RULE 497(e)
Registration No. 2-89264
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NEW YORK
DAILY TAX FREE
INCOME FUND, INC.
600 Fifth Avenue,
New York, NY 10020
(212) 830-5220
STATEMENT OF ADDITIONAL INFORMATION
August 28, 2000
AS SUPPLEMENTED ON OCTOBER 31, 2000
Relating to the New York Daily Tax Free Income Fund, Inc. Prospectus,
the Victory Shares of New York Daily Tax Free Income Fund, Inc. Prospectus
and the Evergreen Shares of New York Daily Tax Free Income Fund, Inc.
Prospectus dated August 28, 2000
This Statement of Additional Information, although not in itself a prospectus,
expands upon and supplements the information contained in the current
Prospectuses for the New York Daily Tax Free Income Fund, Inc., the Victory
Shares of New York Daily Tax Free Income Fund, Inc., and the Evergreen Shares of
New York Daily Tax Free Income Fund, Inc., and should be read in conjunction
with each of the Fund's Prospectuses.
This Statement of Additional Information is incorporated by reference into each
Prospectus in its entirety. The Financial Statements of the Fund have been
incorporated by reference to the Fund's Annual Report. The Annual Report is
available, without charge, upon request by calling (800) 221-3079. The material
relating to Purchase, Redemption and Pricing of Shares has been incorporated by
reference to the Prospectus for each Class of shares.
A Prospectus for the Class A and Class B shares may be obtained from any
Participating Organization or by writing or calling the Fund toll free at (800)
221-3079.
If you wish to invest in Victory Shares of the Fund you should obtain a separate
prospectus by writing to The Victory Funds, c/o Boston Financial Data Services,
P.O. Box 8527, Boston, Massachusetts 02266-8527 or by calling (800) KEY-FUND.
If you wish to invest in Evergreen Shares of the Fund you should obtain a
separate prospectus by writing to State Street Bank and Trust Company, P.O. Box
9021, Boston, Massachusetts 02205-9827 or by calling (800) 807-2840.
Table of Contents
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Fund History...................................2 Capital Stock and Other Securities................20
Description of the Fund and Its Investments Purchase, Redemption and Pricing of Shares........20
And Risks......................................2 Taxation of the Fund..............................21
Management of the Fund........................13 Underwriters......................................23
Control Persons and Principal Holders of Calculation of Performance Data...................23
Securities....................................15 Financial Statements..............................24
Investment Advisory and Other Services........16 Description of Ratings............................25
Brokerage Allocation and Other Practices......19 Taxable Equivalent Yield Tables...................26
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I. FUND HISTORY
The Fund was incorporated on January 31, 1984, in the State of Maryland.
II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
The Fund is an open-end, management investment company that is a short-term,
tax-exempt money market fund. The Fund's investment objectives are to seek a
high level of current income exempt from regular Federal income tax and New York
State and New York City income taxes consistent with preservation of capital,
maintenance of liquidity and stability of principal. No assurance can be given
that these objectives will be achieved.
The following discussion expands upon the description of the Fund's investment
objectives and policies in each of the Prospectuses.
The Fund's assets will be invested primarily in (i) high quality debt
obligations issued by or on behalf of the State of New York, other states,
territories and possessions of the United States and their authorities,
agencies, instrumentalities and political subdivisions, the interest on which
is, in the opinion of bond counsel to the issuer at the date of issuance,
currently exempt from regular Federal and New York income taxation ("Municipal
Obligations") and in (ii) Participation Certificates (which cause the Fund to be
treated as the owner of an interest in the underlying Municipal Obligations for
Federal income tax purposes) in Municipal Obligations purchased from banks,
insurance companies or other financial institutions ("Participation
Certificates"). Dividends paid by the Fund are exempt-interest dividends by
virtue of being properly designated by the Fund as derived from Municipal
Obligations and Participation Certificates. They will be exempt from regular
Federal income tax provided the Fund qualifies as a regulated investment company
under Subchapter M of the Code and the Fund complies with Section 852(b)(5) of
the Internal Revenue Code. Although the Supreme Court has determined that
Congress has the authority to subject the interest on bonds such as the
Municipal Obligations to regular Federal income taxation, existing law excludes
such interest from regular Federal income tax. However, such interest, including
exempt-interest dividends, may be subject to the Federal alternative minimum
tax.
Exempt-interest dividends paid by the Fund that are correctly identified by the
Fund as derived from obligations issued by or on behalf of the State of New York
or any New York local governments, or their instrumentalities, authorities or
districts ("New York Municipal Obligations") will be exempt from the New York
State and New York City income taxes. Exempt-interest dividends correctly
identified by the Fund as derived from obligations of Puerto Rico, Guam and the
Virgin Islands, as well as any other types of obligations that New York is
prohibited from taxing under the Constitution, the laws of the United States of
America or the New York Constitution ("Territorial Municipal Obligations"),
should also be exempt from New York State and New York City personal income
taxes provided the Fund complies with applicable New York laws. See "New York
Income Taxes" in the Prospectus. To the extent that suitable New York Municipal
Obligations are not available for investment by the Fund, the Fund may purchase
Municipal Obligations issued by other states, their agencies and
instrumentalities. The dividends on these will be designated by the Fund as
derived from interest income which will be, in the opinion of bond counsel to
the issuer at the date of issuance, exempt from regular Federal income tax but
will be subject to the New York State and New York City personal income taxes.
Except as a temporary defensive measure during periods of adverse market
conditions as determined by the Manager, the Fund will invest at least 65% of
its assets in New York Municipal Obligations, although the exact amount of the
Fund's assets invested in such securities will vary from time to time. The Fund
seeks to maintain an investment portfolio with a dollar-weighted average
maturity of 90 days or less and to value its investment portfolio at amortized
cost and maintain a net asset value at $1.00 per share of each Class. There can
be no assurance that this value will be maintained.
The Fund may hold uninvested cash reserves pending investment. The Fund's
investments may include "when-issued" Municipal Obligations, stand-by
commitments and taxable repurchase agreements. Although the Fund will attempt to
invest 100% of its assets in Municipal Obligations and in Participation
Certificates, the Fund reserves the right to invest up to 20% of the value of
its total assets in securities, the interest income on which is subject to
regular Federal, state and local income tax. The Fund may invest more than 25%
of its assets in Participation Certificates and other New York Municipal
Obligations. In view of this possible "concentration" in bank Participation
Certificates in New York Municipal Obligations, an investment in Fund shares
should be made with an understanding of the characteristics of the banking
industry and the risks which such an investment may entail. (See "Variable Rate
Demand Instruments and Participation Certificates" herein.) The investment
objectives of the Fund described in the preceding paragraphs of this section may
not be changed unless approved by the holders of a majority of the outstanding
shares of the Fund that would be affected by such a change. As used herein, the
term "majority of the outstanding shares" of the Fund means, respectively, the
vote of the lesser of (i) 67% or more of the shares of the Fund present at a
meeting, if the holders of more than 50% of the outstanding shares of the Fund
are present or represented by proxy, or (ii) more than 50% of the outstanding
shares of the Fund.
The Fund may only purchase United States dollar-denominated securities that have
been determined by the Fund's Board of Directors to present minimal credit risks
and that are Eligible Securities at the time of acquisition. The term
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Eligible Securities means: (i) securities which have or are deemed to have
remaining maturities of 397 days or less and rated in the two highest short-term
rating categories by any two nationally recognized statistical rating
organizations ("NRSROs") or in such categories by the only NRSRO that has rated
the Municipal Obligations (collectively, the "Requisite NRSROs") or (ii) unrated
securities determined by the Fund's Board of Directors to be of comparable
quality. In addition, securities which have or are deemed to have remaining
maturities of 397 days or less but that at the time of issuance were long-term
securities (i.e. with maturities greater than 366 days) are deemed unrated and
may be purchased if such had received a long-term rating from the Requisite
NRSROs in one of the three highest rating categories. Provided, however, that
such may not be purchased if it (i) does not satisfy the rating requirements set
forth in the preceding sentence and (ii) has received a long-term rating from
any NRSRO that is not within the three highest long-term rating categories. A
determination of comparability by the Board of Directors is made on the basis of
its credit evaluation of the issuer, which may include an evaluation of a letter
of credit, guarantee, insurance or other credit facility issued in support of
the securities. While there are several organizations that currently qualify as
NRSROs, two examples of NRSROs are Standard & Poor's Rating Services, a division
of The McGraw-Hill Companies, ("S&P") and Moody's Investors Service, Inc.
("Moody's"). The two highest ratings by S&P and Moody's are "AAA" and "AA" by
S&P in the case of long-term bonds and notes or "Aaa" and "Aa" by Moody's in the
case of bonds; "SP-1" and "SP-2" by S&P or "MIG-1" and "MIG-2" by Moody's in the
case of notes; "A-1" and "A-2" by S&P or "Prime-1" and "Prime-2" by Moody's in
the case of tax-exempt commercial paper. The highest rating in the case of
variable and floating demand notes is "VMIG-1" by Moody's or "SP-1/AA" by S&P.
Such instruments may produce a lower yield than would be available from less
highly rated instruments.
Subsequent to its purchase by the Fund, a rated security may cease to be rated
or its rating may be reduced below the minimum required for purchase by the
Fund. If this occurs, the Board of Directors of the Fund shall promptly reassess
whether the security presents minimal credit risks and shall cause the Fund to
take such action as the Board of Directors determines is in the best interest of
the Fund and its shareholders. However, reassessment is not required if the
security is disposed of or matures within five business days of the Manager
becoming aware of the new rating and provided further that the Board of
Directors is subsequently notified of the Manager's actions.
In addition, in the event that a security (i) is in default, (ii) ceases to be
an Eligible Security under Rule 2a-7 of the Investment Company Act of 1940, as
amended (the "1940 Act"), or (iii) is determined to no longer present minimal
credit risks, or an event of insolvency occurs with respect to the issues of a
portfolio security or the provider of any Demand Feature or Guarantee, the Fund
will dispose of the security absent a determination by the Fund's Board of
Directors that disposal of the security would not be in the best interests of
the Fund. Disposal of the security shall occur as soon as practicable consistent
with achieving an orderly disposition by sale, exercise of any demand feature or
otherwise. In the event of a default with respect to a security which
immediately before default accounted for 1/2 of 1% or more of the Fund's total
assets, the Fund shall promptly notify the SEC of such fact and of the actions
that the Fund intends to take in response to the situation.
All investments by the Fund will mature or will be deemed to mature within 397
days or less from the date of acquisition and the average maturity of the Fund
portfolio (on a dollar-weighted basis) will be 90 days or less. The maturities
of variable rate demand instruments held in the Fund's portfolio will be deemed
to be the longer of the period required before the Fund is entitled to receive
payment of the principal amount of the instrument through demand, or the period
remaining until the next interest rate adjustment, although the stated
maturities may be in excess of 397 days.
With respect to 75% of its total assets, the Fund shall invest not more than 5%
of its total assets in Municipal Obligations or Participation Certificates
issued by a single issuer. However, the Fund shall not invest more than 5% of
its total assets in Municipal Obligations or Participation Certificates issued
by a single issuer unless Municipal Obligations are First Tier Securities.
The Fund intends to qualify as a regulated investment company under Subchapter M
of the Code. The Fund will be restricted in that at the close of each quarter of
the taxable year, at least 50% of the value of its total assets must be
represented by cash, government securities, regulated investment company
securities and other securities which are limited in respect of any one issuer
to not more than 5% in value of the total assets of the Fund and to not more
than 10% of the outstanding voting securities of such issuer. In addition, at
the close of each quarter of its taxable year, not more than 25% in value of the
Fund's total assets may be invested in securities of one issuer (or two or more
issuers that the Fund controls) other than Government securities or regulated
investment company securities. The limitations described in this paragraph
regarding qualification as a regulated investment company are not fundamental
policies and may be revised to the extent applicable Federal income tax
requirements are revised. (See "Federal Income Taxes" herein.)
Description Of Municipal Obligations
As used herein, "Municipal Obligations" include the following as well as
"Variable Rate Demand Instruments and Participation Certificates."
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1. Municipal Bonds with remaining maturities of 397 days or less that are
Eligible Securities at the time of acquisition. Municipal Bonds are debt
obligations of states, cities, counties, municipalities and municipal
agencies (all of which are generally referred to as "municipalities"). They
generally have a maturity at the time of issue of one year or more and
are issued to raise funds for various public purposes such as construction
of a wide range of public facilities, to refund outstanding obligations and
to obtain funds for institutions and facilities.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by
the issuer's pledge of its faith, credit and taxing power for the payment
of principal and interest. Issuers of general obligation bonds include
states, counties, cities, towns and other governmental units. The principal
of, and interest on, revenue bonds are payable from the income of specific
projects or authorities and generally are not supported by the issuer's
general power to levy taxes. In some cases, revenues derived from specific
taxes are pledged to support payments on a revenue bond.
