STATEMENT OF ADDITIONAL INFORMATION
August 30, 1996
THE EVERGREEN INCOME FUNDS
2500 Westchester Avenue, Purchase, New York 10577
800-807-2940
Evergreen U.S. Government Fund (formerly First Union U.S. Government Portfolio)
("U.S.Government")
Evergreen Short Intermediate Bond Fund (formerly Evergreen Fixed
Income Fund) ("Short Intermediate Bond")
Evergreen Intermediate Term Bond Fund (formerly The FFB Lexicon Fund - Fixed
Income Fund) ("Intermediate Term Bond")
Evergreen Intermediate Term Government Securities Fund (formerly The FFB
Lexicon Fund - Intermediate Term Government
Securities Fund ("Intermediate Term Government")
This Statement of Additional Information pertains to all classes of
shares of the Funds listed above. It is not a prospectus and should be read in
conjunction with the Prospectus dated August 30, 1996 for the Fund in which you
are making or contemplating an investment. The Evergreen Income Funds are
offered through two separate prospectuses: one offering Class A, Class B and
Class C shares of U.S. Government, Short Intermediate Bond, Intermediate Term
Bond and Intermediate Term Government, and a separate prospectus offering Class
Y shares of each Fund. Copies of each Prospectus may be obtained without charge
by calling the number listed above.
TABLE OF CONTENTS
Investment Objectives and Policies................................2
Investment Restrictions...........................................11
Certain Risk Considerations.......................................16
Management........................................................16
Investment Adviser................................................23
Distribution Plans................................................27
Allocation of Brokerage...........................................30
Additional Tax Information........................................31
Net Asset Value...................................................33
Purchase of Shares................................................34
General Information About the Funds...............................45
Performance Information...........................................47
Financial Statements..............................................51
Appendix A - Description of Bond, Municipal Note and Commercial Paper
Ratings - 51
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INVESTMENT OBJECTIVES AND POLICIES (See also "Description of the
Funds Investment Objectives and Policies" in each Fund's Prospectus)
The investment objective of each Fund and a description of the securities
in which each Fund may invest is set forth under "Description of the Funds
Investment Objectives and Policies" in the relevant Prospectus. The investment
objectives of each Fund are fundamental and cannot be changed without the
approval of shareholders. The following expands the discussion in the Prospectus
regarding certain investments of each Fund.
Types of Investments
U.S. Government Obligations (All Funds)
The types of U.S. Government obligations in which the Funds may invest
generally include obligations issued or guaranteed by U.S. Government agencies
or instrumentalities.
These securities are backed by:
(1) the discretionary authority of the U.S. Government to purchase certain
obligations of agencies or instrumentalities; or
(2) the credit of the agency or instrumentality issuing the obligations.
Examples of agencies and instrumentalities that may not always receive
financial support from the U.S. Government are:
(i) Farm Credit System, including the National Bank for Cooperatives, Farm
Credit Banks and Banks for Cooperatives;
(ii) Farmers Home Administration;
(iii) Federal Home Loan Banks;
(iv) Federal Home Loan Mortgage Corporation;
(v) Federal National Mortgage Association;
(vi) Government National Mortgage Association; and
(vii) Student Loan Marketing Association
GNMA Securities. The Funds may invest in securities issued by the Government
National Mortgage Association ("GNMA"), a wholly-owned U.S. Government
corporation, which guarantees the timely payment of principal and interest, but
not premiums paid to purchase these instruments. The market value and interest
yield of these instruments can vary due to market interest rate fluctuations and
early prepayments of underlying mortgages. These securities represent ownership
in a pool of federally insured mortgage loans. GNMA certificates consist of
underlying mortgages with a maximum maturity of 30 years. However, due to
scheduled and unscheduled principal payments, GNMA certificates have a shorter
average maturity and, therefore, less principal volatility than a comparable
30-year bond. Since prepayment rates vary widely, it is not possible to
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accurately predict the average maturity of a particular GNMA pool. The scheduled
monthly interest and principal payments relating to mortgages in the pool will
be "passed through" to investors. GNMA securities differ from conventional bonds
in that principal is paid back to the certificate holders over the life of the
loan rather than at maturity. As a result, there will be monthly scheduled
payments of principal and interest. In addition, there may be unscheduled
principal payments representing prepayments on the underlying mortgages.
Although GNMA certificates may offer yields higher than those available from
other types of U.S. Government securities, GNMA certificates may be less
effective than other types of securities as a means of "locking in" attractive
long-term rates because of the prepayment feature. For instance, when interest
rates decline, the value of a GNMA certificate likely will not rise as much as
comparable debt securities due to the prepayment feature. In addition, these
prepayments can cause the price of a GNMA certificate originally purchased at a
premium to decline in price to its par value, which may result in a loss.
Mortgage-Backed or Asset-Backed Securities. U.S. Government, Short Intermediate
Bond and Intermediate Term Bond may invest in mortgage-backed securities and
asset-backed securities. Two principal types of mortgage-backed securities are
collateralized mortgage obligations ("CMOs") and real estate mortgage investment
conduits ("REMICs"). CMOs are securities collateralized by mortgages, mortgage
pass-throughs, mortgage pay-through bonds (bonds representing an interest in a
pool of mortgages where the cash flow generated from the mortgage collateral
pool is dedicated to bond repayment), and mortgage-backed bonds (general
obligations of the issuers payable out of the issuers' general funds and
additionally secured by a first lien on a pool of single family detached
properties). Many CMOs are issued with a number of classes or series which have
different maturities and are retired in sequence.
Investors purchasing such CMOs in the shortest maturities receive or are
credited with their pro rata portion of the scheduled payments of interest and
principal on the underlying mortgages plus all unscheduled prepayments of
principal up to a predetermined portion of the total CMO obligation. Until that
portion of such CMO obligation is repaid, investors in the longer maturities
receive interest only. Accordingly, the CMOs in the longer maturity series are
less likely than other mortgage pass-throughs to be prepaid prior to their
stated maturity. Although some of the mortgages underlying CMOs may be supported
by various types of insurance, and some CMOs may be backed by GNMA certificates
or other mortgage pass-throughs issued or guaranteed by U.S. Government agencies
or instrumentalities, the CMOs themselves are not generally guaranteed.
REMICs, which were authorized under the Tax Reform Act of 1986, are private
entities formed for the purpose of holding a fixed pool of mortgages secured by
an interest in real property. REMICs are similar to CMOs in that they issue
multiple classes of securities.
In addition to mortgage-backed securities, U.S. Government, Short
Intermediate Bond and Intermediate Term Bond may invest in securities secured by
other assets including company receivables, truck and auto loans, leases, and
credit card receivables. These issues may be traded over-the-counter and
typically have a short-intermediate maturity structure depending on the paydown
characteristics of the underlying financial assets which are passed through to
the security holder.
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Credit card receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain amounts owed
on the credit cards, thereby reducing the balance due. Most issuers of
asset-backed securities backed by automobile receivables permit the servicers of
such receivables to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
rated asset- backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of asset-backed securities backed by
automobile receivables may not have a proper security interest in all of the
obligations backing such receivables. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.
In general, issues of asset-backed securities are structured to include
additional collateral and/or additional credit support to protect against the
risk that a portion of the collateral supporting the asset-backed securities may
default and/or may suffer from these defects. In evaluating the strength of
particular issues of asset-backed securities, the Adviser (as hereinafter
defined)considers the financial strength of the guarantor or other provider of
credit support, the type and extent of credit enhancement provided as well as
the documentation and structure of the issue itself and the credit support.
Restricted and Illiquid Securities (All Funds)
The ability of the Board of Trustees of either Evergreen Investment
Trust, in the case of Short Intermediate Bond and U.S. Government, or The
Evergreen Lexicon Trust, in the case of Intermediate Term Bond and Intermediate
Term Government ("Trustees") to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission ("SEC") Staff
position set forth in the adopting release for Rule 144A under the Securities
Act of 1933 (the "Rule"). The Rule is a non-exclusive, safe-harbor for certain
secondary market transactions involving securities subject to restrictions on
resale under federal securities laws. The Rule provides an exemption from
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the liquidity of
the secondary market for securities eligible for sale under the Rule. The Funds
which invest in Rule 144A securities believe that the Staff of the SEC has left
the question of determining the liquidity of all restricted securities (eligible
for resale under the Rule) for determination by the Trustees. The Trustees
consider the following criteria in determining the liquidity of certain
restricted securities:
(i) the frequency of trades and quotes for the security;
(ii) the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
(iii) dealer undertakings to make a market in the security; and
(iv) the nature of the security and the nature of the marketplace trades.
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Variable or Floating Rate Instruments.
Certain of the investments of Intermediate Term Bond and Intermediate Term
Government may include variable or floating rate instruments which may involve a
demand feature and may include variable amount master demand notes which may or
may not be backed by bank letters of credit. Variable or floating rate
instruments bear interest at a rate which varies with changes in market rates.
The holder of an instrument with a demand feature may tender the instrument back
to the issuer at par prior to maturity. A variable amount master demand note is
issued pursuant to a written agreement between the issuer and the holder, its
amount may be increased by the holder or decreased by the holder or issuer, it
is payable on demand, and the rate of interest varies based upon an agreed
formula. The quality of the underlying credit must, in the opinion of each
Fund's Adviser, be equivalent to the long-term bond or commercial paper ratings
applicable to permitted investments for each Fund. The Adviser will monitor, on
an ongoing basis, the earning power, cash flow, and liquidity ratios of the
issuers of such instruments and will similarly monitor the ability of an issuer
of a demand instrument to pay principal and interest on demand.
When-Issued and Delayed Delivery Securities (All Funds)
The Funds may enter into securities transactions on a when-issued
basis. These transactions involve the purchase of debt obligations on a
when-issued basis, in which case delivery and payment normally take place within
45 days after the date of commitment to purchase. The Funds will only make
commitments to purchase obligations on a when-issued basis with the intention of
actually acquiring the securities, but may sell them before the settlement date.
The when-issued securities are subject to market fluctuation, and no interest
accrues on the security to the purchaser during this period. The payment
obligation and the interest rate that will be received on the securities are
each fixed at the time the purchaser enters into the commitment. Purchasing
obligations on a when-issued basis is a form of leveraging and can involve a
risk that the yields available in the market when the delivery takes place may
actually be higher than those obtained in the transaction itself. In that case
there could be an unrealized loss at the time of delivery.
Segregated accounts will be established with the custodian, and the Funds will
maintain liquid assets in an amount at least equal in value to a Fund's
commitments to purchase when-issued securities. If the value of these assets
declines, a Fund will place additional liquid assets in the account on a daily
basis so that the value of the assets in the account is equal to the amount of
such commitments. The Funds do not intend to engage in when-issued and delayed
delivery transactions to an extent that would cause segregation of more than 20%
of the total value of their assets.
Lending of Portfolio Securities (All Funds)
The Funds may lend securities pursuant to agreements requiring that the loans be
continuously secured by cash, securities of the U.S. Government or its agencies,
or any combination of cash and such securities, as collateral equal at all times
to 100% of the market value of the securities lent. The collateral received when
a Fund lends portfolio securities must be valued daily and, should the market
value of the loaned securities increase, the borrower must furnish additional
collateral to the lending Fund. During the time portfolio securities are on
loan, the borrower pays the Fund any dividends or interest paid on such
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securities. Loans are subject to termination at the option of the Fund or the
borrower. A Fund may pay reasonable administrative and custodial fees in
connection with a loan and may pay a negotiated portion of the interest earned
on the cash or equivalent collateral to the borrower or placing broker. A Fund
does not have the right to vote securities on loan, but would terminate the loan
and regain the right to vote if that were considered important with respect to
the investment. Any loan may be terminated by either party upon reasonable
notice to the other party. There may be risks of delay in receiving additional
collateral or risks of delay in recovery of the securities or even loss of
rights in the collateral should the borrower of the securities fail financially.
However, loans are made only to borrowers deemed by the Adviser to be of good
standing and when, in the judgment of the Adviser, the consideration which can
be earned currently from such securities loans justifies the attendant risk.
Such loans will not be made if, as a result, the aggregate amount of all
outstanding securities loans for U.S. Government, Intermediate Term Bond and
Intermediate Term Government exceed one-third of the value of a Fund's total
assets taken at fair market value. Loans of securities by Short Intermediate
Bond are limited to 15% of its total assets.
Reverse Repurchase Agreements
As described herein, U.S. Government and Short Intermediate Bond may also
enter into reverse repurchase agreements. These transactions are similar to
borrowing cash. In a reverse repurchase agreement, a Fund transfers possession
of a portfolio instrument to another person, such as a financial institution,
broker, or dealer, in return for a percentage of the instrument's market value
in cash, and agrees that on a stipulated date in the future the Fund will
repurchase the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate.
The use of reverse repurchase agreements may enable a Fund to avoid selling
portfolio instruments at a time when a sale may be deemed to be disadvantageous,
but the ability to enter into reverse repurchase agreements does not ensure that
the Fund will be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of a Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated at the trade date. These securities are marked to market daily
and maintained until the transaction is settled.
Options and Futures Transactions
Options which Short Intermediate Bond trades must be listed on national
securities exchanges.
Purchasing Put and Call Options on Financial Futures Contracts
Short Intermediate Bond and U.S. Government may purchase listed put and call
options on financial futures contracts for U.S. Government securities. U.S.
Government may buy and sell financial futures contracts and options on financial
futures contracts and may buy and sell put and call options on U.S. Government
securities. Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at an undetermined price,
the purchase of a put option on a futures contract entitles (but does not
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obligate) its purchaser to decide on or before a future date whether to assume a
short position at the specified price.
A Fund may purchase put and call options on futures to protect portfolio
securities against decreases in value resulting from an anticipated increase in
market interest rates. Generally, if the hedged portfolio securities decrease in
value during the term of an option, the related futures contracts will also
decrease in value and the put option will increase in value. In such an event, a
Fund will normally close out its option by selling an identical put option. If
the hedge is successful, the proceeds received by the Fund upon the sale of the
put option plus the realized decrease in value of the hedged securities.
Alternately, a Fund may exercise its put option to close out the position.
To do so, it would enter into a futures contract of the type underlying the
option. If the Fund neither closes out nor exercises an option, the option will
expire on the date provided in the option contract, and the premium paid for the
contract will be lost.
Purchasing Options
Short Intermediate Bond and U.S. Government may purchase both put and
call options on their portfolio securities. These options will be used as a
hedge to attempt to protect securities which a Fund holds or will be purchasing
against decreases or increases in value. A Fund may purchase call and put
options for the purpose of offsetting previously written call and put options of
the same series. If the Fund is unable to effect a closing purchase transaction
with respect to covered options it has written, the Fund will not be able to
sell the underlying securities or dispose of assets held in a segregated account
until the options expire or are exercised.
Short Intermediate Bond intends to purchase put and call options on
currency and other financial futures contracts for hedging purposes. A put
option purchased by the Fund would give it the right to assume a position as the
seller of a futures contract. A call option purchased by the Fund would give it
the right to assume a position as the purchaser of a futures contract. The
purchase of an option on a futures contract requires the Fund to pay a premium.
In exchange for the premium, the Fund becomes entitled to exercise the benefits,
if any, provided by the futures contract, but is not required to take any action
under the contract. If the option cannot be exercised profitably before it
expires, the Fund's loss will be limited to the amount of the premium and any
transaction costs.
Short Intermediate Bond and U.S. Government currently do not intend to
invest more than 5% of their net assets in options transactions.
A Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and thereby insure
that the purchase of such futures contracts is unleveraged.
