EVERGREEN MUNICIPAL TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 633-2700
SOUTHERN STATE MUNICIPAL BOND FUNDS
STATEMENT OF ADDITIONAL INFORMATION
January 1, 1999, as amended January 7, 1999
Evergreen Florida High Income Municipal Bond Fund ("Florida High Income Fund")
Evergreen Florida Municipal Bond Fund ("Florida Fund")
Evergreen Georgia Municipal Bond Fund ("Georgia Fund")
Evergreen Maryland Municipal Bond Fund ("Maryland Fund")
Evergreen North Carolina Municipal Bond Fund ("North Carolina Fund")
Evergreen South Carolina Municipal Bond Fund ("South Carolina Fund")
Evergreen Virginia Municipal Bond Fund ("Virginia Fund")
(Each a "Fund"; together, the "Funds")
Each Fund is a series of 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 January 1, 1999 for the Fund
in which you are interested. The Funds are offered through two separate
prospectuses: one offering Class A and Class B shares of each Fund and Class C
shares of the Florida High Income Fund and the Florida Fund, and one offering
Class Y shares of each Fund. You may obtain either of these prospectuses without
charge by calling (800) 343-2898.
Certain information may be incorporated by reference to the Funds'
Annual Report dated August 31, 1998. You may obtain a copy of the Annual Report
without charge by calling (800) 343-2898.
<PAGE>
TABLE OF CONTENTS
PART 1
FUND HISTORY.................................................................1-2
INVESTMENT POLICIES..........................................................1-2
OTHER SECURITIES AND PRACTICES...............................................1-3
PRINCIPAL HOLDERS OF FUND SHARES.............................................1-3
EXPENSES.....................................................................1-9
PERFORMANCE.................................................................1-13
SERVICE PROVIDERS...........................................................1-14
FINANCIAL STATEMENTS........................................................1-16
COMPUTATION OF CLASS A OFFERING PRICE.......................................1-16
ADDITIONAL INFORMATION CONCERNING FLORIDA...................................1-16
ADDITIONAL INFORMATION CONCERNING GEORGIA...................................1-22
ADDITIONAL INFORMATION CONCERNING MARYLAND..................................1-23
ADDITIONAL INFORMATION CONCERNING NORTH CAROLINA............................1-26
ADDITIONAL INFORMATION CONCERNING SOUTH CAROLINA............................1-27
ADDITIONAL INFORMATION CONCERNING VIRGINIA..................................1-28
PART 2
ADDITIONAL INFORMATION ON SECURITIES AND INVESTMENT PRACTICES................2-1
PURCHASE, REDEMPTION AND PRICING OF SHARES..................................2-12
SALES CHARGE WAIVERS AND REDUCTIONS.........................................2-14
PERFORMANCE CALCULATIONS....................................................2-17
PRINCIPAL UNDERWRITER.......................................................2-17
DISTRIBUTION EXPENSES UNDER RULE 12b-1......................................2-18
TAX INFORMATION.............................................................2-21
BROKERAGE...................................................................2-22
ORGANIZATION................................................................2-23
INVESTMENT ADVISORY AGREEMENT...............................................2-24
MANAGEMENT OF THE TRUST.....................................................2-25
CORPORATE AND MUNICIPAL BOND RATINGS........................................2-27
ADDITIONAL INFORMATION......................................................2-36
<PAGE>
PART 1
FUND 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
FUNDAMENTAL INVESTMENT RESTRICTIONS
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. Diversification (Florida High Income Fund)
Florida High Income Fund may not make any investment that is
inconsistent with its classification as a diversified investment company under
the 1940 Act.
Further Explanation of Diversification Policy:
To remain classified as a diversified investment company under the 1940
Act, Florida High Income Fund must conform with the following: With respect to
75% of its total assets, a diversified investment company may not invest more
than 5% of its total assets, determined at market or other fair value at the
time of purchase, in the securities of any one issuer, or invest in more than
10% of the outstanding voting securities of any one issuer, determined at the
time of purchase. These limitations do not apply to investments in securities
issued or guaranteed by the United States ("U.S.") government or its agencies or
instrumentalities.
1a. Non-Diversification (Excluding Florida High Income Fund)
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) or any one
issuer and must invest 50% of its total assets under the 5% of its assets and
10% of outstanding voting securities test 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).
<PAGE>
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. Each Fund may borrow only as a temporary measure for
extraordinary or emergency purposes such as the redemption of Fund shares. Each
Fund may purchase additional securities as long as outstanding 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.
<PAGE>
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.
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
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 September 30, 1998, 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 September 30, 1998.
Florida High Income Fund - Class A
MLPF&S For the Sole Benefit of Its Customers 9.032%
Attn: Fund Administration
4800 Deer Lake Drive E. 2nd Floor
Jacksonville, FL 32246-6484
Florida High Income Fund - Class B
MLPF&S For the Sole Benefit of its Customers 10.312%
Attn: Fund Administration
4800 Deer Lake Drive E. 2nd Floor
Jacksonville, FL 32246-6484
Florida High Income Fund - Class C
First Union Brokerage Services 28.316%
Leon Lerner
3501 Keyser Avenue
Hollywood, FL 33021
First Union Brokerage Services 9.415%
William A. Floyd
3613 Providence Plantation Lane
Charlotte, NC 28270-3771
Robert W. Baird & Co. Inc. 9.241%
777 East Wisconsin Avenue
Milwaukee, WI 53202-5391
First Union Brokerage Services 7.825%
Claire O?Donnell
4820 Glenbrook Road
Washington, DC 20016
MLPF&S For the Sole Benefit of Its Customers 7.101%
Attn: Fund Administration
4800 Deer Lake Drive E. 2nd Floor
Jacksonville, FL 32246-6484
Florida High Income Fund - Class Y
First Union National Bank 91.275%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28202-1910
Florida Municipal Bond Fund - Class A
MLPF&S For the Sole Benefit of Its Customers 5.436%
Attn: Fund Administration
4800 Deer Lake Drive E. 2nd Floor
Jacksonville, FL 32246-6484
Florida Municipal Bond Fund - Class B
MLPF&S For the Sole Benefit of Its Customers 10.416%
Attn: Fund Administration
4800 Deer Lake Drive E. 2nd Floor
Jacksonville, FL 32246-6484
<PAGE>
Florida Municipal Bond Fund - Class C
MLPF&S for the Sole Benefit of Its Customers 27.633%
Attn: Fund Administration
4800 Deer Lake Drive E. 2nd Floor
Jacksonville, FL 32246-6484
Paine Webber for the Benefit of 7.520%
Betty J. Puskar Trustee
Betty J. Puskar Rev. Trust
708 Ocean Drive
Juno Beach, FL 33408-1911
Paine Webber for the Benefit of 5.552%
Wayne D Rebertus Trustee
U/A dtd 8/3/89
FBO Wayne D. Rebertus
23725 SR 180
Rockbridge, OH 43149
Florida Municipal Bond Fund - Class Y
First Union National Bank 98.769%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28202-1910
Georgia Municipal Bond Fund - Class A
MLPF&S for the Sole Benefit of Its Customers 11.886%
Attn: Fund Administration
4800 Deer Lake Drive E. 2nd Floor
Jacksonville, FL 32246-6484
First Union Brokerage Services 9.270%
Susan B. Hanchey
1388 St. Michaels
Lilburn, GA 30047
FUBS & Co. FEBO 6.168%
Lee R. Meadows and
Mary Lee Meadows
1270 Hicks Circle SW
Conyers, GA 30207-4221
<PAGE>
Jasper G. Woodroof Jr. 5.846%
Jane W. Akers Cade W. Smith Co. Trust
J G Woodroof Living Trust
P.O. Box 995
Griffin, GA 30224
Georgia Municipal Bond Fund - Class B
None
Georgia Municipal Bond Fund - Class Y
First Union National Bank 98.978%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28202-1910
Maryland Municipal Bond Fund - Class A
Charles Schwab & Co. Inc. 13.011%
Special Custody Account
FBO Exclusive Benefit of Customers
Reinvest Account Attn: Mutual Fund
101 Montgomery Street
San Francisco, CA 94104-4122
Maryland Municipal Bond Fund - Class B
Jeanne Hochreiter 8.616%
50 Moonsheel Drive
Berlin, MD 21811
First Union Brokerage Services 6.693%
Deborah D. Ringgold
21 Dawman Court
Baltimore, MD 21244
Maryland Municipal Bond Fund - Class C
None
Maryland Municipal Bond Fund - Class Y
First Union National Bank/EB/INT 97.535%
Cash Account
Attn: Trust Operations Fund Group
401 S. Tryon Street 3rd Floor CMG-1151
Charlotte, NC 28202-1911
North Carolina Municipal Bond Fund - Class A
First Union Brokerage Services 6.385%
Walter L. Williams and
Marie S. Williams
207 Crown Point Road
Greenville, NC 27834
Kenneth Edward Haigler 6.366%
P.O. Box 249
Greenville, NC 27835-0249
First Union Brokerage Services 6.301%
Frank J. Blythe Jr.
4312 Foxcroft Road
Charlotte, NC 28211
North Carolina Municipal Bond Fund - Class B
None
North Carolina Municipal Bond Fund - Class Y
First Union National Bank 97.970%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28202-1910
South Carolina Municipal Bond Fund - Class A
MLPF&S For the Sole Benefit of Its Customers 19.357%
Attn: Fund Administration
4800 Deer Lake Drive E. 2nd Floor
Jacksonville, FL 32246-6484
FUBS & CO FEBO 10.773%
Charles W. Lombard Trust
Charlotte Lombard and
Warren Prout Co-Trustees
U/A/D 5/4/94
Boone, NC 28607
Donaldson Lufkin Jenrette 9.003%
Securities Corporaiton Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
FUBS & CO 7.599%
EN Todd Crittenden
201 S. College Street 5th Floor
Charlotte, NC 28288-1167
FUBS & CO FEBO 6.040%
Warren A. Ransom Jr.