In addition, certain kinds of "private activity bonds" are issued by public
authorities to provide funding for various privately operated industrial
facilities (hereinafter referred to as "industrial revenue bonds" or
"IRBs"). Interest on IRBs is generally exempt, with certain exceptions,
from regular Federal income tax pursuant to Section 103(a) of the Code,
provided the issuer and corporate obligor thereof continue to meet certain
conditions. (See "Federal Income Taxes" herein.) IRBs are, in most cases,
revenue bonds and do not generally constitute the pledge of the credit of
the issuer of such bonds. The payment of the principal and interest on IRBs
usually depends solely on the ability of the user of the facilities
financed by the bonds or other guarantor to meet its financial obligations
and, in certain instances, the pledge of real and personal property as
security for payment. If there is no established secondary market for the
IRBs, the IRBs or the Participation Certificates in IRBs purchased by the
Fund will be supported by letters of credit, guarantees or insurance that
meet the definition of Eligible Securities at the time of acquisition and
provide the demand feature which may be exercised by the Fund at any time
to provide liquidity. Shareholders should note that the Fund may invest in
IRBs acquired in transactions involving a Participating Organization. In
accordance with Investment Restriction 6 herein, the Fund is permitted to
invest up to 10% of the portfolio in high quality, short-term Municipal
Obligations (including IRBs) meeting the definition of Eligible Securities
at the time of acquisition that may not be readily marketable or have a
liquidity feature.
2. Municipal Notes with remaining maturities of 397 days or less that are
Eligible Securities at the time of acquisition. The principal kinds of
Municipal Notes include tax anticipation notes, bond anticipation notes,
revenue anticipation notes and project notes. Notes sold in anticipation of
collection of taxes, a bond sale or receipt of other revenues are usually
general obligations of the issuing municipality or agency. Project notes
are issued by local agencies and are guaranteed by the United States
Department of Housing and Urban Development. Project notes are also secured
by the full faith and credit of the United States. The Fund's investments
may be concentrated in Municipal Notes of New York issuers.
3. Municipal Commercial Paper that is an Eligible Security at the time of
acquisition. Issues of Municipal Commercial Paper typically represent very
short-term, unsecured, negotiable promissory notes. These obligations are
often issued to meet seasonal working capital needs of municipalities or to
provide interim construction financing. They are paid from general revenues
of municipalities or are refinanced with long-term debt. In most cases
Municipal Commercial Paper is backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or other institutions which may be called upon in the
event of default by the issuer of the commercial paper.
4. Municipal Leases, which may take the form of a lease or an installment
purchase or conditional sale contract, issued by state and local
governments and authorities to acquire a wide variety of equipment and
facilities such as fire and sanitation vehicles, telecommunications
equipment and other capital assets. Municipal Leases frequently have
special risks not normally associated with general obligation or revenue
bonds. Leases and installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt-issuance
limitations of many state constitutions and statutes are deemed to be
inapplicable because of the inclusion in many leases or contracts of
"non-appropriation" clauses. These clauses provide that the governmental
issuer has no obligation to make future payments under the lease or
contract unless money is appropriated for such purpose by the appropriate
legislative body on a yearly or other periodic basis. To reduce this risk,
the Fund will only purchase Municipal Leases subject to a non-appropriation
clause where the payment of principal and accrued interest is backed by an
unconditional irrevocable letter of credit, a guarantee, insurance or other
comparable undertaking of an approved financial institution. These types of
Municipal Leases may be considered illiquid and subject to the 10%
limitation of investments in illiquid securities set forth under
"Investment Restrictions" contained herein. The Board of Directors may
adopt guidelines and delegate to the Manager the daily function of
determining and monitoring the liquidity of Municipal Leases. In making
such determination, the Board and the Manager may consider such factors as
the frequency of trades for the obligation, the number of dealers willing
to purchase or sell the obligations and the number of other potential
buyers and the nature of the marketplace
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for the obligations, including the time needed to dispose of the
obligations and the method of soliciting offers. If the Board determines
that any Municipal Leases are illiquid, such lease will be subject to the
10% limitation on investments in illiquid securities. The Fund has no
intention to invest in Municipal Leases in the foreseeable future and will
amend this Statement of Additional Information in the event that such an
intention should develop in the future.
5. Any other Federal tax-exempt, and to the extent possible, New York State
and New York City tax-exempt obligations issued by or on behalf of states
and municipal governments and their authorities, agencies,
instrumentalities and political subdivisions, whose inclusion in the Fund
would be consistent with the Fund's investment objectives, policies and
risks described herein and permissible under Rule 2a-7 under the 1940 Act.
Subsequent to its purchase by the Fund, a rated Municipal Obligation may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. If this occurs, the Board of Directors of the Fund shall promptly
reassess whether the Municipal Obligation presents minimal credit risks and
shall cause the Fund to take such action as the Board of Directors determines is
in the best interest of the Fund and its shareholders. However, reassessment is
not required if the Municipal Obligation is disposed of or matures within five
business days of the Manager becoming aware of the new rating and provided
further that the Board of Directors is subsequently notified of the Manager's
actions.
In addition, in the event that a Municipal Obligation (i) is in default, (ii)
ceases to be an Eligible Security under Rule 2a-7 of the 1940 Act, or (iii) is
determined to no longer present minimal credit risks, or an event of insolvency
occurs with respect to the issues of a portfolio security or the provider of any
Demand Feature or Guarantee, the Fund will dispose of the security absent a
determination by the Fund's Board of Directors that disposal of the security
would not be in the best interests of the Fund. Disposal of the security shall
occur as soon as practicable consistent with achieving an orderly disposition by
sale, exercise of any demand feature or otherwise. In the event of a default
with respect to a security which immediately before default accounted for 1/2 of
1% or more of the Fund's total assets, the Fund shall promptly notify the SEC of
such fact and of the actions that the Fund intends to take in response to the
situation. Certain Municipal Obligations issued by instrumentalities of the
United States Government are not backed by the full faith and credit of the
United States Treasury but only by the creditworthiness of the instrumentality.
The Fund's Board of Directors has determined that when it is necessary to ensure
that the Municipal Obligations are Eligible Securities, or where the obligations
are not freely transferable, the Fund will require that the obligation to pay
the principal and accrued interest be backed by an unconditional irrevocable
bank letter of credit, a guarantee, insurance or other comparable undertaking of
an approved financial institution that would qualify the investment as an
Eligible Security.
Variable Rate Demand Instruments and Participation Certificates
Variable rate demand instruments that the Fund will purchase are tax-exempt
Municipal Obligations. They provide for a periodic adjustment in the interest
rate paid on the instrument and permit the holder to demand payment of the
unpaid principal balance plus accrued interest at specified intervals upon a
specified number of days notice either from the issuer or by drawing on a bank
letter of credit, a guarantee or insurance issued with respect to such
instrument.
The variable rate demand instruments in which the Fund may invest are payable on
demand on not more than 30 calendar days' notice and may be exercised at any
time or at specified intervals not exceeding 397 days depending upon the terms
of the instrument. Variable rate demand instruments that cannot be disposed of
properly within seven days in the ordinary course of business are illiquid
securities. The terms of the instruments provide that interest rates are
adjustable at intervals ranging from daily to up to 397 days. The adjustments
are based upon the "prime rate"* of a bank or other appropriate interest rate
adjustment index as provided in the respective instruments. The Fund decides
which variable rate demand instruments it will purchase in accordance with
procedures prescribed by its Board of Directors to minimize credit risks. A fund
utilizing the amortized cost method of valuation under Rule 2a-7 of the 1940 Act
may purchase variable rate demand instruments only if (i) the instrument is
subject to an unconditional demand feature, exercisable by the Fund in the event
of a default in the payment of principal or interest on the underlying
securities, that is an Eligible Security or (ii) the instrument is not subject
to an unconditional demand feature but does qualify as an Eligible Security and
has a long-term rating by the Requisite NRSROs in one of the two highest rating
categories, or if unrated, is determined to be of comparable quality by the
Fund's Board of Directors. The Fund's Board of Directors may determine that an
unrated variable rate demand instrument meets the Fund's high quality criteria
if it is backed by a letter of credit or guarantee or is insured by an insurer
that meets the quality criteria for the Fund stated herein or on the basis of a
credit evaluation of the underlying obligor. If an instrument is ever not deemed
to be an Eligible Security, the Fund either will sell it in the market or
exercise the demand feature.
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* The prime rate is generally the rate charged by a bank to its most
creditworthy customers for short-term loans. The prime rate of a particular
bank may differ from other banks and will be the rate announced by each
bank on a particular day. Changes in the prime rate may occur with great
frequency and generally become effective on the date announced.
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The variable rate demand instruments that the Fund may invest in include
Participation Certificates purchased by the Fund from banks, insurance companies
or other financial institutions in fixed or variable rate, tax-exempt Municipal
Obligations (expected to be concentrated in IRBs) owned by such institutions or
affiliated organizations. The Fund will not purchase Participation Certificates
in fixed rate tax-exempt Municipal Obligations without obtaining an opinion of
counsel that the Fund will be treated as the owner thereof for Federal income
tax purposes. A Participation Certificate gives the Fund an undivided interest
in the Municipal Obligation in the proportion that the Fund's participation
interest bears to the total principal amount of the Municipal Obligation and
provides the demand repurchase feature described below. Where the institution
issuing the participation does not meet the Fund's eligibility criteria, the
participation is backed by an irrevocable letter of credit or guaranty of a bank
(which may be the bank issuing the Participation Certificate, a bank issuing a
confirming letter of credit to that of the issuing bank, or a bank serving as
agent of the issuing bank with respect to the possible repurchase of the
certificate of participation) or insurance policy of an insurance company that
the Board of Directors of the Fund has determined meets the prescribed quality
standards for the Fund. The Fund has the right to sell the Participation
Certificate back to the institution. Where applicable, the Fund can draw on the
letter of credit or insurance after no more than 30 days' notice either at any
time or at specified intervals not exceeding 397 days (depending on the terms of
the participation), for all or any part of the full principal amount of the
Fund's participation interest in the security plus accrued interest. The Fund
intends to exercise the demand only (i) upon a default under the terms of the
bond documents, (ii) as needed to provide liquidity to the Fund in order to make
redemptions of Fund shares, or (iii) to maintain a high quality investment
portfolio. The institutions issuing the Participation Certificates will retain a
service and letter of credit fee (where applicable) and a fee for providing the
demand repurchase feature, in an amount equal to the excess of the interest paid
on the instruments over the negotiated yield at which the participations were
purchased by the Fund. The total fees generally range from 5% to 15% of the
applicable prime rate or other interest rate index. With respect to insurance,
the Fund will attempt to have the issuer of the Participation Certificate bear
the cost of the insurance. However, the Fund retains the option to purchase
insurance if necessary, in which case the cost of insurance will be an expense
of the Fund subject to the expense limitation (see "Expense Limitation" herein).
The Manager has been instructed by the Fund's Board of Directors to continually
monitor the pricing, quality and liquidity of the variable rate demand
instruments held by the Fund, including the Participation Certificates, on the
basis of published financial information and reports of the rating agencies and
other bank analytical services to which the Fund may subscribe. Although these
instruments may be sold by the Fund, the Fund intends to hold them until
maturity, except under the circumstances stated above (see "Federal Income
Taxes" herein).
In view of the Fund's investment in bank Participation Certificates in Municipal
Obligations, which may be secured by bank letters of credit or guarantees, an
investment in the Fund should be made with an understanding of the
characteristics of the banking industry and the risks which such an investment
may entail. Banks are subject to extensive governmental regulations which may
limit both the amounts and types of loans and other financial commitments which
may be made and interest rates and fees which may be charged. The profitability
of this industry is largely dependent upon the availability and cost of capital
funds for the purpose of financing lending operations under prevailing money
market conditions. Also, general economic conditions play an important part in
the operations of this industry and exposure to credit losses arising from
possible financial difficulties of borrowers might affect a bank's ability to
meet its obligations under a letter of credit. The Fund may invest 25% or more
of its net assets in securities that are related in such a way that an economic,
business or political development or change affecting one of the securities
would also affect the other securities. This includes, for example, securities
the interest upon which is paid from revenues of similar type projects, or
securities the issuers of which are located in the same state.
While the value of the underlying variable rate demand instruments may change
with changes in interest rates generally, the variable rate nature of the
underlying variable rate demand instruments should minimize changes in value of
the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation and the risk of potential capital
depreciation is less than would be the case with a portfolio of fixed income
securities. The Fund may contain variable rate demand instruments with variable
maximum rates set by state law, which limit the degree to which interest on such
variable rate demand instruments may fluctuate; to the extent state law contains
such limits, increases or decreases in value may be somewhat greater than would
be the case without such limits. Additionally, the portfolio may contain
variable rate demand Participation Certificates in fixed rate Municipal
Obligations. The fixed rate of interest on these Municipal Obligations will be a
ceiling on the variable rate of the Participation Certificate. In the event that
interest rates increase so that the variable rate exceeds the fixed rate on the
Municipal Obligations, the Municipal Obligations can no longer be valued at par
and may cause the Fund to take corrective action, including the elimination of
the instruments from the portfolio. Because the adjustment of interest rates on
the variable rate demand instruments is made in relation to movements of the
applicable banks' "prime rates," or other interest rate adjustment index, the
variable rate demand instruments are not comparable to long-term fixed rate
securities. Accordingly, interest rates on the variable rate demand instruments
may be higher or lower than current market rates for fixed rate obligations of
comparable quality with similar maturities.
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Because of the variable rate nature of the instruments, the Fund's yield will
decline and its shareholders will forego the opportunity for capital
appreciation during periods when prevailing interest rates have declined. On the
other hand, during periods where prevailing interest rates have increased, the
Fund's yield will increase and its shareholders will have reduced risk of
capital depreciation.