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Purchasing Call Options on Financial Futures Contracts
An additional way in which U.S. Government may hedge against decreases in
market interest rates is to buy a listed call option on a financial futures
contract for U.S. Government securities. When the Fund purchases a call option
on a futures contract, it is purchasing the right (not the obligation) to assume
a long futures position (buy a futures contract) at a fixed price at any time
during the life of the option. As market interest rates fall, the value of the
underlying futures contract will normally increase, resulting in an increase in
value of the Fund's option position. When the market price of the underlying
futures contract increases above the strike price plus premium paid, the Fund
could exercise its option and buy the futures contact below market price.
Prior to the exercise or expiration of the call option, the Fund could sell
an identical call option and close out its position. If the premium received
upon selling the offsetting call is greater than the premium originally paid,
the Fund has completed a successful hedge.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, a Fund does not pay or receive
money upon the purchase or sale of a futures contract. Rather, a Fund is
required to deposit an amount of "initial margin" in cash or U.S. Treasury bills
with its custodian (or the broker, if legally permitted). The nature of initial
margin in futures transactions is different from that of margin in securities
transactions in that futures contract initial margin does not involve the
borrowing of funds by a Fund to finance the transactions. Initial margin is in
the nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied.
A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Fund pays
or receives cash, called "variation margin", equal to the daily change in value
of the futures contract. This process is known as "marking to market". Variation
margin does not represent a borrowing or loan by the Fund but is instead
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing its daily net asset value, a Fund
will mark-to-market its open futures positions. The Fund is also required to
deposit and maintain margin when it writes call options on futures contracts.
U.S. Government will not maintain open positions in futures contracts it
has sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds the
current market value of its securities portfolio plus or minus the unrealized
gain or loss on those open positions, adjusted for the correlation of volatility
between the hedged securities and the futures contracts. If this limitation is
exceeded at any time, the Fund will take prompt action to close out a sufficient
number of open contracts to bring its open futures and options positions within
this limitation.
Purchasing and Writing Put and Call Options on U.S. Government Securities
U.S. Government may purchase put and call options on U.S. Government
securities to protect against price movements in particular securities. A put
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option gives the Fund, in return for a premium, the right to sell the underlying
security to the writer (seller) at a specified price during the term of the
option. A call option gives the Fund, in return for a premium, the right to buy
the underlying security from the seller.
The Fund may generally purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the options
since options on the portfolio securities held by the Fund are not traded on an
exchange. The Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings and loan
associations) deemed creditworthy by the Adviser.
Over-the-counter options are two party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange-traded options are third party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market while over-the-counter options may not.
Section 4(2) Commercial Paper
U.S. Government and Short Intermediate Bond may invest in commercial paper
issued in reliance on the exemption from registration afforded by Section 4(2)
of the Securities Act of 1933. Section 4(2) commercial paper is restricted as to
disposition under federal securities law and is generally sold to institutional
investors, such as the Funds, who agree that they are purchasing the paper for
investment purposes and not with a view to public distribution. Any resale by
the purchaser must be in an exempt transaction. Section 4(2) commercial paper is
normally resold to other institutional investors like the Funds through or with
the assistance of the issuer or investment dealers who make a market in Section
4(2) commercial paper, thus providing liquidity. The Funds believe that Section
4(2) commercial paper and possibly certain other restricted securities which
meet the criteria for liquidity established by the Trustees are quite liquid.
The Funds intend, therefore, to treat the restricted securities which meet the
criteria for liquidity established by the Trustees, including Section 4(2)
commercial paper, as determined by each Fund's Adviser, as liquid and not
subject to the investment limitation applicable to illiquid securities. In
addition, because Section 4(2) commercial paper is liquid, the Funds do not
intend to subject such paper to the limitation applicable to restricted
securities.
Repurchase Agreements (All Funds)
Repurchase Agreements. Certain of the investments of the Funds may include
repurchase agreements which are agreements by which a person (e.g., a portfolio)
obtains a security and simultaneously commits to return the security to the
seller (a member bank of the Federal Reserve System or recognized securities
dealer) at an agreed upon price (including principal and interest) on an agreed
upon date within a number of days (usually not more than seven) from the date of
purchase. The resale price reflects the purchase price plus an agreed upon
market rate of interest which is unrelated to the coupon rate or maturity of the
underlying security. A repurchase agreement involves the obligation of the
seller to pay the agreed upon price, which obligation is in effect secured by
the value of the underlying security.
A Fund or its custodian will take possession of the securities subject to
repurchase agreements, and these securities will be marked to market daily. To
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the extent that the original seller does not repurchase the securities from the
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by a Fund might be delayed
pending court action. The Funds believe that under the regular procedures
normally in effect for custody of a Fund's portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Fund and allow retention or disposition of such securities. The Fund will
only enter into repurchase agreements with banks and other recognized financial
institutions, such as broker/dealers, which are deemed by the Adviser to be
creditworthy pursuant to guidelines established by the Trustees.
Foreign Securities.
Short Intermediate Bond may invest up to 20% of its assets in foreign securities
or U.S. securities traded in foreign markets and Intermediate Term Bond may
invest in U.S. dollar denominated obligations or securities of foreign issuers.
Permissible investments may consist of obligations of foreign branches of U.S.
banks and of foreign banks, including European Certificates of Deposit, European
Time Deposits, Canadian Time Deposits and Yankee Certificates of Deposit, and
investments in Canadian Commercial Paper, foreign securities and Europaper.
These instruments may subject the Fund to investment risks that differ in some
respects from those related to investments in obligations of U.S. domestic
issuers. Such risks include future adverse political and economic developments,
the possible imposition of withholding taxes on interest or other income,
possible seizure, nationalization, or expropriation of foreign deposits, the
possible establishment of exchange controls or taxation at the source, greater
fluctuations in value due to changes in exchange rates, or the adoption of other
foreign governmental restrictions which might adversely affect the payment of
principal and interest on such obligations. Such investments may also entail
higher custodial fees and sales commissions than domestic investments. Foreign
issuers of securities or obligations are often subject to accounting treatment
and engage in business practices different from those respecting domestic
issuers of similar securities or obligations. Foreign branches of U.S. banks and
foreign banks may be subject to less stringent reserve requirements than those
applicable to domestic branches of U.S. banks.
Foreign Currency Transactions
As one way of managing exchange rate risk, Short Intermediate Bond may enter
into forward currency exchange contracts (agreements to purchase or sell
currencies at a specified price and date). The exchange rate for the transaction
(the amount of currency the Fund will deliver and receive when the contract is
completed) is fixed when the Fund enters into the contract. The Fund usually
will enter into these contracts to stabilize the U.S. dollar value of a security
it has agreed to buy or sell. The Fund intends to use these contracts to hedge
the U.S. dollar value of a security it already owns, particularly if the Fund
expects a decrease in the value of the currency in which the foreign security is
denominated. Although the Fund will attempt to benefit from using forward
contracts, the success of its hedging strategy will depend on the Adviser's
ability to predict accurately the future exchange rates between foreign
currencies and the U.S. dollar. The value of the Fund's investments denominated
in foreign currencies will depend on the relative strengths of those currencies
and the U.S. dollar, and the Fund may be affected favorably or unfavorably by
changes in the exchange rates or exchange control regulations between
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foreign currencies and the U.S. dollar. Changes in foreign currency exchange
rates also may affect the value of dividends and interest earned, gains and
losses realized on the sale of securities and net investment income and gains,
if any, to be distributed to shareholders by the Fund. The Fund may also
purchase and sell options related to foreign currencies in connection with
hedging strategies.
The Fund will not enter into forward contracts for hedging purposes in a
particular currency in an amount in excess of the Fund's assets denominated in
that currency, but as consistent with its other investment policies, is not
otherwise limited in its ability to use this strategy.
Other Investments
The Funds are not prohibited from investing in obligations of banks which
are clients of the Distributor (as herein after defined). However, the purchase
of shares of the Funds by such banks or by their customers will not be a
consideration in determining which bank obligations the Funds will purchase. The
Funds will not purchase obligations of its Adviser or its affiliates.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS
Except as noted, the investment restrictions set forth below are
fundamental and may not be changed with respect to each Fund without the
affirmative vote of a majority of the outstanding voting securities of the Fund.
Where an asterisk (*) appears after a Fund's name, the relevant policy is
non-fundamental with respect to that Fund and may be changed by each Fund's
Adviser without shareholder approval, subject to review and approval by the
Trustees. As used in this Statement of Additional Information and in the
Prospectus, "a majority of the outstanding voting securities of the Fund" means
the lesser of (1) the holders of more than 50% of the outstanding shares of
beneficial interest of the Fund or (2) 67% of the shares present if more than
50% of the shares are present at a meeting in person or by proxy.
1........Concentration of Assets in Any One Issuer
Diversification of Investments
With respect to 75% of the value of its assets, a Fund will not
purchase securities of any one issuer (other than cash, cash items or securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities)
if as a result more than 5% of the value of its total assets would be invested
in the securities of the issuer. U.S. Government, Intermediate Term Bond and
Intermediate Term Government will not acquire more than 10% of the outstanding
voting securities of any one issuer.
2........Purchase of Securities on Margin
.........No Fund will purchase securities on margin, except that each Fund may
obtain such short-term credits as may be necessary for the clearance of
transactions. A deposit or payment by a Fund of initial or variation margin in
connection with financial futures contracts or related options transactions is
not considered the purchase of a security on margin.
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3........Unseasoned Issuers
.........Neither Short Intermediate Bond* nor U.S. Government* may invest
more than 5% of its total assets in securities of unseasoned issuers that have
been in continuous operation for less than three years, including operating
periods of their predecessors.
4........Underwriting
.........The Funds will not underwrite any issue of securities except as they
may be deemed an underwriter under the Securities Act of 1933 in connection with
the sale of securities in accordance with their investment objectives, policies
and limitations.
5........Interests in Oil, Gas or Other Mineral Exploration or Development
Programs.
Short Intermediate Bond*, Intermediate Term Bond and Intermediate Term
Government will not purchase interests in oil, gas or other mineral exploration
or development programs or leases, although each Fund may purchase the
securities of other issuers which invest in or sponsor such programs.
6........Concentration in Any One Industry
.........Short Intermediate Bond and U.S. Government not will invest more
than 25% of the value of its total assets in any one industry except either Fund
may invest more than 25% of its total assets in securities issued or guaranteed
by the U.S. government, its agencies or instrumentalities.
7........Warrants
........ Short Intermediate Bond*, Intermediate Term Bond* and Intermediate Term
Government* will not invest more than 5% of their assets in warrants, including
those acquired in units or attached to other securities. To comply with certain
state restrictions, each Fund will limit its investment in such warrants not
listed on the New York Stock Exchange or the American Stock Exchange to 2% of
its net assets. (If state restrictions change, this latter restriction may be
changed without notice to shareholders.) For purposes of this restriction,
warrants acquired by the Funds in units or attached to securities may be deemed
to be without value.
8.......Ownership by Trustees/Officers
None of Short Intermediate Bond*, U.S. Government*, Intermediate Term
Bond or Intermediate Term Government may purchase or retain the securities of
any issuer if (i) one or more officers or Trustees of a Fund or its investment
adviser individually owns or would own, directly or beneficially, more than 1/2
of 1% of the securities of such issuer, and (ii) in the aggregate, such persons
own or would own, directly or beneficially, more than 5% of such securities.
9.......Short Sales
.........Short Intermediate Bond will not make short sales of securities or
maintain a short position, unless at all times when a short position is open it
owns an equal amount of such securities or of securities which, without payment
of any further consideration are convertible into or exchangeable for securities
12
<PAGE>
of the same issue as, and equal in amount to, the securities sold short. The use
of short sales will allow a Fund to retain certain bonds in its portfolio longer
than it would without such sales. To the extent that the Fund receives the
current income produced by such bonds for a longer period than it might
otherwise, the Fund's investment objective is furthered.
.........U.S. Government, Intermediate Term Bond and Intermediate Term
Government will not sell any securities short.
10.......Lending of Funds and Securities
.........U.S. Government will not lend any of its assets except portfolio
securities in accordance with its investment objectives, policies and
limitations. Short Intermediate Bond will not lend portfolio securities valued
at more than 15% of its total assets to broker-dealers.
.........Intermediate Term Bond and Intermediate Term Government may not make
loans, except that (a) a Fund may purchase or hold debt instruments in
accordance with its investment objective and policies; (b) a Fund may enter into
repurchase agreements, and (c) the Funds may engage in securities lending as
described in the Prospectus and in this Statement of Additional Information.
11.......Commodities
.........Neither of Short Intermediate Bond or U.S. Government will purchase or
sell commodities or commodity contracts; however, each Fund may enter into
futures contracts on financial instruments or currency and sell or buy options
on such contracts. Intermediate Term Bond and Intermediate Term Government may
not purchase commodities or commodities contracts. However, subject to their
permitted investments, any Fund may invest in companies which invest in
commodities and commodities contracts.
12.......Real Estate
.........Short Intermediate Bond and U.S. Government may not buy or sell real
estate although each Fund may invest in securities of companies whose business
involves the purchase or sale of real estate or in securities which are secured
by real estate or interests in real estate.
.........Intermediate Term Bond and Intermediate Term Government may not
purchase or sell real estate, real estate limited partnership interests, and
interests in a pool of securities that are secured by interests in real estate.
However, subject to their permitted investments, any Fund may invest in
companies which invest in real estate.
13.......Borrowing, Senior Securities, Reverse Repurchase Agreements
.........Intermediate Term Bond and Intermediate Term Government will not
borrow money except as a temporary measure for extraordinary or emergency
purposes in an amount up to one-third of the value of total assets, including
the amounts borrowed. Any borrowing will be done from a bank and to the extent
such borrowing exceeds 5% of the value of a Fund's total assets, asset coverage
of at least 300% is required. In the event that such asset coverage shall at any
time fall below 300%, the Fund shall within three days thereafter or such longer
13
<PAGE>
period as the Securities and Exchange Commission may prescribe by rules and
regulations, reduce the amount of its borrowings to such an extent that the
asset coverage of such borrowings shall be at least 300%. This borrowing
provision is included soley to facilitate the orderly sale of portfolio
securities to accommodate heavy redemption requests if they should occur and is
not for investment purposes. All borrowings will be repaid before making
additional investments and any interest paid on such borrowings will reduce
income.
U.S. Government will not issue senior securities. However, U.S. Government may
borrow money directly or through reverse repurchase agreements as a temporary
measure for extraordinary or emergency purposes in an amount up to one-third of
the value of its total assets, including the amounts borrowed. Short
Intermediate Bond may borrow only in amounts not in excess of 5% of the value of
its total assets in order to meet redemption requests when the liquidation of
portfolio securities is deemed to be inconvenient or disadvantageous. The entry
by Short-Intermediate Bond into futures contracts shall be deemed a borrowing.
Any such borrowings need not be collateralized. Short Intermediate Bond and U.S.
Government will not purchase any securities while borrowings in excess of 5% of
the value of their total assets are outstanding.
14.......Pledging Assets
..............No Fund will mortgage, pledge or hypothecate any assets except to
secure permitted borrowings. In these cases, Short Intermediate Bond may pledge
assets having a market value not exceeding the lesser of the dollar amounts
borrowed or 15% of the value of total assets at the time of borrowing and
Intermediate Term Bond and Intermediate Term Government may do so in amounts up
to 10% of their total assets. Margin deposits for the purchase and sale of
financial futures contracts and related options and segregation or collateral
arrangements made in connection with options activities are not deemed to be a
pledge.
