1933 Act Registration No. 333-41251
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-14AE
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
[ ] Pre-Effective [X] Post-Effective
Amendment No. Amendment No. 1
EVERGREEN MUNICIPAL TRUST
(Exact Name of Registrant as Specified in Charter)
Area Code and Telephone Number: (617) 210-3200
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------
(Address of Principal Executive Offices)
Rosemary D. Van Antwerp, Esq.
Keystone Investment Management Company
200 Berkeley Street
Boston, Massachusetts 02116
-----------------------------------------
(Name and Address of Agent for Service)
Copies of All Correspondence to:
Robert N. Hickey, Esq.
Sullivan & Worcester LLP
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on ________ pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] on ________ pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on ________ pursuant to paragraph (a)(2) of Rule 485
Pursuant to Rule 414 under the Securities Act of 1933, by this
amendment to Registration No. 333-41251 on Form N-14 of Evergreen Investment
Trust, a Massachusetts business trust, the Registrant hereby adopts the
Registration Statement of such trust with respect to the Evergreen Virginia
Municipal Bond Fund series
<PAGE>
thereof under
the Securities Act of 1933.
<PAGE>
EVERGREEN MUNICIPAL TRUST
CROSS REFERENCE SHEET
Pursuant to Rule 481(a) under the Securities Act of 1933
Location in Prospectus/Proxy
Item of Part A of Form N-14 Statement
1. Beginning of Registration Cross Reference Sheet; Cover
Statement and Outside Front Page
Cover Page of Prospectus
2. Beginning and Outside Back Table of Contents
Cover Page of Prospectus
3. Fee Table, Synopsis and Comparison of Fees and
Risk Factors Expenses; Summary;
Comparison of Investment
Objectives and Policies;
Risks
4. Information About the Summary; Reasons for the
Transaction Reorganization; Comparative
Information on Shareholders'
Rights; Exhibit A (Agreement
and Plan of Reorganization)
5. Information about the Cover Page; Summary; Risks;
Registrant Comparison of Investment
Objectives and Policies;
Comparative Information on
Shareholders' Rights;
Additional Information
6. Information about the Cover Page; Summary; Risks;
Company Being Acquired Comparison of Investment
Objective and Policies;
Comparative Information on
Shareholders' Rights;
Additional Information
<PAGE>
7. Voting Information Cover Page; Summary; Voting
Information Concerning the
Meeting
8. Interest of Certain Persons Financial Statements and
and Experts Experts; Legal Matters
9. Additional Information Inapplicable
Required for Reoffering by
Persons Deemed to be
Underwriters
Item of Part B of Form N-14
10. Cover Page Cover Page
11. Table of Contents Omitted
12. Additional Information Statement of Additional
About the Registrant Information of
Evergreen
Virginia Municipal Bond Fund
dated October 31, 1996, as
amended
13. Additional Information Statement of Additional
about the Company Being Information of The Virtus
Acquired Funds - The Virginia
Municipal Bond Fund dated
November 30, 1997
14. Financial Statements Financial Statements dated
August 31, 1997 of Evergreen
Virginia Municipal Bond
Fund; Financial Statements
of The
Virginia Municipal Bond Fund
dated September 30, 1997;
Pro Forma Financial
Statements
<PAGE>
Item of Part C of Form N-14
15. Indemnification Incorporated by Reference to
Part A Caption -"Comparative
Information on Shareholders'
Rights -Liability and
Indemnification of Trustees"
16. Exhibits Item 16. Exhibits
17. Undertakings Item 17. Undertakings
<PAGE>
THE VIRTUS FUNDS
THE VIRGINIA MUNICIPAL BOND FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
January 5, 1998
Dear Shareholder,
As a result of the merger of Signet Banking Corporation with and into a
wholly-owned subsidiary of First Union Corporation effective November 28, 1997,
I am writing to shareholders of The Virginia Municipal Bond Fund (the "Fund"),
to inform you of a Special Shareholders' meeting to be held on February 20,
1998. Before that meeting, I would like your vote on the important issues
affecting your Fund as described in the attached Prospectus/Proxy Statement.
The Prospectus/Proxy Statement includes two proposals. The first proposal
requests that shareholders consider and act upon an Agreement and Plan of
Reorganization whereby all of the assets of the Fund would be acquired by
Evergreen Virginia Municipal Bond Fund in exchange for either Class A or Class Y
shares of Evergreen Virginia Municipal Bond Fund and the assumption by Evergreen
Virginia Municipal Bond Fund of certain liabilities of the Fund. You will
receive shares of Evergreen Virginia Municipal Bond Fund having an aggregate net
asset value equal to the aggregate net asset value of your Fund shares. Details
about Evergreen Virginia Municipal Bond Fund's investment objective, portfolio
management team, performance, etc. are contained in the attached
Prospectus/Proxy Statement. The transaction is a non-taxable event for
shareholders.
The second proposal requests shareholder consideration of an Interim Investment
Advisory Agreement between the Fund and Virtus
Capital Management, Inc.
Information relating to the Interim Investment Advisory Agreement is contained
in the attached Prospectus/Proxy Statement.
The Board of Trustees has approved the proposals and recommends that you vote
FOR these proposals.
I realize that this Prospectus/Proxy Statement will take time to review, but
your vote is very important. Please take the time to familiarize yourself with
the proposals presented and sign and return your proxy card in the enclosed
postage paid envelope today.
<PAGE>
If we do not receive your completed proxy card after several weeks, you may be
contacted by our proxy solicitor, Shareholder Communications Corporation, who
will remind you to vote your shares.
Thank you for taking this matter seriously and participating in this important
process.
Sincerely,
Edward C. Gonzales
President
The Virtus Funds
<PAGE>
THE VIRTUS FUNDS
THE VIRGINIA MUNICIPAL BOND FUND
FEDERATED INVESTORS TOWER
PITTSBURGH, PENNSYLVANIA 15222-3779
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 20, 1998
Notice is hereby given that a Special Meeting (the "Meeting") of
Shareholders of The Virginia Municipal Bond Fund, a series of The Virtus Funds
(the "Fund"), will be held at the offices of the Evergreen Funds, 200 Berkeley
Street, 26th Floor, Boston, Massachusetts 02116 on February 20, 1998 at 2:00
p.m. for the following purposes:
1. To consider and act upon the Agreement and Plan of Reorganization
(the "Plan") dated as of November 26, 1997, providing for the acquisition of all
of the assets of the Fund by Evergreen Virginia Municipal Bond Fund, a series of
Evergreen Municipal Trust, ("Evergreen VA") in exchange for shares of Evergreen
VA and the assumption by Evergreen VA of certain identified liabilities of the
Fund. The Plan also provides for distribution of such shares of Evergreen VA to
shareholders of the Fund in liquidation and subsequent termination of the Fund.
A vote in favor of the Plan is a vote in favor of the liquidation and
dissolution of the Fund.
2. To consider and act upon the Interim Investment Advisory Agreement
between the Fund and Virtus Capital
Management, Inc.
3. To transact any other business which may properly come before the
Meeting or any adjournment or adjournments thereof.
The Trustees of The Virtus Funds on behalf of the Fund have fixed the
close of business on December 26, 1997 as the record date for the determination
of shareholders of the Fund entitled to notice of and to vote at the Meeting or
any adjournment thereof.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO
NOT EXPECT TO ATTEND IN PERSON ARE URGED WITHOUT DELAY TO SIGN AND RETURN THE
ENCLOSED PROXY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE, SO THAT
THEIR SHARES MAY BE REPRESENTED AT THE MEETING. YOUR PROMPT ATTENTION TO THE
ENCLOSED PROXY WILL HELP TO AVOID THE EXPENSE OF FURTHER SOLICITATION.
By Order of the Board of Trustees
<PAGE>
John W. McGonigle
Secretary
January 5, 1998
<PAGE>
INSTRUCTIONS FOR EXECUTING PROXY CARDS
The following general rules for signing proxy cards may be of
assistance to you and may help to avoid the time and expense involved in
validating your vote if you fail to sign your proxy card(s) properly.
1. INDIVIDUAL ACCOUNTS: Sign your name exactly as it
appears in the Registration on the proxy card(s).
2. JOINT ACCOUNTS: Either party may sign, but the name of
the party signing should conform exactly to a name shown in the
Registration on the proxy card(s).
3. ALL OTHER ACCOUNTS: The capacity of the individual signing the proxy
card(s) should be indicated unless it is reflected in the form of Registration.
For example:
REGISTRATION VALID SIGNATURE
CORPORATE
ACCOUNTS
(1) ABC Corp. ABC Corp.
(2) ABC Corp. John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer John Doe, Treasurer
(4) ABC Corp. Profit Sharing Plan John Doe, Trustee
TRUST ACCOUNTS
(1) ABC Trust Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee Jane B. Doe
u/t/d 12/28/78
CUSTODIAL OR ESTATE ACCOUNTS
(1) John B. Smith, Cust. John B. Smith
f/b/o John B. Smith, Jr. UGMA
(2) John B. Smith, Sr. John B. Smith, Jr., Executor
<PAGE>
PROSPECTUS/PROXY STATEMENT DATED JANUARY 5, 1998
Acquisition of Assets of
THE VIRGINIA MUNICIPAL BOND FUND
a series of
The Virtus Funds
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
By and in Exchange for Shares of
EVERGREEN VIRGINIA MUNICIPAL BOND FUND
a series of
Evergreen Municipal Trust
200 Berkeley Street
Boston, Massachusetts 02116
This Prospectus/Proxy Statement is being furnished to shareholders of
The Virginia Municipal Bond Fund ("Virtus VA") in connection with a proposed
Agreement and Plan of Reorganization (the "Plan") to be submitted to
shareholders of Virtus VA for consideration at a Special Meeting of Shareholders
to be held on February 20, 1998 at 2:00 p.m. at the offices of the Evergreen
Funds, 200 Berkeley Street, Boston, Massachusetts 02116, and any adjournments
thereof (the "Meeting"). The Plan provides for all of the assets of Virtus VA to
be acquired by Evergreen Virginia Municipal Bond Fund ("Evergreen VA") in
exchange for shares of Evergreen VA and the assumption by Evergreen VA of
certain identified liabilities of Virtus VA (hereinafter referred to as the
"Reorganization"). Evergreen VA and Virtus VA are sometimes hereinafter referred
to individually as the "Fund" and collectively as the "Funds." Following the
Reorganization, shares of Evergreen VA will be distributed to shareholders of
Virtus VA in liquidation of Virtus VA and such Fund will be terminated. Holders
of Investment shares of Virtus VA will receive Class A shares of Evergreen VA
and holders of Trust shares of Virtus VA will receive Class Y shares of
Evergreen VA. Each such class of shares of Evergreen VA has the same Rule 12b-1
distribution-related fees, if any, as the shares of the class of Virtus VA held
by them prior to the Reorganization. No initial sales charge will be imposed in
connection with Class A shares of Evergreen VA received by holders of Investment
shares of Virtus VA. As a result of the proposed Reorganization, shareholders of
Virtus VA will receive that number of full and fractional shares of Evergreen VA
having an aggregate net asset value equal to the aggregate net asset value of
such shareholder's shares of Virtus VA. The Reorganization is being structured
as a tax-free reorganization for federal income tax purposes.
<PAGE>
Evergreen VA is a separate series of Evergreen Municipal Trust, an
open-end management investment company registered under the Investment Company
Act of 1940, as amended (the "1940 Act"). The investment objective of Evergreen
VA is to seek current income exempt from federal regular income tax and Virginia
state income tax, consistent with the preservation of capital. The investment
objective of Virtus VA is substantially identical --to provide current income
which is exempt from federal regular income tax and the personal income tax
imposed by the Commonwealth of Virginia. Each Fund invests primarily in
municipal bonds of the Commonwealth of Virginia.
Shareholders of Virtus VA are also being asked to approve the Interim
Investment Advisory Agreement with Virtus Capital Management, Inc., a subsidiary
of First Union Corporation ("Virtus") (the "Interim Advisory Agreement"), with
the same terms and fees as the previous advisory agreement between Virtus VA and
Virtus. The Interim Advisory Agreement will be in effect for the period of time
between November 28, 1997, the date on which the merger of Signet Banking
Corporation with and into a wholly-owned subsidiary of First Union Corporation
was consummated, and the date of the Reorganization (scheduled for on or about
February 27, 1998).
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about Evergreen VA that
shareholders of Virtus VA should know before voting on the Reorganization.
Certain relevant documents listed below, which have been filed with the
Securities and Exchange Commission ("SEC"), are incorporated in whole or in part
by reference. A Statement of Additional Information dated January 5, 1998,
relating to this Prospectus/Proxy Statement and the Reorganization which
includes the financial statements of Evergreen VA dated August 31, 1997 and
Virtus VA dated September 30, 1997, has been filed with the SEC and is
incorporated by reference in its entirety into this Prospectus/Proxy Statement.
A copy of such Statement of Additional Information is available upon request and
without charge by writing to Evergreen VA at 200 Berkeley Street, Boston,
Massachusetts 02116 or by calling toll-free 1-800-343-2898.
The two Prospectuses of Evergreen VA dated October 31, 1996, as amended,
and its Annual Report for the fiscal year ended August 31, 1997 are incorporated
herein by reference in their entirety, insofar as they relate to Evergreen VA
only, and not to any other funds described therein. The Prospectuses, which
pertain (i) to Class A and Class B shares and (ii) to Class Y shares, differ
only insofar as they describe the separate distribution and shareholder
servicing arrangements applicable to the classes. Shareholders of Virtus VA will
receive, with this
<PAGE>
Prospectus/Proxy Statement, copies of the Prospectus pertaining to the class of
shares of Evergreen VA that they will receive as a result of the consummation of
the Reorganization. Additional information about Evergreen VA is contained in
its Statement of Additional Information of the same date which has been filed
with the SEC and which is available upon request and without charge by writing
to or calling Evergreen VA at the address or telephone number listed in the
preceding paragraph.
The two Prospectuses of Virtus VA (which pertain to (i) Trust shares
and (ii) Investment shares) dated November 30, 1997, insofar as they relate to
Virtus VA only, and not to any other funds described therein, are incorporated
herein in their entirety by reference. Copies of the Prospectuses and related
Statements of Additional Information dated the same date, are available upon
request without charge by writing to Virtus VA at the address listed on the
cover page of this Prospectus/Proxy Statement or by calling toll-free
1-800-829-3863.
Included as Exhibits A and B to this Prospectus/Proxy Statement is a
copy of the Plan and the Interim Advisory Agreement, respectively.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OFFERED BY THIS PROSPECTUS/PROXY STATEMENT ARE NOT DEPOSITS
OR OBLIGATIONS OF ANY BANK AND ARE NOT INSURED OR OTHERWISE PROTECTED BY THE
U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENT AGENCY AND INVOLVE INVESTMENT RISK, INCLUDING
POSSIBLE LOSS OF CAPITAL.
<PAGE>
TABLE OF CONTENTS
Page
COMPARISON OF FEES AND EXPENSES...............................................6
SUMMARY ....................................................................10
Proposed Plan of Reorganization.....................................10
Tax Consequences....................................................12
Investment Objectives and Policies of the Funds.....................12
Comparative Performance Information for each Fund...................13
Management of the Funds.............................................14
Investment Advisers.................................................14
Administrators......................................................15
Portfolio Management................................................16
Distribution of Shares..............................................16
Purchase and Redemption Procedures..................................18
Exchange Privileges.................................................18
Dividend Policy.....................................................19
Risks ...........................................................19
REASONS FOR THE REORGANIZATION...............................................21
Agreement and Plan of Reorganization............................. 24
Federal Income Tax Consequences.................................. 26
Pro-forma Capitalization............................................27
Shareholder Information.............................................29
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES.............................29
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS..............................31
Forms of Organization...............................................31
Capitalization......................................................32
Shareholder Liability...............................................32
Shareholder Meetings and Voting Rights..............................33
Liquidation or Dissolution..........................................34
Liability and Indemnification of Trustees...........................34
INFORMATION REGARDING THE INTERIM ADVISORY AGREEMENT.........................35
Introduction........................................................35
Comparison of the Interim Advisory Agreement and the
Previous Advisory Agreement ............................ 37
Information About Virtus VA's Investment Adviser....................38
ADDITIONAL INFORMATION.................................................... 39
VOTING INFORMATION CONCERNING THE MEETING....................................39
FINANCIAL STATEMENTS AND EXPERTS.............................................42
<PAGE>
LEGAL MATTERS................................................................42
OTHER BUSINESS...............................................................42
APPENDIX A................................................................ 44
EXHIBIT A
EXHIBIT B
EXHIBIT C
<PAGE>
COMPARISON OF FEES AND EXPENSES
The amounts for Class Y and Class A shares of Evergreen VA set forth in
the following tables and in the examples are based on the expenses of Evergreen
VA for the fiscal year ended August 31, 1997. The amounts for Trust and
Investment shares of Virtus VA set forth in the following tables and in the
examples are based on the expenses for Virtus VA for the fiscal year ended
September 30, 1997. The pro forma amounts for Class Y and Class A shares of
Evergreen VA are based on what the combined expenses would have been for
Evergreen VA for the fiscal year ending August 31, 1997. All amounts are
adjusted for voluntary expense waivers.
The following tables show for Evergreen VA, Virtus VA and Evergreen VA
pro forma, assuming consummation of the Reorganization, the shareholder
transaction expenses and annual fund operating expenses associated with an
investment in the Class Y, Class A, Trust and Investment shares of each Fund, as
applicable.
<TABLE>
<CAPTION>
Comparison of Class Y and Class A Shares
of Evergreen VA With Trust and
Investment Shares of Virtus VA
Evergreen VA Virtus VA
Class Y Class A Trust Investment
<S> <C> <C> <C> <C>
Shareholder Transaction
Expenses
Maximum Sales Load None 4.75% None None
Imposed on Purchases (as
a percentage of offering
price)
Maximum Sales Load None None None None
Imposed on Reinvested
Dividends (as a
percentage of offering
price)
<PAGE>
Shareholder Transaction
Expenses
Contingent Deferred Sales None None None 2.00%
Charge (as a percentage within
of original purchase five years
price or redemption after
proceeds, whichever is purchase
lower) date, and
0.00%
thereafter
Exchange Fee None None None None
Annual Fund Operating
Expenses (as a percentage
of average daily net
assets)
Management Fee (After Waiver) 0.00% 0.00% 0.75% 0.75%
12b-1 Fees (1) None 0.25% None 0.25%
Other Expenses (After Reimbursement) 0.79% 0.78% 0.36% 0.36%
----- ----- ----- -----
Annual Fund Operating
Expenses (2) 0.79% 1.03% 1.11% 1.36%
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Evergreen VA Pro Forma
Class Y Class A
<S> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on None 4.75%
Purchases (as a percentage of
offering price)
Maximum Sales Load Imposed on None None
Reinvested Dividends
Contingent Deferred Sales Charge None None
Exchange Fee None None
Annual Fund Operating Expenses
(as a percentage of average daily
net assets)
Management Fee (After Waiver) 0.07% 0.07%
12b-1 Fees (1) None 0.25%
Other Expenses 0.72% 0.71%
----- -----
Annual Fund Operating Expenses (3) 0.79% 1.03%
===== =====
</TABLE>
- ---------------
(1) Class A shares of Evergreen VA can pay up to 0.75% of average daily net
assets as a 12b-1 fee. For the foreseeable future, the Class A 12b-1
fees will be limited to 0.25% of average daily net assets.
(2) Annual Fund Operating Expenses for Evergreen VA for the fiscal year ended
August 31, 1997 would have been 1.84% for Class A shares and 1.60% for
Class Y shares absent fee waivers of 0.50% and expense reimbursements of
0.31% for each of Class A and Class Y shares.
(3) Annual Fund Operating Expenses for Evergreen VA pro forma for the fiscal
year ending August 31, 1997 would have been 1.46% for Class A shares and
1.22% for Class Y shares absent fee waivers of 0.43% for each of Class A
and Class Y.
Examples. The following tables show expense amounts for shares of
Evergreen VA and of Virtus VA, and for shares of Evergreen VA pro forma,
assuming consummation of the Reorganization, which illustrate the cumulative
effect of shareholder transaction expenses and annual fund operating expenses
indicated above on a $1,000 investment in each class of shares for the periods
specified, assuming (i) a 5% annual return
<PAGE>
and (ii) redemption at the end of such period, and additionally, for Investment
shares, no redemption at the end of each period. In the case of Evergreen VA pro
forma, the examples do not reflect the imposition of the 4.75% maximum sales
load on purchases since Virtus VA shareholders who receive Class A shares of
Evergreen VA in the Reorganization or who purchase additional Class A shares
subsequent to the Reorganization will not incur any sales load.
<TABLE>
<CAPTION>
Evergreen VA
One Year Three Years Five Years Ten Years
<S> <C> <C> <C> <C>
Class Y $8 $25 $44 $98
Class A $58 $79 $102 $167
</TABLE>
<TABLE>
<CAPTION>
Virtus VA
One Year Three Years Five Years Ten Years
<S> <C> <C> <C> <C>
Trust $11 $35 $61 $135
Investment $34 $63 $74 $164
(Assuming
redemption at
end of period)
Investment $14 $43 $74 $164
(Assuming no
redemption at
end of period)
</TABLE>
<TABLE>
<CAPTION>
Evergreen VA Pro Forma
One Year Three Years Five Years Ten Years
<S> <C> <C> <C> <C>
Class Y $8 $25 $44 $98
Class A $11 $33 $57 $126
</TABLE>
<PAGE>
The purpose of the foregoing examples is to assist Virtus VA
shareholders in understanding the various costs and expenses that an investor in
Evergreen VA as a result of the Reorganization would bear directly and
indirectly, as compared with the various direct and indirect expenses currently
borne by a shareholder in Virtus VA. These examples should not be considered a
representation of past or future expenses or annual return. Actual expenses may
be greater or less than those shown.
SUMMARY
This summary is qualified in its entirety by reference to the additional
information contained elsewhere in this Prospectus/Proxy Statement, and, to the
extent not inconsistent with such additional information, the Prospectuses of
Evergreen VA dated October 31, 1996, as amended, and the Prospectuses of Virtus
VA dated November 30, 1997, (which are incorporated herein by reference), and
the Plan and the Interim Advisory Agreement, the forms of which are attached to
this Prospectus/Proxy Statement as Exhibits A and B, respectively.
Proposed Plan of Reorganization
The Plan provides for the transfer of all of the assets of Virtus VA in
exchange for shares of Evergreen VA and the assumption by Evergreen VA of
certain identified liabilities of Virtus VA. The identified liabilities consist
only of those liabilities reflected on the Fund's statement of assets and
liabilities determined immediately preceding the Reorganization. The Plan also
calls for the distribution of shares of Evergreen VA to Virtus VA shareholders
in liquidation of Virtus VA as part of the Reorganization. As a result of the
Reorganization, the holders of Investment shares and Trust shares, respectively,
of Virtus VA will become the owners of that number of full and fractional Class
A and Class Y shares of Evergreen VA which have an aggregate net asset value
equal to the aggregate net asset value of the holders' shares of Virtus VA, as
of the close of business immediately prior to the date of the Reorganization.
See "Reasons for the Reorganization - Agreement and Plan of Reorganization."
The Trustees of The Virtus Funds, including the Trustees who are not
"interested persons," as such term is defined in the 1940 Act (the "Independent
Trustees"), have concluded that the Reorganization would be in the best
interests of shareholders of Virtus VA, and that the interests of the
shareholders of Virtus VA will not be diluted as a result of the transactions
contemplated by the Reorganization. Accordingly, the Trustees have submitted the
Plan for the approval of Virtus VA's shareholders.
<PAGE>
THE BOARD OF TRUSTEES OF THE VIRTUS FUNDS
RECOMMENDS APPROVAL BY SHAREHOLDERS OF VIRTUS VA
OF THE PLAN EFFECTING THE REORGANIZATION.
The Trustees of Evergreen Municipal Trust have also approved the Plan
and, accordingly, Evergreen VA's participation in the Reorganization.
Approval of the Reorganization on the part of Virtus VA will require
the affirmative vote of a majority of Virtus VA's shares voted and entitled to
vote, with all classes voting together as a single class at a Meeting at which a
quorum of the Fund's shares is present. A majority of the outstanding shares
entitled to vote, represented in person or by proxy, is required to constitute a
quorum at the Meeting. See "Voting Information Concerning the Meeting."
The merger (the "Merger") of Signet Banking Corporation ("Signet") with
and into a wholly-owned subsidiary of First Union Corporation ("First Union")
has been consummated and, as a result, by law the Merger terminated the
investment advisory agreement between Virtus and Virtus VA. Prior to
consummation of the Merger, Virtus VA received an order from the SEC which
permitted the implementation, without formal shareholder approval, of a new
investment advisory agreement between the Fund and Virtus for a period of not
more than 120 days beginning on the date of the closing of the Merger and
continuing through the date the Interim Advisory Agreement is approved by the
Fund's shareholders (but in no event later than April 30, 1998). The Interim
Advisory Agreement has the same terms and fees as the previous investment
advisory agreement between Virtus VA and Virtus. The Reorganization is scheduled
to take place on or about February 27, 1998.
Approval of the Interim Advisory Agreement requires the affirmative
vote of (i) 67% or more of the shares of Virtus VA present in person or by proxy
at the Meeting, if holders of more than 50% of the shares of Virtus VA
outstanding on the record date are present, in person or by proxy, or (ii) more
than 50% of the outstanding shares of Virtus VA, whichever is less. See "Voting
Information Concerning the Meeting."
If the shareholders of Virtus VA do not vote to approve the
Reorganization, the Trustees will consider other possible courses of action in
the best interests of shareholders.
Tax Consequences
Prior to or at the completion of the Reorganization, Virtus VA will
have received an opinion of Sullivan & Worcester
<PAGE>
LLP that the Reorganization has been structured so that no gain or loss will be
recognized by the Fund or its shareholders for federal income tax purposes as a
result of the receipt of shares of Evergreen VA in the Reorganization. The
holding period and aggregate tax basis of shares of Evergreen VA that are
received by Virtus VA's shareholders will be the same as the holding period and
aggregate tax basis of shares of the Fund previously held by such shareholders,
provided that shares of the Fund are held as capital assets. In addition, the
holding period and tax basis of the assets of Virtus VA in the hands of
Evergreen VA as a result of the Reorganization will be the same as in the hands
of the Fund immediately prior to the Reorganization, and no gain or loss will be
recognized by Evergreen VA upon the receipt of the assets of the Fund in
exchange for shares of Evergreen VA and the assumption by Evergreen VA of
certain identified liabilities.
Investment Objectives and Policies of the Funds
The investment objective and policies of Evergreen VA and Virtus VA are
substantially identical.
The investment objective of Evergreen VA is to seek current income
exempt from federal regular income tax and from income taxes of the Commonwealth
of Virginia. The investment objective of Virtus VA is to provide current income
which is exempt from federal regular income tax and the personal income tax
imposed by the Commonwealth of Virginia.
Each Fund will normally invest its assets so that at least 80% of its
annual interest income is derived from, or at least 80% of its net assets are
invested in, obligations which provide interest income which is exempt from
federal regular income taxes. In addition, at least 65% of the value of each
Fund's total assets will be invested in municipal bonds of Virginia.
Each Fund seeks to achieve its investment objective by investing
principally in municipal bonds, including industrial development bonds, of
Virginia. In addition, the Funds may invest in obligations issued by or on
behalf of any state, territory, or possession of the United States, including
the District of Columbia, or their political subdivisions or agencies and
instrumentalities, the interest from which is exempt from federal regular income
tax. See "Comparison of Investment Objectives and Policies" below.
Comparative Performance Information for each Fund
Discussions of the manner of calculation of total return are
contained in the respective Prospectuses and Statements of
Additional Information of the Funds. The total return of
<PAGE>
Evergreen VA and Virtus VA for the one and five year periods ended September 30,
1997 and for the periods from inception through September 30, 1997 are set forth
in the table below. The calculations of total return assume the reinvestment of
all dividends and capital gains distributions on the reinvestment date and the
deduction of all recurring expenses (including sales charges) that were charged
to shareholders' accounts.
<TABLE>
<CAPTION>
Average Annual Total Return (1)
From
1 Year 5 Years Inception
Ended Ended To
September September September Inception
30,1997 30, 1997 30, 1997 Date
------- ------- --------- ---------
<S> <C> <C> <C> <C>
Evergreen
VA
Class A 3.42% N/A 4.09% 7/22/93
shares
Class Y 8.85% N/A 2/28/94
shares 6.24%
Virtus VA
Trust 8.00% 6.62% 10/16/90
shares 5.96%
Investment 7.74% 5.73% 6.45% 10/16/90
shares
</TABLE>
- --------------
(1) Reflects waiver of advisory fees and reimbursements and/or waivers of
expenses. Without such reimbursements and/or waivers, the average
annual total return during the period would have been lower.
Important information about Evergreen VA is also contained in
management's discussion of Evergreen VA's performance, attached hereto as
Exhibit C. This information also appears in Evergreen VA's most recent Annual
Report.
Management of the Funds
The overall management of Evergreen VA and of Virtus VA is
the responsibility of, and is supervised by, the Board of
<PAGE>
Trustees of Evergreen Municipal Trust and The Virtus Funds,
respectively.
Investment Advisers
The investment adviser to Evergreen VA is the Capital Management Group
of First Union National Bank ("FUNB"). FUNB is a subsidiary of First Union, the
sixth largest bank holding company in the United States based on total assets as
of September 30, 1997. The Capital Management Group of FUNB and its affiliates
manage the Evergreen family of mutual funds with assets of approximately $40
billion as of November 30, 1997. For further information regarding FUNB and
First Union, see "Management of the Funds - Investment Advisers" in the
Prospectuses of Evergreen VA.
FUNB manages investments and supervises the daily business affairs of
Evergreen VA subject to the authority of the Trustees. FUNB is entitled to
receive from the Fund an annual fee equal to 0.50% of the Fund's average daily
net assets.
Virtus serves as the investment adviser for Virtus VA. As investment
adviser, Virtus continuously conducts investment research and supervision of the
Fund and is responsible for the purchase and sale of portfolio securities. For
its services as investment adviser, Virtus receives a fee at an annual rate of
0.75% of the Fund's average daily net assets.
Each investment adviser may, at its discretion, reduce or waive its fee
or reimburse a Fund for certain of its other expenses in order to reduce its
expense ratios. Each investment adviser may reduce or cease these voluntary
waivers and reimbursements at any time.
Administrators
Evergreen Investment Services, Inc. ("EIS") serves as administrator to
Evergreen VA. As administrator, EIS provides facilities, equipment and personnel
to Evergreen VA and is entitled to receive an administration fee from the Fund
based on the average daily net assets of all the mutual funds advised by FUNB
and its affiliates, calculated in accordance with the following schedule: 0.050%
on the first $7 billion, 0.035% on the next $3 billion, 0.030% on the next $5
billion, 0.020% on the next $10 billion, 0.015% on the next $5 billion and
0.010% on assets in excess of $30 billion.
Federated Administrative Services ("FAS") provides Virtus VA with
certain administrative personnel and services including certain legal and
accounting services. FAS is entitled to
<PAGE>
receive a fee for such services at the following annual rates: 0.15% on the
first $250 million of average daily net assets of the combined assets of the
funds in the Blanchard/Virtus mutual fund family, 0.125% on the next $250
million of such assets, 0.10% on the next $250 million of such assets, and
0.075% on assets in excess of $750 million.
Portfolio Management
Charles E. Jeanne has been portfolio manager of Evergreen VA since
1993. Mr. Jeanne joined FUNB in 1993 as a portfolio manager and has been an
Assistant Vice President since July, 1996. From 1989 until joining FUNB, Mr.
Jeanne served as a trader/portfolio manager for First American Bank where he was
responsible for individual accounts and common trust funds.
Distribution of Shares
Evergreen Distributor, Inc. ("EDI"), an affiliate of BISYS Fund
Services, acts as underwriter of Evergreen VA's shares. EDI distributes the
Fund's shares directly or through broker-dealers, banks (including FUNB), or
other financial intermediaries. Evergreen VA offers three classes of shares:
Class A, Class B and Class Y. Each class has separate distribution arrangements.
(See "Distribution-Related Expenses" below.) No class bears the distribution
expenses relating to the shares of any other class.
In the proposed Reorganization, shareholders of Virtus VA who own Trust
shares will receive Class Y shares of Evergreen VA, and shareholders of Virtus
VA who own Investment shares will receive Class A shares of Evergreen VA. The
Class Y and Class A shares of Evergreen VA have substantially similar
arrangements with respect to the imposition of Rule 12b-1 distribution and
service fees as the Trust and Investment shares of Virtus VA. Because the
Reorganization will be effected at net asset value without the imposition of a
sales charge, Evergreen VA shares acquired by shareholders of Virtus VA pursuant
to the proposed Reorganization would not be subject to any initial sales charge
or contingent deferred sales charge ("CDSC") as a result of the Reorganization.
The following is a summary description of charges and fees for the
Class Y and Class A shares of Evergreen VA which will be received by Virtus VA
shareholders in the Reorganization. More detailed descriptions of the
distribution arrangements applicable to the classes of shares are contained in
the respective Evergreen VA Prospectuses and the Virtus VA Prospectuses and in
each Fund's respective Statements of Additional Information.
<PAGE>
Class Y Shares. Class Y shares are sold at net asset value without any
initial sales charge and are not subject to distribution-related fees. Class Y
shares are only available to (i) all shareholders of record in one or more of
the Evergreen family of funds for which Evergreen Asset Management Corp.
("Evergreen Asset") serves as investment adviser as of December 30, 1994, (ii)
certain institutional investors and (iii) investment advisory clients of FUNB,
Evergreen Asset or their affiliates. Virtus VA shareholders who receive
Evergreen VA Class Y shares in the Reorganization who wish to make subsequent
purchases of Evergreen VA's shares will be able to purchase Class Y shares.
Class A Shares. Class A shares are sold at net asset value plus an
initial sales charge and, as indicated below, are subject to
distribution-related fees. For a description of the initial sales charges
applicable to purchases of Class A shares, see "Purchase and Redemption of
Shares - How to Buy Shares" in the applicable Prospectus for Evergreen VA.
Holders of Investment shares of Virtus VA who receive Class A shares of
Evergreen VA in the Reorganization will be able to purchase additional Class A
shares of Evergreen VA and any other Evergreen fund at net asset value. No
initial sales charge will be imposed.
Additional information regarding the classes of shares of each Fund is
included in its respective Prospectuses and Statements of Additional
Information.
Distribution-Related Expenses. Evergreen VA has adopted a Rule 12b-1
plan with respect to its Class A shares under which the Class may pay for
distribution-related expenses at an annual rate which may not exceed 0.75% of
average daily net assets attributable to the Class. Payments with respect to
Class A shares are currently limited to 0.25% of average daily net assets
attributable to the Class, which amount may be increased to the full plan rate
for the Fund by the Trustees without shareholder approval.
Virtus VA has adopted a Rule 12b-1 plan with respect to its Investment
shares under which the Class may pay for distribution- related expenses at an
annual rate of 0.25% of average daily net assets attributable to the Class.
Additional information regarding the Rule 12b-1 plans adopted by each
Fund is included in its respective Prospectuses and Statements of Additional
Information.
<PAGE>
Purchase and Redemption Procedures
Information concerning applicable sales charges and
distribution-related fees is provided above. Investments in the Funds are not
insured. The minimum initial purchase requirement for each Fund is $1,000
($10,000 for Trust shares of Virtus VA). Except for the minimum investment
requirement of $100 for Investment shares of Virtus VA, there is no minimum for
subsequent purchases of shares of either Fund. Each Fund provides for telephone,
mail or wire redemption of shares at net asset value (less any applicable CDSC
in the case of Virtus VA) as next determined after receipt of a redemption
request on each day the New York Stock Exchange ("NYSE") is open for trading.
Additional information concerning purchases and redemptions of shares, including
how each Fund's net asset value is determined, is contained in the respective
Prospectuses for each Fund. Each Fund may involuntarily redeem shareholders'
accounts that have less than $1,000 of invested funds. All funds invested in
each Fund are invested in full and fractional shares. The Funds reserve the
right to reject any purchase order.
Exchange Privileges
Virtus VA currently permits holders of Investment shares to exchange
such shares for Investment shares of other funds managed by Virtus. Exchanges of
Trust shares are not permitted. Holders of shares of a class of Evergreen VA
generally may exchange their shares for shares of the same class of any other
Evergreen fund. Virtus VA shareholders will be receiving Class Y and Class A
shares of Evergreen VA in the Reorganization and, accordingly, with respect to
shares of Evergreen VA received by Virtus VA shareholders in the Reorganization,
the exchange privilege is limited to the Class Y and Class A shares, as
applicable, of other Evergreen funds. Evergreen VA limits exchanges to five per
calendar year and three per calendar quarter. No sales charge is imposed on an
exchange. An exchange which represents an initial investment in another
Evergreen fund must amount to at least $1,000.
The current exchange privileges, and the requirements and limitations
attendant thereto, are described in each Fund's respective Prospectuses and
Statements of Additional Information.
<PAGE>
Dividend Policy
Each Fund declares dividends daily and distributes its net income
dividends monthly. Distributions of any net realized gains of a Fund will be
made at least annually. Shareholders begin to earn dividends on the first
business day after shares are purchased unless shares were not paid for, in
which case dividends are not earned until the next business day after payment is
received. Dividends and distributions are reinvested in additional shares of the
same class of the respective Fund, or paid in cash, as a shareholder has
elected. See the respective Prospectuses of each Fund for further information
concerning dividends and distributions.
After the Reorganization, shareholders of Virtus VA who have elected to
have their dividends and/or distributions reinvested will have dividends and/or
distributions received from Evergreen VA reinvested in shares of Evergreen VA.
Shareholders of Virtus VA who have elected to receive dividends and/or
distributions in cash will receive dividends and/or distributions from Evergreen
VA in cash after the Reorganization, although they may, after the
Reorganization, elect to have such dividends and/or distributions reinvested in
additional shares of Evergreen VA.
Each of Evergreen VA and Virtus VA has qualified and intends to
continue to qualify to be treated as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the "Code"). While so qualified, so
long as each Fund distributes all of its investment company taxable income and
any net realized gains to shareholders, it is expected that a Fund will not be
required to pay any federal income taxes on the amounts so distributed. A 4%
nondeductible excise tax will be imposed on amounts not distributed if a Fund
does not meet certain distribution requirements by the end of each calendar
year. Each Fund anticipates meeting such distribution requirements.
Risks
Since the investment objective and policies of each Fund are
substantially comparable, the risks involved in investing in each Fund's shares
are similar. There is no assurance that investment performances will be positive
and that the Funds will meet their investment objectives. For a discussion of
each Fund's objectives and policies, see "Comparison of Investment Objectives
and Policies."
Both Funds are non-diversified investment companies. As such, there is
no limit on the percentage of assets which can be invested in the securities of
a single issuer. An investment in either of the Funds, therefore, will entail
greater risk than
<PAGE>
would exist in a diversified investment company because the higher percentage of
investments among fewer issuers may result in greater fluctuations in the total
market value of the Fund's portfolio. Any adverse developments affecting the
value of the securities in a Fund's portfolio will have a greater impact on the
total value of the portfolio than would be the case if the portfolio were
diversified among more issuers.
Bond yields are dependent on several factors including market
conditions, the size of an offering, the maturity of the bond, ratings of the
bond and the ability of issuers to meet their obligations. There is no limit on
the maturity of the bonds purchased by the Funds. The prices of bonds fluctuate
inversely in relation to the direction of interest rates, i.e., as interest
rates decline the values of the bonds increase, and vice versa. The longer the
maturity of a bond, the greater the exposure to market price fluctuations. The
same market factors are reflected in the share price or net asset value of bond
funds, which will vary with interest rates.
In addition, certain of the obligations in which each Fund may invest
may be variable or floating rate instruments, which may involve a conditional or
unconditional demand feature, and may include variable amount master demand
notes. While these types of instruments may, to a certain degree, offset the
risk to principal associated with rising interest rates, they would not be
expected to appreciate in a falling interest rate environment. The prices of
longer term bonds fluctuate more widely in response to market interest rate
changes.
Although the Funds will not purchase securities rated below BBB by
Standard & Poor's Ratings Group ("S&P") or Baa by Moody's Investors Service
("Moody's"), or if unrated, securities judged by the Fund's investment adviser
to be comparable quality to such rated securities, the Funds are not required to
dispose of securities that have been downgraded subsequent to their purchase. If
the municipal obligations held by a Fund are downgraded, the Fund's
concentration in securities of Virginia may cause the Fund to be subject to the
risks inherent in holding material amounts of low-rated debt securities in its
portfolio. Bonds rated BBB by S&P or Baa by Moody's, although considered to be
investment grade, have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to weakened capacity
of such lower rated investment grade bonds to make principal and interest
payments than is the case with higher rated bonds.
It should be noted that municipal securities may be adversely affected
by local political and economic conditions and developments within a state. For
example, adverse conditions in
<PAGE>
a significant industry within Virginia may from time to time have a
correspondingly adverse effect on specific issuers within Virginia or on
anticipated revenue to the state itself; conversely, an improving economic
outlook for a significant industry may have a positive effect on such issuers or
revenues. Since each Fund concentrates investments in securities issued by
Virginia and Virginia's political subdivisions, each provides a greater level of
risk than a fund which is diversified across numerous states and municipal
entities.
The value of municipal securities may also be affected by general
conditions in the money markets or the municipal bond markets, the levels of
federal and state income tax rates, the supply of tax-exempt bonds, the size of
the particular offering, the maturity of the obligation, the credit quality and
rating of the issue, and perceptions with respect to the level of interest
rates.
Investing in Virginia municipal securities which meet a Fund's quality
standards may not be possible if the Commonwealth of Virginia or its
municipalities do not maintain their current credit ratings. In addition,
certain Virginia constitutional amendments, legislative measures, executive
orders, administrative regulations and voter initiatives could result in adverse
consequences affecting Virginia municipal securities. In addition, from time to
time, the supply of municipal securities acceptable for purchase by the Funds
could become limited.
Each Fund is permitted to make taxable temporary investments. Neither
Fund has a current intention of generating income subject to federal regular
income tax. However, certain temporary investments may generate income that is
subject to state taxes.
REASONS FOR THE REORGANIZATION
On July 18, 1997, First Union entered into an Agreement and Plan of
Merger with Signet, which provided, among other things, for the Merger of Signet
with and into a wholly-owned subsidiary of First Union. The Merger was
consummated on November 28, 1997. As a result of the Merger it is expected that
FUNB and its affiliates will succeed to the investment advisory and
administrative functions currently performed for Virtus VA by various units of
Signet and various unaffiliated parties. It is also expected that Signet will no
longer, upon completion of the Reorganization and similar reorganizations of
other funds in the Signet mutual fund family, provide investment advisory or
administrative services to investment companies.
<PAGE>
At a meeting held on September 16, 1997, the Board of Trustees of The
Virtus Funds considered and approved the Reorganization as in the best interests
of shareholders of Virtus VA and determined that the interests of existing
shareholders of Virtus VA will not be diluted as a result of the transactions
contemplated by the Reorganization. In addition, the Trustees approved the
Interim Advisory Agreement with respect to Virtus VA.
As noted above, Signet has merged with and into a wholly-owned
subsidiary of First Union. Signet is the parent company of Virtus, investment
adviser to the mutual funds which comprise The Virtus Funds. The Merger caused,
as a matter of law, termination of the investment advisory agreement between
each series of The Virtus Funds and Virtus with respect to the Fund. The Virtus
Funds have received an order from the SEC which permits Virtus to continue to
act as Virtus VA's investment adviser, without shareholder approval, for a
period of not more than 120 days from the date the Merger was consummated
(November 28, 1997) to the date of shareholder approval of a new investment
advisory agreement. Accordingly, the Trustees considered the recommendations of
Signet in approving the proposed Reorganization.
In approving the Plan, the Trustees reviewed various factors about the
Funds and the proposed Reorganization. There are substantial similarities
between Evergreen VA and Virtus VA. Specifically, Evergreen VA and Virtus VA
have substantially similar investment objectives and policies and comparable
risk profiles. See "Comparison of Investment Objectives and Policies" below. At
the same time, the Board of Trustees evaluated the potential economies of scale
associated with larger mutual funds and concluded that operational efficiencies
may be achieved upon the combination of Virtus VA with Evergreen VA. As of
September 30, 1997, Evergreen VA's net assets were approximately $17 million and
Virtus VA's net assets were approximately $79 million.
In addition, assuming that an alternative to the Reorganization would
be to propose that Virtus VA continue its existence and be separately managed by
FUNB or one of its affiliates, Virtus VA would be offered through common
distribution channels with the similar Evergreen VA. Virtus VA would also have
to bear the cost of maintaining its separate existence. Signet and FUNB believe
that the prospect of dividing the resources of the Evergreen mutual fund
organization between two similar funds could result in each Fund being
disadvantaged due to an inability to achieve optimum size, performance levels
and the greatest possible economies of scale. Accordingly, for the reasons noted
above and recognizing that there can be no
<PAGE>
assurance that any economies of scale or other benefits will be realized, Signet
and FUNB believe that the proposed Reorganization would be in the best interests
of each Fund and its shareholders.
The Board of Trustees of The Virtus Funds met and considered the
recommendation of Signet and FUNB, and, in addition, considered among other
things, (i) the terms and conditions of the Reorganization; (ii) whether the
Reorganization would result in the dilution of shareholders' interests; (iii)
expense ratios, fees and expenses of Evergreen VA and Virtus VA; (iv) the
comparative performance records of each of the Funds; (v) compatibility of their
investment objectives and policies; (vi) the investment experience, expertise
and resources of FUNB; (vii) the service and distribution resources available to
the Evergreen funds and the broad array of investment alternatives available to
shareholders of the Evergreen funds; (viii) the personnel and financial
resources of First Union and its affiliates; (ix) the fact that FUNB will bear
the expenses incurred by Virtus VA in connection with the Reorganization; (x)
the fact that Evergreen VA will assume certain identified liabilities of Virtus
VA; and (xi) the expected federal income tax consequences of the Reorganization.
The Trustees also considered the benefits to be derived by shareholders
of Virtus VA from the sale of its assets to Evergreen VA. In this regard, the
Trustees considered the potential benefits of being associated with a larger
entity and the economies of scale that could be realized by the participation in
such an entity by shareholders of Virtus VA.
In addition, the Trustees considered that there are alternatives
available to shareholders of Virtus VA, including the ability to redeem their
shares, as well as the option to vote against the Reorganization.
During their consideration of the Reorganization the Trustees met with
Fund counsel and counsel to the Independent Trustees regarding the legal issues
involved. The Trustees of Evergreen Municipal Trust also concluded at a meeting
on September 16, 1997 that the proposed Reorganization would be in the best
interests of shareholders of Evergreen VA and that the interests of the
shareholders of Evergreen VA would not be diluted as a result of the
transactions contemplated by the Reorganization.
THE TRUSTEES OF THE VIRTUS FUNDS RECOMMEND
THAT THE SHAREHOLDERS OF VIRTUS VA APPROVE
THE PROPOSED REORGANIZATION.
<PAGE>
Agreement and Plan of Reorganization
The following summary is qualified in its entirety by reference to the
Plan (Exhibit A hereto).
The Plan provides that Evergreen VA will acquire all of the assets of
Virtus VA in exchange for shares of Evergreen VA and the assumption by Evergreen
VA of certain identified liabilities of Virtus VA on or about February 27, 1998
or such other date as may be agreed upon by the parties (the "Closing Date").
Prior to the Closing Date, Virtus VA will endeavor to discharge all of its known
liabilities and obligations. Evergreen VA will not assume any liabilities or
obligations of Virtus VA other than those reflected in an unaudited statement of
assets and liabilities of Virtus VA prepared as of the close of regular trading
on the NYSE, currently 4:00 p.m. Eastern time, on the business day immediately
prior to the Closing Date. The number of full and fractional shares of each
class of Evergreen VA to be received by the shareholders of Virtus VA will be
determined by multiplying the respective outstanding class of shares of Virtus
VA by a factor which shall be computed by dividing the net asset value per share
of the respective class of shares of Virtus VA by the net asset value per share
of the respective class of shares of Evergreen VA. Such computations will take
place as of the close of regular trading on the NYSE on the business day
immediately prior to the Closing Date. The net asset value per share of each
class will be determined by dividing assets, less liabilities, in each case
attributable to the respective class, by the total number of outstanding shares.
State Street Bank and Trust Company, the custodian for Evergreen VA,
will compute the value of each Fund's respective portfolio securities. The
method of valuation employed will be consistent with the procedures set forth in
the Prospectuses and Statement of Additional Information of Evergreen VA, Rule
22c-1 under the 1940 Act, and with the interpretations of such Rule by the SEC's
Division of Investment Management.
At or prior to the Closing Date, Virtus VA will have declared a
dividend or dividends and distribution or distributions which, together with all
previous dividends and distributions, shall have the effect of distributing to
the Fund's shareholders (in shares of the Fund, or in cash, as the shareholder
has previously elected) all of the Fund's net investment company taxable income
for the taxable period ending on the Closing Date (computed without regard to
any deduction for dividends paid) and all of its net capital gains realized in
all taxable periods ending on the Closing Date (after reductions for any capital
loss carryforward).
<PAGE>
As soon after the Closing Date as conveniently practicable, Virtus VA
will liquidate and distribute pro rata to shareholders of record as of the close
of business on the Closing Date the full and fractional shares of Evergreen VA
received by Virtus VA. Such liquidation and distribution will be accomplished by
the establishment of accounts in the names of the Fund's shareholders on the
share records of Evergreen VA's transfer agent. Each account will represent the
respective pro rata number of full and fractional shares of Evergreen VA due to
the Fund's shareholders. All issued and outstanding shares of Virtus VA,
including those represented by certificates, will be canceled. The shares of
Evergreen VA to be issued will have no preemptive or conversion rights. After
such distributions and the winding up of its affairs, Virtus VA will be
terminated. In connection with such termination, The Virtus Funds will file with
the SEC an application for termination as a registered investment company.
The consummation of the Reorganization is subject to the conditions set
forth in the Plan, including approval by Virtus VA's shareholders, accuracy of
various representations and warranties and receipt of opinions of counsel,
including opinions with respect to those matters referred to in "Federal Income
Tax Consequences" below. Notwithstanding approval of Virtus VA's shareholders,
the Plan may be terminated (a) by the mutual agreement of Virtus VA and
Evergreen VA; or (b) at or prior to the Closing Date by either party (i) because
of a breach by the other party of any representation, warranty, or agreement
contained therein to be performed at or prior to the Closing Date if not cured
within 30 days, or (ii) because a condition to the obligation of the terminating
party has not been met and it reasonably appears that it cannot be met.
The expenses of Virtus VA in connection with the Reorganization
(including the cost of any proxy soliciting agent) will be borne by FUNB whether
or not the Reorganization is consummated. No portion of such expenses will be
borne directly or indirectly by Virtus VA or its shareholders. There are not any
liabilities or any expected reimbursements in connection with the 12b-1 Plan of
Virtus VA. As a result, no 12b-1 liabilities will be assumed by Evergreen VA
following the Reorganization.
If the Reorganization is not approved by shareholders of Virtus VA, the
Board of Trustees of The Virtus Funds will consider other possible courses of
action in the best interests of shareholders.
Federal Income Tax Consequences
<PAGE>
The Reorganization is intended to qualify for federal income tax
purposes as a tax-free reorganization under section 368(a) of the Code. As a
condition to the closing of the Reorganization, Virtus VA will receive an
opinion of Sullivan & Worcester LLP to the effect that, on the basis of the
existing provisions of the Code, U.S. Treasury regulations issued thereunder,
current administrative rules, pronouncements and court decisions, for federal
income tax purposes, upon consummation of the Reorganization:
(1) The transfer of all of the assets of Virtus VA solely in exchange
for shares of Evergreen VA and the assumption by Evergreen VA of certain
identified liabilities, followed by the distribution of Evergreen VA's shares by
Virtus VA in dissolution and liquidation of Virtus VA, will constitute a
"reorganization" within the meaning of section 368(a)(1)(D) of the Code, and
Evergreen VA and Virtus VA will each be a "party to a reorganization" within the
meaning of section 368(b) of the Code;
(2) No gain or loss will be recognized by Virtus VA on the transfer of
all of its assets to Evergreen VA solely in exchange for Evergreen VA's shares
and the assumption by Evergreen VA of certain identified liabilities of Virtus
VA or upon the distribution of Evergreen VA's shares to Virtus VA's shareholders
in exchange for their shares of Virtus VA;
(3) The tax basis of the assets transferred will be the same to
Evergreen VA as the tax basis of such assets to Virtus VA immediately prior to
the Reorganization, and the holding period of such assets in the hands of
Evergreen VA will include the period during which the assets were held by Virtus
VA;
(4) No gain or loss will be recognized by Evergreen VA upon the receipt
of the assets from Virtus VA solely in exchange for the shares of Evergreen VA
and the assumption by Evergreen VA of certain identified liabilities of Virtus
VA;
(5) No gain or loss will be recognized by Virtus VA's shareholders upon
the issuance of the shares of Evergreen VA to them, provided they receive solely
such shares (including fractional shares) in exchange for their shares of Virtus
VA; and
(6) The aggregate tax basis of the shares of Evergreen VA, including
any fractional shares, received by each of the shareholders of Virtus VA
pursuant to the Reorganization will be the same as the aggregate tax basis of
the shares of Virtus VA held by such shareholder immediately prior to the
Reorganization, and the holding period of the shares of Evergreen VA, including
fractional shares, received by each such shareholder will include the period
during which the shares of Virtus VA exchanged
<PAGE>
therefor were held by such shareholder (provided that the shares of Virtus VA
were held as a capital asset on the date of the Reorganization).
Opinions of counsel are not binding upon the Internal Revenue Service
or the courts. If the Reorganization is consummated but does not qualify as a
tax-free reorganization under the Code, a shareholder of Virtus VA would
recognize a taxable gain or loss equal to the difference between his or her tax
basis in his or her Fund shares and the fair market value of Evergreen VA shares
he or she received. Shareholders of Virtus VA should consult their tax advisers
regarding the effect, if any, of the proposed Reorganization in light of their
individual circumstances. It is not anticipated that the securities of the
combined portfolio will be sold in significant amounts in order to comply with
the policies and investment practices of Evergreen VA. Since the foregoing
discussion relates only to the federal income tax consequences of the
Reorganization, shareholders of Virtus VA should also consult their tax advisers
as to the state and local tax consequences, if any, of the Reorganization.
Pro-forma Capitalization
The following table sets forth the capitalizations of Evergreen VA and
Virtus VA as of September 30, 1997, and the capitalization of Evergreen VA on a
pro forma basis as of that date, giving effect to the proposed acquisition of
assets at net asset value. The pro forma data reflects an exchange ratio of
approximately 1.09 and 1.09 Class Y and Class A shares, respectively, of
Evergreen VA issued for each Trust and Investment share, respectively, of Virtus
VA.
<PAGE>
<TABLE>
<CAPTION>
Capitalization of Virtus VA,
Evergreen VA and Evergreen
VA (Pro Forma)
Evergreen VA
(After
Reorgani-
Virtus VA Evergreen VA zation)
--------- -------- ------------
<S> <C> <C> <C>
Net Assets
Trust.......................... $19,891,348 N/A N/A
Investment..................... $58,881,216 N/A N/A
Class A........................ N/A $2,953,726 $61,834,942
Class B........................ N/A $7,007,347 $7,007,347
Class Y........................ N/A $6,853,790 $26,745,138
----------- ----------- ------------
Total Net $78,772,564 $16,814,863 $95,587,427
Assets.......................
Net Asset Value Per
Share
Trust.......................... $11.07 N/A N/A
Investment..................... $11.07 N/A N/A
Class A........................ N/A $10.12 $10.12
Class B........................ N/A $10.12 $10.12
Class Y........................ N/A $10.12 $10.12
Shares Outstanding
Trust.......................... 1,797,148 N/A N/A
Investment..................... 5,319,803 N/A N/A
Class A........................ N/A 291,948 6,111,140
Class B........................ N/A 692,585 692,585
Class Y........................ N/A 677,389 2,643,242
--------- -------- ----------
All Classes.................... 7,116,951 1,661,922 9,446,967
</TABLE>
The table set forth above should not be relied upon to reflect the
number of shares to be received in the Reorganization; the actual number of
shares to be received will depend upon the net asset value and number of shares
outstanding of each Fund at the time of the Reorganization.
<PAGE>
Shareholder Information
As of December 26, 1997 (the "Record Date"), the following number of
each Class of shares of beneficial interest of Virtus VA were outstanding:
Class of Shares
- ---------------
Trust.......................................... 1,741,064
Investment..................................... 5,117,331
---------
All Classes.................................... 6,858,395
As of November 30, 1997, the officers and Trustees of The Virtus Funds
beneficially owned as a group less than 1% of the outstanding shares of Virtus
VA. To Virtus VA's knowledge, the following persons owned beneficially or of
record more than 5% of Virtus VA's total outstanding shares as of November 30,
1997:
<TABLE>
<CAPTION>
Percentage Percentage of
of Shares Shares of
of Class Class After
Before Reorgani-
No. of Reorgani- zation
Name and Address Class Shares zation ---------
- ---------------- ----- ------ ---------
<S> <C> <C> <C> <C>
Stephens, Inc. Investment 30.75% Class A
111 Center Street 1,687,821 32.34%
Little Rock, AR
72201-3507
Bova & Co. Trust 100% 74.04% Class Y
Signet Trust 1,784,894
Company
P.O. Box 26311
Richmond, VA
23260-6311
</TABLE>
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
The following discussion is based upon and qualified in its entirety by
the descriptions of the respective investment objectives, policies and
restrictions set forth in the respective Prospectuses and Statements of
Additional Information of the Funds. The investment objectives, policies and
restrictions of Evergreen VA can be found in the Prospectuses of Evergreen VA
<PAGE>
under the caption "Investment Objectives and Policies." Evergreen VA's
Prospectuses also offer additional funds advised by FUNB or its affiliates.
These additional funds are not involved in the Reorganization, their investment
objectives and policies are not discussed in this Prospectus/Proxy Statement and
their shares are not offered hereby. The investment objective, policies and
restrictions of Virtus VA can be found in the respective Prospectuses of the
Fund under the caption "Investment Objective and Policies of each Fund." Unlike
the investment objective of Virtus VA, which is fundamental, the investment
objective of Evergreen VA is non-fundamental and can be changed by the Board of
Trustees without shareholder approval.
The investment objective and policies of Evergreen VA and of Virtus VA
are substantially identical. The investment objective of Evergreen VA is to seek
current income exempt from federal regular income tax and from income taxes of
the Commonwealth of Virginia. The investment objective of Virtus VA is to
provide current income which is exempt from federal regular income tax and the
personal income tax imposed by the Commonwealth of Virginia.
Each Fund will normally invest its assets so that at least 80% of its
annual interest income is derived from, or at least 80% of its net assets are
invested in, debt obligations which provide interest income which is exempt from
federal regular income taxes. The interest retains its tax-free status when
distributed to the Fund's shareholders. It is likely that shareholders of either
Fund who are subject to the federal alternative minimum tax will be required to
include interest from a portion of the municipal securities owned by the Funds
in calculating the federal individual alternative minimum tax or the federal
alternative minimum tax for corporations. In addition, at least 65% of the value
of each Fund's total assets will be invested in municipal bonds of Virginia.
Each Fund seeks to achieve its investment objective by investing
principally in municipal bonds, including industrial development bonds, of
Virginia. Although each Fund may invest in obligations issued by or on behalf of
any state, territory, or possession of the United States, including the District
of Columbia, or their political subdivisions or agencies and instrumentalities,
the interest from which is exempt from federal regular income tax, Virtus VA,
unlike Evergreen VA, requires that interest from all such "non Virginia" debt
obligations also be exempt from personal income tax imposed by the Commonwealth
of Virginia.
Both Funds seek to invest in debt obligations rated Baa or better by
Moody's, or BBB or better by S&P, or, if unrated,
<PAGE>
determined by the Fund's investment adviser to be of comparable quality to bonds
with such investment grade ratings. Evergreen VA may also invest in municipal
bonds which are insured by a municipal bond insurance company which is rated at
least Aa by Moody's or AA by S&P, which are guaranteed at the time of purchase
by the U.S. government as to the payment of principal and interest, or which are
fully collateralized by an escrow of U.S. government securities. Virtus VA may
invest in insured or guaranteed municipal debt obligations if, in the opinion of
the Trustees, the creditworthiness of the insurer or guarantor is considered
satisfactory. If any security owned by a Fund loses its rating or has its rating
reduced after the Fund has purchased it, neither Evergreen VA nor Virtus VA is
required to sell or otherwise dispose of the security, but may consider doing
so. If ratings made by Moody's or S&P change because of changes in those
organization or their ratings system, each Fund will try to use comparable
ratings as standards in accordance with its investment objective.
Both Funds may employ for hedging purposes the strategy of engaging in
futures transactions and related options, and Evergreen VA may write covered put
and call options and purchase put and call options on securities.
The characteristics of each investment policy and the associated risks
are described in each Fund's respective Prospectuses and Statements of
Additional Information. The Funds have other investment policies and
restrictions which are also set forth in the Prospectuses and Statements of
Additional Information of each Fund.
COMPARATIVE INFORMATION ON SHAREHOLDERS' RIGHTS
Forms of Organization
Evergreen Municipal Trust and The Virtus Funds are open-end management
investment companies registered with the SEC under the 1940 Act, which
continuously offer shares to the public. Evergreen Municipal Trust is organized
as a Delaware business trust and The Virtus Funds is organized as a
Massachusetts business trust. Each Trust is governed by a Declaration of Trust,
By-Laws and a Board of Trustees. Each Trust is also governed by applicable
Delaware, Massachusetts and federal law. Evergreen VA is a series of Evergreen
Municipal Trust and Virtus VA is a series of The Virtus Funds.
As set forth in the Supplement to Evergreen VA's Prospectuses,
effective December 22, 1997, Evergreen Virginia Municipal Bond Fund, a series of
Evergreen Investment Trust, a Massachusetts business trust, was reorganized (the
"Delaware
<PAGE>
Reorganization") into a corresponding series (Evergreen VA) of Evergreen
Municipal Trust. In connection with the Delaware Reorganization, the Fund's
investment objective was reclassified from "fundamental" to "non-fundamental"
and therefore may be changed without shareholder approval; the Fund adopted
certain standardized investment restrictions; and the Fund eliminated or
reclassified from fundamental to non-fundamental certain of the Fund's other
fundamental investment restrictions.
Capitalization
The beneficial interests in Evergreen VA are represented by an
unlimited number of transferable shares of beneficial interest, $.001 par value
per share. The beneficial interests in Virtus VA are represented by an unlimited
number of transferable shares of beneficial interest without par value. The
respective Declaration of Trust under which each Fund has been established
permits the Trustees to allocate shares into an unlimited number of series, and
classes thereof, with rights determined by the Trustees, all without shareholder
approval. Fractional shares may be issued. Each Fund's shares represent equal
proportionate interests in the assets belonging to the Funds. Shareholders of
each Fund are entitled to receive dividends and other amounts as determined by
the Trustees. Shareholders of each Fund vote separately, by class, as to
matters, such as approval of or amendments to Rule 12b-1 distribution plans,
that affect only their particular class and by series as to matters, such as
approval of or amendments to investment advisory agreements or proposed
reorganizations, that affect only their particular series.
Shareholder Liability
Under Massachusetts law, shareholders of a business trust could, under
certain circumstances, be held personally liable for the obligations of the
business trust. However, the Declaration of Trust under which Virtus VA was
established disclaims shareholder liability for acts or obligations of the
series and requires that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Fund or the Trustees.
The Virtus Funds' Declaration of Trust provides for indemnification out of the
series property for all losses and expenses of any shareholder held personally
liable for the obligations of the series. Thus, the risk of a shareholder of The
Virtus Funds incurring financial loss on account of shareholder liability is
considered remote since it is limited to circumstances in which a disclaimer is
inoperative and the series or the trust itself would be unable to meet its
obligations.
<PAGE>
Under Delaware law, shareholders of a Delaware business trust are
entitled to the same limitation of personal liability extended to stockholders
of Delaware corporations. No similar statutory or other authority limiting
business trust shareholder liability exists in any other state. As a result, to
the extent that Evergreen Municipal Trust or a shareholder is subject to the
jurisdiction of courts in those states, the courts may not apply Delaware law,
and may thereby subject shareholders of a Delaware trust to liability. To guard
against this risk, the Declaration of Trust of Evergreen Municipal Trust (a)
provides that any written obligation of the Trust may contain a statement that
such obligation may only be enforced against the assets of the Trust or the
particular series in question and that the obligation is not binding upon the
shareholders of the Trust; however, the omission of such a disclaimer will not
operate to create personal liability for any shareholder; and (b) provides for
indemnification out of Trust property of any shareholder held personally liable
for the obligations of the Trust. Accordingly, the risk of a shareholder of
Evergreen Municipal Trust incurring financial loss beyond that shareholder's
investment because of shareholder liability is limited to circumstances in
which: (i) the court refuses to apply Delaware law; (ii) no contractual
limitation of liability was in effect; and (iii) Evergreen Municipal Trust
itself would be unable to meet its obligations. In light of Delaware law, the
nature of the Trust's business, and the nature of its assets, the risk of
personal liability to a shareholder of Evergreen Municipal Trust is remote.
Shareholder Meetings and Voting Rights
Neither Evergreen Municipal Trust on behalf of Evergreen VA nor The
Virtus Funds on behalf of Virtus VA is required to hold annual meetings of
shareholders. However, a meeting of shareholders for the purpose of voting upon
the question of removal of a Trustee must be called when requested in writing by
the holders of at least 10% of the outstanding shares of Evergreen Municipal
Trust or The Virtus Funds. In addition, each is required to call a meeting of
shareholders for the purpose of electing Trustees if, at any time, less than a
majority of the Trustees then holding office were elected by shareholders. Each
Trust currently does not intend to hold regular shareholder meetings. Each Trust
does not permit cumulative voting. Except when a larger quorum is required by
applicable law, with respect to Evergreen VA, twenty-five percent (25%) of the
outstanding shares entitled to vote, and with respect to Virtus VA, a majority
of the outstanding shares entitled to vote constitutes a quorum for
consideration of such matter. For Evergreen VA and for Virtus VA, a majority of
the votes cast and entitled to vote is sufficient to act on a matter
<PAGE>
(unless otherwise specifically required by the applicable governing documents or
other law, including the 1940 Act).
Under the Declaration of Trust of Evergreen Municipal Trust, each share
of Evergreen VA is entitled to one vote for each dollar of net asset value
applicable to each share. Under the voting provisions governing Virtus VA, each
share is entitled to one vote. Over time, the net asset values of the mutual
funds which are each a series of The Virtus Funds have changed in relation to
one another and are expected to continue to do so in the future. Because of the
divergence in net asset values, a given dollar investment in a fund which is a
series of The Virtus Funds and which has a lower net asset value will purchase
more shares, and under the current voting provisions of The Virtus Funds, will
have more votes, than the same investment in a series with a higher net asset
value. Under the Declaration of Trust of Evergreen Municipal Trust, voting power
is related to the dollar value of the shareholders' investment rather than to
the number of shares held.
Liquidation or Dissolution
In the event of the liquidation of Evergreen Municipal Trust and The
Virtus Funds the shareholders are entitled to receive, when, and as declared by
the Trustees, the excess of the assets belonging to such Fund and attributable
to the class in which they hold shares over the liabilities belonging to the
Fund or attributable to the class. In either case, the assets so distributable
to shareholders of the Fund will be distributed among the shareholders in
proportion to the number of shares of a class of the Fund held by them and
recorded on the books of the Fund.
Liability and Indemnification of Trustees
The Declaration of Trust of The Virtus Funds provides that a Trustee
shall be liable only for his own willful defaults, and that no Trustee shall be
protected against any liability to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
The By-Laws of The Virtus Funds provide that a present or former
Trustee or officer is entitled to indemnification against liabilities and
expenses with respect to claims related to his or her position with the Trust,
provided that no indemnification shall be provided to a Trustee or officer
against any liability to the Trust or any series thereof or the shareholders of
any series by reasons of willful misfeasance, bad faith, gross
<PAGE>
negligence or reckless disregard of the duties involved in the
conduct of his office.
Under the Declaration of Trust of Evergreen Municipal Trust, a Trustee
is liable to the Trust and its shareholders only for such Trustee's own willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of the office of Trustee or the discharge of such
Trustee's functions. As provided in the Declaration of Trust, each Trustee of
the Trust is entitled to be indemnified against all liabilities against him or
her, including the costs of litigation, unless it is determined that the Trustee
(i) did not act in good faith in the reasonable belief that such Trustee's
action was in or not opposed to the best interests of the Trust; (ii) had acted
with willful misfeasance, bad faith, gross negligence or reckless disregard of
such Trustee's duties; and (iii) in a criminal proceeding, had reasonable cause
to believe that such Trustee's conduct was unlawful (collectively, "disabling
conduct"). A determination that the Trustee did not engage in disabling conduct
and is, therefore, entitled to indemnification may be based upon the outcome of
a court action or administrative proceeding or by (a) a vote of a majority of
those Trustees who are neither "interested persons" within the meaning of the
1940 Act nor parties to the proceeding or (b) an independent legal counsel in a
written opinion. The Trust may also advance money for such litigation expenses
provided that the Trustee undertakes to repay the Trust if his or her conduct is
later determined to preclude indemnification and certain other conditions are
met.
The foregoing is only a summary of certain characteristics of the
operations of the Declarations of Trust, By-Laws, Delaware and Massachusetts law
and is not a complete description of those documents or law. Shareholders should
refer to the provisions of such Declarations of Trust, By-Laws, Delaware and
Massachusetts law directly for more complete information.
INFORMATION REGARDING THE INTERIM ADVISORY AGREEMENT
Introduction
In view of the Merger discussed above, and the factors discussed below,
the Board of Trustees of The Virtus Funds recommends that shareholders of Virtus
VA approve the Interim Advisory Agreement. The Merger became effective on
November 28, 1997. Pursuant to an order received from the SEC all fees payable
under the Interim Advisory Agreement will be placed in escrow and paid to Virtus
if shareholders approve the contract within 120 days of its effective date. The
Interim Advisory
<PAGE>
Agreement will remain in effect until the earlier of the Closing Date for the
Reorganization or two years from its effective date. The terms of the Interim
Advisory Agreement are essentially the same as the Previous Advisory Agreement
(as defined below). The only difference between the Previous Advisory Agreement
and the Interim Advisory Agreement, if approved by shareholders, is the length
of time each Agreement is in effect. A description of the Interim Advisory
Agreement pursuant to which Virtus continues as investment adviser to Virtus VA,
as well as the services to be provided by Virtus pursuant thereto is set forth
below under "Advisory Services." The description of the Interim Advisory
Agreement in this Prospectus/Proxy Statement is qualified in its entirety by
reference to the Interim Advisory Agreement, attached hereto as Exhibit B.
Virtus, a Maryland corporation formed in 1995 to succeed to the
business of Signet Asset Management (adviser to the Fund since 1990), is an
indirect wholly-owned subsidiary of First Union. Virtus' address is 707 East
Main Street, Suite 1300, Richmond, Virginia 23219. Virtus has served as
investment adviser pursuant to an Investment Advisory Agreement dated March 1,
1995, as amended on October 21, 1996. As used herein, the Investment Advisory
Agreement, as amended, for Virtus VA is referred to as the "Previous Advisory
Agreement." At a meeting of the Board of Trustees of The Virtus Funds held on
September 16, 1997, the Trustees, including a majority of the Independent
Trustees, approved the Interim Advisory Agreement for Virtus VA.
The Trustees have authorized The Virtus Funds, on behalf of Virtus VA,
to enter into the Interim Advisory Agreement with Virtus. Such Agreement became
effective on November 28, 1997.
If the Interim Advisory Agreement for Virtus VA is not approved by
shareholders, the Trustees will consider appropriate actions to be taken with
respect to Virtus VA's investment advisory arrangements at that time. The
Previous Advisory Agreement was last approved by the Trustees, including a
majority of the Independent Trustees, on February 24, 1997.
Comparison of the Interim Advisory Agreement and the Previous
Advisory Agreement
Advisory Services. The management and advisory services to be provided
by Virtus under the Interim Advisory Agreement are identical to those currently
provided by Virtus under the Previous Advisory Agreement. Under the Previous
Advisory Agreement and Interim Advisory Agreement, Virtus manages Virtus VA and
continually conducts investment research and supervision for the Fund and is
responsible for the purchase and sale of portfolio securities.
<PAGE>
FAS currently acts as administrator of Virtus VA. FAS will continue
during the term of the Interim Advisory Agreement as Virtus VA's administrator
for the same compensation as currently received . An affiliate of FAS currently
performs transfer agency services for Virtus VA's shareholders. Commencing
February 9, 1998 Evergreen Service Company will provide such transfer agency
services for the same fees charged by Virtus VA's current transfer agent. See
"Summary - Administrators."
Fees and Expenses. The investment advisory fees and expense
limitations for Virtus VA under the Previous Advisory Agreement
and the Interim Advisory Agreement are identical. See "Summary -
Investment Advisers."
Expense Reimbursement. The Previous Advisory Agreement included a
provision which provides that Virtus may from time to time and for such periods
as it deems appropriate reduce its compensation to the extent that the Fund's
expenses exceed such lower expense limitation as Virtus may, by notice to The
Virtus Funds, voluntarily declare to be effective. Furthermore, Virtus may, if
it deems appropriate, assume expenses of the Fund or a class to the extent that
the Fund's or classes' expenses exceed such lower expense limitation as Virtus
may, by notice to The Virtus Funds, voluntarily declare to be effective.
The Interim Advisory Agreement contains an identical provision.
Payment of Expenses and Transaction Charges. Under the Previous
Advisory Agreement, The Virtus Funds was required to pay or cause to be paid on
behalf of the Fund or each class, all of the Fund's or classes' expenses and the
Fund's or classes' allocable share of The Virtus Funds' expenses.
The Interim Advisory Agreement contains an identical provision.
Limitation of Liability. The Previous Advisory Agreement provided that
in the absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of obligations or duties under the Agreement on the part of Virtus,
Virtus was not liable to The Virtus Funds or to the Fund or to any shareholder
for any act or omission in the course of or connected in any way with rendering
services or for any losses that may be sustained in the purchase, holding or
sale of any security.
<PAGE>
The Interim Advisory Agreement contains an identical provision.
Termination; Assignment. The Interim Advisory Agreement provides that
it may be terminated without penalty by vote of a majority of the outstanding
voting securities of Virtus VA (as defined in the 1940 Act) or by a vote of a
majority of The Virtus Funds' entire Board of Trustees on 60 days' written
notice to Virtus or by Virtus on 60 days' written notice to The Virtus Funds.
Also, the Interim Advisory Agreement will automatically terminate in the event
of its assignment (as defined in the 1940 Act). The Previous Advisory Agreement
contained identical provisions as to termination and assignment.
Information About Virtus VA's Investment Adviser
Virtus, a registered investment adviser, manages, in addition to the
Fund, other funds of The Virtus Funds, the Blanchard Group of Funds and three
fixed income trust funds. The name and address of each executive officer and
director of Virtus is set forth in Appendix A to this Prospectus/Proxy
Statement.
During the fiscal years ended September 30, 1997, 1996 and 1995, Virtus
received from Virtus VA management fees of $650,276, $762,051 and $775,247,
respectively, of which $0, $20,993 and $227,301, respectively, were voluntarily
waived. Signet acts as custodian for Virtus VA and received $28,448 for the
fiscal year ended September 30, 1997. Commencing on or about January 20, 1998
FUNB will act as Virtus VA's custodian during the term of the Interim Advisory
Agreement.
The Board of Trustees considered the Interim Advisory Agreement as part
of its overall approval of the Plan. The Board of Trustees considered, among
other things, the factors set forth above in "Reasons for the Reorganization."
The Board of Trustees also considered the fact that there were no material
differences between the terms of the Interim Advisory Agreement and the terms of
the Previous Advisory Agreement.
THE TRUSTEES OF THE VIRTUS FUNDS RECOMMEND
THAT THE SHAREHOLDERS OF VIRTUS VA APPROVE
THE INTERIM ADVISORY AGREEMENT
ADDITIONAL INFORMATION
Evergreen VA. Information concerning the operation and management of
Evergreen VA is incorporated herein by reference from the Prospectuses dated
October 31, 1996, as amended, copies of which are enclosed, and the Statement of
Additional
<PAGE>
Information of the same date. A copy of such Statement of Additional Information
is available upon request and without charge by writing to Evergreen VA at the
address listed on the cover page of this Prospectus/Proxy Statement or by
calling toll-free 1-800-343-2898.
Virtus VA. Information about the Fund is included in its current
Prospectuses dated November 30, 1997, and in the Statements of Additional
Information of the same date, that have been filed with the SEC, all of which
are incorporated herein by reference. Copies of the Prospectuses and Statements
of Additional Information are available upon request and without charge by
writing to Virtus VA at the address listed on the cover page of this
Prospectus/Proxy Statement or by calling toll-free 1-800-829-3863.
Evergreen VA and Virtus VA are each subject to the informational
requirements of the Securities Exchange Act of 1934 and the 1940 Act, and in
accordance therewith file reports and other information including proxy
material, and charter documents with the SEC. These items can be inspected and
copies obtained at the Public Reference Facilities maintained by the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's Regional Offices
located at Northwest Atrium Center, 500 West Madison Street, Chicago, Illinois
60661-2511 and Seven World Trade Center, Suite 1300, New York, New York 10048.
VOTING INFORMATION CONCERNING THE MEETING
This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Trustees of The Virtus Funds to be used at the
Special Meeting of Shareholders to be held at 2:00 p.m., February 20, 1998, at
the offices of the Evergreen Funds, 200 Berkeley Street, Boston, Massachusetts
02116, and at any adjournments thereof. This Prospectus/Proxy Statement, along
with a Notice of the meeting and a proxy card, is first being mailed to
shareholders of Virtus VA on or about January 5, 1998. Only shareholders of
record as of the close of business on the Record Date will be entitled to notice
of, and to vote at, the Meeting or any adjournment thereof. The holders of a
majority of the outstanding shares entitled to vote, at the close of business on
the Record Date, present in person or represented by proxy, will constitute a
quorum for the Meeting. If the enclosed form of proxy is properly executed and
returned in time to be voted at the Meeting, the proxies named therein will vote
the shares represented by the proxy in accordance with the instructions marked
thereon. Unmarked proxies will be voted FOR the proposed Reorganization, FOR the
Interim Advisory Agreement and FOR any other matters deemed appropriate. Proxies
that reflect abstentions and "broker non-votes" (i.e., shares
<PAGE>
held by brokers or nominees as to which (i) instructions have not been received
from the beneficial owners or the persons entitled to vote or (ii) the broker or
nominee does not have discretionary voting power on a particular matter) will be
counted as shares that are present and entitled to vote for purposes of
determining the presence of a quorum, but will not be counted as shares voted
and will have no effect on the vote regarding the Plan. However, such "broker
non-votes" will have the effect of being counted as votes against the Interim
Advisory Agreement which must be approved by a percentage of the shares present
at the Meeting or a majority of the outstanding voting securities. A proxy may
be revoked at any time on or before the Meeting by written notice to the
Secretary of The Virtus Funds, Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779. Unless revoked, all valid proxies will be voted in
accordance with the specifications thereon or, in the absence of such
specifications, FOR approval of the Plan and the Reorganization contemplated
thereby, and FOR approval of the Interim Advisory Agreement.
Approval of the Plan will require the affirmative vote of a majority of
the shares voted and entitled to vote, with all classes voting together as a
single class at the Meeting at which a quorum of the Fund's shares is present.
Approval of the Interim Advisory Agreement will require the affirmative vote of
(i) 67% or more of the outstanding voting securities if holders of more than 50%
of the outstanding voting securities are present, in person or by proxy, at the
Meeting, or (ii) more than 50% of the outstanding voting securities, whichever
is less, with all classes voting together as one class. Each full share
outstanding is entitled to one vote and each fractional share outstanding is
entitled to a proportionate share of one vote.
Proxy solicitations will be made primarily by mail, but proxy
solicitations may also be made by telephone, telegraph or personal solicitations
conducted by officers and employees of FUNB or Signet, their affiliates or other
representatives of Virtus VA (who will not be paid for their soliciting
activities). Shareholder Communications Corporation has been engaged by Virtus
VA to assist in soliciting proxies.
If you wish to participate in the Meeting, you may submit the proxy
card included with this Prospectus/Proxy Statement or attend in person. Any
proxy given by you is revocable.
In the event that sufficient votes to approve the Reorganization are
not received by February 20, 1998, the persons named as proxies may propose one
or more adjournments of the Meeting to permit further solicitation of proxies.
In determining whether to adjourn the Meeting, the following factors may be
considered: the percentage of votes actually cast, the
<PAGE>
percentage of negative votes actually cast, the nature of any further
solicitation and the information to be provided to shareholders with respect to
the reasons for the solicitation. Any such adjournment will require an
affirmative vote by the holders of a majority of the shares present in person or
by proxy and entitled to vote at the Meeting. The persons named as proxies will
vote upon such adjournment after consideration of all circumstances which may
bear upon a decision to adjourn the Meeting.
A shareholder who objects to the proposed Reorganization will not be
entitled under either Massachusetts law or the Declaration of Trust of The
Virtus Funds to demand payment for, or an appraisal of, his or her shares.
However, shareholders should be aware that the Reorganization as proposed is not
expected to result in recognition of gain or loss to shareholders for federal
income tax purposes and that, if the Reorganization is consummated, shareholders
will be free to redeem the shares of Evergreen VA which they receive in the
transaction at their then-current net asset value. Shares of Virtus VA may be
redeemed at any time prior to the consummation of the Reorganization.
Shareholders of Virtus VA may wish to consult their tax advisers as to any
differing consequences of redeeming Fund shares prior to the Reorganization or
exchanging such shares in the Reorganization.
Virtus VA does not hold annual shareholder meetings. If the
Reorganization is not approved, shareholders wishing to submit proposals for
consideration for inclusion in a proxy statement for a subsequent shareholder
meeting should send their written proposals to the Secretary of The Virtus Funds
at the address set forth on the cover of this Prospectus/Proxy Statement such
that they will be received by the Fund in a reasonable period of time prior to
any such meeting.
The votes of the shareholders of Evergreen VA are not being solicited
by this Prospectus/Proxy Statement and are not required to carry out the
Reorganization.
NOTICE TO BANKS, BROKER-DEALERS AND VOTING TRUSTEES AND THEIR NOMINEES.
Please advise Virtus VA whether other persons are beneficial owners of shares
for which proxies are being solicited and, if so, the number of copies of this
Prospectus/Proxy Statement needed to supply copies to the beneficial owners of
the respective shares.
FINANCIAL STATEMENTS AND EXPERTS
The financial statements of Evergreen VA as of August 31, 1997, and the
financial statements and financial highlights for
<PAGE>
the periods indicated therein, have been incorporated by reference herein and in
the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
The financial statements and financial highlights of Virtus VA
incorporated in this Prospectus/Proxy Statement by reference from the Annual
Report of The Virtus Funds for the year ended September 30, 1997 have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report, which is incorporated herein by reference, and have been so incorporated
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
LEGAL MATTERS
Certain legal matters concerning the issuance of shares of Evergreen VA
will be passed upon by Sullivan & Worcester LLP, Washington, D.C.
OTHER BUSINESS
The Trustees of The Virtus Funds do not intend to present any other
business at the Meeting. If, however, any other matters are properly brought
before the Meeting, the persons named in the accompanying form of proxy will
vote thereon in accordance with their judgment.
THE TRUSTEES OF THE VIRTUS FUNDS RECOMMEND APPROVAL OF THE PLAN AND THE
INTERIM ADVISORY AGREEMENT, AND ANY UNMARKED PROXIES WITHOUT INSTRUCTIONS TO THE
CONTRARY WILL BE VOTED IN FAVOR OF APPROVAL OF THE PLAN AND THE INTERIM ADVISORY
AGREEMENT.