For purposes of determining whether a variable rate demand instrument held by
the Fund matures within 397 days from the date of its acquisition, the maturity
of the instrument will be deemed to be the longer of (i) the period required
before the Fund is entitled to receive payment of the principal amount of the
instrument or (ii) the period remaining until the instrument's next interest
rate adjustment. The maturity of a variable rate demand instrument will be
determined in the same manner for purposes of computing the Fund's
dollar-weighted average portfolio maturity. If a variable rate demand instrument
ceases to be an Eligible Security it will be sold in the market or through
exercise of the repurchase demand feature to the issuer.
When-Issued Securities
New issues of certain Municipal Obligations frequently are offered on a
when-issued basis. The payment obligation and the interest rate that will be
received on these Municipal Obligations are each fixed at the time the buyer
enters into the commitment although delivery and payment of the Municipal
Obligations normally take place within 45 days after the date of the Fund's
commitment to purchase. Although the Fund will only make commitments to purchase
when-issued Municipal Obligations with the intention of actually acquiring them,
the Fund may sell these securities before the settlement date if deemed
advisable by the Manager.
Municipal Obligations purchased on a when-issued basis and the securities held
in the Fund's portfolio are subject to changes in value (both generally changing
in the same way; that is, both experiencing appreciation when interest rates
decline and depreciation when interest rates rise) based upon the public's
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Purchasing Municipal Obligations on
a when-issued basis can involve a risk that the yields available in the market
when the delivery takes place may actually be higher or lower than those
obtained in the transaction itself. A separate account of the Fund consisting of
cash or liquid debt securities equal to the amount of the when-issued
commitments will be established at the Fund's custodian bank. For the purpose of
determining the adequacy of the securities in the account, the deposited
securities will be valued at market value. If the market or fair value of such
securities declines, additional cash or highly liquid securities will be placed
in the account daily so that the value of the account will equal the amount of
such commitments by the Fund. On the settlement date of the when-issued
securities, the Fund will meet its obligations from then-available cash flow,
sale of securities held in the separate account, sale of other securities or,
although it would not normally expect to do so, from sale of the when-issued
securities themselves (which may have a value greater or lesser than the Fund's
payment obligations). Sale of securities to meet such obligations may result in
the realization of capital gains or losses, which are not exempt from Federal
income tax.
Stand-by Commitments
When the Fund purchases Municipal Obligations, it may also acquire stand-by
commitments from banks and other financial institutions. Under a stand-by
commitment, a bank or broker-dealer agrees to purchase at the Fund's option a
specified Municipal Obligation at a specified price with same day settlement. A
stand-by commitment is the equivalent of a "put" option acquired by the Fund
with respect to a particular Municipal Obligation held in its portfolio.
The amount payable to the Fund upon its exercise of a stand-by commitment
normally would be (i) the acquisition cost of the Municipal Obligation
(excluding any accrued interest that the Fund paid on the acquisition), less any
amortized market premium or plus any amortized market or original issue discount
during the period the Fund owned the security, plus (ii) all interest accrued on
the security since the last interest payment date during the period the security
was owned by the Fund. Absent unusual circumstances relating to a change in
market value, the Fund would value the underlying Municipal Obligation at
amortized cost. Accordingly, the amount payable by a bank or dealer during the
time a stand-by commitment is exercisable would be substantially the same as the
market value of the underlying Municipal Obligation.
The Fund's right to exercise a stand-by commitment would be unconditional and
unqualified. A stand-by commitment would not be transferable by the Fund,
although it could sell the underlying Municipal Obligation to a third party at
any time.
The Fund expects stand-by commitments to generally be available without the
payment of any direct or indirect consideration. However, if necessary and
advisable, the Fund may pay for stand-by commitments either separately in cash
or by paying a higher price for portfolio securities which are acquired subject
to such a commitment (thus reducing the yield to maturity otherwise available
for the same securities). The total amount paid in either manner for outstanding
stand-by commitments held in the Fund's portfolio will not exceed 1/2 of 1% of
the value of the Fund's total assets calculated immediately after the
acquisition of each stand-by commitment.
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The Fund will enter into stand-by commitments only with banks and other
financial institutions that, in the Manager's opinion, present minimal credit
risks. If the issuer of the Municipal Obligation does not meet the eligibility
criteria, the issuer of the stand-by commitment will have received a rating
which meets the eligibility criteria or, if not rated, will present a minimal
risk of default as determined by the Board of Directors. The Fund's reliance
upon the credit of these banks and broker-dealers will be supported by the value
of the underlying Municipal Obligations held by the Fund that were subject to
the commitment.
The Fund intends to acquire stand-by commitments solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The purpose of this practice is to permit the Fund to be fully
invested in securities the interest on which is exempt from Federal income tax
while preserving the necessary liquidity to purchase securities on a when-issued
basis, to meet unusually large redemptions and to purchase at a later date
securities other than those subject to the stand-by commitment. The acquisition
of a stand-by commitment would not affect the valuation or assumed maturity of
the underlying Municipal Obligations which will continue to be valued in
accordance with the amortized cost method. Stand-by commitments acquired by the
Fund will be valued at zero in determining net asset value. In those cases in
which the Fund pays directly or indirectly for a stand-by commitment, its cost
will be reflected as unrealized depreciation for the period during which the
commitment is held by the Fund. Stand-by commitments will not affect the
dollar-weighted average maturity of the Fund's portfolio. The maturity of a
security subject to a stand-by commitment is longer than the stand-by repurchase
date.
The stand-by commitments the Fund may enter into are subject to certain risks.
These include the ability of the issuer of the commitment to pay for the
securities at the time the commitment is exercised, the fact that the commitment
is not marketable by the Fund, and that the maturity of the underlying security
will generally be different from that of the commitment.
In addition, the Fund may apply to the Internal Revenue Service for a ruling, or
seek from its counsel an opinion, that interest on Municipal Obligations subject
to stand-by commitments will be exempt from Federal income taxation (see
"Federal Income Taxes" herein). In the absence of a favorable tax ruling or
opinion of counsel, the Fund will not engage in the purchase of securities
subject to stand-by commitments.
Taxable Securities
Although the Fund will attempt to invest 100% of its net assets in tax-exempt
Municipal Obligations, the Fund may invest up to 20% of the value of its total
assets in securities of the kind described below. The interest income from such
securities is subject to regular Federal or New York income tax, under any one
or more of the following circumstances: (i) pending investment of proceeds of
sales of Fund shares or of portfolio securities, (ii) pending settlement of
purchases of portfolio securities, and (iii) to maintain liquidity for the
purpose of meeting anticipated redemptions. In addition, the Fund may
temporarily invest more than 20% in such taxable securities when, in the opinion
of the Manager, it is advisable to do so because of adverse market conditions
affecting the market for Municipal Obligations. The kinds of taxable securities
in which the Fund may invest are limited to the following short-term,
fixed-income securities (maturing in 397 days or less from the time of
purchase): (i) obligations of the United States Government or its agencies,
instrumentalities or authorities, (ii) commercial paper meeting the definition
of Eligible Securities at the time of acquisition, (iii) certificates of deposit
of domestic banks with assets of $1 billion or more, and (iv) repurchase
agreements with respect to any Municipal Obligations or other securities which
the Fund is permitted to own.
Repurchase Agreements
The Fund may invest in instruments subject to repurchase agreements with
securities dealers or member banks of the Federal Reserve System. Under the
terms of a typical repurchase agreement, the Fund will acquire an underlying
debt instrument for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase and the Fund to resell the
instrument at a fixed price and time, thereby determining the yield during the
Fund's holding period. This results in a fixed rate of return insulated from
market fluctuations during such period. A repurchase agreement is subject to the
risk that the seller may fail to repurchase the security. Repurchase agreements
may be deemed to be loans under the 1940 Act. All repurchase agreements entered
into by the Fund shall be fully collateralized at all times during the period of
the agreement in that the value of the underlying security shall be at least
equal to the amount of the loan, including the accrued interest thereon.
Additionally, the Fund or its custodian shall have possession of the collateral,
which the Fund's Board believes will give it a valid, perfected security
interest in the collateral. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs in connection with the disposition of the
collateral. The Fund's Board believes that the collateral underlying repurchase
agreements may be more susceptible to claims of the seller's creditors than
would be the case with securities owned by the Fund. It is expected that
repurchase agreements will give rise to income which will not qualify as
tax-exempt income when distributed by the Fund. The Fund will not invest in a
repurchase agreement maturing in more than seven days if any such investment,
together with illiquid securities held by
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the Fund, exceeds 10% of the Fund's total net assets. (See Investment
Restriction Number 6 herein.) Repurchase agreements are subject to the same
risks described herein for stand-by commitments.
New York Risk Factors
This summary is included for the purpose of providing a general description of
New York State's and New York City's credit and financial condition. The
information set forth below is derived from the official statements and/or
preliminary drafts of official statements prepared in connection with the
issuance of State and City municipal bonds. The Fund has not independently
verified this information.
Economic Trends. Over the long term, the State of New York (the "State") and the
City of New York (the "City") face serious potential economic problems. The City
accounts for approximately 41% of the State's population and personal income,
and the City's financial health affects the State in numerous ways. The State
historically has been one of the wealthiest states in the nation. For decades,
however, the State has grown more slowly than the nation as a whole, gradually
eroding its relative economic affluence. Statewide, urban centers have
experienced significant changes involving migration of the more affluent to the
suburbs and an influx of generally less affluent residents. Regionally, the
older Northeast cities have suffered because of the relative success that the
South and the West have had in attracting people and business. The City has also
had to face greater competition as other major cities have developed financial
and business capabilities which make them less dependent on the specialized
services traditionally available almost exclusively in the City.
The State has for many years had a very high State and local tax burden relative
to other states. The State and its localities have used these taxes to develop
and maintain their transportation networks, public schools and colleges, public
health systems, other social services and recreational facilities. Despite these
benefits, the burden of State and local taxation, in combination with the many
other causes of regional economic dislocation, has contributed to the decisions
of some businesses and individuals to relocate outside, or not locate within,
the State.
Notwithstanding the numerous initiatives that the State and its localities may
take to encourage economic growth and achieve balanced budgets, reductions in
Federal spending could materially and adversely affect the financial condition
and budget projections of the State and its localities.
New York City. The City, with a population of approximately 7.4 million, is an
international center of business and culture. Its non-manufacturing economy is
broadly based, with the banking and securities, life insurance, communications,
publishing, fashion design, retailing and construction industries accounting for
a significant portion of the City's total employment earnings. Additionally, the
City is the nation's leading tourist destination. Manufacturing activity in the
City is conducted primarily in apparel and printing.
For each of the 1981 through 1999 fiscal years, the City had an operating
surplus, before discretionary transfers, and achieved balanced operating results
as reported in accordance with then applicable generally accepted accounting
principles ("GAAP"), after discretionary transfers. The City has been required
to close substantial gaps between forecast revenues and forecast expenditures in
order to maintain balanced operating results. There can be no assurance that the
City will continue to maintain balanced operating results as required by State
law without tax or other revenue increases or reductions in City services or
entitlement programs, which could adversely affect the City's economic base.
As required by law, the City prepares a four-year annual financial plan, which
is reviewed and revised on a quarterly basis and which includes the City's
capital, revenue and expense projections and outlines proposed gap-closing
programs for years with projected budget gaps. The City's current financial plan
projects a surplus in the 2000 and 2001 fiscal years, before discretionary
transfers, and budget gaps for each of the 2002, 2003 and 2004 fiscal years.
This pattern of current year surplus operating results and projected subsequent
year budget gaps has been consistent through the entire period since 1982,
during which the City has achieved surplus operating results, before
discretionary transfers, for each fiscal year.
The City depends on aid from the State both to enable the City to balance its
budget and to meet its cash requirements. There can be no assurance that there
will not be reductions in State aid to the City from amounts currently
projected; that, in future years, State budgets will be adopted by the April 1
statutory deadline, or interim appropriations will be enacted; or that any such
reductions or delays will not have adverse effects on the City's cash flow or
expenditures. In addition, the Federal budget negotiation process could result
in a reduction in or a delay in the receipt of Federal grants which could have
additional adverse effects on the City's cash flow or revenues.
The Mayor is responsible for preparing the City's financial plan, including the
City's current financial plan for the 2000 through 2004 fiscal years (the
"2000-2004 Financial Plan" or "Financial Plan"). The City's projections set
forth in the Financial Plan are based on various assumptions and contingencies
which are uncertain and which may not materialize. Such assumptions and
contingencies include the condition of the regional and local economies, the
provision of State and Federal aid and the impact on City revenues and
expenditures of any future Federal or State policies affecting the City.
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Implementation of the Financial Plan is dependent upon the City's ability to
market its securities successfully. The City's program for financing capital
projects for fiscal years 2000 through 2004 contemplates the issuance of $7.21
billion of general obligation bonds and $7.33 billion of bonds to be issued by
the New York City Transitional Finance Authority (the "Finance Authority"). In
addition, the Financial Plan anticipates access to approximately $2.4 billion in
financing capacity of TSASC, Inc. ("TSASC"), which will issue debt secured by
revenues derived from the settlement of litigation with tobacco companies
selling cigarettes in the United States. The Finance Authority and TSASC were
created to assist the City in financing its capital program while keeping the
City's indebtedness within the forecast level of the constitutional restrictions
on the amount of debt the City is authorized to incur. In addition, the City
issues revenue and tax anticipation notes to finance its seasonal working
capital requirements. The success of projected public sales of City, New York
City Municipal Water Finance Authority ("Water Authority"), Finance Authority,
TSASC and other bonds and notes will be subject to prevailing market conditions.
