken into account as a factor in the placement of
portfolio transactions.
On occasions when the Adviser or Sub-Adviser deem the purchase or sale
of a security to be in the best interests of a Fund as well as other fiduciary
accounts, the Adviser or Sub-Adviser may aggregate the securities to be sold or
purchased for a Fund with those to be sold or purchased for other accounts in
order to obtain the best net price and most favorable execution. In such event,
the allocation will be made by the Adviser or Sub-Adviser in the manner
considered to be most equitable and consistent with its fiduciary obligations
to all such fiduciary accounts, including the Fund involved. In some instances,
this procedure could adversely affect a Fund but the Adviser and Sub-Adviser
deem that any disadvantage in the procedure would be outweighed by the
increased selection available and the increased opportunity to engage in volume
transactions.
The Adviser and Sub-Adviser believe that research from brokers and
dealers is desirable, although not essential, in carrying out their functions,
in that such outside research supplements the efforts of the Adviser and
Sub-Adviser by corroborating data and enabling the Adviser and Sub-Adviser to
consider the views, information and analyses of other research staffs. Such
views, information and analyses include such matters as communicating with
persons having special expertise on certain companies, industries, areas of the
economy or securities prices, obtaining written materials on these or other
areas which might affect the economy and/or securities prices, obtaining
quotations on securities prices and obtaining information on the activities of
other institutional investors. The Adviser or Sub-Adviser research, at their
own expense, each security included in, or being considered for inclusion in,
the Fund's portfolios. As any particular research obtained by the Adviser and
Sub-Adviser may be useful to the Fund, the Board of Directors or its Committee
on Brokerage, in considering the reasonableness of the commissions paid by the
Fund, will not attempt to allocate, or require the Adviser or Sub-Adviser to
allocate, the relative costs or benefits of research.
The Fund has paid no brokerage commissions during the three-year
period ended September 30, 1998. Securities have generally been purchased or
sold on a principal basis without commissions. The price of such transactions
may include a profit for the dealer involved.
Because of the Fund's investment policies, portfolio turnover rate
will vary. At times it could be high, which could require the payment of larger
amounts in brokerage commissions.
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<PAGE>
INVESTMENT RESTRICTIONS
The fundamental investment restrictions set forth below may not be
changed without the approval of the holders of the lesser of (i) 67% of the
eligible votes, if the holders of more than 50% of the eligible votes are
represented or (ii) more than 50% of the eligible votes. All percentage
limitations set forth in these restrictions apply as of the time of an
investment without regard to later increases or decreases in the value of
securities or total or net assets.
DAVIS TAX-FREE HIGH INCOME FUND'S FUNDAMENTAL INVESTMENT RESTRICTIONS
1. MUNICIPAL SECURITIES, LENDING. The Fund may not invest in securities
other than municipal obligations and temporary investments, and may
not make loans to others except through such investments.
During periods of normal market conditions either (1) the Fund's
assets will be invested so that at least 80% of the income will be
tax-exempt, or (2) the Fund will have at least 80% of its net assets
invested in tax-exempt securities.
2. REAL ESTATE, COMMODITIES. The Fund may not purchase or sell real
estate (but this will not prevent the Fund from investing in municipal
obligations secured by real estate or interests therein) or
commodities or commodity contracts.
3. DIVERSIFICATION OF FUND ASSETS.
(a) Fund Assets. The Fund may not make an investment that would cause
more than 5% of the value of its total assets to be invested in the
securities (other than U.S. Government Securities) of any one issuer.
For this purpose, each state or local governmental entity shall be
deemed a separate "issuer," except that where the entity issuing a
municipal obligation differs from the entity whose revenues are the
primary source of the payment of the obligation, the entity whose
revenues are the primary source of payment shall be deemed the sole
issuer with regard to that obligation.
(b) Securities of Issuers. The Fund may not purchase more than 50% of
the outstanding debt obligations of any one issuer. For this purpose,
all debt obligations of an issuer are treated as a single class of
securities. This restriction does not apply to debt obligations
issued, guaranteed or insured by the U.S. Government, its agencies or
instrumentalities ("U.S. Government Securities").
(c) Securities of a Single State. The Fund may not make an investment
that would cause 25% or more of the value of its total assets to be
invested in municipal obligations the issuers of which are located in
the same state. For this purpose, the location of an issuer shall be
deemed to be the location of the governmental entity issuing the
obligation, regardless of the location of the entity whose revenues
are the primary source of payment or the location of the project or
facility which may be the subject of the obligation.
(d) Sources of Payment. The Fund may not make an investment that would
cause 25% or more of the value of its total assets to be invested in
revenue bonds or notes the payment for which comes from revenues from
any one type of activity. For this purpose, the term "type of
activity" shall include, for example, the following: (a) sewage
treatment and disposal; (b) gas provision; (c) electric power
provision; (d) water provision; (e) mass transportation systems; (f)
housing; (g) hospitals; (h) street development and repair; (i) toll
roads; (j) airport facilities; and (k) educational facilities. This
restriction does not apply to general obligation bonds or notes or to
pollution control revenue bonds.
(e) Securities Other Than Municipal Obligations. The Fund may not,
except for temporary defensive purposes, make an investment in other
than municipal obligations if such investment would cause more than
20% of the value of the Fund's total assets to be invested in
securities other than municipal obligations.
11
<PAGE>
4. PUT AND CALL OPTIONS. The Fund may not write or purchase put or call
options.
5. INVESTMENT COMPANIES. The Fund may not purchase securities of other
registered investment companies (as defined in the Investment Company
Act of 1940), except (i) shares of open-end investment companies
investing primarily in municipal obligations with remaining maturities
of 13 months or less, provided that such purchase does not cause the
Fund to (a) have more than 5% of its total assets invested in any one
such company, (b) have more than 10% of its total assets invested in
the aggregate of such companies or (c) own more than 3% of the total
outstanding voting stock of any such company; or (ii) as part of a
merger, consolidation, reorganization or acquisition of assets.
6. SELL SHORT, PURCHASE ON MARGIN. The Fund may not sell securities short
or purchase securities on margin, except for such short-term credits
as are necessary for the clearance of transactions.
7. BORROWING. The Fund may not borrow money except from banks as a
temporary measure for extraordinary or emergency purposes in amounts
not exceeding 10% of the value of the Fund's total assets (excluding
the amount borrowed) at the time of such borrowing. The Fund may not
pledge or hypothecate any of its assets except in connection with
permitted borrowing in amounts not exceeding 15% of the value of its
total assets (excluding the amount borrowed) at the time of such
borrowing.
8. OWNERSHIP OF PORTFOLIO SECURITIES BY OFFICERS AND DIRECTORS. The Fund
may not buy or continue to hold securities if the directors and
officers of the Fund, the Adviser or the Adviser's General Partner own
too many of the same securities. This would happen if any of these
individuals own 1/2 of 1% or more of the securities and the people who
own that much or more own 5% of such securities.
9. UNDERWRITING. The Fund does not engage in the underwriting of
securities; however, if the Fund sells "restricted" securities it may
technically be considered an "underwriter."
10. SENIOR SECURITIES. The Fund may not issue senior securities nor sell
short more than 5% of its total assets, except as provided by the
Investment Company Act of 1940 and any rules, regulations or orders
issued thereunder. This limitation does not apply to selling short
against the box.
DAVIS TAX-FREE HIGH INCOME FUND NON-FUNDAMENTAL POLICIES. In addition to
the foregoing restrictions, the Fund is subject to certain other
non-fundamental policies which may be changed without shareholder approval
including the following:
1. ILLIQUID SECURITIES. The Fund may not purchase illiquid securities if
more than 15% of the value of the Fund's net assets would be invested
in such securities.
2. BORROWING. In addition to the fundamental policy restricting
borrowing, The Fund may borrow money from any source for temporary
purposes in an amount not exceeding 5% of total assets. The Fund will
not purchase portfolio securities on margin and will not purchase
additional portfolio securities while borrowings exceed 5% of the
total assets of the Fund.
PLEASE NOTE: Except for limitations on borrowing and illiquid securities, all
percentage restrictions, whether fundamental or non-fundamental, apply as of
the time of an investment without regard to any later fluctuations in the value
of portfolio securities or other assets.
12
<PAGE>
Section II: Key Persons
ORGANIZATION OF THE COMPANY
THE COMPANY. Davis Tax-Free High Income Fund, Inc. ("Company") is an
open-end, diversified, management investment company incorporated in Maryland
in 1981 and registered under the Investment Company Act of 1940. The Company is
a series investment company which may issue multiple series, each of which
would represent an interest in its separate portfolio. The Company currently
offers only one series, Davis Tax-Free High Income Fund (the "Fund").
FUND SHARES. The Fund may issue shares in different classes. The Fund
shares are currently divided into four classes, Class A, Class B, Class C, and
Class Y shares. The Board of Directors may offer additional classes in the
future and may at any time discontinue the offering of any class of shares.
Each share, when issued and paid for in accordance with the terms of the
offering, is fully paid and non-assessable. Shares have no preemptive or
subscription rights and are freely transferable. Each of the Fund's shares
represent an interest in the assets of the fund issuing the share and have
identical voting, dividend, liquidation and other rights and the same terms and
conditions as any other shares except that (i) each dollar of net asset value
per share is entitled to one vote, (ii) the expenses related to a particular
class, such as those related to the distribution of each class and the transfer
agency expenses of each class are borne solely by each such class and (iii)
each class of shares votes separately with respect to provisions of the Rule
12b-1 Distribution Plan, which pertains to a particular class, and other
matters for which separate class voting is appropriate under applicable law.
Each fractional share has the same rights, in proportion, as a full share.
Shares do not have cumulative voting rights; therefore, the holders of more
than 50% of the voting power of the Company can elect all of the directors of
the Company. Due to the differing expenses of the classes, dividends of Class B
and Class C shares are likely to be lower than for Class A shares, and are
likely to be higher for Class Y shares than for any other class of shares. For
more information about Class Y shares, call the Distributor at 1-800-279-0279
to obtain the Class Y prospectus.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted under the provisions of the 1940 Act or applicable state law or
otherwise to the shareholders of the outstanding voting securities of an
investment company, such as the Company, will not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each series affected by such matter. Rule 18f-2 further
provides that a series shall be deemed to be affected by a matter unless it is
clear that the interests of each series in the matter are identical or that
that the matter does not affect any interest of such series. Rule 18f-2 exempts
the selection of independent accountants and the election of Board members from
the separate voting requirements of the Rule.
In accordance with Maryland law and the Company's By-laws, the Company
does not hold regular annual shareholder meetings. Shareholder meetings are
held when they are required under the Investment Company Act of 1940 or when
otherwise called for special purposes. Special shareholder meetings may be
called upon the written request of shareholders of at least 25% of the voting
power that could be cast at the meeting.
DIRECTORS AND OFFICERS
The Company's Board of Directors is responsible for the management and
supervision of the Company and the Fund. The Board approves all significant
agreements between the Company, on behalf of the Fund, and those companies that
furnish services to the Fund. The names and addresses of the directors and
officers of the Company are set forth below, together with their principal
business affiliations and occupations for the last five years. As indicated
below, certain directors and officers of the Company hold similar positions
with the following funds that are managed by the Adviser: Davis Intermediate
Investment Grade Bond Fund, Inc., Davis New York Venture Fund, Inc., Davis
Series, Inc. and Davis International Series, Inc. (collectively the "Davis
Funds").
WESLEY E. BASS, JR. (8/21/31), 710 Walden Road, Winnetka, IL 60093. Director of
the Company and each of the Davis Funds except Davis International Series,
Inc.; President, Bass & Associates (a financial consulting firm);
13
<PAGE>
formerly, First Deputy City Treasurer, City of Chicago, and Executive Vice
President, Chicago Title and Trust Company.
JEREMY H. BIGGS (8/16/35),* Two World Trade Center, 94th Floor, New York, NY
10048. Director and Chairman of the Company and each of the Davis Funds;
Director of the Van Eck Funds; Consultant to the Adviser. Director Van Eck
Funds; Vice Chairman, Head of Equity Research Department, Chairman of the U.S.
Investment Policy Committee and member of the International Investment
Committee of Fiduciary Trust Company International.
MARC P. BLUM (9/9/42), 233 East Redwood Street, Baltimore, MD 21202. Director
of the Company and each of the Davis Funds except Davis International Series,
Inc.; Chief Executive Officer, World Total Return Fund, L.P.; Member, Gordon,
Feinblatt, Rothman, Hoffberger and Hollander, LLC (attorneys); Director,
Mid-Atlantic Realty Trust.
JERRY D. GEIST (5/23/34), 931 San Pedro Dr. S.E., Albuquerque, NM 87108.
Director of the Company and each of the Davis Funds except Davis International
Series, Inc.; Chairman, Santa Fe Center Enterprises; President and Chief
Executive Officer, Howard Energy International Utilities; Director, CH2M-Hill,
Inc.; Retired Chairman and President, Public Service Company of New Mexico.
D. JAMES GUZY (3/7/36), 508 Tasman Drive, Sunnyvale, CA 94089. Director of the
Company and each of the Davis Funds except Davis International Series, Inc.;
Chairman, PLX Technology, Inc. (a manufacturer of semi-conductor circuits);
Director, Intel Corp. (a manufacturer semi-conductor circuits), Cirrus Logic
Corp. (a manufacturer of semi-conductor circuits) and Alliance Technology Fund
(a mutual fund).
G. BERNARD HAMILTON (3/18/37), Avanti Partners, P.O. Box 1119, Richmond, VA
23218. Director of the Company and each of the Davis Funds; Managing General
Partner, Avanti Partners, L.P.
LEROY E. HOFFBERGER (6/8/25), The Exchange - Suite 215, 1112 Kenilworth Drive,
Towson, MD 21204. Director of the Company and each of the Davis Funds except
Davis International Series, Inc.; of Counsel to Gordon, Feinblatt, Rothman,
Hoffberger and Hollander, LLC (attorneys); Chairman, Mid-Atlantic Realty Trust;
Director and President, CPC, Inc. (a real estate company); Director and Vice
President, Merchant Terminal Corporation; formerly, Director of Equitable
Bancorporation, Equitable Bank and Maryland National Bank, and formerly,
Director and President, O-W Fund, Inc. (a private investment fund).
LAURENCE W. LEVINE (4/9/31), Walsh & Levine 40 Wall Street, 21st, Floor, New
York, NY 10005. Director of the Company and each of the Davis Funds except
Davis International Series, Inc.; Partner, Bigham, Englar, Jones and Houston
(attorneys); United States Counsel to Aerolineas Argentina; Director, various
private companies.
CHRISTIAN R. SONNE (5/6/30), P.O. Box 777, Tuxedo Park, NY 10987. Director of
the Company and each of the Davis Funds except Davis International Series,
Inc.; General Partner of Tuxedo Park Associates (a land holding and development
firm); President and Chief Executive Officer of Mulford Securities Corporation
(a private investment fund) until 1990; formerly, Vice President of Goldman
Sachs & Company (investment banker).
MARSHA WILLIAMS (3/28/51), 725 Landwehr Rd. Northbrook, Il 60062. Director of
the Company and each of the Davis Funds except Davis International Series,
Inc.; Director of Selected American Shares, Inc., Selected Special Shares, Inc.
and Selected Capital Preservation Trust; Chief Administrative officer of Crate
& Barrel; former. Treasurer, Amoco Corporation. Director, Illinois Benedictine
College, The Conference Board Council of Corporate Treasurers, Illinois Council
on Economic Education, Chicagoland Chamber of Commerce; Formerly, Director,
Fertilizers of Trinidad and Tobago from 1989-1993, Ok Tedi Mining Limited from
1992-1993, Just Jobs from 1988-1992.
SHELBY M.C. DAVIS (3/20/37),** 4135 North Steers Head Road, Jackson Hole, WY
83001. President of the Company and each of the Davis Funds; President of
Selected American Shares, Inc., Selected Special Shares, Inc. and Selected
Capital Preservation Trust; Director, Chairman and Chief Executive Officer,
Venture Advisers, Inc.; Director, Davis Selected Advisers-NY, Inc.; Employee of
Capital Ideas, Inc. (financial consulting firm); Consultant to Fiduciary Trust
Company International; Director, Shelby Cullom Davis Financial Consultants,
Inc.
14
<PAGE>
ANDREW A. DAVIS (6/25/63),* ** 124 East Marcy Street, Santa Fe, NM 87501.
Director and Vice President of the Company and each of the Davis Funds (except
Davis International Series, Inc.), Selected American Shares, Inc., Selected
Special Shares, Inc. and Selected Capital Preservation Trust; Director and
President, Venture Advisers, Inc.; Director and Vice President, Davis Selected
Advisers-NY, Inc.; Consultant to Capital Ideas, a private financial consultant.
Former Vice President and head of convertible security research, PaineWebber,
Incorporated.
CHRISTOPHER C. DAVIS (7/13/65),* ** 609 Fifth Ave, New York, NY 10017. Director
and Vice President of the Company and each of the Davis Funds; Selected
American Shares, Inc., Selected Special Shares, Inc. and Selected Capital
Preservation Trust; Director, Vice Chairman, Venture Advisers, Inc.; Director,
Chairman, Chief Executive Officer, Davis Selected Advisers-NY, Inc.; Chairman
and Director, Shelby Cullom Davis Financial Consultants, Inc.; employee of
Shelby Cullom Davis & Co., a registered broker/dealer; Director, Rosenwald,
Roditi and Company, Ltd., an offshore investment management company.
KENNETH C. EICH (8/14/53), 124 East Marcy Street, Santa Fe, NM 87501. Vice
President of the Company and each of the Davis Funds, Selected American Shares,
Inc., Selected Special Shares, Inc. and Selected Capital Preservation Trust;
Chief Operating Officer, Venture Advisers, Inc.; Vice President, Davis Selected
Advisers-NY, Inc.; President, Davis Distributors, L.L.C. Former President and
Chief Executive Officer of First of Michigan Corporation. Former Executive Vice
President and Chief Financial Officer of Oppenheimer Management Corporation.
CAROLYN H. SPOLIDORO (11/19/52), 124 East Marcy Street, Santa Fe, NM 87501.
Vice President of the Company and each of the Davis Funds; Vice President of
Selected American Shares, Inc., Selected Special Shares, Inc. and Selected
Capital Preservation Trust; Vice President, Venture Advisers, Inc.
SHARRA L. REED (9/25/66), 124 East Marcy Street, Santa Fe NM 87501. Vice
President, Treasurer and Assistant Secretary of the Company and each of the
Davis Funds, Selected American Shares, Inc., Selected Special Shares, Inc. and
Selected Capital Preservation Trust; Vice President of Venture Advisers, Inc.
Former Unit Manager with Investors Fiduciary Trust Company.
THOMAS D. TAYS (3/7/57), 124 East Marcy Street, Santa Fe NM 87501.Vice
President and Secretary of the Company and each of the Davis Funds, Selected
American Shares, Inc. Selected Special Shares, Inc. and Selected Capital
Preservation Trust. Vice President and Secretary, Venture Advisers, Inc., Davis
Selected Advisers-NY, Inc., and Davis Distributors, L.L.C. Former Vice
President and Special Counsel of U.S. Global Investors, Inc.
SHELDON R. STEIN (11/29/28), 111 Wacker Drive, Suite 2800, Chicago, IL
60601-4205, Assistant Secretary of the Company and each of the Davis Funds,
Selected American Shares, Inc., Selected Special Shares, Inc. and Selected
Capital Preservation Trust; Partner D'Ancona & Pflaum, the Company's legal
counsel.
ARTHUR DON (9/24/53), 111 Wacker Drive, Suite 2800, Chicago, IL 60601-4205,
Assistant Secretary of the Company and each of the Davis Funds, Selected
American Shares, Inc., Selected Special Shares, Inc. and Selected Capital
Preservation Trust; Partner D'Ancona & Pflaum, the Company's legal counsel.
* Jeremy H. Biggs, Andrew A. Davis and Christopher C. Davis are considered to
be "interested persons" of the Company, as defined in the Investment Company
Act.
** Shelby M.C. Davis is the father of Andrew A. Davis and Christopher C. Davis.
The Company does not pay salaries to any of its officers. The Adviser
performs certain services on behalf of the Company and is reimbursed by the
Company for the costs of providing these services.
15
<PAGE>
DIRECTORS COMPENSATION SCHEDULE
During the fiscal year ended September 30, 1998, the compensation paid
to the directors who are not considered to be interested persons of the Company
was as follows:
<TABLE>
<CAPTION>
AGGREGATE COMPANY TOTAL
NAME COMPENSATION COMPLEX COMPENSATION*
---- ------------ ---------------------
<S> <C> <C>
Wesley E. Bass $7,490 $45,600
Marc P. Blum 6,950 42,000
Jerry D. Geist 6,950 42,000
D. James Guzy 6,950 42,000
G. Bernard Hamilton 6,950 42,000
LeRoy E. Hoffberger 6,950 42,000
Laurence W. Levine 6,950 42,000
Christian R. Sonne 6,950 42,000
Edwin R. Werner** 4,925 29,750
</TABLE>
* Complex compensation is the aggregate compensation paid, for services as
a Director, by all mutual funds with the same investment adviser. There
are eight registered investment companies in the complex.
** Mr. Werner has retired as a Director but still serves in a non-voting
emeritus status.
CERTAIN SHAREHOLDERS OF THE FUND
As of December 31, 1998, officers and directors owned the following
percentages of each Class of shares issued by the Fund:
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
------- ------- ------- -------
<S> <C> <C> <C> <C>
Davis Tax-Free High Income Fund ** ** ** **
</TABLE>
** indicates that officers and directors owned less than 1% of the outstanding
shares of the indicated Class of shares.
The following table sets forth, as of December 31, 1998 the name and
holdings of each person known by the Company to be a record owner of more than
5% of the outstanding shares of any Class of either of its Funds. The Fund is
not aware of any shareholder that beneficially owns in excess of 25% of the
Fund's total outstanding shares.
<TABLE>
<CAPTION>
PERCENT OF CLASS
NAME AND ADDRESS OUTSTANDING
- - ---------------- -----------
<S> <C>
DAVIS TAX-FREE HIGH INCOME FUND
Class A shares
Salomon Smith Barney, Inc. 8.98%
333 West 34th Street - 3rd Floor
New York, NY 10001-2483
Merrill Lynch Pierce Fenner & Smith 7.48%
Mutual Fund Operations
4800 Deerlake Drive East - 2nd Floor
Jacksonville, FL 32246
Class B shares
Merrill Lynch Pierce Fenner & Smith 22.40%
Mutual Fund Operations
4800 Deerlake Drive East - 2nd Floor
Jacksonville, FL 32246
16
<PAGE>
Class C shares
Merrill Lynch Pierce Fenner & Smith 37.18%
Mutual Fund Operations
4800 Deerlake Drive East - 2nd Floor
Jacksonville, FL 32246
Class Y shares
Merrill Lynch Pierce Fenner & Smith 99.99%
Mutual Fund Operations
4800 Deerlake Drive East - 2nd Floor
Jacksonville, FL 32246
</TABLE>
INVESTMENT ADVISORY SERVICES
Davis Selected Advisers, L.P. (the "Adviser") whose principal office
is at 124 East Marcy Street, Santa Fe, New Mexico 87501, serves as the
investment adviser of the Fund. Venture Advisers, Inc. is the Adviser's sole
general partner. Shelby M.C. Davis is Chief Investment Officer of the Adviser
and the controlling shareholder of the general partner. Subject to the
direction and supervision of the Board of Directors, the Adviser manages the
investment and business operations of the Fund. Davis Distributors, LLC ("the
Distributor"), a subsidiary of the Adviser, serves as the distributor or
principal underwriter of the Fund's shares. Davis Selected Advisers-NY, Inc.,
("DSA-NY") a wholly owned subsidiary of the Adviser, performs research and
other services for the Fund on behalf of the Adviser under a Sub-Advisory
Agreement with the Adviser. The Adviser also acts as investment adviser for
Davis New York Venture Fund, Inc., Davis Intermediate Investment Grade Bond
Fund, Inc., Davis International Series, Inc. Davis Series, Inc., (collectively
with the Fund, the "Davis Funds"), Selected American Shares, Inc., Selected
Special Shares, Inc. and Selected Capital Preservation Trust (collectively the
"Selected Funds"). The Distributor also acts as the principal underwriter for
the Davis Funds and the Selected Funds.
ADVISORY AGREEMENT. Pursuant to the Advisory Agreement, the Fund pays
the Adviser a fee according to a separate negotiated fee schedule. Advisory
fees are allocated among each Class of shares in proportion to each Classes'
relative total net assets.
The Fund pays the Adviser a fee at the annual rate based on average
net assets, as follows: 0.65% on average net assets up to $250 million, 0.60%
on the next $250 million of average net assets and 0.55% on average net assets
over $500 million. The aggregate advisory fees paid by the Fund to the Adviser
during the fiscal years ended September 30, 1998, 1997, and 1996 were
$2,769,520, $1,065,546, and $1,149,436, respectively. These fees may be higher
than that of most other mutual Fund but is not necessarily higher than that
paid by Fund with similar objectives.
Stamper Capital & Investments, Inc., serves as the Fund's Sub-Adviser
under a Sub-Advisory Agreement with the Adviser. The Fund pays no fees directly
to the Sub-Adviser. The Sub-Adviser manages the day to day investment
operations of the Fund, subject to the Adviser's overall supervision. For its
services, the Sub-Adviser receives a fee from the Adviser equal to 30% of the
fees received by the Adviser from the Fund. The Sub-Adviser receives no fees
directly from the Fund.
The Adviser has also entered into a Sub-Advisory Agreement with it
wholly owned subsidiary, Davis Selected Advisers-NY, Inc. ("DSA-NY") where
DSA-NY performs research and other services on behalf of the Adviser. Under the
Agreement, the Adviser pays all of DSA-NY' s direct and indirect costs of
operation. All the fees paid to DSA-NY are paid by the Adviser and not the
Fund. This Agreement does not affect the services provided by Stamper Capital &
Investments.
The Advisory Agreement also makes provisions for portfolio
transactions and brokerage policies of the Fund which are discussed above under
"Portfolio Transactions."
17
<PAGE>
In accordance with the provisions of the Investment Company Act of
1940, the Advisory Agreement will terminate automatically upon assignment and
is subject to cancellation upon 60 days' written notice by the Company's Board
of Directors, the vote of the holders of a majority of the Fund outstanding
shares, or the Adviser. The continuance of the Advisory Agreement must be
approved at least annually by the Fund Board of Directors or by the vote of
holders of a majority of the outstanding shares of the Fund. In addition, any
new agreement or the continuation of the existing agreement must be approved by
a majority of directors who are not parties to the agreement or interested
persons of any such party.
Pursuant to the Advisory Agreement, the Adviser, subject to the
general supervision of the Fund's Board of Directors, provides management and
investment advice, and furnishes statistical, executive and clerical personnel,
bookkeeping, office space, and equipment necessary to carry out its investment
advisory functions and such corporate managerial duties as requested by the
Board of Directors of the Fund. The Fund bear all expenses other than those
specifically assumed by the Adviser under the Advisory Agreement, including
preparation of its tax returns, financial reports to regulatory authorities,
dividend determinations, transaction and accounting matters related to its
custodian bank, transfer agency, custodial and shareholder services, and
qualification of its shares under federal and state securities laws. The Fund
reimburses the Adviser for providing certain services including accounting and
administrative services, qualifying shares for sale with state agencies and
shareholder services. Such reimbursements are detailed below:
<TABLE>
<CAPTION>
Fiscal year ended September 30
1998 1997 1996
Davis Tax-Free High Income Fund
- - -------------------------------
<S> <C> <C> <C>
Accounting and administrative services $15,996 $45,000 $37,998
Qualifying shares for sale with state agencies $12,996 $12,000 $10,002
Shareholder services $46,432 $12,245 $17,914
</TABLE>
CODE OF ETHICS. The Adviser and Sub-Adviser have adopted a Code of
Ethics which regulates the personal securities transactions of the Adviser's
investment personnel, other employees, and affiliates, with access to
information regarding securities transactions of the Fund. The Code of Ethics
requires investment personnel to disclose personal securities holdings upon
commencement of employment and all subsequent trading activity to the Adviser's
Compliance Officer. Investment personnel are prohibited from engaging in any
securities transactions, including the purchase of securities in a private
offering, without the prior consent of the Compliance Officer. Additionally,
such personnel are prohibited from purchasing securities in an initial public
offering and are prohibited from trading in any securities (i) for which the
fund has a pending buy or sell order, (ii) which the fund is considering buying
or selling, or (iii) which the fund purchased or sold within seven calendar
days.
DISTRIBUTION OF COMPANY SHARES
DISTRIBUTION PLANS. Class A, Class B, and Class C shares have each
adopted Distribution Plans under which the Fund reimburses the Distributor for
some of its distribution expenses. The Distribution Plans were approved by the
Fund's Board of Directors in accordance with Rule 12b-1 under the Investment
Company Act of 1940. Rule 12b-1 regulates the manner in which a mutual fund may
assume costs of distributing and promoting the sale of its shares. Payments
pursuant to a Distribution Plan are included in the operating expenses of the
Class.
CLASS A SHARES. Payments under the Class A Distribution Plan are
limited to an annual rate of 0.25% of the average daily net asset value of the
Class A shares. Such payments are made to reimburse the Distributor for the
fees it pays to its salespersons and other firms for selling the Fund's Class A
shares, servicing its shareholders and maintaining its shareholder accounts.
Where a commission is paid for purchases of $1 million or more of Class A
shares and as long as the limits of the Distribution Plan have not been
reached, such payment is also made from 12b-1 distribution fees received from
the Fund. Normally, such fees are at the annual rate of 0.25% of the average
net asset value of the accounts serviced and maintained on the books of the
Fund. Payments under the Class A Distribution Plan may also be used to
reimburse the Distributor for other distribution costs (excluding overhead) not
covered in any year by any portion of the sales charges the Distributor
retains.
18
<PAGE>
CLASS B SHARES. Payments under the Class B Distribution Plan are
limited to an annual rate of 1% of the average daily net asset value of the
Class B shares. In accordance with current applicable rules, such payments are
also limited to 6.25% of gross sales of Class B shares plus interest at 1% over
the prime rate on any unpaid amounts. The Distributor pays broker/dealers up to
4% in commissions on new sales of Class B shares. Up to an annual rate of 0.75%
of the average daily net assets is used to reimburse the Distributor for these
commission payments. Most or all of such commissions are reallowed to
salespersons and to firms responsible for such sales. No commissions are paid
by the Company with respect to sales by the Distributor to officers, directors,
and full-time employees of the fund, the Distributor, the Adviser, the
Adviser's general partner, or DSA-NY. Up to 0.25% of average net assets is used
to reimburse the Distributor for the payment of service and maintenance fees to
its salespersons and other firms for shareholder servicing and maintenance of
its shareholder accounts.