Laurie P. Ransom
1162 East Parkview Place
Mount Pleasant, SC 29464-7909
Wheat First Securities Inc 5.677%
Richard E. Johnson
4 Conch Court
Isle of Palms, SC 29451-2558
First Union Brokerage Services 5.308%
Ann D. Schwab
2189 Windy Oaks Road
FT Mill, SC 29715
South Carolina Municipal Bond Fund - Class B
None
South Carolina Municipal Bond Fund - Class Y
First Union National Bank 99.102%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28202-1910
Virginia Municipal Bond Fund - Class A
Charles Schwab & Co. Inc. 12.067%
Special Custody Account
FBO Exclusive Benefit of Customers
Reinvest Account Attn: Mutual Fund
101 Montgomery Street
San Francisco, CA 94104-4122
Virginia Municipal Bond Fund - Class B
First Union Brokerage Services 5.117%
Estate of Patsy B. Williams
P.O. Box 1327
6 Sixth Street, Suite 354
Bristol, VA 24203
Virginia Municipal Bond Fund - Class Y
First Union National Bank 98.771%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28202-1910
<PAGE>
EXPENSES
Advisory Fees
Evergreen Investment Management ("EIM"), a division of First Union
National Bank ("FUNB") is the investment advisor to each Fund. EIM is entitled
to receive from each Fund, except Florida High Income Fund, an annual fee equal
to 0.50% of the average daily net assets of the Fund. EIM is entitled to receive
from Florida High Income Fund an annual fee equal to 0.60%. (For more
information, see "Investment Advisory Agreements" in Part 2 of this SAI.)
Advisory Fees Paid
Below are the advisory fees accrued by each Fund for the last three
fiscal periods.
Fiscal Period/Fund Advisory Fee Waiver
Periods Ended 1998
Florida High Income Fund $1,737,325 $489,599
Florida Fund $2,509,498 $1,688,280
Georgia Fund $326,000 $300,583
Maryland Fund $173,896 $67,938
North Carolina Fund $1,294,225 $1,063,800
South Carolina Fund $281,276 $136,669
Virginia Fund $565,473 $504,686
Periods Ended 1997
Florida High Income Fund $813,790 $330,629
Florida Fund $791,322 $81,274
Georgia Fund $66,245 $66,245
Maryland Fund $273,851 $0
North Carolina Fund $305,634 $0
South Carolina Fund $70,972 $58,299
Virginia Fund $58,299 $70,972
Periods Ended 1996
Florida High Income Fund $477,128 $238,564
Florida Fund $803,741 $321,496
Georgia Fund $63,102 $63,102
Maryland Fund $315,941 $0
North Carolina Fund $306,892 $164,001
South Carolina Fund $40,781 $40,781
Virginia Fund $51,952 $51,952
<PAGE>
Brokerage Commissions
The Funds paid no brokerage commissions during 1998, 1997 and 1996.
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.
Underwriting
Total Underwtiting Commissions
Fiscal Period/Fund Commissions Retained
Periods ended 1998
Florida High Income Fund $4,723,685 $25,749
Florida Fund $1,118,965 $5,901
Georgia Fund $114,119 $6,249
Maryland Fund $22,642 $586
North Carolina Fund $158,554 $2,417
South Carolina Fund $26,249 $238
Virginia Fund $93,502 $28,121
Periods ended 1997
Florida High Income Fund $757,824 $34,454
Florida Fund $236,607 $22,335
Georgia Fund $22,854 $2,488
Maryland Fund -- --
North Carolina Fund $35,137 $2,377
South Carolina Fund $5,744 $710
Virginia Fund $14,653 $1,596
Periods Ended 1996
Florida High Income Fund $276,615 $29,467
Florida Fund $49,589 $5,996
Georgia Fund $7,300 $875
Maryland Fund -- --
North Carolina Fund $16,557 $154
South Carolina Fund $1,447 $2,228
Virginia Fund $20,400 $2,033
12b-1 Fees
Below are the 12b-1 fees paid by each Fund for the fiscal year ended
August 31, 1998. For more information, see "Distribution Plans and Agreements"
in Part 2 of this SAI.
<TABLE>
<CAPTION>
Class A Class B Class C
Fund
<S> <C> <C> <C> <C> <C> <C>
Distribution Service Fees Distribution Service Fees Distribution Service
Fees Fees Fees Fees
Florida High Income Fund $0 $475,289 $615,488 $205,163 $2,864 $955
Florida Fund $0 $330,600(1) $398,796 $132,932 $39,440 $13,147
Georgia Fund $0 $6,559 $88,482 $29,494 $0 $
Maryland Fund $0 $59,345 $1,260 $420 $0 $0
North Carolina Fund $0 $25,891 $364,752 $121,584 $0 $0
South Carolina Fund $0 $3,277 $34,091 $11,364 $0 $0
Virginia Fund $0 $73,823 $57,663 $19,221 $0 $0
</TABLE>
(1) Of this amount, $224,808 was waived by the Distributor.
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 August 31, 1998. 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.
<PAGE>
Aggregate Compensation Total Compensation
Trustee from Trust from Trust and Fund
Complex Paid to Trustees**
Laurence B. Ashkin $6,163 $72,067
Charles A. Austin, III $6,362 $61,967
K. Dun Gifford $5,839 $58,200
James S. Howell $8,054 $102,671
Leroy Keith Jr. $6,114 $59,700
Gerald M. McDonnell $6,896 $83,115
Thomas L. McVerry $7,306 $90,283
William Walt Pettit $6,187 $75,249
David M. Richardson $6,172 $59,675
Russell A. Salton, III $6,629 $84,300
Michael S. Scofield $6,876 $85,998
Richard J. Shima $6,307 $69,334
Robert J. Jeffries* $1,788 $26,060
Foster Bam* $4,132 $46,767
*Former Trustee; retired as of December 31, 1997.
**Certain Trustees have elected to defer all or part of their
total compensation for the twelve months ended August 31,
1998. The amounts listed below will be payable in later years
to the respective Trustees:
Austin $7,763
McVerry $90,283
Howell $77,761
Salton $84,300
Petit $75,249
McDonnell $83,115
Scofield $15,600
PERFORMANCE
Total Return
Below are the average annual total returns for each class of shares of
the Funds (including applicable sales charges) as of August 31, 1998. For more
information, see "Total Return" under "Performance Calculations" in Part 2 of
this SAI.
<PAGE>
<TABLE>
<CAPTION>
Fund/Class One Year Five Years Ten Years or Since Inception Date
Inception
<S> <C> <C> <C> <C>
Florida High Income Fund
Class A 3.77% 6.34% 7.60% 6/17/92
Class B 3.13% N/A 6.90% 7/10/95
Class C N/A N/A N/A 3/6/98
Class Y 9.22% N/A 8.72% 9/20/95
Florida Fund
Class A 3.79% 5.25% 7.64% 5/11/88
Class B 2.97% N/A 6.01% 6/30/95
Class C N/A N/A N/A 1/26/98
Class Y 9.05% N/A 7.90% 6/30/95
Georgia Fund
Class A 4.46% 4.55% 4.77% 7/2/93
Class B 3.86% 4.51% 4.89% 7/2/93
Class Y 9.94% N/A 6.65% 2/28/94
Maryland Fund
Class A 1.88% 3.28% 5.37% 10/16/90
Class B N/A N/A N/A 3/27/98
Class Y 7.22% 4.55% 6.21% 10/16/90
North Carolina Fund
Class A 4.45% 4.73% 5.64% 1/11/93
Class B 3.85% 4.69% 5.71% 1/11/93
Class Y 9.93% N/A 6.48% 2/28/94
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
South Carolina Fund
<S> <C> <C> <C> <C>
Class A 3.44% N/A 5.02% 1/3/94
Class B 2.79% N/A 5.02% 1/3/94
Class Y 8.87% N/A 7.12% 2/28/94
Virginia Fund
Class A 3.94% 4.72% 4.88% 7/2/93
Class B 3.31% 4.68% 4.99% 7/2/93
Class Y 9.39%% N/A 6.79% 2/28/94
</TABLE>
<PAGE>
Yields
Below are the current and tax equivalent yields of the Funds for the
30-day period ended August 31, 1998. 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>
Florida High Income 28% 4.87% 4.37% 4.37% 5.37% 6.76% 6.07% 6.07% 7.46%
Fund
Florida Fund 28% 4.36% 3.67% 3.67% 4.66% 6.06% 5.10% 5.10% 6.47%
Georgia Fund 34% 4.30% 3.77% N/A 4.77% 6.52% 5.71% N/A 7.23%
Maryland Fund 28% 3.90% 3.32% N/A 4.35% 5.42% 4.61% N/A 6.04%
North Carolina Fund 28% 4.28% 3.77% N/A 4.77% 5.94% 5.24% N/A 6.63%
South Carolina Fund 35% 4.01% 3.47% N/A 4.46% 6.17% 5.34% N/A 6.86%
Virginia Fund 33.25% 4.30% 3.76% N/A 4.76% 6.44% 5.63% N/A 7.13%
</TABLE>
(1) Assumed for purposes of this chart. Your tax may vary.
SERVICE PROVIDERS
Administrator
Evergreen Investment Services, Inc. ("EIS") serves as administrator to
the Funds, 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 Funds based on the total assets of all mutual
funds for which EIS serves as administrator and a First Union Corporation
subsidiary serves as 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 Funds' transfer agent. ESC issues and redeems shares, pays
dividends and performs other duties in connection with the maintenance of
shareholder accounts. The transfer agent's address is P.O. Box 2121, Boston,
Massachusetts 02106-2121. The Funds pay ESC annual fees as follows:
Fund Type Annual Fee Per Annual Fee Per
Open Account Closed Account
Monthly Dividend Funds $22.75 $9.00
Quarterly Dividend Funds $21.75 $9.00
Semiannual Dividend Funds $20.75 $9.00
Annual Dividend Funds $20.75 $9.00
Money Market Funds $22.75 $9.00
Distributor
Evergreen Distributor, Inc. (the "Distributor") markets the Funds
through broker-dealers and other financial representatives. Its address is
125 W. 55th Street, New York, NY 10019.
Independent Auditors
KPMG Peat Marwick LLP, 99 High Street, Boston, Massachusetts 02110,
audits the financial statements of each Fund except Florida High Income Fund.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New
York 10036 audits the financial statements of Florida High Income 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.