January 5, 1998
<PAGE>
APPENDIX A
The names and addresses of the principal executive officers
and directors of Virtus Capital Management, Inc. are as follows:
<TABLE>
<CAPTION>
OFFICERS:
Name Address
- ---- -------
<S> <C>
David C. First Union National Bank
Francis, Chief Investment 201 South College Street
Officer Charlotte, North Carolina 28288-
1195
Tanya Orr Bird, Vice Virtus Capital Management, Inc.
President 707 East Main Street
Suite 1300
Richmond, Virginia 23219
Josie Virtus Capital Management, Inc.
Clemons Rosson, Vice 707 East Main Street
President, Assistant Suite 1300
Secretary Richmond, Virginia 23219
First Union National Bank
L. 201 South College
Robert Cheshire, Vice Street
President Charlotte, North
Carolina 28288-1195
John E. Gray, Vice First Union National Bank
President 201
South College Street
Charlotte, North Carolina 28288-
1195
Dillon S. Harris, Jr., Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
J. Kellie Allen, Vice First Union National Bank
President 201 South College Street
Charlotte, North Carolina 28288-
1195
Ethel B. Sutton, Vice Evergreen Asset Management Corp.
President 2500 Westchester Avenue
Purchase, New York 10577
DIRECTORS:
Name Address
- ---- -------
First Union National Bank
David C. 201 South College
Francis Street
Charlotte, North
Carolina 28288-1195
Donald A. McMullen First Union National Bank
201 South College
Street
Charlotte, North
Carolina 28288-1195
William M. Ennis First Union National Bank
201
South College Street
Charlotte, North Carolina 28288-
1195
Barbara J. Colvin First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-
1195
William D. Munn First Union National Bank
201 South College Street
Charlotte, North Carolina 28288-1195
</TABLE>
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this 26th day of November, 1997, by and between the Evergreen Municipal
Trust, a Delaware business trust, with its principal place of business at 200
Berkeley Street, Boston, Massachusetts 02116 (the "Trust"), with respect to its
Evergreen Virginia Municipal Bond Fund series (the "Acquiring Fund"), and The
Virtus Funds, a Massachusetts business trust, with its principal place of
business at Federated Investors Tower, Pittsburgh, Pennsylvania 15222-3779
("Virtus Funds"), with respect to its The Virginia Municipal Bond Fund series
(the "Selling Fund").
This Agreement is intended to be, and is adopted as, a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(D) of the
United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of (i) the transfer of all of
the assets of the Selling Fund in exchange solely for Class A and Class Y shares
of beneficial interest, $.001 par value per share, of the Acquiring Fund (the
"Acquiring Fund Shares"); (ii) the assumption by the Acquiring Fund of certain
identified liabilities of the Selling Fund; and (iii) the distribution, after
the Closing Date hereinafter referred to, of the Acquiring Fund Shares to the
shareholders of the Selling Fund in liquidation of the Selling Fund as provided
herein, all upon the terms and conditions hereinafter set forth in this
Agreement.
WHEREAS, the Selling Fund and the Acquiring Fund are each a separate
investment series of an open-end, registered investment company of the
management type and the Selling Fund owns securities that generally are assets
of the character in which the Acquiring Fund is permitted to invest;
WHEREAS, both Funds are authorized to issue their shares of
beneficial interest;
WHEREAS, the Trustees of the Trust have determined that the exchange of
all of the assets of the Selling Fund for Acquiring Fund Shares and the
assumption of certain identified liabilities of the Selling Fund by the
Acquiring Fund on the terms and conditions hereinafter set forth are in the best
interests of the Acquiring Fund's shareholders;
<PAGE>
WHEREAS, the Trustees of Virtus Funds have determined that the Selling
Fund should exchange all of its assets and certain identified liabilities for
Acquiring Fund Shares and that the interests of the existing shareholders of the
Selling Fund will not be diluted as a result of the transactions contemplated
herein;
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
ARTICLE I
TRANSFER OF ASSETS OF THE SELLING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES AND ASSUMPTION OF SELLING FUND
LIABILITIES AND LIQUIDATION OF THE SELLING FUND
1.1 THE EXCHANGE. Subject to the terms and conditions herein set forth
and on the basis of the representations and warranties contained herein, the
Selling Fund agrees to transfer all of the Selling Fund's assets as set forth in
paragraph 1.2 to the Acquiring Fund. The Acquiring Fund agrees in exchange
therefor (i) to deliver to the Selling Fund the number of Acquiring Fund Shares,
including fractional Acquiring Fund Shares, determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of each such class of the Selling Fund by the net
asset value per share of the corresponding class of Acquiring Fund Shares
computed in the manner and as of the time and date set forth in paragraph 2.2;
and (ii) to assume certain identified liabilities of the Selling Fund, as set
forth in paragraph 1.3. Such transactions shall take place at the closing
provided for in paragraph 3.1 (the "Closing Date").
1.2 ASSETS TO BE ACQUIRED. The assets of the Selling Fund to be
acquired by the Acquiring Fund shall consist of all property, including, without
limitation, all cash, securities, commodities, and interests in futures and
dividends or interest receivables, that is owned by the Selling Fund and any
deferred or prepaid expenses shown as an asset on the books of the Selling Fund
on the Closing Date.
The Selling Fund has provided the Acquiring Fund with its most recent
audited financial statements, which contain a list of all of Selling Fund's
assets as of the date thereof. The Selling Fund hereby represents that as of the
date of the execution of this Agreement there have been no changes in its
financial position as reflected in said financial statements other than those
occurring in the ordinary course of its business in
<PAGE>
connection with the purchase and sale of securities and the
payment of its normal operating expenses.
The Acquiring Fund will, within a reasonable time prior to the Closing
Date, furnish the Selling Fund with a list of the securities, if any, on the
Selling Fund's list referred to in the second sentence of this paragraph that do
not conform to the Acquiring Fund's investment objectives, policies, and
restrictions. The Selling Fund will, within a reasonable period of time prior to
the Closing Date, furnish the Acquiring Fund with a list of its portfolio
securities and other investments. In the event that the Selling Fund holds any
investments that the Acquiring Fund may not hold, the Selling Fund, if requested
by the Acquiring Fund, will dispose of such securities prior to the Closing
Date. In addition, if it is determined that the Selling Fund and the Acquiring
Fund portfolios, when aggregated, would contain investments exceeding certain
percentage limitations imposed upon the Acquiring Fund with respect to such
investments, the Selling Fund if requested by the Acquiring Fund will dispose of
a sufficient amount of such investments as may be necessary to avoid violating
such limitations as of the Closing Date. Notwithstanding the foregoing, nothing
herein will require the Selling Fund to dispose of any investments or securities
if, in the reasonable judgment of the Selling Fund, such disposition would
adversely affect the tax-free nature of the Reorganization or would violate the
Selling Fund's fiduciary duty to its shareholders.
1.3 LIABILITIES TO BE ASSUMED. The Selling Fund will endeavor to
discharge all of its known liabilities and obligations prior to the Closing
Date. The Acquiring Fund shall assume only those liabilities, expenses, costs,
charges and reserves reflected on a Statement of Assets and Liabilities of the
Selling Fund prepared on behalf of the Selling Fund, as of the Valuation Date
(as defined in paragraph 2.1), in accordance with generally accepted accounting
principles consistently applied from the prior audited period. The Acquiring
Fund shall assume only those liabilities of the Selling Fund reflected in such
Statement of Assets and Liabilities and shall not assume any other liabilities,
whether absolute or contingent, known or unknown, accrued or unaccrued, all of
which shall remain the obligation of the Selling Fund.
In addition, upon completion of the Reorganization, for purposes of
calculating the maximum amount of sales charges (including asset based sales
charges) permitted to be imposed by the Acquiring Fund under the National
Association of Securities Dealers, Inc. Conduct Rule 2830 ("Aggregate NASD
Cap"), the Acquiring Fund will add to its Aggregate NASD Cap of the Selling
<PAGE>
Fund immediately prior to the Reorganization, in each case calculated in
accordance with such Rule 2830.
1.4 LIQUIDATION AND DISTRIBUTION. On or as soon after the Closing Date
as is conveniently practicable (the "Liquidation Date"), (a) the Selling Fund
will liquidate and distribute pro rata to the Selling Fund's shareholders of
record, determined as of the close of business on the Valuation Date (the
"Selling Fund Shareholders"), the Acquiring Fund Shares received by the Selling
Fund pursuant to paragraph 1.1; and (b) the Selling Fund will thereupon proceed
to dissolve as set forth in paragraph 1.8 below. Such liquidation and
distribution will be accomplished by the transfer of the Acquiring Fund Shares
then credited to the account of the Selling Fund on the books of the Acquiring
Fund to open accounts on the share records of the Acquiring Fund in the names of
the Selling Fund Shareholders and representing the respective pro rata number of
the Acquiring Fund Shares due such shareholders. All issued and outstanding
shares of the Selling Fund will simultaneously be canceled on the books of the
Selling Fund. The Acquiring Fund shall not issue certificates representing the
Acquiring Fund Shares in connection with such exchange.
1.5 OWNERSHIP OF SHARES. Ownership of Acquiring Fund Shares will be
shown on the books of the Acquiring Fund's transfer agent. Shares of the
Acquiring Fund will be issued in the manner described in the combined Prospectus
and Proxy Statement on Form N-14 to be distributed to shareholders of the
Selling Fund as described in paragraph 5.7.
1.6 TRANSFER TAXES. Any transfer taxes payable upon issuance of the
Acquiring Fund Shares in a name other than the registered holder of the Selling
Fund shares on the books of the Selling Fund as of that time shall, as a
condition of such issuance and transfer, be paid by the person to whom such
Acquiring Fund Shares are to be issued and transferred.
1.7 REPORTING RESPONSIBILITY. Any reporting responsibility of the
Selling Fund is and shall remain the responsibility of the Selling Fund up to
and including the Closing Date and such later date on which the Selling Fund is
terminated.
<PAGE>
1.8 TERMINATION. The Selling Fund shall be terminated promptly
following the Closing Date and the making of all distributions pursuant to
paragraph 1.4.
ARTICLE II
VALUATION
2.1 VALUATION OF ASSETS. The value of the Selling Fund's assets to be
acquired by the Acquiring Fund hereunder shall be the value of such assets
computed as of the close of business on the New York Stock Exchange on the
business day next preceding the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures set
forth in the Trust's Declaration of Trust and the Acquiring Fund's then current
prospectuses and statement of additional information or such other valuation
procedures as shall be mutually agreed upon by the parties.
2.2 VALUATION OF SHARES. The net asset value per share of the Acquiring
Fund Shares shall be the net asset value per share computed as of the close of
business on the New York Stock Exchange on the Valuation Date, using the
valuation procedures set forth in the Trust's Declaration of Trust and the
Acquiring Fund's then current prospectuses and statement of additional
information.
2.3 SHARES TO BE ISSUED. The number of the Acquiring Fund Shares of
each class to be issued (including fractional shares, if any) in exchange for
the Selling Fund's assets shall be determined by multiplying the shares
outstanding of each class of the Selling Fund by the ratio computed by dividing
the net asset value per share of the Selling Fund attributable to each of its
classes by the net asset value per share of the respective classes of the
Acquiring Fund determined in accordance with paragraph 2.2. Holders of
Investment shares and Trust shares of the Selling Fund will receive Class A and
Class Y shares, respectively, of the Acquiring Fund.
2.4 DETERMINATION OF VALUE. All computations of value shall be made by
State Street Bank and Trust Company in accordance with its regular practice in
pricing the shares and assets of the Acquiring Fund.
ARTICLE III
CLOSING AND CLOSING DATE
<PAGE>
3.1 CLOSING DATE. The Closing (the "Closing") shall take place on or
about February 27, 1998 or such other date as the parties may agree to in
writing (the "Closing Date"). All acts taking place at the Closing shall be
deemed to take place simultaneously immediately prior to the opening of business
on the Closing Date unless otherwise provided. The Closing shall be held as of
9:00 a.m. at the offices of the Evergreen Funds, 200 Berkeley Street, Boston, MA
02116, or at such other time and/or place as the parties may agree.
3.2 CUSTODIAN'S CERTIFICATE. Signet Trust Company, as custodian for the
Selling Fund (the "Custodian"), shall deliver at the Closing a certificate of an
authorized officer stating that (a) the Selling Fund's portfolio securities,
cash, and any other assets shall have been delivered in proper form to the
Acquiring Fund on the Closing Date; and (b) all necessary taxes including all
applicable federal and state stock transfer stamps, if any, shall have been
paid, or provision for payment shall have been made, in conjunction with the
delivery of portfolio securities by the Selling Fund.
3.3 EFFECT OF SUSPENSION IN TRADING. In the event that on the Valuation
Date (a) the New York Stock Exchange or another primary trading market for
portfolio securities of the Acquiring Fund or the Selling Fund shall be closed
to trading or trading thereon shall be restricted; or (b) trading or the
reporting of trading on said Exchange or elsewhere shall be disrupted so that
accurate appraisal of the value of the net assets of the Acquiring Fund or the
Selling Fund is impracticable, the Valuation Date shall be postponed until the
first business day after the day when trading shall have been fully resumed and
reporting shall have been restored.
3.4 TRANSFER AGENT'S CERTIFICATE. Evergreen Service Company, as
transfer agent for the Selling Fund as of the Closing Date, shall deliver at the
Closing a certificate of an authorized officer stating that its records contain
the names and addresses of the Selling Fund Shareholders and the number and
percentage ownership of outstanding shares owned by each such shareholder
immediately prior to the Closing. The Acquiring Fund shall issue and deliver or
cause Evergreen Service Company, its transfer agent as of the Closing Date, to
issue and deliver a confirmation evidencing the Acquiring Fund Shares to be
credited on the Closing Date to the Secretary of Virtus Funds or provide
evidence satisfactory to the Selling Fund that such Acquiring Fund Shares have
been credited to the Selling Fund's account on the books of the Acquiring Fund.
At the Closing, each party shall deliver to the other such bills of sale,
checks, assignments, share certificates, if any, receipts and other documents as
such other party or its counsel may reasonably request.
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS OF THE SELLING FUND. The Selling Fund
represents and warrants to the Acquiring Fund as follows:
(a) The Selling Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing, and in good
standing under the laws of The Commonwealth of Massachusetts.
(b) The Selling Fund is a separate investment series of a
Massachusetts business trust that is registered as an investment company
classified as a management company of the open-end type, and its registration
with the Securities and Exchange Commission (the "Commission") as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
is in full force and effect.
(c) The current prospectuses and statement of additional
information of the Selling Fund conform in all material respects to the
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act"), and the 1940 Act and the rules and regulations of the Commission
thereunder and do not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(d) The Selling Fund is not, and the execution, delivery, and
performance of this Agreement (subject to shareholder approval) will not result,
in violation of any provision of Virtus Funds' Declaration of Trust or By-Laws
or of any material agreement, indenture, instrument, contract, lease, or other
undertaking to which the Selling Fund is a party or by which it is bound.
(e) The Selling Fund has no material contracts or other
commitments (other than this Agreement) that will be terminated with liability
to it prior to the Closing Date except for liabilities, if any, to be discharged
or reflected on the Statement of Assets and Liabilities as provided in paragraph
1.3 hereof.
(f) Except as otherwise disclosed in writing to and accepted
by the Acquiring Fund, no litigation, administrative proceeding, or
investigation of or before any court or governmental body is presently pending
or to its knowledge threatened against the Selling Fund or any of its properties
or
<PAGE>
assets, which, if adversely determined, would materially and adversely affect
its financial condition, the conduct of its business, or the ability of the
Selling Fund to carry out the transactions contemplated by this Agreement. The
Selling Fund knows of no facts that might form the basis for the institution of
such proceedings and is not a party to or subject to the provisions of any
order, decree, or judgment of any court or governmental body that materially and
adversely affects its business or its ability to consummate the transactions
herein contemplated.
(g) The financial statements of the Selling Fund at September
30, 1997 are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been furnished
to the Acquiring Fund) fairly reflect the financial condition of the Selling
Fund as of such date, and there are no known contingent liabilities of the
Selling Fund as of such date not disclosed therein.
(h) Since September 30, 1997 there has not been any material
adverse change in the Selling Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Selling Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Acquiring Fund. For the purposes of this subparagraph (h), a
decline in the net asset value of the Selling Fund shall not constitute a
material adverse change.
(i) At the Closing Date, all federal and other tax returns and
reports of the Selling Fund required by law to have been filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid, or provision shall have been made for the
payment thereof. To the best of the Selling Fund's knowledge, no such return is
currently under audit, and no assessment has been asserted with respect to such
returns.
(j) For each fiscal year of its operation, the Selling Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains.
(k) All issued and outstanding shares of the Selling Fund are,
and at the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable by the Selling Fund (except that, under Massachusetts
law, Selling Fund Shareholders could under certain circumstances be held
personally liable for obligations of the Selling Fund). All of the issued
<PAGE>
and outstanding shares of the Selling Fund will, at the time of the Closing
Date, be held by the persons and in the amounts set forth in the records of the
transfer agent as provided in paragraph 3.4. The Selling Fund does not have
outstanding any options, warrants, or other rights to subscribe for or purchase
any of the Selling Fund shares, nor is there outstanding any security
convertible into any of the Selling Fund shares.
(l) At the Closing Date, the Selling Fund will have good and
marketable title to the Selling Fund's assets to be transferred to the Acquiring
Fund pursuant to paragraph 1.2 and full right, power, and authority to sell,
assign, transfer, and deliver such assets hereunder, and, upon delivery and
payment for such assets, the Acquiring Fund will acquire good and marketable
title thereto, subject to no restrictions on the full transfer thereof,
including such restrictions as might arise under the 1933 Act, other than as
disclosed to the Acquiring Fund and accepted by the Acquiring Fund.
(m) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Selling
Fund and, subject to approval by the Selling Fund Shareholders, this Agreement
constitutes a valid and binding obligation of the Selling Fund, enforceable in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights and to general equity principles.
(n) The information to be furnished by the Selling Fund for
use in no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations thereunder applicable thereto.
(o) The Proxy Statement of the Selling Fund to be included in
the Registration Statement (as defined in paragraph 5.7)(other than information
therein that relates to the Acquiring Fund) will, on the effective date of the
Registration Statement and on the Closing Date, not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not misleading.
<PAGE>
4.2.1 REPRESENTATIONS OF THE ACQUIRING FUND. The
Acquiring Fund represents and warrants to the Selling Fund as
follows:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust that is registered as an investment company classified
as a management company of the open-end type, and its registration with the
Commission as an investment company under the 1940 Act is in full force and
effect.
(c) The current prospectus and statement of additional
information of the Acquiring Fund conform in all material respects to the
applicable requirements of the 1933 Act and the 1940 Act and the rules and
regulations of the Commission thereunder and do not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(d) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of the Trust's
Declaration of Trust or By-Laws or of any material agreement, indenture,
instrument, contract, lease, or other undertaking to which the Acquiring Fund is
a party or by which it is bound.
(e) Except as otherwise disclosed in writing to the Selling
Fund and accepted by the Selling Fund, no litigation, administrative proceeding
or investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against the Acquiring Fund or any of its
properties or assets, which, if adversely determined, would materially and
adversely affect its financial condition and the conduct of its business or the
ability of the Acquiring Fund to carry out the transactions contemplated by this
Agreement. The Acquiring Fund knows of no facts that might form the basis for
the institution of such proceedings and is not a party to or subject to the
provisions of any order, decree, or judgment of any court or governmental body
that materially and adversely affects its business or its ability to consummate
the transactions contemplated herein.
(f) The financial statements of the Acquiring Fund at
August 31, 1997 are in accordance with generally accepted
<PAGE>
accounting principles consistently applied, and such statements (copies of which
have been furnished to the Selling Fund) fairly reflect the financial condition
of the Acquiring Fund as of such date, and there are no known contingent
liabilities of the Acquiring Fund as of such date not disclosed therein.
(g) Since August 31, 1997, there has not been any material
adverse change in the Acquiring Fund's financial condition, assets, liabilities,
or business other than changes occurring in the ordinary course of business, or
any incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Selling Fund. For the purposes of this subparagraph (g), a
decline in the net asset value of the Acquiring Fund shall not constitute a
material adverse change.
(h) At the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law then to be filed by such dates
shall have been filed, and all federal and other taxes shown due on said returns
and reports shall have been paid or provision shall have been made for the
payment thereof. To the best of the Acquiring Fund's knowledge, no such return
is currently under audit, and no assessment has been asserted with respect to
such returns.
(i) For each fiscal year of its operation, the Acquiring Fund
has met the requirements of Subchapter M of the Code for qualification and
treatment as a regulated investment company and has distributed in each such
year all net investment income and realized capital gains.
(j) All issued and outstanding Acquiring Fund Shares are, and
at the Closing Date will be, duly and validly issued and outstanding, fully paid
and non-assessable. The Acquiring Fund does not have outstanding any options,
warrants, or other rights to subscribe for or purchase any Acquiring Fund
Shares, nor is there outstanding any security convertible into any Acquiring
Fund Shares.
(k) The execution, delivery, and performance of this Agreement
have been duly authorized by all necessary action on the part of the Acquiring
Fund, and this Agreement constitutes a valid and binding obligation of the
Acquiring Fund enforceable in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium, and other
laws relating to or affecting creditors' rights and to general equity
principles.
(l) The Acquiring Fund Shares to be issued and
delivered to the Selling Fund, for the account of the Selling
<PAGE>
Fund Shareholders, pursuant to the terms of this Agreement will, at the Closing
Date, have been duly authorized and, when so issued and delivered, will be duly
and validly issued Acquiring Fund Shares, and will be fully paid and
non-assessable.
(m) The information to be furnished by the Acquiring Fund for
use in no-action letters, applications for orders, registration statements,
proxy materials, and other documents that may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations applicable thereto.
(n) The Prospectus and Proxy Statement (as defined in
paragraph 5.7) to be included in the Registration Statement (only insofar as it
relates to the Acquiring Fund) will, on the effective date of the Registration
Statement and on the Closing Date, not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which such statements were made, not misleading.
(o) The Acquiring Fund agrees to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the 1940 Act,
and such of the state Blue Sky or securities laws as it may deem appropriate in
order to continue its operations after the Closing Date.
4.2.2 REPRESENTATIONS OF PREDECESSOR FUND. The representations and
warranties set forth in Section 4.2.1 shall be deemed to include, to the extent
applicable, representations and warranties made by and on behalf of Evergreen
Virginia Municipal Bond Fund (the "Predecessor Fund"), a series of Evergreen
Investment Trust, a Massachusetts business trust, as of the date hereof. The
Acquiring Fund shall deliver to the Selling Fund a certificate of the
Predecessor Fund of even date making the representations set forth in Section
4.2.1 with respect to the Predecessor Fund to the extent applicable to the
Predecessor Fund as of the date hereof.
ARTICLE V
COVENANTS OF THE ACQUIRING FUND AND THE SELLING FUND
5.1 OPERATION IN ORDINARY COURSE. The Acquiring Fund and
the Selling Fund each will operate its business in the ordinary
course between the date hereof and the Closing Date, it being
<PAGE>
understood that such ordinary course of business will include customary
dividends and distributions.
5.2 APPROVAL OF SHAREHOLDERS. Virtus Funds will call a meeting of the
Selling Fund Shareholders to consider and act upon this Agreement and to take
all other action necessary to obtain approval of the transactions contemplated
herein.
5.3 INVESTMENT REPRESENTATION. The Selling Fund covenants that the
Acquiring Fund Shares to be issued hereunder are not being acquired for the
purpose of making any distribution thereof other than in accordance with the
terms of this Agreement.
5.4 ADDITIONAL INFORMATION. The Selling Fund will assist the Acquiring
Fund in obtaining such information as the Acquiring Fund reasonably requests
concerning the beneficial ownership of the Selling Fund shares.
5.5 FURTHER ACTION. Subject to the provisions of this Agreement, the
Acquiring Fund and the Selling Fund will each take, or cause to be taken, all
action, and do or cause to be done, all things reasonably necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement, including any actions required to be taken after the Closing Date.
5.6 STATEMENT OF EARNINGS AND PROFITS. As promptly as practicable, but
in any case within sixty days after the Closing Date, the Selling Fund shall
furnish the Acquiring Fund, in such form as is reasonably satisfactory to the
Acquiring Fund, a statement of the earnings and profits of the Selling Fund for
federal income tax purposes that will be carried over by the Acquiring Fund as a
result of Section 381 of the Code, and which will be reviewed by KPMG Peat
Marwick LLP and certified by Virtus Funds' President and Treasurer.
5.7 PREPARATION OF FORM N-14 REGISTRATION STATEMENT. The Selling Fund will
provide the Acquiring Fund with information reasonably necessary for the
preparation of a prospectus, which will include the proxy statement, referred to
in paragraph 4.1(o) (the "Prospectus and Proxy Statement"), all to be included
in a Registration Statement on Form N-14 of the Acquiring Fund (the
"Registration Statement"), in compliance with the 1933 Act, the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act in
connection with the meeting of the Selling Fund Shareholders to consider
approval of this Agreement and the transactions contemplated herein.
<PAGE>
5.8 CAPITAL LOSS CARRYFORWARDS. AS promptly as practicable, but in any
case within sixty days after the Closing Date, the Acquiring Fund and the
Selling Fund shall cause KPMG Peat Marwick LLP to issue a letter addressed to
the Acquiring Fund and the Selling Fund, in form and substance satisfactory to
the Funds, setting forth the federal income tax implications relating to capital
loss carryforwards (if any) of the Selling Fund and the related impact, if any,
of the proposed transfer of all of the assets of the Selling Fund to the
Acquiring Fund and the ultimate dissolution of the Selling Fund, upon the
shareholders of the Selling Fund.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLING FUND
The obligations of the Selling Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations, covenants, and warranties of the Acquiring
Fund contained in this Agreement shall be true and correct as of the date hereof
and as of the Closing Date with the same force and effect as if made on and as
of the Closing Date, and the Acquiring Fund shall have delivered to the Selling
Fund a certificate executed in its name by the Trust's President or Vice
President and its Treasurer or Assistant Treasurer, in form and substance
reasonably satisfactory to the Selling Fund and dated as of the Closing Date, to
such effect and as to such other matters as the Selling Fund shall reasonably
request.
6.2 The Selling Fund shall have received on the Closing Date an opinion
from Sullivan & Worcester LLP, counsel to the Acquiring Fund, dated as of the
Closing Date, in a form reasonably satisfactory to the Selling Fund, covering
the following points:
(a) The Acquiring Fund is a separate investment series of a
Delaware business trust duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the power to own all of its
properties and assets and to carry on its business as presently conducted.
(b) The Acquiring Fund is a separate investment series of a
Delaware business trust registered as an investment company under the 1940 Act,
and, to such counsel's knowledge,
<PAGE>
such registration with the Commission as an investment company under the 1940
Act is in full force and effect.
(c) This Agreement has been duly authorized, executed, and
delivered by the Acquiring Fund and, assuming due authorization, execution and
delivery of this Agreement by the Selling Fund, is a valid and binding
obligation of the Acquiring Fund enforceable against the Acquiring Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights generally and to general equity principles.
(d) Assuming that a consideration therefor not less than the
net asset value thereof has been paid, the Acquiring Fund Shares to be issued
and delivered to the Selling Fund on behalf of the Selling Fund Shareholders as
provided by this Agreement are duly authorized and upon such delivery will be
legally issued and outstanding and fully paid and non-assessable, and no
shareholder of the Acquiring Fund has any preemptive rights in respect thereof.
(e) The Registration Statement, to such counsel's knowledge,
has been declared effective by the Commission and no stop order under the 1933
Act pertaining thereto has been issued, and to the knowledge of such counsel, no
consent, approval, authorization or order of any court or governmental authority
of the United States or the State of Delaware is required for consummation by
the Acquiring Fund of the transactions contemplated herein, except such as have
been obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
(f) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of the Trust's Declaration of Trust or By-Laws or any provision of any
material agreement, indenture, instrument, contract, lease or other undertaking
(in each case known to such counsel) to which the Acquiring Fund is a party or
by which it or any of its properties may be bound or to the knowledge of such
counsel, result in the acceleration of any obligation or the imposition of any
penalty, under any agreement, judgment, or decree to which the Acquiring Fund is
a party or by which it is bound.
(g) Only insofar as they relate to the Acquiring Fund, the
descriptions in the Prospectus and Proxy Statement of statutes, legal and
governmental proceedings and material contracts, if any, are accurate and fairly
present the information required to be shown.
<PAGE>
(h) Such counsel does not know of any legal or governmental
proceedings, only insofar as they relate to the Acquiring Fund, existing on or
before the effective date of the Registration Statement or the Closing Date
required to be described in the Registration Statement or to be filed as
exhibits to the Registration Statement which are not described or filed as
required.
(i) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Acquiring Fund or
any of its properties or assets and the Acquiring Fund is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body, which materially and adversely affects its business, other
than as previously disclosed in the Registration Statement.
Such counsel shall also state that they have participated in
conferences with officers and other representatives of the Acquiring Fund at
which the contents of the Prospectus and Proxy Statement and related matters
were discussed and, although they are not passing upon and do not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Prospectus and Proxy Statement (except to the extent indicated
in paragraph (g) of their above opinion), on the basis of the foregoing (relying
as to materiality to a large extent upon the opinions of the Trust's officers
and other representatives of the Acquiring Fund), no facts have come to their
attention that lead them to believe that the Prospectus and Proxy Statement as
of its date, as of the date of the Selling Fund Shareholders' meeting, and as of
the Closing Date, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein regarding the Acquiring Fund
or necessary, in the light of the circumstances under which they were made, to
make the statements therein regarding the Acquiring Fund not misleading. Such
opinion may state that such counsel does not express any opinion or belief as to
the financial statements or any financial or statistical data, or as to the
information relating to the Selling Fund, contained in the Prospectus and Proxy
Statement or the Registration Statement, and that such opinion is solely for the
benefit of Virtus Funds and the Selling Fund. Such opinion shall contain such
other assumptions and limitations as shall be in the opinion of Sullivan &
Worcester LLP appropriate to render the opinions expressed therein.
In this paragraph 6.2, references to the Prospectus and Proxy Statement
include and relate to only the text of such Prospectus and Proxy Statement and
not to any exhibits or
<PAGE>
attachments thereto or to any documents incorporated by reference
therein.
6.3 The merger between First Union Corporation and Signet Banking
Corporation shall be completed prior to the Closing Date.
6.4 The acquisition of the assets of the Predecessor Fund by the
Acquiring Fund shall have been completed prior to the Closing Date.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions
provided for herein shall be subject, at its election, to the performance by the
Selling Fund of all the obligations to be performed by it hereunder on or before
the Closing Date and, in addition thereto, the following conditions:
7.1 All representations, covenants, and warranties of the Selling Fund
contained in this Agreement shall be true and correct as of the date hereof and
as of the Closing Date with the same force and effect as if made on and as of
the Closing Date, and the Selling Fund shall have delivered to the Acquiring
Fund on the Closing Date a certificate executed in its name by Virtus Funds'
President or Vice President and the Treasurer or Assistant Treasurer, in form
and substance satisfactory to the Acquiring Fund and dated as of the Closing
Date, to such effect and as to such other matters as the Acquiring Fund shall
reasonably request.
7.2 The Selling Fund shall have delivered to the Acquiring Fund a
statement of the Selling Fund's assets and liabilities, together with a list of
the Selling Fund's portfolio securities showing the tax costs of such securities
by lot and the holding periods of such securities, as of the Closing Date,
certified by the Treasurer of Virtus Funds.
7.3.1 The Acquiring Fund shall have received on the Closing Date an
opinion of Dickstein Shapiro Morin & Oshinsky LLP, counsel to the Selling Fund,
in a form satisfactory to the Acquiring Fund covering the following points:
(a) The Selling Fund is a separate investment series of a
Massachusetts business trust duly organized, validly existing and in good
standing under the laws of The Commonwealth of Massachusetts and has the power
to own all of its properties and assets and to carry on its business as
presently conducted.
<PAGE>
(b) The Selling Fund is a separate investment series of a
Massachusetts business trust registered as an investment company under the 1940
Act, and, to such counsel's knowledge, such registration with the Commission as
an investment company under the 1940 Act is in full force and effect.
(c) This Agreement has been duly authorized, executed and
delivered by the Selling Fund, and, assuming due authorization, execution, and
delivery of this Agreement by the Acquiring Fund, is a valid and binding
obligation of the Selling Fund enforceable against the Selling Fund in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and to general equity principles.
(d) To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority of the United
States or The Commonwealth of Massachusetts is required for consummation by the
Selling Fund of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act, and as may be
required under state securities laws.
(e) The execution and delivery of this Agreement did not, and
the consummation of the transactions contemplated hereby will not, result in a
violation of Virtus Funds' Declaration of Trust or By-laws, or any provision of
any material agreement, indenture, instrument, contract, lease or other
undertaking (in each case known to such counsel) to which the Selling Fund is a
party or by which it or any of its properties may be bound or, to the knowledge
of such counsel, result in the acceleration of any obligation or the imposition
of any penalty, under any agreement, judgment, or decree to which the Selling
Fund is a party or by which it is bound.
(f) The descriptions in the Prospectus and Proxy Statement of
this Agreement, as set forth under the caption "Reasons for the Reorganization -
Agreement and Plan of Reorganization," the Interim Advisory Agreement and the
Previous Advisory Agreement, as set forth under the caption "Information
Regarding the Interim Advisory Agreement," and the description of voting
requirements applicable to approval of the Interim Advisory Agreement, as set
forth under the caption "Voting Information Concerning the Meeting," insofar as
the latter constitutes a summary of applicable voting requirements under the
Investment Company Act of 1940, as amended, are, in each case, accurate and
fairly present the information required to be shown by the applicable
requirements of Form N-14.
<PAGE>
(g) Such counsel does not know of any legal or governmental
proceedings, insofar as they relate to the Selling Fund existing on or before
the date of mailing of the Prospectus and Proxy Statement and the Closing Date,
required to be described in the Prospectus and Proxy Statement or to be filed as
an exhibit to the Registration Statement which are not described or filed as
required.
(h) To the knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the Selling Fund or
any of its respective properties or assets and the Selling Fund is neither a
party to nor subject to the provisions of any order, decree or judgment of any
court or governmental body, which materially and adversely affects its business
other than as previously disclosed in the Prospectus and Proxy Statement.
7.3.2 The Acquiring Fund shall have received on the Closing
Date an opinion of C. Grant Anderson, Esq., Assistant Secretary of Virtus Funds,
in form satisfactory to the Acquiring Fund as follows: Assuming that a
consideration therefor of not less than the net asset value thereof has been
paid, and assuming that such shares were issued in accordance with the terms of
the Selling Fund's registration statement, or any amendment thereto, in effect
at the time of such issuance, all issued and outstanding shares of the Selling
Fund are legally issued and fully paid and non-assessable (except that, under
Massachusetts law, Selling Fund Shareholders could under certain circumstances
be held personally liable for obligations of the Selling Fund).
Mr. Anderson shall also state that he has reviewed and is familiar with
the contents of the Prospectus and Proxy Statement and, although he is not
passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Prospectus and Proxy
Statement, on the basis of the foregoing, no facts have come to his attention
that lead him to believe that the Prospectus and Proxy Statement as of its date,
as of the date of the Selling Fund Shareholders' meeting, and as of the Closing
Date, contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein regarding the Selling Fund or
necessary, in the light of the circumstances under which they were made, to make
the statements therein regarding the Selling Fund not misleading. Such opinion
may state that he does not express any opinion or belief as to the financial
statements or any financial or statistical data, or as to the information
relating to the Acquiring Fund, contained in the Prospectus and Proxy Statement
or Registration Statement.
<PAGE>
The opinions set forth in paragraphs 7.3.1 and 7.3.2 may state that
such opinions are solely for the benefit of the Acquiring Fund. Such opinions
shall contain such other assumptions and limitations as shall be in the opinion
of Dickstein Shapiro Morin & Oshinsky LLP and C. Grant Anderson, as applicable,
appropriate to render the opinions expressed therein, and shall indicate, with
respect to matters of Massachusetts law, that as Dickstein Shapiro Morin &
Oshinsky LLP and C. Grant Anderson are not admitted to the bar of Massachusetts,
such opinions are based either upon the review of published statutes, cases and
rules and regulations of the Commonwealth of Massachusetts or upon an opinion of
Massachusetts counsel.
In this paragraph 7.3, references to the Prospectus and Proxy Statement
include and relate to only the text of such Prospectus and Proxy Statement and
not to any exhibits or attachments thereto or to any documents incorporated by
reference therein.
7.4 The merger between First Union Corporation and Signet Banking
Corporation shall be completed prior to the Closing Date.
ARTICLE VIII
FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING
FUND AND THE SELLING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to the Selling Fund or the Acquiring Fund, the other
party to this Agreement shall, at its option, not be required to consummate the
transactions contemplated by this Agreement:
8.1 This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
the Selling Fund in accordance with the provisions of Virtus Funds' Declaration
of Trust and By-Laws and certified copies of the resolutions evidencing such
approval shall have been delivered to the Acquiring Fund. Notwithstanding
anything herein to the contrary, neither the Acquiring Fund nor the Selling Fund
may waive the conditions set forth in this paragraph 8.1.
8.2 On the Closing Date, the Commission shall not have issued an
unfavorable report under Section 25(b) of the 1940 Act, nor instituted any
proceeding seeking to enjoin the consummation of the transactions contemplated
by this Agreement under Section 25(c) of the 1940 Act and no action, suit or
other proceeding
<PAGE>
shall be threatened or pending before any court or governmental agency in which
it is sought to restrain or prohibit, or obtain damages or other relief in
connection with, this Agreement or the transactions contemplated herein.
8.3 All required consents of other parties and all other consents,
orders, and permits of federal, state and local regulatory authorities
(including those of the Commission and of state Blue Sky securities authorities,
including any necessary "no-action" positions of and exemptive orders from such
federal and state authorities) to permit consummation of the transactions
contemplated hereby shall have been obtained, except where failure to obtain any
such consent, order, or permit would not involve a risk of a material adverse
effect on the assets or properties of the Acquiring Fund or the Selling Fund,
provided that either party hereto may for itself waive any of such conditions.
8.4 The Registration Statement shall have become effective under the
1933 Act, and no stop orders suspending the effectiveness thereof shall have
been issued and, to the best knowledge of the parties hereto, no investigation
or proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act.
8.5 The Selling Fund shall have declared a dividend or dividends which,
together with all previous such dividends, shall have the effect of distributing
to the Selling Fund Shareholders all of the Selling Fund's net investment
company taxable income for all taxable periods ending on or prior to the Closing
Date (computed without regard to any deduction for dividends paid) and all of
its net capital gains realized in all taxable periods ending on or prior to the
Closing Date (after reduction for any capital loss carryforward).
8.6 The parties shall have received a favorable opinion of Sullivan &
Worcester LLP, addressed to the Acquiring Fund and the Selling Fund
substantially to the effect that for federal income tax purposes:
(a) The transfer of all of the Selling Fund assets in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund followed by the distribution of
the Acquiring Fund Shares to the Selling Fund in dissolution and liquidation of
the Selling Fund will constitute a "reorganization" within the meaning of
Section 368(a)(1)(D) of the Code and the Acquiring Fund and the Selling Fund
will each be a "party to a reorganization" within the meaning of Section 368(b)
of the Code.
<PAGE>
(b) No gain or loss will be recognized by the Acquiring Fund
upon the receipt of the assets of the Selling Fund solely in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of certain stated
liabilities of the Selling Fund.
(c) No gain or loss will be recognized by the Selling Fund
upon the transfer of the Selling Fund assets to the Acquiring Fund in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain stated liabilities of the Selling Fund or upon the distribution (whether
actual or constructive) of the Acquiring Fund Shares to Selling Fund
Shareholders in exchange for their shares of the Selling Fund.
(d) No gain or loss will be recognized by the Selling Fund
Shareholders upon the exchange of their Selling Fund shares for the Acquiring
Fund Shares in liquidation of the Selling Fund.
(e) The aggregate tax basis for the Acquiring Fund Shares
received by each Selling Fund Shareholder pursuant to the Reorganization will be
the same as the aggregate tax basis of the Selling Fund shares held by such
shareholder immediately prior to the Reorganization, and the holding period of
the Acquiring Fund Shares to be received by each Selling Fund Shareholder will
include the period during which the Selling Fund shares exchanged therefor were
held by such shareholder (provided the Selling Fund shares were held as capital
assets on the date of the Reorganization).
(f) The tax basis of the Selling Fund assets acquired by the
Acquiring Fund will be the same as the tax basis of such assets to the Selling
Fund immediately prior to the Reorganization, and the holding period of the
assets of the Selling Fund in the hands of the Acquiring Fund will include the
period during which those assets were held by the Selling Fund.
Notwithstanding anything herein to the contrary, neither the Acquiring
Fund nor the Selling Fund may waive the conditions set forth in this paragraph
8.6.
8.7 The Acquiring Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Acquiring Fund, in form and substance satisfactory to
the Acquiring Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Selling Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
<PAGE>
(b) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the Capitalization Table
appearing in the Registration Statement and Prospectus and Proxy Statement has
been obtained from and is consistent with the accounting records of the Selling
Fund;
(c) on the basis of limited procedures agreed upon by the
Acquiring Fund and described in such letter (but not an examination in
accordance with generally accepted auditing standards), the data utilized in the
calculations of the projected expense ratios appearing in the Registration
Statement and Prospectus and Proxy Statement agree with underlying accounting
records of the Selling Fund or with written estimates by Selling Fund's
management and were found to be mathematically correct.
In addition, the Acquiring Fund shall have received from KPMG Peat
Marwick LLP a letter addressed to the Acquiring Fund dated on the Closing Date,
in form and substance satisfactory to the Acquiring Fund, to the effect, that on
the basis of limited procedures agreed upon by the Acquiring Fund (but not an
examination in accordance with generally accepted auditing standards), the
calculation of net asset value per share of the Selling Fund as of the Valuation
Date was determined in accordance with generally accepted accounting practices
and the portfolio valuation practices of the Acquiring Fund.
8.8 The Selling Fund shall have received from KPMG Peat Marwick LLP a
letter addressed to the Selling Fund, in form and substance satisfactory to the
Selling Fund, to the effect that:
(a) they are independent certified public accountants with
respect to the Acquiring Fund within the meaning of the 1933 Act and the
applicable published rules and regulations thereunder;
(b) on the basis of limited procedures agreed upon by the
Selling Fund and described in such letter (but not an examination in accordance
with generally accepted auditing standards), the Capitalization Table appearing
in the Registration Statement and Prospectus and Proxy Statement has been
obtained from and is consistent with the accounting records of the Acquiring
Fund; and
(c) on the basis of limited procedures agreed upon by the
Selling Fund (but not an examination in accordance with generally accepted
auditing standards), the data utilized in the calculations of the projected
expense ratio appearing in the
<PAGE>
Registration Statement and Prospectus and Proxy Statement agree with written
estimates by each Fund's management and were found to be mathematically correct.
ARTICLE IX
EXPENSES
9.1 Except as otherwise provided for herein, all expenses of the
transactions contemplated by this Agreement incurred by the Selling Fund and the
Acquiring Fund will be borne by First Union National Bank. Such expenses
include, without limitation, (a) expenses incurred in connection with the
entering into and the carrying out of the provisions of this Agreement; (b)
expenses associated with the preparation and filing of the Registration
Statement under the 1933 Act covering the Acquiring Fund Shares to be issued
pursuant to the provisions of this Agreement; (c) registration or qualification
fees and expenses of preparing and filing such forms as are necessary under
applicable state securities laws to qualify the Acquiring Fund Shares to be
issued in connection herewith in each state in which the Selling Fund
Shareholders are resident as of the date of the mailing of the Prospectus and
Proxy Statement to such shareholders; (d) postage; (e) printing; (f) accounting
fees; (g) legal fees; and (h) solicitation costs of the transaction.
Notwithstanding the foregoing, the Acquiring Fund shall pay its own federal and
state registration fees.
ARTICLE X
ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Selling Fund agree that neither party
has made any representation, warranty or covenant not set forth herein and that
this Agreement constitutes the entire agreement between the parties.
10.2 The representations, warranties, and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall not survive the consummation of the transactions contemplated hereunder.
<PAGE>
ARTICLE XI
TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the
Acquiring Fund and the Selling Fund. In addition, either the Acquiring Fund or
the Selling Fund may at its option terminate this Agreement at or prior to the
Closing Date because:
(a) of a breach by the other of any representation, warranty,
or agreement contained herein to be performed at or prior to the Closing Date,
if not cured within 30 days; or
(b) a condition herein expressed to be precedent to the
obligations of the terminating party has not been met and it reasonably appears
that it will not or cannot be met.
11.2 In the event of any such termination, in the absence of willful
default, there shall be no liability for damages on the part of either the
Acquiring Fund, the Selling Fund, the Trust, Virtus Funds, the respective
Trustees or officers, to the other party or its Trustees or officers.
ARTICLE XII
AMENDMENTS
12.1 This Agreement may be amended, modified, or supplemented in such
manner as may be mutually agreed upon in writing by the authorized officers of
the Selling Fund and the Acquiring Fund; provided, however, that following the
meeting of the Selling Fund Shareholders called by the Selling Fund pursuant to
paragraph 5.2 of this Agreement, no such amendment may have the effect of
changing the provisions for determining the number of the Acquiring Fund Shares
to be issued to the Selling Fund Shareholders under this Agreement to the
detriment of such shareholders without their further approval.
ARTICLE XIII
HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
13.1 The Article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
13.2 This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original.
<PAGE>
13.3 This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without giving effect to the conflicts
of laws provisions thereof; provided, however, that the due authorization,
execution and delivery of this Agreement, in the case of the Selling Fund, shall
be governed and construed in accordance with the laws of The Commonwealth of
Massachusetts, without giving effect to the conflicts of laws provisions
thereof.
13.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but, except as provided in
this paragraph, no assignment or transfer hereof or of any rights or obligations
hereunder shall be made by any party without the written consent of the other
party. Nothing herein expressed or implied is intended or shall be construed to
confer upon or give any person, firm, or corporation, other than the parties
hereto and their respective successors and assigns, any rights or remedies under
or by reason of this Agreement.
13.5 It is expressly agreed that the obligations of the Selling Fund
and the Acquiring Fund hereunder shall not be binding upon any of the Trustees,
shareholders, nominees, officers, agents, or employees of Virtus Funds or the
Trust personally, but shall bind only the trust property of the Selling Fund and
the Acquiring Fund, as provided in the Declarations of Trust of Virtus Funds and
the Trust. The execution and delivery of this Agreement have been authorized by
the Trustees of Virtus Funds on behalf of the Selling Fund and the Trust on
behalf of the Acquiring Fund and signed by authorized officers of Virtus Funds
and the Trust, acting as such, and neither such authorization by such Trustees
nor such execution and delivery by such officers shall be deemed to have been
made by any of them individually or to impose any liability on any of them
personally, but shall bind only the trust property of the Selling Fund and the
Acquiring Fund as provided in the Declarations of Trust of Virtus Funds and the
Trust.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement, all
as of the date first written above.
EVERGREEN MUNICIPAL TRUST
ON BEHALF OF EVERGREEN
VIRGINIA MUNICIPAL BOND FUND
By:
Name:
Title:
THE VIRTUS FUNDS
ON BEHALF OF THE VIRGINIA
MUNICIPAL BOND FUND
By:
Name:
Title:
<PAGE>
EXHIBIT B
THE VIRTUS FUNDS
INTERIM INVESTMENT ADVISORY AGREEMENT
This Agreement is made between Virtus Capital Management, Inc., a
Maryland corporation having its principal place of business in Richmond,
Virginia (the "Adviser"), and The Virtus Funds, a Massachusetts business trust
having its principal place of business in Pittsburgh, Pennsylvania (the
"Trust").
WHEREAS, the Trust is an open-end management investment company as that
term is defined in the Investment Company Act of 1940 (the "Act") and
is registered as such with the Securities and Exchange Commission; and
WHEREAS, the Adviser is engaged in the business of rendering investment
advisory and management services.
NOW, THEREFORE, the parties hereto, intending to be legally bound,
agree as follows:
1. The Trust hereby appoints Adviser as Investment Adviser for each of
the portfolios ("Funds") of the Trust, which may be offered in one or more
classes of shares ("Classes"), on whose behalf the Trust executes an exhibit to
this Agreement, and Adviser, by its execution of each such exhibit, accepts the
appointments. Subject to the direction of the Trustees of the Trust, Adviser
shall provide investment research and supervision of the investments of each of
the Funds and conduct a continuous program of investment evaluation and of
appropriate sale or other disposition and reinvestment of each Fund's assets.
2. Adviser, in its supervision of the investments of each of the Funds,
will be guided by each of the Fund's fundamental investment policies and the
provisions and restrictions contained in the Declaration of Trust and By-Laws of
the Trust and as set forth in the Registration Statement and exhibits as may be
on file with the Securities and Exchange Commission.
3. The Trust shall pay or cause to be paid on behalf of each Fund or
Class, all of the Fund's or Classes' expenses and the Fund's or Classes'
allocable share of Trust expenses.
4. The Trust, on behalf of each of the Funds shall pay to Adviser for
all services rendered to such Fund by Adviser hereunder the fees set forth in
the exhibits attached hereto.
<PAGE>
5. The Adviser may from time to time and for such periods as it deems
appropriate reduce its compensation to the extent that any Fund's expenses
exceed such lower expense limitation as the Adviser may, by notice to the Trust,
voluntarily declare to be effective. Furthermore, the Adviser may, if it deems
appropriate, assume expenses of one or more Fund or Class to the extent that any
Fund's or Classes' expenses exceed such lower expense limitation as the Adviser
may, by notice to the Trust, voluntarily declare to be effective.
6. This Agreement shall begin for each Fund on the date that the Trust
executes an exhibit to this Contract relating to such Fund. This Agreement shall
remain in effect for each Fund until the earlier of the Closing Date defined in
the Agreement and Plan of Reorganization to be dated as of November 26, 1997
with respect to each Fund or for two years from the date of its execution and
from year to year thereafter, subject to the provisions for termination and all
of the other terms and conditions hereof if: (a) such continuation shall be
specifically approved at least annually by the vote of a majority of the
Trustees of the Trust, including a majority of the Trustees who are not parties
to this Agreement or interested persons of any such party (other than as
Trustees of the Trust) cast in person at a meeting called for that purpose; and
(b) Adviser shall not have notified the Trust in writing at least sixty (60)
days prior to the anniversary date of this Agreement in any year thereafter that
it does not desire such continuation with respect to that Fund.
7. Notwithstanding any provision in this Agreement, it may be
terminated at any time with respect to any Fund, without the payment of any
penalty, by the Trustees of the Trust or by a vote of a majority of the
outstanding voting securities of that Fund, as defined in Section 2(a)(42) of
the Act on sixty (60) days' written notice to Adviser.
8. This Agreement may not be assigned by Adviser and shall
automatically terminate in the event of any assignment. Adviser may employ or
contract with such other person, persons, corporation or corporations at its own
cost and expense as it shall determine in order to assist it in carrying out
this Agreement.
9. In the absence of willful misfeasance, bad faith, gross negligence
or reckless disregard of obligations or duties under this Agreement on the part
of Adviser, Adviser shall not be liable to the Trust or to any of the Funds or
to any shareholder for any act or omission in the course of or connected in any
way with rendering services or for any losses that may be sustained in the
purchase, holding or sale of any security.
<PAGE>
10. This Agreement may be amended at any time by agreement of the
parties provided that the amendment shall be approved both by vote of a majority
of the Trustees of the Trust, including a majority of the Trustees who are not
parties to this Agreement or interested persons of any such party to this
Agreement (other than as Trustees of the Trust), cast in person at a meeting
called for that purpose, and on behalf of a Fund by a majority of the
outstanding voting securities of such Fund as defined in Section 2(a)(42) of the
Act.
11. Adviser is hereby expressly put on notice of the limitation of
liability as set forth in Article XI of the Declaration of Trust and agrees that
the obligations pursuant to this Agreement of a particular Fund and of the Trust
with respect to that particular Fund be limited solely to the assets of that
particular Fund, and Adviser shall not seek satisfaction of any such obligation
from the assets of any other Fund, the shareholders of any Fund, the Trustees,
officers, employees or agents of the Trust, or any of them.
12. This Agreement shall be construed in accordance with and governed
by the laws of the Commonwealth of Pennsylvania.
13. This Agreement will become binding on the parties hereto upon their
execution of the attached exhibits to this Agreement.
<PAGE>
EXHIBIT A
THE U.S. GOVERNMENT SECURITIES FUND
THE VIRGINIA MUNICIPAL BOND FUND
THE MARYLAND MUNICIPAL BOND FUND
THE TREASURY MONEY MARKET FUND
THE MONEY MARKET FUND
THE TAX-FREE MONEY MARKET FUND
THE STYLE MANAGER FUND
THE STYLE MANAGER: LARGE CAP FUND
Name of Fund Percentage of Net Assets
- ------------ ------------------------
The Treasury Money Market Fund .50 of 1%
The Money Market Fund .50 of 1%
The Tax-Free Money Market Fund .50 of 1%
The U.S. Government Securities Fund .75 of 1%
The Virginia Municipal Bond Fund .75 of 1%
The Maryland Municipal Bond Fund .75 of 1%
The Style Manager: Large Cap Fund .75 of 1%
The Style Manager Fund 1.25 of 1%
For all services rendered by Adviser hereunder, the Trust shall pay to
Adviser and Adviser agrees to accept as full compensation for all services
rendered hereunder, an annual investment advisory fee equal to the following
percentage (the "applicable percentage") of the average daily net assets of each
Fund.
The fee shall be accrued daily at the rate of 1/365th of the applicable
percentage applied to the daily net assets of the Fund.
The advisory fee so accrued shall be paid to Adviser daily.
Witness the due execution hereof this 28th day of November, 1997.
Attest: VIRTUS CAPITAL MANAGEMENT, INC.
By:
Assistant Secretary President
Attest: THE VIRTUS FUNDS
By:
Assistant Secretary Vice President
C. Grant Anderson
<PAGE>
EXHIBIT C
(logo)
EVERGREEN
VIRGINIA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
FUND AT A GLANCE
As of August 31, 1997
PERFORMANCE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUALIZED
1 YEAR TOTAL RETURN(1)
---------------------------- ----------------------- CUMULATIVE TOTAL
SHARE INCEPTION WITHOUT SALES WITH SALES SINCE RETURN(1) SINCE 12-MONTH
CLASS DATE CHARGE CHARGE 3 YEARS INCEPTION INCEPTION DISTRIBUTION
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
A 7/2/93 9.05% 3.87% 6.08% 3.90% 17.25% $0.50
B 7/2/93 8.24% 3.24% 6.14% 3.98% 17.71% $0.41
Y 2/28/94 9.32% -- 8.08% 6.06% 22.93% $0.51
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Adjusted for maximum sales charge.
CURRENT STRATEGY
- --------------------------------------------------------------------------------
For the twelve months ended September 30, 1997, the Fund's class Y
and class A shares ranked number 6 and 8, respectively, out of 32
Virginia municipal debt funds tracked by Lipper Analytical
Services, an independent mutual fund rating company. (2) During
the course of the fiscal year, we continued to emphasize an
income-oriented approach. In doing so, we maintained a
higher-coupon structure which allows our funds to provide tax-free
income and in the long term, produce a strong total return with
reduced volatility. A substantial portion of the total return of
the Fund is produced by the portfolio's higher coupon structure.
To ensure credit quality and increase total return, our municipal
credit analysts work in conjunction with portfolio managers to
carefully monitor existing holdings and seek out new investment
opportunities.
(Photo of
Charles E. Jeanne)
CHARLES E. JEANNE
ASSISTANT VICE PRESIDENT,
PORTFOLIO MANAGER
- --------------------------------------------------------------------------------
GROWTH OF INVESTMENT
Evergreen Virginia Municipal Bond Fund
Comparison of a $10,000 investment in Evergreen Virginia Municipal Bond
Fund, Class A shares, versus a similar investment in the Lehman Brothers
Virginia Municipal Bond Index (LBVMBI) and the Consumer Price Index (CPI).
(A chart appears here with the following plot points.)
In Thousands
7/93 8/93 8/94 8/95 8/96 8/97
Class A Shares 9,525 9,675 9,355 10,228 10,752 $11,725
CPI 10,000 10,028 10,318 10,589 10,893 $11,113
LBVMBI 10,000 10,189 10,241 11,151 11,665 $12,695
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholders
investing in different classes. The Lehman Brothers Virginia Municipal Bond
Index is an unmanaged market index. The index does not include transaction
costs associated with buying and selling securities nor any management fees. The
Consumer Price Index, a measure of inflation, is through August 31, 1997.
PORTFOLIO CHARACTERISTICS
- ----------------------------------------------------------------
Total Net Assets: $15,824,821
Average Credit Quality: AA
Average Maturity: 20.56 years
Average Duration: 10.96 years
PORTFOLIO COMPOSITION
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie chart appears here with the following plot points.)
Housing 24.9%
Lease 14.8%
Other 12.9%
Industrial Development 9.5%
Hospital 7.6%
Transportation 7.5%
Residential Care 7.2%
Public Facilities 6.4%
General Obligation Local 4.6%
Education 4.6%
PORTFOLIO QUALITY
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie chart appears here with the following plot points.)
A 27.7%
AA 32.7%
AAA 19.5%
BBB 3.7%
NR 16.4%
(2) THE RANKINGS ARE BASED ON TOTAL RETURN AND DO NOT INCLUDE THE EFFECT OF A
SALES CHARGE.
7
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Acquisition of the Assets of
THE VIRGINIA MUNICIPAL BOND FUND
a Series of
THE VIRTUS FUNDS
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
(800) 829-3863
By and In Exchange For Shares of
EVERGREEN VIRGINIA MUNICIPAL BOND FUND
a Series of
EVERGREEN MUNICIPAL TRUST
200 Berkeley Street
Boston, Massachusetts 02116
(800) 343-2898
This Statement of Additional Information, relating specifically to the
proposed transfer of the assets and liabilities of The Virginia Municipal Bond
Fund ("Virtus VA"), a series of The Virtus Funds, to Evergreen Virginia
Municipal Bond Fund ("Evergreen VA"), a series of the Evergreen Municipal Trust,
in exchange for Class A shares (to be issued to holders of Investment shares of
Virtus VA) and Class Y shares (to be issued to holders of Trust shares of Virtus
VA) of beneficial interest, $.001 par value per share, of Evergreen VA, consists
of this cover page and the following described documents, each of which is
attached hereto and incorporated by reference herein:
(1) The Statement of Additional Information of Evergreen VA dated
October 31, 1996, as amended;
(2) The Statement of Additional Information of Virtus VA dated
November 30, 1997;
(3) Annual Report of Virtus VA for the year ended September 30,
1997;
(4) Annual Report of Evergreen VA for the year ended August 31,
1997; and
(5) Pro-Forma Combining Financial Statements (unaudited) dated
August 31, 1997.
<PAGE>
This Statement of Additional Information, which is not a prospectus,
supplements, and should be read in conjunction with, the Prospectus/Proxy
Statement of Evergreen VA and Virtus VA dated January 5, 1998. A copy of the
Prospectus/Proxy Statement may be obtained without charge by calling or writing
to Evergreen VA or Virtus VA at the telephone numbers or addresses set forth
above.
The date of this Statement of Additional Information is January 5,
1998.
STATEMENT OF ADDITIONAL INFORMATION
October 31, 1996
THE EVERGREEN TAX-FREE FUNDS
2500 Westchester Avenue, Purchase, New York 10577
800-807-2940
Evergreen Florida Municipal Bond Fund("Florida Municipal Bond")
Evergreen Georgia Municipal Bond Fund ("Georgia Municipal Bond")
Evergreen New Jersey Tax-Free Income Fund ("New Jersey Tax-Free")
Evergreen North Carolina Municipal Bond Fund ("North Carolina Municipal Bond")
Evergreen South Carolina Municipal Bond Fund ("South Carolina Municipal Bond")
Evergreen Virginia Municipal Bond Fund ("Virginia Municipal Bond")
Evergreen Florida High Income Municipal Bond Fund ("Florida High Income")
Evergreen High Grade Tax Free Fund ("High Grade")
Evergreen Short-Intermediate Municipal Fund ("Short-Intermediate")
Evergreen Short-Intermediate Municipal Fund-California ("Short-Intermediate-CA")
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 October 31, 1996 for the Fund in which you
are making or contemplating an investment. The Evergreen Tax-Free Funds are
offered through four separate prospectuses: one offering Class A and Class B
shares, and a separate prospectus offering Class Y shares of Florida Municipal
Bond, Georgia Municipal Bond, New Jersey Tax-Free, North Carolina Municipal
Bond, South Carolina Municipal Bond, Virginia Municipal Bond and Florida High
Income; and one offering Class A and Class B shares and a separate prospectus
offering Class Y shares of High Grade, Short-Intermediate and
Short-Intermediate-CA. 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
Non-Fundamental Operating Policies................................ 18
Management........................................................ 19
Investment Advisers............................................... 28
Distribution Plans................................................ 35
Allocation of Brokerage........................................... 38
Additional Tax Information........................................ 39
Net Asset Value................................................... 41
Purchase of Shares................................................ 42
Performance Information........................................... 56
Financial Statements.............................................. 62
Appendix A - Description of Bond, Municipal Note
And Commercial Paper Ratings ................................. 63
Appendix B - Additional Information Concerning California..... 68
1
Appendix C - Additional Information Concerning Florida........... 69
Appendix D - Additional Information Concerning Georgia............ 71
Appendix E - Additional Information Concerning North Carolina..... 72
Appendix F - Additional Information Concerning South Carolina..... 73
Appendix G - Additional Information Concerning Virginia........... 74
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 Florida Municipal Bond, Georgia Municipal Bond, New
Jersey Tax- Free, North Carolina Municipal Bond, South Carolina Municipal Bond,
Virginia Municipal Bond and High Grade 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.
Additional Information Regarding Investments that each Fund May Make
Participation Interests (All Funds)
<PAGE>
Participation interests may take the form of participations, beneficial
interests, in a trust, partnership interests, or any other form of indirect
ownership that allows a Fund to treat the income from the investments as exempt
from federal and state tax. The financial institutions from which a Fund
purchases participation interests frequently provide or secure from another
financial institution irrevocable letters of credit or guarantees and give a
Fund the right to demand payment of the principal amounts of the participation
interests plus accrued interest on short notice (usually within seven days).
Variable Rate Municipal Securities (All Funds)
Variable interest rates generally reduce changes in the market value of
municipal securities from their original purchase prices. Accordingly, as
interest rates decrease or increase, the potential for capital appreciation or
depreciation is less for variable rate municipal securities than for fixed
income obligations.
Many municipal securities with variable interest rates purchased by a Fund
are subject to repayment of principal (usually within seven days) on the Fund's
demand. The terms of these variable rates demand instruments require payment of
principal obligations by the issuer of the participation interests or a
guarantor of either issuer. All variable rate municipal securities will meet the
quality standards for a Fund. The Fund's investment adviser has been instructed
by the Board of Trustees (the "Trustees") to monitor the pricing, quality, and
liquidity of the variable rate municipal securities, including participation
interests held by a Fund, on the basis of published financial information and
reports of the rating agencies and other analytical services.
2
<PAGE>
Municipal Leases (All Funds)
When determining whether municipal leases purchased by a Fund will be
classified as a liquid or illiquid security, the Trustees have directed each
Fund's investment adviser to consider certain factors, such as: the frequency of
trades and quotes for the security; the volatility of quotations and trade
prices for the security, the number of dealers willing to purchase or sell the
security and the number of potential purchasers; dealer undertakings to make a
market in the security; the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers, and the mechanics of transfer); the rating of the security
and the financial condition and prospects of the issuer of the security; whether
the lease can be terminated by the lessee; the potential recovery, if any, from
a sale of the leased property upon termination of the lease; the lessee's
general credit strength (e.g., its debt, administrative, economic and financial
characteristics and prospects); the likelihood that the lessee will discontinue
appropriating funding for the leased property because the property is no longer
deemed essential to its operations (e.g., the potential for an "event of
nonappropriation"); any credit enhancement or legal recourse provided upon an
event of nonappropriation or other termination of the lease; and such other
factors as may be relevant to the Fund's ability to dispose of the security.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an
advantageous price or yield for a Fund. No fees or other expenses, other than
normal transaction costs, are incurred. However, liquid assets of a Fund
sufficient to make payment for the securities to be purchased are segregated on
the Fund's records at the trade date. These assets are marked to market daily
and are maintained until the transaction has been settled. The Funds (other than
High Grade, Short-Intermediate and Short-Intermediate-CA) do not intend to
engage in when-issued and delayed delivery transactions to an extent that would
cause the segregation of more than 20% of the total value of its assets.
Short-Intermediate and Short-Intermediate-CA do not expect that commitments to
purchase when-issued securities will normally exceed 25% of their total assets
and High Grade does not expect that such commitments will exceed 20% of its
total assets.
Futures and Options Transactions (All Funds Except New Jersey Tax-
Free, High Grade, Short-Intermediate and Short-Intermediate-CA)
A Fund may attempt to hedge all or a portion of its portfolio by buying and
selling financial futures contracts and options on financial futures contracts.
Additionally, a Fund may buy and sell call and put options on portfolio
securities. The Funds do
<PAGE>
not intend to invest more than 5% of their assets in options and futures.
Purchasing Put Options on Financial Futures Contracts
A Fund may purchase listed put and call options on financial futures
contracts for 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 a specified price, the purchase of a put option on a futures
contract entitles (but does not obligate) its purchaser to decide on or before a
future date whether to assume a short position at the specified price.
3
<PAGE>
A Fund may purchase put 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 option will increase in value. In such an event, the Fund will
normally close out its option by selling an identical option. If the hedge is
successful, the proceeds received by a Fund upon the sale of the second option
will be large enough to offset both the premium paid by the Fund for the
original option plus the realized decrease in value of the hedged securities.
Alternatively, a Fund may exercise its put option. To do so, it would
simultaneously enter into a futures contract of the type underlying the option
(for a price less than the strike price of the option) and exercise the option.
A Fund would then deliver the futures contract in return for payment of the
strike price. If a 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.
Writing Call Options on Financial Futures Contracts
In addition to purchasing put options on futures, a Fund may write listed
call options on futures contracts for U.S. government securities to hedge its
portfolio against an increase in market interest rates. When a Fund writes a
call option on a futures contract, it is undertaking the obligation of assuming
a short futures position (selling a futures contract) at the fixed strike price
at any time during the life of the option, if the option is exercised. As market
interest rates rise, causing the prices of futures to go down, a Fund's
obligation under a call option on a future (to sell a futures contract) costs
less to fulfill, causing the value of the Fund's call option position to
increase.
In other words, as the underlying futures price goes down below the strike
price, the buyer of the option has no reason to exercise the call, so that the
Fund keeps the premium received for the option. This premium can offset the drop
in value of a Fund's fixed income portfolio which is occurring as interest rates
rise.
Prior to the expiration of a call written by a Fund, or exercise of it by
the buyer, a Fund may close out the option by buying an identical option. If the
hedge is successful, the cost of the second option will be less than the premium
received by the Fund for the initial option. The net premium income of a Fund
will then offset the decrease in value of the hedged securities. Writing Put
Options on Financial Futures Contracts
A Fund may write listed put options on financial futures contracts for U.S.
government securities to hedge its portfolio against a decrease in market
interest rates. When a Fund writes a put option on a futures contract, it
receives a premium for undertaking the obligation to assume a long futures
position (buying a futures contract) at a fixed price at any time during the
life of the option. As market interest rates decrease, the market price of the
underlying futures contract normally increases.
As the market value of the underlying futures contract increases, the buyer
4
<PAGE>
of the put option has less reason to exercise the put because the buyer can sell
the same futures contract at a higher price in the market. The premium received
by a Fund can then be used to offset the higher prices of portfolio securities
to be purchased in the future due to the decrease in the market interest rates.
Prior to the expiration of the put option or its exercise by the buyer, a
Fund may close out the option by buying an identical option. If the hedge is
successful, the cost of buying the second option will be less than the premium
received by the Fund for the initial option.
Purchasing Call Options on Financial Futures Contracts
An additional way in which a Fund 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 a 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 contract below market price.
Prior to the exercise or expiration of the call option a 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.
Limitation on Open Futures Positions
A Fund will not maintain open positions in futures contracts it has sold or
call options it has written on futures contracts if, in the aggregate, the value
of the open positions (marked to market) exceeds the current market value of its
securities portfolio plus or minus the unrealized gain or loss on those open
positions, adjusted for the correlation of volatility between the hedged
securities and the futures contracts. If this limitation is exceeded at any
time, a Fund will take prompt action to close out a sufficient number of open
contracts to bring its open futures and options positions within this
limitation.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, 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 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.
5
<PAGE>
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 a Fund but is instead
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing its daily net asset value, the
Fund will mark-to-market its open futures positions.
A Fund is also required to deposit and maintain margin when it writes call
options on futures contracts.
Purchasing and Writing Put and Call Options on Portfolio Securities (All Funds,
except New Jersey Tax-Free, High Grade,Short-Intermediate and Short-Intermediate
- - -CA).
A Fund may purchase put and call options on portfolio securities to protect
against price movements in particular securities. A put 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.
A Fund may generally purchase and write over-the-counter options on
portfolio securities in negotiated transactions with the writers or buyers of
the options since options on the portfolio securities held by the Fund are to be
traded on an exchange. A 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 Fund's 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. Repurchase
Agreements (All Funds)
Repurchase agreements are arrangements in which banks, broker/dealers, and
other recognized financial institutions sell U.S. government securities or other
securities to a Fund and agree at the time of sale to repurchase them at a
mutually agreed upon time and price within one year from the date of
acquisition. A Fund or its custodian will take possession of the securities
subject to repurchase agreements. To the extent that the original seller does
not repurchase the securities from a Fund, the Fund could receive less than the
repurchase price on any sale of such securities. In the event that such a
defaulting seller filed for bankruptcy or became insolvent, disposition of such
securities by the Fund might be delayed pending court action. Each Fund believes
that under the regular procedures normally in effect for custody of the Fund's
portfolio securities subject to repurchase agreements, a court of competent
jurisdiction would rule in favor of the Fund and allow retention or disposition
of such securities. A Fund may only enter into repurchase agreements with banks
and other recognized financial institutions, such as broker/dealers, which are
found by the Fund's investment adviser to be creditworthy pursuant to guidelines
6
<PAGE>
established by the Trustees.
Reverse Repurchase Agreements (All Funds)
A Fund may 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.
Lending of Portfolio Securities (All Funds)
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 Fund. During the time
portfolio securities are on loan, the borrower pays the Fund any dividends or
interest paid on such 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.
Restricted Securities (All Funds)
With the expectations noted below, a Fund may invest in restricted
securities. Restricted securities are any securities in which a Fund may
otherwise invest pursuant to its investment objectives and policies but which
are subject to restrictions on resale under federal securities laws. A Fund will
not invest more than 15% (10% for High Grade) of the value of its net assets in
restricted securities; however, certain restricted securities which the Trustees
deem to be liquid will be excluded from this 15% limitation. New Jersey Tax-Free
may invest up to 10% of its net assets in restricted securities which are
determined to be liquid.
The ability of the 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
7
<PAGE>
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for resale under the
Rule 144A. Each Fund believes that the Staff of the SEC has left the question of
determining the liquidity of all restricted securities (eligible for resale
under Rule 144A) 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.
Municipal Bond Insurance (High Grade)
The Fund may purchase two types of municipal bond insurance policies
("Policies") issued by municipal bond insurers. One type of Policy covers
certain municipal securities only during the period in which they are in the
Fund's portfolio. In the event that a municipal security covered by such a
Policy is sold by the Fund, the insurer of the relevant Policy will be liable
only for those payments of interest and principal which are then due and owing
at the time of sale.
The other type of Policy covers municipal securities not only while they
remain in the Fund's portfolio but also until their final maturity, even if they
are sold out of the Fund's portfolio, so that the coverage may benefit all
subsequent holders of those municipal securities. The Fund will obtain insurance
which covers municipal securities until final maturity even after they are sold
out of the Fund's portfolio only if, in the judgment of the investment adviser,
the Fund would receive net proceeds from the sale of those securities, after
deducting the cost of such permanent insurance and related fees, significantly
in excess of the proceeds it would receive if such municipal securities were
sold without insurance. Payments received from municipal bond insurers may not
be tax-exempt income to shareholders of the Fund.
Depending upon the characteristics of the municipal security held by the
Fund, the annual premiums for the Policies are estimated to range from 0.10% to
0.25% of the value of the municipal securities covered under the Policies, with
an average annual premium rate of approximately 0.175%.
The Fund may purchase Policies from Municipal Bond Investors Assurance
Corp. ("MBIA"), AMBAC Indemnity Corporation ("AMBAC"), Financial Guaranty
Insurance Company ("FGIC"), each as described under "Municipal Bond Insurers",
or any other municipal bond insurer which is rated at least Aa by Moody's
Investors Service Inc ("Moody's") or AA by Standards & Poor's Ratings Service
("S&P"). Each Policy guarantees the payment of principal and interest on those
municipal securities it insures. The Policies will have the same general
characteristics and features. A municipal security will be eligible for coverage
if it meets certain requirements set forth in a Policy. In the event interest or
principal on an insured municipal security is not paid when due, the insurer
covering the security will be obligated under its Policy to make such payment
not later than 30 days after it has been notified by the Fund that such
non-payment has occurred.
8
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MBIA, AMBAC, and FGIC will not have the right to withdraw coverage on
securities insured by their Policies so long as such securities remain in the
Fund's portfolio, nor may MBIA, AMBAC, or FGIC cancel their Policies for any
reason except failure to pay premiums when due. MBIA, AMBAC, and FGIC will
reserve the right at any time upon 90 days' written notice to the Fund to refuse
to insure any additional municipal securities purchased by the Fund after the
effective date of such notice. The Fund's investment adviser will reserve the
right to terminate any of the Policies if it determines that the benefits to the
Fund of having its portfolio insured under such Policy are not justified by the
expense involved.
Additionally, the Fund's investment adviser reserves the right to enter
into contracts with insurance carriers other than MBIA, AMBAC, or FGIC, if such
carriers are rated Aaa by Moody's or AAA by S&P.
Under the Policies, municipal bond insurers unconditionally guarantee to
the Fund the timely payment of principal and interest on the insured municipal
securities when and as such payments shall become due but shall not be paid by
the issuer, except that in the event of any acceleration of the due date of the
principal by reason of mandatory or optional redemption (other than acceleration
by reason of mandatory sinking fund payments), default or otherwise, the
payments guaranteed will be made in such amounts and at such times as payments
of principal would have been due had there not been such acceleration. The
municipal bond insurers will be responsible for such payments less any amounts
received by the Fund from any trustee for the municipal bond holders or from any
other source. The Policies do not guarantee payment on an accelerated basis, the
payment of any redemption premium, the value for the shares of the Fund, or
payments of any tender purchase price upon the tender of the municipal
securities. The Policies also do not insure against nonpayment of principal of
or interest on the securities resulting from the insolvency, negligence or any
other act or omission of the trustee or other paying agent for the securities.
However, with respect to small issue industrial development municipal bonds and
pollution control revenue municipal bonds covered by the Policies, the municipal
bond insurers guarantee the full and complete payments required to be made by or
on behalf of an issuer of such municipal securities if there occurs any change
in the tax-exempt status of interest on such municipal securities, including
principal, interest or premium payments, if any, as and when required to be made
by or on behalf of the issuer pursuant to the terms of such municipal
securities. A when-issued municipal security will be covered under the Policies
upon the settlement date of the original issue of such when-issued municipal
securities. In determining whether to insure municipal securities held by the
Fund, each municipal bond insurer has applied its own standard, which
corresponds generally to the standards it has established for determining the
insurability of new issues of municipal securities. This insurance is intended
to reduce financial risk, but the cost thereof and compliance with investment
restrictions imposed under the Policies and these guidelines will reduce the
yield to shareholders of the Fund.
If a Policy terminates as to municipal securities sold by the Fund on the
date of sale, in which event municipal bond insurers will be liable only for
those payments of principal and interest that are then due and owing, the
provision for insurance will not enhance the marketability of securities held by
the Fund, whether or not the securities are in default or subject to significant
risk of default, unless the option to obtain permanent insurance is exercised.
On the other hand, since issuer-obtained insurance will remain in effect as long
9
<PAGE>
as the insured municipal securities are outstanding, such insurance may enhance
the marketability of municipal securities covered thereby, but the exact effect,
if any, on marketability cannot be estimated. The Fund generally intends to
retain any securities that are in default or subject to significant risk of
default and to place a value on the insurance, which ordinary will be the
difference between the market value of the defaulted security and the market
value of similar securities of minimum high grade (i.e., rated A by Moody's or
S&P) that are not in default. To the extent that the Fund holds defaulted
securities, it may be limited in its ability to manage its investment and to
purchase other municipal securities. Except as described above with respect to
securities that are in default or subject to significant risk of default, the
Fund will not place any value on the insurance in valuing the municipal
securities that it holds.
Municipal Bond Insurers (High Grade)
Municipal bond insurance may be provided by one or more of the following
insurers or any other municipal bond insurer which is rated at least Aaa by
Moody's or AAA by S&P.
Municipal Bond Investors Assurance Corp. (High Grade)
Municipal Bond Investors Assurance Corp. is a wholly-owned subsidiary of
MBIA, Inc., a Connecticut insurance company, which is owned by AEtna Life and
Casualty, Credit Local DeFrance CAECL, S.A., The Fund American Companies, and
the public. The investors of MBIA, Inc. are not obligated to pay the obligations
of MBIA. MBIA, domiciled in New York, is regulated by the New York State
Insurance Department and licensed to do business in various states. The address
of MBIA is 113 King Street, Armonk, New York, 10504, and its telephone number is
(914) 273-4345. S&P has rated the claims-paying ability of MBIA AAA.
AMBAC Indemnity Corporation (High Grade)
AMBAC Indemnity Corporation is a Wisconsin-domiciled stock insurance
company, regulated by the Insurance Department of Wisconsin, and licensed to do
business in various states. AMBAC is a wholly-owned subsidiary of AMBAC, Inc., a
financial holding company which is owned by the public. Copies of certain
statutorily required filings of AMBAC can be obtained from AMBAC. The address of
AMBAC's administrative offices is One State Street Plaza, 17th Floor, New York,
New York, 10004, and its telephone number is (212) 668-0340. S&P has rated the
claims-paying ability of AMBAC AAA.
Financial Guaranty Insurance Company (High Grade)
Financial Guaranty Insurance Company is a wholly-owned subsidiary of FGIC
Corporation, a Delaware holding company. FGIC Corporation is wholly-owned by
General Electric Capital Corporation. The investors of FGIC Corporation are not
obligated to pay the debts of or the claims against Financial Guaranty.
Financial Guaranty is subject to regulation by the state of New York Insurance
Department and is licensed to do business in various states. The address of
Financial Guaranty is 115 Broadway, New York, New York, 10006, and its telephone
number is (212) 312-3000. S&P has rated the claims-paying ability of Financial
Guaranty AAA.
10
<PAGE>
Municipal Bonds
The two principal classifications of municipal bonds are "general
obligation" bonds and "revenue bonds". General obligation bonds are secured by
the issuer's pledge of its full faith, credit and unlimited taxing power for the
payment of principal and interest. Revenue or special tax bonds are payable only
from the revenues derived from a particular facility or class of facilities or
projects or, in a few cases, from the proceeds of a special excise or other tax,
but are not supported by the issuer's power to levy general taxes. There are, of
course, variations in the security of municipal bonds, both within a particular
classification and between classifications, depending on numerous factors. The
yields of municipal bonds depend on, among other things, general money market
conditions, general conditions of the municipal bond market, size of a
particular offering, the maturity of the obligations and rating of the issue.
Since the Funds may invest in industrial development bonds, the Funds may
not be appropriate investment for entities which are "substantial users" of
facilities financed by industrial development bonds or for investors who are
"related persons". Generally, an individual will not be a "related person" under
the Internal Revenue Code of 1986 (the "Code") unless such investor or his
immediate family (spouse, brothers, sisters and lineal descendants) own directly
or indirectly in the aggregate more than 50 percent of the value of the equity
of a corporation or partnership which is a "substantial user" of a facility
financed from proceeds of "industrial development bonds". A "substantial user"
of such facilities is defined generally as a "non-exempt person who regularly
uses a part of a facility" financed from the proceeds of industrial development
bonds.
As set forth in the Prospectus, the Code establishes new unified volume
caps for most "private purpose" municipal bonds (such as industrial development
bonds and obligations to finance low-interest mortgages on owner-occupied
housing and student loans). The unified volume cap is not expected to affect
adversely the availability of municipal bonds for investment by the Funds;
however, it is possible that proposals will be introduced before Congress to
further restrict or eliminate the federal income tax exemption for interest on
Municipal Obligations. Any such proposals, if enacted, could adversely affect
the availability of municipal bonds for investment by the Funds and the value of
each Fund's portfolio might be affected. In that event, each Fund might
reevaluate its investment policies and restrictions and consider recommending to
its shareholders changes in both.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS
<PAGE>
.........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 the Fund's
investment 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
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<PAGE>
50% of the shares are present at a meeting in person or by proxy.
1........Concentration of Assets in Any One Issuer
.........None of Florida High Income, Short-Intermediate or
Short-Intermediate-CA may invest more than 5% of its total assets, at the time
of the investment in question, in the securities of any one issuer other than
the U.S. government and its agencies or instrumentalities, except that up to 25%
of the value of each Fund's total assets may be invested without regard to such
5% limitation. For this purpose each political subdivision, agency, or
instrumentality and each multi-state agency of which a state is a member, and
each public authority which issues industrial development bonds on behalf of a
private entity, will be regarded as a separate issuer for determining the
diversification of each Fund's portfolio.
With respect to 75% of the value of its total assets, High Grade 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 that issuer.
Under this limitation, each governmental subdivision, including states and
the District of Columbia, territories, possessions of the United States, or
their political subdivisions, agencies, authorities, instrumentalities, or
similar entities, will be considered a separate issuer if its assets and
revenues are separate from those of the governmental body creating it and the
security is backed only by its own assets and revenues.
Industrial development bonds, backed only by the assets and revenues of a
nongovernmental issuer, are considered to be issued solely by that issuer. If,
in the case of an industrial development bond or governmental-issued security, a
governmental or other entity guarantees the security, such guarantee would be
considered a separate security issued by the guarantor as well as the other
issuer, subject to limited exclusions allowed by the Investment Company Act of
1940.
2........Ten Percent Limitation on Securities of Any One Issuer
.........Short-Intermediate-CA, Florida High Income*, and Short-Intermediate may
not purchase more than 10% of any class of securities (voting securities in the
case of Florida High Income* and Short-Intermediate) of any one issuer other
than the U.S. government and its agencies or instrumentalities.
<PAGE>
3........Investment for Purposes of Control or Management
.........None of Florida High Income, Short-Intermediate or
Short-Intermediate-CA may invest in companies for the purpose of exercising
control or management.
4........Purchase of Securities on Margin
.........None of Florida Municipal Bond, Georgia Municipal Bond, New Jersey Tax
Free, North Carolina Municipal Bond, South Carolina Municipal Bond, Virginia
Municipal Bond, Florida High Income*, High Grade, Short-Intermediate or
Short-Intermediate-CA may purchase securities on margin, except that each Fund
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<PAGE>
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.
5........Unseasoned Issuers
.........None of Florida Municipal Bond*, Georgia Municipal Bond*, North
Carolina Municipal Bond*, South Carolina Municipal Bond*, Virginia Municipal
Bond* or High Grade* will invest more than 5% of its total assets in industrial
development bonds (and, in the case of High Grade, other municipal securities)
where the principal and interest are the responsibility of companies (or
guarantors, where applicable) with less than three years of continuous
operations, including the operation of any predecessor.
.........None of Florida High Income*, Short-Intermediate or
Short-Intermediate-CA may invest more than 5% of its total assets in securities
of unseasoned issuers (taxable securities of unseasoned issuers for
Short-Intermediate and Short-Intermediate-CA) that have been in continuous
operation for less than three years, including operating periods of their
predecessors, except that no such limitation shall apply to the extent that (i)
each Fund may invest in obligations issued or guaranteed by the U.S. government
and its agencies or instrumentalities, (ii) Short-Intermediate and
Short-Intermediate-CA may invest in municipal securities, and (iii) Florida High
Income* may invest in municipal bonds.