CLASS C SHARES. Payments under the Class C Distribution Plan are also
limited to an annual rate of 1% of the average daily net asset value of the
Class C shares, and are subject to the same 6.25% and 1% limitations applicable
to the Class B Distribution Plan. The entire amount of payments may be used to
reimburse the Distributor for the payments of commissions, service, and
maintenance fees to its salespersons and other firms for selling new Class C
shares, shareholder servicing and maintenance of its shareholder accounts.
CARRYOVER PAYMENTS. If, due to the foregoing payment limitations, the
Fund is unable to pay the Distributor the 4% commission on new sales of Class B
shares, or the 1% commission on new sales of Class C shares, the Distributor
intends, but is not obligated, to accept new orders for shares and pay
commissions in excess of the payments it receives from the fund. The
Distributor intends to seek full payment from the Fund of any excess amounts
with interest at 1% over the prime rate at such future date, when and to the
extent such payments on new sales would not be in excess of the limitations.
The Fund is not obligated to make such payments; the amount (if any), timing
and condition of any such payments are solely within the discretion of the
directors of the Company, who are not interested persons of the Distributor or
the Company and have no direct or indirect financial interest in the Class B or
C Distribution Plans (the "Independent Directors"). If the Fund terminates its
Class B share or Class C share Distribution Plan, the Distributor will ask the
Independent Directors to take whatever action they deem appropriate with regard
to the payment of any excess amounts. As of September 30, 1998 the cumulative
totals of these carryover payments on Class B shares were $7,561.473,
representing 2.96% of Class B shares net assets.
ADDITIONAL INFORMATION CONCERNING THE DISTRIBUTION PLANS. In addition,
to the extent that any investment advisory fees paid by the Company may be
deemed to be indirectly financing any activity which is primarily intended to
result in the sale of Company shares within the meaning of Rule 12b-1, the
Distribution Plans authorize the payment of such fees.
The Distribution Plans continue annually so long as they are approved
in the manner provided by Rule 12b-1 or unless earlier terminated by vote of
the majority of the Independent Directors or a majority of a Fund's outstanding
Class of shares. The Distributor is required to furnish quarterly written
reports to the Board of Directors detailing the amounts expended under the
Distribution Plans. The Distribution Plans may be amended provided that all
such amendments comply with the applicable requirements then in effect under
Rule 12b-1. Currently, Rule 12b-1 provides that as long as the Distribution
Plans are in effect, the Company must commit the selection and nomination of
candidates for new Independent Directors to the sole discretion of the existing
Independent Directors.
DEALER COMPENSATION. As described herein, dealers or others may
receive different levels of compensation depending on which class of shares
they sell. The Distributor may make expense reimbursements for special training
of a dealer's registered representatives or personnel of dealers and other
firms who provide sales or other services in respect to the Fund and/or its
shareholders, or to defray the expenses of meetings, advertising or equipment.
Any such amounts may be paid by the Distributor from the fees it receives under
the Class A, Class B and Class C Distribution Plans.
In addition, the Distributor may, from time to time, pay additional
cash compensation or other promotional incentives to authorized dealers or
agents who sell shares of the Fund. In some instances, such cash compensation
or other incentives may be offered only to certain dealers or agents who employ
registered representatives who have sold or may sell significant amounts of
shares of the Fund and/or the other Davis Funds managed by the Adviser during a
specified period of time.
19
<PAGE>
Shares of the Fund may also be sold through banks or bank-affiliated
dealers. Any determination that such banks or bank-affiliated dealers are
prohibited from selling shares of the Fund under the Glass-Steagall Act would
have no material adverse effects on the Fund. State securities laws may require
such firms to be licensed as securities dealers in order to sell shares of the
Fund.
FUND SUPERMARKETS. The Funds participate in various "Fund
Supermarkets" in which a broker-dealer offers many mutual funds to the
sponsor's clients without charging the clients a sales charge. The Funds pay
the supermarket sponsor a negotiated fee for distributing the Funds' shares and
for continuing services provided to their shareholders.
A portion of the supermarket sponsor's fee (that portion related to
sales, marketing, or distribution of Fund shares) is paid with fees authorized
under the Distribution Plans.
A portion of the supermarket sponsor's fee (that portion related to
shareholder services such as new account set-up, shareholder accounting,
shareholder inquires, transaction processing, and shareholder confirmations and
reporting) is paid as a shareholder servicing fee of the Funds. The Funds would
typically be paying these shareholder servicing fees directly, were it not that
the supermarket sponsor holds all customer accounts in a single omnibus account
with the Funds. The amount of shareholder servicing fees which the Funds may
pay to supermarket sponsors may not exceed the lesser of (a) 1/10 of 1 percent
of net assets held by such supermarket sponsors per year or (b) the shareholder
servicing costs saved by the Funds with the omnibus account (determined in the
reasonable judgement of the Adviser).
If the supermarket sponsor's fees exceed the sum available from the
Distribution Plans and shareholder servings fees, then the Adviser pays the
remainder out of its profits.
KRC INVESTMENT ADVISERS, LLC. KRC Investment Advisers, LLC ("KRC"), a
registered investment adviser owned and managed by members of the immediate and
extended family of LeRoy E. Hoffberger, a Director of the Company, has entered
into a service agreement (the "Services Agreement") with the Distributor which
provides payments to KRC under the Fund Rule 12b-1 Plan. Under the Services
Agreement, KRC will provide shareholder maintenance services to clients, in
respect of shares of the Company, and the Distributor will pay KRC a fee at the
annual rate of 0.25% of average net assets of the accounts of clients
maintained and serviced by KRC. Payments made by the Distributor under the
Services Agreement will be reimbursed by the Company under its Rule 12b-1 Plan.
Those payments will be made in connection with shareholder maintenance services
provided by that investment adviser to its clients who are shareholders of the
Company which include, among others, Mr. Hoffberger and members of his
immediate and extended family and trusts of which they are beneficiaries or
trustees. The cost of these services and advisory services provided by KRC are
borne by the clients. Mr. Hoffberger does not have any ownership interest in or
otherwise have any control of KRC.
THE DISTRIBUTOR. Davis Distributors, LLC, ("the Distributor"), 124
East Marcy, Santa Fe, New Mexico, 87501 is a wholly owned subsidiary of the
Adviser and pursuant to a Distributing Agreement acts as principal underwriter
of the Fund shares on a continuing basis pursuant to a Distributing Agreement.
Pursuant to the Distributing Agreement, the Distributor pays for all expenses
in connection with the preparation, printing, and distribution of advertising
and sales literature for use in offering the Fund shares to the public,
including reports to shareholders to the extent they are used as sales
literature. The Distributor also pays for the preparation and printing of
prospectuses other than those forwarded to existing shareholders. The
continuance and assignment provisions of the Distributing Agreement are the
same as those of the Advisory Agreement.
20
<PAGE>
The Distributor or the Adviser, in its capacity as distributor,
received total sales charges (which the Funds do not pay) on the sale of Class
A shares:
<TABLE>
<CAPTION>
Fiscal year ended September 30
1998 1997 1996
<S> <C> <C> <C>
Davis Tax-Free High Income Fund $4,936.465 $1,397,658 $37,029
Amount reallowed to dealers $4,191,179 $1,168,660 $31,258
</TABLE>
The Distributor or the Adviser, in its capacity as distributor,
received compensation on redemptions and repurchases of shares:
<TABLE>
<CAPTION>
Fiscal year ended September 30, 1998
<S> <C>
Davis Tax-Free High Income Fund
Class A shares $ 1,696
Class B shares $294,925
Class C shares $ 6,858
</TABLE>
The Distributor or the Adviser, in its capacity as distributor,
received the following amounts as reimbursements under the Distribution plans.
<TABLE>
<CAPTION>
Fiscal year ended
1998 1997 1996
<S> <C> <C> <C>
Davis Tax-Free High Income Fund
Class A shares $ 535,985 $ 129,433 $ 95,000
Class B shares $2,077,802 $1,099,299 $1,160,529
Class C shares $ 222,588 $ 992 $NA
</TABLE>
OTHER IMPORTANT SERVICE PROVIDERS
CUSTODIAN. State Street Bank and Trust Company ("State Street" or
"Custodian"), One Heritage Drive, North Quincy, Massachusetts 02171, serves as
custodian of the Company's assets. The Custodian maintains all of the
instruments representing the Company's investments and all cash. The Custodian
delivers securities against payment upon sale and pays for securities against
delivery upon purchase. The Custodian also remits the Company assets in payment
of the Fund's expenses, pursuant to instructions of officers or resolutions of
the Board of Directors. The Custodian also provides certain fund accounting and
transfer agent services.
AUDITORS. KPMG LLP ("KPMG"), 707 17th St. Suite 2300, Denver, Colorado
80202, serves as independent auditors for each of the funds. The auditors
consult on financial accounting and reporting matters, and meet with the Audit
Committee of the Board of Directors. In addition, KPMG reviews federal and
state income tax returns and related forms.
COUNSEL. D'Ancona & Pflaum, 111 E. Wackier Drive, Suite 2800, Chicago,
IL. 60601-4205, serves as counsel to the Company and also serves as counsel for
those members of the Board of Directors who are not affiliated with the
Adviser.
21
<PAGE>
Section III: Purchase, Redeem and Exchanging Shares
PURCHASE OF SHARES
CLASS A, B, AND C SHARES. You can purchase Class A, Class B, or Class
C shares of the Fund from any dealer or other person having a sales agreement
with the Distributor. Class Y shares are offered only to certain qualified
purchasers, as described below.
There are three ways to make an initial investment of Class A, Class
B, or Class C shares in the Fund. One way is to fill out the Application Form
included in the Prospectus and mail it to State Street Bank and Trust Company
("State Street") at the address on the Form. The dealer must also sign the
Form. Your dealer or sales representative will help you fill out the Form. All
purchases made by check (minimum $1,000) should be in U.S. dollars and made
payable to THE DAVIS FUNDS. THIRD PARTY CHECKS WILL NOT BE ACCEPTED. When
purchases are made by check, redemptions will not be allowed until the
investment being redeemed has been in the account for 15 calendar days.
The second way to make an initial investment is to have your dealer
order and remit payment for the shares on your behalf. The dealer can also
order the shares from the Distributor by telephone or wire. You can also use
this method for additional investments of at least $1,000.
The third way to purchase shares is by wire. Shares may be purchased
at any time by wiring federal funds directly to State Street. Prior to an
initial investment by wire, the shareholder should telephone Davis
Distributors, LLC at 1-800-279-0279 to advise them of the investment and class
of shares and to obtain an account number and instructions. A completed Plan
Adoption Agreement or Application Form should be mailed to State Street after
the initial wire purchase. To assure proper credit, the wire instructions
should be made as follows:
State Street Bank and Trust Company,
Boston, MA 02210
Attn.: Mutual Fund Services
DAVIS TAX-FREE HIGH INCOME FUND;
Shareholder Name,
Shareholder Account Number,
Federal Routing Number 011000028,
DDA Number 9904-606-2
After your initial investment, you can make additional investments of
at least $25. Simply mail a check payable to "The Davis Funds" to State Street
Bank and Trust Company, c/o The Davis Funds, P.O. Box 8406, Boston, MA
02266-8406. For overnight delivery, please send your check to State Street Bank
and Trust Company, c/o the Davis Funds, 66 Brooks Drive, Braintree, MA. 02184.
THIRD PARTY CHECKS WILL NOT BE ACCEPTED. The check should be accompanied by a
form which State Street will provide after each purchase. If you do not have a
form, you should tell State Street that you want to invest the check in shares
of the applicable fund. If you know your account number, you should also
provide it to State Street.
CERTIFICATES. The Company does not issue certificates for Class A
shares unless you request a certificate each time you make a purchase.
Certificates are not issued for Class B or Class C shares or for accounts using
the Automatic Withdrawal Plan. The Company does not issue certificates for
Class Y shares. Instead, shares purchased are automatically credited to an
account maintained for you on the books of the Company by State Street. You
will receive a statement showing the details of the transaction and any other
transactions you had during the current year each time you add to or withdraw
from your account.
22
<PAGE>
ALTERNATIVE PURCHASE ARRANGEMENTS
The Fund offers four classes of shares. With certain exceptions
described below, Class A shares are sold with a front-end sales charge at the
time of purchase and are not subject to a sales charge when they are redeemed.
Class B shares are sold without a sales charge at the time of purchase, but are
subject to a deferred sales charge if they are redeemed within six years after
purchase. Class B shares will automatically convert to Class A shares eight
years after the end of the calendar month in which the shareholder's order to
purchase was accepted. Class C shares are purchased at their net asset value
per share without the imposition of a front-end sales charge but are subject to
a 1% deferred sales charge if redeemed within one year after purchase and do
not have a conversion feature. Class Y shares are offered to (i) trust
companies, bank trusts, pension plans, endowments or foundations acting on
behalf of their own account or one or more clients for which such institution
acts in a fiduciary capacity and investing at least $5,000,000 at any one time
("Institutions"); (ii) any state, county, city, department, authority or
similar agency which invests at least $5,000,000 at any one time ("Governmental
Entities"); and (iii) any investor with an account established under a "wrap
account" or other similar fee-based program sponsored and maintained by a
registered broker-dealer approved by the Distributor ("Wrap Program
Investors"). Class Y shares are sold at net asset value without the imposition
of Rule 12b-1 charges.
Depending on the amount of the purchase and the anticipated length of
time of the investment, investors may choose to purchase one Class of shares
rather than another. Investors who would rather pay the entire cost of
distribution at the time of investment, rather than spreading such cost over
time, might consider Class A shares. Other investors might consider Class B or
Class C shares, in which case 100% of the purchase price is invested
immediately. The Company will not accept any purchase of Class B shares in the
amount of $250,000 or more per investor. Such purchase must be made in Class A
shares. Class C shares may be more appropriate for the short-term investor. The
Company will not accept any purchase of Class C shares when Class A shares may
be purchased at net asset value.
CLASS A SHARES. Class A shares are sold at their net asset value plus
a sales charge. The amounts of the sales charges are shown in the following
table.
<TABLE>
<CAPTION>
Customary
Sales Charge Charge as Concession to Your
as Percentage Approximate Percentage Dealer as Percentage
Amount of Purchase of Offering Price of Amount Invested of Offering Price
- - ------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C>
$99,999 or less............ 4-3/4% 5.0% 4%
$100,000 to $249,999....... 3-1/2% 3.6% 3%
$250,000 to $499,999....... 2-1/2% 2.6% 2%
$500,000 to $749,999....... 2% 2.0% 1-3/4%
$750,000 to $999,999....... 1% 1.0% 3/4 of 1%
$1,000,000 or more......... 0% 0.0% 0%*
</TABLE>
* On purchases of $1 million or more, the investor pays no front-end sales
charge but a contingent deferred sales charge of 0.75% is imposed if shares
purchased at net asset value without a sales load are redeemed within the first
year after purchase. The Distributor may pay the financial service firm a
commission during the first year after such purchase at an annual rate as
follows:
<TABLE>
<CAPTION>
Purchase Amount Commission
--------------- ----------
<S> <C>
First $3,000,000................. .75%
Next $2,000,000................. .50%
Over $5,000,000................. .25%
</TABLE>
Where a commission is paid for purchases of $1 million or more, such
payment will be made from 12b-1 distribution fees received from the Company
and, in cases where the limits of the distribution plan in any year have been
reached, from the Distributor's own resources.
REDUCTION OF CLASS A SALES CHARGE. There are a number of ways to
reduce the sales charge imposed on the purchase of the Fund's Class A shares,
as described below. These reductions are based upon the fact that there is less
sales effort and expense involved in respect to purchases by affiliated persons
and purchases made in large quantities. If you claim any reduction of sales
charges, you or your dealer must so notify the Distributor (or State
23
<PAGE>
Street, if the investment is mailed to State Street) when the purchase is made.
Enough information must be given to verify that you are entitled to such right.
(1) FAMILY OR GROUP PURCHASES. Certain purchases made by or for more
than one person may be considered to constitute a single purchase, including
(i) purchases for family members, including spouses and children under 21, (ii)
purchases by trust or other fiduciary accounts and (iii) purchases made by an
organized group of persons, whether incorporated or not, if the group has a
purpose other than buying shares of mutual Fund. For further information on
group purchase reductions, contact the Adviser or your dealer.
(2) STATEMENTS OF INTENTION. Another way to reduce the sales charge is
by signing a Statement of Intention ("Statement"). See Appendix B: "Terms and
Conditions of a Statement of Intention." If you enter into a Statement of
Intention you (or any "single purchaser") may state that you intend to invest
at least $100,000 in the Fund Class A shares over a 13-month period. The amount
you say you intend to invest may include Class A shares which you already own,
valued at the offering price, at the end of the period covered by the
Statement. A Statement may be backdated up to 90 days to include purchases made
during that period, but the total period covered by the Statement may not
exceed 13 months.
Shares having a value of 5% of the amount you state you intend to
invest will be held "in escrow" to make sure that any additional sales charges
are paid. If any of the Fund shares are in escrow pursuant to a Statement and
such shares are exchanged for shares of another Davis Fund, the escrow will
continue with respect to the acquired shares.
No additional sales charge will be payable if you invest the amount
you have indicated. Each purchase under a Statement will be made as if you were
buying the total amount indicated at one time. For example, if you indicate
that you intend to invest $100,000, you will pay a sales charge of 3-1/2% on
each purchase.
If you buy additional amounts during the period to qualify for an even
lower sales charge, you will be charged such lower charge. For example, if you
indicate that you intend to invest $100,000 and actually invest $250,000, you
will, by retroactive adjustment, pay a sales charge of 2-1/2%.
If during the 13-month period you invest less than the amount you have
indicated, you will pay an additional sales charge. For example, if you state
that you intend to invest $250,000 and actually invest only $100,000, you will,
by retroactive adjustment, pay a sales charge of 3-1/2%. The sales charge you
actually pay will be the same as if you had purchased the shares in a single
purchase.
A Statement does not bind you to buy, nor does it bind the Adviser to
sell, the shares covered by the Statement.
(3) RIGHTS OF ACCUMULATION. Another way to reduce the sales charge is
under a right of accumulation. This means that the larger purchase entitled to
a lower sales charge does not have to be in dollars invested at one time. The
larger purchases that you (or any "single purchaser") make at any one time can
be determined by adding to the amount of a current purchase the value of Fund
shares (at offering price) already owned by you.
For example, if you owned $100,000 worth (at offering price) of shares
(including Class A, B and C shares of all Davis Funds, except Davis Government
Money Market Fund) and invest $5,000 in additional shares, the sales charge on
that $5,000 investment would be 3-1/2%, not 4-3/4%.
(4) COMBINED PURCHASES WITH OTHER DAVIS FUNDS. Your ownership or
purchase of Class A shares of other Davis Funds may also reduce your sales
charges in connection with the purchase of the Fund's Class A shares. This
applies to all three situations for reduction of sales charges discussed above.
If a "single purchaser" decides to buy a Fund Class A shares as well
as Class A shares of any of the other Davis Funds (other than shares of Davis
Government Money Market Fund) at the same time, these purchases will be
considered a single purchase for the purpose of calculating the sales charge.
For example, a single purchaser can invest at the same time $100,000 in Davis
Tax-Free High Income Fund's Class A shares and $150,000 in the Class A shares
of Davis New York Venture Fund and pay a sales charge of 2-1/2%, not 3-1/2%.
24
<PAGE>
Similarly, a Statement of Intention for the Fund's Class A shares and
for the Class A shares of the other Davis Funds (other than Davis Government
Money Market Fund) may be aggregated. In this connection, the Company's Class A
shares and the Class A shares of the other Davis Funds which you already own,
valued at the current offering price at the end of the period covered by your
Statement of Intention, may be included in the amount you have stated you
intend to invest pursuant to your Statement.
Lastly, the right of accumulation also applies to the Class A, Class B
and Class C shares of the other Davis Funds (other than Davis Government Money
Market Fund) which you own. Thus, the amount of current purchases of the Fund's
Class A shares which you make may be added to the value of the Class A shares
of the other Davis Funds (valued at their current offering price) already owned
by you in determining the applicable sales charge. For example, if you owned
$100,000 worth of shares of Davis Intermediate Investment Grade Bond Fund and
Davis Financial Fund and Davis Convertible Securities Fund, (valued at the
applicable current offering price) and invest $5,000 in the Fund's shares, the
sales charge on your investment would be 3-1/2%, not 4-3/4%.
In all the above instances where you wish to assert this right of
combining the shares you own of the other Davis Funds, you or your dealer must
notify the Distributor (or State Street, if the investment is mailed to State
Street) of the pertinent facts. Enough information must be given to permit
verification as to whether you are entitled to a reduction in sales charges.
(5) ISSUANCE OF SHARES AT NET ASSET VALUE. There are many situations
where the sales charge will not apply to the purchase of Class A shares, as
discussed in the Prospectus. A sales charge is not imposed on these
transactions either because of the purchaser deals directly with the Fund (as
in employee purchases) or because a responsible party (such as a financial
institution) is providing the necessary services usually provided by a
registered representative. In addition, the Fund occasionally may be provided
with an opportunity to purchase substantially all the assets of a public or
private investment company or to merge another such company into the Fund. This
offers the Fund the opportunity to obtain significant assets. No dealer
concession is involved. It is industry practice to effect such transactions at
net asset value as it would adversely affect the Fund's ability to do such
transactions if the Fund had to impose a sales charge.
(6) SALES AT NET ASSET VALUE. The sales charge will not apply to: (1)
Class A shares purchased through the automatic reinvestment of dividends and
distributions; (2) Class A shares purchased by directors, officers, and
employees of any fund for which the Adviser acts as investment adviser or
officers and employees of the Adviser, Sub-Adviser, or Distributor, including
former directors and officers and any spouse, child, parent, grandparent,
brother or sister ("immediate family members") of all of the foregoing, and any
employee benefit or payroll deduction plan established by or for such persons;
(3) Class A shares purchased by any registered representatives, principals, and
employees (and any immediate family member) of securities dealers having a
sales agreement with the Distributor; (4) initial purchases of Class A shares
totaling at least $250,000 but less than $5,000,000, made at any one time by
banks, trust companies, and other financial institutions on behalf of one or
more clients for which such institution acts in a fiduciary capacity; (5) Class
A shares purchased by any single account covering a minimum of 250 participants
(this 250 participant minimum may be waived for certain fee based mutual fund
marketplace programs) and representing a defined benefit plan, defined
contribution plan, cash or deferred plan qualified under 401(a) or 401(k) of
the Internal Revenue Code or a plan established under section 403(b), 457 or
501(c)(9) of such Code or "rabbi trusts"; (6) Class A shares purchased by
persons participating in a "wrap account" or similar fee-based program
sponsored and maintained by a registered broker-dealer approved by the Fund
Distributor or by investment advisors or financial planners who place trades
for their own accounts or the accounts of their clients and who charge a
management, consulting, or other fee for their services; and clients of such
investment advisors or financial planners who place trades for their own
accounts if the accounts, are linked to the master account of such investment
advisor or financial planner, on the books and records of the broker or agent;
and (7) Class A shares amounting to less than $5,000,000 purchased by any
state, county, city, department, authority or similar agency. Investors may be
charged a fee if they effect purchases in fund shares through a broker or
agent. The Fund may also issue Class A shares at net asset value incident to a
merger with or acquisition of assets of an investment company.
CLASS B SHARES. Class B shares are offered at net asset value, without
a front-end sales charge. The Distributor receives and usually reallows
commissions to firms responsible for the sale of such shares. With certain
exceptions described below, the Fund impose a deferred sales charge of 4% on
shares redeemed during the first year
25
<PAGE>
after purchase, 3% on shares redeemed during the second or third year after
purchase, 2% on shares redeemed during the fourth or fifth year after purchase
and 1% on shares redeemed during the sixth year after purchase. However, on
Class B shares of the Fund which are acquired in exchange from Class B shares
of other Davis Funds which were purchased prior to December 1, 1994, the Fund
will impose a deferred sales charge of 4% on shares redeemed during the first
calendar year after purchase; 3% on shares redeemed during the second calendar
year after purchase; 2% on shares redeemed during the third calendar year after
purchase; and 1% on shares redeemed during the fourth calendar year after
purchase; and, no deferred sales charge is imposed on amounts redeemed after
four calendar years from purchase. Class B shares will be subject to a maximum
Rule 12b-1 fee at the annual rate of 1% of the class's average daily net asset
value. The Fund will not accept any purchase of Class B shares in the amount of
$250,000 or more per investor.
Class B shares that have been outstanding for eight years will
automatically convert to Class A shares without imposition of a front-end sales
charge. The Class B shares so converted will no longer be subject to the higher
expenses borne by Class B shares. Because the net asset value per share of the
Class A shares may be higher or lower than that of the Class B shares at the
time of conversion, although the dollar value will be the same, a shareholder
may receive more or less Class A shares than the number of Class B shares
converted. Under a private Internal Revenue Service Ruling, such a conversion
will not constitute a taxable event under the federal income tax law. In the
event that this ceases to be the case, the Board of Directors will consider
what action, if any, is appropriate and in the best interests of the Class B
shareholders. In addition, certain Class B shares held by certain defined
contribution plans automatically convert to Class A shares based on increases
of plan assets.
CLASS C SHARES. Class C shares are offered at net asset value without
a sales charge at the time of purchase. Class C shares redeemed within one year
of purchase will be subject to a 1% charge upon redemption. Class C shares do
not have a conversion feature. The Fund will not accept any purchases of Class
C shares when Class A shares may be purchased at net asset value.
The Distributor will pay a commission to the firm responsible for the
sale of Class C shares. No other fees will be paid by the Distributor during
the one-year period following purchase. The Distributor will be reimbursed for
the commission paid from 12b-1 fees paid by the Fund during the one-year
period. If Class C shares are redeemed within the one-year period after
purchase, the 1% redemption charge will be paid to the Distributor. After Class
C shares have been outstanding for more than one year, the Distributor will
make quarterly payments to the firm responsible for the sale of the shares in
amounts equal to 0.75% of the annual average daily net asset value of such
shares for sales fees and 0.25% of the annual average daily net asset value of
such shares for service and maintenance fees.
CONTINGENT DEFERRED SALES CHARGES. Any contingent deferred sales
charge ("CDSC") imposed upon the redemption of Class A, Class B or Class C
shares is a percentage of the lesser of (i) the net asset value of the shares
redeemed or (ii) the original cost of such shares. No CDSC is imposed when you
redeem amounts derived from (a) increases in the value of shares redeemed above
the net cost of such shares or (b) certain shares with respect to which the
Fund did not pay a commission on issuance, including shares acquired through
reinvestment of dividend income and capital gains distributions. Upon request
for a redemption, shares not subject to the CDSC will be redeemed first.
Thereafter, shares held the longest will be the first to be redeemed.
The CDSC on Class A, B, and C shares that are subject to a CDSC will
be waived if the redemption relates to the following: (a) in the event of the
total disability (as evidenced by a determination by the federal Social
Security Administration) of the shareholder (including registered joint owner)
occurring after the purchase of the shares being redeemed; (b) in the event of
the death of the shareholder (including a registered joint owner); (c) for
redemptions made pursuant to an automatic withdrawal plan in an amount, on an
annual basis, up to 12% of the value of the account at the time the shareholder
elects to participate in the automatic withdrawal plan; (d) on redemptions of
shares sold to directors, officers, and employees of any fund for which the
Adviser acts as investment adviser, or officers and employees of the Adviser,
Sub-Adviser, or Distributor, including former directors and officers and
immediate family members of all of the foregoing, and any employee benefit or
payroll deduction plan established by or for such persons; and (e) on
redemptions pursuant to the right of the Company to liquidate a shareholder's
account if the aggregate net asset value of the shares held in such account
falls below an established minimum amount.
26
<PAGE>
CLASS Y SHARES. Class Y shares are offered through a separate
Prospectus to (i) trust companies, bank trusts, endowments, pension plans or
foundations ("Institutions") acting on behalf of their own account or one or
more clients for which such Institution acts in a fiduciary capacity and
investing at least $5,000,000 at any one time; (ii) any state, county, city,
department, authority or similar agency which invests at least $5,000,000
("Government Entities"); and (iii) any investor with an account established
under a "wrap account" or other similar fee-based program sponsored and
maintained by a registered broker-dealer approved by the Fund's Distributor
("Wrap Program Investors"). Wrap Program Investors may only purchase Class Y
shares through the sponsors of such programs who have entered into agreements
with Davis Distributors, LLC.
Wrap Program Investors should be aware that both Class A and Class Y
shares are made available by the Fund at net asset value to sponsors of wrap
programs. However, Class A shares are subject to additional expenses under the
Fund's Rule 12b-1 Plan and sponsors of wrap programs utilizing Class A shares
are generally entitled to payments under the Plan. If the sponsor has selected
Class A shares, investors should discuss these charges with their program's
sponsor and weigh the benefits of any services to be provided by the sponsor
against the higher expenses paid by Class A shareholders.
SPECIAL SERVICES
PROTOTYPE RETIREMENT PLANS. Because Davis Tax-Free High Income Fund's
investment objective is to earn current income free from federal income tax, it
is not an appropriate investment for retirement accounts and does not offer
retirement plan accounts:
AUTOMATIC INVESTMENT PLAN. You may arrange for automatic monthly
investing whereby State Street will be authorized to initiate a debit to your
bank account of a specific amount (minimum $25) each month which will be used
to purchase the Fund shares. The account minimum of $1,000 for non-retirement
accounts (the Fund does not offer retirement accounts) will be waived, if
pursuant to the automatic investment plan, the account balance will meet the
minimum investment requirements within twelve months of the initial investment.
For institutions that are members of the Automated Clearing House system (ACH),
such purchases can be processed electronically on any day of the month between
the 4th and 28th day of each month. After each automatic investment, you will
receive a transaction confirmation, and the debit should be reflected on your
next bank statement. You may terminate the Automatic Investment Plan at any
time. If you desire to utilize this plan, you may use the appropriate
designation on the Application Form. Class Y shares are not eligible to
participate in the Automatic Investment Plan.
DIVIDEND DIVERSIFICATION PROGRAM. You may also establish a dividend
diversification program which allows you to have all dividends and any other
distributions automatically invested in shares of one or more of the Davis
Funds, subject to state securities law requirements and the minimum investment
requirements set forth below. You must receive a current prospectus for the
other fund or funds prior to investment. Shares will be purchased at the chosen
fund's net asset value on the dividend payment date. A dividend diversification
account must be in the same registration as the distributing fund account and
must be of the same class of shares. All accounts established or utilized under
this program must have a minimum initial value, and all subsequent investments
must be at least $25. This program can be amended or terminated at any time,
upon at least 60 days' notice. If you would like to participate in this
program, you may use the appropriate designation on the Application Form. Class
Y shares are not eligible to participate in the Dividend Diversification
Program.