The City's planned capital and operating expenditures are dependent upon the
sale of its general obligation debt, as well as debt of the Water Authority,
Finance Authority and TSASC. Future developments concerning the City and public
discussion of such developments, as well as prevailing market conditions, may
affect the market for outstanding City general obligation bonds and notes.
The City Comptroller and other agencies and public officials, from time to time,
issue reports and make public statements which, among other things, state that
projected revenues and expenditures may be different from those forecast in the
City's financial plans.
For the 1999 fiscal year, the City had an operating surplus, before
discretionary and other transfers, and achieved balanced operating results,
after discretionary and other transfers, in accordance with GAAP. The 1999
fiscal year is the nineteenth year that the City has achieved an operating
surplus, before discretionary and other transfers, and balanced operating
results, after discretionary and other transfers.
On June 15, 2000, the City released the Financial Plan for the 2000 through 2004
fiscal years, which relates to the City and certain entities which receive funds
from the City, and which reflects changes as a result of the City's expense and
capital budgets for fiscal year 2001, which were adopted on June 6, 2000. The
Financial Plan is a modification to the financial plan submitted to the Control
Board on June 14, 1999 (the "June Financial Plan"), which was subsequently
modified in November 1999 and January and May 2000. The Financial Plan projects
revenues and expenditures for the 2000 and 2001 fiscal years balanced in
accordance with GAAP, and projects gaps of $2.6 billion, $2.7 billion and $2.7
billion for fiscal years 2002 through 2004, respectively, after implementation
of a gap closing program.
Changes since the June Financial Plan include: (i) an increase in projected
revenues of $1.9 billion, $1.2 billion, $1.1 billion, $1.3 billion and $1.6
billion in fiscal years 2000 through 2004, respectively, reflecting primarily
increases in projected personal income, business, sales, real estate transfer
and mortgage recording tax revenues; (ii) a delay in the assumed collection of
$730 million of projected rent payments for the City's airports from fiscal year
2001 through 2004 to fiscal years 2002 through 2005; (iii) establishment of a
labor reserve for merit pay wage increases for City employees of $30 million,
$325 million, $750 million, $800 million and $800 million in fiscal years 2000
through 2004, respectively, contingent upon productivity savings set forth in
the gap-closing program; and (iv) increased costs and revenue losses from State
and Federal actions of $185 million, $392 million, $454 million, $518 million
and $587 million in fiscal years 2000 through 2004, respectively, including a
reduction in the sales tax on utilities approved by the State Legislature; and
(v) other net expenditure savings of $784 million in fiscal year 2000, and net
expenditure increases of $771 million, $897 million, $1.2 billion and $888
million in fiscal years 2001 through 2004, respectively. The changes in net
expenditures include, among other things, pension fund savings of $524 million
and $284 million in fiscal years 2000 and 2001, respectively, resulting
primarily from a market value restart, increased net pension costs of $230
million, $348 million and $286 million in fiscal years 2002 through 2004,
respectively, reflecting recent pension benefit legislation, and increased
spending for education and other agencies. Increased pension costs reflect
certain pension benefit improvements, to which the City and its unions have
agreed, which are estimated at $279 million per year commencing in fiscal year
2001, pending the Governor signing enabling legislation and other actions. In
addition, various benefit enhancements for City and State employees, including a
cost of living adjustment in pension payments, which have been adopted by the
State legislature, are not reflected in the Financial Plan. These benefit
enhancements are expected to increase pension costs reflected in the City's
future financial plan modifications by $98 million, $236 million, $363 million
and $480 million in fiscal years 2001 through 2004, respectively, and by $586
million in fiscal year 2005 when the adjustment in fully implemented. The City
will consider revising the proposed tax reduction program and implementing a
planned expenditure reduction program to help offset these increased pension
costs.
The Financial Plan reflects a proposed discretionary transfer from fiscal year
2000 to fiscal year 2001 primarily to pay debt service due in fiscal year 2001
totaling $3.2 billion, a proposed discretionary transfer from fiscal year 2001
to fiscal year 2002 to pay debt service due in fiscal year 2002 totaling $904
million and a proposed discretionary transfer from fiscal year 2002 to fiscal
year 2003 to pay debt service in fiscal year 2003 totaling $345 million.
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In addition, the Financial Plan sets forth gap-closing actions to eliminate a
previously projected gap for the 2001 fiscal year and to reduce projected gaps
for fiscal years 2002 through 2004. The gap-closing actions for the 2000 through
2004 fiscal years include: (i) additional agency actions totaling $337 million,
$400 million, $210 million, $210 million and $210 million for fiscal years 2000
through 2004, respectively; (ii) assumed additional Federal and State actions of
$75 million in each of fiscal years 2001 through 2004, which are subject to
Federal and State approval; and (iii) proposed productivity savings and reducing
fringe benefits costs totaling $250 million, $265 million, $280 million and $300
million in fiscal years 2001 through 2004, respectively, to partly offset the
costs of the proposed merit pay program which is subject to collective
bargaining negotiations. The Financial Plan also reflects a proposed tax
reduction program totaling $418 million, $735 million, $877 million and $1.1
billion in fiscal years 2001 through 2004, respectively, including elimination
of the commercial rent tax over three years commencing June 1, 2000 at a cost of
$16 million in fiscal year 2001, increasing to $430 million in fiscal year 2004;
a reduction and restructuring in the 14% personal income tax surcharge on July
1, 2000 at a cost of $329 million in fiscal year 2001, increasing to $403
million in fiscal year 2004; the extension of current tax reductions for owners
of cooperative and condominium apartments at an annual cost of approximately
$200 million starting in fiscal year 2002; and repeal of the $2 flat fee hotel
occupancy tax effective December 1, 2000; and other tax reduction proposals
including elimination of the borough commercial revitalization tax. Except for
the elimination of the commercial rent tax, the proposed tax reductions require
State legislative approval. To date, only the reduction and restructuring of the
14% personal income tax surcharge and the reduction of the borough commercial
revitalization program have been passed by the State Legislature.
Wage increases for City employees are provided for in the Financial Plan through
a merit pay plan for two years after their collective bargaining agreements
expire in fiscal years 2000 and 2001, contingent upon productivity savings. The
Financial Plan does not make any provision for wage increases thereafter. In
addition, the economic and financial condition of the City may be affected by
various financial, social, economic and other factors which could have a
material effect on the City.
The Financial Plan is based on numerous assumptions, including the condition of
the City's and the region's economies and modest employment growth and the
concomitant receipt of economically sensitive tax revenues in the amounts
projected. The 2000-2004 Financial Plan is subject to various other
uncertainties and contingencies relating to, among other factors, the extent, if
any, to which wage increases for City employees exceed the annual wage costs
assumed for the 2000 through 2004 fiscal years; continuation of projected
interest earnings assumptions for pension fund assets and current assumptions
with respect to wages for City employees affecting the City's required pension
fund contributions; the willingness and ability of the State to provide the aid
contemplated by the Financial Plan and to take various other actions to assist
the City; the ability of City agencies to maintain balanced budgets; the
willingness of the Federal government to provide the amount of Federal aid
contemplated in the Financial Plan; the impact on City revenues and expenditures
of Federal and State welfare reform and any future legislation affecting
Medicare or other entitlement programs; adoption of the City's budgets by the
City Council in substantially the forms submitted by the Mayor; the ability of
the City to implement cost reduction initiatives, and the success with which the
City controls expenditures; the impact of conditions in the real estate market
on real estate tax revenues; the City's ability to market its securities
successfully in the public credit markets; and unanticipated expenditures that
may be incurred as a result of the need to maintain the City's infrastructure.
Although the City has maintained balanced budgets in each of its last nineteen
fiscal years and is projected to achieve balanced operating results for the 2000
and 2001 fiscal years, there can be no assurance that the gap-closing actions
proposed in the Financial Plan can be successfully implemented or that the City
will maintain a balanced budget in future years without additional State aid,
revenue increases or expenditure reductions. Additional tax increases and
reductions in essential City services could adversely affect the City's economic
base.
On July 16, 1998, Standard & Poor's revised its rating of City bonds upward from
BBB+ to A-. Moody's rating of City bonds was revised in February 1998 to A3 from
Baa1. On March 8, 1999, Fitch revised its rating of City bonds upward to A.
Moody's, Standard & Poor's and Fitch currently rate the City's outstanding
general obligation bonds A3, A- and A, respectively.
New York State and its Authorities. The State ended the 1999-2000 fiscal year in
balance on a cash basis, with a reported closing balance in the General Fund of
$1.17 billion. The State adopted the debt service portion of the State budget
for the 2000-01 fiscal year on March 30, 2000. The remainder of the budget for
the State's 2000-01 fiscal year was adopted by the State Legislature on May 5,
2000, 35 days after the statutory deadline of April 1, 2000. Following enactment
of the budget, the State prepared a Financial Plan for the 2000-01 fiscal year
which projects total General Fund disbursements of $38.9 billion, an increase of
4.7 percent. Preliminary analysis by the State Division of the Budget indicates
that the State could face a projected 2001-02 budget gap of approximately $2
billion. In a report released on June 7, 2000, the State Comptroller estimated
future State budget gaps of approximately $3.0 billion in 2001-02 and $4.9
billion in 2002-03, assuming certain one-time legislative additions to the
budget would be recurring.
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In 2000-01, General Fund disbursements, including transfers to support capital
projects, debt service and other funds, are estimated at $38.92 billion, an
increase of $1.75 billion or 4.72 percent over 1999-2000. Projected spending
under the 2000-01 enacted budget is $992 million above the Governor's Executive
Budget recommendations, including 30-day amendments submitted January 31, 2000.
The 2000-01 Financial Plan projects closing balances in the General Fund and
other reserves of $3.2 billion, including $1.71 billion in the General Fund.
This closing balance is comprised of $675 million in reserves for potential
labor costs resulting from new collective bargaining agreements and other
spending commitments, $547 million in the Tax Stabiliztion Reserve Fund (for use
in case of unanticipated deficits), $150 million in the Contingency Reserve Fund
(which helps offset litigation risks), and $338 million in the Community
Projects Fund (which finances legislative initiatives). In addition to the $1.71
billion balance in the General Fund, $1.2 billion is projected for reserve in
the STAR Special Revenue Fund and $250 million in the Debt Reduction Reserve
Fund.
Many complex political, social and economic forces influence the State's economy
and finances, which may in turn affect the State Financial Plan. The 2000-01
Financial Plan is also necessarily based upon forecasts of national and State
economic activity. The Division of Budget believes that its projections of
receipts and disbursements relating to the 2000-01 Financial Plan, and the
assumptions on which they are based, are reasonable, however, actual results
could differ materially and adversely from these projections.
Standard & Poor's rates the State's general obligation bonds A+, and Moody's
rates the State's general obligation bonds A2. On November 9, 1999, Standard &
Poor's revised its rating on the State's general obligation bonds from A to A+.
Litigation. A number of court actions have been brought involving State
finances. The court actions in which the State is a defendant generally involve
State programs and miscellaneous tort, real property, and contract claims. While
the ultimate outcome and fiscal impact, if any, on the State of those
proceedings and claims are not currently predictable, adverse determinations in
certain of them might have a material adverse effect upon the State's ability to
carry out the State Financial Plan.
The City has estimated that its potential future liability on account of
outstanding claims against it as of June 30, 1999 amounted to approximately $3.5
billion.
Investment Restrictions
The Fund has adopted the following fundamental investment restrictions. They may
not be changed unless approved by a majority of the outstanding shares of the
Fund." The term "majority of the outstanding shares" of the Fund means the vote
of the lesser of (i) 67% or more of the shares of the Fund present at a meeting,
if the holders of more than 50% of the outstanding shares of the Fund are
present or represented by proxy, or (ii) more than 50% of the outstanding shares
of the Fund. The Fund may not:
1. Make portfolio investments other than as described under "Description of
the Fund and Its Investments and Risks." Any other form of Federal
tax-exempt investment must meet the Fund's high quality criteria, as
determined by the Board of Directors, and be consistent with the Fund's
objectives and policies.
2. Borrow money. This restriction shall not apply to borrowings from banks
for temporary or emergency (not leveraging) purposes. This includes the
meeting of redemption requests that might otherwise require the untimely
disposition of securities, in an amount up to 15% of the value of the
Fund's total assets (including the amount borrowed) valued at market less
liabilities (not including the amount borrowed) at the time the borrowing
was made. While borrowings exceed 5% of the value of the Fund's total
assets, the Fund will not make any investments. Interest paid on borrowings
will reduce net income.
3. Pledge, hypothecate, mortgage or otherwise encumber its assets, except in
an amount up to 15% of the value of its total assets and only to secure
borrowings for temporary or emergency purposes.
4. Sell securities short or purchase securities on margin, or engage in the
purchase and sale of put, call, straddle or spread options or in writing
such options. However, securities subject to a demand obligation and
stand-by commitments may be purchased as set forth under "Description of
the Fund and Its Investments and Risks."
5. Underwrite the securities of other issuers, except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933 in disposing of a
portfolio security.
6. Purchase securities subject to restrictions on disposition under the
Securities Act of 1933 ("restricted securities"), except the Fund may
purchase variable rate demand instruments which contain a demand feature.
The Fund will not invest in a repurchase agreement maturing in more than
seven days if any such investment together with securities that are not
readily marketable held by the Fund exceed 10% of the Fund's net assets.