6........Underwriting
.........None of Florida Municipal Bond, Georgia Municipal Bond, New Jersey
Tax- Free, North Carolina Municipal Bond, South Carolina Municipal Bond,
Virginia Municipal Bond, High Grade, Florida High Income*, Short-Intermediate or
Short-Intermediate-CA may engage in the business of underwriting the securities
of other issuers, provided that the purchase of municipal securities or other
permitted investments, directly from the issuer thereof (or from an underwriter
for an issuer) and the later disposition of such securities in accordance with a
Fund's investment program shall not be deemed to be an underwriting.
<PAGE>
7........Interests in Oil, Gas or Other Mineral Exploration or Development
Programs
.........Neither Florida High Income, Short-Intermediate nor
Short-Intermediate-CA may purchase, sell or invest in interests in oil, gas or
other mineral exploration or development programs.
.........Florida Municipal Bond*, Georgia Municipal Bond*, North Carolina
Municipal Bond*, South Carolina Municipal Bond*, Virginia Municipal Bond*, or
High Grade will not purchase interests in or sell oil, gas or other mineral
exploration or development programs or leases, although they may purchase the
securities of issuers which invest in or sponsor such programs.
8........Concentration in Any One Industry
.........Neither New Jersey Tax Free, Short-Intermediate, nor
Short-Intermediate-CA may invest 25% or more of its total assets in the
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<PAGE>
securities of issuers conducting their principal business activities in any one
industry; provided, that this limitation shall not apply (i) with respect to
each Fund, to obligations issued or guaranteed by the U.S. government or its
agencies or instrumentalities and to municipal securities, or (ii) with respect
to New Jersey Tax-Free and Short-Intermediate-CA to certificates of deposit and
bankers' acceptances issued by domestic branches of U.S. banks or (iii) with
respect to New Jersey Tax-Free to municipal obligations.
.........Florida Municipal Bond, Georgia Municipal Bond, North Carolina
Municipal Bond, South Carolina Municipal Bond, Virginia Municipal Bond, High
Grade and Florida High Income will not purchase securities if, as a result of
such purchase, 25% or more of the value of their total assets would be invested
in any one industry, or in industrial development bonds or other securities, the
interest upon which is paid from revenues of similar types of projects. However,
the Fund may invest as temporary investments more than 25% of the value of their
total assets in cash or cash items, securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, or instruments secured by these
money market instruments, such as repurchase agreements.
9........Warrants
.........None of Florida High Income*, Short-Intermediate or
Short-Intermediate-CA may invest more than 5% of its total net assets in
warrants, and, of this amount, no more than 2% of each Fund's total net assets
may be invested in warrants that are listed on neither the New York nor the
American Stock Exchange.
10.......Ownership by Trustees/Officers
.........None of Florida Municipal Bond*, Georgia Municipal Bond*, North
Carolina Municipal Bond*, South Carolina Municipal Bond*, Virginia Municipal
Bond*, High Grade*, Florida High Income*, Short-Intermediate or
Short-Intermediate-CA 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
<PAGE>
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.
11.......Short Sales
.........High Grade and Florida High Income* will not make short sales of
securities or maintain a short position, unless at all times when a short
position is open a Fund owns an equal amount of such securities or of securities
which, without payment of any further consideration are convertible into or
exchangeable for securities of the same issue as, and equal in amount to, the
securities sold short. The use of short sales will allow the Funds to retain
certain bonds in their portfolios longer than it would without such sales. To
the extent that a Fund receives the current income produced by such bonds for a
longer period than it might otherwise, a Fund's investment objective is
furthered.
.........Florida Municipal Bond, Georgia Municipal Bond, North Carolina
Municipal Bond, South Carolina Municipal Bond, Virginia Municipal Bond,
Short-Intermediate and Short- Intermediate-CA will not sell any securities short
or maintain a short position.
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<PAGE>
12.......Lending of Funds and Securities
.........None of Florida High Income, Short-Intermediate or
Short-Intermediate-CA may lend its funds to other persons, provided that each
Fund may purchase issues of debt securities, acquire privately negotiated loans
made to municipal borrowers and enter into repurchase agreements.
.........Neither Florida High Income* nor Short-Intermediate may lend its
portfolio securities, unless the borrower is a broker, dealer or financial
institution that pledges and maintains collateral with the Fund consisting of
cash or securities issued or guaranteed by the U.S. government having a value at
all times not less than 100% of the current market value of the loaned
securities, including accrued interest, provided that the aggregate amount of
such loans shall not exceed 30% of the Fund's total assets.
.........Short-Intermediate-CA may not lend its portfolio securities, unless the
borrower is a broker, dealer or financial institution that pledges and maintains
collateral with the Fund consisting of cash, letters of credit or securities
issued or guaranteed by the U.S. government having a value at all times not less
than 100% of the current market value of the loaned securities, including
accrued interest, provided that the aggregate amount of such loans shall not
exceed 30% of the Fund's total assets.
.........Florida Municipal Bond, Georgia Municipal Bond, North Carolina
Municipal Bond, South Carolina Municipal Bond and Virginia Municipal Bond will
not lend any of their assets, except portfolio securities up to one-third of the
value of their total assets. Each Fund may, however, acquire publicly or
non-publicly issued municipal bonds or temporary investments or enter into
repurchase agreements in accordance with its investment objective, policies and
limitations or the Declaration of Trust.
<PAGE>
.........High Grade will not lend any of its assets except that it may purchase
or hold money market instruments, including repurchase agreements and variable
amount demand master notes in accordance with its investment objective, policies
and limitations and it may lend portfolio securities valued at not more than 15%
of its total assets to broker-dealers.
13.......Commodities
.........Florida High Income* may not purchase, sell or invest in physical
commodities unless acquired as a result of ownership of securities or other
instruments (but this shall not prevent the Fund from purchasing or selling
options and futures contracts or from investing in securities or other
instruments backed by physical commodities).
.........Neither Short-Intermediate nor Short-Intermediate-CA may purchase, sell
or invest in commodities, commodity contracts or financial futures contracts.
........New Jersey Tax-Free and High Grade will not purchase or sell commodities
or commodity contracts.
.........Florida Municipal Bond, Georgia Municipal Bond, North Carolina
Municipal Bond, South Carolina Municipal Bond and Virginia Municipal Bond will
15
<PAGE>
not purchase or sell commodities. However, each Fund may purchase put and call
options on portfolio securities and on financial futures contracts. In addition,
each Fund reserves the right to hedge its portfolio by entering into financial
futures contracts and to sell puts and calls on financial futures contracts.
14.......Real Estate
.........Florida Municipal Bond, Georgia Municipal Bond, North Carolina
Municipal Bond, South Carolina Municipal Bond and Virginia Municipal Bond will
not buy or sell real estate, including limited partnership interests, although
each Fund may invest in municipal bonds secured by real estate or interests in
real estate.
.........Florida High Income* may not purchase, sell or invest in real estate or
interests in real estate, except that it may purchase, sell or invest in
marketable securities of companies holding real estate or interests in real
estate, including real estate investment trusts.
.........High Grade will not buy or sell real estate, although it 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.
.........Neither Short-Intermediate nor Short-Intermediate-CA may purchase, sell
or invest in real estate or interests in real estate, except that each Fund may
purchase municipal securities and other debt securities secured by real estate
or interests therein.
<PAGE>
.........New Jersey Tax-Free will not purchase or sell real estate except that
it may purchase municipal obligations or other securities issued by companies
which invest in real estate or securities issued by companies which invest in
real estate or interests therein.
15.......Borrowing, Senior Securities, Reverse Repurchase Agreements
.........Neither Short-Intermediate nor Short-Intermediate-CA nor Florida High
Income may borrow money, issue senior securities or enter into reverse
repurchase agreements, except for temporary or emergency purposes, and not for
leveraging, and then in amounts not in excess of 10% of the value of each Fund's
total assets at the time of such borrowing; or mortgage, pledge or hypothecate
any assets except in connection with any such borrowing and in amounts not in
excess of the lesser of the dollar amounts borrowed or 10% of the value of each
Fund's total assets at the time of such borrowing, provided that
Short-Intermediate and Short-Intermediate-CA will not purchase any securities at
any time when borrowings, including reverse repurchase agreements, are
outstanding. No Fund will enter into reverse repurchase agreements exceeding 5%
of the value of its total assets.
.........Florida Municipal Bond, Georgia Municipal Bond, North Carolina
Municipal Bond, South Carolina Municipal Bond, Virginia Municipal Bond and High
Grade will not issue senior securities, except each Fund may borrow money
directly or through reverse repurchase agreement 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 amount borrowed, in order to meet redemption
requests without immediately selling portfolio instruments; and except to the
16
<PAGE>
extent a Fund will enter into futures contracts. Any such borrowings need not be
collateralized. No Fund will purchase any securities while borrowings in excess
of 5% of its total assets are outstanding. No Fund will borrow money or engage
in reverse repurchase agreements for investment leverage purposes. None of
Florida Municipal Bond*, Georgia Municipal Bond*, North Carolina Municipal
Bond*, South Carolina Municipal Bond*, Virginia Municipal Bond* or High Grade
will mortgage, pledge or hypothecate any assets except to secure permitted
borrowings. In those cases, High Grade 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. 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 and the purchase of
securities on a when-issued basis are not deemed to be a pledge. 16.......Joint
Trading
.........Florida High Income may not participate on a joint or joint and several
basis in any trading account in any securities. (The "bunching of orders for the
purchase or sale of portfolio securities with its investment adviser or accounts
under its management to reduce brokerage commissions, to average prices among
them or to facilitate such transactions is not considered a trading account in
securities for purposes of this restriction).
.........New Jersey Tax-Free will not issue senior securities, borrow money or
pledge or mortgage its assets, except that the Fund may borrow from banks up to
10% of the value of its total net assets for temporary or
<PAGE>
emergency purposes only to meet anticipated redemption requirements. The Fund
will not purchase securities while any such borrowings are outstanding.
17.......Options
.........Neither New Jersey Tax Free, Short-Intermediate nor
Short-Intermediate-CA may write, purchase or sell put or call options, or
combinations thereof, except that each Fund may purchase securities with rights
to put securities to the seller in accordance with its investment program.
18.......Investing in Securities of Other Investment Companies
.........Florida Municipal Bond*, Georgia Municipal Bond*, North Carolina
Municipal Bond*, South Carolina Municipal Bond*, Virginia Municipal Bond* and
High Grade will purchase securities of investment companies only in open-market
transactions involving customary broker's commissions. 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.
.........Florida High Income*, New Jersey Tax-Free, Short-Intermediate* and
Short-Intermediate-CA* may not purchase the securities of other investment
companies, except to the extent such purchases are not prohibited by applicable
law.
19.......Restricted Securities
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<PAGE>
.........High Grade will not invest more than 10% of its total assets in
securities subject to restrictions on resale under the Federal securities laws.
.........New Jersey Tax-Free will not purchase restricted securities, which are
securities that must be registered under the Securities Act of 1933 before they
may be offered or sold to the public. This restriction does not apply to
restricted securities which are determined to be liquid by the Fund's investment
adviser under supervision of the Board of Trustees.
20.......Investment in Municipal Securities
.........Neither Short-Intermediate nor Short-Intermediate-CA may invest more
than 20% of its total assets in securities other than, in the case of
Short-Intermediate, municipal securities, and in the case of
Short-Intermediate-CA, California municipal securities (as described under
"Description of the Funds - Investment Objectives and Policies" in the Funds'
Prospectus), unless extraordinary circumstances dictate a more defensive
posture.
.........Florida High Income will invest, under normal market conditions, at
least 80% of its net assets in municipal securities and at least 90% of such
assets will be invested in Florida obligations.
21.......Equity Securities
New Jersey Tax-Free may not purchase equity securities or securities
convertible into equity securities.
NON FUNDAMENTAL OPERATING POLICIES
.........Certain Funds have adopted additional non-fundamental operating
policies. Operating policies may be changed by the Board of Trustees without a
shareholder vote.
1........Securities Issued by Government Units; Industrial Development Bonds
.........Short-Intermediate has determined not to invest more than 25% of its
total assets (i) in securities issued by governmental units located in any one
state, territory or possession of the United States (but this limitation does
not apply to project notes backed by the full faith and credit of the U.S.
government) or (ii) industrial development bonds not backed by bank letters of
credit. In addition, Short-Intermediate-CA has determined not to invest more
than 25% of its total assets in industrial development bonds not backed by bank
letters of credit.
2........Illiquid Securities.
.........Florida Municipal Bond, Georgia Municipal Bond, North Carolina
Municipal Bond, South Carolina Municipal Bond, Virginia Municipal Bond, High
Grade, Short-Intermediate and Short-Intermediate-CA may not invest more than 15%
(10% in the case of High Grade) of their net assets in illiquid securities and
other securities which are not readily marketable, including repurchase
agreements which have a maturity of longer than seven days, but excluding
certain securities and municipal leases determined by the Trustees to be liquid.
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<PAGE>
3........Other. In order to comply with certain state blue sky limitations:
...........Each of Short-Intermediate and Short-Intermediate-CA interprets
fundamental investment restriction 7 to prohibit investments in oil, gas and
mineral leases.
...........Each of Short-Intermediate and Short-Intermediate-CA interprets
fundamental investment restriction 14 to prohibit investment in real estate
limited partnerships which are not readily marketable.
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 (other than Short-Intermediate, Short-Intermediate-CA and Florida
High Income) have no present intention to borrow money or invest in reverse
repurchase agreements in excess of 5% of the value of
<PAGE>
their net assets during the coming fiscal year. The Funds did not invest more
than 5% of their net assets in 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 having capital, surplus, and undivided
profits in excess of $100,000,000 at the time of investment to be "cash items".
.........High Grade does not intend to invest more than 25% of the value of its
assets in any issuer in a single state.
MANAGEMENT
The age, address and principal occupation of the Trustees and executive
officers of The Evergreen Municipal Trust, the Evergreen Tax Free Trust
(formerly, FFB Funds Trust) and Evergreen Investment Trust (formerly, First
Union Funds) (each a "Trust") and collectively the "Trust") during the past five
years are set forth below.
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), Greenwich Plaza, Greenwich, CT-Trustee. Partner in the law firm
of Cummings and Lockwood since 1968.
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.
Gerald M. McDonnell (57), 209 East Nucor Rd. Norfolk, NE, NC-Trustee. Sales
Representative with Nucor-Yamoto Inc. (steel producer) since 1988.
19
<PAGE>
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., 227 West Trade St.,
Charlotte, NC-Trustee. Partner in the law firm Holcomb and Pettit, P.A. since
1990; Attorney, Clontz and Clontz from 1980 to 1990.
Russell A. Salton, III, M.D. (49) 205 Regency Executive Park, Charlott,
NC-Trustee. Medical Director, U.S. Healthcare of Charlotte, North Carolina since
1995, President, Primary Physician Care from 1990 to 1996.
Michael S. Scofield (53), 212 S. Tryon Street Suite 1280, Charlotte, NC-Trustee.
Attorney, Law Offices of Michael S. Scofield since 1969.
Robert J. Jeffries (73), 2118 New Bedford Drive, Sun City Center, FL-Trustee
Emeritus. Corporate consultant since 1967.
John J. Pileggi (37), 237 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), 237 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.
The officers listed above hold the same positions with thirteen investment
companies offering a total of forty-three investment funds within the Evergreen
mutual fund complex. Messrs. Howell, 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 each 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 the Trusts 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. The Evergreen Municipal Trust and Evergreen Investment Trust
pay each Trustee who is not an "affiliated person" an annual retainer and fee
per meeting attended, plus expenses. The Evergreen Tax Free Trust pays each
Trustee who is not an "affiliated person a fee per meeting attended, plus
expenses, as follows:
20
<PAGE>
Name of Trust/Fund Annual Retainer Meeting Fee
The Evergreen Municipal Trust - $ 4,000*
Florida High Income $100
Short-Intermediate $100
Short-Intermediate-CA $100
Evergreen Investment Trust - $15,000** $2,000**
Florida Municipal Bond
Georgia Municipal Bond
North Carolina Municipal Bond
South Carolina Municipal Bond
Virginia Municipal Bond
High Grade
Evergreen Tax Free Trust $ 0 $100
New Jersey Tax-Free
- - - ------------------------
* Allocated among the Evergreen Money Market Trust, which offers three
investment series (Evergreen Money Market Fund, Evergreen Institutional Money
Market Fund and Evergreen Institutional Treasury Money Market Fund), and the
Evergreen Municipal Trust, which offers five investment series (Evergreen Tax
Exempt Money Market Fund, Evergreen Short-Intermediate Municipal Fund, Evergreen
Short-Intermediate Municipal Fund-California, Evergreen Florida High Income
Municipal Bond Fund and Evergreen Institutional Tax-Exempt Money Market Fund).
** The annual retainer and the per meeting fee paid by Evergreen Investment
Trust to each Trustee are allocated among its fourteen series.
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.
Set fourth below for each of the Trustees is the aggregate compensation
paid to such Trustees by each of The Evergreen Municipal Trust and Evergreen
Investment Trust for the fiscal year ended August 31, 1996, and by Evergreen Tax
Free Trust for the period January 19, 1996 (the date of their election as
Trustees )through August 31, 1996:
21
<PAGE>
Total
Compensation
Aggregate Compensation From Each Trust From Trusts
The Evergreen Evergreen Evergreen & Fund
Name of Municipal Investment Tax Free Complex Paid
Trustee Trust Trust* Trust to Trustees
Laurence Ashkin 3,522 -0- 611 26,475
Foster Bam 3,522 -0- 611 26,475
James S. Howell 3,771 22,029 606 53,000
Robert J.
Jeffries** 2,170 -0- 311 15,238
Gerald M.
McDonnell 3,447 19,916 606 45,975
Thomas L.
McVerry 3,537 20,456 606 47,100
William Walt
Pettit 3,411 19,737 606 45,600
Russell A.
Salton, III, M.D. 3,411 19,737 606 48,750
Michael S.
Scofield 3,411 19,737 606 48,750
* Formerly known as First Union Funds.
** Robert J. Jeffries has been serving as a Trustee Emeritus since January 1,
1996.
No officer or Trustee of the Trusts owned Class A or B shares of any Fund
as of the date hereof. The number and percent of outstanding Class Y shares of
of each Fund owned by officers and Trustees as a group on October 10, 1996 is as
follows:
No. of Shares Owned
By Officers and Ownership by Officers and
Trustees Trustees as a % of Class &
Name of Fund as a Group as a % of Fund
Florida Municipal Bond -0-
Georgia Municipal Bond -0-
North Carolina Municipal Bond 2,213 .24%
South Carolina Municipal Bond -0-
Virginia Municipal Bond -0-
Florida High Income -0-
High Grade 410,541 17.50%
Short-Intermediate 15,558 0.50%
Short-Intermediate-CA -0-
22
<PAGE>
New Jersey Tax-Free -0-
Set forth below is information with respect to each person, who, to
each Fund's knowledge, owned
<PAGE>
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 October 10, 1996.
Name of No. of % of
Name and Address Fund/Class Shares Class/Fund
- ------------------- ---------- ------ ----------
First Union National Bank of NC North Carolina 347,331 90.93%/ 5.67%
Trust Accounts Municipal Bond/Y
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank of NC North Carolina 20,039 5.25%/ .33%
Trust Accounts Municipal Bond/Y
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo South Carolina 16,327 18.78%/ 1.40%
7RK0124218 Municipal Bond/A
Thomas B. Carr and
Louise R. Carr
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo South Carolina 5,943 6.84%/ .51%
Charles Dean Turner Municipal Bond/A
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo South Carolina 19,247 22.14%/ 1.65%
Mildred R. Robards Municipal Bond/A
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo South Carolina 5,407 6.22%/ .46%
Warren A. Ransom, Jr. Municipal Bond/A
Laurie P. Ransom
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo South Carolina 4,979 5.73%/ .43%
Virginia C. Thomas Municipal Bond/A
23
<PAGE>
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo South Carolina 28,220 6.44%/ 2.43%
Ruby B. Motsinger Municipal Bond/B
Joseph Glenn Motsinger
Tennants by Common
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank of NC* South Carolina 225,966 42.00%/ 19.42%
Trust Accounts Municipal Bond/Y
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank of NC* South Carolina 310,535 57.72%/ 26.69%
Trust Accounts Municipal Bond/Y
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
Duff M. Green Virginia 22,596 7.57%/ 1.66%
c/o First Union National Bank Municipal Bond/A
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo Virginia 17,966 6.02%/ 1.32%
David A. Hetzer and Municipal Bond/A
Iris L. Hetzer
C/O First Union National Bank
<PAGE>
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo Virginia 41,533 6.75%/ 3.05%
Harry S. Williams Municipal Bond/B
Patsy Williams
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank of NC* Virginia 332,285 74.33%/ 24.41%
Trust Accounts Municipal Bond/Y
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
24
<PAGE>
First Union National Bank of NC* Virginia 111,321 24.90%/ 8.18%
Trust Accounts Municipal Bond/Y
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
Merrill Lynch Pierce Fenner Florida
Private Client Group Municipal Bond/A 607,260 5.21%/ 3.81%
C/O FUBS
301 S. Tryon St.
Charlotte, NC 28288
First Union National Bank Florida 1,179,622 87.83%/ 7.40%
Trust Accounts Municipal Bond/Y
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank of NC* Florida 122,721 9.14%/ .77%
Trust Accounts Municipal Bond/Y
<PAGE>
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo Georgia 11,087 5.23%/ .82%
Yasmin M. Dharamsi Municipal Bond/A
Farid M Dharamsi
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo Georgia 10,828 6.11/.76%
Yasmin M. Dharamsi Municipal Bond/A
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo Georgia 10,966 5.17%/ .81%
William F. Hill Jr. and Municipal Bond/A
Marvin Hill
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank of NC Georgia 135,291 79.67%/ 9.95%
Trust Accounts Municipal Bond/Y
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
25
<PAGE>
First Union National Bank of NC Georgia 31,929 18.80%/12.35%
Trust Accounts Municipal Bond/Y
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
<PAGE>
Charlotte, NC 28288-0001
First Union National Bank of NC Fl.High Income 165,822 80.86%/1.68%
Trust Accounts Muni Bond/Y
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Bank of NC Fl.High Income 11,845 5.78%/.12%
Trust Accounts Muni Bond/Y
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
Merrill Lynch Fl.High Income 789,508 10.52%/8.02%
Trade House Account - Aid Muni Bond/A
c/o:FUBS & Co. FEBO
301 S.Tryon St.
Charlotte, NC 28288
First Union National Bank of NC High Grade/Y 515,367 22.07%/ 5.14%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
Foster & Foster High Grade/Y 405,595 17.37%/ 4.05%
P.O. Box 1669
c/o Lieber & Co.
2500 Westchester Ave.
Purchase, NY 10577
Fubs & Co. Febo ** Short-Intermediate/A 1,984,127 72.66%/28.87%
Irwin Belk
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. FBO Short-Intermediate/B 37,083 5.40%/ .54%
Mark E. Smith
Melissa A. Smith JT TEN
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
<PAGE>
26
<PAGE>
Fubs & Co. FBO Short-Intermediate/B 48,961 7.13%/ .71%
Carl R. Nodine and
Linda F. Nodine
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
First Union National Band/EB/INT Short-Intermediate/Y 417,133 12.07%/6.07%
Trust Account
Attn: Trust Operation Fund Group
401 S. Tryon St.
Charlotte, NC 28202-1911
Fubs & Co. Febo New Jersey Tax-Free/Y 649,557 76.42%/15.57%
Trust Accounts
Attn: Ginny Batten CMG-1151-2
C/O First Union National Bank
401 S. Tryon Street
Charlotte, NC 28202-1911
Fubs & Co. Febo New Jersey Tax-Free/Y 200,425 23.58%/4.80%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo New Jersey Tax-Free/B 26,116 8.82%/ 63%
Dominick J. Huster and
Grace D. Huster
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
Fubs & Co. Febo New Jersey Tax-Free/B 18,978 6.41%/45%
Ralph Gangemi and
Alice Gangemi
C/O First Union National Bank
301 S. Tryon Street
Charlotte, NC 28288-0001
<PAGE>
First Union National Bank of North Carolina and its affiliates act in
various capacities for numerous accounts. As a result of its ownership on
October 10, 1996, it may be deemed to "control" the Funds listed below, as that
term is defined in the 1940 Act.
Fund % of Ownership - Class % of Ownership - Fund
- ---- ---------------------- ---------------------
Evergreen VA Muni Bond 99.23% - Class(Y) 32.59%
Evergreen SC Muni Bond 84.08% - Class(Y) 46.12%
27
<PAGE>
** As a result of his ownership of 72.66% of Class A shares and 28.87% overall
of Evergreen Short-Intermediate Municipal Fund on October 10, 1996, Irwin Belk
may be deemed to "control" the Fund as that each term is defined in the 1940
Act.
INVESTMENT ADVISERS
(See also "Management of the Funds" in each Fund's Prospectus)
The investment adviser of Short-Intermediate and Short-Intermediate-CA is
Evergreen Asset Management Corp., a New York corporation, with offices at 2500
Westchester Avenue, Purchase, New York ("Evergreen Asset" or the "Adviser").
Evergreen Asset is owned by 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. The investment adviser of Florida Municipal Bond, Georgia Municipal
Bond, New Jersey Tax Free, North Carolina Municipal Bond, South Carolina
Municipal Bond, Virginia Municipal Bond, Florida High Income and High Grade is
FUNB which provides investment advisory services through its Capital Management
Group. The Directors of Evergreen Asset are Richard K. Wagoner and Barbara I.
Colvin. The executive officers of Evergreen Asset are Stephen A. Lieber,
Chairman and Co-Chief Executive Officer, Nola Maddox Falcone, President and
Co-Chief Executive Officer and Theodore J. Israel, Jr., Executive Vice
President.
On June 30, 1994, Evergreen Asset and Lieber and Company ("Lieber")
were acquired by First Union through certain of its subsidiaries. Evergreen
Asset was acquired by FUNB, a wholly-owned subsidiary (except for directors'
qualifying shares) of First Union, by merger into EAMC Corporation ("EAMC") a
wholly-owned subsidiary of FUNB. EAMC then assumed the name "Evergreen Asset
Management Corp." and succeeded to the business of Evergreen Asset.
Contemporaneously with the succession of EAMC to the business of Evergreen Asset
and its assumption of the name "Evergreen Asset Management Corp.", Short-
Intermediate and Short-Intermediate-CA entered into a new investment advisory
agreement with EAMC and into a distribution agreement with Evergreen Funds
Distributor, Inc. (the "Distributor"), an affiliate of Furman Selz LLC. At that
time, EAMC also entered into a new sub-advisory agreement with Lieber pursuant
to which Lieber provides certain services to Evergreen Asset in connection with
its duties as
<PAGE>
investment adviser.
The partnership interests in Lieber, a New York general partnership,
were acquired by Lieber I Corp. and Lieber II Corp., which are both wholly-owned
subsidiaries of FUNB. The business of Lieber is being continued. The new
advisory and sub-advisory agreements were approved by the shareholders of
Short-Intermediate and Short-Intermediate-CA at their meeting held on June 23,
1994, and became effective on June 30, 1994. Florida High Income, which
commenced operations on June 30, 1995, entered into an advisory agreement with
FUNB on June 30, 1995.
Prior to January 1, 1996, First Fidelity Bank, N.A. ("First Fidelity")
acted as investment adviser to New Jersey Tax-Free. On June 18, 1995, First
Union entered into an Agreement and Plan of Merger (the "Merger Agreement") 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 28
<PAGE>
consummated on January 1, 1996. As a result of the Merger, FUNB and Evergreen
Asset, succeeded to the investment advisory and administrative functions
currently performed by various units of First Fidelity.
Under its Investment Advisory Agreement with each Fund, each Adviser has
agreed to furnish reports, statistical and research services and recommendations
with respect to each Fund's portfolio of investments. In addition, each Adviser
provides office facilities to the Funds and performs a variety of administrative
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, share certificates, mailings, brokerage, custodian and stock
transfer charges, printing, legal and auditing expenses, expenses of shareholder
meetings and reports to shareholders. Notwithstanding the foregoing, each
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:
FLORIDA MUNICIPAL
BOND Year Ended Period Ended Year Ended
8/31/96 8/31/95 12/31/94
Advisory Fee $803,741 $243,413 $171,732
Waiver (321,496) (73,661) (171,732)
-------- -------- ---------
Net Advisory Fee 482,245 169,752 $ 0
========= ========== ==========
Expense
Reimbursement (152,334) (46,864) (90,218
-------- -------- ---------
GEORGIA MUNICIPAL
BOND Year Ended Period Ended Year Ended
8/31/96 8/31/95 12/31/94
Advisory Fee $63,102 $ 32,646 $36,674
Waiver (63,102) (32,646) (36,674)
-------- -------- --------
Net Advisory Fee $ 0 $ 0 $ 0
======== ======== =========
Expense
Reimbursement (176,832) (105,409) (189,746)
---------- ---------
NEW JERSEY
TAX FREE Year Ended Period Ended Year Ended
8/31/96 2/28/96 2/28/95
Advisory Fee $107,212 $190,195 $191,038
29
<PAGE>
Waiver (107,212) (190,195) (191,038)
---------- --------- --------
Net
Advisory Fee $ 0 $ 0 $ 0
========== ========== ==========
Expense
Reimbursement ($47,673) $ 63,918 $107,952
--------- ---------- ----------
NORTH CAROLINA
MUNICIPAL BOND Year Ended Period Ended Year Ended
8/31/96 8/31/95 12/31/94
Advisory Fee $306,892 $190,284 $287,040
Waiver (164,001) (132,051) (193,158)
--------- --------- ---------
Net
Advisory Fee $142,891 $ 58,233 $93,882
========== ========== ==========
Expense
Reimbursement -0- -0- (28,121)
--------- ---------- ----------
SOUTH CAROLINA
MUNICIPAL BOND Year Ended Period Ended Year Ended
8/31/96 8/31/95 12/31/94
Advisory Fee $ 40,781 $ 13,154 $8,905
Waiver (40,781) (13,154) (8,905)
-------- -------- --------
Net Advisory Fee $ 0 $ 0 $ 0
======== ======== ========
Expense
Reimbursement (213,820) (144,430) (177,387)
--------- --------- ----------
VIRGINIA
MUNICIPAL BOND Year Ended Period Ended Year Ended
8/31/96 8/31/95 12/31/94
Advisory Fee $51,952 $ 23,156 $24,942
Waiver (51,952) ($ 23,156) ($24,942)
Net Advisory Fee 0 0 0
======== ======== ========
Expense
Reimbursement (209,667) (120,876) (205,073)
--------- --------- --------
FLORIDA HIGH
INCOME Year Ended Year Ended
8/31/96 8/31/95
Advisory Fee $477,128 $123,320
30
<PAGE>
Waiver (238,564) (71,690)
--------- --------
Net Advisory Fee 238,564 $ 51,630
======== ========
Expense
Reimbursement 0 0
HIGH GRADE Year Ended Period Ended Year Ended
8/31/96 8/31/95 12/31/94
Advisory Fee $575,456 $338,767 $599,854
Waiver (228,548) ( 20,456) (16,091)
--------- --------- --------
Net Advisory Fee 346,908 $318,311 $583,763
========= ========= ==========
SHORT-INTERMEDIATE Year Ended Year Ended Year Ended
8/31/96 8/31/95 8/31/94
Advisory Fee $287,149 $263,947 $301,565
Waiver (109,619) ( 63,612) (150,194)
--------- --------- --------
Net Advisory Fee 177,530 $200,335 $151,371
======== ======== ========
Expense
Reimbursement (30,962) ( 28,521) $ 0
-------- -------- -------
SHORT-INTERMEDIATE-
CA Year Ended Year Ended Year Ended
8/31/96 8/31/95 8/31/94
Advisory Fee $109,714 $134,625 $164,447
Waiver (49,870) ( 48,955) (129,952)
------- -------- ---------
Net Advisory Fee $59,844 $ 85,670 $34,495
======= ======= =======
Expense
Reimbursement 0 0 0
-------- ------- ------
South Carolina Municipal Bond and Florida High Grade commenced
operations on January 4, 1994, and June 30, 1995, respectively, and, therefore,
the first year's figures set forth in the table above reflect investment
advisory fees paid for the period from commencement of operations through
December 31, 1994 for South Carolina Municipal Bond and, with respect to Florida
High Income, for the period from commencement of operations through August 31,
1995.
Expense Limitations
With respect to Short-Intermediate and Short-Intermediate CA, Evergreen
31
<PAGE>
Asset has agreed to reimburse each Fund to the extent that the Fund's aggregate
operating expenses (including the Adviser's fee but excluding interest, taxes,
brokerage commissions and extraordinary expenses, and, for Class A and Class B
shares Rule 12b-1 distribution fees and shareholder servicing fees payable)
exceed 1% of its average net assets for any fiscal year.
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 each
Trust's Trustees or by the respective 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 willful misfeasance, bad faith or gross negligence
on the part of the Adviser or of reckless disregard of its obligations
thereunder. The Investment Advisory Agreements with respect to Florida High
Income, Short-Intermediate and Short-Intermediate-CA were approved by each
Fund's shareholders on June 23, 1994, became effective on June 30, 1994, (June
30, 1995 with respect to Florida High Income) was last approved on February
8,1996, and will continue in effect until April 30, 1997, (June 30, 1997 with
respect to Florida High Income) and thereafter from year to year provided that
their continuance is approved annually by a vote of a majority of the Trustees
of each Trust including a majority of those Trustees who are not parties thereto
or "interested persons" (as defined in the 1940 Act) of any such party, cast in
person
<PAGE>
at a meeting duly called for the purpose of voting on such approval or a
majority of the outstanding voting shares of each Fund. With respect to Florida
Municipal Bond, Georgia Municipal Bond, North Carolina Municipal Bond, South
Carolina Municipal Bond, Virginia Municipal Bond and High Grade, the Investment
Advisory Agreement dated February 28, 1985 and amended from time to time
thereafter was last approved by the Trustees of Evergreen Investment Trust
(formerly, First Union Funds) on February 8, 1996 and it will continue in effect
until April 30, 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 of Evergreen Investment Trust 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 New Jersey Tax Free, the Investment Advisory Agreement dated January
1, 1996 was first approved by the shareholders of the Fund on December 12, 1995
and will continue until January 1, 1998 and from year to year with respect to
the Fund provided that such continuance is approved annually by a vote of a
majority of the Trustees of Evergreen Tax Free Trust 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 the
Fund.
Certain other clients of each Adviser may have investment objectives
and policies similar to those of the Funds. Each Adviser (including the
sub-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 each Adviser to allocate advisory recommendations and the
placing of orders in a manner which is deemed equitable by the Adviser to the
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accounts involved, including the Funds. When two or more of the 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.
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 or FUNB
acts as investment adviser or between the Fund and any advisory clients of
<PAGE>
Evergreen Asset, FUNB or Lieber. 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 $250 million. On July 1, 1995, Evergreen Asset commenced providing
administrative services to each of the portfolios of Evergreen Investment Trust
and on January 19, 1996 Evergreen Asset commenced providing administrative
services to each of the portfolios of Evergreen Tax Free Trust for a fee based
on the average daily net assets of each fund administered by Evergreen Asset for
which Evergreen Asset or FUNB also serves 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 .010% on assets in
excess of $30 billion.
Prior to January 1, 1996, Furman Selz LLC acted as administrator for
New Jersey Tax Free. For the fiscal years ended February 28, 1994, 1995 and the
fiscal period ended January 18, 1996, Furman Selz LLC waived its entire
administrative fee.
Furman Selz LLC, an affiliate of the Distributor, serves as
sub-administrator to Florida Municipal Bond, Georgia Municipal Bond, North
Carolina Municipal Bond, South Carolina Municipal Bond, Virginia Municipal Bond,
High Grade and New Jersey Tax Free 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:
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.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 serve as investment adviser as of September 30, 1996 were approximately
$16 billion.
For the fiscal year ended August 31, 1996, the fiscal period ended August
31, 1995, and the year ended December 31, 1994 Florida Municipal Bond incurred
$81,881, $38,751 and $75,397 respectively, in administrative service costs, all
of which were voluntarily waived for the year ended December 31, 1994. For the
fiscal year ended August 31, 1996, the fiscal period ended August 31, 1995 and
the fiscal year ended December 31, 1994, Georgia Municipal Bond incurred $4,159,
$3,901 and $75,479, respectively, in administrative service costs, all of which
were voluntarily waived. For the fiscal year ended August 31, 1996,
<PAGE>
the fiscal period ended August 31, 1995 and the fiscal year ended December 31,
1994, North Carolina Municipal Bond incurred $31,447, $23,309 and $75,476,
respectively, in administrative service costs, of which $ 0, $0 and $28,121,
respectively were voluntarily waived. For the fiscal year ended August 31, 1996,
the fiscal period ended August 31, 1995, and the period January 3, 1994
(commencement of operations) to December 31, 1994, South Carolina Municipal Bond
incurred $4,123, $1,451 and $104,356, respectively in administrative service
costs, all of which were voluntarily waived. For the fiscal year ended August
31, 1996, the fiscal period ended August 31, 1995 and the fiscal year ended
December 31, 1994, Virginia Municipal Bond incurred $5,136, $2,701 and $75,479
,respectively, in administrative service costs, all of which were voluntarily
waived. For the fiscal year ended August 31, 1996, the fiscal period ended
August 31, 1995 and the fiscal year ended December 31, 1994, High Grade incurred
$59,073, $50,406 and $101,004, respectively, in administrative service costs.
For the fiscal period from January 19, 1996 through August 31, 1996 New Jersey
Tax-Free incurred $9,468, in administrative service costs.
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 and B shares and are charged as class expenses, as
accrued. The distribution fees attributable to the Class B shares are designed
to permit an investor to purchase such shares through broker-dealers without the
assessment of a front-end sales charge, while at the same time permitting the
Distributor to compensate broker-dealers in connection with the sale of such
shares. In this regard the purpose and function of the combined contingent
deferred sales charge and distribution services fee on the Class B shares are
the same as those of the front-end sales charge and distribution fee with
respect to the Class A shares in that in each case the sales charge and/or
distribution fee provide for the financing of the distribution of the Fund's
shares.
Under the Rule 12b-1 Distribution Plans that have been adopted by each
Fund with respect to each of its Class A and Class B 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 each 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 each Trust (as defined in the 1940 Act) are committed to
the discretion of such disinterested Trustees then in office.
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Each Adviser may from time to time and from its own funds or such other
resources as may be permitted by rules of the Securities and Exchange Commission
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.
Short-Intermediate and Short-Intermediate-CA commenced offering Class A and
Class B shares on January 3, 1995 and Florida High Income commenced offering
Class A and Class B shares on June 30, 1995. Each Plan
<PAGE>
with respect to such Funds became effective on December 30, 1994 (June 30, 1995
with respect to Florida High Income) and was initially approved by the sole
shareholder of each Class of shares of each Fund with respect to which a Plan
was adopted on that date and by the unanimous vote of the Trustees of each
Trust, including the disinterested Trustees voting separately, at a meeting
called for that purpose and held on December 13, 1994 (April 20, 1995 with
respect to Florida High Income). The Distribution Agreements between each Fund
and the Distributor, pursuant to which distribution fees are paid under the
Plans by each Fund with respect to its Class A and Class B shares were also
approved at the December 13, 1994 (April 20, 1995 with respect to Florida High
Income) meeting 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 each 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 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.
Prior to July 7, 1995, Federated Securities Corp., a subsidiary of
Federated Investors, served as the distributor for Florida Municipal Bond,
Georgia Municipal Bond, North Carolina Municipal Bond, South Carolina Municipal
Bond, Virginia Municipal Bond and High Grade as well as other portfolios of
Evergreen Investment Trust. The Distribution Agreements between each Fund and
the Distributor pursuant to which distribution fees are paid under the Plans by
each Fund with respect to its Class A and Class B shares were approved on April
20, 1995 by the unanimous vote of the Trustees including the disinterested
Trustees voting separately.
New Jersey Tax-Free commenced offering Class B shares on January 19, 1996.
Prior to January 19, 1996, FFB Funds Distributor, Inc. served as distributor to
New Jersey Tax-Free. The Distribution Agreement between New Jersey Tax-Free and
the Distributor pursuant to which distribution fees are paid under the Plan by
New Jersey Tax-Free with respect to its Class A and Class B shares was approved
on January 19, 1996, by the unanimous vote of the Trustees including the
disinterested Trustees voting separately.
The Plans permit the payment of fees to brokers and others for distribution
and shareholder-related administrative services and to broker-dealers,
depository institutions, financial intermediaries and administrators for
administrative services as to Class A and Class B shares. The Plans are designed
to (i) stimulate brokers to provide distribution and
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administrative support services to each Fund and holders of Class A and Class B
shares and (ii) stimulate administrators to render administrative support
services to the Fund and holders of Class A and Class B 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
<PAGE>
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 and Class B shares; assisting clients in changing dividend options, account
designations, and addresses; and providing such other services as the Fund
reasonably requests for its Class A and Class B shares.
In addition to the Plans, Florida Municipal Bond, Georgia Municipal
Bond, North Carolina Municipal Bond, South Carolina Municipal Bond, Virginia
Municipal Bond, High Grade and New Jersey Tax-Free have each adopted a
Shareholder Services Plan whereby shareholder servicing agents may receive fees
from the Fund 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 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.
All material amendments to any Plan or Distribution Agreement must be
approved by a vote of the Trustees of a 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. With respect to Florida
Municipal Bond, Georgia Municipal Bond, North Carolina Municipal Bond, South
Carolina Municipal Bond, Virginia Municipal Bond and High Grade, 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.
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<PAGE>
<PAGE>
Fees Paid Pursuant To Distribution Plans. The Funds incurred the following
distribution services fee:
Florida Municipal Bond. For the fiscal period from January 1, 1995 through
August 31, 1995, and the fiscal year ended August 31, 1996, $59,721 and
$240,978, respectively, on behalf of Class A shares; and $28,054 and $215,869,
respectively, on behalf of Class B shares.
Georgia Municipal Bond. For the fiscal period from January 1, 1995 through
August 31, 1995, and the fiscal year ended August 31, 1996, $2,856 and $5,047,
respectively, on behalf of Class A shares; and $37,476 and $63,447,
respectively, on behalf of Class B shares.
North Carolina Municipal Bond. For the fiscal period from January 1, 1995
through August 31, 1995,and the fiscal year ended August 31, 1996, $13,739 and
$20,833, respectively, on behalf of Class A shares; and $239,789 and $375,352,
respectively, on behalf of Class B shares.
South Carolina Municipal Bond. For the fiscal period from January 1, 1995
through August 31, 1995,and the fiscal year ended August 31, 1996, $788 and
$1,917, respectively, on behalf of Class A shares; and $15,094 and $29,922,
respectively, on behalf of Class B shares.
Virginia Municipal Bond. For the fiscal period from January 1, 1995 through
August 31, 1995,and the fiscal year ended August 31, 1996, $3,127 and $6,048,
respectively, on behalf of Class A shares; and $22,700 and $43,430,
respectively, on behalf of Class B shares.
High Grade. For the fiscal period from January 1, 1995 through August 31, 1995,
and the fiscal year ended August 31, 1996, $97,996 and $138,927, respectively,
on behalf of Class A shares; and $167,706 and $258,074, respectively, on behalf
of Class B shares.
New Jersey Tax-Free. For the fiscal periods from March 1, 1995 through February
29, 1996, and March 1, 1996 through August 31, 1996, $11,178 and $42,308,
respectively, on behalf of Class A shares; and $87 and $5,865 for the period
from January 19, 1996 through February 29, 1996 and March 1, 1996.
Short-Intermediate. For the fiscal period from January 3, 1995 through August
31, 1995, and the fiscal year ended August 31, 1996, $4,106 and $13,347,
respectively, on behalf of Class A shares; and $20,584 and $52,375,
respectively, on behalf of Class B shares.
Short-Intermediate-CA. For the fiscal period from January 3, 1995 through August
31, 1995,and the fiscal year ended August 31, 1996, $0 and $0, respectively, on
behalf of Class A shares; and $0 and $0, respectively, on behalf of Class B
shares.
Florida High Income. For the fiscal period from June 30, 1995 through August 31,
1995, and the fiscal year ended August 31, 1996, $41,690 and $169,651,
respectively, on behalf of Class A shares; and $1,565 and $80,050, respectively,
on behalf of Class B shares.
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Fee Paid Pursuant To Shareholder Services Plans.The Funds incurred the following
shareholder services fees:
Florida Municipal Bond. For the fiscal period from January 1, 1995 through
August 31, 1995, and the fiscal year ended August 31, 1996, $9,351 and $71,956,
respectively, on behalf of Class B shares.
Georgia Municipal Bond. For the fiscal period from January 1, 1995 through
August 31, 1995, and the fiscal year ended August 31, 1996, $12,492 and $21,149,
respectively, on behalf of Class B shares.
North Carolina Municipal Bond. For the fiscal period from January 1, 1995
through August 31, 1995, and the fiscal year ended August 31, 1996, $79,930 and
$125,117, respectively, on behalf of Class B shares.
South Carolina Municipal Bond. For the fiscal period from January 1, 1995
through August 31, 1995, and the fiscal year ended August 31, 1996, $5,031 and
$9,974, respectively, on behalf of Class B shares.
Virginia Municipal Bond. For the fiscal period from January 1, 1995 through
August 31, 1995, and the fiscal year ended August 31, 1996, $7,567 and $14,476,
respectively, on behalf of Class B shares.
High Grade. For the fiscal period from January 1, 1995 through August 31, 1995,
and the fiscal year ended August 31, 1996, $55,902 and $86,025, respectively, on
behalf of Class B shares.
Florida High Income. For the fiscal period from July 10, 1995 through August 31,
1995 and for the fiscal year ended August 31, 1996, $522 and $26,683,
respectively, on behalf of Class B shares.
Short Intermediate. For the fiscal period from January 5, 1995 and the fiscal
year ended August 31, 1996, $6861 and $17,458, respectively, on behalf of Class
B shares.
New Jersey Tax-Free. For the fiscal period January 30, 1996 through February 29,
1996 and March 1, 1996 throuth August 31, 1996, $29 and $1,949 on behalf of
Class B 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, all of whom, in the case of Evergreen Asset, are associated with
Lieber. 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.
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It is anticipated that most of the Funds purchase and sale transactions
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. To the extent that receipt of these services for which the Adviser or its
affiliates might otherwise have paid, it would tend to reduce their expenses.
Except with respect to North Carolina Municipal Bond, the transactions
in which the Funds engage do not involve the payment of brokerage commissions
and are executed with dealers other than Lieber. For the fiscal year ended
August 31, 1996, the fiscal period ended August 31, 1995 and the fiscal year
ended December 31, 1994, North Carolina Municipal Bond paid $10, $ 0 and $
1,250, respectively, in commissions on brokerage transactions.
ADDITIONAL TAX INFORMATION
(See also "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
39
<PAGE>
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
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 gains or losses
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
40
<PAGE>
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.
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.
Special Tax Considerations
To the extent that the Fund distributes exempt interest dividends to a
shareholder, interest on indebtedness incurred or continued by such shareholder
to purchase or carry shares of the Fund is not deductible. Furthermore, entities
or persons who are "substantial users" (or related persons) of facilities
financed by "private activity" bonds (some of which were formerly referred to as
"industrial development" bonds) should consult their tax advisers before
purchasing shares of the Fund. "Substantial user" is defined generally as
including a "non-exempt person" who regularly uses in its trade or business a
part of a facility financed from the proceeds of industrial development bonds.
The percentage of the total dividends paid by a Fund with respect to
any taxable year that qualifies as exempt interest dividends will be the same
for all shareholders of the Fund receiving dividends with respect to such year.
If a shareholder receives an exempt interest dividend with respect to any share
and such share has been held for six months or less, any loss on the sale or
exchange of such share will be disallowed to the extent of the exempt interest
dividend amount.
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NET ASSET VALUE
The following information supplements that set forth in each Fund's
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 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 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 shares relating to distribution services fees (and, with respect to Florida
Municipal Bond, Georgia Municipal Bond, New Jersey Tax-Free, North Carolina
Municipal Bond, South Carolina Municipal Bond, Virginia Municipal Bond, Florida
High Income and High Grade, 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 three 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.
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".
42
<PAGE>
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"), or with a contingent
deferred sales charge (the deferred sales charge 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 or Class B 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. New York 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
43
<PAGE>
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
subscriber, and to avoid unnecessary expense to a Fund, stock certificates
representing shares of a Fund are not issued for any class of shares of any
Fund. 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 three 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; and (iii) 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 Advisers and
their affiliates, and (c) institutional investors. The three 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 and Class B shares are subject to a Rule 12b-1 distribution fee, (II)
Class B shares of Florida Municipal Bond, Georgia Municipal Bond, New Jersey
Tax- Free, North Carolina Municipal Bond, South Carolina Municipal Bond,
Virginia Municipal Bond and High Grade are subject to a shareholder service fee,
(III) Class A shares bear the expense of the front-end sales charge and Class B
shares bear the expense of the deferred sales charge, (IV) Class B shares bear
the expense of a higher Rule 12b-1 distribution services fee and shareholder
service fee than Class A shares and 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 and Class B 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 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, to the
extent applicable, shareholder service) fee and contingent deferred sales
charges on Class B shares prior to conversion 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 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 shares.
44
<PAGE>
Class A shares are subject to a lower distribution services fee and no
shareholder service fee and, accordingly, pay correspondingly higher dividends
per share than Class B 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, to the extent applicable, shareholder service) charges on
Class B 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 in order to have all their funds
invested initially, although remaining subject to higher continuing distribution
services (and, to the extent applicable, shareholder service) fees and 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 charge imposed by the Evergreen Equity and Long-Term Bond Funds,
(i.e., Florida Municipal Bond, Georgia Municipal Bond, New Jersey Tax-Free,
North Carolina Municipal Bond, South Carolina Municipal Bond, Virginia Municipal
Bond, Florida High Income and High Grade)or the 3.25% front end sales charge
imposed by the Evergreen Intermediate and Short-Term Bond Funds (i.e.,
Short-Intermediate and Short-Intermediate-CA) would have to hold his or her
investment approximately seven years for the Class B distribution services (and,
to the extent applicable, shareholders service) fees to exceed the front-end
sales charge plus the accumulated distribution services fee 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 distribution services (and, to the extent applicable, shareholder
service) fees on the investment, fluctuations in net asset value or the effect
of different performance assumptions.
With respect to each Fund, the Trustees have determined that currently
no conflict of interest exists between or among the Class A, Class B 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.
<PAGE>
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
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<PAGE>
Prospectus. In this regard, the Distributor may elect to reallow the entire
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
Florida
Municipal
Bond $ 9.70 $.48 8/31/96 $10.18
Georgia
Municipal
Bond $ 9.57 $.48 8/31/96 $10.05
New Jersey $10.75 $.54 8/31/96 $ 11.29
Tax-Free
North Carolina
Municipal Bond $ 9.98 $.50 8/31/96 $10.48
South Carolina
Municipal Bond $ 9.69 $.48 8/31/96 $10.17
Virginia
Municipal
Bond $ 9.68 $.48 8/31/96 $10.16
Florida
High Income $10.42 $.52 8/31/96 $10.94
High Grade $10.72 $.53 8/31/96 $11.25
<PAGE>
Short-
Intermediate $10.08 $.34 8/31/96 $10.42
Short-
Intermediate-
CA $ 9.98 $.34 8/31/96 $10.32
Prior to January 3, 1995, shares of Short-Intermediate and Short-
Intermediate-CA were offered exclusively on a no-load basis and, accordingly, no
underwriting commissions were paid in respect of sales of shares of the Funds or
retained by the Distributor. In addition, since Class B shares were not offered
prior to January 3, 1995, contingent deferred sales charges have been paid to
the Distributor with respect to Class B shares only since January 3, 1995.
46
<PAGE>
With respect to Florida Municipal Bond, Georgia Municipal Bond, North
Carolina Municipal Bond, South Carolina Municipal Bond, Virginia Municipal Bond
and High Grade for the periods indicated, the following commissions were paid to
and amounts were retained by Federated Securities Corp. through July 6, 1995,
which until such date was the principal underwriter of the portfolios of
Evergreen Investment Trust. For the period from July 7, 1995 through August 31,
1995, and the fiscal year ended August 31, 1996, commissions were paid to and
amounts were retained by the current Distributor as noted below:
Fiscal Year Period From Period From Year Ended
Ended 8/31/96 7/7/95-8/31/95 1/1/95-7/6/95 12/31/94
FLORIDA MUNICIPAL BOND
Commissions Received $49,589 $ 23,324 $ 64,431 $ 2,000
Commissions Retained 5,996 2,747 1,554 ___
GEORGIA MUNICIPAL BOND
Commissions Received $7,300 $ 9,947 $ 46,263 $103,000
Commissions Retained 875 1,747 2,473 6,000
VIRGINIA MUNICIPAL BOND
Commissions Received $20,400 $ 4,340 $ 41,373 $ 62,000
Commissions Retained 2,033 533 1,787 6,000
HIGH GRADE
Commissions Received $73,014.20 $ 5,767 $ 29,154 $ 82,000
Commissions Retained 9,050.09 712 1,515 5,000
NORTH CAROLINA MUNICIPAL
BOND
Commissions Received $16,557 $ 5,238 $117,937 $210,000
Commissions Retained 2,228 637 7,206 3,000
<PAGE>
Fiscal Year Period From Period From Period From
Ended 8/31/96 7/7/95-8/31-95 1/1/95-7/6/95 1/3/94-
12/31/94
SOUTH CAROLINA MUNICIPAL
BOND
Commissions Received $1,447 $ 853 $ 34,388 $34,000
Commissions Retained 154 98 3,497 5,000
With respect to New Jersey Tax-Free, the following commissions were
paid to and amounts were retained by FFB Funds Distributor, Inc. through January
19, 1996, which until such date was the principal underwriter of portfolios of
Evergreen Tax Free Trust (formerly FFB Funds Trust). For the period from January
20, 1996, through August 31, 1996, commissions were paid to and amounts were
retained by the current Distributor as noted below:
47
<PAGE>
Period From Period From
3/1/96-8/31/96 1/20/96-2/29/96
New Jersey Tax-Free
Commissions Received $25,644 $ 5,982
Commissions Retained $ 2,316 $ 650
With respect to Florida High Income, for the period from June 30, 1995
(commencement of offering of Class A shares) through August 31, 1995, and the
fiscal year ended August 31, 1996, commissions were paid to and amounts were
retained by the current Distributor as noted below:
Fiscal Year Period From
Ended 8/31/96 6/30/95-8/31/95
FLORIDA HIGH INCOME
Commissions Received $276,615 $196,614
Commissions Retained $ 29,467 $ 24,672
With respect to Short-Intermediate and Short-Intermediate-CA, for the
period from January 3, 1995 (commencement of offering of Class A shares) through
August 31, 1995, and the fiscal year ended August 31, 1996, commissions were
paid to and amounts were retained by the current Distributor as noted below:
Fiscal Year Period From
Ended 8/31/96 1/5/95-8/31/95
SHORT-INTERMEDIATE
Commissions Received $33,816 $ 37,130
Commissions Retained 4,326 4,445
SHORT-INTERMEDIATE-CA
Commissions Received $ 0 $ 0
Commissions Retained $ 0 $ 0
<PAGE>
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 fund 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
48
<PAGE>
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
Evergreen Fund
Evergreen Aggressive Growth Fund
Evergreen Equity Trust:
Evergreen Global Real Estate Equity Fund
Evergreen U.S. Real Estate Equity Fund
Evergreen Global Leaders Fund
The Evergreen Limited Market Fund, Inc.
Evergreen Growth and Income Fund
The Evergreen Total Return Fund
The Evergreen American Retirement Trust:
Evergreen American Retirement Fund
Evergreen Small Cap Equity Income Fund
Evergreen Foundation Trust:
Evergreen Foundation Fund
Evergreen Tax Strategic Foundation Fund
<PAGE>
The Evergreen Municipal Trust:
Evergreen Short-Intermediate Municipal Fund
Evergreen Short-Intermediate Municipal Fund-CA
Evergreen Florida High Income Municipal Bond Fund
Evergreen Tax Exempt Money Market Fund
Evergreen Institutional Tax Exempt Money Market Fund
Evergreen Money Market Trust
Evergreen Money Market Fund
Evergreen Institutional Money Market Fund
Evergreen Institutional Treasury Money Market Fund
Evergreen Investment Trust
Evergreen Emerging Markets Growth Fund
Evergreen International Equity Fund
Evergreen Balanced Fund
Evergreen Value Fund
Evergreen Utility Fund
Evergreen Short-Intermediate Bond Fund
Evergreen U.S. Government 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
Evergreen Treasury Money Market Fund
The Evergreen Lexicon Fund:
Evergreen Intermediate-Term Government Securities Fund
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<PAGE>
Evergreen Intermediate-Term Bond 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
Prospectuses for the Evergreen mutual funds may be obtained without
charge by contacting the Distributor or the Advisers at the telephone number
shown on the front cover of this Statement of Additional Information.
Cumulative Quantity Discount (Right of Accumulation). An investor's
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:
<PAGE>
(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 and Class B 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 or B 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 Evergreen Intermediate or
Short-Term Bond Fund (i.e., Short-Intermediate and Short-Intermediate-CA), 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 (i.e.,
Florida Municipal Bond, Georgia Municipal Bond, New Jersey Tax-Free, North
Carolina Municipal Bond, South Carolina Municipal Bond, Virginia Municipal Bond,
Florida High Income and High Grade) 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 and Class B
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
50
<PAGE>
dollar amount indicated in the Statement of Intention. At the investor's option,
a Statement of Intention may include purchases of Class A or B 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 the 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
purchases in an Evergreen Equity or Long-Term Bond Fund, (i.e., Florida
Municipal Bond, Georgia Municipal Bond, New Jersey
<PAGE>
Tax-Free, North Carolina Municipal Bond, South Carolina Municipal Bond, Virginia
Municipal Bond, Florida High Income and High Grade) or 2.50% applicable to
purchases in an Evergreen Intermediate or Short-Term Bond Fund (i.e.,
Short-Intermediate and Short-Intermediate-CA) 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 the Fund should complete the
appropriate portion of the Subscription 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 Advisers may provide
compensation to organizations providing administrative and record keeping
services to plans which make shares of the Evergreen mutual funds available to
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<PAGE>
their participants.
Reinstatement Privilege. A Class A shareholder who has caused any or
all of his or her shares of the 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,
<PAGE>
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.
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 the Advisers or their affiliates; (ii) officers and present or former
Trustees of the Trusts; present or former trustees of other investment companies
managed by the Advisers; 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
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<PAGE>
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
<PAGE>
dealers and agents for selling Class B shares. The combination of the contingent
deferred sales charge and the distribution services fee (and, with respect to
Florida Municipal Bond, Georgia Municipal Bond, New Jersey Tax-Free, North
Carolina Municipal Bond, South Carolina Municipal Bond, Virginia Municipal Bond
and High Grade, the 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, with respect to Florida Municipal Bond,
Georgia Municipal Bond, New Jersey Tax- Free, North Carolina Municipal Bond,
South Carolina Municipal Bond, Virginia Municipal Bond and High Grade, the
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 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 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).
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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.
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, with respect to Florida
Municipal Bond, Georgia Municipal Bond, New Jersey Tax-Free North Carolina
Municipal Bond, South Carolina Municipal Bond, Virginia Municipal Bond and High
Grade, 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, with respect to Florida
Municipal Bond Fund, Georgia Municipal Bond Fund, New Jersey Tax-Free, North
Carolina Municipal Bond Fund, South Carolina Municipal Bond Fund, Virginia
Municipal Bond Fund and High Grade, the shareholder services fee) for an
indefinite period which may extend beyond the period ending seven years after
the end of the calendar month in which the shareholder's purchase order was
accepted.
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 the Advisers 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
54
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(See also "Other Information - General Information" in each Fund's Prospectus)
Capitalization and Organization
The Evergreen Florida High Income Municipal Bond, Evergreen
Short-Intermediate Municipal Fund and Evergreen Short-Intermediate Municipal
Fund-California are each separate series of The Evergreen Municipal Trust, a
Massachusetts business trust. Florida High Income, which is a newly created
series of The Evergreen Municipal Trust, acquired substantially all of the
assets of ABT Florida High Income Municipal Bond Fund (the"ABT Fund") on June
30, 1995. The 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 and
Evergreen High Grade Tax Free Fund, are each separate series of Evergreen
Investment Trust, a Massachusetts business trust. On July 7, 1995, First Union
Funds changed its name to Evergreen Investment Trust. On December 14, 1992, The
Salem Funds changed its name to First Union Funds. The New Jersey Tax-Free
Income Fund is a separate series of Evergreen Tax Free Trust (formerly known as
FFB Funds Trust, a Massachusetts Business Trust organized on December 4, 1985.
The above-named Trusts are individually referred to in this Statement of
Additional Information as the "Trust" and collectively as the "Trusts". Each
Trust is governed by a board of trustees. Unless otherwise stated, references to
the "Board of Trustees" or "Trustees" in this Statement of Additional
Information refer to the Trustees of all the Trusts.
Each Fund, other than New Jersey Tax-Free, may issue an unlimited number of
shares of beneficial interest with a $0.0001 par value. New Jersey Tax-Free may
issue an unlimited number of shares of beneficial interest with a $0.001 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
55
<PAGE>
more Trusts. 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 a 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 that same investment portfolio. Except for
the different distribution related and other specific costs borne by such
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 Securities and Exchange Commission
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 Securities
and Exchange Commission 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 each Fund and the Distributor, each 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
Price Waterhouse LLP has been selected to be the independent auditors of
Florida High Income, Short-Intermediate and Short-Intermediate-CA.
KPMG Peat Marwick LLP has been selected to be the independent auditors of
Florida Municipal Bond, Georgia Municipal Bond, New Jersey Tax-Free, North
56
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Carolina Municipal Bond, South Carolina Municipal Bond, Virginia Municipal Bond,
and High Grade.
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, and Class Y shares in any
advertisement or information including performance data of the Fund.
With respect to Short-Intermediate and Short-Intermediate-CA, the
shares of each Fund outstanding prior to January 3, 1995 have been reclassified
as Class Y shares. With respect to Florida High Income, the Fund is the
successor of the ABT Fund and the information presented is with respect to the
ABT Fund's Class A shares, the only outstanding class. The average annual
compounded total return for each Class of shares offered by the Funds for the
most recently completed one year fiscal periods and the period since each Fund's
inception is set forth in the table below.
1 Year Ended From Inception**
8/31/96 to 8/31/96
FLORIDA MUNICIPAL
BOND
Class A 5.15% 7.91%
Class B 4.17% 7.77%
Class Y 5.22% 7.92%
GEORGIA MUNICIPAL
BOND
Class A 6.22% 3.65%
Class B 5.44% 2.99%
Class Y 6.48% 4.45%
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NORTH CAROLINA
MUNICIPAL BOND
Class A 5.21% 5.02%
Class B 4.42% 4.37%
Class Y 5.40% 4.01%
SHORT-INTERMEDIATE
Class A .01% 4.23%
Class B (2.51%) 4.28%
Class Y 3.34% 4.94%
SHORT-INTERMEDIATE-
CA
Class A - -
Class B - -
Class Y 3.24% 4.23%
SOUTH CAROLINA
MUNICIPAL BOND
Class A 6.23% 4.03%
Class B 5.43% 3.33%
Class Y 6.49% 5.46%
VIRGINIA MUNICIPAL
BOND
Class A 5.12% 3.91%
Class B 4.34% 3.23%
Class Y 5.38% 4.79%
HIGH GRADE
Class A .21% 5.86%
Class B (.58%) 4.67%
Class Y 5.47% 4.51%
FLORIDA HIGH
INCOME
Class A 6.42% 7.78%
Class B 8.63% 7.56%
Class Y 6.68% 7.84%
NEW JERSEY TAX
FREE
Class A 5.24% 7.17%
Class B 4.83% 7.09%
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Class Y 5.25% 7.17%
** INCEPTION DATE
Florida Municipal Bond Class A May 11, 1988
Class B and Y July 1, 1995
Georgia Municipal Bond Class A and B June 1, 1993
Class Y February 28, 1994
North Carolina Municipal Class A and B January 12, 1993
Bond Class Y February 28, 1994
Short-Intermediate Class A and B January 3, 1995
Class Y November 18, 1991
Short-Intermediate-CA Class Y October 16, 1988
South Carolina Municipal Class A and B January 3, 1994
Bond Class Y February 28, 1994
Virginia Municipal Bond Class A and B June 1, 1993
Class Y February 28, 1994
High Grade Class A February 21, 1992
Class B January 11, 1993
Class Y February 28, 1994
Florida High Income Class A June 17, 1992
Class B July 10, 1995
Class Y September 20, 1995
New Jersey Tax-Free Class A July 16, 1991
Class B January 30, 1996
Class Y February 8, 1996
The performance numbers for Short-Intermediate and
Short-Intermediate-CA for the Class A, and Class B shares are hypothetical
numbers based on the performance for Class Y shares as adjusted for any
applicable front-end sales charge or contingent deferred sales charge. For
Florida High Income the performance numbers for the Class B and Class Y shares
are hypothetical numbers based upon the performance for the Class A shares as
adjusted for any applicable contingent deferred sales charge.
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
59
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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 SEC 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+1)6-1]
cd
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
60
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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.
Tax Equivalent Yield
The Funds invest principally in obligations the interest from which is
exempt from Federal income tax other than the AMT. In addition, the securities
in which state-specific Funds invest will also, to the extent practicable, be
exempt from such state's income taxes. However, from time to time the Funds may
make investment which generate taxable income. A Fund's tax-equivalent yield is
the rate an investor would have to earn from a fully taxable investment in order
to equal the Fund's yield after taxes. Tax-equivalent yields are calculated by
dividing a Fund's yield by the result of one minus a stated Federal or combined
Federal and state tax rate. (If only a portion of the Fund's yield is
tax-exempt, only that portion is adjusted in the calculation.) Of course, no
assurance can be given that a Fund will achieve any specific tax-exempt yield.
If only a portion of the Fund's yield is tax-exempt, only that portion is
adjusted in the calculation. Of course, no assurance can be given that the Fund
will achieve any specific tax-exempt yield.
The following formula is used to calculate Tax Equivalent Yield without taking
into account state tax:
Fund's Yield
1 - Fed Tax Rate
<PAGE>
The following formula is used to calculate Tax Equivalent Yield taking into
account state tax:
Fund's Yield
1 - Fed Tax Rate + (State Tax Rate - [State Tax Rate x Fed Tax Rate])
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
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.
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The tax exempt and tax equivalent yields of each Fund for the
thirty-day period ended August 31, 1996 for each Class of shares offered by the
Funds is set forth in the table below. The table assumes the following combined
Federal and state tax rate: California - 36%; Florida - 28%; Georgia - 34%;
North Carolina - 28%; South Carolina - 35%; Virginia - 33.25%; New Jersey -
33.5%.
Yield Tax Equivalent Yield
Florida High Income
Class A 5.94% 8.25%
Class B 5.43% 7.54%
Class Y 6.50% 9.03%
Short-Intermediate
Class A 3.58% 4.97%
Class B 2.80% 3.89%
Class Y 3.81% 5.29%
Short-Intermediate-CA
Class A - -
Class B - -
Class Y 3.71% 5.80%
Florida Municipal Bond
Class A 5.23% 7.26%
Class B 4.55% 6.32%
Class Y 5.56% 7.72%
Georgia Municipal Bond
Class A 4.91% 7.25%
Class B 4.39% 6.49%
<PAGE>
Class Y 5.41% 7.99%
New Jersey Tax-Free
Class A 4.87% 7.16%
Class B 4.17% 6.13%
Class Y 5.17% 7.60%
North Carolina
Municipal Bond
Class A 4.51% 6.26%
Class B 3.97% 5.51%
Class Y 4.99% 6.93%
South Carolina
Municipal Bond
Class A 4.90% 7.32%
Class B 4.38% 6.54%
Class Y 5.40% 8.06%
Virginia Municipal
Bond
Class A 4.76% 6.98%
Class B 4.23% 6.20%
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Class Y 5.24% 7.68%
High Grade
Class A 4.62% 6.42%
Class B 4.09% 5.68%
Class Y 5.11% 7.10%
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 General Obligations Municipal Bond Index or any other commonly quoted
index of common stock or municipal bond prices. The Standard & Poor's 500
Composite Stock Price Index and the Dow Jones Industrial Average are unmanaged
indices of selected common stock prices. The Lehman Brothers General Obligations
Municipal Bond Index is an unmanaged index of state general obligation debt
issues which are rated A or better and represent a variety of coupon ranges. 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
<PAGE>
with that of its competitors. Of course, past performance cannot be a
guarantee of future results.
Additional Information
Any shareholder inquiries may be directed to the shareholder's broker or to
each 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 Securities and Exchange Commission under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the Securities and Exchange Commission or may be
examined, without charge, at the offices of the Securities and Exchange
Commission in Washington, D.C.
FINANCIAL STATEMENTS
The financial statements of Florida Municipal Bond, Georgia Municipal
Bond, New Jersey Tax-Free, North Carolina Municipal Bond, South Carolina
Municipal Bond, Virginia Municipal Bond and High Grade, appearing in their most
current fiscal year
63
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Annual Report to Shareholders and the report thereon of KPMG Peat Marwick LLP,
independent auditors, appearing therein are incorporated by reference in this
Statement of Additional Information. The financial statements of
Short-Intermediate, Short-Intermediate-CA and Florida High Income, appearing in
their most current fiscal year Annual Report to Shareholders and the report
thereon of Price Waterhouse LLP, 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.
<PAGE>
APPENDIX "A"
DESCRIPTION OF BOND, MUNICIPAL NOTE AND COMMERCIAL PAPER RATINGS
Standard & Poor's Ratings Group. 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
<PAGE>
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
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 64
<PAGE>
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 is 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.
<PAGE>
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
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
65
<PAGE>
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.
<PAGE>
Moody's Investors Service, Inc. A brief description of the applicable
Moody's Investors Service, Inc. rating symbols 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
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
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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.
<PAGE>
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 form 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 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).
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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.
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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. 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 Group: "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
68
quality given to issues regarded as having strongest degree of assurance for
timely payment; F-1+ -- very strong credit quality, with only slightly less
degree of assurance for timely payment than 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.
<PAGE>
APPENDIX B - ADDITIONAL INFORMATION CONCERNING CALIFORNIA
The following information as to certain California risk factors is
given to investors in view of Short-Intermediate-CA's policy of investing
primarily in California state and municipal issuers. The information is based
primarily upon information derived from public documents relating to securities
offerings of California state and municipal issuers, from independent municipal
credit reports and historically reliable sources, but has not been independently
verified by the Fund
On June 6, 1978, California voters approved Proposition 13, which added
Article XIIIA to the California Constitution. The principal thrust of Article
XIIIA is to limit the amount of ad valorem taxes on real property to one percent
of the full cash value as determined by the county assessor. The assessed
valuation of all real property may be increased, but not in excess of two
percent per year, or decreased to reflect the rate of
<PAGE>
inflation or deflation as shown by the consumer price index. Article XIIIA
requires a vote of two thirds of the qualified electorate to impose special
taxes, and completely prohibits the imposition of any additional ad valorem,
sales or transaction tax on real property (other than ad valorem taxes to repay
general obligation bonds issued to acquire or improve real property), and
requires the approval of two-thirds of all members of the State Legislature to
change any state tax laws resulting in increased tax revenues.
On November 6, 1979, California voters approved the initiative seeking
to amend the California Constitution entitled "Limitation of Government
Appropriations" which added Article XIIIB to the California Constitution. Under
Article XIIIB state and local governmental entities have an annual
appropriations limit and may not spend certain monies which are called
appropriations subject to limitations (consisting of tax revenues, state
subventions and certain other funds) in an amount higher than the appropriations
limit. Generally, the appropriations limit is to be based on certain 1978-79
expenditures, and is to be adjusted annually to reflect changes in consumer
prices, population and services provided by these entities.
Decreased in state and local revenues in future fiscal years as a
consequence of these initiatives may continue to result in reductions in
allocations of state revenues to California municipal issuers or reduce the
ability of such California issuers to pay their obligations.
With the apparent onset of recovery in California's economy, revenue
growth over the next few years could recommence at levels that would enable
California to restore fiscal stability. The political environment, however,
combined with pressures on the state's financial flexibility, may frustrate its
ability to reach this goal. Strong interests in long-established state programs
ranging from low-cost public higher education access to welfare and health
benefits join with the more recently emerging pressure for expanded prison
construction and a heightened awareness and concern over the state's business
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climate.
The fiscal 1994 budget, which was adopted on July 8, 1994 was
designed to address California'a accumulated deficit over a 22-month period. In
order to alleviate the California's cash needs the state issued $4 billion
revenue anticipation warrants that mature in April 1996 and $3 billion revenue
anticipation notes that matured in June 1995. The state's fiscal plan relies
upon aggressive assumptions of federal aid, projected at $2.8 billion in fiscal
year 1996, to compensate the state for its costs of providing service to illegal
immigrants. These assumptions, combined with fiscal year 1996 constitutionally
mandated increases in spending for K-14 education, and continued growth in
social services and corrections expenditures, are risky. To offset this risk,
the state has enacted a Budget Adjustment Law, known as the "trigger"
legislation, which established a set of backup budget adjustment mechanisms to
address potential shortfalls in cash. The trigger mechanism will be in effect
for both fiscal years 1995 and 1996. So far in fiscal 1996 state revenue
collections have been sufficiently strong so that no budget adjustments have
been required. However, the state is expected to issue another $2 billion of
notes for cash flow purposes prior to the maturity date of the revenue
anticipation warrants.
In July of 1994, S&P and Moody's lowered the general obligation bond
rating of the state of California. The rating agencies explained their actions
by citing the state's continuing deferral of substantial portions of
its estimated $3.8 billion accumulated deficit; continuing structural budgetary
constraints including a funding guarantee for K-14 education; overly optimistic
expectation of federal aid to balance fiscal year 1995's budget and fiscal year
1996's cash flow projections; and reliance upon a trigger mechanism to reduce
spending if the plan's federal aid assumptions prove to be inflated.
<PAGE>
APPENDIX C - ADDITIONAL INFORMATION CONCERNING FLORIDA
Florida Municipal Bond and Florida High Income Fund invest in
obligations of Florida issuers, which results in each Fund's performance being
subject to risks associated with the overall conditions present within the
state. The following information is a brief summary of the recent prevailing
economic conditions and a general summary of the state's financial status. This
information is based on official statements relating to securities that have
been offered by Florida issuers and from other sources believed to be reliable,
but should not be relied upon as a complete description of all relevant
information.
Florida is the twenty-second largest state, with an area of 54,136
square miles and a water area of 4,424 square miles. The state is 447 miles long
and 361 miles wide with a tidal shoreline of almost 2,300 miles. According to
the U.S. Census Bureau, Florida moved past Illinois in 1986 to become the fourth
most populous state, and as of 1990, had an estimated population of 13.2
million.
Services and trade continue to be the largest components of the Florida
economy, reflecting the importance of tourism as well as the need to serve
Florida's rapidly growing population. Agriculture is also an important part of
the economy, particularly citrus fruits. Oranges have been the principal crop,
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accounting for 70% of the nation's output. Manufacturing, although of less
significance, is a rapidly growing component of the economy. The economy also
has substantial insurance, banking, and export participation. Unemployment rates
have historically been below national averages, but have recently risen above
the national rate.
Section 215.32 of the Florida Statutes provides that financial
operations of the State of Florida covering all receipts and expenditures be
maintained through the use of three funds - the General Revenue Fund, the Trust
Fund and the Working Capital Fund. The General Fund receives the majority of
state tax revenues. The Working Capital Fund receives revenues in excess of
appropriations and its balances are freely transferred to the General Revenue
Fund as necessary. In November, 1992, Florida voters approved a constitutional
amendment requiring the state to fund a Budget Stabilization Fund to 5% of
general revenues, with funding to be phased in over five years beginning in
fiscal 1995. The Working Capital Fund will become the Budget Stabilization Fund.
Major sources of tax revenues to the General Revenue Fund are the sales and use
tax, corporate income tax and beverage tax. The over- dependence on the
sensitive sales tax creates vulnerability to recession. Accordingly, financial
operations have been strained during the past few years, but the state has
responded in a timely manner to maintain budgetary control.
The state is highly vulnerable to hurricane damage. Hurricane Andrew
devastated portions of southern Florida in August, 1992, costing billions of
dollars in emergency relief, damage, and repair costs. However, the overall
financial condition of the major issuers of municipal bond debt in the state
were relatively unaffected by Hurricane Andrew, due to federal disaster
assistance payments and the over all level of private insurance. However, it is
possible that single revenue-based local bond issues could be severely impacted
by storm damage in certain circumstances.
Florida's debt structure is complex. Most state debt is payable from
specified taxes and additionally secured by the full faith and credit of the
state. Under the general obligation pledge, to the extent specified taxes are
insufficient, the state is unconditionally required to make payment on bonds
71
from all non-dedicated taxes.
Each Fund's concentration in securities issued by the state and its
political subdivisions provides a greater level of risk than a fund which is
diversified across numerous states and municipal entities. The ability of the
state or its municipalities to meet their obligations will depend on the
availability of tax and other revenues; economic, political, and demographic
conditions within the state; and the underlying condition of the state, and its
municipalities.
<PAGE>
APPENDIX D - ADDITIONAL INFORMATION CONCERNING GEORGIA
Because Georgia Municipal Bond will ordinarily invest 80% or more of
its net assets in Georgia obligations, it is more susceptible to factors
affecting Georgia issuers than is a comparable municipal bond fund not
concentrated in the obligations of issuers located in a single state.
Georgia's rating reflects the state's positive economic trends,
conservative financial management, improved financial position, and low debt
burden. The state's recovery from the recent economic recession has been steady;
the rate of recovery is better than regional trends, albeit half the rate of
earlier recoveries. While this recovery does not meet the explosive patterns set
in past cycles, recent state data reveal that Georgia ranks among the top five
states in the nation in employment and total population growth. Stronger
economic trends and conservative revenue forecasting resulted in the
continuation of improved financial results for the fiscal year ended June 30,
1994. The state's general fund closed fiscal 1994 with a total fund balance
position of $480.6 million, of which $249.5 million was in the revenue shortfall
reserve fund (3% of revenues), marking the second consecutive year of build-up
in that reserve. The mid-year adjustment reserve was fully funded at $89.1
million. The state's adopted budget fiscal 1995, called for an increase in state
spending to $9.8 billion, up 6.5% from the prior period. Estimating that
economic growth will be in the 6%-8% range for the second straight year, the
budget report forecasted general fund revenues to grow to $9.4 billion, an
increase of $490.0 million, or 5.5% above actual fiscal 1994 levels. Sales and
income taxes account for the majority of that increase, despite a $100 million
cut in personal income taxes. Additional revenues provided by lottery proceeds
($240 million) and indigent-care trust fund monies support the remaining
spending. Revenues for the first three months of the current year are running
nearly 8.4% above fiscal 1994 levels. Most of the increase is attributable to
the growth in personal and corporate income and sales taxes. As a result, the
state anticipates that fiscal 1995 will once again produce positive financial
results.
Except for the major building projects necessary for the 1996 Summer
Olympics, it appears unlikely that areas in and around metropolitan Atlanta will
experience the building construction rates of the mid to late 1980's. It further
appears that many of Georgia's other cities are poised to participate in the
recovery that inevitably will take place.
The classification of the Fund under the Investment Company Act of 1940
as a "non-diversified" investment company allows the Fund to invest more than 5%
of its assets in the securities of any issuer, subject to satisfaction of
72
certain tax requirements. Because of the relatively small number of issues of
Georgia obligations, the Fund is likely to invest a greater percentage of its
assets in the securities of a single issuer than is an investment company which
invests in a broad range of municipal obligations. Therefore, the Fund would be
more susceptible than a diversified investment company to any single adverse
economic or political occurrence or development affecting Georgia issuers. The
Fund will also be subject to an increase risk of loss if the issuer is unable to
make interest or principal payments or if the market value of such securities
declines. It is also possible that there will not be sufficient availability of
suitable Georgia tax-exempt obligations for the Fund to achieve its objective of
providing income exempt from Georgia income tax.
<PAGE>
APPENDIX E - ADDITIONAL INFORMATION CONCERNING NORTH CAROLINA
Because North Carolina Municipal Bond will ordinarily invest 80% or
more of its net assets in North Carolina obligations, it is more susceptible to
factors affecting North Carolina (or the "State") issuers than is a comparable
municipal bond fund not concentrated in the obligations of issuers located in a
single state.
North Carolina has an economy dependent on manufacturing and
agriculture; however, diversification into trade and service areas is occurring.
Historically, textiles and furniture dominated industry lines, but increased
activity in financial services, research, and high technology manufacturing is
now apparent. Tobacco remains the primary agricultural commodity. Economic
development continues, and long-term personal income trends indicate gains,
although wealth levels remain below those of the nation. Employment growth
accelerated over the past two years, and unemployment rates remain below those
of the nation.
North Carolina is characterized by moderate debt levels (albeit with
growing capital needs), favorable economic performance, and financial strengths
exhibited over the past several years. North Carolina is one of only several
states expected to sustain favorable economic expansion throughout the 1990s,
according to the U.S. Bureau of Economic Analysis indicators. Economic growth in
the State is bolstered by a lower-than-average cost of living, income levels at
about 90% of U.S. averages - though it is much higher in the metropolitan
centers - and a highly respected public and private higher education system,
including the University of North Carolina at Chapel Hill and Duke University in
Durham.
<PAGE>
The North Carolina State Constitution requires that the total
expenditures of the State for a fiscal period shall not exceed the total of
receipts during the fiscal period and the surplus remaining in the State
Treasury at the beginning of the period. In certain of the past several years,
the State has had to restrict expenditures to comply with the State
Constitution. The State has long record of sound financial operations, and while
the revenue system is narrow, the budget balancing law is strong and appropriate
curbs are made when necessary.
The state's finances, which enjoyed surpluses and adequate reserves
throughout the 1980s, began reflecting economic downturn in fiscal 1990.
73
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Reserves were fully depleted during the recession, but through a combination of
tax and spending actions and more recently, with the aid of economic recovery,
have now been fully restored.
Financial operations have been restored to their historically healthy
position after a period of strain between fiscal years 1990 and 1992. Available
unreserved balances and budget stabilization reserve totaled $440 million at the
end of fiscal 1994 equivalent to 4.1% of annual expenditures. On a budgetary
basis, fiscal 1994 ended with an $887.5 million balance; however, a portion of
this balance has been appropriated for fiscal 1995 operations. Conservative
revenue assumptions and sound budgeting practices should result in a similar
balance at the end of 1995. The restoration of adequate reserve levels confirms
the state's longstanding commitment to a sound financial position.
Debt ratios are among the lowest in the country. State debt ratios will
remain below national medians even after all of the $300 million of currently
authorized debt is issued. Payout is rapid.
North Carolina ranks among the top ten states in terms of economic
growth, as measured by job and personal income growth. Diversification into
financial services, research, and high technology manufacturing is reducing
historical dependence on agriculture, textiles, and furniture manufacturing.
As of December 31, 1994, general obligations of the State of North
Carolina were rated Aaa/AAA/AAA by Moody's, S&P and Fitch Investors Service
("Fitch"), respectively. There can be no assurance that the economic conditions
on which these ratings are based will continue or that particular bond issues
may not be adversely affected by changes in economic, political or other
conditions.
North Carolina obligations also include obligations of the governments
of Puerto Rico, the Virgin Islands and Guam to the extent these obligations are
exempt from North Carolina State personal income taxes. The Fund will not invest
more than 5% of its net assets in the obligations of each of the Virgin Islands
and Guam, but may invest without limitation in the obligations of Puerto Rico.
Accordingly, the Fund may be adversely affected by local political and economic
conditions and developments within Puerto Rico affecting the issuers of such
obligations.
<PAGE>
APPENDIX F - ADDITIONAL INFORMATION CONCERNING SOUTH CAROLINA
The State of South Carolina has an economy dominated from the early
1920s to the present by textile industry, with over one of every three
manufacturing workers directly or indirectly related to the textile industry.
