1933 Act No. 333-36033
1940 Act No. 811-08367
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 11 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 12 [X]
EVERGREEN MUNICIPAL TRUST
(Exact Name of Registrant as Specified in Charter)
200 Berkeley Street, Boston, Massachusetts 02116-5034
(Address of Principal Executive Offices)
(617) 210-3200
(Registrant's Telephone Number)
The Corporation Trust Company
1209 Orange Street
Wilmington, Delaware 19801
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[x] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
<PAGE>
EVERGREEN MUNICIPAL TRUST
CONTENTS OF
POST-EFFECTIVE AMENDMENT NO. 11
to
REGISTRATION STATEMENT
This Post-Effective Amendment No. 11 to Registrant's Registration Statement
No. 333-36033/811-08367 consists of the following pages, items of information
and documents:
The Facing Sheet
The Contents Page
PART A
-------------
Prospectus for Evergreen Connecticut Municipal Bond Fund, Evergreen
New Jersey Municipal Bond Fund and Evergreen Pennsylvania Municipal Bond Fund
is contained herein.
Prospectus for Evergreen California Municipal Bond Fund,
Evergreen Massachusetts Municipal Bond Fund, Evergreen Missouri Municipal
Bond Fund and Evergreen New York Municipal Bond Fund is contained herein.
Prospectuses for Evergreen High Grade Municipal Bond Fund, Evergreen
Short-Intermediate Municipal Fund and Evergreen Municipal Bond Fund contained in
Post-Effective Amendment No. 10 to Registration Statement No.
333-36033/811-08367 filed on April 1, 1999 are incorporated by reference herein.
Prospectuses for Evergreen Florida High Income Municipal Bond Fund,
Evergreen Florida Municipal Bond Fund, Evergreen Georgia Municipal Bond Fund,
Evergreen Maryland Municipal Bond Fund, Evergreen North Carolina Municipal Bond
Fund, Evergreen South Carolina Municipal Bond Fund and Evergreen Virginia
Municipal Bond Fund contained in Post-Effective Amendment No. 9 to
Registration Statement No.333-36033/811-08367
filed on October 30, 1998 are incorporated by
reference herein.
PART B
------
Statement of Additional Information for Evergreen California
Municipal Bond Fund, Evergreen Massachusetts Municipal Bond Fund, Evergreen
Missouri Municipal Bond Fund, Evergreen New York Municipal Bond Fund, Evergreen
Connecticut Municipal Bond Fund, Evergreen New Jersey Municipal Bond Fund and
Evergreen Pennsylvania Municipal Bond Fund is contained herein.
Statement of Additional Information for Evergreen High Grade Municipal Bond
Fund, Evergreen Short-Intermediate Municipal Fund and Evergreen Municipal Bond
Fund contained in Post-Effective Amendment No. 10 to Registration Statement
No.333-36033/811-08367 filed on April 1, 1999 is incorporated by reference
herein.
Statement of Additional Information for Evergreen Florida High Income
Municipal Bond Fund, Evergreen Florida Municipal Bond Fund, Evergreen Georgia
Municipal Bond Fund, Evergreen Maryland Municipal Bond Fund, Evergreen North
Carolina Municipal Bond Fund, Evergreen South Carolina Municipal Bond Fund and
Evergreen Virginia Municipal Bond Fund contained in Post-Effective Amendment
No. 9 to Registration Statement No.333-36033/811-08367 filed on
October 30, 1998 is incorporated by reference herein.
PART C
------
Exhibits
Indemnification
Business and Other Connections of Investment Advisor
Principal Underwriter
Location of Accounts and Records
Undertakings
Signatures
<PAGE>
EVERGREEN MUNICIPAL TRUST
PART A
PROSPECTUSES
<PAGE>
Evergreen
State
Municipal Bond
Funds
Evergreen Connecticut Municipal Bond Fund
Evergreen New Jersey Municipal Bond Fund
Evergreen Pennsylvania Municipal Bond Fund
Class A
Class B
Class C
Class Y
Prospectus, August 1, 1999
The Securities and Exchange Commission has not determined that the information
in this prospectus is accurate or complete, nor has it approved or disapproved
these securities. Anyone who tells you otherwise is committing a crime.
p:ssdocs/public/harnesx/statepromay-528.doc
<PAGE>
FUND SUMMARIES:
Evergreen Connecticut Municipal Bond Fund 4
Evergreen New Jersey Municipal Bond Fund 6
Evergreen Pennsylvania Municipal Bond Fund 8
GENERAL INFORMATION:
The Funds' Investment Advisors 10
The Funds' Portfolio Managers 10
Calculating the Share Price 10
How to Choose an Evergreen Fund 10
How to Choose the Share Class
That Best Suits You 11
How to Buy Shares 13
How to Redeem Shares 14
Other Services 15
The Tax Consequences of
Investing in the Funds 15
Fees and Expenses of the Funds 16
Financial Highlights 17
Other Fund Practices 18
In general, Funds included in this prospectus seek to provide investors with
current income exempt from federal income and certain state income taxes,
consistent with the preservation of capital. The Funds emphasize investments in
securities with higher yields and longer maturities.
Fund Summaries Key
Each Fund's summary is organized around the following basic topics and
questions:
Investment Goal
What is the Fund's financial objective? You can find clarification on how the
Fund seeks to achieve its objective by looking at the Fund's strategy and
investment policies. The Fund's Board of Trustees can change the investment
objective without a shareholder vote.
Investment Strategy
How does the fund go about trying to meet its goals? What types of investments
does it contain? What style of investing and investment philosophy does it
follow? Does it have limits on the amount invested in any particular type of
security?
Risk Factors
What are the specific risks for an investor in the Fund?
Performance
How well has the Fund performed in the past year? The past five years? The past
ten years?
Expenses
How much does it cost to invest in the Fund? What is the difference between
sales charges and expenses?
<PAGE>
State Municipal
Bond Funds
typically rely on a combination of the following strategies:
o investing at least 80% of their assets in municipal securities that are
exempt from federal income tax, other than the alternative minimum tax;
o investing at least 65% of their assets in municipal securities that are
exempt from income taxes, as applicable, in the state for which the Fund is
named;
o investing at least 80% of their assets in investment grade municipal
securities, which are bonds rated within the four highest ratings
categories by a nationally recognized statistical ratings organizations, or
unrated securities determined to be of comparable quality by the investment
advisor;
o purchasing municipal securities of any maturity, but maintaining an average
dollar weighted maturity of 10 to 20 years; and
o selling a portfolio investment when the issuer's investment fundamentals
begin to deteriorate, when the investment no longer appears to meet the
Fund's investment objective, when the Fund must meet redemptions, or for
other reasons which the investment advisor deems necessary.
may be appropriate for investors who:
o seek a high quality portfolio of municipal bonds; and
o seek income which is exempt from federal and state income tax.
Following this overview, you will find information on each State Municipal Bond
Fund's specific investment strategies and risks, including state specific risks.
Municipal securities are affected by political and economic events of the
issuing state. Also, see the Statement of Additional Information for further
information on the state specific risks of your Fund.
Risk Factors For All Mutual Funds
Please remember that mutual fund shares are:
o not guaranteed to achieve their investment goal
o not insured, endorsed or guaranteed by the FDIC, a bank or any government
agency
o subject to investment risks, including possible loss of your original
investment
Like most investments, your investment in an Evergreen State Municipal Bond Fund
could fluctuate significantly in value over time and could result in a loss of
money.
Here are the most important factors that may affect the value of your
investment:
Interest Rate Risk
When interest rates go up, the value of debt securities tends to fall. Since
your Fund invests a significant portion of its portfolio in debt securities, if
interest rates rise, then the value of your investment may decline. When
interest rates go down, interest earned by your Fund on its debt securities may
also decline, which could cause the Fund to reduce the dividends it pays.
Credit Risk
The value of a debt security is directly affected by the issuer's ability to
repay principal and pay interest on time. Since your Fund invests in debt
securities, the value of your investment may decline if an issuer fails to pay
an obligation on a timely basis.
Below Investment Grade Bond Risk
Below investment grade bonds are commonly referred to as "junk bonds" because
they are usually backed by issuers of less proven or questionable financial
strength. Such issuers are more vulnerable to financial setbacks and less
certain to pay interest and principal than issuers of bonds offering lower
yields and risk. Markets may react to unfavorable news about issuers of below
investment grade bonds, causing sudden and steep declines in value.
Non-Diversification Risk
An investment in a Fund that is non-diversified entails greater risk than an
investment in a diversified fund. When a Fund is non-diversified, it may invest
up to 25% of its assets in a single issuer and up to 50% of its assets may
consist of securities of only two issuers. A higher percentage of investments
among fewer issuers may result in greater fluctuation in the total market value
of the Fund's portfolio.
<PAGE>
CONNECTICUT MUNICIPAL BOND FUND
FUND FACTS:
Goal:
o Tax Exempt Current Income
Principal Investment:
o Municipal Securities
Classes of Shares Offered in this Prospectus:
o Class A
o Class B
o Class Y
Investment Advisor:
o Evergreen Investment Management
Portfolio Managers:
o Jocelyn Turner
o Joseph R. Baxter
NASDAQ Symbols:
o ECTAX (Class A)
o ECTBX (Class B)
o ECTYX (Class Y)
Dividend Payment Schedule:
o Monthly
Investment Goal
The Fund seeks current income exempt from federal income taxes other than the
alternative minimum tax and Connecticut personal income taxes. In addition, the
Fund seeks to preserve capital.
Investment Strategy
The following investment strategies are in addition to the investment strategies
discussed in the "Overview" on page 1.
The Fund normally invests at least 80% of its assets in municipal securities
that are exempt from federal income tax, other than the alternative minimum tax.
The Fund also invests at least 65% of its assets in Connecticut municipal
obligations. The Fund will invest at least 80% of its assets in bonds that, at
the date of investment, are rated within the four highest ratings categories by
a nationally recognized statistical ratings organization, or unrated securities
determined to be of comparable quality by the investment advisor. The Fund may
invest up to 20% of its assets in below investment grade bonds, but will not
invest in bonds rated below B. The Fund may also invest up to 20% of its assets
in high quality short-term obligations. In purchasing municipal securities, the
Fund includes in its analysis how well the securities fit into the Fund's
overall portfolio strategy, credit criteria, and established price levels.
The Fund may invest up to 100% of its assets in high quality money market
instruments in response to adverse economic, political or market conditions.
This strategy is inconsistent with the Fund's principal investment strategy and
investment goal and, if employed, could result in a lower return and loss of
market opportunity.
Risk Factors
Your investment in the Fund is subject to the risks discussed in the "Overview"
on page 1 under the headings:
o Interest Rate Risk
o Credit Risk
o Below Investment Grade Bond Risk
o Non-Diversification Risk
The performance of the Connecticut Municipal Bond Fund is influenced by the
political, economic and statutory environment within the State. The Fund invests
in obligations of Connecticut issuers, which results in the Fund's performance
being subject to risks associated with the most current conditions within the
State. Currently, Connecticut is experiencing a slight decline in population,
output growth and manufacturing employment. Defense related business is an
important component of the manufacturing sector in Connecticut. Due to the
scaling back of the national defense budget in the past decade, spending on
certain defense related areas has been dramatically reduced.
The Fund's concentration in Connecticut municipal bonds may expose shareholders
to additional risks. In particular, the Fund will be vulnerable to any
development in Connecticut's economy that may weaken or jeopardize the ability
of Connecticut municipal bond issuers to pay interest and principal on their
bonds. As a result, the Fund's shares may fluctuate more widely in value than
those of a fund investing in municipal bonds from a number of different states.
For more information on the factors that could affect the ability of the bond
issuers to pay interest and principal on securities acquired by the Fund, see
the Statement of Additional Information.
Generally, exempt-interest dividends paid by the Fund are not subject to the
Connecticut income tax on individuals, trusts and estates to the extent such
dividends are exempt from federal income tax and derived from securities issued
by the State or its political subdivisions. Distributions from the Fund to
shareholders subject to the state's business tax are included in gross income,
but a dividends received deduction may be available for a portion of such
distributions.
For further information regarding the Fund's investment strategy and risk
factors, see "Other Fund Practices."
<PAGE>
Performance
The following charts show how the Fund has performed in the past. Past
performance is not an indication of future results.
The chart below shows the percentage gain or loss for Class Y shares of the Fund
in the past ten calendar years. It should give you a general idea of how the
Fund's return has varied from year-to-year. This graph includes the effects of
Fund expenses.
Year-by-Year Total Return for Class Y Shares (%)*
1989 1990 1991 1992 1993
7.71% 6.32% 9.12% 5.86% 6.53%
1994 1995 1996 1997 1998
- -3.48% 11.06% 3.75% 7.26% 5.80%
Best Quarter: 1st Quarter 1995 +4.39%*
Worst Quarter: 1st Quarter 1994 -3.32%*
Year to date total return through 3/31/99 is 0.42%.
The next table lists the Fund's average annual total return over the past one,
five and ten years and since inception (through 12/31/98), including applicable
sales charges. This table is intended to provide you with some indication of the
risks of investing in the Fund. At the bottom of the table you can compare this
performance with the Lehman Brothers Municipal Bond Index, which is a broad
measure of the municipal bond market; it is not an actual investment.
Average Annual Total Return
(for the period ended 12/31/98)*
Inception Performance Since
Date of Class 1 year 5 year 10 year 1/31/81
Class A 12/30/97 0.51% 3.50% 5.15% 6.36%
Class B 1/9/98 -0.30% 3.39% 4.88% 5.86%
Class Y 11/24/97 5.80% 4.76% 5.93% 6.92%
Lehman Brothers
Municipal Bond Index 6.54% 6.24% 8.22% 10.39%**
* Historical performance shown for Class Y prior to its inception is based on
the Fund's predecessor common trust fund's (CTF) performance, adjusted for
estimated mutual fund expenses. The CTF was not registered under the Investment
Company Act of 1940, as amended, and was not subject to certain investment
restrictions. If the CTF had been registered, its performance might have been
adversely affected. For Classes A and B prior to their inception, the historical
performance shown is based on the performance of Class Y and has not been
adjusted to reflect the effect of each Class' 12b-1 fees. These fees for Classes
A and B are 0.25% and 1.00%, respectively. If these fees had been reflected,
returns for Classes A and B would have been lower. Performance for the CTF has
been adjusted to include the effect of estimated mutual fund class gross expense
ratios at the time the Fund was converted to a mutual fund. If fee waivers and
expense reimbursements had been calculated into the mutual fund class expense
ratio, the total returns would be as follows: Class A - 5 year =3.71%, 10 year
=5.41% and since 1/31/81 =6.63%; Class B - 5 year =3.59%, 10 year =5.12% and
since 1/31/81 =6.12%; Class Y - 5 year =4.98%, 10 year =6.18% and since 1/31/81
=7.19%.
**Performance since 12/31/97 is 6.54%.
Expenses
This section describes the fees and expenses you would pay if you bought and
held shares of the Fund.
Shareholder Fees (fees paid directly from your investment)
Shareholder Transaction Expenses Class A Class B Class Y
Maximum sales charge imposed on 4.75% None None
purchases (as a % of offering
price)
Maximum deferred sales charge None* 5.00% None
(as a % of either the redemption
amount or initial investment
whichever is lower)
*Investments of $1 million or more are not subject to a front-end sales charge,
but may be subject to a contingent deferred sales charge of 1.00% upon
redemption within one year after the month of purchase.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)*
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating Expenses**
Class A 0.60% 0.25% 0.14% 0.99%
Class B 0.60% 1.00% 0.14% 1.74%
Class Y 0.60% None 0.14% 0.74%
*Restated for the fiscal year ended 3/31/99.
**From time to time, the Fund's investment advisor may, at its discretion,
reduce or waive its fees or reimburse a Fund for certain of its expenses in
order to reduce expense ratios. The Fund's investment advisor may cease these
waivers or reimbursements at any time. The annual operating expenses do not
reflect fee waivers and expense reimbursements. Including current fee waivers
and expense reimbursements, Total Fund Operating Expenses for Class A, Class B
and Class Y were 0.83%, 1.58% and 0.58%, respectively.
The table below shows the total expenses you would pay on a $10,000 investment
over one-, three-, five- and ten-year periods. The example is intended to help
you compare the cost of investing in this Fund versus other mutual funds and is
for illustration only. The example assumes a 5% average annual return and that
you reinvest all of your dividends. Your actual costs may be higher or lower.
Example of Fund Expenses
Assuming Redemption at Assuming
End of Period No Redemption
After: Class A Class B Class Y Class B
1 year $571 $667 $76 $177
3 years $775 $848 $237 $548
5 years $996 $1,144 $411 $944
10 years $1,630 $1,760 $918 $1,760
<PAGE>
NEW JERSEY MUNICIPAL BOND FUND
FUND FACTS:
Goal:
o Tax Exempt Current Income
Principal Investment:
o Municipal Securities
Classes of Shares Offered in this Prospectus:
o Class A
o Class B
o Class Y
Investment Advisor:
o Evergreen Investment Management
Portfolio Managers:
o Jocelyn Turner
o Joseph R. Baxter
NASDAQ Symbols:
o ENJAX (Class A)
o ENJBX (Class B)
o ENJYX (Class Y)
Dividend Payment Schedule:
o Monthly
Investment Goal
The Fund seeks the highest possible current income exempt from federal income
taxes, other than the alternative minimum tax, and state income taxes while
preserving capital.
Investment Strategy
The following investment strategies are in addition to the investment strategies
discussed in the "Overview" on page 1.
The Fund normally invests at least 80% of its assets in municipal securities
that are exempt from federal income tax, other than the alternative minimum tax.
The Fund also invests at least 65% of its assets in municipal securities that
are exempt from income taxes in the State of New Jersey. The Fund will invest at
least 80% of its assets in bonds that, at the date of investment, are rated
within the four highest ratings categories by a nationally recognized
statistical ratings organization, or unrated securities determined to be of
comparable quality by the investment advisor. The Fund may invest up to 20% of
its assets in below investment grade bonds, but will not invest in bonds rated
below B. The Fund may also invest up to 20% of its assets in high quality
short-term obligations. In purchasing municipal securities, the Fund includes in
its analysis how well the securities fit into the Fund's overall portfolio
strategy, credit criteria, and established price levels.
The Fund may invest up to 100% of its assets in high quality money market
instruments in response to adverse economic, political or market conditions.
This strategy is inconsistent with the Fund's principal investment strategy and
investment goal and, if employed, could result in a lower return and loss of
market opportunity.
Risk Factors
Your investment in the Fund is subject to the risks discussed in the "Overview"
on page 1 under the headings:
o Interest Rate Risk
o Credit Risk
o Below Investment Grade Bond Risk
o Non-Diversification Risk
The performance of the New Jersey Municipal Bond Fund is influenced by the
political, economic and statutory environment within the State. The Fund invests
in obligations of New Jersey issuers, which results in the Fund's performance
being subject to risks associated with the most current conditions within the
State. Some of these conditions may include the State's slowing growth rate
since 1987, the job losses experienced in certain sectors of New Jersey's
economy, and other factors which may cause rating agencies to downgrade the
credit ratings on certain issues.
The Fund's concentration in New Jersey municipal bonds may expose shareholders
to additional risks. In particular, the Fund will be vulnerable to any
development in New Jersey's economy that may weaken or jeopardize the ability of
New Jersey municipal bond issuers to pay interest and principal on their bonds.
As a result, the Fund's shares may fluctuate more widely in value than those of
a fund investing in municipal bonds from a number of different states.
For more information on the factors that could affect the ability of the bond
issuers to pay interest and principal on securities acquired by the Fund, see
the Statement of Additional Information.
Distributions of capital gains and other taxable income will be subject to tax
under the New Jersey Gross Income Tax. Corporations subject to the New Jersey
franchise tax will be subject to tax on all distributions of income from the
Fund. For more information on New Jersey tax consequences, see the Statement of
Additional Information.
For further information regarding the Fund's investment strategy and risk
factors, see "Other Fund Practices."
<PAGE>
PERFORMANCE
The following charts show how the Fund has performed in the past. Past
performance is not an indication of future results.
The chart below shows the percentage gain or loss for Class A shares of the Fund
in each calendar year since the Class A shares' inception on 7/16/91. It should
give you a general idea of how the Fund's return has varied from year-to-year.
This graph includes the effects of Fund expenses, but not sales charges. Returns
would be lower if sales charges were included.
Year-by-Year Total Return for Class A Shares (%)
1992 1993 1994 1995 1996 1997
8.77% 12.52% -5.48% 15.90% 3.84% 8.02%
1998
5.92%
Best Quarter: 1st Quarter 1995 +6.76%
Worst Quarter: 1st Quarter 1994 -5.48%
Year to date total return through 3/31/99 is 0.56%.
The next table lists the Fund's average annual total return over the past one
and five years and since inception (through 12/31/98), including applicable
sales charges. This table is intended to provide you with some indication of the
risks of investing in the Fund. At the bottom of the table you can compare this
performance with the Lehman Brothers Municipal Bond Index, which is a broad
measure of the municipal bond market; it is not an actual investment.
Average Annual Total Return
(for the period ended 12/31/98)*
Inception Performance Since
Date of Class 1 year 5 year 10 year 7/16/91
Class A 7/16/91 0.85% 4.39% N/A 6.55%
Class B 1/30/96 -0.04% 4.56% N/A 6.89%
Class Y 2/8/96 6.01% 5.46% N/A 7.28%
Lehman Brothers
Municipal Bond Index 6.54% 6.24% 8.22% 7.87%**
* Historical performance shown for Classes B and Y prior to their inception is
based on the performance of Class A, the original class offered. These
historical returns for Classes B and Y have not been adjusted to reflect the
effect of each Class' 12b-1 fees. These fees for Classes A and B are 0.25% and
1.00%, respectively. Class Y does not pay a 12b-1 fee. If these fees had been
reflected, returns for Class B would have been lower while returns for Class Y
would have been higher.
**Performance since 1/31/96 is 6.63%.
EXPENSES
This section describes the fees and expenses you would pay if you bought and
held shares of the Fund.
Shareholder Fees (fees paid directly from your investment)
Shareholder Transaction Expenses Class A Class B Class Y
Maximum sales charge imposed on 4.75% None None
purchases (as a % of offering
price)
Maximum deferred sales charge None* 5.00% None
(as a % of either the
redemption amount or initial
investment whichever is lower)
* Investments of $1 million or more are not subject to a front-end sales charge,
but may be subject to a contingent deferred sales charge of 1.00% upon
redemption within one year after the month of purchase.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)*
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating Expenses**
Class A 0.50% 0.25% 0.12% 0.87%
Class B 0.50% 1.00% 0.12% 1.62%
Class Y 0.50% None 0.12% 0.62%
*Actual for the fiscal year ended 3/31/99.
**From time to time, the Fund's investment advisor may, at its discretion,
reduce or waive its fees or reimburse a Fund for certain of its expenses in
order to reduce expense ratios. The Fund's investment advisor may cease these
waivers or reimbursements at any time. The annual operating expenses do not
reflect fee waivers and expense reimbursements. Including current fee waivers
and expense reimbursements, Total Fund Operating Expenses for Class A, Class B
and Class Y were 0.50%, 1.41% and 0.41%, respectively.
The table below shows the total expenses you would pay on a $10,000 investment
over one-, three-, five- and ten-year periods. The example is intended to help
you compare the cost of investing in this Fund versus other mutual funds and is
for illustration only. The example assumes a 5% average annual return and that
you reinvest all of your dividends. Your actual costs may be higher or lower.
Example of Fund Expenses
Assuming Redemption at Assuming
End of Period No Redemption
After: Class A Class B Class Y Class B
1 year $560 $665 $63 $165
3 years $739 $811 $199 $511
5 years $934 $1,081 $346 $881
10 years $1,497 $1,627 $774 $1,627
<PAGE>
PENNSYLVANIA MUNICIPAL BOND FUND
FUND FACTS:
Goal:
o Tax Exempt Current Income
Principal Investment:
o Municipal Securities
Classes of Shares Offered in this Prospectus:
o Class A
o Class B
o Class C
o Class Y
Investment Advisor:
o Evergreen Investment Management Company
Portfolio Manager:
o Jocelyn Turner
o Joseph R. Baxter
NASDAQ Symbols:
o EKVAX (Class A)
o EKVBX (Class B)
o EKVYX (Class C)
o EKVYX (Class Y)
Dividend Payment Schedule:
o Monthly
Investment Goal
The Fund seeks the highest possible current income exempt from federal income
taxes, other than the alternative minimum tax, and state income taxes while
preserving capital.
Investment Strategy
The following investment strategies are in addition to the investment strategies
discussed in the "Overview" on page 1.
The Fund normally invests at least 80% of its assets in municipal securities
that are exempt from federal income tax, other than the alternative minimum tax.
The Fund also invests at least 65% of its assets in municipal securities that
are exempt from income taxes in the Commonwealth of Pennsylvania. The Fund will
invest at least 80% of its assets in bonds that, at the date of investment, are
rated within the four highest ratings categories by a nationally recognized
statistical ratings organization, or unrated securities determined to be of
comparable quality by the investment advisor. The Fund may invest up to 20% of
its assets in below investment grade bonds, but will not invest in bonds rated
below B. The Fund may also invest up to 20% of its assets in high quality
short-term obligations. In purchasing municipal securities, the Fund includes in
its analysis how well the securities fit into the Fund's overall portfolio
strategy, credit criteria, and established price levels.
The Fund may invest up to 100% of its assets in high quality money market
instruments in response to adverse economic, political or market conditions.
This strategy is inconsistent with the Fund's principal investment strategy and
investment goal and, if employed, could result in a lower return and loss of
market opportunity.
Risk Factors
Your investment in the Fund is subject to the risks discussed in the "Overview"
on page 1 under the headings:
o Interest Rate Risk
o Credit Risk
o Below Investment Grade Bond Risk
o Non-Diversification Risk
The performance of the Pennsylvania Municipal Bond Fund is influenced by the
political, economic and statutory environment within the Commonwealth . The Fund
invests in obligations of Pennsylvania issuers, which results in the Fund's
performance being subject to risks associated with the most current conditions
within the State. Some of these conditions may include the uncertainty
associated with the shift occurring in the State's economy away from the coal,
steel and railroad industries and toward the service sectors of trade, medical
and health services, education and financial institutions, as well as other
factors which may cause rating agencies to downgrade the credit ratings on
certain issues.
The Fund's concentration in Pennsylvania municipal bonds may expose shareholders
to additional risks. In particular, the Fund will be vulnerable to any
development in Pennsylvania's economy that may weaken or jeopardize the ability
of Pennsylvania municipal bond issuers to pay interest and principal on their
bonds. As a result, the Fund's shares may fluctuate more widely in value than
those of a fund investing in municipal bonds from a number of different states.
For more information on the factors that could affect the ability of the bond
issuers to pay interest and principal on securities acquired by the Fund, see
the Statement of Additional formation.
For further information regarding the Fund's investment strategy and risk
factors, see "Other Fund Practices."
<PAGE>
Performance
The following charts show how the Fund has performed in the past. Past
performance is not an indication of future results. The chart below shows the
percentage gain or loss for Class A shares of the Fund in each calendar year
since the Class A shares' inception on 12/27/90. It should give you a general
idea of how the Fund's return has varied from year-to-year. This graph includes
the effects of Fund expenses, but not sales charges. Returns would be lower if
sales charges were included.
Year-by-Year Total Return for Class A Shares (%)
1991 1992 1993 1994 1995
13.88% 9.27% 14.25% -8.25% 18.23%
1996 1997 1998
2.74% 4.16% 5.46%
Best Quarter: 1st Quarter 1995 +7.09%
Worst Quarter: 1st Quarter 1994 -6.34%
Year to date total return through 3/31/99 is 0.66%.
The next table lists the Fund's average annual total return over the one and
five years and since inception (through 12/31/98), including applicable sales
charges. This table is intended to provide you with some indication of the risks
of investing in the Fund. At the bottom of the table you can compare this
performance with the Lehman Brothers Municipal Bond Index, which is a broad
measure of the municipal bond market; it is not an actual investment.
Average Annual Total Return (for the period ended 12/31/98)*
Inception Performance Since
Date of Class 1 year 5 year 10 year 12/27/90
Class A 12/27/90 0.41% 4.10% N/A 7.41%
Class B 2/1/93 -0.22% 4.03% N/A 7.47%
Class C 2/1/93 3.77% 4.35% N/A 7.47%
Class Y 11/24/97 5.73% 5.17% N/A 8.11%
Lehman Brothers
Municipal Bond Index 6.54% 6.24% 8.22% 8.02%**
* Historical performance shown for Classes B, C, and Y prior to their inception
is based on the performance of Class A, the original class offered. These
historical returns for Classes B, C, and Y have not been adjusted to reflect the
effect of each Class' 12b-1 fees. These fees for Classes A, B, and C are 0.25%,
1.00% and 1.00%, respectively. Class Y does not pay a 12b-1 fee. If these fees
had been reflected, returns for Classes B and C would have been lower while
returns for Class Y would have been higher.
**Performance since 1/31/93 is 7.12% and since 11/30/97 is 7.45%.
EXPENSES
This section describes the fees and expenses you would pay if you bought and
held shares of the Fund.
Shareholder Fees (fees paid directly from your investment)
Shareholder Transaction Expenses Class A Class B Class C Class Y
Maximum sales charge imposed on 4.75% None None None
purchases (as a % of offering price)
Maximum deferred sales charge None* 5.00% 1.00% None
(as a % of either the redemption
amount or initial investment
whichever is lower)
* Investments of $1 million or more are not subject to a front-end sales charge,
but may be subject to a contingent deferred sales charge of 1.00% upon
redemption within one year after the month of purchase.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)*
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating Expenses
Class A 0.47% 0.25% 0.10% 0.82%
Class B 0.47% 1.00% 0.11% 1.58%
Class C 0.47% 1.00% 0.11% 1.58%
Class Y 0.47% None 0.10% 0.57%
*Actual for the fiscal year ended 3/31/99.
The table below shows the total expenses you would pay on a $10,000 investment
over one-, three-, five- and ten-year periods. The example is intended to help
you compare the cost of investing in this Fund versus other mutual funds and is
for illustration only. The example assumes a 5% average annual return and that
you reinvest all of your dividends. Your actual costs may be higher or lower.
Example of Fund Expenses
Assuming Redemption at Assuming
End of Period No Redemption
After: Class A Class B Class C Class Y Class B Class C
1 year $555 $661 $261 $58 $161 $161
3 years $724 $799 $499 $183 $499 $499
5 years $908 $1,060 $860 $318 $860 $860
10 years $1,140 $1,578 $1,878 $714 $1,578 $1,878
<PAGE>
THE FUNDS' INVESTMENT ADVISORS
The investment advisor manages a Fund's investments and supervises its daily
business affairs. There are two investment advisors for the Evergreen State
Municipal Bond Funds. All investment advisors for the Evergreen Funds are
subsidiaries of First Union Corporation, the sixth largest bank holding company
in the United States, with over $___ billion in consolidated assets as of
_/__/99. First Union Corporation is located at 301 South College Street,
Charlotte, North Carolina 28288-0630.
Evergreen Investment Management of First Union National Bank (EIM) is the
investment advisor to:
o Evergreen Connecticut Municipal Bond Fund
o Evergreen New Jersey Municipal Bond Fund
EIM (formerly known as Capital Management Group, or CMG), a division of First
Union National Bank, has been managing money for over 50 years and currently
manages $____ billion in investment assets, including __ of the Evergreen Funds.
EIM is located at 201 South College Street, Charlotte, North Carolina
28288-0630.
Evergreen Investment Management Company (EIMC) is the investment advisor to:
o Evergreen Pennsylvania Municipal Bond Fund
EIMC has been managing mutual funds and private accounts since 1932 and
currently manages over $___ billion in assets for __ of the Evergreen Funds.
EIMC is located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
Year 2000 Compliance
The investment advisors and other service providers for the Evergreen Funds are
taking steps to address any potential Year 2000-related computer problems.
However, there is some risk that these problems could disrupt the Funds'
operations or financial markets generally.
THE FUNDS' PORTFOLIO MANAGERS
The day-to-day management of the Funds is handled by Jocelyn Turner. Since
joining First Union in 1992, Ms. Turner has been a Vice President and municipal
bond portfolio manager.
Joseph R. Baxter co-manages the Funds with Jocelyn Turner. Mr. Baxter has been a
Vice President and portfolio manager with Evergreen Funds since April 1998.
Prior to that he was Head of the Tax Advantage Unit at Corestates Investment
Advisers from 1990-1998. Mr. Baxter has been an institutional investment
professional since 1985.
CALCULATING THE SHARE PRICE
The value of one share of a Fund, also known as the net asset value, or NAV, is
calculated on each day the New York Stock Exchange is open as of the time the
Exchange closes (normally 4:00 p.m. Eastern time). We calculate the share price
for each share by adding up the total assets of a Fund, subtracting all
liabilities, then dividing the result by the total number of shares outstanding.
Each class of shares is calculated separately. Each security held by a Fund is
valued using the most recent market data for that security. If no market data is
available for a given security, we will price that security at fair value
according to policies established by the Funds' Board of Trustees. Short-term
securities with maturities of 60 days or less will be valued on the basis of
amortized cost.
The price per share you pay for a Fund purchase or the amount you receive for a
Fund redemption is based on the next price calculated after the order is
received and all required information is provided. The value of your account at
any given time is the latest share price multiplied by the number of shares you
own. Your account balance may change daily because the share price may change
daily.
HOW TO CHOOSE AN EVERGREEN FUND
When choosing an Evergreen Fund, you should:
o Most importantly, read the prospectus to see if the Fund is suitable for
you.
o Consider talking to an investment professional. He or she is qualified to
give you investment advice based on your investment goals and financial
situation and will be able to answer questions you may have after reading
the Fund's prospectus.
He or she can also assist you through all phases of opening your account.
o Request any additional information you want about the Fund, such as the
Statement of Additional Information, Annual Report or Semi-annual Report by
calling 1-800-343-2898.
HOW TO CHOOSE THE SHARE CLASS THAT BEST SUITS YOU
After choosing a Fund, you select a share class. Each Evergreen State Municipal
Bond Fund offers up to four different share classes: Class A, Class B, Class C
and Class Y. Each class except Class Y has its own sales charge. Pay
particularly close attention to the fee structure of each class so you know how
much you will be paying before you invest.
Class A
If you select Class A shares, you may pay a front-end sales charge of up to
4.75%. This charge is deducted from your investment before it is invested. The
actual charge depends on the amount invested, as shown below:
As a % of As a % Dealer
Your NAV excluding of your commission
Investment sales charge investment as a % of NAV
Up to $49,999 4.75% 4.99% 4.25%
$50,000-$99,999 4.50% 4.71% 4.25%
$100,000-$249,999 3.75% 3.90% 3.25%
$250,000-$499,999 2.50% 2.56% 2.00%
$500,000-$999,999 2.00% 2.04% 1.75%
$1,000,000 and over 0% 0% 1.00 to .25%
Although no front-end sales charge applies to purchases of $1,000,000 and over,
you will pay a 1% deferred sales charge if you redeem any such shares within 13
months of purchase.
Two ways you can reduce your Class A sales charges:
1.Rights of Accumulation allow you to combine your investment with all existing
investments in all your Evergreen Fund accounts when determining whether you
meet the threshold for a reduced Class A sales charge.
2.Letter of Intent. If you agree to purchase at least $50,000 over a 13-month
period, you pay the same sales charge as if you had invested the full amount
all at once. The Fund will hold a certain portion of your investment in escrow
until your commitment is met.
Contact your broker or the Evergreen Service Company at 1-800-343-2898 if you
think you may qualify for either of these services.
Each Fund may also sell Class A shares at net asset value without any initial or
contingent sales charge to the Directors, Trustees, officers and employees of
the Fund and the advisory affiliates of First Union Corporation, and to members
of their immediate families, to registered representatives of firms with dealer
agreements with Evergreen Distributor, Inc., and to a bank or trust company
acting as trustee for a single account.
Class B
If you select Class B shares, you do not pay a front-end sales charge, so the
entire amount of your purchase is invested in the Fund. However, your shares are
subject to an additional expense, known as the 12(b)-1 fee. In addition, you may
pay a deferred sales charge if you redeem your shares within six years after the
month of purchase. The amount of the deferred sales charge depends on the length
of time the shares were held, as shown below:
Time Held Contingent Deferred Sales Charge
Month of Purchase + First 12 Month Period 5.00%
Month of Purchase + Second 12 Month Period 4.00%
Month of Purchase + Third 12 Month Period 3.00%
Month of Purchase + Fourth 12 Month Period 3.00%
Month of Purchase + Fifth 12 Month Period 2.00%
Month of Purchase + Sixth 12 Month Period 1.00%
Thereafter 0%
After 7 years Converts to Class A
Dealer Allowance 4.00%
The deferred sales charge percentage is applied to the value of the shares when
purchased or when redeemed, whichever is less. No deferred sales charge is paid
on shares purchased through dividend or capital gains reinvestments or on any
gains in the value of your shares.
Class C
Class C shares, which are offered only by Evergreen Pennsylvania Municipal Bond
Fund, are similar to
Class B shares, except the deferred sales charge is less and only applies if
shares are redeemed within the first year after the month of purchase. Also,
these shares do not convert to Class A shares and so the higher 12(b)-1 fee
continues for the life of the account.
Time Held Deferred Sales Charge
Month of Purchase + Less than 1 year 1.00%
Month of Purchase + 1 year or more 0%
Waiver of Class B or Class C Sales Charges
You will not be assessed a deferred sales charge for Class B or Class C shares
if you redeem shares in the following situations:
o When the shares were purchased through reinvestment of dividends/capital
gains
o Death or disability
o Lump-sum distribution from a 401(k) plan or other benefit plan qualified under
ERISA
o Automatic IRA withdrawals if your age is at least 59 1/2
o Automatic withdrawals of up to 1.0% of the account balance per month
o Loan proceeds and financial hardship distributions from a retirement plan
o Returns of excess contributions or excess deferral amounts made to a
retirement plan participant
Class Y
Each Fund offers Class Y shares at net asset value without an initial sales
charge, deferred sales charge or 12b-1 fees. Class Y shares are only offered to
persons who owned shares in a Fund advised by Evergreen Asset Management Corp.
on or before December 31, 1994; certain institutional investors; and investment
advisory clients of an investment advisor of an Evergreen Fund (or the
investment advisor's affiliates).
<PAGE>
HOW TO BUY SHARES
Evergreen Funds' low investment minimums make investing easy. Once you decide
on an amount and a share class, simply fill out an application and send in your
payment, or talk to your investment professional.
Minimum Investments
Initial Additional
Regular Accounts $1,000 None
IRAs $250 None
Systematic Investment Plan $50 $25
<TABLE>
<CAPTION>
Method Opening an Account Adding to an Account
<S> <C> <C>
By Mail or through o Complete and sign the account application. o Make your check payable to
an Investment o Make the check payable to Evergreen Funds. Evergreen Funds
Professional o Mail the application and your check to the address o Write a note specifying:
below: - The Fund name
Evergreen Service Company Overnight Address: - Share class
P.O. Box 2121 - Your account number
Boston, MA 02106-2121 Evergreen Service Company - The name(s) in which the account is
200 Berkeley St. registered.
Boston, MA 02116-5039 o Mail to the address to the left or
deliver to your investment
o Or deliver them to your investment representative representative
(provided he or she has a broker/dealer arrangement
with Evergreen Distributor, Inc.)