TELEPHONE PRIVILEGE. Unless you have provided in your application that
the telephone privilege is not to be available, the telephone privilege is
automatically available under certain circumstances for exchanging shares and
for redeeming shares. BY EXERCISING THE TELEPHONE PRIVILEGE TO SELL OR EXCHANGE
SHARES, YOU AGREE THAT THE DISTRIBUTOR SHALL NOT BE LIABLE FOR FOLLOWING
TELEPHONE INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE. Reasonable procedures
will be employed to confirm that such instructions are genuine and if not
employed, the Company may be liable for unauthorized instructions. Such
procedures will include a request for personal identification (account or
social security number) and tape recording of the instructions. You should be
aware that during unusual market conditions we might have difficulty in
accepting telephone requests, in which case you should contact us by mail.
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<PAGE>
EXCHANGE OF SHARES
GENERAL. The exchange privilege is a convenient way to buy shares in
other Davis Funds in order to respond to changes in your goals or in market
conditions. If such goals or market conditions change, the Davis Funds offer a
variety of investment objectives that includes common stock funds, tax-exempt,
government and corporate bond funds, and a money market fund. However, the Fund
is intended as long-term investments and is not intended for short-term trades.
Shares of a particular class of a fund may be exchanged only for shares of the
same class of another Davis Fund except that Class A shareholders who are
eligible to purchase Class Y shares may exchange their shares for Class Y
shares of the Fund. All of the Davis Funds offer Class A, Class B, Class C and
Class Y shares. The shares to be received upon exchange must be legally
available for sale in your state. For Class A, Class B or Class C shares the
net asset value of the initial shares being acquired must meet the required
minimum of $1,000 unless such exchange is under the Automatic Exchange Program
described below. For Class Y shares the net asset value of the initial shares
being acquired must be at least $5,000,000 for Institutions and Government
Entities or minimums set by wrap program sponsors.
Shares may be exchanged at relative net asset value without any
additional charge. However, if any shares being exchanged are subject to an
escrow or segregated account pursuant to the terms of a Statement of Intention
or a CDSC, such shares will be exchanged at relative net asset value, but the
escrow or segregated account will continue with respect to the shares acquired
in the exchange. In addition, the terms of any CDSC, or redemption fee
applicable at the time of exchange, will continue to apply to any shares
acquired upon exchange.
Before you decide to make an exchange, you must obtain the current
prospectus of the desired fund. Call your broker or the Distributor for
information and a prospectus for any of the other Davis Funds registered in
your state. Read the prospectus carefully. If you decide to exchange your
shares, contact your broker/dealer, the Distributor, or send State Street a
written unconditional request for the exchange and follow the instructions
regarding delivery of share certificates contained in the section on
"Redemption of Shares." A medallion signature guarantee is not required for
such an exchange. However, if shares are also redeemed for cash in connection
with the exchange transaction, a medallion signature guarantee may be required.
A medallion signature guarantee is a written confirmation from an eligible
guarantor institution, such as a securities broker-dealer or a commercial bank,
that the signature(s) on the account is (are) valid. Unfortunately, no other
form of signature verification can be accepted. Your dealer may charge an
additional fee for handling an exercise of the exchange privilege.
An exchange involves both a redemption and a purchase, and normally
both are done on the same day. However, in certain instances such as where a
large redemption is involved, the investment of redemption proceeds into shares
of other Davis Funds may take up to seven days. For federal income tax
purposes, exchanges between funds are treated as a sale and purchase.
Therefore, there will usually be a recognizable capital gain or loss due to an
exchange. An exchange between different classes of the same fund is not a
taxable event.
The number of times you may exchange shares among the Davis Funds
within a specified period of time may be limited at the discretion of the
Distributor. Currently, more than four exchanges out of a fund during a
twelve-month period are not permitted without the prior written approval of the
Distributor. The Company reserves the right to terminate or amend the exchange
privilege at any time upon 60 days' notice.
BY TELEPHONE. You may exchange shares by telephone into accounts with
identical registrations. Please see the discussion of procedures in respect to
telephone instructions in the section entitled "Telephone Privilege," as such
procedures are also applicable to exchanges.
AUTOMATIC EXCHANGE PROGRAM. The Company also offers an automatic
monthly exchange program. All accounts established or utilized under this
program must have the same registration and a minimum initial value of at least
$250. All subsequent exchanges must have a value of at least $25. Each month,
shares will be simultaneously redeemed and purchased at the chosen fund's
applicable price. If you would like to participate in this program, you may use
the appropriate designation on the Application Form.
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<PAGE>
REDEMPTION OF SHARES
GENERAL. You can redeem, or sell back to the Company, all or part of
your shares at any time at net asset value less any applicable sales charges.
You can do this by sending a written request to State Street Bank and Trust
Company, c/o The Davis Funds, P.O. Box 8406, Boston, MA 02266-8406, indicating
how many of your shares or what dollar amount you want to redeem. If more than
one person owns the shares to be redeemed, all owners must sign the request.
The signatures on the request must correspond to the account from which the
shares are being redeemed.
Sometimes State Street needs more documents to verify authority to
make a redemption. This usually happens when the owner is a corporation,
partnership or fiduciary (such as a trustee or the executor of an estate) or if
the person making the request is not the registered owner of the shares.
If shares to be redeemed are represented by a certificate, the
certificate must be signed by the owner or owners and must be sent to State
Street with the request.
For the protection of all shareholders, the Company also requires that
signatures appearing on a share certificate, stock power or redemption request
where the proceeds would be more than $50,000, must be medallion signature
guaranteed by an eligible guarantor institution, such as a securities
broker-dealer, or a commercial bank. A medallion signature guarantee is also
required in the event that any modification to the Company's application is
made after the account is established, including the selection of the Expedited
Redemption Privilege. In some situations such as where corporations, trusts, or
estates are involved, additional documents may be necessary to effect the
redemption. The transfer agent may reject a request from any of the foregoing
eligible guarantors, if such guarantor does not satisfy the transfer agent's
written standards or procedures, or if such guarantor is not a member or
participant of a medallion signature guarantee program. This provision also
applies to exchanges when there is also a redemption for cash. A medallion
signature guarantee on redemption requests where the proceeds would be $50,000
or less is not required, provided that such proceeds are being sent to the
address of record and, in order to ensure authenticity of an address change,
such address of record has not been changed within the last 30 days. All
notifications of address changes must be in writing.
Redemption proceeds are normally paid to you within seven days after
State Street receives your proper redemption request. Payment for redemptions
can be suspended under certain emergency conditions determined by the
Securities and Exchange Commission or if the New York Stock Exchange is closed
for other than customary or holiday closings. If any of the shares redeemed
were just bought by you, payment to you may be delayed until your purchase
check has cleared (which usually takes up to 15 days from the purchase date).
You can avoid any redemption delay by paying for your shares with a bank wire
or federal funds.
Redemptions are ordinarily paid to you in cash. However, the Company's
Board of Directors is authorized to decide if conditions exist making cash
payments undesirable, (although the Board has never reached such a decision).
If the Board of Directors should decide to make payments other than in cash,
redemptions could be paid in securities, valued at the value used in computing
a fund's net asset value. There would be brokerage costs incurred by the
shareholder in selling such redemption proceeds. We must, however, redeem
shares solely in cash up to the lesser of $250,000 or 1% of the Fund's net
asset value, whichever is smaller, during any 90-day period for any one
shareholder.
Your shares may also be redeemed through participating dealers. Under
this method, the Distributor repurchases the shares from your dealer, if your
dealer is a member of the Distributor's selling group. Your dealer may, but is
not required to, use this method in selling back your shares and may place
repurchase request by telephone or wire. Your dealer may charge you a service
fee or commission. No such charge is incurred if you redeem your own shares
through State Street rather than having a dealer arrange for a repurchase.
EXPEDITED REDEMPTION PRIVILEGE. Expedited Redemption Privilege:
Investors may instruct State Street to establish banking instructions for the
purpose of a future expedited redemption. Class Y shareholders are not eligible
for the expedited redemption privilege. Expedited redemption privilege allows
the shareholder to instruct State Street to forward redemption proceeds to
their checking or savings account at the their commercial banking institution.
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<PAGE>
Shareholders may establish expedited redemption privilege by (a)
completion of the expedited redemption privilege section at the time the
account is established, (b) written instruction signed by all shareholders with
their signature medallion guaranteed, or (c) completion of the Davis Funds
Account Service Form by all shareholders with their signature(s) medallion
guaranteed. In each case, the shareholders must submit a copy of a voided check
or encoded deposit slip. With the voided check or encoded deposit slip, State
Street can verify the correct banking instructions.
Once the expedited redemption privilege is established, proceeds may
be sent via expedited redemption privilege by notifying Davis Distributors by
(a) telephone request from the registered shareholder(s) (b) telephone request
from the registered representative of a Qualified Dealer, or (c) written
request signed by the registered shareholder.
Redemption proceeds may be delivered by federal funds wire or by
Automated Clearing House (ACH). Proceeds delivered by federal funds wire should
be received the business day following the redemption transaction. There is a
$5.00 charge by State Street for federal funds wire service and the receiving
bank may charge for this service. Proceeds delivered by ACH should be received
within two business days following the redemption transaction. State Street
does not charge for this service. Certain financial institutions may not accept
proceeds by either of these methods except by arrangement with its
correspondent bank or unless such institution is a member of the Federal
Reserve System.
BY TELEPHONE. You can redeem shares by telephone and receive a check
by mail, but please keep in mind:
The check can only be issued for up to $25,000;
The check can only be issued to the registered owner (who
must be an individual);
The check can only be sent to the address of record; and
Your current address of record must have been on file for 30 days.
AUTOMATIC WITHDRAWALS PLAN. Under the Automatic Withdrawals Plan, you
can indicate to State Street how many dollars you would like to receive each
month or each quarter. Your account must have a value of at least $10,000 to
start a plan. On shares that are redeemed you will receive the payment you have
requested approximately on the 25th day of the month. Withdrawals involve
redemption of shares and may produce gain or loss for income tax purposes.
Shares of the Fund initially acquired by exchange from any of the other Davis
Funds will remain subject to an escrow or segregated account to which any of
the exchanged shares were subject. If you utilize this program, any applicable
CDSCs will be imposed on such shares redeemed. Purchase of additional shares
concurrent with withdrawals may be disadvantageous to you because of tax and
sales load consequences. If the amount you withdraw exceeds the dividends on
your shares, your account will suffer depletion. You may terminate your
Automatic Withdrawals Plan at any time without charge or penalty. The Company
reserves the right to terminate or modify the Automatic Withdrawals Plan at any
time. Class Y shares are not eligible for the Automatic Withdrawal Plan.
INVOLUNTARY REDEMPTIONS. To relieve the Company of the cost of
maintaining uneconomical accounts, the Company may effect the redemption of
shares at net asset value in any account if the account, due to shareholder
redemptions, has a value of less than $250. At least 60 days prior to such
involuntary redemption, the Company will mail a notice to the shareholder so
that an additional purchase may be effected to avoid such redemption.
SUBSEQUENT REPURCHASES. After some or all of your shares are redeemed
or repurchased, you may decide to put back all or part of your proceeds into
the same Class of a fund's shares. Any such shares will be issued without sales
charge at the net asset value next determined after you have returned the
amount of your proceeds. In addition, any applicable CDSC assessed on such
shares will be returned to the account. Shares will be deemed to have been
purchased on the original purchase date for purposes of calculating the CDSC
and the conversion period. This can be done by sending State Street or the
Distributor a letter, together with a check for the reinstatement amount. The
letter must be received, together with the payment, within 60 days after the
redemption or repurchase. You can only use this privilege once.
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Section IV: General Information
DETERMINING THE PRICE OF SHARES
NET ASSET VALUE. The net asset value per share of each class is
determined daily by dividing the total value of investments and other assets,
less any liabilities, by the total outstanding shares. The net asset value of
the Fund is determined daily as of the earlier of the close of the New York
Stock Exchange (the "Exchange") or 4:00 p.m., Eastern Time, on each day that
the Exchange is open for trading.
The price per share for purchases or redemptions made directly through
State Street is generally the value next computed after State Street receives
the purchase order or redemption request. In order for your purchase order or
redemption request to be effective on the day you place your order with your
broker-dealer or other financial institution, such broker-dealer or financial
institution must (i) receive your order before 4:00 p.m. Eastern time and (ii)
promptly transmit the order to State Street. The broker-dealer or financial
institution is responsible for promptly transmitting purchase orders or
redemption requests to State Street so that you may receive the same day's net
asset value. Note that in the case of redemptions and repurchases of shares
owned by corporations, trusts, or estates, or of shares represented by
outstanding certificates, State Street may require additional documents to
effect the redemption and the applicable price will be determined as of the
close of the next computation following the receipt of the required
documentation or outstanding certificates. See "Redemption of Shares."
The Company does not price its shares or accept orders for purchases
or redemptions on days when the New York Stock Exchange is closed. Such days
currently include New Year's Day, Martin Luther King, Jr. Day, President's Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Certain brokers and certain designated intermediaries on their behalf
may accept purchase and redemption orders. The Distributor will be deemed to
have received such an order when the broker or the designee has accepted the
order. Customer orders are priced at the net asset value next computed after
such acceptance. Such order may be transmitted to the Fund or its agents
several hours after the time of the acceptance and pricing.
VALUATION OF PORTFOLIO SECURITIES. Portfolio securities are normally
valued using current market valuations. Securities traded on a national
securities exchange are valued at the last published sales price on the
exchange, or in the absence of recorded sales, at the average of closing bid
and asked prices on such exchange. Over-the-counter securities are valued at
the average of closing bid and asked prices. Fixedincome securities may be
valued on the basis of prices provided by a pricing service.
Investments in shortterm securities (maturing in sixty days or less)
are valued at amortized cost unless the Board of Directors determines that such
cost is not a fair value. Assets for which there are no quotations available
will be valued at a fair value as determined by or at the direction of the
Board of Directors.
YEAR 2000 ISSUES
Like all financial service providers, the Adviser, Sub-Adviser,
Distributor, and third parties providing investment advisory, administrative,
transfer agent, custodial and other services (jointly the "Service Providers")
utilize systems that may be affected by Year 2000 transition issues.
YEAR 2000 ISSUES. The services provided to the Fund and the
shareholders by the Service Providers depend on the smooth functioning of their
computer systems and those of other parties they deal with. Many computer
software systems in use today cannot distinguish the year 2000 from the year
1900 because of the way dates are encoded and calculated.
Difficulties with Year 2000 issues could have a negative impact on
handling securities trades, payments of interest and dividends, pricing and
account services. Although, at this time, there can be no assurance that there
will be no adverse impact on the Fund, the Service Providers have advised the
Fund that they have been actively working
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on necessary changes to their computer systems to prepare for the Year 2000 and
expect that their systems, and those of other parties they deal with, will be
adapted in time for these events. In addition, there can be no assurance that
the companies which the Fund invests in will not experience difficulties with
Year 2000 issues which may negatively effect the market value of issuers of
municipal obligations.
DIVIDENDS AND DISTRIBUTIONS
Income dividends are declared and distributed monthly and
distributions of net realized capital gains, if any, will normally be paid
annually. To provide stable distributions for its shareholders, the Fund at
times may continue to pay distributions based on expectations of future
investment results even though, as a result of temporary market conditions or
other factors, the Fund may have failed to achieve projected investment results
for a given period. In such cases, the Fund's distributions may include a
return of capital to shareholders. Shareholders who reinvest their
distributions are largely unaffected by such returns of capital. In the case of
shareholders that do not reinvest, a return of capital is equivalent to a
partial redemption of the shareholder's investment. Because Class B and Class C
shares incur higher distribution services fees and bear certain other expenses,
such shares will have a higher expense ratio and will pay correspondingly lower
dividends than Class A shares.
You will receive confirmation statements for dividends declared and
shares purchased through reinvestment of dividends. You will also receive
confirmations after each purchase and after each redemption. Different classes
of shares may be expected to have different expense ratios due to differing
distribution services fees and certain other expenses. Classes with higher
expense ratios will pay correspondingly lower dividends than Classes with lower
expense ratios. For tax purposes, information concerning distributions will be
mailed annually to shareholders.
Shareholders have the option to receive all dividends and
distributions in cash, to have all dividends and distributions reinvested, or
to have income dividends paid in cash and capital gain distributions
reinvested. Reinvestment of all dividends and distributions is automatic for
accounts utilizing the Automatic Withdrawals Plan. The reinvestment of
dividends and distributions is made at net asset value (without any initial or
contingent deferred sales charge) on the payment date.
For the protection of the shareholder, upon receipt of the second
dividend check which has been returned to State Street as undeliverable,
undelivered dividends will be invested in additional shares at the current net
asset value and the account designated as a dividend reinvestment account.
Information concerning distributions will be mailed to shareholders
annually. Distributions will be classified in terms of non-taxable return of
capital, federal tax-exempt income and taxable income. Since some states may
not tax their residents on the portion of the Fund's distributions representing
income from governmental entities in such states, information about state
sources of tax-exempt distributions will also be reported annually.
Shareholders have the option to receive all dividends and
distributions in cash, to have all dividends and distributions reinvested, or
to have income dividends paid in cash and capital gain distributions
reinvested. The reinvestment of dividends and distributions is made at net
asset value (without any sales charge) on the dividend payment date. Upon
receipt of the second dividend check which has been returned to State Street as
undeliverable, undelivered dividends will be invested in additional shares at
the current net asset value and the account designated as a dividend
reinvestment account.
FEDERAL INCOME TAXES
This section is not intended to be a full discussion of all the
aspects of the federal income tax law and its effects on the Fund and its
shareholders. Shareholders may be subject to state and local taxes on
distributions. Each investor should consult his or her own tax adviser
regarding the effect of federal, state, and local taxes on any investment in
the Fund.
The Fund intends to continue to qualify as a regulated investment
company under the Internal Revenue Code (the "Code"), and if so qualified, will
not be liable for federal income tax to the extent its earnings are
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<PAGE>
distributed. If, for any calendar year, the distribution of earnings required
under the Code exceeds the amount distributed, an excise tax, equal to 4% of
the excess, will be imposed on the applicable fund. The Fund intends to make
distributions during each calendar year sufficient to prevent imposition of the
excise tax.
Dividends paid to shareholders from interest earned by the Fund from
municipal obligations and from exempt interest dividends received by the Fund
from investment companies investing in tax-exempt securities are not includible
in a shareholder's gross income for federal income tax purposes, although a
portion of such dividends may be subject to the alternative minimum tax as
discussed below. Distributions of net interest income derived from other
sources, if any, and of net short-term capital gains realized by the Fund will
be taxable to shareholders as ordinary income. Net long-term capital gain
distributions, if any, will be taxable to shareholders as long-term capital
gain regardless of how long the shares of the Fund have been held.
Distributions will be treated the same for tax purposes whether received in
cash or in additional shares of the Fund.
Interest paid on "specified private activity bonds" issued after
August 7, 1986, as defined in the Code, although exempt from federal income
tax, will constitute a tax preference item for purposes of both the individual
and the corporate alternative minimum tax. If the Fund were to own any such
bonds, it is expected that a portion of the exempt income distributed by the
Fund would be treated as a preference item for shareholders based upon the
proportionate share of the interest from the specified private activity bonds
received by the Fund. In the case of a corporate shareholder, the alternative
minimum tax base may also include a portion of all the other tax-exempt income.
Corporate shareholders are advised to consult their own tax advisers with
respect to the corporate alternative minimum tax.
A gain or loss for tax purposes may be realized on the redemption of
shares. If a shareholder realizes a loss on the sale or exchange of any shares
held for six months or less and during such period the shareholder received any
exempt-interest dividends, then such loss is disallowed to the extent of the
amount of the exempt-interest dividends. If a shareholder realizes a loss on
the sale or exchange of any shares held for six months or less and during such
period the shareholder received any capital gains dividends, then such loss (to
the extent it is allowed) is treated as a long-term capital loss to the extent
of such capital gain dividends. Interest on indebtedness incurred by
shareholders to purchase or carry shares of the Fund will not be deductible for
federal income tax purposes. Dividends declared in the last calendar month to
shareholders of record in such month and paid by the end of the following
January are treated as received by the shareholder in the year in which they
are declared.
The Fund may not be an appropriate investment vehicle for entities
which are "substantial users" (or "related persons" thereto) of facilities
financed by "industrial development bonds" as such terms are defined in the
Internal Revenue Code. Such entities (or persons) should consult their own tax
advisers before investing.
PERFORMANCE DATA
From time to time, the Fund may advertise information regarding its
performance. Such information will be calculated separately for each class of
shares. These performance figures are based upon historical results and are not
intended to indicate future performance.
CUMULATIVE TOTAL RETURN AND AVERAGE ANNUAL TOTAL RETURN
The cumulative total return and the average annual total return (each
is defined below) with respect to each class of shares for the periods
indicated below is as follows:
<TABLE>
<CAPTION>
Cumulative
Davis Tax-Free High Income Fund Total Return (1) Average Annual Total Return (2)
- - ------------------------------- ---------------- -------------------------------
<S> <C> <C>
Class A Shares
One year ended September 30, 1998...............................................1.47% 1.47%
Period from December 1, 1994 through September 30, 1998 (life of class)........25.43% 6.09%
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Class B Shares
One year ended September 30, 1998...............................................1.75% 1.75%
Five years ended September 30, 1998............................................28.87% 5.20%
Ten years ended September 30, 1998.............................................95.81% 6.95%
Period from March 21, 1985 through September 30, 1998 (life of class).........153.38% 7.11%
Class C Shares
One year ended September 30, 1998...............................................4.74% 4.74%
Period from August 18, 1997 through September 30, 1998 (life of class) .........6.55% 5.84%
Class Y Shares
Period from October 6, 1997 through September 30, 1998 (life of class)..........6.34% NA
</TABLE>
(1) "Cumulative Total return" is a measure of a fund's performance encompassing
all elements of return. Total return reflects the change in share price
over a given period and assumes all distributions are taken in additional
fund shares. Total return is determined by assuming a hypothetical
investment at the beginning of the period, deducting a maximum front-end or
applicable contingent deferred sales charge, adding in the reinvestment of
all income dividends and capital gains, calculating the ending value of the
investment at the net asset value as of the end of the specified time
period and subtracting the amount of the original investment, and by
dividing the original investment. This calculated amount is then expressed
as a percentage by multiplying by 100. Periods of less than one year are
not annualized.
(2) "Average annual total return" represents the average annual compounded rate
of return for the periods presented. Periods of less than one year are not
annualized. Average annual total return measures both the net investment
income generated by, and the effect of any realized or unrealized
appreciation or depreciation of, the underlying investments in the fund's
portfolio. Average annual total return is calculated separately for each
class in accordance with the standardized method prescribed by the
Securities and Exchange Commission by determining the average annual
compounded rates of return over the periods indicated, that would equate
the initial amount invested to the ending redeemable value, according to
the following formula:
P(1+T)n = ERV
Where: P = hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the
end of the period of a hypothetical
$1,000 payment made at the
beginning of such period
This calculation (i) assumes all dividends and distributions are reinvested at
net asset value on the appropriate reinvestment dates and (ii) deducts (a) the
maximum front-end or applicable contingent deferred sales charge from the
hypothetical initial $1,000 investment, and (b) all recurring fees, such as
advisory fees, charged as expenses to all shareholder accounts.
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30-DAY SEC YIELD
The 30-Day SEC Yield (defined below) with respect to each class of
shares of Davis Tax-Free High Income Fund for the period ended September 30,
1998, is as follows:
Class A shares 5.08%
Class B shares 4.59%
Class C shares 4.58%
Class Y shares 5.54%
"30 Day SEC Yield" is computed in accordance with a standardized
method prescribed by the rules of the Securities and Exchange Commission and is
calculated separately for each class. 30 Day SEC Yield is a measure of the net
investment income per share (as defined) earned over a specified 30-day period
expressed as a percentage of the maximum offering price of the Funds shares at
the end of the period. Such yield figure was determined by dividing the net
investment income per share on the last day of the period, according to the
following formula:
30 Day SEC Yield = 2 [(a - b + 1) 6 - 1]
-----
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period.
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.
Davis Tax-Free High Income Fund's 30-Day SEC Yield will fluctuate
depending upon prevailing interest rates, quality, maturities, types of
instruments held, and operating expenses. Thus, any yield quotation should not
be considered representative of future results. If a broker-dealer charges
investors for services related to the purchase or redemption of Fund shares,
the yield will effectively be reduced.
TAX EQUIVALENT YIELD. Tax equivalent yield is the yield that a taxable
investment must generate in order to equal the Fund's yield for an investor in
a stated federal income tax bracket. The Fund's tax equivalent yield is
computed separately for each class in accordance with the standardized method
prescribed by the Securities and Exchange Commission, by dividing that portion
of such Fund's yield (computed as described above) that is tax exempt by one
minus the stated federal income tax rate, and adding the resulting number to
that portion, if any, of the Fund's yield that is not tax exempt.
NON-STANDARD DISTRIBUTION RATES
DISTRIBUTION RATES. Distribution rates are computed by dividing the
income dividends for the preceding 12 months by the maximum offering price on
the last day of such period. The distribution rate with respect to each class
of shares of Davis Tax-Free High Income Fund for the period ended September 30,
1998, is as follows:
Class A shares 5.85%
Class B shares 5.40%
Class C shares 5.40%
Class Y shares 5.75%
35
<PAGE>
ANNUALIZED CURRENT DISTRIBUTION RATES. Annualized current distribution
rates are computed by multiplying income dividends for a specified month by
twelve and dividing the resulting figure by the maximum offering price on the
last day of the specified period. The annualized current distribution rate with
respect to each class of shares of Davis Tax-Free High Income Fund for the
period ended September 30, 1998, is as follows:
Class A shares 4.97%
Class B shares 4.47%
Class C shares 4.50%
Class Y shares 5.44%
TAX EQUIVALENT DISTRIBUTION RATE. Tax equivalent distribution rate is
computed by dividing that portion of the annualized current distribution rate
(computed as described above) which is tax-exempt by one minus the stated
federal income tax rate, and adding the resulting figure to that portion, if
any, of the annualized current distribution rate which is not tax-exempt. Based
upon the maximum federal income tax rate of 39.6% and the annualized current
distribution rate for the month ended September 30, 1998, the tax equivalent
distribution rate with respect to each class of shares of Davis Tax-Free High
Income Fund for the period ended September 30, 1998, is as follows:
Class A shares 8.23%
Class B shares 7.40%
Class C shares 7.45%
Class Y shares 9.01%
OTHER FUND STATISTICS
In reports or other communications to shareholders and in advertising
material, the performance of the Fund may be compared to recognized unmanaged
indices or averages of the performance of similar securities. Also, the
performance of the Fund may be compared to that of other funds of comparable
size and objectives as listed in the rankings prepared by Lipper Analytical
Services, Inc., Morningstar, Inc. or similar independent mutual fund rating
services, and the Funds may use evaluations published by nationally recognized
independent ranking services and publications. Any given performance comparison
should not be considered representative of the Fund's performance for any
future period.
In advertising and sales literature the Funds may publish various
statistics describing its investment portfolio such as the Funds' weighted
average maturity , weighted average duration, etc.
The Funds' 1998 Annual Report contains additional performance
information and will be made available upon request and without charge by
calling Davis Funds toll-free at 1-800-279-0279, Monday-Friday, 7 a.m. to
4 p.m. Mountain Time.
36
<PAGE>
APPENDIX A
QUALITY RATINGS OF DEBT SECURITIES
MOODY'S CORPORATE 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 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 risks appear somewhat larger than Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade-obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e. they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. 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 as 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 longer 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.
STANDARD & POOR'S CORPORATE BOND RATINGS
AAA - Debt rated 'AAA' has the highest rating assigned by Standard and Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A - Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
37
<PAGE>
BB - Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B - Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC - Debt rated 'CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The 'CCC' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'B' or 'B-' rating.
CC - The rating 'CC' is typically applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.
C - The rating 'C' is typically applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
CI - The rating 'CI' is reserved for income bonds on which no interest is being
paid.
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 that such
payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
MOODY'S COMMERCIAL PAPER RATINGS
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers: Prime-1 (superior capacity), Prime-2 (strong capacity) and
Prime-3 (acceptable capacity). In assigning ratings to an issuer which
represents that its commercial paper obligations are supported by the credit of
another entity or entities, Moody's evaluates the financial strength of the
indicated affiliated corporations, commercial banks, insurance companies,
foreign governments or other entities, but only as one factor in the total
rating assessment.
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
The S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from 'A' for the highest
quality to 'D' for the lowest. Issues assigned an 'A' rating are regarded as
having the greatest capacity for timely payment. Within the 'A' category, the
numbers 1, 2 and 3 indicate relative degrees of safety. The addition of a plus
sign to the category A-1 denotes that the issue is determined to possess
overwhelming safety characteristics.
38
<PAGE>
APPENDIX B
TERMS AND CONDITIONS FOR A STATEMENT OF INTENTION (CLASS A SHARES ONLY)
TERMS OF ESCROW:
1. Out of my initial purchase (or subsequent purchases if necessary) 5% of the
dollar amount specified in this Statement will be held in escrow by State
Street in the form of shares (computed to the nearest full share at the public
offering price applicable to the initial purchase hereunder) registered in my
name. For example, if the minimum amount specified under this statement is
$100,000 and the public offering price applicable to transactions of $100,000
is $10 a share, 500 shares (with a value of $5,000) would be held in escrow.
2. In the event I should exchange some or all of my shares to those of another
mutual fund for which Davis Distributors, LLC, acts as distributor, according
to the terms of this prospectus, I hereby authorize State Street to escrow the
applicable number of shares of the new fund, until such time as this Statement
is complete.
3. If my total purchases are at least equal to the intended purchases, the
shares in escrow will be delivered to me or to my order.
4. If my total purchases are less than the intended purchases, I will remit to
Davis Distributors, LLC, the difference in the dollar amount of sales charge
actually paid by me and the sales charge which I would have paid if the total
purchase had been made at a single time. If remittance is not made within 20
days after written request by Davis Distributors, LLC, or my dealer, State
Street will redeem an appropriate number of the escrowed shares in order to
realize such difference.
5. I hereby irrevocably constitute and appoint State Street my attorney to
surrender for redemption any or all escrowed shares with full power of
substitution in the premises.
6. Shares remaining after the redemption referred to in Paragraph No. 4 will be
credited to my account.
7. The duties of State Street are only such as are herein provided being purely
ministerial in nature, and it shall incur no liability whatever except for
willful misconduct or gross negligence so long as it has acted in good faith.