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7. Purchase or sell real estate, real estate investment trust securities,
commodities or commodity contracts, or oil and gas interests. This shall
not prevent the Fund from investing in Municipal Obligations secured by
real estate or interests in real estate.
8. Make loans to others, except through the purchase of portfolio investments,
including repurchase agreements, as described under "Description of the
Fund and Its Investments and Risks."
9. Purchase more than 10% of all outstanding voting securities of any one
issuer or invest in companies for the purpose of exercising control.
10. Invest more than 25% of its assets in the securities of "issuers" in any
single industry. The Fund may invest more than 25% of its assets in
Participation Certificates and there shall be no limitation on the purchase
of those Municipal Obligations and other obligations issued or guaranteed
by the United States Government, its agencies or instrumentalities. When
the assets and revenues of an agency, authority, instrumentality or other
political subdivision are separate from those of the government creating
the issuing entity and a security is backed only by the assets and revenues
of the entity, the entity would be deemed to be the sole issuer of the
security. Similarly, in the case of an industrial revenue bond, if that
bond is backed only by the assets and revenues of the non-government user,
then such non-government user would be deemed to be the sole issuer. If,
however, in either case, the creating government or some other entity, such
as an insurance company or other corporate obligor, guarantees a security
or a bank issues a letter of credit, such a guarantee or letter of credit
would be considered a separate security and would be treated as an issue of
such government, other entity or bank. Immediately after the acquisition of
any securities subject to a Demand Feature or Guarantee (as such terms are
defined in Rule 2a-7 of the 1940 Act), with respect to 75% of the total
assets of the Fund, not more than 10% of the Fund's assets may be invested
in securities that are subject to a Guarantee or Demand Feature from the
same institution. However, the Fund may only invest more than 10% of its
assets in securities subject to a Guarantee or Demand Feature issued by a
Non-Controlled Person (as such term is defined in Rule 2a-7 of the 1940
Act).
11. Invest in securities of other investment companies. The Fund may purchase
(i) unit investment trust securities where such unit trusts meet the
investment objectives of the Fund and then only up to 5% of the Fund's net
assets, except as they may be acquired as part of a merger, consolidation
or acquisition of assets and (ii) securities as permitted by section 12(a)
of the 1940 Act.
12. Issue senior securities, except insofar as the Fund may be deemed to have
issued a senior security in connection with a permitted borrowing.
If a percentage restriction is adhered to at the time of an investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or in the amount of the Fund's assets will not constitute a
violation of such restriction.
III. MANAGEMENT OF THE FUND
The Fund's Board of Directors, which is responsible for the overall management
and supervision of the Fund, has employed the Manager to serve as investment
manager of the Fund. The Manager provides persons satisfactory to the Fund's
Board of Directors to serve as officers of the Fund. Such officers, as well as
certain other employees and directors of the Fund, may be directors or officers
of Reich & Tang Asset Management, Inc., the sole general partner of the Manager
or employees of the Manager or its affiliates. Due to the services performed by
the Manager, the Fund currently has no employees and its officers are not
required to devote their full-time to the affairs of the Fund.
The Directors and Officers of the Fund and their principal occupations during
the past five years are set forth below. Unless otherwise specified, the address
of each of the following persons is 600 Fifth Avenue, New York, New York 10020.
Mr. Duff may be deemed an "interested person" of the Fund, as defined in the
1940 Act, on the basis of his affiliation with Reich & Tang Asset Management
L.P.
Steven W. Duff, 46 - President and Director of the Fund, has been President of
the Mutual Funds Division of the Manager since September 1994. Mr. Duff is
President and a Director/Trustee of 13 other funds in the Reich & Tang Fund
Complex, President of Back Bay Funds, Inc., Director of Pax World Money Market
Fund, Inc., and President and Chief Executive Officer of Tax Exempt Proceeds
Fund, Inc.
Edward A. Kuczmarski, 49 - Director of the Fund, Trustee of The Empire Builder
Tax Free Bond Fund; Certified Public Accountant and Partner of Hays & Company
since 1980. His address is 477 Madison Avenue, New York, N.Y. 10022-5892.
Caroline E. Newell, 59 - Director of the Fund, Trustee of The Empire Builder Tax
Free Bond Fund; Director, International Preschools, Inc. Her address is
International Preschools, Inc., 330 East 45th Street, New York, N.Y. 10017.
13
<PAGE>
John P. Steines, 50 - Director of the Fund, Trustee of The Empire Builder Tax
Free Bond Fund; Professor of Law, New York University School of Law. His address
is New York University School of Law, 40 Washington Square South, New York, N.Y.
10012.
Molly Flewharty, 49 - Vice President of the Fund, has been Vice President of the
Mutual Funds Division of the Manager since September 1993. Ms. Flewharty is also
Vice President of 17 other funds in the Reich & Tang Fund Complex.
Lesley M. Jones, 51 - Vice President of the Fund, has been Senior Vice President
of the Mutual Funds Division of the Manager since September 1993. Ms. Jones is
also a Vice President of 13 other funds in the Reich & Tang Fund Complex.
Dana E. Messina, 43 - Vice President of the Fund, has been Executive Vice
President of the Mutual Funds Division of the Manager since January 1995 and was
Vice President from September 1993 to January 1995. Ms. Messina is also Vice
President of 14 other funds in the Reich & Tang Fund Complex.
Bernadette N. Finn, 52 - Secretary of the Fund, has been Vice President of the
Mutual Funds Division of the Manager since September 1993. Ms. Finn is also
Secretary of 13 other funds in the Reich & Tang Fund Complex, and a Vice
President and Secretary of 4 funds in the Reich & Tang Fund Complex.
Richard DeSanctis, 43 - Treasurer of the Fund, has been Treasurer of the Manager
of the Manager since 1993. Mr. DeSanctis is also Treasurer of 16 other funds in
the Reich & Tang Fund Complex, and is Vice President and Treasurer of Cortland
Trust, Inc.
Rosanne Holtzer, 35 - Assistant Treasurer of the Fund, has been Vice President
of the Mutual Funds division of the Manager since December 1997. Ms. Holtzer was
formerly Manager of Fund Accounting for the Manager with which she was
associated with from June 1986. Ms. Holtzer is also Assistant Treasurer of 17
other funds in the Reich & Tang Fund Complex.
The Fund paid an aggregate remuneration of $15,000 to its directors with respect
to the period ended April 30, 2000, all of which consisted of aggregate
directors' fees paid to the three disinterested directors, pursuant to the terms
of the Investment Management Contract. (See "Investment Advisory and Other
Services" that follows.)
Directors of the Fund not affiliated with the Manager receive from the Fund an
annual retainer of $3,000 and a fee of $500 for each Board of Directors meeting
attended and are reimbursed for all out-of-pocket expenses relating to
attendance at such meetings. Directors who are affiliated with the Manager do
not receive compensation from the Fund. See the Compensation Table.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
COMPENSATION TABLE
(1) (2) (3) (4) (5)
Pension or
Retirement Total Compensation
Aggregate Benefits Accrued Estimated Annual from Fund and Fund
Name of Person, Compensation as Part of Fund Benefits upon Complex Paid to
Position from the Fund Expenses Retirement Directors*
------- ------------- ------------- ---------- ---------
Edward A.
Kuczmarski, $5,000 0 0 $5,000 (1 Fund)
Director
Caroline E. Newell,
Director $5,000 0 0 $5,000 (1 Fund)
John P. Steines, $5,000 0 0 $5,000 (1 Fund)
Director
</TABLE>
* These figures represent the total compensation paid to such persons by the
Fund and Fund Complex for the fiscal year ending April 30, 2000. The total
number of Funds in the same Fund complex from which the Directors receive
compensation is listed in parenthesis. A Fund is considered to be the same
Fund complex if, among other things, it shares a common investment adviser
with the Fund.
14
<PAGE>
IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
On July 31, 2000 there were 276,947,221 shares of Class A common stock
outstanding, 53,563,620 shares of Class B common stock outstanding, 88,275,026
shares of Victory common stock outstanding, and 17,152,772 shares of Evergreen
common stock outstanding. As of July 31, 2000, the amount of shares owned by all
officers and directors of the Fund as a group was less than 1% of the
outstanding shares of the Fund. Set forth below is certain information as to
persons who owned 5% or more of the Fund's outstanding common stock as of July
31, 2000:
% of Nature of
Name and Address Class Ownership
CLASS A
Joe Allen 31.95% Record & Beneficial
C/O Boston Financial Data Services
2 Heritage Drive
Quincy, MA 02171
Ron Staib 30.20% Record & Beneficial
C/O Neuberger & Berman
55 Water Street - 27th Floor
New York, NY 10041
Alan J. Patricof 5.17% Record & Beneficial
C/O Patricof & Co. Ventures, Inc.
445 Park Avenue
New York, NY 10022-2606
CLASS B
Jonathan Fram 9.30% Record & Beneficial
C/O Lewco Securities Corp.
34 Exchange Place - 4th Floor
Jersey City, NJ 07311
Richard S. Braddock Sr. 8.67% Record & Beneficial
C/O Morgan Stanley Dean Witter
1251 Avenue of the Americas
New York, NY 10020
Mr. Lee Pollak 6.21% Record & Beneficial
C/O Morgan Stanley Dean Witter
1251 Avenue of the Americas
New York, NY 10020
Paul A. Brooke 5.01% Record & Beneficial
C/O Morgan Stanley Dean Witter
1251 Avenue of the Americas
New York, NY 10020
Evergreen Shares
Evergreen Investment Services 6.20% Record
401 S. Tryon Street - 5th Floor
Charlotte, NC 28288-1195
Victory Shares
None
15
<PAGE>
V. INVESTMENT ADVISORY AND OTHER SERVICES
The Investment Manager for the Fund is Reich & Tang Asset Management L.P., a
Delaware limited partnership with principal offices at 600 Fifth Avenue, New
York, New York 10020. The Manager was, as of July 31, 2000, investment manager,
adviser, or supervisor with respect to assets aggregating in excess of $18
billion. In addition to the Fund, the Manager acts as investment manager and
administrator of seventeen other investment companies and also advises pension
trusts, profit-sharing trusts and endowments.
Nvest Companies, L.P. (Nvest Companies) is the limited partner and owner of a
99.5% interest in the Manager. Reich & Tang Asset Management, Inc. (RTAM) is the
sole general partner and owner of the remaining 0.5% interest of the Manager, as
well as being an indirect wholly-owned subsidiary of Nvest Companies. Nvest
Companies is a publicly traded company of which approximately 13% of its
outstanding partnership interests is owned, directly and indirectly, by Reich &
Tang, Inc.
CDC Asset Management ("CDC AM"), the investment management arm of France's
Caisse des Depots Group, has completed its acquisition of Nvest, L.P. and Nvest
Companies. As a result, CDC AM owns, directly or indirectly, a controlling
interest in the Manager. CDC AM is 60% owned by CDC Finance, a wholly-owned
subsidiary of Caisse des depots et Consignations ("CDC"). Founded in 1816, CDC
is a major diversified financial institution. In addition to its 60% ownership
of CDC AM through CDC Finance, CDC owns 40% of CNP Assurances, the leading
French insurance company, which itself owns 20% of CDC AM. CDC also owns 35% of
Caisse National des Caisses d'Epargne, which also owns 20% of CDC AM. CDC is
100% owned by the French state.
Nvest Companies is a holding company offering a broad array of investment styles
across a wide range of asset categories through seventeen subsidiaries,
divisions and affiliates offering a wide array of investment styles and products
to institutional clients. Its business units, in addition to the Manager,
include AEW Capital Management, L.P., Back Bay Advisors, L.P.; Capital Growth
Management Limited Partnerships; Greystone Partners, L.P.; Harris Associates,
L.P.; Jurika & Voyles, L.P.; Kobrick Funds, LLP, Loomis, Sayles & Company, L.P.;
New England Funds, L.P.; Nvest Associates, Inc.; Snyder Capital Management,
L.P.; Vaughan, Nelson, Scarborough & McCullough, L.P.; and Westpeak Investment
Advisors, L.P. These affiliates in the aggregate are investment advisors or
managers to more than 80 other registered investment companies.
The Nvest-CDC AM transaction involved a change of ownership of Nvest Companies,
which may be deemed to have caused a "change of control" of the Manager, even
though operations did not change as a result. As required by the 1940 Act, the
Fund's shareholders approved a new Investment Management Contract for the Fund
to assure that there was no interruption in the services that the Manager
provides to the Fund. The new Investment Management Contract was approved by the
shareholders on October 10, 2000 and is effective as of October 30, 2000.
On July 27, 2000, the Board of Directors, including a majority of the directors
who are not interested persons (as defined in the 1940 Act) of the Fund or the
Manager, approved the Investment Management Contract for an initial term of two
years, extending to April 30, 2002. The contract may be continued in force after
the initial term for successive twelve-month periods beginning each May 1,
provided that such continuance is specifically approved annually by a majority
vote of the Fund's outstanding voting securities or its Board of Directors, and
in either case by a majority of the directors who are not parties to the
Investment Management Contract or interested persons of any such party, by votes
cast in person at a meeting called for the purpose of voting on such matter.
Pursuant to the Investment Management Contract, the Manager manages the Fund's
portfolio of securities and makes decisions with respect to the purchase and
sale of investments, subject to the general control of the Board of Directors of
the Fund.