By Phone o Call 1-800-343-2898 to set up an account number o Call the Evergreen Express Line at
and get wiring instructions (call before 12 noon if 1-800-346-3858 24 hours a day or
you want wired funds to be credited that day). 1-800-343-2898 between 8 a.m. and 6
o Instruct your bank to wire or transfer your p.m. Eastern time, on any business
purchase (they may charge a wiring fee). day.
o Complete the account application and mail to: o If your bank account is set up on
Evergreen Service Company Overnight Address: file, you can request either:
P.O. Box 2121 Evergreen - Federal Funds Wire (offers
Service Company immediate access to funds) or
Boston, MA 02106-2121 200 Berkeley St. - Electronic transfer through the
Automated Clearing House which avoids
Boston, MA 02116 wiring fees.
o Wires received after 4:00 p.m. Eastern time on
market trading days will receive the next market
day's closing price.**
By Exchange o You can make an additional investment by
exchange from an existing Evergreen Funds account by
contacting your investment representative or calling
the Evergreen Express Line at 1-800-346-3858*.
o You can only exchange shares within the same class.
o There is no sales charge or redemption fee when
exchanging Funds within the Evergreen Funds family.
o Orders placed before 4 p.m. Eastern time on market
trading days will receive that day's closing share
price (if not, you will receive the next market
day's closing price).**
o Exchanges are limited to three per calendar quarter, and five per calendar year.
o Exchanges between accounts which do not have identical ownership must be in writing with a
signature guarantee (see below).
Systematic o You can transfer money automatically from your bank account o To establish automatic
Investment Plan into your Fund on a monthly basis. investing for an existing
(SIP) o Initial investment minimum is $50 if you invest at least $25 account, call
per month with this service. 1-800-343-2898 for an
o To enroll, check off the box on the account application and application.
provide: o The minimum is $25 per
- Your bank account information month or $75 per quarter.
- The amount and date of your monthly investment. o You can also establish
an investing program
through direct deposit
from your paycheck. Call
1-800-343-2898 for details.
</TABLE>
* Once you have authorized either the telephone exchange or redemption service,
anyone with a Personal Identification Number (PIN) and the required account
information (including your broker) can request a telephone transaction in your
account. All calls are recorded or monitored for verification, recordkeeping and
quality-assurance purposes. The Evergreen Funds reserve the right to terminate
the exchange privilege of any shareholder who exceeds the listed maximum number
of exchanges, as well as to reject any large dollar exchange if placing it
would, in the judgment of the portfolio manager, adversely affect the price of
the Fund.
** The Fund's shares may be made available through financial service
firms who have a service agreement with the Fund, which are also investment
dealers. The Fund has approved the acceptance of purchase and repurchase request
orders effective as of the time of their receipt by certain authorized financial
intermediaries.
<PAGE>
HOW TO REDEEM SHARES
We offer you several convenient ways to sell your shares in any of the Evergreen
Funds:
<TABLE>
<CAPTION>
Methods Requirements
<S> <C>
Call Us o Call the Evergreen Express Line at 1-800-346-3858 24 hours a day or 1-800-343-2898 between 8 a.m.
and 6 p.m. Eastern time, on any business day.
o This service must be authorized ahead of time, and is only
available for regular accounts.* o All authorized requests
made before 4 p.m. Eastern time on market trading days will be
processed at
that day's closing price. Requests after 4 p.m. will be processed the following business day.**
o We can either:
- wire the proceeds into your bank account (service charges may apply)
- electronically transmit the proceeds to your bank
account via the Automated Clearing House service - mail
you a check.
o All telephone calls are recorded for your protection. We
are not responsible for acting on telephone orders we
believe are genuine.
o See exceptions list below for requests that must be made in
writing.
Write Us o You can mail a redemption request to: Evergreen Service Company Overnight Address:
P.O. Box 2121 Evergreen Service Company
Boston, MA 02106-2121 200 Berkeley St.
Boston, MA 02116-5039
o Your letter of instructions must:
- list the Fund name and the account number
- indicate the number of shares or dollar value you wish to redeem
- be signed by the registered owner(s)
o See exceptions list below for requests that must be signature guaranteed.
o To redeem from an IRA or other retirement account, call 1-800-346-3858 for a special application.
Sell Your o You may also redeem your shares through participating broker-dealers by delivering a letter as
Shares in
Person described above to your broker-dealer.
o A fee may be charged for this service.
Systematic o You can transfer money automatically from your Fund account on a monthly or quarterly basis
Withdrawal without redemption fees. Plan (SWP)
o The withdrawal can be mailed to you, or deposited directly to your bank account.
o The minimum is $75 per month.
o The maximum is 1% of your account per month or 3% per quarter.
o To enroll, call 1-800-343-2898 for an application.
Timing of Proceeds
Normally, we will send your redemption proceeds on the next business day after
we receive your request; however, we reserve the right to wait up to seven
business days to redeem any investments made by check and five business days for
investments made by Automated Clearing House transfer. We also reserve the right
to redeem in kind, and to redeem the remaining amount in the account if your
redemption brings the account balance below the initial minimum of $1,000.
Exceptions: Redemption Requests That Require A Signature Guarantee
To protect you and Evergreen Funds against fraud, certain redemption requests
must be in writing with your signature guaranteed. A signature guarantee can be
obtained at most banks and securities dealers. A notary public is not authorized
to provide a signature guarantee. The following circumstances require signature
guarantees:
o You are redeeming more than $50,000.
o You want the funds transmitted to a bank account not listed on the
account.
Who Can Provide A Signature Guarantee:
o You want the proceeds payable to anyone other than the registered
owner(s) of the account. o Commercial Bank
o Either your address or the address of your bank account has been changed within o Trust Company
30 days. o Savings Association
o The account is registered in the name of a fiduciary corporation or any other o Credit Union
organization. o Member of a U.S. stock
exchange
In these cases, additional documentation is required:
corporate accounts: certified copy of corporate resolution
fiduciary accounts: copy of the power of attorney or other governing document
</TABLE>
<PAGE>
OTHER SERVICES
Evergreen Express Line
Use our automated, 24-hour service to check the value of your investment in a
Fund; purchase, redeem or exchange Fund shares; find a Fund's price, yield or
total return; order a statement or duplicate tax form; or hear market commentary
from Evergreen portfolio managers.
Automatic Reinvestment of Dividends
For the convenience of investors, all dividends and capital gains distributions
are automatically reinvested, unless you request otherwise. Distributions can be
made by check or electronic transfer through the Automated Clearing House to
your bank account. The details of your dividends and other distributions will be
included on your statement.
Payroll Deduction (Class A, Class B and Class C only)
If you want to invest automatically through your paycheck, call us to find out
how you can set up direct payroll deductions. The amounts deducted will be
invested in your Fund using the Electronic Funds Transfer System. We will
provide the Fund account number. Your payroll department will let you know the
date of the pay period when your investment begins.
Telephone Investment Plan
You may make additional investments electronically in an existing Fund account
at amounts of not less than $100 or more than $10,000 per investment. Telephone
requests received by 4:00 p.m. Eastern time will be invested the day the request
is received.
Dividend Exchange
You may elect on the application to reinvest capital gains and/or dividends
earned in one Evergreen Fund into an existing account in another Evergreen Fund
in the same share class -- automatically. Please indicate on the application the
Evergreen Fund(s) into which you want to invest the distributions.
Reinvestment Privileges
Under certain circumstances, shareholders may, within one year of redemption,
reinstate their accounts at the current price (NAV).
THE TAX CONSEQUENCES OF INVESTING IN THE FUND
You may be taxed in two ways:
o On Fund distributions (capital gains and dividends) o On any profit you make
when you sell any or all of your shares.
Fund Distributions
A mutual fund passes along to all of its shareholders the net income or profits
it receives from its investments. The shareholders of the fund then pay any
taxes due, whether they receive these distributions in cash or elect to have
them reinvested. The Evergreen State Municipal Bond Funds expect that
substantially all of their regular dividends will be exempt from federal income
tax. The Funds may also distribute two types of taxable income to you:
oDividends. To the extent that regular dividends are derived from interest that
is not tax exempt, or from short term capital gains, you will have to include
them in your federal taxable income. Each Fund pays a monthly dividend from
the dividends, interest and other income on the securities in which it
invests.
o Capital Gains. When a mutual fund sells a security it owns for a profit, the
result is a capital gain. Evergreen State Municipal Bond Funds generally
distribute capital gains at least once a year, near the end of the calendar
year. Short-term capital gains reflect securities held by the Fund for a year
or less and are considered ordinary income just like dividends. Profits on
securities held longer than 12 months are considered long-term capital gains
and are taxed at a special tax rate (20% for most taxpayers, on sales made
after January 1, 1998).
Dividend and Capital Gain Reinvestment
Unless you choose otherwise on the account application, all dividend and capital
gain payments will be reinvested to buy additional shares. Distribution checks
that are returned and distribution checks that are uncashed when the shareholder
has failed to respond to mailings from the shareholder servicing agent will
automatically be reinvested to buy additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks. We will send
you a statement each January with the federal tax status of dividends and
distributions paid by each Fund during the previous calendar year. Profits You
Realize When You Redeem Shares When you sell shares in a mutual fund, whether by
redeeming or exchanging, you have created a taxable event. You must report any
gain or loss on your tax return unless the transaction was entered into by a
tax-deferred retirement plan or occurred in a money market fund. It is your
responsibility to keep accurate records of your mutual fund transactions. You
will need this information when you file your income tax return, since you must
report any capital gains or losses you incur when you sell shares. Remember, an
exchange is a purchase and a sale for tax purposes.
Tax Reporting
Evergreen Service Company provides you with a tax statement of your dividend and
capital gains distributions for each calendar year on Form 1099 DIV. Proceeds
from a sale are reported on Form 1099B. You must report these on your tax
return. Since the IRS receives a copy as well, you could pay a penalty if you
neglect to report them.
Evergreen Service Company will send you a tax information guide each year during
tax season, which may include a cost basis statement detailing the gain or loss
on taxable transactions you had during the year. Please consult your own tax
advisor for further information regarding the federal, state and local tax
consequences of an investment in the Funds.
Retirement Plans
You may invest in each Fund through various retirement plans, including IRAs,
401(k) plans, Simplified Employee Plans, (SEPs), IRAs, 403(b) plans, 457 plans
and others. For special rules concerning these plans, including applications,
restrictions, tax advantages, and potential sales charge waivers, contact your
broker-dealer. To determine if a retirement plan may be appropriate for you,
consult your tax advisor.
FEES AND EXPENSES OF THE FUNDS
Every mutual fund has fees and expenses that are assessed either directly or
indirectly. This section describes each of those fees.
Management Fee
The management fee pays for the normal expenses of managing the fund, including
portfolio manager salaries, research costs, corporate overhead expenses and
related expenses.
12b-1 Fee
The Trustees of the Evergreen Funds have approved a policy to assess 12b-1 fees
for Class A, Class B and Class C shares. These fees increase the cost of your
investment. The purpose of the 12b-1 fee is to promote the sale of more shares
of the Funds to the public. The Fund might use this fee for advertising and
marketing and as a "service fee" to the broker-dealer for additional shareholder
services.
Other Expenses
Other expenses include miscellaneous fees from affiliated and outside service
providers. These may include legal, audit, custodial and safekeeping fees, the
printing and mailing of reports and statements, automatic reinvestment of
distributions and other conveniences for which the shareholder pays no
transaction fees.
Total Fund Operating Expenses
The total cost of running the Fund is called the expense ratio. As a
shareholder, you are not charged these fees directly; instead they are taken out
before the Fund's net asset value is calculated, and are expressed as a
percentage of the Fund's average daily net assets. The effect of these fees is
reflected in the performance results for that share class. Because these fees
are "invisible," investors should examine them closely in the prospectus,
especially when comparing one fund with another fund in the same investment
category. There are three things to remember about expense ratios: 1) your total
return in the Fund is reduced in direct proportion to the fees; 2) expense
ratios can vary greatly between funds and fund families, from under 0.25% to
over 3.0%; and 3) a Fund's advisor may waive a portion of the Fund's expenses
for a period of time, reducing its expense ratio.
<PAGE>
FINANCIAL HIGHLIGHTS
This section looks in detail at the results for one share in each share class of
the Funds -- how much income it earned, how much of this income was passed along
as a distribution and how much the return was reduced by expenses. The tables
have been derived from financial information audited by KPMG LLP, the Funds'
independent auditors. For a more complete picture of the Funds' financial
statements, please see the Funds' Annual Report as well as the Statement of
Additional Information.
Financial highlights will be inserted in (B) filing.
<PAGE>
OTHER FUND PRACTICES
The Funds may invest in futures and options, which are forms of derivatives. The
Funds may also engage in short sales. Such practices are used to hedge a Fund's
portfolio to protect against changes in interest rates and to adjust the
portfolio's duration. Although this is intended to increase returns, these
practices may actually reduce returns or increase volatility.
The Funds may also invest in other investment companies. This practice may
expose a Fund to duplicate expenses and lower its value.
In addition, the Funds may borrow money and lend their securities. Borrowing is
a form of leverage that may magnify a Fund's gain or loss. Lending securities
may cause the Fund to lose the opportunity to sell these securities at the most
desirable price and, therefore, lose money.
The Funds generally do not take portfolio turnover into account in making
investment decisions. This means the Fund could experience a high rate of
portfolio turnover (100% or more) in any given fiscal year, resulting in greater
brokerage and other transactions costs which are borne by the Funds and their
shareholders. It may also result in the Funds realizing greater net short-term
capital gains, distributions from which are taxable to shareholders as ordinary
income.
Please consult the Statement of Additional Information for more information
regarding these and other investment practices used by the Funds, including
risks.
<PAGE>
Evergreen Funds
Money Market
Treasury Money Market Fund
Money Market Fund
Municipal Money Market Fund
Pennsylvania Municipal Money Market Fund
Florida Municipal Money Market Fund
New Jersey Municipal Money Market Fund
Municipal Bond
Short-Intermediate Municipal Fund
High Grade Municipal Bond Fund
Municipal Bond Fund
California Municipal Bond Fund
Connecticut Municipal Bond Fund
Florida High Income Municipal Bond Fund
Florida Municipal Bond Fund
Georgia Municipal Bond Fund
Maryland Municipal Bond Fund
Massachusetts Municipal Bond Fund
Missouri Municipal Bond Fund
New Jersey Municipal Bond Fund
New York Municipal Bond Fund
North Carolina Municipal Bond Fund
Pennsylvania Municipal Bond Fund
South Carolina Municipal Bond Fund
Virginia Municipal Bond Fund
Income
Capital Preservation and Income Fund
Short Intermediate Bond Fund
Intermediate Term Government Securities Fund
Intermediate Term Bond Fund
U.S. Government Fund
Diversified Bond Fund
Strategic Income Fund
High Yield Bond Fund
Balanced
American Retirement Fund
Balanced Fund
Tax Strategic Foundation Fund
Foundation Fund
Growth & Income
Utility Fund
Income and Growth Fund
Equity Income Fund
Value Fund
Blue Chip Fund
Growth and Income Fund
Small Cap Value Fund
Domestic Growth
Strategic Growth Fund
Stock Selector Fund
Evergreen Fund
Omega Fund
Small Company Growth Fund
Aggressive Growth Fund
Micro Cap Fund
Tax Strategic Equity Fund
Masters Fund
Global International
Global Leaders Fund
International Growth Fund
Global Opportunities Fund
Precious Metals Fund
Emerging Markets Growth Fund
Latin America Fund
Express Line
800.346.3858
Investor Services
800.343.2898
<PAGE>
1. Evergreen Express Line
Call 1-800-346-3858
24 hours a day to
o check your account
o order a statement
o get a Fund's current price, yield and
total return
o buy, redeem or exchange Fund shares
2. Non-retirement account holders
Call 1-800-343-2898
Monday through Friday, 8 a.m. to 6 p.m. Eastern time to
o buy, redeem or exchange shares
o order applications
o get assistance with your account
3. Information Line for Hearing and Speech Impaired (TTY/TDD) Call
1-800-343-2888 Monday through Friday, 8 a.m. to 6 p.m. Eastern time
4. Write us a letter
Evergreen Service Company
P.O. Box 2121
Boston, MA 02106-2121
o to buy, redeem or exchange shares
o to change the registration on your account
o for general correspondence
5. For express, registered, certified mail:
Evergreen Service Company
200 Berkeley Street
Boston, MA 02116-5039
6. Contact us on-line:
www.evergreen-funds.com
7. Regular communications you will receive:
Account Statements -- You will receive quarterly statements for each Fund
you own.
Confirmation Notices -- We send a confirmation of any transaction you make
within five days of the transaction.
Annual and Semiannual reports -- You will receive a detailed financial
report on your Funds twice a year.
Tax Forms -- Each January you will receive any tax forms you need to file
in your taxes as well as the Evergreen Tax Information Guide.
<PAGE>
For More Information About the Evergreen State Municipal Bond Funds, Ask for:
The Funds' most recent Annual or Semi-annual Report, which contains a
complete financial accounting for each Fund and a complete list of the
Fund's holdings as of a specific date, as well as commentary from the
Fund's portfolio manager. This Report discusses the market conditions and
investment strategies that significantly affected the Fund's performance
during the most recent fiscal year or period.
The Statement of Additional Information (SAI), which contains more detailed
information about the policies and procedures of the Funds. The SAI has
been filed with the Securities and Exchange Commission (SEC) and its
contents are legally considered to be part of this prospectus.
For questions, other information, or to request a copy, without charge, of
any of the documents, call 1-800-343-2898 or ask your investment
representative. We will mail material within three business days.
Information about these Funds (including the SAI) is also available on the
SEC's Internet web site at http://www.sec.gov, or, for a duplication fee,
by writing the SEC Public Reference Section, Washington DC 20549-6009. This
material can be reviewed and copied at the SEC's Public Reference Room in
Washington, DC. For more information, call the SEC at 1-800-SEC-0330.
[LOGO OF EVERGREEN FUNDS APPEARS HERE]
Evergreen Distributor, Inc.
90 Park Avenue
New York, New York 10016
SEC File No.: 811-08367
<PAGE>
Evergreen State Municipal Bond Funds
Evergreen California Municipal Bond Fund
Evergreen Massachusetts Municipal Bond Fund
Evergreen Missouri Municipal Bond Fund
Evergreen New York Municipal Bond Fund
Class A
Class B
Class C
Class Y
Prospectus, August 1, 1999
The Securities and Exchange Commission has not determined that the information
in this prospectus is accurate or complete, nor has it approved or disapproved
these securities. Anyone who tells you otherwise is committing a crime.
p:ssdocs/public/harnesx/dyingstatepromay.doc
<PAGE>
FUND SUMMARIES:
Evergreen California Municipal Bond Fund 4
Evergreen Massachusetts Municipal Bond Fund 6
Evergreen Missouri Municipal Bond Fund 8
Evergreen New York Municipal Bond Fund 10
GENERAL INFORMATION:
The Funds' Investment Advisors 12
The Funds' Portfolio Managers 12
Calculating the Share Price 12
How to Choose an Evergreen Fund 12
How to Choose the Share Class
That Best Suits You 12
How to Buy Shares 14
How to Redeem Shares 15
Other Services 16
The Tax Consequences of
Investing in the Funds 16
Fees and Expenses of the Funds 17
Financial Highlights 18
Other Fund Practices 20
In general, Funds included in this prospectus seek to provide investors with
current income exempt from federal income and certain state income taxes,
consistent with the preservation of capital. The Funds emphasize investments in
securities with higher yields and longer maturities.
Fund Summaries Key
Each Fund's summary is organized around the following basic topics and
questions:
Investment Goal
What is the Fund's financial objective? You can find clarification on how the
Fund seeks to achieve its objective by looking at the Fund's strategy and
investment policies. The Fund's Board of Trustees can change the investment
objective without a shareholder vote.
Investment Strategy
How does the fund go about trying to meet its goals? What types of investments
does it contain? What style of investing and investment philosophy does it
follow? Does it have limits on the amount invested in any particular type of
security?
Risk Factors
What are the specific risks for an investor in the Fund?
Performance
How well has the Fund performed in the past year? The past five years? The past
ten years?
Expenses
How much does it cost to invest in the Fund? What is the difference between
sales charges and expenses?
<PAGE>
State Municipal
Bond Funds
typically rely on a combination of the following strategies:
o investing at least 80% of their assets in municipal securities that are
exempt from federal income tax, other than the alternative minimum tax;
o investing at least 65% of their assets in municipal securities that are
exempt from income taxes, as applicable, in the state for which the Fund is
named;
o investing at least 80% of their assets in investment grade municipal
securities, which are bonds rated within the four highest ratings
categories by a nationally recognized statistical ratings organizations, or
unrated securities determined to be of comparable quality by the investment
advisor;
o purchasing municipal securities of any maturity, but maintaining an average
dollar weighted maturity of 10 to 20 years; and
o selling a portfolio investment when the issuer's investment fundamentals
begin to deteriorate, when the investment no longer appears to meet the
Fund's investment objective, when the Fund must meet redemptions, or for
other reasons which the investment advisor deems necessary.
may be appropriate for investors who:
o seek a high quality portfolio of municipal bonds; and
o seek income which is exempt from federal and state income tax.
Following this overview, you will find information on each State Municipal
Bond Fund's specific investment strategies and risks, including state specific
risks. Municipal securities are affected by political and economic events of
the issuing state. Also, see the Statement of Additional Information for
further information on the state specific risks of your Fund.
Risk Factors For All Mutual Funds
Please remember that mutual fund shares are:
o not guaranteed to achieve their investment goal
o not insured, endorsed or guaranteed by the FDIC, a bank or any government
agency
o subject to investment risks, including possible loss of your original
investment
Like most investments, your investment in an Evergreen State Municipal Bond Fund
could fluctuate significantly in value over time and could result in a loss of
money.
Here are the most important factors that may affect the value of your
investment:
Interest Rate Risk
When interest rates go up, the value of debt securities tends to fall. Since
your Fund invests a significant portion of its portfolio in debt securities, if
interest rates rise, then the value of your investment may decline. When
interest rates go down, interest earned by your Fund on its debt securities may
also decline, which could cause the Fund to reduce the dividends it pays.
Credit Risk
The value of a debt security is directly affected by the issuer's ability to
repay principal and pay interest on time. Since your Fund invests in debt
securities, the value of your investment may decline if an issuer fails to pay
an obligation on a timely basis.
Below Investment Grade Bond Risk
Below investment grade bonds are commonly referred to as "junk bonds" because
they are usually backed by issuers of less proven or questionable financial
strength. Such issuers are more vulnerable to financial setbacks and less
certain to pay interest and principal than issuers of bonds offering lower
yields and risk. Markets may react to unfavorable news about issuers of below
investment grade bonds, causing sudden and steep declines in value.
Non-Diversification Risk
An investment in a Fund that is non-diversified entails greater risk than an
investment in a diversified fund. When a Fund is non-diversified, it may invest
up to 25% of its assets in a single issuer and up to 50% of its assets may
consist of securities of only two issuers. A higher percentage of investments
among fewer issuers may result in greater fluctuation in the total market value
of the Fund's portfolio.
<PAGE>
CALIFORNIA MUNICIPAL BOND FUND
FUND FACTS:
Goal:
o Tax Exempt Current Income
Principal Investment:
o Municipal Securities
Classes of Shares Offered in this Prospectus:
o Class A
o Class B
o Class C
Investment Advisor:
o Evergreen Investment Management Company
Portfolio Manager:
o George Kimball
NASDAQ Symbols:
o EKCAX (Class A)
o EKCBX (Class B)
o EKCCX (Class C)
Dividend Payment Schedule:
o Monthly
Investment Goal
The Fund seeks the highest possible current income exempt from federal income
taxes, other than the alternative minimum tax, and state income taxes while
preserving capital.
Investment Strategy
The following investment strategies are in addition to the investment strategies
discussed in the "Overview" on page 1.
The Fund normally invests at least 80% of its assets in municipal securities
that are exempt from federal income tax, other than the alternative minimum tax.
The Fund also invests at least 65% of its assets in California municipal
obligations. The Fund will invest at least 80% of its assets in bonds that, at
the date of investment, are rated within the four highest ratings categories by
a nationally recognized statistical ratings organization, or unrated securities
determined to be of comparable quality by the investment advisor. The Fund may
invest up to 20% of its assets in below investment grade bonds, but will not
invest in bonds rated below B. The Fund may also invest up to 20% of its assets
in high quality short-term obligations. In purchasing municipal securities, the
Fund includes in its analysis the credit quality of comparative pricing
valuation of the securities as well as the impact of the purchase on the Fund's
yield and average maturity.
The Fund will invest at least 80% of its assets in municipal securities that at
all times are fully insured by a policy purchased by either the issuer or the
Fund as to timely payment of all principal and interest when due.
The Fund may invest up to 100% of its assets in high quality money market
instruments in response to adverse economic, political or market conditions.
This strategy is inconsistent with the Fund's principal investment strategy and
investment goal and, if employed, could result in a lower return and loss of
market opportunity.
Risk Factors
Your investment in the Fund is subject to the risks discussed in the "Overview"
on page 1 under the headings:
o Interest Rate Risk
o Credit Risk
o Below Investment Grade Bond Risk
o Non-Diversification Risk
The performance of the California Municipal Bond Fund is influenced by the
political, economic and statutory environment within the State. The Fund invests
in obligations of California issuers, which results in the Fund's performance
being subject to risks associated with the most current conditions within the
State. Some of these conditions may include the uncertainty of the Asian
economic crisis on the State's revenues, the impact of the 1996 federal welfare
reform law as immigration increases, and other factors which may cause rating
agencies to downgrade the credit ratings on certain issues.
The Fund's concentration in California municipal bonds may expose shareholders
to additional risks. In particular, the Fund will be vulnerable to any
development in California's economy that may weaken or jeopardize the ability of
California municipal bond issuers to pay interest and principal on their bonds.
As a result, the Fund's shares may fluctuate more widely in value than those of
a fund investing in municipal bonds from a number of different states.
For more information on the factors that could affect the ability of the bond
issuers to pay interest and principal on securities acquired by the Fund, see
the Statement of Additional Information.
Distributions of capital gains and other taxable income will be subject to
California personal income tax at the rates applicable to ordinary income.
Corporations subject to the California franchise tax are taxable on all
distributions of income from the Fund. For more information on California tax
consequences, see the Statement of Additional Information.
For further information regarding the Fund's investment strategy and risk
factors, see "Other Fund Practices."
<PAGE>
Performance
The following charts show how the Fund has performed in the past. Past
performance is not an indication of future results.
The chart below shows the percentage gain or loss for Class A shares of the Fund
in each calendar year since the Class A shares' inception on 2/1/94. It should
give you a general idea of how the Fund's return has varied from year-to-year.
This graph includes the effects of Fund expenses, but not sales charges. Returns
would be lower if sales charges were included.
Year-by-Year Total Return for Class A Shares (%)
1995 1996 1997 1998
20.90% 1.70% 8.74% 6.25%
Best Quarter: 1st Quarter 1995 +8.39%
Worst Quarter: 1st Quarter 1996 -3.17%
Year to date total return through 3/31/99 is 0.72%.
The next table lists the Fund's average annual total return over the past year
and since inception (through 12/31/98), including applicable sales charges. This
table is intended to provide you with some indication of the risks of investing
in the Fund. At the bottom of the table you can compare this performance with
the Lehman Brothers Municipal Bond Index, which is a broad measure of the
municipal bond market; it is not an actual investment.
Average Annual Total Return
(for the period ended 12/31/98)
Inception Performance Since
Date of Class 1 year 5 year 10 year 2/1/94
Class A 2/1/94 1.18% N/A N/A 4.48%
Class B 2/1/94 0.47% N/A N/A 4.52%
Class C 2/1/94 4.57% N/A N/A 4.82%
Lehman Brothers
Municipal Bond Index 6.54% 6.24% 8.22% 6.10%
Expenses
This section describes the fees and expenses you would pay if you bought and
held shares of the Fund.
Shareholder Fees (fees paid directly from your investment) Shareholder
Transaction Expenses
Class A Class B Class C
Maximum sales charge imposed on 4.75% None None
purchases (as a % of offering price)
Maximum deferred sales charge None* 5.00% 1.00%
(as a % of either the redemption
amount or initial investment whichever
is lower)
*Investments of $1 million or more are not subject to a front-end sales charge,
but may be subject to a contingent deferred sales charge of 1.00% upon
redemption within one year after the month of purchase.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)*
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating Expenses**
Class A 0.55% 0.25% 0.23% 1.03%
Class B 0.55% 1.00% 0.23% 1.78%
Class C 0.55% 1.00% 0.23% 1.78%
*Actual for the fiscal year ended 3/31/99.
**From time to time, the Fund's investment advisor may, at its discretion,
reduce or waive its fees or reimburse a Fund for certain of its expenses in
order to reduce expense ratios. The Fund's investment advisor may cease these
waivers or reimbursements at any time. The annual operating expenses do not
reflect fee waivers and expense reimbursements. Including current fee waivers
and expense reimbursements, Total Fund Operating Expenses for Class A, Class B
and Class C were 0.96%, 1.70% and 1.70%, respectively.
The table below shows the total expenses you would pay on a $10,000 investment
over one-, three-, five- and ten-year periods. The example is intended to help
you compare the cost of investing in this Fund versus other mutual funds and is
for illustration only. The example assumes a 5% average annual return and that
you reinvest all of your dividends. Your actual costs may be higher or lower.
Example of Fund Expenses
Assuming Redemption at Assuming
End of Period No Redemption
Class A Class B Class C Class B Class C
After 1 year $575 $681 $281 $181 $181
After 3 years $787 $860 $560 $560 $560
After 5 years $1,017 $1,164 $964 $964 $964
After 10 years $1,675 $1,804 $2,095 $1,804 $2,095
<PAGE>
MASSACHUSETTS MUNICIPAL BOND FUND
FUND FACTS:
Goal:
o Tax Exempt Current Income
Principal Investment:
o Municipal Securities
Classes of Shares Offered in this Prospectus:
o Class A
o Class B
o Class C
Investment Advisor:
o Evergreen Investment Management Company
Portfolio Manager:
o George Kimball
NASDAQ Symbols:
o EKMAX (Class A)
o EKMBX (Class B)
o EKMCX (Class C)
Dividend Payment Schedule:
o Monthly
Investment Goal
The Fund seeks the highest possible current income exempt from federal income
taxes, other than the alternative minimum tax, and state income taxes while
preserving capital.
Investment Strategy
The following investment strategies are in addition to the investment strategies
discussed in the "Overview" on page 1.
The Fund normally invests at least 80% of its assets in municipal securities
that are exempt from federal income tax, other than the alternative minimum tax.
The Fund also invests at least 65% of its assets in municipal securities that
are exempt from income taxes in the Commonwealth of Massachusetts. The Fund will
invest at least 80% of its assets in bonds that, at the date of investment, are
rated within the four highest ratings categories by a nationally recognized
statistical ratings organization, or unrated securities determined to be of
comparable quality by the investment advisor. The Fund may invest up to 20% of
its assets in below investment grade bonds, but will not invest in bonds rated
below B. The Fund may also invest up to 20% of its assets in high quality
short-term obligations. In purchasing municipal securities, the Fund includes in
its analysis the credit quality of comparative pricing valuation of the
securities as well as the impact of the purchase on the Fund's yield and average
maturity.
The Fund may invest up to 100% of its assets in high quality money market
instruments in response to adverse economic, political or market conditions.
This strategy is inconsistent with the Fund's principal investment strategy and
investment goal and, if employed, could result in a lower return and loss of
market opportunity.
Risk Factors
Your investment in the Fund is subject to the risks discussed in the "Overview"
on page 1 under the headings:
o Interest Rate Risk
o Credit Risk
o Below Investment Grade Bond Risk
o Non-Diversification Risk
The performance of the Massachusetts Municipal Bond Fund is influenced by the
political, economic and statutory environment within the Commonwealth. The Fund
invests in obligations of Massachusetts issuers, which results in the Fund's
performance being subject to risks associated with the most current conditions
within the Commonwealth. Continuation of many of the Commonwealth's programs,
particularly its human service programs, are dependent upon continuing federal
reimbursements which have experienced declines in recent years. This and other
factors may cause rating agencies to downgrade the credit ratings on certain
issues.
The Fund's concentration in Massachusetts municipal bonds may expose
shareholders to additional risks. In particular, the Fund will be vulnerable to
any development in Massachusetts' economy that may weaken or jeopardize the
ability of Massachusetts municipal bond issuers to pay interest and principal on
their bonds. As a result, the Fund's shares may fluctuate more widely in value
than those of a fund investing in municipal bonds from a number of different
states.
For more information on the factors that could affect the ability of the bond
issuers to pay interest and principal on securities acquired by the Fund, see
the Statement of Additional Information.
For further information regarding the Fund's investment strategy and risk
factors, see "Other Fund Practices."
<PAGE>
PERFORMANCE
The following charts show how the Fund has performed in the past. Past
performance is not an indication of future results.
The chart below shows the percentage gain or loss for Class A shares of the Fund
in each calendar year since the Class A shares' inception on 2/4/94. It should
give you a general idea of how the Fund's return has varied from year-to-year.
This graph includes the effects of Fund expenses, but not sales charges. Returns
would be lower if sales charges were included.
Year-by-Year Total Return for Class A Shares (%)
1995 1996 1997 1998
16.99% 2.29% 9.44% 5.29%
Best Quarter: 1st Quarter 1995 +7.01%
Worst Quarter: 1st Quarter 1996 -2.44%
Year to date total return through 3/31/99 is 0.82%.
The next table lists the Fund's average annual total return over the past year
and since inception (through 12/31/98), including applicable sales charges. This
table is intended to provide you with some indication of the risks of investing
in the Fund. At the bottom of the table you can compare this performance with
the Lehman Brothers Municipal Bond Index, which is a broad measure of the
municipal bond market; it is not an actual investment.
Average Annual Total Return
(for the period ended 12/31/98)
Inception Performance Since
Date of Class 1 year 5 year 10 year 2/4/94
Class A 2/4/94 0.26% N/A N/A 3.91%
Class B 2/4/94 -0.20% N/A N/A 3.96%
Class C 2/4/94 3.85% N/A N/A 4.27%
Lehman Brothers
Municipal Bond Index 6.54% 6.24% 8.22% 6.10%
EXPENSES
This section describes the fees and expenses you would pay if you bought and
held shares of the Fund.
Shareholder Fees (fees paid directly from your investment)
Shareholder Transaction Expenses
Class A Class B Class C
Maximum sales charge imposed on 4.75% None None
purchases (as a % of offering
price)
Maximum deferred sales charge None* 5.00% 1.00%
(as a % of either the redemption
amount or initial investment
whichever is lower)
* Investments of $1 million or more are not subject to a front-end sales charge,
but may be subject to a contingent deferred sales charge of 1.00% upon
redemption within one year after the month of purchase.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)*
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating Expenses**
Class A 0.55% 0.25% 0.49% 1.29%
Class B 0.55% 1.00% 0.48% 2.03%
Class C 0.55% 1.00% 0.48% 2.03%
*Actual for the fiscal year ended 3/31/99.
**From time to time, the Fund's investment advisor may, at its discretion,
reduce or waive its fees or reimburse a Fund for certain of its expenses in
order to reduce expense ratios. The Fund's investment advisor may cease these
waivers or reimbursements at any time. The annual operating expenses do not
reflect fee waivers and expense reimbursements. Including current fee waivers
and expense reimbursements, Total Fund Operating Expenses for Class A, Class B
and Class C were 0.91%, 1.66% and 1.66%, respectively.
The table below shows the total expenses you would pay on a $10,000 investment
over one-, three-, five- and ten-year periods. The example is intended to help
you compare the cost of investing in this Fund versus other mutual funds and is
for illustration only. The example assumes a 5% average annual return and that
you reinvest all of your dividends. Your actual costs may be higher or lower.
Example of Fund Expenses
Assuming Redemption at Assuming
End of Period No Redemption
Class A Class B Class C Class B Class C
After 1 year $600 $706 $306 $206 $206
After 3 years $865 $937 $637 $637 $637
After 5 years $1,149 $1,293 $1,093 $1,093 $1,093
After 10 years $1,958 $2,079 $2,358 $2,079 $2,358
<PAGE>
MISSOURI MUNICIPAL BOND FUND
FUND FACTS:
Goal:
o Tax Exempt Current Income
Principal Investment:
o Municipal Securities
Classes of Shares Offered in this Prospectus:
o Class A
o Class B
o Class C
Investment Advisor:
o Evergreen Investment Management Company
Portfolio Manager:
o George Kimball
NASDAQ Symbols:
o EKUAX (Class A)
o EKUBX (Class B)
o EKUCX (Class C)
Dividend Payment Schedule:
o Monthly
Investment Goal
The Fund seeks the highest possible current income exempt from federal income
taxes, other than the alternative minimum tax, and state income taxes while
preserving capital.
Investment Strategy
The following investment strategies are in addition to the investment strategies
discussed in the "Overview" on page 1.
The Fund normally invests at least 80% of its assets in municipal securities
that are exempt from federal income tax, other than the alternative minimum tax.
The Fund also invests at least 65% of its assets in municipal securities that
are exempt from income taxes in the State of Missouri. The Fund will invest at
least 80% of its assets in bonds that, at the date of investment, are rated
within the four highest ratings categories by a nationally recognized
statistical ratings organization, or unrated securities determined to be of
comparable quality by the investment advisor. The Fund may invest up to 20% of
its assets in below investment grade bonds, but will not invest in bonds rated
below B. The Fund may also invest up to 20% of its assets in high quality
short-term obligations. In purchasing municipal securities, the Fund includes in
its analysis the credit quality of comparative pricing valuation of the
securities as well as the impact of the purchase on the Fund's yield and average
maturity.
The Fund may invest up to 100% of its assets in high quality money market
instruments in response to adverse economic, political or market conditions.
This strategy is inconsistent with the Fund's principal investment strategy and
investment goal and, if employed, could result in a lower return and loss of
market opportunity.
Risk Factors
Your investment in the Fund is subject to the risks discussed in the "Overview"
on page 1 under the headings:
o Interest Rate Risk
o Credit Risk
o Below Investment Grade Bond Risk
o Non-Diversification Risk
The performance of the Missouri Municipal Bond Fund is influenced by the
political, economic and statutory environment within the State. The Fund invests
in obligations of Missouri issuers, which results in the Fund's performance
being subject to risks associated with the most current conditions within the
State. Some of these conditions may include any adverse changes in military
appropriations which could significantly increase unemployment, problems
comparable to those occurring in other states which could negatively affect
Missouri's significant agriculture sector and the impact of ongoing
desegregation lawsuits, as well as other factors which may cause rating agencies
to downgrade the credit ratings on certain issues.
The Fund's concentration in Missouri municipal bonds may expose shareholders to
additional risks. In particular, the Fund will be vulnerable to any development
in Missouri's economy that may weaken or jeopardize the ability of Missouri
municipal bond issuers to pay interest and principal on their bonds. As a
result, the Fund's shares may fluctuate more widely in value than those of a
fund investing in municipal bonds from a number of different states.
For more information on the factors that could affect the ability of the bond
issuers to pay interest and principal on securities acquired by the Fund, see
the Statement of Additional Information.
Dividends paid by the Fund, if any, that do not qualify as tax exempt dividends
under Section 825(b)(5) of the Code, will be exempt from Missouri income tax
only to the extent that such dividends are derived from interest on certain U.S.
obligations that the State of Missouri is expressly prohibited from taxing under
the laws of the U.S. The portion of such dividends that is not subject to
taxation by the State of Missouri may be reduced by interest, or other expenses,
in excess of $500 paid or incurred by a shareholder in any taxable year to
purchase or carry shares of the Fund or other investments producing income that
is includable in federal gross income, but exempt from Missouri income tax.
For further information regarding the Fund's investment strategy and risk
factors, see "Other Fund Practices."
<PAGE>
Performance
The following charts show how the Fund has performed in the past. Past
performance is not an indication of future results. The chart below shows the
percentage gain or loss for Class A shares of the Fund in each calendar year
since the Class A shares' inception on 2/1/94. It should give you a general idea
of how the Fund's return has varied from year-to-year. This graph includes the
effects of Fund expenses, but not sales charges. Returns would be lower if sales
charges were included.
Year-by-Year Total Return for Class A Shares (%)
1995 1996 1997 1998
18.16% 2.78% 9.67% 5.41%
Best Quarter: 1st Quarter 1995 +6.50%
Worst Quarter: 1st Quarter 1996 -2.49%
Year to date total return through 3/31/99 is 0.70%.