However, since 1950 the economic bases of the State have become more
diversified, as the trade and service sectors and durable goods manufacturing
industries have developed. Currently, Moody's rates South Carolina general
obligations bonds "Aaa" and S&P rates such bonds "AAA". There can be no
assurance that the economic conditions on which those ratings are based will
continue or that particular bond issues may not be adversely affected by changes
in the economic or political conditions.
The South Carolina State Constitution mandates a balanced budget. If a
deficit occurs, the General Assembly must account for it in the succeeding
74
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fiscal year. In addition, if a deficit appears likely, the State Budget and
Control Board (the "State Board") may reduce appropriations during the current
fiscal year as necessary to prevent the deficit. The State Constitution limits
annual increases in State appropriations to the average growth rate of the
economy of the State and annual increases in the number of State employees to
the average growth of the population of the State.
The State Constitution requires a General Reserve Fund ("General Fund")
that equals three percent of General Fund revenue for the latest fiscal year.
When deficits have occurred, the State has funded them out of the General Fund.
The State Constitution also requires a Capital Reserve Fund ("Capital Fund")
equal to two percent of General Fund revenue. Before March 1st of each year, the
Capital Fund must be used to offset mid-year budget reductions before mandating
cuts in operating appropriations, and after March 1st, the Capital Fund may be
appropriated by a special vote of the General Assembly to finance previously
authorized capital improvements or other nonrecurring purposes. Monies in the
Capital Fund not appropriated or any appropriation for a particular project or
item that has been reduced due to application of the monies to a year-end
deficit must go back to the General Fund.
South Carolina Municipal Bond's concentration in securities issued by
the State or its subdivisions provides a greater level of risk than an
investment company which is diversified across a larger geographic area. For
example, the passage of the North American Free Trade Agreement could result in
increased competition for the State's textile industry due to the availability
of less-expensive foreign labor.
Presently, South Carolina subjects bonds issued by other states to its
income tax. If this tax was declared unconstitutional, the value of bonds in the
Fund could decline a small but measurable amount. Also, the Fund could become
slightly less attractive to potential future investors.
The Fund's investment adviser believes that the information summarized
above describes some of the more significant matters relating to the Fund. The
sources of the information are the official statements of issuers located in
South Carolina, other publicly available documents, and oral statements from
various State agencies. The Fund's investment adviser has not independently
verified any of the information contained in the official statement, other
publicly available documents, or oral statements from various State agencies.
<PAGE>
APPENDIX G - ADDITIONAL INFORMATION CONCERNING VIRGINIA
Virginia Municipal Bond invests in obligations of Virginia issuers,
which results in the Fund's performance being subject to risks associated with
the overall conditions present within the State. The following information is a
brief summary of the recent prevailing economic conditions and a general summary
of the State's financial status. This information is based on official
statements relating to securities that have been offered by Virginia issuers and
from other sources believed to be reliable, but should not be relied upon as a
complete description of all relevant information.
Virginia's credit strength is derived from a diversified economy,
75
relatively low unemployment rates, strong financial management, and low debt
burden. The State's economy benefits significantly from its proximity to
Washington D.C. Government is the State's third- largest employment sector,
comprising 21% of total employment. Other important sectors of the economy
include shipbuilding, tourism, construction, and agriculture.
Virginia is a very conservative debt issuer and has maintained debt
levels that are low in relation to its substantial resources. Conservative
policies also dominate the State's financial operations, and the State
administration continually demonstrates its ability and willingness to adjust
financial planning and budgeting to preserve financial balance. For example,
economic weakness in the State and the region caused personal income and sales
and corporate tax collections to fall below projected forecasts and placed the
State under budgetary strain. The State reacted by reducing its revenue
expectations for the 1990-92 biennium and preserved financial balance through a
series of transfers, appropriation reductions, and other budgetary revisions.
Management's actions resulted in a modest budget surplus for fiscal 1992, and
another modest surplus was reported for fiscal 1993, which ended June 30th. The
1994 Virginia budget experienced a significant surplus due to an improving
economy, including job growth of 3.0%/year overall. Overall, Virginia has a
stable credit outlook due mainly to its diverse economy and resource base, as
well as a conservative approach to financial operations. Revenue growth for 1994
was 6%. Budgets for 1995 and 1996 call for revenue growth of 6.1% and 5.8%,
respectively.
The Fund's concentration in securities issued by the State and its
political subdivisions provides a greater level of risk than a fund which is
diversified across numerous states and municipal entities. The ability of the
State or its municipalities to meet their obligations will depend on the
availability of tax and other revenues; economic, political, and demographic
conditions within the State; and the underlying fiscal condition of the State,
its countries, and its municipalities.
Virginia faces some economic uncertainties with respect to
defense-cutbacks. Although Virginia's unemployment rate of 4.9% (as of August,
1994) is well below the national rate of 5.9%, the State has been able to make
some gains in the services, government, and construction sectors when
manufacturing and trade were down slightly.
<PAGE>
The effects of the most recent base-closing legislation were muted
because of consolidation from out-of-state bases to Virginia installations.
While military operations at the Pentagon are unlikely to be threatened, another
round of base-closings scheduled for 1995 may jeopardize a number of Virginia
installations.
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SUPPLEMENT TO THE STATEMENTS
OF ADDITIONAL INFORMATION OF
Evergreen Aggressive Growth Fund, Evergreen American Retirement Fund, Evergreen
Emerging Markets Growth Fund, Evergreen Florida High Income Municipal Bond Fund,
Evergreen Foundation Fund, Evergreen Fund, Evergreen Georgia Municipal Bond
Fund, Evergreen Global Leaders Fund, Evergreen Growth and Income Fund, Evergreen
High Grade Tax Free Fund, Evergreen Income and Growth Fund, Evergreen
Intermediate Term Government Securities Fund, Evergreen International Equity
Fund, Evergreen Institutional Money Market Fund, Evergreen Institutional Tax
Exempt Money Market Fund, Evergreen Institutional Treasury Money Market Fund,
Evergreen Micro Cap Fund, Evergreen Money Market Fund, Evergreen North Carolina
Municipal Bond Fund, Evergreen Short-Intermediate Bond Fund, Evergreen
Short-Intermediate Municipal Fund, Evergreen Small Cap Equity Income Fund,
Evergreen South Carolina Municipal Bond Fund, Evergreen Tax Strategic Foundation
Fund, Evergreen U.S. Government Fund, Evergreen Utility Fund, Evergreen Value
Fund, Evergreen Virginia Municipal Bond Fund, Evergreen Capital Preservation and
Income Fund, Evergreen Fund for Total Return, Evergreen Natural Resources Fund,
Evergreen Omega Fund, Evergreen Strategic Income Fund, Evergreen California Tax
Free Fund, Evergreen Massachusetts Tax Free Fund, Evergreen Missouri Tax Free
Fund, Evergreen New York Tax Free Fund, Evergreen Pennsylvania Tax Free Fund,
Keystone Balanced Fund (K-1), Keystone Diversified Bond Fund (B-2), Keystone
High Income Bond Fund (B-4), Keystone Quality Bond Fund (B-1), Keystone Small
Company Growth Fund (S-4), Keystone Strategic Growth Fund (K- 2), Keystone
Growth and Income Fund (S-1), Evergreen Select Adjustable Rate Fund, Evergreen
Select Small Cap Growth Fund, Keystone International Fund, Keystone Precious
Metals Holdings, and Keystone Tax Free Fund (each a "Fund" and, collectively,
the "Funds")
The Statements of Additional Information of each of the Funds are
hereby supplemented as follows:
STANDARDIZED FUNDAMENTAL INVESTMENT RESTRICTIONS
Each of the above Funds, except Keystone Balanced Fund (K-1), Keystone
Diversified Bond Fund (B-2), Keystone Small Company Growth Fund (S-4), and
Keystone Tax Free Fund, has adopted the following standardized fundamental
investment restrictions. These restrictions may be changed only by a vote of
Fund shareholders.
1. Diversification of Investments
The Fund may not make any investment inconsistent with the Fund's
classification as a diversified [non-diversified] investment company
under the Investment Company Act of 1940.
22943
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2. Concentration of a Fund's Assets in a Particular Industry. ([All Funds
other than those listed below.)
The Fund may not concentrate its investments in the securities of
issuers primarily engaged in any particular industry (other than
securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities [or in the case of Money Market Funds domestic
bank money instruments]).
For Evergreen Utility Fund
The Fund will concentrate its investments in the utilities industry.
For Keystone Precious Metals Holdings
The Fund will concentrate its investments in industries related to the
mining, processing or dealing in gold or other precious metals and
minerals.
3. Issuance of Senior Securities
Except as permitted under the Investment Company Act of 1940, the Fund
may not issue senior securities.
4. Borrowing
The Fund may not borrow money, except to the extent permitted by
applicable law.
5. Underwriting
The Fund may not underwrite securities of other issuers, except insofar
as the Fund may be deemed an underwriter in connection with the
disposition of its portfolio securities.
6. Investment in Real Estate
The Fund may not purchase or sell real estate, except that, to the
extent permitted by applicable law, the Fund may invest in (a)
securities directly or indirectly secured by real estate, or (b)
securities issued by companies that invest in real estate.
7. Commodities
The Fund may not purchase or sell commodities or contracts on
commodities except to the extent that the Fund may engage in financial
futures contracts and related options and currency contracts and
related options and may otherwise do so in accordance with
22943
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applicable law and without registering as a commodity pool operator
under the Commodity Exchange Act.
8. Lending
The Fund may not make loans to other persons, except that the Fund may
lend its portfolio securities in accordance with applicable law. The
acquisition of investment instruments shall not be deemed to be the
making of a loan.
9. Investment in Federally Tax Exempt Securities
The following Funds have also adopted a standardized fundamental
investment restriction in regard to investments in federally tax-exempt
securities:
<TABLE>
<CAPTION>
<S> <C>
Evergreen Tax Strategic Foundation Fund Evergreen High Grade Tax Free Fund
Evergreen Georgia Municipal Bond Fund Evergreen North Carolina Municipal Bond Fund
Evergreen South Carolina Municipal Bond Fund Evergreen Virginia Municipal Bond Fund
Evergreen New York Tax Free Fund Evergreen Massachusetts Tax Free Fund
Evergreen California Tax Free Fund Evergreen Pennsylvania Tax Free Fund
Evergreen Institutional Tax Exempt Money Market Fund Evergreen Missouri Tax Free Fund
Evergreen Short-Intermediate Municipal Fund
</TABLE>
The Fund will, during periods of normal market conditions, invest its
assets in accordance with applicable guidelines issued by the Securities and
Exchange Commission or its staff concerning investment in tax-exempt securities
for Funds with the words tax exempt, tax free or municipal in their names.
ELIMINATION OF CERTAIN NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The nonfundamental investment restrictions described below have been
eliminated by each Fund listed under such restriction:
1. PROHIBITION ON INVESTMENT IN UNSEASONED ISSUERS
Evergreen Fund, Growth and Income Fund, Income and Growth Fund,
American Retirement Fund, Money Market Fund, Short-Intermediate
Municipal Fund, Growth and Income Fund (S-1), Omega Fund, Precious
Metals Holding, Strategic Growth Fund (K- 2), High Income Bond Fund
(B-4), Capital Preservation and Income Fund, Select Adjustable Rate
Fund, Strategic Income Fund, Fund for Total Return, International Fund
2. PROHIBITION ON INVESTMENT IN COMPANIES FOR THE PURPOSE OF EXERCISING
CONTROL OR MANAGEMENT
Evergreen Fund, Growth and Income Fund, Income and Growth Fund, Value
Fund, Intermediate Term Government Securities Fund, Foundation Fund,
American Retirement Fund, Emerging Markets Growth Fund, International
Equity Fund, Global Leaders Fund, Money Market Fund, Florida High
Income Municipal Bond Fund, Short-Intermediate Municipal Fund, Growth
and Income Fund (S-1), Precious Metals Holdings, Strategic Growth Fund
(K-2), High Income Bond Fund (B-4), Fund for Total Return,
International Fund
3. PROHIBITION ON INVESTMENT IN COMPANIES IN WHICH TRUSTEES OR OFFICERS OF
THE FUNDS ALSO HOLD SHARES ABOVE CERTAIN PERCENTAGE LEVELS
Evergreen Fund, MicroCap Fund, Growth and Income Fund, Income and
Growth Fund, Intermediate Term Government Securities Fund, Foundation
Fund, American Retirement Fund, Money Market Fund, Short-Intermediate
Municipal Fund, Precious Metals Holdings, Inc.
4. Prohibition on Investment of More Than 5% of a Fund's Net Assets in
Warrants, With No More Than 2% of Net Assets Being Invested in Warrants
That Are Listed NEW YORK NOR AMERICAN STOCK EXCHANGES
Evergreen Fund, MicroCap Fund, Growth and Income Fund, Income and
Growth Fund, Foundation Fund, American Retirement Fund,
Short-Intermediate Municipal Fund
5. PROHIBITION ON INVESTMENT IN OIL, GAS OR OTHER MINERAL EXPLORATION OR
DEVELOPMENT PROGRAMS
Evergreen Fund, MicroCap Fund, Aggressive Growth Fund, Growth and
Income Fund, Small Cap Equity Fund, Income and Growth Fund, Value Fund,
Intermediate Term Government Securities Fund, Foundation Fund, American
Retirement Fund, Money Market Fund, Florida High Income Municipal Bond
Fund, Short-Intermediate Municipal Fund, High Grade Tax Free Fund,
Precious Metals Holdings, Inc.
6. PROHIBITION ON JOINT TRADING ACCOUNTS
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<PAGE>
Evergreen Fund, MicroCap Fund, Growth and Income Fund, Income and
Growth Fund, Foundation Fund, American Retirement Fund, Florida High
Income Municipal Bond Fund
7. PROHIBITION ON INVESTMENT IN OTHER INVESTMENT COMPANIES. [Note: The
Funds may invest in such companies to the extent permitted by the
Investment Company Act of 1940 and the rules thereunder.]
Growth and Income Fund, Utility Fund, Small Cap Equity Income Fund,
Income and Growth Fund, Value Fund, Short-Intermediate Bond Fund,
Intermediate Term Government Securities Fund, Foundation Fund, Tax
Strategic Foundation Fund, American Retirement Fund, High Grade Tax
Free Fund, Growth and Income Fund (S-1), Omega Fund, Precious Metals
Holdings, Strategic Growth Fund (K-2), High Income Bond Fund (B-4),
Select Adjustable Rate Fund, Strategic Income Fund, Fund for Total
Return, Global Opportunities Fund, International Fund, Massachusetts
Tax Free Fund, New York Tax Free Fund, Pennsylvania Tax Free Fund,
California Tax Free Fund and Missouri Tax Free Fund.
RECLASSIFICATION OF ALL OTHER FUNDAMENTAL INVESTMENT RESTRICTIONS
All investment restrictions other than those described above as having been
standardized or eliminated have been reclassified from fundamental to
nonfundamental and, as, such, may be changed by the Funds' Boards of Trustees at
any time without a shareholder vote.
TRUSTEES
The Trustees and executive officers of each Trust, their ages, and
their principal occupations during the last five years are shown below:
JAMES S. HOWELL (72), 4124 Crossgate Road, Charlotte, NC-Chairman of
the Evergreen Group of Mutual Funds and Trustee. Retired Vice President
of Lance Inc. (food manufacturing); Chairman of the Distribution Comm.
Foundation for the Carolinas from 1989 to 1993.
RUSSELL A. SALTON, III, M.D. (49), 205 Regency Executive Park,
Charlotte, NC- Trustee. Medical Director, U.S. Healthcare of Charlotte,
North Carolina 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 1969.
GERALD M. MCDONNELL (57), 821 Regency Drive, Charlotte, NC - Trustee.
Sales Representative with Nucor-Yamoto Inc. (steel producer) since
1988.
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<PAGE>
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., 227 West Trade St.,
Charlotte, NC - Trustee. Partner in the law firm Holcomb and Pettit,
P.A. since 1990.
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.
CHARLES A. AUSTIN III (61), Trustee. Investment counselor to Appleton
Partners, Inc.; former Managing Director, Seaward Management
Corporation (investment advice); and former Director, Executive Vice
President and Treasurer, State Street Research & Management Company
(investment advice).
K. DUN GIFFORD (57) Trustee. Chairman of the Board, Director, and
Executive Vice President, The London Harness Company; Managing Partner,
Roscommon Capital Corp.; Trustee, Cambridge College; Chairman Emeritus
and Director, American Institute of Food and Wine; Chief Executive
Officer, Gifford Gifts of Fine Foods; Chairman, Gifford, Drescher &
Associates (environmental consulting); President, Oldways Preservation
and Exchange Trust (education); and former Director, Keystone
Investments, Inc. and Keystone Investment Management Company.
LEROY KEITH, JR. (57) Trustee. Director of Phoenix Total Return Fund
and Equifax, Inc.; Trustee of Phoenix Series Fund, Phoenix
Multi-Portfolio Fund, and The Phoenix Big Edge Series Fund; and former
President, Morehouse College.
DAVID M. RICHARDSON (55) Trustee. Executive Vice President, DMR
International, Inc. (executive recruitment); former Senior Vice
President, Boyden International Inc. (executive recruitment); and
Director, Commerce and Industry Association of New Jersey, 411
International, Inc., and J&M Cumming Paper Co.
RICHARD J. SHIMA (57) Trustee and Advisor to the Boards of Trustees of
the Evergreen Group of Mutual Funds. Chairman, Environmental Warranty,
Inc., and Consultant, Drake Beam Morin, Inc. (executive outplacement);
Director of Connecticut Natural Gas Corporation, Trust Company of
Connecticut, Hartford Hospital, Old State House Association, and
Enhance Financial Services, Inc.; Chairman, Board of Trustees, Hartford
YMCA; former Director; Executive Vice President, and Vice Chairman of
The Travelers Corporation.
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<PAGE>
EXECUTIVE OFFICERS
JOHN J. PILEGGI (37), 230 Park Avenue, Suite 910, New York, NY -
President and Treasurer. Consultant to BISYS Fund Services since 1996.
Senior Managing Director, Furman Selz LLC since 1992, Managing Director
from 1984 to 1992.
GEORGE O. MARTINEZ (37), 3435 Stelzer Road, Columbus, OH - Secretary.
Senior Vice President/Director of Administration and Regulatory
Services, BISYS Fund Services since April 1995. Vice
President/Assistant General Counsel, Alliance Capital Management from
1988 to 1995.
The officers of the Trusts are officers and/or employees of The BISYS
Group, Inc. ("BISYS Group"), except for Mr. Pileggi, who is a consultant to The
BISYS Group. The BISYS Group is an affiliate of Evergreen Distributor, Inc.
("EDI"), the distributor of each class of shares of each Fund.
No officer or Trustee of the Trusts owned more than 1.0% of any class
of shares of any of the Funds as of November 30, 1997.
DISTRIBUTION PLANS
The following is added to the disclosure under the caption "Distribution Plan"
Class A and B shares are made available to employer-sponsored retirement or
savings plans ("Plans") without a sales charge if:
(i) the Plan is recordkept on a daily valuation basis by Merrill Lynch and, on
the date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service
Agreement, the Plan has $3 million or more in assets invested in broker/dealer
funds not advised or managed by Merrill Lynch Asset Management, L.P. ("MLAM")
that are made available pursuant to a Services Agreement between Merrill Lynch
and the Fund's principal underwriter or distributor and in Funds advised or
managed by MLAM (collectively, the "Applicable Investments"); or
(ii) the Plan is recordkept on a daily valuation basis by an independent
recordkeeper whose services are provided through a contract or alliance
arrangement with Merrill Lynch, and on the date the Plan Sponsor signs the
Merrill Lynch Recordkeeping Service Agreement, the Plan has $3 million or more
in assets, excluding money market funds, invested in Applicable Investments; or
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<PAGE>
(iii) the Plan has 500 or more eligible employees, as determined by the Merrill
Lynch plan conversion manager, on the date the Plan Sponsor signs the Merrill
Lynch Recordkeeping Service Agreement.
Plans recordkept on a daily basis by Merrill Lynch or an independent
recordkeeper under a contract with Merrill Lynch that are currently investing in
Class B shares convert to Class A shares once the Plan has reached $5 million
invested in Applicable Investments. The Plan will receive a Plan level share
conversion.
The following is added to the Statement of Additional Information of each of
Keystone Balanced Fund (K-1), Keystone Diversified Bond Fund (B-2), Keystone
High Income Bond Fund (B-4), Keystone International Fund, Keystone Precious
Metals Holdings, Keystone Quality Bond Fund (B-1), Keystone Small Company Growth
Fund (S-4), Keystone Strategic Growth Fund (K-2), Keystone Growth and Income
Fund (S-1) and Keystone Tax Free Fund.
PURCHASE, REDEMPTION AND PRICING OF SHARES
DISTRIBUTION PLANS AND AGREEMENTS
Distribution fees are accrued daily and paid monthly on Class A, Class
B and Class C shares and are charged as class expenses, as accrued. The
distribution fees attributable to the Class B 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 the month of 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 Fund's shares.
Under the Rule 12b-1 Distribution Plans that have been adopted by each
Fund with respect to each of its 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 Plans and the purposes for which such expenditures
were made to the Trustees of the Trust for their review on a quarterly basis.
Also, each Plan provides that the selection and nomination of the disinterested
Trustees are committed to the discretion of such disinterested Trustees then in
office.
Each 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
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<PAGE>
latter may in turn pay part or all of such compensation to brokers or other
persons for their distribution assistance.
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 of that Class
and, in either case, by a majority of the Independent Trustees of the Trust who
have no direct or indirect financial interest in the operation of the Plan or
any agreement related thereto.
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<PAGE>
The Plans permit the payment of fees to brokers and others for
distribution and shareholder-related administrative services and to
broker-dealers, depository institutions, financial intermediaries and
administrators for administrative services as to Class A, Class B and Class C
shares. The Plans are designed to (i) stimulate brokers to provide distribution
and administrative support services to each Fund and holders of Class A, Class B
and Class C shares and (ii) stimulate administrators to render administrative
support services to the Fund and holders of Class A, Class B and Class C shares.
The administrative services are provided by a representative who has knowledge
of the shareholder's particular circumstances and goals, and include, but are
not limited to providing office space, equipment, telephone facilities, and
various personnel including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding Class
A, Class B and Class C shares; assisting clients in changing dividend options,
account designations, and addresses; and providing such other services as the
Fund reasonably requests for its Class A, Class B and Class C shares.
In the event that 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.
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. Any Plan, Shareholder Services
Plan or Distribution Agreement may be terminated (i) 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
disinterested Trustees, or (ii) by the Distributor. To terminate any
Distribution Agreement, any party must give the other parties 60 days' written
notice; to terminate a Plan only, the Fund need give no notice to the
Distributor. Any Distribution Agreement will terminate automatically in the
event of its assignment.
HOW THE FUNDS OFFER SHARES TO THE PUBLIC
You may buy shares of a Fund through the Funds' distributor,
broker-dealers that have entered into special agreements with the Funds'
distributor or certain other financial institutions. Each Fund offers four
classes of shares that differ primarily with respect to sales
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<PAGE>
charges and distribution fees. Depending upon the class of shares, you will pay
an initial sales charge when you buy a Fund's shares, a contingent deferred
sales charge (a "CDSC") when you redeem a Fund's shares or no sales charges at
all.
Purchase Alternatives
CLASS A SHARES
With certain exceptions, when you purchase Class A shares you will pay
a maximum sales charge of 4.75%. (The prospectus contains a complete table of
applicable sales charges and a discussion of sales charge reductions or waivers
that may apply to purchases.) If you purchase Class A shares in the amount of $1
million or more, without an initial sales charge, the Funds will charge a CDSC
of 1.00% if you redeem during the month of your purchase and the 12-month period
following the month of your purchase. See "Calculation of Contingent Deferred
Sales Charge" below.
CLASS B SHARES
The Funds offer Class B shares at net asset value (without a front-end
load). With certain exceptions, however, the Funds will charge a CDSC of 1.00%
on shares you redeem within 72 months after the month of your purchase. The
Funds will charge CDSCs at the following rate:
REDEMPTION TIMING CDSC RATE
Month of purchase and the first twelve-month
period following the month of purchase..........................5.00%
Second twelve-month period following the month of purchase...............4.00%
Third twelve-month period following the month of purchase................3.00%
Fourth twelve-month period following the month of purchase...............3.00%
Fifth twelve-month period following the month of purchase................2.00%
Sixth twelve-month period following the month of purchase................1.00%
Thereafter...............................................................0.00%
Class B shares that have been outstanding for seven years after the month of
purchase will automatically convert to Class A shares without imposition of a
front-end sales charge or exchange fee. (Conversion of Class B shares
represented by stock certificates will require the return of the stock
certificate to ESC.
CLASS C SHARES
Class C shares are available only through broker-dealers who have
entered into special distribution agreements with the Underwriter. The Funds
offer Class C shares at net asset value (without an initial sales charge). With
certain exceptions, however, the Funds will charge a
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CDSC of 1.00% on shares you redeem within 12-months after the month of your
purchase. See "Contingent Deferred Sales Charge" below.
CLASS Y SHARES
No CDSC is imposed on the redemption of Class Y shares. Class Y shares
are not offered to the general public and are available only to (1) persons who
at or prior to December 31, 1994 owned shares in a mutual fund advised by
Evergreen Asset Management Corp. ("Evergreen Asset"), (2) certain institutional
investors and (3) investment advisory clients of the Capital Management Group of
First Union National Bank ("FUNB"), Evergreen Asset, Keystone Investment
Management Company, or their affiliates. Class Y shares are offered at net asset
value without a front-end or back-end sales charge and do not bear any Rule
12b-1 distribution expenses.
Contingent Deferred Sales Charge
The Funds charge a CDSC as reimbursement for certain expenses, such as
commissions or shareholder servicing fees, that it has incurred in connection
with the sale of its shares (see "Distribution Plan"). If imposed, the Funds
deduct the CDSC from the redemption proceeds you would otherwise receive. The
CDSC is a percentage of the lesser of (1) the net asset value of the shares at
the time of redemption or (2) the shareholder's original net cost for such
shares. Upon request for redemption, to keep the CDSC a shareholder must pay as
low as possible, a Fund will first seek to redeem shares not subject to the CDSC
and/or shares held the longest, in that order. The CDSC on any redemption is, to
the extent permitted by the National Association of Securities Dealers, Inc.
("NASD"), paid to the Principal Underwriter or its predecessor.
SALES CHARGE WAIVERS OR REDUCTIONS
Reducing Class a Front-end Loads
With a larger purchase, there are several ways that you can combine
multiple purchases of Class A shares in Evergreen funds and take advantage of
lower sales charges.
COMBINED PURCHASES
You can reduce your sales charge by combining purchases of Class A
shares of multiple Evergreen funds. For example, if you invested $75,000 in each
of two different Evergreen funds, you would pay a sales charge based on a
$150,000 purchase (i.e., 3.75% of the offering price, rather than 4.75%).
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<PAGE>
RIGHTS OF ACCUMULATION
You can reduce your sales charge by adding the value of Class A shares
of Evergreen funds you already own to the amount of your next Class A
investment. For example, if you hold Class A shares valued at $99,999 and
purchase an additional $5,000, the sales charge for the $5,000 purchase would be
at the next lower sales charge of 3.75%, rather than 4.75%.
LETTER OF INTENT
You can, by completing the "Letter of Intent" section of the
application, purchase Class A shares over a 13-month period and receive the same
sales charge as if you had invested all the money at once. All purchases of
Class A shares of an Evergreen fund during the period will qualify as Letter of
Intent purchases.
Shares That Are Not Subject to a Sales Charge or CDSC
WAIVER OF SALES CHARGES
The Funds may sell their shares at net asset value without an initial
sales charge to:
1. purchases of shares in the amount of $1 million or more;
2. a corporate or certain other qualified retirement plan or a
non-qualified deferred compensation plan or a Title 1 tax
sheltered annuity or TSA plan sponsored by an organization
having 100 or more eligible employees (a "Qualifying Plan") or
a TSA plan sponsored by a public educational entity having
5,000 or more eligible employees (an "Educational TSA Plan");
3. institutional investors, which may include bank trust
departments and registered investment advisers;
4. investment advisers, consultants or financial planners who
place trades for their own accounts or the accounts of their
clients and who charge such clients a management, consulting,
advisory or other fee;
5. clients of investment advisers or financial planners who place
trades for their own accounts if the accounts are linked to
master accounts of such investment advisers or financial
planners on the books of the broker-dealer through whom shares
are purchased;
6. institutional clients of broker-dealers, including retirement
and deferred compensation plans and the trusts used to fund
these plans, which place trades through an omnibus account
maintained with a Fund by the broker-dealer;
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<PAGE>
7. employees of FUNB, its affiliates, Evergreen Distributor,
Inc., any broker-dealer with whom Evergreen Distributor, Inc.,
has entered into an agreement to sell shares of the Funds, and
members of the immediate families of such employees;
8. certain Directors, Trustees, officers and employees of the
Evergreen funds, the Distributor or their affiliates and to
the immediate families of such persons; or
9. a bank or trust company in a single account in the name of
such bank or trust company as trustee if the initial
investment in or any Evergreen fund made pursuant to this
waiver is at least $500,000 and any commission paid at the
time of such purchase is not more than 1.00% of the amount
invested.
With respect to items 8 and 9 above, each Fund will only sell shares to
these parties upon the purchasers written assurance that the purchase is for
their personal investment purposes only. Such purchasers may not resell the
securities except through redemption by the Fund. The Funds will not charge any
CDSC on redemptions by such purchasers.
WAIVER OF CDSCS
The Funds do not impose a CDSC when the shares you are redeeming
represent:
1. an increase in the share value above the net cost of such
shares;
2. certain shares for which the Fund did not pay a commission on
issuance, including shares acquired through reinvestment of
dividend income and capital gains distributions;
3. shares that are in the account of a shareholder who has died
or become disabled;
4. a lump-sum distribution from a 401(k) plan or other benefit
plan qualified under the Employee Retirement Income Security
Act of 1974 ("ERISA");
5. an automatic withdrawal from the ERISA plan of a shareholder
who is a least 59 1/2 years old;
6. shares in an account that we have closed because the account
has an aggregate net asset value of less than $1,000;
7. an automatic withdrawal under an Systematic Income Plan of up
to 1.00% per month of your initial account balance;
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<PAGE>
8. a withdrawal consisting of loan proceeds to a retirement plan
participant;
9. a financial hardship withdrawal made by a retirement plan
participant;
10. a withdrawal consisting of returns of excess contributions or
excess deferral amounts made to a retirement plan; or
11. a redemption by an individual participant in a Qualifying Plan
that purchased Class C shares (this waiver is not available in
the event a Qualifying Plan, as a whole, redeems substantially
all of its assets).
EXCHANGES
Investors may exchange shares of a Fund for shares of the same class of
any other Evergreen fund, as described under the section entitled "Exchanges" in
a Fund's prospectus. Before you make an exchange, you should read the prospectus
of the Evergreen fund into which you want to exchange. The Trust's Board of
Trustees reserves the right to discontinue, alter or limit the exchange
privilege at any time.
HOW THE FUNDS VALUE SHARES
How and When a Fund Calculates its Net Asset Value per Share ("NAV")
Each Fund computes its NAV once daily on Monday through Friday, as
described in the Prospectus. A Fund will not compute its NAV on the day the
following legal holidays are observed: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The NAV of each Fund is calculated by dividing the value of a Fund's
net assets attributable to that class by all of the shares issued for that
class.
How a Fund Values the Securities it Owns
Current values for a Fund's portfolio securities are determined as
follows:
(1) Securities that are traded on a national securities exchange or the
over-the-counter National Market System ("NMS") are valued on the basis of the
last sales price on the exchange where primarily traded or on the NMS prior to
the time of the valuation, provided that a sale has occurred.
(2) Securities traded in the over-the-counter market, other than on
NMS, are valued at the mean of the bid and asked prices at the time of
valuation.
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(3) Short-term investments maturing in more than sixty days for which
market quotations are readily available, are valued at current market value.
(4) Short-term investments maturing in sixty days or less (including
all master demand notes) are valued at amortized cost (original purchase cost as
adjusted for amortization of premium or accretion of discount), which, when
combined with accrued interest, approximates market.
(5) Short-term investments maturing in more than sixty days when
purchased that are held on the sixtieth day prior to maturity are valued at
amortized cost (market value on the sixtieth day adjusted for amortization of
premium or accretion of discount), which, when combined with accrued interest,
approximates market.
(6) Securities, including restricted securities, for which complete
quotations are not readily available; listed securities or those on NMS if, in
the Fund's opinion, the last sales price does not reflect a current market value
or if no sale occurred; and other assets are valued at prices deemed in good
faith to be fair under procedures established by the Board of Trustees.
SHAREHOLDER SERVICES
As described in the prospectus, a shareholder may elect to receive his
or her dividends and capital gains distributions in cash instead of shares.
However, ESC will automatically convert a shareholder's distribution option so
that the shareholder reinvests all dividends and distributions in additional
shares when it learns that the postal or other delivery service is unable to
deliver checks or transaction confirmations to the shareholder's address of
record. The Funds will hold the returned distribution or redemption proceeds in
a non interest-bearing account in the shareholder's name until the shareholder
updates his or her address. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
December 22, 1997
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SUPPLEMENT TO THE STATEMENT OF ADDITIONAL INFORMATION OF
EVERGREEN FLORIDA MUNICIPAL BOND FUND (THE "FLORIDA FUND"), EVERGREEN GEORGIA
MUNICIPAL BOND FUND (THE "GEORGIA FUND"), EVERGREEN NORTH CAROLINA MUNICIPAL
BOND FUND (THE "NORTH CAROLINA FUND"), EVERGREEN SOUTH CAROLINA MUNICIPAL BOND
FUND (THE "SOUTH CAROLINA FUND"), EVERGREEN VIRGINIA MUNICIPAL BOND FUND (THE
"VIRGINIA FUND"), EVERGREEN FLORIDA HIGH INCOME MUNICIPAL BOND FUND (THE
"FLORIDA HIGH INCOME FUND") (EACH A "FUND"; TOGETHER, THE "FUNDS")
The Statement of Additional Information of each of the Funds is hereby
supplemented as follows:
FINANCIAL INFORMATION
Expenses
The table below shows the total dollar amounts paid by each Fund for
services rendered during the fiscal periods specified. For more information on
specific expenses, see "Investment Advisory and Other Services," "Distribution
Plans and Agreements," "Principal Underwriter" and "Purchase, Redemption and
Pricing of Shares."
<TABLE>
<CAPTION>
Aggregate
Dollar
Aggregate Amount of
Dollar Underwriting
Amount of Commissions
Advisory Class A Class B Underwriting Retained by
Fees 12b-1 Fees 12b-1 Fees Commissions EIS or EDI
====================== ============ ============ ============ ============= ==============
<S> <C> <C> <C> <C> <C>
1997 FUND EXPENSES
Florida $791,322 $275,983* $298,114 $22,335
Georgia $66,245 $5,499 $96,055 $2,488
North Carolina $305,634 $20,523 $490,164 $2,377
South Carolina $58,299 $2,271 $45,393 $710
Virginia $70,972 $7,230 $61,471 $1,596
Florida High Income $813,790 $235,662 $383,197 $34,454
- ----------------------
1996 FUND EXPENSES
- ----------------------
Florida $803,741 $240,978 $287,825 $49,589 $5,996
Georgia $63,102 $5,047 $84,596 $7,300 $875
North Carolina $306,892 $20,833 $500,469 $16,557 $154
South Carolina $40,781 $1,917 $39,896 $1,447 $2,228
Virginia $51,952 $6,048 $57,906 $20,400 $2,033
Florida High Income $477,128 $169,651 $106,733 $276,615 $29,467
- ----------------------
1995 FUND EXPENSES
- ----------------------
Florida $243,413 $59,721 $37,405 $87,755 $4,301
Georgia $32,646 $2,856 $49,968 $56,210 $4,220
North Carolina $190,284 $13,739 $319,719 $123,175 $7,843
South Carolina $13,154 $788 $20,125 $35,241 $3,595
Virginia $23,156 $3,127 $30,267 $45,713 $2,320
Florida High Income $123,320 $41,690 $2,087 $196,614 $24,672
====================== ============ ============ ============ ============= ==============
</TABLE>
*Of this amount, $191,541 was waived by the Distributor.
Advisory Fee Waivers
In accordance with voluntary expense limitations in effect during the
fiscal year or period ended August 31, 1997, CMG voluntarily reimbursed or
waived advisory fees, as follows:
Florida $81,274
Georgia $66,245
North Carolina $0
South Carolina $58,299
Virginia $70,972
Florida High Income $330,629
===================== ==========
Brokerage Commissions
The Funds paid no brokerage commissions during the fiscal year or period
ended August 31, 1997, 1996 and 1995.
Total Return
Total return quotations for a class of shares of a Fund as they may appear
from time to time in advertisements are calculated by finding the average annual
compounded rates of return over one, five and ten year periods, or the time
periods for which such class of shares has been effective, whichever is
relevant, on a hypothetical $1,000 investment that would equate the initial
amount invested in the class to the ending redeemable value. To the initial
investment all dividends and distributions are added, and all recurring fees
charged to all shareholder accounts are deducted.
The ending redeemable value assumes a complete redemption at the end of the
relevant periods.
The annual total returns for each class of shares of the Funds (including
applicable sales charges) are as follows:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS SINCE INCEPTION INCEPTION DATE
<S> <C> <C> <C> <C> <C>
FLORIDA
Class A 3.88% 5.81% 5.92% 7.47% 5/11/88
Class B 3.06% - - 5.03% 6/30/95
Class Y 9.14% - - 7.38% 6/30/95
GEORGIA
Class A 3.57% 5.78% - 3.63% 7/2/93
Class B 2.93% 5.83% - 3.73% 7/2/93
Class Y 9.00% 7.78% - 5.73% 2/28/94
NORTH CAROLINA
Class A 3.93% 6.03% - 4.79% 1/11/93
Class B 3.30% 6.08% - 4.85% 1/11/93
Class Y 9.39% 8.03% - 5.51% 2/28/94
SOUTH CAROLINA
Class A 4.14% 7.05% - 4.06% 1/3/94
Class B 3.52% 7.12% - 3.99% 1/3/94
Class Y 9.60% 9.07% - 6.62% 2/28/94
VIRGINIA
Class A 3.87% 6.08% - 3.90% 7/2/93
Class B 3.24% 6.14% - 3.98% 7/2/93
Class Y 9.32% 8.08% - 6.06% 2/28/94
FLORIDA HIGH INCOME
Class A 5.51% 6.96% 7.33% 7.34% 6/17/92
Class B 4.95% - - 6.24% 7/10/95
Class Y 11.04% - - 8.47% 9/20/95
==================== ========= ======== ========= ============= ==============
</TABLE>
Current and Tax Equivalent Yields
Current yield quotations as they may appear from time to time in
advertisements will consist of a quotation based on a 30-day period ended on the
date of the most recent balance sheet of a Fund, computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the base period. Such yield will include
income from sources other than municipal obligations, if any. Tax equivalent
yield is, in general, the current yield divided by a factor equal to one minus a
stated income tax rate and reflects the yield a taxable investment would have to
achieve in order to equal on an after-tax basis a tax-exempt yield. For the
30-day period ended August 31, 1997, the current and tax-equivalent yields of
the Funds are shown below. Any given yield or total return quotation should not
be considered representative of the Fund's yield or total return for any future
period.
<TABLE>
<CAPTION>
30-DAY YIELD TAX-EQUIVALENT YIELD
================================= ============================================ ============================================
FUND COMBINED CLASS A CLASS B CLASS Y CLASS A CLASS B CLASS Y
FEDERAL &
STATE TAX
RATE (1)
================== ============= ============ =========== =========== =========== =========== ==============
<S> <C> <C> <C> <C> <C> <C> <C>
Florida 28% 4.94% 4.02% 5.02% 6.86% 5.58% 6.97%
Georgia 34% 4.80% 4.04% 5.05% 7.27% 6.12% 7.65%
North Carolina 28% 4.67% 3.92% 4.92% 6.49% 5.44% 6.83%
South Carolina 35% 4.65% 3.90% 4.90% 7.15% 6.00% 7.54%
Virginia 33.25% 4.78% 4.03% 5.03% 7.16% 6.04% 7.54%
Florida High 28% 5.48% 4.73% 5.73% 7.61% 6.57% 7.96%
Income
================== ============= ============= =========== =============== ============ ============ ==============
(1) Assumed for purposes of this chart. Your tax may vary.
</TABLE>
Method of Computing Offering Price for Class A Shares
Class A shares are sold at the NAV plus a sales charge. Below is an example
of the method of computing the offering price of the Class A shares of each
Fund. The example assumes a purchase of Class A shares of each Fund aggregating
less than $100,000 based upon the NAV of each Fund's Class A shares at the end
of each Fund's latest fiscal period.
<TABLE>
<CAPTION>
FUND DATE NET ASSET VALUE PER SHARE SALES OFFERING PRICE PER
CHARGE SHARE
<S> <C> <C> <C> <C>
Florida 8/31/97 $9.98 4.75% $10.48
Georgia 8/31/97 $9.90 4.75% $10.39
North Carolina 8/31/97 $10.37 4.75% $10.89
South Carolina 8/31/97 $10.08 4.75% $10.58
Virginia 8/31/97 $10.05 4.75% $10.55
Florida High Income 8/31/97 $10.89 4.75% $11.43
</TABLE>
Trustee Compensation
Listed below is the Trustee compensation for the fiscal year ended August
31, 1997.
TRUSTEE COMPENSATION FROM COMPENSATION FROM
TRUST TRUST AND FUND
COMPLEX
Laurence B. Ashkin $3,176 $56,200
Charles A.Austin III * -0- $48,200
K. Dun Gifford* -0- $39,600
James S. Howell $3,979 $89,229
Leroy Keith Jr.* -0- $45,200
Gerald M. McDonnell $3,154 $81,001
Thomas L. McVerry $3,820 $81,468
William Walt Pettit $3,483 $79,009
David M. Richardson* -0- $48,200
Russell A. Salton,III $3,501 $81,601
Michael S. Scofield $5,572 $77,501
Richard J. Shima $4,180 $58,667
*Not a Trustee of the Trust during the relevant fiscal period.
PRINCIPAL HOLDERS OF FUND SHARES
As of the date of this SAI, the officers and Trustees of the Trust owned as
a group less than 1% of the outstanding of any class of each Fund. As of the
same date, no person, to any Fund's knowledge, owned beneficially or of record
more than 5% of a class of a Fund's outstanding shares.
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 a
Fund's outstanding shares as of November 30, 1997.
FLORIDA FUND CLASS A
None
FLORIDA FUND CLASS B
None
FLORIDA FUND CLASS Y
First Union National Bank 98.79%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon St.
Charlotte, NC 28288-0002
FLORIDA HIGH INCOME FUND CLASS A
MLPF&S 9.63%
Attn: Fund Administration
4800 Deer Lake Dr. E 3rd Fl
Jacksonville, FL 32246-6484
FLORIDA HIGH INCOME FUND CLASS B
MLPF&S 10.31%
Attn: Fund Administration
4800 Deer Lake Dr. E 3rd Fl
Jacksonville, FL 32246-6484
FLORIDA HIGH INCOME FUND CLASS Y
First Union National Bank 68.58%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon St.
Charlotte, NC 28288-0002
First Union National Bank 19.69%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon St.
Charlotte, NC 28288-0002
GEORGIA FUND CLASS A
FUBS & Co. FEBO 10.09%
Lee R. Meadows and
Mary Lee Meadows
1270 Hicks Cir SW
Conyers, GA 30207-4221
FUBS & Co. FEBO 6.03%
William F. Hill Jr. and Marvin Hill
P O Box 554 Silver Creek, GA 30173-0554
FUBS & Co. FEBO 5.46%
Samuel A Barber
Velma H Barber
4852 Banner Elk Drive
Stone Mountain, GA 30083
FUBS & Co. FEBO 5.18%
Larry N Merritt
Ann C Merritt
310 Chinquapin Drive
Marietta, GA 30064-3506
FUBS & Co. FEBO 5.13%
Raiden W Dellinger
710 River Ave.
Rome, GA 30161-4773
GEORGIA FUND CLASS B
None
GEORGIA FUND CLASS Y
First Union National Bank 98.61%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon St.
Charlotte, NC 28288-0002
NORTH CAROLINA FUND CLASS A
None
NORTH CAROLINA FUND CLASS B
None
NORTH CAROLINA FUND CLASS Y
First Union National Bank 99.64%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon St.
Charlotte, NC 28288-0002
SOUTH CAROLINA FUND CLASS A
FUBS & Co. FEBO 21.96%
Charles W. Lombard Trust
Charlotte Lombard and
Warren Prout Co-tees
U/A/D 5/4/94
Boone, NC 28607
FUBS & Co. FEBO 11.87%
Warren A. Ransom Jr.
Laurie P. Ransom
1162 East Parkview Place
Mount Pleasant, SC 29464-7909
First Union Brokerage Services 10.82%
Ann D. Schwab
A/C 7448-7777
2189 Windy Oaks Rd.
Ft. Mills, SC 29715
FUBS & Co. FEBO 6.91%
Charles Dean Turner
103 Carolina Club Drive
Spartanburg, SC 29306-6601
FUBS & Co. FEBO 5.79%
Virginia C. Thomas
330 Concord St. No 7G
Charleston, SC 29401-2731
FUBS & Co. FEBO 5.05%
Virginia S. Herring
Oren L. Herring Jr. JTWROS
107 Bennett Street
Mt. Pleasant, SC 29464-4382
SOUTH CAROLINA FUND CLASS B
FUBS & Co. FEBO 5.99%
Ruby B. Motsinger and
Joseph G. Motsinger JTTENCOM
550 Brandon Rd.
Clover, SC 29710-9667
SOUTH CAROLINA FUND CLASS Y
First Union National Bank 93.13%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon St.
Charlotte, NC 28288-0002
First Union National Bank 6.16%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon St.
Charlotte, NC 28288-0002
VIRGINIA FUND CLASS A
Duff M Green 7.97%
638 Kings Highway
Fredericksburg, VA 22405-3156
FUBS & Co. FEBO 6.34%
David A. Hetzer and Iris L. Hetzer
5009 Laburch Lane
Annandale, VA 22003-6019
VIRGINIA FUND CLASS B
FUBS & Co. FEBO 6.13%
Patsy B. Williams and
Harry S. Williams
P O Box 888
Marion, VA 24354
VIRGINIA FUND CLASS Y
First Union National Bank 98.34%
Trust Accounts
Attn: Ginny Batten
11th Floor CMG-1151
301 S. Tryon St.
Charlotte, NC 28288-0002
Financial Statements
The audited financial statements and the reports thereon are hereby
incorporated by reference to each Fund's Annual Report, a copy of which may be
obtained without charge from ESC, P.O. Box 2121, Boston, Massachusetts
02106-2121.
January 1, 1998
<PAGE>
THE VIRTUS FUNDS
INVESTMENT SHARES
CONSISTS OF EIGHT PORTFOLIOS:
THE U.S. GOVERNMENT SECURITIES FUND;
THE STYLE MANAGER: LARGE CAP FUND;
THE STYLE MANAGER FUND;
THE VIRGINIA MUNICIPAL BOND FUND;
THE MARYLAND MUNICIPAL BOND FUND;
THE TREASURY MONEY MARKET FUND;
THE MONEY MARKET FUND; AND
THE TAX-FREE MONEY MARKET FUND.
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information should be read with the Prospectus for
the Investment Shares ("Investment Shares") of The Virtus Funds (the "Trust"),
dated November 30, 1997. This Statement is not a prospectus itself. You may
request a copy of a prospectus or a paper copy of this Statement of Additional
Information, if you have received it electronically, free of charge by writing
to the Trust or calling toll-free 1-800-723-9512.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated November 30, 1997
[GRAPHIC OMITTED]
CUSIP 927913202 CUSIP 927913848 CUSIP 927913400 CUSIP 927913871 CUSIP
927913509 CUSIP 927913889 CUSIP 927913707 CUSIP 927913806 2102608B-R
(11/97)
<PAGE>
Table of Contents
- -------------------------------------------------------------------------------
I
General Information About the Trust 1
- -------------------------------------------------------------------------------
Investment Objective and Policies of the Funds 1
- -------------------------------------------------------------------------------
The U.S. Government Securities Fund 1
- -------------------------------------------------------------------------------
Types of Investments 1
The Style Manager: Large Cap Fund and The Style Manager Fund 2
- -------------------------------------------------------------------------------
Commercial Paper 4
Bank Instruments 4
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund 5
- -------------------------------------------------------------------------------
Acceptable Investments 5
Types of Acceptable Investments 5
The Treasury Money Market Fund 5
- -------------------------------------------------------------------------------
Types of Investments 5
The Money Market Fund 6
- -------------------------------------------------------------------------------
Types of Investments 6
The Tax-Free Money Market Fund 6
- -------------------------------------------------------------------------------
Portfolio Investments and Strategies 6
- -------------------------------------------------------------------------------
Repurchase Agreements 6
Reverse Repurchase Agreements 6
When-Issued and Delayed Delivery Transactions 6
Lending of Portfolio Securities 7
Restricted and Illiquid Securities 7
Participation Interests 7
Variable Rate Municipal Securities 8
Municipal Leases 8
Temporary Investments 8
Adjustable Rate Mortgage Securities 8
Portfolio Turnover 9
Investment Limitations 9
- -------------------------------------------------------------------------------
Virtus Funds Management 12
- -------------------------------------------------------------------------------
Fund Ownership 16
Officers and Trustees Compensation 17
Trustee Liability 17
Investment Advisory Services 17
- -------------------------------------------------------------------------------
Adviser to the Trust 17
Advisory Fees 18
Sub-Adviser to The Style Manager: Large Cap Fund
and The Style Manager Fund 18
Sub-Advisory Fees 18
Other Services 18
- --------------------------------------------------------------------------------
Administrative Services 18
Custodian 19
Transfer Agent 19
Independent Auditors 19
Brokerage Transactions 19
- --------------------------------------------------------------------------------
Purchasing Shares 20
- --------------------------------------------------------------------------------
Distribution Plan 20
Conversion to Federal Funds 20
Determining Net Asset Value 21
- --------------------------------------------------------------------------------
Determining Market Value of Securities 21
Use of the Amortized Cost Method 21
Valuing Municipal Securities 22
Use of Amortized Cost 23
Redeeming Shares 23
- --------------------------------------------------------------------------------
Redemption in Kind 23
Massachusetts Partnership Law 23
- --------------------------------------------------------------------------------
Tax Status 23
- --------------------------------------------------------------------------------
The Funds' Tax Status 23
Shareholders' Tax Status 24
Total Return 24
- --------------------------------------------------------------------------------
Yield 25
- --------------------------------------------------------------------------------
Effective Yield 26
Tax-Equivalent Yield 26
Performance Comparisons 29
- --------------------------------------------------------------------------------
The U.S. Government Securities Fund 30
The Style Manager: Large Cap Fund and The Style Manager Fund 31
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund 31
The Treasury Money Market Fund 31
The Money Market Fund 31
The Tax-Free Money Market Fund 32
Financial Statements 32
- -------------------------------------------------------------------------------
Appendix 33
<PAGE>
- -------------------------------------------------------------------------------
24
General Information About the Trust
- -------------------------------------------------------------------------------
The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated June 20, 1990. As of the date of this Statement, the Trust
consists of eight separate portfolios of securities (collectively, the "Funds",
individually, a "Fund") which are as follows: The U. S. Government Securities
Fund, The Style Manager: Large Cap Fund, The Style Manager Fund, The Virginia
Municipal Bond Fund, The Maryland Municipal Bond Fund, The Treasury Money Market
Fund, The Money Market Fund, and The Tax-Free Money Market Fund. On October 1,
1992, the name of the Trust was changed from "The SBK Select Series" to "Signet
Select Funds." On August 15, 1994, the name of the Trust was changed from
"Signet Select Funds" to "The Medalist Funds." On February 15, 1995, the name of
the Trust was changed from "The Medalist Funds" to "The Virtus Funds."
With the exception of The Tax-Free Money Market Fund and The Style Manager Fund,
which offer a single class of shares, the Funds are offered in two classes,
Investment Shares and Trust Shares. This Combined Statement of Additional
Information relates only to the Investment Shares of those Funds offering
classes and to shares of The Tax-Free Money Market Fund and The Style Manager
Fund.
Investment Objective and Policies of the Funds
- --------------------------------------------------------------------------------
The prospectus discusses the objective of each Fund and the policies it employs
to achieve those objectives. The following discussion supplements the
description of the Funds' investment policies in the combined prospectus.
The Funds' respective investment objectives cannot be changed without approval
of shareholders. The investment policies described below may be changed by the
Trustees without shareholder approval. Shareholders will be notified before any
material change in these policies becomes effective.
Additional information about investment limitations, strategies that one or more
Funds may employ, and certain investment policies mentioned below appear in the
prospectus section "Portfolio Investments and Strategies."
The U.S. Government Securities Fund
- --------------------------------------------------------------------------------
Types of Investments
The Fund invests primarily in securities which are guaranteed as to payment of
principal and interest by the U.S. government or its instrumentalities.
U.S. Government Obligations
The types of U.S. government obligations in which the Fund may invest
generally include direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, and bonds) and obligations issued or guaranteed
by U.S. government agencies or instrumentalities. These securities are
backed by: the full faith and credit of the U.S. Treasury; the issuer's
right to borrow from the U.S. Treasury; the discretionary authority of
the U.S. government to purchase certain obligations of agencies or
instrumentalities; or the credit of the agency or instrumentality
issuing the obligations.
Examples of agencies and instrumentalities which may not always receive
financial support from the U.S. government are: the Farm Credit System;
Federal Home Loan Banks; Farmers Home Administration; and Federal
National Mortgage Association.
Collateralized Mortgage Obligations (CMOs)
Privately issued CMOs generally represent an ownership interest in
federal agency mortgage pass-through securities such as those issued by
the Government National Mortgage Association. The terms and
characteristics of the mortgage instruments may vary among pass-through
mortgage loan pools.
The market for such CMOs has expanded considerably since its inception.
The size of the primary issuance market and the active participation in
the secondary market by securities dealers and other investors make
government-related pools highly liquid.
<PAGE>
The Style Manager: Large Cap Fund and The Style Manager Fund
- --------------------------------------------------------------------------------
The Funds invest primarily in corporate securities, including common stocks,
preferred stocks, corporate bonds, notes, warrants and convertible securities.
Convertible Securities
Convertible securities are fixed income securities which may be
exchanged or converted into a predetermined number of the issuer's
underlying common stock at the option of the holder during a specified
time period. Convertible securities may take the form of convertible
preferred stock, convertible bonds or debentures, units consisting of
"usable" bonds and warrants or a combination of the features of several
of these securities. The investment characteristics of each convertible
security vary widely, which allows convertible securities to be
employed for different investment objectives.
A Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock in instances in
which, in the investment adviser's opinion, the investment
characteristics of the underlying common shares will assist the Fund in
achieving its investment objectives. Otherwise, the Fund may hold or
trade convertible securities. In selecting convertible securities for a
Fund, the Fund's adviser evaluates the investment characteristics of
the convertible security as a fixed income instrument, and the
investment potential of the underlying equity security for capital
appreciation. In evaluating these matters with respect to a particular
convertible security, a Fund's adviser considers numerous factors,
including the economic and political outlook, the value of the security
relative to other investment alternatives, trends in the determinants
of the issuer's profits, and the issuer's management capability and
practices.
Warrants
Warrants are basically options to purchase common stock at a specific
price (usually at a premium above the market value of the optioned
common stock at issuance) valid for a specific period of time. Warrants
may have a life ranging from less than a year to twenty years or may be
perpetual. However, most warrants have expiration dates after which
they are worthless. In addition, if the market price of the common
stock does not exceed the warrant's exercise price during the life of
the warrant, the warrant will expire as worthless. Warrants have no
voting rights, pay no dividends, and have no rights with respect to the
assets of the corporation issuing them. The percentage increase or
decrease in the market price of the warrant may tend to be greater than
the percentage increase or decrease in the market price of the optioned
common stock.
Futures And Options Transactions
As a means of reducing fluctuations in the net asset value of shares of
a Fund, the Fund may attempt to hedge all or a portion of its portfolio
by buying and selling financial futures contracts, buying put options
on portfolio securities and listed put options on futures contracts,
and writing call options on futures contracts. A Fund may also write
covered call options on portfolio securities to attempt to increase its
current income. The Fund will maintain its positions in securities,
option rights, and segregated cash subject to puts and calls until the
options are exercised, closed, or have expired. An option position on
financial futures contracts may be closed out only on an exchange which
provides a secondary market from options of the same series.
Financial Futures Contracts
A futures contract is a firm commitment by two parties: the seller, who
agrees to make delivery of the specific type of security called for in
the contract ("going short") and the buyer, who agrees to take delivery
of the security ("going long") at a certain time in the future.
Financial futures contracts call for the delivery of shares of common
stocks represented in a particular index.
Put Options on Financial Futures Contracts
A Fund may purchase listed put options on financial futures contracts.
Unlike entering directly into a futures contract, which requires the
purchaser to buy a financial instrument on a set date at a specified
price, the purchase of a put option on a futures contract entitles (but
does not obligate) its purchaser to decide on or before a future date
whether to assume a short position at the specified price.
<PAGE>
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 option will increase in value. In such an event, a
Fund will normally close out its option by selling an identical option.
If the hedge is successful, the proceeds received by a Fund upon the
sale of the second option will be large enough to offset both the
premium paid by the Fund for the original option plus the decrease in
value of the hedged securities.
Alternatively, the Fund may exercise its put option to close out the
position. To do so, it would simultaneously enter into a futures
contract of the type underlying the option (for a price less than the
strike price of the option) and exercise the option. The Fund would
then deliver the futures contract in return for payment of the strike
price. If the Fund neither closes out nor exercises an option, the
option will expire on the date provided in the option contract, and
only the premium paid for the contract will be lost.
Call Options on Financial Futures Contracts
In addition to purchasing put options on futures, a Fund may write
listed call options on futures contracts to hedge its portfolio. When a
Fund writes a call option on a futures contract, it is undertaking the
obligation of assuming a short futures position (selling a futures
contract) at the fixed strike price at any time during the life of the
option if the option is exercised. As stock prices fall, causing the
prices of futures to go down, the Fund's obligation under a call option
on a future (to sell a futures contract) costs less to fulfill, causing
the value of the Fund's call option position to increase.
In other words, as the underlying futures price goes down below the
strike price, the buyer of the option has no reason to exercise the
call, so that the Fund keeps the premium received for the option. This
premium can substantially offset the drop in value of the Fund's fixed
income or indexed portfolio which is occurring as interest rates rise.
Prior to the expiration of a call written by a Fund, or exercise of it
by the buyer, the Fund may close out the option by buying an identical
option. If the hedge is successful, the cost of the second option will
be less than the premium received by the Fund for the initial option.
The net premium income of the Fund will then substantially offset the
decrease in value of the hedged securities.
A Fund will not maintain open positions in futures contracts it has
sold or call options it has written on futures contracts if, in the
aggregate, the value of the open positions (marked to market) exceeds
the current market value of its securities portfolio plus or minus the
unrealized gain or loss on those open positions, adjusted for the
correlation of volatility between the hedged securities and the futures
contracts. If this limitation is exceeded at any time, the Fund will
take prompt action to close out a sufficient number of open contracts
to bring its open futures and options positions within this limitation.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, a Fund does not pay or
receive money upon the purchase or sale of a futures contract. Rather,
the Fund is required to deposit an amount of "initial margin" in cash
or U.S. Treasury bills with its custodian (or the broker, if legally
permitted). The nature of initial margin in futures transactions is
different from that of margin in securities transactions in that
futures contract initial margin does not involve the borrowing of funds
by the Fund to finance the transactions. Initial margin is in the
nature of a performance bond or good faith deposit on the contract
which is returned to the Fund upon termination of the futures contract,
assuming all contractual obligations have been satisfied.
A futures contract held by 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, the Fund will mark to
market its open futures positions.
The Fund is also required to deposit and maintain margin when it writes
call options on futures contracts.
Purchasing Put Options on Portfolio Securities
A Fund may purchase put options on portfolio securities to protect
against price movements in particular securities in its portfolio. A
put 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.
<PAGE>
Writing Covered Call Options On Portfolio Securities
A Fund may also write covered call options to generate income. As
writer of a call option, the Fund has the obligation upon exercise of
the option during the option period to deliver the underlying security
upon payment of the exercise price. The Fund may only sell call options
either on securities held in its portfolio or on securities which it
has the right to obtain without payment of further consideration (or
has segregated cash in the amount of any additional consideration).
Over-the-Counter Options
A Fund may purchase and write over-the-counter options on portfolio
securities in negotiated transactions with the buyers or writers of the
options for those options on portfolio securities held by the Fund and
not traded on an exchange.
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.
U.S. Government Obligations
The types of U.S. government obligations in which the Fund may invest
are those set forth under "The U.S. Government Securities Fund-U.S.
Government Obligations."
Commercial Paper
A Fund may invest in commercial paper rated at least A-1 by Standard & Poor's
Ratings Group ("S&P"), Prime-1 by Moody's Investors Service, Inc. ("Moody's"),
or F-1 by Fitch Investors Service ("Fitch") and money market instruments
(including commercial paper) which are unrated but of comparable quality,
including Canadian Commercial Paper ("CCPs") and Europaper. In the case where
commercial paper, CCPs or Europaper have received different ratings from
different rating services, such commercial paper, CCPs or Europaper is an
acceptable investment so long as at least one rating is one of the preceding
high quality ratings and provided the investment adviser has determined that
such investment presents minimal credit risks.
Bank Instruments
A Fund may invest in the instruments of banks and savings associations whose
deposits are insured by the Bank Insurance Fund ("BIF"), which is administered
by the Federal Deposit Insurance Corporation ("FDIC"), or the Savings
Association Insurance Fund ("SAIF"), which is administered by the FDIC, such as
certificates of deposit, demand and time deposits, savings shares, and bankers'
acceptances. These instruments are not necessarily guaranteed by those
organizations.
In addition to domestic bank obligations such as certificates of deposit, demand
and time deposits, savings shares, and bankers' acceptances, the Fund may invest
in:
o Eurodollar Certificates of Deposit ("ECDs") issued by foreign
branches of U.S. or foreign banks;
o Eurodollar Time Deposits ("ETDs"), which are U.S. dollar-denominated
deposits in foreign branches of U.S. or foreign banks;
o Canadian Time Deposits, which are U.S. dollar-denominated deposits
issued by branches of major Canadian banks located in the United
States; and
o Yankee Certificates of Deposit ("Yankee CDs"), which are U.S.
dollar-denominated certificates of deposit issued by U.S. branches
of foreign banks and held in the United States.
<PAGE>
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund
- --------------------------------------------------------------------------------
Acceptable Investments
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund pursue
their investment objectives by investing in professionally managed portfolios of
securities at least 65% of which are comprised of Virginia (in the case of The
Virginia Municipal Bond Fund) or Maryland (in the case of The Maryland Municipal
Bond Fund) municipal securities. The Funds will invest their assets so that,
under normal circumstances, at least 80% of their annual interest income is
exempt from federal regular and Virginia (in the case of The Virginia Municipal
Bond Fund) or Maryland (in the case of The Maryland Municipal Bond Fund) state
income taxes or that at least 80% of their total assets are invested in
obligations, the interest income from which is exempt from federal regular and
Virginia (in the case of The Virginia Municipal Bond Fund) or Maryland (in the
case of The Maryland Municipal Bond Fund) state income taxes.
Characteristics
The municipal securities in which the Funds invest have the
characteristics set forth in the prospectus. An unrated municipal
security will be determined by a Fund's adviser to meet the quality
standards established by the Fund's Board of Trustees if it is of
comparable quality to the rated municipal securities which the Fund
purchases. The Trustees consider the creditworthiness of the issuer of
a municipal security, the issuer of a participation interest if the
Fund has the right to demand payment from the issuer of the interest or
the guarantor of payment by either of those issuers.
If Moody's or S&P's ratings change because of changes in those
organizations or in their rating systems, a Fund will try to use
comparable ratings as standards in accordance with the investment
policies described in the Fund's prospectus.
Types of Acceptable Investments
Examples of Virginia and Maryland municipal securities are:
o municipal notes and tax-exempt commercial paper;
o serial bonds sold with a series of maturity dates;
o tax anticipation notes sold to finance working capital needs of
municipalities in anticipation of receiving taxes at a later date;
o bond anticipation notes sold in anticipation of the issuance of
longer-term bonds in the future;
o revenue anticipation notes sold in expectation of receipt of federal
income available under the Federal Revenue Sharing Program;
o prerefunded municipal bonds refundable at a later date (payment of
principal and interest on prerefunded bonds is assured through the
first call date by the deposit in escrow of U.S. government
securities); or
o general obligation bonds secured by a municipality's pledge of
taxation.
The Treasury Money Market Fund
- --------------------------------------------------------------------------------
Types of Investments
The Fund invests only in short-term U.S. Treasury obligations. Short-term U.S.
Treasury obligations as used herein refers to evidences of indebtedness issued
by the United States, or issued by an agency or instrumentality thereof, and
fully guaranteed as to principal and interest by the United States, maturing in
397 days or less from the date of acquisition unless they are purchased under a
repurchase agreement that provides for repurchase by the seller within one year
from the date of acquisition.
The Fund may also retain Fund assets in cash.
<PAGE>
The Money Market Fund
- --------------------------------------------------------------------------------
Types of Investments
The Fund invests primarily in money market instruments maturing in 397 days or
less and which include, but are not limited to, commercial paper and demand
master notes, domestic and foreign bank instruments, U.S. government
obligations, and corporate debt obligations.
Bank Instruments
The types of bank instruments in which the Fund invests are those set
forth under "The Style Manager: Large Cap Fund-Bank Instruments."
U.S. Government Obligations
The types of U.S. government obligations in which the Fund may invest
are those set forth under "The U.S. Government Securities Fund-U.S.
Government Obligations."
The Tax-Free Money Market Fund
- --------------------------------------------------------------------------------
The Fund invests in a portfolio of municipal securities maturing in 13 months or
less. As a matter of investment policy, which cannot be changed without
shareholder approval, at least 80% of the Fund's annual interest income will be
exempt from federal income tax (including alternative minimum tax). The average
maturity of the securities in the Fund's portfolio, computed on a
dollar-weighted basis, will be 90 days or less.
Portfolio Investments and Strategies
- --------------------------------------------------------------------------------
Repurchase Agreements
The Funds or their custodian will take possession of the securities subject to
repurchase agreements and these securities will be marked to market daily. In
the event that 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 a Fund and allow
retention or disposition of such securities. The Funds 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.
Reverse Repurchase Agreements
The Funds 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 a 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 are maintained until the transaction is settled.
When-Issued and Delayed Delivery Transactions
These transactions are made to secure what is considered to be an advantageous
price or yield for a Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid assets of a Fund sufficient to
make payment for the securities to be purchased are segregated on a Fund's
records at the trade date. These assets are marked to market daily and are
maintained until the transaction has been settled. The Funds may engage in these
transactions to an extent that would cause the segregation of an amount up to
20% of the total value of their assets. The Funds do not intend to engage in
when-issued and delayed delivery transactions to an extent that would cause the
segregation of more than 20% of the total value of their respective assets.
<PAGE>
Lending of Portfolio Securities
The collateral received when The U.S. Government Securities Fund, The Style
Manager: Large Cap Fund, The Style Manager Fund, and The Money Market Fund lend
portfolio securities must be valued daily and, should the market value of the
loaned securities increase, the borrower must furnish additional collateral to
the particular Fund. During the time portfolio securities are on loan, the
borrower pays a Fund any dividends or interest paid on such securities. Loans
are subject to termination at the option of a 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. The U.S. Government Securities
Fund and The Style Manager: Large Cap Fund do 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.
Restricted and Illiquid Securities
The Funds may invest in restricted securities. Restricted securities are any
securities in which a Fund may otherwise invest pursuant to its investment
objective and policies but which are subject to restriction on resale under
federal securities law. However, The U.S. Government Securities Fund, The Style
Manager: Large Cap Fund, The Style Manager Fund, The Virginia Municipal Bond
Fund and The Maryland Municipal Bond Fund will limit investments in illiquid
securities, including certain restricted securities determined by the Trustees
not to be liquid, and repurchase agreements providing for settlement in more
than seven days after notice, to 15% of its net assets. In the case of The
Virginia Municpal Bond Fund and The Maryland Municipal Bond Fund, illiquid
securities will include participation interests and variable rate municipal
securities without a demand feature or with a demand feature of longer than
seven days and which the adviser believes cannot be sold within seven days. The
Treasury Money Market Fund, The Money Market Fund, and The Tax-Free Money Market
Fund will limit investments in illiquid securities, including certain securities
determined by the Trustees not to be liquid, and repurchase agreements providing
for settlement in more than seven days after notice, and in the case of The
Money Market Fund, specifically including non-negotiable fixed income time
deposits with maturities over seven days, to 10% of their net assets.
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund, The
Style Manager Fund, and The Money Market Fund 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 Fund, 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 Fund 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 Board of 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 a Fund's investment 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 intend
to not subject such paper to the limitation applicable to restricted securities.
Participation Interests
The financial institutions from which The Virginia Municipal Bond Fund, The
Maryland Municipal Bond Fund, and The Tax-Free Money Market Fund purchase
participation interests frequently provide or secure from other financial
institutions irrevocable letters of credit or guarantees and give a Fund the
right to demand payment on specified notice (normally within thirty days for The
Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund and seven days
for The Tax-Free Money Market Fund) from the issuer of the letter of credit or
guarantee. These financial institutions may charge certain fees in connection
with their repurchase commitments, including a fee equal to the excess of the
interest paid on the municipal securities over the negotiated yield at which the
participation interests were purchased by a Fund. By purchasing participation
interests, a Fund is buying a security meeting the maturity and quality
requirements of a Fund and is also receiving the tax-free benefits of the
underlying securities.
In the acquisition of participation interests, a Fund's investment adviser will
consider the following quality factors:
o the quality of the underlying municipal security (of which a Fund
takes possession);
o the quality of the issuer of the participation interest; and
o a guarantee or letter of credit from a high-quality financial
institution supporting the participation interest.
<PAGE>
Variable Rate Municipal Securities
The Virginia Municipal Bond Fund, The Maryland Municipal Bond Fund, and The
Tax-Free Money Market Fund invest in variable municipal securities. Variable
interest rates generally reduce changes in the market value of municipal
securities from their original purchase prices. Accordingly, as interest rates
decrease or increase, the potential for capital appreciation or depreciation is
less for variable rate municipal securities than for fixed income obligations.
Many municipal securities with variable interest rates purchased by the The
Tax-Free Money Market Fund are subject to repayment of principal (usually within
seven days) on the The Tax-Free Money Market Fund's demand. For purposes of
determining the Fund's average maturity, the maturities of these variable rate
demand municipal securities (including participation interests) are the longer
of the periods remaining until the next readjustment of their interest rates or
the periods remaining until their principal amounts can be recovered by
exercising the right to demand payment. The terms of these variable rate demand
instruments require payment of principal and accrued interest from the issuer of
the municipal obligations, the issuer of the participation interests or a
guarantor of either issuer.
Municipal Leases
The Virginia Municipal Bond Fund, The Maryland Municipal Bond Fund, and The
Tax-Free Money Market Fund may purchase municipal securities in the form of
participation interests which represent undivided proportional interests in
lease payments by a governmental or nonprofit entity. The lease payments and
other rights under the lease provide for and secure the payments on the
certificates. Lease obligations may be limited by municipal charter or the
nature of the appropriation for the lease. In particular, lease obligations may
be subject to periodic appropriation. If the entity does not appropriate funds
for future lease payments, the entity cannot be compelled to make such payments.
Furthermore, a lease may provide that the certificate trustee cannot accelerate
lease obligations upon default. The trustee would only be able to enforce lease
payments as they became due. In the event of a default or failure of
appropriation, it is unlikely that the trustee would be able to obtain an
acceptable substitute source of payment.
In determining the liquidity of municipal lease securities, the adviser, under
the authority delegated by the Board of Trustees, will base its determination on
the following factors: (a) whether the lease can be terminated by the lessee;
(b) the potential recovery, if any, from a sale of the leased property upon
termination of the lease; (c) the lessee's general credit strength (e.g., its
debts, administrative, economic and financial characteristics, and prospects);
(d) the likelihood that the lessee will discontinue appropriating funding for
the leased property because the property is no longer deemed essential to its
operations (e.g., the potential for an "event of nonappropriation"); and (e) any
credit enhancement of legal recourse provided upon an event of nonappropriation
or other termination of the lease.
Temporary Investments
The Virginia Municipal Bond Fund, The Maryland Municipal Bond Fund and The
Tax-Free Money Market Fund may also invest in temporary investments during times
of unusual market conditions for defensive purposes and to maintain liquidity.
From time to time, such as when suitable securities are not available to the
respective Fund, a Fund may invest a portion of its assets in cash. Any portion
of a Fund's assets maintained in cash will reduce the amount of assets in
securities held in the respective Fund, and could thereby reduce a Fund's yield.
Adjustable Rate Mortgage Securities
The U.S. Government Securities Fund invests in adjustable rate mortgage
securities ("ARMS"). Not unlike other U.S. government securities, the market
value of ARMS will generally vary inversely with changes in market interest
rates. Thus, the market value of ARMS generally declines when interest rates
rise and generally rises when interest rates decline.
While ARMS generally entail less risk of a decline during periods of rapidly
rising rates, ARMS may also have less potential for capital appreciation than
other similar investments (e.g. investments with comparable maturities) because
as interest rates decline, the likelihood increases that mortgages will be
prepaid. Furthermore, if ARMS are purchased at a premium, mortgage foreclosures
and unscheduled principal payment may result in some loss of a holder's
principal investment to the extent of the premium paid. Conversely, if ARMS are
purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal would increase current and total returns and
would accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.
<PAGE>
Portfolio Turnover
The Funds will not attempt to set or meet a portfolio turnover rate since any
turnover would be incidental to transactions undertaken in an attempt to achieve
a Fund's investment objective. The Style Manager: Large Cap Fund and The Style
Manager Fund may experience greater portfolio turnover than would be expected
with a portfolio of higher-rated securities. A high portfolio turnover will
result in increased transaction costs to the Fund. For the fiscal years ended
September 30, 1997 and 1996, the portfolio turnover rates were 80% and 118%,
respectively, for The U.S. Government Securities Fund; 56% and 151%,
respectively, for The Style Manager: Large Cap Fund; 19% and 129%, respectively,
for The Virginia Municipal Bond Fund; 13% and 138%, respectively, for The
Maryland Municipal Bond Fund; and 94% and 112%, respectively, for The Style
Manager Fund.
Investment Limitations
- --------------------------------------------------------------------------------
Issuing Senior Securities and Borrowing Money
The Funds will not issue senior securities except that a Fund may
borrow money directly or through reverse repurchase agreements in
amounts up to one-third of the value of its net assets, including the
amount borrowed. The Funds will not borrow money or engage in reverse
repurchase agreements for investment leverage, but rather as a
temporary, extraordinary, or emergency measure or to facilitate
management of the portfolio by enabling a Fund to meet redemption
requests when the liquidation of portfolio securities is deemed to be
inconvenient or disadvantageous. A Fund will not purchase any
securities while any borrowings in excess of 5% of its total assets are
outstanding. With respect to The U.S. Government Securities Fund, The
Style Manager: Large Cap Fund, The Style Manager Fund, The Virginia
Municipal Bond Fund, The Maryland Municipal Bond Fund, The Treasury
Money Market Fund, and The Money Market Fund, during the period any
reverse repurchase agreements are outstanding, the Funds will restrict
the purchase of portfolio securities to money market instruments
maturing on or before the expiration date of the reverse repurchase
agreements, but only to the extent necessary to assure completion of
the reverse repurchase agreements.
Selling Short and Buying on Margin
The Funds will not purchase any securities on margin but they may
obtain such short-term credits as may be necessary for clearance of
transactions. With respect to The U.S. Government Securities Fund, The
Style Manager: Large Cap Fund, and The Style Manager Fund, the deposit
or payment by the 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. The Virginia Municipal
Bond Fund, The Maryland Municipal Bond Fund, The Treasury Money Market
Fund, The Money Market Fund, and The Tax-Free Money Market Fund may not
sell any securities short.
Pledging Assets
The Funds will not mortgage, pledge, or hypothecate any assets except
to secure permitted borrowings. In these cases the Funds, except The
Tax-Free Money Market Fund, may pledge assets having a market value not
exceeding the lesser of the dollar amounts borrowed or 15% of the value
of total assets of a Fund at the time of the pledge. Margin deposits
for the purchase and sale of financial futures contracts and related
options are not deemed to be a pledge.
Lending Cash or Securities
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund,
The Style Manager Fund, The Treasury Money Market Fund and The Money
Market Fund, will not lend any of their assets, except portfolio
securities up to one-third of the value of their total assets. This
shall not prevent a Fund from purchasing or holding bonds, debentures,
notes, certificates of indebtedness, or other debt securities, entering
into repurchase agreements, or engaging in other transactions where
permitted by a Fund's investment objective, policies, and limitations
or the Trust's Declaration of Trust.
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund
will not lend any of their assets, except that they may acquire
publicly or nonpublicly issued municipal securities or temporary
investments or enter into repurchase agreements as permitted by a
Fund's investment objective, policies, limitations and Declaration of
Trust.
The Tax-Free Money Market Fund will not lend any of its assets except
that it may purchase or hold portfolio securities permitted by its
investment objective, policies and limitations, or Declaration of
Trust.
<PAGE>
Investing in Restricted Securities
Except for The Tax-Free Money Market Fund, the Funds will not invest
more than 10% of their net assets in securities subject to restrictions
on resale under the Securities Act of 1933 (except certain restricted
securities which meet the criteria for liquidity as established by the
Board of Trustees. With respect to The U.S. Government Securities Fund,
The Style Manager: Large Cap Fund, The Style Manager Fund and The Money
Market Fund, this exception specifically extends to commercial paper
issued under Section 4(2) of the Securities Act of 1933 and certain
other restricted securities which meet the criteria for liquidity as
established by the Board of Trustees).
The Tax-Free Money Market Fund will not invest more than 10% of its
total assets in securities subject to restrictions on resale under
federal securities law, except for restricted securities determined to
be liquid under criteria established by the Trustees.
Investing in Commodities
The Funds will not purchase or sell commodities, commodity contracts or
commodity futures contracts except for financial futures contracts in
the case of The Style Manager: Large Cap Fund and The Style Manager
Fund.
Investing in Real Estate
The Funds will not purchase or sell real estate, including limited
partnership interests with respect to The Style Manager Fund, although
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund
and The Style Manager Fund may invest in securities secured by real
estate or interests in real estate or issued by companies, including
real estate investment trusts, which invest in real estate or interests
therein. The Virginia Municipal Bond Fund, The Maryland Municipal Bond
Fund, The Money Market Fund, and The Tax-Free Money Market Fund may
invest in securities of issuers whose business involves the purchase or
sale of real estate or in securities which are secured by real estate
or interests in real estate.
Diversification of Investments
With respect to 75% of the value of its total assets, The U.S.
Government Securities Fund, The Style Manager: Large Cap Fund, The
Style Manager Fund and The Money Market Fund will not purchase
securities issued by any one issuer (other than cash, cash items or
securities issued or guaranteed by the government of the United States
or its agencies or instrumentalities and repurchase agreements
collateralized by such securities), if as a result more than 5% of the
value of its total assets would be invested in the securities of that
issuer. The U.S. Government Fund and The Style Manager: Large Cap Fund
will not acquire more than 10% of the outstanding voting securities of
any one issuer.
Concentration of Investments
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund,
The Style Manager Fund and The Money Market Fund will not invest 25% or
more of the value of their total assets in any one industry. With
respect to The Money Market Fund, investing in bank instruments (such
as time and demand deposits and certificates of deposit), U.S.
government obligations, or instruments secured by these money market
instruments, such as repurchase agreements for U.S. government
obligations, shall not be considered investments in any one industry.
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund
will not purchase securities if, as a result of such purchase, 25% or
more of the value of its total assets would be invested in any one
industry or in industrial development bonds or other securities, the
interest on which is paid from revenues of similar types of projects.
However, these Funds may invest as temporary investments more than 25%
of the value of its assets in cash or cash items, securities issued or
guaranteed by the U.S. government, its agencies, or instrumentalities,
or instruments secured by these money market instruments, such as
repurchase agreements.
The Tax-Free Money Market Fund will not invest 25% or more of the value
of its total assets in any one industry, except that it may invest more
than 25% of its total assets in securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities and industrial
development bonds as long as they are not from the same facility or
similar types of facilities. The Tax-Free Money Market Fund does not
intend to purchase securities that would increase the percentage of its
assets invested in the securities of governmental subdivisions located
in any one state, territory, or U.S. possession to 25% or more.
<PAGE>
Underwriting
The Funds will not underwrite any issue of securities, except as a Fund
may be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its
investment objective, policies, and limitations.
The above limitations cannot be changed with respect to a Fund without approval
of a majority of that Fund's Shares. The following limitations may be changed by
the Trustees without shareholder approval. Shareholders will be notified before
any material change in these limitations becomes effective.
Investing in Illiquid Securities
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund,
The Style Manager Fund, The Virginia Municipal Bond Fund, and The
Maryland Municipal Bond Fund will not invest more than 15% of the value
of their net assets in illiquid securities, including repurchase
agreements providing for settlement in more than seven days after
notice, and certain restricted securities determined by the Trustees
not to be liquid; and, in the case of The Virginia Municipal Bond Fund
and The Maryland Municipal Bond Fund, specifically including
participation interests and variable rate municipal securities without
a demand feature or with a demand feature of longer than seven days and
which the adviser believes cannot be sold within seven days. The
Treasury Money Market Fund, The Money Market Fund, and The Tax-Free
Money Market Fund will not invest more than 10% of the value of their
net assets in illiquid securities, including repurchase agreements
providing for settlement more than seven days after notice and certain
securities determined by the Trustees not to be liquid; and, in the
case of The Money Market Fund, specifically including non-negotiable
fixed income time deposits with maturities over seven days.
Investing in Securities of Other Investment Companies
The Funds will limit their respective investment in other investment
companies to no more than 3% of the total outstanding voting stock of
any investment company, invest no more than 5% of total assets in any
one investment company, or invest more than 10% of total assets in
investment companies in general , unless permitted to do so by order of
the SEC. The U.S. Government Securities Fund, The Style Manager: Large
Cap Fund, The Style Manager Fund, The Treasury Money Market Fund and
The Money Market Fund will purchase securities of closed-end investment
companies only in open market transactions involving only customary
broker's commissions. However, these limitations are not applicable if
the securities are acquired in a merger, consolidation, reorganization,
or acquisition of assets. With respect to The Treasury Money Market
Fund and The Money Market Fund, the Funds will limit their investments
and the securities of other investment companies to those of The Money
Market Funds having investment objectives and policies similar to their
own. The Virginia Municipal Bond Fund and The Maryland Municipal Bond
Fund will invest in other investment companies primarily for the
purposes of investing short-term cash which has not yet been invested
in other portfolio instruments. The adviser will waive its investment
advisory fee on assets invested in securities of open-end investment
companies.
Purchasing Securities to Exercise Control
A Fund will not purchase securities of a company for the purpose of
exercising control or management.
Selling Short
Neither The U.S. Government Securities Fund, The Style Manager: Large
Cap Fund, nor The Style Manager Fund will sell securities short unless
(1) it owns, or has a right to acquire, an equal amount of such
securities, or (2) it has segregated an amount of its other assets
equal to the lesser of the market value of the securities sold short or
the amount required to acquire such securities. The segregated amount
will not exceed 10% of The U.S. Government Securities Fund's nor The
Style Manager: Large Cap Fund's net assets.
With respect to The Style Manager Fund, the segregated amount will not
exceed 5% of the Fund's net assets. The dollar amount of short sales at
any one time shall not exceed 5% of the Fund's net assets and the value
of securities of any one issuer in which the Fund is short may not
exceed the lesser of 2% of the value of the Fund's net assets or 2% of
the securities of any class of any issuer.