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 the 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's Class A shares
at the end of each Fund's latest fiscal period.
<TABLE>
<CAPTION>
Net Asset Value Per Share Sales Charge Offering Price Per Share
Fund Per Share
<S> <C> <C> <C>
Florida High Income Fund $11.26 4.75% $11.82
Florida Fund $10.15 4.75% $10.66
Georgia Fund $10.35 4.75% $10.87
Maryland Fund $11.16 4.75% $11.72
North Carolina Fund $10.84 4.75% $11.38
South Carolina Fund $10.44 4.75% $10.96
Virginia Fund $10.46 4.75% $10.98
</TABLE>
ADDITIONAL INFORMATION CONCERNING FLORIDA
The performance of the Florida Fund and the Florida High Income
Fund is susceptible to various statutory, political and economic factors unique
to the State of Florida. The information summarized below describes some of the
more significant factors that could affect the ability of the bond issuers to
repay interest and principal on securities acquired by each Fund. Such
information is derived from various public sources all of which are available to
investors generally and which each Fund believes to be accurate.
State Economy
General. Florida is the nation's fourth most popular state with an
estimated population of 14,713,000 as of April 1, 1997. Only California, New
York and Texas have populations larger than Florida. The State's population grew
from 6,800,000 in 1970 to 12,900,000 in 1990 and to an estimated 14,713,000 in
1997. This represents a 13.7% growth since the 1990 Census. Florida's population
is primarily an urban population with approximately 85% of its population
located in urbanized areas. The University of Florida, Bureau of Economic and
Business Research projects Florida's population will exceed 17,900,000 by April
1, 2010.
Economic Condition and Outlook. The current Florida Economic Consensus
Estimating Conference (February 5, 1998) forecast shows that the Florida economy
is expected to grow at a moderate pace along with the nation, but will continue
to outperform the U.S. as a whole. Total non-farm employment is expected to
increase 3.9% for the 1997-98 fiscal year which began July 1, 1997. By the end
of fiscal year 1998-99, non-farm employment is expected to reach an average of
6.7 million. Trade and service employment, the two largest sectors, account for
more than half of total non-farm employment. Florida's unemployment rate is
forecasted at 4.6% for 1997-98, then to rise to 4.8% in 1998-99.
Tourism is an important element of Florida's economy. Tourist arrivals
are expected to increase 2.1% for 1997-98 and 4.0% for 1998-99. Air tourist will
increase 1.6% and 3.7%, while auto tourists will increase 2.7% and 4.2%,
respectively. By the end of 1997-98, 43.8 million domestic and international
tourists are expected to have visited the State. In 1998-99, tourist visits
should reach 45.6 million.
Florida's Budget Process
Balance Budget Requirement. Florida's constitution requires an annual
balanced budget. In addition, the constitution requires a Budget Stabilization
Fund equal to 4% of the last fully completed fiscal year's net revenue
collections for the General Revenue Fund for the fiscal year 1997-98 and 5% for
fiscal year 1998-99 and thereafter. In the Governor's 1998-99 Recommended
Budget, the Budget Stabilization Fund is required to be funded at 5%, or $785
million.
<PAGE>
State Revenue Limitations. On November 8, 1994, the citizens of Florida
enacted a Constitutional Amendment on state revenue. This amendment provides
that the rate of growth in state revenues is limited to no more than the average
annual growth rate in Florida personal income during the past five years.
Revenue growth in excess of the limitation is to be deposited into the Budget
Stabilization Fund unless two-thirds of the members of both houses of the
Legislature vote to raise the limit. The revenue limit is determined by
multiplying the average annual growth rate in Florida personal income over the
past five years times state revenues for the previous year.
Budget Process. Chapter 216 Florida Statutes, promulgates the process
used to develop the budget for the State of Florida. By September 1 of each
year, the head of each State agency and the Chief Justice of the Supreme Court
for the Judicial Branch submit a final annual legislative budget request to the
Governor and Legislature. Then, at least 45 days before the scheduled annual
legislative session in each year, the Governor, as chief budget officer, submits
his recommended budget to each legislator.
The Governor also provides estimates of revenues sufficient to fund the
recommended appropriations. Estimates for the General Revenue Fund, Budget
Stabilization Fund and Working Capital Fund are made by the Revenue Estimating
Conference (see the description of the budgetary basis fund types in the next
section). This group includes members of the executive and legislative branches
with forecasting experience who develop official information regarding
anticipated State and local government revenues as needed for the State
budgeting process. In addition to the Revenue Estimating Conference, other
consensus estimating conferences cover national and state economics, national
and state demographics, the state public education system, criminal justice
system, social services system, transportation planning and budgeting, the child
welfare system, the juvenile justice system and the career education planning
process.
Trust fund revenue estimates are generally made by the agency that
administers the fund. These estimates are reviewed by the Governor and then
incorporated into his recommended budget.
The Governor's recommended budget forms the basis of the appropriations
bill. As amended and approved by the Legislature (subject to the line-item veto
power of the Governor and override authority of the Legislature), this bill
becomes the General Appropriations Act.
The Governor and the Comptroller are responsible for detecting
conditions which could lead to a deficit in any agency's funds and reporting
that fact to the Administration Commission and the Chief Justice of the Supreme
Court. The Constitution of the State, Article VII, Section 1(d), states,
"Provision shall be made by law for raising sufficient revenue to defray the
expenses of the State for each fiscal year."
The Legislature is responsible for annually providing direction in the
General Appropriations Act regarding the use of the Working Capital Fund to
offset General Revenue Fund deficits. Absent any specific direction to the
contrary, the Governor and the Chief Justice of the Supreme Court shall comply
with guidelines provided in Section 216.221(5), F.S., for reductions in the
approved operating budgets of the executive branch and the judicial branch.
<PAGE>
The State of Florida is progressing toward full implementation of a
performance-based budgeting system. Chapter 216., F.S., designates when each
department will be phased into this new budgeting method. Some agencies are
already subject to the performance-based budgeting standards and all agencies
will be under this new system by the fiscal year ended June 30, 2002. With
performance-based budgeting, a department receives a lump-sum appropriation from
the Legislature for each designated program at the beginning of the year. The
Governor, for State agencies, or the Chief Justice, for the judicial branch, is
responsible for allocating the amounts among the traditional appropriation
categories so that specified performance standards can be met. At any time
during the year, the agency head or Chief Justice may transfer appropriations
between categories within the performance-based program with no limit on the
amount of the transfer in order for the designated program to accomplish its
objectives. However, no transfer from any other budget entity may be made into
the performance-based program, nor may any funds be transferred from the
performance-based program to another budget entity, except pursuant to Section
216.77, FS.
Line Item Veto. Florida's Constitution grants the Governor the power to
veto any specific appropriation in a general appropriation bill, but the
Governor may not veto any qualification or restriction without also vetoing the
appropriation to which it relates. A statement identifying the items vetoed and
containing his or her objections thereto must be delivered to the appropriate
house in which the bill originated, if in session, otherwise to the Secretary of
State. The legislature may reconsider and restate the vetoed specific
appropriation items by a two-thirds vote of each house.
Revenues. The State accounts for its receipts using fund accounting. It
has established the General Revenue Fund, the working Capital Fund and various
other trust funds, which are maintained for the receipt of monies which under
law or trust agreements must be maintained separately. The General Revenue Fund
consists of all monies received by the State from every source whatsoever which
are not allocable to the other funds. Major sources of tax revenues for the
General Revenue Fund are the sales and use tax, the corporate income tax, and
the intangible personal property tax, which are projected for fiscal year
1998-99 to amount to 71%, 8% and 4%, respectively, of the total receipts of that
fund. Florida's constitution and statutes mandate that the state budget as a
whole and each separate fund within the State budget be kept in balance from
currently available revenues for each fiscal year.
Sales and Use Tax. The greatest single source of tax receipts in
Florida is the sales and use tax, which is projected to amount to $12.5 billion
for fiscal year 1998-99. The sales tax rate is 6% of the sales price of tangible
personal property sold at retail in the State. The use tax rate is 6% of the
cash price of fair market value of tangible personal property when it is not
sold but is used, or stored for use, in the State. In other words, the use tax
applies to the use of tangible personal property in Florida, which was purchased
in another state but would have been subject to the sales tax if purchased in
Florida. Approximately 10% of the sales tax is designated for local governments
and is distributed to the respective counties in which collected for use by such
counties and municipalities therein. In addition to this distribution, local
governments may (by referendum) assess a 1% sales surtax within their county.
Proceeds from this local option sales surtax can be earmarked for funding county
wide bus and rapid transit systems, local infrastructure construction and
maintenance, medical care for indigents and capital projects for county school
districts as set forth in Section 212.055(2), of the Florida Statutes.
The two taxes, sales and use, stand as complements to each other, and
taken together provide a uniform tax upon either the sale at retail or the use
of all tangible personal property irrespective of where it may have been
purchased. The sales tax also includes a levy on the following: (1) rentals on
tangible personal property and accommodations in hotels, motels, some
apartments, offices, real estate, parking and storage places in parking lots,
garages and marinas for motor vehicles or boats; (ii) admissions to places of
amusements, most sports and recreation events; (iii) utilities, except those
used in homes; and (iv) restaurant meals and expendables used in radio and
television broadcasting. Exemptions include: groceries; medicines; hospital
rooms and meals; seeds, feeds, fertilizers and farm crop protection materials;
purchases by religious, charitable and educational nonprofit institutions;
professional services, insurance and certain personal service transaction;
newspapers; apartments used as permanent dwellings; and kindergarten through
community college athletic contests or amateur plays.