The next table lists the Fund's average annual total return over the past year
and since inception (through 12/31/98), including applicable sales charges. This
table is intended to provide you with some indication of the risks of investing
in the Fund. At the bottom of the table you can compare this performance with
the Lehman Brothers Municipal Bond Index, which is a broad measure of the
municipal bond market; it is not an actual investment.
Average Annual Total Return
(for the period ended 12/31/98)
Inception Performance Since
Date of Class 1 year 5 year 10 year 2/1/94
Class A 2/1/94 0.40% N/A N/A 4.79%
Class B 2/1/94 0.18% N/A N/A 4.78%
Class C 2/1/94 4.17% N/A N/A 5.09%
Lehman Brothers
Municipal Bond Index 6.54% 6.24% 8.22% 6.10%
EXPENSES
This section describes the fees and expenses you would pay if you bought and
held shares of the Fund.
Shareholder Fees (fees paid directly from your investment)
Shareholder Transaction Expenses
Class A Class B Class C
Maximum sales charge imposed on 4.75% None None
purchases (as a % of offering price)
Maximum deferred sales charge None* 5.00% 1.00%
(as a % of either the redemption
amount or initial investment
whichever is lower)
* Investments of $1 million or more are not subject to a front-end sales charge,
but may be subject to a contingent deferred sales charge of 1.00% upon
redemption within one year after the month of purchase.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)*
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating Expenses**
Class A 0.55% 0.25% 0.20% 1.00%
Class B 0.55% 1.00% 0.20% 1.75%
Class C 0.55% 1.00% 0.20% 1.75%
*Restated for the fiscal year ended 3/31/99.
**From time to time, the Fund's investment advisor may, at its discretion,
reduce or waive its fees or reimburse a Fund for certain of its expenses in
order to reduce expense ratios. The Fund's investment advisor may cease these
waivers or reimbursements at any time. The annual operating expenses do not
reflect fee waivers and expense reimbursements. Including current fee waivers
and expense reimbursements, Total Fund Operating Expenses for Class A, Class B
and Class C were 0.87%, 1.62% and 1.62%, respectively.
The table below shows the total expenses you would pay on a $10,000 investment
over one-, three-, five- and ten-year periods. The example is intended to help
you compare the cost of investing in this Fund versus other mutual funds and is
for illustration only. The example assumes a 5% average annual return and that
you reinvest all of your dividends. Your actual costs may be higher or lower.
Example of Fund Expenses
Assuming Redemption at Assuming
End of Period No Redemption
Class A Class B Class C Class B Class C
After 1 year $572 $678 $278 $178 $178
After 3 years $778 $851 $551 $551 $551
After 5 years $1,001 $1,149 $949 $949 $949
After 10 years $1,641 $1,771 $2,062 $1,771 $2,062
<PAGE>
NEW YORK MUNICIPAL BOND FUND
FUND FACTS:
Goal:
o Tax Exempt Current Income
Principal Investment:
o Municipal Securities
Classes of Shares Offered in this Prospectus:
o Class A
o Class B
o Class C
o Class Y
Investment Advisor:
o Evergreen Investment Management Company
Portfolio Manager:
o George Kimball
NASDAQ Symbols:
o EKYAX (Class A)
o EKYBX (Class B)
o EKYCX (Class C)
Dividend Payment Schedule:
o Monthly
Investment Goal
The Fund seeks the highest possible current income exempt from federal income
taxes, other than the alternative minimum tax, and state income taxes while
preserving capital.
Investment Strategy
The following investment strategies are in addition to the investment strategies
discussed in the "Overview" on page 1.
The Fund normally invests at least 80% of its assets in municipal securities
that are exempt from federal income tax, other than the alternative minimum tax.
The Fund also invests at least 65% of its assets in municipal securities that
are exempt from income taxes in the State of New York. The Fund will invest at
least 80% of its assets in bonds that, at the date of investment, are rated
within the four highest ratings categories by a nationally recognized
statistical ratings organization, or unrated securities determined to be of
comparable quality by the investment advisor. The Fund may invest up to 20% of
its assets in below investment grade bonds, but will not invest in bonds rated
below B. The Fund may also invest up to 20% of its assets in high quality
short-term obligations. In purchasing municipal securities, the Fund includes in
its analysis the credit quality of comparative pricing valuation of the
securities as well as the impact of the purchase on the Fund's yield and average
maturity.
The Fund will invest at least 80% of its assets in municipal securities that at
all times are fully insured as to timely payment of all principal and interest
when due.
The Fund may invest up to 100% of its assets in high quality money market
instruments in response to adverse economic, political or market conditions.
This strategy is inconsistent with the Fund's principal investment strategy and
investment goal and, if employed, could result in a lower return and loss of
market opportunity.
Risk Factors
Your investment in the Fund is subject to the risks discussed in the "Overview"
on page 1 under the headings:
o Interest Rate Risk
o Credit Risk
o Below Investment Grade Bond Risk
o Non-Diversification Risk
The performance of the New York Municipal Bond Fund is influenced by the
political, economic and statutory environment within the State. The Fund invests
in obligations of New York issuers, which results in the Fund's performance
being subject to risks associated with the most current conditions within the
State. Some of these conditions may include significant cutbacks in recent years
in the computer and instrument manufacturing, utility, defense and banking
industries hindering employment growth and the State's slow recovery from the
recession of early 1990s, as well as other factors which may cause rating
agencies to downgrade the credit ratings on certain issues.
The Fund's concentration in New York municipal bonds may expose shareholders to
additional risks. In particular, the Fund will be vulnerable to any development
in New York's economy that may weaken or jeopardize the ability of New York
municipal bond issuers to pay interest and principal on their bonds. As a
result, the Fund's shares may fluctuate more widely in value than those of a
fund investing in municipal bonds from a number of different states.
For more information on the factors that could affect the ability of the bond
issuers to pay interest and principal on securities acquired by the Fund, see
the Statement of Additional Information.
Distributions of capital gains and other taxable income will be subject to tax
under the personal income taxes of New York State, New York City and other New
York municipalities. Corporations subject to the New York State corporation
franchise tax or the New York City general corporation tax will generally be
subject to tax on all distributions of income from the Fund. For more
information on New York tax consequences, see the Statement of Additional
Information.
For further information regarding the Fund's investment strategy and risk
factors, see "Other Fund Practices."
<PAGE>
Performance
The following charts show how the Fund has performed in the past. Past
performance is not an indication of future results. The chart below shows the
percentage gain or loss for Class A shares of the Fund in each calendar year
since the Class A shares' inception on 2/4/94. It should give you a general idea
of how the Fund's return has varied from year-to-year. This graph includes the
effects of Fund expenses, but not sales charges. Returns would be lower if sales
charges were included.
Year-by-Year Total Return for Class A Shares (%)
1995 1996 1997 1998
17.90% 3.08% 9.26% 6.02%
Best Quarter: 1st Quarter 1995 +7.14%
Worst Quarter: 1st Quarter 1996 -2.09%
Year to date total return through 3/31/99 is 0.52%.
The next table lists the Fund's average annual total return over the past year
and since inception (through 12/31/98), including applicable sales charges. This
table is intended to provide you with some indication of the risks of investing
in the Fund. At the bottom of the table you can compare this performance with
the Lehman Brothers Municipal Bond Index, which is a broad measure of the
municipal bond market; it is not an actual investment.
Average Annual Total Return
(for the period ended 12/31/98)*
Inception Performance Since
Date of Class 1 year 5 year 10 year 2/4/94
Class A 2/4/94 0.95% N/A N/A 4.84%
Class B 2/4/94 0.34% N/A N/A 4.80%
Class C 2/4/94 4.26% N/A N/A 5.12%
Class Y 10/29/98 6.07% N/A N/A 5.89%
Lehman Brothers
Municipal Bond Index 6.54% 6.24% 8.22% 6.10%**
*Historical performance shown for Class Y prior to its inception is based on the
performance of Class A, one of the original classes offered along with Classes B
and C. Historical returns for Class Y have not been adjusted to reflect the
effect of 12b-1 fees. These fees for Classes A, B, and C are 0.25%, 1.00% and
1.00%, respectively. Class Y does not pay a 12b-1 fee. If these fees had not
been reflected, returns for Class Y would have been higher.
** Performance since 10/29/98 is 0.66%.
EXPENSES
This section describes the fees and expenses you would pay if you bought and
held shares of the Fund.
Shareholder Fees (fees paid directly from your investment)
Shareholder Transaction Expenses
Class A Class B Class C Class Y
Maximum sales charge imposed on 4.75% None None None
purchases (as a % of offering
price)
Maximum deferred sales charge None* 5.00% 1.00% None
(as a % of either the redemption
amount or initial investment
whichever is lower)
* Investments of $1 million or more are not subject to a front-end sales charge,
but may be subject to a contingent deferred sales charge of 1.00% upon
redemption within one year after the month of purchase.
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)*
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating Expenses**
Class A 0.55% 0.25% 0.27% 1.07%
Class B 0.55% 1.00% 0.26% 1.81%
Class C 0.55% 1.00% 0.27% 1.82%
Class Y 0.55% None 0.27% 0.82%
*Actual for the fiscal year ended 3/31/99.
**From time to time, the Fund's investment advisor may, at its discretion,
reduce or waive its fees or reimburse a Fund for certain of its expenses in
order to reduce expense ratios. The Fund's investment advisor may cease these
waivers or reimbursements at any time. The annual operating expenses do not
reflect fee waivers and expense reimbursements. Including current fee waivers
and expense reimbursements, Total Fund Operating Expenses for Class A, Class B,
Class C and Class Y were 0.88%, 1.63%, 1.63% and 0.63%, respectively.
The table below shows the total expenses you would pay on a $10,000 investment
over one-, three-, five- and ten-year periods. The example is intended to help
you compare the cost of investing in this Fund versus other mutual funds and is
for illustration only. The example assumes a 5% average annual return and that
you reinvest all of your dividends. Your actual costs may be higher or lower.
Example of Fund Expenses
Assuming Redemption at Assuming
End of Period No Redemption
Class A Class B Class C Class Y Class B Class C
After 1 year $579 $684 $285 $84 $184 $185
After 3 years $799 $869 $573 $262 $569 $573
After 5 years $1,037 $1,180 $985 $455 $980 $985
After 10 years $1,719 $1,841 $2,137 $1,014 $1,841 $2,137
<PAGE>
THE FUNDS' INVESTMENT ADVISOR
The investment advisor manages a Fund's investments and supervises its daily
business affairs. All investment advisors for the Evergreen Funds are
subsidiaries of First Union Corporation, the sixth largest bank holding company
in the United States, with over $___ billion in consolidated assets as of
_/__/99. First Union Corporation is located at 301 South College Street,
Charlotte, North Carolina 28288-0630.
Evergreen Investment Management Company (EIMC) is the investment advisor to:
o Evergreen California Municipal Bond Fund
o Evergreen Massachusetts Municipal Bond Fund
o Evergreen Missouri Municipal Bond Fund
o Evergreen New York Municipal Bond Fund
EIMC has been managing mutual funds and private accounts since 1932 and
currently manages over $___ billion in assets for __ of the Evergreen Funds.
EIMC is located at 200 Berkeley Street, Boston, Massachusetts 02116-5034.
Year 2000 Compliance
The investment advisors and other service providers for the Evergreen Funds are
taking steps to address any potential Year 2000-related computer problems.
However, there is some risk that these problems could disrupt the Funds'
operations or financial markets generally.
THE FUNDS' PORTFOLIO MANAGER
The day-to-day management of Evergreen California Municipal Bond Fund, Evergreen
Massachusetts Municipal Bond Fund, Evergreen Missouri Municipal Bond Fund and
Evergreen New York Municipal Bond Fund is handled by George Kimball. Mr. Kimball
has been employed by Evergreen or one of its affiliates since 1991, and was a
Vice President and analyst prior to becoming a portfolio manager. Prior to
joining Evergreen, Mr. Kimball was employed by BankBoston. He has more than 15
years of investment experience.
CALCULATING THE SHARE PRICE
The value of one share of a Fund, also known as the net asset value, or NAV, is
calculated on each day the New York Stock Exchange is open as of the time the
Exchange closes (normally 4:00 p.m. Eastern time). We calculate the share price
for each share by adding up the total assets of a Fund, subtracting all
liabilities, then dividing the result by the total number of shares outstanding.
Each class of shares is calculated separately. Each security held by a Fund is
valued using the most recent market data for that security. If no market data is
available for a given security, we will price that security at fair value
according to policies established by the Funds' Board of Trustees. Short-term
securities with maturities of 60 days or less will be valued on the basis of
amortized cost.
The price per share you pay for a Fund purchase or the amount you receive for a
Fund redemption is based on the next price calculated after the order is
received and all required information is provided. The value of your account at
any given time is the latest share price multiplied by the number of shares you
own. Your account balance may change daily because the share price may change
daily.
HOW TO CHOOSE AN EVERGREEN FUND
When choosing an Evergreen Fund, you should:
o Most importantly, read the prospectus to see if the Fund is suitable for
you.
o Consider talking to an investment professional. He or she is qualified to
give you investment advice based on your investment goals and financial
situation and will be able to answer questions you may have after reading
the Fund's prospectus.
He or she can also assist you through all phases of opening your account.
o Request any additional information you want about the Fund, such as the
Statement of Additional Information, Annual Report or Semi-annual Report by
calling 1-800-343-2898.
HOW TO CHOOSE THE SHARE CLASS THAT BEST SUITS YOU
After choosing a Fund, you select a share class. Each Evergreen State Municipal
Bond Fund offers up to four different share classes: Class A, Class B, Class C
and Class Y. Each class except Class Y has its own sales charge. Pay
particularly close attention to the fee structure of each class so you know how
much you will be paying before you invest.
Class A
If you select Class A shares, you may pay a front-end sales charge of up to
4.75%. This charge is deducted from your investment before it is invested. The
actual charge depends on the amount invested, as shown below:
As a % of As a % Dealer
Your NAV excluding of your commission
Investment sales charge investment as a % of NAV
Up to $49,999 4.75% 4.99% 4.25%
$50,000-$99,999 4.50% 4.71% 4.25%
$100,000-$249,999 3.75% 3.90% 3.25%
$250,000-$499,999 2.50% 2.56% 2.00%
$500,000-$999,999 2.00% 2.04% 1.75%
$1,000,000 and
over 0% 0% 1.00 to .25%
Although no front-end sales charge applies to purchases of $1,000,000 and over,
you will pay a 1% deferred sales charge if you redeem any such shares within 13
months of purchase.
Two ways you can reduce your Class A sales charges:
1.Rights of Accumulation allow you to combine your investment with all existing
investments in all your Evergreen Fund accounts when determining whether you
meet the threshold for a reduced Class A sales charge.
2.Letter of Intent. If you agree to purchase at least $50,000 over a 13-month
period, you pay the same sales charge as if you had invested the full amount
all at once. The Fund will hold a certain portion of your investment in escrow
until your commitment is met.
Contact your broker or the Evergreen Service Company at 1-800-343-2898 if you
think you may qualify for either of these services.
Each Fund may also sell Class A shares at net asset value without any initial or
contingent sales charge to the Directors, Trustees, officers and employees of
the Fund and the advisory affiliates of First Union Corporation, and to members
of their immediate families, to registered representatives of firms with dealer
agreements with Evergreen Distributor, Inc., and to a bank or trust company
acting as trustee for a single account.
Class B
If you select Class B shares, you do not pay a front-end sales charge, so the
entire amount of your purchase is invested in the Fund. However, your shares are
subject to an additional expense, known as the 12(b)-1 fee. In addition, you may
pay a deferred sales charge if you redeem your shares within six years after the
month of purchase. The amount of the deferred sales charge depends on the length
of time the shares were held, as shown below:
Time Held Contingent Deferred Sales Charge
Month of Purchase + First 12 Month Period 5.00%
Month of Purchase + Second 12 Month Period 4.00%
Month of Purchase + Third 12 Month Period 3.00%
Month of Purchase + Fourth 12 Month Period 3.00%
Month of Purchase + Fifth 12 Month Period 2.00%
Month of Purchase + Sixth 12 Month Period 1.00%
Thereafter 0%
After 7 years Converts to Class A
Dealer Allowance 4.00%
The deferred sales charge percentage is applied to the value of the shares when
purchased or when redeemed, whichever is less. No deferred sales charge is paid
on shares purchased through dividend or capital gains reinvestments or on any
gains in the value of your shares.
Class C
Class C shares are similar to Class B shares, except the deferred sales charge
is less and only applies if shares are redeemed within the first year after the
month of purchase. Also, these shares do not convert to Class A shares and so
the higher 12(b)-1 fee continues for the life of the account.
Time Held Deferred Sales Charge
Month of Purchase + Less than 1 year 1.00%
Month of Purchase + 1 year or more 0%
Waiver of Class B or Class C Sales Charges
You will not be assessed a deferred sales charge for Class B or Class C shares
if you redeem shares in the following situations:
o When the shares were purchased through reinvestment of dividends/capital
gains
o Death or disability
o Lump-sum distribution from a 401(k) plan or other benefit plan qualified under
ERISA
o Automatic IRA withdrawals if your age is at least 59 1/2
o Automatic withdrawals of up to 1.0% of the account balance per month
o Loan proceeds and financial hardship distributions from a retirement plan
o Returns of excess contributions or excess deferral amounts made to a
retirement plan participant
Class Y
New York Municipal Bond Fund offers Class Y shares at net asset value without an
initial sales charge, deferred sales charge or 12b-1 fees. Class Y shares are
only offered to persons who owned shares in a Fund advised by Evergreen Asset
Management Corp. on or before December 31, 1994; certain institutional
investors; and investment advisory clients of an investment advisor of an
Evergreen Fund (or the investment advisor's affiliates).
HOW TO BUY SHARES
Evergreen Funds' low investment minimums make investing easy. Once you decide
on an amount and a share class, simply fill out an application and send in your
payment, or talk to your investment professional.
Minimum Investments
Initial Additional
Regular Accounts $1,000 None
IRAs $250 None
Systematic Investment Plan $50 $25
<TABLE>
<CAPTION>
Method Opening an Account Adding to an Account
<S> <C> <C>
By Mail or through o Complete and sign the account application. o Make your check payable to
an Investment o Make the check payable to Evergreen Funds. Evergreen Funds
Professional o Mail the application and your check to the address o Write a note specifying:
below: - The Fund name
Evergreen Service Company Overnight Address: - Share class
P.O. Box 2121 - Your account number
Boston, MA 02106-2121 Evergreen Service Company - The name(s) in which the account is
200 Berkeley St. registered.
Boston, MA 02116-5039 o Mail to the address to the left or
deliver to your investment
o Or deliver them to your investment representative representative
(provided he or she has a broker/dealer arrangement
with Evergreen Distributor, Inc.)
By Phone o Call 1-800-343-2898 to set up an account number o Call the Evergreen Express Line at
and get wiring instructions (call before 12 noon if 1-800-346-3858 24 hours a day or
you want wired funds to be credited that day). 1-800-343-2898 between 8 a.m. and 6
o Instruct your bank to wire or transfer your p.m. Eastern time, on any business
purchase (they may charge a wiring fee). day.
o Complete the account application and mail to: o If your bank account is set up on
Evergreen Service Company Overnight Address: file, you can request either:
P.O. Box 2121 Evergreen - Federal Funds Wire (offers
Service Company immediate access to funds) or
Boston, MA 02106-2121 200 Berkeley St. - Electronic transfer through the
Automated Clearing House which avoids
Boston, MA 02116 wiring fees.
o Wires received after 4:00 p.m. Eastern time on
market trading days will receive the next market
day's closing price.**
By Exchange o You can make an additional investment by
exchange from an existing Evergreen Funds account by
contacting your investment representative or calling
the Evergreen Express Line at 1-800-346-3858*.
o You can only exchange shares within the same class.
o There is no sales charge or redemption fee when
exchanging Funds within the Evergreen Funds family.
o Orders placed before 4 p.m. Eastern time on market
trading days will receive that day's closing share
price (if not, you will receive the next market
day's closing price).**
o Exchanges are limited to three per calendar quarter, and five per calendar year.
o Exchanges between accounts which do not have identical ownership must be in writing with a
signature guarantee (see below).
Systematic o You can transfer money automatically from your bank account o To establish automatic
Investment Plan into your Fund on a monthly basis. investing for an existing
(SIP) o Initial investment minimum is $50 if you invest at least $25 account, call
per month with this service. 1-800-343-2898 for an
o To enroll, check off the box on the account application and application.
provide: o The minimum is $25 per
- Your bank account information month or $75 per quarter.
- The amount and date of your monthly investment. o You can also establish
an investing program
through direct deposit
from your paycheck. Call
1-800-343-2898 for details.
</TABLE>
* Once you have authorized either the telephone exchange or redemption service,
anyone with a Personal Identification Number (PIN) and the required account
information (including your broker) can request a telephone transaction in your
account. All calls are recorded or monitored for verification, recordkeeping and
quality-assurance purposes. The Evergreen Funds reserve the right to terminate
the exchange privilege of any shareholder who exceeds the listed maximum number
of exchanges, as well as to reject any large dollar exchange if placing it
would, in the judgment of the portfolio manager, adversely affect the price of
the Fund.
** The Fund's shares may be made available through financial service
firms who have a service agreement with the Fund, which are also investment
dealers. The Fund has approved the acceptance of purchase and repurchase request
orders effective as of the time of their receipt by certain authorized financial
intermediaries.
<PAGE>
HOW TO REDEEM SHARES
We offer you several convenient ways to sell your shares in any of the Evergreen
Funds:
<TABLE>
<CAPTION>
Methods Requirements
<S> <C>
Call Us o Call the Evergreen Express Line at 1-800-346-3858 24 hours a day or 1-800-343-2898 between 8 a.m.
and 6 p.m. Eastern time, on any business day.
o This service must be authorized ahead of time, and is only
available for regular accounts.* o All authorized requests
made before 4 p.m. Eastern time on market trading days will be
processed at
that day's closing price. Requests after 4 p.m. will be processed the following business day.**
o We can either:
- wire the proceeds into your bank account (service charges may apply)
- electronically transmit the proceeds to your bank
account via the Automated Clearing House service - mail
you a check.
o All telephone calls are recorded for your protection. We
are not responsible for acting on telephone orders we
believe are genuine.
o See exceptions list below for requests that must be made in
writing.
Write Us o You can mail a redemption request to: Evergreen Service Company Overnight Address:
P.O. Box 2121 Evergreen Service Company
Boston, MA 02106-2121 200 Berkeley St.
Boston, MA 02116-5039
o Your letter of instructions must:
- list the Fund name and the account number
- indicate the number of shares or dollar value you wish to redeem
- be signed by the registered owner(s)
o See exceptions list below for requests that must be signature guaranteed.
o To redeem from an IRA or other retirement account, call 1-800-346-3858 for a special application.
Sell Your o You may also redeem your shares through participating broker-dealers by delivering a letter as
Shares in
Person described above to your broker-dealer.
o A fee may be charged for this service.
Systematic o You can transfer money automatically from your Fund account on a monthly or quarterly basis
Withdrawal without redemption fees. Plan (SWP)
o The withdrawal can be mailed to you, or deposited directly to your bank account.
o The minimum is $75 per month.
o The maximum is 1% of your account per month or 3% per quarter.
o To enroll, call 1-800-343-2898 for an application.
Timing of Proceeds
Normally, we will send your redemption proceeds on the next business day after
we receive your request; however, we reserve the right to wait up to seven
business days to redeem any investments made by check and five business days for
investments made by Automated Clearing House transfer. We also reserve the right
to redeem in kind, and to redeem the remaining amount in the account if your
redemption brings the account balance below the initial minimum of $1,000.
Exceptions: Redemption Requests That Require A Signature Guarantee
To protect you and Evergreen Funds against fraud, certain redemption requests
must be in writing with your signature guaranteed. A signature guarantee can be
obtained at most banks and securities dealers. A notary public is not authorized
to provide a signature guarantee. The following circumstances require signature
guarantees:
o You are redeeming more than $50,000.
o You want the funds transmitted to a bank account not listed on the
account.
Who Can Provide A Signature Guarantee:
o You want the proceeds payable to anyone other than the registered
owner(s) of the account. o Commercial Bank
o Either your address or the address of your bank account has been changed within o Trust Company
30 days. o Savings Association
o The account is registered in the name of a fiduciary corporation or any other o Credit Union
organization. o Member of a U.S. stock
exchange
In these cases, additional documentation is required:
corporate accounts: certified copy of corporate resolution
fiduciary accounts: copy of the power of attorney or other governing document
</TABLE>
<PAGE>
OTHER SERVICES
Evergreen Express Line
Use our automated, 24-hour service to check the value of your investment in a
Fund; purchase, redeem or exchange Fund shares; find a Fund's price, yield or
total return; order a statement or duplicate tax form; or hear market commentary
from Evergreen portfolio managers.
Automatic Reinvestment of Dividends
For the convenience of investors, all dividends and capital gains distributions
are automatically reinvested, unless you request otherwise. Distributions can be
made by check or electronic transfer through the Automated Clearing House to
your bank account. The details of your dividends and other distributions will be
included on your statement.
Payroll Deduction (Class A, Class B and Class C only)
If you want to invest automatically through your paycheck, call us to find out
how you can set up direct payroll deductions. The amounts deducted will be
invested in your Fund using the Electronic Funds Transfer System. We will
provide the Fund account number. Your payroll department will let you know the
date of the pay period when your investment begins.
Telephone Investment Plan
You may make additional investments electronically in an existing Fund account
at amounts of not less than $100 or more than $10,000 per investment. Telephone
requests received by 4:00 p.m. Eastern time will be invested the day the request
is received.
Dividend Exchange
You may elect on the application to reinvest capital gains and/or dividends
earned in one Evergreen Fund into an existing account in another Evergreen Fund
in the same share class -- automatically. Please indicate on the application the
Evergreen Fund(s) into which you want to invest the distributions.
Reinvestment Privileges
Under certain circumstances, shareholders may, within one year of redemption,
reinstate their accounts at the current price (NAV).
THE TAX CONSEQUENCES OF INVESTING IN THE FUND
You may be taxed in two ways:
o On Fund distributions (capital gains and dividends)
o On any profit you make when you sell any or all of your shares.
Fund Distributions
A mutual fund passes along to all of its shareholders the net income or profits
it receives from its investments. The shareholders of the fund then pay any
taxes due, whether they receive these distributions in cash or elect to have
them reinvested. The Evergreen State Municipal Bond Funds expect that
substantially all of their regular dividends will be exempt from federal income
tax. The Funds may also distribute two types of taxable income to you:
o Dividends. To the extent that regular dividends are derived from interest
that is not tax exempt, or from short term capital gains, you will have to
include them in your federal taxable income. Each Fund pays a monthly
dividend from the dividends, interest and other income on the securities in
which it invests.
o Capital Gains. When a mutual fund sells a security it owns for a profit, the
result is a capital gain. Evergreen State Municipal Bond Funds generally
distribute capital gains at least once a year, near the end of the calendar
year. Short-term capital gains reflect securities held by the Fund for a year
or less and are considered ordinary income just like dividends. Profits on
securities held longer than 12 months are considered long-term capital gains
and are taxed at a special tax rate (20% for most taxpayers, on sales made
after January 1, 1998).
Dividend and Capital Gain Reinvestment
Unless you choose otherwise on the account application, all dividend and capital
gain payments will be reinvested to buy additional shares. Distribution checks
that are returned and distribution checks that are uncashed when the shareholder
has failed to respond to mailings from the shareholder servicing agent will
automatically be reinvested to buy additional shares. No interest will accrue on
amounts represented by uncashed distribution or redemption checks. We will send
you a statement each January with the federal tax status of dividends and
distributions paid by each Fund during the previous calendar year.
Profits You Realize When You Redeem Shares
When you sell shares in a mutual fund, whether by redeeming or exchanging, you
have created a taxable event. You must report any gain or loss on your tax
return unless the transaction was entered into by a tax-deferred retirement plan
or occurred in a money market fund. It is your responsibility to keep accurate
records of your mutual fund transactions. You will need this information when
you file your income tax return, since you must report any capital gains or
losses you incur when you sell shares. Remember, an exchange is a purchase and a
sale for tax purposes.
Tax Reporting
Evergreen Service Company provides you with a tax statement of your dividend and
capital gains distributions for each calendar year on Form 1099 DIV. Proceeds
from a sale are reported on Form 1099B. You must report these on your tax
return. Since the IRS receives a copy as well, you could pay a penalty if you
neglect to report them.
Evergreen Service Company will send you a tax information guide each year during
tax season, which may include a cost basis statement detailing the gain or loss
on taxable transactions you had during the year. Please consult your own tax
advisor for further information regarding the federal, state and local tax
consequences of an investment in the Funds.
Retirement Plans
You may invest in each Fund through various retirement plans, including IRAs,
401(k) plans, Simplified Employee Plans, (SEPs), IRAs, 403(b) plans, 457 plans
and others. For special rules concerning these plans, including applications,
restrictions, tax advantages, and potential sales charge waivers, contact your
broker-dealer. To determine if a retirement plan may be appropriate for you,
consult your tax advisor.
FEES AND EXPENSES OF THE FUNDS
Every mutual fund has fees and expenses that are assessed either directly or
indirectly. This section describes each of those fees.
Management Fee
The management fee pays for the normal expenses of managing the fund, including
portfolio manager salaries, research costs, corporate overhead expenses and
related expenses.
12b-1 Fee
The Trustees of the Evergreen Funds have approved a policy to assess 12b-1 fees
for Class A, Class B and Class C shares. These fees increase the cost of your
investment. The purpose of the 12b-1 fee is to promote the sale of more shares
of the Funds to the public. The Fund might use this fee for advertising and
marketing and as a "service fee" to the broker-dealer for additional shareholder
services.
Other Expenses
Other expenses include miscellaneous fees from affiliated and outside service
providers. These may include legal, audit, custodial and safekeeping fees, the
printing and mailing of reports and statements, automatic reinvestment of
distributions and other conveniences for which the shareholder pays no
transaction fees.
Total Fund Operating Expenses
The total cost of running the Fund is called the expense ratio. As a
shareholder, you are not charged these fees directly; instead they are taken out
before the Fund's net asset value is calculated, and are expressed as a
percentage of the Fund's average daily net assets. The effect of these fees is
reflected in the performance results for that share class. Because these fees
are "invisible," investors should examine them closely in the prospectus,
especially when comparing one fund with another fund in the same investment
category. There are three things to remember about expense ratios: 1) your total
return in the Fund is reduced in direct proportion to the fees; 2) expense
ratios can vary greatly between funds and fund families, from under 0.25% to
over 3.0%; and 3) a Fund's advisor may waive a portion of the Fund's expenses
for a period of time, reducing its expense ratio.
<PAGE>
FINANCIAL HIGHLIGHTS
This section looks in detail at the results for one share in each share class of
the Funds -- how much income it earned, how much of this income was passed along
as a distribution and how much the return was reduced by expenses. The tables
have been derived from financial information audited by KPMG LLP, the Funds'
independent auditors. For a more complete picture of the Funds' financial
statements, please see the Funds' Annual Report as well as the Statement of
Additional Information.
Financial highlights will be inserted in (B) filing.
<PAGE>
OTHER FUND PRACTICES
The Funds may invest in futures and options, which are forms of derivatives. The
Funds may also engage in short sales. Such practices are used to hedge a Fund's
portfolio to protect against changes in interest rates and to adjust the
portfolio's duration. Although this is intended to increase returns, these
practices may actually reduce returns or increase volatility.
The Funds may also invest in other investment companies. This practice may
expose a Fund to duplicate expenses and lower its value.
In addition, the Funds may borrow money and lend their securities. Borrowing is
a form of leverage that may magnify a Fund's gain or loss. Lending securities
may cause the Fund to lose the opportunity to sell these securities at the most
desirable price and, therefore, lose money.
The Funds generally do not take portfolio turnover into account in making
investment decisions. This means the Fund could experience a high rate of
portfolio turnover (100% or more) in any given fiscal year, resulting in greater
brokerage and other transactions costs which are borne by the Funds and their
shareholders. It may also result in the Funds realizing greater net short-term
capital gains, distributions from which are taxable to shareholders as ordinary
income.
Please consult the Statement of Additional Information for more information
regarding these and other investment practices used by the Funds, including
risks.
<PAGE>
Evergreen Funds
Money Market
Treasury Money Market Fund
Money Market Fund
Municipal Money Market Fund
Pennsylvania Municipal Money Market Fund
Florida Municipal Money Market Fund
New Jersey Municipal Money Market Fund
Municipal Bond
Short-Intermediate Municipal Fund
High Grade Municipal Bond Fund
Municipal Bond Fund
California Municipal Bond Fund
Connecticut Municipal Bond Fund
Florida High Income Municipal Bond Fund
Florida Municipal Bond Fund
Georgia Municipal Bond Fund
Maryland Municipal Bond Fund
Massachusetts Municipal Bond Fund
Missouri Municipal Bond Fund
New Jersey Municipal Bond Fund
New York Municipal Bond Fund
North Carolina Municipal Bond Fund
Pennsylvania Municipal Bond Fund
South Carolina Municipal Bond Fund
Virginia Municipal Bond Fund
Income
Capital Preservation and Income Fund
Short Intermediate Bond Fund
Intermediate Term Government Securities Fund
Intermediate Term Bond Fund
U.S. Government Fund
Diversified Bond Fund
Strategic Income Fund
High Yield Bond Fund
Balanced
American Retirement Fund
Balanced Fund
Tax Strategic Foundation Fund
Foundation Fund
Growth & Income
Utility Fund
Income and Growth Fund
Equity Income Fund
Value Fund
Blue Chip Fund
Growth and Income Fund
Small Cap Value Fund
Domestic Growth
Strategic Growth Fund
Stock Selector Fund
Evergreen Fund
Omega Fund
Small Company Growth Fund
Aggressive Growth Fund
Micro Cap Fund
Tax Strategic Equity Fund
Masters Fund
Global International
Global Leaders Fund
International Growth Fund
Global Opportunities Fund
Precious Metals Fund
Emerging Markets Growth Fund
Latin America Fund
Express Line
800.346.3858
Investor Services
800.343.2898
<PAGE>
1. Evergreen Express Line
Call 1-800-346-3858
24 hours a day to
o check your account
o order a statement
o get a Fund's current price, yield and
total return
o buy, redeem or exchange Fund shares
2. Non-retirement account holders
Call 1-800-343-2898
Monday through Friday, 8 a.m. to 6 p.m. Eastern time to
o buy, redeem or exchange shares
o order applications
o get assistance with your account
3. Information Line for Hearing and Speech Impaired (TTY/TDD) Call
1-800-343-2888 Monday through Friday, 8 a.m. to 6 p.m. Eastern time
4. Write us a letter
Evergreen Service Company
P.O. Box 2121
Boston, MA 02106-2121
o to buy, redeem or exchange shares
o to change the registration on your account
o for general correspondence
5. For express, registered, certified mail:
Evergreen Service Company
200 Berkeley Street
Boston, MA 02116-5039
6. Contact us on-line:
www.evergreen-funds.com
7. Regular communications you will receive:
Account Statements -- You will receive quarterly statements for each Fund
you own.
Confirmation Notices -- We send a confirmation of any transaction you make
within five days of the transaction.
Annual and Semiannual reports -- You will receive a detailed financial
report on your Funds twice a year.
Tax Forms --Each January you will receive any tax forms you need to file in
your taxes as well as the Evergreen Tax Information Guide.
<PAGE>
For More Information About the Evergreen State Municipal Bond Funds, Ask for:
The Funds' most recent Annual or Semi-annual Report, which contains a
complete financial accounting for each Fund and a complete list of the
Fund's holdings as of a specific date, as well as commentary from the
Fund's portfolio manager. This Report discusses the market conditions and
investment strategies that significantly affected the Fund's performance
during the most recent fiscal year or period.
The Statement of Additional Information (SAI), which contains more detailed
information about the policies and procedures of the Funds. The SAI has
been filed with the Securities and Exchange Commission (SEC) and its
contents are legally considered to be part of this prospectus.
For questions, other information, or to request a copy, without charge, of
any of the documents, call 1-800-343-2898 or ask your investment
representative. We will mail material within three business days.
Information about these Funds (including the SAI) is also available on the
SEC's Internet web site at http://www.sec.gov, or, for a duplication fee,
by writing the SEC Public Reference Section, Washington DC 20549-6009. This
material can be reviewed and copied at the SEC's Public Reference Room in
Washington, DC. For more information, call the SEC at 1-800-SEC-0330.
[LOGO OF EVERGREEN FUNDS APPEARS HERE]
Evergreen Distributor, Inc.
90 Park Avenue
New York, New York 10016
SEC File No.: 811-08367
<PAGE>
<PAGE>
EVERGREEN MUNICIPAL TRUST
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
EVERGREEN MUNICIPAL TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 633-2700
EVERGREEN STATE MUNICIPAL BOND FUNDS
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1999
Evergreen California Municipal Bond Fund (the "California Fund")
Evergreen Massachusetts Municipal Bond Fund (the "Massachusetts Fund")
Evergreen Missouri Municipal Bond Fund (the "Missouri Fund")
Evergreen New York Municipal Bond Fund (the "New York Fund")
Evergreen Connecticut Municipal Bond Fund (the "Connecticut Fund")
Evergreen New Jersey Municipal Bond Fund (the "New Jersey Fund")
Evergreen Pennsylvania Municipal Bond Fund (the "Pennsylvania Fund")
(Each a "Fund"; together, the "Funds")
Each Fund is a series of an open-end management investment company
known as Evergreen Municipal Trust (the "Trust")
This Statement of Additional Information ("SAI") pertains to all
classes of shares of the Funds listed above. It is not a prospectus but should
be read in conjunction with the prospectuses dated August 1, 1999 for the Fund
in which you are interested. The Funds are offered through prospectuses offering
Class A and Class B shares of each Fund, Class C shares of each Fund except the
Connecticut Fund and the New Jersey Fund, and Class Y shares of the Connecticut
Fund, the New Jersey Fund, the New York Fund and the Pennsylvania Fund.
Certain information may be incorporated by reference to the Funds'
Annual Report dated March 31, 1998. You may obtain a copy of the Annual Report
without charge by calling (800) 343-2898.
<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....................................................................1-10
PERFORMANCE.................................................................1-14
COMPUTATION OF CLASS A OFFERING PRICE ......................................1-16
SERVICE PROVIDERS...........................................................1-17
FINANCIAL STATEMENTS........................................................1-18
ADDITIONAL INFORMATION CONCERNING CALIFORNIA
ADDITIONAL INFORMATION CONCERNING MASSACHUSETTS
ADDITIONAL INFORMATION CONCERNING MISSOURI
ADDITIONAL INFORMATION CONCERNING NEW YORK
ADDITIONAL INFORMATION CONCERNING CONNECTICUT
ADDITIONAL INFORMATION CONCERNING NEW JERSEY
ADDITIONAL INFORMATION CONCERNING PENNSYLVANIA
PART 2
ADDITIONAL INFORMATION ON SECURITIES AND INVESTMENT PRACTICES................2-1
PURCHASE, REDEMPTION AND PRICING OF SHARES..................................2-14
SALES CHARGE WAIVERS AND REDUCTIONS.........................................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.
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. This summary is qualified
in its entirety by reference to the Declaration of Trust.
INVESTMENT POLICIES
Each Fund has adopted the fundamental investment restrictions set forth
below which may not be changed without the vote of a majority of the Fund's
outstanding shares, as defined in the Investment Company Act of 1940 (the"1940
Act"). Where necessary, an explanation beneath a fundamental policy describes
the Fund's practices with respect to that policy, as allowed by current law. If
the law governing a policy changes, the Fund's practices may change accordingly
without a shareholder vote. Unless otherwise stated, all references to the
assets of the Fund are in terms of current market value.
1. Non-Diversification
Each Fund may not make any investment that is inconsistent with its
classification as a non-diversified investment company under the 1940 Act.