While in a short position, the Fund will retain the securities, rights
or segregated assets.
<PAGE>
Except with respect to the Funds' policy of 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 U.S. Government Securities Fund, The Style Manager: Large Cap Fund and The
Style Manager Fund have no present intent to borrow money, pledge securities,
sell securities short, or invest in restricted or illiquid securities in excess
of 5% of the value of their respective net assets in the coming fiscal year.
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund have no
present intent to issue senior securities or borrow money, pledge securities,
invest in restricted or illiquid securities, sell securities short, or engage in
when-issued and delayed delivery transactions in excess of 5% of the value of
its net assets during the fiscal period.
The Treasury Money Market Fund and The Money Market Fund do not expect to issue
senior securities or borrow money, pledge securities, sell securities short,
engage in when-issued and delayed delivery transactions or reverse repurchase
agreements, for The Money Market Fund only, in excess of 5% of the value of
their net assets during the coming fiscal year.
The Tax-Free Money Market Fund does not intend to borrow money, sell securities
short, or pledge securities in excess of 5% of the value of its net assets
during the coming fiscal year.
Virtus Funds Management
- --------------------------------------------------------------------------------
Officers and Trustees are listed with their addresses, birthdates, present
positions with Virtus Funds, and principal occupations.
- --------------------------------------------------------------------------------
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Birthdate: July 28, 1924
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; Chairman and Director, Federated Research
Corp. and Federated Global Research Corp.; Chairman, Passport Research, Ltd.;
Chief Executive Officer and Director or Trustee of the Funds.Mr. Donahue is the
father of J. Christopher Donahue, Executive Vice President of the Company.
- --------------------------------------------------------------------------------
Thomas G. Bigley
15 Old Timber Trail
Pittsburgh, PA
Birthdate: February 3, 1934
Trustee
Chairman of the Board, Children's Hospital of Pittsburgh; formerly, Senior
Partner, Ernst & Young LLP; Director, MED 3000 Group, Inc.; Director, Member of
Executive Committee, University of Pittsburgh; Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Birthdate: June 23, 1937
Trustee
President, Investment Properties Corporation; Senior Vice-President, John R.
Wood and Associates, Inc., Realtors; Partner or Trustee in private real estate
ventures in Southwest Florida; formerly, President, Naples Property Management,
Inc. and Northgate Village Development Corporation; Director or Trustee of the
Funds.
- --------------------------------------------------------------------------------
<PAGE>
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Birthdate: July 4, 1918
Trustee
Director and Member of the Executive Committee, Michael Baker, Inc.; formerly,
Vice Chairman and Director, PNC Bank, N.A., and PNC Bank Corp.; Director, Ryan
Homes, Inc.; Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
James E. Dowd
571 Hayward Mill Road
Concord, MA
Birthdate: May 18, 1922
Trustee
Attorney-at-law; Director, The Emerging Germany Fund, Inc.; Director or Trustee
of the Funds.
- --------------------------------------------------------------------------------
Lawrence D. Ellis, M.D.*
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Birthdate: October 11, 1932
Trustee
Professor of Medicine, University of Pittsburgh; Medical Director, University of
Pittsburgh Medical Center - Downtown; Member, Board of Directors, University of
Pittsburgh Medical Center; formerly, Hematologist, Oncologist, and Internist,
Presbyterian and Montefiore Hospitals; Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
Edward L. Flaherty, Jr.@
Miller, Ament, Henny & Kochuba
205 Ross Street
Pittsburgh, PA
Birthdate: June 18, 1924
Trustee
Attorney of Counsel, Miller, Ament, Henny & Kochuba; Director, Eat'N Park
Restaurants, Inc.; formerly, Counsel, Horizon Financial, F.A., Western Region;
Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
Edward C. Gonzales *
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 22, 1930
President, Treasurer and Trustee
Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Shareholder Services Company; Trustee or Director of some of the Funds;
President, Executive Vice President and Treasurer of some of the Funds.
- --------------------------------------------------------------------------------
<PAGE>
Peter E. Madden
One Royal Palm Way
100 Royal Palm Way
Palm Beach, FL
Birthdate: March 16, 1942
Trustee
Consultant; Former State Representative, Commonwealth of Massachusetts;
formerly, President, State Street Bank and Trust Company and State Street Boston
Corporation; Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
John E. Murray, Jr., J.D., S.J.D.
President, Duquesne University
Pittsburgh, PA
Birthdate: December 20, 1932
Trustee
President, Law Professor, Duquesne University; Consulting Partner, Mollica &
Murray; Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Birthdate: September 14, 1925
Trustee
Professor, International Politics; Management Consultant; Trustee, Carnegie
Endowment for International Peace, RAND Corporation, Online Computer Library
Center, Inc., National Defense University and U.S. Space Foundation; President
Emeritus, University of Pittsburgh; Founding Chairman, National Advisory Council
for Environmental Policy and Technology, Federal Emergency Management Advisory
Board and Czech Management Center, Prague; Director or Trustee of the Funds.
- --------------------------------------------------------------------------------
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Birthdate: June 21, 1935
Trustee
Public relations/Marketing/Conference Planning; Director or Trustee of the Funds
- --------------------------------------------------------------------------------
<PAGE>
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Birthdate: April 11, 1949
Executive Vice President
President and Trustee, Federated Investors, Federated Advisers, Federated
Management, and Federated Research; President and Director, Federated Research
Corp. and Federated Global Research Corp.; President, Passport Research, Ltd.;
Trustee, Federated Shareholder Services Company, and Federated Shareholder
Services; Director, Federated Services Company; President or Executive Vice
President of the Funds; Director or Trustee of some of the Funds. Mr. Donahue is
the son of John F. Donahue, Chairman and Trustee of the Company.
- --------------------------------------------------------------------------------
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Birthdate: October 26, 1938
Executive Vice President and Secretary
Executive Vice President, Secretary, and Trustee, Federated Investors; Trustee,
Federated Advisers, Federated Management, and Federated Research; Director,
Federated Research Corp. and Federated Global Research Corp.; Trustee, Federated
Shareholder Services Company; Director, Federated Services Company; President
and Trustee, Federated Shareholder Services; Director, Federated Securities
Corp.; Executive Vice President and Secretary of the Funds; Treasurer of some of
the Funds.
- --------------------------------------------------------------------------------
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 17, 1923
Vice President
Executive Vice President and Trustee, Federated Investors; Chairman and
Director, Federated Securities Corp.; President or Vice President of some of the
Funds; Director or Trustee of some of the Funds.
- --------------------------------------------------------------------------------
Joseph S. Machi
Federated Investors Tower
Pittsburgh, PA
Birthdate: May 22, 1962
Vice President and Assistant Treasurer
Vice President and Assistant Treasurer of some of the Funds.
- --------------------------------------------------------------------------------
* This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.
@ Member of the Executive Committee. The Executive Committee of the
Board of Trustees handles the responsibilities of the Board between
meetings of the Board.
<PAGE>
As used in the table above, "The Funds" and "Funds" mean the following
investment companies: 111 Corcoran Funds; Arrow Funds; Automated Government
Money Trust; Blanchard Funds; Blanchard Precious Metals Fund, Inc.; Cash Trust
Series II; Cash Trust Series, Inc. ; DG Investor Series; Edward D. Jones & Co.
Daily Passport Cash Trust; Federated Adjustable Rate U.S. Government Fund, Inc.;
Federated American Leaders Fund, Inc.; Federated ARMs Fund; Federated Equity
Funds; Federated Equity Income Fund, Inc.; Federated Fund for U.S. Government
Securities, Inc.; Federated GNMA Trust; Federated Government Income Securities,
Inc.; Federated Government Trust; Federated High Income Bond Fund, Inc.;
Federated High Yield Trust; Federated Income Securities Trust; Federated Income
Trust; Federated Index Trust; Federated Institutional Trust; Federated Insurance
Series; Federated Investment Portfolios; Federated Investment Trust; Federated
Master Trust; Federated Municipal Opportunities Fund, Inc.; Federated Municipal
Securities Fund, Inc.; Federated Municipal Trust; Federated Short-Term Municipal
Trust; Federated Short-Term U.S. Government Trust; Federated Stock and Bond
Fund, Inc.; Federated Stock Trust; Federated Tax-Free Trust; Federated Total
Return Series, Inc.; Federated U.S. Government Bond Fund; Federated U.S.
Government Securities Fund: 1-3 Years; Federated U.S. Government Securities
Fund: 2-5 Years; Federated U.S. Government Securities Fund: 5-10 Years;
Federated Utility Fund, Inc.; First Priority Funds; Fixed Income Securities,
Inc.; High Yield Cash Trust; Intermediate Municipal Trust; International Series,
Inc.; Investment Series Funds, Inc.; Investment Series Trust; Liberty Term
Trust, Inc. - 1999; Liberty U.S. Government Money Market Trust; Liquid Cash
Trust; Managed Series Trust; Money Market Management, Inc.; Money Market
Obligations Trust; Money Market Obligations Trust II; Money Market Trust;
Municipal Securities Income Trust; Newpoint Funds; RIMCO Monument Funds;
Targeted Duration Trust; Tax-Free Instruments Trust; The Planters Funds; The
Virtus Funds; Trust for Financial Institutions; Trust for Government Cash
Reserves; Trust for Short-Term U.S. Government Securities; Trust for U.S.
Treasury Obligations; Wesmark Funds; and World Investment Series, Inc.
Fund Ownership
Officers and Trustees own less than 1% of the outstanding shares of each Fund.
As of October 31, 1997, the following shareholders of record owned 5% or more of
the outstanding shares of the Funds: Stephens Inc., Little Rock, AR, for the
exclusive benefit of their customers owned approximately 4,204,370 (40.26%) of
the Investment Shares of U.S. Government Securities Fund; 1,208,630 (24.63%) of
the Investment Shares of The Style Manager: Large Cap Fund; 1,742,805 (34.81%)
of the Shares of The Style Manager Fund; 1,758,994 (33.10%) of the Investment
Shares of The Virginia Municipal Bond Fund; 629,671 (25.07%) of the Investment
Shares of The Maryland Municipal Bond Fund; 18,064,663 (15.34%) of the
Investment Shares of Treasury Money Market Fund; 21,024,493 (27.80%) of the
Investment Shares of Money Market Fund; and 3,716,118 (6.60%) of the Shares of
The Tax-Free Money Market Fund. As of October 31, 1997, Bova & Co., Richmond,
VA, acting in various capacities for numerous accounts, owned approximately
5,165,113 (100%) of the Trust Shares of The U.S. Government Securities Fund;
1,613,118 (99%) of the Trust Shares of The Style Manager: Large Cap Fund;
1,693,162 (33.82%) of the Shares of The Style Manager Fund; 1,802,105 (99.78%)
of the Trust Shares of The Virginia Municipal Bond Fund; 434,681 (100%) of the
Trust Shares of The Maryland Municipal Bond Fund; 206,814,801 (99.92%) of the
Trust Shares of Treasury Money Market Fund; 177,645,283 (96.43%) of the Trust
Shares of The Money Market Fund; and 42,583,759 (75.60%) of the Shares of The
Tax-Free Money Market Fund.
<PAGE>
Officers and Trustees Compensation
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
NAME , AGGREGATE TOTAL COMPENSATION
POSITION WITH COMPENSATION FROM PAID TO TRUSTEES FROM
TRUST TRUST+ TRUST AND FUND COMPLEX
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
John F. Donahue, $0 $-0- for the Trust and
Chairman and Trustee 2 investment companies
Thomas G. Bigley $2,001 $3,217 for the Trust and
Trustee 2 investment companies
John T. Conroy, Jr., $2,198 $3,538 for the Trust and
Trustee 2 investment companies
William J. Copeland, $2,198 $3,538 for the Trust and
Trustee 2 investment companies
James E. Dowd $2,198 $3,538 for the Trust and
Trustee 2 investment companies
Lawrence D. Ellis, M.D., $2,001 $3,217 for the Trust and
Trustee 2 investment companies
Edward L. Flaherty, Jr., $2,198 $3,538 for the Trust and
Trustee 2 investment companies
Edward C. Gonzales, $0 $-0- for the Trust and
President, Treasurer and Trustee 2 investment companies
Peter E. Madden, $2,001 $3,217 for the Trust and
Trustee 2 investment companies
Wesley W. Posvar, $2,001 $3,217 for the Trust and
Trustee 2 investment companies
Marjorie P. Smuts, $2,001 $3,217 for the Trust and
Trustee 2 investment companies
</TABLE>
+The aggregate compensation is provided for the Trust which is comprised of
eight portfolios.
Trustee Liability
The Trust's Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.
Investment Advisory Services
- --------------------------------------------------------------------------------
Adviser to the Trust
The Trust's investment adviser is Virtus Capital Management, Inc., a
wholly-owned subsidiary of Signet Banking Corporation. Because of the internal
controls maintained by Signet Bank to restrict the flow of non-public
information, Fund investments are typically made without any knowledge of Signet
Bank's or its affiliates' lending relationships with an issuer.
The adviser shall not be liable to the Trust, a Fund, or any shareholder of any
of the Funds for any losses that may be sustained in the purchase, holding, or
sale of any security or for anything done or omitted by it, except acts or
omissions involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its contract with the Trust.
<PAGE>
Advisory Fees
For its advisory services, Virtus Capital Management, Inc. receives an annual
investment advisory fee as described in the prospectus. During the fiscal years
ended September 30, 1997, 1996, and 1995, the adviser earned fees from: The U.S.
Government Securities Fund of $1,325,841, $1,612,364, and $1,581,364,
respectively, of which $37,709, $276,121, and $589,885, respectively, were
voluntarily waived; The Style Manager: Large Cap Fund of $749,609, $704,007, and
$678,512, respectively, of which $0, $0, and $189,983, respectively, were
voluntarily waived; The Virginia Municipal Bond Fund of $650,276, $762,051, and
$775,247, respectively, of which $0, $20,993, and $227,301, respectively, were
voluntarily waived; The Maryland Municipal Bond Fund of $273,851, $315,941, and
$316,194, respectively, of which $0, $106,102, and $187,476, respectively, were
voluntarily waived; The Treasury Money Market Fund of $1,897,464, $1,721,497,
and $2,347,424, respectively, of which $46,840, $209,248, and $469,485,
respectively, were voluntarily waived; The Money Market Fund of $1,250,019,
$1,249,811, and $868,490, respectively, of which $57,472, $299,129, and
$336,697, respectively, were voluntarily waived; and The Tax Free Money Market
Fund of $302,027, $462,900 and $262,792, respectively, of which $94,455,
$184,473, and $262,792, respectively, were voluntarily waived. During the fiscal
years ended September 30, 1997, 1996 and for the period from March 7, 1995 (date
of initial public investment) to September 30, 1996, the adviser earned fees
from The Style Manager Fund of $830,673, $657,611 and $374,393, respectively, of
which $326,846, $290,966 and $374,393, respectively, were voluntarily waived.
Sub-Adviser to The Style Manager: Large Cap Fund and The Style Manager Fund
Trend Capital Management, Inc. is the sub-adviser to The Style Manager: Large
Cap Fund and The Style Manager Fund.
Sub-Advisory Fees
For its sub-advisory services, the Sub-Adviser receives an annual sub-advisory
fee as described in the prospectus. For the fiscal years ended September 30,
1997, 1996, and 1995, the sub-adviser earned fees from The Style Manager; Large
Cap Fund of $144,886, $0, and $0, respectively, of which $0, $0, and $0,
respectively, were voluntarily waived. For the fiscal years ended September 30,
1997, 1996, and for the period from March 7, 1995 (date of initial public
investment) to September 30, 1995, the sub-adviser earned fees from The Style
Manager Fund of $74,119, $0, and $0, respectively, of which $0, $0, and $0,
respectively, were voluntarily waived.
Other Services
- --------------------------------------------------------------------------------
Administrative Services
Federated Administrative Services, which is a subsidiary of Federated Investors,
provides administrative personnel and services to the Funds for the fees set
forth in the prospectus. For the fiscal years ended September 30, 1997, 1996,
and 1995, the Funds incurred administrative services fees as follows: The U.S.
Government Securities Fund incurred $172,113, $211,649, and $226,246,
respectively, none of which was voluntarily waived; The Style Manager: Large Cap
Fund incurred $97,360, $92,298, and $97,229, respectively, none of which was
voluntarily waived; The Virginia Municipal Bond Fund incurred $84,421, $100,059,
and $110,908, respectively, none of which was voluntarily waived; The Maryland
Municipal Bond Fund incurred $75,000, $67,667, and $45,246, respectively, none
of which was voluntarily waived; The Treasury Money Market Fund incurred
$369,581, $336,951, and $500,283, respectively, none of which was voluntarily
waived; The Money Market Fund incurred $243,450, $254,134, and $185,586,
respectively, none of which was voluntarily waived; and The Tax-Free Money
Market Fund incurred $75,171, $95,363, and $58,355, respectively, none of which
was voluntarily waived. For the fiscal years ended September 30, 1997, 1996 and
for the period from March 7, 1995 (date of initial public investment) to
September 30, 1995, The Style Manager Fund incurred $75,125, $93,863 and
$85,069, respectively, in administrative services fees, none of which was
voluntarily waived.
<PAGE>
Custodian
Signet Trust Company, Richmond, Virginia, is custodian for the securities and
cash of the Funds. Under the Custodian Agreement, Signet Trust Company holds the
Funds' portfolio securities in safekeeping and keeps all necessary records and
documents relating to its duties.
Transfer Agent
Federated Shareholder Services Company, Boston, Massachusetts, is transfer agent
for the Shares of the Funds and dividend disbursing agent for the Funds.
Independent Auditors
The independent auditors for the Funds are Deloitte & Touche LLP, Pittsburgh,
Pennsylvania.
Brokerage Transactions
- --------------------------------------------------------------------------------
When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the adviser looks for prompt execution of the order at a favorable
price. In working with dealers, the adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better price
and execution of the order can be obtained elsewhere. The adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
guidelines established by the Board of Trustees.
The adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Funds or to the
adviser and may include:
o advice as to the advisability of investing in securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations; and
o similar services.
The adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by the adviser in advising the
Funds and other accounts. To the extent that receipt of these services may
supplant services for which the adviser or its affiliates might otherwise have
paid, it would tend to reduce their expenses.
For the fiscal years ended September 30, 1997, 1996 and 1995, The Style Manager:
Large Cap Fund paid $140,842, $403,888 and $562,493, respectively, in
commissions on brokerage transactions. For the fiscal years ended September 30,
1997, 1996 and for the period from March 7, 1995 (date of initial public
investment) to September 30, 1995, The Style Manager Fund paid $215,622,
$311,323, and $0, respectively, in commissions on brokerage transactions.
<PAGE>
Purchasing Shares
- --------------------------------------------------------------------------------
Shares of the Funds are sold at their net asset value without a sales charge on
days the New York Stock Exchange is open for business. The procedure for
purchasing Shares of the Funds is explained in the prospectus under "Investing
in Shares."
Distribution Plan
The Trust has adopted a Plan for Investment Shares of the The U.S. Government
Securities Fund, The Style Manager: Large Cap Fund, The Virginia Municipal Bond
Fund, The Maryland Municipal Bond Fund, The Treasury Money Market Fund and The
Money Market Fund and Shares of The Style Manager Fund and The Tax-Free Money
Market Fund pursuant to Rule 12b-1 which was promulgated by the Securities and
Exchange Commission pursuant to the Investment Company Act of 1940. The Plan
provides that the Funds' distributor, Federated Securities Corp., shall act as
the distributor of Shares, and it permits the payment of fees to brokers and
dealers for distribution and administrative services and to administrators for
administrative services. The Plan is designed to (i) stimulate brokers and
dealers to provide distribution and administrative support services to the Funds
and their holders of Shares and (ii) stimulate administrators to render
administrative support services to the Funds and their holders of Shares. These
services are to be provided by a representative who has knowledge of the holder
of Shares' 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 the
Funds; assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Trust reasonably requests.
Other benefits which the Funds hope to achieve through the Plan include, but are
not limited to the following: (1) an efficient and effective administrative
system; (2) a more efficient use of assets of holders of Shares by having them
rapidly invested in the Funds with a minimum of delay and administrative detail;
and (3) an efficient and reliable records system for holders of Shares and
prompt responses to shareholder requests and inquiries concerning their
accounts.
By adopting the Plan, the Board of Trustees expects that the Funds will be able
to achieve a more predictable flow of cash for investment purposes and to meet
redemptions. This will facilitate more efficient portfolio management and assist
the Funds in seeking to achieve their respective investment objectives. By
identifying potential investors in Shares whose needs are served by a particular
Fund's objective, and properly servicing these accounts, the Funds may be able
to curb sharp fluctuations in rates of redemptions and sales.
For the fiscal years ended September 30, 1997, 1996, and 1995, the Funds paid
fees to brokers and administrators (financial institutions) pursuant to the Plan
as follows: The U.S. Government Securities Fund $279,386, $297,511, and
$268,621, respectively; The Style Manager: Large Cap Fund $175,775, $128,090,
and $80,046, respectively; The Virginia Municipal Bond Fund, $158,225, $174,114,
and $174,523, respectively; The Maryland Municipal Bond Fund, $73,620, $82,278,
and $80,136, respectively; The Treasury Money Market Fund, $331,053, $270,001,
and $80,097, respectively; and The Money Market Fund, $206,038, $198,913, and
$79,316, respectively. For the fiscal years ended September 30, 1997, 1996 and
1995, the Tax-Free Money Market Fund paid no fees pursuant to the Plan. For the
fiscal years ended September 30, 1997, 1996 and for the period from March 7,
1995 (date of initial public investment) to September 30, 1995, The Style
Manager Fund paid no fees pursuant to the Plan.
Conversion to Federal Funds
It is the policy of The Treasury Money Market Fund, The Money Market Fund, and
The Tax-Free Money Market Fund to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from shareholders must
be in federal funds or be converted into federal funds. Federated Services
Company acts as the shareholder's agent in depositing checks and converting them
to federal funds.
<PAGE>
Determining Net Asset Value
- --------------------------------------------------------------------------------
Net asset values of The U.S. Government Securities Fund, The Style Manager:
Large Cap Fund, The Style Manager Fund, The Virginia Municipal Bond Fund and The
Maryland Municipal Bond Fund generally change each day. The Treasury Money
Market Fund, The Money Market Fund, and The Tax-Free Money Market Fund attempt
to stabilize the value of their Shares at $1.00. The days on which the net asset
value is calculated by these Funds are described in the prospectus.
Determining Market Value of Securities
The market value of The U.S. Government Securities Fund's portfolio securities
is determined as follows:
o according to the mean between the over-the-counter bid and asked
prices provided by an independent pricing service, if available, or
at fair value as determined in good faith by the Fund's Board of
Trustees; or
o for short-term obligations with remaining maturities of 60 days or
less at the time of purchase at amortized cost unless the Board of
Trustees determines that particular circumstances of the security
indicate otherwise.
Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.
The market value of portfolio securities of The Style Manager: Large Cap Fund
and The Style Manager Fund is determined as follows:
o for equity securities, according to the last sale price on a
national securities exchange, if available;
o in the absence of recorded sales for listed equity securities,
according to the mean between the last closing bid and asked prices;
o for unlisted equity securities, the latest bid prices;
o for bonds and other fixed income securities, as determined by an
independent pricing service;
o for short-term obligations, according to the mean between bid and
asked prices as furnished by an independent pricing service or for
short-term obligations with remaining maturities of 60 days or less
at the time of purchase at amortized cost; or
o for all other securities, at fair value as determined in good faith
by the Board of Trustees.
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund, and The
Style Manager Fund will value futures contracts, options, and put options on
futures and at their market values established by the exchanges at the close of
option trading on such exchanges unless the Board of Trustees determine in good
faith that another method of valuing option positions is necessary to appraise
their fair value. Over-the-counter put options will be valued at the mean
between the bid and the asked prices.
Use of the Amortized Cost Method
With respect to The Treasury Money Market Fund, The Money Market Fund, and The
Tax-Free Money Market Fund, the Trustees have decided that the best method for
determining the value of portfolio instruments is amortized cost. Under this
method, portfolio instruments are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at current
market value.
A Fund's use of the amortized cost method of valuing portfolio instruments
depends on its compliance with certain conditions in Rule 2a-7 (the "Rule")
promulgated by the Securities and Exchange Commission under the Investment
Company Act of 1940. Under the Rule, the Trustees must establish procedures
reasonably designed to stabilize the net asset value per share, as computed for
purposes of distribution and redemption, at $1.00 per Share, taking into account
current market conditions and a Fund's investment objective.
<PAGE>
Under the Rule, a Fund is permitted to purchase instruments which are subject to
demand features or standby commitments. As defined by the Rule, a demand feature
entitles a Fund to receive the principal amount of the instrument from the
issuer or a third party on (1) no more than 30 days' notice or (2) at specified
intervals not exceeding one year on no more than 30 days' notice. A standby
commitment entitles a Fund to achieve same day settlement and to receive an
exercise price equal to the amortized cost of the underlying instrument plus
accrued interest at the time of exercise.
The Funds acquire instruments subject to demand features and standby commitments
to enhance the instrument's liquidity. The Funds treat demand features and
standby commitments as a part of the underlying instruments, because the Funds
do not acquire them for speculative purposes and cannot transfer them separately
from the underlying instruments. Therefore, although the Rule defines demand
features and standby commitments as "puts", the Fund does not consider them to
be separate investments for purposes of its investment policies.
Monitoring Procedures
The Trustees' procedures include monitoring the relationship between
the amortized cost value per share and the net asset value per share
based upon available indications of market value. The Trustees will
decide what, if any, steps should be taken if there is a difference of
more than .50% between the two. The Trustees will take any steps they
consider appropriate (such as redemption in kind or shortening the
average portfolio maturity) to minimize any material dilution or other
unfair results arising from differences between the two methods of
determining net asset value.
Investment Restrictions
The Rule requires that a Fund limit its investments to instruments
that, in the opinion of the Trustees, present minimal credit risks and
have received the requisite rating from one or more nationally
recognized statistical rating organizations. If the instruments are not
rated, the Trustees must determine that they are of comparable quality.
The Rule also requires a Fund to maintain a dollar-weighted average
portfolio maturity (not more than 90 days) appropriate to the objective
of maintaining a stable net asset value of $1.00 per Share. In
addition, no instrument with a remaining maturity of more than 397 days
can be purchased by a Fund.
Should the disposition of a portfolio security result in a
dollar-weighted average portfolio maturity of more than 90 days, a Fund
will invest its available cash to reduce the average maturity to 90
days or less as soon as possible.
A Fund may attempt to increase yield by trading portfolio securities to take
advantage of short-term market variations. Under the amortized cost method of
valuation, neither the amount of daily income nor the net asset value is
affected by any unrealized appreciation or depreciation of the portfolio.
In periods of declining interest rates, the indicated daily yield on Shares,
computed by dividing the annualized daily income on a Fund's portfolio by the
net asset value computed as above, may tend to be higher than a similar
computation made by using a method of valuation based upon market prices and
estimates.
In periods of rising interest rates, the indicated daily yield on Shares
computed the same way may tend to be lower than a similar computation made by
using a method of calculation based upon market prices and estimates.
Valuing Municipal Securities
With respect to The Virginia Municipal Bond Fund, The Maryland Municipal Bond
Fund, and The Tax-Free Money Market Fund, the Board of Trustees uses an
independent pricing service to value municipal securities. The independent
pricing service takes into consideration: yield; stability; risk; quality;
coupon rate; maturity; type of issue; trading characteristics; special
circumstances of a security or trading market; and any other factors or market
data it considers relevant in determining valuations for normal institutional
size trading units of debt securities and does not rely exclusively on quoted
prices.
<PAGE>
Use of Amortized Cost
With respect to The Virginia Municipal Bond Fund and The Maryland Municipal Bond
Fund, the Board of Trustees has decided that the fair value of debt securities
purchased by a Fund with remaining maturities of 60 days or less at the time of
purchase shall be their amortized cost value, unless the particular
circumstances of the security indicate otherwise. Under this method, portfolio
instruments and assets are valued at the acquisition cost as adjusted for
amortization of premium or accumulation of discount rather than at current
market value. The Executive Committee continually assesses this method of
valuation and recommends changes where necessary to assure that the Fund's
portfolio instruments are valued at their fair value as determined in good faith
by the Trustees.
Redeeming Shares
- --------------------------------------------------------------------------------
Each Fund redeems Shares at the next computed net asset value after a Fund
receives the redemption request, less a contingent deferred sales charge, if
applicable. Redemption procedures are explained in the prospectus under
"Redeeming Investment Shares."
Redemption in Kind
Although the Trust intends to redeem Shares in cash, it reserves the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from a Fund's portfolio.
Redemption in kind will be made in conformity with applicable Securities and
Exchange Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the Board
of Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 of the Investment Company Act
of 1940 under which a Fund is obligated to redeem Shares for any one shareholder
in cash only up to the lesser of $250,000 or 1% of any class' net asset value
during any 90-day period. Although a Fund reserves the right to redeem Shares in
kind, it will activate this right only after providing 60 days' notice to
shareholders.
Massachusetts Partnership Law
- --------------------------------------------------------------------------------
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation, or instrument the Trust or its Trustees
enter into or sign.
In the unlikely event a shareholder is held personally liable for obligations of
the Trust, the Trust is required to use its property to protect or compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust cannot meet its obligations to indemnify shareholders and pay
judgments against them from its assets.
Tax Status
- --------------------------------------------------------------------------------
The Funds' Tax Status
The Funds will pay no federal income tax because they expect to meet the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, each Fund must, among other
requirements:
o derive at least 90% of its gross income from dividends, interest,
and gains from the sale of securities;
o invest in securities within certain statutory limits; and
o distribute to its shareholders at least 90% of its net income earned
during the year.
<PAGE>
Shareholders' Tax Status
With respect to The U.S. Government Securities Fund, The Style Manager: Large
Cap Fund, The Style Manager Fund, The Treasury Money Market Fund and The Money
Market Fund, shareholders are subject to federal income tax on dividends
received as cash or additional shares. No portion of any income dividend paid by
a Fund is eligible for the dividends received deduction available to
corporations. These dividends, and any short-term capital gains, are taxable as
ordinary income.
With respect to The Virginia Municipal Bond Fund, The Maryland Municipal Bond
Fund, and The Tax-Free Money Market Fund, no portion of any income dividend paid
by a Fund is eligible for the dividends received deduction available to
corporations.
Capital Gains
Capital gains experienced by The Treasury Money Market Fund and The
Money Market Fund could result in an increase in dividends. Capital
losses could result in a decrease in dividends. If, for some
extraordinary reason, these Funds realize net long-term capital gains,
such net long-term capital gains will be distributed at least once
every 12 months.
With respect to The U.S. Government Securities Fund, The Style Manager: Large
Cap Fund and The Style Manager Fund, long-term capital gains distributed to
shareholders will be treated as long-term capital gains regardless of how long
shareholders have held Shares.
With respect to The Maryland Municipal Bond Fund, The Virginia Municipal Bond
Fund, and The Tax-Free Money Market Fund, capital gains or losses may be
realized by a Fund on the sale of portfolio securities and as a result of
discounts from par value on securities held to maturity. Sales would generally
be made because of:
o the availability of higher relative yields;
o differentials in market values;
o new investment opportunities;
o changes in creditworthiness of an issuer; or
o an attempt to preserve gains or limit losses.
Distribution of long-term capital gains are taxed as such, whether they are
taken in cash or reinvested, and regardless of the length of time the
shareholder has owned the Shares.
Total Return
- --------------------------------------------------------------------------------
The average annual total returns for Investment Shares and Trust Shares of The
U.S. Government Securities Fund for the one-year and five-year periods ended
September 30, 1997 and for the period from October 16, 1990 (date of initial
public investment) to September 30, 1997 were 4.75%, 4.70%, 7.10% and 7.16%,
4.93%, 7.27%, respectively.
The average annual total returns for Investment Shares and Trust Shares of The
Style Manager: Large Cap Fund for the one-year and five-year periods ended
September 30, 1997 and for the period from October 16, 1990 (date of initial
public investment) to September 30, 1997 were 37.02%, 13.84%, 14.03% and 37.37%,
14.09%, 14.21%, respectively.
The average annual total returns for The Style Manager Fund for the one-year
period ended September 30, 1997 and for the period from March 7, 1995 (date of
initial public investment) to September 30, 1997 were 41.85% and 28.04%,
respectively.
The average annual total returns for Investment Shares and Trust Shares of The
Virginia Municipal Bond Fund for the one-year and five-year periods ended
September 30, 1997 and for the period from October 16, 1990 (date of initial
public investment) to September 30, 1997 were 7.74%, 5.73%, 6.45% and 8.00%,
5.96%, 6.62%, respectively.
The average annual total returns for Investment Shares and Trust Shares of The
Maryland Municipal Bond Fund for the one-year and five-year periods ended
September 30, 1997 and for the period from October 16, 1990 (date of initial
public investment) to September 30, 1997 were 6.92%, 5.33%, 6.01% and 7.19%,
5.56%, 6.18%, respectively.
<PAGE>
The average annual total returns for Investment Shares and Trust Shares of The
Treasury Money Market Fund for the one-year and five-year periods ended
September 30, 1997 and for the period from October 16, 1990 (date of initial
public investment) to September 30, 1997 were 4.58%, 3.93%, 4.18% and 4.84%,
4.15%, 4.34%, respectively.
The average annual total returns for Investment Shares and Trust Shares of The
Money Market Fund for the one-year and five-year periods ended September 30,
1997 and for the period from October 16, 1990 (date of initial public
investment) to September 30, 1997 were 4.67%, 4.11%, 4.36% and 4.93%, 4.31%,
4.50%, respectively.
The average annual total returns for The Tax-Free Money Market Fund for the
one-year period ended September 30, 1997 and for the period from July 27, 1994
(date of initial public investment) to September 30, 1997 were 2.83% and 3.09%,
respectively.
The average annual total return for Shares of each Fund is the average
compounded rate of return for a given period that would equate a $1,000 initial
investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of shares owned at the
end of the period by the net asset value per share at the end of the period. The
number if shares owned at the end of the period is based on the number of shares
purchased at the beginning of the period with $1,000, adjusted over the period
by any additional shares, assuming the monthly/quarterly reinvestment of all
dividends and distributions.
Yield
- --------------------------------------------------------------------------------
The yield for the seven-day period ended September 30, 1997 for The Treasury
Money Market Fund and The Money Market Fund were 4.54% and 4.59%, respectively,
for Investment Shares and 4.79% and 4.84%, respectively, for Trust Shares. The
yield for the seven-day period ended September 30, 1997 for The Tax-Free Money
Market Fund was 3.06%.
The U.S. Government Securities Fund, The Style Manager: Large Cap Fund, The
Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund's yield for
the thirty-day period ended September 30, 1997 was 5.27%, 0.36%, 3.72% and 3.10%
for Investment Shares and 5.52%, 0.61%, 3.97% and 3.35% for Trust Shares. The
yield for the thirty-day period ended September 30, 1997 for The Style Manager
Fund was 0.23%.
The Treasury Money Market Fund, The Money Market Fund, and The Tax-Free Money
Market Fund calculate yield daily, based upon the seven days ending on the day
of the calculation, called the "base period." This yield is computed by:
o determining the net change in the value of a hypothetical account
with a balance of one share at the beginning of the base period,
with the net change excluding capital changes but including the
value of any additional Shares purchased with dividends earned from
the original one share and all dividends declared on the original
and any purchased Shares;
o dividing the net change in the account's value by the value of the
account at the beginning of the base period to determine the base
period return; and
o multiplying the base period return by 365/7.
The yield for Shares of The U.S. Government Securities Fund, The Style Manager:
Large Cap Fund, The Style Manager Fund, The Virginia Municipal Bond Fund and The
Maryland Municipal Bond Fund is determined by dividing the net investment income
per share (as defined by the Securities and Exchange Commission) earned by the
class of shares over a thirty-day period by the maximum offering price per share
of the class of shares on the last day of the period. The yield of the
Investment Shares of the Fund is determined each day by dividing the net
investment income per share (as defined by the Securities and Exchange
Commission) earned by the class of shares over a thirty-day period by the
maximum offering price per share of the class of shares on the last day of the
period. This value is then annualized using semiannual compounding. This means
that the amount of income generated during the thirty-day period is assumed to
be generated each month over a 12-month period and is reinvested every six
months. The yield does not necessarily reflect income actually earned by the
Fund because of certain adjustments required by the Securities and Exchange
Commission and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
<PAGE>
With respect to The U.S. Government Securities Fund and The Style Manager: Large
Cap Fund, the yield will be calculated separately for Investment Shares and
Trust Shares. Because Investment Shares are subject to a 12b-1 fee, the net
yield for Trust Shares for the same period will exceed that of Investment
Shares.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in a Fund,
the performance will be reduced for those shareholders paying those fees.
Effective Yield
- --------------------------------------------------------------------------------
The effective yields for the seven-day period ended September 30, 1997 for The
Treasury Money Market Fund and The Money Market Fund were 4.64% and 4.70%,
respectively, for Investment Shares and 4.90% and 4.96%, respectively, for Trust
Shares. The effective yield for the period ended September 30, 1997 for The
Tax-Free Money Market Fund was 3.11%.
The effective yield of The Treasury Money Market Fund, The Money Market Fund,
and The Tax-Free Money Market Fund is computed by compounding the unannualized
base period return by:
o adding 1 to the base period return;
o raising the sum to the 365/7th power; and
o subtracting 1 from the result.
Tax-Equivalent Yield
- --------------------------------------------------------------------------------
The tax-equivalent yield for both classes of shares for The Virginia Municipal
Bond Fund and The Maryland Municipal Bond Fund, and for The Tax-Free Money
Market Fund is calculated similarly to the yield, but is adjusted to reflect the
taxable yield that either class would have had to earn to equal its actual
yield, assuming a 28% tax rate and also assuming that income earned by the Fund
is 100% tax-exempt.
The tax-equivalent yield for the Investment Shares for the thirty-day period
ended September 30, 1997, was 5.17% for The Virginia Municipal Bond Fund and
4.31% for The Maryland Municipal Bond Fund. The tax-equivalent yield for the
Trust Shares was 5.51% for The Virginia Municipal Bond Fund and 4.65% for The
Maryland Municipal Bond Fund for the same period. The tax-equivalent yield for
The Tax-Free Money Market Fund for the seven-day period ended September 30,
1997, was 4.25%.
<PAGE>
Tax-Equivalency Tables
Both classes of shares may also use a tax-equivalency table in
advertising and sales literature. The interest earned by the municipal
bonds in the Fund's portfolio generally remains free from federal
regular income tax, and is often free from state and local taxes as
well. As the tables below indicate, a "tax-free" investment is an
attractive choice for investors, particularly in times of narrow
spreads between tax-free and taxable yields.
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1997
MULTISTATE MUNICIPAL FUNDS
- ---------------------------------------------------------------------------------------------------------------------------------
FEDERAL INCOME TAX BRACKET:
<S> <C> <C> <C> <C> <C>
15.00% 28.00% 31.00% 36.00% 39.60%
- ---------------------------------------------------------------------------------------------------------------------------------
JOINT $1- $41,201- $99,601- $151,751- OVER
RETURN 41,200 99,600 151,750 271,050 $271,050
SINGLE $1- $24,651- $59,751- $124,651- OVER
RETURN 24,650 59,750 124,650 271,050 $271,050
- ---------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt
Yield Taxable Yield Equivalent
- ---------------------------------------------------------------------------------------------------------------------------------
1.00% 1.18% 1.39% 1.45% 1.56% 1.66%
1.50% 1.76% 2.08% 2.17% 2.34% 2.48%
2.00% 2.35% 2.78% 2.90% 3.13% 3.31%
2.50% 2.94% 3.47% 3.62% 3.91% 4.14%
3.00% 3.53% 4.17% 4.35% 4.69% 4.97%
3.50% 4.12% 4.86% 5.07% 5.47% 5.79%
4.00% 4.71% 5.56% 5.80% 6.25% 6.62%
4.50% 5.29% 6.25% 6.52% 7.03% 7.45%
5.00% 5.88% 6.94% 7.25% 7.81% 8.28%
5.50% 6.47% 7.64% 7.97% 8.59% 9.11%
6.00% 7.06% 8.33% 8.70% 9.38% 9.93%
6.50% 7.65% 9.03% 9.42% 10.16% 10.76%
7.00% 8.24% 9.72% 10.14% 10.94% 11.59%
7.50% 8.82% 10.42% 10.87% 11.72% 12.42%
8.00% 9.41% 11.11% 11.59% 12.50% 13.25%
</TABLE>
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. Furthermore, additional state
and local taxes paid on comparable taxable investments were not used to
increase federal deductions.
The chart above is for illustrative purposes only. It is not an
indicator of past or future performance of Fund shares.
* Some portion of the Fund's income may be subject to the federal
alternative minimum tax and state and local income taxes.
<PAGE>
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1997
STATE OF VIRGINIA
- ---------------------------------------------------------------------------------------------------------------------------------
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
<S> <C> <C> <C> <C> <C>
20.75% 33.75% 36.75% 41.75% 45.35%
- ---------------------------------------------------------------------------------------------------------------------------------
JOINT $1- $41,201- $99,601- $151,751- OVER
RETURN 41,200 99,600 151,750 271,050 $271,050
SINGLE $1- $24,651- $59,751- $124,651- OVER
RETURN 24,650 59,750 124,650 271,050 $271,050
- ---------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt
Yield Taxable Yield Equivalent
- ---------------------------------------------------------------------------------------------------------------------------------
1.50% 1.89% 2.26% 2.37% 2.58% 2.74%
2.00% 2.52% 3.02% 3.16% 3.43% 3.66%
2.50% 3.15% 3.77% 3.95% 4.29% 4.57%
3.00% 3.79% 4.53% 4.74% 5.15% 5.49%
3.50% 4.42% 5.28% 5.53% 6.01% 6.40%
4.00% 5.05% 6.04% 6.32% 6.87% 7.32%
4.50% 5.68% 6.79% 7.11% 7.73% 8.23%
5.00% 6.31% 7.55% 7.91% 8.58% 9.15%
5.50% 6.94% 8.30% 8.70% 9.44% 10.06%
6.00% 7.57% 9.06% 9.49% 10.30% 10.98%
</TABLE>
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. Furthermore, additional state
and local taxes paid on comparable taxable investments were not used to
increase federal deductions.
<PAGE>
<TABLE>
<CAPTION>
TAXABLE YIELD EQUIVALENT FOR 1997
STATE OF MARYLAND
INCLUDING LOCAL INCOME TAX
- ---------------------------------------------------------------------------------------------------------------------------------
COMBINED FEDERAL, STATE, AND COUNTY INCOME TAX BRACKET:
<S> <C> <C> <C> <C> <C>
22.50% 35.50% 38.50% 43.50% 47.10%
- ---------------------------------------------------------------------------------------------------------------------------------
JOINT $1- $41,201- $99,601- $151,751- OVER
RETURN: 41,200 99,600 151,750 271,050 $271,050
SINGLE $1- $24,651- $59,751- $124,651- OVER
RETURN: 24,650 59,750 124,650 271,050 $271,050
- ---------------------------------------------------------------------------------------------------------------------------------
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
- ---------------------------------------------------------------------------------------------------------------------------------
2.00% 2.58% 3.10% 3.25% 3.54% 3.78%
2.50% 3.23% 3.88% 4.07% 4.42% 4.73%
3.00% 3.87% 4.65% 4.88% 5.31% 5.67%
3.50% 4.52% 5.43% 5.69% 6.19% 6.62%
4.00% 5.16% 6.20% 6.50% 7.08% 7.56%
4.50% 5.81% 6.98% 7.32% 7.96% 8.51%
5.00% 6.45% 7.75% 8.13% 8.85% 9.45%
5.50% 7.10% 8.53% 8.94% 9.73% 10.40%
6.00% 7.74% 9.30% 9.76% 10.62% 11.34%
6.50% 8.39% 10.08% 10.57% 11.50% 12.29%
NOTE: THE MAXIMUM MARGINAL TAX RATE FOR EACH BRACKET WAS USED IN
CALCULATING THE TAXABLE YIELD EQUIVALENT. FURTHERMORE, ADDITIONAL STATE
AND LOCAL TAXES PAID ON COMPARABLE TAXABLE INVESTMENTS WERE NOT USED TO
INCREASE FEDERAL DEDUCTIONS. THE LOCAL INCOME TAX RATE IS ASSUMED TO BE
50% OF THE STATE RATE FOR ALL COUNTIES EXCLUDING ALLEGANY, BALITMORE,
MONTGOMERY, PRINCE GEORGE'S, QUEEN ANNE'S, ST. MARY'S, SOMERSET,
TALBOT, WICOMICO, AND WORCESTER.
Performance Comparisons
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Each Fund's performance of both classes of shares depends upon such variables
as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates on money market instruments, in the case
of The Treasury Money Market Fund and The Money Market Fund, or
changes in interest rates and market value of portfolio securities
in the case of U.S. Government Income Fund, The Style Manager: Large
Cap Fund, The Style Manager Fund, The Virginia Municipal Bond Fund
and Maryland Municipal Bond Fund;
o changes in each Fund's or each class of Shares' expenses;
o the relative amount of The Treasury Money Market Fund's and The
Money Market Fund's cash flow; and
o various other factors.
<PAGE>
In the case of The U.S. Government Securities Fund, The Style Manager: Large Cap
Fund, The Style Manager Fund, The Virginia Municipal Bond Fund and The Maryland
Municipal Bond Fund, either class of shares' performance fluctuates on a daily
basis largely because net earnings and offering price per Share fluctuate daily.
Both net earnings and offering price per Share are factors in the computation of
yield and total return. The Style Manager Fund and The Style Manger: Large Cap
Fund may also from time to time provide information on, or use quotations from,
studies of investment analysts dealing with the management of equity portfolios
on the basis of "style" selection (i.e., value vs. growth) and stock "size"
(i.e., large cap vs. small cap) and may also use historical data demonstrating
the performance records of the value, growth, large cap and small cap components
of the equity market, and combinations thereof.
From time to time, the Funds may provide information on certain markets or
countries and specific equity securities and quote published editorial comments
and/or information from newspapers, magazines, investment newsletters and other
publications such as The Wall Street Journal, Money Magazine, Forbes, Barron's,
USA Today and Mutual Fund Investors. We may also compare the historical returns
on various investments, performance indexes of those investments or economic
indicators. In addition, the Funds may reprint articles about the Funds and
provide them to prospective shareholders. The Broker/Dealer may also make
available economic, financial and investment reports to shareholders and
prospective shareholders. In order to describe these reports, the Funds may
include descriptive information on the reports in advertising literature sent to
the public prior to the mailing of a prospectus. Performance information may be
quoted numerically or may be represented in a table, graph, chart or other
illustration. It should be noted that such performance ratings and comparison
may be made with funds which may have different investment restrictions,
objectives, policies or techniques than the Funds, and that such other funds or
market indicators may be comprised of securities that differ significantly from
the Funds' investments.
The financial publications and/or indices which the Funds use in advertising may
include, but are not limited to:
The U.S. Government Securities Fund
o MERRILL LYNCH COMPOSITE 1-5 YEAR TREASURY INDEX is comprised of
approximately 66 issues of U.S. Treasury securities maturing between
1 and 4.99 years, with coupon rates of 4.25% or more. These total
return figures are calculated for one, three, six, and twelve month
periods and year-to-date and include the value of the bond plus
income and any price appreciation or depreciation.
o SALOMON BROTHERS 3-5 YEARS GOVERNMENT INDEX quotes total returns for
U.S. Treasury issues (excluding flower bonds) which have maturities
of three to five years. These total returns are year-to-date figures
which are calculated each month following January 1.
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes income into account any
change in net asset value over a specific period of time. From time
to time, the Trust will quote its Lipper ranking in the U.S.
Government funds category in advertising and sales literature.
o MERRILL LYNCH 3-5 YEAR TREASURY INDEX is comprised of approximately
24 issues of intermediate-term U.S. government and U.S. Treasury
securities with maturities between 3 and 4.99 years and coupon rates
above 4.25%. Index returns are calculated as total returns for
periods of one, three, six and twelve months as well as
year-to-date.
o MERRILL LYNCH 3-YEAR TREASURY YIELD CURVE INDEX is an unmanaged
index comprised of the most recently issued 3-year U.S. Treasury
notes. Index returns are calculated as total returns for periods of
one, three, six, and twelve months as well as year-to-date.
o LEHMAN BROTHERS GOVERNMENT INTERMEDIATE INDEX is an unmanaged index
comprised of all publicly issued, non-convertible domestic debt of
the U.S. government, or any agency thereof, or any quasi-federal
corporation and of corporate debt guaranteed by the U.S. government.
Only notes and bonds with a minimum outstanding principal of $1
million and maturities of 1-10 years.
o 3 YEAR TREASURY NOTES Source: Wall Street Journal, Bloomberg
Financial Markets, and Telerate.
o MORNINGSTAR, INC., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns. The maximum rating is five stars, and
ratings are effective for two weeks.
<PAGE>
The Style Manager: Large Cap Fund and The Style Manager Fund
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any change
in net asset value over a specific period of time. From time to
time, the Fund will quote its Lipper ranking in the "growth and
income funds" category in advertising and sales literature.
o DOW JONES INDUSTRIAL AVERAGE ("DJIA") represents share prices of
selected blue-chip industrial corporations as well as public utility
and transportation companies. The DJIA indicates daily changes in
the average price of stocks in any of its categories. It also
reports total sales for each group of industries. Because it
represents the top corporations of America, the DJIA index is a
leading economic indicator for the stock market as a whole.
o STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS, a
composite index of common stocks in industry, transportation, and
financial and public utility companies, compares total returns of
funds whose portfolios are invested primarily in common stocks. In
addition, the Standard & Poor's index assumes reinvestment of all
dividends paid by stocks listed on the index. Taxes due on any of
these distributions are not included, nor are brokerage or other
fees calculated in the Standard & Poor's figures.
o MORNINGSTAR, INC., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns. The maximum rating is five stars, and
ratings are effective for two weeks.
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all capital gains
distributions and income dividends and takes into account any change
in net asset value over a specific period of time. From time to
time, the Fund will quote its Lipper ranking in the "general
municipal bond funds" category in advertising and sales literature.
o MORNINGSTAR, INC., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more
than 1,000 NASDAQ-listed mutual funds of all types, according to
their risk-adjusted returns.
The maximum rating is five stars, and ratings are effective for two
weeks.
The Treasury Money Market Fund
o LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund
will quote its Lipper ranking in the "short-term U.S. government
funds" category in advertising and sales literature.
o SALOMON 30-DAY TREASURY BILL INDEX is a weekly quote of the most
representative yields for selected securities, issued by the U.S.
Treasury, maturing in 30 days.
The Money Market Fund
o LIPPER ANALYTICAL SERVICES, INC., ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund
will quote its Lipper ranking in the "money market instruments fund"
category in advertising and sales literature.
o BANK RATE MONITOR NATIONAL INDEX, Miami, Florida, is a financial
reporting service which publishes weekly average rates of 50 leading
bank and thrift institution money market deposit accounts. The rates
published in the index are an average of the personal account rates
offered on the Wednesday prior to the date of publication by ten of
the largest banks and thrifts in each of the five largest Standard
<PAGE>
Metropolitan Statistical Areas. Account minimums range upward from
$2,500 in each institution and compounding methods vary. If more
than one rate is offered, the lowest rate is used. Rates are subject
to change at any time specified by the institution. Investors may
use such indices or reporting services in addition to either class
of shares' prospectus to obtain a more complete view of the Share's
performance before investing. Of course, when comparing performance
of either class of shares to any index, factors such as portfolio
composition and prevailing market conditions should be considered in
assessing the significance of such comparisons.
The Tax-Free Money Market Fund
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund
categories by making comparative calculations using total return.
Total return assumes the reinvestment of all income dividends and
capital gains distributions, if any. From time to time, the Fund
will quote its Lipper ranking in the "Tax-Free Money Market Funds"
category in advertising and sales literature.
o IBC/DONOGHUE'S MONEY FUND REPORT publishes annualized yields of
hundreds of money market funds on a weekly basis, and through its
Money Market Insight publication, reports monthly and
12-month-to-date investment results for the same money funds.
o MONEY, A MONTHLY MAGAZINE, regularly ranks money market funds in
various categories based on the latest available seven-day compound
effective yield. From time to time, the Fund will quote its Money
ranking in advertising and sales literature.
o SALOMON BROTHERS SIX-MONTH PRIME MUNI NOTES is an index of selected
municipal notes, maturing in six months, whose yields are chosen as
representative of this market. Calculations are made weekly and
monthly.
o SALOMON BROTHERS ONE-MONTH TAX-EXEMPT COMMERCIAL PAPER is an index
of selected tax-exempt commercial paper issues, maturing in one
month, whose yields are chosen as representative of this particular
market. It is a weekly quote of the most representative yields for
selected securities, issued by the U.S. Treasury, maturing in 30
days. Calculations are made weekly and monthly. Ehrlich-Bober & Co.,
Inc. also tracks this Salomon Brothers Index.
Advertisements and other sales literature for both classes of shares may quote
total returns which are calculated on non-standardized base periods. These total
returns also represent the historic change in the value of an investment in
either class of shares based on monthly reinvestment of dividends over a
specified period of time.
Economic and Market Information
Advertising and sales literature for the Trust may include discussions of
economic, financial and political developments and their effect on the
securities market. Such discussions may take the form of commentary on these
developments by the Trust's portfolio managers and their views and analysis on
how such developments could affect the Funds. In addition, advertising and sales
literature may quote statistics and give general information about the mutual
fund industry, including the growth of the industry, from sources such as the
Investment Company Institute ("ICI"). For example, according to the ICI,
thirty-seven percent of American households are pursuing their financial goals
through mutual funds. These investors, as well as businesses and institutions,
have entrusted over $3.5 trillion t the more than 6,000 funds available.
Financial Statements
- --------------------------------------------------------------------------------
The financial statements for the fiscal period ended September 30, 1997, are
incorporated herein by reference from the Funds' Annual Report dated September
30, 1997. A copy of the Annual Report for a Fund may be obtained without charge
by contacting Signet Trust Company at the address located on the back cover of
the combined prospectus or by calling 804-771-7470.
<PAGE>
Appendix
- --------------------------------------------------------------------------------
Standard and Poor's Ratings Group Municipal Bond Rating Definitions
AAA Debt rated AAA has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues
only in small degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the
adverse effect of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
BB, B, CCC, CC Debt rated BB, B, CCC and CC is regarded, on
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 CC the highest degree of
speculation. While such debt will likely have some quality
and protective characteristics, these are outweighed by
large uncertainties of major risk exposures to adverse
conditions.
CI The rating CI is reserved for income bonds on which no
interest is being paid.
D Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears.
Moody's Investors Service, Inc. Municipal Bond Rating Definitions
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are
generally known as high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long
term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
some time in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small. Caa-Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger
with respect to principal or interest.
<PAGE>
Ca Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Fitch Investors Service, Inc., Long-Term Debt Ratings
AAA Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high quality. The
obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bonds rated in
the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated F-1+.
NR NR indicates that Fitch does not the specific issue.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in AAA category.
Standard & Poor's Corporation, Municipal Note Ratings
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.
SP-2 Satisfactory capacity to pay principal and interest.
Moody's Investors Service, Short-Term Loan Ratings
MIG1/VMIG1 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.
MIG2/VMIG2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
Evergreen
State Tax Free
Funds
(Photo of mountains and trees)
1997 Annual Report
(Evergreen tree logo)
Evergreen Funds(SM)
SINCE 1932
<PAGE>
(Evergreen graphic)
EVERGREEN
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders............................... 1
FUND AT A GLANCE
Evergreen Florida High Income Municipal Bond
Fund............................................ 2
Evergreen Florida Municipal Bond Fund.............. 3
Evergreen Georgia Municipal Bond Fund.............. 4
Evergreen North Carolina Municipal Bond Fund....... 5
Evergreen South Carolina Municipal Bond Fund....... 6
Evergreen Virginia Municipal Bond
Fund............................................ 7
FINANCIAL HIGHLIGHTS
Evergreen Florida High Income Municipal Bond
Fund............................................ 8
Evergreen Florida Municipal Bond Fund.............. 10
Evergreen Georgia Municipal Bond Fund.............. 12
Evergreen North Carolina Municipal Bond Fund....... 14
Evergreen South Carolina Municipal Bond Fund....... 16
Evergreen Virginia Municipal Bond Fund............. 18
SCHEDULES OF INVESTMENTS
Evergreen Florida High Income Municipal Bond
Fund............................................ 20
Evergreen Florida Municipal Bond Fund.............. 24
Evergreen Georgia Municipal Bond Fund.............. 27
Evergreen North Carolina Municipal Bond Fund....... 28
Evergreen South Carolina Municipal Bond Fund....... 30
Evergreen Virginia Municipal Bond
Fund............................................ 31
Statements of Assets and Liabilities................. 33
Statements of Operations............................. 34
Statements of Changes in Net Assets.................. 35
Combined Notes to Financial Statements............... 37
Independent Auditors' Report--
KPMG Peat Marwick LLP.............................. 43
Report of Independent Accountants--
Price Waterhouse LLP............................... 44
Federal Income Tax Status of Distributions........... 45
</TABLE>
ABOUT EVERGREEN KEYSTONE
Since 1971, the Evergreen Funds have been providing investors with a proven,
value-driven approach to equity investment management. For over 60 years of
changing economic conditions, Keystone has taken pride in helping investors meet
their financial goals through a broad range of financial products and services.
Combined, Evergreen Keystone offers over 70 funds designed to meet a broad range
of objectives, including fixed-income, balanced, growth and income, and
aggressive growth. Assets under management total more than $30 billion.
<PAGE>
EVERGREEN
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
October 1997
(Photo of William M. Ennis)
WILLIAM M. ENNIS
Dear Shareholders:
Investors in state tax-free mutual funds enjoyed strong performance during the
past year despite some short-term price fluctuations.
The fiscal year that ended on August 31, 1997 ultimately proved rewarding for
investors in municipal bond funds, despite some uncertainty and volatility. The
municipal bond market finished the year with a strong six months, despite some
weakness in March and April which could be attributed largely to comments from
Alan Greenspan, Chairman of the Federal Reserve Board, who warned of "irrational
exuberance" in the soaring stock market in early March. His comments were
followed up by the Federal Reserve Board's March 25 decision to raise short-term
rates by one-quarter of one percent. In the short run, this action caused
interest rates to rise rather dramatically. However, by early June the markets
were again back on track, as inflationary fears declined, despite continued
economic strength and high employment.
This sustained growth and low inflation enabled the municipal bond market to
recoup the losses sustained during the first quarter of 1997 and to climb to new
highs. In fact, rates fell through July, allowing 30-year municipal yields to
reach approximately 5.15% in July. Then, an unexpectedly sharp increase in
non-farm payrolls, accompanied by a drop in the unemployment rate, caused
municipal bond yields to rise and prices to fall. However, even in this period,
municipal bonds outperformed U.S. Treasuries, as demand for tax-free bonds
outstripped new supply.
Throughout the year, your Evergreen state tax free funds delivered healthy
returns, with income exempt both from federal income taxes and many state
taxes.(1)
I am delighted to inform you that Evergreen Keystone has successfully integrated
all service functions of Evergreen and Keystone Funds. This means that you now
have full exchange privileges among all Evergreen and Keystone America funds. In
addition, you will be receiving the top-flight service that earned Evergreen
Keystone the 1996 Dalbar Quality Tested Service Seal, the highest award for
mutual fund service presented by Dalbar, an independent mutual fund survey and
rating firm.
In the following pages, we provide specific information about each Evergreen
state tax-free fund. We present this information in a new format that makes
information easily accessible. We are very interested in hearing your thoughts
on this new format, and we welcome your suggestions.
Sincerely,
/s/ William M. Ennis
WILLIAM M. ENNIS
MANAGING DIRECTOR
(1) SOME PORTION OF THE FUND'S INCOME MAY BE SUBJECT TO THE FEDERAL ALTERNATIVE
MINIMUM TAX.
1
<PAGE>
(logo)
EVERGREEN
FLORIDA HIGH INCOME MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
FUND AT A GLANCE
As of August 31, 1997
<TABLE>
<CAPTION>
PERFORMANCE
- -------------------------------------------------------------------------------------------------------------------------------
1 YEAR AVERAGE ANNUALIZED TOTAL RETURN(1)
---------------------------- ----------------------------------------------- CUMULATIVE TOTAL
SHARE INCEPTION WITHOUT SALES WITH SALES SINCE RETURN(1) SINCE
CLASS DATE CHARGE CHARGE 3 YEARS 5 YEARS INCEPTION INCEPTION
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
A 6/17/92 10.77% 5.51% 6.96% 7.33% 7.34% 44.65%
B 7/10/95 9.95% 4.95% -- -- 6.24% 13.88%
Y 9/20/95 11.04% -- -- -- 8.47% 17.19%
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SHARE 12-MONTH
CLASS DISTRIBUTION
- ------
<S> <C>
A $0.62
B $0.54
Y $0.65
- ------
</TABLE>
(1) Adjusted for maximum sales charges.
CURRENT STRATEGY
- --------------------------------------------------------------------------------
For the twelve-month period ended September 30, 1997, the Fund's
class Y and class A shares ranked number 1 and 3, respectively,
out of 63 Florida municipal debt funds tracked by Lipper
Analytical Services, an independent mutual fund rating company.(2)
One constant through the recent environment of fluctuating
interest rates has been the narrowing of spreads between higher
and lower quality bonds, as investors searched for more yield.
Since most of the Fund is comprised of lower rated and non-rated
bonds, performance was aided dramatically by this tightening of
spreads. The increased supply of higher-yielding bonds within the
market should enable us to maintain our current yield-- with the
possibility of increasing it-- even as heavy cash inflows enter
the Fund.
(Photo of Richard
K. Marrone)
RICHARD K. MARRONE
VICE PRESIDENT,
SENIOR FIXED INCOME
PORTFOLIO MANAGER
- --------------------------------------------------------------------------------
GROWTH OF INVESTMENT
Evergreen Florida High Income Municipal Bond Fund
Comparison of a $10,000 investment in Evergreen Florida High Income Municipal
Bond Fund, Class A shares, versus a similar investment in the Lehman Brothers
Municipal Bond Index (LBMBI) and the Consumer Price Index (CPI).
(A chart appears here with the following plot points.)
In Thousands
6/92 8/92 8/93 8/94 8/95 8/96 8/97
Class A Shares 9,525 9,672 11,039 11,261 12,271 13,059 $14,465
CPI 10,000 10,085 10,364 10,664 10,943 11,258 $11,508
LMBI 10,000 10,371 11,636 11,653 12,686 13,350 $14,586
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholders
investing in different classes. The Lehman Brothers Municipal Bond Index is an
unmanaged market index. The index does not include transactions costs
associated with buying and selling securities nor any management fees. The
Consumer Price Index, a measure of inflation, is through August 31, 1997.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
<S> <C>
- ----------------------------------------------------------------
Total Net Assets: $189,743,181
Average Credit Quality: BB+
Average Maturity: 23.04 years
Average Duration: 8.31 years
</TABLE>
PORTFOLIO COMPOSITION
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie chart appears here with the following plot points.)
Health 2.7%
Housing 24.1%
Community Development 15.2%
Residential Care 12.5%
Industrial Development 12.5%
Hospital 9.4%
Other 8.8%
Education 5.3%
Utility 5.2%
Special Care 4.3%
PORTFOLIO QUALITY
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie chart appears here with the following plot points.)
A 2.5%
AA 2.0%
AAA 11.1%
B 0.4%
BB 1.2%
BBB 16.7%
NR 66.1%
(2) THE RANKINGS ARE BASED ON TOTAL RETURN AND DO NOT INCLUDE THE EFFECT OF A
SALES CHARGE. FOR THE 5-YEAR PERIOD ENDING SEPTEMBER 30, 1997, THE FUND'S
CLASS A SHARES RANKED 1 OUT OF 19 FLORIDA MUNICIPAL DEBT FUNDS TRACKED BY
LIPPER ANALYTICAL SERVICES.
2
<PAGE>
(logo)
EVERGREEN
FLORIDA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
FUND AT A GLANCE
As of August 31, 1997
<TABLE>
<CAPTION>
PERFORMANCE
- -------------------------------------------------------------------------------------------------------------------------------
1 YEAR AVERAGE ANNUALIZED TOTAL RETURN(1)
---------------------------- ----------------------------------------------- CUMULATIVE TOTAL
SHARE INCEPTION WITHOUT SALES WITH SALES SINCE RETURN (1) SINCE
CLASS DATE CHARGE CHARGE 3 YEARS 5 YEARS INCEPTION INCEPTION
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
A 5/11/88 9.06% 3.88% 5.81% 5.92% 7.47% 95.60%
B 6/30/95 8.06% 3.06% -- -- 5.03% 11.26%
Y 6/30/95 9.14% -- -- -- 7.38% 16.75%
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------
SHARE 12-MONTH
CLASS DISTRIBUTION
- ------
<S> <C>
A $0.58
B $0.49
Y $0.59
- ------
</TABLE>
(1) Adjusted for maximum sales charges.
CURRENT STRATEGY
- --------------------------------------------------------------------------------
We continue to emphasize an income-oriented approach for the Fund.
We replaced older, lower-yielding bonds with higher-yielding
securities as opportunities became available. During the Fund's
fiscal year, the BOND BUYER 20 BOND INDEX declined from 5.86% to
5.45%. Despite this decline, as the year progressed we sold
approximately $68.8 million worth of bonds yielding 5.07%, while
buying $65.1 million in bonds yielding 5.77%. Illustrating our
emphasis on higher-yielding securities, this action has added
substantial earning power to the portfolio. For the twelve- months
ended September 30, 1997, the Fund ranked in the top 25%; class Y
shares ranked 12 out of 63 and class A shares 14 out of 63 Florida
municipal debt funds tracked by Lipper Analytical Services, an
independent mutual fund rating company.(2)
(Photo of
Robert S. Drye)
ROBERT S. DRYE
VICE PRESIDENT,
FIXED INCOME
PORTFOLIO MANAGER
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH OF INVESTMENT
Evergreen Florida Municipal Bond Fund
Comparison of a $10,000 investment in Evergreen Florida Municipal Bond Fund,
Class A shares, versus a similar investment in the Lehman Brothers Municipal
Bond Index (LBMBI) and the Consumer Price Index (CPI).
(A chart appears here with the following plot points.)
In Thousands
5/88 8/88 8/89 8/90 8/91 8/92 8/93 8/94 8/95 8/96 8/97
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A Shares 9,525 9,726 10,609 11,051 12,504 13,977 15,719 15,725 17,057 17,935 19,560
CPI 10,000 10,162 10,639 11,237 11,664 12,030 12,363 12,721 13,054 13,429 13,727
LBMBI 10,000 10,191 11,310 12,035 13,455 14,959 16,783 16,808 18,298 19,255 21,038
</TABLE>
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholders
investing in different classes. The Lehman Brothers Municipal Bond Index is an
unmanaged market index. The index does not include transaction costs
associated with buying and selling securities nor any management fees. The
Consumer Price Index, a measure of inflation, is through August 31, 1997.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
<S> <C>
- ----------------------------------------------------------------
Total Net Assets: $161,803,570
Average Credit Quality: AA
Average Maturity: 20.68 years
Average Duration: 9.25 years
</TABLE>
PORTFOLIO COMPOSITION
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
Health Care 30.9%
Housing 24.1%
Public Facilities 13.7%
Industrial Revenue Bonds 9.7%
Utilities 6.4%
Education 5.9%
Transportation 3.9%
State General Obligation 2.9%
Other 2.5%
PORTFOLIO QUALITY
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie chart appears here with the following plot points.)
A 11.6%
AA 16.7%
AAA 45.7%
BBB 19.8%
NR 6.2%
(2)THE RANKINGS ARE BASED ON TOTAL RETURN AND DO NOT INCLUDE THE EFFECT OF A
SALES CHARGE.
3
<PAGE>
(logo)
EVERGREEN
GEORGIA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
FUND AT A GLANCE
As of August 31, 1997
<TABLE>
<CAPTION>
PERFORMANCE
- -------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUALIZED
1 YEAR TOTAL RETURN(1)
---------------------------- ------------------------------ CUMULATIVE TOTAL
SHARE INCEPTION WITHOUT SALES WITH SALES SINCE RETURN (1) SINCE 12-MONTH
CLASS DATE CHARGE CHARGE 3 YEARS INCEPTION INCEPTION DISTRIBUTION
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
A 7/2/93 8.73% 3.57% 5.78% 3.63% 16.04% $0.49
B 7/2/93 7.93% 2.93% 5.83% 3.73% 16.52% $0.41
Y 2/28/94 9.00% -- 7.78% 5.73% 21.59% $0.51
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)Adjusted for maximum sales charge.
CURRENT STRATEGY
- --------------------------------------------------------------------------------
In the past several months, it has become increasingly difficult
to maneuver within the fixed income markets. We have maintained
our focus on providing strong income, a strategy which has paid
off during the volatile interest rate swings throughout the fiscal
year. The month of August was a particularly good month for the
Fund, enabling it to climb higher in its peer group rankings. For
the twelve months ended September 30, 1997, the Fund's class Y
shares ranked 10 out of 32 Georgia municipal debt funds tracked by
Lipper Analytical Services, an independent mutual fund rating
company.(2) Class A shares ranked 13 out of the 32 Georgia
municipal debt funds tracked by Lipper.
(photo of Richard K. Marrone)
RICHARD K. MARRONE
VICE PRESIDENT,
SENIOR FIXED INCOME
PORTFOLIO MANAGER
- --------------------------------------------------------------------------------
GROWTH OF INVESTMENT
Evergreen Georgia Municipal Bond Fund
Comparison of a $10,000 investment in Evergreen Georgia Municipal Bond Fund,
Class A shares, versus a similar investment in the Lehman Brothers Georgia
Municipal Bond Index (LBGMBI) and the Consumer Price Index (CPI).
(A chart appears here with the following plot points.)
In Thousands
7/93 8/93 8/94 8/95 8/96 8/97
Class A Shares 9,525 9,703 9,338 10,047 10,672 11,604
CPI 10,000 10,028 10,318 10,589 10,293 11,113
LBGMBI 10,000 10,232 10,878 11,095 11,643 12,685
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholders
investing in different classes. The Lehman Brothers Georgia Municipal Bond Index
is an unmanaged market index. The index does not include transaction costs
associated with buying and selling securities nor any management fees. The
Consumer Price Index, a measure of inflation, is through August 31, 1997.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
<S> <C>
- ----------------------------------------------------------------
Total Net Assets: $14,252,077
Average Credit Quality: AA
Average Maturity: 22 years
Average Duration: 9.47 years
</TABLE>
PORTFOLIO COMPOSITION
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie chart appears here with the following plot points.)
Other 4.4%
Hospital 24.1%
General Obligation Local 23.7%
Housing 14.7%
Industrial Development 13.3%
Escrow 6.9%
Utilities 6.7%
Public Facilities 6.2%
PORTFOLIO QUALITY
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie chart appears here with the following plot points.)
A 25.2%
AA 20.2%
AAA 43.3%
BBB 3.9%
NR 7.4%
(2) THE RANKINGS ARE BASED ON TOTAL RETURN AND DO NOT INCLUDE THE EFFECT OF A
SALES CHARGE.
4
<PAGE>
(logo)
EVERGREEN
NORTH CAROLINA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
FUND AT A GLANCE
As of August 31, 1997
<TABLE>
<CAPTION>
PERFORMANCE
- ------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUALIZED
1 YEAR TOTAL RETURNS(1)
---------------------------- ----------------------- CUMULATIVE
SHARE INCEPTION WITHOUT SALES WITH SALES SINCE TOTAL RETURN (1) 12-MONTH
CLASS DATE CHARGE CHARGE 3 YEARS INCEPTION SINCE INCEPTION DISTRIBUTION
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
A 1/11/93 9.11% 3.93% 6.03% 4.79% 24.23% $0.50
B 1/11/93 8.30% 3.30% 6.08% 4.85% 24.56% $0.42
Y 2/28/94 9.39% -- 8.03% 5.51% 20.72% $0.53
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Adjusted for maximum sales charge.
CURRENT STRATEGY
- --------------------------------------------------------------------------------
In the past several months, it has become increasingly difficult
to maneuver within the fixed income markets. The Fund began the
calendar year with great strength, outperforming most of its
competitors, only to relinquish some of that lead as the first
quarter came to a close. As the second quarter began, the Fund was
managed more defensively-- due to our concerns of rising interest
rates-- and moved back near the top of the performance rankings.
We purchased a block of high-yielding bonds in August, which we
anticipate will contribute to both income and total return. For
the twelve-month period ended September 30, 1997, the Fund's class
Y shares ranked in the top 5%, number 2 out of 37 North Carolina
municipal debt funds tracked by Lipper Analytical Services, an
independent mutual fund rating company. (2) Class A shares ranked
in the top 11%, number 4 out of 37 North Carolina municipal debt
funds tracked by Lipper.
(Photo of Richard K. Marrone)
RICHARD K. MARRONE
VICE PRESIDENT,
SENIOR FIXED INCOME
PORTFOLIO MANAGER
- --------------------------------------------------------------------------------
GROWTH OF INVESTMENT
Evergreen North Carolina Municipal Bond Fund
Comparison of a $10,000 investment in Evergreen North Carolina Municipal Bond
Fund, Class A shares, versus a similar investment in the Lehman Brothers State
General Oglibation Bond Index (LBSGOBI) and the Consumer Price Index (CPI).
(A chart appears here with the following plot points.)
In Thousands
1/93 8/93 8/94 8/95 8/96 8/97
Class A Shares 9,525 10,300 9,926 10,822 11,386 $12,423
CPI 10,000 10,205 10,500 10,775 11,085 $11,331
LBSGOBI 10,000 10,893 10,921 11,897 12,475 $13,529
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholders
investing in different classes. The Lehman Brothers State General Obligation
Bond Index is an unmanaged market index. The index does not include transaction
costs associated with buying and selling securities nor any management fees. The
Consumer Price Index, a measure of inflation, is through August 31, 1997.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
<S> <C>
- --------------------------------------------------------------
Total Net Assets: $60,355,046
Average Credit Quality: A+
Average Maturity: 21.26 years
Average Duration: 9.5 years
</TABLE>
PORTFOLIO COMPOSITION
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie chart appears here with the following plot points.)
Housing 20.1%
Escrow 13.7%
Lease 10.5%
Industrial Development 10.5%
Education 9.3%
Utility 8.6%
Hospital 8.2%
Other 6.9%
Health 6.6%
Residential Care 5.6%
PORTFOLIO QUALITY
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie chart appears here with the following plot points.)
A 27.7%
AA 19.0%
AAA 27.0%
BBB 19.5%
NR 6.8%
(2) THE RANKINGS ARE BASED ON TOTAL RETURN AND DO NOT INCLUDE THE EFFECT OF A
SALES CHARGE.
5
<PAGE>
(logo)
EVERGREEN
SOUTH CAROLINA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
FUND AT A GLANCE
As of August 31, 1997
<TABLE>
<CAPTION>
PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
AVERAGE ANNUALIZED
1 YEAR TOTAL RETURN(1)
---------------------------- ----------------------- CUMULATIVE
SHARE INCEPTION WITHOUT SALES WITH SALES SINCE TOTAL RETURN (1) 12-MONTH
CLASS DATE CHARGE CHARGE 3 YEARS INCEPTION SINCE INCEPTION DISTRIBUTION
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
A 1/3/94 9.33% 4.14% 7.05% 4.06% 15.70% $0.49
B 1/3/94 8.52% 3.52% 7.12% 3.99% 15.41% $0.42
Y 2/28/94 9.60% -- 9.07% 6.62% 25.25% $0.52
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Adjusted for maximum sales charge.
CURRENT STRATEGY
- --------------------------------------------------------------------------------
We continue to emphasize an income-oriented approach for the Fund.
We replaced older, lower-yielding bonds with higher-yielding
securities as opportunities became available. During the Fund's
fiscal year, the BOND BUYER 20 BOND INDEX declined from 5.86% to
5.45%. Despite this decline, as the year progressed we sold
approximately $7 million worth of bonds yielding 5.83%, while
buying $9.5 million in bonds yielding 6.08%. By continuing to
structure our portfolio with higher yielding issues, a substantial
portion of the total return in the portfolio is produced by higher
income. In an ongoing effort to ensure credit quality and increase
total return, our municipal credit analysts continue to monitor
existing holdings and screen potential new acquisitions. For the
twelve-month period ended September 30, 1997, the Fund's class Y
and class A shares ranked number 2 and 3, respectively, out of 16
South Carolina municipal debt funds tracked by Lipper Analytical
Services, an independent mutual fund rating company.(2)
(Photo of
Robert S. Drye)
ROBERT S. DRYE
VICE PRESIDENT,
FIXED INCOME
PORTFOLIO MANAGER
- --------------------------------------------------------------------------------
GROWTH OF INVESTMENT
Evergreen South Carolina Municipal Bond Fund
Comparison of a $10,000 investment in Evergreen South Carolina Municipal Bond
Fund, Class A shares, versus a similar investment in the Lehman Brothers South
Carolina Municipal Bond Index (LBSCMBI) and the Consumer Price Index (CPI).
(A chart appears here with the following plot points.)
In Thousands
1/94 8/94 8/95 8/96 8/97
Class A Shares 9,525 8,984 9,962 10,583 $11,570
CPI 10,000 10,219 10,487 10,788 $11,028
LBSCMBI 10,000 9,654 10,568 11,081 $12,076
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholders
investing in different classes. The Lehman Brothers South Carolina
Municipal Bond Index is an unmanaged market index. The index does not include
transaction costs associated with buying and selling securities nor any
management fees. The Consumer Price Index, a measure of inflation, is through
August 31, 1997.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
<S> <C>
- ----------------------------------------------------------------
Total Net Assets: $12,770,530
Average Credit Quality: AA
Average Maturity: 22.20 years
Average Duration: 10.31 years
</TABLE>
PORTFOLIO COMPOSITION
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie chart appears here with the following plot points.)
Health Care 30.9%
Housing 24.1%
Public Facilities 13.7%
Industrial Revenue Bonds 9.7%
Utilities 6.4%
Education 5.9%
Transportation 3.9%
General Obligation 2.9%
Other 2.5%
PORTFOLIO QUALITY
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie chart appears here with the following plot points.)
A 13.1%
AA 28.5%
AAA 32.8%
BBB 12.8%
NR 12.8%
(2) THE RANKINGS ARE BASED ON TOTAL RETURN AND DO NOT INCLUDE THE EFFECT OF A
SALES CHARGE.
6
<PAGE>
(logo)
EVERGREEN
VIRGINIA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
FUND AT A GLANCE
As of August 31, 1997
<TABLE>
<CAPTION>
PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
AVERAGE ANNUALIZED
1 YEAR TOTAL RETURN(1)
---------------------------- ----------------------- CUMULATIVE TOTAL
SHARE INCEPTION WITHOUT SALES WITH SALES SINCE RETURN(1) SINCE 12-MONTH
CLASS DATE CHARGE CHARGE 3 YEARS INCEPTION INCEPTION DISTRIBUTION
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
A 7/2/93 9.05% 3.87% 6.08% 3.90% 17.25% $0.50
B 7/2/93 8.24% 3.24% 6.14% 3.98% 17.71% $0.41
Y 2/28/94 9.32% -- 8.08% 6.06% 22.93% $0.51
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Adjusted for maximum sales charge.
CURRENT STRATEGY
- --------------------------------------------------------------------------------
For the twelve months ended September 30, 1997, the Fund's class Y
and class A shares ranked number 6 and 8, respectively, out of 32
Virginia municipal debt funds tracked by Lipper Analytical
Services, an independent mutual fund rating company. (2) During
the course of the fiscal year, we continued to emphasize an
income-oriented approach. In doing so, we maintained a
higher-coupon structure which allows our funds to provide tax-free
income and in the long term, produce a strong total return with
reduced volatility. A substantial portion of the total return of
the Fund is produced by the portfolio's higher coupon structure.
To ensure credit quality and increase total return, our municipal
credit analysts work in conjunction with portfolio managers to
carefully monitor existing holdings and seek out new investment
opportunities.
(Photo of
Charles E. Jeanne)
CHARLES E. JEANNE
ASSISTANT VICE PRESIDENT,
PORTFOLIO MANAGER
- --------------------------------------------------------------------------------
GROWTH OF INVESTMENT
Evergreen Virginia Municipal Bond Fund
Comparison of a $10,000 investment in Evergreen South Carolina Municipal Bond
Fund, Class A shares, versus a similar investment in the Lehman Brothers
Virginia Municipal Bond Index (LBVMBI) and the Consumer Price Index (CPI).
(A chart appears here with the following plot points.)
In Thousands
7/93 8/93 8/94 8/95 8/96 8/97
Class A Shares 9,525 9,675 9,355 10,228 10,752 $11,725
CPI 10,000 10,028 10,318 10,589 10,893 $11,113
LBVMBI 10,000 10,189 10,241 11,151 11,665 $12,695
Past performance is no guarantee of future results. The performance of each
class may vary based on differences in loads and fees paid by the shareholders
investing in different classes. The Lehman Brothers Virginia Municipal Bond
Index is an unmanaged market index. The index does not include transaction
costs associated with buying and selling securities nor any management fees. The
Consumer Price Index, a measure of inflation, is through August 31, 1997.
<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
<S> <C>
- ----------------------------------------------------------------
Total Net Assets: $15,824,821
Average Credit Quality: AA
Average Maturity: 20.56 years
Average Duration: 10.96 years
</TABLE>
PORTFOLIO COMPOSITION
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie chart appears here with the following plot points.)
Housing 24.9%
Lease 14.8%
Other 12.9%
Industrial Development 9.5%
Hospital 7.6%
Transportation 7.5%
Residential Care 7.2%
Public Facilities 6.4%
General Obligation Local 4.6%
Education 4.6%
PORTFOLIO QUALITY
(AS A PERCENTAGE OF PORTFOLIO ASSETS)
(A pie chart appears here with the following plot points.)
A 27.7%
AA 32.7%
AAA 19.5%
BBB 3.7%
NR 16.4%
(2) THE RANKINGS ARE BASED ON TOTAL RETURN AND DO NOT INCLUDE THE EFFECT OF A
SALES CHARGE.
7
<PAGE>
(logo)
EVERGREEN
FLORIDA HIGH INCOME MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, FOUR MONTHS YEAR ENDED APRIL 30,
----------------------- ENDED -----------------------
1997 1996 AUGUST 31, 1995* 1995 1994
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
CLASS A SHARES
NET ASSET VALUE BEGINNING OF YEAR....... $ 10.42 $ 10.40 $ 10.16 $ 10.08 $ 10.36
-------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................... 0.62 0.63 0.21 0.65 0.68
Net realized and unrealized gain (loss)
on investments........................ 0.47 0.02 0.24 0.08 (0.26)
-------- ------- ------- ------- -------
Total from investment operations........ 1.09 0.65 0.45 0.73 0.42
-------- ------- ------- ------- -------
LESS DISTRIBUTIONS FROM:
Net investment income................... (0.62) (0.63) (0.21) (0.65) (0.68)
Net realized gains on investments....... 0 0 0 0 (0.02)
-------- ------- ------- ------- -------
Total distributions..................... (0.62) (0.63) (0.21) (0.65) (0.70)
-------- ------- ------- ------- -------
NET ASSET VALUE END OF YEAR............. $ 10.89 $ 10.42 $ 10.40 $ 10.16 $ 10.08
-------- ------- ------- ------- -------
TOTAL RETURN (B)........................ 10.77% 6.42% 4.43% 7.56% 3.94%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses........................ 0.88% 0.85% 1.07%(a) 0.60% 0.14%
Total expenses excluding indirectly
paid expenses....................... 0.87% -- -- -- --
Total expenses excluding waivers and
reimbursements...................... 1.12% 1.15% 1.42%(a) 1.26% 1.12%
Net investment income................. 5.86% 6.02% 5.92%(a) 6.52% 6.16%
Portfolio turnover rate................. 32% 42% 14% 28% 31%
NET ASSETS END OF YEAR (THOUSANDS)...... $119,942 $76,267 $ 59,551 $65,043 $72,683
<CAPTION>
JUNE 17, 1992
THROUGH
APRIL 30, 1993
<S> <C>
- ----------------------------------------
CLASS A SHARES
NET ASSET VALUE BEGINNING OF YEAR....... $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................... 0.61
Net realized and unrealized gain (loss)
on investments........................ 0.39
-------
Total from investment operations........ 1.00
-------
LESS DISTRIBUTIONS FROM:
Net investment income................... (0.61)
Net realized gains on investments....... (0.03)
-------
Total distributions..................... (0.64)
-------
NET ASSET VALUE END OF YEAR............. $ 10.36
-------
TOTAL RETURN (B)........................ 10.33%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses........................ 0.00%(a)
Total expenses excluding indirectly
paid expenses....................... --
Total expenses excluding waivers and
reimbursements...................... 1.12%(a)
Net investment income................. 5.92%(a)
Portfolio turnover rate................. 50%
NET ASSETS END OF YEAR (THOUSANDS)...... $ 33,541
</TABLE>
* The Fund changed its fiscal year end from April 30 to August 31.