Other State Taxes. Other taxes which Florida levies include the motor
fuel tax, intangible property tax, documentary stamp tax, gross-receipts
utilities tax and severance tax on the production of oil and gas and the mining
of solid minerals, such as phosphate and sulfur.
<PAGE>
Government Debt. Florida maintains a high bond rating from Moody's
Investors Service ("Moody's") (AA+), Standard and Poor's ("S&P")(AA) and Fitch
IBCA, Inc. ("Fitch") (AA) on all state general obligation bonds. Outstanding
general obligation bonds have been issued to finance capital outlay for
educational projects of local school districts, community colleges and state
universities, environmental protection and highway construction.
Numerous government units, counties, cities, school districts and
special taxing district, issue general obligation bonds backed by their taxing
power. State and local government units may issue revenue obligations, which are
supported by the revenues generated from the particular projects or enterprises.
Examples include obligations issued to finance the construction of water and
sewer systems, health care facilities and educational facilities. In some cases,
sewer or water revenue obligations may be further secured by the full faith and
credit of the State.
Florida's Constitution generally limits state bonds pledging the full
faith and credit of the state, to those necessary to finance or refinance the
cost of state fixed capital outlay projects authorized by law, and then only
upon approval by a vote of the electors. The constitution further limits the
total outstanding principal of such bonds to no more than 50% of the total tax
revenues of the state for the two preceding fiscal years, excluding any tax
revenues held in trust. Exceptions to the requirement for voter approval are:
(i) bonds issued for pollution control and abatement and solid waste disposal
facilities and other water facilities authorized by general law and operated by
state or local governmental agencies; and (ii) bonds issued to finance or
refinance the cost of acquiring real property or rights thereto for state roads
as defined by law, or to finance or refinance the cost of state bridge
construction.
State revenue bonds may be issued without a vote of the electors to
finance or refinance the cost of state fixed capital outlay projects authorized
by law, as long as they are payable solely from funds derived directly from
sources other than State tax revenues. Revenue bonds may be issued to establish
a student loan fund, as well as to finance or refinance housing and related
facilities so long as repayments come solely from revenues derived from the fund
or projects so financed. The Constitution imposes no limit on the principal
amount of revenue bonds which may be issued by the state and Local Governmental
Agency. Local Governmental Agencies, such as counties, school boards or
municipalities may issue bonds, certificates of indebtedness or any form of tax
anticipation certificate, payable from ad valorem taxes and maturing more than
12 months from the date of issuance only: (i) to finance or refinance capital
projects authorized by law, and only when approved by a vote of the electors who
are property owners living within boundaries of the agency. Generally, ad
valorem taxes levied by a Local Governmental Agency may not exceed 10 mills on
the value of real estate and tangible personal property unless approved by the
electors. Local Governmental Agencies may issue revenue bonds to finance or
refinance the cost of capital projects for airports or port facilities or for
industrial or manufacturing plants, without the vote of electors, so long as the
revenue bonds are payable solely from revenues derived from the projects.
Other Factors. The performance of the obligations issued by Florida,
its municipalities, subdivisions and instrumentalities are in part tied to
state-wide, regional and local conditions within Florida. Adverse changes to
state-wide, regional or local economies may adversely affect the
creditworthiness of Florida, its municipalities, etc. Also, some revenue
obligations may be issued to finance construction of capital projects which are
leased to nongovernmental entities. Adverse economic conditions might affect
those lessees' ability to meet their obligations to the respective governmental
authority which in turn might jeopardize the repayment of the principal of, or
the interest on, the revenue obligations.
<PAGE>
Litigation
Due to its size and broad range of activities, the State is involved in
numerous routine legal actions. The ultimate disposition and fiscal consequences
of these lawsuits are not presently determinable, however, according to the
departments involved, the results of such litigation pending or anticipated will
not materially affect the State of Florida's financial position. The information
disclosed in this Litigation Section has been deemed material by the Florida
Auditor General and has been derived from information disclosed in the Florida
Comptroller's Annual Report dated January 29, 1998. No assurance can be made
that other litigation has not been filed or is not pending which may have a
material impact on the State's financial position.
A. Coastal Petroleum v. State of Florida
Case No. 90-3195, 2nd Judicial Circuit. This is an inverse condemnation
case claiming that the action of the Trustees and Legislature constitute a
taking of Coastal's leases for which compensation is due. The Circuit judge
granted the State's motion for summary judgment finding that as a matter of law,
the State had not deprived Coastal of any royalty they might have. Coastal
appealed to the First District Court of Appeals, but the case was remanded to
Circuit Court for trial. On August 6, 1996, final judgment was made in favor of
the State. Coastal petitioned the Florida Supreme Court for a review, which was
denied on January 28, 1998.
B. Florida Department of Transportation v. 745 Property Investments, CSX
Transportation, Inc. and Continental Equities
Case No. 94-17739 CA 27, Dade County Circuit Court. This cases involves
the Florida Department of Transportation (FDOT) and CSX Transportation, Inc.
FDOT has filed an action against the adjoining property owners seeking a
declaratory judgment from the Dade County Circuit Court that the Department is
not the owner of the property that is subject to a claim by the U.S.
Environmental Protection Agency (EPA). The case was dismissed and FDOT's appeal
of the order of dismissal is pending in the Third District Court of Appeal.
The EPA is seeking clean-up costs, pursuant to the Comprehensive
Environmental Response Compensation and Liability Act, regarding property which
the EPA alleges is owned by the FDOT (and formerly owned by CSX Transportation,
Inc.). The EPA has agreed to await the outcome of the Department's declaratory
action before proceeding further. If the Department is unsuccessful in its
actions, the possible clean-up costs could exceed $25 million.
C. Jenkins v. Florida Department of Health and Rehabilitative Services
Case No. 79-102-CIV-J-16, United States District Court. This is a class
action suit on behalf of clients of residential placement for the
developmentally disabled seeking refunds for services where children were
entitled to free education under the Education for Handicapped Act. The district
court held that the State could not charge maintenance fees for children between
the ages of 5 and 17 based on the Education for Handicapped Act. The State's
potential cost of refunding these charges could exceed $42 million. Attorneys
are in the process of negotiating a settlement amount.
D. Nathan M. Hameroff, M.D., et. al. v. Agency for Health Care
Administration, et. al.
Case No. 95-5036, Leon County Circuit Court. The plaintiffs challenge
the constitutionality of the Public Medical Assistance Trust Fund (PMATF) annual
assessment on net operating revenue of free-standing out-patient facilities
offering sophisticated radiology services. A trial has not been scheduled.
Plaintiff filed a Notice of Pendency of Class Action on July 29, 1997. If the
State is unsuccessful in its actions, the potential refund liability could
amount to approximately $70 million.
<PAGE>
E. Walden v. Department of Corrections
Case No. 95-40357-WS (USDC N.D. Fla.) This action is brought by one
captain and one lieutenant in the Department of Corrections seeking declaratory
judgment that they (and potentially 700 similarly situated others) are not
exempt employees under the Fair Labor Standards Act (FLSA) and, therefore, are
entitled to overtime compensation at a rate of not less than one and one-half
times their regular rate of pay for overtime hours worked since April 1, 1992,
forward and including liquidated damages. The U.S. District Court for the
Northern District of Florida entered an order dismissing the case for lack of
jurisdiction on June 24, 1996. Plaintiffs filed a lawsuit against the Department
(Case No. 96-3955) in July 1996 at the State level (Circuit Court, Second
Judicial Circuit), making the same allegations at that level which plaintiffs
previously made before the U.S. District Court for the Northern District of
Florida. On December 20, 1996, that Court determined that it has jurisdiction
over the FLSA claim. On December 10, 1997, the Court entered final summary
judgment. Plaintiffs were not awarded any damages, but were awarded attorneys'
fees and costs.
F. Barnett Bank v. Department of Revenue
Case No. 97-02375, 4th Judicial Circuit, involves the issue of whether
Florida's refund statute for dealer repossessions authorizes the Department to
grant a refund to a financial institution as the assignee of numerous security
agreements governing the sale of automobiles and other property sold by dealers.
The questions turn on whether the Legislature intended the statute only to
provide a refund or credit to the dealer who actually sold the tangible personal
property and collected and remitted the tax or intended that right to be
assignable. Several banks have applied for refunds; the potential refund to
financial institutions exceeds $30,000,000.
ADDITIONAL INFORMATION CONCERNING GEORGIA
The performance of the Georgia Fund is influenced by the political,
economic and statutory environment within the State. The Fund invests in
obligations of Georgia issuers, which results in the Fund's performance being
subject to risks associated with the most current conditions in the State. The
information presented below describes in more detail the factors that could
affect the ability of the bond issuers to repay interest and principal on
securities acquired by the Fund. The following information has been obtained
from a variety of public sources and is believed to be accurate, but should not
be relied upon as a complete description of all relevant information.
General
The State of Georgia has continued to benefit from job growth, personal
income growth and continued economic expansion. The State ranks tenth in
population and 25th in personal income according to the U.S. Bureau of the
Census and the U.S. Bureau of Economic Analysis, respectively. The State has yet
to feel the post-Olympic headache that was expected when the games closed in
July of 1996. Employment gains have slowed from 3.7% in 1996, but still
continued at a respectable 2.4% in 1997. Non-agricultural employment gained 2.4%
between October 1997 and October 1998. The unemployment rate stands at 4.1% (not
seasonally adjusted) as of September 1998, compared to the national average of
4.4%. The State's unemployment rate is 0.3% below the national average. The slow
growth that was anticipated after the Olympics is probably still on its way, but
it may not arrive until late 1998 or 1999. Some negative trends in employment in
the apparel industry, utilities and the military have surfaced during this
expansion. However, these have been offset by gains in services, transportation
and finance. The construction industry has seen a $3.5 billion boost due to
school construction. Georgia is following most states in their push to upgrade
old school buildings and build new structures to meet population growth and keep
current with technological advances.