Further Explanation of Non-Diversified Funds:
A non-diversified management investment company may have no more than
25% of its total assets invested in the securities (other that U.S. government
securities or the shares of other regulated investment companies) of any one
issuer and must invest 50% of its total assets under the 5% of its assets and
10% of outstanding voting securities tests applicable to diversified funds.
2. Concentration
Each Fund may not concentrate its investments in the securities of
issuers primarily engaged in any particular industry (other than securities that
are issued or guaranteed by the U.S. government or its agencies or
instrumentalities).
Further Explanation of Concentration Policy:.
Each Fund may not invest more than 25% of its total assets, taken at
market value, in the securities of issuers primarily engaged in any particular
industry (other than securities issued or guaranteed by the U.S. government or
its agencies or instrumentalities).
3. Issuing Senior Securities
Except as permitted under the 1940 Act, each Fund may not issue senior
securities.
4. Borrowing
Each Fund may not borrow money, except to the extent permitted by
applicable law.
Further Explanation of Borrowing Policy:
Each Fund may borrow from banks and enter into reverse repurchase
agreements in an amount up to 33 1/3% of its total assets, taken at market
value. Each Fund may also borrow up to an additional 5% of its total assets from
banks or others. A Fund may borrow only as a temporary measure for extraordinary
or emergency purposes such as the redemption of Fund shares. A Fund may purchase
additional securities so long as borrowings do not exceed 5% of its total
assets. Each Fund may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities. Each Fund may purchase
securities on margin and engage in short sales to the extent permitted by
applicable law.
5. Underwriting
Each Fund may not underwrite securities of other issuers, except
insofar as a Fund may be deemed to be an underwriter in connection with the
disposition of its portfolio securities.
6. Real Estate
Each Fund may not purchase or sell real estate, except that, to the
extent permitted by applicable law, a Fund may invest in (a) securities that are
directly or indirectly secured by real estate, or (b) securities issued by
issuers that invest in real estate.
7. Commodities
Each Fund may not purchase or sell commodities or contracts on
commodities, except to the extent that a Fund may engage in financial futures
contracts and related options and currency contracts and related options and may
otherwise do so in accordance with applicable law and without registering as a
commodity pool operator under the Commodity Exchange Act.
8. Lending
Each Fund may not make loans to other persons, except that a Fund may
lend its portfolio securities in accordance with applicable law. The acquisition
of investment securities or other investment instruments shall not be deemed to
be the making of a loan.
Further Explanation of Lending Policy:
To generate income and offset expenses, a Fund may lend portfolio
securities to broker-dealers and other financial institutions in an amount up to
33 1/3% of its total assets, taken at market value. While securities are on
loan, the borrower will pay the Fund any income accruing on the security. The
Fund may invest any collateral it receives in additional portfolio securities,
such as U.S. Treasury notes, certificates of deposit, other high-grade,
short-term obligations or interest bearing cash equivalents. Gains or losses in
the market value of a security lent will affect the Fund and its shareholders.
When a Fund lends its securities, it will require the borrower to give
the Fund collateral in cash or government securities. The Fund will require
collateral in an amount equal to at least 100% of the current market value of
the securities lent, including accrued interest. The Fund has the right to call
a loan and obtain the securities lent any time on notice of not more than five
business days. The Fund may pay reasonable fees in connection with such loans.
9. Investment in Federally Tax Exempt Securities
Each Fund will, during periods of normal market conditions, invest its
assets in accordance with applicable guidelines issued by the Securities and
Exchange Commission or its staff concerning investment in tax-exempt securities
for funds with the words "tax exempt," "tax free" or "municipal" in their names.
OTHER SECURITIES AND PRACTICES
For information regarding certain securities the Funds may purchase and
certain investment practices the Funds may use, see the following sections under
"Additional Information on Securities and Investment Practices" in Part 2 of
this SAI:
Defensive Investments
U.S. Government Securities
When-Issued, Delayed-Delivery and Forward Commitment Transactions
Repurchase Agreements
Reverse Repurchase Agreements
Securities Lending
Options
Futures Transactions
High Yield, High Risk Bonds
Illiquid and Restricted Securities
Investment in Other Investment Companies
Short Sales
Municipal Bonds
Virgin Islands, Guam and Puerto Rico
Zero Coupon "Stripped" Bonds
PRINCIPAL HOLDERS OF FUND SHARES
As of May 1, 1999, the officers and Trustees of the Trust owned as a
group less than 1% of the outstanding shares of any class of each Fund.
Set forth below is information with respect to each person who, to each
Fund's knowledge, owned beneficially or of record more than 5% of the
outstanding shares of any class of each Fund as of May 1, 1999.
California Municipal Bond Fund Class A
MLPF & S for the Sole Benefit of Its 9.82%
Customers
Attn: Fund Administration #97DG2
4800 Deer Lake Dr., E 2nd Fl
Jacksonville, FL 32246-6484
Billie Cheek 6.58%
Irmgard Cheek Ttee
Cheek Family Trust
U/A dtd 06/14/95
California Municipal Bond Fund Class B
MLPF & S for the Sole Benefit of Its 19.10%
Customers
Attn: Fund Administration #97DG3
4800 Deer Lake Dr., E 2nd Fl
Jacksonville, FL 32246-6484
California Municipal Bond Fund Class C
MLPF & S for the Sole Benefit of Its 19.20%
Customers
Attn: Fund Administration #97DG4
4800 Deer Lake Dr., E 2nd Fl
Jacksonville, FL 32246-6484
Salomon Smith Barney Inc. 15.88%
00167349880
333 West 34th Street, 3rd Floor
New York, NY 10001
Victor Edward Rylander 11.22%
Lucille Rylander Co-Ttees
Victor & Lucille Rylander Trust
U/A dtd 09-18-96
4102 Caflur Avenue
San Diego, CA 92117-4436
Prudential Securities 7.62%
FBO Rakesh C Gupta
Neelam Gupta Co-Ttees
FBO Gupta Family Living Trust 12/22/94
Hemet, CA 92544
NFSC FEBO # 0KS-714674 7.07%
Rozene L Kretz
776 Lawrence Drive
Gilroy, CA 95020
Salomon Smith Barney Inc. 6.58%
00154933343
333 West 34th Street, 3rd Floor
New York, NY 10001
Richard B. Smith 6.45%
Mary L. Smith JT WROS
4853 Mt. Royal Court
San Diego, CA 82117-2917
Massachusetts Municipal Bond Fund Class A
Margaret Vogel 10.49%
Tr #21720
Keystone Trust Company Ttee
865 Central Avenue
Needham, MA 02192-1341
Richard Nakashian 9.78%
P.O Box 3150
Pocasset, MA 02559-3150
Alfred Campanelli 8.98%
P.O. Box 850985
Braintree, MA 02185
Ida R. Rodriguez 7.86%
Tr #21528
Keystone Trust Company Ttee
58 Helen Road
Needham, MA 02192-3934
Frank J. Pusateri 5.77%
Helen C. Pusateri Ttees
Pusateri Family Trust
U/A dtd 05-20-93
1687 Dawes Road, NE
Palm Bay, FL 32905-4549
Marion E. Taylor Ttee 5.56%
Marion E Taylor Trust
U/A dtd 06-12-95
10 Longwood Drive, Apt. 305
Westwood, MA 02090-1141
Massachusetts Municipal Bond Fund Class B
MLPF&S for the Sole Benefit of 5.09%
Its Customers
Attn: Fund Administration #97DG0
4800 Deer Lake Drive, E 2nd Floor
Jacksonville, FL 32246-6484
Massachusetts Municipal Bond Fund Class C
PaineWebber for the Benefit of 9.61%
Samuel J. Freelander CPA
340 Main Street
Worcester, Ma 01608
Malcolm F. Groves & 7.28%
Jean N. Groves Ttees
Malcom F. Groves Rev Liv Trust
U/A dtd 05-18-94
80 Indian Hill Road
Cummaquid, MA 02637
First Clearing Corporation 6.28%
A/C 8024-0964
Ruth A. Schreiner Trust
William B. Schreiner Ttee
161 Marquand Drive
Osterville, MA 02655-1803
William Ripley 6.12%
c/o Eastern
Environmental Systems Inc.
45 Accord Park Drive
Norwell, MA 02061-1614
John Pierce & Marie Pierce JT TEN 5.86%
424 King's Town Way
Duxbury, MA 02332-4605
Missouri Municipal Bond Fund Class A
MLPF&S for the Sole Benefit of Its 30.37%
Customers
Attn: Fund Administration #97DE7
4800 Deer Lake Drive, E. 2nd Floor
Jacksonville, FL 32246-6484
BHC Securities, Inc. 5.64%
FAO 54355607
Attn: Mutual Funds Dept.
One Commerce Square
2005 Market Street, Suite 1200
Philadelphia, PA 19103
Missouri Municipal Bond Fund Class B
MLPF&S for the Sole Benefit of Its 25.76%
Customers
Attn: Fund Administration #97DE8
4800 Deer Lake Drive, E. 2nd Floor
Jacksonville, FL 32246-6484
Missouri Municipal Bond Fund Class C
Robert L. Beckman 9.27%
Carol A. Beckman JT TEN
940 Sherman Lane
Florissant, MO 63031-2336
MLPF & S for the Sole Benefit of Its 8.94%
Customers
Attn: Fund Administration #97DE9
4800 Deer Lake Drive, E 2nd Floor
Jacksonville, FL 32246-6484
Felicia L. Bart 8.78%
Vern E. Alexander JT WROS
6501 Twin Springs Road
Parkville, MO 64152-3046
PaineWebber for the Benefit of 8.07%
Joseph Henry Children Trust
U/A dtd 6/25/84
Edwin C. Hogueland Ttee
Donnelly Meiners Jordan Kline
4600 Madison, Suite 1100
Kansas City, MO 64112-3012
Eiolet Utley Baker 8.02%
Tod David W. Baker
1342 E Stanford
Springfield, MO 65804
PaineWebber for the Benefit of 7.48%
Steven L. Cox
Nancy S. Cox JTWROS
2809 Ajax Road
Saint Joseph, MO 64503-1327
Patricia W. Duwe 6.74%
9014 Laurel Crest
Saint Louis, MO 63126-2413
Kenneth J. Heutel 6.59%
811 Butterfly Lane
Saint Charles, MO 63304-7878
PaineWebber for the Benefit of 5.66%
Jeffrey M. Lowe and
Kathy E. Lowe JT/WROS
700 Deer Vue Lane
Fenton, MO 63026
Charles L. Merz 5.13%
#11 Dunleith
St. Louis, MO 63131-4835
New York Municipal Bond Fund Class A
MLPF&S for the Sole Benefit of 6.36%
Its Customers
Attn: Fund Administration #97DE0
4800 Deer Lake Drive, E. 2nd Floor
Jacksonville, FL 32246-6484
New York Municipal Bond Fund Class B
MLPF&S for the Sole Benefit of 13.94%
Its Customers
Attn: Fund Administration #97DF1
4800 Deer Lake Drive, E. 2nd Floor
Jacksonville, FL 32246-6484
New York Municipal Bond Fund Class C
Steven Starker & 16.41%
Farrel Starker JTWROS
7 Flagler Drive
Rye, NY 10580-1851
Carol Whitman 13.85%
P.O. Box 43
Whippleville, NY 12995
Carol L. Moore 9.91%
Rt. 2 Box 1055
Chatteaugay, NY 12920-9522
Henry W. Demoy 6.42%
Patricia K. Demoy JTWROS
Rd. 2 King Road
Cambrige, NY 12816-9802
MLPF&S for the Sole Benefit of 5.54%
Its Customers
Attn: Fund Administration #97DF8
4800 Deer Lake Drive, E. 2nd Floor
Jacksonville, FL 32246-6484
Robert C. Rudd 5.38%
Audrey A. Rudd JT WROS
20 Harborview Road
Northport, NY 11768-3422
Moo Kir Tsui 5.14%
1235 Promenade Drive, Apt. 502J
Boca Raton, FL 33433-6916
New York Municipal Bond Fund Class Y
First Union National Bank 97.03%
Trust Accounts
Attn: Ginny Batten
CMG-1151 11th Floor
Charlotte, NC 28202-1910
Connecticut Municipal Bond Fund Class A
Raymond James Tr Co Ttee 19.07%
FBO Edwin Pugsley Jr Trust
A/C 20603100
P.O. Box 14407
St. Petersburg, Fl 33733-4407
First Union Brokerage Services 17.57%
Sarah Allin & A/C 1099-8268
10 Sandgate Road
Madison, CT 06443-3453
First Union Brokerage Services 12.68%
Crown Realty LLC
A/C 2134-4973
P.O. Box 2-224 Devon Station
Milford, CT 06460
First Union Brokerage Services 11.17%
Dominic R. Spera
A/C 7953-1716
21 Milano Pond Drive
Madison, CT 06443
Rose Santoro 8.39%
Bruce A. McEntee JTWROS
19 Mitchell Avenue
Waterbury, CT 06710-2416
First Clearing Corporation 6.67%
A/C 8612-7796
Beatrice M. Wright
c/o Duncaster - #P216
60 Loeffler Road
Bloomfield, CT 06002-2279
First Union Brokerage Services 5.22%
Marc Riccio &
Kendra J. Riccio JTWROS
A/C 7058-2926
34 Valley Brook Road S
Branford, CT 06405
MLPF&S for the Sole Benefit of 5.10%
Its Customers
Attn: Fund Administration #97W06
4800 Deer Lake Drive, E. 2nd Floor
Jacksonville, FL 32246-6484
Connecticut Municipal Bond Fund Class B
First Union Brokerage Services 17.22%
Stewart Monroe Jr.
A/C 5984-0530
Avalon Springs
25 River Road #7208
Wilton, CT 06897-4085
First Union Brokerage Services 12.20%
Edith B. White
A/C 8686-9653
50 Ledge Road, Apt. #219
Darien, CT 06897-4085
First Union Brokerage Services 9.34%
David E. Fendler &
Sylvia Fendler JTWROS
A/C 3154-4481
72 Brinkerhoff Avenue
Stamford, CT 06905-3203
First Union Brokerage Services 7.73%
Kathleen K Delaney
A/C 2452-6141
14 Smoke Hill Drive
Stamford, CT 06903-3817
Connecticut Municipal Bond Fund Class Y
First Union National Bank BK/EB/INT 99.77%
Cash Account
Attn: Trust Operations Fund Group
401 S. Tryon Street, 3rd Floor CMG-1151
Charlotte, NC 28202-1911
New Jersey Municipal Bond Fund Class A
FUBS & Co. FEBO 5.06%
Norman Sevell &
Marie Sevell
1600 Cooper Road
Scotch Plains, NJ 07076
New Jersey Municipal Bond Fund Class B
None
New Jersey Municipal Bond Fund Class Y
First Union National Bank 95.71%
Trust Accounts
Attn: Ginny Batten CMG-1151
401 S. Tryon Street, 3rd Floor
Charlotte, NC 28202-1911
Pennsylvania Municipal Bond Fund Class A
MLPF&S for the Sole Benefit of Its 5.00%
Customers
Attn: Fund Administration #977F7
4800 Deer Lake Drive, 2nd Floor
Jacksonville, FL 32246-6484
Pennsylvania Municipal Bond Fund Class B
MLPF&S for the Sole Benefit of Its 9.28%
Customers
Attn: Fund Administration #97A06
4800 Deer Lake Drive, 2nd Floor
Jacksonville, FL 32246-6484
Pennsylvania Municipal Bond Fund Class C
MLPF&S for the Sole Benefit of Its 18.47%
Customers
Attn: Fund Administration #97A07
4800 Deer Lake Drive, 2nd Floor
Jacksonville, FL 32246-6484
Pennsylvania Municipal Bond Fund Class Y
First Union National Bank BK/EB/INT 96.99%
Cash Account
Attn: Trust Operations Fund Group
401 S. Tryon Street, 3rd Floor
CMG-1151
Charlotte, NC 28202-1911
EXPENSES
Advisory Fees
Each Fund has its own investment advisor. For more information, see
"Investment Advisory Agreements" in Part 2 of this SAI.
Evergreen Investment Management Company ("EIMC") is the investment
advisor to the California Fund, the Massachusetts Fund, the Missouri Fund and
the Pennsylvania Fund. EIMC is entitled to receive a fee from each Fund at the
annual rates below:
Average Daily Fee
Net Assets
First $50 million 0.55%
Next $50 million 0.50%
Next $100 million 0.45%
Next $100 million 0.40%
Next $100 million 0.35%
Next $100 million 0.30%
Over $500 million 0.25%
Evergreen Investment Management ("EIM") (formerly known as Capital
Management Group, or CMG), a division of First Union National Bank, is the
investment advisor to the Connecticut Fund. EIM is entitled to receive a fee
from the Connecticut Fund at the annual rate of 0.60% of the Fund's average
daily net assets. EIM has voluntarily agreed to reduce or waive a portion of its
fee equal to 0.10%, resulting in a net advisory fee of 0.50%. EIM may change or
stop this waiver at any time.
EIM is also the advisor to the New Jersey Fund. EIM is entitled to
receive a fee from the New Jersey Fund at the annual rates below:
Average Daily Fee
Net Assets
First $500 million 0.50%
Next $500 million 0.45%
Next $1 billion 0.40%
Over $1.5 billion 0.35%
Advisory Fees Paid
Below are the advisory fees paid by each Fund for the last three fiscal
periods.
Fund/Fiscal Year or Period Advisory Fee Paid Advisory Fees
Waived
Year Ended 1999
California Fund $146,303 $20,292
Massachusetts Fund $53,014 $36,054
Missouri Fund $134,405 $32,169
New York Fund $118,788 $39,788
Connecticut Fund $425,935 $116,474
New Jersey Fund $825,018 $396,701
Pennsylvania Fund $1,135,581 $0
Year or Period Ended 1998
California Fund $150,177 $67,381
Massachusetts Fund $62,171 $54,590
Missouri Fund $138,262 $94,233
New York Fund $132,245 $58,744
Connecticut Fund (a) $141,059 $64,322
New Jersey Fund $429,995 $296,793
Pennsylvania Fund $610,824 $174,928
Year or Period Ended 1997
California Fund (c) $51,555 $43,885
Massachusetts Fund $63,584 $63,584
Missouri Fund (c) $46,447 $46,447
New York Fund $135,473 $106,560
New Jersey Fund (b) $135,196 $135,196
Pennsylvania Fund $390,366 $169,740
(a) The Fund commenced operations on November 24, 1997.
(b) Seven months ended March 31, 1997. During the period, the New Jersey
Fund changed its fiscal year end from August 31 to March 31.
(c) Four months ended March 31, 1997. During the period the Fund changed its
fiscal year end from November 30 to March 31.
Brokerage Commissions
The Funds paid no brokerage commissions during 1999, 1998 and 1997.
Underwriting Commissions
Below are the underwriting commissions paid by each Fund and the
amounts retained by the principal underwriter for the last three fiscal periods.
For more information, see "Principal Underwriter" in Part 2 of this SAI.
Fund/Fiscal Year or Period Total Underwriting
Underwriting Commissions
Commissions Retained
Year Ended 1999
California Fund $38,738 $0
Massachusetts Fund $19,554 $1,293
Missouri Fund $62,002 $3,144
New York Fund $61,550 $1,164
Connecticut Fund $52,550 $0
New Jersey Fund $340,407 $0
Pennsylvania Fund $363,030 $10,125
Year or Period Ended 1998
California Fund $46,632 $3,029
Massachusetts Fund $22,859 $1,771
Missouri Fund $138,428 $8,737
New York Fund $62,317 $4,131
Connecticut Fund(a) $3,194 $476
New Jersey Fund $44,432 $4,471
Pennsylvania Fund $65,672 $6,605
Year or Period Ended 1997
California Fund (c) $133,966 $60,931
Massachusetts Fund $97,579 $29,745
Missouri Fund (c) $96,918 $55,982
New York Fund $236,114 $20,175
New Jersey Fund (b) $0 $0
Pennsylvania Fund $504,459 $106,694
(a) The Fund commenced operations on November 24, 1997.
(b) Seven months ended March 31, 1997. During the period, the New Jersey Fund
changed its fiscal year end from August 31 to March 31.
(c) Four months ended March 31, 1997. During the period the Fund changed its
fiscal year end from November 30 to March 31.
12b-1 Fees
Below are the 12b-1 fees paid by each Fund for the fiscal year or
period ended March 31, 1999. For more information, see "Distribution Expenses
Under Rule 12b-1" in Part 2 of this SAI.
<TABLE>
<CAPTION>
Class A Class B Class C
Fund Distribution Service Fees Distribution Service Fees Distribution Service Fees
Fees Fees Fees
<S> <C> <C> <C> <C> <C> <C>
California Fund N/A $16,950 $137,742 $45,914 $10,912 $3,637
Massachusetts Fund N/A $5,246 $43,516 $14,505 $12,542 $4,181
Missouri Fund N/A $11,818 $141,781 $47,260 $6,046 $2,015
New York Fund N/A $9,275 $121,805 $40,602 $10,611 $3,537
Connecticut Fund N/A $897 $4,715 $1,572 N/A N/A
New Jersey Fund* N/A $83,206 $125,167 $41,722 N/A N/A
Pennsylvania Fund N/A $67,908 $279,530 $93,177 $48,440 $16,147
*The Fund waived $53,252 in Class A service fees.
</TABLE>
Trustee Compensation
Listed below is the Trustee compensation paid by the Trust
individually and by the Trust and the eight other trusts in the Evergreen Fund
Complex for the twelve months ended March 31, 1999. The Trustees do not receive
pension or retirement benefits from the Funds. For more information, see
"Management of the Trust" in Part 2 of this SAI.
Trustee Aggregate Compensation Total Compensation from
Compensation from Trust Trust and Fund Complex Paid
to Trustees*
Laurence B. Ashkin $5,489 $75,000
Charles A. Austin, III $5,489 $75,000
K. Dun Gifford $5,292 $72,500
James S. Howell $7,061 $97,500
Leroy Keith Jr. $5,292 $72,500
Gerald M. McDonnell $5,489 $75,000
Thomas L. McVerry $6,353 $86,000
William Walt Pettit $5,292 $72,500
David M. Richardson $5,240 $71,875
Russell A. Salton, III $5,489 $77,500
Michael S. Scofield $5,489 $77,500
Richard J. Shima $5,292 $72,500
*Certain Trustees have elected to defer all or part of their total
compensation for the twelve months ended March 31, 1999. The amounts
listed below will be payable in later years to the respective Trustees:
Austin $11,250
Howell $77,600
McDonnell $75,000
McVerry $86,000
Pettit $72,500
Salton $77,000
Scofield $11,250
PERFORMANCE
Total Return
Below are the annual total returns for each class of shares of the
Funds (including applicable sales charges) as of March 31, 1999. For more
information, see "Total Return" under "Performance Calculations" in Part 2 of
this SAI.
<TABLE>
<CAPTION>
Fund/Class One Year Five Years Ten Years or Inception Date
Since Inception of Class
<S> <C> <C> <C> <C>
California Fund
Class A 0.83% 5.84% 4.40% 2/1/94
Class B 0.20% 5.80% 4.59% 2/1/94
Class C 4.31% 6.06% 4.71% 2/1/94
Massachusetts Fund
Class A 0.05% 5.62% 3.89% 2/4/94
Class B -0.21% 5.61% 4.07% 2/4/94
Class C 3.84% 5.92% 4.21% 2/4/94
Missouri Fund
Class A 0.06% 5.88% 4.69% 2/1/94
Class B -0.16% 5.87% 4.81% 2/1/94
Class C 3.82% 6.17% 4.94% 2/1/94
New York Fund
Class A 0.75% 6.13% 4.71% 2/4/94
Class B 0.06% 6.08% 4.79% 2/4/94
Class C 4.07% 6.40% 4.93% 2/4/94
Class Y 5.84% 7.20% 5.72% 10/29/98
Connecticut Fund
Class A 0.26 % 4.27% 5.20% 12/30/97
Class B -0.49% 4.19% 4.92% 1/9/98
Class Y 5.56% 5.56% 5.97% 11/24/97
New Jersey Fund
Class A 0.68% 5.70% 6.41% 7/16/91
Class B -0.29% 5.83% 6.71% 1/30/96
Class Y 5.76% 6.78% 7.12% 2/8/96
Pennsylvania Fund
Class A 0.39% 5.60% 7.27% 12/27/90
Class B -0.31% 5.55% 7.30% 2/1/93
Class C 3.59% 5.86% 7.30% 2/1/93
Class Y 5.63% 6.71% 7.95% 11/24/97
</TABLE>
Yields
Below are the current and tax equivalent yields of the Funds for the
30-day period ended March 31, 1999. For more information, see "30-Day Yield" and
"Tax Equivalent Yield" under "Performance Calculations" in Part 2 of this SAI.
<TABLE>
<CAPTION>
30-Day Yield Tax-Equivalent Yield
Combined Federal
& State Tax
Fund Rate (1) Class A Class B Class C Class Y Class A Class B Class C Class Y
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California Fund 46.29% 3.79% 3.23% 3.23% N/A 7.06% 6.01% 6.01% N/A
Massachusetts Fund 44.31% 3.56% 2.99% 2.99% N/A 6.39% 5.37% 5.37% N/A
Missouri Fund 44.34% 4.29% 3.76% 3.76% N/A 7.71% 6.76% 6.76% N/A
New York Fund 44.84% 3.92% 3.36% 3.36% 4.37% 7.11% 6.09% 6.09% 7.92%
Connecticut Fund 43.45% 3.55% 2.97% N/A 3.98% 6.28% 5.25% N/A 7.04%
New Jersey Fund 44.56% 4.09% 3.38% N/A 4.39% 7.38% 6.10% N/A 7.92%
Pennsylvania Fund 42.45% 4.11% 3.56% 3.56% 4.57% 7.14% 6.19% 6.19% 7.94%
(1) Assumed for purposes of this chart. Your tax may vary.
</TABLE>
COMPUTATION OF CLASS A OFFERING PRICE
Class A shares are sold at the NAV plus a sales charge. Below is an
example of the method of computing the offering price of Class A shares of each
Fund. The example assumes a purchase of Class A shares of each Fund aggregating
less than $100,000 based upon the NAV of each Fund' Class A shares at the end of
March 31, 1999. For more information, see "Purchase, Redemption and Pricing of
Shares."
Fund Net Asset Sales Charge Offering Price
Value Per Per Share
Share
California Fund $10.00 4.75% $10.50
Massachusetts Fund $9.58 4.75% $10.06
Missouri Fund $9.87 4.75% $10.36
New York Fund $9.90 4.75% $10.39
Connecticut Fund $6.38 4.75% $6.70
New Jersey Fund $11.16 4.75% $11.72
Pennsylvania Fund $11.66 4.75% $12.24
SERVICE PROVIDERS
Administrator
Evergreen Investment Services, Inc. ("EIS") serves as administrator to
Evergreen Connecticut Municipal Bond Fund and Evergreen New Jersey Municipal
Bond Fund, subject to the supervision and control of the Trust's Board of
Trustees. EIS provides the Funds with facilities, equipment and personnel and is
entitled to receive a fee from the Fund based on the total assets of all mutual
funds for which EIS serves as administrator and a First Union Corporation
subsidiary serves as investment advisor. The fee paid to EIS is calculated in
accordance with the following schedule:
Assets Fee
First $7 billion 0.050%
Next $3 billion 0.035%
Next $5 billion 0.030%
Next $10 billion 0.020%
Next $5 billion 0.015%
Over $30 billion 0.010%
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. (the "Distributor") markets the Funds
through broker-dealers and other financial representatives. Its address is 90
Park Avenue, New York, NY 10016.
Independent Auditors
KPMG LLP, 99 High Street, Boston, Massachusetts 02110, audits the
financial statements of each Fund.
Custodian
State Street Bank and Trust Company is the Funds' custodian. The bank
keeps custody of each Fund's securities and cash and performs other related
duties. The custodian's address is 225 Franklin Street, Boston, Massachusetts
02110.
Legal Counsel
Sullivan & Worcester LLP provides legal advice to the Funds. Its
address is 1025 Connecticut Avenue, N.W., Washington, D.C. 20036.
FINANCIAL STATEMENTS
The audited financial statements and the reports thereon are hereby
incorporated by reference to the Funds' Annual Report, a copy of which may be
obtained without charge from ESC, P.O. Box 2121, Boston, Massachusetts
02106-2121.
ADDITIONAL INFORMATION CONCERNING CALIFORNIA
General
California's economy is the largest among the 50 states and one of the
largest in the world. The State's population of almost 34 million represents
over 12% of the total United States population and grew by 26% in the 1980s,
more than double the national rate. Population growth slowed to less than 1%
annually in 1994 and 1995, but rose to 1.8% in 1996 and 1.6% in 1997. During the
early 1990's, net population growth in the State was due to births and foreign
immigration, but in recent years, in-migration from the other states has
increased.
Total personal income in the State, at an estimated $846 billion in
1997, accounts for almost 13% of all personal income in the nation. Total
employment is over 15 million, the majority of which is in the service, trade
and manufacturing sectors.
From mid-1990 to late 1993, the State suffered a recession with the
worst economic, fiscal and budget conditions since the 1930s. Construction,
manufacturing (especially aerospace), and financial services, among others, were
all severely affected, particularly in Southern California. Employment levels
stabilized by late 1993 and pre-recession job levels were reached in 1996.
Unemployment, while remaining higher than the national average, has come down
from its 10% recession peak to under 6% in early 1999. Economic indicators show
a steady and strong recovery underway in California since the start of 1994
particularly in high technology manufacturing and services, including computer
software, electronic manufacturing and motion picture/television production, and
other services, entertainment and tourism, and both residential and commercial
construction. The Asian economic crisis beginning in mid-1997 has significantly
reduced exports to that region, although this has been offset by increased
exports to Latin America and other areas. Overall, the Asian crisis is expected
to have a moderate dampening effect on the State's economy, but the economy is
still expected to outpace the nation in 1999. Any delay or reversal of the
recovery may create new shortfalls in State revenues.
Constitutional Limitations on Taxes, Other Charges and Appropriations
Limitation on Property Taxes. Certain California Municipal Obligations
may be obligations of issuers which rely in whole or in part, directly or
indirectly, on ad valorem property taxes as a source of revenue. The taxing
powers of California local governments and districts are limited by Article
XIIIA of the California Constitution, enacted by the voters in 1978 and commonly
known as "Proposition 13." Briefly, Article XIIIA limits to 1% of full cash
value of the rate of ad valorem property taxes on real property and generally
restricts the reassessment of property to 2% per year, except under new
construction or change of ownership (subject to a number of exemptions). Taxing
entities may, however, raise ad valorem taxes above the 1% limit to pay debt
service on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied
against the assessed value of property as of the owner's date of acquisition (or
as of March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been filed challenging the acquisition-based
assessment system of Proposition 13, but it was upheld by the U.S. Supreme Court
in 1992.
Article XIIIA prohibits local governments from raising revenues through
ad valorem taxes above the 1% limit; it also requires voters of any governmental
unit to give two-thirds approval to levy any "special tax." Court decisions,
however, allowed a non-voter approved levy of "general taxes" which were not
dedicated to a specific use.
Limitations on Other Taxes, Fees and Charges. On November 5, 1996, the
voters of the State approved Proposition 218, called the "Right to Vote on Taxes
Act." Proposition 218 added Articles XIIIC and XIIID to the State Constitution,
which contain a number of provisions affecting the ability of local agencies to
levy and collect both existing and future taxes, assessments, fees and charges.
Article XIIIC requires that all new or increased local taxes be
submitted to the electorate before they become effective. Taxes for general
governmental purposes require a majority vote and taxes for specific purposes
require a two-thirds vote. Further, any general purpose tax which was imposed,
extended or increased without voter approval after December 31, 1994 must be
approved by a majority vote within two years.
Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain "assessments" for municipal
services and programs. Article XIIID also contains several new provisions
affecting "fees" and "charges", defined for purposes of Article XIIID to mean
"any levy other than an ad valorem tax, a special tax, or an assessment, imposed
by a [local government] upon a parcel or upon a person as an incident of
property ownership, including a user fee or charge for a property related
service." All new and existing property related fees and charges must conform to
requirements prohibiting, among other things, fees and charges which generate
revenues exceeding the funds required to provide the property related service or
are used for unrelated purposes. There are new notice, hearing and protest
procedures for levying or increasing property related fees and charges, and,
except for fees or charges for sewer, water and refuse collection services (or
fees for electrical and gas service, which are not treated as "property related"
for purposes of Article XIIID), no property related fee or charge may be imposed
or increased without majority approval by the property owners subject to the fee
or charge or, at the option of the local agency, two-thirds voter approval by
the electorate residing in the affected area.
In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes, assessments, fees
and charges. Consequently, local voters could, by future initiative, repeal,
reduce or prohibit the future imposition or increase of any local tax,
assessment, fee or charge. It is unclear how this right of local initiative may
be used in cases where taxes or charges have been or will be specifically
pledged to secure debt issues.
The interpretation and application of Proposition 218 will ultimately
be determined by the courts with respect to a number of matters, and it is not
possible at this time to predict with certainly the outcome of such
determinations. Proposition 218 is generally viewed as restricting the fiscal
flexibility of local governments, and for this reason, some ratings of
California cities and counties have been, and others may be, reduced.
Appropriations Limits. The State and its local governments are subject
to an annual "appropriations limit" imposed by Article XIIIB of the California
Constitution, enacted by the voters in 1979 and significantly amended by
Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB prohibits
the State or any covered local government from spending "appropriations subject
to limitation" in excess of the appropriations limit imposed. "Appropriations
subject to limitation" are authorizations to spend "proceeds of taxes," which
consist of tax revenues and certain other funds, including proceeds from
regulatory licenses, user charges or other fees, to the extent that such
proceeds exceed the cost of providing the product or service, but "proceeds of
taxes" exclude most State subventions to local governments. No limit is imposed
on appropriations of funds which are not "proceeds of taxes," such as reasonable
user charges or fees, and certain other non-tax funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations
arising from certain emergencies declared by the Governor, (3) appropriations
for certain capital outlay projects, (4) appropriations by the State of
post-1989 increases in gasoline taxes and vehicle weight fees, and (5)
appropriations made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population, and any transfers of service
responsibilities between government units. The definitions for such adjustments
were liberalized in 1990 to follow more closely growth in the State's economy.
"Excess" revenues are measured over a two year cycle. Local governments
must return any excess to taxpayers by rate reductions. The State must refund
50% of any excess, with the other 50% paid to schools and community colleges.
With more liberal annual adjustment factors since 1988, and depressed revenues
since 1990 because of the recession, few governments are currently operating
near their spending limits, but this condition may change over time. Local
governments may by voter approval exceed their spending limits for up to four
years. During fiscal year 1986-87, State receipts from proceeds of taxes
exceeded its appropriations limit by $1.1 billion, which was returned to
taxpayers. Since that year, appropriations subject to limitation have been under
the State limit. State appropriations were $6.8 billion under the limit for
fiscal year 1998-99.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and XIIID
of the California Constitution, the ambiguities and possible inconsistencies in
their terms, and the impossibility of predicting future appropriations or
changes in population and cost of living, and the probability of continuing
legal challenges, it is not currently possible to determine fully the impact of
these Articles on California [Municipal Obligations] or on the ability of the
State or local governments to pay debt service on such California [Municipal
Obligations]. It is not possible, at the present time, to predict the outcome of
any pending litigation with respect to the ultimate scope, impact or
constitutionality of these Articles or the impact of any such determinations
upon State agencies or local governments, or upon their ability to pay debt
service on their obligations. Further initiatives or legislative changes in laws
or the California Constitution may also affect the ability of the State or local
issuers to repay their obligations.
Obligations of the State of California
Under the California Constitution, debt service on outstanding general
obligation bonds is the second charge to the General Fund after support of the
public school system and public institutions of higher education. As of February
1, 1999, the State had outstanding approximately $19.2 billion of long-term
general obligation bonds, plus $484 million of general obligation commercial
paper which will be refunded by long-term bonds in the future, and $6.7 billion
of lease-purchase debt supported by the State General Fund. The State also had
about $15.8 billion of authorized and unissued long-term general obligation
bonds and lease-purchase debt. In FY 1997-98, debt service on general obligation
bonds and lease purchase debt was approximately 4.4% of General Fund revenues.
Recent Financial Results
The principal sources of General Fund revenues in 1996-1997 were the
California personal income tax (47% of total revenues), the sales tax (34%),
bank and corporation taxes (12%), and the gross premium tax on insurance (2%).
The State maintains a Special Fund for Economic Uncertainties (the "SFEU"),
derived from General Fund revenues, as a reserve to meet cash needs of the
General Fund, but which is required to be replenished as soon as sufficient
revenues are available. Year-end balances in the SFEU are included for financial
reporting purposes in the General Fund balance. Because of the recession and an
accumulated budget deficit, no reserve was budgeted in the SFEU from 1992-93 to
1995-96.
General. Throughout the 1980's, State spending increased rapidly as the
State population and economy also grew rapidly, including increased spending for
many assistance programs to local governments, which were constrained by
Proposition 13 and other laws. The largest State program is assistance to local
public school districts. In 1988, an initiative (Proposition 98) was enacted
which (subject to suspension by a two-thirds vote of the Legislature and the
Governor) guarantees local school districts and community college districts a
minimum share of State General Fund revenues (currently about 35%).
Recent Budgets. As a result of the severe economic recession from
1990-94 and other factors, the State experienced substantial revenue shortfalls,
and greater than anticipated social service costs, in the early 1990's. The
State accumulated and sustained a budget deficit in the budget reserve, the
SFEU, approaching $2.8 billion at its peak at June 30, 1993. The Legislature and
Governor agreed on a number of different steps to respond to the adverse
financial conditions and produce Budget Acts in the Years 1991-92 to 1994-95
(although not all of these actions were taken in each year):
significant cuts in health and welfare program expenditures;
transfers of program responsibilities and some funding sources from the
State to local governments, coupled with some reduction in mandates on
local government;
transfer of about $3.6 billion in annual local property tax revenues
from cities, counties, redevelopment agencies and some other districts
to local school districts, thereby reducing State funding for schools;
reduction in growth of support for higher education programs, coupled
with increases in student fees;
revenue increases (particularly in the 1992-93 Fiscal Year budget),
most of which were for a short duration;
increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare
services to undocumented aliens (although these efforts have produced
much less federal aid than the State Administration had requested); and
various one-time adjustments and accounting changes (some of which have
been challenged in court and reversed).
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. The State's cash condition became so serious that from
late spring 1992 until 1995, the State had to rely on issuance of short term
notes which matured in a subsequent fiscal year to finance its ongoing deficit,
and pay current obligations. For a two-month period in the summer of 1992,
pending adoption of the annual Budget Act, the State was forced to issue
registered warrants (IOUs) to some of its suppliers, employees and other
creditors. The last of these deficit notes was repaid in April, 1996.
The State's financial condition improved markedly during the 1995-96,
1996-97 and 1997-98 fiscal years, with a combination of better than expected
revenues, slowdown in growth of social welfare programs, and continued spending
restraint based on the actions taken in earlier years. The State's cash position
also improved, and no external deficit borrowing has occurred over the end of
these three fiscal years.
The economy grew strongly during these fiscal years, and as a result,
the General Fund took in substantially greater tax revenues (around $2.2 billion
in 1995-96, $1.6 billion in 1996-97 and $2.1 billion in 1997-98) than were
initially planned when the budgets were enacted. These additional funds were
largely directed to school spending as mandated by Proposition 98, and to make
up shortfalls from reduced federal health and welfare aid in 1995-96 and
1996-97. The accumulated budget deficit from the recession years was finally
eliminated. The Department of Finance estimates that the State's budget reserve
(the SFEU) totaled about $400 million as of June 30, 1997 and $1.8 billion at
June 30, 1998.