15.......Investing in Securities of Other Investment Companies
..............Short Intermediate Bond and U.S. Government* will purchase
securities of investment companies only in open-market transactions involving
customary broker's commissions. Intermediate Term Bond and Intermediate Term
Government may only purchase securities of other investment companies which are
money market funds and CMOs and REMICs deemed to be investment companies. In
each case the Funds will only make such purchases to the extent permitted by the
Investment Company Act of 1940 and the rules and regulations thereunder.
However, these limitations are not applicable if the securities are acquired in
a merger, consolidation or acquisition of assets. It should be noted that
investment companies incur certain expenses such as management fees and
therefore any investment by a Fund in shares of another investment company would
be subject to such duplicate expenses.
It is the position of the SEC's Staff that certain nongovernmental issuers
of CMOs and REMICs constitute investment companies pursuant to the Investment
Company Act of 1940 and either (a) investments in such instruments are subject
to the limitations set forth above or (b) the issuers of such instruments have
received orders from the SEC's exempting such instruments from the definition of
investment company.
14
<PAGE>
16.......Restricted Securities
.........Short Intermediate Bond and U.S. Government* will not invest more
than 10% of their net assets (total assets in the case of U.S. Government) in
securities subject to restrictions on resale under the Securities Act of 1933
(except for, in the case of U.S. Government, certain restricted securities which
meet criteria for liquidity established by the Trustees). For U.S. Government,
the restriction is not applicable to commercial paper issued under Section 4(2)
of the Securities Act of 1933.
17........Illiquid Securities
..........Short Intermediate Bond, Intermediate Term Bond* and Intermediate
Term Government* will not invest more than 10% and U.S. Government* will not
invest more than 15% of their net assets in illiquid securities, including
repurchase agreements providing for settlement in more than seven days after
notice and certain securities determined by the Trustees not to be liquid.
18........Options
..........Intermediate Term Bond and Intermediate Government Term may not write
or purchase puts, calls, options or combinations thereof.
19........Control
..........Intermediate Term Bond and Intermediate Government Term may not invest
in companies for the purpose of exercising control.
20.......Other
.........In order to comply with certain state blue sky limitations Short
Intermediate Bond* will not invest in real estate limited partnerships.
Except with respect to borrowing money, if a percentage limitation is
adhered to at the time of investment, a later increase or decrease in percentage
resulting from any change in value or net assets will not result in a violation
of such restriction.
The Funds did not borrow money, sell securities short, invest in reverse
repurchase agreements in excess of 5% of the value of their net assets, or
invest more than 5% of their net assets in the securities of other investment
companies in the last fiscal year, and have no present intent to do so during
the coming year.
For purposes of their policies and limitations, the Funds consider
certificates of deposit and demand and time deposits issued by a U.S. branch of
a domestic bank or savings and loan association, having capital, surplus, and
undivided profits in excess of $100,000,000 at the time of investment, to be
"cash items".
15
<PAGE>
CERTAIN RISK CONSIDERATIONS
There can be no assurance that a Fund will achieve its investment
objectives and an investment in the Fund involves certain risks which are
described under "Description of the Funds - Investment Objectives and Policies"
in the Prospectus.
MANAGEMENT
The age, address and principal occupation of the Trustees and executive
officers of the Evergreen Investment Trust (formerly First Union Funds) and The
Evergreen Lexicon Fund (formerly The FFB Lexicon Fund) (each a "Trust" and
collectively the "Trusts"), during the past five years is set forth below:
James S. Howell (72), 4124 Crossgate Road, Charlotte, NC-Chairman and Trustee.
Retired Vice President of Lance Inc. (food manufacturing); Chairman of the
Distribution Comm. Foundation for the Carolinas from 1989 to 1993.
Laurence B. Ashkin (68), 180 East Pearson Street, Chicago, IL- Trustee. Real
estate developer and construction consultant since 1980; President of Centrum
Equities since 1987 and Centrum Properties, Inc. since 1980.
Foster Bam (69), 2 Greenwich Plaza, Greenwich, CT-Trustee. Partner in the law
firm of Cummings and Lockwood since 1968.
Gerald M. McDonnell (57) 209 Harris Drive, Norfolk, NE-Trustee. Sales
Representative with Nucor-Yamoto Inc. (steel producer) since 1988.
Thomas L. McVerry (58), 4419 Parkview Drive, Charlotte, NC-Trustee. Director of
Carolina Cooperative Federal Credit Union since 1990 and Rexham Corporation from
1988 to 1990; Vice President of Rexham Industries, Inc. (diversified
manufacturer) from 1989 to 1990; Vice President-Finance and Resources, Rexham
Corporation from 1979 to 1990.
William Walt Pettit*(41), Holcomb and Pettit, P.A., 207 West Trade St.,
Charlotte, NC-Trustee. Partner in the law firm Holcomb and Pettit, P.A. since
1990.
Russell A. Salton, III, M.D. (49), 205 Regency Executive Park, Charlotte, NC-
Trustee. Medical Director, U.S. Healthcare of the Charlotte, NC Carolinas since
1996; President, Primary Physician Care from 1990 to 1996.
Michael S. Scofield (53), 212 S. Tryon Street Suite 980, Charlotte, NC-Trustee.
Attorney, Law Offices of Michael S. Scofield since prior to 1989.
Robert J. Jeffries (73), 2118 New Bedford Drive, Sun City Center, FL- Trustee
Emeritus. Corporate consultant since 1967.
John J. Pileggi (37), 230 Park Avenue, Suite 910, New York, NY-President and
Treasurer. Senior Managing Director, Furman Selz LLC since 1992, Managing
Director from 1984 to 1992.
Joan V. Fiore (40), 230 Park Avenue, Suite 910, New York, NY-Secretary. Managing
Director and Counsel, Furman Selz LLC since 1991; Staff Attorney, Securities and
Exchange Commission from 1986 to 1991.
16
<PAGE>
The officers listed above hold the same positions with thirteen
investment companies offering a total of thirty-eight investment funds within
the Evergreen mutual fund complex. Messrs. Howelll, Salton and Scofield are
Trustees of all thirteen investment companies. Messrs. McDonnell, McVerry and
Pettit are Trustees of twelve of the investment companies (excluded is Evergreen
Variable Trust). Messrs. Ashkin, Bam and Jeffries are Trustees of eleven of the
investment companies (excluded are Evergreen Variable Trust and Evergreen
Investment Trust).
- --------
* Mr. Pettit may be deemed to be an "interested person" within the meaning
of the Investment Company Act of 1940, as amended (the "1940 Act").
The officers of each Trust are all officers and/or employees of Furman Selz
LLC. Furman Selz LLC is an affiliate of Evergreen Funds Distributor, Inc., the
distributor of each Class of shares of each Fund.
The Funds do not pay any direct remuneration to any officer or Trustee who
is an "affiliated person" of either First Union National Bank of North Carolina
or Evergreen Asset Management Corp. or their affiliates. See "Investment
Adviser". Currently, none of the Trustees is an "affiliated person" as defined
in the 1940 Act. Evergreen Investment Trust pays each Trustee who is not an
"affiliated person" an annual retainer and a fee per meeting attended, plus
expenses. The Evergreen Lexicon Fund pays each Trustee who is not an "affiliated
person" a fee per meeting attended, plus expenses, as follows:
Name of Fund Annual Retainer Meeting Fee
Evergreen Investment Trust - $15,000** $2,000**
U.S. Government
Short Intermediate Bond
The Evergreen Lexicon Fund - -0-
Intermediate Term Bond $ 100
Intermediate Term Government $ 100
In addition:
(1) Each non-affiliated Trustee is paid a fee of $500 for each special
telephonic meeting in which he participates, regardless of the number
of Funds for which the meeting is called.
(2) The Chairman of the Board of the Evergreen group of mutual funds is
paid an annual retainer of $5,000, and the Chairman of the Audit
Committee is paid an annual retainer of $2,000. These retainers are
allocated among all the funds in the Evergreen group of mutual funds,
based upon assets.
(3) Each member of the Audit Committee is paid an annual retainer of $500.
(4) Any individual who has been appointed as a Trustee Emeritus of one or
more funds in the Evergreen group of mutual funds is paid one-half of
the fees that are payable to regular Trustees.
17
<PAGE>
- --------------------
** The annual retainer and the per meeting fee paid by Evergreen Investment
Trust to each Trustee are allocated among its fourteen series.
Set forth below for each of the Trustees is the aggregate compensation (and
expenses) paid to such Trustees by The Evergreen Investment Trust for the fiscal
year ended June 30, 1996, and by Evergreen Lexicon Fund for the period from
January 19, 1996(the date of their election as such Trustees) through June 30,
1996:
Aggregate Compensation From Each Trust
Total Compensation
Evergreen From Trust
Name of Evergreen Lexicon & Fund Complex
Trustee Investment Trust Fund Paid To Trustees
James S. Howell $20,620 $ 410 $ 51,900
Laurence B. Ashkin - 419 28,050
Foster Bam - 419 28,050
Gerald M. McDonnell 19,036 410 47,050
Thomas L. McVerry 19,555 410 48,000
William Walt Pettit 18,916 410 46,800
Russell A. Salton, III, M.D. 19,073 410 49,100
Michael S. Scofield 18,916 410 48,900
Robert Jeffries* - 219 20,475
- --------------------
* Robert J. Jeffries has been serving as a Trustee Emeritus since January 1,
1996.
No officer or Trustee of the Trusts owned shares of any Fund as of the date
hereof.
Set forth below is information with respect to each person, who, to each
Fund's knowledge, owned beneficially or of record more than 5% of a class of
each Fund's total outstanding shares and their aggregate ownership of the Fund's
total outstanding shares as of July 31, 1996.
Name of % of
Name and Address Fund/Class No. of Shares Class/Fund
- ---------------- ---------- ------------- ----------
Fubs & Co. Febo U.S. Government/C 11,037 12.12%/.03%
Helen G. Bender
18
<PAGE>
C/O First Union National Bank of NC
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo U.S. Government/C 4,583 5.03%/.01%
Douglas H. Thompson, Sr.
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. FEBO U.S. Government/C 10,132 11.13%/.03%
William F. Daly Trust and
William F. Daly TTEE
UAD 09/02/77
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union Natl Bank-NJ C/F U.S. Government/C 22,039 24.21%/.07%
Kenneth Friedland IRA
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank U.S. Government/Y 1,352,544 10.23%/4.13%
Trust Accounts
Attn: Ginny Batten
11th FL CMG-151
301 S. Tyron Street
Charlotte, NC 28288
First Union National Bank U.S. Government/Y 4,029,653 30.47%/12.30%
Trust Accounts
Attn: Ginny Batten
11th FL CMG-151
301 S. Tyron Street
Charlotte, NC 28288
Wachovia Bank of Georgia U.S. Government/Y 6,060,653 45.83%/18.50%
Directed Trustee for First Union
Non-Qualified Retirement Plan
U/A Dtd 8/31/94 Investment Act
301 N. Main St. MC-MC 31051
Winston Salem NC 27150
Wachovia Bank of Georgia Trustee U.S. Government/Y 1,483,295 11.22%/4.53%
First Union Corp Retirement Trust
For Non Employee Directors 10/24/94
301 N Main St. MC-NC 31051
Winston Salem, NC 27150
Fubs & Co. Febo Short Intermediate Bond/C 8,054 6.89%/.02%
Kerry D. Fitzgerald GDH
19
<PAGE>
Christina Griffin
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo Short Intermediate Bond/C 10,277 8.79%/.03%
Lucile L. Murray
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo Short Intermediate Bond/C 6,591 5.64%/.02%
Edward C. Fort and
Rachel W. Fort
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo Short Intermediate Bond/C 10,729 9.18%/.03%
Dreamland Skating Rink, Inc.
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank* Short Intermediate Bond/Y 11,112,917 31.47%/28.11%
Trust Accounts
Attn: Ginny Batten
11th FL CMG-151
301 S. Tyron Street
Charlotte, NC 28288
First Union National Bank* Short Intermediate Bond/Y 23,795,321 67.39%/60.19%
Trust Accounts
Attn: Ginny Batten
11th FL CMG-151
301 S. Tyron Street
Charlotte, NC 28288
First Union Natl Bank-NY C/F** Intermediate Term Bond/B 3,673 8.17%/.02%
Dorothy G. Beck IRA
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. FEBO Intermediate Term Bond/B 2,404 5.35%/.01%
Marie Wilder
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. FEBO Intermediate Term Bond/B 3,001 6.67%/.02%
Julia C. Beers
301 S. Tryon Street
Charlotte, NC 28288-0001
20
<PAGE>
Fubs & Co. FEBO Intermediate Term Bond/B 7,650 17.01%/.05%
Mary Louise Chatman
Flora Louise Chatman Wages POA
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. FEBO Intermediate Term Bond/B 9,745 21.67%/.06%
Frances E. Clyma Rev Trust
Frances E. Clyma Trustee
U/A/D 01/25/96
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union Natl Bank-NC C/F** Intermediate Term Bond/B 3,053 6.79%/.02%
Charles I Allred IRA
301 S. Tryon Street
Charlotte, NC 28288-0001
Margaret S. Collins Intermediate Term Bond/C 1,994 80.56%/.01%
C/O FUNB
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. FEBO Intermediate Term Bond/C 453 18.30%/.0%
Chris J. Thigpen
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank** Intermediate Term Bond/Y 4,028,239 25.36%/24.85%
Trust Accounts
Attn: Ginny Batten
301 S. Tryon Street-11th floor
Charlotte, NC 28288-0001
First Union National Bank** Intermediate Term Bond/Y 11,831,720 74.50%/72.97%
Trust Accounts
Attn Ginny Batten
301 S. Tryon Street-11th floor
Charlotte, NC 28288-0001
Fubs & Co. Febo*** Intermediate Term Gov/A 4,755 9.29%/.05%
Ignaz Keglovits & Securities
Mary Keglovits Jtten
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo*** Intermediate Term Gov/A 2,874 5.62%/.03%
Alice T. Brophy Securities
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
21
<PAGE>
Fubs & Co. Febo*** Intermediate Term Gov/A 4,412 8.62%/.05%
Doris Mack Securities
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo*** Intermediate Term Gov/A 4,967 9.72%/.06%
NJ State Fireman's Assoc. Securities
of Morris Township
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo*** Intermediate Term Gov/A 6,810 13.30%/.08%
Upper Saucon Volunteer Fire Securities
Company C/O Joe Hoffstetter
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo*** Intermediate Term Gov/B 9,921 26.36%/.11%
Carmela M. Woodruff Securities
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
First Fidelity Bank C/F Intermediate Term Gov/B 2,547 6.77%/.03%
Kenneth Vanzile IRA Securities
301 S. Tryon St.
Charlotte, NC 28288-0001
Fubs & Co. Febo*** Intermediate Term Gov/B 3,038 8.07%/.03%
Attn: Howard J. Carroll Securities
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo*** Intermediate Term Gov/B 9,833 26.13%/.11%
Frances E. Clyma Rev Trust Securities
Frances E. Clyma Trustee
U/A/D 01/25/96
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo*** Intermediate Term Gov/B 4,433 11.78%/.05%
Frank Decrescenzo and Securities
Anna M. Decrescenzo
301 S. Tryon Street
Charlotte, NC 28288-0001
Paine Webber For the Benefit of Intermediate Term Gov/C 2,914 99.01%/.03%
Robert L. Southwell TTEE Securities
Southwell Family Trust
UAD 12/5/86 as amended
22
<PAGE>
301 S. Tryon St.
Charlotte, NC 28288-0001
Fubs & Co. Febo*** Intermediate Term Gov/Y 1,065,448 12.30%/12.17%
Attn: Ginny Batten Securities
Trust Accounts
301 S. Tryon Street-CMG 1151
Charlotte, NC 28288-0001
Fubs & Co. Febo*** Intermediate Term Gov/Y 7,593,941 87.65%/86.73%
Attn: Ginny Batten Securities
Trust Accounts
301 S. Tryon Street-CMG 1151
Charlotte, NC 28288-0001
- ---------------------------------
* Acting in various capacities for numerous accounts. As a result of its
ownership of 88.3% of Short-Intermediate Bond on July 31, 1996, First Union
National Bank of North Carolina may be deemed to "control" the Fund as that term
is defined in the 1940 Act.