(a) Annualized.
(b) Excluding applicable sales charges.
<TABLE>
<CAPTION>
JULY 10, 1995
(COMMENCEMENT OF
CLASS
YEAR ENDED AUGUST 31, OPERATIONS)
----------------------- THROUGH
1997 1996 AUGUST 31, 1995
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES
NET ASSET VALUE BEGINNING OF YEAR.............................................. $ 10.42 $ 10.40 $10.41
------- ------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.......................................................... 0.54 0.55 0.08
Net realized and unrealized gain (loss) on investments......................... 0.47 0.02 (0.01)
------- ------- ------
Total from investment operations............................................... 1.01 0.57 0.07
Less distributions from net investment income.................................. (0.54) (0.55) (0.08)
------- ------- ------
NET ASSET VALUE END OF YEAR.................................................... $ 10.89 $ 10.42 $10.40
------- ------- ------
TOTAL RETURN (B)............................................................... 9.95% 5.63% 0.64%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses............................................................... 1.63% 1.59% 1.09%(a)
Total expenses excluding indirectly paid expenses............................ 1.63% -- --
Total expenses excluding waivers and reimbursements.......................... 1.87% 1.89% --
Net investment income........................................................ 5.09% 5.27% 3.40%(a)
Portfolio turnover rate........................................................ 32% 42% 14%
NET ASSETS END OF YEAR (THOUSANDS)............................................. $63,475 $19,219 $3,137
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
(logo)
EVERGREEN
FLORIDA HIGH INCOME MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
SEPTEMBER 20, 1995
(COMMENCEMENT OF
CLASS OPERATIONS)
YEAR ENDED THROUGH
AUGUST 31, 1997 AUGUST 31, 1996
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF YEAR.................................................... $ 10.42 $10.48
--------------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................................ 0.65 0.63
Net realized and unrealized gain (loss) on investments............................... 0.47 (0.06)
--------------- ------
Total from investment operations..................................................... 1.12 0.57
Less distributions from net investment income........................................ (0.65) (0.63)
--------------- ------
NET ASSET VALUE END OF YEAR.......................................................... $ 10.89 $10.42
--------------- ------
TOTAL RETURN......................................................................... 11.04% 5.54%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses..................................................................... 0.63% 0.59%(a)
Total expenses excluding indirectly paid expenses.................................. 0.63% --
Total expenses excluding waivers and reimbursements................................ 0.87% 0.89%(a)
Net investment income.............................................................. 6.08% 6.27%(a)
Portfolio turnover rate.............................................................. 32% 42%
NET ASSETS END OF YEAR (THOUSANDS)................................................... $ 6,326 $1,970
</TABLE>
(a) Annualized.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
(logo)
EVERGREEN
FLORIDA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31, FOUR MONTHS YEAR ENDED APRIL 30,
-------------------- ENDED -------------------------
1997 1996 AUGUST 31, 1995 (C)* 1995(C) 1994(C)
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES
NET ASSET VALUE BEGINNING OF YEAR...................... $ 9.70 $ 9.74 $ 9.61 $ 9.52 $ 9.95
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................................. 0.51 0.54 0.19 0.54 0.56
Net realized and unrealized gain (loss) on
investments.......................................... 0.35 (0.04) 0.22 0.11 (0.36)
-------- -------- -------- -------- --------
Total from investment operations....................... 0.86 0.50 0.41 0.65 0.20
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS FROM:
Net investment income.................................. (0.52) (0.54) (0.19) (0.54) (0.56)
Distributions in excess of net investment income....... 0 0 (0.03) 0 0
Net realized gains on investments...................... (0.06) 0 (0.06) (0.02) (0.07)
Paid-in capital........................................ 0 0 0 0 0
-------- -------- -------- -------- --------
Total distributions.................................... (0.58) (0.54) (0.28) (0.56) (0.63)
-------- -------- -------- -------- --------
NET ASSET VALUE END OF YEAR............................ $ 9.98 $ 9.70 $ 9.74 $ 9.61 $ 9.52
-------- -------- -------- -------- --------
TOTAL RETURN (B)....................................... 9.06% 5.15% 4.20% 7.05% 1.87%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses....................................... 0.74% 0.63% 0.82%(a) 0.61% 0.56%
Total expenses excluding indirectly paid expenses.... 0.74% -- -- -- --
Total expenses excluding waivers and reimbursements.. 0.91% 0.95% 1.05%(a) -- --
Net investment income................................ 5.22% 5.46% 4.89%(a) 5.73% 5.37%
Portfolio turnover rate................................ 41% 30% 29% 53% 32%
NET ASSETS END OF YEAR (THOUSANDS)..................... $105,673 $115,723 $136,449 $168,542 $199,612
</TABLE>
<TABLE>
<CAPTION>
MAY 11, 1988
(COMMENCEMENT OF
CLASS
OPERATIONS)
YEAR ENDED APRIL 30, THROUGH
------------------------------------------ APRIL 30,
1993(C) 1992(C) 1991(C) 1990(C) 1989(C)
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES (continued)
NET ASSET VALUE BEGINNING OF YEAR................................ $ 9.35 $ 9.21 $ 8.80 $ 9.09 $ 8.82
-------- -------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................ 0.56 0.61 0.66 0.58 0.47
Net realized and unrealized gain (loss) on investments........... 0.67 0.22 0.43 (0.24) 0.22
-------- -------- ------- ------- ------
Total from investment operations................................. 1.23 0.83 1.09 0.34 0.69
-------- -------- ------- ------- ------
LESS DISTRIBUTIONS FROM:
Net investment income............................................ (0.56) (0.61) (0.68) (0.59) (0.42)
Distributions in excess of net investment income................. 0 0 0 0 0
Net realized gains on investments................................ (0.07) (0.04) 0 (0.04) 0
Paid-in capital.................................................. 0 (0.04) 0 0 0
-------- -------- ------- ------- ------
Total distributions.............................................. (0.63) (0.69) (0.68) (0.63) (0.42)
-------- -------- ------- ------- ------
NET ASSET VALUE END OF YEAR...................................... $ 9.95 $ 9.35 $ 9.21 $ 8.80 $ 9.09
-------- -------- ------- ------- ------
TOTAL RETURN (B)................................................. 13.63% 9.30% 12.87% 3.74% 9.16%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses................................................. 0.58% 0.41% 0.10% 0.10% 0.30%(a)
Total expenses excluding indirectly paid expenses.............. -- -- -- -- --
Total expenses excluding waivers and reimbursements............ -- 0.68% 0.88% 5.14% 20.40%(a)
Net investment income.......................................... 5.66% 6.12% 6.55% 6.15% 5.30%(a)
Portfolio turnover rate.......................................... 24% 24% 66% 82% 30%
NET ASSETS END OF YEAR (THOUSANDS)............................... $198,286 $147,996 $75,791 $7,286 $ 717
</TABLE>
* The Fund changed its fiscal year end from April 30 to August 31.
(a) Annualized.
(b) Excluding applicable sales charges.
(c) On June 30, 1995, ABT Florida Tax-Free Fund sold substantially all of its
net assets to Evergreen Florida Municipal Bond Fund. As ABT Florida Tax-Free
Fund is the accounting survivor, its basis of accounting for assets and
liabilities and its operating results for periods prior to June 30, 1995
have been carried forward in these financial highlights.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
(logo)
EVERGREEN
FLORIDA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
JUNE 30, 1995
(COMMENCEMENT OF
CLASS
YEAR ENDED AUGUST 31, OPERATIONS)
----------------------- THROUGH
1997 1996 AUGUST 31, 1995
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES
NET ASSET VALUE BEGINNING OF YEAR................................................. $ 9.70 $ 9.74 $ 9.67
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................................. 0.42 0.44 0.07
Net realized and unrealized gain (loss) on investments............................ 0.35 (0.04) 0.10
------- ------- -------
Total from investment operations.................................................. 0.77 0.40 0.17
------- ------- -------
LESS DISTRIBUTIONS FROM:
Net investment income............................................................. (0.43) (0.44) (0.07)
Net realized gains on investments................................................. (0.06) 0 (0.03)
------- ------- -------
Total distributions............................................................... (0.49) (0.44) (0.10)
------- ------- -------
NET ASSET VALUE END OF YEAR....................................................... $ 9.98 $ 9.70 $ 9.74
------- ------- -------
TOTAL RETURN (B).................................................................. 8.06% 4.17% 1.49%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................................. 1.66% 1.56% 1.44%(a)
Total expenses excluding indirectly paid expenses............................... 1.66% -- --
Total expenses excluding waivers and reimbursements............................. 1.84% 1.76% 1.64%(a)
Net investment income........................................................... 4.29% 4.52% 3.22%(a)
Portfolio turnover rate........................................................... 41% 30% 29%
NET ASSETS END OF YEAR (THOUSANDS)................................................ $31,281 $28,849 $ 27,351
</TABLE>
(a) Annualized.
(b) Excluding applicable sales charges.
<TABLE>
<CAPTION>
JUNE 30, 1995
(COMMENCEMENT OF
CLASS
YEAR ENDED AUGUST 31, OPERATIONS)
----------------------- THROUGH
1997 1996 AUGUST 31, 1995
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF YEAR................................................. $ 9.70 $ 9.74 $ 9.67
------- ------- ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................................................. 0.52 0.53 0.09
Net realized and unrealized gain (loss) on investments............................ 0.35 (0.03) 0.10
------- ------- ------
Total from investment operations.................................................. 0.87 0.50 0.19
------- ------- ------
LESS DISTRIBUTIONS FROM:
Net investment income............................................................. (0.53) (0.54) (0.09)
Net realized gains on investments................................................. (0.06) 0 (0.03)
------- ------- ------
Total distributions............................................................... (0.59) (0.54) (0.12)
------- ------- ------
NET ASSET VALUE END OF YEAR....................................................... $ 9.98 $ 9.70 $ 9.74
------- ------- ------
TOTAL RETURN...................................................................... 9.14% 5.22% 1.67%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses.................................................................. 0.67% 0.57% 0.59%(a)
Total expenses excluding indirectly paid expenses............................... 0.67% -- --
Total expenses excluding waivers and reimbursements............................. 0.84% 0.77% 0.79%(a)
Net investment income........................................................... 5.27% 5.55% 4.93%(a)
Portfolio turnover rate........................................................... 41% 30% 29%
NET ASSETS END OF YEAR (THOUSANDS)................................................ $24,850 $12,259 $3,602
</TABLE>
(a) Annualized.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
(logo)
EVERGREEN
GEORGIA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
JULY 2, 1993
(COMMENCEMENT OF
CLASS
YEAR ENDED OPERATIONS)
AUGUST 31, EIGHT MONTHS THROUGH
---------------- ENDED YEAR ENDED DECEMBER 31,
1997 1996 AUGUST 31, 1995* DECEMBER 31, 1994 1993
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES
NET ASSET VALUE BEGINNING OF YEAR................ $ 9.57 $ 9.47 $ 8.74 $ 10.19 $10.00
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................ 0.49 0.48 0.33 0.48 0.20
Net realized and unrealized gain (loss) on
investments.................................... 0.33 0.10 0.73 (1.45) 0.19
------ ------ ------ ------ ------
Total from investment operations................. 0.82 0.58 1.06 (0.97) 0.39
------ ------ ------ ------ ------
Less distributions from net investment income.... (0.49) (0.48) (0.33) (0.48) (0.20)
------ ------ ------ ------ ------
NET ASSET VALUE END OF YEAR...................... $ 9.90 $ 9.57 $ 9.47 $ 8.74 $10.19
------ ------ ------ ------ ------
TOTAL RETURN (B)................................. 8.73% 6.22% 12.28% (9.64%) 3.96%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses................................. 0.94% 0.88% 0.71%(a) 0.53% 0.25%(a)
Total expenses excluding indirectly paid
expenses..................................... 0.94% -- -- -- --
Total expenses excluding waivers and
reimbursements............................... 1.83% 2.82% 2.83%(a) 3.61% 6.82%(a)
Net investment income.......................... 5.00% 4.96% 5.39%(a) 5.26% 4.71%(a)
Portfolio turnover rate.......................... 32% 21% 91% 147% 15%
NET ASSETS END OF YEAR (THOUSANDS)............... $2,201 $1,954 $2,098 $ 1,387 $ 817
</TABLE>
* The Fund changed its fiscal year end from December 31 to August 31.
(a) Annualized.
(b) Excluding applicable sales charges.
<TABLE>
<CAPTION>
JULY 2, 1993
(COMMENCEMENT OF
CLASS
YEAR ENDED OPERATIONS)
AUGUST 31, EIGHT MONTHS THROUGH
----------------- ENDED YEAR ENDED DECEMBER 31,
1997 1996 AUGUST 31, 1995* DECEMBER 31, 1994 1993
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES
NET ASSET VALUE BEGINNING OF YEAR............... $ 9.57 $ 9.47 $ 8.74 $ 10.19 $10.00
------- ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income........................... 0.41 0.41 0.28 0.43 0.18
Net realized and unrealized gain (loss) on
investments................................... 0.33 0.10 0.73 (1.45) 0.19
------- ------ ------ ------ ------
Total from investment operations................ 0.74 0.51 1.01 (1.02) 0.37
------- ------ ------ ------ ------
Less distributions from net investment income... (0.41) (0.41) (0.28) (0.43) (0.18)
------- ------ ------ ------ ------
NET ASSET VALUE END OF YEAR..................... $ 9.90 $ 9.57 $ 9.47 $ 8.74 $10.19
------- ------ ------ ------ ------
TOTAL RETURN (B)................................ 7.93% 5.44% 11.72% (10.15%) 3.74%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses................................ 1.69% 1.63% 1.46%(a) 1.13% 0.75%(a)
Total expenses excluding indirectly paid
expenses.................................... 1.69% -- -- -- --
Total expenses excluding waivers and
reimbursements.............................. 2.58% 3.54% 3.58%(a) 4.21% 7.32%(a)
Net investment income......................... 4.25% 4.21% 4.64%(a) 4.66% 4.15%(a)
Portfolio turnover rate......................... 32% 21% 91% 147% 15%
NET ASSETS END OF YEAR (THOUSANDS).............. $10,870 $9,271 $7,538 $ 6,912 $3,692
</TABLE>
* The Fund changed its fiscal year end from December 31 to August 31.
(a) Annualized.
(b) Excluding applicable sales charges.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
(logo)
EVERGREEN
GEORGIA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
FEBRUARY 28,
1994
(COMMENCEMENT OF
CLASS
YEAR ENDED OPERATIONS)
AUGUST 31, EIGHT MONTHS THROUGH
---------------- ENDED DECEMBER 31,
1997 1996 AUGUST 31, 1995* 1994
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF YEAR.................................... $ 9.57 $ 9.47 $ 8.74 $ 9.83
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................ 0.51 0.50 0.35 0.42
Net realized and unrealized gain (loss) on investments............... 0.33 0.10 0.73 (1.09)
------ ------ ------ ------
Total from investment operations..................................... 0.84 0.60 1.08 (0.67)
------ ------ ------ ------
Less distributions from net investment income........................ (0.51) (0.50) (0.35) (0.42)
------ ------ ------ ------
NET ASSET VALUE END OF YEAR.......................................... $ 9.90 $ 9.57 $ 9.47 $ 8.74
------ ------ ------ ------
TOTAL RETURN......................................................... 9.00% 6.48% 12.47% (6.86%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses..................................................... 0.69% 0.63% 0.46%(a) 0.31%(a)
Total expenses excluding indirectly paid expenses.................. 0.69% -- -- --
Total expenses excluding waivers and reimbursements................ 1.58% 2.51% 2.58%(a) 3.39%(a)
Net investment income.............................................. 5.25% 5.21% 5.64%(a) 5.68%(a)
Portfolio turnover rate.............................................. 32% 21% 91% 147%
NET ASSETS END OF YEAR (THOUSANDS)................................... $1,180 $1,620 $1,339 $ 284
</TABLE>
* The Fund changed its fiscal year end from December 31 to August 31.
(a) Annualized.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
(logo)
EVERGREEN
NORTH CAROLINA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
JANUARY 11, 1993
(COMMENCEMENT OF
CLASS
YEAR ENDED OPERATIONS)
AUGUST 31, EIGHT MONTHS THROUGH
---------------------- ENDED YEAR ENDED DECEMBER 31,
1997 1996 AUGUST 31, 1995* DECEMBER 31, 1994 1993
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES
NET ASSET VALUE BEGINNING OF YEAR.......... $ 9.98 $ 9.95 $ 9.16 $ 10.61 $ 10.00
------ ------ ------ ------ -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income...................... 0.49 0.49 0.33 0.49 0.46
Net realized and unrealized gain (loss) on
investments.............................. 0.40 0.02 0.79 (1.45) 0.64
------ ------ ------ ------ -------
Total from investment operations........... 0.89 0.51 1.12 (0.96) 1.10
------ ------ ------ ------ -------
LESS DISTRIBUTIONS FROM:
Net investment income...................... (0.50) (0.48) (0.33) (0.49) (0.46)
Net realized gains on investments.......... 0 0 0 0 (0.03)
------ ------ ------ ------ -------
Total distributions........................ (0.50) (0.48) (0.33) (0.49) (0.49)
------ ------ ------ ------ -------
NET ASSET VALUE END OF YEAR................ $10.37 $ 9.98 $ 9.95 $ 9.16 $ 10.61
------ ------ ------ ------ -------
TOTAL RETURN (B)........................... 9.11% 5.21% 12.34% (9.12%) 11.28%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses........................... 1.11% 1.08% 0.92%(a) 0.79% 0.32%(a)
Total expenses excluding indirectly paid
expenses............................... 1.11% -- -- -- --
Total expenses excluding waivers and
reimbursements......................... 1.11% 1.35% 1.27%(a) 1.18% 1.25%(a)
Net investment income.................... 4.77% 4.81% 5.09%(a) 5.11% 4.91%(a)
Portfolio turnover rate.................... 50% 86% 117% 126% 57%
NET ASSETS END OF YEAR (THOUSANDS)......... $8,115 $7,989 $8,279 $ 7,979 $ 12,739
</TABLE>
* The Fund changed its fiscal year end from December 31 to August 31.
(a) Annualized.
(b) Excluding applicable sales charges.
<TABLE>
<CAPTION>
JANUARY 11, 1993
(COMMENCEMENT OF
CLASS
YEAR ENDED OPERATIONS)
AUGUST 31, EIGHT MONTHS THROUGH
------------------------ ENDED YEAR ENDED DECEMBER 31,
1997 1996 AUGUST 31, 1995* DECEMBER 31, 1994 1993
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES
NET ASSET VALUE BEGINNING OF YEAR........ $ 9.98 $ 9.95 $ 9.16 $ 10.61 $ 10.00
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................... 0.41 0.42 0.28 0.44 0.42
Net realized and unrealized gain (loss)
on investments......................... 0.40 0.02 0.79 (1.45) 0.64
------- ------- ------- ------- -------
Total from investment operations......... 0.81 0.44 1.07 (1.01) 1.06
------- ------- ------- ------- -------
LESS DISTRIBUTIONS FROM:
Net investment income.................... (0.42) (0.41) (0.28) (0.44) (0.42)
Net realized gains on investments........ 0 0 0 0 (0.03)
------- ------- ------- ------- -------
Total distributions...................... (0.42) (0.41) (0.28) (0.44) (0.45)
------- ------- ------- ------- -------
NET ASSET VALUE END OF YEAR.............. $ 10.37 $ 9.98 $ 9.95 $ 9.16 $ 10.61
------- ------- ------- ------- -------
TOTAL RETURN (B)......................... 8.30% 4.42% 11.78% (9.64%) 10.80%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses......................... 1.86% 1.83% 1.67%(a) 1.37% 0.79%(a)
Total expenses excluding indirectly
paid expenses........................ 1.86% -- -- -- --
Total expenses excluding waivers and
reimbursements....................... 1.86% 2.10% 2.02%(a) 1.76% 1.74%(a)
Net investment income.................. 4.02% 4.06% 4.34%(a) 4.53% 4.47%(a)
Portfolio turnover rate.................. 50% 86% 117% 126% 57%
NET ASSETS END OF YEAR (THOUSANDS)....... $48,198 $49,382 $ 49,040 $44,616 $ 45,168
</TABLE>
* The Fund changed its fiscal year end from December 31 to August 31.
(a) Annualized.
(b) Excluding applicable sales charges.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
(logo)
EVERGREEN
NORTH CAROLINA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
FEBRUARY 28,
1994
(COMMENCEMENT OF
CLASS
YEAR ENDED OPERATIONS)
AUGUST 31, EIGHT MONTHS THROUGH
---------------- ENDED DECEMBER 31,
1997 1996 AUGUST 31, 1995* 1994
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF YEAR.................................... $ 9.98 $ 9.95 $ 9.16 $10.31
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................ 0.51 0.51 0.35 0.43
Net realized and unrealized gain (loss) on investments............... 0.41 0.03 0.79 (1.15)
------ ------ ------ ------
Total from investment operations..................................... 0.92 0.54 1.14 (0.72)
------ ------ ------ ------
Less distributions from net investment income........................ (0.53) (0.51) (0.35) (0.43)
------ ------ ------ ------
NET ASSET VALUE END OF YEAR.......................................... $10.37 $ 9.98 $ 9.95 $ 9.16
------ ------ ------ ------
TOTAL RETURN......................................................... 9.39% 5.47% 12.52% (7.01%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses..................................................... 0.86% 0.84% 0.67%(a) 0.59%(a)
Total expenses excluding indirectly paid expenses.................. 0.86% -- -- --
Total expenses excluding waivers and reimbursements................ 0.86% 1.07% 1.02%(a) 0.98%(a)
Net investment income.............................................. 5.02% 5.05% 5.34%(a) 5.58%(a)
Portfolio turnover rate.............................................. 50% 86% 117% 126%
NET ASSETS END OF YEAR (THOUSANDS)................................... $4,042 $3,771 $1,006 $ 642
</TABLE>
* The Fund changed its fiscal year end from December 31 to August 31.
(a) Annualized.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
(logo)
EVERGREEN
SOUTH CAROLINA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
JANUARY 3, 1994
(COMMENCEMENT OF
CLASS
YEAR ENDED OPERATIONS)
AUGUST 31, EIGHT MONTHS THROUGH
--------------- ENDED DECEMBER 31,
1997 1996 AUGUST 31, 1995* 1994
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES
NET ASSET VALUE BEGINNING OF YEAR..................................... $ 9.69 $9.59 $ 8.62 $10.00
------ ----- ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................. 0.48 0.49 0.34 0.46
Net realized and unrealized gain (loss) on investments................ 0.40 0.10 0.97 (1.38)
------ ----- ------ ------
Total from investment operations...................................... 0.88 0.59 1.31 (0.92)
------ ----- ------ ------
LESS DISTRIBUTIONS FROM:
Net investment income................................................. (0.48) (0.49) (0.34) (0.46)
Net realized gains on investments..................................... (0.01) 0 0 0
------ ----- ------ ------
Total distributions................................................... (0.49) (0.49) (0.34) (0.46)
------ ----- ------ ------
NET ASSET VALUE END OF YEAR........................................... $10.08 $9.69 $ 9.59 $ 8.62
------ ----- ------ ------
TOTAL RETURN (B)...................................................... 9.33% 6.23% 15.35% (9.32%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses...................................................... 0.98% 0.86% 0.53%(a) 0.25%(a)
Total expenses excluding indirectly paid expenses................... 0.98% -- -- --
Total expenses excluding waivers and reimbursements................. 2.16% 4.00% 6.50%(a) 10.71%(a)
Net investment income............................................... 4.87% 4.98% 5.41%(a) 5.57%(a)
Portfolio turnover rate............................................... 62% 37% 66% 23%
NET ASSETS END OF YEAR (THOUSANDS).................................... $1,025 $ 841 $ 610 $ 312
</TABLE>
* The Fund changed its fiscal year end from December 31 to August 31.
(a) Annualized.
(b) Excluding applicable sales charges.
<TABLE>
<CAPTION>
JANUARY 3, 1994
(COMMENCEMENT OF
CLASS
YEAR ENDED OPERATIONS)
AUGUST 31, EIGHT MONTHS THROUGH
---------------- ENDED DECEMBER 31,
1997 1996 AUGUST 31, 1995* 1994
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES
NET ASSET VALUE BEGINNING OF YEAR.................................... $ 9.69 $ 9.59 $ 8.62 $10.00
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................ 0.41 0.41 0.29 0.41
Net realized and unrealized gain (loss) on investments............... 0.40 0.10 0.97 (1.38)
------ ------ ------ ------
Total from investment operations..................................... 0.81 0.51 1.26 (0.97)
------ ------ ------ ------
LESS DISTRIBUTIONS FROM:
Net investment income................................................ (0.41) (0.41) (0.29) (0.41)
Net realized gains on investments.................................... (0.01) 0 0 0
------ ------ ------ ------
Total distributions.................................................. (0.42) (0.41) (0.29) (0.41)
------ ------ ------ ------
NET ASSET VALUE END OF YEAR.......................................... $10.08 $ 9.69 $ 9.59 $ 8.62
------ ------ ------ ------
TOTAL RETURN (B)..................................................... 8.52% 5.43% 14.77% (9.83%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses..................................................... 1.73% 1.61% 1.28%(a) 0.87%(a)
Total expenses excluding indirectly paid expenses.................. 1.73% -- -- --
Total expenses excluding waivers and reimbursements................ 2.91% 4.76% 7.25%(a) 11.33%(a)
Net investment income.............................................. 4.13% 4.23% 4.66%(a) 4.88%(a)
Portfolio turnover rate.............................................. 62% 37% 66% 23%
NET ASSETS END OF YEAR (THOUSANDS)................................... $4,734 $4,282 $3,542 $2,456
</TABLE>
* The Fund changed its fiscal year end from December 31 to August 31.
(a) Annualized.
(b) Excluding applicable sales charges.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
(logo)
EVERGREEN
SOUTH CAROLINA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
FEBRUARY 28,
1994
(COMMENCEMENT OF
CLASS
YEAR ENDED OPERATIONS)
AUGUST 31, EIGHT MONTHS THROUGH
---------------- ENDED DECEMBER 31,
1997 1996 AUGUST 31, 1995* 1994
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF YEAR.................................... $ 9.69 $ 9.59 $ 8.62 $ 9.74
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................ 0.51 0.51 0.35 0.43
Net realized and unrealized gain (loss) on investments............... 0.40 0.10 0.97 (1.12)
------ ------ ------ ------
Total from investment operations..................................... 0.91 0.61 1.32 (0.69)
------ ------ ------ ------
LESS DISTRIBUTIONS FROM:
Net investment income................................................ (0.51) (0.51) (0.35) (0.43)
Net realized gains on investments.................................... (0.01) 0 0 0
------ ------ ------ ------
Total distributions.................................................. (0.52) (0.51) (0.35) (0.43)
------ ------ ------ ------
NET ASSET VALUE END OF YEAR.......................................... $10.08 $ 9.69 $ 9.59 $ 8.62
------ ------ ------ ------
TOTAL RETURN......................................................... 9.60% 6.49% 15.54% (7.12%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses..................................................... 0.73% 0.62% 0.28%(a) 0.00%(a)
Total expenses excluding indirectly paid expenses.................. 0.73% -- -- --
Total expenses excluding waivers and reimbursements................ 1.91% 3.70% 6.25%(a) 10.46%(a)
Net investment income.............................................. 5.12% 5.22% 5.66%(a) 5.92%(a)
Portfolio turnover rate.............................................. 62% 37% 66% 23%
NET ASSETS END OF YEAR (THOUSANDS)................................... $7,012 $4,555 $1,673 $ 92
</TABLE>
* The Fund changed its fiscal year end from December 31 to August 31.
(a) Annualized.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
(logo)
EVERGREEN
VIRGINIA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
JULY 2, 1993
(COMMENCEMENT OF
CLASS
YEAR ENDED OPERATIONS)
AUGUST 31, EIGHT MONTHS THROUGH
---------------- ENDED YEAR ENDED DECEMBER 31,
1997 1996 AUGUST 31, 1995* DECEMBER 31, 1994 1993
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES
NET ASSET VALUE BEGINNING OF YEAR................ $ 9.68 $ 9.67 $ 8.85 $ 10.19 $10.00
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................ 0.50 0.48 0.33 0.47 0.20
Net realized and unrealized gain (loss) on
investments.................................... 0.37 0.01 0.82 (1.34) 0.19
------ ------ ------ ------ ------
Total from investment operations................. 0.87 0.49 1.15 (0.87) 0.39
------ ------ ------ ------ ------
Less distributions from net investment income.... (0.50) (0.48) (0.33) (0.47) (0.20)
------ ------ ------ ------ ------
NET ASSET VALUE END OF YEAR...................... $10.05 $ 9.68 $ 9.67 $ 8.85 $10.19
------ ------ ------ ------ ------
TOTAL RETURN (B)................................. 9.05% 5.12% 13.09% (8.60%) 3.89%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses................................. 1.03% 0.93% 0.72%(a) 0.53% 0.25%(a)
Total expenses excluding indirectly paid
expenses..................................... 1.02% -- -- -- --
Total expenses excluding waivers and
reimbursements............................... 1.84% 3.47% 3.83%(a) 5.14% 7.75%(a)
Net investment income.......................... 4.95% 4.83% 5.17%(a) 5.11% 4.64%(a)
Portfolio turnover rate.......................... 72% 68% 87% 59% 0%
NET ASSETS END OF YEAR (THOUSANDS)............... $2,934 $2,892 $1,983 $ 1,606 $1,306
</TABLE>
* The Fund changed its fiscal year end from December 31 to August 31.
(a) Annualized.
(b) Excluding applicable sales charges.
<TABLE>
<CAPTION>
JULY 2, 1993
(COMMENCEMENT OF
CLASS
YEAR ENDED OPERATIONS)
AUGUST 31, EIGHT MONTHS THROUGH
---------------- ENDED YEAR ENDED DECEMBER 31,
1997 1996 AUGUST 31, 1995* DECEMBER 31, 1994 1993
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES
NET ASSET VALUE BEGINNING OF YEAR................ $ 9.68 $ 9.67 $ 8.85 $ 10.19 $10.00
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............................ 0.41 0.41 0.28 0.42 0.17
Net realized and unrealized gain (loss) on
investments.................................... 0.37 0.01 0.82 (1.34) 0.19
------ ------ ------ ------ ------
Total from investment operations................. 0.78 0.42 1.10 (0.92) 0.36
------ ------ ------ ------ ------
Less distributions from net investment income.... (0.41) (0.41) (0.28) (0.42) (0.17)
------ ------ ------ ------ ------
NET ASSET VALUE END OF YEAR...................... $10.05 $ 9.68 $ 9.67 $ 8.85 $10.19
------ ------ ------ ------ ------
TOTAL RETURN (B)................................. 8.24% 4.34% 12.53% (9.13%) 3.66%
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses................................. 1.79% 1.68% 1.47%(a) 1.12% 0.75%(a)
Total expenses excluding indirectly paid
expenses..................................... 1.78% -- -- -- --
Total expenses excluding waivers and
reimbursements............................... 2.59% 4.23% 4.58%(a) 5.73% 8.25%(a)
Net investment income.......................... 4.21% 4.09% 4.42%(a) 4.54% 4.25%(a)
Portfolio turnover rate.......................... 72% 68% 87% 59% 0%
NET ASSETS END OF YEAR (THOUSANDS)............... $6,695 $5,963 $5,083 $ 3,817 $2,235
</TABLE>
* The Fund changed its fiscal year end from December 31 to August 31.
(a) Annualized.
(b) Excluding applicable sales charges.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
(logo)
EVERGREEN
VIRGINIA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
FEBRUARY 28,
1994
(COMMENCEMENT OF
CLASS
YEAR ENDED OPERATIONS)
AUGUST 31, EIGHT MONTHS THROUGH
---------------- ENDED DECEMBER 31,
1997 1996 AUGUST 31, 1995* 1994
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
CLASS Y SHARES
NET ASSET VALUE BEGINNING OF YEAR.................................... $ 9.68 $ 9.67 $ 8.85 $ 9.83
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................................ 0.51 0.50 0.34 0.41
Net realized and unrealized gain (loss) on investments............... 0.37 0.01 0.82 (0.98)
------ ------ ------ ------
Total from investment operations..................................... 0.88 0.51 1.16 (0.57)
------ ------ ------ ------
Less distributions from net investment income........................ (0.51) (0.50) (0.34) (0.41)
------ ------ ------ ------
NET ASSET VALUE END OF YEAR.......................................... $10.05 $ 9.68 $ 9.67 $ 8.85
------ ------ ------ ------
TOTAL RETURN......................................................... 9.32% 5.38% 13.28% (5.80%)
RATIOS/SUPPLEMENTAL DATA
RATIOS TO AVERAGE NET ASSETS:
Total expenses..................................................... 0.79% 0.70% 0.47%(a) 0.28%(a)
Total expenses excluding indirectly paid expenses.................. 0.78% -- -- --
Total expenses excluding waivers and reimbursements................ 1.60% 3.24% 3.58%(a) 4.89%(a)
Net investment income.............................................. 5.27% 5.05% 5.42%(a) 5.54%(a)
Portfolio turnover rate.............................................. 72% 68% 87% 59%
NET ASSETS END OF YEAR (THOUSANDS)................................... $6,195 $4,266 $ 965 $ 344
</TABLE>
* The Fund changed its fiscal year end from December 31 to August 31.
(a) Annualized.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
(logo)
EVERGREEN
FLORIDA HIGH INCOME MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
August 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- --------------------------------------------------------------
LONG-TERM INVESTMENTS-- 97.5%
CALIFORNIA-- 1.9%
$3,500,000 Valley Hlth. Sys. Hosp. RB, Ser. A
6.50%, 5/15/25.................... $ 3,703,070
------------
FLORIDA-- 88.3%
745,000 Alachua Cnty. Hlth. Facs. RB,
Beverly Enterprises Proj.
10.13%, 4/1/10.................... 804,354
1,000,000 Bay Cnty. Hosp. Sys. RB, Bay
Med. Ctr. Proj.
8.00%, 10/1/12.................... 1,178,930
100,000 Baytree Cmnty. Dev. Dist.
Special Assmt. RB
8.75%, 5/1/12..................... 108,061
750,000 Boynton Beach Hsg. Mtg.
Clipper Cove Apts.
6.35%, 7/1/16..................... 773,430
Brevard Cnty. Hlth. Facs.
Auth. RB, Courtenay Springs Vlg.:
910,000 7.38%, 11/15/04..................... 977,367
1,875,000 7.50%, 11/15/12..................... 2,007,188
1,000,000 Brevard Cnty. Tourist Dev.
Tax RB, Marlins Spring
6.88%, 3/1/13..................... 1,073,860
1,000,000 Broward Cnty. Hsg. Fin. Auth.
RB, Ser. A
7.35%, 3/1/23, (GNMA)............. 1,059,020
2,000,000 Clay County Hsg. Fin. Auth.
RB, Single Family Mortgage
Multi-Cnty. Prog.
5.95%, 10/1/19.................... 2,043,560
2,850,000 Cory Lakes Florida Cmnty.
Dev. Dist. RB
8.38%, 5/1/17..................... 2,929,344
1,080,000 Crossings At Fleming Island
Cmnty. Dev. Dist. Util. RB
7.38%, 10/1/19.................... 1,116,666
4,000,000 Dade Cnty. Single Family Mtg.
RB, Ser. B 1
5.60%, 4/1/27..................... 4,200,000
2,310,000 Duval Cnty. Hsg. Fin. Auth.
RB, St. Augustine Apts. Proj.
6.00%, 3/1/21..................... 2,318,917
1,500,000 Eastlake Oaks Cmnty. Dev. Dist.
7.75%, 5/1/17..................... 1,559,550
Escambia Cnty. Hlth. Facs.
Auth. RB, Azalea Trace Inc.:
2,905,000 6.00%, 1/1/15....................... 2,930,419
2,250,000 6.10%, 1/1/19....................... 2,279,362
515,000 8.50%, 1/1/19....................... 544,139
535,000 9.25%, 1/1/06....................... 580,416
235,000 9.25%, 1/1/12....................... 254,949
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS-- CONTINUED
FLORIDA-- CONTINUED
$1,500,000 Escambia Cnty. Hlth. Facs.
Auth. RB, Baptist Hosp. Inc., Ser.
B
6.00%, 10/1/14.................... $ 1,531,470
Escambia Cnty. PCR Champion
Intl. Corp. Proj.:
3,000,000 6.40%, 9/1/30....................... 3,205,350
2,000,000 6.90%, 8/1/22....................... 2,202,580
Florida Hsg. Fin. Agy. RB:
Glen Oaks Apts. Proj.
1,600,000 5.80%, 8/1/17....................... 1,613,616
Mar Lago Village Apts. Proj., Ser. F
2,945,000 6.00%, 6/1/39....................... 2,982,931
St. Cloud Village Proj., Ser. D
4,905,000 5.95%, 2/1/30....................... 4,965,577
The Vineyards Proj., Ser. H
1,000,000 6.50%, 11/1/25...................... 1,030,640
Grand Haven Cmnty. Dev.
Special Assmt., Ser. A:
2,000,000 6.30%, 5/1/02....................... 2,023,940
3,000,000 6.90%, 5/1/19....................... 2,963,430
3,610,000 Hernando Cnty. IDR, Florida
Crushed Stone Co.
8.50%, 12/1/14.................... 4,084,859
1,545,000 Hialeah Gardens, IDR,
Waterford Convalescent, Ser. A
7.88%, 12/1/07.................... 1,645,301
600,000 Hillsborough Cnty. Aviation
Auth. RB, US Air Proj., Ser. 2
8.60%, 1/15/22.................... 666,516
1,000,000 Hillsborough Cnty. Hsg. Fin.
5.88%, 10/1/30.................... 998,490
3,245,000 Homestead IDR, Cmnty. Rehab.
Providers Prog., Ser. A
7.95%, 11/1/18.................... 3,450,506
2,500,000 Indian Trace Cmnty. GO Wtr.
Mgmt. Special Benefit,
Subser. B
8.25%, 5/1/11..................... 2,789,125
Jacksonville Hlth. Facs.
Auth. RB, Natl. Benevolent
Assoc., Cypress Vlg. Proj.:
750,000 7.00%, 12/1/14...................... 809,438
1,020,000 7.00%, 12/1/22...................... 1,096,000
500,000 8.00%, 12/1/15...................... 574,950
2,500,000 Lake Bernadette Cmnty. Dev.
Dist. Florida Special, Ser. A
8.00%, 5/1/17..................... 2,595,975
3,200,000 Lake County Resources
Recreation IDR., Ser. A
5.85%, 10/1/09.................... 3,243,392
2,295,000 Largo Sun Coast Hlth. Sys.
RB, Refunding Hospital
6.20%, 3/1/13..................... 2,269,571
</TABLE>
(CONTINUED)
20
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EVERGREEN
FLORIDA HIGH INCOME MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
August 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS-- CONTINUED
FLORIDA-- CONTINUED
Lee Cnty. Hsg. Fin. Auth. RB,
Single Family Mtg.,
Multi-Cnty. Prog., Ser. A:
$1,000,000 7.20%, 3/1/27....................... $ 1,103,980
Subser. 2:
2,780,000 5.60%, 3/19/29...................... 3,047,519
1,685,000 7.50%, 9/1/27....................... 1,875,843
Subser. 3
1,000,000 7.45%, 9/1/27....................... 1,114,430
850,000 Lee Cnty. IDA, Encore Nursing
Center Partner
8.13%, 12/1/07.................... 937,899
2,790,000 Leon Cnty. Ed. Facs. Auth.
RB, Ser. A
8.25%, 5/1/14..................... 2,867,953
950,000 Manatee Cnty. Hsg. Fin. Auth.
RB, Single Family Mtg., Subser. 1
7.45%, 5/1/27..................... 1,055,763
1,125,000 Manatee Cnty. Hsg. Fin. Auth.
RB, Multi-Family Hsg.,
Conquistador, Ser. A
6.25%, 10/1/22.................... 1,183,185
Martin Cnty. IDR, Indiantown
Cogeneration Proj.:
Ser. A
2,175,000 7.88%, 12/15/25..................... 2,507,710
Ser. B
650,000 8.05%, 12/15/25..................... 755,885
1,245,000 Meadow Point II Cmnty. Dev.
Dist. Cap. Impt. RB
7.75%, 5/1/18..................... 1,300,353
Miami Beach City Center
Historic Convention:
1,000,000 6.25%, 12/1/16...................... 1,033,370
500,000 6.35%, 12/1/22...................... 517,010
1,285,000 North Springs Impt. Dist.
Wtr. Mgmt. Special Assmt., Ser. A
8.20%, 5/1/24..................... 1,391,359
2,500,000 Northern Palm Beach Cnty.
Impt. RB, Wtr. Ctl. & Impt.,
Unit Dev., Ser. A
7.20%, 8/1/16..................... 2,627,175
Northern Palm Beach Cnty.
Wtr. Ctl. Dist. Special
Assmt.:
500,000 6.88%, 11/1/13...................... 544,045
500,000 7.00%, 8/1/15....................... 546,290
1,500,000 Northwood Cmnty. Dev. Dist.
7.60%, 5/1/17..................... 1,553,415
2,605,000 Ocean Highway & Port Auth.
PCR, Solid Waste, Jefferson
Smurfit Corp.
6.50%, 11/1/06.................... 2,653,297
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS-- CONTINUED
FLORIDA-- CONTINUED
Orange Cnty. Hlth. Facs.
Auth. RB:
Lakeside Apts. Inc.
$1,040,000 6.50%, 7/1/13....................... $ 1,112,426
Orlando Lutheran Tower
395,000 8.40%, 7/1/14....................... 434,069
2,250,000 Orange Cnty. Hsg. Fin. Auth.
Mtg. RB, Ser. B
8.10%, 11/1/21.................... 2,380,523
Orange Cnty. Hsg. Fin. Auth.
Mtg. RB, Single Family Mtg.:
1,000,000 6.85%, 10/1/27...................... 1,035,100
Ser. B:
1,000,000 5.80%, 9/1/17....................... 1,013,810
2,500,000 5.88%, 3/1/28....................... 2,528,975
1,050,000 Osceola Cnty. Hsg. Fin.
Auth., Tierra Vista Apts.
Proj., Ser. A
5.75%, 12/1/22.................... 1,053,780
2,000,000 Osceola Cnty. IDA, Cmnty.
Provider Pooled Ln. Proj.,
Ser. A
7.75%, 7/1/17..................... 2,098,980
565,000 Overoaks Cmnty. Dev. Dist.
Cap. Impt. RB
8.25%, 5/1/17..................... 578,165
1,500,000 Palm Beach Cnty. IDR,
Geriatric Care Inc. Proj.
6.55%, 12/1/16.................... 1,599,540
3,695,000 Pasco Cnty. Hsg. Fin. Auth.,
Oak Trail Apts. Proj., Ser. A
5.35%, 6/1/27..................... 3,728,580
3,100,000 Pinellas Cnty. Edl. Facs.
Auth. RB, Clearwater
Christian College
8.00%, 2/1/11..................... 3,215,630
685,000 Pinellas Cnty. Edl. Facs.
Auth. RB, Eckerd College
7.75%, 7/1/14..................... 743,828
Pinellas Cnty. Hlth. Facs.
Auth. RB:
150,000 6.75%, 10/1/00...................... 151,777
100,000 7.00%, 10/1/01...................... 101,515
200,000 7.25%, 10/1/02...................... 203,636
1,100,000 8.00%, 10/1/08...................... 1,125,520
5,000,000 Polk Cnty. IDA, IMC
Fertilizer, Ser. A
7.53%, 1/1/15..................... 5,407,500
1,000,000 Port Everglades RB, Ser. A
7.50%, 9/1/12..................... 1,066,050
</TABLE>
(CONTINUED)
21
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EVERGREEN
FLORIDA HIGH INCOME MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
August 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS-- CONTINUED
FLORIDA-- CONTINUED
$1,705,000 Quantum Cmnty. Dev. Dist.
Special Assmt.
7.75%, 3/1/14..................... $ 1,811,256
2,045,000 Riverwood Cmnty. Sys. RB
7.75%, 10/1/14.................... 2,148,068
1,000,000 Sarasota Cnty. Hlth. Fac.
Auth. RB, Jewish Hsg. Council
7.38%, 7/1/16..................... 1,060,320
1,500,000 Sarasota Cnty. Hlth. Fac.
Auth. RB, Manatee Jewish Hsg.
6.70%, 7/1/25..................... 1,542,885
1,000,000 Sarasota Cnty. Hlth. Fac.
Auth. RB, Sunnyside Properties
6.00%, 5/15/10.................... 1,013,380
1,830,000 Seminole Wtr. Ctl Unit of
Dev. No. 2
7.25%, 8/1/22..................... 1,872,236
1,500,000 South Indian River, Wtr. Ctl.
Dist. RB, Egret Landing, Phase I
7.50%, 11/1/18.................... 1,586,550
2,500,000 St. John's Cnty. IDA, Bayview
Proj., Ser. A
7.10%, 10/1/26.................... 2,551,875
2,500,000 St. John's Ctny. IDA, Vicars
Landing Proj., Ser. A
6.75%, 2/15/12.................... 2,548,875
3,000,000 Tampa, RB Aquarium Inc. Proj.
7.75%, 5/1/27..................... 3,446,940
1,000,000 Tarpon Springs, Hlth. Facs.
Auth. RB, Helen Ellis Mem.
Hosp. Proj.
7.50%, 5/1/11..................... 1,065,100
Volusia Cnty. Edl. Facs.
Auth. RB, Embry-Riddle, Ser. A:
1,025,000 6.13%, 10/15/16..................... 1,063,878
5,000,000 6.13%, 10/15/26..................... 5,168,750
2,000,000 Volusia Cnty. IDA, RB,
Bishops Glen Proj.
7.63%, 11/1/26.................... 2,085,240
Westchase East Cmnty. Dev.
Dist. Cap. Impt. RB:
1,350,000 7.30%, 5/1/18....................... 1,378,877
1,775,000 7.50%, 5/1/17....................... 1,827,806
1,000,000 Winter Garden, IDR, Beverly
Enterprises
8.75%, 7/1/12..................... 1,124,160
Winter Haven Hsg. Auth. RB,
Multi-Family Mtg., Abbey Lane
Apts., Ser. C:
250,000 7.00%, 7/1/12, (FNMA)............... 265,285
250,000 7.00%, 7/1/24, (FNMA)............... 263,828
------------
167,504,383
------------
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS-- CONTINUED
GEORGIA-- 1.4%
Coffee Cnty. Hosp. Auth. RB:
$1,100,000 6.75%, 12/1/16...................... $ 1,107,689
1,500,000 6.75%, 12/1/26...................... 1,504,245
------------
2,611,934
------------
NEW YORK-- 1.7%
3,000,000 Port Auth. NY & NJ
6.75%, 10/1/11.................... 3,248,400
------------
TEXAS-- 1.6%
2,860,000 Lufkin Hlth. Facs. Dev. Corp.
RB, Memorial Hlth. Sys. of
East Texas
6.88%, 2/15/26.................... 3,069,495
------------
U. S. VIRGIN ISLANDS-- 1.2%
2,000,000 Virgin Islands, Wtr. & Pwr.
Auth. RB, Ser. B
7.60%, 1/1/12..................... 2,229,480
------------
PUERTO RICO-- 1.4%
1,000,000 Puerto Rico Indl. Tourist
Edl. Med. Envir. Ctl. Facs.
RB, Mennonite Gen. Hosp.
Proj., Ser. A
6.50%, 7/1/12..................... 1,056,550
1,475,000 Puerto Rico Ports Auth. RB,
American Airlines Proj., Ser. A
6.25%, 6/1/26..................... 1,563,766
------------
2,620,316
------------
TOTAL LONG-TERM INVESTMENTS
(COST $178,015,116)............... 184,987,078
------------
SHORT-TERM INVESTMENTS-- 0.4%
(COST $700,000)
FLORIDA
700,000 Remington Cmnty. Dev. Dist.,
Bond Anticipation Notes
7.50%, 10/31/97................... 700,000
------------
SHARES
- ----------
MUTUAL FUND SHARES-- 3.3%
(COST $6,310,000)
6,310,000 Federated Municipal
Obligations Fund.................. 6,310,000
------------
TOTAL INVESTMENTS--
(COST $185,025,116)....... 101.2% 191,997,078
OTHER ASSETS AND
LIABILITIES-- NET......... (1.2) (2,253,897)
------- ------------
NET ASSETS--................ 100.0% $189,743,181
------- ------------
</TABLE>
(CONTINUED)
22
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EVERGREEN
FLORIDA HIGH INCOME MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
August 31, 1997
SUMMARY OF ABBREVIATIONS:
FNMA Insured by Federal National Mortgage Association
GNMA Insured by Government National Mortgage Association
GO General Obligation
IDA Industrial Development Authority
IDR Industrial Development Revenue Bond
PCR Pollution Control Revenue Bond
RB Revenue Bond
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
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EVERGREEN
FLORIDA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
August 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- --------------------------------------------------------------
LONG-TERM INVESTMENTS-- 94.7%
FLORIDA-- 94.7%
$2,000,000 Altamonte Springs Hlth. Fac.
Auth. RB, Adventist
Hlth./Sunbelt, Ser. B
5.13%, 11/15/18, (AMBAC)........... $ 1,897,020
3,750,000 Brevard Cnty. Hsg. Fin. Auth.
RB, Multi-Family Hsg.
Windover Oaks, Ser. A
6.90%, 2/1/27, (FNMA).............. 4,155,750
600,000 Brevard Cnty. Hsg. Fin.,
Auth. RB, Single Family Mtg.,
Refunding, Ser. B
7.00%, 3/1/13, (FSA)............... 635,394
Broward Cnty. Hsg. Fin. Auth.
RB, Ser. B:
180,000 7.55%, 3/1/15, (GNMA)................ 189,936
1,375,000 7.13%, 3/1/17, (GNMA)................ 1,450,955
105,000 Charlotte Cnty. Spec. Assmt.,
Peachland Muni. Svc. Tax &
Ben. Unit
7.25%, 10/1/10, (MBIA)............. 115,257
500,000 Collier Cnty. Hlth. Facs.
Auth. RB, The Moorings, Inc. Proj.
7.00%, 12/1/19..................... 544,340
Dade Cnty. Edl. Facs. Auth.
RB, St. Thomas Univ.:
2,000,000 6.00%, 1/1/14, (LOC: Sun Bank
Miami)........................... 2,059,260
1,000,000 6.13%, 1/1/19, (LOC: Sun Bank
Miami)........................... 1,046,710
230,000 Dade Cnty. Hlth. Fac. Auth.
RB, South Shore Hosp. & Med.
Center, Ser. A
7.60%, 8/1/24...................... 247,059
3,815,000 Dade Cnty. Pub. Fac. RB,
Jackson Mem. Hosp. Proj., Ser. A
4.88%, 6/1/15, (MBIA).............. 3,526,243
Dade Cnty. Single Family Mtg.
RB, Ser. A:
230,000 7.50%, 9/1/13........................ 243,016
135,000 7.10%, 3/1/17........................ 142,176
340,000 Dade Cnty. Single Family Mtg.
RB, Ser. D
6.95%, 12/15/12.................... 360,621
1,000,000 Dade Cnty. Spec. Oblig.
RB, Courthouse Ctr. Proj.
6.25%, 4/1/09...................... 1,077,390
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS-- CONTINUED
FLORIDA-- CONTINUED
Duval Cnty. Hsg. Fin. Auth.
RB, Single Family Mtg.:
$ 200,000 7.50%, 6/1/15, (FGIC)................ $ 211,044
840,000 7.35%, 7/1/24, (GNMA)................ 896,288
Escambia Cnty. Hlth. Facs.
Auth. RB:
2,560,000 6.00%, 1/1/15........................ 2,582,400
1,250,000 6.10%, 1/1/19........................ 1,266,313
2,750,000 Escambia Cnty. Hlth. Facs.
Auth. RB, Baptist Hosp. Inc., Ser.
B
6.00%, 10/1/14..................... 2,807,695
Escambia Cnty. PCR, Champion
Int'l. Corp. Proj.:
5,230,000 5.88%, 6/1/22........................ 5,285,647
1,650,000 6.40%, 9/1/30........................ 1,762,942
Florida Hsg. Fin. Agcy. RB:
2,810,000 8.00%, 12/1/20, (GNMA)............... 2,950,641
1,860,000 6.35%, 5/1/26, (GNMA) Ser. A......... 1,925,398
1,895,000 6.88%, 10/1/12....................... 1,969,170
Florida Hsg. Fin. Agcy. RB,
Landings At Sea Forest:
560,000 5.85%, 12/1/18, (AMBAC).............. 569,178
805,000 6.05%, 12/1/36, (AMBAC).............. 821,382
Florida Ports. Fin.
Commission RB, St. Trans.
Trust Fund:
2,000,000 5.38%, 6/1/16, (MBIA)................ 1,950,240
6,500,000 5.38%, 6/1/27, (MBIA)................ 6,270,485
4,000,000 Florida St. Div. of Bond Fin.,
Dept. Genl. Svcs. RB, Dept.
Envir.-Preserv. 2000, Ser. A
5.75%, 7/1/13, (AMBAC)............. 4,145,400
1,000,000 Hialeah Cap. Impt. RB
5.50%, 10/1/13..................... 986,300
3,250,000 Hillsborough Cnty. Indl. Dev.
Auth. IDR, Univ. Cmnty.
Hosp., Ser. 1994
6.50%, 8/15/19, (MBIA)............. 3,738,605
Jacksonville Hlth. Indl.
Dev., Nat'l. Benevolent-Cypress
Vlg., Ser. A:
345,000 6.13%, 12/1/16....................... 354,022
1,245,000 6.25%, 12/1/26....................... 1,304,349
1,250,000 Lee Cnty. Hsg. Fin. Auth.
7.20%, 3/1/27...................... 1,379,975
</TABLE>
(CONTINUED)
24
<PAGE>
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EVERGREEN
FLORIDA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
August 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS-- CONTINUED
FLORIDA-- CONTINUED
Lee Cnty. Hsg. Fin. Auth. RB,
Single Family Mtg.,
Multi-Cnty. Prog., Ser. A:
$1,700,000 7.45%, 9/1/27........................ $ 1,894,531
3,685,000 7.50%, 9/1/27........................ 4,102,363
4,890,000 Leesburg Hosp. RB, Leesburg
Regl. Med. Ctr. Proj., Ser. B
5.70%, 7/1/18...................... 4,937,531
770,000 Leon Cnty. Hsg. Fin. Auth.
RB, Single Family Mtg.,
Multi-Cnty. Prog., Ser. B
6.25%, 7/1/19, (GNMA).............. 797,458
1,425,000 Manatee Cnty. Hsg. Fin. Auth.
Mtg. RB
7.45%, 5/1/27...................... 1,583,645
1,750,000 Manatee Cnty. Hsg. Fin. Auth.
Mtg. RB, Single Family
Subser. 1
7.20%, 5/1/28...................... 1,933,593
5,000,000 Miami Hlth. Fac. Auth. RB
5.25%, 8/15/15, (AMBAC)............ 4,819,750
Miami Beach Redev. Agency Tax
Increment RB, City Center-Historic
Convention Vlg.:
2,000,000 5.63%, 12/1/09....................... 1,998,920
3,000,000 5.80%, 12/1/13....................... 2,980,980
2,000,000 5.88%, 12/1/22....................... 1,982,880
1,500,000 North Miami Hlth. Fac. Auth. RB,
Catholic Hlth. Svc. Oblig. Group
6.00%, 8/15/16..................... 1,539,960
1,000,000 North Tampa Hsg. Dev. Corp. RB,
Cntry. Oaks Apts., Ser. A
6.90%, 1/1/24, (FNMA).............. 1,052,620
1,300,000 Northern Palm Beach Cnty. Impt. RB,
Wtr. Ctl. & Impt.,
Unit Dev. 9A, Ser. A
7.20%, 8/1/16...................... 1,366,131
1,000,000 Okaloosa Cnty. Wtr. & Swr. RB
6.00%, 7/1/11, (AMBAC)............. 1,095,790
3,000,000 Orange Cnty. Hlth. Facs. Auth. RB,
Lakeside Apts. Inc.
6.50%, 7/1/13...................... 3,208,920
4,000,000 Orlando Utils. Commission Wtr. &
Elec. RB, Linked SAVRs/RIBs (a)
5.60%, 10/6/17..................... 3,990,200
3,000,000 Palm Beach Cnty. Criminal
Justice Facs. RB
7.20%, 6/1/15, (FGIC).............. 3,681,810
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------
LONG-TERM INVESTMENTS-- CONTINUED
<C> <S> <C>
FLORIDA-- CONTINUED
Palm Beach Cnty. Hlth. Facs. Auth.
RB, Good Samaritan Hlth. Sys.:
$3,695,000 6.20%, 10/1/11....................... $ 3,874,133
6,000,000 6.30%, 10/1/22....................... 6,301,680
4,440,000 Palm Beach Cnty. Hsg. Fin. Auth. RB,
Daughters of Charity, Ser. B
7.60%, 3/1/23, (GNMA).............. 4,718,921
1,000,000 Palm Beach Cnty. Hsg. Fin. Auth. RB,
Single Family Mtg., Ser. A
6.50%, 10/1/21, (GNMA)............. 1,052,830
2,000,000 Palm Beach Cnty. IDR,
Geriatric Care Inc. Proj.
6.55%, 12/1/16..................... 2,132,720
5,000,000 Pensacola Hlth. Facs. Auth. RB,
Daughters of Charity Natl. Hlth.
5.25%, 1/1/11...................... 4,943,000
860,000 Polk Cnty Hsg. Fin. Auth.
RB, Single Family Mtg., Ser. A
7.00%, 9/1/15...................... 893,703
8,350,000 Polk Cnty. Indl. Dev. Auth.,
Tampa Elec. Co. Proj.
5.85%, 12/1/30..................... 8,459,803
1,500,000 Reedy Creek Impt. Dist.
Util. RB, Ser. 1
5.00%, 10/1/19, (MBIA)............. 1,415,670
1,800,000 Sarasota Cnty. Hlth. Fac.
Auth. RB, Sunnyside Properties
6.00%, 5/15/10..................... 1,824,084
3,590,000 Seacoast Util. Auth. RB,
Wtr. & Swr. Sys., Ser. A
5.50%, 3/1/18, (FGIC).............. 3,683,663
1,000,000 St. John's Cnty. Indl. Dev. Auth.,
Bayview Proj., Ser. A
7.00%, 10/1/12..................... 1,025,880
Volusia Cnty. Ed. Facs. Auth. RB,
Embry-Riddle Aero, Ser. A:
3,500,000 6.13%, 10/15/16...................... 3,632,755
2,600,000 6.13%, 10/15/26...................... 2,687,750
Winter Haven Hsg. Auth. RB,
Multi-Family Mtg., Abbey Lane
Apts., Ser. C:
850,000 7.00%, 7/1/12, (FNMA)................ 901,969
1,750,000 7.00%, 7/1/24, (FNMA)................ 1,846,793
-----------
TOTAL LONG-TERM INVESTMENTS
(COST $145,060,611)................ 153,231,037
-----------
</TABLE>
(CONTINUED)
25
<PAGE>
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EVERGREEN
FLORIDA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
August 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
- ---------------------------------------------------------------
<C> <S> <C>
MUTUAL FUND SHARES-- 3.6%
(COST $5,881,000)
5,881,000 Federated Municipal
Obligations Fund.................... $ 5,881,000
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C> <C>
TOTAL INVESTMENTS--
(COST $150,941,611)...... 98.3% 159,112,037
OTHER ASSETS AND
LIABILITIES-- NET........ 1.7 2,691,533
--------- ------------
NET ASSETS--............... 100.0% $161,803,570
--------- ------------
--------- ------------
</TABLE>
SUMMARY OF ABBREVIATIONS:
AMBAC Insured by American Municipal Bond
Assurance Corporation
FGIC Insured by Federal Guaranty Insurance Company
FNMA Insured by Federal National Mortgage Association
FSA Insured by Financial Security Assurance Company
GNMA Insured by Government National Mortgage
Association
IDR Industrial Development Revenue Bond
LOC Line of Credit
MBIA Insured by Municipal Bond Investors Assurance
Corporation
PCR Pollution Control Revenue Bond
RIBs Residual Interest Bonds
RB Revenue Bond
SAVRs Select Auction Variable Rate Securities
(a) At the discretion of the portfolio manager, these securities may be
separated into securities with interest or principal payments that are
linked to another rate or index and therefore would be considered derivative
securities.
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
(logo)
EVERGREEN
GEORGIA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
August 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
LONG-TERM INVESTMENTS-- 95.5%
<C> <S> <C>
GEORGIA-- 91.8%
$ 500,000 Appling Cnty. Dev. Auth. PCR
7.15%, 1/1/21, (MBIA).............. $ 562,730
300,000 Butts Cnty. COP
6.75%, 12/1/14, (MBIA)............. 335,394
1,100,000 Cartersville, Dev. Auth. RB, Wtr. &
Waste Facs.
7.40%, 11/1/10..................... 1,328,954
120,000 Cartersville, GO
6.70%, 1/1/12...................... 138,420
500,000 Clayton Cnty. Hsg. Auth. Mtg. RB
7.13%, 12/1/25, (FHA/VA)........... 533,950
1,000,000 Coffee Cnty. Hosp. Auth. RB
6.75%, 12/1/16..................... 1,006,990
500,000 DeKalb Cnty. Hsg. Auth. RB, The Lakes
at Indian Creek Proj.
7.15%, 1/1/25, (FSA)............... 537,270
500,000 DeKalb Cnty. Sch. Dist., Ser. A
6.25%, 7/1/11...................... 558,655
600,000 Fayette Cnty. Sch. Dist.
6.13%, 3/1/15...................... 636,912
500,000 Forsyth Cnty. Sch. Dist. GO
6.75%, 7/1/16...................... 586,345
600,000 Fulton Cnty. Hsg. Auth. RB, Ser. C
6.90%, 1/1/28...................... 606,768
400,000 Fulton Cnty. Wtr. & Swr. RB
6.38%, 1/1/14, (FGIC).............. 452,228
500,000 George L. Smith II, World Congress
Ctr. Auth. RB, Domed Stadium Proj.
7.88%, 7/1/20...................... 547,085
395,000 Georgia State, Hsg. & Fin. Auth. RB,
Ser. A
6.55%, 12/1/27..................... 414,063
400,000 Georgia State, Muni. Elec. Auth. Pwr.
RB, Ser. EE
7.25%, 1/1/24, (AMBAC)............. 505,984
500,000 Glynn-Brunswick Mem. Hosp.
Auth. RB
6.00%, 8/1/16, (MBIA).............. 526,595
500,000 Hall Cnty. Sch. Dist. GO
6.70%, 12/1/14..................... 563,025
330,000 Metro Atlanta Rapid Tran. Auth.,
Sales Tax RB
7.00%, 7/1/11, (FGIC).............. 392,033
500,000 Putnam Cnty. Sch. Dist. GO
6.90%, 2/1/14, (AMBAC)............. 568,555
1,500,000 Richmond Cnty. Dev. Auth. RB,
Southern Care, Ser. C, (effective
yield 5.72%) (a)
0.00%, 12/1/21..................... 381,945
<CAPTION>
LONG-TERM INVESTMENTS-- CONTINUED
<C> <S> <C>
GEORGIA-- CONTINUED
$ 775,000 Savannah Eco. Dev. Auth. RB,
Southern Care, Ser. C, (effective
yield 5.72%) (a)
0.00%, 12/1/21..................... $ 197,338
Savannah Hosp. Auth. RB, St. Joseph's
Hosp. Proj.:
800,000 6.13%, 7/1/12........................ 846,024
500,000 6.20%, 7/1/23........................ 514,625
300,000 Washington Cnty. Sch. Dist. GO 6.88%,
1/1/14, (AMBAC).................... 340,335
-----------
13,082,223
-----------
TEXAS-- 3.7%
500,000 Lufkin Hlth. Facs. Dev. Corp. RB
6.88%, 2/15/26..................... 536,625
-----------
TOTAL LONG-TERM INVESTMENTS
(COST $12,787,033)................. 13,618,848
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES
- ----------
MUTUAL FUND SHARES-- 3.5%
(COST $494,000)
<C> <S> <C>
494,000 Federated Municipal
Obligations Fund................... 494,000
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C> <C>
TOTAL INVESTMENTS--
(COST $13,281,033)........ 99.0% 14,112,848
OTHER ASSETS AND
LIABILITIES-- NET......... 1.0 139,229
--------- -----------
NET ASSETS--................ 100.0% $14,252,077
--------- -----------
--------- -----------
</TABLE>
(a) Effective yield (calculated at the date of purchase) is the yield at which
the bond accretes on an annual basis until maturity date.
SUMMARY OF ABBREVIATIONS:
AMBAC Insured by American Municipal Bond Assurance
Corporation
COP Certificate of Participation
FGIC Insured by Federal Guaranty Insurance Company
FHA/VA Insured by Federal Housing Authority/Veterans
Administration
FSA Insured by Financial Security Assurance Company
GO General Obligation Bond
MBIA Insured by Municipal Bond Investors Assurance
Corporation
PCR Pollution Control Revenue Bond
RB Revenue Bond
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
(logo) EVERGREEN
NORTH CAROLINA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
August 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- --------------------------------------------------------------
LONG-TERM INVESTMENTS-- 94.5%
NEW JERSEY-- 2.5%
$1,430,000 Western Monmouth Util. Auth.
RB, Sewer Revenue
6.80%, 2/1/14...................... $ 1,494,636
-----------
NORTH CAROLINA-- 76.6%
1,315,000 Burlington Hsg. Auth. Mtg. RB,
Burlington Homes, Sec. 8-A
6.00%, 8/1/09...................... 1,354,226
1,000,000 Chapel Hill Parking Fac., COP
6.35%, 12/1/18..................... 1,053,660
1,455,000 Charlotte Hsg. Dev. Corp.
Mtg. RB, Vantage 78 Apts.
6.60%, 7/15/21, (FHA).............. 1,493,514
1,475,000 Charlotte Stadium Parking
Facs. Proj., COP, Ser. C
6.00%, 6/1/14...................... 1,521,418
2,390,000 Cumberland Cnty. Civic Center
Proj., COP, Ser. A
6.40%, 12/1/24, (AMBAC)............ 2,612,437
920,000 Fremont Hsg. Dev. Corp. First
Lien RB, Torhunta Apts.
6.75%, 7/15/22, (FHA).............. 953,212
1,000,000 Gastonia Combined Util. Sys. RB
6.00%, 5/1/14, (MBIA).............. 1,053,050
1,000,000 Harnett Cnty., COP
6.40%, 12/1/14, (AMBAC)............ 1,093,070
1,000,000 Haywood Cnty. Indl. Facs. &
Poll. Ctrl. Fin. Auth. RB,
Champion Int'l. Corp. Proj.
6.25%, 9/1/25...................... 1,043,820
4,750,000 Martin Cnty. Indl. Facs. &
Poll. Ctrl. Fin. Auth. RB,
Solid Waste Disp.,
Weyerhauser Co.
6.80%, 5/1/24...................... 5,218,825
North Carolina Hsg. Fin. &
Dev. Auth. RB, Single Family:
3,890,000 Ser. JJ
6.15%, 3/1/11, (FHA)................. 4,061,316
1,390,000 Ser. T
7.05%, 9/1/20, (FHA)................. 1,470,425
500,000 North Carolina Med. Care
Cmnty. Hlth. Care Fac. RB,
First Mtg. Southminster
6.88%, 10/1/09..................... 529,180
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- --------------------------------------------------------------
LONG-TERM INVESTMENTS-- CONTINUED
NORTH CAROLINA-- CONTINUED
North Carolina Med. Care
Cmnty. Hosp. RB:
$1,100,000 6.13%, 6/1/10........................ $ 1,164,152
1,000,000 Duke University Hosp.
Project, Ser. C
5.25%, 6/1/17........................ 984,220
1,350,000 Rex Hosp. Proj.
6.25%, 6/1/17........................ 1,430,555
3,000,000 North Carolina Muni. Pwr.
Agcy. RB, No. 1 Catawba
Elec., Ser. B
5.00%, 1/1/20...................... 2,883,900
North Carolina Stud. Ed.
Assist. Auth. RB:
2,000,000 Ser. A
6.30%, 7/1/15........................ 2,078,540
2,375,000 Ser. C
6.35%, 7/1/16........................ 2,476,840
1,000,000 North Carolina Stud. Ed.
Assist. Auth. RB, First Mtg.
Southminister, Ser. A
6.05%, 7/1/10...................... 1,031,310
North Carolina Muni. Pwr.
Sys. Agcy. RB, Ser. A:
3,750,000 6.50%, 1/1/18, (ETM)................. 4,098,600
4,000,000 5.00%, 1/1/21........................ 3,825,640
3,000,000 Univ. North Carolina Chapel
Hill Hosp. RB
5.00%, 2/15/29..................... 2,772,480
-----------
46,204,390
-----------
TEXAS-- 7.4%
1,500,000 Dallas Fort Worth Int'l. Arpt.
Facs. Impt. Corp. RB,
American Airlines Inc.
6.00%, 11/1/14..................... 1,542,390
2,750,000 Lufkin Hlth. Facs. Dev. Corp.
RB, Mem. Hlth. Sys. of East Texas
6.88%, 2/15/26..................... 2,951,437
-----------
4,493,827
-----------
VIRGINIA-- 5.5%
James City Cnty. Indl. Dev.
Auth. RB, Residential Care
Facs., First Mtg. Williamsburg
Landing:
1,750,000 6.63%, 3/1/19........................ 1,794,573
1,500,000 6.63%, 3/1/23........................ 1,534,980
-----------
3,329,553
-----------
</TABLE>
(CONTINUED)
28
<PAGE>
(logo)
EVERGREEN
NORTH CAROLINA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
August 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS-- CONTINUED
PUERTO RICO-- 2.5%
$1,400,000 Puerto Rico Ports Auth. RB,
American Airlines Proj., Ser. A
6.25%, 6/1/26...................... $ 1,484,252
-----------
TOTAL LONG-TERM INVESTMENTS
(COST $53,335,912)................. 57,006,658
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES
- ----------
<C> <S> <C> <C>
MUTUAL FUND SHARES-- 4.5%
(COST-- $2,739,000)
2,739,000 Federated Municipal
Obligations Fund................... 2,739,000
-----------
TOTAL INVESTMENTS--
(COST $56,074,912)......... 99.0% 59,745,658
OTHER ASSETS AND
LIABILITIES-- NET.......... 1.0 609,388
------- -----------
NET ASSETS--................. 100.0% $60,355,046
------- -----------
------- -----------
</TABLE>
SUMMARY OF ABBREVIATIONS:
<TABLE>
<S> <C>
AMBAC Insured by American Municipal Bond Assurance Corporation
COP Certificates of Participation
ETM Escrowed to Maturity
FHA Insured by Federal Housing Authority
MBIA Insured by Municipal Bond Investors Assurance Corporation
RB Revenue Bond
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
29
<PAGE>
(logo)
EVERGREEN
SOUTH CAROLINA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
August 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- --------------------------------------------------------------
LONG-TERM INVESTMENTS-- 97.3%
SOUTH CAROLINA-- 97.3%
$ 400,000 Calhoun Cnty. Solid Waste
Disp. Facs. RB, Eastman Kodak
Co. Proj.
6.75%, 5/1/17...................... $ 463,836
400,000 Camden Pub. Util. RB,
Refunding & Imp.
5.50%, 3/1/17...................... 403,052
Charleston Cnty. Hlth. Facs.
RB, First Mtg. Episcopal
Church:
300,000 7.13%, 4/1/20........................ 313,836
500,000 Ser. A
6.25%, 4/1/19........................ 502,510
Darlington Cnty. IDR:
500,000 Nucor Corp. Proj., Ser. A
5.75%, 8/1/23...................... 502,180
750,000 Sonoco Products. Co. Proj.
6.00%, 4/1/26...................... 774,885
200,000 Georgetown Cnty. Wtr. & Swr.
Dist. RB
6.50%, 6/1/17...................... 203,148
600,000 Greenville Hosp. Sys. RB,
Hosp. Facs., Ser. B
5.70%, 5/1/12...................... 614,604
400,000 Greenville Mem. Auditorium
Dist. GO, Bi Lo Center Proj.
5.75%, 4/1/18, (AMBAC)............. 411,156
300,000 Horry County Arpt. RB, Ser. A
5.60%, 7/1/17...................... 299,262
400,000 Marion Cnty. RB, Hosp. Rev.
5.38%, 11/1/25..................... 383,464
Piedmont Muni. Pwr. Agcy.
Elec. RB:
800,000 6.55%, 1/1/16........................ 802,616
Refunding, Ser. A
500,000 5.75%, 1/1/24........................ 495,935
South Carolina Jobs Eco. Dev.
Auth. RB:
200,000 Oconee Mem. Hosp.
6.15%, 3/1/16...................... 208,322
400,000 Plasti Line Inc. Proj.
6.25%, 7/1/17...................... 400,620
250,000 South Carolina State Ed.
Assist. Auth. RB, Gtd. Stud.
Ln., Sub. Lien
5.88%, 9/1/07...................... 262,013
250,000 South Carolina State Ed. Facs.
Auth. RB, Furman Univ. Proj.,
Ser. A
5.50%, 10/1/16..................... 250,810
<CAPTION>
PRINCIPAL
AMOUNT VALUE
<C> <S> <C>
- --------------------------------------------------------------
LONG-TERM INVESTMENTS-- CONTINUED
SOUTH CAROLINA-- CONTINUED
South Carolina St. Hsg. Fin.
& Dev. Auth. Mtg. RB:
$ 100,000 6.55%, 7/1/15........................ $ 105,601
595,000 Heritage Crt. Apts.
6.15%, 7/1/25........................ 608,167
675,000 Ser. A
6.35%, 7/1/25........................ 700,360
South Carolina St. Hsg. Fin.
& Dev. Auth. RB:
500,000 5.95%, 7/1/29........................ 506,250
200,000 Homeownership Mtg., Ser. A
7.55%, 7/1/11........................ 211,698
265,000 Hunting Ridge Apts. RB
6.75%, 6/1/25........................ 275,931
300,000 Runaway Bay Apts. Proj.
6.13%, 12/1/15....................... 304,644
100,000 Ser. A
6.80%, 11/15/11...................... 106,098
500,000 South Carolina St. Refunding,
Ser. A
5.75%, 1/1/22, (MBIA).............. 510,110
500,000 Spartanburg County Hlth.
Facs. RB, Ser. B
5.50%, 4/15/27..................... 494,200
Three Rivers Solid Waste
Auth. RB, Capital
Appreciation:
(effective yield 5.61%) (a)
1,015,000 0.00%, 1/1/16........................ 367,968
(effective yield 5.66%) (a)
1,015,000 0.00%, 1/1/17........................ 344,907
585,000 York Cnty. IDR,
Hoechst Celanese Corp.
5.70%, 1/1/24...................... 591,248
-----------
TOTAL LONG-TERM INVESTMENTS
(COST $11,892,323)................. 12,419,431
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES
- ----------
<C> <S> <C> <C>
MUTUAL FUND SHARES-- 5.1%
(COST $652,000)
652,000 Federated Municipal
Obligations Fund................... 652,000
-----------
TOTAL INVESTMENTS--
(COST $12,544,323)......... 102.4% 13,071,431
OTHER ASSETS AND
LIABILITIES-- NET.......... (2.4) (300,901)
------- -----------
NET ASSETS--................. 100.0% $12,770,530
------- -----------
------- -----------
</TABLE>
(a) Effective yield (calculated at the date of purchase) is the yield at which
the bond accretes on an annual basis until maturity date.
SUMMARY OF ABBREVIATIONS:
AMBAC Insured by American Municipal Bond Assurance Corporation
GO General Obligation Bond
IDR Industrial Development Revenue Bond
MBIA Insured by Municipal Bond Investors Assurance Corporation
RB Revenue Bond
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
30
<PAGE>
(logo)
EVERGREEN
VIRGINIA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
August 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------
LONG-TERM INVESTMENTS-- 96.9%
<C> <S> <C>
DISTRICT OF COLUMBIA-- 1.5%
$ 250,000 Metro. Washington DC Arpt.
Auth. RB, Ser. B
5.50%, 10/1/23..................... $ 244,900
-----------
VIRGINIA-- 95.4%
Albemarle Cnty. Indl. Dev.
Auth. RB, Residential Care
Fac. Our Lady of Peace Inc.:
100,000 6.45%, 7/1/15........................ 102,953
145,000 6.63%, 7/1/21........................ 149,301
350,000 Arlington Cnty. Indl. Dev.
Auth. RB, The Nature
Conservancy, Ser. A
5.40%, 7/1/17...................... 346,612
390,000 Buena Vista Indl. Dev. Auth.
RB, Wtr. & Swr. Fac. Route 60 Proj.
6.25%, 7/15/11..................... 391,283
250,000 Charlottesville-Albemarle
Arpt. Auth. RB
6.13%, 12/1/13....................... 255,588
500,000 Chesapeake Redev. & Hsg.
Auth. RB, Multi-Family Hsg.,
Cedar Assoc., Ser. A
7.75%, 6/1/20...................... 515,730
500,000 Chesterfield Cnty. Hlth. Ctr.
Cmnty. Mtg. RB, Lucy Corr.
Nursing Home Proj.
5.88%, 12/1/21..................... 511,315
370,000 Fairfax Cnty. Indl. Dev.
Auth. RB, Hlth. Care, Inova
Hlth. Sys. Proj.
5.88%, 8/15/16..................... 381,300
500,000 Fairfax Cnty. Redev. & Hsg.
Auth. RB, Hsg. for the Elderly
6.00%, 9/1/16, (FHA)............... 514,195
Giles Cnty. Indl. Dev. Auth.
RB, Hoechst Celanese Proj.:
250,000 5.95%, 12/1/25....................... 256,632
500,000 6.45%, 5/1/26........................ 537,745
500,000 Harrisonburg Redev. & Hsg.
Auth. RB, Greens of Salem Run Proj.
6.20%, 4/1/17...................... 517,530
350,000 Isle Wright Cnty. Indl. Dev.
Auth. RB, Solid Waste Disp.
Fac. Union Camp Corp. Proj.
6.55%, 4/1/24...................... 376,873
600,000 James City Cnty. Indl. Dev.
Auth. RB, Williamsburg Landing
6.63%, 3/1/23...................... 613,992
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------------------------------------------------------------
<C> <S> <C>
LONG-TERM INVESTMENTS-- CONTINUED
VIRGINIA-- CONTINUED
$1,000,000 King & Queen Cnty. Indl. Dev.
Auth. RB, King & Queen Cnty.
Courts Complex, Ser. A
5.63%, 7/15/17..................... $ 994,600
700,000 King George Cnty. Indl. Dev.
Auth. RB, King George Cnty.
School Proj.
6.40%, 8/1/16...................... 722,722
640,000 Portsmouth Redev. & Hsg.
Auth. RB, Multi-Family Hsg., Ser. A
6.30%, 9/1/26, (FNMA).............. 667,878
Prince William Cnty. Indl.
Dev. Auth. RB:
500,000 ATCC Proj.
6.00%, 2/1/14...................... 518,400
500,000 Potomac Hosp. Corp.
6.75%, 10/1/15....................... 542,675
1,250,000 Prince William Cnty. Park
Auth. RB
6.88%, 10/15/16.................... 1,366,325
400,000 Riverside Regl. Jail Auth. RB
6.00%, 7/1/25, (MBIA).............. 420,908
750,000 Virginia Port Auth. RB,
Comwlth. Port Fund
5.90%, 7/1/16...................... 769,260
400,000 Virginia Port Auth. RB, Port Fac.
5.60%, 7/1/27, (MBIA).............. 396,528
700,000 Virginia College Bldg. Auth.
RB, Hampton Univ. Proj.
5.75%, 4/1/14...................... 715,925
Virginia St. Hsg. Dev. Auth.
RB, Comwlth. Mtg.:
Ser. A
100,000 7.10%, 1/1/17........................ 105,503
Ser. A, Subser. A-6
100,000 6.95%, 1/1/10........................ 103,957
Ser. B, Subser. B-2
500,000 6.65%, 1/1/13........................ 536,675
Ser. D, Subser. D-1
300,000 6.10%, 1/1/19........................ 311,202
Ser. F, Subser. F-1
300,000 6.25%, 7/1/12........................ 314,148
Virginia St. Hsg. Dev. Auth.
RB, Multi-Family Hsg.:
Ser. H
300,000 6.35%, 11/1/11....................... 313,749
Ser. O
500,000 6.05%, 11/1/17....................... 507,330
</TABLE>
(CONTINUED)
31
<PAGE>
(logo)
EVERGREEN
VIRGINIA MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
August 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------
LONG-TERM INVESTMENTS-- CONTINUED
<C> <S> <C>
VIRGINIA-- CONTINUED
$ 300,000 West Point Indl. Dev. Auth.