FY 1997-98 Budget. In May 1997, the California Supreme Court ruled that
the State had acted illegally in 1993 and 1994 by using a deferral of payments
to the Public Employees Retirement Fund to help balance earlier budgets. In
response to this court decision, the Governor ordered an immediate repayment to
the Retirement Fund of about $1.235 billion, which was made in late July, 1997,
and substantially "used up" the then-expected additional General Fund revenues
for the fiscal year. The 1997-98 Budget Act provided another year of rapidly
increasing funding for K-14 public education. Support for higher education units
in the State also increased by about 6 percent. Because of the pension payment,
most other State programs were funded at levels consistent with prior years, and
several initiatives had to be dropped. The final results for FY 1997-98 showed
General Fund revenues and transfers of $54.7 billion and expenditures of $53.3
billion.
Part of the 1997-98 Budget Act was completion of State welfare reform
legislation to implement the new federal law passed in 1996. The new State
program, called "CalWORKs," became effective January 1, 1998, and emphasizes
programs to bring aid recipients into the workforce. As required by federal law,
new time limits are placed on receipt of welfare aid.
FY 1998-99 Budget. The FY 1998-99 Budget Act was signed on August 21,
1998. After giving effect to line-item vetoes made by the Governor, the Budget
plan resulted in spending of about $57.3 billion for the General Fund and $14.7
billion for Special Funds. The Budget Act assumed General Fund revenues and
transfers in FY 1998-99 of $57.0 billion. After enactment of the Budget Act, the
Legislature passed a number of additional fiscal bills, which resulted in a net
increase of expenditures of about $250 million, but the Administration also
raised its estimate of revenues from the 1997-98 fiscal year. In total, the
Administration projected in September, 1998 that the balance in the SFEU at June
30, 1999 would be about $1.2 billion.
The Administration released new projections for the balance of FY
1998-99 on January 8, 1999 as part of the Governor's Proposed Budget for
1999-2000 (the "Governor's Budget"). As a result of somewhat slower economic
growth largely due to the Asian economic slowdown, resulting in reduced
revenues, and higher health and welfare caseloads than projected, the
Administration projected that the SFEU would be reduced to about $600 million as
of June 30, 1999. However, a later report in February, 1999 from the State
Legislative Analyst stated that economic activity in the State appeared to be
stronger in late 1998 than the Governor's Budget predicted, and revenues for
1998-99 could be as much as $750 million higher than projected by the Governor's
Budget.
As has been the case in the last several years, spending on K-12
education increased significantly, by a total of $2.2 billion, with projected
per-pupil spending of $5,695, more than one-third higher than the per-pupil
spending during the last recession year of 1993-94. Funding to support higher
education was also increased significantly (15% for the University of California
and 14% for the California State University system). The Budget included some
increases in health and welfare programs, including the first increase in the
monthly welfare grant since levels were cut during the recession.
One of the most important elements of the 1998-99 Budget Act was
agreement on substantial tax cuts. The largest of these is a phased-in cut in
the Vehicle License Fee (an annual tax on the value of cars registered in the
State, the "VLF"). Starting in 1999, the VLF is reduced by 25%. Under current
law, VLF funds are automatically transferred to cities and counties, so the new
legislation provides for the General Fund to make up the reductions. If State
General Fund revenues continue to grow above certain targeted levels in future
years (a development which appears unlikely given more recent revenue
projections), the cut could reach as much as 67.5% by the year 2003. The initial
25% VLF cut will be offset by about $500 million in General Fund money in FY
1998-99, and $1 billion for future years. Other tax cuts in FY 1998-99 include
an increase in the dependent credit exemption for personal income tax filers,
restoration of a renter's tax credit for taxpayers, and a variety of business
tax relief measures. The total cost of these tax cuts is estimated at $1.4
billion for FY 1998-99.
Although, as noted, the 1998-99 Budget Act projects a budget reserve in
the SFEU of about $1.2 billion on June 30, 1999 (since reduced in the Governor's
Budget), the General Fund balance on that date also reflects $1.0 billion of
"loans" which the General Fund made to local schools in the recession years,
representing cash outlays above the mandatory minimum funding level. Settlement
of litigation over these transactions in July 1996 calls for repayment of these
loans over the period ending in 2001-02, about equally split between outlays
from the General Fund and from schools' entitlements. The 1998-99 Budget Act
contained a $300 million appropriation from the General Fund toward this
settlement
Proposed FY 1999-2000 Budget. The newly elected Governor, Gray Davis,
released his proposed FY 1999-00 Budget in January. It projected somewhat lower
General Fund revenues than in earlier projections, due to slower economic
growth, but totaling an estimated $60.3 billion. (This figure could be higher
based on the more recent revenue estimates from the State Legislative Analyst.)
The proposed budget assumes certain one-time revenues, receipt of the first
installment payment from the tobacco manufacturer's litigation settlement, and
increased federal aid for the cost of incarcerating illegal aliens.
The Governor's Budget proposes expenditures of about $60.5 billion,
which would result in a balance in the SFEU at June 30, 2000 of about $400
million. Major expenditures initiatives include increased funding and some new
programs for K-12 schools, a modest increase in funding for higher education, an
increase in certain State-funded welfare programs, combined with decreased
caseloads for Medi-Cal and CalWORKs (the replacement to the old welfare system,
following the 1996 federal welfare reform law).
Although the State's strong economy is producing record revenues to the
State government, the State's budget continues to be under stress from mandated
spending on education, a rising prison population, and social needs of a growing
population with many immigrants. These factors which limit State spending growth
also put pressure on local governments. There can be no assurances that, if
economic conditions weaken, or other factors intercede, the State will not
experience budget gaps in the future.
Bond Rating
The ratings on California's long-term general obligation bonds were
reduced in the early 1990's from "AAA" levels which had existed prior to the
recession. After 1996, the three major rating agencies raised their ratings of
California's general obligation bonds, which as of February 1999 were assigned
ratings of "A+" from Standard & Poor's Ratings Services ("S&P"), "Aa3" and from
Moody's Investors Service ("Moody's") and
"AA-" from Fitch IBCA, Inc ("Fitch").
There can be no assurance that such ratings will be maintained in the
future. It should be noted that the creditworthiness of obligations issued by
local California issuers may be unrelated to creditworthiness of obligations
issued by the State of California, and that there is no obligation on the part
of the State to make payment on such local obligations in the event of default.
Legal Proceedings
The State is involved in certain legal proceedings (described in the
State's recent financial statements) that, if decided against the State, may
require the State to make significant future expenditures or may substantially
impair revenues. Trial courts have recently entered tentative decisions or
injunctions which would overturn several parts of the State's recent budget
compromises. The matters covered by these lawsuits include reductions in welfare
payments and the use of certain cigarette tax funds for health costs. All of
these cases are subject to further proceedings and appeals, and if California
eventually loses, the final remedies may not have to be implemented in one year.
Obligations of Other Issuers
Other Issuers of California Municipal Obligations. There are a number
of State agencies, instrumentalities and political subdivisions of the State
that issue Municipal Obligations, some of which may be conduit revenue
obligations payable from payments from private borrowers. These entities are
subject to various economic risks and uncertainties, and the credit quality of
the securities issued by them may vary considerably from the credit quality of
obligations backed by the full faith and credit of the State.
State Assistance. Property tax revenues received by local governments
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of the
State's General Fund surplus to local agencies, the reallocation of certain
State revenues to local agencies and the assumption of certain governmental
functions by the State to assist municipal issuers to raise revenues. Total
local assistance from the State's General Fund was budgeted at approximately 75%
of General Fund expenditures in recent years, including the effect of
implementing reductions in certain aid programs. To reduce State General Fund
support for school districts, the 1992-93 and 1993-94 Budget Acts caused local
governments to transfer $3.9 billion of property tax revenues to school
districts, representing loss of the post-Proposition 13 "bailout" aid. Local
governments have in return received greater revenues and greater flexibility to
operate health and welfare programs. However, except for agreement in 1997 on a
new program for the State to substantially take over funding for local trial
courts (saving cities and counties some $400 million annually), there has been
no large-scale reversal of the property tax shift to help local government.
To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of State
assistance to local governments may continue to be reduced. Any such reductions
in State aid could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. Los Angeles County, the
largest in the State, was forced to make significant cuts in services and
personnel, particularly in the health care system, in order to balance its
budget in FY1996-96 and FY1996-97. Orange County, which emerged from Federal
Bankruptcy Court protection in June 1996, has significantly reduced county
services and personnel, and faces strict financial conditions following large
investment fund losses in 1994 which resulted in bankruptcy.
Counties and cities may face further budgetary pressures as a result of
changes in welfare and public assistance programs, which were enacted in August,
1997 in order to comply with the federal welfare reform law. Generally, counties
play a large role in the new system, and are given substantial flexibility to
develop and administer programs to bring aid recipients into the workforce.
Counties are also given financial incentives if either at the county or
statewide level, the "Welfare-to-Work" programs exceed minimum targets; counties
are also subject to financial penalties for failure to meet such targets.
Counties remain responsible to provide "general assistance" for able-bodied
indigents who are ineligible for other welfare programs. The long-term financial
impact of the new CalWORKs system on local governments is still unknown.
Assessment Bonds. California Municipal Obligations which are assessment
bonds may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are secured by
land which is undeveloped at the time of issuance but anticipated to be
developed within a few years after issuance. In the event of such reduction or
slowdown, such development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special assessments or taxes
securing these bonds are not the personal liability of the owners of the
property assessed, the lien on the property is the only security for the bonds.
Moreover, in most cases the issuer of these bonds is not required to make
payments on the bonds in the event of delinquency in the payment of assessments
or taxes, except from amounts, if any, in a reserve fund established for the
bonds.
California Long Term Lease Obligations. Based on a series of court
decisions, certain long-term lease obligations, though typically payable from
the general fund of the State or a municipality, are not considered
"indebtedness" requiring voter approval. Such leases, however, are subject to
"abatement" in the event the facility being leased is unavailable for beneficial
use and occupancy by the municipality during the term of the lease. Abatement is
not a default, and there may be no remedies available to the holders of the
certificates evidencing the lease obligation in the event abatement occurs. The
most common cases of abatement are failure to complete construction of the
facility before the end of the period during which lease payments have been
capitalized and uninsured casualty losses to the facility (e.g., due to
earthquake). In the event abatement occurs with respect to a lease obligation,
lease payments may be interrupted (if all available insurance proceeds and
reserves are exhausted) and the certificates may not be paid when due. Although
litigation is brought from time to time which challenges the constitutionality
of such lease arrangements, the California Supreme Court issued a ruling in
August, 1998 which reconfirmed the legality of these financing methods.
Other Considerations
The repayment of industrial development securities secured by real
property may be affected by California laws limiting foreclosure rights of
creditors. Securities backed by health care and hospital revenues may be
affected by changes in State regulations governing cost reimbursements to health
care providers under Medi-Cal (the State's Medicaid program), including risks
related to the policy of awarding exclusive contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g., because of a major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that
all revenues produced by a tax rate increase go directly to the taxing entity
which increased such tax rate to repay that entity's general obligation
indebtedness. As a result, redevelopment agencies (which, typically, are the
issuers of tax allocation securities) no longer receive an increase in tax
increment when taxes on property in the project area are increased to repay
voter-approved bonded indebtedness.
The effect of these various constitutional and statutory changes upon
the ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Legislation has been or
may be introduced which would modify existing taxes or other revenue-raising
measures or which either would further limit or, alternatively, would increase
the abilities of state and local governments to impose new taxes or increase
existing taxes. It is not possible, at present, to predict the extent to which
any such legislation will be enacted. Nor is it possible, at present, to
determine the impact of any such legislation on California Municipal Obligations
in which the Fund may invest, future allocations of state revenues to local
governments or the abilities of state or local governments to pay the interest
on, or repay the principal of, such California Municipal Obligations.
Substantially all of California is within an active geologic region
subject to major seismic activity. Northern California in 1989 and Southern
California in 1994 experienced major earthquakes causing billions of dollars in
damages. The federal government provided more than $13 billion in aid for both
earthquakes, and neither event is expected to have any long-term negative
economic impact. Any California Municipal Obligation in the Fund could be
affected by an interruption of revenues because of damaged facilities, or,
consequently, income tax deductions for casualty losses or property tax
assessment reductions. Compensatory financial assistance could be constrained by
the inability of (i) an issuer to have obtained earthquake insurance coverage
rates; (ii) an insurer to perform on its contracts of insurance in the event of
widespread losses; or (iii) the federal or State government to appropriate
sufficient funds within their respective budget limitations.
ADDITIONAL INFORMATION CONCERNING MASSACHUSETTS
The Commonwealth of Massachusetts and certain of its cities and towns
and public bodies have experienced in the past, and may experience in the
future, financial difficulties that may adversely affect their credit standing.
The prolonged effects of such financial difficulties could adversely affect the
market value of the municipal securities held by the Massachusetts Fund. The
information summarized below describes some of the more significant factors that
could affect the Massachusetts Fund or the ability of the obligors to pay debt
service on certain of the securities. The sources of such information are the
official statement of issuers located in the Commonwealth of Massachusetts as
well as other publicly available documents, and statements of public officials.
The Massachusetts Fund has not independently verified any of the information
contained in such statements and documents but the Massachusetts Fund is not
aware of facts which would render such information inaccurate.
General
The Commonwealth's constitution requires, in effect, that its budget,
though not necessarily its operating expenditures and revenue, be balanced each
year. In addition, the Commonwealth has certain budgetary procedures and fiscal
controls in place that are designed to ensure that sufficient cash is available
to meet the Commonwealth's obligations, that state expenditures are consistent
with periodic allotments of annual appropriations and that funds are expended
consistent with statutory and public purposes. The condition of the three
principal operating funds (the General Fund, the Local Aid Fund and the Highway
Fund), viewed on a consolidated basis, is generally regarded as the principal
indicator of whether the Commonwealth's operating revenues and expenses are in
balance.
1998 FISCAL YEAR
The budget for fiscal 1998 was enacted by the Legislature on June 30,
1997 and approved by Governor Weld on July 10, 1997. (Appropriations covering
the first two weeks of the fiscal year were enacted and approved on June 30,
1997.) The budget was based on a consensus tax revenue forecast of $12.85
billion, as agreed by both houses of the Legislature in March. The Executive
Office for Administration and Finance revised the fiscal 1998 tax forecast to
$13.06 billion on July 30, 1997 and, after a review of first quarter fiscal 1998
tax receipts, to $13.20 billion on October 15, 1997. The fiscal 1998 tax revenue
estimates were revised again on January 16, 1998 to reflect an increase of $100
million in tax revenues. Tax law changes effective in fiscal 1998 have (I)
increased anticipated revenues by $19.0 million from miscellaneous fees to be
collected as a result of the convention center legislation approved on November
17, 1997, (ii) reduced tax revenues by an estimated $25.0 million as a result of
the exemption of military pensions from state income tax, effective January 1,
1998, which was approved by Acting Governor Cellucci on November 6, 1997, and
(iii) reduced tax revenues by an estimated $140 million as a result of a change
in the sales tax payment schedule. After taking into account such tax law
changes, the January 16, 1998 estimate was $13.154 billion. On May 5, 1998, the
tax revenue estimate was further revised upward to $13.3 billion. On June 1,
1998, Revenue Commissioner Mitchell Adams announced that year-to-date revenue
collections totaled $12.364 billion, which he found to be in line with revenue
estimates.
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The fiscal 1998 budget provides for total appropriations of
approximately $18.4 billion, a 2.8% increase over fiscal 1997 expenditures. The
budget incorporates tax cuts valued by the Department of Revenue at $61 million
and provides for an accelerated pension funding schedule. Supplemental
appropriations have been approved for fiscal 1998 in the amount of approximately
$210.4 million, including the transfer of approximately $34.8 million to the
Massachusetts Water Pollution Abatement Trust for state revolving fund programs.
In addition, on November 26, 1997, Acting Governor Cellucci approved legislation
transferring off-budget the $206.3 million Department of Medical Assistance
reserve to indemnify certain medical facilities against losses that might result
from providing uncompensated care. On January 30, 1998, Acting Governor Cellucci
filed two bills recommending supplemental appropriations for fiscal 1998
totaling $211.8 million. The bills incorporated most of the supplemental
appropriations recommended in bills filed by the Administration on October 6,
1997 and October 17, 1997 which were not enacted by the Legislature. The first
bill totaled $44.6 million in proposed spending to provide to certain
unanticipated obligations of the Commonwealth. The second bill recommended
$167.1 million in proposed spending to provide for one-time expenditures,
matching grants and capital initiatives, including $50 million for the
construction and repair of local roads and bridges, $20 million for the
development of a new human resource compensation management system and $10
million in additional funding for the upgrade of the Commonwealth's information
technology systems in preparation for the year 2000 conversion. On April 29,
1998, Acting Governor Cellucci approved a supplemental appropriations bill for
$116.4 million, of which $56.3 million is for expenditures contained in the
bills filed by the Acting Governor on January 30, 1998. The bill includes $21.1
million for snow and ice costs at the Massachusetts Highway Department, $15.4
million for child care services relating to welfare reform and $11 million at
the Department of Social Services for residential group care and adoption.
Projected Total fiscal 1998 expenditures are approximately $18.930 billion.
Cash Flow
The most recent cash flow projections for fiscal 1998 and fiscal 1999
were released by the State Treasurer and the Secretary of Administration and
Finance on March 25, 1998. The forecast for fiscal 1998 is based on the fiscal
1998 budget signed by Governor Weld on July 10, 1997, and includes the value of
all fiscal 1998 supplemental budgets enacted by the Legislature. The fiscal 1999
forecast is based on the proposed fiscal 1999 budget submitted by the Acting
Governor on January 27, 1998. Both projections are based on revenue and spending
estimates prepared by the Executive Office for Administration and Finance and
incorporate actual results through January, 1998 and monthly projections through
June, 1999.
Fiscal 1998 is projected to end with a cash balance of $477.9 million,
without regard to any fiscal 1998 activity that may occur after June 30, 1998.
Such balance does not include the balance in the Stabilization Fund ($799.0
million at June 30, 1997) or interest earnings thereon expected during fiscal
1998; it does reflect the required Stabilization Fund transfer related to fiscal
1997 of $234.0 million during fiscal 1998. The cash flow statement notes that
general obligation bonds were issued for capital projects in August, 1997 in the
amount of $250 million and in January, 1998 in the amount of $250 million and
projects that an additional $428 million of general obligation bonds will be
issued for such purposes during the remainder of the fiscal year. The statement
also notes that $105 million of special obligation bonds were issued in October,
1997.
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The cash flow statement notes that the Massachusetts Turnpike Authority
and the Massachusetts Port Authority are required to make payments to the
Commonwealth in connection with the Central Artery/Ted Williams Tunnel project
and forecasts that the Commonwealth will receive $430 million in the aggregate
during fiscal 1998 from such authorities or from the issuance of Commonwealth
notes in anticipation of payments from such authorities. (The statement also
notes that the Commonwealth has the statutory authority to issue bonds to pay
any such notes.) The statement further forecasts, in connection with the Central
Artery/Ted Williams Tunnel project, that the Commonwealth will issue $350
million of notes in anticipation of future federal highway grants, noting that
federal funding for such purposes has been extended on an interim basis through
March 31, 1998, and that successor federal funding legislation is expected to be
enacted by late 1998.
1999 FISCAL YEAR
On January 27, 1998, Acting Governor Cellucci filed his fiscal 1999
budget recommendations with the House of Representatives. The proposal calls for
budgeted expenditures of approximately $19.06 billion, or total fiscal 1999
spending of $19.49 billion after adjusting for shifts to and from off-budget
accounts. The proposed fiscal 1999 spending level represents a $559 million, or
3.0%, increase over projected total fiscal 1998 expenditures of $18.930 billion.
Budgeted revenues for fiscal 1999 are projected to be $18.961 billion, or
$19.291 billion after adjusting for shifts to and from off-budget accounts. This
represents a $53.0 million, or 0.3%, increase over the $18.908 billion forecast
for fiscal 1998. (The $18.908 billion revenue estimate for fiscal 1998 reflects
the addition of $100 million in tax revenue incorporated into the forecast by
the Secretary of Administration and Finance on January 16, 1998 and the addition
of $146 million in tax revenue incorporated into the forecast by the Secretary
of Administration and Finance on May 5, 1998.) The Governor's proposal projects
a fiscal 1999 ending balance in the budgeted funds of $906.3 million, including
a Stabilization Fund balance of $878.1 million.
The Governor's budget recommendation is based on a tax revenue estimate
of $13.665 billion, a $365.0 million, or 2.7%, increase over fiscal 1998
projected tax revenues of $13.300 billion. The projection incorporates $244.8
million in income tax cuts proposed by the Governor, including a reduction of
the Part B ("earned income") tax rate from 5.95% to 5% over three years ($205.8
million), a reduction of the Part A ("unearned income"; i.e., interest from
non-Massachusetts banks, dividends, and short-term capital gains) tax rate from
12% to 5% over five years ($30 million), credits and exemptions to encourage
saving for children's higher education ($3 million), an exemption from capital
gains taxes on the sale of a house ($2 million) and an exemption for providing
care to an elderly relative ($4 million). The recommendation also proposes
moving $92.5 million in tax revenue in the Children's and Seniors Health
Protection Fund off-budget.
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The proposed budget assumes non-tax revenues of $5.297 billion, or
$5.624 billion when adjusted for the shifts to and from off-budget accounts, and
represents an increase of $15.4 million from fiscal 1998. Of the three classes
of non-tax revenue, federal reimbursements, including those for Medicaid, and
block grants for Temporary Assistance to Needy Families and Child Care programs
most affect the Commonwealth's budgetary considerations. These payments are
projected to total $3.216 billion in fiscal 1999, or $3.426 billion after the
impact of shifts to and from off-budget accounts is removed. This level of
federal payments represents an increase of $41.0 million, or 1.2%, from fiscal
1998, the result primarily of changes in federal reimbursement for Medicaid
programs. Fiscal 1999 departmental revenues of $1.130 billion, or $1.158 billion
after adjusting for shifts to and from off-budget accounts, represent a decrease
of approximately $127 million from fiscal 1998 projections, due primarily to the
implementation of free, lifetime driver licensing and vehicle registration and a
decrease of $29.3 million from fiscal 1998 in the revenue generated by the
revenue optimization program. Consolidated transfers, the third category of
non-tax revenue, consists primarily of state lottery profits which are
distributed to cities and towns. Consolidated transfers are projected to
increase by $1.8 million from fiscal 1998 levels. Lottery profits are expected
to remain constant in fiscal 1999.
The Governor's budget proposal generally provides for maintaining
current levels of service for most state programs but recommends increased
spending for certain priority areas, including a $357 million increase in
funding for the Department of Education, $309.7 million in additional local aid
to cities and towns, $69 million for Medicaid program medical inflation and $34
million in additional local aid funded by the State Lottery.
The Governor's fiscal 1999 budget recommendations call for
appropriations of $945.3 million for pension funding, $85.2 million less than
the amount appropriated for fiscal 1998 and $113.9 million less than the amount
called for in the most recent adopted funding schedule. The recommended amount
reflects the elimination in 1997 of the Commonwealth's responsibility for
funding cost-of-living adjustments incurred by local pension systems and assumes
the adoption of a revised funding schedule in the spring of 1998. The proposed
budget also includes a $20 million reserve to meet the Commonwealth's obligation
to reduce the unfunded pension liabilities attributable to former employees of
Franklin, Hampden, Middlesex and Worcester counties and certain incremental
benefit costs associated with legislation enacted in 1996; any expenditures from
the reserve are contingent upon the adoption of a new funding schedule.
On April 27, 1998, the House Committee on Ways and Means released its
proposed budget for fiscal 1999. Debate in the full House of Representatives
began on May 4, 1998. The House Committee's budget provides for total spending
of $19.592 billion and assumes total revenues of $19.446 billion. The House
Committee's budget is based on the consensus tax revenue estimate of $14.4
billion, less approximately $534 million from tax cuts proposed in such budget.
The Committee's budget includes the income tax provisions approved by the House
of Representatives on March 12, 1998. It would raise the statutory ceiling on
amounts in the Stabilization Fund from 5% to 7.5% of budgeted revenues and other
financial resources pertaining to the budgeted funds. The committee's budget
would add $18 million in appropriations for building maintenance and $21 million
in appropriations for debt service related to the "forward funding" of the
Massachusetts Bay Transportation Authority. The committee's budget would also
appropriate approximately $965.3 million for the Commonwealth's pension
liabilities.
On November 28, 1995 the Governor approved a modified version of the
legislation he had filed in September to establish a "single sales factor"
apportionment formula for the business corporations tax. As finally enacted, the
legislation applies the new formula, effective January 1, 1996, to certain
federal defense contractors and phases the new formula in over five years to
manufacturing firms generally. The Department of Revenue estimates that the new
law reduced revenues by $44 million in fiscal 1996 and will reduce revenues by
$90 million in fiscal 1997. If the new formula were fully effective for all
covered businesses, the Department estimates that the annual revenue reduction
would be $100 million to $150 million. On August 8, 1996, the Governor approved
legislation changing the apportionment formula for the business corporations tax
payable by certain mutual fund service corporations. The legislation changes the
computation of the sales factor effective January 1, 1997 and adopts the ?single
sales factor? formula effective July 1, 1997 with respect to these companies. It
also requires the affected corporations to increase their numbers of employees
by 5% per year for five years, subject to certain exceptions. The Department of
Revenue estimates that the changes will reduce revenues by $10 million in fiscal
1997 and by approximately $39 million to $53 million per year beginning in
fiscal 1998.
Limitations on Tax Revenues
In Massachusetts, efforts to limit and reduce levels of taxation have
been underway for several years. Limits were established on state tax revenues
by legislation enacted on October 25, 1986 and by an initiative petition
approved by the voters on November 4, 1986. The two measures are inconsistent in
several respects.
Chapter 62F, which was added to the General Laws by initiative petition
in November 1986, establishes a state tax revenue growth limit for each fiscal
year equal to the average positive rate of growth in total wages and salaries in
the Commonwealth, as reported by the federal government, during the three
calendar years immediately preceding the end of such fiscal year. Chapter 62F
also requires that allowable state tax revenues be reduced by the aggregate
amount received by local governmental units from any newly authorized or
increased local option taxes or excises. Any excess in state tax revenue
collections for a given fiscal year over the prescribed limit, as determined by
the State Auditor, is to be applied as a credit against the then current
personal income tax liability of all taxpayers in the Commonwealth in proportion
to the personal income tax liability of all taxpayers in the Commonwealth for
the immediately preceding tax year.
Unlike Chapter 29B, as described below, the initiative petition did not
exclude principal and interest payments on Commonwealth debt obligations from
the scope of its tax limit. However, the preamble contained in Chapter 62F
provides that ?although not specifically required by anything contained in this
chapter, it is assumed that from allowable state tax revenues as defined herein
the Commonwealth will give priority attention to the funding of state financial
assistance to local governmental units, obligations under the state governmental
pension systems, and payment of principal and interest on debt and other
obligations of the Commonwealth?.
The legislation enacted in October 1986, which added Chapter 29B to the
General Laws, also establishes an allowable state revenue growth factor by
reference to total wages and salaries in the Commonwealth. However, rather than
utilizing a three-year average wage and salary growth rate, as used by Chapter
62F, Chapter 29B utilizes an allowable state revenue growth factor equal to 1/3
of the positive percentage gain in Massachusetts wages and salaries, as reported
by the federal government during the three calendar years immediately preceding
the end of a given fiscal year. Additionally, unlike Chapter 62F, Chapter 29B
allows for an increase in maximum state tax revenues to fund the increase in
local aid and excludes from its definition of state tax revenues (I) income
derived from local option taxes and excises, and (ii) revenues needed to fund
debt service costs.
Proposition 2?
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1-63
In November 1980, voters in the Commonwealth approved a statewide tax
limitation initiative petition, commonly known as Proposition 2?, to constrain
levels of property taxation and to limit the charges and fees imposed on cities
and towns by certain governmental entities, including county governments.
Proposition 2? is not a provision of the state constitution and accordingly is
subject to amendment or repeal by the legislature. Proposition 2?, as amended to
date, limits the property taxes that may be levied by any city or town in any
fiscal year to the lesser of (I) 2.5% of the full and fair cash valuation of the
real estate and personal property therein, and (ii) 2.5% over the previous
year?s levy limit plus any growth in the tax base from certain new construction
and parcel subdivisions. Proposition 2? also limits any increase in the charges
and fees assessed by certain governmental entities, including county
governments, on cities and towns to the sum of (I) 2.5% of the total charges and
fees imposed in the preceding fiscal year, and (ii) any increase in charges for
services customarily provided locally or services obtained by the city or town
at its option. The law contains certain override provisions and, in addition,
permits debt service on specific bonds and notes and expenditures for identified
capital projects to be excluded from the limits by a majority vote at a general
or special election.
Many communities have responded to the limitations imposed by
Proposition 2? through statutorily permitted overrides and exclusions. Override
activity peaked in fiscal 1991 and decreased thereafter. In fiscal 1992, 65
communities approved one of the three types of referenda questions (override of
levy limit, exclusion of debt service, or exclusion of capital expenditures),
adding $31.0 million to their levy limits.
In fiscal 1993, 59 communities added $16.3 million through override
votes and in fiscal 1994, only 48 communities had successful override referenda
which added $8.4 million to their levy limits. In fiscal 1995, 32 communities
added $8.8 million, and in fiscal 1996, 30 communities added $5.8 million to
their levy limits. Although Proposition 2? will continue to constrain local
property tax revenues, significant capacity exists for overrides in nearly all
cities and towns.
In addition to overrides, Proposition 2? allows a community, through
voter approval, to assess taxes in excess of its levy limit for the payment of
certain capital projects (capital outlay expenditure exclusions) and for the
payment of specified debt service costs (debt exclusions). Capital exclusions
were passed by 19 communities in fiscal 1996 and totaled $1.5 million. In fiscal
1996, the impact of successful debt exclusion votes going back as far as fiscal
1983, was to raise the levy limits of 229 communities by $125.8 million.
Litigation
There are pending in state and federal courts within the Commonwealth
and in the U.S. Supreme Court various suits in which the Commonwealth is a
party. In the opinion of the Attorney General, no litigation is pending or, to
his knowledge, threatened which is likely to result, either individually or in
the aggregate, in final judgments against the Commonwealth that would affect
materially its financial condition.
Other Factors
Many factors affect the financial condition of the Commonwealth,
including many social, environmental, and economic conditions, which are beyond
the control of the Commonwealth. As with most urban states, the continuation of
many of the Commonwealth?s programs, particularly its human service programs,
is, in significant part, dependent upon continuing federal reimbursements, which
are expected to decline in fiscal 1997.
ADDITIONAL INFORMATION CONCERNING MISSOURI
General
Missouri's economy includes manufacturing, commerce, trade, services,
agriculture, tourism and mining. The State's economy is diversified and closely
resembles that of the nation's although growth prospects are less favorable than
in the past. It is the nation's fifteenth largest state. The State employment
sectors, services, trade and manufacturing, also account for the primary sources
of national employment. Recent growth in the manufacturing sector has outpaced
the nation as a whole. Labor force growth has remained steady, totaling 2.89
million in 1997, up from 2.3 million in 1980. Through the 1980's and early
1990's the State's unemployment rate essentially mirrored that of the nation;
however, adverse changes in military appropriations, which play an important
role in the State's economy, could contribute to a significant increase in
unemployment. In December 1998, the State's unemployment rate was estimated to
be 3.3% as against the national rate of 4.3%. In recent years, Missouri's wealth
indicators have grown at a slower rate than national levels and in 1997, the
State's three-year moving average median household income was $36,093, compared
with a national average of $36,391.
Missouri displayed strong fiscal performance during most of the 1980's.
However, Missouri has recently experienced difficulties in balancing its budget
as a result of increased expenses and declining sources of revenues. Other
factors contributing to Missouri's weak fiscal position relate to the reduction
of large manufacturing companies, including those in aerospace and the auto
industry. The Missouri portions of the St. Louis and Kansas City metropolitan
areas together contain over 50% of Missouri's population. Economic reversals in
either of these two areas would have a major impact on the overall economic
condition of the State of Missouri. Additionally, the State of Missouri has a
significant agricultural sector, which may experience problems comparable to
those which are occurring in other states. To the extent that any such problems
intensify, there could possibly be an adverse impact on the overall economic
condition of the State.
Currently, general obligations of Missouri are rated "AAA," "Aaa" and
"AAA," by S&P, Moody's and Fitch, respectively. There can be no assurance that
the economic conditions on which these ratings are based will continue or that
particular bond issues may not be adversely affected by changes in economic,
political or other conditions.
Revenue and Limitations Thereon
Article X, Section 16-24 of the Constitution of Missouri (the "Hancock
Amendment"), imposes limitations on the amount of State taxes which may be
imposed by the General Assembly of Missouri (the "General Assembly") as well as
on the amount of local taxes, licenses and fees (including taxes, licenses and
fees used to meet debt service commitments on debt obligations) which may be
imposed by local governmental units (such as cities, counties, school districts,
fire protection districts and other similar bodies) in the State of Missouri in
any fiscal year.The State limit on taxes is tied to total State revenues for
fiscal year 1980-81, as defined in the Hancock Amendment, adjusted annually in
accordance with the formula set forth in the amendment, which adjusts the limit
based on increases in the average personal income of Missouri for certain
designated periods. The details of the Amendment are complex and clarification
from subsequent legislation and further judicial decisions may be necessary.
Generally, if the total State revenues exceed the State revenue limit imposed by
Section 18 of Article X by more than one percent, the State is required to
refund the excess. The State revenue limitation imposed by the Hancock Amendment
does not apply to taxes imposed for the payment of principal and interest on
bonds, approved by the voters and authorized by the Missouri constitution. The
revenue limit also can be exceeded by a constitutional amendment authorizing new
or increased taxes or revenue adopted by the voters of the State of Missouri.
The Hancock Amendment also limits new taxes, licenses and fees and
increases in taxes, licenses and fees by local governmental units in Missouri.
It prohibits counties and other political subdivisions (essentially all local
governmental units) from levying new taxes, licenses and fees or increasing the
current levy of an existing tax, license or fee without the approval of the
required majority of the qualified voters of that county or other political
subdivision voting thereon.
When a local government unit's tax base with respect to certain fees or
taxes is broadened, the Hancock Amendment requires the tax levy or fees to be
reduced to yield the same estimated gross revenue as on the prior base. It also
effectively limits any percentage increase in property tax revenues to the
percentage increase in the general price level (plus the value of new
construction and improvements), even if the assessed valuation of property in
the local governmental unit, excluding the value of new construction and
improvements, increases at a rate exceeding the increase in the general price
level.
Industry and Employment
While Missouri has a diverse economy with a distribution of earnings
and employment among manufacturing, trade and service sectors closely
approximating the average national distribution, the national economic recession
of the early 1980's had a disproportionately adverse impact on the economy of
Missouri. During the 1970's, Missouri characteristically had a pattern of
unemployment levels well below the national averages. Since the 1980 to 1983
recession periods Missouri unemployment levels generally approximated or
slightly exceeded the national average; however, Missouri unemployment levels
have generally been lower than the national average in the second half of the
1990s. A return to a pattern of high unemployment could adversely affect the
Missouri debt obligations acquired by the Missouri Fund and, consequently, the
value of the shares of the Fund.
The Missouri portions of the St. Louis and Kansas City metropolitan
areas collectively contain over fifty percent of Missouri's 1997 population
census of approximately 5,402,058. Economic reversals in either of these two
areas would have a major impact on the overall economic condition of the State
of Missouri. Additionally, the State of Missouri has a significant agricultural
sector which is experiencing farm-related problems comparable to those which are
occurring in other states. To the extent that these problems were to intensify,
there could possibly be an adverse impact on the overall economic condition of
the State of Missouri. Defense related business plays an important role in
Missouri's economy. There are a large number of civilians employed at the
various military installations and training bases in the State. In addition,
aircraft and related businesses in Missouri are the recipients of substantial
annual dollar volumes of defense contract awards. There can be no assurances
that there will be further changes in the levels of military appropriations,
and, to the extent that further changes in military appropriations are enacted
by the United States Congress, Missouri could be disproportionately affected. It
is impossible to determine what effect, if any, continued consolidation in
defense-related industries will have, including the completion of the
acquisition of all McDonnell Douglas Corporation by The Boeing Company, on the
economy of the State. However, any shift or loss of production now conducted in
Missouri would have a negative impact on the economy of the State.
Other Factors
Desegregation lawsuits in St. Louis and Kansas City continue to require
significant levels of state funding and are sources of uncertainty. Litigation
continues on many issues, notwithstanding a 1995 U.S. Supreme Court favorable to
the State in the Kansas City desegregation litigation; court orders are
unpredictable, and school district spending patterns have proven difficult to
predict. The State paid $282 million for desegregation costs in fiscal 1994,
$315 million for fiscal 1995, $274 million for fiscal 1996, and $227 million for
fiscal 1997. This expense accounted for approximately 7% of total state General
Revenue Fund spending in fiscal 1994 and 1995, approximately 5% in fiscal 1996
and approximately 6% in fiscal 1997. The State has entered into a settlement
agreement with respect to the Kansas City lawsuit, pursuant to which the State
will cease additional desegregation payments after the fiscal year 2000.
ADDITIONAL INFORMING CONCERNING NEW YORK
Special Considerations Relating to New York Municipal Securities
The financial condition of the State of New York ("New York State" or
the "State"), its public authorities and public benefit corporations (the
"Authorities") and its local governments, particularly The City of New York (the
"City"), could affect the market values and marketability of, and therefore the
net asset value per share and the interest income of a Fund, or result in the
default of existing obligations, including obligations which may be held by the
Fund. The following section provides only a brief summary of the complex factors
affecting the financial situation in New York and is based on information
obtained from New York State, certain of its Authorities, the City and certain
other localities as publicly available on the date of this Statement of
Additional Information. The information contained in such publicly available
documents has not been independently verified. It should be noted that the
creditworthiness of obligations issued by local issuers may be unrelated to the
creditworthiness of New York State, and that there is no obligation on the part
of New York State to make payment on such local obligations in the event of
default in the absence of a specific guarantee or pledge provided by New York
State.
Economic Factors. New York is the third most populous state in the
nation and has a relatively high level of personal wealth. The State's economy
is diverse, with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. The State's location and its
excellent air transport facilities and natural harbors have made it an important
link in international commerce. Travel and tourism constitute an important part
of the economy. Like the rest of the nation, New York has a declining proportion
of its workforce engaged in manufacturing, and an increasing proportion engaged
in service industries.
Both the State and the City experienced substantial revenue increases
in the mid-1980s and late 1990s attributable directly (corporate income and
financial corporations taxes) and indirectly (personal income and a variety of
other taxes) to growth in new jobs, rising profits and capital appreciation
derived from the finance sector of the City's economy. Economic activity in the
City has experienced periods of growth and recession and can be expected to
experience periods of growth and recession in the future. In recent years, the
City has experienced increases in employment. Real per capita personal income
(i.e., per capita personal income adjusted for the effects of inflation and the
differential in living costs) has generally experienced fewer fluctuations than
employment in the City. Although the City periodically experienced declines in
real per capita personal income between 1969 and 1981, real per capita personal
income in the City has generally increased from the mid-1980s until the present.
In nearly all of the years between 1969 and 1988 the City experienced strong
increases in retail sales. However, from 1989 to 1993, the City experienced a
weak period of retail sales. Since 1994, the City has returned to a period of
growth in retail sales. Overall, the City's economic improvement continued
strongly into fiscal year 1999. Much of the increase can be traced to the
performance of the securities industry, but the City's economy also produced
gains in the retail trade sector, the hotel and tourism industry, and business
services, with private sector employment higher than previously forecasted. The
City's current Financial Plan assumes that, after strong growth in 1998-1999,
moderate economic growth will exist through calendar year 2003, with moderating
job growth and wage increases. However, there can be no assurance that the
economic projections assumed in the Financial Plan will occur or that the tax
revenues projected in the Financial Plan to be received will be received in the
amounts anticipated. Additionally, the securities industry is more important to
the New York economy than the national economy, potentially amplifying the
impact of downturn. In 1997, the finance, insurance and real estate sector
accounted for 19.5 percent of nonfarm labor and proprietors' income statewide,
compared to 8.5 percent nationwide.