The Manager provides persons satisfactory to the Board of Directors of the Fund
to serve as officers of the Fund. Such officers, as well as certain other
employees and directors of the Fund, may be directors or officers of NEIC, the
sole general partner of the Manager, or employees of the Manager or its
affiliates.
The Investment Management Contract is terminable without penalty by the Fund on
sixty days' written notice when authorized either by majority vote of its
outstanding voting shares or by a vote of a majority of its Board of Directors,
or by the Manager on sixty days written notice, and will automatically terminate
in the event of its assignment. The Investment Management Contract provides that
in the absence of willful misfeasance, bad faith or gross negligence on the part
of the Manager, or of reckless disregard of its obligations thereunder, the
Manager shall not be liable for any action or failure to act in accordance with
its duties.
16
<PAGE>
Under the Investment Management Contract, the Manager receives from the Fund a
fee equal to .30% per annum of the Fund's average daily net assets. The fees are
accrued daily and paid monthly. The Manager at its discretion may voluntarily
waive all or a portion of the management fee. For the Fund's fiscal years ended
April 30, 2000, 1999 and 1998, the fees payable to the Manager under the
Investment Management Contract were $1,442,517, $1,368,074 and $1,100,638,
respectively. The Fund's net assets at the close of business on April 30, 2000
totaled $446,423,449.
Pursuant to the Administrative Services Contract with the Fund, the Manager also
performs clerical, accounting supervision, office service and related functions
for the Fund and provides the Fund with personnel to (i) supervise the
performance of accounting related services by State Street Kansas City, the
Fund's bookkeeping or recordkeeping agent, (ii) prepare reports to and filings
with regulatory authorities, and (iii) perform such other services as the Fund
may from time to time request of the Manager. The personnel rendering such
services may be employees of the Manager, of its affiliates or of other
organizations. For its services under the Administrative Services Contract, the
Manager receives from the Fund a fee equal to .21% per annum of the Fund's
average daily net assets. For the fiscal years ended April 30, 2000, 1999 and
1998, the Manager received a fee of $1,009,762, $957,652 and $770,441,
respectively.
The Manager at its discretion may waive its rights to any portion of the
management fee or the administrative services fee and may use any portion of the
management fee for purposes of shareholder and administrative services and
distribution of the Fund's shares. There can be no assurance that such fees will
be waived in the future (see "Distribution and Service Plan" herein).
Investment management fees and operating expenses which are attributable to more
than one Class of the Fund will be allocated daily to each Class based on the
percentage of outstanding shares at the end of the day. Additional shareholder
services provided by Participating Organizations to Class A, Victory or
Evergreen shareholders pursuant to the Plan shall be compensated by the
Distributor from its shareholder servicing fee, the Manager from its management
fee and the Fund itself. Expenses incurred in the distribution of Class B shares
and the servicing of Class B shares shall be paid by the Manager.
Expense Limitation
The Manager has agreed, pursuant to the Investment Management Contract (see
"Distribution and Service Plan" herein) to reimburse the Fund for its expenses
(exclusive of interest, taxes, brokerage and extraordinary expenses) that in any
year exceed the lesser of (i) 1 1/2% of the Fund's average annual net assets, or
(ii) the limits on investment company expenses prescribed by any state in which
the Fund's shares are qualified for sale. For the purpose of this obligation to
reimburse expenses, the Fund's annual expenses are estimated and accrued daily,
and any appropriate estimated payments are made to it on a monthly basis.
Subject to the obligations of the Manager to reimburse the Fund for its excess
expenses as described above, the Fund has, under the Investment Management
Contract, confirmed its obligation for payment of all its other expenses. This
includes all operating expenses, taxes, brokerage fees and commissions,
commitment fees, certain insurance premiums, interest charges and expenses of
the custodian, transfer agent and dividend disbursing agent's fees,
telecommunications expenses, auditing and legal expenses, bookkeeping agent
fees, costs of forming the corporation and maintaining corporate existence,
compensation of directors, officers and employees of the Fund and costs of other
personnel performing services for the Fund who are not officers of the Manager
or its affiliates, costs of investor services, shareholders' reports and
corporate meetings, SEC registration fees and expenses, state securities laws
registration fees and expenses, expenses of preparing and printing the Fund's
Prospectuses for delivery to existing shareholders and of printing application
forms for shareholder accounts, and the fees payable to the Distributor under
the Shareholder Servicing Agreement and the Distribution Agreement and all other
costs borne by the Fund pursuant to the Distribution Plan.
The Fund may from time to time hire its own employees or contract to have
management services performed by third parties (including Participating
Organizations) as discussed herein. The management of the Fund intends to do so
whenever it appears advantageous to the Fund. The Fund's expenses for employees
and for such services are among the expenses subject to the expense limitation
described above.
Distribution And Service Plan
The Fund's distributor is Reich & Tang Distributors, Inc., (the "Distributor") a
Delaware corporation with principal officers at 600 Fifth Avenue, New York, New
York 10020. Pursuant to Rule 12b-1 under the 1940 Act, the SEC has required that
an investment company which bears any direct or indirect expense of distributing
its shares must do so only in accordance with a plan permitted by the Rule. The
Fund's Board of Directors has adopted a distribution and service plan (the
"Plan") and, pursuant to the Plan, the Fund has entered into a Distribution
Agreement and a Shareholder Servicing Agreement (with respect to Class A,
Evergreen and Victory shares) with the Distributor, as distributor of the Fund's
shares.
For its services under the Shareholder Servicing Agreements with respect to
Class A, Evergreen and Victory shares only, the Manager receives from the Fund a
service fee equal to .20% per annum of the Fund's average daily net assets of
Class A, Evergreen or Victory shares (the "Shareholder Servicing Fee") for
providing personal shareholder services and for the maintenance of shareholder
accounts. The fee is accrued daily and paid monthly and any portion of the fee
may
17
<PAGE>
be deemed to be used by the Distributor for purposes of distribution of the
Fund's Class A, Evergreen or Victory shares and for payments to Participating
Organizations with respect to servicing their clients or customers who are Class
A, Evergreen or Victory shareholders of the Fund. The Class B shareholders will
not receive the benefit of such services from Participating Organizations and,
therefore, will not be assessed a shareholder servicing fee.
The following information applies to the Class A shares of the Fund. For the
Fund's fiscal year ended April 30, 2000, the amount payable to the Distributor
under the Distribution and Service Plan and Shareholder Servicing Agreement
adopted thereunder pursuant to Rule 12b-1 totaled $731,013, none of which was
waived. During the same period, the Manager made total payments under the Plan
to or on behalf of Participating Organizations of $1,576,610. Of the total
amount paid pursuant to the Plan, $15,060 was utilized for compensation to sales
personnel, $4,438 on travel & entertainment for sales personnel, $10,059 on
Prospectus printing and $771 on miscellaneous expenses. The excess of such
payments over the total payments the Distributor received from the Fund under
the Plan represents distribution and servicing expenses funded by the Manager
from its own resources including the management fee. For the fiscal year ended
April 30, 2000, the total amount spent pursuant to the Plan for Class A shares
was .44% of the average daily net assets of the Fund, of which .20% of the
average daily net assets was paid by the Fund to the Distributor, pursuant to
the Shareholder Servicing Agreement, and an amount representing .24% was paid by
the Manager (which may be deemed an indirect payment by the Fund).
With respect to the Evergreen shares for the Fund's fiscal year ended April 30,
2000, the amount payable to the Distributor under the Distribution and Service
Plan and Shareholder Servicing Agreement adopted thereunder pursuant to Rule
12b-1 totaled $34,639. During the same period, the Manager made total payments
under the Plan to or on behalf of Participating Organizations of $73,901. Of the
total amount paid pursuant to the Plan, $0 was utilized for compensation to
sales personnel, $0 on travel & entertainment for sales personnel, $1,310 on
Prospectus printing and $0 on miscellaneous expenses. For the fiscal year ended
April 30, 2000, the total amount spent pursuant to the Plan for Evergreen shares
was .44% of the average daily net assets of the Fund, of which .20% of the
average daily net assets was paid by the Fund to the Distributor, pursuant to
the Shareholder Servicing Agreement, and an amount representing .24% was paid by
the Manager (which may be deemed an indirect payment by the Fund).
With respect to the Victory shares for the Fund's fiscal year ended April 30,
2000, the amount payable to the Distributor under the Distribution and Service
Plan and Shareholder Servicing Agreement adopted thereunder pursuant to Rule
12b-1 totaled $141,865. During the same period, the Manager made total payments
under the Plan to or on behalf of Participating Organizations of $214,604. Of
the total amount paid pursuant to the Plan, $0 was utilized for compensation to
sales personnel, $0 on travel & entertainment for sales personnel, $2,266 on
Prospectus printing and $0 on miscellaneous expenses. For the fiscal year ended
April 30, 2000, the total amount spent pursuant to the Plan for Victory shares
was .31% of the average daily net assets of the Fund, of which .20% of the
average daily net assets was paid by the Fund to the Distributor, pursuant to
the Shareholder Servicing Agreement, and an amount representing .11% was paid by
the Manager (which may be deemed an indirect payment by the Fund).
Under the Distribution Agreement, the Distributor, for nominal consideration
(i.e., $1.00) and as agent for the Fund, will solicit orders for the purchase of
the Fund's shares, provided that any subscriptions and orders will not be
binding on the Fund until accepted by the Fund as principal.
The Plan and the Shareholder Servicing Agreement provide that the Distributor
will pay for (i) telecommunications expenses, including the cost of dedicated
lines and CRT terminals, incurred by the Participating Organizations and
Distributor in carrying out their obligations under the Shareholder Servicing
Agreement with respect to the Class A , Evergreen and Victory shares and (ii)
preparing, printing and delivering the Fund's prospectus to existing
shareholders of the Fund and preparing and printing subscription application
forms for shareholder accounts.
The Plan and Shareholder Servicing Agreement provides that the Manager may make
payments from time to time from its own resources, which may include the
management fee, and past profits for the following purposes: (i) to defray the
costs of, and to compensate others, including Participating Organizations with
whom the Distributor has entered into written agreements for performing
shareholder servicing and related administrative functions on behalf of the
Class A, Evergreen, and Victory shares of the Fund; (ii) to compensate certain
Participating Organizations for providing assistance in distributing the Fund's
shares; and (iii) to pay the costs of printing and distributing the Fund's
prospectus to prospective investors, and to defray the cost of the preparation
and printing of brochures and other promotional materials, mailings to
prospective shareholders, advertising, and other promotional activities,
including the salaries and/or commissions of sales personnel in connection with
the distribution of the Fund's shares. The Distributor may also make payments
from time to time from its own resources, which may include the Shareholder
Servicing Fee and past profits for the purpose enumerated in (i) above. The
Distributor will determine the amount of such payments made pursuant to the
Plan, provided that such payments will not increase the amount which the Fund is
required to pay to the Manager or the Distributor for any fiscal year under the
Investment Management Contract, the Administrative Services Contract or the
Shareholder Servicing Agreement in effect for that year.
18
<PAGE>
In accordance with the Rule, the Plan provides that all written agreements
relating to the Plan entered into between either the Fund or the Distributor and
Participating Organizations or other organizations must be in a form
satisfactory to the Fund's Board of Directors. In addition, the Plan requires
the Fund and the Distributor to prepare, at least quarterly, written
reports setting forth all amounts expended for distribution purposes by the Fund
and the Distributor pursuant to the Plan and identifying the distribution
activities for which those expenditures were made.
The Plan provides that it will remain in effect until April 30, 2001. Thereafter
it may continue in effect for successive annual periods commencing May 1,
provided it is approved by the Class A, Evergreen, and Victory shareholders or
by the Board of Directors. This includes a majority of directors who are not
interested persons of the Fund and who have no direct or indirect interest in
the operation of the Plan or in the agreements related to the Plan. The Plan
further provides that it may not be amended to increase materially the costs
which may be spent by the Fund for distribution pursuant to the Plan without
Class A, Evergreen, and Victory shareholder approval, and that other material
amendments must be approved by the directors in the manner described in the
preceding sentence. The Plan may be terminated at any time by a vote of a
majority of the disinterested directors of the Fund or the Fund's Class A,
Evergreen and Victory shareholders.
Custodian And Transfer Agent
State Street Kansas City, 801 Pennsylvania, Kansas City, Missouri 64105 is
custodian for the Fund's cash and securities. Reich & Tang Services, Inc., 600
Fifth Avenue, New York, New York 10020 is transfer agent and dividend agent for
the shares of the Fund. State Street Bank and Trust Company, the transfer agent
for Victory Shares of the Fund, subcontracts all services to Boston Financial
Data Services at P.O. Box 8527, Boston, Massachusetts 02266-8527. Boston
Financial Data Services is also the servicing agent for the Victory shares of
the Fund. State Street Bank and Trust Company, P.O. Box 9021, Boston,
Massachusetts 02205-9827 is the registrar, transfer agent and dividend
disbursing agent for the Evergreen Shares of the Fund. The custodian and
transfer agents do not assist in, and are not responsible for, investment
decisions involving assets of the Fund.
Counsel and Independent Accountants
Legal matters in connection with the issuance of shares of stock of the Fund are
passed upon by Paul, Hastings, Janosky & Walker LLP, 399 Park Avenue, New York,
New York 10022.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, independent certified public accountants, has been selected as
accountants for the Fund.