** Acting in various capacities for numerous accounts. As a result of its
ownership of 97.86% of Intermediate Term Bond on July 31, 1996, First Union
National Bank of North Carolina may be deemed to "control" the Fund as that term
is defined in the 1940 Act.
***Acting in various capacites for numerous accounts. As a result of its
ownership of 99.47% of Intermediate Term Government on July 31, 1996, FUBS & CO.
may be deemed to "control" the Fund as that term is defined in the 1940 Act.
INVESTMENT ADVISER
(See also "Management of the Funds" in each Fund's Prospectus) The
investment adviser of each Fund is First Union National Bank of North Carolina
("FUNB" or the "Adviser") which, in turn, is a subsidiary of First Union
Corporation ("First Union"), a bank holding company headquartered in Charlotte,
North Carolina. FUNB provides investment advisory services through its Capital
Management Group. Prior to January 19, 1996, First Fidelity Bank, N.A. ("First
Fidelity") acted as investment adviser to Intermediate Term Bond and
Intermediate Term Government. On June 18, 1995, First Union, entered into an
Agreement and Plan of Merger with First Fidelity Bancorporation ("FFB"), the
corporate parent of First Fidelity which provided, among other things, for the
merger (the "Merger") of FFB with and into a wholly-owned subsidiary of First
Union. The Merger was consummated on January 19, 1996. As a result of the
Merger, FUNB and its wholly-owned subsidiary, Evergreen Asset Management Corp.,
succeeded to the investment advisory and administrative functions currently
performed by various units of First Fidelity.
Under its Investment Advisory Agreement with each Fund, the Adviser has
agreed to furnish reports, statistical and research services and recommendations
with respect to each Fund's portfolio of investments. In addition, the Adviser
provides office facilities to the Funds and performs a variety of administrative
23
<PAGE>
services. Each Fund pays the cost of all of its other expenses and liabilities,
including expenses and liabilities incurred in connection with maintaining their
registration under the Securities Act of 1933, as amended, and the 1940 Act,
printing prospectuses (for existing shareholders) as they are updated, state
qualifications, mailings, brokerage, custodian and stock transfer charges,
printing, legal and auditing expenses, expenses of shareholder meetings and
reports to shareholders. Notwithstanding the foregoing, the Adviser will pay the
costs of printing and distributing prospectuses used for prospective
shareholders.
The method of computing the investment advisory fee for each Fund is
described in such Fund's Prospectus. The advisory fees paid by each Fund for the
three most recent fiscal periods reflected in its registration statement are set
forth below:
Six Months
U.S. GOVERNMENT Year Ended Ended Year Ended
6/30/96 6/30/95 12/31/94
-------- -------- --------
Advisory Fee $1,507,281 $575,771 $1,355,420
--------- -------- ---------
Waiver ___ ( 7,399) ( 105,523)
Net Advisory Fee $1,507,281 $568,372 $1,249,897
========= ========= =========
Six Months
SHORT INTERMEDIATE Year Ended Ended Year Ended
BOND 6/30/96 6/30/95 12/31/94
---------- -------- --------
Advisory Fee $1,951,949 $961,697 $2,022,773
========= ========= =========
INTERMEDIATE Ten Months Year Ended Year Ended
TERM BOND Ended 6/30/96 8/31/95 8/31/94
------------ -------- --------
Advisory Fee $600,081 $544,577 $564,696
---------- -------- ========
Waiver ( 64,983) ( 128,003) (266,241)
Net Advisory Fee $535,098 $416,554 $298,455
========= ========= =========
INTERMEDIATE Ten Months Year Ended Year Ended
TERM GOVERNMENT Ended 6/30/96 8/31/95 8/31/94
----------- ------- -------
Advisory Fee $506,065 $634,185 $708,958
--------- --------- --------
Waiver ( 61,160) (144, 507) (321,751)
Net Advisery Fee $444,905 $489,678 $387,207
========= ========= =========
24
<PAGE>
Expense Limitations
The Adviser's fee will be reduced by, or the Adviser will reimburse the
Funds for any amount necessary to prevent such expenses (exclusive of taxes,
interest, brokerage commissions and extraordinary expenses, but inclusive of the
Adviser's fee) from exceeding the most restrictive of the expense limitations
imposed by state securities commissions of the states in which the Funds' shares
are then registered or qualified for sale. Reimbursement, when necessary, will
be made monthly in the same manner in which the advisory fee is paid. Currently
the most restrictive state expense limitation is 2.5% of the first $30,000,000
of a Fund's average daily net assets, 2% of the next $70,000,000 of such assets
and 1.5% of such assets in excess of $100,000,000.
The Investment Advisory Agreements are terminable, without the payment of
any penalty, on sixty days' written notice, by a vote of the holders of a
majority of each Fund's outstanding shares, or by a vote of a majority of the
Trust's Trustees or by the Adviser. The Investment Advisory Agreements will
automatically terminate in the event of their assignment. Each Investment
Advisory Agreement provides in substance that the Adviser shall not be liable
for any action or failure to act in accordance with its duties thereunder in the
absence of wilful misfeasance, bad faith or gross negligence on the part of the
Adviser or of reckless disregard of its obligations thereunder. With respect to
U.S. Government and Short Intermediate Bond, the Investment Advisory Agreement
dated February 28, 1985 and amended from time to time thereafter was last
approved by the Trustees on February 8, 1996 and it will continue from year to
year with respect to each Fund provided that such continuance is approved
annually by a vote of a majority of the Trustees including a majority of those
Trustees who are not parties thereto or "interested persons" of any such party
cast in person at a meeting duly called for the purpose of voting on such
approval or by a vote of a majority of the outstanding voting securities of each
Fund. With respect to Intermediate Term Bond and Intermediate Term Government,
the Investment Advisory Agreements dated December 31, 1995 were first approved
by the shareholders of each Fund on December 12, 1995 and will continue until
December 31, 1997 and from year to year with respect to each Fund provided that
such continuance is approved annually by a vote of a majority of the Trustees
including a majority of those Trustees who are not parties thereto or
"interested persons" of any such party cast in person at a meeting duly called
for the purpose of voting on such approval or by a vote of a majority of the
outstanding voting securities of each Fund.
Certain other clients of the Adviser may have investment objectives and
policies similar to those of the Funds. The Adviser may, from time to time, make
recommendations which result in the purchase or sale of a particular security by
its other clients simultaneously with a Fund. If transactions on behalf of more
than one client during the same period increase the demand for securities being
purchased or the supply of securities being sold, there may be an adverse effect
on price or quantity. It is the policy of the Adviser to allocate advisory
recommendations and the placing of orders in a manner which is deemed equitable
by the Adviser to the accounts involved, including the Funds. When two or more
clients of the Adviser (including one or more of the Funds) are purchasing or
selling the same security on a given day from the same broker-dealer, such
transactions may be averaged as to price.
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Although the investment objectives of the Funds are not the same, and
their investment decisions are made independently of each other, they rely upon
the same resources for investment advice and recommendations. Therefore, on
occasion, when a particular security meets the different investment objectives
of the various Funds, they may simultaneously purchase or sell the same
security. This could have a detrimental effect on the price and quantity of the
security available to each Fund. If simultaneous transactions occur, the Adviser
attempts to allocate the securities, both as to price and quantity, in
accordance with a method deemed equitable to each Fund and consistent with their
different investment objectives. In some cases, simultaneous purchases or sales
could have a beneficial effect, in that the ability of one Fund to participate
in volume transactions may produce better executions for that Fund.
Each Fund has adopted procedures under Rule 17a-7 of the 1940 Act to
permit purchase and sales transactions to be effected between each Fund and the
other registered investment companies for which either Evergreen Asset
Management Corp., a subsidiary of FUNB ("Evergreen Asset"), or FUNB act as
investment adviser or between the Fund and any advisory clients of Evergreen
Asset, FUNB or their affiliates. Each Fund may from time to time engage in such
transactions but only in accordance with these procedures and if they are
equitable to each participant and consistent with each participant's investment
objectives.
Prior to July 1, 1995, Federated Administrative Services, a subsidiary of
Federated Investors, provided legal, accounting and other administrative
personnel and support services to each of the portfolios of Evergreen Investment
Trust. The Trust paid a fee for such services at the following annual rate: .15%
on the first $250 million average daily net assets of the Trust; .125% on the
next $250 million; .10% on the next $250 million and .075% on assets in excess
of $750 million. For the fiscal year ended June 30, 1996, the fiscal period
ended June 30, 1995, and the fiscal year ended December 31, 1994 U.S.
Government, incurred $159,046, $95,122 and $228,590, respectively, in
administrative service costs of which $0, $0 and $30,827, respectively,
were voluntarily waived. For the fiscal year ended June 30, 1996, the fiscal
period ended June 30, 1995 and the fiscal year ended December 31, 1994 Short
Intermediate Bond incurred $205,938, $159,002 and $341,243, respectively, in
administrative service costs.
Prior to January 19, 1996, SEI Financial Management Company acted as
administrator for Intermediate Term Bond and Intermediate Term Government. For
the ten months ended June 30, 1996, and the fiscal years ended August 31, 1995
and 1994 Intermediate Term Bond incurred $97,364, $154,291 and $159,990,
respectively, in administrative service costs. For ten months ended June 30,
1996 and the fiscal years ended August 31, 1995 and 1994 Intermediate Term
Government incurred $91,283, $179,686 and $200,870, respectively, in
administrative service costs.
Commencing July 8, 1995, in the case of Evergreen Investment Trust, and on
January 19, 1996, in the case of the Evergreen Lexicon Fund, Evergreen Asset has
been providing administrative services to each of the portfolios of the Trusts
for a fee based on the average daily net assets of each Fund administered by
Evergreen Asset for which Evergreen Asset or FUNB also serve as investment
adviser, calculated daily and payable monthly at the following annual rates:
.050% on the first $7 billion; .035% on the next $3 billion; .030% on the next
$5 billion; .020% on the next $10 billion; .015% on the next $5 billion; and
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.010% on assets in excess of $30 billion. Furman Selz LLC, an affiliate of
Evergreen Funds Distributor, Inc., distributor for the Evergreen group of mutual
funds (the "Distributor"), serves as sub-administrator to U.S. Government, Short
Intermediate Bond, Intermediate Term Bond and Intermediate Term Government and
is entitled to receive a fee from each Fund calculated on the average daily net
assets of each Fund at a rate based on the total assets of the mutual funds
administered by Evergreen Asset for which FUNB or Evergreen Asset also serve as
investment adviser, calculated in accordance with the following schedule: .0100%
of the first $7 billion; .0075% on the next $3 billion; .0050% on the next $15
billion; and .0040% on assets in excess of $25 billion. The total assets of
mutual funds administered by Evergreen Asset for which Evergreen Asset or FUNB
serves as investment adviser as of July 31, 1996 were approximately $15 billion.
DISTRIBUTION PLANS
Reference is made to "Management of the Funds - Distribution Plans and
Agreements" in the Prospectus of each Fund for additional disclosure regarding
the Funds' distribution arrangements. Distribution fees are accrued daily and
paid monthly on the Class A, B and C shares and are charged as class expenses,
as accrued. The distribution fees attributable to the Class B shares and Class C
shares are designed to permit an investor to purchase such shares through
broker-dealers without the assessment of a front-end sales charge, and, in the
case of Class C shares, without the assessment of a contingent deferred sales
charge after the first year following purchase, while at the same time
permitting the Distributor to compensate broker-dealers in connection with the
sale of such shares. In this regard the purpose and function of the combined
contingent deferred sales charge and distribution services fee on the Class B
shares and the Class C shares are the same as those of the front-end sales
charge and distribution fee with respect to the Class A shares in that in each
case the sales charge and/or distribution fee provide for the financing of the
distribution of the Funds' shares.
Under the Rule 12b-1 Distribution Plans that have been adopted by the Funds
with respect to each of their Class A, Class B and Class C shares (each a "Plan"
and collectively, the "Plans"), the Treasurer of each Fund reports the amounts
expended under the Plan and the purposes for which such expenditures were made
to the Trustees of the Trust for their review on a quarterly basis. Also, each
Plan provides that the selection and nomination of Trustees who are not
"interested persons" of the Trust (as defined in the 1940 Act) are committed to
the discretion of such disinterested Trustees then in office.
The Adviser may from time to time and from its own funds or such other
resources as may be permitted by rules of the SEC make payments for distribution
services to the Distributor; the latter may in turn pay part or all of such
compensation to brokers or other persons for their distribution assistance.
Prior to July 7, 1995, Federated Securities Corp., a subsidiary of
Federated Investors, served as the distributor for U.S. Government and Short
Intermediate Bond as well as other portfolios of Evergreen Investment Trust. The
Distribution Agreements between Evergreen Investment Trust and the Distributor
pursuant to which distribution fees are paid under the Plans by U.S. Government
and Short Intermediate Bond with respect to their Class A, Class B and Class C
shares were approved on April 20, 1995 by the unanimous vote of the Trustees
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including the disinterested Trustees voting separately. In the case of The
Evergreen Lexicon Fund, with respect to the Intermediate Term Bond and
Intermediate Term Government, SEI Financial Services Company served as
distributor prior to January 19, 1996. The Distribution Agreements between The
Evergreen Lexicon Fund and the Distributor pursuant to which distribution fees
are paid under the Plans by Intermediate Term Bond and Intermediate Term
Government with respect to their Class A, Class B and Class C shares were
approved on January 19, 1996 by the unanimous vote of the Trustees including the
disinterested Trustees voting separately. Each Plan and Distribution Agreement
will continue in effect for successive twelve-month periods provided, however,
that such continuance is specifically approved at least annually by the Trustees
of the Trust or by vote of the holders of a majority of the outstanding voting
securities (as defined in the 1940 Act) of that Class, and, in either case, by a
majority of the Trustees of the Trust who are not parties to the Distribution
Agreement or interested persons, as defined in the 1940 Act, of any such party
(other than as Trustees of the Trust) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related
thereto.
The Plans permit the payment of fees to brokers and others for
distribution and shareholder-related administrative services and to
broker-dealers, depository institutions, financial intermediaries and
administrators for administrative services to Class A, Class B and Class C
shares. The Plans are designed to (i) stimulate brokers to provide distribution
and administrative support services to the Funds and holders of Class A, Class B
and Class C shares and (ii) stimulate administrators to render administrative
support services to the Funds and holders of Class A, Class B and Class C
shares. The administrative services are provided by a representative who has
knowledge of the shareholder's particular circumstances and goals, and include,
but are not limited to providing office space, equipment, telephone facilities,
and various personnel including clerical, supervisory, and computer, as
necessary or beneficial to establish and maintain shareholder accounts and
records; processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine client inquiries
regarding Class A, Class B and Class C shares; assisting clients in changing
dividend options, account designations, and addresses; and providing such other
services as the Funds reasonably request for their Class A, Class B and Class C
shares.