During the calendar years 1984 through 1991, the State's rate of
economic expansion was somewhat slower than that of the nation as a whole. In
the 1990-1991 national recession, the economy of the Northeast region in general
and the State in particular was more heavily damaged than that of the rest of
the nation and has been slower to recover.
Although the national economy began to expand in 1991, the State
economy remained in recession until 1993, when employment growth resumed.
Currently the State economy continues to expand, but growth remains somewhat
slower than in the nation. Although the State has added over 400,000 jobs since
late 1992, employment growth has been hindered during recent years by
significant cutbacks in the computer and instrument manufacturing, utility,
defense and banking industries. Government downsizing has also moderated these
job gains. Personal income increased substantially in 1992 and 1993. The State's
economy entered into the seventh year of growth in 1999.
The seasonally adjusted unemployment rate in New York was 5.5 percent
in December 1998 (compared to 6.1 percent one year earlier. From December 1997
to December 1998, the number of nonfarm jobs increased by 140,800 or 1.7
percent, and the number of private sector jobs increased by 142,900 or 2.1
percent. Year-to-year growth was especially strong in motion pictures (+13.3
percent), construction (+7.1 percent), business services (+6.3 percent), and
engineering and management services (+6.3 percent). Employment also increased in
construction, retail trade, finance, insurance and real estate, wholesale trade,
and transportation and utilities. Employment declined in government and
manufacturing.
The State has released information regarding the national and state
economic activity in its Annual Information Statement of the State of New York,
dated June 26, 1998 (the "Annual Information Statement'). At the State level,
the Annual Information Statement projects continued expansion during the 1999
calendar year, with employment growth gradually slowing as the year progresses.
The financial and business service sectors are expected to continue to do well,
while employment in the manufacturing and government sectors will post only
small, if any, declines. On an average annual basis, the employment growth rate
in the State is expected to decline slightly from 1998. Personal income is
expected to record moderate gains in 1999. Wage growth in 1999 is expected to be
slower than in the previous year as the recent robust growth in bonus payments
moderates.
Personal income tax collections for 1999-2000 are projected to reach
$22.83 billion, or $2.65 billion above the reported 1998-99 collection total.
This increase is due in part to refund reserve transactions which serve to shift
receipts of $1.77 billion into 1999-2000 from the year earlier. Collections also
benefit from the estimated increase in income tax liability of 13.5 percent in
1998 and 5.3 percent in 1999. The large increases in liability in recent years
have been supported by the continued surge in taxable capital gains
realizations, activity related at least partially to changes in federal tax
treatment of such income. The State expects the growth in capital gains income
to plateau in 1999. Growth in 1999-2000 personal income tax receipts is
partially offset by the diversion of such receipts into the School Tax Relief
Fund, which finances the STAR (the School Tax Relief Program) tax reduction
program. For 1999-2000, $1.22 billion will be deposited into this fund, an
increase of $638 billion.
Business tax receipts are expected to total $4.53 billion in 1999-2000,
$267 million below the 1998-99 estimated result, caused by tax reductions
already scheduled in law and slower growth in the underlying tax base. Receipts
from user taxes and fees are projected to total $7.16 billion, a decrease of $72
million from the current year, reflecting the incremental effects of
already-enacted tax reductions and the diversion of $30 million of additional
motor vehicle registration fees to the Dedicated Highway and Bridge Trust Fund.
Other tax receipts are projected to total $980 million, $119 million below
1998-99. Total miscellaneous receipts are projected to reach $1.24 billion, down
almost $292 million from 1998-99.
General Fund disbursements in 1999-2000, including transfers to support
capital projects, debt service and other funds are estimated at $37.10 billion.
This represents an increase of $482 million from 1998-99. Grants to local
governments constitute approximately 67 percent of all General Fund spending,
and include financial assistance to local governments and not-for-profit
corporations, as well as entitlement benefits to individuals. The 1999-2000
Financial Plan projects spending of $24.81 billion in this category, a decrease
of $87 million over the prior year.
The 1999-2000 Financial Plan projects a closing fund balance in the
General Fund of $2.36 billion. This fund balance is composed of a reserve of
$1.79 billion of a proposed tax reduction reserve, $473 million balance in the
Tax Stabilization Reserve Fund, and $100 million in the Contingency Reserve
Fund. The entire $226 million balance in the Community Projects Fund is expected
to be used in 1999-2000.
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. These factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the federal government, that
are not under the control of the State. Because of the uncertainty and
unpredictability of these factors, their impact cannot, as a practical matter,
be included in the assumptions underlying the State's projections at this time.
As a result, there can be no assurance that the State economy will not
experience results in the current fiscal year that are worse than predicted,
with corresponding material and adverse effects on the State's, projections of
receipts and disbursements.
The State Financial Plan is based upon forecasts of national and State
economic activity developed through both internal analysis and review of State
and national economic forecasts prepared by commercial forecasting services and
other public and private forecasters. Economic forecasts have frequently failed
to predict accurately the timing and magnitude of changes in the national and
the State economies, including consumer attitudes toward spending, the extent of
corporate and governmental restructuring, the condition of the financial sector,
federal fiscal and monetary policies, the level of interest rates, and the
condition of the world economy, which could have an adverse effect on the
State's projections of receipts and disbursements.
The State. Owing to the factors mentioned above and other factors, the
State may, in future years, face substantial potential budget gaps resulting
from a significant disparity between tax revenues projected from a lower
recurring receipts base and the future costs of maintaining State programs at
current levels.
Many complex political, social and economic forces influence the
State's economy and finances, which may in turn affect the State's Financial
Plan. These forces may affect the State unpredictably from fiscal year to fiscal
year and are influenced by governments, institutions, and organizations that are
not subject to the State's control. The State Financial Plan is also necessarily
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and the State economies. Because of the uncertainty and
unpredictability of changes in these factors, their impact cannot be fully
included in the assumptions underlying the State's projections.
An additional risk to the State Financial Plan arises from the
potential impact of certain litigation and of federal disallowances now pending
against the State, which could adversely affect the States projections of
receipts and disbursements. The State Financial Plan assumes no significant
litigation or federal disallowance or other federal actions that could affect
State finances, but has significant reserves in the event of such an action.
Revenue Base. The State's principal revenue sources are economically
sensitive, and include the personal income tax, user taxes and fees and business
taxes. The 1998-99 Financial Plan projects General Fund receipts (including
transfers from other funds) of $37.56 billion, an increase of over 3 billion
from the $34.55 billion recorded in 1997-98. This total includes $34.36 billion
in tax receipts, $1.40 billion in miscellaneous receipts, and $1.80 billion in
transfers from other funds.
The transfer of a portion of the surplus recorded in 1997-98 to 1998-99
exaggerates the `real' growth in State receipts from year to year by depressing
reported 1997-98 figures and inflating 1998-99 projections. Conversely, the
incremental cost of tax reductions newly effective in 1998-99 and the impact of
statutes earmarking certain tax receipts to other funds work to depress apparent
growth below the underlying growth in receipts attributable to expansion of the
State's economy. On an adjusted basis, State tax revenues in the 1998-99 fiscal
year are projected to grow at approximately 7.5 percent, following an adjusted
growth of roughly nine percent in the 1997-98 fiscal year.
The Personal Income Tax is imposed on the income of individuals,
estates and trusts and is based on federal definitions of income and deductions
with certain modifications. This tax continues to account for over half of the
State's General Fund receipts base. Net personal income tax collections are
projected to reach $21.24 billion, nearly $3.5 billion above the reported
1997-98 collection total. Since 1997 represented the completion of the 20
percent income tax reduction program enacted in 1995, growth from 1997 to 1998
will be unaffected by major income tax reductions. Adding to the projected
annual growth is the net impact of the transfer of the surplus from 1997-98 to
the current year which affects reported collections by over $2.4 billion on a
year-over-year basis, as partially offset by the diversion of slightly over $700
million in income tax receipts to the STAR fund to finance the initial year of
the school tax reduction program. The STAR program was enacted in 1997 to
increase the State share of school funding and reduce residential school taxes.
Adjusted for these transactions, the growth in net income tax receipts is
roughly $1.7 billion, an increase of over 9 percent. This growth is largely a
function of over 8 percent growth in income tax liability projected for 1998 as
well as the impact of the 1997 tax year settlement on 1998-99 net collections.
User taxes and fees are comprised of three quarters of the State four
percent sales and use tax (the balance, one percent, flows to support Local
Government Assistance Corporation ("LGAC") debt service requirements),
cigarette, alcoholic beverage, container and auto rental taxes, and a portion of
the motor fuel excise levies. Also included in this category are receipts from
the motor vehicle registration fees and alcoholic beverage license fees. A
portion of the motor fuel tax and motor vehicle registration fees and all of the
highway use tax are earmarked for dedicated transportation funds.
Receipts from user taxes and fees receipts are projected to total $7.14
billion, an increase of $107 million from reported collections in the prior
year. The sales tax component of this category accounts for all of the 1998-99
growth, as receipts from all other sources declined $100 million. The growth in
yield of the sales tax in 1998-99, after adjusting for tax law and other
changes, is projected at 4.7 percent. The yields of most of the excise taxes in
this category show a long-term declining trend, particularly cigarette and
alcoholic beverage taxes. These General Fund declines are exacerbated in 1998-99
by revenue losses from scheduled and newly enacted tax reductions, and by an
increase in earmarking of motor vehicle registration fees to the Dedicated
Highway and Bridge Trust Fund.
Business taxes include franchise taxes based generally on net income of
general business, bank and insurance corporations, as well as gross receipt
taxes on utilities and galling-based petroleum business taxes. Beginning in
1994, a 15 percent surcharge on these levies began to be phased out and, for
most taxpayers, there is no surcharge liability for taxable periods ending in
1997 and thereafter.
Total business tax collections in 1998-99 are now projected to be $4.96
billion, $91 million less than received in the prior fiscal year. The category
includes receipts from the largely income-based levies on general business
corporations, banks and insurance companies, gross receipts taxes on energy and
telecommunication service providers and a per-gallon imposition on petroleum
business. The year-over-year decline in projected receipts in this category is
largely attributable to statutory changes between the two years. These include
the first year of utility-tax rate cuts and the Power for Jobs tax reduction
program for energy providers, and the scheduled additional diversion of General
Fund petroleum business and utility tax receipts to other funds. In addition,
profit growth is also expected to slow in 1998.
Other taxes include estate, gift and real estate transfer taxes, a tax
on gains from the sale or transfer of certain real estate (this tax was repealed
in 1996), a pari-mutuel tax and other minor levies. They are now projected to
total $1.02 billion -- $75 million below last year's amount. Two factors account
for a significant part of the expected decline in collections from this
category. First, the effects of the elimination of the real property gains tax
collections; second, a decline in estate tax receipts, following the explosive
growth recorded in 1997-98, when receipts expanded by over 16 percent.
Miscellaneous receipts include investment income, abandoned property
receipts, medical provider assessments, minor federal grants, receipts from
public authorities, and certain other license and fee revenues. Total
miscellaneous receipts are projected to reach $1.40 billion, down almost $200
million from the prior year, reflecting the loss of non-recurring receipts in
1997-98 and the growing effects of the phase-out of the medical provider
assessments.
Transfers from other funds to the General Fund consist primarily of tax
revenues in excess of debt service requirements, particularly the one percent
sales tax used to support payments to LGAC. Transfers from other funds are
expected to total $1.8 billion, or $222 million less than total receipts from
this category during 1997-98. Total transfers of sales taxes in excess of LGAC
debt service requirements are expected to increase by approximately $51 million,
while transfers from all other funds are expected to fall by $273 million,
primarily reflecting the absence, in 1998-1999, of a one-time transfer of nearly
$200 million for retroactive reimbursement of certain social services claims
from the federal government. The Local Government Assistance Tax fund is
projected to receive $1.93 billion in receipts from the dedicated one-cent
statewide sales tax in 1999-2000. Debt service and associated costs on the
completed $4.7 billion LGAC program are projected at $340 billion, which results
in the transfer of excess sales taxes to the General Fund in the amount of $1.59
billion.
State Debt. The State's 1998-99 borrowing plan projects issuances of
$331 million in general obligation bonds (including $154 million for purposes of
redeeming outstanding BANs) and $154 million in general obligation commercial
paper. The State has issued $179 million in Certificates of Participation to
finance equipment purchases during 1998-99. Borrowings by public authorities
pursuant to lease-purchase and contractual-obligation financings for capital
programs of the State are projected to total approximately $2.85 billion,
including costs of issuance in 1998-99.
Nonrecurring Sources. The Division of the Budget estimates that the
1999-2000 State Financial Plan contains actions that provide nonrecurring
resources or savings totaling approximately $33 million, less than one-tenth of
one percent of General Fund disbursements.
Outyear Projections of Receipts and Disbursements. The 1999-2000
Executive Budget projects General Fund disbursements of $38.19 billion in
2000-01 and $39.97 billion in 2001-02.
State law requires the Governor to propose a balanced budget each year.
In recent years, the State has closed projected budget gaps of $3.9 billion
(1996-97), $2.3 billion (1997-98) and less than $1 billion (1998-99). The State,
as a part of the 1999-2000 Executive Budget projections submitted to the
Legislature in January 1999 (as well as a revised Financial Plan in February
1999), projects a 1999-2000 General Fund budget gap of approximately $1.14
billion and a 2000-01 gap of $2.07 billion. A tentative labor agreement was
reached in early 1999 (discussed below), and if the agreement is applied to the
entire Executive Branch workforce, the State estimates that the budget gaps
would increase by $275 million in 2000-01 and $475 million in 2001-02. The
budget gaps are projected after making the use of $589 million in 2000-01 and
$1.2 billion in 2001-02 from the 1998-99 tax reduction reserve.
Sustained growth in the State's economy could contribute to closing
projected budget gaps over the next several years, both in terms of
higher-than-projected tax receipts and in lower-than-expected entitlement
spending. The State does not expect that past rates of growth will be sustained.
The State's projections in 1999-2000 currently assume actions to achieve $600
million in lower disbursements and $250 million in additional receipts from the
settlement of State claims against the tobacco industry The State expects that
the 1999-2000 Financial Plan will achieve savings from initiatives by State
agencies to deliver services more efficiently, unspecified annual spending
efficiencies, workforce management efforts, maximization of federal and
non-General Fund spending offsets, and other actions necessary to bring
projected disbursements and receipts into balance.
The STAR program, which dedicates a portion of personal income tax
receipts to fund school tax reductions, has a significant impact on General Fund
receipts. STAR is projected to reduce personal income tax revenues available to
the General Fund by an estimated $1.3 billion in 2000-01. Measured from the
1998-99 base, scheduled reductions to estate and gift, sales and other taxes,
reflecting tax cuts enacted in 1997-98 and 1998-99, will lower General Fund
taxes and fees by an estimated $1.8 billion in 2000-01.
Labor Costs. The State government workforce is mostly unionized,
subject to the Taylor Law which authorizes collective bargaining and prohibits
(but has not, historically, prevented) strikes and work slowdowns. Costs for
employee health benefits have increased substantially, and can be expected to
further increase. Many of the labor contracts expire in the spring of 1999.
In early 1999, the State reached a tentative agreement with the Civil
Service Employees Association (CSEA) on a new four-year labor contract. If this
agreement is ratified by CSEA and approved by the Legislature, and the terms of
that contract applied to the entire Executive Branch workforce, the State
estimates that the budget gaps would increase by $275 million in 2000-01 and
$475 million in 2001-02.
The New York State and Local Retirement Systems (the Systems) provide
coverage for public employees of the State and its localities (except employees
of New York City and teachers, who are covered by separate plans). Net assets
available for benefits of the systems have increased from $58.05 million in
March, 1993 to $106.32 million in March, 1998. Under the funding method used by
the Systems, according to DOB, the net assets, plus future actuarially
determined contributions, are expected to be sufficient to pay for the
anticipated benefits of current members, retirees and beneficiaries.
Since January 1995, the State's workforce has been reduced by about 10
percent, and is projected to remain at approximately 191,000 persons in 1998-99.
Public Assistance. Spending on welfare is projected in the 1999-2000
fiscal year at $1.49 billion, a decline of 2.7 percent from the prior year.
Since 1994-95, State spending on welfare has fallen by more than 25 percent,
driven by significant welfare changes initiated at the Federal and State levels
and a large, steady decline in the number of people receiving benefits. The
State does not forecast further significant reductions in this spending
category.
Federal law enacted in 1996 abolished the federal Aid to Families with
Dependent Children program (AFDC) and created a new Temporary Assistance to
Needy Families with Dependent Children program (TANF) funded with a fixed
federal block grant to states. The law also imposes (with certain exceptions) a
five-year durational limit on TANF recipients, requires that virtually all
recipients be engaged in work or community service activities within two years
of receiving benefits, and limits assistance provided to certain immigrants and
other classes of individuals.
Local assistance spending by the State for Children and Families
Services is projected at $864 million in 1999-2000, a reduction of 4.7 percent
from the year earlier. The decline in General Fund spending is offset by higher
spending on child care and child welfare services from federal TANF funds.
Medicaid. New York participates in the federal Medicaid program under a
state plan approved by the Health Care Financing Administration. The federal
government provides a substantial portion of eligible program costs, with the
remainder shared by the State and its counties (including the City). Basic
program eligibility and benefits are determined by federal guidelines, but the
State provides a number of optional benefits and expanded eligibility. Program
costs have increased substantially in recent years, and account for a rising
share of the State budget. Federal law requires that the State adopt
reimbursement rates for hospitals and nursing homes that are reasonable and
adequate to meet the costs that must be incurred by efficiently and economically
operated facilities in providing patient care, a standard that has led to past
litigation by hospitals and nursing homes seeking higher reimbursement from the
State. Medicaid is the second largest program, after grants to local
governments, in the General Fund. Payments for Medicaid are projected to be
$5.50 billion in 1999-2000, a decrease of $87 million, or 1.6 percent, from the
prior year.
The State Authorities. The fiscal stability of the State is related in
part to the fiscal stability of its public authorities. Public authorities refer
to public benefit corporations, created pursuant to State law, other than local
authorities. Public authorities are not subject to the constitutional
restrictions on the incurrence of debt which apply to the State itself and may
issue bonds and notes within the amounts and restrictions set forth in
legislative authorization. The State's access to the public credit markets could
be impaired and the market price of its outstanding debt may be materially and
adversely affected if any of its public authorities were to default on their
respective obligations, particularly those using the financing techniques
referred to as State-supported or State-related debt. As of December 31, 1997,
there were 17 public authorities with outstanding debt of $100 million or more,
and the aggregate outstanding debt, including refunding bonds, of all State
public authorities was $84 billion, only a portion of which constitutes
State-supported or State-related debt.
The State has numerous public authorities with various
responsibilities, including those which finance, construct and/or operate
revenue producing public facilities. Public authority operating expenses and
debt service costs are generally paid by revenues generated by the projects
financed or operated, such as tolls charged for the use of highways, bridges or
tunnels, charges for public power, electric and gas utility services, rentals
charged for housing units, and charges for occupancy at medical care facilities.
In addition, State legislation authorizes several financing techniques
for public authorities. Also there are statutory arrangements providing for
State local assistance payments otherwise payable to localities to be made under
certain circumstances to public authorities. Although the State has no
obligation to provide additional assistance to localities whose local assistance
payments have been paid to public authorities under these arrangements, the
affected localities may seek additional State assistance if local assistance
payments are diverted. Some authorities also receive moneys from State
appropriations to pay for the operating costs of certain of their programs. The
MTA receives the bulk of this money in order to provide transit and commuter
services.
Beginning in 1998, the Long Island Power Authority (LIPA) assumed
responsibility for the provision of electric utility services previously
provided by Long Island Lighting Company for Nassau, Suffolk and a portion of
Queen Counties, as part of an estimated $7 billion financing plan.
Metropolitan Transportation Authority. Since 1980, the State has
enacted several taxes -- including a surcharge on the profits of banks,
insurance corporations and general business corporations doing business in the
12 county Metropolitan Transportation Region served by the MTA and a special one
quarter of 1 percent regional sales and use tax -- that provide revenues for
mass transit purposes, including assistance to the MTA. Since 1987 State law has
required that the proceeds of a one quarter of 1 percent mortgage recording tax
paid on certain mortgages in the Metropolitan Transportation Region be deposited
in a special MTA fund for operating or capital expenses. In 1993, the State
dedicated a portion of certain additional State petroleum business tax receipts
to fund operating or capital assistance to the MTA. For the 1998-99 fiscal year,
State assistance to the MTA is projected to total approximately $1.3 billion, an
increase of $133 million over the 1997-98 fiscal year.
State legislation accompanying the 1996-97 adopted State budget
authorized the MTA, Triborough Bridge and Tunnel Authority and Transit Authority
to issue an aggregate of $6.5 billion in bonds to finance a portion of the
$12.17 billion MTA capital plan for the 1995 through 1999 calendar years (the
"1995-99 Capital Program"). In July 1997, the Capital Program Review Board
(CPRB) approved the 1995-99 Capital Program (subsequently amended in August
1997), which supersedes the overlapping portion of the MTA's 1992-96 Capital
Program. The 1995-99 Capital Program is the fourth capital plan since the
Legislature authorized procedures for the adoption, approval and amendment of
MTA capital programs and is designed to upgrade the performance of the MTA's
transportation systems by investing in new rolling stock, maintaining
replacement schedules for existing assets and bringing the MTA system into a
state of good repair. The 1995-99 Capital Program assumes the issuance of an
estimated $5.2 billion in bonds under this $6.5 billion aggregate bonding
authority. The remainder of the plan is projected to be financed through
assistance from the State, the federal government, and the City of New York, and
from various other revenues generated from actions taken by the MTA.
There can be no assurance that all the necessary governmental actions
for future capital programs will be taken, that funding sources currently
identified will not be decreased or eliminated, or that the 1995-99 Capital
Program, or parts thereof, will not be delayed or reduced. Should funding levels
fall below current projections, the MTA would have to revise its 1995-99 Capital
Program accordingly. If the 1995-99 Capital Program is delayed or reduced,
ridership and Fare revenues may decline, which could, among other things, impair
the MTA's ability to meet its operating expenses without additional assistance.
The City of New York. The fiscal health of the State may also be
affected by the fiscal health of New York City (the "City"), which continues to
receive significant financial assistance from the State. State aid contributes
to the City's ability to balance its budget and meet its cash requirements. The
State may also be affected by the ability of the City and certain entities
issuing debt for the benefit of the City to market their securities successfully
in the public credit markets.
The City has achieved balanced operating results for each of its fiscal
years since 1981 as measured by the GAAP standards in force at that time.
However, in the early 1970s, the City incurred substantial operating deficits,
and its financial controls, accounting practices and disclosure policies were
widely criticized. In response to the City's fiscal crisis in 1975, the State
took action to assist the City in returning to fiscal stability. Among these
actions, the State established the Municipal Assistance Corporation for The City
of New York ("MAC") to provide financing assistance for the City; the New York
State Financial Control Board (the "Control Board") to oversee the City's
financial affairs; and the Office of the State Deputy Comptroller for the City
of New York ("OSDC") to assist the Control Board in exercising its powers and
responsibilities. A "control period" existed from 1975 to 1986, during which the
City was subject to certain statutorily imposed conditions. State law requires
the Control Board to reimpose a control period upon the occurrence, or
"substantial likelihood and imminence' of the occurrence, of certain events,
including (but not limited to) a City operating budget deficit of more than $100
million or impaired access to the public credit markets.
The City provides services usually undertaken by counties, school
districts or special districts in other large urban areas, including the
provision of social services such as day care, foster care, health care, family
planning, services for the elderly and special employment services for needy
individuals and families who qualify for such assistance. State law requires the
City to allocate a large portion of its total budget to Board of Education
operations, and mandates that the City assume the local share of public
assistance and Medicaid costs. For each of the 1981 through 1998 fiscal years,
the City achieved balanced operating results as reported in accordance with then
applicable generally accepted accounting principles ("GAAP"). The City was
required to close substantial budget gaps in recent years in order to maintain
balanced operating results. There can be no assurance that the City will
continue to maintain a balanced budget as required by State law without
additional tax or other revenue increases or additional reductions in City
services or entitlement programs, which could adversely affect the City's
economic base.
Pursuant to the New York State Financial Emergency Act for The City of
New York (the "Financial Emergency Act" or the "Act"), the City prepares a four
year annual financial plan, which is reviewed and revised on a quarterly basis
and which includes the City's capital, revenue and expense projections and
outlines proposed gap closing programs for years with projected budget gaps. The
City's projections set forth in the 1999-2003 Financial Plan are based on
various assumptions and contingencies which are uncertain and which may not
materialize. Changes in major assumptions could significantly effect the City's
ability to balance its budget and to meet its annual cash flow and financing
requirements. Such assumptions and contingencies include the timing and pace of
a regional and local economic recovery, increases in tax revenues, employment
growth, the ability to implement proposed reductions in City personnel and other
cost reduction initiatives which may require in certain cases the cooperation of
the City's municipal unions, the ability of New York City Health and Hospitals
Corporation and the Board of Education to take actions to offset reduced
revenues, the ability to complete revenue generating transactions, provision of
State and federal aid and mandate relief, and the impact on City revenues of
proposals for federal and State welfare reform. No assurance can be given that
the assumptions used by the City in the 1999-2003 Financial Plan will be
realized. Due to the uncertainty existing on the federal and state levels, the
ultimate adoption of the State budget for FY 1999-2000 may result in substantial
reductions in projected expenditures for social spending programs. Cost
containment assumptions contained in the 1999-2003 Financial Plan and the City
FY 1999-2000 Budget may therefore be significantly adversely affected upon the
final adoption of the State budget for FY 1999-2000. Furthermore, actions taken
in recent fiscal years to avert deficits may have reduced the City's flexibility
in responding to future budgetary imbalances, and have deferred certain
expenditures to later fiscal years.
On January 29, 1999, the City released the Financial Plan for fiscal
years 2000-2003. It projects total revenues in FY 1999 of $35.60 billion, of
which federal categorical grants provide $4.2 billion and State categorical
grants provide $6.7 billion. The City's Financial Plan projects that
expenditures will grow to $38.94 billion in FY 2003. While the Financial Plan
projects revenues and expenditures for the 1999 fiscal year balanced in
accordance with GAAP, it projects budget gaps of $738 million, $1.91 billion,
$2.04 billion and $1.54 billion in the 2000, 2001, 2002 and 2003 fiscal years,
respectively.
Although the City has maintained balanced budgets in each of its last
sixteen fiscal years and is projected to achieve balanced operating results for
the 1998 fiscal year, there can be no assurance that the gap closing actions
proposed in the Financial Plan can be successfully implemented or that the City
will maintain a balanced budget in future years without additional State aid,
revenue increases or expenditure reductions. Additional tax increases and
reductions in essential City services could adversely affect the City's economic
base.
The 1999-2003 Financial Plan includes a proposed discretionary transfer
in the 1999 fiscal year of approximately $1.57 billion to pay debt service due
in fiscal year 2000, included in the Budget Stabilization Plan for the 1999
fiscal years. In addition, the Financial Plan reflects actual and proposed tax
reduction programs totaling $338 million, $410 million, $461 million and $473
million in fiscal years 2000 through 2003.
The City derives its revenues from a variety of local taxes, user
charges and miscellaneous revenues, as well as from Federal and State
unrestricted and categorical grants. State aid as a percentage of the City's
revenues has remained relatively constant over the period from 1980 to 1997,
while unrestricted Federal aid has been sharply reduced. The City reports that
local revenues provided approximately 58.3% of total revenues in FY 1997-98 of
$34.9 billion, while federal and State aid, including unrestricted aid and
categorical grants, provided 33.5% in the same year.
The City since 1981 has fully satisfied its seasonal financing needs in
the public credit markets, repaying all short term obligations within their
fiscal year of issuance. The City issued $1.075 billion of short term
obligations in fiscal year 1998 to finance the City's projected cash flow needs
for that year. In previous years, the City's short term obligations have been
$2.4 billion, $2.4 billion, $2.2 billion, and $1.75 billion in fiscal years
1997, 1996, 1995 and 1994, respectively. The delay in the adoption of the
State's budget in certain past fiscal years has required the city to issue short
term notes in amounts exceeding those expected early in such fiscal years.
The City makes substantial capital expenditures to reconstruct and
rehabilitate the city's infrastructure and physical assets, including City mass
transit facilities, sewers, streets, bridges and tunnels, and to make capital
investments that will improve productivity in City operations. The City utilizes
a three tiered capital planning process consisting of the Ten Year Capital
Strategy, the Four Year Capital Plan and the current year Capital Budget. The
Ten Year Capital Strategy is a long term planning tool designed to reflect
fundamental allocation choices and basic policy objectives. The Four Year
Capital Program translates mid-range policy goals into specific projects. The
Capital Budget defines specific projects and the timing of their initiation,
design, construction and completion.
The City is nearing the constitutionally-permissible limit on its
general obligation debt. Under the State constitution, the City may not contract
indebtedness in an amount greater than 10 percent of the average full value of
taxable real estate in the City for the most recent five years. To provide for
the City's capital program, State legislation was enacted in 1997 which created
the Transitional Finance Authority ("TFA"), the debt of which is not subject to
the general debt limit. Without TFA or other legislative relief, new contractual
commitments for the City's general obligation financed capital program would
have been virtually brought to a halt during the Financial Plan period beginning
early in the 1998 fiscal year. By utilizing projected TFA borrowing and
including TFA's projected borrowing as part of the total debt incurring power,
the City's total debt incurring power has been increased.
Even with the increase, the City may reach the limit of its capacity
to enter into new contractual commitments in fiscal year 2000. As of July 1,
1998, the City's outstanding general obligation debt totaled $27.1 billion., and
as of July 1, 1998, the City's net general obligation debt limit was $28.9
billion. As of July 1, 1998, the remaining City and TFA debt incurring power
totaled $3.9 billion. Despite this additional financing mechanism, the City
projected that, if no further action was taken, it would reach its debt limit in
City fiscal year 1999-2000. Issuance of tobacco settlement bonds may accelerate
income of $2.5 billion, but the City estimates that it would still reach its
Constitutional indebtedness limit in fiscal year 2002.
In June, 1997, the constitutionality of TFA was challenged in court,
but the challenge was dismissed at the trial level, appellate level, and before
the New York Court of Appeals in 1998. Future developments concerning the City
or entities issuing debt for the benefit of the City, and public discussion of
such developments, as well as prevailing market conditions and securities credit
ratings, may affect the ability or cost to sell securities issued by the City or
such entities and may also effect the market for their outstanding securities.
In addition to general obligation debt, the City has other long-term
obligations, including capital leases and bond transactions of public benefit
corporations that are components of the City or whose debt is guaranteed by the
City.
The City is the largest municipal debt issuer in the nation, and has
more than doubled its debt load since the end of FY 1988, in large measure to
rehabilitate its extensive, aging physical plant. The City's Financial Plan
projects $22.3 billion of long-term borrowings for the period of FY 1999 through
FY 2003 to support the City's current capital plan. The City's Preliminary
Ten-Year Capital Strategy dated January 1999 has identified $48 billion in
additional capital expenditures over the next ten years. Additionally, a report
of the City Comptroller indicates the Preliminary Ten-Year Capital Strategy
significantly underestimates the actual capital needs of the City for
reconstructing and rehabilitating the City's infrastructure and physical assets.
Other Localities. Certain localities outside New York City have
experienced financial problems and have requested and received additional State
assistance during the last several State fiscal years. The City of Troy
continues to operate under a State-ordered control agency. The City of Yonkers
satisfied the statutory conditions for ending the supervision of its finances by
a State-ordered control board, whose powers lapsed December 31, 1998. The
potential impact on the State of any future requests by localities for
additional oversight or financial assistance is not included in the projections
of the State's receipts and disbursements.
Eighteen municipalities received extraordinary assistance during the
1996 legislative session through $50 million in special appropriations targeted
for distressed cities, and twenty-eight municipalities received more than $32
million in targeted unrestricted aid in the 1997-98 budget. These emergency aid
packages have largely continued through the 1998-99 budget, and the State is
examining methods for recalculating the distribution of State aid.
State law requires the Comptroller to review and make recommendations
concerning the budgets of those local government units other than New York City
authorized by State law to issue debt to finance deficits during the period that
such deficit financing is outstanding. Twenty-one localities had outstanding
indebtedness for deficit financing at the close of their fiscal year ending in
1996.
Municipalities and school districts have engaged in substantial short
term and long term borrowings. In 1996, the total indebtedness of all localities
in the State other than New York City was approximately $20.0 billion.
Like the State, local governments must respond to changing political,
economic and financial influences over which they have little or no control.
Such changes may adversely affect the financial condition of certain local
governments. For example, the federal government may reduce (or in some cases
eliminate) federal funding of some local programs which, in turn, may require
local governments to fund these expenditures from their own resources. It is
also possible that the State, New York City, or any of their respective public
authorities may suffer serious financial difficulties that could jeopardize
local access to the public credit markets, which may adversely affect the
marketability of notes and bonds issued by localities within the State.
Localities may also face unanticipated problems resulting from certain pending
litigation, judicial decisions and long-range economic trends. Other large-scale
potential problems, such as declining urban populations, increasing
expenditures, and the loss of skilled manufacturing jobs, may also adversely
affect localities and necessitate State assistance.
ADDITIONAL INFORMATION CONCERNING CONNECTICUT
As described in the prospectus, the Fund will generally invest in
Connecticut municipal obligations. The performance of the Fund is therefore
susceptible to political, economic and regulatory factors affecting the State of
Connecticut and governmental bodies within the State of Connecticut. The
information summarized below briefly describes some of the more significant
factors that could affect the performance of the Fund or the ability of the
obligors to pay debt service on certain of the securities. Such information is
derived from sources that are generally available to investors and is believed
to be accurate. It is based on information from official statements of issuers
located in the State of Connecticut as well as other publicly available
documents. The Fund has not independently verified any of the information
contained in such statements and documents.
State Economy
General. Connecticut, the southernmost of the New England States, is
located on the northeast coast and is bordered by Long Island Sound, New York,
Massachusetts and Rhode Island. Connecticut is situated directly between the
financial centers of Boston and New York and is a highly developed and urbanized
state. More than one-quarter of the total population of the United States and
approximately 60% of the Canadian population live within 500 miles of the State.
The State's population grew at a rate which exceeded the United States' rate of
population growth during the period 1940 to 1970, slowed substantially during
the 1970s and 1980s, and declined in the years 1992 through 1995. The 1997
estimated population increased slightly from 1996, but remained below the figure
recorded in the 1990 Federal Census.
Connecticut's economic performance is measured by personal income,
which has been and is expected to remain among the highest in the nation; gross
state product (the current market value of all final goods and services produced
by labor and property located within the State), which demonstrated stronger
output growth than the nation in general during the 1980s and a lower growth in
the 1990s; and employment, which, although rising, still remains below the
levels achieved in the late 1980s as manufacturing employment has declined and
non-manufacturing employment has recovered most of its losses.
Defense Industry. One important component of the manufacturing sector
in Connecticut is defense related business. Approximately one-quarter of
manufacturing establishments and total manufacturing employees in Connecticut
are involved in defense related businesses. Nonetheless, its significance in the
state economy has declined considerably. Due to the scaling back of the national
defense budget in the past decade, spending on defense procurement as well as
outlays for personnel, research and development and construction has been
dramatically reduced. In fiscal year 1997, Connecticut received $2,536 million
of prime contract awards. This accounted for 2.4% of national total awards and
ranked thirteenth in total defense dollars awarded and sixth in per capita
dollars awarded among the 50 states. In fiscal year 1997, Connecticut had $776
in per capita defense awards, compared to the national average of $398. As
measured by a three-year moving average of defense contract awards as a percent
of Gross State Product (GSP), awards to Connecticut based firms have fallen to
2.0% of GSP in fiscal year 1997, down from 9.8% of GSP in fiscal year 1982.
State Budgetary Process
Balanced Budget Requirement. In November 1992, State electors approved
an amendment to the State Constitution providing that the amount of general
budget expenditures authorized for any fiscal year shall not exceed the
estimated amount of revenue for such fiscal year. This amendment also provides
for a cap on budget expenditures. The General Assembly is precluded from
authorizing an increase in general budget expenditures for any fiscal year above
the amount of general budget expenditures authorized for the previous fiscal
year by a percentage which exceeds the greater of the percentage increase in
personal income or the percentage increase in inflation, unless the Governor
declares an emergency or the existence of extraordinary circumstances and at
least three-fifths of the members of each house of the General Assembly vote to
exceed such limit for the purposes of such emergency or extraordinary
circumstances. The limitation on general budget expenditures does not include
expenditures for the payment of bonds, notes or other evidences of indebtedness.
There is no statutory or constitutional prohibition against bonding for general
budget expenditures.
Biennium Budget. The State's fiscal year begins on July 1 and ends June
30. The Connecticut General Statutes require that the budgetary process be on a
biennium basis. The Governor is required to transmit a budget document in
February of each odd-numbered year setting forth the financial program for the
ensuing biennium with a separate budget for each of the two fiscal years and a
report which sets forth estimated revenues and expenditures for the three fiscal
years after the biennium to which the budget document relates. In each
even-numbered year, the Governor must prepare a report on the status of the
budget enacted in the previous year with any recommendations for adjustments and
revisions, and a report, with revisions, if any, which sets forth estimated
revenues and expenditures for the three fiscal years after the biennium in
progress.
Adoption of the Budget. The budget document, as finally developed by
the Governor with the assistance of the Office of Policy Management, is
published and transmitted to the General Assembly in February of each
odd-numbered year. A report summarizing recommended adjustments or revisions is
submitted by the Governor to the General Assembly in even-numbered years. The
Governor or a representative then appears before the appropriate committee of
the General Assembly to explain and address questions concerning the budget
document or reports. Prior to June 30 of each odd-numbered year, the General
Assembly generally enacts one bill making all appropriations for the next two
fiscal years and setting forth revenue estimates for those years. Subsequent
appropriations of revenue bills are occasionally passed.
Line Item Veto. Under the State Constitution, the Governor has the
power to veto any line of any itemized appropriations bill while at the same
time approving the remainder of the bill. A statement identifying the items so
disapproved and explaining the reasons therefore must be transmitted with the
bill to the Secretary of the State and, when in session, the General Assembly.
The General Assembly may separately reconsider and re-pass such disapproved
appropriation items by a two-thirds vote of each house.
State General Fund
The State finances most of its operations through the General Fund.
However, certain State functions are financed through other State funds.
1997-98 Operations. The Comptroller's 1998 annual report indicated
1997-98 General Fund expenditures of $9,829.3 million, General Fund revenues of
$10,142.2 million and a surplus of $312.9 million. Any unappropriated surplus,
up to five percent of General Fund expenditures, will be deposited into the
Budget Reserve Fund. After the transfer of $161.7 million, as required to meet
the five percent of General Fund expenditures, the balance of $151.2 million
will be used to reduce bonded indebtedness.
Adopted Budget 1998-99. On February 4, 1998, the Governor submitted to
the legislature a status report including proposed Midterm Budget Adjustments
for the 1998-99 fiscal year. After consideration of the Governor's proposal, the
legislature adopted budget adjustments for fiscal year 1998-99 in Special Act
No. 98-6. The adopted Midterm Budget Adjustments for fiscal year 1998-99
anticipate General Fund expenditures of $9,972.4 million, General Fund revenues
of $9,992.0 million and an estimated General Fund surplus of $19.6 million.
The enacted Midterm Budget Adjustments for fiscal year 1998-99 are
within the limits imposed by the expenditure cap. For fiscal year 1998-99,
permitted growth in capped expenditures is estimated at 4.86%. The enacted
Midterm Budget Adjustments would result in a fiscal 1998-99 budget that is $82.3
million below the expenditure cap.