Budget Process
The State has been consistently rebuilding their reserves that were
drawn down in the early 1990's. At that time, the State had basically reduced
its reserves to zero. As of fiscal year-end 1997, the State's main reserves of
Revenue Shortfall, Lottery and Midyear Adjustment stood at $313 million, $128
million and $105 million, respectively. In continuing with this positive trend,
the State ended fiscal 1997 with another substantial surplus of $493.8 million.
The 1998 budget again reflects a healthy increase in revenues of 4.6%.
In 1997, the grocery sales tax was reduced by one cent. This should
have had a negative effect, but the State had set aside $129 million to buffer
this in 1996 surplus. The State set aside an additional $129 million in 1999
from actual collections to fund the removal of all sales taxes on groceries.
Each cent reduction signals a loss of approximately $175 million in tax revenue.
Effective January 1, 1998, the State increased the standard deduction for both
individuals and dependants from $1,500 to $2,700, and raised the deduction for
citizens over 65 from $700 to $1,300.
The budget for 1998 authorized $564.1 million in new debt. This new
issuance should not have an adverse affect on their moderate level of $651 debt
per capita. As of October 1998, the State had $5.187 billion indirect and
authority debt outstanding which results in debt per capita of $692.56. The
State has been able to use their extremely successful lottery to enhance their
budgetary reserves. Specific programs funded by the lottery are intended to be
educational in nature and one time expenses.
State's Revenues and Expenditures
State revenue estimates show that the reduction in grocery sales tax
did not derail the tax collections to this point in the year. Collections now
stand at 6.1% above the original projections through six months. Tax collections
should benefit from strong capital gains for individuals and continued strong
corporate collections. These increases should help the State post a 9% increase
in collections. However, rising labor costs will probably lead to a slowdown in
fiscal 1999 that will cause growth to temper to a still respectable 7%. As is
the case in many southeastern states, Georgia continues to spend heavily on
education and transportation. These initiatives will continue to be a large part
of their spending.
As of December 1998, general obligations of the State of Georgia were
rated Aaa/AAA/AAA by Moody's, S&P and Fitch IBCA, 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.
ADDITIONAL INFORMATION CONCERNING MARYLAND
The following information constitutes only a brief summary, does not
purport to be a complete description of risk factors, and is principally drawn
from official statements relating to securities offerings of the State of
Maryland that were available as of the date of this SAI.
According to 1990 Census reports, Maryland's population in that year
was 4,780,800, reflecting an increase of 13.4% from the 1980 Census. Maryland's
population in 1997 was 5,094,300. Maryland's population is concentrated in urban
areas: the eleven counties and Baltimore City located in the
Baltimore-Washington Corridor contain 50.4% of the State's land area and 87.2%
of its population. The estimated 1990 population for the Baltimore Standard
Metropolitan Statistical Area was 2,382,172 and for the Maryland portion of the
Washington Standard Metropolitan Statistical Area, 1,788,314. Overall,
Maryland's population per square mile in 1990 was 489.1.
<PAGE>
Personal income in Maryland grew at annual rates between 8.2% and 9.6%
in each of the years 1986 through 1988, but fell from a rate of 8.5% in 1989 to
3.1% in 1991. Commencing in 1992, however, personal income growth rebounded,
increasing at annual rates of between 4.0% and 5.4% in each of the years 1992
through 1997. Similarly, per capita personal income, which had grown at rates no
lower than 6.4% for the period from 1972 to 1989, grew at a rate of 4.8% in 1990
and only 1.8% in 1991. Subsequently, per capita personal income has grown at
annual rates of between 3.0% and 4.7% in each of the years 1992 through 1997.
Unemployment in Maryland peaked in 1982 at 8.5%, then decreased steadily to a
low of 3.7% in 1989. In 1990, unemployment increased to 4.7%, and increased
further to 6.0% in 1991, 6.7% in 1992 and 6.2% in 1993, before dropping to 5.1%
in 1994 and 1995, 4.9% in 1996 and rising to 5.1% in 1997.
Retail sales in Maryland dropped by 2.2% in 1991, but rebounded
slightly and grew by 0.2% in 1992, 6.1% in 1993, 9.6% in 1994, 2.9% in 1995 and
1.5% in 1996, versus nationwide growth of 0.6%, 4.8%, 6.5%, 7.5%, 4.7% and 5.3%
in such years, respectively.
Services (including mining), wholesale and retail trade, government and
manufacturing (primarily printing and publishing, food and kindred products,
instruments and related products, industrial machinery, electronic equipment and
chemical and allied products) are the leading areas of employment in the State
of Maryland. In contrast to the nation as a whole, more people in Maryland are
employed in government than in manufacturing (18.5% versus 16.1% in 1997).
Between 1976 and 1996, manufacturing wages decreased by 25.2%, while
non-manufacturing wages increased by 58.5%.
The State's total expenditures for the fiscal years ending June 30,
1995, 1996, 1997 and 1998 were $13.5 billion, $14.2 billion, $14.8 billion and
$15.9 billion respectively. These results were due primarily to revenue
collections which fell short of projections, and increases in expenditures for
public assistance. The Governor of Maryland reduced fiscal year 1993
appropriations by approximately $56 million to offset the fiscal year 1992
deficit. The State Constitution mandates a balanced budget. Balances in the
Revenue Stabilization Account of the State Reserve Fund have also risen from
$300,000 million in 1992 to $50.9 million in 1993, $161.8 million in 1994,
$286.1 million in 1995, $461.2 million in 1996 (reflecting a net transfer to the
General Fund of $56.4 million) and $490.1 million in 1997.
In April 1996, the General Assembly approved a $14.6 billion 1997
fiscal year budget. The budget included funds sufficient to meet all fiscal year
1996 deficiencies and to meet all specific statutory funding requirements; the
budget incorporated $29 million in savings from revisions to the State personnel
system and reform to the welfare and Medicare programs. The State ended fiscal
year 1997 with $490.1 million in the Revenue Stabilization Account of the State
Reserve Fund which exceeds 5% of general fund revenues.
In April 1997, the General Assembly approved a $15.4 billion 1998
fiscal year budget. This budget (i) included funds sufficient to meet all
specific statutory funding requirements; (ii) incorporated the first year of a
five-year phase-in of a 10% reduction in personal income taxes (estimated to
reduce revenues by $38.5 million in fiscal year 1998 and $450 million when fully
phased in) and certain reductions in sales taxes on certain manufacturing
equipment (estimated to reduce revenues by $38.6 million when the reductions are
fully phased in, in fiscal year 2001); and (iii) included the first year's $30
million funding under an agreement to provide additional funds totaling $230
million over a five-year period to schools in the City of Baltimore and related
grants to other subdivisions totaling $32 million. When this budget was enacted,
the State estimated the General Fund surplus on a budgetary basis would be $28.2
million, in addition to which the State projected that there would be a balance
of $617.6 million in the Revenue Stabilization Account of the State Reserve
Fund. Based on the 1999 budget, it is estimated that the general Fund surplus on
a budgetary basis at June 30, 1999, will be approximately $14.5 million. The
balance in the Revenue Stabilization Account is estimated to be $634 million
after a $185.2 transfer to the General Fund.
The State of Maryland and its various political subdivisions issue a
number of different kinds of municipal obligations, including general obligation
bonds supported by tax collections, revenue bonds payable from certain
identified tax levies or revenue streams, conduit revenue bonds payable from the
repayment of certain loans to authorized entities such as hospitals and
universities, and certificates of participation in tax-exempt municipal leases.
<PAGE>
The State of Maryland issues general obligation bonds, which are
payable from ad valorem property taxes. The State Constitution prohibits the
contracting of State debt unless the debt is authorized by law levying an annual
tax or taxes sufficient to pay the debt service within 15 years and prohibiting
the repeal of the tax or taxes or their use for another purpose until the debt
has been paid. The State also enters into lease-purchase agreements, in which
participation interests are often sold publicly as individual securities.
As of July 1998, the State's general obligation bonds were rated "Aaa"
by Moody's, "AAA" by S&P, and "AAA" by Fitch.
The Maryland Department of Transportation issues Consolidated
Transportation Bonds, which are payable out of specific excise taxes, motor
vehicle taxes, and corporate income taxes, and from the general revenues of the
Department. Issued to finance highway, port, transit, rail or aviation
facilities, these bonds are rated "Aa" by Moody's, "AA" by S&P, and "AA" by
Fitch. The Maryland Transportation Authority, a unit of the Department, issues
its own revenue bonds for transportation facilities, which are payable from
certain highway, bridge and tunnel tolls. These bonds are rated "A+" by S&P.
Other State agencies which issue municipal obligations include the
Maryland Stadium Authority, which has issued bonds payable from sports facility
and other lease revenues and certain lottery revenues and convention center
lease revenue bonds; the Maryland Water Quality Financing Administration, which
issues bonds to provide loans to local governments for wastewater control
projects; the Community Development Administration of the Department of Housing
and Community Development, which issues mortgage revenue bonds for housing; the
Maryland Environmental Service, which issues bonds secured by the revenues from
its various water supply, wastewater treatment and waste management projects;
and the various public institutions of higher education in Maryland (which
include the University System of Maryland, Morgan State University and Towson
State University, and St. Mary's College of Maryland) which issue their own
revenue bonds. None of these bonds constitute debts or pledges of the full faith
and credit of the State of Maryland. The issuers of these obligations are
subject to various economic risks and uncertainties, and the credit quality of
the securities issued by them may vary considerably from the quality of
obligations backed by the full faith and credit of the State.