It shall be under no responsibility other than faithfully to follow the
instructions herein. It may consult with legal counsel and shall be fully
protected in any action taken in good faith in accordance with advice from such
counsel. It shall not be required to defend any legal proceedings which may be
instituted against it in respect of the subject matter of this Agreement unless
requested to do so and indemnified to its satisfaction against the cost and
expense of such defense.
8. If my total purchases are more than the intended purchases and such total is
sufficient to qualify for an additional quantity discount, a retroactive price
adjustment shall be made for all purchases made under such Statement to reflect
the quantity discount applicable to the aggregate amount of such purchases
during the thirteen-month period.
39
<PAGE>
EVERGREEN MUNICIPAL TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 633-2700
EVERGREEN NATIONAL MUNICIPAL BOND FUNDS
STATEMENT OF ADDITIONAL INFORMATION
January 10, 2000
Evergreen Tax-Free High Income Fund
(the"Fund")
The 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 Fund listed above. It is not a prospectus but should be
read in conjunction with the prospectus dated January 10, 2000, as supplemented
from time to time. You may obtain a prospectus without charge by calling (800)
343-2898.
o:/emt-de/n-a1/SAI-tfhif(newfund)-10'22'99.doc
<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.................................................................1-4
SERVICE PROVIDERS........................................................1-4
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.......................................................2-16
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.
The Fund is a 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.
INVESTMENT POLICIES
The Fund has adopted the fundamental investment restrictions set forth
below which may not be changed without the vote of a majority of the Fund's
outstanding shares, as defined in the Investment Company Act of 1940 (the"1940
Act"). 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. Diversification
The Fund may not make any investment that is inconsistent with its
classification as a diversified investment company under the 1940 Act.
Further Explanation of Diversification Policy:
To remain classified as a diversified investment company under the 1940
Act, the Fund must conform with the following: With respect to 75% of its total
assets, a diversified investment company may not invest more than 5% of its
total assets, determined at market or other fair value at the time of purchase,
in the securities of any one issuer, or invest in more than 10% of the
outstanding voting securities of any one issuer, determined at the time of
purchase. These limitations do not apply to investments in securities issued or
guaranteed by the United States ("U.S.") government or its agencies or
instrumentalities.
2. Concentration
The Fund may not concentrate its investments in the securities of
issuers primarily engaged in any particular industry (other than securities that
are issued or guaranteed by the U.S. government or its agencies or
instrumentalities).
Further Explanation of Concentration Policy:.
The 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, the Fund may not issue senior
securities.
4. Borrowing
The Fund may not borrow money, except to the extent permitted by
applicable law.
Further Explanation of Borrowing Policy:
The 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. The Fund may also borrow up to an additional 5% of its total assets from
banks or others. The Fund may borrow only as a temporary measure for
extraordinary or emergency purposes such as the redemption of Fund shares. The
Fund may purchase additional securities so long as borrowings do not exceed 5%
of its total assets. The Fund may obtain such short-term credit as may be
necessary for the clearance of purchases and sales of portfolio securities. The
Fund may purchase securities on margin and engage in short sales to the extent
permitted by applicable law.
5. Underwriting
The Fund may not underwrite securities of other issuers, except insofar
as the Fund may be deemed to be an underwriter in connection with the
disposition of its portfolio securities.
6. Real Estate
The Fund may not purchase or sell real estate, except that, to the
extent permitted by applicable law, the Fund may invest in (a) securities that
are directly or indirectly secured by real estate, or (b) securities issued by
issuers that invest in real estate.
7. Commodities
The Fund may not purchase or sell commodities or contracts on
commodities, except to the extent that the Fund may engage in financial futures
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
The Fund may not make loans to other persons, except that the 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, the 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 the Fund lends its securities, it will require the borrower to
give the Fund collateral in cash or government securities. The Fund will require
collateral in an amount equal to at least 100% of the current market value of
the securities lent, including accrued interest. The Fund has the right to call
a loan and obtain the securities lent any time on notice of not more than five
business days. The Fund may pay reasonable fees in connection with such loans.
9. Investment in Federally Tax Exempt Securities
The 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 Fund may purchase and
investment practices the Fund 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 Fund's prospectus.
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
Zero Coupon "Stripped" Bonds
PRINCIPAL HOLDERS OF FUND SHARES
As of September 30, 1999, the officers and Trustees of the Trust owned
as a group less than 1% of the outstanding shares of any class of the Fund.
As of September 30, 1999, no person, to the Fund's knowledge, owned
beneficially or of record more than 5% of the outstanding shares of any class.
EXPENSES
Advisory Fees
Evergreen Investment Management Company ("EIMC") is the investment
advisor to the Fund. EIMC is entitled to receive from the Fund an annual fee
equal to ____% of the average daily net assets of the Fund.
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 May 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>
------------------------------- ------------------------------ =============================
Trustee Aggregate Compensation from Total Compensation from
Trust Trust and Fund Complex Paid
to Trustees*
------------------------------- ------------------------------ =============================
------------------------------- ------------------------------ =============================
<S> <C> <C>
Laurence B. Ashkin $4,763 $75,000
------------------------------- ------------------------------ =============================
------------------------------- ------------------------------ =============================
$2,381 $75,500
Charles A. Austin, III
------------------------------- ------------------------------ =============================
------------------------------- ------------------------------ =============================
$2,321 $73,833
K. Dun Gifford
------------------------------- ------------------------------ =============================
------------------------------- ------------------------------ =============================
$3,046 $97,000
James S. Howell
------------------------------- ------------------------------ =============================
------------------------------- ------------------------------ =============================
$2,321 $73,833
Leroy Keith Jr.
------------------------------- ------------------------------ =============================
------------------------------- ------------------------------ =============================
$2,381 $75,000
Gerald M. McDonnell
------------------------------- ------------------------------ =============================
------------------------------- ------------------------------ =============================
$2,747 $86,500
Thomas L. McVerry
------------------------------- ------------------------------ =============================
------------------------------- ------------------------------ =============================
$2,321 $73,833
William Walt Pettit
------------------------------- ------------------------------ =============================
------------------------------- ------------------------------ =============================
$2,313 $73,625
David M. Richardson
------------------------------- ------------------------------ =============================
------------------------------- ------------------------------ =============================
$2,381 $77,001
Russell A. Salton, III
------------------------------- ------------------------------ =============================
------------------------------- ------------------------------ =============================
$2,608 $85,335
Michael S. Scofield*
------------------------------- ------------------------------ =============================
------------------------------- ------------------------------ =============================
$2,321 $73,833
Richard J. Shima
------------------------------- ------------------------------ =============================
</TABLE>
* As of January 1, 2000, Michael S. Scofield will become
Chairman of the Board and James S. Howell will become Trustee
of Emeritis.
**Certain Trustees have elected to defer all or
part of their total compensation for the twelve months ended
May 31, 1999. The amounts listed below will be payable in
later years to the respective Trustees:
Austin $10,800
Howell $74,933
McDonnell $71,667
McVerry $83,000
Pettit $70,333
Salton $73,667
Scofield $21,950
SERVICE PROVIDERS
Administrator
Evergreen Investment Services, Inc. ("EIS") serves as administrator to
the Fund, subject to the supervision and control of the Trust's Board of
Trustees. EIS provides the Fund with facilities, equipment and personnel and is
entitled to receive a fee 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. EIS is entitled to receive from the
Fund an annual fee at a rate of 0.10% of the Fund's average daily net assets.
Transfer Agent
Evergreen Service Company ("ESC"), a subsidiary of First Union
Corporation, is the Fund's 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. The 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 accounts are maintained on the system in order to facilitate
historical and tax information.
Distributor
Evergreen Distributor, Inc. ("EDI") markets the Fund through
broker-dealers and other financial representatives. Its address is 90 Park
Avenue, New York, NY 10016.
Independent Auditors
______________, ______________, Boston, Massachusetts 02110, audits the
financial statements of the Fund.
Custodian
State Street Bank and Trust Company keeps custody of the Fund's
securities and cash and performs other related duties. The custodian's address
is 225 Franklin Street, Boston, Massachusetts 02110.
Legal Counsel
Sullivan & Worcester LLP provides legal advice to the Fund. Its address
is 1025 Connecticut Avenue, N.W., Washington, D.C. 20036.
<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 or the Class 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 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
determining the liquidity of Rule 144A securities, the Trustees will consider:
(1) the frequency of trades and quotes for the security; (2) the number of
dealers willing to purchase or sell the security and the number of other
potential buyers; (3) dealer undertakings to make a market in the security; and
(4) the nature of the security and the nature of the marketplace trades.
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
("SEC") 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. With certain exceptions, 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.
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 and Institutional Service 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 and
Institutional Service 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.
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 an 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.
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:
[OBJECT OMITTED]
P = initial payment of $1,000
T = average annual 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:
[OBJECT OMITTED] [OBJECT OMITTED]
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:
[OBJECT OMITTED]
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:
[OBJECT OMITTED]
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 annually on 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.
The shareholder-related administrative service fees are accrued daily
and paid at least annually and are charged as accrued. The shareholder-related
administrative service fees are used for advertising and marketing and as a
"service fee" to the broker-dealer for additional shareholder services.
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, as
amended. (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 or
U.S. Government 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 or U.S.
Government 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 Shareholders of Municipal Bond Funds
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, as amended.) 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.
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 Evergreen Asset Management Company ("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
The foregoing is qualified in its entirety by reference to each Trust's
Declaration of Trust.
Description of Shares
The Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest of series and classes of shares. Each share of
the Fund represents an equal proportionate interest with each other share of
that series and/or class. Upon liquidation, shares are entitled to a pro rata
share of the Trust based on the relative net assets of each series and/or class.
Shareholders have no preemptive or conversion rights. Shares are redeemable and
transferable.
Voting Rights
Under the terms of the Declaration of Trust, the Trust is not required
to hold annual meetings. 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.,
OppenheimerFunds, 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.
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, Michael Scofield, K. Dun Gifford 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>
<CAPTION>
Name Position with Trust Principal Occupations for Last Five Years
<S> <C> <C>
Laurence B. Ashkin Trustee Real estate developer and construction consultant; and
(DOB: 2/2/28) President of Centrum Equities (real estate development) and
Centrum Properties, Inc.(real estate development).
Charles A. Austin III Trustee Investment Counselor to Appleton Partners, Inc.(investment
(DOB: 10/23/34) advice); former Director, Executive Vice President and
Treasurer, State Street Research & Management Company
(investment advice); Director, The Andover Companies
(insurance); and Trustee, Arthritis Foundation of New
England.
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 (leather goods purveyor); former
Managing Partner, Roscommon Capital Corp.; former Chief
Executive Officer, Gifford Gifts of Fine Foods; former
Chairman, Gifford, Drescher & Associates (environmental
consulting).
Leroy Keith, Jr. Trustee Chairman of the Board and Chief Executive Officer, Carson
(DOB: 2/14/39) Products Company (manufacturing); Director of Phoenix Total
Return Fund and Equifax, Inc. (worldwide information
management); 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.
(communications), 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 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 (property/
casualty insurance), and Enhance Financial Services, Inc.
(financial guaranty insurance); 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.(investment banking, specializing in the
insurance industry)
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 National 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.
*Address: BISYS Fund Services, 90 Park Avenue, New York, New York 10016
**Address: BISYS, 3435 Stelzer Road, Columbus, Ohio 43219-8001
</TABLE>
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.
COMPARISON OF LONG-TERM BOND RATINGS
- ----------------- --------- ---------- ========================================
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
- ----------------- --------- ---------- ========================================
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>
ANNUAL REPORT
SEPTEMBER 30, 1999
DAVIS TAX-FREE
HIGH INCOME FUND
[DAVIS FUNDS LOGO]
<PAGE>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
================================================================================
Dear Shareholder,
Despite 1999's difficult bond market environment, the Davis Tax-Free High Income
Fund continues to be one of the top-performing municipal bond funds on a
risk-adjusted basis. Your Fund's Class A and Class B shares enjoy Morningstar's
highest ***** (five-star) rating for risk-adjusted performance over every time
period measured.(1)
In terms of absolute performance, the Fund's Class A shares declined 0.61%
(based on net asset value) for the one-year period ended September 30, 1999.(2)
While we view this as a disappointing result, your Fund did outperform its peer
group, with the 52 high-yield municipal bond funds tracked by Lipper Analytical
Services registering an average decline of 1.54% for the same time period.(3)
In addition, the credit quality and liquidity of the Fund's portfolio are
substantially better than the average high-yield fund--meaning your Fund took
far less risk in achieving its results.
A TRYING TIME FOR BONDS
The year 1999 is on track to becoming the worst year for the bond market since
1927. The yield on the 30-year U.S. Treasury "long bond" increased 96 basis
points from 5.09% to 6.05% and the price of the bond went down by 13% in the
first nine months of the year.
The municipal market also posted poor results--with the yield on the average
AAA-rated municipal rising 79 basis points from 4.95% to 5.74%, resulting in a
price drop of around 11% over the same time frame. A primary reason for the
municipal market's negative performance was lack of institutional demand. Large
insurance companies, normally big buyers of tax-free municipal bonds, had less
need for tax-free income because of lower profitability. In addition, municipal
bond funds in general were experiencing net shareholder redemptions and were
selling more municipal bonds than they were buying in order to meet those
redemptions.
Overall, we believe the bond markets today offer investors great value and
municipal securities in particular provide exceptional value. Yields on
AAA-rated municipal bonds have risen to about 95% of U.S. Treasury yields--the
highest this percentage has been since the mid-1990s. These yields make the case
for owning tax-free municipals compelling, particularly for investors in higher
tax brackets.
At the same time, the yield spreads between high-quality and low-quality bonds
have widened from about 25 basis points at the beginning of year to about 45
basis points at the end of September. This means lower quality bonds have
performed worse than higher quality bonds.
In this uncertain environment, the Fund continued to upgrade the credit quality
of its portfolio as it has done for several years. The average credit quality of
the rated securities in our portfolio is AA--an investment-grade rating
considerably higher than the credit quality rating of most high-yield municipal
funds.(4) And the percentage of nonrated securities is around 7%, the lowest
level it has been since June, 1990.
As a further risk-reducing strategy, the Fund is well diversified with 377
positions from issuers in most states and Puerto Rico. Because even our biggest
holdings each represent less than 2 1/2% of the portfolio, no one position by
itself should have a substantial impact on the Fund's overall results.
<PAGE>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
================================================================================
MANAGING FOR RISK-ADJUSTED PERFORMANCE
The Davis Tax-Free High Income Fund continues to employ the same disciplined
investment approach and intensive research process that it used to achieve its
top risk-adjusted performance rating. We constantly evaluate each bond's credit
quality and security characteristics in terms of upside potential and downside
protection. Our objective is to maximize total return relative to the amount of
risk taken and to optimize tax-free income. We also monitor the characteristics
of the portfolio as a whole in order to assure proper portfolio
diversification.(5)
The bonds we own possess a variety of special characteristics that have made
them more resilient in the down market we have experienced in 1999. For example,
we own higher coupon bonds with shorter maturities and lower durations. In
addition, the Fund's strategy of investing in cushion bonds--a principal
investment focus for several years--proved beneficial in this environment.
Cushion bonds are bonds with above-average interest coupons trading at
relatively low prices because the market expects them to be called in by the
issuer long before maturity, but that we think are unlikely to be called for
various structural reasons. Because the bonds are purchased at fairly low
prices, the Fund has some protection or cushion if the overall market drops.
Furthermore, if the bonds remain outstanding after the anticipated call date--as
has occurred in many cases--the Fund continues collecting the high tax-free
income.
By employing these strategies, the Fund sacrificed some upside potential to gain
a more than proportionate amount of downside protection. As the market declined,
we outperformed on a relative basis.
As the market continued to trade off in the second and third quarter of 1999,
many of the Fund's cushion bonds lost their price cushion and we sold them. We
also sold off lower quality bonds that were somewhat defensive. At the same
time, we began gradually moving into more aggressive, higher quality bonds with
better upside potential, such as zero coupon bonds and lower coupon, AAA-rated
insured bonds--even picking up some additional yield in certain instances. This
turned out to be a smart move, as credit quality spreads widened and higher
quality bonds performed relatively better than lower grade issues.
Going forward, we plan to pursue the same strategies, assuming interest rates
stabilize or trend lower as we expect. That is, we intend to maintain our core
portfolio and, as opportunities arise, make commitments to bonds that offer more
yield per credit quality and more upside potential while giving up only a little
bit of downside protection. In a flat to declining interest rate environment,
that seems like a good trade-off to us. As always, we remain committed to
helping shareholders build and preserve wealth through prudent strategies
focused on minimizing volatility and optimizing long-term, risk-adjusted
performance.
Sincerely,
/s/ Shelby M.C. Davis /s/ B. Clark Stamper
Shelby M.C. Davis B. Clark Stamper
Chief Investment Officer Portfolio Manager
November 5, 1999
2
<PAGE>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
================================================================================
This Annual Report is authorized for distribution only when accompanied or
preceded by a current prospectus of Davis Tax-Free High Income Fund which
contains more information about risks, fees and expenses. Please read the
prospectus carefully before investing or sending money.
(1) Morningstar proprietary ratings reflect historical risk-adjusted performance
as of September 30, 1999. Subject to change every month, Morningstar ratings are
calculated from a fund's three-, five-, and ten-year average annual total
returns in excess of 90-day Treasury bill (T-bill) returns, with appropriate fee
adjustments and a risk factor that reflects fund performance below 90-day T-bill
returns. The Fund's Class A shares (inception date December 1, 1994) were rated
against 1611 short-term municipal bond funds for the three-year period. The
Fund's Class B shares were rated against 1611, 1241, and 375 short-term
municipal bond funds for the three-, five-, and ten-year periods, respectively.
Ten percent of the funds in an investment category receive five stars; the next
22.5% receive four stars; the next 35% receive three stars; the next 22.5%
receive two stars, and 10% receive one star. Star ratings for the Fund's other
classes may vary and are available only for those classes with at least three
years of performance history. Past performance is not a guarantee of future
results.
(2) Total return assumes reinvestment of dividends and capital gain
distributions. Past performance is not a guarantee of future results. Investment
return and principal value will vary so that, when redeemed, an investor's
shares may be worth more or less than when purchased. Below are the average
annual total returns for all classes of shares for Davis Tax-Free High Income
Fund for the periods ended September 30, 1999.
* (Without a 4.75% sales charge or any applicable contingent deferred sales
charge taken into consideration for the period ended September 30, 1999)
- --------------------------------------------------------------------------------
FUND NAME 1 YEAR 5 YEAR 10 YEAR INCEPTION
- --------------------------------------------------------------------------------
Davis Tax-Free High Income A (0.61%) N/A N/A 5.72% - 12/01/94
- --------------------------------------------------------------------------------
Davis Tax-Free High Income B (1.39%) 4.63% 5.92% 6.50% - 03/21/85
- --------------------------------------------------------------------------------
Davis Tax-Free High Income C (1.34%) N/A N/A 2.39% - 08/18/97
- --------------------------------------------------------------------------------
Davis Tax-Free High Income Y (0.51%) N/A N/A 2.88% - 10/06/97
- --------------------------------------------------------------------------------
** (With a 4.75% sales charge or any applicable contingent deferred sales charge
taken into consideration for the period ended September 30, 1999)
- --------------------------------------------------------------------------------
FUND NAME 1 YEAR 5 YEAR 10 YEAR INCEPTION
- --------------------------------------------------------------------------------
Davis Tax-Free High Income A (5.34%) N/A N/A 4.67% - 12/01/94
- --------------------------------------------------------------------------------
Davis Tax-Free High Income B (5.16%) 4.31% 5.92% 6.50% - 03/21/85
- --------------------------------------------------------------------------------
Davis Tax-Free High Income C (2.28%) N/A N/A 2.39% - 08/18/97
- --------------------------------------------------------------------------------
Davis Tax-Free High Income Y (0.51%) N/A N/A 2.88% - 10/06/97
- --------------------------------------------------------------------------------
(3) Lipper Analytical Services rankings are based on total returns but do not
consider sales charges.
(4) Standard & Poor's Corporate Bond Ratings - Debt rated AA has a very strong
capacity to pay interest and repay principal, and differs from the highest rated
issues only in small degree.
(5) There can be no guarantee that the Fund will achieve its goals.
An investment in the Fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
3
<PAGE>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
P.O. Box 1688, 124 East Marcy Street
Santa Fe, New Mexico 87501
================================================================================
TABLE OF KEY STATISTICS
NET ASSET VALUE TOTAL RETURNS
- --------------------------------------------------------------------------------
Class A Shares 3 mos. (1.02%) 6 mos. (1.80%) 12 mos. (0.61%)
Class B Shares 3 mos. (1.22%) 6 mos. (2.19%) 12 mos. (1.39%)
Class C Shares 3 mos. (1.20%) 6 mos. (2.15%) 12 mos. (1.34%)
Class Y Shares 3 mos. (1.09%) 6 mos. (1.81%) 12 mos. (0.51%)
- --------------------------------------------------------------------------------
NET ASSET VALUE AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
Class A Shares 3 yrs. 4.46% Since inception (December 1, 1994) 5.72%
Class B Shares 3 yrs. 3.68% 5 yrs. 4.63% 10 yrs. 5.92%
Class C Shares Since inception (August 18, 1997) 2.39%
Class Y Shares Since inception (October 6, 1997) 2.88%
- --------------------------------------------------------------------------------
COMPOSITION OF THE FUND'S PORTFOLIO BY QUALITY RATING AS A PERCENTAGE OF
TOTAL ASSETS AT SEPTEMBER 30, 1999
Moody's/S&P Fund's Assessment of General Definition
Rating Category Percentage Non-rated Securities of Bond Quality
- - --------------- ---------- -------------------- ---------------
Aaa/AAA.................. 58.15% 0.49% Highest quality
Aa/AA.................... 13.45% 0.00% High quality
A/A...................... 10.44% 0.67% Upper medium grade
Baa/BBB.................. 6.92% 1.08% Medium grade
Ba/BB.................... 1.08% 3.96% Some speculative
elements
B/B...................... 0.47% 1.19% Speculative
Caa/CCC.................. 0.00% 0.00% More speculative
Ca, C/CC, C, D........... 0.00% 0.00% Very speculative,
may be in default
Not Rated................ 7.39% 0.00% Not rated by
Moody's or S&P
Short-term Investments... 2.10% 0.00%
------- -----
100.00% 7.39%
Average credit rating: AA
Weighted average maturity: 18.26 years
4
<PAGE>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
COMPARISON OF DAVIS TAX-FREE HIGH INCOME FUND, INC., CLASS A SHARES AND LEHMAN
BROTHERS 10 YEAR REVENUE BOND INDEX
================================================================================
Average Annual Total Return For the Periods ended September 30, 1999.
- - ---------------------------------------------------------------
CLASS A SHARES
(This calculation includes an initial sales charge of 4 3/4%).
One Year ......................................... (5.34%)
Life of Class (December 1, 1994
through September 30, 1999).............. 4.67%
- - ---------------------------------------------------------------
$10,000 INVESTED AT INCEPTION. Let's say you invested $10,000 in Davis Tax-Free
High Income Fund, Inc. A shares on December 1, 1994 (inception of class) and
paid a 4 3/4% sales charge. As the chart below shows, by September 30, 1999 the
value of your investment would have grown to $12,467 - a 24.67% increase on your
initial investment. For comparison, the Lehman Brothers 10 Year Revenue Bond
Index is also presented on the chart below.
Lehman Brothers
Davis Tax-Free High Income Fund Class A 10 Year Revenue
--------------------------------------- ---------------
12/1/94 9,525 10,000
9/30/95 10,285 11,652
9/30/96 10,936 12,162
9/30/97 11,774 13,283
9/30/98 12,543 14,449
9/30/99 12,467 14,433
Lehman Brothers 10 Year Revenue Bond Index is an unmanaged index and has no
specific investment objective. The index used includes gross dividends
reinvested, but does not take into account any sales charge.
The performance data for Davis Tax-Free High Income Fund, Inc. contained in this
report represents past performance and assumes that all distributions were
reinvested, and should not be considered as an indication of future performance
from an investment in the Fund today. The investment return and principal value
will fluctuate so that shares may be worth more or less than their original cost
when redeemed.
5
<PAGE>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
COMPARISON OF DAVIS TAX-FREE HIGH INCOME FUND, INC., CLASS B SHARES AND LEHMAN
BROTHERS 10 YEAR REVENUE BOND INDEX
================================================================================
Average Annual Total Return For the Periods ended September 30, 1999.
- - ---------------------------------------------------------------
CLASS B SHARES (This calculation includes applicable contingent
deferred sales charges.)
One Year............................................... (5.16%)
Five Years.............................................. 4.31%
Ten Years............................................... 5.92%
- - ---------------------------------------------------------------
$10,000 INVESTED OVER TEN YEARS. Let's say you invested $10,000 in Davis
Tax-Free High Income Fund, Inc. B shares on September 30, 1989. As the chart
below shows, by September 30, 1999 the value of your investment would have grown
to $17,775 - a 77.75% increase on your initial investment. For comparison, the
Lehman Brothers 10 Year Revenue Bond Index is also presented on the chart below.
Lehman Brothers
Davis Tax-Free High Income Fund Class B 10 Year Revenue
--------------------------------------- ---------------
9/30/89 10,000 10,000
9/30/90 10,537 10,675
9/30/91 11,600 12,175
9/30/92 12,635 13,435
9/30/93 13,784 15,214
9/30/94 14,172 14,957
9/30/95 15,113 16,704
9/30/96 15,949 17,542
9/30/97 17,047 19,159
9/30/98 18,026 20,841
9/30/99 17,775 20,818
Lehman Brothers 10 Year Revenue Bond Index is an unmanaged index and has no
specific investment objective. The index used includes gross dividends
reinvested, but does not take into account any sales charge.
The performance data for Davis Tax-Free High Income Fund, Inc. contained in this
report represents past performance and assumes that all distributions were
reinvested, and should not be considered as an indication of future performance
from an investment in the Fund today. The investment return and principal value
will fluctuate so that shares may be worth more or less than their original cost
when redeemed.
6
<PAGE>
DAVIS TAX-FREE HIGH INCOME FUND, INC. COMPARISON OF DAVIS
TAX-FREE HIGH INCOME FUND, INC., CLASS C SHARES AND LEHMAN BROTHERS 10 YEAR
REVENUE BOND INDEX
================================================================================
Average Annual Total Return For the Periods ended September 30, 1999.
- - ----------------------------------------------------------------------------
CLASS C SHARES
(This calculation includes any applicable contingent deferred sales charge.)
One Year....................................................... (2.28%)
Life of Class (August 18, 1997 through September 30, 1999) .... 2.39%
- - ----------------------------------------------------------------------------
$10,000 INVESTED ON AUGUST 31, 1997. Let's say you invested $10,000 in Davis
Tax-Free High Income Fund, Inc. C shares on August 31, 1997. As the chart below
shows, by September 30, 1999 the value of your investment would have grown to
$10,512 - a 5.12% increase on your initial investment. For comparison, the
Lehman Brothers 10 Year Revenue Bond Index is also presented on the chart below.
Lehman Brothers
Davis Tax-Free High Income Fund Class C 10 Year Revenue
--------------------------------------- ---------------
8/31/97 10,000 10,000
9/30/97 10,077 10,121
9/30/98 10,655 11,009
9/30/99 10,512 10,996
Lehman Brothers 10 Year Revenue Bond Index is an unmanaged index and has no
specific investment objective. The index used includes gross dividends
reinvested, but does not take into account any sales charge.
The performance data for Davis Tax-Free High Income Fund, Inc. contained in this
report represents past performance and assumes that all distributions were
reinvested, and should not be considered as an indication of future performance
from an investment in the Fund today. The investment return and principal value
will fluctuate so that shares may be worth more or less than their original cost
when redeemed.
7
<PAGE>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
COMPARISON OF DAVIS TAX-FREE HIGH INCOME FUND, INC., CLASS Y SHARES AND LEHMAN
BROTHERS 10 YEAR REVENUE BOND INDEX
================================================================================
Average Annual Total Return For the Periods ended September 30, 1999.
- - ------------------------------------------------------------------------
CLASS Y SHARES
(There is no sales charge applicable to this calculation.)
One Year...................................................... (0.51%)
Life of Class (October 6, 1997 through September 30, 1999) ... 2.88%
- - ------------------------------------------------------------------------
$10,000 INVESTED ON OCTOBER 31, 1997. Let's say you invested $10,000 in Davis
Tax-Free High Income Fund, Inc. Y shares on October 31, 1997. As the chart below
shows, by September 30, 1999 the value of your investment would have grown to
$10,545 - a 5.45% increase on your initial investment. For comparison, the
Lehman Brothers 10 Year Revenue Bond Index is also presented on the chart below.
Lehman Brothers
Davis Tax-Free High Income Fund Class Y 10 Year Revenue
--------------------------------------- ---------------
10/31/97 10,000 10,000
9/30/98 10,599 10,807
9/30/99 10,545 10,795
Lehman Brothers 10 Year Revenue Bond Index is an unmanaged index and has no
specific investment objective. The index used includes gross dividends
reinvested, but does not take into account any sales charge.
The performance data for Davis Tax-Free High Income Fund, Inc. contained in this
report represents past performance and assumes that all distributions were
reinvested, and should not be considered as an indication of future performance
from an investment in the Fund today. The investment return and principal value
will fluctuate so that shares may be worth more or less than their original cost
when redeemed.
8
<PAGE>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
PORTFOLIO HOLDINGS AS OF SEPTEMBER 30, 1999
================================================================================
PORTFOLIO MAKEUP SECTOR WEIGHTINGS
(% OF FUND NET ASSETS) (% OF PORTFOLIO)
---------------------- ----------------
[PIE CHART] [PIE CHART]
Other Assets & Liabilities 2.0% Revenue Bonds 27.7%
Municipal Bonds 98.0% Poll. Ctrl. Rev. 5.0%
Utilities 8.0%
General Obligation 7.5%
Education 6.6%
Health 25.1%
Housing 6.0%
Other 2.4%
Ind. Dev. Rev. 11.7%
<TABLE>
<CAPTION>
% OF FUND
TOP 10 HOLDINGS STATE NET ASSETS
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Hawaii St. Airports System Rev. Bds. (Second Series), 7.00%, 07/01/18 Hawaii 2.36%
Ohio St. Air Quality Dev. Auth. Rev. Ref. Bds. (Pollution Ctl./Ohio Edison)
Ser. `90, 7.45%, 03/01/16 Ohio 1.74%
Manchester, NH, Gen. Airport Rev. Bds., (MBIA Insured) Ser. `A,
4.50%, 01/01/28 New Hampshire 1.73%
Louisville & Jefferson Cnty., KY, Riverport Auth. Mtg. Rev. Bds.,
Ser. `86, 7.875%, 05/15/16 Kentucky 1.63%
Port Auth NY & NJ Rev. Bds. (Cons.-Sixty-Ninth) Ser. `90, 7.125%,
06/01/25 New York 1.62%
Illinois Hlth. Fac. Auth. Rev. Ref. Bds. (Hinsdale Hosp.) Ser. `90 A,
9.00%, 11/15/15 Illinois 1.44%
Chicago, IL, Pub. Bldg. Comm. Mtg. Rev. Bds. (MBIA Insured) Ser. A,
7.125%, 01/01/15 Illinois 1.42%
Illinois Hlth. Fac. Auth. Rev. Bds. (Hosp. Sisters Svcs.) Ser. A,
5.00%, 06/01/18 Illinois 1.39%
Indiana Hlth. Fac. Auth. Hosp. Rev. Bds., Ser. A (Sisters St. Francis Hlth.),
5.00%, 11/01/29 Indiana 1.34%
Port Auth NY & NJ Rev. Bds. (Cons.-Seventy-Second) Ser. `92, 7.35%,
10/01/27 New York 1.22%
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS
At September 30, 1999
=======================================================================================================================
VALUE
PRINCIPAL (NOTE 1)
--------- --------
<S> <C> <C>
MUNICIPAL BONDS - (98.01%)
ALABAMA - (1.85%)
$ 3,670,000 Birmingham Med. Ctr., Eastern Alabama Special Care Fac. Rev. Ref. Bds.