1998-99 Operations. The Comptroller's monthly report for the period
ending October 31, 1998 estimates 1998-99 fiscal year General Fund expenditures
of $9,993.5 million, General Fund revenues of $10,164.2 million and an estimated
operating surplus of $170.7 million, as a result of an increase in estimated
revenue that more than offset the increase in estimated expenditures. No
assurances can be given that subsequent estimates will not indicate changes in
the final result of the fiscal year 1998-99 operations of the General Fund.
The December 1998 Special Session of the Legislature increased budgeted
appropriations for the 1998-99 fiscal year by $80 million. (See additional
information below.)
Proposed Budget 1999-2001. On February 10, 1999, the Governor proposed
a budget for fiscal years 2000 and 2001. The budget calls for General Fund
expenditures of $10,542.1 million in the fiscal year that ends June 30, 2000 and
$11,057.2 million in the fiscal year that ends June 30, 2001.
State Debt
Constitutional Provisions. The State has no constitutional limit on its
power to issue obligations or incur debt other than it may borrow only for
public purposes. There are no reported court decisions relating to State bonded
debt other than two cases validating the legislative determination of the public
purpose for improving employment opportunities and related activities. The State
Constitution has never required a public referendum on the question of incurring
debt. Therefore, the authorization and issuance of State debt, including the
purpose, amount and nature thereof, the method and manner of the incidence of
such debt, the maturity and terms of repayment thereof, and other related
matters are statutory.
Types of State Debt. Pursuant to various public and special acts, the
State has authorized a variety of types of debt. These types fall generally into
the following categories: direct general obligation debt, which is payable from
the State's General Fund; special tax obligation debt, which is payable from
specified taxes and other funds which are maintained outside the State's General
Fund; and special obligation and revenue debt, which is payable from specified
revenues or other funds which are maintained outside the State's General Fund.
In addition, the State has a number of programs under which the State is
contingently liable on the debt of certain State quasi-public agencies and
political subdivisions.
Statutory Authorization and Security Provisions for State Direct
General Obligation Debt. In general, the State issues general obligation bonds
pursuant to specific statutory bond acts and Section 3-20 of the Connecticut
General Statutes, the State General Obligation Bond Procedure Act. That act
provides that such bonds shall be general obligations of the State and that the
full faith and credit of the State of Connecticut are pledged for the payment of
the principal of an interest on such bonds as the same become due. Such act
further provides that, as a part of the contract of the State with the owners of
such bonds, appropriation of all amounts necessary for the punctual payment of
such principal and interest is made, and the Treasurer shall pay such principal
and interest as the same become due. As of December 1, 1998, there was
legislatively authorized direct general obligation bond indebtedness in the
aggregate amount of $12,398,200,000 of which $11,057,371,000 had been approved
for issuance and $9,814,857,000 had been issued. As of December 1, 1998,
$6,951,626,000 was outstanding.
There are no State Constitutional provisions precluding the exercise of
State power by statute to impose any taxes, including taxes on taxable property
in the State or on income, in order to pay debt service on bonded debt now or
thereafter incurred. The constitutional limit on increases in general fund
expenditures for any fiscal year does not include expenditures for the payment
of bonds, notes or other evidences of indebtedness. There are also no
constitutional or statutory provisions requiring or precluding the enactment of
liens on or pledges of State general fund revenues or taxes, or the
establishment of priorities for payment of debt service on the State's general
obligation bonds. There are no express statutory provisions establishing any
priorities in favor of general obligation bondholders over other valid claims
against the State.
Statutory Debt Limit for State Direct General Obligation Debt. Section
3-21 of the Connecticut General Statutes provides that no bonds, notes or other
evidences of indebtedness for borrowed money payable from General Fund tax
receipts of the State shall be authorized by the General Assembly, except to the
extent such authorization shall cause the aggregate amount of (1) the total
amount of bonds, notes or other evidences of indebtedness payable from General
Fund tax receipts authorized by the General Assembly but which have not been
issued and (2) the total amount of such indebtedness which has been issued and
remains outstanding, to exceed 1.6 times the total estimated General Fund tax
receipts of the State for the fiscal year in which any such authorization will
become effective or in which such indebtedness is issued, as estimated for such
fiscal year by the joint standing committee of the General Assembly having
cognizance of finance, revenue and bonding. However, in computing the aggregate
amount of indebtedness at any time, there shall be excluded or deducted revenue
anticipation notes having a maturity of one year or less, refunded indebtedness,
bond anticipation notes, borrowings payable solely from the revenues of a
particular project, the balances of debt retirement funds associated with
indebtedness subject to the debt limit as certified by the Treasurer, the amount
of federal grants certified by the Secretary of the Office of Policy and
Management as receivable to meet the principal of certain indebtedness, all
authorized and issued indebtedness to fund any budget deficits of the State for
any fiscal year ending on or before June 30, 1991, all authorized debt to fund
the Connecticut Development Authority's tax increment bond program under Section
32-285 of the Connecticut General Statutes, and any indebtedness represented by
agreements entered into pursuant to subsection (b) or (c) of Section 3-20a of
the General Statutes, provided the indebtedness in connection with which such
agreements were entered into shall be included in such aggregate amount of
indebtedness. For purposes of the debt limit statute, all bonds and notes issued
or guaranteed by the State and payable from General Fund tax receipts are
counted against the limit, except for the exclusions or deductions described
above. In addition, under Public Act No. 95-230, the amount of authorized but
unissued debt under that Act for UConn 2000 is limited to the amount permitted
to be issued under the cap.
In accordance with Section 2-27b of the Connecticut General Statutes,
the Treasurer shall compute the aggregate amount of indebtedness as of January 1
and July 1 of each year and shall certify the results of such computation to the
Governor and the General Assembly. If the aggregate amount of indebtedness
reaches 90% of the statutory debt limit, the Governor shall review each bond act
for which no bonds, notes or other evidences of indebtedness have been issued,
and recommend to the General Assembly priorities for repealing authorizations
for remaining projects.
Ratings. As of December 15, 1998, the most recent general obligation
bonds of the State were rated Aa3 by Moody's, AA by S&P, a division of the
McGraw-Hill Companies, Inc., and AA by Fitch. There can be no assurance that
these ratings will remain in effect in the future.
Obligations of Other State Issuers. The State conducts certain of its
operations through State funds other than the General Fund and pursuant to
legislation may issue debt secured by special taxes or revenues pledged to such
funds. In addition, the State is contingently liable or has limited liability,
from the resources of the General Fund, for payment of debt service on certain
obligations of quasi-public state agencies and municipalities of the State. The
State has also made commitments to municipalities to make future grant payments
for school construction projects, payable over a period of years. In addition,
the State has committed to apply moneys for debt service on loans to finance
child care facilities and has certain contingent liabilities for future
payments.
Future Issuance of Direct General Obligation Debt. On November 19,
1998, the Governor entered into a memorandum of understanding on behalf of the
State with the New England Patriots football team for the relocation of the team
to the City of Hartford and for the development and financing of a new football
stadium and related facilities. The open air stadium would provide seating for
68,000, including 150 luxury suites, 6000 club seats and 61,000 general
admission seats. The target date for the stadium's completion would be 2001. The
stadium would be used primarily for Patriots and University of Connecticut
football games.
The State legislature approved the project and its financing at a
December 1998 Special Session. The State legislature approved the financing by
transferring $20 million from 1998-99 budgeted appropriations, appropriating an
additional $80 million from the General Fund, and authorizing general obligation
bonds in an amount up to $250 million (plus issuance costs and an inflation
factor) to fund the costs of the stadium and related facilities, including site
preparation, infrastructure improvements and a $15 million training facility.
Subject to allotment by the Governor and several conditions precedent, including
approvals by the National Football League and satisfactory parking, insurance
and other arrangements, the Treasurer is authorized to issue the bonds. The
State expects to generate additional revenues from the 10% admission tax and
other existing taxes on activities and income generated by the stadium's use and
the relocation of the Patriots to Connecticut.
Litigation
The State, its officers and employees are defendants in numerous
lawsuits. The ultimate disposition and fiscal consequences of these lawsuits are
not presently determinable. In the cases described below, the fiscal impact of
an adverse decision might be significant, but is not determinable at this time.
The cases described in this section generally do not include any individual case
where the fiscal impact of an adverse judgment is expected to be less than $15
million, but adverse judgments in a number of such cases could, in the aggregate
and in certain circumstances, have a significant impact.
Connecticut Criminal Defense Lawyers Association v. Forst is an action
brought in 1989 in Federal Court alleging a pervasive campaign by the State and
various State Police officials of illegal electronic surveillance, wiretapping
and bugging for a number of years at Connecticut State Police facilities. The
plaintiffs seek compensatory damages, punitive damages, as well as other damages
and costs and attorneys fees, as well as temporary and permanent injunctive
relief. In November 1991, the court issued an order which will allow the
plaintiffs to represent a class of all persons who participated in wire or oral
communications to, from, or within State Police facilities between January 1,
1974 and November 9, 1989 and whose communications were intercepted, recorded
and/or used by the defendants in violation of the law. This class includes a
sub-class of the Connecticut State Police Union, current and former Connecticut
State Police officers who are not defendants in this or any consolidated case,
and other persons acting on behalf of the State Police who participated in oral
or wire communications to, from or within State Police facilities between such
dates.
Sheff v. O'Neill is a Superior Court action brought in 1989 on behalf
of black and Hispanic school children in the Hartford school district. The
plaintiffs sought a declaratory judgment that the public schools in the greater
Hartford metropolitan area are segregated de facto by race and ethnicity and are
inherently unequal to their detriment. They also sought injunctive relief
against state officials to provide them with an "integrated education." On April
12, 1995, the Superior Court entered judgment for the State. On July 9, 1996,
the State Supreme Court reversed the Superior Court judgment and remanded the
case with direction to render a declaratory judgment in favor of the plaintiffs.
The Court directed the legislature to develop appropriate measures to remedy the
racial and ethnic segregation in the Hartford public schools. The Supreme Court
also directed the Superior Court to retain jurisdiction of this matter. In
response to the Supreme Court decision, the 1997 General Assembly enacted P.A.
97-290, an Act Enhancing Educational Choices and Opportunities. In 1998, the
Superior Court ordered the State to show cause as to whether there has been
compliance with the Supreme Court's ruling. On March 3, 1999, the Superior Court
found that the State had complied with the Supreme Court's ruling.
The Connecticut Traumatic Brain Injury Association, Inc. v. Hogan is a
Federal District Court civil rights action brought in 1990 on behalf of all
persons with retardation or traumatic brain injury who have been, or may be,
placed in Norwich, Fairfield Hills or Connecticut Valley Hospitals. The
plaintiffs claim that the treatment and training they need is unavailable in
state hospitals for the mentally ill and that placement in those hospitals
violates their constitutional rights. The plaintiffs seek relief which would
require that the plaintiff class members be transferred to community residential
settings with appropriate support services. This case has been settled as to all
persons with mental retardation by their eventual discharge from Norwich and
Fairfield Hills Hospital. The case is still proceeding as to those persons with
traumatic brain injury. The class of plaintiffs has been expanded to include
persons who are in the custody of the Department of Mental Health and Addiction
Services. The Court in 1998 expanded the class of plaintiffs to include persons
who are or have been in the custody of the Department of Mental Health and
Addiction Services at any time during the pendency of the case without reference
to a particular facility.
Johnson v. Rowland is a Superior Court action brought in 1998 in the
name of several public school students and the Connecticut municipalities in
which the students reside, seeking a declaratory judgement that the State's
current system of financing public education through local property taxes and
State payments to municipalities determined under a statutory Education Cost
Sharing ("ECS") formula violates the Connecticut Constitution. Additionally, the
suit seeks various injunctive orders requiring the State to, among other things,
cease implementation of the present system, modify the ECS formula, and fund the
ECS formula at the level contemplated in the original 1988 public act which
established the ECS.
Several suits have been filed since 1977 in the Federal District Court
and the Connecticut Superior Court on behalf of alleged Indian Tribes in various
parts of the State, claiming monetary recovery as well as ownership to land in
issue. Some of these suits have been settled or dismissed. The plaintiff group
in the remaining suits is the alleged Golden Hill Paugussett Tribe and the lands
involved are generally located in Bridgeport, Trumbull, Orange, Shelton and
Seymour. There may be additional suits filed by other alleged Indian Tribes
claiming ownership of land located in the State, but to which the State is not a
party. One claim includes the alleged Schaghticoke Indian Tribe claiming
privately held lands in the Town of Kent.
Local Government Debt
General. Numerous governmental units, cities, school districts and
special taxing districts, issue general obligation bonds backed by their taxing
power. Under the Connecticut statutes, such entities have the power to levy ad
valorem taxes on all taxable property without limit as to rate or amount, except
as to certain classified property such as certified forest land taxable at a
limited rate and dwelling houses of qualified elderly persons of low income or
qualified disabled persons taxable at limited amounts. Under existing statutes,
the State is obligated to pay to such entities the amount of tax revenue which
it would have received except for the limitation on its power to tax such
dwelling houses.
Payment of principal and interest on such general obligations is not
limited to property tax revenues or any other revenue source, but certain
revenues may be restricted as to use and therefore may not be available to pay
debt service on such general obligations.
Local government units may also issue revenue obligations, which are
supported by the revenues generated from particular projects or enterprises.
Debt Limit. Pursuant to the Connecticut General Statutes, local
governmental units are prohibited from incurring indebtedness in any of the
following categories if such indebtedness would cause the aggregate indebtedness
in that category to exceed, excluding sinking fund contributions, the multiple
for such category times the aggregate annual tax receipts of such local
governmental unit for the most recent fiscal year ending prior to the date of
issue:
DEBT CATEGORY MULTIPLE
(i) all debt other than urban renewal projects,
water pollution control projects and school
building projects......................................2 1/4
(ii) urban renewal projects.................................3 1/4
(iii) water pollution control projects ......................3 3/4
(iv) school building projects...............................4 1/2
(v) total debt, including (i), (ii), (iii) and (iv)
above..................................................7
ADDITIONAL INFORMATION CONCERNING NEW JERSEY
New Jersey Municipal Securities
The financial condition of the State of New Jersey, its public
authorities (the "Authorities") and its local governments, could affect the
market values and marketability of, and therefore the net asset value per share
and the interest income of New Jersey Fund, or result in the default of existing
obligations, including obligations which may be held by the Fund. The following
section provides only a brief summary of the complex factors affecting the
financial situation in New Jersey and is based on information obtained from New
Jersey, certain of its Authorities and certain other localities, as publicly
available on the date of this Statement of Additional Information. The
information contained in such publicly available documents has not been
independently verified. It should be noted that the creditworthiness of
obligations issued by local issuers may be unrelated to the creditworthiness of
New Jersey, and that there is no obligation on the part of New Jersey to make
payment on such local obligations in the event of default in the absence of a
specific guarantee or pledge provided by New Jersey.
Economic Factors
New Jersey is the ninth largest state in population and the fifth
smallest in land area. With an average of 1,075 people per square mile, it is
the most densely populated of all the states. The State's economic base is
diversified, consisting of a variety of manufacturing, construction and service
industries, supplemented by rural areas with selective commercial agriculture.
The extensive facilities of the Port Authority of New York and New Jersey, the
Delaware River Port Authority and the South Jersey Port Corporation across the
Delaware River from Philadelphia augment the air, land and water transportation
complex which has influenced much of the State's economy. The State's central
location in the northeastern corridor, the transportation and port facilities
and proximity to New York City make the State an attractive location for
corporate headquarters and international business offices. According to the
United States Bureau of the Census and the Department of Labor, the population
of New Jersey was 7,170,000 in 1970, 7,365,000 in 1980, 7,730,000 in 1990 and
8,053,000 in 1997. Historically, New Jersey's average per capita income has been
well above the national average, and in 1997 the State ranked second among the
states in per capita personal income ($32,233).
While New Jersey's economy continued to expand during the late 1980s,
the level of growth slowed considerably after 1987. By the beginning of the
national recession in July 1990 (according to the National Bureau of Economic
Research), construction activity had already been declining in New Jersey for
nearly two years, growth had tapered off markedly in the service sectors and the
long-term downward trend of factory employment had accelerated, partly because
of a leveling off of industrial demand nationally. The onset of recession caused
an acceleration of New Jersey's job losses in construction and manufacturing, as
well as an employment downturn in such previously growing sectors as wholesale
trade, retail trade, finance, utilities and trucking and warehousing. The net
effect was a decline in the State's total nonfarm wage and salary employment,
according to the U.S. Dept. of Labor, from a peak of 3.69 million in 1989 to a
low of 3.46 million in 1992. This low has been followed by an employment gain,
reaching 3.72 million at year-end 1997. The New Jersey Dept. of Labor reports
that employment growth continued at 2.1 percent in 1998, to 3.82 million.
The annual average jobless rate has fallen from 8.5 percent in 1992, to
6.2 percent in 1996, to 5.1 percent in 1997, reaching 4.8 percent in 1998. In
November 1998, the State's unemployment level of 184,000 and its unemployment
rate of 4.5 percent were the lowest since the first calendar quarter of 1990.
The New Jersey Department of Labor reports that from January 1998 to
January 1999, on a seasonally adjusted basis, private nonfarm employment climbed
to 3.26 million, an increase of 58,200 or 1.8 percent. Nongovernment services
employment increased to 2.64 million, an increase of 64,400 or 2.5 percent.
Manufacturing declined to 474,600, a reduction of 10,000 or slightly less than
one percent.
The U.S. Department of Labor reports that non-manufacturing employment
has increased 4.1 percent over the ten-year period 1987-97 and comprises 88.5
percent of employment in New Jersey at year-end 1997. Total non-manufacturing
employment, including contract construction, was 3.576 million in 1987, 3.458
million in 1992, and 3.724 million in 1997.
Conditions have slowly improved in the construction industry, where
employment has risen by 21,100 since its low in May 1992. Between 1992 and 1996,
this sector's hiring rebound was driven primarily by increased homebuilding and
nonresidential projects. During 1996 and early 1997, public works projects and
homebuilding became the growth segments while nonresidential construction
lessened but remained positive. Construction employment, after falling from
163,400 in 1987 to 110,200 in 1992, has recovered to a level of 131,300 in 1997.
In the manufacturing sector, employment losses have continued during
the past ten years. Total manufacturing employment in New Jersey was 672,200 in
1987, 530,400 in 1992, and 482,100 in 1997, a ten-year reduction of 28 percent.
Manufacturing employment comprised 11.5 percent of employment in 1997.
Manufacturing durable goods employment is down 38 percent over the ten years,
while non-durable goods employment is down 20 percent.
Total employment in New Jersey has changed from 4.248 million in 1987,
to 3.988 million in 1992, to 4.207 million in 1997. Looking forward, the New
Jersey Department of Labor projects that the State's non-farm employment growth
will occur almost exclusively in the service industries, such as transportation,
communications, utilities, wholesale and retail trade, financial services,
insurance, real estate and public education. The State projects continuing slow
decline in manufactured goods employment.
State Finances
The State operates on a fiscal year beginning July 1 and ending June
30. For example, "Fiscal Year 2000" refers to the State's fiscal year beginning
July 1, 1999 and ending June 30, 2000.
The General Fund is the fund into which all State revenues not
otherwise restricted by statute are deposited and from which appropriations are
made. The largest part of the total financial operations of the State is
accounted for in the General Fund. Revenues received from taxes and unrestricted
by statute, most federal revenue and certain miscellaneous revenue items are
recorded in the General Fund. The appropriations act provides the basic
framework for the operation of the General Fund. Undesignated Fund Balances are
available for appropriation in succeeding fiscal years. There have been positive
Undesignated Fund Balances in the General Fund at the end of each year since the
State Constitution was adopted in 1947. The estimates for Fiscal Year 1999 and
Fiscal Year 2000 reflect the amounts contained in the Governor's Fiscal Year
2000 Budget Message delivered on January 25, 1999.
Actual General Fund balances in Fiscal Years 1997 and 1998 were $280.5
million and $228.3 million, respectively, and for Fiscal Years 1999 and 2000,
they are projected to be be $311.3 million and $112.9 million. Total
Undesignated Fund balances in Fiscal Years 1997 and 1998 were $1,107.9 million
and $1,257.3 million, respectively, and for Fiscal Years 1999 and 2000 they are
projected to be $1,051.5 million and $750.1 million.
In July 1991, S&P lowered the State's general obligation bond rating
from AAA to AA.
The State sold $2.75 billion in taxable bonds in 1997 to balance the
budget and finance an underfunded pension fund. The source of revenue for these
bonds depends on annual State appropriations.
Fiscal Years 1999 and 2000 State Revenue Estimates
The January 1999 estimate of total fiscal year 1999 revenue is $18
billion. The three largest taxes, Gross Income, Sales and Use, and Corporation
Business, account for 70 percent of total revenues.
Sales and Use Tax. The revised estimate forecasts Sales and Use tax
collections for Fiscal Year 1999 as $5.02 billion, a 6.25 percent increase from
the Fiscal Year 1998 revenue. The Fiscal Year 2000 estimate of $5.26 billion, is
a 4.8 percent increase from the Fiscal Year 1999 estimate.
Gross Income Tax. The revised estimate forecasts Gross Income Tax
collections for Fiscal Year 1999 of $6.1 billion, a 5.5 percent increase from
Fiscal Year 1998. The Fiscal Year 2000 estimate of $6.5 billion is a 6.8 percent
increase from the Fiscal Year 1999 estimate. Included in the Fiscal Year 1999
estimate and the Fiscal Year 2000 estimate is the second year of a property tax
deduction, to be phased in over a three-year period, permitting a deduction by
resident taxpayers against gross income tax of a percentage of their property
taxes.
Corporation Business Tax. The revised estimate forecasts Corporation
Business Tax collection for Fiscal Year 1999 as $1.5 billion, a 20 percent
increase from Fiscal Year 1998 revenue. The Fiscal Year 2000 estimate of $1.6
billion, is a 5.3 percent increase from the Fiscal Year 1999 estimate.
General Considerations. Estimated receipts from State taxes and
revenues, including the three principal taxes set forth above, are forecasts
based on the best information available at the time of such forecasts. Changes
in economic activity in the State and the nation, consumption of durable goods,
corporate financial performance and other factors that are difficult to predict
may result in actual collections being more or less than forecasted.
Should revenues be less than the amount anticipated in the budget for a
fiscal year, the Governor may, pursuant to statutory authority, prevent any
expenditure under any appropriation. There are additional means by which the
Governor may ensure that the State is operated efficiently and does not incur a
deficit. No supplemental appropriation may be enacted after adoption of an
appropriations act except where there are sufficient revenues on hand or
anticipated, as certified by the Governor, to meet such appropriation. In the
past when actual revenues have been less than the amount anticipated in the
budget, the Governor has exercised her plenary powers leading to, among other
actions, implementation of a hiring freeze for all State departments and the
discontinuation of programs for which appropriations were budgeted but not yet
spent. Under the State Constitution, no general appropriations law or other law
appropriating money for any State purpose may be enacted if the amount of money
appropriated therein, together with all other prior appropriations made for the
same fiscal year, exceeds the total amount of revenue on hand and anticipated to
be available for such fiscal year, as certified by the Governor.
ADDITIONAL INFORMATION CONCERNING PENNSYLVANIA
General
The Commonwealth of Pennsylvania, the fifth most populous state,
historically has been identified as a heavy industry state, although that
reputation has changed with the decline of the coal, steel and railroad
industries and the resulting diversification of the Commonwealth's industrial
composition. The major new sources of growth are in the service sector,
including trade, medical and health services, educational and financial
institutions. Manufacturing has fallen behind in both the service sector and the
trade sector as a source of employment in Pennsylvania. The Commonwealth is the
headquarters for 58 major corporations. Pennsylvania's average annual
unemployment rate for the year 1990 has generally not been more than one percent
greater or lesser than the nation's annual average unemployment rate. The
seasonally adjusted unemployment rate for Pennsylvania for December, 1998 was
4.4% and for the United States for December, 1998 was 4.3%. The population of
Pennsylvania,12.02 million people in 1997 according to the U.S. Bureau of the
Census, represents an increase from the 1988 estimate of 11.846 million. Per
capita income in Pennsylvania for 1997 of $25,678 was higher than the per capita
income of the United States of $25,298. The Commonwealth's General Fund, which
receives all tax receipts and most other revenues and through which debt service
on all general obligations of the Commonwealth are made, closed fiscal years
ended June 30, 1995, June 30, 1996 and June 30, 1997 with positive fund balances
of $688.304 million, $635.182 million and $1,364.9 million respectively.
Debt
The Commonwealth may incur debt to rehabilitate areas affected by
disaster, debt approved by the electorate, debt for certain capital projects
(for projects such as highways, public improvements, transportation assistance,
flood control, redevelopment assistance, site development and industrial
development) and tax anticipation debt payable in the fiscal year of issuance.
The Commonwealth had outstanding general obligation debt of $4,724.5 million at
June 30, 1998. The Commonwealth is not permitted to fund deficits between fiscal
years with any form of debt. All year-end deficit balances must be funded within
the succeeding fiscal year's budget. At December 1, 1998, all outstanding
general obligation bonds of the Commonwealth were rated AA by S&P and Aa3 by
Moody's (see Appendix H). There can be no assurance that these ratings will
remain in effect in the future. Over the five-year period ending June 30, 2003,
the Commonwealth has projected that it will issue notes and bonds totaling
$2,984.5 million and retire bonded debt in the principal amount of $2,350.9
million.
Certain agencies created by the Commonwealth have statutory
authorization to incur debt for which Commonwealth appropriations to pay debt
service thereon are not required. As of June 30, 1998, the Combined total debt
outstanding for all these agencies was $8,518 million. The debt of these
agencies is supported by assets of, or revenues derived from, the various
projects financed and is not an obligation of the Commonwealth. Some of these
agencies, however, are indirectly dependent on Commonwealth appropriations. The
only obligations of agencies in the Commonwealth that bear a moral obligation of
the Commonwealth are those issued by the Pennsylvania Housing Finance Agency
("PHFA"), a state-created agency which provides housing for lower and moderate
income families, and The Hospitals and Higher Education Facilities Authority of
Philadelphia (the "Hospital Authority"), an agency created by the City of
Philadelphia to acquire and prepare various sites for use as intermediate care
facilities for the mentally retarded.
Local Government Debt
Numerous local government units in Pennsylvania issue general
obligation (i.e., backed by taxing power) debt, including counties, cities,
boroughs, townships and school districts. School district obligations are
supported indirectly by the Commonwealth. The issuance of non-electoral general
obligation debt is limited by constitutional and statutory provisions. Electoral
debt, i.e., that approved by the voters, is unlimited. In addition, local
government units and municipal and other authorities may issue revenue
obligations that are supported by the revenues generated from particular
projects or enterprises. Examples include municipal authorities (frequently
operating water and sewer systems), municipal authorities formed to issue
obligations benefitting hospitals and educational institutions, and industrial
development authorities, whose obligations benefit industrial or commercial
occupants. In some cases, sewer or water revenue obligations are guaranteed by
taxing bodies and have the credit characteristics of general obligations debt.
Litigation
Pennsylvania is currently involved in certain litigation where adverse
decisions could have an adverse impact on its ability to pay debt service. For
example, County of Allegheny v. Commonwealth of Pennsylvania involves litigation
regarding the state constitutionality of the statutory scheme for county funding
of the judicial system and in Pennsylvania Association of Rural and Small
Schools v. Casey, the constitutionality of Pennsylvania's system for funding
local school districts has been challenged. No estimates for the amount of these
claims are available.
Other Factors
The performance of the obligations held by the Fund issued by the
Commonwealth, its agencies, subdivisions and instrumentalities are in part tied
to state-wide, regional and local conditions within the Commonwealth and to the
creditworthiness of certain non-Commonwealth related obligers, depending upon
the Pennsylvania Fund's portfolio mix at any given time. Adverse changes to the
state-wide, regional or local economies or changes in government may adversely
affect the creditworthiness of the Commonwealth, its agencies and
municipalities, and certain other non-government related obligers of
Pennsylvania tax-free obligations (e.g., a university, a hospital or a corporate
obligor). The City of Philadelphia, for example, experienced severe financial
problems which impaired its ability to borrow money and adversely affected the
ratings of its obligations and their marketability. Conversely, some obligations
held by the Fund will be almost exclusively dependent on the creditworthiness of
one underlying obligor, such as a project occupant or provider of credit or
liquidity support.
<PAGE>
EVERGREEN FUNDS
Statement of Additional Information ("SAI")
PART 2
ADDITIONAL INFORMATION ON SECURITIES
AND INVESTMENT PRACTICES
The prospectus describes the Fund's investment objective and the
securities in which it primarily invests. The following describes other
securities the Fund may purchase and investment strategies it may use. Some of
the information below will not apply to the Fund in which you are interested.
See the list under Other Securities and Practices in Part 1 of this SAI to
determine which of the sections below are applicable.
Defensive Investments
The Fund may invest up to 100% of its assets in high quality money
market instruments, such as notes, certificates of deposit, commercial paper,
banker's acceptances, bank deposits or U.S. government securities if, in the
opinion of the 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) Credit System, including the National Bank for Cooperatives, Farm
Credit Banks and Banks for Cooperatives;
(ii) 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 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 S&P or Fitch or below Baa by Moody's, commonly known as "junk
bonds," offer high yields, but also high risk. While investment in junk bonds
provides opportunities to maximize return over time, they are considered
predominantly speculative with respect to the ability of the issuer to meet
principal and interest payments. Investors should be aware of the following
risks:
(1) The lower ratings of junk bonds reflect a greater possibility that
adverse changes in the financial condition of the issuer or in general economic
conditions, or both, or an unanticipated rise in interest rates may impair the
ability of the issuer to make payments of interest and principal, especially if
the issuer is highly leveraged. Such issuer's ability to meet its debt
obligations may also be adversely affected by the issuer's inability to meet
specific forecasts or the unavailability of additional financing. Also, an
economic downturn or an increase in interest rates may increase the potential
for default by the issuers of these securities.
(2) The value of junk bonds may be more susceptible to real or
perceived adverse economic or political events than is the case for higher
quality bonds.
(3) The value of junk bonds, like those of other fixed income
securities, fluctuates in response to changes in interest rates, generally
rising when interest rates decline and falling when interest rates rise. For
example, if interest rates increase after a fixed income security is purchased,
the security, if sold prior to maturity, may return less than its cost. The
prices of junk bonds, however, are generally less sensitive to interest rate
changes than the prices of higher-rated bonds, but are more sensitive to news
about an issuer or the economy which is, or investors perceive as, negative.
(4) The secondary market for junk bonds may be less liquid at certain
times than the secondary market for higher quality bonds, which may adversely
effect (a) the bond's market price, (b) the Fund's ability to sell the bond and
the Fund's ability to obtain accurate market quotations for purposes of valuing
its assets.
For bond ratings descriptions, see "Corporate and Municipal Bond
Ratings" below.
Illiquid and Restricted Securities
The Fund may not invest more than 15% of its net assets in securities
that are illiquid. A security is illiquid when the Fund cannot dispose of it in
the ordinary course of business within seven days at approximately the value at
which the Fund has the investment on its books.
The Fund may invest in "restricted" securities, i.e., securities
subject to restrictions on resale under federal securities laws. Rule 144A under
the Securities Act of 1933 ("Rule 144A") allows certain restricted securities to
trade freely among qualified institutional investors. Since Rule 144A securities
may have limited markets, the Board of Trustees will determine whether such
securities should be considered illiquid for the purpose of determining the
Fund's compliance with the limit on illiquid securities indicated above. In
determine the liquidity of Rule 144A securities, the Trustees will consider: (1)
the frequency of trades and quotes for the security; (2) the number of dealers
willing to purchase or sell the security and the number of other potential
buyers; (3) dealer undertakings to make a market in the security; and (4) the
nature of the security and the nature of the marketplace trades.
Investment in Other Investment Companies
The Fund may purchase the shares of other investment companies to the
extent permitted under the 1940 Act. Currently, the Fund may not (1) own more
than 3% of the outstanding voting stocks of another investment company, (2)
invest more than 5% of its assets in any single investment company, and (3)
invest more than 10% of its assets in investment companies. However, the Fund
may invest all of its investable assets in securities of a single open-end
management investment company with substantially the same fundamental investment
objectives, policies and limitations as the Fund. Investing in other investment
companies may expose a Fund to duplicate expenses and lower it 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 commercial paper discussed in this
statement of additional information (which limits such investments to commercial
paper 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. Coupon 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 coupon 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 coupon 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
services 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.
<PAGE>
PURCHASE, REDEMPTION AND PRICING OF SHARES
You may buy shares of the Fund through the Distributor, broker-dealers
that have entered into special agreements with the Distributor or certain other
financial institutions. The Fund offers up to 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.
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 the Distributor. 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 EIM,
Evergreen Asset Management Corp. ("EAMC"), EIMC, Meridian Investment Company,
First International Advisors, Ltd., or their affiliates. Class Y shares are
offered at net asset value without a front-end or back-end sales charge and do
not bear any Rule 12b-1 distribution expenses.
INSTITUTIONAL SHARES, INSTITUTIONAL SERVICE SHARES AND CHARITABLE 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, Institutional Service and Charitable shares do not charge
a CDSC. If imposed, the Fund deducts the CDSC from the redemption proceeds you
would otherwise receive. The CDSC is a percentage of the lesser of (1) the net
asset value of the shares at the time of redemption or (2) the shareholder's
original net cost for such shares. Upon request for redemption, to keep the CDSC
a shareholder must pay as low as possible, the Fund will first seek to redeem
shares not subject to the CDSC and/or shares held the longest, in that order.
The CDSC on any redemption is, to the extent permitted by the National
Association of Securities Dealers, Inc. ("NASD"), paid to the Distributor or its
predecessor.
<PAGE>
SALES CHARGE WAIVERS AND REDUCTIONS
The following information is not applicable to Institutional,
Institutional Service and Charitable shares.
If you making a large purchase, there are several ways you can combine
multiple purchases of Class A shares in Evergreen Funds and take advantage of
lower sales charges. These are described below.
Combined Purchases
You can reduce your sales charge by combining purchases of Class A
shares of multiple Evergreen Funds. For example, if you invested $75,000 in each
of two different Evergreen Funds, you would pay a sales charge based on a
$150,000 purchase (i.e., 3.75% of the offering price, rather than 4.75%).
Rights of Accumulation
You can reduce your sales charge by adding the value of Class A shares
of Evergreen Funds you already own to the amount of your next Class A
investment. For example, if you hold Class A shares valued at $99,999 and
purchase an additional $5,000, the sales charge for the $5,000 purchase would be
at the next lower sales charge of 3.75%, rather than 4.75%.
Your account, and therefore your rights of accumulation, can be linked
to immediate family members which includes father and mother, brothers and
sisters, and sons and daughters. The same rule applies with respect to
individual retirement plans. Please note, however, that retirement plans
involving employees stand alone and do not pass on rights of accumulation.
Letter of Intent
You can, by completing the "Letter of Intent" section of the
application, purchase Class A shares over a 13-month period and receive the same
sales charge as if you had invested all the money at once. All purchases of
Class A shares of an Evergreen Fund during the period will qualify as Letter of
Intent purchases.
Waiver of Initial Sales Charges
The Fund may sell its shares at net asset value without an initial
sales charge to:
1. purchasers of shares in the amount of $1 million or more;
2. a corporate or certain other qualified retirement plan or a
non-qualified deferred compensation plan or a Title 1
tax-sheltered annuity or TSA plan sponsored by an organization
having 100 or more eligible employees (a "Qualifying Plan") or
a TSA plan sponsored by a public educational entity having
5,000 or more eligible employees (an "Educational TSA Plan");
3. institutional investors, which may include bank trust
departments and registered investment advisors;
4. investment advisors, consultants or financial planners who
place trades for their own accounts or the accounts of their
clients and who charge such clients a management, consulting,
advisory or other fee;
5. clients of investment advisors or financial planners who place
trades for their own accounts if the accounts are linked to a
master account of such investment advisors or financial
planners on the books of the broker-dealer through whom shares
are purchased;
6. institutional clients of broker-dealers, including retirement
and deferred compensation plans and the trusts used to fund
these plans, which place trades through an omnibus account
maintained with the Fund by the broker-dealer;
7. employees of FUNB, its affiliates, the Distributor, any
broker-dealer with whom the Distributor, 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, the Distributor 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 trust company as Trustee if the initial
investment in or any Evergreen fund made pursuant to this
waiver is at least $500,000 and any commission paid at the
time of such purchase is not more than 1% of the amount
invested.
With respect to items 8 and 9 above, 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 other that the Evergreen Select Funds. 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.
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.
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:
P = initial payment of $1,000 T = average total return N = number of
years
ERV = ending redeemable value of the initial $1,000
<PAGE>
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:
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:
<PAGE>
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:
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
The Distributor 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 the Distributor
with respect to each class of the Fund. The Distributor is a subsidiary of The
BISYS Group, Inc.
The Distributor, as agent, has agreed to use its best efforts to find
purchasers for the shares. The Distributor may retain and employ representatives
to promote distribution of the shares and may obtain orders from broker-dealers,
and others, acting as principals, for sales of shares to them. The Underwriting
Agreement provides that the Distributor will bear the expense of preparing,
printing, and distributing advertising and sales literature and prospectuses
used by it.
All subscriptions and sales of shares by the Distributor are at the
public offering price of the shares, which is determined in accordance with the
provisions of the Trust's Declaration of Trust, By-Laws, current prospectuses
and SAI. All orders are subject to acceptance by the 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.
The Distributor has agreed that it will, in all respects, duly conform
with all state and federal laws applicable to the sale of the shares. The
Distributor has also agreed that it will indemnify and hold harmless the Trust
and each person who has been, is, or may be a Trustee or officer of the Trust
against expenses reasonably incurred by any of them in connection with any
claim, action, suit, or proceeding to which any of them may be a party that
arises out of or is alleged to arise out of any misrepresentation or omission to
state a material fact on the part of the Distributor or any other person for
whose acts the Distributor is responsible or is alleged to be responsible,
unless such misrepresentation or omission was made in reliance upon written
information furnished by the Trust.
The Underwriting Agreement provides that it will remain in effect as
long as its terms and continuance are approved annually (I) by a vote of a
majority of the Trust's 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 the Distributor's judgment, it could benefit
the sales of shares, the Distributor may provide to selected broker-dealers
promotional materials and selling aids, including, but not limited to, personal
computers, related software, and data files.
DISTRIBUTION EXPENSES UNDER RULE 12b-1
The Fund bears some of the costs of selling its Class A, Class B, and,
when applicable, Class C shares, or Institutional Service shares, including
certain advertising, marketing and shareholder service expenses, pursuant to
Rule 12b-1 of the 1940 Act. These "12b-1 fees" or "distribution 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, and, when applicable, Class
C shares, or Institutional Service shares, the Fund may incur expenses for
distribution costs 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 0.35%*
-------------------------------- ------------
*Currently limited to 0.25% or less. 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.
<PAGE>
Amounts paid under the Plans are used to compensate the Distributor
pursuant to Distribution Agreements (each an "Agreement," together, the
"Agreements") that the Fund has entered into with respect to its Class A, Class
B and, if applicable, Class C shares. 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%
--------------- -------------
*May be lower. See the expense table in the prospectus of the Fund in which
you are interested.
The Agreements provide that the Distributor 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 the Distributor 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. The Distributor may assign its rights to receive compensation under the
Plans to secure such financings. FUNB or its affiliates may finance payments
made by the Distributor 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 the Distributor under the Agreements may be paid by the
Fund's Distributor to the acquired fund's distributor or its predecessor.
Since the Distributor's compensation under the Agreements is not
directly tied to the expenses incurred by the Distributor, 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 the Distributor.
Distribution expenses incurred by the Distributor in one fiscal year that exceed
the compensation paid to the Distributor for that year may be paid from
distribution fees received from the Fund in subsequent fiscal years.