In addition, the Maryland Health and Higher Educational Facilities
Authority and the Maryland Industrial Development Financing Authority issue
conduit revenue bonds, the proceeds of which are lent to borrowers eligible
under relevant state and federal law. The Northeast Maryland Waste Disposal
Authority, the Maryland Economic Development Corporation and the Maryland Energy
Financing Administration also issue conduit revenue bonds. These bonds of these
issuers are payable solely from the loan payments made by borrowers and other
financing participants, and their credit quality varies with the financial
strengths of these entities.
Maryland has 24 geographical subdivisions, composed of 23 counties plus
the independent City of Baltimore, which functions much like a county. Some of
the counties and the City of Baltimore operate pursuant to the provisions of
codes of their own adoption, while others operate pursuant to State-approved
charters and State statutes.
Maryland counties and municipalities and the City of Baltimore receive
most of their revenues from ad valorem taxes on real and personal property,
individual income taxes, transfer taxes, miscellaneous taxes and aid from the
State. Their expenditures include public safety, public works, health, public
welfare, court and correctional services, education, and general governmental
costs.
The economic factors affecting the State, as discussed above, also have
affected the counties, municipalities and the City of Baltimore. In addition,
reductions in State aid caused by State budget deficits have caused the local
governments to trim expenditures and, in some cases, raise taxes.
According to recent available ratings, general obligation bonds of
Montgomery County (abutting Washington, D.C.) are rated "Aaa" by Moody's and
"AAA" by S&P. Prince George's County, also in the Washington, D.C. suburbs,
issues general obligation bonds rated "Aa3" by Moody's and "AA-" by S&P, while
Baltimore County, a separate political subdivision surrounding the City of
Baltimore, issues general obligation bonds rated "Aaa" by Moody's and "AAA" by
S&P and Anne Arundel County issues general obligation bonds which are rated
"AA+" by both Fitch and S&P and "Aa2" by Moody's. The City of Baltimore's
general obligation bonds are rated "A1" by Moody's and "A" by S&P. The other
counties in Maryland all have general obligation bond ratings of "A" or better,
except for Allegheny County and Garrett County, the bonds of which are rated
"Baa2" and "Baa3", respectively, by Moody's. The Washington Suburban Sanitary
District, a bi-county agency providing water and sewerage services in Montgomery
and Prince George's counties, issues general obligation bonds rated "Aa1" by
Moody's and "AA" by S&P. Additionally, some of the large municipal corporations
in Maryland (such as the cities of Rockville, Annapolis and Frederick) have
issued general obligation bonds. There can be no assurance that these ratings
will continue.
Many of Maryland's counties and the City of Baltimore have established
subsidiary agencies with bond issuing powers, such as housing authorities,
parking revenue authorities, and industrial development authorities. In
addition, all Maryland municipalities have the authority under State law to
issue conduit revenue bonds. 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
the faith and credit of the State.
ADDITIONAL INFORMATION CONCERNING NORTH CAROLINA
The performance of the North Carolina Fund is influenced by the
political, economic and statutory environment within the State. The Fund invests
in obligations of North Carolina issuers, which results in the Fund's
performance being subject to risks associated with the most current conditions
in the State. The information presented below describes in more detail the
factors that could affect the ability of the bond issuers to repay interest and
principal on securities acquired by the Fund. The following information has been
obtained from a variety of public sources and is believed to be accurate, but
should not be relied upon as a complete description of all relevant information.
General
North Carolina's economy has historically been dependent on small
manufacturing and agriculture. More recently, the employment base has shifted
away from the traditional roots in textiles and furniture making into services
and trade. Areas of growth include financial, high technology and research. The
State benefits from (1) a friendly environment for businesses, (2) being the
banking center of the southeast, (3) the research facilities of the
Raleigh/Durham area and (4) access to ports in Wilmington. Tobacco remains the
primary cash crop. The State has continued to post economic gains, although the
current wealth levels are 32nd according to the U.S. Bureau of the Census. This
ranks North Carolina, the 11th largest state in population, just above the
national average for wealth.
Budget Process
The State of North Carolina has continued to expand its economy and
diversify its employment base, while maintaining conservative fiscal and debt
management policies. The State has enjoyed significant surpluses in the past two
years and has been able to reallocate these to best serve their many needs in
transportation and education. As of early 1998, the State's debt was
approximately $2.15 billion or $289 per capita. The amortization for this debt
is a respectable 62% over the next ten years.
The budget for the 1998-99 year of $12.5 billion calls for significant
increases in spending. The increase of almost $1 billion over the 1997-98 budget
will be offset by strong projected tax revenue growth and the historically
conservative nature of the State's expenditures which continually come in under
budget. The main areas of emphasis for spending include reform to the juvenile
justice system, Smart Start, an early childhood program, and education,
including a 6.5% increase in teacher salaries.
The State has been very cognizant of its finances since the early
1990's recessionary period. The addition of permanent revenue enhancements and
conservative spending policies resulted in a positive general fund balance of
almost $1.5 billion in 1997. Much of that surplus was used in the 1998-99
budget. $600 million remains in the budget stabilization reserve account to
protect the State from future economic downturns.
State's Revenues and Expenditures
State revenues have continued to come in above projections. For fiscal
1997, tax collections increased 8.3% which exceeded the 2.9% budgeted increase
by a wide margin. Revenues outpaced their budgeted levels in almost every
category. The early indications for 1998 show results ahead of projections. One
unexpected expense was the transfer of $116 million to a disaster relief fund.
On July 1, 1998, the State reduced its sales tax on food to 2%, and the 1997-98
budget will eliminate the food tax entirely in May 1999. The 1998-99 budget also
eliminates the inheritance tax.
As of December 31, 1997, general obligations of the State of North
Carolina were rated Aaa/AAA/AAA by Moody's, S&P 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.
ADDITIONAL INFORMATION CONCERNING SOUTH CAROLINA
The performance of the South Carolina Fund is influenced by the
political, economic and statutory environment within the State. The Fund invests
in obligations of South Carolina issuers, which results in the Fund's
performance being subject to risks associated with the most current conditions
in the State. The information presented below describes in more detail the
factors that could affect the ability of the bond issuers to repay interest and
principal on securities acquired by the Fund. The following information has been
obtained from a variety of public sources and is believed to be accurate, but
should not be relied upon as a complete description of all relevant information.
General
The State's population currently ranks 26th in the nation with
approximately 3.7 million people. The income per capita ranks 39th. The State
ended 1997 with a budget deficit for the first time in five years. Most of the
$128 million deficit was due to one-time expenses. This action caused their
overall general fund balance to fall to $156 million or 2.6% of expenditures for
the year. Initial projections for 1998 show a surplus of over $200 million. With
$1.2 billion in debt outstanding, South Carolina's debt levels are considerably
below national medians in comparison to personal income and debt per capita. In
1997, the State's economy showed impressive signs of employment growth which
continued to fuel reductions in the unemployment rate to approximately 3.0%.
Growth came in many areas including durable goods, trade and services. The
additions of Bridgestone/Firestone, Corning and Honda have highlighted the
economic development efforts that have produced significant job growth in the
State. Continued expansion by BMW, DuPont and Nucor Steel enhanced already
successful ventures and employment bases. The State added 29,303 jobs in 1997.
This growth surpasses 1996 by 13% and the previous record year of 1965 by 11%.
Budget Process
The South Carolina State Constitution mandates a balanced budget. If a
deficit occurs, the General Assembly must account for it in the succeeding
fiscal year. In addition, if a deficit appears likely, the State Budget and
Control Board may reduce appropriations during the current fiscal year as
necessary to prevent the deficit. The State Constitution limits annual increases
in State appropriations to the average growth rate of the economy of the State
and annual increases in the number of State employees to the average growth of
the population of the State.
The State Constitution requires a General Reserve Fund that equals
three percent of General Fund revenues for the latest fiscal year. When deficits
have occurred, the State has funded them out of the General Fund. The State
Constitution also requires a Capital Reserve Fund equal to two percent of
General Fund revenues. Before March 1st of each year, the Capital Fund must be
used to offset mid-year budget reductions before mandating cuts in operating
appropriations, and after March 1st, the Capital Fund may be appropriated by a
special vote of the General Assembly to finance previously authorized capital
improvements or other non-recurring purposes. Monies in the Capital Fund not
appropriated or any appropriation for a particular project or item that has been
reduced due to application of the monies to a year-ended deficit must go back to
the General Fund.
Debt levels have been very conservative over the years. The current
level of $327 debt per capita and aggressive amortization of 80% of outstanding
indebtedness over the next ten years should continue their previous success.
Currently, the maximum limit for debt service is 5% of the prior year's
revenues. Also, highway bonds are limited to an amount which can be serviced by
15% of the highway revenues.
State's Revenues and Expenditures
State Revenues primarily come from income and sales taxes. Education
and healthcare continue to lead the way in expenditures. As with many of the
States in the nation, South Carolina has been conscience of the need to upgrade
their school infrastructure and become competitive in salaries with the national
averages. A big positive for issuers within the State is the revamping of the
South Carolina State Aid Intercept Program. The credit enhancement provided by
Section 59-71-15, Code of Laws of South Carolina, has been amended to provide
extra protection for bondholders. The school districts now are required to
notify the State Treasurer 15 days prior to an interest or principal payment of
a deficiency in funds on hand to make the schedule payment. Statutory provisions
now require the state to advance funds from the state's distributed school
district revenues or the state's general fund for an amount up to the total
amount appropriated for the Education Finance Act for that fiscal year. Road and
transportation upgrades are another big initiative for the State. The State
Legislation passed a bill to fund a state infrastructure bank that allows the
state to issue up to $1 billion in bonds. The first issue, which will fund
improvements in Horry County, came in October of this year. This new funding
source should help the State meet their ever expanding highway needs around
their major cities and vacation spots.
As of December 31, 1998, general obligations of the State of South
Carolina were rated Aaa/AAA/AAA by Moody's, S&P 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.