VI. BROKERAGE ALLOCATION AND OTHER PRACTICES
The Fund's purchases and sales of portfolio securities are usually principal
transactions. Portfolio securities are normally purchased directly from the
issuer, from banks and financial institutions or from an underwriter or market
maker for the securities. There usually are no brokerage commissions paid for
such purchases. The Fund has paid no brokerage commissions since its formation.
Any transaction for which the Fund pays a brokerage commission will be effected
at the best price and execution available. Thus, the Fund will select a broker
for such a transaction based upon which broker can effect the trade at the best
price and execution available. Purchases from underwriters of portfolio
securities include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers serving as market makers include the
spread between the bid and asked price. The Fund purchases Participation
Certificates in variable rate Municipal Obligations with a demand feature from
banks or other financial institutions at a negotiated yield to the Fund based on
the applicable interest rate adjustment index for the security. The interest
received by the Fund is net of a fee charged by the issuing institution for
servicing the underlying obligation and issuing the Participation Certificate,
letter of credit, guarantee or insurance and providing the demand repurchase
feature.
Allocation of transactions, including their frequency, to various dealers is
determined by the Manager in its best judgment and in a manner deemed in the
best interest of shareholders of the Fund rather than by any formula. The
primary consideration is prompt execution of orders in an effective manner at
the most favorable price. No preference in purchasing portfolio securities will
be given to banks or dealers that are Participating Organizations.
Investment decisions for the Fund will be made independently from those for any
other investment companies or accounts that may be or become managed by the
Manager or its affiliates. If, however, the Fund and other investment companies
or accounts managed by the Manager are simultaneously engaged in the purchase or
sale of the same security, the transactions may be averaged as to price and
allocated equitably to each account. In some cases, this policy might adversely
affect the price paid or received by the Fund or the size of the position
obtainable for the Fund. In addition, when purchases or sales of the same
security for the Fund and for other investment companies managed by the Manager
occur contemporaneously, the purchase or sale orders may be aggregated in order
to obtain any price advantage available to large denomination purchasers or
sellers.
19
<PAGE>
No portfolio transactions are executed with the Manager or its affiliates acting
as principal. In addition, the Fund will not buy bankers' acceptances,
certificates of deposit or commercial paper from the Manager or its affiliates.
VII. CAPITAL STOCK AND OTHER SECURITIES
The authorized capital stock of the Fund consists of twenty billion shares of
stock having a par value of one tenth of one cent ($.001) per share. The Fund's
Board of Directors is authorized to divide the shares into separate series of
stock, one for each of the portfolios that may be created. Each share of any
series of shares when issued will have equal dividend, distribution and
liquidation rights within the series for which it was issued and each fractional
share has those rights in proportion to the percentage that the fractional share
represents of a whole share. Shares of all series have identical voting rights,
except where, by law, certain matters must be approved by a majority of the
shares of the affected series. Shares will be voted in the aggregate. There are
no conversion or preemptive rights in connection with any shares of the Fund.
All shares, when issued in accordance with the terms of the offering, will be
fully paid and nonassessable. Shares are redeemable at net asset value, at the
option of the shareholder. The Fund is subdivided into four classes of common
stock: Class A, Class B, Evergreen Class and Victory Class. Each share,
regardless of class, will represent an interest in the same portfolio of
investments and will have identical voting, dividend, liquidation and other
rights, preferences, powers, restrictions, limitations, qualifications,
designations and terms and conditions, except that: (i) the Class A, Class B,
Evergreen Class and Victory Class shares will have different Class designations;
(ii) only the Class A, Evergreen, and Victory shares will be assessed a service
fee pursuant to the Rule 12b-1 Distribution and Service Plan of the Fund of .20%
of each Class shares' average daily net assets; (iii) only the holders of the
Class A, Evergreen and Victory shares will be entitled to vote on matters
pertaining to the Plan and any related agreements in accordance with provisions
of Rule 12b-1; and (iv) the exchange privilege permits shareholders to exchange
their shares only for shares of the same class of an investment company that
participates in an exchange privilege program with the Fund (except for the
Evergreen Class which does not offer an exchange privilege). Payments that are
made under the Plan will be calculated and charged daily to the appropriate
class prior to determining daily net asset value per share and
dividends/distributions.
Under its Articles of Incorporation, as amended, the Fund has the right to
redeem for cash shares of stock owned by any shareholder to the extent and at
such times as the Fund's Board of Directors determines to be necessary or
appropriate to prevent an undue concentration of stock ownership which would
cause the Fund to become a "personal holding company" for Federal income tax
purposes. In this regard, the Fund may also exercise its right to reject
purchase orders.
The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares outstanding voting for the election of
directors can elect 100% of the directors if the holders choose to do so. In
that event, the holders of the remaining shares will not be able to elect any
person or persons to the Board of Directors. Unless specifically requested by an
investor, the Fund will not issue certificates evidencing Fund shares.
As a general matter, the Fund will not hold annual or other meetings of the
Fund's shareholders. This is because the By-laws of the Fund provide for annual
or special meetings only (i) for the election (or re-election) of directors,
(ii) for approval of the revised investment advisory contracts with respect to a
particular class or series of stock, (iii) for approval of the Fund's
distribution agreement with respect to a particular class or series of stock,
and (iv) upon the written request of shareholders entitled to cast not less than
25% of all the votes entitled to be cast at such meeting. Annual and other
meetings may be required with respect to such additional matters relating to the
Fund as may be required by the 1940 Act, including the removal of Fund
director(s) and communication among shareholders, any registration of the Fund
with the SEC or any state, or as the Directors may consider necessary or
desirable. Each Director serves until his successor is elected or qualified, or
until such Director sooner dies, resigns, retires or is removed by the vote of
the shareholders.
VIII. PURCHASE, REDEMPTION AND PRICING OF SHARES
The material relating to the purchase, redemption and pricing of shares for each
Class of shares is located in the Shareholder Information section of each
prospectus and is incorporated herein by reference.
Net Asset Value
The Fund does not determine net asset value per share of each Class on any day
in which the New York Stock Exchange is closed for trading. Those days include:
New Year's Day, Martin Luther King Jr. Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
The net asset value of the Fund's shares is determined as of 12 noon, New York
City time, on each Fund Business Day. The net asset value of a Class is computed
by dividing the value of the Fund's net assets for such Class (i.e., the value
of its securities and other assets less its liabilities, including expenses
payable or accrued but excluding capital stock and surplus) by the total number
of shares outstanding for such Class.
20
<PAGE>
The Fund's portfolio securities are valued at their amortized cost in compliance
with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost valuation
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium. If fluctuating interest
rates cause the market value of the Fund's portfolio to deviate more than 1/2 of
1% from the value determined on the basis of amortized cost, the Board of
Trustees will consider whether any action should be initiated, as described in
the following paragraph. Although the amortized cost method provides certainty
in valuation, it may result in periods during which the value of an instrument
is higher or lower than the price an investment company would receive if the
instrument were sold.
The Fund's Board of Directors has established procedures to stabilize the Fund's
net asset value at $1.00 per share of each Class. These procedures include a
review of the extent of any deviation of net asset value per share, based on
available market rates, from the Fund's $1.00 amortized cost per share of each
Class. Should that deviation exceed 1/2 of 1%, the Board will consider whether
any action should be initiated to eliminate or reduce material dilution or other
unfair results to shareholders. Such action may include redemption of shares in
kind, selling portfolio securities prior to maturity, reducing or withholding
dividends and utilizing a net asset value per share as determined by using
available market quotations. The Fund will maintain a dollar-weighted average
portfolio maturity of 90 days or less, will not purchase any instrument with a
remaining maturity greater than 397 days, will limit portfolio investments,
including repurchase agreements, to those United States dollar-denominated
instruments that the Fund's Board of Directors determines present minimal credit
risks, and will comply with certain reporting and record keeping procedures. The
Fund has also established procedures to ensure compliance with the requirement
that portfolio securities are Eligible Securities. (See "Description of the Fund
and Its Investments and Risks" herein.)
IX. TAXATION OF THE FUND
Federal Income Taxes
The Fund has elected and intends to qualify under the Internal Revenue Code and
under New York law as a regulated investment company that distributes
exempt-interest dividends. It intends to continue to qualify as long as
qualification is in the best interests of its shareholders, because
qualification relieves the Fund of liability for Federal income taxes to the
extent its earnings are distributed in accordance with the applicable provisions
of the Code.
The Fund's policy is to distribute as dividends each year 100% and in no event
less than 90% of its net tax-exempt interest income. Exempt-interest dividends
are dividends paid by the Fund that are attributable to interest on obligations,
the interest on which is exempt from regular Federal income tax, and designated
by the Fund as exempt-interest dividends in a written notice mailed to the
Fund's shareholders not later than 60 days after the close of its taxable year.
The percentage of the total dividends paid by the Fund during any taxable year
that qualifies as exempt-interest dividends will be the same for all
shareholders receiving dividends during the year.
Exempt-interest dividends are excludable from gross income by the Fund's
shareholder under the Code although the amount of that interest must be
disclosed on the shareholders Federal income tax returns. A shareholder should
consult their tax advisor with respect to whether exempt-interest dividends
retain the exclusion under the Code if such shareholder would be treated as a
substantial user or related person with respect to some or all of the "private
activity bonds", if any, held by the Fund. If a shareholder receives an
exempt-interest dividend with respect to any share and such share has been held
for six months or less, then any loss on the sale or exchange of such share will
be disallowed to the extent of the amount of such exempt-interest dividend.
Interest on indebtedness incurred or continued to purchase or carry tax exempt
securities, such as shares of the Fund, is not deductible. Therefore, among
other consequences, a certain portion of interest on margin indebtedness may not
be deductible during the period an investor holds shares of the Fund. Interest
on tax-exempt bonds, including exempt-interest dividends paid by the Fund, is to
be added to adjusted gross income for purposes of computing the amount of Social
Security and Railroad Retirement benefits includable in gross income. Taxpayers
other than corporations are required to include as an item of tax preference for
purposes of the Federal alternative minimum tax all tax-exempt interest on
private activity bonds (generally, a bond issue in which more than 10% of the
proceeds are used in a non-governmental trade or business) (other than qualified
Section 501(c)(3) bonds) issued after August 7, 1986 less any deductions (not
allowable in computing Federal income tax) which would have been allowable if
such interest were includable in gross income. Thus, this provision will apply
to any exempt-interest dividends from the Fund's assets attributable to any
private activity bonds acquired by the Fund less every deduction attributable to
such income. Corporations are required to increase their alternative minimum
taxable income by 75% of the amount by which the adjusted current earnings
(which will include tax-exempt interest) of the corporation exceeds its
alternative minimum taxable income (determined without this provision). In
addition, in certain cases, Subchapter S corporations with accumulated earnings
and profits from Subchapter C years are subject to a tax on tax-exempt interest.
Although not intended, it is possible that the Fund may realize marked discount
income, short-term or long-term capital gains or losses from its portfolio
transactions. The Fund may also realize market discount income, short-term or
long-term
21
<PAGE>
capital gains upon the maturity or disposition of securities acquired at
discounts resulting from market fluctuations. Accrued market discount income and
short-term capital gains will be taxable to shareholders as ordinary income when
they are distributed. Any net capital gains (the excess of net realized
long-term capital gain from sales of assets with a holding period of more than
twelve months over net realized short-term capital loss) will be distributed
annually to the Fund's shareholders. The Fund will have no tax liability with
respect to distributed net capital gains and the distributions will be taxable
to shareholders as long-term capital gains regardless of how long the
shareholders have held Fund shares. However, Fund shareholders who at the time
of such a net capital gain distribution have not held their Fund shares for more
than six months, and who subsequently dispose of those shares at a loss, will be
required to treat such loss as a long-term capital loss to the extent of such
net capital gain distribution. Distributions of net capital gain will be
designated as a capital gain dividend in a written notice mailed to the Fund's
shareholders not later than 60 days after the close of the Fund's taxable year.
Capital gains realized by corporations are generally taxed at the same rate as
ordinary income. However, long-term capital gains are taxable at a maximum rate
of 20% to non-corporate shareholders rather than the regular maximum tax rate of
39.6%. Corresponding maximum rate and holding period rules apply with respect to
capital gains realized by a holder on the disposition of shares.
The Fund intends to distribute at least 90% of its investment company taxable
income (taxable income subject to certain adjustments exclusive of the excess of
net long-term capital gain over net short-term capital loss) for each taxable
year. These distributions will be taxable to shareholders as ordinary income.
The Fund will be subject to Federal income tax on any undistributed investment
company taxable income. The Fund also intends to distribute at least 90% of its
net tax exempt income for each taxable year. Expenses paid or incurred by the
Fund will be allocated between tax-exempt and taxable income in the same
proportion as the amount of the Fund's tax-exempt income bears to the total of
such exempt income and its gross income (excluding from gross income the excess
of capital gains over capital losses). If the Fund does not distribute during
the calendar year at least 98% of its ordinary income determined on a calendar
year basis and 98% of its capital gain net income (generally determined on a
October year end), the Fund will be subject to a 4% excise tax on the excess of
such amounts over the amounts actually distributed.
If a shareholder (other than a corporation) fails to provide the Fund with a
current taxpayer identification number, the Fund is generally required to
withhold 31% of taxable interest or dividend payments and proceeds from the
redemption of shares of the Fund.
Dividends and distributions to shareholders will be treated in the same manner
for Federal and New York income tax purposes whether received in cash or
reinvested in additional shares of the Fund.