(MBIA Insured), 7.25%, 07/01/15........................................................ $ 3,679,395
295,000 Houston Cnty., AL, (Southeast Alabama Med. Ctr. Prj.) (MBIA Insured),
7.625%, 04/01/07....................................................................... 295,965
2,000,000 Lauderdale Cnty & Florence, AL, Hlth. Care Fac. Rev. Bds., Unlimited
G.O., (MBIA Insured) Ser. A (Coffee Hlth. Group), 5.25%, 07/01/24...................... 1,814,840
770,000 Selma, AL, Ind'l. Dev. Brd. Ind'l. Dev. Rev. Bds., (Hammermill Plant Prj.)
Ser. `79, 6.875%, 04/01/04............................................................. 777,515
500,000 The Special Care Fac. Fin. Auth. of the City of Pell City, AL, 1st Mtg.
Rev. Bds. (The Village of Cook Springs, Inc. Prj.) Ser. `93-A,
8.50%, 07/01/18........................................................................ 535,950
1,000,000 The West Jefferson Amusement and Public Park Auth. (Alabama) 1st Mtg.
Rev. Bds. (Visionland Alabama Prj.) Ser. `96, 7.50%, 12/01/08.......................... 1,129,590
------------
8,233,255
------------
ARIZONA - (1.10%)
1,000,000 Arizona Educ. Loan Marketing Corp., Educ. Loan Rev. Bds., Ser. B,
7.30%, 09/01/03........................................................................ 1,022,390
1,000,000 Arizona Educ. Loan Marketing Corp., Educ. Loan Rev. Bds., Ser. B,
7.35%, 09/01/04........................................................................ 1,022,430
775,000 Arizona Educ. Loan Marketing Corp., Educ. Loan Rev. Bds., Ser. B,
7.375%, 09/01/05....................................................................... 792,399
230,000 Coconino & Mohave Cntys., AZ, Unified School Dist. No. 6, Cap.
Appreciation Ref. Bds., Zero Cpn., 07/01/02 (d)........................................ 202,117
620,000 The IDA of the City of Casa Grande, AZ, Dev. Rev. Bds. (Five Points
Redevelopment Prj.), Sr. Bds., 8.25%, 12/01/15......................................... 630,683
500,000 The IDA of the City of Sierra Vista, 1st Mtg. Nursing Home Ref. Rev. Bds.
(Sierra Vista Medical Investors, Ltd. Prj.) Ser. `94A, 8.50%, 08/01/10................. 515,640
260,000 Pima, AZ, Ind'l. Dev. Auth. Hlth. Care Corp. Rev. Bds. Unrefunded, Ser. `88,
8.00%, 07/01/13........................................................................ 263,414
400,000 Pima, AZ, Ind'l. Dev. Auth. Multi. Fam. Mtg. Rev. Bds. (Broadway Prop.)
(FHA Insured) Ser. `85, 8.15%, 12/01/25................................................ 437,132
------------
4,886,205
------------
CALIFORNIA - (9.03%)
765,000 California Hlth. Fac. Auth. Insured Hosp. Rev. Bds. FGIC Insured (Victor
Valley Community Hosp.) `84 Ser. A, 9.875%, 07/01/12................................... 779,918
345,000 California Hlth. Fac. Auth. Insured Hosp. Rev. Bds. (Victor Valley
Community Hosp.) `84 Ser. A, 9.875%, 07/01/12.......................................... 346,580
3,955,000 California Hlth. Fac. Fin. Auth. Insured Hlth. Fac. Rev. Bds.
(Henry Mayo Newhall Memorial Hosp.) Ser. `88A, 8.00%, 10/01/18......................... 4,005,743
500,000 California Hlth. Fac. Fin. Auth. Insured Hosp. Rev. Bds. (H.E.L.P. Group)
Ser. A, 7.00%, 08/01/21................................................................ 527,610
140,000 California Hlth. Fac. Fin. Auth. Rev. Bds. (Cnty. Prj.) Ser. `86B,
7.20%, 01/01/12........................................................................ 140,202
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1999
=======================================================================================================================
VALUE
PRINCIPAL (NOTE 1)
--------- --------
<S> <C> <C>
MUNICIPAL BONDS - CONTINUED
CALIFORNIA - CONTINUED
$ 155,000 California Hsg. Fin. Agy. Rev. Home Mtg Bds., Cap. Appreciation,
Ser. D, Zero Cpn., 08/01/20 (d)........................................................ $ 31,060
760,000 California Hsg. Fin. Agy. Rev. Home Mtg Bds., Ser. C, 7.60%, 08/01/30.................... 771,248
1,430,000 California Hsg. Fin. Agy. Rev. Home Mtg Bds., Ser. G, 7.25%, 08/01/17.................... 1,463,748
585,000 California Hsg. Fin. Agy. Rev. Insured Hsg. Bds., Ser. B,
8.625%, 08/01/15....................................................................... 596,636
430,000 California Pub. Cap. Impts. Fac. Auth. Rev. Bds. (Pooled Prj.) Ser. B,
8.10%, 03/01/18........................................................................ 437,869
600,000 California St. Veteran's Bds., 6.15%, 02/01/11........................................... 603,900
200,000 California St. Veteran's Bds., 6.20%, 02/01/12........................................... 201,252
250,000 California St. Veteran's Bds., 6.20%, 02/01/16........................................... 251,203
3,000,000 California St. Veteran's Bds., 6.375%, 02/01/27.......................................... 3,015,840
800,000 City of Napa, CA, `92, Ind. Rev. Ref. Bds. (Napa Motel and Restaurant),
8.50%, 12/01/07........................................................................ 804,304
250,000 Cnty. of Marin, Mtg. Rev. Bds., Ser. `84A (FHA Insured Mtg. Loan -
Marion Park Apts. Prj.), Zero Cpn., 04/01/01 (d)....................................... 216,465
1,000,000 Cnty. of Marin, Multifam. Hsg. Rev. Bds., Ser. `84B (Marion Park
Apts. Prj.), Zero Cpn., 04/01/07 (d)................................................... 474,990
5,000,000 El Camino, CA, Hosp. Dist. Rev. Ref. Bds., Ser. A, 6.25%, 08/15/17....................... 5,052,200
2,545,000 Elk Grove, CA, Uni. School Dist. Special Tax Cap. Appreciation (Comm.
Facs. - Dist. 1)(MBIA Insured) Zero Cpn., 12/01/17 (d)................................. 891,106
2,790,000 Elk Grove, CA, Uni. School Dist. Special Tax Cap. Appreciation (Comm.
Facs. - Dist. 1)(MBIA Insured) Zero Cpn., 12/01/18 (d)................................. 913,502
1,730,000 Lancaster, CA, School Dist. Ctfs. of Participation (FSA Proj.) Capital
Appreciation Bds., Refunded, Zero Cpn., 04/01/19 (d)................................... 558,721
1,730,000 Lancaster, CA, School Dist. Ctfs. of Participation (FSA Proj.) Capital
Appreciation Bds., Refunded, Zero Cpn., 04/01/22 (d)................................... 466,495
680,000 Los Angeles, CA, Community Redevelopment Agy. Bds., `87 Ser. G,
6.75%, 07/01/10........................................................................ 685,107
200,000 Los Angeles, CA, Community Redevelopment Agy. Bds., Prerefunded
`87 Ser. G, 6.75%, 07/01/10............................................................ 201,502
360,000 Los Angeles, CA, Home Mtg. Rev. Bds. (GNMA Mtg. Sec. Prog.), 8.10%,
05/01/17............................................................................... 366,466
100,000 Los Angeles, CA, Multi. Fam. Hsg. Rev. Ref. Bds., Ser. `91 A, 7.00%,
05/01/21 (c)........................................................................... 102,379
175,000 Los Angeles, CA, Multi. Fam. Rev. (FHA Insured Multi-Fam. Hsg. Mtg.
Rev. Bds.) Park Parthenia Prj., 7.30%, 07/20/11........................................ 178,934
2,635,000 Menlo Park, CA, Community Dev. Agy. Multi. Fam. Mtg. Rev. Bds.
(Gateway Prj.) (FHA Insured) Ser. `87 A, 8.25%, 12/01/28............................... 2,703,694
2,000,000 Monrovia, CA, Redev. Agy., Tax Allocation Rev. Ref. Bds. (Cent. Redev.
Prj.-Area 1), Ser. `92, 6.70%, 05/01/21................................................ 2,167,440
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1999
=======================================================================================================================
VALUE
PRINCIPAL (NOTE 1)
--------- --------
<S> <C> <C>
MUNICIPAL BONDS - CONTINUED
CALIFORNIA - CONTINUED
$ 900,000 New Haven, CA, Unified School Dist., Cap. Appreciation Ref. Bds.,
Unlimited G.O., Zero Cpn., 08/01/13 (d)................................................ $ 423,684
985,000 New Haven, CA, Unified School Dist., Cap. Appreciation, Unlimited G.O.,
Ser. B, Zero Cpn., 08/01/14 (d)........................................................ 432,829
1,200,000 New Haven, CA, Unified School Dist., Cap. Appreciation, Unlimited G.O.,
Ser. B, Zero Cpn., 08/01/15 (d)........................................................ 493,524
1,400,000 New Haven, CA, Unified School Dist., Cap. Appreciation, Unlimited G.O.,
Ser. B, Zero Cpn., 08/01/16 (d)........................................................ 539,938
1,650,000 New Haven, CA, Unified School Dist., Cap. Appreciation, Unlimited G.O.,
Ser. B, Zero Cpn., 08/01/17 (d)........................................................ 596,145
1,390,000 Palmdale, CA, School Dist. Ctfs. of Participation, Capital Appreciation
Bds., Zero Cpn., 10/01/18 (d).......................................................... 469,862
1,580,000 Palmdale, CA, School Dist. Ctfs. of Participation, Capital Appreciation
Bds., Zero Cpn., 10/01/22 (d).......................................................... 413,818
350,000 Ridgecrest, CA, Certificates of Participation Bds. (Ridgecrest Redev. Agy.)
Ser. `88, 7.60%, 03/01/03.............................................................. 359,828
680,000 Ridgecrest, CA, Certificates of Participation Bds. (Ridgecrest Redev. Agy.)
Ser. `88, 7.60%, 03/01/13.............................................................. 698,353
500,000 San Diego, CA, GNMA Collateralized Multi. Fam. Mtg. Rev. Bds.
(Island Gardens Apts. Prj.) Ser. `85B, 9.50%, 10/20/20................................. 502,165
3,915,000 San Francisco, CA, City & Cnty. Redev. Fin. Auth. Tax Allocation,
Ctfs. of Participation Bds., Ser. A, Zero Cpn., 08/01/17 (d)........................... 1,354,551
3,910,000 San Francisco, CA, City & Cnty. Redev. Fin. Auth. Tax Allocation,
Ctfs. of Participation Bds., Ser. A, Zero Cpn., 08/01/18 (d)........................... 1,270,007
500,000 San Luis Obispo, CA, Certificates of Participation Rev. Bds., Ser. `88,
7.25%, 06/01/08........................................................................ 501,400
1,400,000 Santa Maria, CA, Wtr. & Wastewtr. Certificates of Participation,
Ser. A, Zero Cpn., 08/01/27 (d)........................................................ 1,022,000
440,000 Torrance, CA, Hosp. Rev. Bds. (Torrance Mem. Hosp.) Ser. `87, 6.75%,
01/01/12............................................................................... 440,933
245,000 University, CA, Rev. Bds. (Faculty Residential Mtg.) Ser. `79, 7.20%,
09/01/12............................................................................... 245,630
1,500,000 Vacaville, CA, Pub. Fin. Auth. Tax Allocation Rev. Bds.
(Vacaville Redev. Prj.) (MBIA Insured) Ser. `902, 6.35%, 09/01/22.................... 1,553,325
------------
40,274,106
------------
COLORADO - (0.57%)
1,850,000 Colorado St. Student Obligation Bd. Auth. Student Ln. Sr. Sub. Rev. Bds.
Ser. II B, 6.20%, 12/01/08............................................................. 1,915,083
530,000 Colorado Student Obligation Bd. Auth. Student Ln. Rev. Bds.
Ser. A-3, 7.25%, 09/01/05.............................................................. 539,572
180,000 Hamilton Creek Metro Dist., Summit Cnty., CO, G.O., 11.25%, 12/01/04..................... 102,600
------------
2,557,255
------------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1999
=======================================================================================================================
VALUE
PRINCIPAL (NOTE 1)
--------- --------
<S> <C> <C>
MUNICIPAL BONDS - CONTINUED
CONNECTICUT - (0.30%)
$ 600,000 Connecticut Dev. Auth., Hlth. Care Rev. Bds. (Corp. for Independent Living
Prj.) Ser. `93B, 8.00%, 07/01/17....................................................... $ 678,966
650,000 Connecticut St. Higher Ed. Supplemental Ln. Auth. Rev. Bds., Ser. `90A,
7.375%, 11/15/05....................................................................... 664,196
------------
1,343,162
------------
DELAWARE - (0.58%)
830,000 Delaware Econ. Dev. Rev. Ref. Bds. (Supermarkets General Corp. Prj.)
Ser. `83, 10.875%, 12/01/03............................................................ 833,793
1,500,000 Delaware St. Econ. Dev. Auth. Rev. Bds. (Exempt Facs. Delmarva
P & L Co.) Ser. `90A, 7.60%, 03/01/20.................................................. 1,549,320
200,000 Delaware St. Econ. Dev. Comm. Multi. Fam. Mtg. Rev. Bds. Cap.
Appreciation & Def. Inc. Sec. (Chestnut Cross), 0%/9.75%, 07/20/20 (b)................. 211,912
------------
2,595,025
------------
FLORIDA - (5.37%)
540,000 Broward Cnty., FL, Hsg. Fin. Auth. Rev. Home Mtg., Ser. A, Cap.
Appreciation, Zero Cpn., 04/01/14 (d).................................................. 127,057
385,000 Charlotte Cnty., FL, IDR Ref. Bds. (Beverly Enterprises - Florida, Inc.
Prj.) Ser. `87, 10.00%, 06/01/11....................................................... 415,638
210,000 Dade Cnty., FL, Hlth. Fac. Auth. Hosp. Rev. Ref. Bds. (Miami Childrens
Hosp. Prj.) (FGIC Insured) Ser. `87, 6.875%, 08/15/17................................. 210,464
2,670,000 Dade Cnty., FL, Hlth. Fac. Auth. Hosp. Rev. Ref. Bds. (Miami Childrens
Hosp. Prj.) (MBIA/FGIC Insured) Ser. `87, 6.875%, 08/15/17............................ 2,675,901
215,000 Dade Cnty., FL, Hsg. Fin. Auth. Mtg. Rev. Bds. (Coll-Lihud Ltd. Apts.
Prj.) Ser. `84 H, 10.50%, 06/01/00..................................................... 216,348
935,000 Florida Hsg. Fin. Agy., 1st Mtg. Rev. Bds., Cap. Appreciation, Ser. `84,
Zero Cpn., 07/15/16 (d)................................................................ 121,111
900,000 Florida Hsg. Fin. Agy. (Southlake Apartments Prj. - D), 8.10%, 10/01/02.................. 864,099
5,545,000 Florida Hsg. Fin. Corp. Rev. Bds., Cap. Appreciation, (Logan's Pointe
Assoc. Ltd.) Zero Cpn., 12/01/29 (d)................................................... 797,981
5,000,000 Florida Hsg. Fin. Corp. Rev. Bds. (Florida Hsg. Fin. Corp.-CAB)
Zero Cpn., 07/01/30 (d)................................................................ 790,200
600,000 Gulf Breeze, FL, Rev. Bds., (MBIA Insured) 7.75%, 12/01/15.............................. 603,660
90,000 Highlands Cnty., FL, IDA (Beverly Enterprises - Florida, Inc. Prj.) Ser. `91,
9.25%, 07/01/07........................................................................ 98,511
500,000 Jacksonville, FL, Excise Taxes Rev. Bds., Ser. `77, 5.65%, 10/01/05...................... 525,660
460,000 Jacksonville Hlth. Fac. Auth. Hosp. Rev. Ref. Bds., Ser. `89A (Methodist
Hosp. Prj.), 8.00%, 10/01/15........................................................... 433,702
280,000 Jacksonville Hlth. Fac. Auth. Hosp. Rev. Ref. Bds., Ser. `89B (Methodist
Hosp. Prj.), 8.00%, 10/01/15........................................................... 260,666
178,680 Manatee Cnty., FL, Hsg. Fin. Auth. Mtg. Rev. Bds., Cap. Appreciation,
`83 Ser. A, Zero Cpn., 10/01/15 (d).................................................... 30,933
375,000 Melbourne, FL, Wtr. & Swr. Rev. Ref. Bds., Ser. `86C, 6.00%, 10/01/14.................... 378,338
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1999
=======================================================================================================================
VALUE
PRINCIPAL (NOTE 1)
--------- --------
<S> <C> <C>
MUNICIPAL BONDS - CONTINUED
FLORIDA - CONTINUED
$ 7,500,000 Miami-Dade Cnty., FL, Special Obligation Bds. (MBIA Insured) Ser. `97 B,
Zero Cpn., 10/01/32 (d)................................................................ $ 1,031,325
33,010,000 Miami-Dade Cnty., FL, Special Obligation Bds. (MBIA Insured) Ser. `97 B,
Zero Cpn., 10/01/33 (d)................................................................ 4,271,494
3,990,000 Miami-Dade Cnty., FL, Special Obligation Ref. Bds. (MBIA Insured)
Ser. `97 A, Zero Cpn., 10/01/24 (d).................................................... 895,117
3,800,000 Miami-Dade Cnty., FL, Special Obligation Ref. Bds. (MBIA Insured)
Ser. `97 B, Zero Cpn., 10/01/28 (d).................................................... 666,102
4,320,000 Miami-Dade Cnty., FL, Special Obligation Ref. Bds. (MBIA Insured)
Ser. `97 C, Zero Cpn., 10/01/13 (d).................................................... 1,958,472
290,000 Miami, FL, Special Obligation Bds. (MBIA Insured) `86 Ser. A, 7.375%,
07/01/06............................................................................... 292,500
745,000 Orange Cnty., FL, IDA (Beverly Enterprises - Florida, Inc. Prj.) Ser. `91,
9.25%, 08/01/10........................................................................ 798,670
175,000 Palm Beach Cnty., FL, Hsg. Fin. Auth. Sngl. Fam. Mtg. Rev. Bds. Cap.
Appreciation, Zero Cpn., 07/01/14 (d).................................................. 35,579
1,000,000 Pinellas Cnty., FL, Res. Recovery Rev. Ref. Bds. (MBIA Insured)
Ser. `90A, 6.90%, 10/01/04............................................................. 1,050,290
100,000 Pinellas Park, FL, Wtr. & Swr. Rev. Bds., Ser. `84 A, 10.00%, 10/01/02................... 100,498
2,750,000 St. Petersburg, FL, Hlth. Fac. Auth. Rev. Bds. (Allegany Hlth.-A)
(MBIA Insured) Ser. `85, 7.00%, 12/01/15.............................................. 2,957,213
225,000 South Indian River Wtr. Control Dist., Sect. 15A Improvement Bds. (Egret
Landing - Phase I), 8.00%, 11/01/18.................................................... 240,388
3,215,000 Tampa, FL, Home Mtg. Rev. Muni Multiplier Rev. Bds., Ser. `83 A,
Zero Cpn., 10/01/14 (d)................................................................ 589,792
470,000 Winter Garden, FL, IDR Ref. Bds. (Beverly Enterprises - Florida, Inc. Prj.)
Ser. `91, 8.75%, 07/01/12.............................................................. 507,078
------------
23,944,787
------------
GEORGIA - (1.02%)
200,000 Gainesville Redevelopment Auth., 1st Mtg. Rev. Bds. (Autumn Breeze
Personal Care Home, Inc. Prj.) Ser. `96A, 8.00%, 04/01/26.............................. 209,268
570,000 The Hsg. Auth. of Columbus, GA, Multifamily Hsg. Rev. Bds. (Columbus
Gardens Elderly Hsg. Prj.) Ser. `94, 8.25%, 01/01/24................................... 614,614
200,000 Liberty Cnty., IDA, Ind. Rev. Ref. Bds., Ser. `92 (LeConte Properties,
Inc. Prj.), 7.875%, 12/01/14........................................................... 209,976
750,000 Macon Cnty., GA, Hosp. Ref. Rev. Bds. (Flint River Comm.
Hospital - Paracelsus Healthcare Corp. Prj.) Ser. `91, 9.00%, 03/01/11................. 751,613
1,000,000 Savannah, GA, Econ. Dev. Auth. Rev. Bds. (First Mtg.-Coastal Care)
Ser. `97 A, 7.75%, 09/01/27............................................................ 988,900
8,000,000 Washington, GA, Wilkes Payroll Dev. Auth., 1st Mtg. Rev. Bds.,
Zero Cpn., 12/01/21 (d)................................................................ 1,751,600
------------
4,525,971
------------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1999
=======================================================================================================================
VALUE
PRINCIPAL (NOTE 1)
--------- --------
<S> <C> <C>
MUNICIPAL BONDS - CONTINUED
HAWAII - (3.11%)
$ 170,000 Dept. of Transportation of the State of HI, Special Fac. Rev. Bds., Ser. `90
(Continental Airlines, Inc.), 9.60%, 06/01/08.......................................... $ 177,856
10,000,000 Hawaii St. Airports System Rev. Bds. (Second Series), 7.00%, 07/01/18.................... 10,501,900
3,000,000 Honolulu, HI, (City & Cnty.) Multifam. Rev. Hsg. (Waipahu Towers Prj.)
Ser. `95, 6.90%, 06/20/35.............................................................. 3,166,440
------------
13,846,196
------------
ILLINOIS - (12.90%)
1,500,000 Bolingbrook, IL, Cap. Appreciation Rev. Bds., Unlimited G.O.,
(MBIA Insured) Ser. B, Zero Cpn., 01/01/29 (d)........................................ 248,850
2,500,000 Bolingbrook, IL, Cap. Appreciation Rev. Bds., Unlimited G.O.,
(MBIA Insured) Ser. B, Zero Cpn., 01/01/30 (d)........................................ 389,825
2,500,000 Bolingbrook, IL, Cap. Appreciation Rev. Bds., Unlimited G.O.,
(MBIA Insured) Ser. B, Zero Cpn., 01/01/31 (d)........................................ 366,375
1,500,000 Bolingbrook, IL, Cap. Appreciation Rev. Bds., Unlimited G.O.,
(MBIA Insured) Ser. B, Zero Cpn., 01/01/32 (d)........................................ 206,595
2,500,000 Bolingbrook, IL, Cap. Appreciation Rev. Bds., Unlimited G.O.,
(MBIA Insured) Ser. B, Zero Cpn., 01/01/33 (d)........................................ 323,600
10,000,000 Chicago, IL, Brd. of Education Cap. Appreciation Rev. Bds., School
Reform B-1 (FGIC Insured), Unlimited G.O., Zero Cpn., 12/01/14 (d)..................... 4,176,100
11,225,000 Chicago, IL, Brd. of Education Cap. Appreciation Rev. Bds., School
Reform B-1 (FGIC Insured), Unlimited G.O., Zero Cpn., 12/01/15 (d)..................... 4,390,771
5,500,000 Chicago, IL, Brd. of Education Cap. Appreciation Rev. Bds., School
Reform B-1 (FGIC Insured), Unlimited G.O., Zero Cpn., 12/01/28 (d)..................... 946,165
10,000,000 Chicago, IL, Brd. of Education Cap. Appreciation Rev. Bds., School
Reform Ser. A (FGIC Insured), Unlimited G.O., Zero Cpn., 12/01/30 (d).................. 1,522,900
6,000,000 Chicago, IL, Pub. Bldg. Comm. Mtg. Rev. Bds. (MBIA Insured) Ser. A,
7.125%, 01/01/15....................................................................... 6,329,160
250,000 Chicago, IL, School Fin. Auth. Unlimited G.O., Ser. B, 7.60%, 06/01/01................... 252,775
85,000 Cnty. of Cook, IL, Sngl. Mtg. Rev. Bds., `83 Ser. A, Zero Cpn.,
07/01/15 (d).......................................................................... 14,366
7,000,000 Illinois Hlth. Fac. Auth. Rev. Bds. (Hosp. Sisters Svcs.) Ser. A,
5.00%, 06/01/18........................................................................ 6,212,500
5,980,000 Illinois Hlth. Fac. Auth. Rev. Ref. Bds. (Hinsdale Hosp.) Ser. `90 A,
9.00%, 11/15/15........................................................................ 6,439,025
4,460,000 Illinois Hlth. Fac. Auth. Rev. Ref. Bds. (Hinsdale Hosp.) Ser. `90 B,
9.00%, 11/15/15........................................................................ 4,802,350
500,000 Illinois Hlth. Fac. Auth. Rev. Ref. Bds. (Midwest Physician Group Ltd.),
5.50%, 11/15/19........................................................................ 439,685
3,125,000 Illinois Hlth. Fac. Auth. Rev. Ref. Bds. (Refunded Balance-C)
(Hinsdale), 9.50%, 11/15/19............................................................ 3,381,938
1,000,000 Illinois Hlth. Fac. Auth. Rev. Ref. Bds. (Silver Cross Hosp. & Med.)
5.50%, 08/15/19........................................................................ 916,300
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1999
=======================================================================================================================
VALUE
PRINCIPAL (NOTE 1)
--------- --------
<S> <C> <C>
MUNICIPAL BONDS - CONTINUED
ILLINOIS - CONTINUED
$ 395,000 Illinois Hlth. Fac. Auth. Rev. Ref. Bds. (Unrefunded Balance-A)
(MBIA Insured) Ser. `88, 7.90%, 08/15/03............................................... $ 396,284
8,897,526 Illinois Hsg. Dev. Auth., Multi-Fam. Hsg. Rev. Bds., Cap. Appreciation,
Ser. `83A, Zero Cpn., 07/01/25 (d)..................................................... 620,021
3,975,000 Illinois St. Dedicated Tax Unrefunded Bal., Rev. Bds. (Civic Ctr.) Ser. `90A,
7.00%, 12/15/10........................................................................ 4,182,336
11,425,000 Metro. Pier & Expo. Auth. IL Ded. St. Tax Rev. Ref. Bds. (McCormick
Prj.) Ser.`94, Zero Cpn., 06/15/29 (d)................................................. 1,918,486
14,305,000 Metro. Pier & Expo. Auth. IL Ded. St. Tax Rev. Ref. Bds. (McCormick
Prj.) Ser.`96A, Zero Cpn., 06/15/24 (d)................................................ 3,268,406
1,000,000 St. Clair Cnty., IL, Pub. Bldg., Community Bldg. Rev. Bds., 8.00%,
12/01/05............................................................................... 1,007,080
2,975,000 Southern, IL, Univ. Rev. Bds. Cap. Appreciation (Hsg. & Auxiliary-A)
Zero Cpn., 04/01/25 (d)................................................................ 642,332
2,000,000 Southern, IL, Univ. Rev. Bds. Cap. Appreciation (Hsg. & Auxiliary-A)
Zero Cpn., 04/01/28 (d)................................................................ 358,380
2,000,000 Southern, IL, Univ. Rev. Bds. Cap. Appreciation (Hsg. & Auxiliary-A)
Zero Cpn., 04/01/29 (d)................................................................ 337,200
5,345,000 University, IL, Univ. Rev. Bds. Cap. Appreciation (Auxiliary)
(MBIA Insured), Ser. `91, Zero Cpn., 04/01/21 (d)...................................... 1,504,885
111,000 Village of Sauget, IL, IDR Bds. (The Pillsbury Co. Prj.) Ser. `80, 8.375%,
05/01/05............................................................................... 111,249
500,000 Village of Sherman, IL, 1st Mtg. Rev. Bds. (Villa Vianney, Inc.) Ser. `95A,
8.375%, 07/01/25....................................................................... 519,580
550,000 Village of Sherman, IL, 1st Mtg. Rev. Bds. (Villa Vianney, Inc.) Ser. `97A,
7.75%, 10/01/22........................................................................ 555,891
1,000,000 Village of Wataga, IL, 1st Mtg. Hlth. Fac. Rev. Bds. (First Humanics Corp.
- Galesburg, IL Prj.) Ser. `86, 10.00%, 09/01/16....................................... 720,000
------------
57,501,410
------------
INDIANA - (3.52%)
470,000 Carmel, IN, Retirement Rental Hsg. Rev. Ref. Bds. (Beverly Enterprises -
Indiana, Inc. Prj.) Ser. `92, 8.75%, 12/01/08.......................................... 509,851
121,828 Elwood, IN, Econ. Dev. Rev. (K-Mart Co. - S. S. Kresge Co. Prj.), 8.50%,
10/15/00............................................................................... 122,042
1,020,000 Goshen-Chandler, IN, School Bldg. Corp. 1st Mtg. Rev. Ref. Bds., Cap.
Appreciation (MBIA Insured), Zero Cpn., 01/15/11 (d)................................... 552,748
500,000 Griffith, IN, Econ. Dev. Rev. Bds. (May Dept. Stores Co. Prj.) Ser. `79,
6.75%, 03/01/09........................................................................ 501,660
510,000 Indiana Bond Bank, Ser. `88 B Bds., 8.50%, 02/01/18...................................... 516,523
410,000 Indiana Bond Bank, Ser. `88 C Bds., 8.125%, 02/01/17..................................... 414,756
125,000 Indiana Bond Bank, Special Program Bds., Ser. `87 A, 8.70%, 02/01/13..................... 126,711
7,000,000 Indiana Hlth. Fac. Auth. Hosp. Rev. Bds., Ser. A (Sisters St. Francis Hlth.), ...........