Eligible investments for the South Carolina Fund also include
obligations of the governments of Puerto Rico, the Virgin Islands and Guam to
the extent these obligations are exempt from South Carolina State personal
income taxes. The Fund will not invest more than 5% of its net assets in the
obligations of each of the Virgin Islands and Guam, but may invest without
limitation in the obligations of Puerto Rico. Accordingly, the Fund may be
adversely affected by local political and economic conditions and developments
within Puerto Rico affecting the issuers of such obligations.
ADDITIONAL INFORMATION CONCERNING VIRGINIA
The performance of the Virginia Fund is influenced by the political,
economic and statutory environment within the State. The Fund invests in
obligations of Virginia issuers, which results in the Fund=s performance being
subject to risks associated with the most current conditions in the State. The
information presented below describes in more detail the factors that could
affect the ability of the bond issuers to repay interest and principal on
securities acquired by the Fund. The following information has been obtained
from a variety of public sources and is believed to be accurate, but should not
be relied upon as a complete description of all relevant information.
General
Virginia is the nation=s twelfth most populous state. As of July 1998,
the State=s population approached 6.8 million. The population of the State has
increased 9.7% since 1990 according to the U.S. Bureau of the Census. As for
personal income, the State is currently ranked highest in the Southeast region
and greater than the national average. Although Virginia is largely rural,
almost 80% of the population lives in the eight metropolitan statistical areas.
Current growth is being fueled by service industries. Employment in the
services increased 19.8% from 1992-96 and now makes up approximately 29% of all
employment. The additions of major semiconductor plants, continued expansion of
healthcare and financial services make up the majority of these gains. Virginia
has one of the highest concentrations of high technology jobs in the nation.
Currently, almost 150,000 people work for approximately 3,900 firms. Many of the
original high-tech jobs were related to defense, but have more recently been
attributed to the computer industry. The State=s unemployment rate has typically
remained about 1.0% below the national average. In October 1998, the
unemployment rate was 2.9%. The State is governed by the Right-to-Work Law and
is considered one of the least unionized of the industrialized states. This has
created a very favorable business climate in the past.
Tourism continues to be important for the State. In 1996, retail
spending by domestic travelers represented nearly 20% of all retail sales. The
main draws include the beach, mountains, metropolitan cities and the amusement
parks. These tourism dollars represent a significant asset for the State.
The State has been able to weather the most recent base closings in
1993. In some cases, the State=s military bases have actually benefited from
realignment of units and programs. The concern of base closings is still
evident, but has subsided for the near-term.
Virginia's Budget Process
With its new Governor, James S. Gilmore III, who took office in January
of 1998, the State is continuing its policy of strong fiscal management. During
his campaign, Governor Gilmore promised to eliminate the personal property tax
on motor vehicles. The previous Governor, George Allen, left office after
submitting a biennium budget that included $39.8 billion in spending and
procedures in place to continue the recent success of budget surpluses (4 out of
the last 5 years). The State currently has a fund balance of $1,442.2 million as
of July 1, 1998, and a rainy day fund in excess of $348 million and general
obligation debt service of 3% of operating expenditures. The State also enjoys
low debt levels at just $521 per capita and nearly 67% of the State-backed debt
outstanding is not tax supported. On December 19, 1998, the Secretary of Finance
projected $8.69 million in general fund dollars over the current budget for the
fiscal year 1999-2000. The Debt Capacity Advisory Committee has stated that the
State can issue $531 million a year for the next two years. This figure is up
significantly from the 1996 projection of $243 million.
State=s Revenues and Expenditures
The State derives over 95.6% of its revenues from taxes. Individual and
fiduciary income and estate taxes supply 63.7% of all tax revenue. State sales
taxes account for nearly 22.6%. The top expenditure categories include education
(44.5%), individual and family services (27.1%) and the administration of
justice (20.4%).
Governor's Objectives
Governor Gilmore made it clear that his first priority was the
elimination of the personal property tax on motor vehicles, as stated earlier.
The second initiative that the Governor insisted upon was the addition of 1,000
new elementary teachers. The Governor signed into law on May 20, 1998,
amendments to the Appropriations Act that would fully fund the $110 million
program for public school construction and effect personal and effect personal
property tax relief totaling $434.8 million.
As of December 31, 1997, general obligations of the State of Virginia
were rated Aaa/AAA/AAA by Moody=s, S&P 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.
<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 short-term
obligations, such as notes, commercial paper, certificates of deposit, banker's
acceptances, bank deposits or U.S. government securities if, in the opinion of
the investment advisor, market conditions warrant a temporary defensive
investment strategy.
U.S. Government Securities
The Fund may invest in securities issued or guaranteed by U.S.
government agencies or instrumentalities.
These securities are backed by (1) the discretionary authority of the
U.S. government to purchase certain obligations of agencies or instrumentalities
or (2) the credit of the agency or instrumentality issuing the obligations.
Some government agencies and instrumentalities may not receive
financial support from the U.S. government. Examples of such agencies are:
(i) Farm Credit System, including the National Bank for
Cooperatives, Farm Credit Banks and Banks for Cooperatives;
(ii) Farmers Home Administration;
(iii) Federal Home Loan Banks;
(iv) Federal Home Loan Mortgage Corporation;
(v) Federal National Mortgage Association; and
(vi) Student Loan Marketing Association.
Securities Issued by the Government National Mortgage Association
("GNMA")
The Fund may invest in securities issued by the GNMA, a corporation
wholly-owned by the U.S. government. GNMA securities or "certificates" represent
ownership in a pool of underlying mortgages. The timely payment of principal and
interest due on these securities is guaranteed.
<PAGE>
Unlike conventional bonds, the principal on GNMA certificates is not
paid at maturity but over the life of the security in scheduled monthly
payments. While mortgages pooled in a GNMA certificate may have maturities of up
to 30 years, the certificate itself will have a shorter average maturity and
less principal volatility than a comparable 30-year bond.
The market value and interest yield of GNMA certificates can vary due
not only to market fluctuations, but also to early prepayments of mortgages
within the pool. Since prepayment rates vary widely, it is impossible to
accurately predict the average maturity of a GNMA pool. In addition to the
guaranteed principal payments, GNMA certificates may also make unscheduled
principal payments resulting from prepayments on the underlying mortgages.
Although GNMA certificates may offer yields higher than those available
from other types of U.S. government securities, they may be less effective as a
means of locking in attractive long- term rates because of the prepayment
feature. For instance, when interest rates decline, prepayments are likely to
increase as the holders of the underlying mortgages seek refinancing. As a
result, the value of a GNMA certificate is not likely to rise as much as the
value of a comparable debt security would in response to 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.
<PAGE>
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 (i.e., write) put and call options on
securities it holds or intends to acquire and may also 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.
<PAGE>
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 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.
<PAGE>
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.
<PAGE>
The Fund may invest in "restricted" securities, i.e., securities
subject to restrictions on resale under federal securities laws. Rule 144A under
the Securities Act of 1933 ("Rule 144A") allows certain restricted securities to
trade freely among qualified institutional investors. Since Rule 144A securities
may have limited markets, the Board of Trustees will determine whether such
securities should be considered illiquid for the purpose of determining the
Fund's compliance with the limit on illiquid securities indicated above. In
determining the liquidity of Rule 144A securities, the Trustees will consider:
(1) the frequency of trades and quotes for the security; (2) the number of
dealers willing to purchase or sell the security and the number of other
potential buyers; (3) dealer undertakings to make a market in the security; and
(4) the nature of the security and the nature of the marketplace trades.
Investment in Other Investment Companies
The Fund may purchase the shares of other investment companies to the
extent permitted under the 1940 Act. Currently, the Fund may not (1) own more
than 3% of the outstanding voting stocks of another investment company, (2)
invest more than 5% of its assets in any single investment company, and (3)
invest more than 10% of its assets in investment companies. However, the Fund
may invest all of its investable assets in securities of a single open-end
management investment company with substantially the same fundamental investment
objectives, policies and limitations as the Fund.
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 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 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 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.
<PAGE>
The yield on municipal bonds depends 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 a 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
Master demand notes 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. The Fund 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, a Fund 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, a 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 SAI (which limits such
investments to commercial paper rated A-1 by S&P, Prime-1 by Moody's or F-1 by
Fitch).
Obligations of Foreign Branches of United States Banks
The obligations of foreign branches of U.S. banks 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
Obligations of U.S. branches of foreign banks 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
Payment-in-kind ("PIK") securities 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
A zero coupon "stripped" bond represents 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 each 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.
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 four classes of shares that differ
primarily with respect to sales charges and distribution fees. Depending upon
the class of shares, you will pay an initial sales charge when you buy the
Fund's shares, a contingent deferred sales charge (a "CDSC," described below
under "Contingent Deferred Sales Charge") 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 a Fund by the broker-dealer; (e) shareholders of record on
October 12, 1990 in any series of Evergreen Investment Trust in existence on
that date, and the members of their immediate families; (f) current and retired
employees of FUNB and its affiliates, EDI and any broker-dealer with whom EDI
has entered into an agreement to sell shares of the Fund, and members of the
immediate families of such employees; and (g) upon the initial purchasee 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.
<PAGE>
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 TIMING CDSC RATE
Month of purchase and the first twelve-month
period following the month of purchase....................................5.00%
Second twelve-month period following the month of purchase................4.00%
Third twelve-month period following the month of purchase.................3.00%
Fourth twelve-month period following the month of purchase................3.00%
Fifth twelve-month period following the month of purchase.................2.00%
Sixth twelve-month period following the month of purchase.................1.00%
Thereafter................................................................0.00%
Class B shares that have been outstanding for seven years after the
month of purchase will automatically convert to Class A shares without
imposition of a front-end sales charge or exchange fee. Conversion of Class B
shares represented by stock certificates will require the return of the stock
certificate to ESC.