Distribution fees are accrued daily and paid at least monthly on Class
A, Class B and Class C shares and are charged as class expenses, as accrued. The
distribution fees attributable to the Class B and Class C shares are designed to
permit an investor to purchase such shares through broker-dealers without the
assessment of a front-end sales charge, while at the same time permitting the
Distributor to compensate broker-dealers in connection with the sale of such
shares. In this regard, the purpose and function of the combined contingent
deferred sales charge and distribution services fee on the Class B shares are
the same as those of the front-end sales charge and distribution fee with
respect to the Class A shares in that in each case the sales charge and/or
distribution fee provide for the financing of the distribution of the Fund's
shares.
Under the 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 Securities and Exchange
Commission ("SEC") make payments for distribution services to the Distributor;
the latter may in turn pay part or all of such compensation to brokers or other
persons for their distribution assistance.
Each Plan and 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 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 the Distributor with respect to that class or classes, and
(ii) the Fund would not be obligated to pay the Distributor for any amounts
expended under the Distribution Agreement not previously recovered by the
Distributor from distribution services fees in respect of shares of such class
or classes through deferred sales charges.
All material amendments to any Plan or 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 the
Distributor. To terminate any Distribution Agreement, any party must give the
other parties 60 days' written notice; to terminate a Plan only, the Fund need
give no notice to the Distributor. Any Distribution Agreement will terminate
automatically in the event of its assignment. 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 Internal
Revenue Code of 1986, as amended (the "Code"). (Such qualification does not
involve supervision of management or investment practices or policies by the
Internal Revenue Service.) In order to qualify as a RIC, the Fund must, among
other things, (i) derive at least 90% of its gross income from dividends,
interest, payments with respect to proceeds from securities loans, gains from
the sale or other disposition of securities or foreign currencies and other
income (including gains from options, futures or forward contracts) derived with
respect to its business of investing in such securities; and (ii) diversify its
holdings so that, at the end of each quarter of its taxable year, (a) at least
50% of the market value of the Fund's total assets is represented by cash, U.S.
government securities and other securities limited in respect of any one issuer,
to an amount not greater than 5% of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (b) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than U.S. government securities and securities of other regulated investment
companies). By so qualifying, the Fund is not subject to federal income tax if
it timely distributes its investment company taxable income and any net realized
capital gains. A 4% nondeductible excise tax will be imposed on the Fund to the
extent it does not meet certain distribution requirements by the end of each
calendar year. The Fund anticipates meeting such distribution requirements.
Taxes on Distributions
Unless the Fund is a municipal bond fund, distributions will be taxable
to shareholders whether made in shares or in cash. Shareholders electing to
receive distributions in the form of additional shares will have a cost basis
for federal income tax purposes in each share so received equal to the net asset
value of a share of the Fund on the reinvestment date.
To calculate ordinary income for federal income tax purposes,
shareholders must generally include dividends paid by the Fund from its
investment company taxable income (net taxable investment income plus net
realized short-term capital gains, if any). The Fund will include dividends it
receives from domestic corporations when the Fund calculates its gross
investment income. Unless the Fund is a municipal bond fund or U.S. Treasury
money market fund, it anticipates that all or a portion of the ordinary
dividends which it pays will qualify for the 70% dividends-received deduction
for corporations. The Fund will inform shareholders of the amounts that so
qualify. If the Fund is a municipal bond fund or U.S. Treasury money market
fund, none of its income will consist of corporate dividends; therefore, none of
its distributions will qualify for the 70% dividends-received deduction for
corporations.
From time to time, the Fund will distribute the excess of its net
long-term capital gains over its short-term capital loss to shareholders (i.e.,
capital gain dividends). For federal tax purposes, shareholders must include
such capital gain dividends when calculating their net long-term capital gains.
Capital gain dividends are taxable as net long-term capital gains to a
shareholder, no matter how long the shareholder has held the shares.
Distributions by the Fund reduce its NAV. A distribution that reduces
the Fund's NAV below a shareholder's cost basis is taxable as described above,
although from an investment standpoint, it is a return of capital. In
particular, if a shareholder buys Fund shares just before the Fund makes a
distribution, when the Fund makes the distribution the shareholder will receive
what is in effect a return of capital. Nevertheless, the shareholder may incur
taxes on the distribution. Therefore, shareholders should carefully consider the
tax consequences of buying Fund shares just before a distribution.
All distributions, whether received in shares or cash, must be reported
by each shareholder on his or her federal income tax return. Each shareholder
should consult a tax advisor to determine the state and local tax implications
of Fund distributions.
If more than 50% of the value of the Fund's total assets at the end of
a fiscal year is represented by securities of foreign corporations and the Fund
elects to make foreign tax credits available to its shareholders, a shareholder
will be required to include in his gross income both cash dividends and the
amount the Fund advises him is his pro rata portion of income taxes withheld by
foreign governments from interest and dividends paid on the Fund's investments.
The shareholder may be entitled, however, to take the amount of such foreign
taxes withheld as a credit against his U.S. income tax, or to treat the foreign
tax withheld as an itemized deduction from his gross income, if that should be
to his advantage. In substance, this policy enables the shareholder to benefit
from the same foreign tax credit or deduction that he would have received if he
had been the individual owner of foreign securities and had paid foreign income
tax on the income therefrom. As in the case of individuals receiving income
directly from foreign sources, the credit or deduction is subject to a number of
limitations.
Special Tax Information for Municipal Bond Fund Shareholders
The Fund expects that substantially all of its dividends will be
"exempt interest dividends," which should be treated as excludable from federal
gross income. In order to pay exempt interest dividends, at least 50% of the
value of the Fund's assets must consist of federally tax-exempt obligations at
the close of each quarter. An exempt interest dividend is any dividend or part
thereof (other than a capital gain dividend) paid by the Fund with respect to
its net federally excludable municipal obligation interest and designated as an
exempt interest dividend in a written notice mailed to each shareholder not
later than 60 days after the close of its taxable year. The percentage of the
total dividends paid by the Fund with respect to any taxable year that qualifies
as exempt interest dividends will be the same for all shareholders of the Fund
receiving dividends with respect to such year. If a shareholder receives an
exempt interest dividend with respect to any share and such share has been held
for six months or less, any loss on the sale or exchange of such share will be
disallowed to the extent of the exempt interest dividend amount.
Any shareholder of the Fund who may be a "substantial user" (as defined
by the Code) of a facility financed with an issue of tax-exempt obligations or a
"related person" to such a user should consult his tax advisor concerning his
qualification to receive exempt interest dividends should the Fund hold
obligations financing such facility.
Under regulations to be promulgated, to the extent attributable to
interest paid on certain private activity bonds, the Fund's exempt interest
dividends, while otherwise tax-exempt, will be treated as a tax preference item
for alternative minimum tax purposes. Corporate shareholders should also be
aware that the receipt of exempt interest dividends could subject them to
alternative minimum tax under the provisions of Section 56(g) of the Code
(relating to "adjusted current earnings").
Interest on indebtedness incurred or continued by shareholders to
purchase or carry shares of the Fund will not be deductible for federal income
tax purposes to the extent of the portion of the interest expense relating to
exempt interest dividends. Such portion is determined by multiplying the total
amount of interest paid or accrued on the indebtedness by a fraction, the
numerator of which is the exempt interest dividends received by a shareholder in
his taxable year and the denominator of which is the sum of the exempt interest
dividends and the taxable distributions out of the Fund's investment income and
long-term capital gains received by the shareholder.
Taxes on The Sale or Exchange of Fund Shares
Upon a sale or exchange of Fund shares, a shareholder will realize a
taxable gain or loss depending on his or her basis in the shares. A shareholder
must treat such gains or losses as a capital gain or loss if the shareholder
held the shares as capital assets. Capital gain on assets held for more than 12
months is generally subject to a maximum federal income tax rate of 20% for an
individual. Generally, the Code will not allow a shareholder to realize a loss
on shares he or she has sold or exchanged and replaced within a 61-day period
beginning 30 days before and ending 30 days after he or she sold or exchanged
the shares. The Code will not allow a shareholder to realize a loss on the sale
of Fund shares held by the shareholder for six months or less to the extent the
shareholder received exempt interest dividends on such shares. Moreover, the
Code will treat a shareholder's loss on shares held for six months or less as a
long-term capital loss to the extent the shareholder received distributions of
net capital gains on such shares.
Shareholders who fail to furnish their taxpayer identification numbers
to the Fund and to certify as to its correctness and certain other shareholders
may be subject to a 31% federal income tax backup withholding requirement on
dividends, distributions of capital gains and redemption proceeds paid to them
by the Fund. If the withholding provisions are applicable, any such dividends or
capital gain distributions to these shareholders, whether taken in cash or
reinvested in additional shares, and any redemption proceeds will be reduced by
the amounts required to be withheld. Investors may wish to consult their own tax
advisors about the applicability of the backup withholding provisions.
Other Tax Considerations
The foregoing discussion relates solely to U.S. federal income tax law
as applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates). It does not reflect
the special tax consequences to certain taxpayers (e.g., banks, insurance
companies, tax exempt organizations and foreign persons). Shareholders are
encouraged to consult their own tax advisors regarding specific questions
relating to federal, state and local tax consequences of investing in shares of
the Fund.
<PAGE>
Each shareholder who is not a U.S. person should consult his or her tax advisor
regarding the U.S. and foreign tax consequences of ownership of shares of the
Fund, including the possibility that such a shareholder may be subject to a U.S.
withholding tax at a rate of 30% (or at a lower rate under a tax treaty) on
amounts treated as income from U.S. sources under the Code.
BROKERAGE
Brokerage Commissions
If the Fund invests in equity securities, it expects to buy and sell
them through brokerage transactions for which commissions are payable. Purchases
from underwriters will include the underwriting commission or concession, and
purchases from dealers serving as market makers will include a dealer's mark-up
or reflect a dealer's mark-down. Where transactions are made in the
over-the-counter market, the Fund will deal with primary market makers unless
more favorable prices are otherwise obtainable.
If the Fund invests in fixed income securities, it expects to buy and
sell them directly from the issuer or an underwriter or market maker for the
securities. Generally, the Fund will not pay brokerage commissions for such
purchases. When the Fund buys a security from an underwriter, the purchase price
will usually include an underwriting commission or concession. The purchase
price for securities bought from dealers serving as market makers will similarly
include the dealer's mark up or reflect a dealer's mark down. When the Fund
executes transactions in the over-the-counter market, it will deal with primary
market makers unless more favorable prices are otherwise obtainable.
Selection of Brokers
When buying and selling portfolio securities, the advisor seeks brokers
who can provide the most benefit to the Fund. When selecting a broker, the
investment advisor will primarily look for the best price at the lowest
commission, but in the context of the broker's:
1. ability to provide the best net financial result to the Fund;
2. efficiency in handling trades;
3. ability to trade large blocks of securities;
4. readiness to handle difficult trades;
5. financial strength and stability; and
6. provision of "research services," defined as (a) reports and
analyses concerning issuers, industries, securities and
economic factors and (b) other information useful in making
investment decisions.
The Fund may pay higher brokerage commissions to a broker providing it
with research services, as defined in item 6, above. Pursuant to Section 28(e)
of the Securities Exchange Act of 1934, this practice is permitted if the
commission is reasonable in relation to the brokerage and research services
provided. Research services provided by a broker to the investment advisor do
not replace, but supplement, the services the investment advisor is required to
deliver to the Fund. It is impracticable for the investment advisor to allocate
the cost, value and specific application of such research services among its
clients because research services intended for one client may indirectly benefit
another.
When selecting a broker for portfolio trades, the investment advisor
may also consider the amount of Fund shares a broker has sold, subject to the
other requirements described above.
If the Fund is advised by EAMC, Lieber & Company, an affiliate of EAMC
and a member of the New York and American Stock Exchanges, will to the extent
practicable effect substantially all of the portfolio transactions effected on
those exchanges for the Fund.
Simultaneous Transactions
The investment advisor makes investment decisions for the Fund
independently of decisions made for its other clients. When a security is
suitable for the investment objective of more than one client, it may be prudent
for the investment advisor to engage in a simultaneous transaction, that is, buy
or sell the same security for more than one client. The investment advisor
strives for an equitable result in such transactions by using an allocation
formula. The high volume involved in some simultaneous transactions can result
in greater value to the Fund, but the ideal price or trading volume may not
always be achieved for the Fund.
ORGANIZATION
Description of Shares
The Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest of series and classes of shares. Each share of
the Fund represents an equal proportionate interest with each other share of
that series and/or class. Upon liquidation, shares are entitled to a pro rata
share of the Trust based on the relative net assets of each series and/or class.
Shareholders have no preemptive or conversion rights. Shares are redeemable and
transferable.
Voting Rights
Under the terms of the Declaration of Trust, the Trust is not required
to hold annual meetings. At meetings called for the initial election of Trustees
or to consider other matters, each share is entitled to one vote for each dollar
of "NAV"applicable to such share. Shares generally vote together as one class on
all matters. Classes of shares of the Fund have equal voting rights. No
amendment may be made to the Declaration of Trust that adversely affects any
class of shares without the approval of a majority of the votes applicable to
the shares of that class. Shares have non-cumulative voting rights, which means
that the holders of more than 50% of the votes applicable to shares voting for
the election of Trustees can elect 100% of the Trustees to be elected at a
meeting and, in such event, the holders of the remaining shares voting will not
be able to elect any Trustees.
After the initial meeting as described above, no further meetings of
shareholders for the purpose of electing Trustees will be held, unless required
by law (for such reasons as electing or removing Trustees, changing fundamental
policies, and approving advisory agreements or 12b-1 plans), unless and until
such time as less than a majority of the Trustees holding office have been
elected by shareholders, at which time, the Trustees then in office will call a
shareholders' meeting for the election of Trustees.
Limitation of Trustees' Liability
The Declaration of Trust provides that a Trustee will not be liable for
errors of judgment or mistakes of fact or law, but nothing in the Declaration of
Trust protects a Trustee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his duties involved in the conduct of his office.
Banking Laws
The Glass-Steagall Act and other banking laws and regulations presently
prohibit member banks of the Federal Reserve System ("Member Banks") or their
non-bank affiliates from sponsoring, organizing, controlling, or distributing
the shares of registered, open-end investment companies such as the Trust. Such
laws and regulations also prohibit banks from issuing, underwriting or
distributing securities in general. However, under the Glass-Steagall Act and
such other laws and regulations, a Member Bank or an affiliate thereof may act
as investment advisor, transfer agent or custodian to a registered open-end
investment company and may also act as agent in connection with the purchase of
shares of such an investment company upon the order of its customer, FUNB and
its affiliates are subject to, and in compliance with, the aforementioned laws
and regulations.
Changes to applicable laws and regulations or future judicial or
administrative decisions could result in FUNB and its affiliates being prevented
from continuing to perform the services required under the investment advisory
contract or from acting as agent in connection with the purchase of shares of
the Fund by its customers. If FUNB and its affiliates were prevented from
continuing to provide for services called for under the investment advisory
agreement, it is expected that the Trustees would identify, and call upon the
Fund's shareholders to approve a new investment advisor. If this were to occur,
it is not anticipated that the shareholders of the Fund would suffer any adverse
financial consequences.
INVESTMENT ADVISORY AGREEMENT
On behalf of the Fund, the Trust has entered into an investment
advisory agreement with the Fund's investment advisor (the "Advisory
Agreement"). Under the Advisory Agreement, and subject to the supervision of the
Trust's Board of Trustees, the investment advisor furnishes to the Fund (unless
the Fund is Masters ) 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 Masters, 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 (Masters only)
Masters' 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. ("MFS"),
OppenheimerFunds, Inc. ("Oppenheimer") and Putnam Investment Management, Inc.
("Putnam").
The Trust and FUNB have received an order from, the SEC that will
permit the investment advisor to employ a "manager of managers" strategy in
connection with its management of the Fund. The exemptive order permits the
investment advisor, subject to certain conditions, and without shareholder
approval, to: (a) select new Managers who are unaffiliated with the investment
advisor with the approval of the Trust's Board of Trustees; (b) change the
material terms of the Portfolio Management Agreements with the Managers; and (c)
continue the employment of a Manager after an event which would otherwise cause
the automatic termination of a Portfolio Management Agreement. Shareholders
would be notified of any Manager changes. Shareholders have the right to
terminate arrangements with a Manager by vote of a majority of the outstanding
shares of the Fund. The order also permits the Fund to disclose the Managers'
fees only in the aggregate.
<PAGE>
Transactions Among Advisory Affiliates
The Trust has adopted procedures pursuant to Rule 17a-7 of the 1940 Act
("Rule 17a-7 Procedures"). The Rule 17a-7 Procedures permit the Fund to buy or
sell securities from another investment company for which a subsidiary of First
Union Corporation is an investment advisor. The Rule 17a-7 Procedures also allow
the Fund to buy or sell securities from other advisory clients for whom a
subsidiary of First Union Corporation is an investment advisor. The Fund may
engage in such transaction if it is equitable to each participant and consistent
with each participant's investment objective.
MANAGEMENT OF THE TRUST
The Trust is supervised by a Board of Trustees that is responsible for
representing the interest of the shareholders. The Trustees meet periodically
throughout the year to oversee the Fund's activities, reviewing, among other
things, the Fund's performance and its contractual arrangements with various
service providers. Each Trustee is paid a fee for his or her services.
See "Expenses-Trustee Compensation" in Part 1 of this SAI.
The Trust has an Executive Committee which consists of the Chairman of
the Board, James Howell, the Vice Chairman of the Board, Michael Scofield, and
Russell Salton, each of whom is an Independent Trustee. The Executive Committee
recommends Trustees to fill vacancies, prepares the agenda for Board meetings
and acts on routine matters between scheduled Board meetings.
Set forth below are the Trustees and officers of the Trust and their
principal occupations and affiliations over the last five years. Unless
otherwise indicated, the address for each Trustee and officer is 200 Berkeley
Street, Boston, Massachusetts 02116. Each Trustee is also a Trustee of each of
the other Trusts in the Evergreen Fund complex.
<TABLE>
<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 and Centrum Properties, Inc.
Charles A. Austin III Trustee Investment Counselor to Appleton Partners, Inc.; former
(DOB: 10/23/34) Director, Executive Vice President and Treasurer, State
Street Research & Management Company (investment advice);
Director, The Andover Companies (Insurance); and Trustee,
Arthritis Foundation of New England
K. Dun Gifford Trustee Trustee, Treasurer and Chairman of the Finance Committee,
(DOB: 10/12/38) Cambridge College; Chairman Emeritus and Director, American
Institute of Food and Wine; Chairman and President,
Oldways Preservation and Exchange Trust (education);
former Chairman of the Board, Director, and Executive
Vice President, The London Harness Company; former
Managing Partner, Roscommon Capital Corp.; former Chief
Executive Officer, Gifford Gifts of Fine Foods; former
Chairman, Gifford, Drescher & Associates (environmental
consulting)
James S. Howell Chairman of the Board Former Chairman of the Distribution Foundation for the
(DOB: 8/13/24) of Trustees Carolinas; and former Vice President of Lance Inc. (food
manufacturing).
Leroy Keith, Jr. Trustee Chairman of the Board and Chief Executive Officer, Carson
(DOB: 2/14/39) Products Company; Director of Phoenix Total Return Fund and
Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix
Multi-Portfolio
Fund, and The Phoenix Big Edge Series Fund; and former
President, Morehouse College.
Gerald M. McDonnell Trustee Sales Representative with Nucor-Yamoto, Inc. (steel
(DOB: 7/14/39) producer).
Thomas L. McVerry Trustee Former Vice President and Director of Rexham Corporation
(DOB: 8/2/39) (manufacturing); and former Director of Carolina
Cooperative Federal Credit Union.
William Walt Pettit Trustee Partner in the law firm of William Walt Pettit, P.A.
(DOB: 8/26/55)
David M. Richardson Trustee Vice Chair and former Executive Vice President, DHR
(DOB: 9/14/41) International, Inc. (executive recruitment); former Senior
Vice President, Boyden International Inc. (executive
recruitment); and Director, Commerce and Industry
Association of New Jersey, 411 International, Inc., and J&M
Cumming Paper Co.
Russell A. Salton, III MD Trustee Medical Director, U.S. Health Care/Aetna Health Services;
(DOB: 6/2/47) former Managed Health Care Consultant; and former
President, Primary Physician Care.
Michael S. Scofield Vice Chairman of the Attorney, Law Offices of Michael S. Scofield.
(DOB: 2/20/43) Board of Trustees
Richard J. Shima Trustee Former Chairman, Environmental Warranty, Inc. (insurance
(DOB: 8/11/39) agency); Executive Consultant, Drake Beam Morin, Inc.
(executive outplacement); Director of Connecticut
Natural Gas Corporation Hartford Hospital, Old State
House Association, Middlesex Mutual Assurance Company,
and Enhance Financial Services, Inc.; Chairman, Board
of Trustees, Hartford Graduate Center; Trustee, Greater
Hartford YMCA; former Director, Vice Chairman and Chief
Investment Officer, The Travelers Corporation; former
Trustee, Kingswood-Oxford School; and former Managing
Director and Consultant, Russell Miller, Inc.
William J. Tomko* President and Treasurer Executive Vice President/Operations, BISYS Fund Services.
(DOB:8/30/58)
Nimish S. Bhatt* Vice President and Vice President, Tax, BISYS Fund Services; former Assistant
(DOB: 6/6/63) Assistant Treasurer Vice President, EAMC/First Union Bank; former Senior Tax
Consulting/Acting Manager, Investment Companies Group,
PricewaterhouseCoopers LLP, New York.
Bryan Haft* Vice President Team Leader, Fund Administration, BISYS Fund Services.
(DOB: 1/23/65)
Senior Vice President and Assistant General Counsel, First
Michael H. Koonce Secretary Union Corporation; former Senior Vice President and General
(DOB: 4/20/60) Counsel, Colonial Management Associates, Inc.
*Address: BISYS, 3435 Stelzer Road, Columbus, Ohio 43219-8001
</TABLE>
<PAGE>
CORPORATE AND MUNICIPAL BOND RATINGS
The Fund relies on ratings provided by independent rating services to
help determine the credit quality of bonds and other obligations the Fund
intends to purchase or already owns. A rating is an opinion of an issuer's
ability to pay interest and/or principal when due. Ratings reflect an issuer's
overall financial strength and whether it can meet its financial commitments
under various economic conditions.
If a security held by the Fund loses its rating or has its rating
reduced after the Fund has purchased it, the Fund is not required to sell or
otherwise dispose of the security, but may consider doing so.
The principal rating services, commonly used by the Fund and investors
generally, are S&P and Moody's. The Fund may also rely on ratings provided by
Fitch. Rating systems are similar among the different services. As an example,
the chart below compares basic ratings for long-term bonds. The "Credit Quality"
terms in the chart are for quick reference only. Following the chart are the
specific definitions each service provides for its ratings.
<TABLE>
<CAPTION>
COMPARISON OF LONG-TERM BOND RATINGS
<S> <C> <C> <C>
----------------- ---------------- --------------- =================================================
MOODY'S S&P FITCH Credit Quality
----------------- ---------------- --------------- =================================================
----------------- ---------------- --------------- =================================================
Aaa AAA AAA Excellent Quality (lowest risk)
----------------- ---------------- --------------- =================================================
----------------- ---------------- --------------- =================================================
Aa AA AA Almost Excellent Quality (very low risk)
----------------- ---------------- --------------- =================================================
----------------- ---------------- --------------- =================================================
A A A Good Quality (low risk)
----------------- ---------------- --------------- =================================================
----------------- ---------------- --------------- =================================================
Baa BBB BBB Satisfactory Quality (some risk)
----------------- ---------------- --------------- =================================================
----------------- ---------------- --------------- =================================================
Ba BB BB Questionable Quality (definite risk)
----------------- ---------------- --------------- =================================================
----------------- ---------------- --------------- =================================================
B B B Low Quality (high risk)
----------------- ---------------- --------------- =================================================
----------------- ---------------- --------------- =================================================
Caa/Ca/C CCC/CC/C CCC/CC/C In or Near Default
----------------- ---------------- --------------- =================================================
----------------- ---------------- --------------- =================================================
D DDD/DD/D In Default
----------------- ---------------- --------------- =================================================
</TABLE>
CORPORATE BONDS
LONG-TERM RATINGS
Moody's Corporate Long-Term Bond Ratings
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa Bonds which are rated Baa are considered as medium-grade obligations, (i.e.
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa to Caa. The modifier 1 indicates that the company ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range raking and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
S&P Corporate Long-Term Bond Ratings
AAA An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA An obligation rated AA differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
BB, B, CCC, CC and C: As described below, obligations rated BB, B, CCC, CC, and
C are regarded as having significant speculative characteristics. BB indicates
the least degree of speculation and C the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
BB An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions, which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B An obligation rated B is more vulnerable to nonpayment than obligations rated
BB, but the obligor currently has the capacity to meet its financial commitment
on the obligation. Adverse business, financial, or economic conditions will
likely impair the obligor's capacity or willingness to meet it financial
commitment on the obligation.
CCC An obligation rated CCC is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C The C rating may be used to cover a situation where a bankruptcy petition has
been filed or similar action has been taken, but payments on this obligation are
being continued.
D The D rating, unlike other ratings, is not prospective; rather, it is used
only where a default has actually occurred--and not where a default is only
expected. S&P changes ratings to D either:
- - On the day an interest and/or principal payment is due and is not paid.
An exception is made if there is a grace period and S&P believes that a
payment will be made, in which case the rating can be maintained; or
- - Upon voluntary bankruptcy filing or similar action. An exception is
made if S&P expects that debt service payments will continue to be made
on a specific issue. In the absence of a payment default or bankruptcy
filing, a technical default (i.e., covenant violation) is not
sufficient for assigning a D rating.
Plus (+) or minus (-) The ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
Fitch Corporate Long-Term Bond Ratings
Investment Grade
AAA Highest credit quality. AAA ratings denote the lowest expectation of credit
risk. They are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA Very high credit quality. AA ratings denote a very low expectation of credit
risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A High credit quality. A ratings denote a lower expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB Speculative. BB ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met.
Securities rated in this category are not investment grade.
B Highly speculative. B ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
CCC, CC, C High default risk. Default is a real possibility. Capacity for
meeting financial commitment is solely reliant upon sustained, favorable
business or economic developments. A CC rating indicates that default of some
kind appears probable. C ratings signal imminent default.
DDD, DD, D Default. Securities are not meeting current obligations and are
extremely speculative. DDD designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, DD indicates expected recovery of 50%-90% of such outstandings, and D
the lowest recovery potential, i.e. below 50%.
+ or - may be appended to a rating to denote relative status within major rating
categories. Such suffixes are not added to the AAA rating category or to
categories below CCC.
CORPORATE SHORT-TERM RATINGS
Moody's Corporate Short-Term Issuer Ratings
Prime-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics.
- -- Leading market positions in well-established industries.
- -- High rates of return on funds employed.
- -- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- -- Broad margins in earnings coverage of fixed financial changes and high
internal cash generation.
- -- Well-established access to a range of financial markets and assured sources
of alternate liquidity.
Prime-2 Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
Not Prime Issuers rated Not Prime do not fall within any of the Prime rating
categories.
S&P Corporate Short-Term Obligation Ratings
A-1 A short-term obligation rated A-1 is rated in the highest category by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
strong. Within this category certain obligations are designated with a plus sign
(+). This indicates that the obligor's capacity to meet its financial commitment
on these obligations is extremely strong.
A-2 A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated A-3 exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
B A short-term obligation rated B is regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
C A short-term obligation rated C is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D The D rating, unlike other ratings, is not prospective; rather, it is used
only where a default has actually occurred--and not where a default is only
expected. S&P changes ratings to D either:
- - On the day an interest and/or principal payment is due and is not paid.
An exception is made if there is a grace period and S&P believes that a
payment will be made, in which case the rating can be maintained; or
- - Upon voluntary bankruptcy filing or similar action, An exception is
made if S&P expects that debt service payments will continue to be made
on a specific issue. In the absence of a payment default or bankruptcy
filing, a technical default (i.e., covenant violation) is not
sufficient for assigning a D rating.
Fitch Corporate Short-Term Obligation Ratings
F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; may have an added "+" to denote any exceptionally
strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial commitments
is adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
B Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D Default. Denotes actual or imminent payment default.
MUNICIPAL BONDS
LONG-TERM RATINGS
Moody's Municipal Long-Term Bond Ratings
Aaa Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risk appear somewhat larger than the Aaa securities.
A Bonds rated A possess many favorable investment attributes and are to be
considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa Bonds rated Baa are considered as medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba Bonds rated Ba are judged to have speculative elements; their future cannot
be considered as well-assured. Often the protection of interest and principal
payments may be very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
B Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa Bonds rated Caa are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest.
Ca Bonds rated Ca represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
C Bonds rated C are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range raking and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
S&P Municipal Long-Term Bond Ratings
AAA An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA An obligation rated AA differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
BB, B, CCC, CC and C: As described below, obligations rated BB, B, CCC,
CC, and C are regarded as having significant speculative characteristics. BB
indicates the least degree of speculation and C the highest. While such
obligations will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major exposures to adverse
conditions.
BB An obligation rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions, which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B An obligation rated B is more vulnerable to nonpayment than obligations rated
BB, but the obligor currently has the capacity to meet its financial commitment
on the obligation. Adverse business, financial, or economic conditions will
likely impair the obligor's capacity or willingness to meet it financial
commitment on the obligation.
<PAGE>
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 of 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 the
Distributor, and no person is entitled to rely on any information or
representation not contained therein.
The Fund's prospectus and SAI omit certain information contained in the
Trust's registration statement, which you may obtain for a fee from the SEC in
Washington, D.C.
<PAGE>
EVERGREEN MUNICIPAL TRUST
PART C
OTHER INFORMATION
Item 23. Exhibits
Unless otherwise noted, the exhibits listed below are contained herein.
<TABLE>
<CAPTION>
Exhibit
Number Description Location
- ------- ----------- -----------
<S> <C> <C>
(a) Declaration of Trust Incorporated by reference to
Registrant's Pre-Effective Amendment No. 1
Filed on October 8, 1997
(b) By-laws Incorporated by reference to
Registrant's Pre-Effective Amendment No. 1
Filed on October 8, 1997
(c) Provisions of instruments defining the rights Incorporated by reference to
of holders of the securities being registered Registrant's Post-Effective Amendment No. 1
are contained in the Declaration of Trust Filed on July 31, 1998
Articles II, III.(6)(c), VI.(3), IV.(8), V, VI,
VII, VIII and By-laws Articles II, III and VIII
included as part of Exhibits 1 and 2, above.
(d)(1) Investment Advisory and Management Incorporated by reference to
Agreement between the Registrant and First Registrant's Post-Effective Amendment No. 7
Union National Bank Filed on July 31, 1998
(d)(2) Investment Advisory and Management Incorporated by reference to
Agreement between the Registrant and Evergreen Registrant's Post-Effective Amendment No. 7
Asset Management Corp. Filed on July 31, 1998
(d)(3) Investment Advisory and Management Incorporated by reference to
Agreement between the Registrant and Evergreen Registrant's Post-Effective Amendment No. 7
Investment Management Company Filed on July 31, 1998.
(formerly Keystone Investment Management Company)
(e)(1) Class A and Class C Principal Underwriting Incorporated by reference to
Agreement between the Registrant and Evergreen Registrant's Post-Effecive Amendment No. 7
Distributor, Inc. Filed on July 31, 1998.
(e)(2) Class B Principal Underwriting Agreement Incorporated by reference to
between the Registrant and Evergreen Distributor Registrant's Post-Effective Amendment No. 7
Inc. (B-1) Filed on July 31, 1998.
(e)(3) Class B Principal Underwriting Agreement Incorporated by reference to
between the Registrant and Evergreen Distributor, Registrant's Post-Effective Amendment No. 7
Inc. (B-2) Filed on July 31, 1998.
(e)(4) Class B Principal Underwriting Agreement Incorporated by reference to
between the Registrant and Evergreen Distributor, Registrant's Post-Effective Amendment No. 7
Inc. (Evergreen/KCF) Filed on July 31, 1998.
(e)(5) Class Y Principal Underwriting Agreement Incorporated by reference to
between the Registrant and Evergreen Distributor, Registrant's Post-Effective Amendment No. 7
Inc. Filed on July 31, 1998.
(e)(6) Specimen copy of Dealer Agreement used by Incorporated by reference to
Evergreen Distributor, Inc. Registrant's Pre-Effective Amendment No. 1
Filed November 12, 1997
(f) Form of Deferred Compensation Plan Incorporated by reference to
Registrant's Pre-Effective Amendment No. 2
Filed on November 10, 1997
(g) Custodian Agreement between the Registrant Incorporated by reference to
and State Street Bank and Trust Company Registrant's Post-Effective Amendment No. 7
Filed on July 31, 1998
(h)(1) Administration Agreement between Evergreen Incorporated by reference to
Investment Services, Inc. and the Registrant Registrant's Post-Effective Amendment No. 7
Filed on July 31, 1998.
(h)(2) Transfer Agent Agreement between the Incorporated by reference to
Registrant and Evergreen Service Company Registrant's Post-Effective Amendment No. 7
Filed on July 31, 1998.
(i) Opinion and Consent of Sullivan & Worcester LLP Incorporated by reference to
Registrant's Post-Effective Amendment No. 2
Filed on December 12, 1997
(j) Not applicable
(k) Not applicable
(l) Not applicable
(m)(1) 12b-1 Distribution Plan for Class A Incorporated by reference to
Registrant's Post-Effective Amendment No. 7
Filed on July 31, 1998.
(m)(2) 12b-1 Distribution Plan for Class B Incorporated by reference to
Registrant's Post-Effective Amendment No. 7
Filed on July 31, 1998
(m)(3) 12b-1 Distribution Plan for Class B Incorporated by reference to
(KAF B-1) Registrant's Post-Effective Amendment No. 7
Filed on July 31, 1998.
(m)(4) 12b-1 Distribution Plan for Class B Incorporated by reference to
(KAF B-2) Registrant's Post-Effective Amendment No. 7
Filed on July 31, 1998
(m)(5) 12b-1 Distribution Plan for Class B Incorporated by reference to
(KCF/Evergreen) Registrant's Post-Effective Amendment No. 7
Filed on July 31, 1998.
(m)(6) 12b-1 Distribution Plan for Class C Incorporated by reference to
Registrant's Post-Effective Amendment No. 7
Filed on July 31, 1998
(n) Not applicable
(o) Multiple Class Plan Incorporated by reference to
Registrant's Post-Effective Amendment No. 10
filed on April 1, 1999.
</TABLE>
Item 24. Persons Controlled by or Under Common Control with Registrant.
None
Item 25. Indemnification.
Registrant has obtained from a major insurance carrier a trustees and
officers liability policy covering certain types of errors and omissions.
Provisions for the indemnification of the Registrant's Trustees and
officers are also contained the Registrant's Declaration of Trust.
Provisions for the indemnification of Registrant's Investment Advisors are
contained in their respective Investment Advisory and Management Agreements.
Provisions for the indemnification of Evergreen Distributor, Inc., the
Registrant's principal underwriter, are contained in each Principal Underwriting
Agreement between Evergreen Distributor, Inc. and the Registrant.
Provisions for the indemnification of Evergreen Service Company, the
Registrant's transfer agent, are contained in the Master Transfer and
Recordkeeping Agreement between Evergreen Service Company and the Registrant.
Provisions for the indemnification of State Street Bank and Trust Company,
the Registrant's custodian, are contained in the Custodian Agreement between
State Street Bank and Trust Company and the Registrant.
Item 26. Business or Other Connections of Investment Adviser.
The Directors and principal executive officers of First Union National Bank
are:
Edward E. Crutchfield, Jr. Chairman and Chief Executive Officer,
First Union Corporation; Chief Executive
Officer and Chairman, First Union National
Bank
John R. Georgius President, First Union Corporation; Vice
Chairman and President, First Union National
Bank
Marion A. Cowell, Jr. Executive Vice President, Secretary &
General Counsel, First Union Corporation;
Secretary and Executive Vice President,
First Union National Bank
Robert T. Atwood Executive Vice President and Chief Financial
Officer, First Union Corporation; Chief
Financial Officer and Executive Vice
President
All of the above persons are located at the following address: First Union
National Bank, One First Union Center, Charlotte, NC 28288.
The information required by this item with respect to Evergreen Asset
Management Corp. is incorporated by reference to the Form ADV (File No.
801-46522) of Evergreen Asset Management Corp.
The information required by this item with respect to Evergreen Investment
Management Company (formerly Keystone Investment Management Company) is
incorporated by reference to the Form ADV (File No. 801-8327) of Evergreen
Investment Management Company.
Item 27. Principal Underwriters.
Evergreen Distributor, Inc. acts as principal underwriter for each
registered investment company or series thereof that is a part of the Evergreen
"fund complex" as such term is defined in Item 22(a) of Schedule 14A under the
Securities Exchange Act of 1934.
The Directors and principal executive officers of Evergreen Distributor,
Inc. are:
Lynn C. Mangum Director, Chairman and Chief Executive
Officer
Dennis Sheehan Director, Chief Financial Officer
J. David Huber President
Kevin J. Dell Vice President, General Counsel and Secretary
All of the above persons are located at the following address: Evergreen
Distributor, Inc., 90 Park Avenue, New York, New York 10016.
Evergreen Distributor, Inc. acts as principal underwriter for each
registered investment company or series thereof that is a part of the Evergreen
"fund complex" as such term is defined in Item 22(a) of Schedule 14A
under the Securities Exchange Act of 1934.
Item 28. Location of Accounts and Records.
All accounts and records required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and the Rules 31a-1 through 31a-3 promulgated
thereunder are maintained at one of the following locations:
Evergreen Investment Services, Inc., Evergreen Service Company and
Evergreen Investment Management Company, all located at 200 Berkeley
Street, Boston, Massachusetts 02110
First Union National Bank, One First Union Center, 301 S. College Street,
Charlotte, North Carolina 28288
Evergreen Asset Management Corp., 2500 Westchester Avenue, Purchase,
New York 10577
Iron Mountain, 3431 Sharp Slot Road, Swansea, Massachusetts 02777
State Street Bank and Trust Company, 2 Heritage Drive, North Quincy,
Massachusetts 02171
Item 29. Management Services.
Not Applicable
Item 30. Undertakings.
The Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual
report to shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940 the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Columbus, and State of Ohio, on the 28th day of
May, 1999.
EVERGREEN MUNICIPAL TRUST
By: /s/ William J. Tomko
-----------------------------
Name: William J. Tomko
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 28th day of May, 1999.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/William J. Tomko /s/ Laurence B. Ashkin /s/ Charles A. Austin, III
- ------------------------- ----------------------------- --------------------------------
William J. Tomko Laurence B. Ashkin* Charles A. Austin III*
President and Treasurer (Principal Trustee Trustee
Financial and Accounting Officer)
/s/ K. Dun Gifford /s/ James S. Howell /s/ William Walt Pettit
- ---------------------------- ---------------------------- --------------------------------
K. Dun Gifford* James S. Howell* William Walt Pettit*
Trustee Chairman of the Board Trustee
and Trustee
/s/Gerald M. McDonnell /s/ Thomas L. McVerry /s/ Michael S. Scofield
- ------------------------------- ----------------------------- --------------------------------
Gerald M. McDonell* Thomas L. McVerry* Michael S. Scofield*
Trustee Trustee Vice Chairman of the Board
and Trustee
/s/ David M. Richardson /s/ Russell A. Salton, III MD /s/ Leroy Keith, Jr.
- ------------------------------ ------------------------------- --------------------------------
David M. Richardson* Russell A. Salton, III MD* Leroy Keith, Jr.
Trustee Trustee Trustee
/s/ Richard J. Shima
- ------------------------------
Richard J. Shima*
Trustee
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*By: /s/ Catherine Foley
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Catherine Foley
Attorney-in-Fact
*Catherine Foley, by signing her name hereto, does hereby sign this
document on behalf of each of the above-named individuals pursuant to powers of
attorney duly executed by such persons.
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INDEX TO EXHIBITS
Exhibit Number Exhibit
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