With respect to the variable rate demand instruments, including Participation
Certificates therein, the Fund should be treated for Federal income tax purposes
as the owner of an interest in the underlying Municipal Obligations and the
interest thereon will be exempt from regular Federal income taxes to the Fund
and its shareholders to the same extent as interest on the underlying Municipal
Obligations.
The Code provides that interest on indebtedness incurred or continued to
purchase or carry tax exempt bonds is not deductible by most taxpayers.
Therefore, a certain portion of interest on debt incurred or continued to
purchase or carry securities may not be deductible during the period an investor
holds shares of the Fund.
The U.S. Supreme Court held that there is no constitutional prohibition against
the Federal government's taxing the interest earned on state or other municipal
bonds. The Supreme Court decision affirms the authority of the Federal
government to regulate and control bonds such as the Municipal Obligations and
to tax the interest earned on such bonds in the future. The decision does not,
however, affect the current exemption from taxation of the interest earned on
the Municipal Obligations.
From time to time, proposals have been introduced before Congress to restrict or
eliminate the Federal income tax exemption for interest on Municipal
Obligations. If such a proposal were introduced and enacted in the future, the
ability of the Fund to pay exempt-interest dividends would be adversely affected
and the Fund would re-evaluate its investment objective and policies and
consider changes in the structure.
The exemption for Federal income tax purposes of exempt interest dividends does
not necessarily result in an exemption under the tax laws of any state or local
taxing authority. However, to the extent that dividends are derived from
interest on New York Municipal Obligations, the dividends will also be excluded
from a New York shareholder's gross income for New York State and New York City
personal income tax purposes. This exclusion will not result in a corporate
shareholder being exempt from tax on such dividends for New York State and New
York City franchise tax purposes. Shareholders are advised to consult with their
tax advisers concerning the application of state and local taxes to investments
in the Fund which may differ from the Federal income tax consequences described
above.
22
<PAGE>
X. UNDERWRITERS
The Fund sells and redeems its shares on a continuing basis at their net asset
value and does not impose a sales charge. The Distributor does not receive an
underwriting commission. In effecting sales of Fund shares under the
Distribution Agreement, the Distributor, for nominal consideration (i.e., $1.00)
and as agent for the Fund, will solicit orders for the purchase of the Fund's
shares, provided that any subscriptions and orders will not be binding on the
Fund until accepted by the Fund as principal.
The Glass-Steagall Act and other applicable laws and regulations prohibit banks
and other depository institutions from engaging in the business of underwriting,
selling or distributing most types of securities. On November 16, 1999,
President Clinton signed the Gramm-Leach-Bliley Act, repealing certain
provisions of the Glass-Steagall Act which have restricted affiliation between
banks and securities firms and amending the Bank Holding Company Act thereby
removing restrictions on banks and insurance companies. The new legislation
grants banks new authority to conduct certain authorized activity through
financial subsidiaries. In the opinion of the Manager, however, based on the
advice of counsel, these laws and regulations do not prohibit such depository
institutions from providing other services for investment companies such as the
shareholder servicing and related administrative functions referred to above.
The Fund's Board of Directors will consider appropriate modifications to the
Fund's operations, including discontinuance of any payments then being made
under the Plan to banks and other depository institutions, in the event of any
future change in such laws or regulations which may affect the ability of such
institutions to provide the above-mentioned services. It is not anticipated that
the discontinuance of payments to such an institution would result in loss to
shareholders or change in the Fund's net asset value. In addition, state
securities laws on this issue may differ from the interpretations of Federal law
expressed herein and banks and financial institutions may be required to
register as dealers pursuant to state law.
XI. CALCULATION OF PERFORMANCE DATA
The Fund calculates a seven-day yield quotation using a standard method
prescribed by the rules of the SEC. Under that method, the Fund's yield figure,
which is based on a chosen seven-day period, is computed as follows: the Fund's
return for the seven-day period is obtained by dividing the net change in the
value of a hypothetical account having a balance of one share at the beginning
of the period by the value of such account at the beginning of the period
(expected to always be $1.00). This is multiplied by (365/7) with the resulting
annualized figure carried to the nearest hundredth of one percent. For purposes
of the foregoing computation, the determination of the net change in account
value during the seven-day period reflects (i) dividends declared on the
original share and on any additional shares, including the value of any
additional shares purchased with dividends paid on the original share, and (ii)
fees charged to all shareholder accounts. Realized capital gains or losses and
unrealized appreciation or depreciation of the Fund's portfolio securities are
not included in the computation. Therefore, annualized yields may be different
from effective yields quoted for the same period.
The Fund's "effective yield" for each Class is obtained by adjusting its
"current yield" to give effect to the compounding nature of the Fund's
portfolio, as follows: the unannualized base period return is compounded and
brought out to the nearest one hundredth of one percent by adding one to the
base period return, raising the sum to a power equal to 365 divided by 7, and
subtracting one from the result, i.e., effective yield = [(base period return +
1)365/7] - 1.
Although published yield information is useful to investors in reviewing the
Fund's performance, investors should be aware that the Fund's yield fluctuates
from day to day. The Fund's yield for any given period is not an indication, or
representation by the Fund, of future yields or rates of return on the Fund's
shares, and may not provide a basis for comparison with bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors who
purchase the Fund's shares directly may realize a higher yield than Participant
Investors because they will not be subject to any fees or charges that may be
imposed by Participating Organizations.
The Fund may from time to time advertise its tax equivalent current yield. The
tax equivalent yield for each Class is computed based upon a 30-day (or one
month) period ended on the date of the most recent balance sheet included in
this Statement of Additional Information. It is computed by dividing that
portion of the yield of the Fund (as computed pursuant to the formulae
previously discussed) which is tax exempt by one minus a stated income tax rate
and adding the quotient to that portion, if any, of the yield of the Fund that
is not tax exempt. The tax equivalent yield for the Fund may also fluctuate
daily and does not provide a basis for determining future yields.
The Fund may from time to time advertise a tax equivalent effective yield table
which shows the yield that an investor would need to receive from a taxable
investment in order to equal a tax-free yield from the Fund. This is calculated
by dividing that portion of the Fund's effective yield that is tax-exempt by 1
minus a stated income tax rate and adding the quotient to that portion, if any,
of the Fund's effective yield that is not tax-exempt. See "Taxable Equivalent
Yield Table" herein.
23
<PAGE>
The Fund's Class A shares' yield for the seven-day period ended April 30, 2000
was 3.59% which is equivalent to an effective yield of 3.66%. The Fund's Class B
shares' yield for the seven-day period ended April 30, 2000 was 3.81% which is
equivalent to an effective yield of 3.88%. The Fund's Evergreen shares' yield
for the seven day period ended April 30, 2000 was 3.59%, which is equivalent to
an effective yield of 3.66%. The Fund's Victory shares' yield for the seven day
period ended April 30, 2000 was 3.59%, which is equivalent to an effective yield
of 3.66%.
XII. FINANCIAL STATEMENTS
The audited financial statements for the Fund for the fiscal year ended April
30, 2000 and the report therein of PricewaterhouseCoopers LLP, are herein
incorporated by reference to the Fund's Annual Report. The Annual Report is
available upon request and without charge.
24
<PAGE>
Description of Moody's Investors Service, Inc.'s Two Highest Municipal 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 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 which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities, or fluctuation of protective elements
may be of greater amplitude, or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
Con: (c) Bonds for which the security depends upon the completion of some act or
the fulfillment of some condition are rated conditionally. These are bonds
secured by (i) earnings of projects under construction, (ii) earnings of
projects unseasoned in operating experience, (iii) rentals which begin when
facilities are completed, or (iv) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
Description of Moody's Investors Service, Inc.'s Two Highest Ratings of State
and Municipal Notes and Other Short-Term Loans:
Moody's ratings for state and municipal notes and other short-term loans will be
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing, while various factors of the first importance in bond risk
are of lesser importance in the short run. Symbols used will be as follows:
MIG-1: Loans bearing this designation are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both.
MIG-2: Loans bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.
Description of Standard & Poor's Rating Services Two Highest Debt Ratings:
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only to a small degree.
Plus ( + ) or Minus ( - ): The AA rating may be modified by the addition of a
plus or minus sign to show relative standing within the AA rating category.
Provisional Ratings: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
Standard & Poor's does not provide ratings for state and municipal notes.
Description of Standard & Poor's Rating Services Two Highest Commercial Paper
Ratings:
A: Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1: This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+) sign
designation.
-----------------------------------
* As described by the rating agencies.
25
<PAGE>
INDIVIDUAL TAXABLE EQUIVALENT YIELD TABLE
(Based on Tax Rates Effective Until December 31, 2000)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------------
1. If Your Taxable Income Bracket Is . . .
------------------------------------------------------------------------------------------------------------------------------------
--------------- ---------- ---------- --------- --------- --------- -------- -------- -------- --------- ---------
Single $12,000- $13,001 - $20,001- $25,001- $26,251- $50,001- $63,551- $132,601- $288,351-
Return $13,000 $20,000 $25,000 $26,250 $50,000 $63,550 $132,600 $288,350 and over
--------------- ---------- ---------- --------- --------- --------- -------- -------- -------- --------- ---------
--------------- ---------- ---------- --------- --------- --------- -------- -------- -------- --------- ---------
Joint $22,000- $26,001- $40,001 - $43,851 - $45,001- $90,001- $105,951- $161,451- $288,351-
Return $26,000 $40,000 $43,850 $45,000 $90,000 $105,950 $161,450 $288,350 and over
--------------- ---------- ---------- --------- --------- --------- -------- -------- -------- --------- ---------
------------------------------------------------------------------------------------------------------------------------------------
2. Then Your Combined Income Tax Bracket Is . . .
------------------------------------------------------------------------------------------------------------------------------------
--------------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------
Federal
Tax Rate 15.00% 15.00% 15.00% 15.00% 28.00% 28.00% 28.00% 31.00% 36.00% 39.60%
--------------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------
--------------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------
State
Tax Rate 5.250% 5.900% 6.850% 6.850% 6.850% 6.850% 6.850% 6.850% 6.850% 6.850%
--------------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------
--------------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------
City Tax
Rate 3.215% 3.215% 3.215% 3.265% 3.215% 3.265% 3.315% 3.315% 3.315% 3.315%
--------------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------
--------------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------
Combined
Marginal
Tax Rate 22.195% 22.748% 23.555% 23.598% 35.247% 35.283% 35.319% 38.014% 42.506 45.740%
--------------- ----------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- ----------- ---------
------------------------------------------------------------------------------------------------------------------------------------
3. Now Compare Your Tax Free Income Yields With Taxable Income Yields
------------------------------------------------------------------------------------------------------------------------------------
--------------- --------------------------------------------------------------------------------------------------------------------
Tax Exempt Equivalent Taxable Investment Yield
Yield Required to Match Tax Exempt Yield
--------------- --------------------------------------------------------------------------------------------------------------------
--------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------------ ------------ ----------
2.00% 2.57% 2.59% 2.62% 2.62% 3.09% 3.09% 3.09% 3.23% 3.48% 3.69%
--------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------------ ------------ ----------
--------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------------ ------------ ----------
2.50% 3.21% 3.24% 3.27% 3.27% 3.86% 3.86% 3.87% 4.03% 4.35% 4.61%
--------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------------ ------------ ----------
--------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------------ ------------ ----------
3.00% 3.86% 3.88% 3.92% 3.93% 4.63% 4.64% 4.64% 4.84% 5.22% 5.53%
--------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------------ ------------ ----------
--------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------------ ------------ ----------
3.50% 4.50% 4.53% 4.58% 4.58% 5.41% 5.41% 5.41% 5.65% 6.09% 6.45%
--------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------------ ------------ ----------
--------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------------ ------------ ----------
4.00% 5.14% 5.18% 5.23% 5.24% 6.18% 6.18% 6.18% 6.45% 6.96% 7.37%
--------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------------ ------------ ----------
--------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------------ ------------ ----------
4.50% 5.78% 5.83% 5.89% 5.89% 6.95% 6.95% 6.96% 7.26% 7.83% 8.29%
--------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------------ ------------ ----------
--------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------------ ------------ ----------
5.00% 6.43% 6.47% 6.54% 6.54% 7.72% 7.73% 7.73% 8.07% 8.70% 9.21%
--------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------------ ------------ ----------
--------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------------ ------------ ----------
5.50% 7.07% 7.12% 7.19% 7.20% 8.49% 8.50% 8.50% 8.87% 9.57% 10.14%
--------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------------ ------------ ----------
--------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------------ ------------ ----------
6.00% 7.71% 7.77% 7.85% 7.85% 9.27% 9.27% 9.28% 9.68% 10.44% 11.06%
--------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------------ ------------ ----------
--------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------------ ------------ ----------
6.50% 8.35% 8.41% 8.50% 8.51% 10.04% 10.04% 10.05% 10.49% 11.31% 11.98%
--------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------------ ------------ ----------
--------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------------ ------------ ----------
7.00% 9.00% 9.06% 9.16% 9.16% 10.81% 10.82% 10.82% 11.29% 12.18% 12.90%
--------------- ---------- ---------- ---------- ---------- ----------- ----------- ----------- ------------ ------------ ----------
</TABLE>
To use this chart, find the applicable level of taxable income based on your tax
filing status in section one. Then read down to section two to determine your
combined tax bracket and, to section three, to see the equivalent taxable yields
for each of the tax free income yields given.
26
<PAGE>