RB, Solid Waste Disp. Fac.,
Chesapeake Corp. Proj., Ser. B
6.25%, 3/1/19...................... $ 314,955
-----------
15,093,789
-----------
TOTAL LONG-TERM INVESTMENTS
(COST $14,771,682)................. 15,338,689
-----------
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C> <C>
SHARES VALUE
- ---------------------------------------------------------------
MUTUAL FUND SHARES-- 1.5%
(COST $232,000)
232,000 Federated Municipal
Obligations Fund................... $ 232,000
-----------
TOTAL INVESTMENTS--
(COST $15,003,682)......... 98.4% 15,570,689
OTHER ASSETS AND
LIABILITIES-- NET.......... 1.6 254,132
------- -----------
NET ASSETS--................. 100.0% $15,824,821
------- -----------
------- -----------
</TABLE>
SUMMARY OF ABBREVIATIONS:
<TABLE>
<S> <C>
FHA Insured by Federal Housing Authority
FNMA Insured by Federal National Mortgage Association
MBIA Insured by Municipal Bond Investors Assurance Corporation
RB Revenue Bond
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
32
<PAGE>
(logo)
EVERGREEN
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
August 31, 1997
<TABLE>
<CAPTION>
(logo) (logo) (logo) (logo) (logo)
FLORIDA NORTH SOUTH
HIGH INCOME FLORIDA GEORGIA CAROLINA CAROLINA
FUND FUND FUND FUND FUND
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments at market value (identified cost--
$185,025,116, $150,941,611, $13,281,033,
$56,074,912, $12,544,323 and $15,003,682,
respectively).................................. $191,997,078 $159,112,037 $14,112,848 $59,745,658 $13,071,431
Cash............................................. 0 464 465 0 146
Interest receivable.............................. 3,392,928 2,577,016 166,405 854,839 187,334
Receivable for Fund shares sold.................. 1,875,061 784,613 0 7,000 38,500
Unamortized organization expenses................ 14,443 0 0 0 0
Prepaid expenses and other assets................ 25,818 7,850 11,190 2,228 7,165
- --------------------------------------------------------------------------------------------------------------------------
Total assets................................... 197,305,328 162,481,980 14,290,908 60,609,725 13,304,576
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Payable for investments purchased................ 6,805,891 0 0 0 502,865
Dividends payable................................ 427,507 432,405 12,954 56,887 17,691
Distribution fee payable......................... 109,586 45,272 8,737 53,518 5,495
Payable for Fund shares redeemed................. 96,254 78,460 10,000 86,192 0
Due to related parties........................... 43,008 83,649 463 27,909 66
Accrued custodian fees........................... 9,000 13,200 1,300 9,715 960
Due to custodian................................. 3,970 0 0 0 0
Accrued expenses and other liabilities........... 66,931 25,424 5,377 20,458 6,969
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities.............................. 7,562,147 678,410 38,831 254,679 534,046
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS......................................... $189,743,181 $161,803,570 $14,252,077 $60,355,046 $12,770,530
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS REPRESENTED BY
Paid-in capital.................................. $183,979,565 $150,128,843 $14,019,261 $60,199,042 $12,209,433
Undistributed net investment income.............. 71,079 102,244 3,588 0 2,439
Accumulated net realized gain (loss) on
investments.................................... (1,279,425 ) 3,402,057 (602,587) (3,514,742) 31,550
Net unrealized appreciation on investments....... 6,971,962 8,170,426 831,815 3,670,746 527,108
- --------------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS............................... $189,743,181 $161,803,570 $14,252,077 $60,355,046 $12,770,530
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF
Class A.......................................... $119,942,452 $105,672,609 $ 2,201,213 $ 8,114,829 $ 1,024,797
Class B.......................................... 63,474,546 31,281,385 10,870,454 48,197,720 4,734,195
Class Y.......................................... 6,326,183 24,849,576 1,180,410 4,042,497 7,011,538
- --------------------------------------------------------------------------------------------------------------------------
$189,743,181 $161,803,570 $14,252,077 $60,355,046 $12,770,530
- --------------------------------------------------------------------------------------------------------------------------
SHARES OUTSTANDING
Class A.......................................... 11,013,506 10,589,864 222,411 782,431 101,700
Class B.......................................... 5,828,551 3,134,781 1,098,398 4,647,049 469,801
Class Y.......................................... 580,894 2,490,213 119,266 389,762 695,799
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE
Class A.......................................... $ 10.89 $ 9.98 $ 9.90 $ 10.37 $ 10.08
- --------------------------------------------------------------------------------------------------------------------------
Class A-- Offering price (based on sales charge
of 4.75%)...................................... $ 11.43 $ 10.48 $ 10.39 $ 10.89 $ 10.58
- --------------------------------------------------------------------------------------------------------------------------
Class B.......................................... $ 10.89 $ 9.98 $ 9.90 $ 10.37 $ 10.08
- --------------------------------------------------------------------------------------------------------------------------
Class Y.......................................... $ 10.89 $ 9.98 $ 9.90 $ 10.37 $ 10.08
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(logo)
VIRGINIA
FUND
- ---------------------------------------------------
<S> <C>
ASSETS
Investments at market value (identified cost--
$185,025,116, $150,941,611, $13,281,033,
$56,074,912, $12,544,323 and $15,003,682,
respectively).................................. $15,570,689
Cash............................................. 617
Interest receivable.............................. 262,744
Receivable for Fund shares sold.................. 36,370
Unamortized organization expenses................ 0
Prepaid expenses and other assets................ 6,723
- ---------------------------------------------------
Total assets................................... 15,877,143
- ---------------------------------------------------
LIABILITIES
Payable for investments purchased................ 0
Dividends payable................................ 25,082
Distribution fee payable......................... 9,602
Payable for Fund shares redeemed................. 0
Due to related parties........................... 10,951
Accrued custodian fees........................... 1,500
Due to custodian................................. 0
Accrued expenses and other liabilities........... 5,187
- ---------------------------------------------------
Total liabilities.............................. 52,322
- ---------------------------------------------------
NET ASSETS......................................... $15,824,821
- ---------------------------------------------------
NET ASSETS REPRESENTED BY
Paid-in capital.................................. $15,456,526
Undistributed net investment income.............. 6,150
Accumulated net realized gain (loss) on
investments.................................... (204,862)
Net unrealized appreciation on investments....... 567,007
- ---------------------------------------------------
TOTAL NET ASSETS............................... $15,824,821
- ---------------------------------------------------
NET ASSETS CONSIST OF
Class A.......................................... $ 2,933,967
Class B.......................................... 6,695,383
Class Y.......................................... 6,195,471
- ---------------------------------------------------
$15,824,821
- ---------------------------------------------------
SHARES OUTSTANDING
Class A.......................................... 291,836
Class B.......................................... 665,945
Class Y.......................................... 616,230
- ---------------------------------------------------
NET ASSET VALUE PER SHARE
Class A.......................................... $ 10.05
- ---------------------------------------------------
Class A-- Offering price (based on sales charge
of 4.75%)...................................... $ 10.55
- ---------------------------------------------------
Class B.......................................... $ 10.05
- ---------------------------------------------------
Class Y.......................................... $ 10.05
- ---------------------------------------------------
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
33
<PAGE>
(logo)
EVERGREEN
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
Year Ended August 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
(logo) (logo) (logo) (logo) (logo) (logo)
FLORIDA NORTH SOUTH
HIGH INCOME FLORIDA GEORGIA CAROLINA CAROLINA VIRGINIA
FUND FUND FUND FUND FUND FUND
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Interest......................................... $9,126,685 $ 9,416,396 $ 786,503 $3,595,558 $ 682,195 $ 848,887
- -----------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Management fee................................... 813,790 791,322 66,245 305,634 58,299 70,972
Distribution Plan expenses....................... 618,859 574,097 101,554 510,687 47,664 68,701
Transfer agent fees.............................. 108,023 105,456 29,963 58,241 29,051 38,992
Custodian fees................................... 64,433 68,109 39,566 52,247 40,242 39,704
Administrative services fees..................... 52,864 65,916 5,267 24,354 4,596 9,900
Professional fees................................ 26,226 17,894 16,979 16,902 16,082 15,516
Registration and filing fees..................... 73,818 24,152 23,623 23,925 21,552 21,315
Trustees' fees and expenses...................... 3,268 4,827 1,308 1,833 700 888
Organization expenses............................ 3,544 10,301 9,791 26,702 26,658 8,886
Other............................................ 35,761 42,017 16,209 16,423 25,879 18,370
Fee waivers and/or expense reimbursements........ (330,629) (272,815) (117,219) 0 (137,607) (114,180)
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses................................. 1,469,957 1,431,276 193,286 1,036,948 133,116 179,064
Less: Indirectly paid expenses................... (3,474) (81) (281) (298) (37) (596)
- -----------------------------------------------------------------------------------------------------------------------------------
Net expenses................................... 1,466,483 1,431,195 193,005 1,036,650 133,079 178,468
- -----------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME............................ 7,660,202 7,985,201 593,498 2,558,908 549,116 670,419
- -----------------------------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments................. 145,751 4,253,020 84,767 297,379 42,822 177,142
Net change in unrealized appreciation
(depreciation) on investments.................. 6,008,472 1,314,673 354,644 2,148,174 396,963 361,929
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on
investments.................................... 6,154,223 5,567,693 439,411 2,445,553 439,785 539,071
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS..................................... $13,814,425 $13,552,894 $1,032,909 $5,004,461 $ 988,901 $1,209,490
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
34
<PAGE>
(logo)
EVERGREEN
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended August 31, 1997
<TABLE>
<CAPTION>
(logo) (logo) (logo) (logo) (logo)
FLORIDA NORTH SOUTH
HIGH INCOME FLORIDA GEORGIA CAROLINA CAROLINA
FUND FUND FUND FUND FUND
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income............................ $ 7,660,202 $ 7,985,201 $ 593,498 $ 2,558,908 $ 549,116
Net realized gain on investments................. 145,751 4,253,020 84,767 297,379 42,822
Net change in unrealized appreciation
(depreciation) on investments.................. 6,008,472 1,314,673 354,644 2,148,174 396,963
- --------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations................................... 13,814,425 13,552,894 1,032,909 5,004,461 988,901
- --------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A........................................ (5,491,178) (5,824,608) (110,152) (403,703) (44,289)
Class B........................................ (1,956,616) (1,295,519) (408,815) (2,042,140) (187,294)
Class Y........................................ (212,408) (960,612) (75,880) (201,277) (318,010)
Net realized gains on investments:
Class A........................................ 0 (665,344) 0 0 (1,178)
Class B........................................ 0 (171,649) 0 0 (5,778)
Class Y........................................ 0 (81,865) 0 0 (7,006)
- --------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders............ (7,660,202) (8,999,597) (594,847) (2,647,120) (563,555)
- --------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold........................ 102,384,802 27,824,216 3,285,353 5,860,717 4,936,067
Proceeds from reinvestment of distributions...... 3,354,164 2,877,333 422,287 1,817,312 346,366
Payment for shares redeemed...................... (19,605,169) (30,281,998) (2,738,013) (10,822,725) (2,614,880)
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from capital share transactions.............. 86,133,797 419,551 969,627 (3,144,696) 2,667,553
- --------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets...... 92,288,020 4,972,848 1,407,689 (787,355) 3,092,899
NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------
Beginning of year................................ 97,455,161 156,830,722 12,844,388 61,142,401 9,677,631
- --------------------------------------------------------------------------------------------------------------------------
END OF YEAR...................................... $189,743,181 $161,803,570 $14,252,077 $60,355,046 $12,770,530
- --------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income................ $ 71,079 $ 102,244 $ 3,588 $ 0 $ 2,439
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(logo)
VIRGINIA
FUND
- ---------------------------------------------------
<S> <C>
OPERATIONS
Net investment income............................ $ 670,419
Net realized gain on investments................. 177,142
Net change in unrealized appreciation
(depreciation) on investments.................. 361,929
- ---------------------------------------------------
Net increase in net assets resulting from
operations................................... 1,209,490
- ---------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income:
Class A........................................ (142,824)
Class B........................................ (257,414)
Class Y........................................ (271,563)
Net realized gains on investments:
Class A........................................ 0
Class B........................................ 0
Class Y........................................ 0
- ---------------------------------------------------
Total distributions to shareholders............ (671,801)
- ---------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold........................ 4,600,357
Proceeds from reinvestment of distributions...... 369,743
Payment for shares redeemed...................... (2,804,295)
- ---------------------------------------------------
Net increase (decrease) in net assets resulting
from capital share transactions.............. 2,165,805
- ---------------------------------------------------
Total increase (decrease) in net assets...... 2,703,494
NET ASSETS
- ---------------------------------------------------
Beginning of year................................ 13,121,327
- ---------------------------------------------------
END OF YEAR...................................... $15,824,821
- ---------------------------------------------------
Undistributed net investment income................ $ 6,150
- ---------------------------------------------------
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
35
<PAGE>
(logo)
EVERGREEN
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended August 31, 1996
<TABLE>
<CAPTION>
(logo) (logo) (logo) (logo) (logo)
FLORIDA NORTH SOUTH
HIGH INCOME FLORIDA GEORGIA CAROLINA CAROLINA
FUND FUND FUND FUND FUND
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income............................ $4,708,138 $ 8,509,981 $ 565,522 $ 2,585,742 $ 384,455
Net realized gain (loss) on investments.......... (67,136) 1,550,230 28,904 483,051 10,377
Net change in unrealized appreciation
(depreciation) on investments.................. (42,880) (2,163,335) 57,035 (416,432) 19,665
- -------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations................................... 4,598,122 7,896,876 651,461 2,652,361 414,497
- -------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income
Class A........................................ (4,083,337) (6,726,492) (100,626) (396,192) (38,206)
Class B........................................ (562,849) (1,290,196) (357,853) (2,003,550) (168,950)
Class Y........................................ (61,952) (417,123) (109,101) (147,923) (177,721)
- -------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders............ (4,708,138) (8,433,811) (567,580) (2,547,665) (384,877)
- -------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold........................ 51,887,683 23,857,675 5,651,629 10,964,230 4,780,175
Proceeds from reinvestment of distributions...... 1,815,929 2,678,816 366,974 1,752,076 251,384
Payment for shares redeemed...................... (18,826,666) (36,571,005) (4,232,687) (10,003,099) (1,208,640)
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from capital share transactions.............. 34,876,946 (10,034,514) 1,785,916 2,713,207 3,822,919
- -------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets...... 34,766,930 (10,571,449) 1,869,797 2,817,903 3,852,539
NET ASSETS
Beginning of year................................ 62,688,231 167,402,171 10,974,591 58,324,498 5,825,092
- -------------------------------------------------------------------------------------------------------------------------
END OF YEAR...................................... $97,455,161 $156,830,722 $12,844,388 $61,142,401 $9,677,631
- -------------------------------------------------------------------------------------------------------------------------
Undistributed net investment income (distributions
in excess of net investment income).............. $ (7,223) $ 98,832 $ 1,349 $ 88,212 $ 477
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(logo)
VIRGINIA
FUND
- ---------------------------------------------------
<S> <C>
OPERATIONS
Net investment income............................ $ 458,280
Net realized gain (loss) on investments.......... (98,854)
Net change in unrealized appreciation
(depreciation) on investments.................. 47,564
- ---------------------------------------------------
Net increase in net assets resulting from
operations................................... 406,990
- ---------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income
Class A........................................ (117,625)
Class B........................................ (238,415)
Class Y........................................ (105,354)
- ---------------------------------------------------
Total distributions to shareholders............ (461,394)
- ---------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold........................ 6,625,000
Proceeds from reinvestment of distributions...... 309,870
Payment for shares redeemed...................... (1,791,146)
- ---------------------------------------------------
Net increase (decrease) in net assets resulting
from capital share transactions.............. 5,143,724
- ---------------------------------------------------
Total increase (decrease) in net assets...... 5,089,320
NET ASSETS
Beginning of year................................ 8,032,007
- ---------------------------------------------------
END OF YEAR...................................... $13,121,327
- ---------------------------------------------------
Undistributed net investment income (distributions
in excess of net investment income).............. $ 1,382
- ---------------------------------------------------
</TABLE>
SEE COMBINED NOTES TO FINANCIAL STATEMENTS.
36
<PAGE>
(logo)
EVERGREEN
- --------------------------------------------------------------------------------
COMBINED NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Evergreen State Tax Free Funds consist of Evergreen Florida High Income
Municipal Bond Fund ("Florida High Income Fund"), Evergreen Florida Municipal
Bond Fund ("Florida Fund"), Evergreen Georgia Municipal Bond Fund ("Georgia
Fund"), Evergreen North Carolina Municipal Bond Fund ("North Carolina Fund"),
Evergreen South Carolina Municipal Bond Fund ("South Carolina Fund") and
Evergreen Virginia Municipal Bond Fund ("Virginia Fund"), (collectively, the
"Funds"). The Funds are registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as non-diversified, open-end management investment
companies. Each Fund, except Florida High Income Fund, is a separate series of
Evergreen Investment Trust. Florida High Income Fund is a series of Evergreen
Municipal Trust.
The Funds offer Class A, Class B and Class Y shares. Class A shares are sold
with a maximum front-end sales charge of 4.75%. Class B shares are sold without
a front-end sales charge, but pay a higher ongoing distribution fee than Class
A. Class B shares are sold subject to a contingent deferred sales charge that is
payable upon redemption and decreases depending on how long the shares have been
held. Class Y shares are sold at net asset value and are not subject to
contingent deferred sales charges or distribution fees. Class Y shares are sold
only to investment advisory clients of First Union Corporation ("First Union")
and its affiliates, certain institutional investors or Class Y shareholders of
record of certain other funds managed by First Union and its affiliates as of
December 30, 1994.
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles, which
require management to make estimates and assumptions that affect amounts
reported herein. Actual results could differ from these estimates.
A. VALUATION OF SECURITIES
An independent pricing service values each Fund's municipal bonds at fair value
using a variety of factors which may include yield, liquidity, interest rate
risk, credit quality, coupon, maturity and type of issue. Securities for which
valuations are not available from an independent pricing service, including
restricted securities, are valued at fair value as determined in good faith
according to procedures established by the Board of Trustees.
Short-term investments with remaining maturities of 60 days or less are carried
at amortized cost, which approximates market value.
B. SECURITY TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are accounted for no later than one business day after
the trade date. Realized gains and losses are computed on the identified cost
basis. Interest income is recorded on the accrual basis and includes accretion
of discounts and amortization of premiums.
C. FEDERAL INCOME TAXES
The Funds have qualified and intend to continue to qualify as regulated
investment companies under the Internal Revenue Code of 1986, as amended (the
"Code"). Thus, the Funds will not incur any federal income tax liability since
they are expected to distribute all of their net investment company taxable
income, net tax-exempt income and net capital gains, if any, to their
shareholders. The Funds also intend to avoid any excise tax liability by making
the required distributions under the Code. Accordingly, no provision for federal
income taxes is required. To the extent that realized capital gains can be
offset by capital loss carryforwards, it is each Fund's policy not to distribute
such gains.
D. DISTRIBUTIONS
Distributions from net investment income for each Fund are declared daily and
paid monthly. Distributions from net realized capital gains, if any, are paid at
least annually. Distributions to shareholders are recorded at the close of
business on the ex-dividend date.
Income and capital gains distributions to shareholders are determined in
accordance with income tax regulations, which may differ from generally accepted
accounting principles. The significant differences between financial statement
amounts available for distributions and distributions made in accordance with
income tax regulations are primarily due to differing treatment of market
discount on securities.
E. CLASS ALLOCATIONS
Income, expenses (other than class specific expenses) and realized and
unrealized gains and losses are prorated among the classes based on the relative
net assets of each class. Currently, class specific expenses are limited to
expenses incurred under the Distribution Plans for each class.
F. ORGANIZATION EXPENSES
Organization expenses for the Florida High Income Fund are amortized to
operations over a five-year period beginning June 30, 1995 on a straight-line
basis. In the event any of the initial shares of the Fund are redeemed by any
holder during the five-year amortization period, redemption proceeds will be
reduced by any unamortized organization expenses in the same proportion as the
number of initial shares being redeemed bears to the number of initial shares
outstanding at the time of the redemption.
37
<PAGE>
(logo)
EVERGREEN
- --------------------------------------------------------------------------------
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Organization expenses of the Florida, Georgia, North Carolina, South Carolina
and Virginia Funds were initially borne by the Funds' prior administrator. As a
result of a change in the administration agreement, First Union purchased the
remaining unreimbursed organizational expenses from the prior administrator. As
of, and for the year ended August 31, 1997, the Funds paid and have a remaining
liability to First Union as follows:
<TABLE>
<CAPTION>
REMAINING
PAYMENTS LIABILITY
<S> <C> <C>
- -----------------------------------------------------------------------
Florida Fund................................... $10,301 $11,093
Georgia Fund................................... 9,791 9,520
North Carolina Fund............................ 26,702 0
South Carolina Fund............................ 26,658 30,466
Virginia Fund.................................. 8,886 9,569
</TABLE>
2. CAPITAL SHARE TRANSACTIONS
Each of the Funds has an unlimited number of shares of beneficial interest with
a par value of $0.0001 authorized. Shares of beneficial interest of the Funds
are currently divided into Class A, Class B and Class Y. Transactions in shares
of the Funds were as follows:
<TABLE>
<CAPTION> YEAR ENDED AUGUST 31,
1997 1996
-------------------------- --------------------------
FLORIDA HIGH INCOME FUND SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS A
Shares sold............................................................ 4,908,227 $ 52,353,817 3,124,792 $ 32,820,683
Shares issued in reinvestment of distributions......................... 218,163 2,333,137 141,897 1,492,720
Shares redeemed........................................................ (1,431,303) (15,236,336) (1,673,161) (17,673,622)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase........................................................... 3,695,087 $ 39,450,618 1,593,528 $ 16,639,781
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS B
Shares sold............................................................ 4,247,193 $ 45,291,821 1,606,756 $ 16,929,901
Shares issued in reinvestment of distributions......................... 89,841 961,874 29,466 309,488
Shares redeemed........................................................ (352,500) (3,764,886) (93,856) (985,765)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase........................................................... 3,984,534 $ 42,488,809 1,542,366 $ 16,253,624
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS Y
Shares sold............................................................ 443,071 $ 4,739,164 203,571 $ 2,137,099
Shares issued in reinvestment of distributions......................... 5,518 59,153 1,303 13,721
Shares redeemed........................................................ (56,700) (603,947) (15,879) (167,279)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase........................................................... 391,889 $ 4,194,370 188,995 $ 1,983,541
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FLORIDA FUND
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS A
Shares sold............................................................ 680,065 $ 6,676,415 647,176 $ 6,349,216
Shares issued in reinvestment of distributions......................... 200,942 1,980,889 198,575 1,954,093
Shares redeemed........................................................ (2,225,426) (21,851,674) (2,919,201) (28,758,982)
- ----------------------------------------------------------------------------------------------------------------------------------
Net decrease........................................................... (1,344,419) $(13,194,370) (2,073,450) $(20,455,673)
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS B
Shares sold............................................................ 586,099 $ 5,756,602 720,789 $ 7,109,005
Shares issued in reinvestment of distributions......................... 77,038 759,420 67,958 668,617
Shares redeemed........................................................ (503,356) (4,943,204) (621,849) (6,110,433)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase........................................................... 159,781 $ 1,572,818 166,898 $ 1,667,189
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS Y
Shares sold............................................................ 1,566,132 $ 15,391,199 1,061,203 $ 10,399,454
Shares issued in reinvestment of distributions......................... 13,894 137,024 5,711 56,106
Shares redeemed........................................................ (353,969) (3,487,120) (172,594) (1,701,590)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase........................................................... 1,226,057 $ 12,041,103 894,320 $ 8,753,970
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
(logo)
EVERGREEN
- --------------------------------------------------------------------------------
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION> YEAR ENDED AUGUST 31,
1997 1996
-------------------------- --------------------------
GEORGIA FUND SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS A
Shares sold............................................................ 58,988 $ 571,356 37,924 $ 365,163
Shares issued in reinvestment of distributions......................... 7,041 68,727 7,779 75,126
Shares redeemed........................................................ (47,699) (464,268) (63,160) (605,087)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)................................................ 18,330 $ 175,815 (17,457) $ (164,798)
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS B
Shares sold............................................................ 234,534 $ 2,292,070 268,620 $ 2,600,226
Shares issued in reinvestment of distributions......................... 30,017 293,086 26,313 253,826
Shares redeemed........................................................ (134,483) (1,307,027) (122,257) (1,183,493)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase........................................................... 130,068 $ 1,278,129 172,676 $ 1,670,559
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS Y
Shares sold............................................................ 43,212 $ 421,927 280,783 $ 2,686,240
Shares issued in reinvestment of distributions......................... 6,202 60,474 3,963 38,022
Shares redeemed........................................................ (99,306) (966,718) (256,913) (2,444,107)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)................................................ (49,892) $ (484,317) 27,833 $ 280,155
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NORTH CAROLINA FUND
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS A
Shares sold............................................................ 104,597 $ 1,069,375 118,007 $ 1,198,058
Shares issued in reinvestment of distributions......................... 27,845 283,991 27,147 275,346
Shares redeemed........................................................ (150,887) (1,540,570) (176,511) (1,780,168)
- ----------------------------------------------------------------------------------------------------------------------------------
Net decrease........................................................... (18,445) $ (187,204) (31,357) $ (306,764)
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS B
Shares sold............................................................ 387,839 $ 3,937,543 635,229 $ 6,447,862
Shares issued in reinvestment of distributions......................... 148,184 1,511,443 144,603 1,466,473
Shares redeemed........................................................ (839,134) (8,524,353) (759,219) (7,700,019)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)................................................ (303,111) $ (3,075,367) 20,613 $ 214,316
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS Y
Shares sold............................................................ 84,295 $ 853,799 327,111 $ 3,318,310
Shares issued in reinvestment of distributions......................... 2,138 21,878 1,016 10,257
Shares redeemed........................................................ (74,420) (757,802) (51,457) (522,912)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase........................................................... 12,013 $ 117,875 276,670 $ 2,805,655
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SOUTH CAROLINA FUND
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS A
Shares sold............................................................ 41,892 $ 414,564 31,170 $ 305,932
Shares issued in reinvestment of distributions......................... 2,239 22,308 1,829 17,842
Shares redeemed........................................................ (29,248) (286,768) (9,800) (95,582)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase........................................................... 14,883 $ 150,104 23,199 $ 228,192
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS B
Shares sold............................................................ 55,162 $ 544,288 109,335 $ 1,062,828
Shares issued in reinvestment of distributions......................... 14,381 142,689 12,969 126,461
Shares redeemed........................................................ (41,753) (410,305) (49,850) (485,446)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase........................................................... 27,790 $ 276,672 72,454 $ 703,843
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS Y
Shares sold............................................................ 400,553 $ 3,977,215 349,743 $ 3,411,415
Shares issued in reinvestment of distributions......................... 18,276 181,369 10,998 107,081
Shares redeemed........................................................ (193,151) (1,917,807) (65,167) (627,612)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase........................................................... 225,678 $ 2,240,777 295,574 $ 2,890,884
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
(logo)
EVERGREEN
- --------------------------------------------------------------------------------
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION> YEAR ENDED AUGUST 31,
1997 1996
-------------------------- --------------------------
VIRGINIA FUND SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS A
Shares sold............................................................ 52,270 $ 516,653 105,025 $ 1,032,730
Shares issued in reinvestment of distributions......................... 12,391 122,884 10,186 99,877
Shares redeemed........................................................ (71,543) (705,708) (21,674) (211,176)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)................................................ (6,882) $ (66,171) 93,537 $ 921,431
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS B
Shares sold............................................................ 127,982 $ 1,276,030 145,062 $ 1,427,003
Shares issued in reinvestment of distributions......................... 18,384 182,440 19,108 187,592
Shares redeemed........................................................ (96,368) (959,225) (74,064) (721,093)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase........................................................... 49,998 $ 499,245 90,106 $ 893,502
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS Y
Shares sold............................................................ 284,030 $ 2,807,674 425,577 $ 4,165,267
Shares issued in reinvestment of distributions......................... 6,490 64,419 2,286 22,401
Shares redeemed........................................................ (114,905) (1,139,362) (87,094) (858,877)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase........................................................... 175,615 $ 1,732,731 340,769 $ 3,328,791
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
3. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities (excluding
short-term securities) were as follows for the year ended August 31, 1997:
<TABLE>
<CAPTION>
COST OF PROCEEDS
PURCHASES FROM SALES
<S> <C> <C>
- -------------------------------------------------------------------------
Florida High Income Fund................... $127,507,828 $43,933,866
Florida Fund............................... 62,562,977 67,138,568
Georgia Fund............................... 4,761,178 4,200,233
North Carolina Fund........................ 29,901,470 34,034,440
South Carolina Fund........................ 9,501,226 6,901,828
Virginia Fund.............................. 12,133,746 10,145,848
</TABLE>
On August 31, 1997, the tax cost and composition of gross unrealized
appreciation and depreciation of investment securities based on the aggregate
cost of investments for federal income tax purposes was as follows:
<TABLE>
<CAPTION>
GROSS GROSS
TAX UNREALIZED UNREALIZED NET UNREALIZED
COST APPRECIATION DEPRECIATION APPRECIATION
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Florida High Income Fund................... $185,025,116 $7,034,248 $(62,286) $6,971,962
Florida Fund............................... 150,941,611 8,172,823 (2,397) 8,170,426
Georgia Fund............................... 13,281,033 831,815 0 831,815
North Carolina Fund........................ 56,074,912 3,670,746 0 3,670,746
South Carolina Fund........................ 12,544,323 527,108 0 527,108
Virginia Fund.............................. 15,003,682 568,192 (1,185) 567,007
</TABLE>
As of August 31, 1997, the Funds had capital loss carryovers for federal income
tax purposes as follows:
<TABLE>
<CAPTION>
EXPIRATION
---------------------------------
2002 2003 2004
---------- -------- -------
<S> <C> <C> <C>
Florida High Income Fund............................................ $ 577,000 $635,000 $64,000
Georgia Fund........................................................ -- 603,000 --
North Carolina Fund................................................. 3,515,000 -- --
Virginia Fund....................................................... 175,000 30,000 --
</TABLE>
40
<PAGE>
(logo)
EVERGREEN
- --------------------------------------------------------------------------------
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. DISTRIBUTION PLANS
Evergreen Keystone Distributor, Inc. ("EKD"), a wholly-owned subsidiary of The
BISYS Group Inc. ("BISYS") serves as the principal underwriter for each of the
Funds.
Each Fund has adopted a distribution plan for each class of shares as allowed by
Rule 12b-1 of the 1940 Act. Distribution plans permit each Fund to reimburse its
principal underwriter for costs related to selling shares of the Fund and for
various other services. These costs, which consist primarily of commissions and
services fees to broker-dealers who sell shares of the Fund, are paid by
shareholders through expenses called "Distribution Plan expenses." Each class,
except Class Y, currently pays an annual service fee equal to 0.25% of the
average daily net assets of the class. Class B also presently pays an annual
distribution fee equal to 0.75% of the average daily net assets of the class.
Distribution Plan expenses are calculated daily and paid monthly.
The Funds have entered into a Shareholder Services Agreement with First Union
Brokerage Services ("FUBS"), an affiliate of First Union, whereby they will
compensate FUBS up to an annual fee of 0.25% of Class B average daily net
assets, as referred to above, for certain services provided to shareholders
and/or maintenance of shareholder accounts relating to each of the Fund's Class
B shares.
During the year ended August 31, 1997, amounts paid or accrued to EKD and fees
waived, if any, pursuant to each Fund's Class A and Class B Distribution Plans
were as follows:
<TABLE>
<CAPTION>
FEES
WAIVED
CLASS A CLASS B CLASS A
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
Florida High Income Fund............................................ $235,662 $383,197 $ 0
Florida Fund........................................................ 275,983 298,114 191,541
Georgia Fund........................................................ 5,499 96,055 0
North Carolina Fund................................................. 20,523 490,164 0
South Carolina Fund................................................. 2,271 45,393 0
Virginia Fund....................................................... 7,230 61,471 0
</TABLE>
EKD intends, but is not obligated, to continue to pay distribution costs that
exceed the current annual payments from the Fund. EKD intends to seek full
payment of such distribution costs from the Fund at such time in the future as,
and to the extent that, payment thereof by the Class B shares would be within
permitted limits.
EKD has advised the Funds that it has retained front-end sales charges resulting
from the sales of Class A shares during the year ended August 31, 1997 as
follows:
<TABLE>
<S> <C>
Florida High Income Fund................................ $34,454
Florida Fund............................................ 22,335
Georgia Fund............................................ 2,488
North Carolina Fund..................................... 2,377
South Carolina Fund..................................... 710
Virginia Fund........................................... 1,596
</TABLE>
Contingent deferred sales charges paid by redeeming shareholders are paid to
EKD.
5. INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT AND OTHER AFFILIATED
TRANSACTIONS
The Capital Management Group of First Union National Bank of North Carolina
("CMG"), a subsidiary of First Union, serves as the investment adviser to each
Fund and is paid a management fee that is computed daily and paid monthly. CMG
is paid at an annual rate of 0.50% of the average daily net assets of the
Florida Fund, Georgia Fund, North Carolina Fund, South Carolina Fund and
Virginia Fund. CMG is paid at an annual rate of 0.60% of the average daily net
assets of the Florida High Income Fund.
For each Fund, Evergreen Keystone Investment Services, Inc. ("EKIS"), a
subsidiary of First Union, is the administrator. Prior to March 11, 1997,
Evergreen Asset Management Corp. ("Evergreen Asset"), a wholly-owned subsidiary
of First Union, was the administrator. Furman Selz LLC ("Furman Selz") was the
sub-administrator through December 31, 1996. Effective January 1, 1997, BISYS
acquired Furman Selz' mutual fund unit and accordingly BISYS Fund Services
became sub-administrator to each of the Funds. The administrator and
sub-administrator for each Fund are entitled to an annual fee based on the
average daily net assets of the funds administered by EKIS for which First Union
or its investment advisory subsidiaries are also the investment advisers. The
administration fee is calculated by applying percentage rates, which start at
0.05% and decline to 0.01% per annum as net assets increase, to the average
daily net asset value of each Fund. The sub-administration fee is calculated by
applying percentage rates, which start at 0.01% and decline to 0.004% per annum
as net assets increase, to the average daily net asset value of each Fund.
BISYS, as sub-administrator, compensates the officers of each Fund.
41
<PAGE>
(logo)
EVERGREEN
- --------------------------------------------------------------------------------
COMBINED NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the year ended August 31, 1997, investment management fees and
administration fees were waived and/or expenses reimbursed as follows:
<TABLE>
<CAPTION>
MANAGEMENT
FEES ADMINISTRATION EXPENSES
WAIVED FEES WAIVED REIMBURSED
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Florida High Income Fund............................... $330,629 $ 0 $ 0
Florida Fund........................................... 81,274 0 0
Georgia Fund........................................... 66,245 4,027 46,947
South Carolina Fund.................................... 58,299 3,810 75,498
Virginia Fund.......................................... 70,972 4,281 38,927
</TABLE>
During the year ended August 31, 1997, the Funds paid or accrued to EKIS the
following amounts for certain administrative services:
<TABLE>
<CAPTION>
<S> <C>
Florida High Income Fund................................ $43,778
Florida Fund............................................ 52,171
Georgia Fund............................................ 4,368
North Carolina Fund..................................... 20,199
South Carolina Fund..................................... 3,810
Virginia Fund........................................... 8,940
</TABLE>
Effective May 5, 1997, Evergreen Keystone Service Company ("EKSC"), a
wholly-owned subsidiary of Keystone Investment Management Company ("Keystone"),
a subsidiary of First Union, began providing transfer and dividend disbursing
agent services for the Funds that were formerly provided by State Street Bank
and Trust Company ("State Street").
Officers of the Funds and affiliated Trustees receive no compensation directly
from the Funds.
6. EXPENSE OFFSET ARRANGEMENT
The Funds have entered into an expense offset arrangement with their custodian.
The assets deposited with the custodian under this expense offset arrangement
could have been invested in income-producing assets.
7. DEFERRED TRUSTEES' FEES
Each Independent Trustee of each Fund may defer any or all compensation related
to performance of their duties as Trustees. The Trustees' deferred balances are
allocated to deferral accounts which are included in the accrued expenses for
the Fund. The investment performance of the deferral accounts is based on the
investment performance of certain Evergreen Funds. Any gains earned or losses
incurred in the deferral accounts are reported in the Funds' Trustees' fees and
expenses. Trustees will be paid either in one lump sum or in quarterly
installments for up to ten years at their election, not earlier than either the
year in which the Trustee ceases to be a member of the Board of Trustees or
January 1, 2000. As of August 31, 1997, the value of the Trustees deferral
account for each Fund was as follows:
<TABLE>
<S> <C>
Florida High Income Fund................................. $6,242
Florida Fund............................................. 6,265
Georgia Fund............................................. 512
North Carolina Fund...................................... 2,436
South Carolina Fund...................................... 388
Virginia Fund............................................ 480
</TABLE>
8. FINANCING AGREEMENT
On October 31, 1996, a financing agreement between all of the Evergreen Funds
and State Street, Societe Generale and ABN Amro Bank N.V. (collectively, the
"Banks") became effective. Under this agreement, the Banks provide an unsecured
credit facility in the aggregate amount of $225 million ($112.5 million
committed and $112.5 million uncommitted) allocated evenly among the Banks.
Borrowings under this facility bear interest at 0.75% per annum above the
Federal Funds rate. A commitment fee of 0.10% per annum will be incurred on the
unused portion of the committed facility which will be allocated to all
participating funds. State Street acts as agent for the Banks, and as agent is
entitled to a fee of $15,000 which is allocated to all of the Evergreen Funds.
During the year ended August 31, 1997, the Funds had no borrowings under this
agreement.
9. CONCENTRATION OF CREDIT RISK
Each Fund invests a substantial portion of its assets in issuers located in a
single state, therefore, it may be more affected by economic and political
developments in that state or region than would be a comparable general
tax-exempt mutual fund.
42
<PAGE>
(logo)
EVERGREEN
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Trustees and Shareholders
Evergreen Investment Trust
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments of the Evergreen State Tax Free Funds listed below
as of August 31, 1997, and the related statements of operations, statements of
changes in net assets, and financial highlights for each of the years or periods
listed below:
EVERGREEN FLORIDA MUNICIPAL BOND FUND-- statement of operations for the year
ended August 31, 1997, statements of changes in net assets for each of the
years in the two-year period ended August 31, 1997 and the financial
highlights for the periods presented on pages 10 and 11.
EVERGREEN GEORGIA MUNICIPAL BOND FUND-- statement of operations for the year
ended August 31, 1997, statements of changes in net assets for each of the
years in the two-year period ended August 31, 1997 and the financial
highlights for the periods presented on pages 12 and 13.
EVERGREEN NORTH CAROLINA MUNICIPAL BOND FUND-- statement of operations for
the year ended August 31, 1997, statements of changes in net assets for each
of the years in the two-year period ended August 31, 1997 and the financial
highlights for the periods presented on pages 14 and 15.
EVERGREEN SOUTH CAROLINA MUNICIPAL BOND FUND-- statement of operations for
the year ended August 31, 1997, statements of changes in net assets for each
of the years in the two-year period ended August 31, 1997 and the financial
highlights for the periods presented on pages 16 and 17.
EVERGREEN VIRGINIA MUNICIPAL BOND FUND-- statement of operations for the
year ended August 31, 1997, statements of changes in net assets for each of
the years in the two-year period ended August 31, 1997 and the financial
highlights for the periods presented on pages 18 and 19.
These financial statements and financial highlights are the responsibility of
the Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1997 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Evergreen Florida Municipal Bond Fund, Evergreen Georgia Municipal Bond Fund,
Evergreen North Carolina Municipal Bond Fund, Evergreen South Carolina Municipal
Bond Fund and Evergreen Virginia Municipal Bond Fund as of August 31, 1997, the
results of their operations, the changes in their net assets and financial
highlights for each of the years or periods specified in the first paragraph
above in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
October 10, 1997
43
<PAGE>
(logo)
EVERGREEN
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES AND SHAREHOLDERS OF
EVERGREEN FLORIDA HIGH INCOME MUNICIPAL BOND FUND
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Evergreen Florida High Income
Municipal Bond Fund (the "Fund"), one of the Evergreen Municipal Trust
Portfolios, at August 31, 1997, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for the two years in the period ended
August 31, 1997 and for the four month period ended August 31, 1995, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at August 31, 1997 by
correspondence with the custodian and the application of alternative auditing
procedures where securities purchased had not been received, provide a
reasonable basis for the opinion expressed above. The financial statements of
the Fund for the year ended and indicated periods prior to, April 30, 1995 were
audited by other independent accountants whose report dated June 2, 1995
expressed an unqualified opinion.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
October 14, 1997
44
<PAGE>
(logo)
EVERGREEN
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX STATUS OF DIVIDENDS (UNAUDITED)
100% of the dividends distributed by Florida High Income Fund, Georgia Fund and
the North Carolina Fund and 99% of the dividends distributed by Florida Fund,
South Carolina Fund and the Virginia Fund for the year ended August 31, 1997 are
exempt from federal income tax, other than alternative minimum tax.
45
<PAGE>
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<PAGE>
(This Page Left Blank Intentionally)
<PAGE>
(This Page Left Blank Intentionally)
<PAGE>
This brochure must be preceded or accompanied by a prospectus of an Evergreen
fund contained herein. The prospectus contains more complete information,
including fees and expenses, and should be read carefully before investing or
sending money.
________________________________________
| NOT May lose value |
| FDIC No bank guarantee |
| INSURED |
|________________________________________|
Evergreen Funds Distributor, Inc.
62544 540712 Rev. 01
10/97
<PAGE>
EVERGREEN KEYSTONE FUNDS
EVERGREEN KEYSTONE INVESTMENT SERVICES, INC.
200 Berkeley Street
Boston, MA 02116-5034
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, NW
Washington, D.C.
Attn: File Room
Re: Evergreen Municipal Trust (Evergreen Florida High
Income Municipal Bond Fund)
File No. 811-5579
CCC # 4#95fcsi
CIK # 0000836375
Evergreen Investment Trust (Evergreen Florida Municipal Bond Fund, Evergreen
Georgia Municipal Bond Fund, Evergreen North
Carolina Municipal Bond Fund, Evergreen South
Carolina Municipal Bond Fund and Evergreen
Virginia Municipal Bond Fund)
File No. 811-4154
CCC # 4apyfsr*
CIK # 0000757440
Commissioners:
Please be advised that the Annual Report for the above referenced Fund(s) were
submitted to your office on November 5, 1997, via electronic transmission
(EDGAR).
Any questions or comments about this document should be directed to the
undersigned at (617) 210-3570.
Very Truly Yours,
/s/ Doug Miller
Doug Miller
Assistant Vice President
COMBINED
ANNUAL REPORT
SHAREHOLDERS
September 30, 1997
. The U.S. Government Securities Fund
. The Style Manager: Large Cap Fund
. The Style Manager Fund
. The Virginia Municipal Bond Fund
. The Maryland Municipal Bond Fund
. The Treasury Money Market Fund
. The Money Market Fund
. The Tax-Free Money Market Fund
Funds Managed by
[LOGO] VIRTUS
CAPITAL MANAGEMENT, INC.
The Investment Adviser to The Virtus Funds is Virtus Capital Management, Inc., a
subsidiary of Signet Banking corporation. The Virtus Funds are administered by
subsidiaries of Federated Investors, independent of Signet.
Investment products are not deposits, obligations of, or guaranteed by any bank.
They are not insured by FDIC. They involve risk, including the possible loss of
principal invested.
Virtus Capital Management, Inc. is the investment adviser for The Virtus
Funds. Federated Securities Corp. is the distributor of The Funds.
Federated Securities Corp., Distributor, is independent of Signet Bank.
[LOGO] VIRTUS
FUNDS
MESSAGE TO SHAREHOLDERS
- -------------------------------------------------------------------------------
Dear Investor:
Here is your Annual Report for The Virtus Funds, which covers the 12-month
period from October 1, 1996 through September 30, 1997.
On the following pages, you will find complete financial information for every
fund in the Virtus family. The sections for The U.S. Government Securities Fund,
The Style Manager: Large Cap Fund, The Style Manager Fund, The Virginia
Municipal Bond Fund and The Maryland Municipal Bond Fund begin with a management
discussion and analysis by the portfolio manager, followed by a long-term
performance graph. Each fund also contains a complete list of holdings, and the
financial statements.
As the following fund-by-fund summary indicates, the reporting period was very
strong for stocks and improved for bonds:
. THE U.S. GOVERNMENT SECURITIES FUND paid a dividend stream totaling $0.60 per
share for Investment Shares ($0.63 for Trust Shares). These dividends helped
the fund produce a total return of 6.89% for Investment Shares (7.16% for
Trust Shares) in an improved bond market.* The net asset value of both share
classes increased slightly from $9.89 on the first day of the period to $9.95
on the last day of the period. At the end of the reporting period, net assets
amounted to more than $157 million.
. THE STYLE MANAGER: LARGE CAP FUND produced a strong total return of 37.02% for
Investment Shares (37.37% for Trust Shares) in a highly favorable environment
for stocks.* The fund's high-quality stock portfolio paid dividends of $0.14
per share and capital gains of $1.83 per share for Investment Shares (and
dividends of $0.18 per share and capital gains of $1.83 per share for Trust
Shares). The net asset value of each share class rose 19% from the first day
of the period to the last day of the period. At the end of the reporting
period, net assets amounted to more than $106 million.
. THE STYLE MANAGER FUND produced an extremely strong total return of 44.01%*
through dividends totaling $0.24 per share and capital gains totaling $0.63
per share. In a highly favorable stock market environment, the fund's net
asset value soared from $11.47 on the first day of the period to $15.37 on the
last day. Net assets exceeded $76 million on the last day of the reporting
period.
. THE VIRGINIA MUNICIPAL BOND FUND paid double-tax-free dividends** of $0.42 per
share for Investment Shares ($0.45 for Trust Shares) through a portfolio that
included 29 Virginia municipal bonds. This income stream helped the fund
produce a total return of 7.74% for Investment Shares (8.00% for Trust Shares)
in a difficult bond market.* The net asset value for both share classes
increased from $10.68 on the first day of the period to $11.07 on the last day
of the period. Net assets totaled more than $78 million on the last day of the
reporting period.
. THE MARYLAND MUNICIPAL BOND FUND paid double-tax-free dividends** totaling
$0.37 per share for Investment Shares ($0.40 for Trust Shares). This income
stream helped the fund produce a total return of 6.92% for Investment Shares
(7.19% for Trust Shares) in a difficult bond market.* The net asset value for
both share classes increased from $10.56 on the first day of the period to
$10.91 on the last day of the period. At the end of the reporting period, net
assets totaled more than $33 million.
. THE TREASURY MONEY MARKET FUND, a portfolio of U.S. Treasury money market
securities, paid dividends totaling $0.05 per share for both Trust Shares
and Investment Shares. Assets totaled more than $317 million on the last day
of the reporting period.+
. THE MONEY MARKET FUND paid dividends totaling $0.05 per share for both Trust
Shares and Investment Shares through its portfolio of high-quality money
market securities. The fund ended the reporting period with more than $241
million in net assets.+
. THE TAX-FREE MONEY MARKET FUND, a portfolio of municipal money market
securities, paid tax-free dividends totaling $0.03 per share.++ At the end of
the reporting period, net assets reached more than $57 million.+
Thank you for pursuing your financial goals through The Virtus Funds. We hope
you are pleased with your progress.
Sincerely,
/s/ John S. Hall
John S. Hall
Chief Investment Officer
Virtus Capital Management, Inc.
Investment Adviser to The Virtus Funds
November 15, 1997
- --------
* Performance quoted reflects past performance and is not indicative of
future results. Investment return and principal value will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than
their original cost. Reflecting the fund's contingent deferred sales
charge, the total returns of The Virtus Funds were as follows: The U.S.
Government Securities Fund (Investment Shares): 4.75%; The Style Manager
Fund: 41.85%; The Style Manager: Large Cap Fund (Investment Shares):
34.75%; The Virginia Municipal Bond Fund (Investment Shares): 5.70%; and
The Maryland Municipal Bond Fund (Investment Shares): 4.87%.
**Income may be subject to the federal alternative minimum tax.
+Although money market funds seek to maintain a stable net asset value of
$1.00 a share, there is no guarantee that they will be able to do so. An
investment in the fund is neither insured nor guaranteed by the U.S.
government.
++Income may be subject to the federal alternative minimum tax and state and
local taxes.
THE U.S. GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS
----------------------------------------------------------------------------
Overall, during the last year, we have experienced a relatively calm U.S. fixed
income market. While interest rates on maturities longer than two years declined
by roughly .50% during the year, that was reasonably mild compared to yield
changes observed over the last 20 years. Even the extreme yields observed on
five-year Treasuries remained in a fairly narrow range by historical standards.
The five-year Treasury saw a low yield of about 5.80% and a high yield of about
6.80% during the 12-month period ended September 30, 1997. One recent study
indicated that a year in which interest rates moved by less than 2.00% is
reasonably uncommon.
Our overall average maturity position has remained neutral since November 1996.
We felt that interest rates would not move by large amounts, and shifted our
investment focus from direct Treasuries to mortgage-backed securities and a few
callable agencies, which seek to provide a better total return through a higher
income component during periods when interest rates are reasonably quiet. Thus,
we were able to provide a good total return despite not actively making changes
to the average maturity of the portfolio in anticipation of changes in interest
rates. For the fiscal year ended September 30, 1997, the fund produced average
annual total returns of 6.89% and 7.16% for Investment Shares and Trust Shares,
respectively.*
Most of the additional mortgage-backed securities were purchased in the
earlier part of the year. After the first quarter of 1997, the yield advantage
of buying mortgage-backed securities fell to near historical lows and
subsequent additional investments have been postponed. Only recently have
yields become slightly more attractive on mortgage-backed securities. For the
time being, the fund will maintain an average maturity similar to that of the
Lehman Brothers Intermediate Government Bond Index**, and will consider buying
additional mortgage-backed securities to help improve the income and total
return characteristics when we believe the additional yield received will
compensate us for the additional risk of pre-payments associated with
mortgage-backed securities.
- --------
* Performance quoted represents past performance and is not indicative of
future results. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
** Lehman Brothers Intermediate Government Bond Index is comprised of all
publicly issued, non-convertible domestic debt of the U.S. government or
any agency thereof, or any quasi-federal corporation and of corporate debt
guaranteed by the U.S. government. This index is unmanaged and investments
cannot be made in an index.
THE U.S. GOVERNMENT SECURITIES FUND--Investment Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE U.S. GOVERNMENT SECURITIES FUND--INVESTMENT
SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
U.S. Government Securities Fund (the "Fund") from October 16, 1990 (start of
performance) to September 30, 1997, compared to the Lehman Brothers Intermediate
Government Bond Index ("LBIGB").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX A
AVERAGE ANNUAL TOTAL RETURN*** FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 4.75%
5 Year 4.70%
Start of Performance (10/16/90) 7.10%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/16/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. Certain investors
are subject to a 2.00% contingent deferred sales charge on shares redeemed
within five years of purchase date. The Fund's performance assumes the
reinvestment of all dividends and distributions.
***Total return quoted reflects all applicable contingent deferred sales
charges.
+The LBIGB is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The LBIGB has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE U.S. GOVERNMENT SECURITIES FUND--Trust Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE U.S. GOVERNMENT SECURITIES FUND--TRUST
SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
U.S. Government Securities Fund (the "Fund") from October 16, 1990 (start of
performance) to September 30, 1997, compared to the Lehman Brothers Intermediate
Government Bond Index ("LBIGB").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX B
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 7.16%
5 Year 4.93%
Start of Performance (10/16/90) 7.27%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/16/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. The Fund's
performance assumes the reinvestment of all dividends and distributions.
+The LBIGB is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The LBIGB has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE U.S. GOVERNMENT SECURITIES FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
LONG-TERM INVESTMENTS--98.9%
---------------------------------------------------------------
U.S. TREASURY BONDS--12.9%
---------------------------------------------------
$ 4,500,000 United States Treasury Bond, 11.75%, 11/15/2014 $ 6,534,225
---------------------------------------------------
13,000,000 United States Treasury Bond, 7.50%, 5/15/2002 13,785,590
--------------------------------------------------- ------------
Total U.S. Treasury Bonds 20,319,815
--------------------------------------------------- ------------
U.S. TREASURY NOTES--30.3%
---------------------------------------------------
22,000,000 United States Treasury Note, 7.125%, 2/29/2000 22,623,920
---------------------------------------------------
2,000,000 United States Treasury Note, 7.50%, 11/15/2001 2,109,080
---------------------------------------------------
22,000,000 United States Treasury Note, 8.875%, 2/15/1999 22,902,220
--------------------------------------------------- ------------
Total U.S. Treasury Notes 47,635,220
--------------------------------------------------- ------------
GOVERNMENT OBLIGATIONS--55.7%
---------------------------------------------------
993,000 Federal Agricultural Mortgage Association, 7.37%,
8/1/2006 1,036,771
---------------------------------------------------
11,350,428 Federal Home Loan Bank, 6.50%, 9/1/2008 11,330,667
---------------------------------------------------
7,801,431 Federal Home Loan Bank, 6.50%, 11/1/2009 7,818,516
---------------------------------------------------
81,255 Federal Home Loan Bank, 7.968%, 8/1/2019 85,404
---------------------------------------------------
29,676 Federal Home Loan Bank, 8.342%, 12/1/2020 30,979
---------------------------------------------------
8,500,000 Federal Home Loan Mortgage Corp., 7.36%, 6/5/2007 8,825,525
---------------------------------------------------
541,561 Federal Home Loan Mortgage Corp., REMIC, 7.80%,
5/15/2012 542,514
---------------------------------------------------
5,000,000 Federal Home Loan Mortgage Corp., 7.974%, 4/20/2005 5,062,750
---------------------------------------------------
4,480,000 Federal National Mortgage Association, 6.16%,
4/3/2001 4,496,486
---------------------------------------------------
4,500,547 Federal National Mortgage Association, 7.00%,
12/1/1999 4,543,933
---------------------------------------------------
3,705,860 Federal National Mortgage Association, 7.00%,
8/1/2001 3,756,816
---------------------------------------------------
15,418,905 Federal National Mortgage Association, 7.00%,
4/1/2011 15,597,148
---------------------------------------------------
23,204,872 Federal National Mortgage Association, 7.50%,
8/1/2026 23,618,151
---------------------------------------------------
341,912 Federal National Mortgage Association, 8.50%,
12/1/2001 354,200
---------------------------------------------------
64,350 Federal National Mortgage Association, 8.83%,
6/1/2019 66,987
---------------------------------------------------
167,619 Government National Mortgage Association, 8.00%,
3/15/2017 175,948
---------------------------------------------------
320,648 Government National Mortgage Association, 9.00%,
9/15/2021 345,196
--------------------------------------------------- ------------
Total Government Obligations 87,687,991
--------------------------------------------------- ------------
TOTAL LONG-TERM INVESTMENTS (IDENTIFIED COST
$154,447,718) 155,643,026
--------------------------------------------------- ------------
</TABLE>
THE U.S. GOVERNMENT SECURITIES FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- -------------------------------------------------- ------------
<C> <S> <C>
(A) REPURCHASE AGREEMENT--0.3%
--------------------------------------------------------------
$ 460,430 CS First Boston Corp., 6.05%, dated 9/30/1997, due
10/1/1997
(AT AMORTIZED COST) $ 460,430
-------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST
$154,908,148)(B) $156,103,456
-------------------------------------------------- ------------
</TABLE>
(a) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
(b) The cost of investments for federal tax purposes amounts to $154,908,148.
The net unrealized appreciation of investments on a federal tax basis
amounts to $1,195,308 which is comprised of $1,747,639 appreciation and
$552,331 depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($157,425,080) at September 30, 1997.
The following acronym is used throughout this portfolio:
REMIC--Real Estate Mortgage Investment Conduit
(See Notes which are an integral part of the Financial Statements)
THE STYLE MANAGER: LARGE CAP FUND
- -------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS
----------------------------------------------------------------------------
While small cap value stocks had a very successful year relative to small cap
growth stocks*, large cap growth and value stocks remained neck and neck. In
August 1997, we transitioned the fund to a more neutral position and now are
roughly 50% value and 50% growth oriented.
Virtus Capital Management, Inc. continues to implement the "Style" approach to
managing the fund. We seek to capture the predominant investment style to take
greater advantage of market trends. This involves opportunistic positioning
defined by investment style. "Style" refers to two widely accepted
descriptions of stocks known as growth and value. Growth stocks are those
companies with above-average earnings expectations. Value stocks are those
companies selling at a low price relative to the actual value of their
underlying assets. During the 12-month period ended September 30, 1997, the
Standard & Poor's ("S&P") 500 Value Index+ produced a total return of 39.22%,
and the S&P 500 Growth Index+ returned 41.48%, again neck and neck performance
in a very strong year. During the same period, S&P 500 Index+ returned 40.7%.
For the 12-month period ended September 30, 1997, the fund produced average
annual total returns of 37.02% and 37.37% for Investment Shares and Trust
Shares, respectively.++
- --------
* Small cap stocks have historically experienced greater volatility than
average.
+ The S&P 500 is an unmanaged index comprised of common stocks in industry,
transportation and financial and public utility companies. The S&P 500 Value
Index and the S&P 500 Growth Index are sub-indices of the S&P 500 Index.
Investments cannot be made in an index.
++ Performance quoted represents past performance and is not indicative of
future results. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
THE STYLE MANAGER: LARGE CAP FUND--Investment Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE STYLE MANAGER: LARGE CAP FUND--INVESTMENT
SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
Style Manager: Large Cap Fund (the "Fund") from October 16, 1990 (start of
performance) to September 30, 1997, compared to the Standard & Poor's 500 Index
("S&P 500").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX C
AVERAGE ANNUAL TOTAL RETURN*** FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 34.75%
5 Year 13.84%
Start of Performance (10/16/90) 14.03%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/16/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. Certain investors
are subject to a 2.00% contingent deferred sales charge on shares redeemed
within five years of purchase date. The Fund's performance assumes the
reinvestment of all dividends and distributions.
***Total return quoted reflects all applicable contingent deferred sales
charges.
+The S&P 500 is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The S&P 500
has been adjusted to reflect reinvestment of dividends on securities in the
index. This index is unmanaged.
THE STYLE MANAGER: LARGE CAP FUND--Trust Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE STYLE MANAGER: LARGE CAP FUND--TRUST SHARES
The graph below illustrates the hypothetical investment of $10,000** in The
Style Manager: Large Cap Fund (the "Fund") from October 16, 1990 (start of
performance) to September 30, 1997, compared to the Standard & Poor's 500 Index
("S&P 500").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX D
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 37.37%
5 Year 14.09%
Start of Performance (10/16/90) 14.21%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/16/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. The Fund's
performance assumes the reinvestment of all dividends and distributions.
+The S&P 500 is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The S&P has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE STYLE MANAGER: LARGE CAP FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ---------------------------- ------------
<C> <S> <C>
COMMON STOCKS--97.6%
--------------------------------------
AEROSPACE & DEFENSE--1.7%
----------------------------
25,600 Boeing Co. $ 1,393,600
----------------------------
3,600 Lockheed Martin Corp. 383,850
---------------------------- ------------
Total 1,777,450
---------------------------- ------------
AIRLINES--0.4%
----------------------------
1,500 (a)AMR Corp. 166,031
----------------------------
2,400 Delta Air Lines, Inc. 226,050
---------------------------- ------------
Total 392,081
---------------------------- ------------
ALUMINUM--0.5%
----------------------------
17,000 Alcan Aluminum, Ltd. 590,750
---------------------------- ------------
AUTO PARTS & EQUIPMENT--0.5%
----------------------------
5,200 Goodyear Tire & Rubber Co. 357,500
----------------------------
3,100 TRW, Inc. 170,113
---------------------------- ------------
Total 527,613
---------------------------- ------------
AUTOMOBILES--1.8%
----------------------------
22,600 Chrysler Corp. 831,962
----------------------------
23,400 Ford Motor Co. 1,058,850
---------------------------- ------------
Total 1,890,812
---------------------------- ------------
BANKS MAJOR REGIONAL--7.0%
----------------------------
16,400 Banc One Corp. 915,325
----------------------------
18,100 Bank of New York Co., Inc. 868,800
----------------------------
8,300 Barnett Banks, Inc. 587,225
----------------------------
19,800 First Union Corp. 991,237
----------------------------
4,100 Fleet Financial Group, Inc. 268,806
----------------------------
4,300 KeyCorp 273,588
----------------------------
10,600 Mellon Bank Corp. 580,350
----------------------------
5,500 National City Corp. 338,594
----------------------------
16,200 NationsBank Corp. 1,002,375
----------------------------
10,900 Norwest Corp. 667,625
----------------------------
12,600 PNC Financial Corp. 615,038
----------------------------
5,200 SunTrust Banks, Inc. 353,275
---------------------------- ------------
Total 7,462,238
---------------------------- ------------
BANKS-MONEY CENTER--2.3%
----------------------------
15,600 BankAmerica Corp. 1,143,675
----------------------------
6,600 Citicorp 883,987
----------------------------
6,000 First Chicago NBD Corp. 451,500
---------------------------- ------------
Total 2,479,162
---------------------------- ------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
-----------------------------------------------
BEVERAGE-ALCOHOLIC--0.5%
-------------------------------------
15,000 Seagram Co. Ltd. $ 528,750
------------------------------------- ------------
BEVERAGE-SOFT DRINK--2.2%
-------------------------------------
38,700 Coca-Cola Co. 2,358,281
------------------------------------- ------------
BIOTECHNOLOGY--0.1%
-------------------------------------
2,900 (a)Amgen, Inc. 139,019
------------------------------------- ------------
BROADCAST MEDIA--1.1%
-------------------------------------
27,900 (a)Tele-Communications, Inc., Class A 571,950
-------------------------------------
28,900 (a)U.S. West Media Group 644,831
------------------------------------- ------------
Total 1,216,781
------------------------------------- ------------
BUILDING MATERIALS--0.4%
-------------------------------------
9,500 Masco Corp. 435,219
------------------------------------- ------------
BUILDING SUPPLIES--0.5%
-------------------------------------
4,400 Home Depot, Inc. 229,350
-------------------------------------
10,800 Sherwin-Williams Co. 317,925
------------------------------------- ------------
Total 547,275
------------------------------------- ------------
CHEMICALS--1.6%
-------------------------------------
7,200 Air Products & Chemicals, Inc. 597,150
-------------------------------------
7,600 Dow Chemical Co. 689,225
-------------------------------------
8,700 Union Carbide Corp. 423,581
------------------------------------- ------------
Total 1,709,956
------------------------------------- ------------
CHEMICALS-DIVERSE--0.6%
-------------------------------------
6,100 Du Pont (E.I.) de Nemours & Co. 375,531
-------------------------------------
8,600 Morton International, Inc. 305,300
------------------------------------- ------------
Total 680,831
------------------------------------- ------------
CHEMICALS-SPECIALTY--0.7%
-------------------------------------
5,900 Grace (W.R.) & Co. 434,388
-------------------------------------
7,000 Great Lakes Chemical Corp. 345,188
------------------------------------- ------------
Total 779,576
------------------------------------- ------------
COMMUNICATION EQUIPMENT--0.3%
-------------------------------------
6,400 Harris Corp. 292,800
------------------------------------- ------------
COMPUTER HARDWARE--4.7%
-------------------------------------
11,900 (a)Compaq Computer Corp. 889,525
-------------------------------------
6,700 (a)Dell Computer Corp. 649,062
-------------------------------------
9,800 (a)Digital Equipment Corp. 424,462
-------------------------------------
3,700 (a)EMC Corp. Mass 215,987
-------------------------------------
22,700 International Business Machines Corp. 2,404,781
-------------------------------------
4,700 (a)Seagate Technology, Inc. 169,788
-------------------------------------
11,300 (a)Silicon Graphics, Inc. 296,625
------------------------------------- ------------
Total 5,050,230
------------------------------------- ------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- --------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
-------------------------------------------------
COMPUTER SERVICES--2.3%
---------------------------------------
5,300 (a)3Com Corp. $ 271,625
---------------------------------------
12,200 (a)Cisco Systems, Inc. 891,362
---------------------------------------
8,800 Computer Associates International, Inc. 631,950
---------------------------------------
18,600 (a)Oracle Corp. 677,738
--------------------------------------- ------------
Total 2,472,675
--------------------------------------- ------------
COMPUTER SOFTWARE--0.2%
---------------------------------------
4,300 (a)Parametric Technology Corp. 189,738
--------------------------------------- ------------
CONTAINERS & PACKAGING--0.1%
---------------------------------------
1,700 Union Camp Corp. 104,869
--------------------------------------- ------------
COSMETICS & TOILETRIES--2.5%
---------------------------------------
1,800 Colgate-Palmolive Co. 125,437
---------------------------------------
9,100 Gillette Co. 785,444
---------------------------------------
24,800 Procter & Gamble Co. 1,712,750
--------------------------------------- ------------
Total 2,623,631
--------------------------------------- ------------
ELECTRIC COMPANIES--3.6%
---------------------------------------
6,800 Carolina Power & Light Co. 244,375
---------------------------------------
10,800 Consolidated Edison Co. 367,200
---------------------------------------
11,600 Duke Power Co. 573,475
---------------------------------------
29,700 Edison International 749,925
---------------------------------------
13,600 Entergy Corp. 354,450
---------------------------------------
28,400 P G & E Corp. 658,525
---------------------------------------
15,500 Peco Energy Co. 363,281
---------------------------------------
24,200 Southern Co. 546,013
--------------------------------------- ------------
Total 3,857,244
--------------------------------------- ------------
ELECTRICAL EQUIPMENT--3.3%
---------------------------------------
13,100 AMP, Inc. 701,669
---------------------------------------
41,400 General Electric Co. 2,817,788
--------------------------------------- ------------
Total 3,519,457
--------------------------------------- ------------
ELECTRONICS-DEFENSE--0.4%
---------------------------------------
7,000 Raytheon Co. 413,875
--------------------------------------- ------------
ELECTRONICS-DISTRIBUTORS--0.3%
---------------------------------------
3,900 (W.W.) Grainger Inc. 347,100
--------------------------------------- ------------
ELECTRONICS-SEMICONDUCTORS--3.5%
---------------------------------------
3,400 (a)Applied Materials, Inc. 323,850
---------------------------------------
26,200 Intel Corp. 2,418,588
---------------------------------------
10,200 (a)LSI Logic Corp. 327,675
---------------------------------------
4,900 Micron Technology, Inc. 169,969
---------------------------------------
3,800 Texas Instruments, Inc. 513,475
--------------------------------------- ------------
Total 3,753,557
--------------------------------------- ------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
-----------------------------------------------------
ENTERTAINMENT--1.3%
-------------------------------------------
17,200 (a)Viacom, Inc., Class B $ 543,950
-------------------------------------------
10,200 Disney (Walt) Co. 822,375
------------------------------------------- ------------
Total 1,366,325
------------------------------------------- ------------
FINANCIAL--3.7%
-------------------------------------------
5,500 American Express Co. 450,312
-------------------------------------------
13,100 American General Corp. 679,562
-------------------------------------------
30,200 Federal Home Loan Mortgage Corp. 1,064,550
-------------------------------------------
21,200 Morgan Stanley, Dean Witter, Discover & Co. 1,146,125
-------------------------------------------
9,300 Washington Mutual, Inc. 648,675
------------------------------------------- ------------
Total 3,989,224
------------------------------------------- ------------
FOODS--0.2%
-------------------------------------------
4,400 Kellogg Co. 185,350
------------------------------------------- ------------
GOLD & PRECIOUS METAL MINES--0.4%
-------------------------------------------
15,100 Barrick Gold Corp. 373,725
------------------------------------------- ------------
HEALTHCARE--2.7%
-------------------------------------------
10,000 Abbott Laboratories 639,375
-------------------------------------------
10,600 American Home Products Corp. 773,800
-------------------------------------------
18,000 Bristol-Myers Squibb Co. 1,489,500
------------------------------------------- ------------
Total 2,902,675
------------------------------------------- ------------
HEALTHCARE-DRUGS MAJOR--3.9%
-------------------------------------------
12,900 Eli Lilly & Co. 1,553,644
-------------------------------------------
21,100 Pfizer, Inc. 1,267,319
-------------------------------------------
19,500 Pharmacia & Upjohn, Inc. 711,750
-------------------------------------------
11,400 Schering Plough Corp. 587,100
------------------------------------------- ------------
Total 4,119,813
------------------------------------------- ------------
HEALTHCARE-HOSPITAL MANAGEMENT--0.7%
-------------------------------------------
27,700 Columbia/HCA Healthcare Corp. 796,375
------------------------------------------- ------------
HEALTHCARE-MEDICAL PRODUCTS & SUPPLY--2.5%
-------------------------------------------
14,400 Baxter International, Inc. 752,400
-------------------------------------------
3,800 (a)Boston Scientific Corp. 209,712
-------------------------------------------
2,800 Guidant Corp. 156,800
-------------------------------------------
18,200 Johnson & Johnson 1,048,775
-------------------------------------------
10,600 Medtronic, Inc. 498,200
------------------------------------------- ------------
Total 2,665,887
------------------------------------------- ------------
HOUSEHOLD FURNITURE & APPLIANCES--0.1%
-------------------------------------------
2,100 Whirlpool Corp. 139,256
------------------------------------------- ------------
INSURANCE-BROKERS--0.5%
-------------------------------------------
9,300 AON Corp. 491,737
------------------------------------------- ------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------------------------------ ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
----------------------------------------------
INSURANCE-LIFE/HEALTH--0.9%
------------------------------------
3,900 Aetna Services, Inc. $ 317,606
------------------------------------
8,200 Conseco, Inc. 400,262
------------------------------------
3,000 Jefferson-Pilot Corp. 237,000
------------------------------------ ------------
Total 954,868
------------------------------------ ------------
INSURANCE-MULTILINE--2.1%
------------------------------------
6,200 American International Group, Inc. 639,762
------------------------------------
2,600 Lincoln National Corp. 181,025
------------------------------------
20,100 Travelers Group, Inc. 1,371,825
------------------------------------ ------------
Total 2,192,612
------------------------------------ ------------
INSURANCE-PROPERTY--0.9%
------------------------------------
8,000 Chubb Corp. 568,500
------------------------------------
7,800 SAFECO Corp. 413,400
------------------------------------ ------------
Total 981,900
------------------------------------ ------------
INVESTMENT BANK-BROKERAGE--0.7%
------------------------------------
10,600 Merrill Lynch & Co., Inc. 786,388
------------------------------------ ------------
IRON & STEEL--0.1%
------------------------------------
3,000 USX-U.S. Steel Group, Inc. 104,250
------------------------------------ ------------
LODGING-HOTELS--0.4%
------------------------------------
5,600 (a)ITT Corp. 379,400
------------------------------------ ------------
MACHINERY--1.0%
------------------------------------
9,800 Cooper Industries, Inc. 529,812
------------------------------------
11,700 Ingersoll-Rand Co. 503,831
------------------------------------ ------------
Total 1,033,643
------------------------------------ ------------
MANUFACTURER-SPECIAL--0.4%
------------------------------------
9,600 Parker-Hannifin Corp. 432,000
------------------------------------ ------------
MANUFACTURING-DIVERSE--2.1%
------------------------------------
7,800 Allied-Signal, Inc. 331,500
------------------------------------
2,000 Minnesota Mining & Manufacturing Co. 185,000
------------------------------------
8,000 Tenneco, Inc. 383,000
------------------------------------
4,200 Textron, Inc. 273,000
------------------------------------
3,300 Unilever N.V., ADR 701,663
------------------------------------
4,600 United Technologies Corp. 372,600
------------------------------------ ------------
Total 2,246,763
------------------------------------ ------------
METALS & MINING--0.3%
------------------------------------
11,900 Inco Ltd. 298,244
------------------------------------ ------------
NATURAL GAS--0.3%
------------------------------------
6,900 Williams Cos., Inc. (The) 323,006
------------------------------------ ------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------------------------------ ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
----------------------------------------------
OIL & GAS-DRILL & EQUIPMENT--0.7%
------------------------------------
8,800 Baker Hughes, Inc. $ 385,000
------------------------------------
3,800 Schlumberger Ltd. 319,913
------------------------------------ ------------
Total 704,913
------------------------------------ ------------
OIL-DOMESTIC--1.1%
------------------------------------
8,900 Phillips Petroleum Co. 459,463
------------------------------------
19,200 USX Corp. 714,000
------------------------------------ ------------
Total 1,173,463
------------------------------------ ------------
OIL-INTERNATIONAL--7.4%
------------------------------------
6,300 Amoco Corp. 607,162
------------------------------------
9,900 Chevron Corp. 823,556
------------------------------------
46,700 Exxon Corp. 2,991,719
------------------------------------
12,600 Mobil Corp. 932,400
------------------------------------
45,700 Royal Dutch Petroleum Co., ADR 2,536,350
------------------------------------ ------------
Total 7,891,187
------------------------------------ ------------
PAPER & FOREST PRODUCTS--1.3%
------------------------------------
3,300 Champion International Corp. 201,094
------------------------------------
13,100 International Paper Co. 721,319
------------------------------------
8,600 Weyerhaeuser Co. 510,625
------------------------------------ ------------
Total 1,433,038
------------------------------------ ------------
PHOTOGRAPH/IMAGING--0.9%
------------------------------------
11,600 Xerox Corp. 976,575
------------------------------------ ------------
RAILROADS--1.1%
------------------------------------
2,800 Burlington Northern Santa Fe 270,550
------------------------------------
7,900 CSX Corp. 462,150
------------------------------------
1,100 Norfolk Southern Corp. 113,575
------------------------------------
5,500 Union Pacific Corp. 344,438
------------------------------------ ------------
Total 1,190,713
------------------------------------ ------------
RETAIL-DEPARTMENT STORES--2.2%
------------------------------------
13,600 (a)Federated Department Stores, Inc. 586,500
------------------------------------
11,200 May Department Stores Co. 610,400
------------------------------------
7,700 Nordstrom, Inc. 490,875
------------------------------------
11,400 J.C. Penney Co., Inc. 664,050
------------------------------------ ------------
Total 2,351,825
------------------------------------ ------------
RETAIL-DRUG STORES--0.5%
------------------------------------
9,500 CVS Corp. 540,312
------------------------------------ ------------
RETAIL-GENERAL MERCHANDISE--1.6%
------------------------------------
10,100 (a)Costco Cos., Inc. 380,012
------------------------------------
16,800 Sears, Roebuck & Co. 956,550
------------------------------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- -------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
-------------------------------------------------
RETAIL-GENERAL MERCHANDISE--CONTINUED
--------------------------------------
8,800 Wal-Mart Stores, Inc. $ 322,300
-------------------------------------- ------------
Total 1,658,862
-------------------------------------- ------------
RETAIL-SPECIALTY--0.5%
--------------------------------------
15,100 (a)Toys 'R' Us, Inc. 536,050
-------------------------------------- ------------
SERVICES-COMMERCIAL & CONSUMER--0.4%
--------------------------------------
12,800 Service Corp. International 412,000
-------------------------------------- ------------
SERVICES-DATA PROCESSING--0.3%
--------------------------------------
8,120 First Data Corp., Class 305,007
-------------------------------------- ------------
SPECIALTY PRINTING--0.4%
--------------------------------------
10,900 Donnelley (R.R.) & Sons Co. 388,994
-------------------------------------- ------------
TELECOMMUNICATIONS-CELLULAR--0.7%
--------------------------------------
20,900 (a)Airtouch Communications, Inc. 740,644
-------------------------------------- ------------
TELECOMMUNICATIONS-EQUIPMENT--1.3%
--------------------------------------
10,600 Lucent Technologies, Inc. 862,575
--------------------------------------
3,500 Northern Telecom Ltd. 363,781
--------------------------------------
3,000 (a)Tellabs, Inc. 154,500
-------------------------------------- ------------
Total 1,380,856
-------------------------------------- ------------
TELECOMMUNICATIONS-LONG DISTANCE--3.3%
--------------------------------------
40,800 AT&T Corp. 1,807,950
--------------------------------------
25,500 MCI Communications Corp. 749,063
--------------------------------------
13,700 Sprint Corp. 685,000
--------------------------------------
7,000 (a)WorldCom, Inc. 247,625
-------------------------------------- ------------
Total 3,489,638
-------------------------------------- ------------
TELEPHONE--2.8%
--------------------------------------
10,398 Bell Atlantic Corp. 836,421
--------------------------------------
30,300 BellSouth Corp. 1,401,375
--------------------------------------
20,200 U.S. West, Inc. 777,700
-------------------------------------- ------------
Total 3,015,496
-------------------------------------- ------------
TEXTILES-APPAREL--0.4%
--------------------------------------
5,100 V.F. Corp. 472,388
-------------------------------------- ------------
TOBACCO--1.4%
--------------------------------------
9,200 Fortune Brands, Inc. 309,925
--------------------------------------
9,200 (a)Gallaher Group PLC, ADR 176,525
--------------------------------------
23,600 Philip Morris Cos., Inc. 980,875
-------------------------------------- ------------
Total 1,467,325
-------------------------------------- ------------
TRUCKS & PARTS--0.1%
--------------------------------------
1,900 Cummins Engine Co., Inc. 148,319
-------------------------------------- ------------
</TABLE>
THE STYLE MANAGER: LARGE CAP FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL
AMOUNT VALUE
---------- --------------------------------------------------- ------------
<C> <S> <C>
COMMON STOCKS--CONTINUED
--------------------------------------------------------------
WASTE MANAGEMENT--0.9%
---------------------------------------------------
24,300 Browning-Ferris Industries, Inc. $ 924,919
--------------------------------------------------- ------------
TOTAL COMMON STOCKS (IDENTIFIED COST $83,618,762) 104,106,935
--------------------------------------------------- ------------
(B) REPURCHASE AGREEMENT--2.4%
--------------------------------------------------------------
$2,576,249 Credit Suisse First Boston, 6.05%, dated 9/30/1997,
due 10/1/1997 (AT AMORTIZED COST) 2,576,249
--------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST $86,195,011)(C) $106,683,184
--------------------------------------------------- ------------
</TABLE>
(a) Non-income producing security.
(b) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
(c) The cost of investments for federal tax purposes amounts to $86,195,011. The
net unrealized appreciation of investments on a federal tax basis amounts to
$20,488,173 which is comprised of $22,202,146 appreciation and $1,713,973
depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($106,684,527) at September 30, 1997.
The following acronyms are used throughout this portfolio:
ADR--American Depository Receipt
PLC--Public Limited Company
(See Notes which are an integral part of the Financial Statements)
THE STYLE MANAGER FUND
- -------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS
----------------------------------------------------------------------------
The 12-month period ended September 30, 1997 was highlighted by significant
growth in small cap stocks*. Feeling that small cap growth stocks were
particularly overvalued, the fund focused on small cap value stocks for the
majority of 1997. During the 12-month period ended September 30, 1997, small cap
value stocks recorded a total return of 48.9% as measured by the S&P 600 Value
Index**, whereas small cap growth stocks returned only 25.2% as measured by the
S&P 600 Growth Index**. The S&P 600 Index** recorded a total return 37.0% and
the S&P 500 Index returned 40.7% for the 12-month period ended September 30,
1997. During the 12-month period ended September 30, 1997, the fund produced an
average annual total return of 44.01%.***
We continue to focus on small cap value stocks which have demonstrated greater
stability in an investment environment characterized by excessive risk
measures. In general, we believe that small cap value stocks will remain less
volatile than small cap growth stocks over time. Due to our value orientation,
the fund remains positioned in a defensive mode.
- --------
* Small capitalization stocks have historically experienced greater volatility
than average.
** The S&P 600 Index is an unmanaged capitalization weighted index representing
all major industries in the mid-range of the U.S. stock market. The S&P 600
Growth Index and the S&P 600 Value Index are sub- indices of the S&P 600
Index. Investments cannot be made in an index.
*** Performance quoted represents past performance and is not indicative of
future results. Investment return and principal value will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
THE STYLE MANAGER FUND
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE STYLE MANAGER FUND.
The graph below illustrates the hypothetical investment of $10,000** in The
Style Manager Fund (the "Fund") from March 7, 1995 (start of performance) to
September 30, 1997, compared to the Standard & Poor's 500 Index ("S&P 500").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX E
AVERAGE ANNUAL TOTAL RETURN*** FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 41.85%
Start of Performance (3/7/95) 28.04
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 3/7/95 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. The ending value
of the Fund reflects a 2.00% contingent deferred sales charge on any
redemption less than five years from the purchase date. The Fund's performance
assumes the reinvestment of all dividends and distributions.
***Total return quoted reflects all applicable contingent deferred sales
charges.
+The S&P 500 is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The S&P 500
has been adjusted to reflect reinvestment of dividends on securities in the
index. The index is unmanaged.