5.00%, 11/01/29........................................................................ 5,961,340
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1999
=======================================================================================================================
VALUE
PRINCIPAL (NOTE 1)
--------- --------
<S> <C> <C>
MUNICIPAL BONDS - CONTINUED
INDIANA - CONTINUED
$ 4,125,000 Indiana Hlth. Fin. Auth. Hosp. Fac. Rev. Bds. (Community Hosp. Prj.)
Ser. `91, (MBIA Insured), 6.85%, 07/01/22.............................................. $ 4,412,636
1,585,000 Madison Cnty., IN, Hosp. Auth. Hosp. Rev. Ref. Bds. (Community Hosp.
Of Anderson), 8.00%, 01/01/14.......................................................... 1,599,534
1,000,000 Monroe Cnty., IN, Multifam. Hsg. Rev. Bds. (GNMA Coll. - Country
View-A), 5.75%, 04/01/33............................................................... 964,080
------------
15,681,881
------------
IOWA - (0.02%)
87,849 Creston, IA, IDR (S.S. Kresge Co. - K-Mart Inc.), 8.50%, 08/01/00......................... 87,991
------------
KANSAS - (0.12%)
205,000 Liberal, KS, Swr. Util. Sys. Rev. Ref. Bds., 8.80%, 10/01/99.............................. 205,027
305,000 Liberal, KS, Swr. Util. Sys. Rev. Ref. Bds., 8.90%, 04/01/00.............................. 312,323
------------
517,350
------------
KENTUCKY - (2.64%)
65,000 Cntys. of Jefferson, Oldham and Bullitt, KY, Home Mtg. Rev. Bds, Ser. `84,
10.75%, 11/01/14....................................................................... 66,716
1,900,000 Elizabethtown, KY, IDR Bds. (Colt Industries Inc.), 9.875%, 10/01/10..................... 1,918,601
550,000 Jefferson Cnty., KY, Cap. Prj. Corp. Rev. Muni Multi Lease Ref. Bds. -
Ser. A `87, Zero Cpn., 08/15/14 (d).................................................... 196,862
395,000 Kentucky, St. Tpk. Auth. Res. Rec. Rd. Rev. Ref. Bds. (FGIC Insured),
Ser. `85 A, 6.00%, 07/01/09............................................................ 395,691
1,720,000 Kentucky, St. Tpk. Auth. Res. Rec. Rd. Rev. Ref. Bds., Ser. `85 A,
6.00%, 07/01/09........................................................................ 1,722,718
7,185,000 Louisville & Jefferson Cnty., KY, Riverport Auth. Mtg. Rev. Bds.,
Ser. `86, 7.875%, 05/15/16............................................................. 7,287,674
175,000 Morehead, KY, Ind. Bldg. Rev. Bds. (Emerson Elec.) Ser. `76, 6.30%,
04/01/01............................................................................... 176,740
------------
11,765,002
------------
LOUISIANA - (2.84%)
2,000,000 Caddo Parish, LA, Rev. Bds. (Ind'l. Dev. Brd. Inc. Exempt Fac.- Atlas Prj.)
Ser. `98, 5.60%, 12/01/28.............................................................. 1,840,120
23,045,000 East Baton Rouge, LA, Mtg. Fin. Auth. Sngl. Fam. Rev. Ref. Bds. Cap.
Appreciation (FNMA/GNMA Insured) Ser. C-1, Zero Cpn., 10/01/30 (d).................... 3,504,684
365,000 Lafayette Parish, LA, Law Enforcement Dist. Special Bds., 6.10%, 03/01/00................ 365,668
275,000 Lafayette Parish, LA, Law Enforcement Dist. Special Bds., 6.20%, 03/01/01................ 275,481
1,000,000 Lake Charles Non-Profit Hsg. Dev. Corp. Mtg. Rev. Ref. Bds., Ser. `90A
and Ser. `90B, 7.875%, 02/15/25........................................................ 1,001,130
720,000 Louisiana Pub. Fac. Auth. Hosp. Rev. Ref. Bds., Ser. `93 (Gen. Hlth., Inc.
Prj.) (MBIA Insured), Ser. `89 A, 6.50%, 11/01/14...................................... 721,390
1,500,000 Louisiana Pub. Fac. Auth. Rev. Ref. Bds., Ser. `93 (Schwegmann Westside
Expressway, Inc. Prj.), 8.00%, 10/01/09 +.............................................. 1,275,000
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1999
=======================================================================================================================
VALUE
PRINCIPAL (NOTE 1)
--------- --------
<S> <C> <C>
MUNICIPAL BONDS - CONTINUED
LOUISIANA - CONTINUED
$ 350,000 Louisiana Pub. Fac. Auth. Supplemental Student Loan Rev. Demand Bds.,
(Statewide Prg.) Ser. `84C, 8.125%, 12/01/99........................................... $ 351,173
1,000,000 Louisiana St., Gas & Fuels Tax, Rev. Bds., Ser. `90 A, 7.25%, 11/15/00................... 1,024,210
1,000,000 Louisiana St., Gas & Fuels Tax, Rev. Bds., Ser. `90 A, 7.25%, 11/15/04................... 1,024,210
335,000 New Orleans, LA, Hsg. Dev. Corp. First Lien Rev. Bds. (Tulane Ave. Prj.)
Ser. `79, 7.875%, 06/01/10............................................................. 335,630
1,000,000 West Feliciana Parish, LA, Rev. Bds. (Pollution Control Rev. Gulf States),
5.80%, 12/01/15........................................................................ 941,440
------------
12,660,136
------------
MARYLAND - (1.58%)
700,000 Allegany Cnty., MD, IDR Bds. (Moran Manor Care Ctr.) Ser. `84,
12.45%, 02/01/27....................................................................... 814,219
45,000 Maryland St. Cmnty. Dev. Admin. Sngl. Fam. Program Rev. Bds. (Dept. &
Econ. & Cmnty. Dev. Fifth Ser.), 7.70%, 04/01/15....................................... 45,072
365,000 Maryland St. Ind'l. Dev. Fin. Auth. Economic Dev. Rev. Bds., Ser. `86
1-11, 7.125%, 07/01/06................................................................. 367,639
475,000 Montgomery Cnty., MD, Econ. Dev. Rev. Bds. (Brink Reservoir Fac.)
Ser. `84, 10.375%, 12/15/14............................................................ 483,346
220,000 Montgomery Cnty., MD, Hsg. Opportunity Comm. Multifam. Mtg. Rev.
Bds., Ser. `88 A, 8.10%, 07/01/08...................................................... 222,825
2,275,000 Montgomery Cnty., MD, Hsg. Opportunity Comm. Multifam. Mtg. Rev.
Bds., Ser. `88 A, 8.25%, 07/01/19...................................................... 2,306,532
2,685,000 Upper Potomac River Comm., MD, PCR Bds., Westvaco Corp. Prj.,
9.125%, 08/01/15....................................................................... 2,798,307
------------
7,037,940
------------
MASSACHUSETTS - (2.61%)
250,000 Lawrence, MA, IDR Bds., (New Balance Realty Trust Prj.), 10.00%,
10/01/03............................................................................... 251,128
185,000 Massachusetts Educ. Loan Auth., Educ. Loan Rev. Bds., Issue D, Ser. `89A,
7.65%, 01/01/07........................................................................ 189,083
125,000 Massachusetts Hlth. & Educational Fac. Auth. Rev. Bds. (New England
School of Law), 8.30%, 07/01/03........................................................ 125,428
125,000 Massachusetts Hlth. & Educational Fac. Auth. Rev. Bds. (New England
School of Law), 8.30%, 07/01/04........................................................ 125,428
300,000 Massachusetts State G.O., 10.50%, 08/01/03............................................... 301,614
160,000 Massachusetts State G.O., 9.75%, 09/01/03................................................ 160,763
1,705,000 Massachusetts State Hlth. & Educational Fac. Auth. Rev. Bds.
(Brockton Hosp.), Ser. `87 B, 8.00%, 07/01/07.......................................... 1,710,337
1,930,000 Massachusetts State Hlth. & Educational Fac. Auth. Rev. Bds.
(Brockton Hosp.), Ser. `87 B, 8.10%, 07/01/13.......................................... 1,936,118
2,000,000 Massachusetts State Hlth. & Educational Fac. Auth. Rev. Bds.
(Care Group Issue) (MBIA Insured) Ser. A, 4.75%, 07/01/20.............................. 1,694,820
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1999
=======================================================================================================================
VALUE
PRINCIPAL (NOTE 1)
--------- --------
<S> <C> <C>
MUNICIPAL BONDS - CONTINUED
MASSACHUSETTS - CONTINUED
$ 180,000 Massachusetts State, Ind. Fin. Agy., Rev. Ref. Bds., (Provider Lease
Program) Ser. `89A, 8.75%, 07/15/09.................................................... $ 180,299
3,855,000 Rail Connections, Inc. MA Rev. Bds. Cap. Appreciation (Rte. 128 Pkg.)
Ser. B, Zero Cpn., 07/01/23 (d)........................................................ 789,234
4,000,000 Rail Connections, Inc. MA Rev. Bds. Cap. Appreciation (Rte. 128 Pkg.)
Ser. B, Zero Cpn., 07/01/24 (d)........................................................ 766,040
4,140,000 Rail Connections, Inc. MA Rev. Bds. Cap. Appreciation (Rte. 128 Pkg.)
Ser. B, Zero Cpn., 07/01/25 (d)........................................................ 739,777
4,195,000 Rail Connections, Inc. MA Rev. Bds. Cap. Appreciation (Rte. 128 Pkg.)
Ser. B, Zero Cpn., 07/01/26 (d)........................................................ 701,152
4,430,000 Rail Connections, Inc. MA Rev. Bds. Cap. Appreciation (Rte. 128 Pkg.)
Ser. B, Zero Cpn., 07/01/27 (d)........................................................ 692,542
4,495,000 Rail Connections, Inc. MA Rev. Bds. Cap. Appreciation (Rte. 128 Pkg.)
Ser. B, Zero Cpn., 07/01/28 (d)........................................................ 655,416
4,640,000 Rail Connections, Inc. MA Rev. Bds. Cap. Appreciation (Rte. 128 Pkg.)
Ser. B, Zero Cpn., 07/01/29 (d)........................................................ 632,710
------------
11,651,889
------------
MICHIGAN - (1.43%)
100,000 Cnty. of Oakland, State of Michigan Bds., Clinton-Oakland Sys., Paint
Creek Inceptor Sewage Disposal Bds., 7.00%, 05/01/01................................... 102,253
1,090,000 The Econ. Dev. Corp. of the City of Westland, MI, Contract Sec'd. Rev. Bds.
(Weyerhauser Co. Contract Rev.), 9.80%, 12/01/00....................................... 1,097,412
310,000 Kentwood, MI, Econ. Dev. Corp. Rev. Bds. (Hanover-Kent, Inc. - K-Mart
Corp.), 7.85%, 09/01/01................................................................ 311,280
570,000 Michigan Muni Bd. Auth. Local Gov't Loan Prg. Rev. Ref. Bds.,
Ser. `92 A, 8.625%, 11/01/16........................................................... 577,592
600,000 Michigan State Strategic Fd. Ltd. Oblig. Rev. Bds. (NSF International Prj.)
Ser. `97A, 5.75%, 08/01/19............................................................. 581,334
975,000 Michigan State Strategic Fd. Ltd. Oblig. Rev. Bds. (St. John-Bon Secours
Cont. Care) Ser. `87, 7.90%, 11/15/16.................................................. 978,968
500,000 Michigan State Strategic Fd. Ltd. Oblig. Rev. Ref. Bds. (Welch Foods Inc.)
Ser. `91, 6.75%, 07/01/01.............................................................. 508,560
1,000,000 Michigan State Strategic Fd. Ltd. Oblig. Rev. Ref. Bds. (Detroit Edison Co.)
Ser. `91, 6.95%, 09/01/21.............................................................. 1,058,070
1,000,000 Michigan State Strategic Fd. Ltd. Oblig. Rev. Ref. Bds. (Detroit Edison Co.)
Ser. `91, 6.875%, 12/01/21............................................................. 1,060,310
100,000 River Dist., MI, Community Hosp. Auth. Hosp. Rev. Ref. Bds., Ser. `89,
7.40%, 05/01/01........................................................................ 100,132
------------
6,375,911
------------
MINNESOTA - (0.26%)
100,000 Hutchinson, MN, Bank Rev. Bds., Ser. `90, 6.70%, 02/01/01................................ 100,767
285,000 Minneapolis, MN, Community Dev. Agy. Rev. Bds. (River Bluff Prj.),
11.375%, 06/01/09...................................................................... 291,623
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1999
=======================================================================================================================
VALUE
PRINCIPAL (NOTE 1)
--------- --------
<S> <C> <C>
MUNICIPAL BONDS - CONTINUED
MINNESOTA - CONTINUED
$ 250,000 Minneapolis, MN, Community Dev. Agy. Rev. Bds. (West Bank
Homes Prj.), 11.75%, 10/01/08.......................................................... $ 261,168
250,000 The Port Auth. of the City of Saint Paul, MN, IDR, Ser. `84-N, Sunwood
Inn/Bandana Square Ltd., 10.00%, 12/01/14.............................................. 254,853
235,000 The Port Auth. of the City of Saint Paul, MN, IDR, Ser. K, Jackson Str.
Shops Ltd., 9.50%, 12/01/14............................................................ 241,700
------------
1,150,111
------------
MISSISSIPPI - (1.91%)
1,500,000 Amory, MS, Dock & Wharf Rev. Bds. (Weyerhauser Co. Prj.), 9.50%,
09/01/00............................................................................... 1,516,125
1,945,000 Clarksdale, MS, Ind. Rev. Bds. (Bah Pptys./Archer-Daniel's), 11.75%,
06/01/11............................................................................... 1,956,087
200,000 Hinds Cmnty. College Dist., MS, Ctfs. of Participation (Conference &
Training Ctr. Prj.) Ser. `94, 6.50%, 09/01/14.......................................... 204,108
1,590,000 Mississippi Bus. Fin. Corp. MS Poll. Ctl. Rev. Bds. (Energy Res. Inc. Prj.)
5.90%, 05/01/22........................................................................ 1,471,545
10,105,000 Mississippi Home Corp. Residual Rev. Bds., Cap. Appreciation, Ser. I `92,
Zero Cpn., 09/15/16 (d)................................................................ 3,353,142
------------
8,501,007
------------
MISSOURI - (0.61%)
250,000 The IDA of the City Of West Plains, MO, IDR Ref. Bds. (Beatrice Cos., Inc.
Prj.) Ser. `84, 8.75%, 08/01/07........................................................ 250,693
200,000 Jefferson Cnty., MO, Reorg. School Dist. No. R3 Unlimited G.O., 6.60%,
03/01/03............................................................................... 200,440
150,000 Kansas City, MO, Ind. Dev. Auth. Econ. Dev. Rev. Ref. Bds. (Encore
Nursing Ctr. Ltd.), 8.00%, 12/01/02.................................................... 155,853
210,000 Missouri Hsg. Dev. Commission, Hsg. Dev. Bds. (Federally Insured Mtg.
Loans) Ser. July 1, 1975, 8.00%, 07/01/17.............................................. 212,927
125,000 Missouri School Bds. Association Ctfs. (Partner Pool) Ser. A, 7.375%,
03/01/06............................................................................... 126,303
665,000 Missouri St. Hsg. Dev. Comm. Mtg. Rev. Ref. Bds., `91 Ser. B, Zero Cpn.,
09/01/12 (d)........................................................................... 267,483
450,000 Missouri St. Hsg. Dev. Comm. Rev. Bds., Ser. `79, 7.00%, 09/15/22........................ 456,966
420,000 Missouri St. Hsg. Dev. Comm., Sngl. Fam. Mtg. Rev. Bds. (FHA/VA/
Private Mtgs. Insured) Ser. `85, 9.375%, 04/01/16...................................... 429,332
1,500,000 St. Louis, MO, Mun. Fin. Corp. Leasehold Rev. Ref. Bds., Ser. A,
Zero Cpn., 07/15/14 (d)................................................................ 600,720
------------
2,700,717
------------
MONTANA - (2.97%)
5,110,000 Forsyth, MT, Pollution Control Rev. Ref. Bds., (Washington Wtr. Pwr. Prj.)
Ser. `89 (MBIA Insured), 7.125%, 12/01/13.............................................. 5,240,509
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1999
=======================================================================================================================
VALUE
PRINCIPAL (NOTE 1)
--------- --------
<S> <C> <C>
MUNICIPAL BONDS - CONTINUED
MONTANA - CONTINUED
$ 4,900,000 Lewis & Clark Cnty., MT, Environmental Facs. Rev. Bds. (Asarco Inc. Prj.)
Ser. `98, 5.85%, 10/01/33.............................................................. $ 4,549,993
3,250,000 Montana St. Brd. Invt. Workers Comp. Prog. Rev. Ref. Bds. MBIA Insured
Ser. `91, 6.875%, 06/01/20............................................................. 3,450,785
------------
13,241,287
------------
NEBRASKA - (0.14%)
1,700,000 Nebraska Higher Educ. Loan Prg. Capital Appreciation Rev. Bds.,
Ser. `89 A, Zero Cpn., 12/15/15 (d).................................................... 608,362
------------
NEVADA - (0.88%)
1,250,000 Clark Cnty., NV, IDR (Nevada Pwr. Co. Prj.) Ser. `97A, 5.90%,
11/01/32............................................................................... 1,175,638
2,000,000 Clark Cnty., NV, Pollution Ctl. Rev. Ref. Bds. (Southern CA Edison Prj.)
Ser. A, 7.125%, 06/01/09............................................................... 2,093,220
500,000 State Of Nevada Muni Bd. Bank Prj. No. 18 & 19, 8.40%, 09/01/01.......................... 538,620
105,000 State Of Nevada Muni Bd. Bank Prj. No. 18 & 19, 8.50%, 09/01/05.......................... 107,062
------------
3,914,540
------------
NEW HAMPSHIRE - (3.49%)
10,000,000 Manchester, NH, Gen. Airport Rev. Bds., (MBIA Insured) Ser. `A,
4.50%, 01/01/28........................................................................ 7,723,800
500,000 New Hampshire Higher Educ. & Hlth. Fac. Auth. Rev. Bds. (NH Catholic
Charities Issue) Ser. `91, 8.40%, 08/01/11............................................. 550,090
925,000 New Hampshire St. Hsg. Fin. Auth. Sngl. Fam. Mtg. Rev. Bds.
(FHA/VA Insured) Ser. B, 6.05%, 07/01/25.............................................. 932,030
2,225,000 New Hampshire St. IDA PCR Ref. Bds. (Pub. Svc. Co. of New Hampshire
Prj.) `91 Ser. C, 7.65%, 05/01/21...................................................... 2,308,104
3,950,000 New Hampshire St. IDA Rev. Bds. (Pollution Ctl. - Connecticut Lt. Prj.)
Ser. `89, 7.375%, 12/01/19............................................................. 4,048,592
------------
15,562,616
------------
NEW JERSEY - (0.91%)
1,350,000 New Jersey Econ. Dev. Auth., Econ. Dev. Rev. Bds. (Borg - Warner - Baker
Protective Svcs. Prj.) Ser. `83, 9.95%, 12/01/03....................................... 1,359,059
1,000,000 New Jersey Econ. Dev. Auth., Econ. Dev. Rev. Ref. Bds. (Holt Hauling &
Warehousing) Ser. G, 8.40%, 12/15/15................................................... 1,060,850
205,000 New Jersey Econ. Dev. Auth., Econ. Dev. Sr. Rev. Bds. (Lakewood of
Voorhees FHA Insured Prj.) Ser. A, 8.875%, 01/15/20.................................... 221,213
200,000 New Jersey Hlth. Care Fac. Fin. Auth. Rev. Bds. (Muhlenberg Reg'l. Med.
Ctr.) Ser. `88 B, 7.60%, 07/01/02...................................................... 202,596
605,000 New Jersey Hlth. Care Fac. Fin. Auth. Rev. Bds. (Muhlenberg Reg'l. Med.
Ctr.) Ser. `88 B, 8.00%, 07/01/18...................................................... 612,974
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1999
=======================================================================================================================
VALUE
PRINCIPAL (NOTE 1)
--------- --------
<S> <C> <C>
MUNICIPAL BONDS - CONTINUED
NEW JERSEY - CONTINUED
$ 590,000 New Jersey Hlth. Care Fac. Rev. Bds. (Muhlenberg Reg'l. Med. Ctr.) (MBIA
Insured) Ser. `88, 8.00%, 07/01/18..................................................... $ 597,776
------------
4,054,468
------------
NEW MEXICO - (0.71%)
120,000 City of Albuquerque, NM, Hlth. Care Sys. Rev. Bds. (Lovelace Medical
Foundation Prj.), 12.00%, 03/01/11..................................................... 120,743
2,970,000 Gallup, NM, Pollution Control Rev. Ref Bds., (Plains Elec. Generation Prj.)
(MBIA Insured), 6.65%, 08/15/17........................................................ 3,061,654
------------
3,182,397
------------
NEW YORK - (6.23%)
300,000 Battery Park City Auth., POD III Hsg. Rev. Bds., Ser. `84 (FHA-Insured
Mtg.), 10.00%, 06/01/23................................................................ 303,591
280,000 New York City, Ser. `90 I, FGIC Insured Bds., 7.25%, 08/15/14............................ 287,762
200,000 New York State Dorm Auth., Rev. Ref. Bds., (Rochester Inst. Tech.)
Ser. `97, 5.30%, 07/01/17.............................................................. 191,078
4,250,000 New York State Energy Research & Dev. Auth., Elec. Fac. Rev. Bds.
(Edison Co. Prj.) Ser. `91, 7.50%, 01/01/26............................................ 4,325,523
1,000,000 New York State Local Gov. Assistance Corp., Rev. Ref. Bds., Ser. `98 A,
4.375%, 04/01/18....................................................................... 819,870
2,350,000 New York State Med. Care Fac. Fin. Agy. FGIC Insured Bds., (St. Francis
Hosp. Prj.), Ser. `88, 7.60%, 11/01/08................................................. 2,403,933
2,000,000 New York State Med. Care Fac. Fin. Agy. Rev. Bds. (Beth Israel Med.
Ctr.-A) (MBIA Insured), Ser. `89, 7.40%, 11/01/04...................................... 2,045,560
700,000 New York State Med. Care Fac. Fin. Agy. Rev. Bds., Long Term-Hlth. Care,
Ser. `89 B, 7.375%, 11/01/11........................................................... 715,848
1,010,000 New York State Med. Care Fac. Fin. Agy. Rev. Ref. Bds., Mental Hlth.
Svcs. Fac., Ser. `87 A, 8.875%, 08/15/07............................................... 1,013,838
1,755,000 New York State Mtg. Agy. Rev. Bds., (Homeownership Mtg. - Ser. HH-2)
(FHA/Priv. Mtgs. Insured) Ser. `88, 7.85%, 04/01/22.................................... 1,792,575
100,000 Onondaga Cnty., NY, Ind'l. Dev. Agy. Ind'l. Dev. Rev. Bds. (Sysco Frosted
Foods Inc.) Ser. `83, 7.75%, 04/01/03.................................................. 101,803
400,000 Otsego Cnty., NY, Ind'l. Dev. Agy. Civic Agy. Rev. Bds. (Bassett Hlth.
Care Prj.) Ser. `98 A, 5.35%, 11/01/20................................................. 379,356
5,000,000 Port Auth NY & NJ Rev. Bds. (Cons.-Seventy-Second) Ser. `92, 7.35%,
10/01/27............................................................................... 5,437,650
7,000,000 Port Auth NY & NJ Rev. Bds. (Cons.-Sixty-Ninth) Ser. `90, 7.125%,
06/01/25............................................................................... 7,204,750
300,000 Port Jervis, NY, IDA, Mercy Community Hosp. Rev. Bds., (Franciscan Hlth.
Partnership) Ser. `97, 5.10%, 11/01/07................................................. 291,552
470,000 Port Jervis, NY, IDA, Mercy Community Hosp. Rev. Bds., (Franciscan Hlth.
Partnership) Ser. `97, 5.20%, 11/01/08................................................. 456,304
------------
27,770,993
------------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1999
=======================================================================================================================
VALUE
PRINCIPAL (NOTE 1)
--------- --------
<S> <C> <C>
MUNICIPAL BONDS - CONTINUED
NORTH CAROLINA - (1.20%)
$ 500,000 Brevard, NC, Hsg. Auth. 1st Mtg. Rev. Bds. (Ascend Healthcare, Inc. Prj.),
Ser. `98A, 7.50%, 03/01/28............................................................. $ 464,345
500,000 Charlotte, NC, Hsg. Auth. 1st Mtg. Rev. Bds. (Ascend Healthcare, Inc. Prj.),
Ser. `98A, 7.50%, 03/01/28............................................................. 464,345
3,000,000 North Carolina Eastern Mun. Pwr. Agy. Pwr. Sys. Rev. Ref. Bds.,
Ser. B, 5.70%, 01/01/17................................................................ 2,803,560
200,000 North Carolina Med. Care Comm. Hosp. Rev. Ref. Bds. (Moore Memorial
Hosp. Prj.), 9.10%, 10/01/99........................................................... 200,028
900,000 North Carolina Mun. Pwr. Agy. No. 1 Catawba Elec. Rev. Bds., Ser. `90,
6.50%, 01/01/10........................................................................ 923,373
500,000 Piedmont Hlth. Dev. Auth., Inc., 1st Mtg. Ref. Rev. Bds. (Nash Grove
Manor Inc. Fac., Nashville, North Carolina) Ser. `93A, 8.00%, 01/01/13................. 508,655
------------
5,364,306
------------
NORTH DAKOTA - (0.24%)
900,000 Ward Cnty., ND, Hlth Care Fac. Rev. Bds. (St. Joseph's Hosp. Corp. Prj.)
Ser. `94, 8.875%, 11/15/14............................................................. 1,079,847
------------
OHIO - (3.53%)
500,000 Cleveland, OH, Waterworks Rev. Bds., Ser. A, 6.125%, 01/01/08............................ 502,585
2,700,000 Cnty. of Belmont, Ohio Hlth. Sys. Rev. and Ref. Bds. (East Ohio Reg'l
Hosp. Issue), 5.80%, 01/01/18.......................................................... 2,448,549
850,000 Hamilton Cnty., OH Hosp. Fac. Auth. Rev. Bds. (Unrefunded Balance)
Ser. `86, 7.00%, 01/01/09.............................................................. 856,018
680,000 Hamilton Cnty., OH Hosp. Fac. Auth. Rev. Bds. (Unrefunded Balance)
(MBIA Insured - IBC) Ser. `86, 7.00%, 01/01/09......................................... 684,903
440,000 Hamilton Cnty., OH Hosp. Fac. Auth. Rev. Bds. (Unrefunded Balance)
(MBIA Insured) Ser. `86, 7.00%, 01/01/09............................................... 443,172
305,000 Lakewood, Ohio Hosp. Impt. Rev. Ref. Bds. (Lakewood Hosp. ) Ser. One,
6.00%, 02/15/10........................................................................ 305,497
2,000,000 Mahoning Valley Sanitary Dist. (Ohio) Wtr. Rev. Bds., Ser. `94,
7.75%, 05/15/19........................................................................ 2,133,400
515,000 Montgomery Cnty., OH, Hosp. Rev. Ref. Bds. (Kettering Med. Ctr.)
Ser. `89, 7.40%, 04/01/09.............................................................. 526,665
470,000 Ohio Hsg. Fin. Agy. Sngl. Fam. Mtg. Rev. Bds. Cap. Appreciation,
Ser. `85 A, Zero Cpn., 01/15/15 (d).................................................... 107,560
7,500,000 Ohio St. Air Quality Dev. Auth. Rev. Ref. Bds. (Pollution Ctl./Ohio
Edison) Ser. `90, 7.45%, 03/01/16...................................................... 7,744,650
------------
15,752,999
------------
OKLAHOMA - (1.27%)
530,000 Oklahoma Dev. Fin. Auth. Rev. Ref. Bds. (Hillcrest Hlth. Sys.) Ser. A,
5.625%, 08/15/19....................................................................... 479,714
12,000,000 Oklahoma Hsg. Fin. Agy. Sngl. Fam. Mtg. Rev. Bds. Cap. Appreciation,
Ser. A-1, Zero Cpn., 03/01/29 (d)...................................................... 2,066,160
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1999
=======================================================================================================================
VALUE
PRINCIPAL (NOTE 1)
--------- --------
<S> <C> <C>
MUNICIPAL BONDS - CONTINUED
OKLAHOMA - CONTINUED
$ 5,000,000 Oklahoma Hsg. Fin. Agy. Sngl. Fam. Mtg. Rev. Bds. Cap. Appreciation,
Ser. B-1, Zero Cpn., 03/01/29 (d)...................................................... $ 829,550
6,185,000 Oklahoma Hsg. Fin. Agy. Sngl. Fam. Mtg. Rev. Bds. Cap. Appreciation,
Ser. D-1, Zero Cpn., 03/01/29 (d)...................................................... 1,052,873
200,000 Oklahoma St. Ind. Auth. Rev. Bds. (Hlth. Sys./Baptist Ctr.) Ser. `95C,
7.00%, 08/15/03........................................................................ 216,772
1,000,000 Southeastern, OK, Ind. Auth. OK Rev. Bds. (Pollution Ctl./Weyerhauser
Co. Prj.) Ser. `85, 9.85%, 02/01/00.................................................... 1,016,670
------------
5,661,739
------------
PENNSYLVANIA - (3.72%)
2,835,000 Beaver Cnty., PA, IDA PCR Bds. (J&L Specialty Steel-formerly known
as Colt Ind. Prj.) Ser. 19, 7.00%, 06/01/08............................................ 2,904,741
2,360,000 Berks Cnty., PA, IDA (Supermarkets General Corp. Prj.), 10.50%, 11/01/03................. 2,440,240
500,000 Clarion Cnty., PA, Ind. Dev. Auth. Rev. Bds., Ser. `80 (Beverly
Enterprises Inc.) 5.875%, 05/01/07..................................................... 478,745
400,000 Columbia Cnty. IDA, Columbia Cnty., PA, 1st Mtg. Rev. Bds., Ser. `86
(Orangeville Nursing Ctr. Associates Prj.), 9.00%, 12/01/12............................ 400,000
1,000,000 Delaware Cnty., PA, Auth. Hlth. Sys. Rev. Bds. (Catholic Hlth. East)
Ser. `98, 4.875%, 11/15/18............................................................. 868,860
2,210,000 Erie, PA, Cap. Appreciation, Unlimited G.O., Ser. B, Zero Cpn.,
11/15/12 (d)........................................................................... 1,069,110
665,000 Luzerne Cnty., PA, Hsg. Corp. Rev. Bds., 8.125%, 12/01/08................................ 666,337
200,000 McKean Cnty., PA, Ind. Dev. Auth. Rev. Bds., Ser. `80 (Corning Glass
Wks. Prj.), 7.75%, 06/01/05............................................................ 200,858
920,000 Mercer Cnty., PA, IDA, Gumberg Assoc. - Pine Grove Square, The Kroger
Co., Ind. Dev. 1st Mtg. Rev. Bds., 13.00%, 06/01/07.................................... 949,173
1,000,000 Pennsylvania Econ. Dev. Fin. Auth. Solid Waste Disp. Rev. Bds.,
(USG Corp. Prj.) 6.00%, 06/01/31....................................................... 960,940
45,000 Pennsylvania Hsg. Fin. Agy. Moderate Rehab. Rev. Bds., 9.00%, 08/01/01................... 45,512
11,000,000 Pennsylvania Hsg. Fin. Agy. Sngl. Fam. Mtg. Rev. Bds., Ser. 63 A,
Zero Cpn., 04/01/30 (d)................................................................ 1,801,690
75,000 Philadelphia, PA, Redev. Auth. Home Improvement Loan Rev. Bds.,
Ser. `86 A, 7.375%, 06/01/03........................................................... 75,616
860,000 Philadelphia, PA, Wtr. & Swr. Rev. Ref. Bds. (MBIA Insured) 15th Ser.,
6.875%, 10/01/06....................................................................... 877,269
220,000 Pittsburgh & Allegheny Cnty., PA, Pub. & Auth. Rev. Bds. Ser. `78,
6.50%, 12/01/07........................................................................ 220,464
45,000 Pittsburgh, PA, Urban Redevelopment Auth. Home Improvement Loan,
Rev. Bds., Ser. `87 A, 7.125%, 08/01/04................................................ 45,783
5,000,000 Pittsburgh, PA, Wtr. & Swr. Auth. Wtr. & Swr. Sys. 1st Lien Rev.