In addition to the Plans, the Funds have each adopted a Shareholder
Services Plan whereby shareholder servicing agents may receive fees from the
Funds for providing services which include, but are not limited to, distributing
prospectuses and other information, providing shareholder assistance, and
communicating or facilitating purchases and redemptions of Class B and Class C
shares of the Fund.
In the event that a Plan or Distribution Agreement is terminated or not
continued with respect to one or more Classes of a Fund, (i) no distribution
fees (other than current amounts accrued but not yet paid) would be owed by the
Fund to the Distributor with respect to that Class or Classes, and (ii) the Fund
would not be obligated to pay the Distributor for any amounts expended under the
Distribution Agreement not previously recovered by the Distributor from
distribution services fees in respect of shares of such Class or Classes through
deferred sales charges.
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All material amendments to any Plan or Distribution Agreement must be
approved by a vote of the Trustees of the Trust or the holders of the Fund's
outstanding voting securities, voting separately by Class, and in either case,
by a majority of the disinterested Trustees, cast in person at a meeting called
for the purpose of voting on such approval; and any Plan or Distribution
Agreement may not be amended in order to increase materially the costs that a
particular Class of shares of a Fund may bear pursuant to the Plan or
Distribution Agreement without the approval of a majority of the holders of the
outstanding voting shares of the Class affected. Amendments to the Shareholder
Services Plan require a majority vote of the disinterested Trustees but do not
require a shareholders vote. Any Plan, Shareholder Services Plan or Distribution
Agreement may be terminated (a) by a Fund without penalty at any time by a
majority vote of the holders of the outstanding voting securities of the Fund,
voting separately by Class or by a majority vote of the Trustees who are not
"interested persons" as defined in the 1940 Act, or (b) by the Distributor. To
terminate any Distribution Agreement, any party must give the other parties 60
days' written notice; to terminate a Plan only, the Fund need give no notice to
the Distributor. Any Distribution Agreement will terminate automatically in the
event of its assignment.
Fees Paid Pursuant to Distribution Plans: The Funds incurred the following
distribution services fees:
U.S. Government. For the fiscal periods ended June 30, 1995 and 1996, $28,081
and $53,238, respectively, on behalf of Class A shares; and $718,711 and
$1,374,856, respectively, on behalf of Class B shares. For the period from
September 7, 1994 (commencement of operations) to June 30, 1995, and the fiscal
period ended June 30, 1996, $1,194 and $3,646, respectively, on behalf of Class
C shares.
Short-Intermediate Bond. For the fiscal periods ended June 30, 1995 and 1996,
$9,479 and $18,291, respectively, on behalf of Class A shares; and $63,900 and
$143,100, respectively, on behalf of Class B shares. For the period from
September 6, 1994 (commencement of operations) to June 30, 1995, and the fiscal
period ended June 30, 1996, $1,927 and $6,662, respectively, on behalf of Class
C shares.
Intermediate Term Bond. For the ten months ended June 30, 1996(commencement of
operations), $1,055 on behalf of Class A shares; $436 on behalf of Class B
shares; and $26 on behalf of Class C shares.
Intermediate Term Government. For the ten months ended June 30, 1996
(commencement of operations), $ 596 on behalf of Class A shares; $ 419 on behalf
of Class B shares; and $48 on behalf of Class C shares.
Fees Paid Pursuant to Shareholder Services Plans. The Funds incurred the
following shareholder services fees:
U.S. Government. For the fiscal periods ended June 30, 1995 and 1996, $239,571
and $458,285, respectively, on behalf of Class B shares; and $398 and $1,215,
respectively, on behalf of Class C shares.
Short-Intermediate Bond. For the fiscal periods ended June 30, 1995 and 1996,
$21,000 and $47,700, respectively, on behalf of Class B shares; and $643 and
$2,221,
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respectively, on behalf on Class C shares.
Intermediate Term Bond. For the ten months ended June 30, 1996 (commencement of
operations), $146 on behalf of Class B shares; and $9 on behalf of Class C
shares.
Intermediate Term Government. For the ten months ended June 30, 1996
(commencement of operations), $140 on behalf of Class B shares; and $16 on
behalf of Class C shares.
ALLOCATION OF BROKERAGE
Decisions regarding each Fund's portfolio are made by its Adviser,
subject to the supervision and control of the Trustees. Orders for the purchase
and sale of securities and other investments are placed by employees of the
Adviser. In general, the same individuals perform the same functions for the
other funds managed by the Adviser. A Fund will not effect any brokerage
transactions with any broker or dealer affiliated directly or indirectly with
the Adviser unless such transactions are fair and reasonable, under the
circumstances, to the Fund's shareholders. Circumstances that may indicate that
such transactions are fair or reasonable include the frequency of such
transactions, the selection process and the commissions payable in connection
with such transactions.
A portion of any transactions in equity securities for each Fund will
occur on domestic stock exchanges. Transactions on stock exchanges involve the
payment of brokerage commissions. In transactions on stock exchanges in the
United States, these commissions are negotiated, whereas on many foreign stock
exchanges these commissions are fixed. In the case of securities traded in the
foreign and domestic over-the-counter markets, there is generally no stated
commission, but the price usually includes an undisclosed commission or markup.
Over-the-counter transactions will generally be placed directly with a principal
market maker, although the Fund may place an over-the-counter order with a
broker-dealer if a better price (including commission) and execution are
available.
It is anticipated that most of each Fund's purchase and sale
transactions involving fixed income securities will be with the issuer or an
underwriter or with major dealers in such securities acting as principals. Such
transactions are normally on a net basis and generally do not involve payment of
brokerage commissions. However, the cost of securities purchased from an
underwriter usually includes a commission paid by the issuer to the underwriter.
Purchases or sales from dealers will normally reflect the spread between bid and
ask prices.
In selecting firms to effect securities transactions, the primary
consideration of each Fund shall be prompt execution at the most favorable
price. A Fund will also consider such factors as the price of the securities and
the size and difficulty of execution of the order. If these objectives may be
met with more than one firm, the Fund will also consider the availability of
statistical and investment data and economic facts and opinions helpful to the
Fund. The extent of receipt of such services would tend to reduce the expenses
of the Adviser or its affiliates.
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U.S. Government, Short Intermediate Bond, Intermediate Term Bond and
Intermediate Term Government did not pay any commissions to affiliated brokers.
For the fiscal year ended June 30, 1996, the six month ended June 30, 1995, and
the fiscal year ended December 31, 1994, U.S. Government paid $ -0-, $10 and
$180, respectively, in commissions on brokerage transactions. For the fiscal
year ended June 30, 1996, the six month period ended June 30, 1995, and the
fiscal year ended December 31, 1994, Short-Intermediate paid $-0-, $-0- and
$9.198, respectively, in commissions on brokerage transactions. For the ten
month period ended June 30, 1996, and for the fiscal years ended August 31, 1995
and 1994, Intermeditate Term Bond and Intermediate Term Government did not pay
commission on brokerage transactions.
ADDITIONAL TAX INFORMATION
(See also " Other Information - Dividends, Distributions,
and Taxes" in the Prospectus)
Each Fund has qualified and intends to continue to qualify for and
elect the tax treatment applicable to regulated investment companies ("RIC")
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). (Such qualification does not involve supervision of management or
investment practices or policies by the Internal Revenue Service.) In order to
qualify as a regulated investment company, a Fund must, among other things, (a)
derive at least 90% of its gross income from dividends, interest, payments with
respect to proceeds from securities loans, gains from the sale or other
disposition of securities or foreign currencies and other income (including
gains from options, futures or forward contracts) derived with respect to its
business of investing in such securities; (b) derive less than 30% of its gross
income from the sale or other disposition of securities, options, futures or
forward contracts (other than those on foreign currencies), or foreign
currencies (or options, futures or forward contracts thereon) that are not
directly related to the RIC's principal business of investing in securities (or
options and futures with respect thereto) held for less than three months; and
(c) diversify its holdings so that, at the end of each quarter of its taxable
year, (i) at least 50% of the market value of the Fund's total assets is
represented by cash, U.S. government securities and other securities limited in
respect of any one issuer, to an amount not greater than 5% of the Fund's total
assets and 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities and securities of other
regulated investment companies). By so qualifying, a Fund is not subject to
Federal income tax if it timely distributes its investment company taxable
income and any net realized capital gains. A 4% nondeductible excise tax will be
imposed on a Fund to the extent it does not meet certain distribution
requirements by the end of each calendar year.
Each Fund anticipates meeting such distribution requirements.
Dividends paid by a Fund from investment company taxable income
generally will be taxed to the shareholders as ordinary income. Investment
company taxable income includes net investment income and net realized
short-term gains (if any). Any dividends received by a Fund from domestic
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corporations will constitute a portion of the Fund's gross investment income. It
is anticipated that this portion of the dividends paid by a Fund (other than
distributions of securities profits) will qualify for the 70% dividends-received
deduction for corporations. Shareholders will be informed of the amounts of
dividends which so qualify.
Distributions of the excess of net long-term capital gain over net
short-term capital loss are taxable to shareholders (who are not exempt from
tax) as long-term capital gain, regardless of the length of time the shares of a
Fund have been held by such shareholders. Short-term capital gains distributions
are taxable to shareholders (who are not exempt from tax) as ordinary income.
Such distributions are not eligible for the dividends-received deduction. Any
loss recognized upon the sale of shares of a Fund held by a shareholder for six
months or less will be treated as a long-term capital loss to the extent that
the shareholder received a long-term capital gain distribution with respect to
such shares.
Distributions of investment company taxable income and any net
short-term capital gains will be taxable as ordinary income as described above
to shareholders (who are not exempt from tax), whether made in shares or in
cash. Shareholders electing to receive distributions in the form of additional
shares will have a cost basis for Federal income tax purposes in each share so
received equal to the net asset value of a share of a Fund on the reinvestment
date.
Distributions by each Fund result in a reduction in the net asset value
of the Fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution nevertheless would be taxable as
ordinary income or capital gain as described above to shareholders (who are not
exempt from tax), even though, from an investment standpoint, it may constitute
a return of capital. In particular, investors should be careful to consider the
tax implications of buying shares just prior to a distribution. The price of
shares purchased at that time includes the amount of the forthcoming
distribution. Those purchasing just prior to a distribution will then receive
what is in effect a return of capital upon the distribution which will
nevertheless be taxable to shareholders subject to taxes.
Upon a sale or exchange of its shares, a shareholder will realize a
taxable gain or loss depending on its basis in the shares. Such gain or loss
will be treated as a capital gain or loss if the shares are capital assets in
the investor's hands and will be a long-term capital gain or loss if the shares
have been held for more than one year. Generally, any loss realized on a sale or
exchange will be disallowed to the extent shares disposed of are replaced within
a period of sixty-one days beginning thirty days before and ending thirty days
after the shares are disposed of. Any loss realized by a shareholder on the sale
of shares of the Fund held by the shareholder for six months or less will be
disallowed to the extent of any exempt interest dividends received by the
shareholder with respect to such shares, and will be treated for tax purposes as
a long-term capital loss to the extent of any distributions of net capital gains
received by the shareholder with respect to such shares.
All distributions, whether received in shares or cash, must be reported
by each shareholder on his or her Federal income tax return. Each shareholder
should consult his or her own tax adviser to determine the state and local tax
implications of Fund distributions.
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Shareholders who fail to furnish their taxpayer identification numbers
to a Fund and to certify as to its correctness and certain other shareholders
may be subject to a 31% Federal income tax backup withholding requirement on
dividends, distributions of capital gains and redemption proceeds paid to them
by the Fund. If the withholding provisions are applicable, any such dividends or
capital gain distributions to these shareholders, whether taken in cash or
reinvested in additional shares, and any redemption proceeds will be reduced by
the amounts required to be withheld. Investors may wish to consult their own tax
advisers about the applicability of the backup withholding provisions.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates). It does not reflect the special
tax consequences to certain taxpayers (e.g., banks, insurance companies, tax
exempt organizations and foreign persons). Shareholders are encouraged to
consult their own tax advisers regarding specific questions relating to Federal,
state and local tax consequences of investing in shares of a Fund. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and foreign tax consequences of ownership of shares of a
Fund, including the possibility that such a shareholder may be subject to a U.S.
withholding tax at a rate of 31% (or at a lower rate under a tax treaty) on
amounts treated as income from U.S. sources under the Code.
NET ASSET VALUE
The following information supplements that set forth in each Prospectus
under the subheading "How to Buy Shares - How the Funds Value Their Shares" in
the Section entitled "Purchase and Redemption of Shares".
The public offering price of shares of a Fund is its net asset value,
plus, in the case of Class A shares, a sales charge which will vary depending on
the purchase alternative chosen by the investor, as more fully described in the
Prospectus. See "Purchase of Shares - Class A Shares - Front-End Sales Charge
"Alternative". On each Fund business day on which a purchase or redemption order
is received by a Fund and trading in the types of securities in which a Fund
invests might materially affect the value of Fund shares, the per share net
asset value of each such Fund is computed in accordance with the Declaration of
Trust and By-Laws governing each Fund as of the next close of regular trading on
the New York Stock Exchange (the "Exchange") (currently 4:00 p.m. Eastern time)
by dividing the value of the Fund's total assets, less its liabilities, by the
total number of its shares then outstanding. A Fund business day is any weekday,
exclusive of national holidays on which the Exchange is closed and Good Friday.
For each Fund, securities for which the primary market is on a domestic or
foreign exchange and over-the-counter securities admitted to trading on the
NASDAQ National List are valued at the last quoted sale or, if no sale, at the
mean of closing bid and asked price and portfolio bonds are presently valued by
a recognized pricing service when such prices are believed to reflect the fair
value of the security. Over-the-counter securities not included in the NASDAQ
National List for which market quotations are readily available are valued at a
price quoted by one or more brokers. If accurate quotations are not available,
securities will be valued at fair value determined in good faith by the Board of
Trustees.
The respective per share net asset values of the Class A, Class B,
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Class C and Class Y shares are expected to be substantially the same. Under
certain circumstances, however, the per share net asset values of the Class B
and Class C shares may be lower than the per share net asset value of the Class
A shares (and, in turn, that of Class A shares may be lower than Class Y shares)
as a result of the greater daily expense accruals, relative to Class A and Class
Y shares, of Class B and Class C shares relating to distribution services fees
and shareholder service fee and, to the extent applicable, transfer agency fees
and the fact that Class Y shares bear no additional distribution, shareholder
service or transfer agency related fees. While it is expected that, in the event
each Class of shares of a Fund realizes net investment income or does not
realize a net operating loss for a period, the per share net asset values of the
four classes will tend to converge immediately after the payment of dividends,
which dividends will differ by approximately the amount of the expense accrual
differential among the Classes, there is no assurance that this will be the
case. In the event one or more Classes of a Fund experiences a net operating
loss for any fiscal period, the net asset value per share of such Class or
Classes will remain lower than that of Classes that incurred lower expenses for
the period.
To the extent that any Fund invests in non-U.S. dollar denominated
securities, the value of all assets and liabilities will be translated into
United States dollars at the mean between the buying and selling rates of the
currency in which such a security is denominated against United States dollars
last quoted by any major bank. If such quotations are not available, the rate of
exchange will be determined in accordance with policies established by the Fund.