Class C Shares
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 CMG,
Evergreen Asset Management Company, Evergreen Investment Management Company,
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.
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). 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
With a larger purchase, there are several ways that you can combine
multiple purchases of Class A shares in Evergreen funds and take advantage of
lower sales charges.
Combined Purchases
You can reduce your sales charge by combining purchases of Class A
shares of multiple Evergreen funds. For example, if you invested $75,000 in each
of two different Evergreen funds, you would pay a sales charge based on a
$150,000 purchase (i.e., 3.75% of the offering price, rather than 4.75%).
Rights of Accumulation
You can reduce your sales charge by adding the value of Class A shares of
Evergreen funds you already own to the amount of your next Class A investment.
For example, if you hold Class A shares valued at $99,999 and purchase an
additional $5,000 the sales charge for the $5,000 purchase would be at the next
lower sales charge of 3.75%, rather than 4.75%.
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;
<PAGE>
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
<PAGE>
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. 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 day the following days the New York Stock Exchange is closed: New
Year's Day, Martin Luther King 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 sixty 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.
<PAGE>
(5) Securities, including restricted securities, for which market
quotations are not readily available; listed securities or those on NMS
if, in the Fund's opinion, the last sales price does not reflect a
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:
n
P(1+T) =ERV
P= initial payment of $1,000
T= average total return
n= number of years
ERV= ending redeemable value of the initial $1,000
Yield
Described below are yield calculations the Fund may use. Yield
quotations are expressed in annualized terms and may be quoted on a compounded
basis. Yields based on these calculations do not represent the Fund's yield for
any future period.
30-Day Yield
If the Fund invests primarily in bonds, it may quote its 30-day yield
in advertisements or in reports or other communications to shareholders. It is
calculated by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period,
according to the following formula:
a-b 6
Yield = 2[( --- + 1 ) - 1]
cd
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 Yields
If the Fund invests primarily in money market instruments, it may quote
its 7-day current yield or effective yield in advertisements or in reports or
other communications to shareholders.
The current yield is calculated by determining the net change,
excluding capital changes and income other than investment income, in the value
of a hypothetical, pre-existing account having a balance of one share at the
beginning of the 7-day base period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, and dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return, and then multiplying the base period return by (365/7).
The effective yield is based on a compounding of the current yield,
according to the following formula:
365/7
Effective Yield=[(base period return)] + 1 ]-1
Tax Equivalent Yield
If the Fund invests primarily in municipal bonds, it may quote in
advertisements or in reports or other communications to shareholders a tax
equivalent yield, which is what an investor would generally need to earn from a
fully taxable investment in order to realize, after income taxes, a benefit
equal to the tax free yield provided by the Fund. Tax equivalent yield is
calculated using the following formula:
Yield
Tax Equivalent Yield= -----------------
1-Income Tax Rate
The quotient is then added to that portion, if any, of the Fund's yield that is
not tax exempt. Depending on the Fund's objective, the income tax rate used in
the formula above may be federal or a combination of federal and state.
PRINCIPAL UNDERWRITER
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.
<PAGE>
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 (1) 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 AIndependent Trustees@), and (2) 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,
if applicable, Class C shares, including certain advertising, marketing and
shareholder service expenses, pursuant to Rule 12b-1 of the 1940 Act. These
A12b-1 fees@ or Adistribution fees@ are indirectly paid by the shareholder, as
shown by the Fund's expense table in the prospectus.
Under the Distribution Plans (each a APlan,@ together, the APlans@)
that the Fund has adopted for its Class A, Class B and, if applicable, Class C
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%
*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.
Amounts paid under the Plans are used to compensate the Distributor
pursuant to Distribution Agreements (each an AAgreement,@ together, the
AAgreements@) 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 a 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 quarterly on
Class A, Class B and Class C shares and are charged as class expenses, as
accrued. The distribution fees attributable to 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.
<PAGE>
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
twelve-month periods provided, however, that such continuance is specifically
approved at least annually by the Trustees of the Trust or by vote of the
holders of a majority of the outstanding voting securities of that class and, in
either case, by a majority of the Independent Trustees of the Trust.
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 and Class C
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
and Class C shares and (ii) stimulate administrators to render administrative
support services to the Fund and holders of Class A, Class B and Class C shares.
The administrative services are provided by a representative who has knowledge
of the shareholder's particular circumstances and goals, and include, but are
not limited to providing office space, equipment, telephone facilities, and
various personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding Class
A, Class B and Class C 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 and Class C 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-1fees, see "Expenses" in the prospectus and "12b-1 Fees" under "Expenses" in
Part 1 of this SAI.
<PAGE>
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 other than
exempt interest dividends 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. None of the Fund's 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.
<PAGE>
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
in 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 sixty-one-day
period beginning thirty days before and ending thirty days after he or she sold
or exchanged the shares. The Code will not allow a shareholder to realize a loss
on the sale of Fund shares held by the shareholder for six months or less to the
extent the shareholder received exempt interest dividends on such shares.
Moreover, the Code will treat a shareholder's allowable 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.
<PAGE>
Other Tax Considerations
The foregoing discussion relates solely to U.S. federal income tax law
as applicable to U.S. persons (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates). It does not reflect
the special tax consequences to certain taxpayers (e.g., banks, insurance
companies, tax exempt organizations and foreign persons). Shareholders are
encouraged to consult their own tax advisors regarding specific questions
relating to federal, state and local tax consequences of investing in shares of
the Fund. Each shareholder who is not a U.S. person should consult his or her
tax advisor regarding the U.S. and foreign tax consequences of ownership of
shares of the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30% (or at a lower rate under a
tax treaty) on amounts treated as income from U.S. sources under the Code.
BROKERAGE
Brokerage Commissions
If the Fund invests in equity securities, it expects to buy and sell
them through brokerage transactions for which commissions are payable. Purchases
from underwriters will include the underwriting commission or concession, and
purchases from dealers serving as market makers will include a dealer's mark-up
or reflect a dealer's mark-down. Where transactions are made in the
over-the-counter market, the Fund will deal with primary market makers unless
more favorable prices are otherwise obtainable.
If the Fund invests in fixed income securities, it expects to buy and
sell them directly from the issuer or an underwriter or market maker for the
securities. Generally, the Fund will not pay brokerage commissions for such
purchases. When the Fund buys a security from an underwriter, the purchase price
will usually include an underwriting commission or concession. The purchase
price for securities bought from dealers serving as market makers will similarly
include the dealer's mark up or reflect a dealer's mark down. When the Fund
executes transactions in the over-the- counter market, it will deal with primary
market makers unless more favorable prices are otherwise obtainable.
Selection of Brokers
When buying and selling portfolio securities, the investment advisor
seeks brokers who can provide the most benefit to the Fund. When selecting a
broker, an 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.
<PAGE>
The Fund may pay higher brokerage commissions to a broker providing it
with research services, as defined in item 6, above. Pursuant to Section 28(e)
of the Securities Exchange Act of 1934, this practice is permitted if the
commission is reasonable in relation to the brokerage and research services
provided. Research services provided by a broker to the investment advisor do
not replace, but supplement, the services the investment advisor is required to
deliver to the Fund. It is impracticable for the investment advisor to allocate
the cost, value and specific application of such research services among its
clients because research services intended for one client may indirectly benefit
another.
When selecting a broker for portfolio trades, the investment advisor
may also consider the amount of Fund shares a broker has sold, subject to the
other requirements described above.
If the Fund is advised by Evergreen Asset Management Corp. ("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 an 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 net asset value 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.
<PAGE>
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
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. 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.
<PAGE>
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.
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, and Messrs. Scofield and 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; and 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 Trustee Attorney, Law Offices of Michael S. Scofield.
(DOB: 2/20/43)
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 Senior Vice President and Operations Executive, BYSIS Fund
(DOB:8/30/58) Services.
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,
Pricewaterhouse-Coopers LLP, New York.
Bryan Haft* Vice President Team Leader, Fund Administration, BISYS Fund Services.
(DOB: 1/23/65)
Michael H. Koonce Secretary Senior Vice President and Assistant General Counsel, First
(DOB: 4/20/60) Union Corporation; former Senior Vice President and General
Counsel, Colonial Management Associates, Inc.
</TABLE>
*Address: BISYS, 3435 Stelzer Road, Columbus, Ohio 43219-8001
CORPORATE AND MUNICIPAL BOND RATINGS
The Fund relies on ratings provided by independent rating services to
help determine the credit quality of bonds and other obligations the Fund
intends to purchase or already owns. A rating is an opinion of an issuer's
ability to pay interest and/or principal when due. Ratings reflect an issuer's
overall financial strength and whether it can meet its financial commitments
under various economic conditions.
If a security held by the Fund loses its rating or has its rating
reduced after the Fund has purchased it, the Fund is not required to sell or
otherwise dispose of the security, but may consider doing so.
The principal rating services, commonly used by the Fund and investors
generally, are S&P and Moody's. The Fund may also rely on ratings provided by
Fitch. Rating systems are similar among the different services. As an example,
the chart below compares basic ratings for long-term bonds. The `Credit Quality'
terms in the chart are for quick reference only. Following the chart are the
specific definitions each service provides for its ratings.
<PAGE>
<TABLE>
<CAPTION>
COMPARISON OF LONG-TERM BOND RATINGS
MOODY'S S&P FITCH Credit Quality
<S> <C> <C> <C>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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 its financial
commitment on the obligation.
CCC An obligation rated CCC is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC An obligation rated CC is currently highly vulnerable to nonpayment.
C The C rating may be used to cover a situation where a bankruptcy petition has
been filed or similar action has been taken, but payments on this obligation are
being continued.
D An obligation rated D is in payment default. The D rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Plus (+) or minus (-) The ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
Fitch Municipal Long-Term Bond Ratings
Investment Grade
AAA Highest credit quality. AAA ratings denote the lowest expectation of credit
risk. They are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
<PAGE>
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 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.
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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.
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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.