Bds. Cap. Appreciation, Ser. B, Zero Cpn., 09/01/28 (d)................................ 890,800
750,000 Sayre, PA, Hlth. Care Facs. Auth. Rev. Bds. (VHA-Cap. Asset)
(MBIA Insured) Ser. `85C, 7.70%, 12/01/15.............................................. 769,275
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1999
=======================================================================================================================
VALUE
PRINCIPAL (NOTE 1)
--------- --------
<S> <C> <C>
MUNICIPAL BONDS - CONTINUED
PENNSYLVANIA - CONTINUED
$ 750,000 Sharon, PA, Reg'l. Hlth. Sys. Auth. Hlth. Sys. Rev. Bds., (Sharon Reg'l.
Hlth. Sys.) (MBIA Insured) Ser. `98, 5.00%, 12/01/18.................................. $ 667,538
250,000 Warren Cnty., PA, IDA Specialized Dev. Rev. Ref. Bds. (Beverly
Enterprises - Pennsylvania, Inc. Prj.) Ser. `91, 9.00%, 11/01/12....................... 268,168
------------
16,601,119
------------
PUERTO RICO - (0.34%)
780,000 Puerto Rico Commonwealth Infrastructure Fin. Auth. Special Bds.,
Unrefunded, Ser. `88 A, 7.75%, 07/01/08................................................ 790,023
720,000 Puerto Rico Ind. Med. & Environmental PCR Fac. Fin. Auth. Rev. Bds.,
(Abbott Chemical Inc. Prj.), 6.50%, 07/01/09........................................... 741,744
------------
1,531,767
------------
SOUTH CAROLINA - (1.81%)
380,000 Certificates of Participation, Ser. `90A, South Carolina School Financing
Corp. (School Dist. No. 2 of Sumter Cnty., SC Prj.), 8.125%, 04/01/10.................. 391,902
100,000 Clemson Univ., SC, Ctfs. of Participation, Ser. `86, 6.90%, 12/01/07..................... 100,245
5,165,000 Piedmont Mun. Pwr. Agy., SC, Elect. Rev. Ref. Bds., Ser. A,
5.00%, 01/01/14........................................................................ 4,776,954
1,055,000 Piedmont Mun. Pwr. Agy., SC, Elect. Rev. Ref. Bds., Ser. A,
6.55%, 01/01/26........................................................................ 1,055,222
1,075,000 South Carolina St. Ports Auth. Ports. Rev. Ref. Bds., 6.625%, 07/01/11................... 1,139,070
595,000 South Carolina St. Ports Auth. Ports. Rev. Ref. Bds., 6.75%, 07/01/21.................... 631,706
------------
8,095,099
------------
SOUTH DAKOTA - (0.06%)
250,000 Aberdeen, SD, Unlimited G.O., Rev. Ref. Bds., (MBIA Insured) Ser. `87,
6.90%, 07/01/04........................................................................ 251,838
------------
TENNESSEE - (0.59%)
285,000 Dover, TN, Hlth. & Educ. Fac., IDR (Wessex Corp. Dover Prj.), 9.50%,
09/01/11............................................................................... 285,618
154,905 Dyer Cnty., TN, Ind. Dev. Brd. IDR Bds. (S.S. Kresge Co. - K-Mart Corp.),
8.10%, 11/01/00........................................................................ 155,066
500,000 The Hlth. & Educational Fac. Auth. of the City of Crossville, TN, 1st Mtg.
Ref. Rev. Bds. (Country Place Hlth. Care Ctr., Inc. Prj.) Ser. `96 A,
7.75%, 06/01/13........................................................................ 522,865
1,040,000 Lewisburg, TN, IDR Bds. (Mead Corp. Prj.), 7.875%, 02/01/00.............................. 1,066,936
145,000 McMinn Cnty., TN, Ind. Dev. Brd. Rev. Bds., (S.S. Kresge Co.), 8.00%,
11/01/00............................................................................... 145,199
430,000 New Tazewell, TN, Hlth. Educational & Hsg. Fac. Brd. IDR Bds. (Wessex
Corp. New Tazewell Prj.) Ser. `87, 10.00%, 06/01/17.................................... 431,277
20,000 Tennessee Hsg. Dev. Agy. Rev. Bds., (Homeownership Prog. - S)
(MBIA Insured) Ser. `90, 7.625%, 07/01/22.............................................. 20,822
------------
2,627,783
------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1999
=======================================================================================================================
VALUE
PRINCIPAL (NOTE 1)
--------- --------
<S> <C> <C>
MUNICIPAL BONDS - CONTINUED
TEXAS - (8.38%)
$ 8,025,000 Austin, TX, Hsg. Fin. Corp., Sngl. Fam. Mtg. Rev. Bds., Ser. `84,
Zero Cpn., 02/01/16 (d)................................................................ $ 718,077
6,305,000 Bexar, TX, Metro. Wtr. Dist. Waterworks Sys. Rev. Bds., Cap.
Appreciation, (MBIA Insured), Zero Cpn., 05/01/32 (d).................................. 866,811
6,305,000 Bexar, TX, Metro. Wtr. Dist. Waterworks Sys. Rev. Bds., Cap.
Appreciation, (MBIA Insured), Zero Cpn., 05/01/34 (d).................................. 766,373
1,000,000 Brazos River Auth., TX, Rev. Ref. Bds. (FGIC Insured) (Houston Light &
Power) Ser. B, 7.20%, 12/01/18......................................................... 1,025,710
1,005,000 Coastal Wtr. Auth. TX Wtr. Rev. Ref. Bds., 6.25%, 12/15/17............................... 1,048,587
370,000 Coastal Wtr. Auth. TX Wtr. Rev. Ref. Bds. (FGIC Insured), Ser. `86 A,
7.50%, 12/15/16........................................................................ 374,681
5,205,000 Coppell, TX, Independent School Dist. Cap. Appreciation Ref. Bds.,
Unlimited G.O., Zero Cpn., 08/15/16 (d)............................................... 1,925,694
5,205,000 Coppell, TX, Independent School Dist. Cap. Appreciation Ref. Bds.,
Unlimited G.O., Zero Cpn., 08/15/17 (d)............................................... 1,806,083
5,205,000 Coppell, TX, Independent School Dist. Cap. Appreciation Ref. Bds.,
Unlimited G.O., Zero Cpn., 08/15/18 (d)............................................... 1,689,803
5,200,000 Coppell, TX, Independent School Dist. Cap. Appreciation Ref. Bds.,
Unlimited G.O., Zero Cpn., 08/15/19 (d)............................................... 1,584,388
625,000 Dallas Cnty., TX, Utility & Reclamation Dist. Rev. Ref. Bds., Cap.
Appreciation (MBIA Insured) Ser. `93, Zero Cpn., 02/15/14 (d).......................... 272,425
2,000,000 Gulf Coast Waste Disp. Auth. Rev. Bds. (TX Waste Disp.-Valero Energy
Corp. Prj.) Ser. `98, 5.60%, 04/01/32.................................................. 1,790,980
1,000,000 Gulf Coast Waste Disp. Auth. Rev. Bds. (TX Waste Disp.-Valero Energy
Corp. Prj.) Ser. `99, 5.70%, 04/01/32.................................................. 907,630
11,185,000 Harris Cnty., Houston, TX, Sports Auth. Sp., Jr. Lien Rev. Bds., Cap.
Appreciation (MBIA Insured) Ser. `98 B, Zero Cpn., 11/15/18 (d)........................ 3,577,522
300,000 Houston, TX, Hsg. Fin. Corp. Sngl. Fam. Mtg. Rev. Ref. Bds., Ser. A-1,
8.00%, 06/01/14........................................................................ 307,056
10,000,000 Houston, TX, Independent School Dist. Cap. Appreciation Ref. Bds.,
Unlimited G.O., Zero Cpn., 02/15/13 (d)............................................... 4,648,600
2,700,000 Matagorda Cnty., TX, NA Dist. No. 1 Poll. Ctl. Rev. Bds. (Central Power
& Light) Ser. `84, 7.50%, 12/15/14..................................................... 2,798,226
500,000 Matagorda Cnty., TX, NA Dist. No. 1, Rev. Ref. Bds., (Houston Ind'l. Inc.,
Prj.) (MBIA Insured) Ser. `98 A, 5.25%, 11/01/29 (c)................................... 444,230
2,000,000 Matagorda Cnty., TX, NA Dist. No. 1, Rev. Ref. Bds., (Houston Lighting
& Power Co,) (FGIC Insured) 7.20%, 12/01/18........................................... 2,049,980
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1999
=======================================================================================================================
VALUE
PRINCIPAL (NOTE 1)
--------- --------
<S> <C> <C>
MUNICIPAL BONDS - CONTINUED
TEXAS - CONTINUED
$ 720,000 Red River Auth. TX Ind. Dev. Ref. Bds. (Cargill Inc. Prj.), 7.90%,
04/01/07............................................................................... $ 735,926
1,000,000 Richardson, TX, Hosp. Auth. Hosp. Rev. Ref. Bds., (Baylor/Richardson)
Ser. `98, 5.625%, 12/01/28............................................................. 879,060
1,250,000 San Antonio, TX, Hlth. Fac. Dev. Corp. Econ. Dev. Rev. Ref. Bds.
(Encore Nursing Ctr.) Ser. `92, 8.25%, 12/01/19........................................ 1,340,888
140,000 Texas St. Higher Educ. Coordinating Brd., College Student Loan Rev. Bds.,
7.20%, 04/01/02........................................................................ 147,256
5,000,000 Texas St. Tax & Rev. Antic. Nts., Rev. Bds., Ser. A, 4.50%, 08/31/00..................... 5,035,900
235,000 Texoma Hsg. Fin. Corp. TX Sngl. Fam. Mtg. Rev. Ref. Bds.
(GNMA/FNMA Mtg.-Backed Sec.Prg.) Ser. `97, 5.80%, 09/01/28............................. 227,412
255,000 Tomball, TX, Independent School Dist. Cap. Appreciation Ref. Bds.,
Unlimited G.O. Prerefunded, Zero Cpn., 02/15/13 (d)................................... 103,525
745,000 Tomball, TX, Independent School Dist. Cap. Appreciation Ref. Bds.,
Unlimited G.O. Unrefunded, Zero Cpn., 02/15/13 (d).................................... 296,950
------------
37,369,773
UTAH - (0.23%)
1,000,000 Utah Hsg. Fin. Agy. Rev. Bds. (RHA Community Services of Utah,
Inc. Prj.) Ser. `97 A, 6.875%, 07/01/27................................................ 1,011,925
------------
VERMONT - (0.31%)
1,390,000 Vermont Hsg. Fin. Agy. Multi-Fam. Hsg. Bds., `79 Ser. A, 8.50%,
02/15/21............................................................................... 1,393,642
------------
VIRGINIA - (3.22%)
1,000,000 Chesapeake, VA, Ind'l Dev. Auth. Nursing Home Rev. Bds. (Sentara Life
Care Corp. Prj.) Ser. `88, 7.875%, 11/01/08............................................ 1,022,960
4,000,000 Chesapeake, VA, Ind'l Dev. Auth. Nursing Home Rev. Bds. (Sentara Life
Care Corp. Prj.) Ser. `88, 8.00%, 11/01/18............................................. 4,092,240
140,000 The IDA of Covington-Alleghany Cnty., VA, IDR Ref. Bds. (Beverly
Enterprises, Inc. Prj.) Ser. `91, 9.375%, 09/01/01..................................... 144,277
110,000 Montgomery Cnty., VA, Rev. Bds., Ser. `87, 6.70%, 04/01/07............................... 111,338
1,000,000 Norfolk, VA, Ind'l Dev. Auth. Nursing Home Rev. Bds. (Sentara Life
Care Corp. Prj.) Ser. `88, 7.875%, 11/01/08............................................ 1,022,960
2,000,000 Norfolk, VA, Ind'l Dev. Auth. Nursing Home Rev. Bds. (Sentara Life
Care Corp. Prj.) Ser. `88, 7.90%, 11/01/18............................................. 2,045,780
500,000 Peninsula Ports Auth. VA, Hosp. Fac. Rev. Ref. Bds. (Whittaker Mem.
Hosp. Prj.) Ser. `87, 8.70%, 08/01/23.................................................. 550,250
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1999
=======================================================================================================================
VALUE
PRINCIPAL (NOTE 1)
--------- --------
<S> <C> <C>
MUNICIPAL BONDS - CONTINUED
VIRGINIA - CONTINUED
$ 400,000 Virginia St. Hsg. Dev. Auth. Commonwealth Mtg., 6.20%, 07/01/21.......................... $ 404,560
600,000 Virginia St. Hsg. Dev. Auth. Commonwealth Mtg., Ser. A,
7.10%, 01/01/17........................................................................ 619,158
1,000,000 Virginia St. Hsg. Dev. Auth. Commonwealth Mtg., Ser. A,
7.10%, 01/01/22........................................................................ 1,028,180
3,000,000 Virginia St. Hsg. Dev. Auth. Commonwealth Mtg., Ser. A,
7.10%, 01/01/25........................................................................ 3,082,860
215,000 Virginia St. Res. Auth. Wtr. & Swr. Sys. Rev. Bds. (Pooled Loan Prg.)
Ser. `97 A, 7.50%, 11/01/17............................................................ 215,624
------------
14,340,187
------------
WASHINGTON - (1.57%)
500,000 Chelan Cnty., WA, Pub. Utilities Dist. No. 1, Chelan Hydro Cons. Sys.
Rev. Bds.. Ser. `97 A, 5.60%, 07/01/32 (c)............................................. 480,975
400,000 King Cnty., WA, Unlimited G.O., Ser. A `78, 6.50%, 12/01/12.............................. 400,816
6,000,000 Spokane Cnty., WA, School Dist. No. 356 Cent. VY Tax Deferred Int.
Unlimited G.O., Ser. B, Zero Cpn., 12/01/17 (d)........................................ 2,056,800
2,000,000 Washington St. Hlth. Care Fac. Auth. Rev. Bds. (SW Washington Hosp.
Vancouver) Ser. `89, 7.125%, 10/01/19................................................. 2,044,540
2,300,000 Washington St. Hsg. Fin. Comm. Nonprofit Hsg. Rev. Bds. (Seattle Univ.
Auxiliary Svcs. Prj.) Ser. `98, 5.30%, 07/01/31........................................ 2,031,222
------------
7,014,353
------------
WEST VIRGINIA - (2.40%)
375,000 Beverly, WV, Hsg. Corp. Mtg. Rev. Bds., Ser. `81 (Beverly Manor/FHA -
Insured/Section 8 Prj.), 11.00%, 11/15/22.............................................. 426,034
135,000 Glasgow, WV, Hlth. Fac. Rev. Ref. Bds. (Beverly Enterprises, Inc. Prj.)
Ser. `91, 9.50%, 09/01/01.............................................................. 139,540
8,700,000 West Virginia St. Cap. Appreciation, Infrastructure -A, Unlimited G.O.
Zero Cpn., 11/01/22 (d)................................................................ 2,282,880
4,400,000 West Virginia St. Cap. Appreciation, Infrastructure -A, Unlimited G.O.
Zero Cpn., 11/01/23 (d)................................................................ 1,086,228
9,400,000 West Virginia St. Cap. Appreciation, Infrastructure -A, Unlimited G.O.
Zero Cpn., 11/01/24 (d)................................................................ 2,183,244
9,250,000 West Virginia St. Cap. Appreciation, Infrastructure -A, Unlimited G.O.
Zero Cpn., 11/01/25 (d)................................................................ 2,020,293
2,525,000 West Virginia St. Hsg. Dev. Fd. Hsg. Fin. Rev. Bds., Ser. B, 7.20%,
11/01/20............................................................................... 2,560,249
------------
10,698,468
------------
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
SCHEDULE OF INVESTMENTS - CONTINUED
At September 30, 1999
=======================================================================================================================
VALUE
PRINCIPAL (NOTE 1)
--------- --------
<S> <C> <C>
MUNICIPAL BONDS - CONTINUED
WISCONSIN - (0.44%)
$ 300,000 Clear Lake, WI, Sewer Sys. Mtg. Rev. Bds., 8.00%, 08/01/11............................... $ 310,194
135,000 Wisconsin Hlth. Fac. Auth. Rev. Ref. Bds., Hosp. Sisters Svcs. Sys.,
Ser. D, 9.125%, 07/01/05............................................................... 135,574
1,595,000 Wisconsin St. Hlth. & Educational Fac. Auth. Rev. Bds. (RFDF Inc. Prj.)
Ser. `97, 7.375%, 07/15/27............................................................. 1,533,896
------------
1,979,664
------------
Total Municipal Bonds - (identified cost $455,815,706)................................. 436,946,479
------------
Total investments - (identified cost $455,815,706)(98.01%) (a)....................... 436,946,479
Other assets less liabilities - (1.99%).............................................. 8,868,322
------------
Net assets - (100%)................................................................ $445,814,801
============
+ These securities are in default but have made partial payments.
(a) Aggregate cost for Federal income tax purposes is $455,815,706.
At September 30, 1999 unrealized appreciation (depreciation) of securities for Federal income tax purposes was
as follows:
Unrealized appreciation................................................................ $ 1,519,358
Unrealized depreciation................................................................ (20,388,585)
------------
Net unrealized depreciation.......................................................... $(18,869,227)
============
(b) Represents a step bond: a zero coupon bond that converts to a fixed or variable interest rate at a designated
future date.
(c) Represents the current rate for a variable rate security.
(d) As of September 30, 1999, zero coupon bonds amounted to $94,837,145 or 21.27% of the Fund's net assets.
Because zero coupon bonds pay no interest and compound semi-annually at the fixed rate at the time of
reissuance, their value is generally more volatile than the value of other debt securities.
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
At September 30, 1999
========================================================================================================
<S> <C>
ASSETS:
Investments in securities, at value (identified cost $455,815,706)
(See accompanying Schedule of Investments).......................................... $436,946,47
Cash................................................................................... 3,201,661
Receivables:
Interest............................................................................ 7,374,886
Investment securities sold.......................................................... 541,533
Capital stock sold.................................................................. 283,804
Prepaid expenses....................................................................... 45,498
------------
Total assets..................................................................... 448,393,861
------------
LIABILITIES:
Payables:
Capital stock reacquired............................................................ 966,035
Investment securities purchased..................................................... 811,350
Commissions to distributor (Note 4)................................................. 409,322
Accrued expenses....................................................................... 392,353
------------
Total liabilities................................................................ 2,579,060
------------
NET ASSETS (NOTE 5)....................................................................... $445,814,801
============
CLASS A SHARES
Net assets.......................................................................... $174,440,651
Shares outstanding.................................................................. 20,139,569
Net asset value and redemption price per share...................................... $8.66
=====
Maximum offering price per share (100/95.25 of $8.66)............................... $9.09
=====
CLASS B SHARES
Net assets.......................................................................... $228,440,224
Shares outstanding.................................................................. 26,470,666
Net asset value and redemption price per share...................................... $8.63
=====
CLASS C SHARES
Net assets.......................................................................... $ 41,642,045
Shares outstanding.................................................................. 4,794,090
Net asset value and redemption price per share...................................... $8.69
=====
CLASS Y SHARES
Net assets.......................................................................... $ 1,291,881
Shares outstanding.................................................................. 149,099
Net asset value and redemption price per share...................................... $8.66
=====
NET ASSETS CONSIST OF:
Par value of shares of capital stock................................................... 515,534
Additional paid-in capital............................................................. 469,108,448
Net unrealized depreciation on investments............................................. (18,869,227)
Accumulated net realized loss.......................................................... (4,939,954)
------------
Net assets....................................................................... $445,814,801
============
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
STATEMENT OF OPERATIONS
For the year ended September 30, 1999
========================================================================================================
<S> <C> <C>
INVESTMENT INCOME:
Income:
Interest............................................................................ $ 31,699,670
------------
Expenses:
Management fees (Note 3)............................................ $ 3,107,801
Custodian fees...................................................... 122,920
Transfer agent fees
Class A.......................................................... 143,135
Class B.......................................................... 214,630
Class C.......................................................... 37,490
Class Y.......................................................... 2,261
Audit fees.......................................................... 24,150
Legal fees ......................................................... 38,048
Accounting fees (Note 3)............................................ 15,996
Reports to shareholders............................................. 115,596
Directors fees and expenses......................................... 77,697
Registration and filing fees........................................ 157,471
Miscellaneous....................................................... 31,909
Payments under distribution plan (Note 4)
Class A.......................................................... 515,625
Class B.......................................................... 2,464,753
Class C.......................................................... 425,374
------------
Total expenses................................................................ 7,494,856
Expenses paid indirectly (Note 6)............................................. (2,705)
------------
Net expenses.................................................................. 7,492,151
------------
Net investment income...................................................... 24,207,519
------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss from investment transactions............................................ (4,702,920)
Net increase in unrealized depreciation of investments during the period.................. (24,020,731)
------------
Net realized and unrealized loss on investments.................................. (28,723,651)
------------
Net decrease in net assets resulting from operations.......................... $ (4,516,132)
============
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
=========================================================================================================
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
OPERATIONS: 1999 1998
------------ ------------
<S> <C> <C>
Net investment income..................................................... $ 24,207,519 $ 21,973,208
Net realized loss from investment transactions............................ (4,702,920) (237,034)
Net change in unrealized appreciation/(depreciation)
of investments......................................................... (24,020,731) 3,568,267
------------ ------------
Net increase (decrease) in net assets resulting
from operations.................................................. (4,516,132) 25,304,441
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A ............................................................ (10,996,601) (11,779,256)
Class B ........................................................... (11,220,403) (10,526,467)
Class C ............................................................ (1,924,689) (1,029,628)
Class Y ............................................................ (67,090) (21,941)
Realized gains
Class A ............................................................ - (673,758)
Class B ............................................................ - (790,190)
Class C ............................................................ - (46,345)
Class Y ............................................................ - (294)
In excess of net investment income
Class A ............................................................ (89,106) (518,381)
Class B ............................................................ (90,919) (262,079)
Class C ............................................................ (15,596) (39,435)
Class Y ............................................................ (544) -
CAPITAL SHARE TRANSACTIONS:
Net increase (decrease) in net assets resulting from
capital share transactions (Note 5)
Class A ............................................................ (57,667,370) 152,107,227
Class B ........................................................... (12,350,227) 122,590,184
Class C ............................................................ 7,608,906 34,078,836
Class Y ............................................................ 489,969 877,300
------------ ------------
Total increase (decrease) in net assets............................. (90,839,802) 309,270,214
NET ASSETS:
Beginning of year ..................................................... 536,654,603 227,384,389
------------ ------------
End of year (including undistributed net investment income
of $1,264 in 1998) .................................................... $445,814,801 $536,654,603
============ ============
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
32
<PAGE>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENT
At September 30, 1999
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Davis Tax-Free High Income Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The Fund's investment objective is to provide
current income free from federal income tax by investing in municipal
obligations. The Fund may invest in high yield, high risk, low rated and unrated
bonds commonly referred to as "junk bonds." Such securities are speculative and
subject to greater market fluctuations and risk of loss of income and principal
than higher rated bonds. The Fund offers shares in four classes, Class A, Class
B, Class C and Class Y. The Class A shares are sold with a front-end sales
charge, the Class B and C shares are sold at net asset value and may be subject
to a contingent deferred sales charge upon redemption. Class Y shares are sold
at net asset value and are not subject to any contingent deferred shares charge.
Class Y shares are only available to certain qualified investors. Income,
expenses (other than those attributable to a specific class) and gains and
losses are allocated daily to each class of shares based upon the relative
proportion of net assets represented by each class. Operating expenses directly
attributable to a specific class are charged against the operations of that
class. All classes have identical rights with respect to voting (exclusive of
each class's distribution arrangement), liquidation and distributions. The
following is a summary of significant accounting policies followed by the Fund
in the preparation of its financial statements.
SECURITY VALUATION
Municipal bonds are normally valued on the basis of prices provided by
an independent pricing service or broker. Securities not priced in this manner
are priced at the last sales price if traded on that day and, if not traded, at
the mean between the most recent quoted bid and asked prices provided by
investment dealers. Short-term obligations are valued at amortized cost, which
approximates value. The pricing service and valuation procedures are reviewed
and subject to approval by the Board of Directors.
FEDERAL INCOME TAXES
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
substantially all of its tax-exempt and taxable income to shareholders.
Therefore, no provision for federal income or excise tax is required. During the
year ended September 30, 1999, the fund deferred $4,700,000 in realized losses
for federal income tax purposes. These losses will be recognized for federal
income tax purposes during the year ended September 30, 2000. At September 30,
1999, the Fund had approximately $249,000 of capital loss carryovers available
to offset future capital gains, if any, which expire by 2007.
SECURITIES TRANSACTIONS AND RELATED INVESTMENT INCOME
Securities transactions are accounted for on the trade date (date the
order to buy or sell is executed) with realized gain or loss on the sale of
securities being determined based upon identified cost. Interest income is
recorded on the accrual basis. Premiums on tax-exempt securities, original issue
discounts and market discounts are amortized to investment income, over the
lives of the respective securities, or to the earliest call date, if applicable,
for financial reporting and tax purposes.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends and distributions to shareholders are recorded on the
ex-dividend date. The character of the distributions made during the year from
net investment income may differ from its ultimate characterization for federal
income tax purposes. Also, due to the timing of distributions, the fiscal year
in which amounts are distributed may differ from the fiscal year in which income
or gain was recorded by the Fund. The Fund adjusts the classification of
distributions to shareholders to reflect the differences between financial
statement amounts
33
<PAGE>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
At September 30, 1999
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
and distributions determined in accordance with income tax regulations.
Accordingly, during the year ended September 30, 1999, amounts have been
reclassified to reflect an increase in undistributed net income of $196,165, a
decrease in accumulated net realized losses of $158,093 and a decrease in
additional paid-in capital of $354,258. Income from amortization of market
discounts and certain short-term investments is not tax-exempt and may result in
some percentage of dividends being reported as taxable income to shareholders.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of income and expenses during the reporting period. Actual
results may differ from these estimates.
NOTE 2 - PURCHASES AND SALES OF SECURITIES
Purchases and sales of investment securities (excluding short-term
securities) during the year ended September 30, 1999, were $357,931,836 and
$412,633,748, respectively.
NOTE 3 - INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Fund pays advisory fees for investment management and advisory
services under a management agreement with Davis Selected Advisers, L.P. (the
"Adviser"). The agreement provides for a fee at the annual rate of 0.65% of the
first $250 million of average annual net assets of the Fund, 0.60% of the next
$250 million of average annual net assets of the Fund and 0.55% of average
annual net assets over $500 million.
The Adviser is paid for registering Fund shares for sale in various
states. The fee for the year ended September 30, 1999, amounted to $12,996.
State Street Bank & Trust Company ("State Street Bank") is the Fund's primary
transfer agent. The Adviser is also paid for certain transfer agent services.
The fee for these services for the year ended September 30, 1999, amounted to
$32,413. State Street Bank is the Fund's primary accounting provider. Fees for
such services are included in the custodian fee as State Street Bank also serves
as the Fund's custodian. The Adviser is also paid for certain accounting
services. Such fee paid to the Adviser for the year ended September 30, 1999,
amounted to $15,996. Certain directors and the officers of the Fund are also
officers and directors of the general partner of the Adviser.
Davis Selected Advisers-NY, Inc. ("DSA-NY"), a wholly-owned subsidiary
of the Adviser, acts as sub-adviser to the Fund. The Fund pays no fees directly
to DSA-NY.
Stamper Capital & Investments, Inc. ("Stamper") also acts as
sub-adviser of the Fund. Stamper manages the day-to-day investment operations
for the Fund. The Fund pays no fees directly to Stamper. Stamper receives from
the Adviser a percentage of the total annual investment advisory fees paid by
the Fund to the Adviser.
NOTE 4 - DISTRIBUTION AND UNDERWRITING FEES
CLASS A SHARES
Class A shares of the Fund are sold at net asset value plus a sales
charge and are redeemed at net asset value (without a contingent deferred sales
charge).
During the year ended September 30, 1999, Davis Distributors, LLC, the
Fund's Underwriter (the "Underwriter" or "Distributor") received $316,814 from
commissions earned on sales of Class A shares of the Fund of which $51,835 was
retained by the Underwriter and the remaining $264,979 was reallowed to
investment dealers. The Underwriter paid the costs of prospectuses in excess of
those required to be filed as part of the Fund's registration statement, sales
literature and other expenses assumed or incurred by it in connection with such
sales.