The Trustees will monitor, on an ongoing basis, a Fund's method of valuation.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York. In addition, European or Far Eastern
securities trading generally or in a particular country or countries may not
take place on all business days in New York. Furthermore, trading takes place in
various foreign markets on days which are not business days in New York and on
which the Fund's net asset value is not calculated. Such calculation does not
take place contemporaneously with the determination of the prices of the
majority of the portfolio securities used in such calculation. Events affecting
the values of portfolio securities that occur between the time their prices are
determined and the close of the Exchange will not be reflected in a Fund's
calculation of net asset value unless the Trustees deem that the particular
event would materially affect net asset value, in which case an adjustment will
be made. Securities transactions are accounted for on the trade date, the date
the order to buy or sell is executed. Dividend income and other distributions
are recorded on the ex-dividend date, except certain dividends and distributions
from foreign securities which are recorded as soon as the Fund is informed after
the ex-dividend date.
PURCHASE OF SHARES
The following information supplements that set forth in each Prospectus
under the heading "Purchase and Redemption of Shares - How To Buy Shares".
General
Shares of each Fund will be offered on a continuous basis at a price
equal to their net asset value plus an initial sales charge at the time of
purchase (the "front-end sales charge alternative"), with a contingent deferred
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sales charge (the deferred sales charge alternative"), or without any front-end
sales charge, but with a contingent deferred sales charge imposed only during
the first year after purchase (the "level-load alternative"), as described
below. Class Y shares which, as described below, are not offered to the general
public, are offered without any front-end or contingent sales charges. Shares of
each Fund are offered on a continuous basis through (i) investment dealers that
are members of the National Association of Securities Dealers, Inc. and have
entered into selected dealer agreements with the Distributor ("selected
dealers"), (ii) depository institutions and other financial intermediaries or
their affiliates, that have entered into selected agent agreements with the
Distributor ("selected agents"), or (iii) the Distributor. The minimum for
initial investments is $1,000; there is no minimum for subsequent investments.
The subscriber may use the Share Purchase Application available from the
Distributor for his or her initial investment. Sales personnel of selected
dealers and agents distributing a Fund's shares may receive differing
compensation for selling Class A, Class B or Class C shares.
Investors may purchase shares of a Fund in the United States either
through selected dealers or agents or directly through the Distributor. A Fund
reserves the right to suspend the sale of its shares to the public in response
to conditions in the securities markets or for other reasons.
Each Fund will accept unconditional orders for its shares to be
executed at the public offering price equal to the net asset value next
determined (plus for Class A shares, the applicable sales charges), as described
below. Orders received by the Distributor prior to the close of regular trading
on the Exchange on each day the Exchange is open for trading are priced at the
net asset value computed as of the close of regular trading on the Exchange on
that day (plus for Class A shares the sales charges). In the case of orders for
purchase of shares placed through selected dealers or agents, the applicable
public offering price will be the net asset value as so determined, but only if
the selected dealer or agent receives the order prior to the close of regular
trading on the Exchange and transmits it to the Distributor prior to its close
of business that same day (normally 5:00 p.m. Eastern time). The selected dealer
or agent is responsible for transmitting such orders by 5:00 p.m. If the
selected dealer or agent fails to do so, the investor's right to that day's
closing price must be settled between the investor and the selected dealer or
agent. If the selected dealer or agent receives the order after the close of
regular trading on the Exchange, the price will be based on the net asset value
determined as of the close of regular trading on the Exchange on the next day it
is open for trading.
Following the initial purchase of shares of a Fund, a shareholder may
place orders to purchase additional shares by telephone if the shareholder has
completed the appropriate portion of the Share Purchase Application. Payment for
shares purchased by telephone can be made only by Electronic Funds Transfer from
a bank account maintained by the shareholder at a bank that is a member of the
National Automated Clearing House Association ("ACH"). If a shareholder's
telephone purchase request is received before 3:00 p.m. Eastern time on a Fund
business day, the order to purchase shares is automatically placed the same Fund
business day for non-money market funds, and two days following the day the
order is received for money market funds, and the applicable public offering
price will be the public offering price determined as of the close of business
on such business day. Full and fractional shares are credited to a subscriber's
account in the amount of his or her subscription. As a convenience to the
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subscriber, and to avoid unnecessary expense to a Fund, stock certificates
representing shares of a Fund are not issued. This facilitates later redemption
and relieves the shareholder of the responsibility for and inconvenience of lost
or stolen certificates.
Alternative Purchase Arrangements
Each Fund issues four classes of shares: (i) Class A shares, which are
sold to investors choosing the front-end sales charge alternative; (ii) Class B
shares, which are sold to investors choosing the deferred sales charge
alternative; (iii) Class C shares, which are sold to investors choosing the
level-load sales charge alternative; and (iv) Class Y shares, which are offered
only to (a) persons who at or prior to December 30, 1994 owned shares in a
mutual fund advised by Evergreen Asset, (b) certain investment advisory clients
of the Evergreen Asset, FUNB and their affiliates, and (c) institutional
investors. The four classes of shares each represent an interest in the same
portfolio of investments of the Fund, have the same rights and are identical in
all respects, except that (I) only Class A, Class B and Class C shares are
subject to a Rule 12b-1 distribution fee, (II) only Class B and Class C shares
are subject to a shareholder service fee, (III) Class A shares bear the expense
of the front-end sales charge and Class B and Class C shares bear the expense of
the deferred sales charge, (IV) Class B shares and Class C shares each bear the
expense of a higher Rule 12b-1 distribution services fee and applicable
shareholder service fee than Class A shares and, in the case of Class B shares,
higher transfer agency costs, (V) with the exception of Class Y shares, each
Class of each Fund has exclusive voting rights with respect to provisions of the
Rule 12b-1 Plan pursuant to which its distribution services (and, to the extent
applicable, shareholder service) fee is paid which relates to a specific Class
and other matters for which separate Class voting is appropriate under
applicable law, provided that, if the Fund submits to a simultaneous vote of
Class A, Class B and Class C shareholders an amendment to the Rule 12b-1 Plan
that would materially increase the amount to be paid thereunder with respect to
the Class A shares, the Class A shareholders and the Class B and Class C
shareholders will vote separately by Class, and (VI) only the Class B shares are
subject to a conversion feature. Each Class has different exchange privileges
and certain different shareholder service options available.
The alternative purchase arrangements permit an investor to choose the
method of purchasing shares that is most beneficial given the amount of the
purchase, the length of time the investor expects to hold the shares, and other
circumstances. Investors should consider whether, during the anticipated life of
their investment in the Fund, the accumulated distribution services and
shareholder service fees (if applicable) and contingent deferred sales charges
on Class B shares prior to conversion, or the accumulated distribution services
and shareholder service fees (if applicable) on Class C shares, would be less
than the front-end sales charge and accumulated distribution services fee on
Class A shares purchased at the same time, and to what extent such differential
would be offset by the higher return of Class A shares. Class B and Class C
shares will normally not be suitable for the investor who qualifies to purchase
Class A shares at the lowest applicable sales charge. For this reason, the
Distributor will reject any order (except orders for Class B shares from certain
retirement plans) for more than $2,500,000 for Class B or Class C shares.
Class A shares are subject to a lower distribution services fee and no
shareholder service fee and, accordingly, pay correspondingly higher dividends
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per share than Class B shares or Class C shares. However, because front-end
sales charges are deducted at the time of purchase, investors purchasing Class A
shares would not have all their funds invested initially and, therefore, would
initially own fewer shares. Investors not qualifying for reduced front-end sales
charges who expect to maintain their investment for an extended period of time
might consider purchasing Class A shares because the accumulated continuing
distribution and shareholder service charges on Class B shares or Class C shares
may exceed the front-end sales charge on Class A shares during the life of the
investment. Again, however, such investors must weigh this consideration against
the fact that, because of such front-end sales charges, not all their funds will
be invested initially.
Other investors might determine, however, that it would be more
advantageous to purchase Class B shares or Class C shares in order to have all
their funds invested initially, although remaining subject to higher continuing
distribution services and applicable shareholder service fees and, in the case
of Class B shares, being subject to a contingent deferred sales charge for a
seven-year period. For example, based on current fees and expenses, an investor
subject to the 4.75% front-end sales charges imposed by the Evergreen Equity or
Long-Term Bond Funds(U.S. Government) or the 3.25% front-end sales charges
imposed by the Evergreen Intermediate and Short-Term Bond Funds
(Short-Intermediate Bond, Intermediate-Term Bond or Intermediate-Term
Government), would have to hold his or her investment approximately seven years
for the Class B and Class C distribution services and shareholders service fees
to exceed the front-end sales charges plus the accumulated distribution services
fees of Class A shares. In this example, an investor intending to maintain his
or her investment for a longer period might consider purchasing Class A shares.
This example does not take into account the time value of money, which further
reduces the impact of the Class B and Class C distribution services and
applicable shareholder service fees on the investment, fluctuations in net asset
value or the effect of different performance assumptions.
Those investors who prefer to have all of their funds invested
initially but may not wish to retain Fund shares for the seven year period
during which Class B shares are subject to a contingent deferred sales charge
may find it more advantageous to purchase Class C shares.
With respect to each Fund, the Trustees have determined that currently
no conflict of interest exists between or among the Class A, Class B, Class C
and Class Y shares. On an ongoing basis, the Trustees, pursuant to their
fiduciary duties under the 1940 Act and state laws, will seek to ensure that no
such conflict arises.
Front-end Sales Charge Alternative--Class A Shares
The public offering price of Class A shares for purchasers choosing the
front-end sales charge alternative is the net asset value plus a sales charge as
set forth in the Prospectus for each Fund.
Shares issued pursuant to the automatic reinvestment of income
dividends or capital gains distributions are not subject to any sales charges.
The Fund receives the entire net asset value of its Class A shares sold to
investors. The Distributor's commission is the sales charge set forth in the
Prospectus for each Fund, less any applicable discount or commission "reallowed"
to selected dealers and agents. The Distributor will reallow discounts to
selected dealers and agents in the amounts indicated in the table in the
Prospectus. In this regard, the Distributor may elect to reallow the entire
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sales charge to selected dealers and agents for all sales with respect to which
orders are placed with the Distributor.
Set forth below is an example of the method of computing the offering
price of the Class A shares of each Fund. The example assumes a purchase of
Class A shares of a Fund aggregating less than $100,000 subject to the schedule
of sales charges set forth in the Prospectus at a price based upon the net asset
value of Class A shares of each Fund at the end of each Fund's latest fiscal
year.
Net Per Share Offering
Asset Sales Price
Value Charge Date Per Share
U.S. Government $ 9.42 $.47 6/28/96 $ 9.89
Short Intermediate $ 9.82 $.33 6/28/96 $ 10.15
Bond
Intermediate Term $ 10.10 $.34 6/28/96 $ 10.44
Bond
Intermediate Term $ 9.99 $.34 6/28/96 $ 10.33
Government
With respect to U.S. Government and Short-Intermediate Bond, the
following commissions were paid to and amounts were retained by Federated
Securities Corp., through July 7, 1995, which until such date was the principal
underwriter of portfolios of The Evergreen Lexicon Fund. For the period from
July 8, 1995 through June 30, 1996, commissions were paid to and amounts were
retained by the current Distributor as noted below.
Period from Seven Days Six Months
7/8/95 to 6/30/96 Ended 7/8/95 Ended Year Ended
6/30/95 12/31/94
U.S. GOVERNMENT:
Commissions Received $159,666 __ $104,303 $450,000
Commissions Retained $ 16,558 __ $ 3,599 $10,000
Six Months
Ended Year Ended
SHORT-INTERMEDIATE BOND: 6/30/95 12/31/94
Commissions Received $74,999 __ $39,906 $247,000
Commissions Retained 9,560 __ $1,334 $21,000
With respect to Intermediate Term Bond and Intermediate Term
Government, the following commissions were paid to and amounts were retained by
SEI Financial
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Securities Company, through January 19, 1996, which until such date was the
principal underwriter of portfolios of Evergreen Investment Trust. For the
period from January 20, 1996 through June 30, 1996, commissions were paid to and
amounts were retained by the current Distributor as noted below.
Period from Period from Period from
1/20/96 to 6/30/96 9/1/95 to 1/19/96 5/2/95 to 8/31/95
INTERMEDIATE TERM BOND -- -- --
Commissions Received
Commissions Retained -- -- --
INTERMEDIATE TERM GOVERNMENT
Commissions Received 1,040 -- --
Commissions Retained 212 -- --
Investors choosing the front-end sales charge alternative may under
certain circumstances be entitled to pay reduced sales charges. The
circumstances under which such investors may pay reduced sales charges are
described below.
Combined Purchase Privilege. Certain persons may qualify for the sales
charge reductions by combining purchases of shares of one or more Evergreen
mutual funds other than money market funds into a single "purchase", if the
resulting "purchase" totals at least $100,000. The term "purchase" refers to:
(i) a single purchase by an individual, or to concurrent purchases, which in the
aggregate are at least equal to the prescribed amounts, by an individual, his or
her spouse and their children under the age of 21 years purchasing shares for
his, her or their own account(s); (ii) a single purchase by a trustee or other
fiduciary purchasing shares for a single trust, estate or single fiduciary
account although more than one beneficiary is involved; or (iii) a single
purchase for the employee benefit plans of a single employer. The term
"purchase" also includes purchases by any "company", as the term is defined in
the 1940 Act, but does not include purchases by any such company which has not
been in existence for at least six months or which has no purpose other than the
purchase of shares of a Fund or shares of other registered investment companies
at a discount. The term "purchase" does not include purchases by any group of
individuals whose sole organizational nexus is that the participants therein are
credit card holders of a company, policy holders of an insurance company,
customers of either a bank or broker-dealer or clients of an investment adviser.
A "purchase" may also include shares, purchased at the same time through a
single selected dealer or agent, of any Evergreen mutual fund. Currently, the
Evergreen mutual funds include:
Evergreen Trust
The Evergreen Fund
Evergreen Aggressive Growth Fund
The Evergreen Total Return Fund
The Evergreen Limited Market Fund, Inc.
The Evergreen Growth and Income Fund
The Evergreen Money Market Fund
The Evergreen American Retirement Trust
The Evergreen American Retirement Fund
Evergreen Small Cap Equity Income Fund
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The Evergreen Municipal Trust:
Evergreen Short-Intermediate Municipal Fund
Evergreen Short-Intermediate Municipal Fund-CA
Evergreen Tax Exempt Money Market Fund
Evergreen Florida High Income Municipal Bond Fund
Evergreen Equity Trust
Evergreen Global Real Estate Equity Fund
Evergreen U.S. Real Estate Equity Fund
Evergreen Global Leaders Fund
Evergreen Foundation Trust:
Evergreen Tax Strategic Foundation Fund
Evergreen Foundation Fund
Evergreen Investment Trust
Evergreen Emerging Markets Growth Fund*
Evergreen International Equity Fund*
Evergreen Balanced Fund*
Evergreen Utility Fund*
Evergreen Value Fund*
Evergreen Short-Intermediate Bond Fund*
(formerly Evergreen Fixed-Income Fund)
Evergreen U.S. Government Fund*
Evergreen Treasury Money Market Fund*
Evergreen Florida Municipal Bond Fund*
Evergreen Georgia Municipal Bond Fund*
Evergreen North Carolina Municipal Bond Fund*
Evergreen South Carolina Municipal Bond Fund*
Evergreen Virginia Municipal Bond Fund*
Evergreen High Grade Tax Free Fund*
The Evergreen Lexicon Fund
Evergreen Intermediate-Term Bond Fund**
Evergreen Intermediate-Term Government Securities Fund**
Evergreen Tax Free Trust
Evergreen Pennsylvania Tax Free Money Market Fund***
Evergreen New Jersey Tax-Free Income Fund***
Evergreen Variable Trust
Evergreen VA Fund
Evergreen VA Growth and Income Fund
Evergreen VA Foundation Fund
* Prior to July 7,1995,each Fund was named "First Union" instead of "Evergreen"
** Prior to January 19, 1996, each Fund was a series of The FFB Lexicon Fund.
***Prior to January 19, 1996, each Fund was a series of FFB Fund Trust.
Prospectuses for the Evergreen mutual funds may be obtained without charge
by contacting the Distributor or the Adviser at the telephone number shown on
the front cover of this Statement of Additional Information.