34
<PAGE>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
At September 30, 1999
================================================================================
NOTE 4 - DISTRIBUTION AND UNDERWRITING FEES - (CONTINUED)
The Underwriter is reimbursed for amounts paid to dealers as a service
fee with respect to Class A shares sold by dealers which remain outstanding
during the period. The service fee is reimbursed at the annual rate up to 1/4 of
1% of the average net assets maintained by the responsible dealers. The
Underwriter is not reimbursed for accounts for which the Underwriter pays no
service fees to other firms. The service fee for Class A shares of the Fund for
the year ended September 30, 1999, was $515,625.
CLASS B SHARES
Class B shares of the Fund are sold at net asset value and are redeemed
at net asset value less a contingent deferred sales charge if redeemed within
six years of purchase.
The Fund pays a distribution fee to reimburse the Distributor for
commission advances on the sale of the Fund's Class B shares. The National
Association of Securities Dealers, Inc., ("NASD") limits the percentage of the
Fund's average annual net assets attributable to Class B shares which may be
used to reimburse the Distributor. The limit is 1%, of which 0.75% may be used
to pay distribution expenses and 0.25% may be used to pay shareholder service
fees. The NASD rule also limits the aggregate amount the Fund may pay for
distribution-related services to 6.25% of gross Fund sales since inception of
the Rule 12b-1 plan plus interest at 1% over the prime rate on unpaid amounts.
The Distributor intends to seek full payment (plus interest at prime plus 1%) of
distribution charges that exceed the 1% annual limit in some future period or
periods when the plan limits have not been reached.
During the year ended September 30, 1999, Class B shares of the Fund
made distribution plan payments which included distribution fees of $1,860,068
and service fees of $604,685.
Commission advances by the Distributor during the year ended September
30, 1999 on the sale of Class B shares of the Fund amounted to $1,097,633 of
which $1,040,189 was re-allowed to qualified selling dealers.
The Distributor intends to seek payment from Class B shares of the Fund
in the amount of $6,713,113, representing the cumulative commission advances by
the Distributor on the sale of the Fund's Class B shares, plus interest, reduced
by cumulative distribution fees paid by the Fund and cumulative contingent
deferred sales charges paid by redeeming shareholders. The Fund has no
contractual obligation to pay any such distribution charges and the amount, if
any, timing and condition of such payment are solely within the discretion of
the Directors who are not interested persons of the Fund or the Distributor.
A contingent deferred sales charge is imposed upon redemption of certain
Class B shares of the Fund within six years of the original purchase. The charge
is a declining percentage starting at 4% of the lesser of net asset value of the
shares redeemed or the total cost of such shares. During the year ended
September 30, 1999, the Distributor received contingent deferred sales charges
of $730,629 from redemptions of Class B shares of the Fund.
35
<PAGE>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
At September 30, 1999
================================================================================
NOTE 4 - DISTRIBUTION AND UNDERWRITING FEES - (CONTINUED)
CLASS C SHARES
Class C shares of the Fund are sold at net asset value and are redeemed
at net asset value less a contingent deferred sales charge of 1% if redeemed
within one year of purchase. The Fund pays the Distributor 1% of the Fund's
average annual net assets attributable to Class C shares, of which 0.75% may be
used to pay distribution expenses and 0.25% may be used to pay shareholder
service fees.
During the year ended September 30, 1999, Class C shares of the Fund
made distribution plan payments of $425,374. During the year ended September 30,
1999, the Distributor received $20,824 in contingent deferred sales charges from
redemption of Class C shares of the Fund.
NOTE 5 - CAPITAL STOCK
At September 30, 1999, there were 1,000,000,000 shares of capital stock
($0.01 par value per share) authorized. Transactions in capital stock were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
CLASS A SEPTEMBER 30, 1999
-------------------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Shares sold....................................... 5,092,150 $ 45,945,933
Shares issued in reinvestment of distributions.... 564,534 5,078,931
------------- -------------
5,656,684 51,024,864
Shares redeemed................................... (12,047,128) (108,692,234)
------------- -------------
Net decrease............................. (6,390,444) $ (57,667,370)
============= =============
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 1998
-------------------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Shares sold....................................... 35,588,556 $ 326,191,003
Shares issued in reinvestment of distributions.... 640,064 5,842,119
------------- -------------
36,228,620 332,033,122
Shares redeemed................................... (19,676,340) (179,925,895)
------------- -------------
Net increase............................. 16,552,280 $ 152,107,227
============= =============
</TABLE>
36
<PAGE>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
At September 30, 1999
================================================================================
NOTE 5 - CAPITAL STOCK - (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
CLASS B SEPTEMBER 30, 1999
-------------------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Shares sold....................................... 4,239,576 $ 38,228,135
Shares issued in reinvestment of distributions.... 444,771 3,985,404
------------- -------------
4,684,347 42,213,539
Shares redeemed................................... (6,090,773) (54,563,766)
------------- -------------
Net decrease............................. (1,406,426) $ (12,350,227)
============= =============
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 1998
-------------------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Shares sold....................................... 17,056,260 $ 155,837,641
Shares issued in reinvestment of distributions.... 511,231 4,656,040
------------- -------------
17,567,491 160,493,681
Shares redeemed................................... (4,154,386) (37,903,497)
------------- -------------
Net increase............................. 13,413,105 $ 122,590,184
============= =============
<CAPTION>
YEAR ENDED
CLASS C SEPTEMBER 30, 1999
-------------------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Shares sold....................................... 2,125,712 $ 19,312,493
Shares issued in reinvestment of distributions.... 86,645 780,258
------------- -------------
2,212,357 20,092,751
Shares redeemed................................... (1,388,222) (12,483,845)
------------- -------------
Net increase............................. 824,135 $ 7,608,906
============= =============
<CAPTION>
YEAR ENDED
SEPTEMBER 30, 1998
-------------------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Shares sold....................................... 4,003,278 $ 36,794,143
Shares issued in reinvestment of distributions.... 37,685 345,114
------------- -------------
4,040,963 37,139,257
Shares redeemed................................... (333,673) (3,060,421)
------------- -------------
Net increase............................. 3,707,290 $ 34,078,836
============= =============
</TABLE>
37
<PAGE>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
At September 30, 1999
================================================================================
NOTE 5 - CAPITAL STOCK - (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
CLASS Y SEPTEMBER 30, 1999
-------------------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Shares sold....................................... 200,923 $ 1,820,882
Shares issued in reinvestment of distributions.... 3,093 27,497
------------- -------------
204,016 1,848,379
Shares redeemed................................... (151,024) (1,358,410)
------------- -------------
Net increase............................. 52,992 $ 489,969
============= =============
<CAPTION>
OCTOBER 6, 1997
(INCEPTION OF CLASS) THROUGH
SEPTEMBER 30, 1998
-------------------------------
SHARES AMOUNT
------ ------
<S> <C> <C>
Shares sold....................................... 115,009 $ 1,049,727
Shares issued in reinvestment of distributions.... 1 5
------------- -------------
115,010 1,049,732
Shares redeemed................................... (18,903) (172,432)
------------- -------------
Net increase............................. 96,107 $ 877,300
============= =============
</TABLE>
NOTE 6 - CUSTODIAN FEES
Under an agreement with the custodian bank, custodian fees are reduced
for earnings on cash balances maintained at the custodian by the Fund. Such
reductions amounted to $2,705 during the year ended September 30, 1999.
38
<PAGE>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
================================================================================
The following financial information represents financial highlights for each
share of capital stock outstanding throughout each period:
CLASS A
<TABLE>
<CAPTION>
DECEMBER 1, 1994
(INCEPTION OF
YEAR ENDED SEPTEMBER 30, CLASS) THROUGH
-------------------------------------------------- SEPTEMBER 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period............................................ $ 9.19 $ 9.22 $ 9.15 $ 9.19 $ 8.90
-------- -------- -------- -------- --------
Income (Loss) From Investment Operations
Net Investment Income................................ 0.47 0.54 0.57 0.61 0.40
Net Realized and Unrealized Gains (Losses)........... (0.52) 0.04 0.11 (0.05) 0.30
-------- -------- ------- -------- --------
Total From Investment Operations............. (0.05) 0.58 0.68 0.56 0.70
-------- -------- ------- -------- --------
Dividends and Distributions
Net Investment Income................................ (0.47) (0.54) (0.59) (0.54) (0.40)
Distribution from Realized Gains..................... - (0.05) (0.02) (0.06) (0.01)
Dividends in Excess of Net Investment
Income.......................................... (0.01) (0.02) - - -
-------- -------- -------- -------- --------
Total Dividends and Distributions............ (0.48) (0.61) (0.61) (0.60) (0.41)
-------- -------- -------- -------- --------
Net Asset Value, End of Period.......................... $ 8.66 $ 9.19 $ 9.22 $ 9.15 $ 9.19
======== ======== ======== ======== ========
Total Return (1)........................................ 0.61)% 6.53% 7.66% 6.33% 7.93%
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted)..................................... $174,441 $243,878 $ 92,020 $ 44,828 $ 45,461
Ratio of Expenses to
Average Net Assets................................ 1.06% 1.04% 1.26%(2) 1.36% 1.43%*
Ratio of Net Investment Income to
Average Net Assets................................ 5.30% 5.37% 6.60% 6.64% 5.95%*
Portfolio Turnover Rate (3).......................... 73.45% 126.28% 112.71% 106.55% 127.80%
</TABLE>
(1) Assumes hypothetical initial investment on the business day before the first
day of the fiscal period (or inception of offering), with all dividends and
distributions reinvested in additional shares on the reinvestment date, and
redemption at the net asset value calculated on the last business day of the
fiscal period. Sales charges are not reflected in the total returns. Total
returns are not annualized for periods of less than one full year.
(2) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 1.25% for September 30, 1997. Prior to
1996, such reductions were reflected in the expense ratios.
(3) The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
* Annualized
39
<PAGE>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
================================================================================
The following financial information represents financial highlights for each
share of capital stock outstanding throughout each period:
CLASS B
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period.......................................... $ 9.16 $ 9.19 $ 9.12 $ 9.17 $ 9.09
-------- -------- -------- -------- --------
Income (Loss) From Investment Operations
Net Investment Income.............................. 0.41 0.49 0.53 0.54 0.48
Net Realized and Unrealized Gains (Losses)......... (0.53) 0.02 0.08 (0.05) 0.10
-------- -------- -------- -------- --------
Total From Investment
Operations................................. (0.12) 0.51 0.61 0.49 0.58
-------- -------- -------- -------- --------
Dividends and Distributions
Net Investment Income.............................. (0.41) (0.48) (0.52) (0.48) (0.48)
Distribution from Realized Gains.................. - (0.05) (0.02) (0.06) (0.01)
Dividends in Excess of Net Investment
Income......................................... -(4) (0.01) - - (0.01)
-------- -------- -------- -------- --------
Total Dividends and Distributions............. (0.41) (0.54) (0.54) (0.54) (0.50)
-------- -------- -------- -------- --------
Net Asset Value, End of Period........................ $ 8.63 $ 9.16 $ 9.19 $ 9.12 $ 9.17
======== ======== ======== ======== ========
Total Return (1)...................................... (1.39)% 5.74% 6.89% 5.51% 6.64%
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted)................................... $228,440 $255,300 $132,934 $109,488 $126,727
Ratio of Expenses to
Average Net Assets.............................. 1.82% 1.80%(2) 2.02% 2.10% 2.14%
Ratio of Net Investment Income
to Average Net Assets........................... 4.54% 4.62% 5.87% 5.89% 5.37%
Portfolio Turnover Rate (3)........................ 73.45% 126.28% 112.71% 106.55% 127.80%
</TABLE>
(1) Assumes hypothetical initial investment on the business day before the first
day of the fiscal period, with all dividends and distributions reinvested in
additional shares on the reinvestment date, and redemption at the net asset
value calculated on the last business day of the fiscal period. Sales
charges are not reflected in the total returns.
(2) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 1.79% for September 30, 1998. Prior to
1996, such reductions were reflected in the expense ratios.
(3) The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
(4) Less than $0.005 per share.
40
<PAGE>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
================================================================================
The following financial information represents financial highlights for each
share of capital stock outstanding throughout each period:
CLASS C
<TABLE>
<CAPTION>
AUGUST 18, 1997
(INCEPTION
OF CLASS)
YEAR ENDED SEPTEMBER 30, THROUGH
------------------------ SEPTEMBER 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net Asset Value, Beginning
of Period.............................................. $ 9.22 $ 9.25 $ 9.20
------- ------- -------
Income (Loss) From Investment Operations
Net Investment Income.................................. 0.42 0.49 0.04
Net Realized and Unrealized Gains (Losses)............. (0.54) 0.03 0.03
------- ------- -------
Total From Investment Operations................. (0.12) 0.52 0.07
------- ------- -------
Dividends and Distributions
Net Investment Income.................................. (0.41) (0.48) (0.02)
Distribution from Realized Gains....................... - (0.05) -
Dividends in Excess of Net Investment Income........... -(4) (0.02) -
------- ------- -------
Total Dividends and Distributions................. (0.41) (0.55) (0.02)
------- ------- -------
Net Asset Value, End of Period............................ $ 8.69 $ 9.22 $ 9.25
======= ======= =======
Total Return (1).......................................... (1.34)% 5.74% 0.77%
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted)....................................... $41,642 $36,594 $ 2,430
Ratio of Expenses to
Average Net Assets.................................. 1.83% 1.77%(2) 2.03%*
Ratio of Net Investment Income to
Average Net Assets.................................. 4.53% 4.65% 5.85%*
Portfolio Turnover Rate (3)............................ 73.45% 126.28% 112.71%
</TABLE>
(1) Assumes hypothetical initial investment on the business day before the first
day of the fiscal period (or inception of offering), with all dividends and
distributions reinvested in additional shares on the reinvestment date, and
redemption at the net asset value calculated on the last business day for
the fiscal period. Sales charges are not reflected in the total returns.
Total returns are not annualized for periods of less than one full year.
(2) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 1.76% for September 30, 1998.
(3) The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
(4) Less than $0.005 per share.
* Annualized
41
<PAGE>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
================================================================================
The following financial information represents financial highlights for each
share of capital stock outstanding throughout each period:
CLASS Y
<TABLE>
<CAPTION>
OCTOBER 6, 1997
(INCEPTION
OF CLASS)
YEAR ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
Net Asset Value, Beginning
of Period.......................................... $ 9.19 $ 9.20
------ ------
Income (Loss) From Investment Operations
Net Investment Income.............................. 0.48 0.54
Net Realized and Unrealized Gain (Loss)............ (0.52) 0.03
------ ------
Total From Investment Operations............. (0.04) 0.57
------ ------
Dividends and Distributions
Net Investment Income.............................. (0.48) (0.53)
Distribution from Realized Gain.................... - (0.05)
Dividend in Excess of Net Investment Income........ (0.01) -
------ ------
Total Dividends and Distributions............. (0.49) (0.58)
------ ------
Net Asset Value, End of Period........................ $ 8.66 $ 9.19
====== ======
Total Return (1)...................................... (0.51)% 6.34%
Ratios/Supplemental Data
Net Assets, End of Period
(000 omitted)................................... $1,292 $883
Ratio of Expenses to
Average Net Assets.............................. 0.93% 0.93%*(2)
Ratio of Net Investment Income to
Average Net Assets.............................. 5.43% 5.49%*
Portfolio Turnover Rate (3)........................ 73.45% 126.28%
</TABLE>
(1) Assumes hypothetical initial investment on the business day before the first
day of the fiscal period (or inception of offering), with all dividends and
distributions reinvested in additional shares on the reinvestment date, and
redemption at the net asset value calculated on the last business day for
the fiscal period. Total returns are not annualized for periods of less than
one full year.
(2) Ratio of expenses to average net assets after the reduction of custodian
fees under a custodian agreement was 0.92% for September 30, 1998.
(3) The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation.
* Annualized
42
<PAGE>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
INDEPENDENT AUDITORS' REPORT
================================================================================
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
OF DAVIS TAX-FREE HIGH INCOME FUND, INC.:
We have audited the accompanying statement of assets and liabilities of
Davis Tax-Free High Income Fund, Inc. including the schedule of investments, as
of September 30, 1999, and the related statement of operations for the year then
ended and the statement of changes in net assets and the financial highlights
for each of the years in the two-year period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits. The financial
highlights for each of the years in the three-year period ended September 30,
1997 were audited by other auditors whose report, dated November 11, 1997,
expressed an unqualified opinion on this information.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1999, by correspondence with the custodian and brokers; and where
confirmations were not received from brokers, we performed other auditing
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Davis Tax-Free High Income Fund, Inc. as of September 30, 1999, the
results of its operations for the year then ended, and the changes in its net
assets and the financial highlights for each of the years in the two-year period
then ended, in conformity with generally accepted accounting principles.
KPMG LLP
Denver, Colorado
November 5, 1999
43
<PAGE>
DAVIS TAX-FREE HIGH INCOME FUND, INC.
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
FOR THE YEAR ENDED SEPTEMBER 30, 1999
================================================================================
In early 2000, shareholders will receive information regarding all
dividends and distributions paid to them by the Fund during calendar year 1999.
Regulations of the U.S. Treasury Department require the Fund to report this
information to the Internal Revenue Service.
None of the dividends paid by the Fund during the year ended September
30, 1999 are eligible for the corporate dividend-received deduction. A total of
93.6% of dividends were derived from interest on municipal bonds, which are not
subject to federal income tax.
The foregoing information is presented to assist shareholders in
reporting distributions received from the Fund to the Internal Revenue Service.
Because of the complexity of the federal regulations which may affect your
individual tax return and the many variations in state and local tax
regulations, we recommend that you consult your tax adviser for specific
guidance.
44
<PAGE>
DAVIS TAX-FREE HIGH
INCOME FUND, INC.
124 East Marcy Street, P.O. Box 1688, Santa Fe, New Mexico 87501
================================================================================
DIRECTORS OFFICERS
Wesley E. Bass, Jr Jeremy H. Biggs
Jeremy H. Biggs. Chairman
Marc P. Blum Shelby M.C. Davis
Andrew A. Davis President
Christopher C. Davis Kenneth C. Eich
Jerry D. Geist Vice President
D. James Guzy Sharra L. Reed
G. Bernard Hamilton Vice President, Treasurer
LeRoy E. Hoffberger & Assistant Secretary
Laurence W. Levine Thomas D. Tays
Christian R. Sonne Vice President & Secretary
Marsha Williams Andrew A. Davis
Vice President
INVESTMENT ADVISER Christopher C. Davis
Davis Selected Advisers, L.P. Vice President
124 East Marcy Street
Santa Fe, New Mexico 87501
1-800-279-2279
DISTRIBUTOR
Davis Distributors, LLC
124 East Marcy Street
Santa Fe, New Mexico 87501
TRANSFER AGENT & CUSTODIAN
State Street Bank and Trust Company
c/o The Davis Funds
P.O. Box 8406
Boston, MA 02266-8406
COUNSEL
D'Ancona & Pflaum
111 E. Wacker Drive, Suite 2800
Chicago, Illinois 60601-4205
AUDITORS
KPMG LLP
707 Seventeenth Street, Suite 2300
Denver, Colorado 80202
================================================================================
FOR MORE INFORMATION ABOUT DAVIS TAX-FREE HIGH INCOME FUND, INC. INCLUDING
MANAGEMENT FEE, CHARGES AND EXPENSES, SEE THE CURRENT PROSPECTUS WHICH MUST
PRECEDE OR ACCOMPANY THIS REPORT.
<PAGE>
DAVIS SELECTED ADVISERS, L.P.
124 EAST MARCY STREET
SANTA FE, NEW MEXICO 87501
1-800-279-0279
[DAVIS FUNDS LOGO]
<PAGE>
EVERGREEN MUNICIPAL TRUST
PART C
OTHER INFORMATION
Item 15. Indemnification.
The response to this item is incorporated by reference to "Liability
and Indemnification of Trustees" under the caption "Comparative Information on
Shareholders' Rights" in Part A of this Registration Statement.
Item 16. Exhibits:
1. Declaration of Trust. Incorporated by reference to
Evergreen Municipal Trust's Registration Statement on Form N-1A
filed on December 12, 1997 Registration No. 333-36033 ("Form N-1A
Registration Statement")
2. Bylaws. Incorporated by reference to the Form N-1A Registration Statement.
3. Not applicable.
4. Agreement and Plan of Reorganization. Exhibit A to Prospectus contained in
Part A of this Registration Statement.
5. Declaration of Trust of Evergreen Municipal Trust Articles II., III.6(c),
IV.(3), IV.(8), V., VI., VII., and VIII and By-Laws Articles II., III. and VIII.
6. Form of Investment Advisory Agreement between Evergreen Investment Management
Company and Evergreen Municipal Trust. Incorporated by reference to the Form
N-1A Registration Statement.
7(a). Principal Underwriting Agreements between Evergreen Municipal Trust and
Evergreen Distributor, Inc. Incorporated by reference to the Form N-1A
Registration Statement.
7(b). Form of Dealer Agreement for Class A, Class B and Class C shares used by
Evergreen Distributor, Inc. Incorporated by reference to the Form N-1A
Registration Statement.
8. Form of Deferred Compensation Plan. Incorporated by reference to the Form
N-1A Registration Statement.
-1-
<PAGE>
9. Form of Custody Agreement between State Street Bank and Trust Company and
Evergreen Municipal Trust. Incorporated by reference to Form N-1A Registration
Statement.
10(a). Rule 12b-1 Distribution Plans. Incorporated by reference to the Form N-1A
Registration Statement.
10(b). Multiple Class Plan. Incorporated by reference to the
Form N-1A Registration Statement.
11. Opinion and consent of Sullivan & Worcester LLP. Filed herewith.
12. Tax opinion and consent of KPMG LLP. To be filed by amendment.
13. Not applicable.
14. Consent of KPMG LLP (with respect to Davis Tax-Free High Income Fund).
Filed herewith.
15. Not applicable.
16. Powers of Attorney. Incorporated by reference to the Form N-1A Registration
Statement.
17. Form of Proxy Card. Filed herewith.
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus that is
a part of this Registration Statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933,
the reoffering prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new Registration Statement for
the securities offered therein, and the offering of
-2-
<PAGE>
the securities at that time shall be deemed to be the initial bona fide offering
of them.
-3-
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement
has been signed on behalf of the Registrant, in the City of New York and State
of New York on the 16th day of December, 1999.
EVERGREEN MUNICIPAL TRUST
By: /s/Anthony J. Fischer
-----------------------
Name: Anthony J. Fischer
Title: President
As required by the Securities Act of 1933, the following persons have
signed this Registration Statement in the capacities indicated on the 16th day
of December, 1999.
Signatures Title
- ---------- -----
/s/Anthony J. Fischer President and
- ------------------- Treasurer
Anthony J. Fischer
/s/Laurence B. Ashkin* Trustee
- ---------------------
Laurence B. Ashkin
/s/Charles A. Austin III* Trustee
- -------------------------
Charles A. Austin III
/s/K. Dun Gifford* Trustee
- -----------------
K. Dun Gifford
/s/James S. Howell* Trustee
- ------------------
James S. Howell
/s/Leroy Keith, Jr.* Trustee
- -------------------
Leroy Keith, Jr.
/s/Gerald M. McDonnell* Trustee
- ----------------------
Gerald M. McDonnell
-4-
<PAGE>
/s/Thomas L. McVerry* Trustee
- --------------------
Thomas L. McVerry
/s/William Walt Pettit* Trustee
- ---------------------
William Walt Pettit
/s/David M. Richardson* Trustee
- ----------------------
David M. Richardson
/s/Russell A. Salton III* Trustee
- -------------------------
Russell A. Salton III
/s/Michael S. Scofield* Trustee
- ----------------------
Michael S. Scofield
/s/Richard J. Shima* Trustee
- -------------------
Richard J. Shima
Trustee
- ---------------------
Arnold H. Dreyfuss
Trustee
- --------------------------
Louis W. Moelchert, Jr.
* By: /s/Maureen E. Towle
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Attorney-in-Fact
Maureen E. Towle, 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 included as Exhibit 16 to this
Registration Statement.
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SULLIVAN & WORCESTER LLP
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: 202-775-8190
FACSIMILE: 202-293-2275
767 THIRD AVENUE ONE POST OFFICE SQUARE
NEW YORK, NEW YORK 10017 BOSTON, MASSACHUSETTS 02109
TELEPHONE: 212-486-8200 TELEPHONE: 617-338-2800
FACSIMILE: 212-758-2151 FACSIMILE: 617-338-2880
December 16, 1999
Evergreen Municipal Trust
200 Berkeley Street
Boston, Massachusetts 02116
Ladies and Gentlemen:
We have been requested by the Evergreen Municipal Trust, a Delaware
business trust with transferable shares (the "Trust") established under an
Agreement and Declaration of Trust dated September 18, 1997, as amended (the
"Declaration"), for our opinion with respect to certain matters relating to
Evergreen Tax-Free High Income Fund (the "Acquiring Fund"), a series of the
Trust. We understand that the Trust is about to file a Registration Statement on
Form N-14 for the purpose of registering shares of the Trust under the
Securities Act of 1933, as amended (the "1933 Act"), in connection with the
proposed acquisition by the Acquiring Fund of all of the assets of Davis
Tax-Free High Income Fund (the "Acquired Fund"), a series of Davis Tax-Free High
Income Fund, Inc., in exchange solely for shares of the Acquiring Fund and the
assumption by the Acquiring Fund of the identified liabilities of the Acquired
Fund pursuant to an Agreement and Plan of Reorganization, the form of which is
included in the Form N-14 Registration Statement (the "Plan").
We have, as counsel, participated in various business and other
proceedings relating to the Trust. We have examined copies, either certified or
otherwise proved to be genuine to our satisfaction, of the Trust's Declaration
and By-Laws, and other documents relating to its organization, operation, and
proposed operation, including the proposed Plan and we have made such other
investigations as, in our judgment, are necessary or appropriate to enable us to
render the opinion expressed below.
We are admitted to the Bars of The Commonwealth of Massachusetts and
the District of Columbia and generally do not purport to be familiar with the
laws of the State of Delaware. To the extent that the conclusions based on the
laws of the State of Delaware are involved in the opinion set forth herein
below,
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Evergreen Municipal Trust
December 16, 1999
Page 2
we have relied, in rendering such opinions, upon our examination of Chapter 38
of Title 12 of the Delaware Code Annotated, as amended, entitled "Treatment of
Delaware Business Trusts" (the "Delaware business trust law") and on our
knowledge of interpretation of analogous common law of The Commonwealth of
Massachusetts.
Based upon the foregoing, and assuming the approval by shareholders of
the Acquired Fund of certain matters scheduled for their consideration at a
meeting presently anticipated to be held on March 10, 2000, it is our opinion
that the shares of the Acquiring Fund currently being registered, when issued in
accordance with the Plan and the Trust's Declaration and By-Laws, will be
legally issued, fully paid and non-assessable by the Trust, subject to
compliance with the 1933 Act, the Investment Company Act of 1940, as amended and
applicable state laws regulating the offer and sale of securities.
We hereby consent to the filing of this opinion with and as a part of
the Registration Statement on Form N-14 and to the reference to our firm under
the caption "Legal Matters" in the Prospectus/Proxy Statement filed as part of
the Registration Statement. In giving such consent, we do not thereby admit that
we come within the category of persons whose consent is required under Section 7
of the 1933 Act or the rules and regulations promulgated thereunder.
Very truly yours,
/s/SULLIVAN & WORCESTER LLP
---------------------------
SULLIVAN & WORCESTER LLP
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CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Davis Tax-Free High Income Fund, Inc.
We consent to the use of our report dated November 5, 1999 for Davis Tax-Free
High Income Fund incorporated by reference herein and to the reference to our
firm under the caption "FINANCIAL STATEMENTS AND EXPERTS" in the
Prospectus/Proxy Statement.
/s/KPMG LLP
-----------------------
KPMG LLP
Denver, Colorado
December 17, 1999
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EVERY SHAREHOLDER'S VOTE IS IMPORTANT!
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH PROPOSAL.
PLEASE VOTE, SIGN, DATE AND PROMPTLY RETURN YOUR PROXY IN THE
ENCLOSED ENVELOPE TODAY!
Please detach at perforation before mailing.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
DAVIS TAX-FREE HIGH INCOME FUND a series of Davis
Tax-Free High Income Fund, Inc.
PROXY FOR THE MEETING OF SHAREHOLDERS
TO BE HELD ON MARCH 10, 2000
The undersigned, revoking all Proxies heretofore given, hereby appoints Kenneth
Eich, Sharra Reed, and Thomas Tays or any of them as Proxies of the undersigned,
with full power of substitution, to vote on behalf of the undersigned all shares
of Davis Tax-Free High Income Fund ("Davis Tax Free Fund"), a series of Davis
Tax-Free High Income Fund, Inc., that the undersigned is entitled to vote at the
special meeting of shareholders of Davis Tax Free Fund to be held at 11:00 a.m.
on Friday, March 10, 2000 at the offices of Davis Selected Advisers, L.P., 124
East Marcy Street, Santa Fe, New Mexico 87501 and at any adjournments thereof,
as fully as the undersigned would be entitled to vote if personally present.
NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR ON THIS PROXY. If joint owners,
EITHER may sign this Proxy. When signing as attorney, executor, administrator,
trustee, guardian, or custodian for a minor, please give your full title. When
signing on behalf of a corporation or as a partner for a partnership, please
give the full corporate or partnership name and your title, if any.
Date
- ----------------------------------------
- ----------------------------------------
Signature(s) and Title(s), if applicable
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF DAVIS
TAX-FREE HIGH INCOME FUND, INC. THIS PROXY WILL BE VOTED AS SPECIFIED
BELOW WITH RESPECT TO THE ACTION TO BE TAKEN ON THE FOLLOWING
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PROPOSALS. THE SHARES REPRESENTED HEREBY WILL BE VOTED AS INDICATED
OR FOR THE PROPOSALS IF NO CHOICE IS INDICATED. THE BOARD OF DIRECTORS
OF DAVIS TAX-FREE HIGH INCOME FUND, INC. RECOMMENDS A VOTE FOR THE
PROPOSALS. PLEASE MARK YOUR VOTE BELOW IN BLUE OR BLACK INK. DO NOT
USE RED INK. EXAMPLE: X
1. To approve an Agreement and Plan of Reorganization whereby Evergreen Tax-Free
High Income Fund, a series of Evergreen Municipal Trust, will (i) acquire all of
the assets of Davis Tax Free Fund in exchange for shares of Evergreen Tax-Free
High Income Fund; and (ii) assume the identified liabilities of Davis Tax-Free
High Income Fund, as substantially described in the accompanying
Prospectus/Proxy Statement.
- ---- FOR ---- AGAINST ---- ABSTAIN
2. To consider and vote upon such other matters as may properly come before said
meeting or any adjournments thereof.
- ---- FOR ---- AGAINST ---- ABSTAIN
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