Cumulative Quantity Discount (Right of Accumulation). An investor's
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purchase of additional Class A shares of a Fund may qualify for a Cumulative
Quantity Discount.
The applicable sales charge will be based on the total of:
(i) the investor's current purchase;
(ii) the net asset value (at the close of business on the
previous day) of (a) all Class A, Class B and Class C
shares of the Fund held by the investor and (b) all
such shares of any other Evergreen mutual fund held by
the investor; and
(iii) the net asset value of all shares described in paragraph
(ii) owned by another shareholder eligible to combine his
or her purchase with that of the investor into a
single "purchase" (see above).
For example, if an investor owned Class A, B or C shares of an Evergreen
mutual fund worth $200,000 at their then current net asset value and ,
subsequently, purchased Class A shares worth an additional $100,000, the sales
charge for the $100,000 purchase, in the case of any of the Evergreen Group of
Evergreen Intermediate or Short-Term Bond Fund (Short-Intermediate Bond,
Intermediate-Term Bond, and Intermediate Government), would be at the 2.00% rate
applicable to a single $300,000 purchase rather than the 2.50% rate or, in the
case of any Evergreen Equity or Long-Term Bond Fund (U.S. Government), at the
2.50% rate applicable to a single $300,000 purchase rather than the 3.75% rate.
To qualify for the Combined Purchase Privilege or to obtain the Cumulative
Quantity Discount on a purchase through a selected dealer or agent, the investor
or selected dealer or agent must provide the Distributor with sufficient
information to verify that each purchase qualifies for the privilege or
discount.
Statement of Intention. Class A investors may also obtain the reduced sales
charges shown in the Prospectus by means of a written Statement of Intention,
which expresses the investor's intention to invest not less than $100,000 within
a period of 13 months in Class A shares (or Class A, Class B and/or Class C
shares) of the Fund or any other Evergreen mutual fund. Each purchase of shares
under a Statement of Intention will be made at the public offering price or
prices applicable at the time of such purchase to a single transaction of the
dollar amount indicated in the Statement of Intention. At the investor's option,
a Statement of Intention may include purchases of Class A, B or C shares of the
Fund or any other Evergreen mutual fund made not more than 90 days prior to the
date that the investor signs a Statement of Intention; however, the 13-month
period during which the Statement of Intention is in effect will begin on the
date of the earliest purchase to be included.
Investors qualifying for the Combined Purchase Privilege described above
may purchase shares of the Evergreen mutual funds under a single Statement of
Intention. For example, if at the time an investor signs a Statement of
Intention to invest at least $100,000 in Class A shares of a Fund, the investor
and the investor's spouse each purchase shares of the Fund worth $20,000 (for a
total of $40,000), it will only be necessary to invest a total of $60,000 during
the following 13 months in shares of the Fund or any other Evergreen mutual
fund, to qualify for the 3.75% sales charge applicable to
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purchases in any of Evergreen Equity or Long-Term Bond Fund (U.S.
Government), or 2.50% applicable to purchases in an Evergreen Intermediate or
Short-Term Bond Fund (Short-Intermediate Bond, Intermediate-Term Bond or
Intermediate-Term Government), on the total amount being invested (the sales
charge applicable to an investment of $100,000).
The Statement of Intention is not a binding obligation upon the investor to
purchase the full amount indicated. The minimum initial investment under a
Statement of Intention is 5% of such amount. Shares purchased with the first 5%
of such amount will be held in escrow (while remaining registered in the name of
the investor) to secure payment of the higher sales charge applicable to the
shares actually purchased if the full amount indicated is not purchased, and
such escrowed shares will be involuntarily redeemed to pay the additional sales
charge, if necessary. Dividends on escrowed shares, whether paid in cash or
reinvested in additional Fund shares, are not subject to escrow. When the full
amount indicated has been purchased, the escrow will be released. To the extent
that an investor purchases more than the dollar amount indicated on the
Statement of Intention and qualifies for a further reduced sales charge, the
sales charge will be adjusted for the entire amount purchased at the end of the
13-month period. The difference in sales charge will be used to purchase
additional shares of the Fund subject to the rate of sales charge applicable to
the actual amount of the aggregate purchases.
Investors wishing to enter into a Statement of Intention in conjunction
with their initial investment in Class A shares of a Fund should complete the
appropriate portion of the Purchase Application found in the Prospectus
while current Class A shareholders desiring to do so can obtain a form of
Statement of Intention by contacting a Fund at the address or telephone number
shown on the cover of this Statement of Additional Information.
Investments Through Employee Benefit and Savings Plans. Certain qualified
and non-qualified benefit and savings plans may make shares of the Evergreen
mutual funds available to their participants. Investments made by such employee
benefit plans may be exempt from any applicable front-end sales charges if they
meet the criteria set forth in the Prospectus under "Class A Shares- Front End
Sales Charge Alternative". The Adviser may provide compensation to organizations
providing administrative and recordkeeping services to plans which make shares
of the Evergreen mutual funds available to their participants.
Reinstatement Privilege. A Class A shareholder, who has caused any or all
of his or her shares of a Fund to be redeemed or repurchased, may reinvest all
or any portion of the redemption or repurchase proceeds in Class A shares of the
Fund at net asset value without any sales charge, provided that such
reinvestment is made within 30 calendar days after the redemption or repurchase
date. Shares are sold to a reinvesting shareholder at the net asset value next
determined as described above. A reinstatement pursuant to this privilege will
not cancel the redemption or repurchase transaction; therefore, any gain or loss
so realized will be recognized for Federal tax purposes except that no loss will
be recognized to the extent that the proceeds are reinvested in shares of the
Fund. The reinstatement privilege may be used by the shareholder only once,
irrespective of the number of shares redeemed or repurchased, except that the
privilege may be used without limit in connection with transactions whose sole
purpose is to transfer a shareholder's interest in the Fund to his or her
individual retirement account or other qualified retirement plan account.
Investors may exercise the reinstatement privilege by written request sent to
the Fund at the address shown on the cover of this Statement of Additional
Information.
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Sales at Net Asset Value. In addition to the categories of investors set
forth in the Prospectus, each Fund may sell its Class A shares at net asset
value, i.e., without any sales charge, to: (i) certain investment advisory
clients of Evergreen Asset, FUNB or their affiliates; (ii) officers and present
or former Trustees of the Trusts; present or former trustees of other investment
companies managed by the Adviser; present or retired full-time employees of the
Adviser; officers, directors and present or retired full-time employees of the
Adviser, the Distributor, and their affiliates; officers, directors and present
and full-time employees of selected dealers or agents; or the spouse, sibling,
direct ancestor or direct descendant (collectively "relatives") of any such
person; or any trust, individual retirement account or retirement plan account
for the benefit of any such person or relative; or the estate of any such person
or relative, if such shares are purchased for investment purposes (such shares
may not be resold except to the Fund); (iii) certain employee benefit plans for
employees of the Adviser, the Distributor and their affiliates; (iv) persons
participating in a fee-based program, sponsored and maintained by a registered
broker-dealer and approved by the Distributor, pursuant to which such persons
pay an asset-based fee to such broker-dealer, or its affiliate or agent, for
service in the nature of investment advisory or administrative services. These
provisions are intended to provide additional job-related incentives to persons
who serve the Funds or work for companies associated with the Funds and selected
dealers and agents of the Funds. Since these persons are in a position to have a
basic understanding of the nature of an investment company as well as a general
familiarity with the Fund, sales to these persons, as compared to sales in the
normal channels of distribution, require substantially less sales effort.
Similarly, these provisions extend the privilege of purchasing shares at net
asset value to certain classes of institutional investors who, because of their
investment sophistication, can be expected to require significantly less than
normal sales effort on the part of the Funds and the Distributor.
Deferred Sales
Charge Alternative--Class B Shares
Investors choosing the deferred sales charge alternative purchase Class B
shares at the public offering price equal to the net asset value per share of
the Class B shares on the date of purchase without the imposition of a sales
charge at the time of purchase. The Class B shares are sold without a front-end
sales charge so that the full amount of the investor's purchase payment is
invested in the Fund initially.
Proceeds from the contingent deferred sales charge are paid to the
Distributor and are used by the Distributor to defray the expenses of the
Distributor related to providing distribution-related services to the Fund in
connection with the sale of the Class B shares, such as the payment of
compensation to selected dealers and agents for selling Class B shares. The
combination of the contingent deferred sales charge and the distribution
services fee and the applicable shareholder service fee enables the Fund to sell
the Class B shares without a sales charge being deducted at the time of
purchase. The higher distribution services fee and the applicable shareholder
service fee incurred by Class B shares will cause such shares to have a higher
expense ratio and to pay lower dividends than those related to Class A shares.
Contingent Deferred Sales Charge. Class B shares which are redeemed within
seven years of purchase will be subject to a contingent deferred sales charge at
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the rates set forth in the Prospectus charged as a percentage of the dollar
amount subject thereto. The charge will be assessed on an amount equal to the
lesser of the cost of the shares being redeemed or their net asset value at the
time of redemption. Accordingly, no sales charge will be imposed on increases in
net asset value above the initial purchase price. In addition, no contingent
deferred sales charge will be assessed on shares derived from reinvestment of
dividends or capital gains distributions. The amount of the contingent deferred
sales charge, if any, will vary depending on the number of years from the time
of payment for the purchase of Class B shares until the time of redemption of
such shares.
In determining the contingent deferred sales charge applicable to a
redemption, it will be assumed, that the redemption is first of any Class A
shares or Class C shares in the shareholder's Fund account, second of Class B
shares held for over seven years or Class B shares acquired pursuant to
reinvestment of dividends or distributions, and third of Class B shares held,
longest during the seven-year period.
To illustrate, assume that an investor purchased 100 Class B shares at $10
per share (at a cost of $1,000) and in the second year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired 10
additional Class B shares upon dividend reinvestment. If at such time the
investor makes his or her first redemption of 50 Class B shares, 10 Class B
shares will not be subject to charge because of dividend reinvestment. With
respect to the remaining 40 Class B shares, the charge is applied only to the
original cost of $10 per share and not to the increase in net asset value of $2
per share. Therefore, of the $600 of the shares redeemed $400 of the redemption
proceeds (40 shares x $10 original purchase price) will be charged at a rate of
4.0% (the applicable rate in the second year after purchase for a contingent
deferred sales charge of $16).
The contingent deferred sales charge is waived on redemptions of shares (i)
following the death or disability, as defined in the Code, of a shareholder, or
(ii) to the extent that the redemption represents a minimum required
distribution from an individual retirement account or other retirement plan to a
shareholder who has attained the age of 70-1/2.
Conversion Feature. At the end of the period ending seven years after the
end of the calendar month in which the shareholder's purchase order was
accepted, Class B shares will automatically convert to Class A shares and will
no longer be subject to a higher distribution services fee and the applicable
shareholder service fee imposed on Class B shares. Such conversion will be on
the basis of the relative net asset values of the two classes, without the
imposition of any sales load, fee or other charge. The purpose of the conversion
feature is to reduce the distribution services fee paid by holders of Class B
shares that have been outstanding long enough for the Distributor to have been
compensated for the expenses associated with the sale of such shares.
For purposes of conversion to Class A, Class B shares purchased through the
reinvestment of dividends and distributions paid in respect of Class B shares in
a shareholder's account will be considered to be held in a separate sub-account.
Each time any Class B shares in the shareholder's account (other than those in
the sub-account) convert to Class A, an equal pro-rata portion of the Class B
shares in the sub-account will also convert to Class A.
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The conversion of Class B shares to Class A shares is subject to the
continuing availability of an opinion of counsel to the effect that (i) the
assessment of the higher distribution services fee and applicable shareholder
service fee and transfer agency costs with respect to Class B shares does not
result in the dividends or distributions payable with respect to other Classes
of a Fund's shares being deemed "preferential dividends" under the Code, and
(ii) the conversion of Class B shares to Class A shares does not constitute a
taxable event under Federal income tax law. The conversion of Class B shares to
Class A shares may be suspended if such an opinion is no longer available at the
time such conversion is to occur. In that event, no further conversions of Class
B shares would occur, and shares might continue to be subject to the higher
distribution services fee and applicable shareholder services fee for an
indefinite period which may extend beyond the period ending eight years after
the end of the calendar month in which the shareholder's purchase order was
accepted.
Level-Load Alternative--Class C Shares
Investors choosing the level load sales charge alternative purchase Class C
shares at the public offering price equal to the net asset value per share of
the Class C shares on the date of purchase without the imposition of a front-end
sales charge. However, you will pay a 1.0% contingent deferred sales charge if
you redeem shares during the first year after purchase. No charge is imposed in
connection with redemptions made more than one year from the date of purchase.
Class C shares are sold without a front-end sales charge so that the Fund will
receive the full amount of the investor's purchase payment and after the first
year without a contingent deferred sales charge so that the investor will
receive as proceeds upon redemption the entire net asset value of his or her
Class C shares. The Class C distribution services fee and applicable shareholder
service fee enables the Fund to sell Class C shares without either a front-end
or contingent deferred sales charge. However, unlike Class B shares, Class C
shares do not convert to any other class shares of the Fund. Class C shares
incur higher distribution services fees and applicable shareholder service fees
than Class A shares, and will thus have a higher expense ratio and pay
correspondingly lower dividends than Class A shares.
Class Y Shares
Class Y shares are not offered to the general public and are available only
to (i) persons who at or prior to December 30, 1994 owned shares in a mutual
fund advised by Evergreen Asset, (ii) certain investment advisory clients of
Evergreen Asset, FUNB and their affiliates, and (iii) institutional investors.
Class Y shares do not bear any Rule 12b-1 distribution expenses and are not
subject to any front-end or contingent deferred sales charges.
GENERAL INFORMATION ABOUT THE FUNDS
(See also "Other Information - General Information" in each Fund's Prospectus)
Capitalization and Organization
The Evergreen U.S. Government Fund and Evergreen Short Intermediate Bond
Fund(formerly Evergreen Fixed Income Fund), which prior to July 7, 1995 were
known as the First Union U.S. Government Portfolio and First Union Fixed Income
Portfolio respectively, are each separate series of Evergreen Investment Trust,
a Massachusetts business trust. On July 7, 1995, First Union Funds changed its
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name to Evergreen Investment Trust. On December 14, 1992, The Salem Funds
changed its name to First Union Funds. The Trust is governed by a Board of
Trustees.
Evergreen Intermediate Term Bond Bond Fund and Evergreen Intermediate Term
Government Securities Fund, which prior to January 19, 1996, were known as the
Fixed Income Fund and the Intermediate Term Government Securities Fund,
respectively, are each separate series of The Evergreen Lexicon Fund, a
Massachusetts business trust. On January 19, 1996, The FFB Lexicon Fund changed
its name to The Evergreen Lexicon Fund.
Each Fund may issue an unlimited number of shares of beneficial interest
with a $0.0001 par value. All shares of these Funds have equal rights and
privileges. Each share is entitled to one vote, to participate equally in
dividends and distributions declared by the Funds and on liquidation to their
proportionate share of the assets remaining after satisfaction of outstanding
liabilities. Shares of these Funds are fully paid, nonassessable and fully
transferable when issued and have no pre-emptive, conversion or exchange rights.
Fractional shares have proportionally the same rights, including voting rights,
as are provided for a full share.
Under each Trust's Declaration of Trust, each Trustee will continue in
office until the termination of the Trust or his or her earlier death,
incapacity, resignation or removal. Shareholders can remove a Trustee upon a
vote of two-thirds of the outstanding shares of beneficial interest of the
Trust. Vacancies will be filled by a majority of the remaining Trustees, subject
to the 1940 Act. As a result, normally no annual or regular meetings of
shareholders will be held, unless otherwise required by the Declaration of Trust
of each Trust or the 1940 Act.
Shares have noncumulative voting rights, which means that the holders of
more than 50% of the shares voting for the election of Trustees can elect 100%
of the Trustees if they choose to do so and in such event the holders of the
remaining shares so voting will not be able to elect any Trustees.
The Trustees of each Trust are authorized to reclassify and issue any
unissued shares to any number of additional series without shareholder approval.
Accordingly, in the future, for reasons such as the desire to establish one or
more additional portfolios of a Trust with different investment objectives,
policies or restrictions, additional series of shares may be created by one or
more Funds. Any issuance of shares of another series or class would be governed
by the 1940 Act and the law of the Commonwealth of Massachusetts. If shares of
another series of the Trust were issued in connection with the creation of
additional investment portfolios, each share of the newly created portfolio
would normally be entitled to one vote for all purposes. Generally, shares of
all portfolios would vote as a single series on matters, such as the election of
Trustees, that affected all portfolios in substantially the same manner. As to
matters affecting each portfolio differently, such as approval of the Investment
Advisory Agreement and changes in investment policy, shares of each portfolio
would vote separately.
In addition any Fund may, in the future, create additional classes of
shares which represent an interest in the same investment portfolio. Except for
the different distribution related and other specific costs borne by such
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additional classes, they will have the same voting and other rights described
for the existing classes of each Fund.
Procedures for calling a shareholders meeting for the removal of the
Trustees of each Trust, similar to those set forth in Section 16(c) of the 1940
Act will be available to shareholders of each Fund. The rights of the holders of
shares of a series of a Fund may not be modified except by the vote of a
majority of the outstanding shares of such series.
An order has been received from the SEC permitting the issuance and sale of
multiple classes of shares representing interests in each Fund. In the event a
Fund were to issue additional Classes of shares other than those described
herein, no further relief from the SEC would be required.
Distributor
Evergreen Funds Distributor, Inc. (the "Distributor"), 230 Park Avenue,
New York, New York 10169, serves as each Fund's principal underwriter, and as
such may solicit orders from the public to purchase shares of any Fund. The
Distributor is not obligated to sell any specific amount of shares and will
purchase shares for resale only against orders for shares. Under the agreement
between the Fund and the Distributor, the Fund has agreed to indemnify the
Distributor, in the absence of its willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations thereunder, against certain
civil liabilities, including liabilities under the Securities Act of 1933, as
amended.
Counsel
Sullivan & Worcester LLP, Washington, D.C., serves as counsel to the
Funds.
Independent Auditors
KPMG Peat Marwick LLP has been selected to be the independent auditors of
the Funds.
PERFORMANCE INFORMATION
Total Return
From time to time a Fund may advertise its "total return". Computed
separately for each class, the Fund's "total return" is its average annual
compounded total return for recent one, five, and ten-year periods (or the
period since the Fund's inception). The Fund's total return for such a period is
computed by finding, through the use of a formula prescribed by the Securities
and Exchange Commission, the average annual compounded rate of return over the
period that would equate an assumed initial amount invested to the value of such
investment at the end of the period. For purposes of computing total return,
income dividends and capital gains distributions paid on shares of the Fund are
assumed to have been reinvested when paid and the maximum sales charge
applicable to purchases of Fund shares is assumed to have been paid. The Fund
will include performance data for Class A, Class B, Class C and Class Y shares
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in any advertisement or information including performance data of the Fund.
With respect to Intermediate Term Bond and Intermediate Term
Government, Class B and Class C shares were not being offered as of August 31,
1995. The average annual compounded total return for each Class of shares
offered by the Funds for the most recently completed one, five and ten year
fiscal periods is set forth in the table below.
U.S. GOVERNMENT 1 Year From
Ended (inception)*
6/30/96 to 6/30/96
Class A (.68%) 3.80%
Class B (1.38%) 3.87%
Class C 2.52% 6.45%
Class Y 4.54% 4.20%
SHORT INTERMEDIATE 1 Year 5 Years From
BOND Ended Ended (inception)**
6/30/96 6/30/96 to 6/30/95
Class A 1.05% 6.18% 7.20%
Class B (1.28%) -- 3.43%
Class C 2.53% -- 5.70%
Class Y 4.63% 7.06% 7.04%
Ten Months From
Ended (inception)***
INTERMEDIATE TERM 6/30/96 to 6/30/96
BOND
Class A 2.7% 3.85%
Class B -- (8.34%)
Class C -- (.68%)
Class Y 2.28% 7.16%
Ten Months From
Ended (inception)+
INTERMEDIATE TERM 6/30/96 to 6/30/96
GOVERNMENT
Class A (.35%) 3.01%
Class B -- (6.89)
Class C -- (.12%)
Class Y 3.00% 5.77%
* Inception date: Class A - January 11, 1993; Class B - January 11, 1993; Class
C - September 2, 1994; Class Y - September 2, 1993.
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** Inception date: Class A - January 31, 1989; Class B - January 25, 1993; Class
C - September 6, 1994; Class Y - December 31, 1990.
***Inception date: Class A - May 2, 1995; Class B - January 30, 1996; Class C-
April 29, 1996; Class Y - November 1, 1991;
+ Inception date: Class A - May 2, 1995; Class B February 9, 1996; Class C -
April 10, 1996; Class Y -November 1, 1991.
A Fund's total return is not fixed and will fluctuate in response to
prevailing market conditions or as a function of the type and quality of the
securities in a Fund's portfolio and its expenses. Total return information is
useful in reviewing a Fund's performance but such information may not provide a
basis for comparison with bank deposits or other investments which pay a fixed
yield for a stated period of time. An investor's principal invested in a Fund is
not fixed and will fluctuate in response to prevailing market conditions.
YIELD CALCULATIONS
From time to time, a Fund may quote its yield in advertisements or in
reports or other communications to shareholders. Yield quotations are expressed
in annualized terms and may be quoted on a compounded basis. Yields are computed
by dividing the Fund's interest income (as defined in the Securities and
Exchange Commission's yield formula) for a given 30-day or one month period, net
of expenses, by the average number of shares entitled to receive distributions
during the period, dividing this figure by the Fund's net asset value per share
at the end of the period and annualizing the result (assuming compounding of
income) in order to arrive at an annual percentage rate. The formula for
calculating yield is as follows:
YIELD = 2[(a-b% cd + 1]
Where a = Interest earned during the period
b = Expenses accrued for the period (net of reimbursements)
c = The average daily number of shares outstanding during the period
that were entitled to receive dividends
d = The maximum offering price per share on the last day of the period
Income is calculated for purposes of yield quotations in accordance
with standardized methods applicable to all stock and bond funds. Gains and
losses generally are excluded from the calculation. Income calculated for
purposes of determining a Fund's yield differs from income as determined for
other accounting purposes. Because of the different accounting methods used, and
because of the compounding assumed in yield calculations, the yields quoted for
a Fund may differ from the rate of distributions a Fund paid over the same
period, or the net investment income reported in a Fund's financial statements.
Yield information is useful in reviewing a Fund's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in a Fund's shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
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fixed yield for a stated period of time. Shareholders should remember that yield
is a function of the kind and quality of the instruments in the Funds'
investment portfolios, portfolio maturity, operating expenses and market
conditions.
It should be recognized that in periods of declining interest rates the
yields will tend to be somewhat higher than prevailing market rates, and in
periods of rising interest rates the yields will tend to be somewhat lower.
Also, when interest rates are falling, the inflow of net new money to a Fund
from the continuous sale of its shares will likely be invested in instruments
producing lower yields than the balance of the Fund's investments, thereby
reducing the current yield of the Fund. In periods of rising interest rates, the
opposite can be expected to occur.
The yield of each Fund for the thirty-day period ended June 28, 1996
for each Class of shares offered by the Funds is set forth in the table below:
U.S. Government Intermediate Term Bond
Class A - 6.73% Class A - 5.70%
Class B - 5.99% Class B - 4.71%
Class C - 5.99% Class C - 4.71%
Class Y - 6.98% Class Y - 5.69%
Short Intermediate Bond Intermediate Term Government Class
Class A - 6.50% Class A - 5.59%
Class B - 5.67% Class B - 4.71%
Class C - 5.67% Class C - 4.50%
Class Y - 6.65% Class Y - 5.59%
Non-Standardized Performance
In addition to the performance information described above, a Fund may
provide total return information for designated periods, such as for the most
recent six months or most recent twelve months. This total return information is
computed as described under "Total Return" above except that no annualization is
made.
GENERAL
From time to time, a Fund may quote its performance in advertising and
other types of literature as compared to the performance of the Standard &
Poor's 500 Composite Stock Price Index, the Dow Jones Industrial Average, Lehman
Brothers Intermediate Government Bond Index, or any other commonly quoted index
of common stock and bond prices. The Standard & Poor's 500 Composite Stock Price
Index, the Dow Jones Industrial Average and the Lehman Brothers Intermediate
Government Bond Index are unmanaged indices of selected common stock and bond
prices. A Fund's performance may also be compared to those of other mutual funds
having similar objectives. This comparative performance would be expressed as a
ranking prepared by Lipper Analytical Services, Inc. or similar independent
services monitoring mutual fund performance. A Fund's performance will be
calculated by assuming, to the extent applicable, reinvestment of all capital
gains distributions and income dividends paid. Any such comparisons may be
useful to investors who wish to compare a Fund's past performance with that of
its competitors. Of course, past performance cannot be a guarantee of future
results.
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Additional Information
Any shareholder inquiries may be directed to the shareholder's broker or to
the Adviser at the address or telephone number shown on the front cover of this
Statement of Additional Information. This Statement of Additional Information
does not contain all the information set forth in the Registration Statement
filed by the Trusts with the SEC under the Securities Act of 1933. Copies of the
Registration Statement may be obtained at a reasonable charge from the SEC or
may be examined, without charge, at the offices of the SEC in Washington, D.C.
FINANCIAL STATEMENTS
Each Fund's financial statements appearing in their most current fiscal
year Annual Report to shareholders and the report thereon of KPMG Peat Marwick
LLP the independent auditors appearing therein are incorporated by reference in
this Statement of Additional Information. The Annual Reports to Shareholders for
each Fund, which contain the referenced statements, are available upon request
and without charge.
APPENDIX A - DESCRIPTION OF BOND, MUNICIPAL NOTE AND COMMERCIAL
PAPER RATINGS
APPENDIX "A"
DESCRIPTION OF BOND RATINGS
Standard & Poor's Ratings Service. A Standard & Poor's corporate or
municipal bond rating is a current assessment of the credit worthiness of an
obligor with respect to a specific obligation. This assessment of credit
worthiness may take into consideration obligers such as guarantors, insurers or
lessees. The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform any audit in connection
with the ratings and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended or withdrawn as a result of changes in,
unavailability of such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default-capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance with the
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terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or their arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA - This is the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to pay interest and
repay any principal.
AA - Debt rated AA also qualifies as high quality debt obligations.
Capacity to pay interest and repay principal is very strong and in the majority
of instances they differ from AAA issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on a
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and C the highest degree
of speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB - Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB - rating.
B - Debt rated B has greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC - Debt rated CCC has a currently indefinable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
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is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC - The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C - The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
C1 - The rating C1 is reserved for income bonds on which no interest is
being paid.
D - Debt rated D is in payment default. It is used when interest
payments or principal payments are not made on a due date even if the applicable
grace period has not expired, unless Standard & Poor's believes that such
payments will be made during such grace periods; it will also be used upon a
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-) - To provide more detailed indications of credit
quality, the ratings from AA to CCC may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
NR - indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy. Debt
obligations of issuers outside the United States and its territories are rated
on the same basis as domestic corporate and municipal issues. The ratings
measure the credit worthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories (AAA, AA, A, BBB, commonly known as "Investment Grade" ratings)
are generally regarded as eligible for bank investment. In addition, the Legal
Investment Laws of various states may impose certain rating or other standards
for obligations eligible for investment by savings banks, trust companies,
insurance companies and fiduciaries generally.
Moody's Investors Service, Inc. A brief description of the applicable
rating symbols Moody's Investors Service, Inc. and their meanings follows:
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 fluctuations of
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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.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Some bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
NOTE: Bonds within the above categories which possess the strongest investment
attributes are designated by the symbol "1" following the rating.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and
issue so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Duff & Phelps, Inc.: AAA-- highest credit quality, with negligible
risk factors; AA -- high credit quality, with strong protection factors and
modest risk, which may vary very slightly from time to time because of economic
conditions; A-- average credit quality with adequate protection factors, but
with greater and more variable risk factors in periods of economic stress. The
indicators "+" and "-" to the AA and A categories indicate the relative position
of a credit within those rating categories.
Fitch Investors Service Inc.: AAA -- highest credit quality, with an
exceptionally strong ability to pay interest and repay principal; AA --very high
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credit quality, with very strong ability to pay interest and repay principal; A
- -- high credit quality, considered strong as regards principal and interest
protection, but may be more vulnerable to adverse changes in economic conditions
and circumstances. The indicators "+" and "-" to the AA, A and BBB categories
indicate the relative position of credit within those rating categories.
DESCRIPTION OF MUNICIPAL NOTE RATINGS
A Standard & Poor's note rating reflects the liquidity concerns and
market access risks unique to notes. Notes due in three years or less will
likely receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
o Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
o Source of Payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.) Note rating symbols
are as follows:
o SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given a
plus (+) designation.
o SP-2 Satisfactory capacity to pay principal and interest.
o SP-3 Speculative capacity to pay principal and interest.
Moody's Short-Term Loan Ratings - Moody's ratings for state and
municipal short-term obligations 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
major importance in bond risk are of lesser importance over the short run.
Rating symbols and their meanings follow:
o MIG 1 - This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
o MIG 2 - This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
o MIG 3 - This designation denotes favorable quality. All security elements
are accounted for but this is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
o MIG 4 - This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
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COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.: Commercial paper rated "Prime" carries the
smallest degree of investment risk. The modifiers 1, 2, and 3 are used to denote
relative strength within this highest classification.
Standard & Poor's Ratings Service: "A" is the highest commercial paper
rating category utilized by Standard & Poor's Ratings Group which uses the
numbers 1+, 1, 2 and 3 to denote relative strength within its "A"
classification.
Duff & Phelps, Inc.: Duff 1 is the highest commercial paper rating
category utilized by Duff & Phelps which uses + or - to denote relative strength
within this classification. Duff 2 represents good certainty of timely payment,
with minimal risk factors. Duff 3 represents satisfactory protection factors,
with risk factors larger and subject to more variation.
Fitch Investors Service Inc.: F-1+ -- denotes exceptionally strong
credit quality given to issues regarded as having strongest degree of assurance
for timely payment; F-1 -- very strong, with only slightly less degree of
assurance for timely payment than F-1+; F-2 -- good credit quality, carrying a
satisfactory degree of assurance for timely payment.
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