THE STYLE MANAGER FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ----------------------------- -----------
<C> <S> <C>
COMMON STOCKS--98.2%
----------------------------------------
AEROSPACE & DEFENSE--1.2%
-----------------------------
22,200 Orbital Sciences Corp. $ 543,900
-----------------------------
20,100 Trimble Navigation Ltd. 394,463
----------------------------- -----------
Total 938,363
----------------------------- -----------
AIR FREIGHT--0.5%
-----------------------------
27,500 Fritz Companies, Inc. 405,625
----------------------------- -----------
APPAREL--0.7%
-----------------------------
15,500 Kellwood Co. 549,281
----------------------------- -----------
AUTO PARTS & EQUIPMENT--1.3%
-----------------------------
6,700 SPX Corp. 392,788
-----------------------------
15,400 Smith (A.O.) Corp. 610,225
----------------------------- -----------
Total 1,003,013
----------------------------- -----------
BANKING-MAJOR REGIONAL--13.3%
-----------------------------
7,920 Associated Banc Corp. 356,895
-----------------------------
10,043 Bankers Trust New York Corp. 1,230,267
-----------------------------
6,400 CCB Financial Corp. 516,000
-----------------------------
11,900 Central Fidelity Banks, Inc. 526,575
-----------------------------
14,300 Centura Banks, Inc. 787,394
-----------------------------
9,812 Commerce Bancorp, Inc. 381,441
-----------------------------
9,600 Commercial Federal Corp. 452,400
-----------------------------
10,600 Cullen Frost Bankers, Inc. 502,175
-----------------------------
27,200 Deposit Guaranty Corp. 906,100
-----------------------------
11,100 First Commercial Corp. 532,800
-----------------------------
15,500 First Michigan Bank Corp. 641,312
-----------------------------
23,600 Firstmerit Corp. 637,200
-----------------------------
22,650 Keystone Financial, Inc. 855,038
-----------------------------
13,200 Magna Group, Inc. 520,575
-----------------------------
15,400 Riggs National Corp. 362,863
-----------------------------
15,975 Summit Bancorp 709,889
-----------------------------
11,100 Susquehanna Bankshares, Inc. 341,325
----------------------------- -----------
Total 10,260,249
----------------------------- -----------
BUILDING MATERIALS--1.5%
-----------------------------
14,700 Lone Star Industries, Inc. 793,800
-----------------------------
13,400 TJ International, Inc. 342,538
----------------------------- -----------
Total 1,136,338
----------------------------- -----------
CHEMICALS--2.2%
-----------------------------
10,000 Cambrex Corp. 466,250
-----------------------------
12,800 ChemFirst, Inc. 321,600
-----------------------------
14,600 Dexter Corp. 584,912
-----------------------------
</TABLE>
THE STYLE MANAGER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------------------------------ -----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
-----------------------------------------------
CHEMICALS--CONTINUED
------------------------------------
15,400 Mississippi Chemical Corp. $ 300,300
------------------------------------ -----------
Total 1,673,062
------------------------------------ -----------
COMMERCIAL SERVICES--0.4%
------------------------------------
9,300 Primark Corp. 274,931
------------------------------------ -----------
COMMUNICATION EQUIPMENT--0.7%
------------------------------------
18,800 Allen Telecom, Inc. 535,800
------------------------------------ -----------
COMPUTER SOFTWARE--1.0%
------------------------------------
34,700 Platinum Technology, Inc. 746,050
------------------------------------ -----------
COMPUTERS-PERIPHERAL--1.4%
------------------------------------
31,000 Komag, Inc. 631,625
------------------------------------
17,700 Telxon Corp. 433,650
------------------------------------ -----------
Total 1,065,275
------------------------------------ -----------
COMPUTERS-NETWORKING--0.7%
------------------------------------
28,700 Network Equipment Technologies, Inc. 500,456
------------------------------------ -----------
DEPARTMENT STORES--2.4%
------------------------------------
14,000 Carson Pirie Scott & Co. 552,125
------------------------------------
13,400 Proffitts, Inc. 793,950
------------------------------------
20,400 Shopko Stores, Inc. 530,400
------------------------------------ -----------
Total 1,876,475
------------------------------------ -----------
DISTRIBUTORS-FOOD & HEALTH--0.7%
------------------------------------
20,100 Rykoff Sexton, Inc. 520,088
------------------------------------ -----------
DRUG STORES--0.8%
------------------------------------
22,600 Longs Drug Stores Corp. 603,138
------------------------------------ -----------
ELECTRIC COMPANIES--2.8%
------------------------------------
33,500 Atlantic Energy, Inc. NJ 600,906
------------------------------------
37,179 MidAmerican Energy Holdings Co. 641,338
------------------------------------
13,500 United Illuminating Co. 491,906
------------------------------------
20,500 United Water Resources, Inc. 381,813
------------------------------------ -----------
Total 2,115,963
------------------------------------ -----------
ELECTRICAL EQUIPMENT--0.7%
------------------------------------
29,700 Anixter International, Inc. 510,469
------------------------------------ -----------
ELECTRONICS-DISTRIBUTORS--1.9%
------------------------------------
23,100 Kent Electronics Corp. 912,450
------------------------------------
13,900 Marshall Industries 538,625
------------------------------------ -----------
Total 1,451,075
------------------------------------ -----------
ELECTRONICS-INSTRUMENTS--0.5%
------------------------------------
7,600 John Fluke Manufacturing, Co. 410,400
------------------------------------ -----------
ELECTRONICS-SEMICONDUCTORS--3.0%
------------------------------------
17,500 Cyrix Corp. 586,250
------------------------------------
14,500 Dallas Semiconductor Corp. 648,875
------------------------------------
</TABLE>
THE STYLE MANAGER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
------------------------------------------------
ELECTRONICS-SEMICONDUCTORS--CONTINUED
-------------------------------------
11,300 Photronic Labs, Inc. $ 684,356
-------------------------------------
16,700 Zilog, Inc. 364,269
------------------------------------- -----------
Total 2,283,750
------------------------------------- -----------
ENTERTAINMENT--0.9%
-------------------------------------
9,900 Carmike Cinemas, Inc., Class A 297,000
-------------------------------------
9,800 GC Cos., Inc. 421,400
------------------------------------- -----------
Total 718,400
------------------------------------- -----------
FOOD CHAINS--0.6%
-------------------------------------
26,400 Ruddick Corp. 425,700
------------------------------------- -----------
FOODS--1.3%
-------------------------------------
33,400 Chiquita Brands International 538,575
-------------------------------------
16,400 Smithfield Foods, Inc. 492,000
------------------------------------- -----------
Total 1,030,575
------------------------------------- -----------
FOOTWEAR--0.8%
-------------------------------------
8,200 Timberland Co., Class A 653,950
------------------------------------- -----------
GAMING & LOTTERY--1.0%
-------------------------------------
28,100 Grand Casinos, Inc. 430,281
-------------------------------------
16,800 Showboat, Inc. 342,300
------------------------------------- -----------
Total 772,581
------------------------------------- -----------
GOLD & PRECIOUS METAL MINES--1.1%
-------------------------------------
32,100 Coeur d'Alene Mines Corp. 523,631
-------------------------------------
16,300 Stillwater Mining Co. 347,394
------------------------------------- -----------
Total 871,025
------------------------------------- -----------
HARDWARE & TOOLS--0.5%
-------------------------------------
9,800 Toro Co. 388,325
------------------------------------- -----------
HEALTHCARE-DIVERSIFIED--0.6%
-------------------------------------
12,700 Sierra Health Services, Inc. 465,138
------------------------------------- -----------
HEALTHCARE-LONG TERM CARE--2.7%
-------------------------------------
18,800 Genesis Health Ventures, Inc. 732,025
-------------------------------------
14,200 Integrated Health Services, Inc. 474,812
-------------------------------------
13,600 Living Centers of America, Inc. 554,200
-------------------------------------
20,700 Mariner Health Group, Inc. 326,025
------------------------------------- -----------
Total 2,087,062
------------------------------------- -----------
HEALTHCARE-MANAGED CARE--0.4%
-------------------------------------
19,500 Coventry Corp. 321,750
------------------------------------- -----------
HOMEBUILDING--1.4%
-------------------------------------
15,093 Fleetwood Enterprises, Inc. 506,559
-------------------------------------
14,800 U.S. Home Corp. 571,650
------------------------------------- -----------
Total 1,078,209
------------------------------------- -----------
</TABLE>
THE STYLE MANAGER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ---------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
---------------------------------------------------
HOMEFURNISHINGS--1.4%
----------------------------------------
18,800 Fieldcrest Cannon, Inc. $ 648,600
----------------------------------------
8,300 Springs Industries, Inc., Class A 435,750
---------------------------------------- -----------
Total 1,084,350
---------------------------------------- -----------
HOSPITAL MANAGEMENT--1.0%
----------------------------------------
17,000 Universal Health Services, Inc., Class B 735,250
---------------------------------------- -----------
HOTELS--1.4%
----------------------------------------
22,700 Prime Hospitality Corp. 512,169
----------------------------------------
19,300 Marcus Corp. 562,113
---------------------------------------- -----------
Total 1,074,282
---------------------------------------- -----------
HOUSEHOLD FURNITURE & APPLIANCES--1.9%
----------------------------------------
12,900 Bassett Furniture Industries, Inc. 367,650
----------------------------------------
21,400 Ethan Allen Interiors, Inc. 663,400
----------------------------------------
11,100 Kimball International, Inc., Class B 466,200
---------------------------------------- -----------
Total 1,497,250
---------------------------------------- -----------
INSURANCE-LIFE/HEALTH--1.4%
----------------------------------------
9,100 Life Re Corp. 480,025
----------------------------------------
12,500 Protective Life Corp. 631,250
---------------------------------------- -----------
Total 1,111,275
---------------------------------------- -----------
INSURANCE-MULTILINE--0.8%
----------------------------------------
17,800 American Bankers Insurance Group, Inc. 649,700
---------------------------------------- -----------
INSURANCE-PROPERTY--3.9%
----------------------------------------
9,000 Allied Group, Inc. 457,312
----------------------------------------
7,900 Capital Re Corp. 481,900
----------------------------------------
9,200 Enhance Financial Services Group, Inc. 503,700
----------------------------------------
9,500 First American Financial Corp. 570,000
----------------------------------------
13,400 Frontier Insurance Group, Inc. 509,200
----------------------------------------
10,000 Orion Capital Corp. 453,125
---------------------------------------- -----------
Total 2,975,237
---------------------------------------- -----------
INVESTMENT BANKING/BROKERAGE--3.6%
----------------------------------------
7,100 Interra Financial, Inc. 426,444
----------------------------------------
13,467 Legg Mason, Inc. 710,367
----------------------------------------
14,100 Piper Jaffray Cos., Inc. 430,931
----------------------------------------
17,300 Quick & Reilly Group, Inc. 647,669
----------------------------------------
14,800 Raymond James Financial, Inc. 532,800
---------------------------------------- -----------
Total 2,748,211
---------------------------------------- -----------
IRON & STEEL--0.6%
----------------------------------------
12,500 Quanex Corp. 438,281
---------------------------------------- -----------
LEISURE TIME--0.5%
----------------------------------------
14,700 K2, Inc. 369,337
---------------------------------------- -----------
</TABLE>
THE STYLE MANAGER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- -------------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
------------------------------------------------------
MACHINERY & EQUIPMENT--0.4%
--------------------------------------------
16,700 Global Industrial Technologies, Inc. $ 345,481
-------------------------------------------- -----------
MANUFACTURING-DIVERSIFIED--1.6%
--------------------------------------------
21,000 Figgie International Holdings, Inc., Class A 309,750
--------------------------------------------
28,200 Premark International, Inc. 902,400
-------------------------------------------- -----------
Total 1,212,150
-------------------------------------------- -----------
MANUFACTURING-SPECIALIZED--3.9%
--------------------------------------------
11,100 Aptargroup, Inc. 620,906
--------------------------------------------
11,218 Flowserve Corp. 335,138
--------------------------------------------
13,000 Greenfield Industries, Inc. 373,750
--------------------------------------------
14,600 Halter Marine Group, Inc. 706,275
--------------------------------------------
12,300 Ionics, Inc. 545,044
--------------------------------------------
13,300 Regal Beloit Corp. 408,975
-------------------------------------------- -----------
Total 2,990,088
-------------------------------------------- -----------
NATURAL GAS--2.7%
--------------------------------------------
9,800 Eastern Enterprises 365,662
--------------------------------------------
17,300 K N Energy, Inc. 791,475
--------------------------------------------
16,400 Northwest Natural Gas Co. 422,300
--------------------------------------------
18,300 Piedmont Natural Gas, Inc. 532,988
-------------------------------------------- -----------
Total 2,112,425
-------------------------------------------- -----------
OFFICE EQUIPMENT & SUPPLIES--0.5%
--------------------------------------------
11,300 Standard Register 376,431
-------------------------------------------- -----------
OIL & GAS--2.8%
--------------------------------------------
22,300 Camco International, Inc. 1,555,425
--------------------------------------------
25,400 Snyder Oil Corp. 576,263
-------------------------------------------- -----------
Total 2,131,688
-------------------------------------------- -----------
PAPER & FOREST PRODUCTS--1.4%
--------------------------------------------
28,600 Longview Fibre Co. 568,425
--------------------------------------------
10,700 Rayonier, Inc. 517,613
-------------------------------------------- -----------
Total 1,086,038
-------------------------------------------- -----------
PHARMACEUTICALS--0.5%
--------------------------------------------
16,900 Alpharma, Inc., Class A 378,137
--------------------------------------------
2,817 Alpharma, Inc., Rights 15,844
-------------------------------------------- -----------
Total 393,981
-------------------------------------------- -----------
PRINTING & PUBLISHING--0.5%
--------------------------------------------
11,700 Bowne & Co., Inc. 410,962
-------------------------------------------- -----------
PROPERTY--1.7%
--------------------------------------------
10,600 Fremont General Corp. 506,150
--------------------------------------------
9,100 Selective Insurance Group, Inc. 468,650
--------------------------------------------
11,300 Zenith National Insurance Corp. 322,756
-------------------------------------------- -----------
Total 1,297,556
-------------------------------------------- -----------
</TABLE>
THE STYLE MANAGER FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- -------------------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS--CONTINUED
-------------------------------------------------------------
RESTAURANTS--2.2%
--------------------------------------------------
11,900 IHOP Corp. $ 425,425
--------------------------------------------------
20,300 Landrys Seafood Restaurants, Inc. 596,313
--------------------------------------------------
13,800 Ruby Tuesday, Inc. 351,900
--------------------------------------------------
13,300 ShowBiz Pizza Time, Inc. 305,900
-------------------------------------------------- -----------
Total 1,679,538
-------------------------------------------------- -----------
RETAIL--0.9%
--------------------------------------------------
13,100 Fabri-Centers of America, Class A 302,937
--------------------------------------------------
12,750 Hughes Supply, Inc. 384,891
-------------------------------------------------- -----------
Total 687,828
-------------------------------------------------- -----------
RETAIL-SPECIALTY--2.4%
--------------------------------------------------
14,600 Michaels Stores, Inc. 446,213
--------------------------------------------------
22,200 O'Reilly Automotive, Inc. 505,050
--------------------------------------------------
31,050 Pier 1 Imports, Inc. 556,959
--------------------------------------------------
17,000 Sports Authority, Inc. 316,625
-------------------------------------------------- -----------
Total 1,824,847
-------------------------------------------------- -----------
SAVINGS & LOAN--5.6%
--------------------------------------------------
15,600 Astoria Financial Corp. 784,875
--------------------------------------------------
18,100 Charter One Financial, Inc. 1,070,162
--------------------------------------------------
18,600 Downey Financial Corp. 453,375
--------------------------------------------------
15,100 JSB Financial, Inc. 738,956
--------------------------------------------------
10,900 RCSB Financial, Inc. 594,050
--------------------------------------------------
27,900 St. Paul Bancorp, Inc. 697,500
-------------------------------------------------- -----------
Total 4,338,918
-------------------------------------------------- -----------
SERVICES-COMMERCIAL & CONSUMER--1.7%
--------------------------------------------------
21,700 Cerner Corp. 519,444
--------------------------------------------------
17,000 Franklin Covey Co. 474,937
--------------------------------------------------
14,247 Ogden Corp. 336,585
-------------------------------------------------- -----------
Total 1,330,966
-------------------------------------------------- -----------
SERVICES-COMPUTER SYSTEMS--0.5%
--------------------------------------------------
13,600 BancTec, Inc. 362,100
-------------------------------------------------- -----------
TRUCKERS--2.8%
--------------------------------------------------
22,900 Alexander and Baldwin, Inc. 592,537
--------------------------------------------------
18,100 American Freightways Corp. 343,900
--------------------------------------------------
16,700 Werner Enterprises, Inc. 404,975
--------------------------------------------------
24,000 Yellow Corp. 781,500
-------------------------------------------------- -----------
Total 2,122,912
-------------------------------------------------- -----------
TRUCKS & PARTS--0.6%
--------------------------------------------------
15,600 Wabash National Corp. 451,425
-------------------------------------------------- -----------
TOTAL COMMON STOCKS (IDENTIFIED COST $60,491,069) 75,511,023
-------------------------------------------------- -----------
</TABLE>
THE STYLE MANAGER FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
---------- --------------------------------------------------- -----------
<C> <S> <C>
(A) REPURCHASE AGREEMENT--1.6%
--------------------------------------------------------------
$1,219,266 C.S. First Boston, 6.05%, dated 9/30/1997, due
10/1/1997
(AT AMORTIZED COST) $ 1,219,266
--------------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST $61,710,335)(B) $76,730,289
--------------------------------------------------- -----------
</TABLE>
(a) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
(b) The cost of investments for federal tax purposes amounts to $61,750,880. The
net unrealized appreciation of investments on a federal tax basis amounts to
$14,979,409 which is comprised of $15,597,054 appreciation and $617,645
depreciation at September 30, 1997.
Note: The categories of investments are shown as a percentage of net assets
($76,873,948) at September 30, 1997.
(See Notes which are an integral part of the Financial Statements)
THE VIRGINIA MUNICIPAL BOND FUND
- -------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS
----------------------------------------------------------------------------
During the last year, interest rates have been relatively calm, but the year
ended with lower yields than were seen at the beginning of the year. Municipal
bonds, in general, outperformed Treasuries during the same period as a lack of
supply and a quieting of tax reform allowed the municipal bond market to gain
strength.
Towards the end of the year, yields on municipal bonds were at their most
attractive level relative to Treasuries at any time in the last three months.
This shift created a buying opportunity especially in the 10 to 15 year maturity
range desirable for this fund. We expect that the supply of municipal bonds will
remain relatively weak through the end of this calendar year and we would expect
municipal bonds to continue to outperform Treasuries during the same period.
Going forward, we expect overall interest rates to remain relatively calm with a
gradual bias toward lower interest rates. We will continue to maintain an
average maturity of about 15 years in an attempt to maximize yield while keeping
risk to changes in interest rates somewhat lower than the average fund.
THE VIRGINIA MUNICIPAL BOND FUND--Investment Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE VIRGINIA MUNICIPAL BOND FUND--INVESTMENT
SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
Virginia Municipal Bond Fund (the "Fund") from October 24, 1990 (start of
performance) to September 30, 1997, compared to the Lehman Brothers 10 Year
Municipal Bond Index ("LBMBI").+
GRAPHIC REPRESENTATION OMITTED. SEE APPEDIX F
AVERAGE ANNUAL TOTAL RETURN*** FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 5.70%
5 Year 5.73%
Start of Performance (10/24/90) 6.45%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/24/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. Certain investors
are subject to a 2.00% contingent deferred sales charge on shares redeemed
within five years of purchase date. The Fund's performance assumes the
reinvestment of all dividends and distributions.
***Total return quoted reflects all applicable contingent deferred sales
charges.
+The LBMBI is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The LBMBI has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE VIRGINIA MUNICIPAL BOND FUND--Trust Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE VIRGINIA MUNICIPAL BOND FUND--TRUST SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
Virginia Municipal Bond Fund (the "Fund") from October 24, 1990 (start of
performance) to September 30, 1997, compared to the Lehman Brothers 10 Year
Municipal Bond Index ("LBMBI").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX G
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 8.00%
5 Year 5.96%
Start of Performance (10/24/90) 6.62%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/24/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. The Fund's
performance assumes the reinvestment of all dividends and distributions.
+The LBMBI is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The LBMBI has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE VIRGINIA MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--95.6%
--------------------------------------------------------
VIRGINIA--95.6%
---------------------------------------------
$1,000,000 Albemarle County, VA IDA, Hospital Revenue
Refunding Bonds, 5.75% (Martha Jefferson
Hospital), 10/1/2008 A $ 1,056,730
---------------------------------------------
1,000,000 Arlington County, VA, GO UT Bonds, 5.30%
(Original Issue Yield: 5.40%), 6/1/2011 AAA 1,030,440
---------------------------------------------
3,175,000 Big Stone Gap, VA Redevelopment & Housing
Authority, Correctional Facility Lease
Revenue Bonds, 6.00% (Wallens Ridge
Development Project), 9/1/2007 AA 3,500,247
---------------------------------------------
2,890,000 Chesapeake Bay Bridge & Tunnel District, VA,
Revenue Bonds, 5.875% (FGIC INS)/(Original
Issue Yield: 5.95%), 7/1/2010 AAA 3,116,605
---------------------------------------------
3,500,000 Chesapeake, VA, GO UT Bonds, 5.375% (Commonwealth of Virginia
GTD)/(Original
Issue Yield: 5.45%), 5/1/2010 AA 3,635,870
---------------------------------------------
2,980,000 Chesterfield County, VA, GO UT Bonds, 5.25%,
3/1/2010 AA+ 3,051,550
---------------------------------------------
2,860,000 Commonwealth of Virginia, GO UT Bonds,
5.375%, 6/1/2009 AAA 2,993,905
---------------------------------------------
4,000,000 Commonwealth of Virginia, GO UT Public
Facilities Bonds (Series A), 5.70% (Original
Issue Yield: 5.75%), 6/1/2008 AAA 4,289,720
---------------------------------------------
2,545,000 Danville, VA IDA, Hospital Refunding Revenue Bonds, 6.20% (Danville
Regional Medical Center)/(FGIC INS)/(Original Issue Yield:
6.30%), 10/1/2009 AAA 2,779,395
---------------------------------------------
2,605,000 Fairfax County, VA Sewer Revenue, Revenue
Bonds, 5.625%, 7/15/2011 AA 2,748,197
---------------------------------------------
1,140,000 Fairfax County, VA Sewer Revenue, Sewer
Refunding Revenue Bonds, 5.30% (AMBAC INS),
11/15/2006 AAA 1,197,467
---------------------------------------------
1,505,000 Fairfax County, VA Sewer Revenue, Sewer
Refunding Revenue Bonds, 5.40% (AMBAC INS),
11/15/2007 AAA 1,583,681
---------------------------------------------
Fairfax County, VA Water Authority, 6.00%,
2,000,000 4/1/2022 AA 2,167,290
---------------------------------------------
1,000,000 Fairfax County, VA Water Authority, Revenue
Refunding Bonds, 4.65% (Original Issue Yield:
4.85%), 4/1/2010 AA 977,750
---------------------------------------------
3,500,000 Fairfax County, VA, (Series A), 5.25% (State Aid Withholding
LOC)/(Original Issue Yield:
5.35%), 6/1/2009 AAA 3,627,960
---------------------------------------------
2,000,000 Henrico County, VA IDA, Refunding Revenue Bonds, 5.60% (Bon Secours
Health System)/(MBIA INS)/(Original Issue Yield:
5.65%), 8/15/2010 AAA 2,090,720
---------------------------------------------
600,000 Loudoun County, VA IDA, Lease Revenue Bonds,
5.50% (Northern Virginia Criminal
Justice)/(Original Issue Yield: 5.829%),
6/1/2008 AA- 623,910
---------------------------------------------
1,000,000 Loudoun County, VA, GO UT Refunding Bonds
(Series A), 5.50% (Commonwealth of Virginia
GTD)/(Original Issue Yield: 5.649%),
10/1/2007 AA- 1,061,750
---------------------------------------------
4,440,000 Newport News, VA, GO UT, 5.75%, 1/15/2017 AA- 4,607,743
---------------------------------------------
3,000,000 Norfolk, VA, GO UT Bonds, 5.25% (Commonwealth of Virginia
GTD)/(Original Issue Yield:
5.55%), 6/1/2011 AA 3,052,140
---------------------------------------------
</TABLE>
THE VIRGINIA MUNICIPAL BOND FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CREDIT
OR SHARES RATING* VALUE
---------- -------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
-------------------------------------------------------
$2,000,000 Norfolk, VA, GO UT Bonds, 5.70% (MBIA INS), AAA
6/1/2008 $ 2,152,380
--------------------------------------------
2,535,000 Portsmouth, VA, GO UT Bonds, 5.00% (FGIC
INS), 8/1/2011 AAA 2,532,313
--------------------------------------------
3,375,000 Riverside, VA Regional Jail Authority, Jail
Facility Revenue Bonds, 5.625% (MBIA
INS)/(Original Issue Yield: 5.75%), 7/1/2007 AAA 3,638,655
--------------------------------------------
1,185,000 Roanoke, VA IDA, Hospital Revenue Refunding
Bonds (Series B), 6.00% (Roanoke Memorial
Hospital)/(Original Issue Yield: 6.10%),
7/1/2007 AA- 1,260,212
--------------------------------------------
3,510,000 Virginia College Building Authority, Revenue
Bonds, 5.40% (21ST Century College Program),
8/1/2015 AA 3,555,700
--------------------------------------------
7,255,000 Virginia State Public Building Authority,
Revenue Bonds, 5.20% (Original Issue Yield:
5.40%), 8/1/2010 AA 7,366,146
--------------------------------------------
2,030,000 Virginia State Transportation Board, Revenue
Bonds, 6.00% (Northern Virginia
Transportation District)/(Original Issue
Yield: 6.10%), 5/15/2008 AA 2,198,348
--------------------------------------------
1,000,000 Virginia State Transportation Board,
Transportation Contract Revenue Refunding
Bonds, 5.375% (U.S. Route 58 Corridor
PG-A), 5/15/2007 AA 1,048,000
--------------------------------------------
2,325,000 Virginia State University-Virginia
Commonwealth, Revenue Bonds, 5.75% (Original
Issue Yield: 5.827%), 5/1/2021 AA- 2,386,055
-------------------------------------------- -----------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST $72,293,301) 75,330,879
-------------------------------------------- -----------
MUTUAL FUND ISSUES--3.5%
-------------------------------------------------------
928,302 Goldman Sachs & Co. ILA Tax Exempt 928,302
--------------------------------------------
1,793,570 Municipal Fund for Temporary Investment 1,793,570
-------------------------------------------- -----------
TOTAL MUTUAL FUND ISSUES (AT NET ASSET
VALUE) 2,721,872
-------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST
$75,015,173)(A) $78,052,751
-------------------------------------------- -----------
</TABLE>
(a) The cost of investments for federal tax purposes amounts to $75,015,173. The
net unrealized appreciation of investments on a federal tax basis amounts to
$3,037,578 which is comprised of $3,041,196 appreciation and $3,618
depreciation at September 30, 1997.
* Please refer to the Appendix of the Statement of Additional Information for
an explanation of the credit ratings. Current credit ratings are unaudited.
Note: The categories of investments are shown as a percentage of net assets
($78,772,564) at September 30, 1997.
The following acronyms are used throughout this portfolio:
AMBAC--American Municipal Bond Assurance Corporation FGIC--Financial Guaranty
Insurance Company GO--General Obligation GTD--Guaranty IDA--Industrial
Development Authority INS--Insured LOC--Letter of Credit MBIA--Municipal Bond
Investors Assurance UT--Unlimited Tax
(See Notes which are an integral part of the Financial Statements)
THE MARYLAND MUNICIPAL BOND FUND
- -------------------------------------------------------------------------------
MANAGEMENT DISCUSSION AND ANALYSIS
----------------------------------------------------------------------------
During the last year, interest rates have been relatively calm, but the year
ended with lower yields than were seen at the beginning of the year. Municipal
bonds, in general, outperformed Treasuries during the same period as a lack of
supply and a quieting of tax reform allowed the municipal bond market to gain
strength.
Towards the end of the year, yields on municipal bonds were at their most
attractive level relative to Treasuries at any time in the last three months.
This shift created a buying opportunity especially in the 10 to 15 year maturity
range desirable for this fund. We expect that the supply of municipal bonds will
remain relatively weak through the end of this calendar year and we would expect
municipal bonds to continue to outperform Treasuries during the same period.
Bonds for the Maryland area continue to enjoy good demand, and typically yield 5
to 10 basis points less than similar bonds nationwide.
Going forward, we expect overall interest rates to remain relatively calm with a
gradual bias toward lower interest rates. We will continue to maintain an
average maturity of about 15 years in an attempt to maximize yield while keeping
risk to changes in interest rates somewhat lower than the average fund.
THE MARYLAND MUNICIPAL BOND FUND--Investment Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE MARYLAND MUNICIPAL BOND FUND--INVESTMENT
SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
Maryland Municipal Bond Fund (the "Fund") from October 30, 1990 (start of
performance) to September 30, 1997, compared to the Lehman Brothers 10 Year
Municipal Bond Index ("LBMBI").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX H
AVERAGE ANNUAL TOTAL RETURN*** FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 4.87%
5 Year 5.33%
Start of Performance (10/30/90) 6.01%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/30/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. Certain investors
are subject to a 2.00% contingent deferred sales charge on shares redeemed
within five years of purchase date. The Fund's performance assumes the
reinvestment of all dividends and distributions.
***Total return quoted reflects all applicable contingent deferred sales
charges.
+The LBMBI is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The LBMBI has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE MARYLAND MUNICIPAL BOND FUND--Trust Shares
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN THE MARYLAND MUNICIPAL BOND FUND--TRUST SHARES.
The graph below illustrates the hypothetical investment of $10,000** in The
Maryland Municipal Bond Fund (the "Fund") from October 30, 1990 (start of
performance) to September 30, 1997, compared to the Lehman Brothers 10 Year
Municipal Bond Index ("LBMBI").+
GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX I
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED SEPTEMBER 30, 1997
1 Year 7.19%
5 Year 5.56%
Start of Performance (10/30/90) 6.18%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Reflects operations of the Fund from the start of performance 10/30/90 through
9/30/97 on a cumulative basis.
**Represents a hypothetical investment of $10,000 in the Fund. The Fund's
performance assumes the reinvestment of all dividends and distributions.
+The LBMBI is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The LBMBI has
been adjusted to reflect reinvestment of dividends on securities in the index.
This index is unmanaged.
THE MARYLAND MUNICIPAL BOND FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--91.0%
--------------------------------------------------------
MARYLAND--91.0%
---------------------------------------------
$1,000,000 Baltimore County, MD Revenue Authority,
Revenue Refunding Bonds, 5.25% (Original
Issue Yield: 5.40%), 7/1/2008 A $ 1,038,610
---------------------------------------------
1,000,000 Baltimore, MD, GO UT Bonds (Series A), 5.375%
(AMBAC INS), 10/15/2008 AAA 1,035,650
---------------------------------------------
1,500,000 Calvert County, MD, Pollution Control Revenue
Bonds, 5.55% (Baltimore Gas & Electric
Co.)/(Original Issue Yield: 5.601%),
7/15/2014 A 1,528,065
---------------------------------------------
1,400,000 Carroll County, MD, GO UT, 5.35%, 12/1/2016 AA 1,411,144
---------------------------------------------
1,000,000 Harford County, MD, GO UT, 4.65%, 12/1/2006 AA- 1,012,150
---------------------------------------------
1,430,000 Howard County, MD, GO Refunding Bonds (Series
A), 5.25% (Original Issue Yield: 5.60%),
8/15/2011 AA+ 1,460,416
---------------------------------------------
1,000,000 Maryland Health & Higher Educational Facilities Authority, Refunding
Revenue Bonds, 5.30% (Francis Scott Key Medical Center)/(FGIC
INS)/(Original Issue Yield:
5.40%), 7/1/2008 AAA 1,037,220
---------------------------------------------
1,500,000 Maryland Health & Higher Educational
Facilities Authority, Revenue Bonds, 5.20%
(Frederick Memorial Hospital)/(FGIC
INS)/(Original Issue Yield: 5.30%), 7/1/2008 AAA 1,565,205
---------------------------------------------
1,740,000 Maryland National Capital Park & Planning
Commission, GO UT Bonds, 5.125% (Park
Aquisition & Development-S-2)/
(Original Issue Yield: 5.25%), 7/1/2010 AA 1,773,982
---------------------------------------------
1,470,000 Maryland State Community Development
Administration, Revenue Bonds (Single Family
Program-Fifth Series), 5.40%, 4/1/2008 Aa 1,508,279
---------------------------------------------
1,800,000 Maryland State Stadium Authority, Revenue
Bonds, 5.875% (AMBAC INS), 12/15/2011 AAA 1,927,980
---------------------------------------------
850,000 Maryland State Transportation Authority,
Refunding Revenue Bonds, 5.80% (Original
Issue Yield: 5.90%), 7/1/2006 A+ 927,223
---------------------------------------------
1,000,000 Maryland State, GO UT Bonds, 5.25%, 6/15/2007 AAA 1,054,210
---------------------------------------------
2,500,000 Maryland State, GO UT Bonds, 5.70% (Original
Issue Yield: 5.75%), 3/15/2010 AAA 2,682,875
---------------------------------------------
820,000 Montgomery County, MD, GO UT Refunding Bonds (Series A), 5.75%
(Original Issue Yield:
5.85%), 7/1/2006 AAA 897,146
---------------------------------------------
1,000,000 Ocean City, MD, GO UT Refunding Bonds, 5.50%
(MBIA Insurance Corporation INS), 3/15/2009 AAA 1,046,760
---------------------------------------------
500,000 Prince Georges County, MD, GO UT Bonds, 5.50% (Stormwater
Management)/(Original Issue
Yield: 5.55%), 3/15/2008 AA 524,910
---------------------------------------------
1,435,000 Prince Georges County, MD IDA, Lease Revenue
Bonds, 6.00% (Hyattsville District Court
Facility)/(Original Issue Yield: 6.10%),
7/1/2009 AA 1,590,941
---------------------------------------------
1,425,000 Rockville, MD, GO UT Revenue Refunding Bonds,
4.90% (Original Issue Yield: 5.00%),
4/15/2007 AA+ 1,449,995
---------------------------------------------
</TABLE>
THE MARYLAND MUNICIPAL BOND FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR CREDIT
SHARES RATING* VALUE
---------- -------------------------------------------- ------- -----------
<C> <S> <C> <C>
LONG-TERM MUNICIPAL SECURITIES--CONTINUED
-------------------------------------------------------
$1,500,000 University of Maryland, System Auxiliary
Facilities & Tuition Revenue Bonds (Series
A), 5.40% (Original Issue Yield: 5.45%),
4/1/2009 AA+ $ 1,573,170
--------------------------------------------
1,600,000 Washington Suburban Sanitation District, MD,
GO UT Bonds, 5.375%, 6/1/2011 AA 1,627,520
--------------------------------------------
1,700,000 Washington Suburban Sanitation District, MD,
GO UT Bonds, 5.50%, 6/1/2010 AA 1,768,781
-------------------------------------------- -----------
TOTAL LONG-TERM MUNICIPAL SECURITIES
(IDENTIFIED COST $29,252,821) 30,442,232
-------------------------------------------- -----------
MUTUAL FUND ISSUES--8.0%
-------------------------------------------------------
1,430,264 Goldman Sachs & Co. 1,430,264
--------------------------------------------
1,243,349 Municipal Fund for Temporary Investment 1,243,349
-------------------------------------------- -----------
TOTAL MUTUAL FUND ISSUES (AT NET ASSET 2,673,613
VALUE) -----------
--------------------------------------------
TOTAL INVESTMENTS (IDENTIFIED COST $33,115,845
$31,926,434)(A) -----------
--------------------------------------------
</TABLE>
At September 30, 1997, 4.7% of the total investments at market value were
subject to alternative minimum tax.
(a) The cost of investments for federal tax purposes amounts to $31,926,434. The
unrealized appreciation of investments on a federal tax basis amounts to
$1,189,411 at September 30, 1997.
* Please refer to the Appendix of the Statement of Additional Information for
an explanation of the credit ratings. Current credit ratings are unaudited.
Note: The categories of investments are shown as a percentage of net assets
($33,468,781) at September 30, 1997.
The following acronym(s) are used throughout this portfolio:
AMBAC--American Municipal Bond Assurance Corporation
FGIC--Financial Guaranty Insurance Company
GO--General Obligation
IDA--Industrial Development Authority
INS--Insured
MBIA--Municipal Bond Investors Assurance
UT--Unlimited Tax
(See Notes which are an integral part of the Financial Statements)
THE TREASURY MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- ------------------------------------------------ ------------
<C> <S> <C>
U.S. TREASURY OBLIGATIONS--52.6%
------------------------------------------------------------
U.S. TREASURY BILL--15.7%
------------------------------------------------
$50,000,000 10/16/1997 $ 49,906,604
------------------------------------------------
------------
------------
U.S. TREASURY NOTES--36.9%
------------------------------------------------
12,000,000 5/125%, 4/30/1998 11,935,655
------------------------------------------------
31,000,000 5.625% - 5.750%, 10/31/1997 31,002,067
------------------------------------------------
15,000,000 6.125%, 5/15/1998 15,031,852
------------------------------------------------
8,000,000 6.125%, 8/31/1998 8,024,535
------------------------------------------------
3,000,000 6.250%, 7/31/1998 3,014,931
------------------------------------------------
27,000,000 7.875%, 1/15/1998 27,168,155
------------------------------------------------
7,000,000 8.250%, 7/15/1998 7,135,850
------------------------------------------------
14,000,000 8.750%, 10/15/1997 14,016,352
------------------------------------------------
------------
Total 117,329,397
------------------------------------------------
------------
TOTAL U.S. TREASURY OBLIGATIONS 167,236,001
------------------------------------------------ ------------
(A) REPURCHASE AGREEMENTS--47.0%
------------------------------------------------------------
40,000,000 CS First Boston, 6.050%, dated 9/30/1997, due
10/1/1997 40,000,000
------------------------------------------------
40,000,000 Merrill Lynch, Pierce, Fenner and Smith, 6.050%,
dated
9/30/1997, due 10/1/1997 40,000,000
------------------------------------------------
29,310,947 Prudential Securities, Inc., 6.050%, dated
9/30/1997, due 10/1/1997 29,310,947
------------------------------------------------
40,000,000 Smith Barney, Inc., 6.000%, dated 9/30/1997, due
10/1/1997 40,000,000
------------------------------------------------
------------
TOTAL REPURCHASE AGREEMENTS 149,310,947
------------------------------------------------ ------------
------------
TOTAL INVESTMENTS (AT AMORTIZED COST)(B) $316,546,948
------------------------------------------------ ------------
</TABLE>
(a) The repurchase agreements are fully collateralized by U.S. Treasury and/or
agency obligations based on market prices at the date of the portfolio.
(b) Also represents cost for federal tax purposes.
Note: The categories of investments are shown as a percentage of net assets
($317,749,268) at September 30, 1997.
(See Notes which are an integral part of the Financial Statements)
THE MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
(A) COMMERCIAL PAPER--55.0%
---------------------------------------------------------------
ASSET BACKED--12.7%
---------------------------------------------------
$ 7,000,000 Ascot Capital Corp., 5.621%, 12/5/1997 $ 6,929,981
---------------------------------------------------
10,000,000 Centre Square Funding, 5.574%, 10/20/1997 9,970,708
---------------------------------------------------
Fleet Funding Corp., 5.557%-5.578%, 10/6/1997-
6,000,000 10/10/1997 5,994,168
---------------------------------------------------
8,000,000 Sigma Finance, 5.697%-5.716%, 2/2/1998-2/27/1998 7,827,485
--------------------------------------------------- ------------
Total 30,722,342
--------------------------------------------------- ------------
BANKING-FINANCE--2.5%
---------------------------------------------------
3,000,000 Banc One Funding Corp., 5.605%, 12/12/1997 2,966,820
---------------------------------------------------
3,000,000 Credit Suisse First Boston, 5.691%, 1/16/1998 2,950,691
--------------------------------------------------- ------------
Total 5,917,511
--------------------------------------------------- ------------
COMMERCIAL SERVICES--1.5%
---------------------------------------------------
3,600,000 McGraw-Hill Cos., Inc., 5.565%, 10/7/1997 3,596,700
--------------------------------------------------- ------------
CONSUMER NON-DURABLES--2.9%
---------------------------------------------------
Campbell Soup Co., 5.476%-5.688%, 11/18/1997-
7,000,000 4/17/1998 6,904,653
--------------------------------------------------- ------------
FINANCE-AUTOMOTIVE--1.2%
---------------------------------------------------
Ford Motor Credit Corp., 5.725%-5.857%, 10/27/1997-
3,000,000 4/13/1998 2,962,196
--------------------------------------------------- ------------
FINANCE-RETAIL--2.9%
---------------------------------------------------
7,000,000 Xerox Credit Corp., 5.493%-5.495%, 11/5/1997 6,964,067
--------------------------------------------------- ------------
FINANCE-LEASING--3.3%
---------------------------------------------------
Pitney Bowes Credit Corp., 5.679%-5.837%,
8,000,000 10/2/1997-1/9/1998 7,922,860
--------------------------------------------------- ------------
FINANCIAL SERVICES--14.8%
---------------------------------------------------
2,000,000 American General Finance Corp., 5.780%, 6/9/1998 1,922,748
---------------------------------------------------
General Electric Capital Corp., 5.761%-5.813%,
8,000,000 5/6/1998-6/9/1998 7,700,036
---------------------------------------------------
2,000,000 Marsh & McLennan Cos., Inc., 5.597%, 12/18/1997 1,976,167
---------------------------------------------------
Merrill Lynch & Co., Inc., 5.741%-5.981%, 1/5/1998-
11,640,000 4/13/1998 11,379,917
---------------------------------------------------
5,000,000 Republic New York Corp., 5.654%, 3/27/1998 4,864,792
---------------------------------------------------
Smith Barney, Inc., 5.560%-5.564%, 10/10/1997-
8,000,000 11/17/1997 7,960,030
--------------------------------------------------- ------------
Total 35,803,690
--------------------------------------------------- ------------
HEALTH SERVICES--4.1%
---------------------------------------------------
10,000,000 Schering Corp., 5.813%-5.822%, 10/7/1997-12/2/1997 9,946,639
--------------------------------------------------- ------------
PROCESS INDUSTRIES--2.5%
---------------------------------------------------
Du Pont (E.I.) de Nemours & Co., 5.847%-5.890%,
6,000,000 10/28/1997 5,974,350
--------------------------------------------------- ------------
PRODUCER MANUFACTURING--1.2%
---------------------------------------------------
3,000,000 Xerox Corp., 5.579%, 10/15/1997 2,993,583
--------------------------------------------------- ------------
</TABLE>
THE MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
OR SHARES VALUE
----------- --------------------------------------------------- ------------
<C> <S> <C>
(A) COMMERCIAL PAPER--CONTINUED
---------------------------------------------------------------
UTILITIES--5.4%
---------------------------------------------------
Southern California Edison Co., 5.604%-5.665%,
$ 8,000,000 10/17/1997-11/14/1997 $ 7,967,456
---------------------------------------------------
5,000,000 Virginia Electric Power Co., 9.375%, 6/1/1998 5,105,256
--------------------------------------------------- ------------
Total 13,072,712
--------------------------------------------------- ------------
TOTAL COMMERCIAL PAPER 132,781,303
--------------------------------------------------- ------------
CORPORATE BONDS--12.2%
---------------------------------------------------------------
BANKING-FINANCE--4.5%
---------------------------------------------------
Associates Corp. of North America, 8.375%,
4,000,000 1/15/1998 4,026,490
---------------------------------------------------
900,000 CIT Group Holdings, Inc., 6.750%, 4/30/1998 901,848
---------------------------------------------------
4,000,000 NationsBank Corp., 6.625%, 1/15/1998 4,007,304
---------------------------------------------------
2,000,000 Norwest Financial, Inc., 8.500%, 8/15/1998 2,042,512
--------------------------------------------------- ------------
Total 10,978,154
--------------------------------------------------- ------------
FINANCE-LEASING--3.2%
---------------------------------------------------
3,000,000 International Lease Finance Corp., 5.609%, 1/5/1998 2,956,160
---------------------------------------------------
International Lease Finance Corp., 8.125%,
4,760,000 1/15/1998 4,789,290
--------------------------------------------------- ------------
Total 7,745,450
--------------------------------------------------- ------------
FINANCIAL SERVICES--2.1%
---------------------------------------------------
5,000,000 American General Finance Corp., 8.250%, 1/15/1998 5,032,656
--------------------------------------------------- ------------
OIL/GAS--0.2%
---------------------------------------------------
500,000 Texaco Capital, Inc., 9.000%, 11/15/1997 501,886
--------------------------------------------------- ------------
PROCESS INDUSTRIES--0.8%
---------------------------------------------------
1,925,000 Du Pont (E.I.) de Nemours & Co., 8.650%, 12/1/1997 1,933,167
--------------------------------------------------- ------------
RESTAURANT/FOOD SERVICE--1.4%
---------------------------------------------------
3,238,000 PepsiCo, Inc., 6.125%, 1/15/1998 3,241,451
--------------------------------------------------- ------------
TOTAL CORPORATE BONDS 29,432,764
--------------------------------------------------- ------------
CORPORATE NOTES--2.2%
---------------------------------------------------------------
BANKING-FINANCE--1.3%
---------------------------------------------------
3,000,000 CIT Group Holdings, Inc., 6.500%, 7/13/1998 3,016,257
--------------------------------------------------- ------------
ELECTRONIC TECHNOLOGY--0.9%
---------------------------------------------------
2,250,000 Rockwell International Corp., 7.625%, 2/17/1998 2,264,006
--------------------------------------------------- ------------
TOTAL CORPORATE NOTES 5,280,263
--------------------------------------------------- ------------
GOVERNMENT AGENCIES--23.7%
---------------------------------------------------------------
(b)Federal National Mortgage Association, 5.360%,
2,000,000 12/14/1998 2,000,382
---------------------------------------------------
55,250,000 (b)Student Loan Marketing Association, 5.220%-
5.410%, 10/30/1997-3/7/2001 55,262,286
--------------------------------------------------- ------------
TOTAL GOVERNMENT AGENCIES 57,262,668
--------------------------------------------------- ------------
</TABLE>
THE MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
----------- ------------------------------------------ ------------
<C> <S> <C>
(C) REPURCHASE AGREEMENT--6.8%
------------------------------------------------------
Prudential Securities, Inc., 6.050%, dated
$16,490,289 9/30/1997, due 10/1/1997 $ 16,490,289
------------------------------------------ ------------
TOTAL INVESTMENTS (AT AMORTIZED COST)(D) $241,247,287
------------------------------------------ ------------
</TABLE>
(a) Each issue shows the rate of discount at the time of purchase for discount
issues, or the coupon for interest bearing issues.
(b) Current rate and next reset date shown.
(c) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio.
(d) Also represents cost for federal tax purposes.
Note: The categories of investments are shown as a percentage of net assets
($241,510,750) at September 30, 1997.
(See Notes which are an integral part of the Financial Statements)
THE TAX-FREE MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES--99.2%
--------------------------------------------------------
ALABAMA--4.4%
---------------------------------------------
$2,500,000 Columbia, AL IDB , PCR (Series C) Daily VRDNs
(Alabama Power Co.) A $ 2,500,000
--------------------------------------------- -----------
ALASKA--5.2%
---------------------------------------------
3,000,000 Alaska State Housing Finance Corp., Revenue
Bonds (Series 1991C) Weekly VRDNs (Swiss Bank
Capital Markets SPA) AAA 3,000,000
--------------------------------------------- -----------
ARIZONA--3.5%
---------------------------------------------
2,000,000 Arizona Health Facilities Authority, Pooled
Loan Program Revenue Bonds (Series 1985B)
Weekly VRDNs (FGIC INS)/(Chase Manhattan Bank
N.A., New York LIQ) AAA 2,000,000
--------------------------------------------- -----------
FLORIDA--5.7%
---------------------------------------------
3,290,000 Putnam County, FL Development Authority, PCR Bonds (Series 1984H)
Weekly VRDNs (Seminole Electric Cooperative, Inc (FL))/(National
Rural Utilities Cooperative Finance Corp.
LOC) AA- 3,290,000
--------------------------------------------- -----------
GEORGIA--12.6%
---------------------------------------------
2,000,000 Burke County, GA Development Authority, PCR
Bonds Daily VRDNs (Georgia Power Company
Plant Vogtle) A+ 2,000,000
---------------------------------------------
2,700,000 Gwinnett County, GA School District, GO UT
Refunding Bonds, 4.40% Bonds, 2/1/1998 AA+ 2,707,489
---------------------------------------------
1,500,000 Monroe County, GA Development Authority IDRB,
PCR Refunding Bonds (Series 2) Daily VRDNs
(Gulf Power Co.) A+ 1,500,000
---------------------------------------------
1,000,000 Putnam County, GA Development Authority Daily
VRDNs (Georgia Power Co.) A+ 1,000,000
--------------------------------------------- -----------
Total 7,207,489
--------------------------------------------- -----------
MARYLAND--8.3%
---------------------------------------------
1,000,000 Anne Arundel County, MD, GO UT, 4.00% Bonds,
4/1/1998 AA+ 1,001,229
---------------------------------------------
1,750,000 Baltimore County, MD Metropolitan District,
GO UT (65th Series), 5.00% Bonds, 6/1/1998 AAA 1,764,110
---------------------------------------------
2,000,000 Maryland Health & Higher Educational
Facilities Authority, Revenue Bonds Weekly
VRDNs (Greater Baltimore Medical
Center)/(First National Bank of Maryland,
Baltimore LOC) A1 2,000,000
--------------------------------------------- -----------
Total 4,765,339
--------------------------------------------- -----------
MASSACHUSETTS--4.4%
---------------------------------------------
2,500,000 Massachusetts IFA, (Series 1992A) Weekly
VRDNs (Ogden Haverhill)/(Union Bank of
Switzerland, Zurich LOC) AA+ 2,500,000
--------------------------------------------- -----------
MINNESOTA--0.7%
---------------------------------------------
400,000 Beltrami County, MN, Environmental Control
Authority Daily VRDNs (Northwood Panelboard
Co.)/(Union Bank of Switzerland, Zurich LOC) AA+ 400,000
--------------------------------------------- -----------
</TABLE>
THE TAX-FREE MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL CREDIT
AMOUNT RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES--CONTINUED
--------------------------------------------------------
NEW YORK--10.3%
---------------------------------------------
$1,000,000 New York City Municipal Water Finance
Authority, Water and Sewer System Revenue
Bonds (Series 1995 A) Daily VRDNs (FGIC
INS)/(FGIC Securities Purchase, Inc. LIQ) AAA $ 1,000,000
---------------------------------------------
1,000,000 New York City, NY Daily VRDNs (AMBAC INS) AAA 1,000,000
---------------------------------------------
900,000 New York City, NY Daily VRDNs (Morgan
Guaranty Trust Co., New York LOC) AAA 900,000
---------------------------------------------
100,000 New York City, NY, (Subseries B-4) Daily
VRDNs AA+ 100,000
---------------------------------------------
400,000 New York City, NY, GO Bonds Series-B Daily
VRDNs (FGIC INS)/(FGIC Securities Purchase,
Inc. LIQ) AAA 400,000
---------------------------------------------
500,000 New York City, NY, Series B Daily VRDNs (FGIC
INS)/(FGIC Securities Purchase, Inc. LIQ) AAA 500,000
---------------------------------------------
2,000,000 New York City, NY, Subseries A-10 Daily VRDNs AAA 2,000,000
--------------------------------------------- -----------
Total 5,900,000
--------------------------------------------- -----------
OHIO--6.8%
---------------------------------------------
1,900,000 Clermont County, OH , Revenue Bonds (Series
B) Weekly VRDNs (Mercy Health Systems) AA- 1,900,000
---------------------------------------------
2,000,000 Ohio State Air Quality Development Authority, Revenue Bonds (Series
B) Daily VRDNs (Cincinnati Gas and Electric Co.)/(J.P.
Morgan Delaware, Wilmington LOC) AAA 2,000,000
--------------------------------------------- -----------
Total 3,900,000
--------------------------------------------- -----------
PENNSYLVANIA--3.5%
---------------------------------------------
2,000,000 Allegheny County, PA HDA, (Series 1990 A)
Daily VRDNs (Presbyterian University
Hospital)/(MBIA Insurance Corporation
INS)/(PNC Bank, N.A. LIQ) AAA 2,000,000
--------------------------------------------- -----------
TEXAS--6.1%
---------------------------------------------
1,500,000 Lower Neches Valley, TX, Refunding Revenue Bonds, 3.75% TOBs
(Chevron U.S.A., Inc.)
2/16/1998 AA 1,500,000
---------------------------------------------
2,000,000 Sabine River Authority, TX , PCR Bonds
(Series B) Daily VRDNs (Texas Utilities
Electric Co.)/(Union Bank of Switzerland,
Zurich LOC) AA+ 2,000,000
--------------------------------------------- -----------
Total 3,500,000
--------------------------------------------- -----------
VIRGINIA--26.0%
---------------------------------------------
2,200,000 Fairfax County, VA IDA, Refunding Revenue
Bonds (Series A) Weekly VRDNs (Fairfax
Hospital System) AA 2,200,000
---------------------------------------------
2,000,000 Fairfax County, VA, GO UT (Series A), 5.50%
Bonds, 6/1/1998 AAA 2,022,729
---------------------------------------------
2,215,000 Loudoun County, VA, GO UT (Series A), 4.375%
Bonds, 8/1/1998 AA- 2,226,345
---------------------------------------------
965,000 Richmond, VA Public Utility, Series A, 8.00%
Bonds (United States Treasury PRF), 1/15/1998
(@102) AAA 996,204
---------------------------------------------
1,400,000 Virginia College Building Authority Weekly
VRDNs (University of Richmond)/(Crestar Bank
of Virginia, Richmond SA) Aa2 1,400,000
---------------------------------------------
</TABLE>
THE TAX-FREE MONEY MARKET FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT CREDIT
OR SHARES RATING* VALUE
---------- --------------------------------------------- ------- -----------
<C> <S> <C> <C>
SHORT-TERM MUNICIPAL SECURITIES--CONTINUED
--------------------------------------------------------
$2,000,000 Virginia State Housing Development Authority,
(Series C), 3.80% TOBs, Mandatory Tender
6/10/1998 AA+ $ 1,999,173
---------------------------------------------
500,000 Virginia State Public Building Authority,
(Series A), 3.90% Bonds, 8/1/1998 AA 500,192
---------------------------------------------
1,500,000 Virginia State Public School Authority,
Series A, 6.00% Bonds, 1/1/1998 AA 1,508,956
---------------------------------------------
2,000,000 Virginia State Transportation Board, 7.70%
Bonds (Route 28 Project)/(United States
Treasury PRF), 3/1/1998 (@102) AAA 2,072,480
--------------------------------------------- -----------
Total 14,926,079
--------------------------------------------- -----------
WYOMING--1.7%
---------------------------------------------
1,000,000 Lincoln County, WY, Revenue Bonds Daily VRDNs
(Exxon Corp.) AA 1,000,000
--------------------------------------------- -----------
TOTAL SHORT-TERM MUNICIPAL SECURITIES 56,888,907
--------------------------------------------- -----------
MUTUAL FUND ISSUES--0.4%
--------------------------------------------------------
247,772 Goldman Sachs & Co. (AT NET ASSET VALUE) 247,772
--------------------------------------------- -----------
TOTAL INVESTMENTS (AT AMORTIZED COST AND NET
ASSET VALUE)(A) $57,136,679
--------------------------------------------- -----------
</TABLE>
(a) Also represents cost for federal tax purposes.
* Please refer to the Appendix of the Statement of Additional Information for
an explanation of the credit ratings. Current credit ratings are unaudited.
Note: The categories of investments are shown as a percentage of net assets
($57,369,580) at September 30, 1997.
The following acronyms are used throughout this portfolio:
AMBAC--American Municipal Bond Assurance Corporation FGIC--Financial Guaranty
Insurance Company GO--General Obligation HDA--Hospital Development Authority
IDA--Industrial Development Authority IDB--Industrial Development Bond
IDRB--Industrial Development Revenue Bond IFA--Industrial Finance Authority
INS--Insured LIQ--Liquidity Agreement LOC--Letter of Credit MBIA--Municipal Bond
Investors Assurance PCR--Pollution Control Revenue PRF--Prerefunded SA--Support
Agreement SPA--Standby Purchase Agreement TOBs--Tender Option Bonds
UT--Unlimited Tax VRDNs--Variable Rate Demand Notes
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE U.S. THE STYLE THE THE
GOVERNMENT MANAGER: THE STYLE VIRGINIA MARYLAND
SECURITIES LARGE CAP MANAGER MUNICIPAL MUNICIPAL
FUND FUND FUND BOND FUND BOND FUND
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments in
repurchase agreements $ 460,430 $ 2,576,249 $ 1,219,266 $ -- $ --
Investments in
securities 155,643,026 104,106,935 75,511,023 78,052,751 33,115,845
- ------------------------------------------------------------------------------------------
Total investments in
securities, at value $156,103,456 $106,683,184 $76,730,289 $78,052,751 $33,115,845
- ------------------------------------------------------------------------------------------
Cash -- 446 -- -- --
Income receivable 1,935,302 128,141 96,421 1,121,169 438,320
Receivable for shares
sold 117,229 57,067 275,041 37,019 200
Deferred expenses -- -- 9,103 -- --
- ------------------------------------------------------------------------------------------
Total assets 158,155,987 106,868,838 77,110,854 79,210,939 33,554,365
- ------------------------------------------------------------------------------------------
LIABILITIES:
Payable for shares
redeemed 249,193 87,484 187,792 238,933 13,519
Income distribution
payable 362,543 -- -- 105,709 33,929
Payable to Bank 3,989 -- -- -- --
Accrued expenses 115,182 96,827 49,114 93,733 38,136
- ------------------------------------------------------------------------------------------
Total liabilities 730,907 184,311 236,906 438,375 85,584
- ------------------------------------------------------------------------------------------
TOTAL NET ASSETS $157,425,080 $106,684,527 $76,873,948 $78,772,564 $33,468,781
- ------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in capital $174,339,274 $ 69,922,418 $48,156,564 $75,912,084 $32,631,102
Net unrealized
appreciation of
investments 1,195,308 20,488,173 15,019,954 3,037,578 1,189,411
Accumulated net realized
gain (loss) on
investments (18,155,068) 16,158,724 13,635,635 (177,098) (351,732)
Accumulated
undistributed net
investment income 45,566 115,212 61,795 -- --
- ------------------------------------------------------------------------------------------
TOTAL NET ASSETS $157,425,080 $106,684,527 $76,873,948 $78,772,564 $33,468,781
- ------------------------------------------------------------------------------------------
NET ASSETS:
Trust Shares $ 52,177,289 $ 26,611,481 $ -- $19,891,348 $ 5,682,750
Investment Shares 105,247,791 80,073,046 76,873,948 58,881,216 27,786,031
- ------------------------------------------------------------------------------------------
Total $157,425,080 $106,684,527 $76,873,948 $78,772,564 $33,468,781
- ------------------------------------------------------------------------------------------
NET ASSET VALUE AND
OFFERING PRICE PER SHARE
Trust Shares $9.95 $16.31 -- $11.07 $10.91
Investment Shares $9.95 $16.31 $15.37 $11.07 $10.91
- ------------------------------------------------------------------------------------------
REDEMPTION PROCEEDS PER
SHARE*
Trust Shares $9.95 $16.31 -- $11.07 $10.91
Investment Shares** $9.75 $15.98 $15.06 $10.85 $10.69
- ------------------------------------------------------------------------------------------
SHARES OUTSTANDING
Trust Shares 5,246,259 1,632,012 -- 1,797,148 521,087
Investment Shares 10,582,280 4,910,713 5,002,112 5,319,803 2,547,851
- ------------------------------------------------------------------------------------------
Total Shares Outstanding 15,828,539 6,542,725 5,002,112 7,116,951 3,068,938
- ------------------------------------------------------------------------------------------
Investments, at
identified cost $154,908,148 $ 86,195,011 $61,710,335 $75,015,173 $31,926,434
- ------------------------------------------------------------------------------------------
Investments, at tax cost $154,908,148 $ 86,195,011 $61,750,880 $75,015,173 $31,926,434
- ------------------------------------------------------------------------------------------
</TABLE>
*See "Redeeming Shares" in the Prospectus.
**Computation of redemption proceeds per share: 98/100 of net asset value.
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE TREASURY THE TAX-FREE
MONEY THE MONEY MONEY
MARKET FUND MARKET FUND MARKET FUND
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments in repurchase agreements $149,310,947 $ 16,490,289 $ --
Investments in securities 167,236,001 224,756,998 57,136,679
- -------------------------------------------------------------------------------
Total investments in securities, at
value 316,546,948 241,247,287 57,136,679
- -------------------------------------------------------------------------------
Income receivable 2,578,221 1,133,016 371,750
Receivable for shares sold 3,106 11,582 69,301
Deferred expenses -- -- 4,692
- -------------------------------------------------------------------------------
Total assets 319,128,275 242,391,885 57,582,422
- -------------------------------------------------------------------------------
LIABILITIES:
Payable for shares redeemed 206,703 66,719 6,000
Income distribution payable 930,196 602,201 135,472
Payable to Bank -- 67,897 --
Accrued expenses 242,108 144,318 71,370
- -------------------------------------------------------------------------------
Total liabilities 1,379,007 881,135 212,842
- -------------------------------------------------------------------------------
TOTAL NET ASSETS $317,749,268 $241,510,750 $57,369,580
- -------------------------------------------------------------------------------
NET ASSETS:
Trust Shares $196,450,150 $164,290,280 $ --
Investment Shares 121,299,118 77,220,470 57,369,580
- -------------------------------------------------------------------------------
TOTAL NET ASSETS $317,749,268 $241,510,750 $57,369,580
- -------------------------------------------------------------------------------
NET ASSET VALUE AND REDEMPTION PROCEEDS
PER SHARE
Trust Shares $1.00 $1.00 --
Investment Shares $1.00 $1.00 $1.00
- -------------------------------------------------------------------------------
SHARES OUTSTANDING
Trust Shares 196,450,150 164,290,280 --
Investment Shares 121,466,050 77,220,470 57,369,580
- -------------------------------------------------------------------------------
Total Shares Outstanding 317,916,200 241,510,750 57,369,580
- -------------------------------------------------------------------------------
Investments, at amortized cost and net
asset value $316,546,948 $241,247,287 $57,136,679
- -------------------------------------------------------------------------------
Investments, at tax cost $316,546,948 $241,247,287 $57,136,679
- -------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE U.S. THE STYLE THE
GOVERNMENT MANAGER: THE STYLE THE VIRGINIA MARYLAND
SECURITIES LARGE CAP MANAGER MUNICIPAL MUNICIPAL
FUND FUND FUND BOND FUND BOND FUND
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ -- $ 2,280,851 $ 1,853,994 $ -- $ --
Interest 12,930,324 109,465 110,776 4,537,516 1,875,016
- --------------------------------------------------------------------------------------
Total income 12,930,324 2,390,316 1,964,770 4,537,516 1,875,016
- --------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fee 1,325,841 749,609 830,673 650,276 273,851
Administrative personnel
and services fee 172,113 97,360 75,125 84,421 75,000
Custodian fees 46,191 47,362 31,329 28,448 12,079
Transfer and dividend
disbursing agent fees
and expenses 132,824 198,044 64,733 80,614 60,084
Directors'/Trustees'
fees 3,071 3,593 2,496 2,754 2,202
Auditing fees 15,412 18,571 12,506 14,195 14,018
Legal fees 2,633 12,728 1,920 2,436 19
Portfolio accounting
fees 58,744 59,472 38,520 62,576 55,277
Distribution services
fee--
Investment Shares 279,386 175,775 -- 158,225 73,620
Share registration costs 15,210 26,705 11,764 15,011 9,626
Printing and postage 14,918 15,397 26,489 12,992 20,995
Insurance premiums 4,006 6,951 2,903 2,092 2,368
Miscellaneous 5,441 7,121 11,563 3,681 14
- --------------------------------------------------------------------------------------
Total expenses 2,075,790 1,418,688 1,110,021 1,117,721 599,153
Waivers--
Waiver of investment
advisory fee 37,709 -- 326,846 -- --
- --------------------------------------------------------------------------------------
Net expenses 2,038,081 1,418,688 783,175 1,117,721 599,153
- --------------------------------------------------------------------------------------
Net investment income 10,892,243 971,628 1,181,595 3,419,795 1,275,863
- --------------------------------------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS:
Net realized gain (loss)
on investments (3,831,048) 16,227,730 13,831,352 579,805 163,436
Change in unrealized
appreciation
of investments 4,711,022 14,347,096 9,985,998 2,442,760 982,703
- --------------------------------------------------------------------------------------
Net realized and
unrealized gain (loss)
on investments 879,974 30,574,826 23,817,350 3,022,565 1,146,139
- --------------------------------------------------------------------------------------
Change in net assets
resulting from
operations $11,772,217 $31,546,454 $24,998,945 $ 6,442,360 $2,422,002
- --------------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE TAX-
THE TREASURY FREE
MONEY THE MONEY MONEY
MARKET FUND MARKET FUND MARKET FUND
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $20,757,671 $13,828,345 $2,158,617
- ------------------------------------------------------------------------------
Total income 20,757,671 13,828,345 2,158,617
- ------------------------------------------------------------------------------
EXPENSES:
Investment advisory fee 1,897,464 1,250,019 302,027
Administrative personnel and services
fee 369,581 243,450 75,171
Custodian fees 120,115 74,934 34,273
Transfer and dividend disbursing agent
fees and expenses 240,905 123,295 44,277
Directors'/Trustees' fees 5,057 3,656 3,408
Auditing fees 20,051 16,000 16,613
Legal fees 412 4,687 2,434
Portfolio accounting fees 109,149 75,599 46,105
Distribution services fee--Investment
Shares 331,053 206,038 --
Share registration costs 18,320 24,568 12,242
Printing and postage 26,923 28,499 23,513
Insurance premiums 4,988 6,662 2,870
Miscellaneous 2,993 8,156 6,815
- ------------------------------------------------------------------------------
Total expenses 3,147,011 2,065,563 569,748
Waivers and Reimbursements--
Waiver of investment advisory fee (46,840) (57,472) (94,455)
Reimbursements of other operating
expenses (4,897) -- --
- ------------------------------------------------------------------------------
Total waivers and reimbursements (51,737) (57,472) (94,455)
- ------------------------------------------------------------------------------
Net expenses 3,095,274 2,008,091 475,293
- ------------------------------------------------------------------------------
Net investment income 17,662,397 11,820,254 1,683,324
- ------------------------------------------------------------------------------
Change in net assets resulting
from operations $17,662,397 $11,820,254 $1,683,324
- ------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE U.S. GOVERNMENT THE STYLE MANAGER:
SECURITIES FUND LARGE CAP FUND
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
OPERATIONS--
Net investment income $ 10,892,243 $ 13,381,466 $ 971,628 $ 1,995,250
Net realized gain (loss)
on investments (3,831,048) (3,219,621) 16,227,730 12,982,465
Net change in unrealized
appreciation
(depreciation) of
investments 4,711,022 (2,011,452) 14,347,096 (2,926,184)
- -------------------------------------------------------------------------------------
Change in net assets
resulting from operations 11,772,217 8,150,393 31,546,454 12,051,531
- -------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS-- Distributions from net investment income:
Trust Shares (4,109,350) (6,107,288) (350,276) (926,390)
Investment Shares (6,782,893) (7,274,178) (656,481) (1,026,148)
Distributions from net realized gains:
Trust Shares -- -- (4,272,531) (3,898,915)
Investment Shares -- -- (7,971,845) (3,989,082)
- -------------------------------------------------------------------------------------
Change in net assets
resulting from
distributions to
shareholders (10,892,243) (13,381,466) (13,251,133) (9,840,535)
- -------------------------------------------------------------------------------------
SHARE TRANSACTIONS--
Proceeds from sale of
shares 22,960,997 46,455,480 17,201,667 18,263,662
Shares issued in
connection with the
acquisition -- -- 1,509,197 9,245,450
Net asset value of
shares issued to
shareholders in payment
of
distributions declared 5,396,173 6,142,681 9,353,220 5,478,249
Cost of shares redeemed (67,228,310) (68,163,717) (33,248,877) (31,477,651)
- -------------------------------------------------------------------------------------
Change in net assets
resulting from share
transactions (38,871,140) (15,565,556) (5,184,793) 1,509,710
- -------------------------------------------------------------------------------------
Change in net assets (37,991,166) (20,796,629) 13,110,528 3,720,706
NET ASSETS:
Beginning of period 195,416,246 216,212,875 93,573,999 89,853,293
- -------------------------------------------------------------------------------------
End of period $157,425,080 $195,416,246 $106,684,527 $ 93,573,999
- -------------------------------------------------------------------------------------
Undistributed net
investment income
included in net assets
at end of period $ 45,566 $ 45,566 $ 115,212 $ 150,341
- -------------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE VIRGINIA MUNICIPAL
THE STYLE MANAGER FUND BOND FUND
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
OPERATIONS--
Net investment income $ 1,181,595 $ 1,728,218 $ 3,419,795 $ 3,919,914
Net realized gain (loss)
on investments 13,831,352 4,542,510 579,805 780,289
Net change in unrealized
appreciation
(depreciation) of
investments 9,985,998 (119,759) 2,442,760 (2,101,082)
- -------------------------------------------------------------------------------------
Change in net assets
resulting
from operations 24,998,945 6,150,969 6,442,360 2,599,121
- -------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS-- Distributions from net investment income:
Trust Shares -- -- (965,706) (1,287,834)
Investment Shares (1,233,260) (1,638,472) (2,454,089) (2,632,080)
Distributions from net realized gains:
Trust Shares -- -- -- --
Investment Shares (3,328,990) (8,143,290) -- --
- -------------------------------------------------------------------------------------
Change in net assets
resulting from
distributions to
shareholders (4,562,250) (9,781,762) (3,419,795) (3,919,914)
- -------------------------------------------------------------------------------------
SHARE TRANSACTIONS--
Proceeds from sale of
shares 40,136,505 16,506,045 6,840,095 16,125,700
Net asset value of
shares issued to
shareholders in payment
of
distributions declared 4,503,897 9,243,789 1,888,518 1,997,026
Cost of shares redeemed (50,985,728) (37,724,499) (26,788,539) (27,234,673)
- -------------------------------------------------------------------------------------
Change in net assets
resulting
from share
transactions (6,345,326) (11,974,665) (18,059,926) (9,111,947)
- -------------------------------------------------------------------------------------
Change in net assets 14,091,369 (15,605,458) (15,037,361) (10,432,740)
NET ASSETS:
Beginning of period 62,782,579 78,388,037 93,809,925 104,242,665
- -------------------------------------------------------------------------------------
End of period $ 76,873,948 $ 62,782,579 $ 78,772,564 $ 93,809,925
- -------------------------------------------------------------------------------------
Undistributed net
investment income
included in net assets
at end of period $ 61,795 $ 113,460 $ -- $ --
- -------------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE MARYLAND MUNICIPAL THE TREASURY
BOND FUND MONEY MARKET FUND
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
OPERATIONS--
Net investment income $ 1,275,863 $ 1,527,863 $ 17,662,397 $ 16,209,478
Net realized gain
(loss) on investments 163,436 186,173 -- --
Net change in
unrealized
appreciation
(depreciation) of
investments 982,703 (739,639) -- --
- --------------------------------------------------------------------------------------
Change in net assets
resulting
from operations 2,422,002 974,397 17,662,397 16,209,478
- --------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS--
Distributions from net investment income:
Trust Shares (261,815) (352,284) (11,714,695) (11,356,506)
Investment Shares (1,015,074) (1,175,552) (5,947,702) (4,852,972)
- --------------------------------------------------------------------------------------
Change in net assets
resulting from
distributions to
shareholders (1,276,889) (1,527,836) (17,662,397) (16,209,478)
- --------------------------------------------------------------------------------------
SHARE TRANSACTIONS--
Proceeds from sale of
shares 2,708,043 8,364,014 723,861,521 659,743,838
Shares issued in
connection with the
acquisition -- -- -- 122,108,127
Net asset value of
shares issued to
shareholders in
payment of
distributions declared 770,265 989,879 5,621,031 4,898,441
Cost of shares redeemed (11,327,459) (10,247,633) (784,872,329) (661,630,604)
- --------------------------------------------------------------------------------------
Change in net assets
resulting
from share
transactions (7,849,151) (893,740) (55,389,777) 125,119,802
- --------------------------------------------------------------------------------------
Change in net assets (6,704,038) (1,447,179) (55,389,777) 125,119,802
NET ASSETS:
Beginning of period 40,172,819 41,619,998 373,139,045 248,019,243
- --------------------------------------------------------------------------------------
End of period $ 33,468,781 $ 40,172,819 $ 317,749,268 $ 373,139,045
- --------------------------------------------------------------------------------------
Undistributed net
investment income
included in net assets
at end of period $ -- $ 1,026 $ -- $ --
- --------------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THE TAX-FREE MONEY
THE MONEY MARKET FUND MARKET FUND
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
OPERATIONS--
Net investment income $ 11,820,254 $ 12,191,680 $ 1,683,324 $ 2,734,120
- --------------------------------------------------------------------------------------
Change in net assets
resulting
from operations 11,820,254 12,191,680 1,683,324 2,734,120
- --------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS--
Distributions from net investment income:
Trust Shares (8,056,642) (8,395,610) -- --
Investment Shares (3,763,612) (3,796,070) (1,683,324) (2,734,120)
- --------------------------------------------------------------------------------------
Change in net assets
resulting from
distributions to
shareholders (11,820,254) (12,191,680) (1,683,324) (2,734,120)
- --------------------------------------------------------------------------------------
SHARE TRANSACTIONS--
Proceeds from sale of
shares 618,631,500 576,928,235 315,423,874 389,800,080
Net asset value of
shares issued to
shareholders in
payment of
distributions declared 3,617,170 3,626,658 417,624 459,305
Cost of shares redeemed (624,937,753) (551,929,373) (310,970,825) (419,737,938)
- --------------------------------------------------------------------------------------
Change in net assets
resulting
from share
transactions (2,689,083) 28,625,520 4,870,673 (29,478,553)
- --------------------------------------------------------------------------------------
Change in net assets (2,689,083) 28,625,520 4,870,673 (29,478,553)
NET ASSETS:
Beginning of period 244,199,833 215,574,313 52,498,907 81,977,460
- --------------------------------------------------------------------------------------
End of period $ 241,510,750 $ 244,199,833 $ 57,369,580 $ 52,498,907
- --------------------------------------------------------------------------------------
</TABLE>
(See Notes which are an integral part of the Financial Statements)
THE U.S. GOVERNMENT SECURITIES FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------
INVESTMENT SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.89 $10.13 $ 9.83 $10.90 $10.95
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.60 0.62 0.64 0.61 0.66
Net realized and
unrealized gain (loss) on
investments 0.06 (0.24) 0.30 (0.94) 0.03
- -------------------------------------------------------------------------------
Total from investment
operations 0.66 0.38 0.94 (0.33) 0.69
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.60) (0.62) (0.64) (0.61) (0.66)
Distributions from net
realized gain on
investments -- -- -- -- (0.08)
Distributions in excess of
net realized gain on
investments (a) -- -- -- (0.13) --
- -------------------------------------------------------------------------------
Total distributions (0.60) (0.62) (0.64) (0.74) (0.74)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 9.95 $ 9.89 $10.13 $ 9.83 $10.90
- -------------------------------------------------------------------------------
TOTAL RETURN (B) 6.89% 3.79% 9.84% (3.36)% 6.82%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS
Expenses 1.25% 1.14% 1.01% 0.99% 0.77%
Net investment income 6.07% 6.11% 6.41% 5.94% 5.91%
Expense
waiver/reimbursement (c) 0.02% 0.13% 0.28% 0.32% 0.43%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $105,248 $116,418 $114,803 $112,439 $119,187
Portfolio turnover 80% 118% 82% 227% 154%
- -------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------
TRUST SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.89 $10.13 $ 9.83 $10.90 $10.95
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.63 0.64 0.66 0.63 0.67
Net realized and
unrealized gain (loss) on
investments 0.06 (0.24) 0.30 (0.94) 0.03
- -------------------------------------------------------------------------------
Total from investment
operations 0.69 0.40 0.96 (0.31) 0.70
- -------------------------------------------------------------------------------
Less distributions
Distributions from net
investment income (0.63) (0.64) (0.66) (0.63) (0.67)
Distributions from net
realized gain on
investments -- -- -- -- (0.08)
Distributions in excess of
net realized gain on
investments (a) -- -- -- (0.13) --
- -------------------------------------------------------------------------------
Total distributions (0.63) (0.64) (0.66) (0.76) (0.75)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 9.95 $ 9.89 $10.13 $ 9.83 $10.90
- -------------------------------------------------------------------------------
TOTAL RETURN (B) 7.16% 4.05% 10.11% (3.12)% 6.94%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS
Expenses 1.00% 0.89% 0.76% 0.74% 0.63%
Net investment income 6.32% 6.36% 6.66% 6.19% 6.17%
Expense
waiver/reimbursement (c) 0.02% 0.13% 0.28% 0.32% 0.43%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $52,177 $78,998 $101,410 $107,103 $112,334
Portfolio turnover 80% 118% 82% 227% 154%
- -------------------------------------------------------------------------------
</TABLE>
(a) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principals. These
distributions do not represent a return of capital for federal income tax
purposes.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
THE STYLE MANAGER: LARGE CAP FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
INVESTMENT SHARES 1997(C) 1996 1995(C) 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $13.68 $13.70 $11.80 $12.39 $12.02
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.13 0.27 0.09 0.17 0.24
Net realized and unrealized
gain (loss) on investments 4.47 1.18 2.20 (0.39) 0.54
- -------------------------------------------------------------------------------
Total from investment operations 4.60 1.45 2.29 (0.22) 0.78
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.14) (0.27) (0.09) (0.17) (0.25)
Distributions from net realized
gain on investments (1.83) (1.20) (0.30) (0.20) (0.16)
- -------------------------------------------------------------------------------
Total distributions (1.97) (1.47) (0.39) (0.37) (0.41)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $16.31 $13.68 $13.70 $11.80 $12.39
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 37.02% 11.28% 20.02% (1.72%) 6.31%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.49% 1.36% 1.21% 1.20% 0.87%
Net investment income 0.88% 2.01% 0.67% 1.40% 1.81%
Expense waiver/reimbursement
(b) -- -- 0.21% 0.23% 0.55%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000
omitted) $80,073 $59,891 $44,509 $26,739 $18,691
Average commission rate paid
(d) $0.0783 $0.0616 -- -- --
Portfolio turnover 56% 151% 208% 205% 67%
- -------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
TRUST SHARES 1997(C) 1996 1995(C) 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $13.68 $13.70 $11.80 $12.39 $12.02
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.18 0.33 0.12 0.20 0.28
Net realized and unrealized
gain (loss) on investments 4.46 1.15 2.20 (0.40) 0.51
- -------------------------------------------------------------------------------
Total from investment operations 4.64 1.48 2.32 (0.20) 0.79
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.18) (0.30) (0.12) (0.19) (0.26)
Distributions from net realized
gain on investments (1.83) (1.20) (0.30) (0.20) (0.16)
- -------------------------------------------------------------------------------
Total distributions (2.01) (1.50) (0.42) (0.39) (0.42)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $16.31 $13.68 $13.70 $11.80 $12.39
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 37.37% 11.55% 20.33% (1.50%) 6.42%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.24% 1.11% 0.96% 0.95% 0.66%
Net investment income 1.17% 2.26% 0.92% 1.68% 2.09%
Expense waiver/reimbursement
(b) -- -- 0.21% 0.23% 0.55%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000
omitted) $26,611 $33,683 $45,345 $70,374 $65,841
Average commission rate paid
(d) $0.0783 $0.0616 -- -- --
Portfolio turnover 56% 151% 208% 205% 67%
- -------------------------------------------------------------------------------
</TABLE>
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Per share information presented is based on the monthly number of shares
outstanding due to large fluctuations in the number of shares outstanding
during the period.
(d) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
(See Notes which are an integral part of the Financial Statements)
THE STYLE MANAGER FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD
SEPTEMBER 30, ENDED
---------------- SEPTEMBER 30,
INVESTMENT SHARES 1997 1996 1995(A)
- --------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.47 $12.03 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.23 0.31 0.03
Net realized and unrealized gain on
investments 4.54 0.77 2.03
- --------------------------------------------------------------------------
Total from investment operations 4.77 1.08 2.06
- --------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net investment income (0.24) (0.29) (0.03)
Distributions from net realized gain on
investments (0.63) (1.35) --
- --------------------------------------------------------------------------
Total distributions (0.87) (1.64) (0.03)
- --------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $15.37 $11.47 $12.03
- --------------------------------------------------------------------------
TOTAL RETURN (B) 44.01% 10.19% 20.59%
- --------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.17% 0.99% 0.44%*
Net investment income 1.76% 2.63% 0.46%*
Expense waiver/reimbursement (c) 0.50% 0.44% 1.03%*
- --------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $76,874 $62,783 $78,388
Average commission rate paid (d) $0.0789 $0.0514 --
Portfolio turnover 94% 112% 92%
- --------------------------------------------------------------------------
</TABLE>
* Computed on an annualized basis.
(a) Reflects operations for the period from March 7, 1995 (date of initial
public investment) to September 30, 1995.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
(See Notes which are an integral part of the Financial Statements)
THE VIRGINIA MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
INVESTMENT SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $10.68 $10.81 $10.26 $11.26 $10.46
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.42 0.41 0.45 0.45 0.51
Net realized and unrealized
gain (loss) on investments 0.39 (0.13) 0.55 (0.92) 0.89
- -------------------------------------------------------------------------------
Total from investment
operations 0.81 0.28 1.00 (0.47) 1.40
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.42) (0.41) (0.45) (0.45)(e) (0.51)
Distributions from net
realized gain on
investments -- -- -- (0.06) (0.09)
Distributions in excess of
net realized gain on
investments (a) -- -- -- (0.02) --
- -------------------------------------------------------------------------------
Total distributions (0.42) (0.41) (0.45) (0.53) (0.60)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.07 $10.68 $10.81 $10.26 $11.26
- -------------------------------------------------------------------------------
TOTAL RETURN (B) 7.74% 2.60% 10.00% (4.25)% 13.49%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.36% 1.32% 1.17% 1.15% 0.90%
Net investment income 3.87% 3.78% 4.32% 4.22% 4.68%
Expense waiver/reimbursement
(c) -- 0.02% 0.22% 0.27% 0.50%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $58,881 $65,700 $70,572 $74,706 $63,492
Portfolio turnover 19% 129% 26% 29% 17%
- -------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
TRUST SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $10.68 $10.81 $10.26 $11.26 $10.46
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.45 0.44 0.48 0.48 0.53
Net realized and unrealized
gain (loss) on investments 0.39 (0.13) 0.55 (0.92) 0.89
- -------------------------------------------------------------------------------
Total from investment
operations 0.84 0.31 1.03 (0.44) 1.42
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.45) (0.44) (0.48) (0.48)(d) (0.53)
Distributions from net
realized gain on
investments -- -- -- (0.06) (0.09)
Distributions in excess of
net realized gain on
investments (a) -- -- -- (0.02) --
- -------------------------------------------------------------------------------
Total distributions (0.45) (0.44) (0.48) (0.56) (0.62)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.07 $10.68 $10.81 $10.26 $11.26
- -------------------------------------------------------------------------------
TOTAL RETURN (B) 8.00% 2.86% 10.27% (4.01%) 13.62%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.11% 1.06% 0.92% 0.90% 0.75%
Net investment income 4.12% 4.03% 4.57% 4.47% 4.85%
Expense waiver/reimbursement
(c) -- 0.02% 0.22% 0.27% 0.50%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $19,891 $28,110 $33,670 $34,165 $41,204
Portfolio turnover 19% 129% 26% 29% 17%
- -------------------------------------------------------------------------------
</TABLE>
(a) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(d) Amount includes distributions to shareholders in excess of net investment
income of $0.0002 per share.
(e) Amount includes distributions to shareholders in excess of net investment
income of $0.0001 per share.
(See Notes which are an integral part of the Financial Statements)
THE MARYLAND MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
INVESTMENT SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $10.56 $10.69 $10.17 $11.24 $10.39
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.37 0.38 0.40 0.45 0.49
Net realized and unrealized
gain (loss) on investments 0.35 (0.13) 0.54 (0.97) 0.85
- -------------------------------------------------------------------------------
Total from investment operations 0.72 0.25 0.94 (0.52) 1.34
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.37) (0.38) (0.40) (0.45) (0.49)
Distributions from net realized
gain on investments -- -- (0.02) (0.10) --
- -------------------------------------------------------------------------------
Total distributions (0.37) (0.38) (0.42) (0.55) (0.49)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.91 $10.56 $10.69 $10.17 $11.24
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 6.92% 2.36% 9.81% (4.74%) 13.24%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.69% 1.43% 1.24% 1.17% 1.00%
Net investment income 3.45% 3.57% 4.24% 4.22% 4.50%
Expense waiver/reimbursement
(b) -- 0.25% 0.44% 0.51% 0.77%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000
omitted) $27,786 $31,284 $32,172 $34,580 $33,907
Portfolio turnover 13% 138% 21% 27% 23%
- -------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
TRUST SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $10.56 $10.69 $10.17 $11.24 $10.39
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.40 0.41 0.42 0.48 0.50
Net realized and unrealized
gain (loss)
on investments 0.35 (0.13) 0.54 (0.97) 0.85
- -------------------------------------------------------------------------------
Total from investment operations 0.75 0.28 0.96 (0.49) 1.35
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.40) (0.41) (0.42) (0.48) (0.50)
Distributions from net realized
gain on investments -- -- (0.02) (0.10) --
- -------------------------------------------------------------------------------
Total distributions (0.40) (0.41) (0.44) (0.58) (0.50)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.91 $10.56 $10.69 $10.17 $11.24
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 7.19% 2.61% 10.09% (4.50%) 13.37%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 1.44% 1.18% 0.99% 0.92% 0.86%
Net investment income 3.70% 3.82% 4.49% 4.46% 4.64%
Expense waiver/reimbursement
(b) -- 0.25% 0.44% 0.51% 0.77%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000
omitted) $5,683 $8,889 $9,447 $11,301 $12,014
Portfolio turnover 13% 138% 21% 27% 23%
- -------------------------------------------------------------------------------
</TABLE>
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
THE TREASURY MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
INVESTMENT SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.05 0.05 0.05 0.03 0.02
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.05) (0.05) (0.05) (0.03) (0.02)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 4.58% 4.67% 4.98% 2.90% 2.52%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 0.98% 0.90% 0.85% 0.84% 0.70%
Net investment income 4.49% 4.49% 4.92% 3.05% 2.47%
Expense
waiver/reimbursement (b) 0.01% 0.09% 0.10% 0.18% 0.20%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $121,299 $146,161 $39,363 $21,883 $20,382
- -------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
TRUST SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.05 0.05 0.05 0.03 0.03
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.05) (0.05) (0.05) (0.03) (0.03)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 4.84% 4.89% 5.24% 3.16% 2.64%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 0.73% 0.65% 0.60% 0.59% 0.58%
Net investment income 4.74% 4.81% 5.17% 3.30% 2.60%
Expense
waiver/reimbursement (b) 0.01% 0.06% 0.10% 0.18% 0.20%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $196,450 $226,978 $208,656 $304,285 $152,921
- -------------------------------------------------------------------------------
</TABLE>
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
THE MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
INVESTMENT SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.05 0.05 0.05 0.03 0.03
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.05) (0.05) (0.05) (0.03) (0.03)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 4.67% 4.91% 5.11% 3.10% 2.77%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 0.97% 0.73% 0.80% 0.80% 0.64%
Net investment income 4.57% 4.77% 5.04% 3.07% 2.68%
Expense
waiver/reimbursement (b) 0.02% 0.23% 0.21% 0.25% 0.30%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $77,220 $83,525 $41,813 $15,236 $9,905
- -------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
TRUST SHARES 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.05 0.05 0.05 0.03 0.03
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net
investment income (0.05) (0.05) (0.05) (0.03) (0.03)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------
TOTAL RETURN (A) 4.93% 5.04% 5.36% 3.35% 2.89%
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 0.72% 0.60% 0.57% 0.55% 0.50%
Net investment income 4.81% 4.93% 5.27% 3.25% 2.83%
Expense
waiver/reimbursement (b) 0.02% 0.12% 0.19% 0.25% 0.30%
- -------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period
(000 omitted) $164,290 $160,675 $173,761 $132,445 $134,397
- -------------------------------------------------------------------------------
</TABLE>
(a) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
THE TAX-FREE MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------
INVESTMENT SHARES 1997 1996 1995 1994(A)
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.03 0.03 0.03 0.01
- ----------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net investment
income (0.03) (0.03) (0.03) (0.01)
- ----------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------------
TOTAL RETURN (B) 2.83% 3.01% 3.53% 0.45%
- ----------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
Expenses 0.79% 0.56% 0.39% 0.36%(c)
Net investment income 2.79% 2.95% 3.55% 2.65%(c)
Expense waiver/reimbursement (d) 0.16% 0.20% 0.56% 0.70%(c)
- ----------------------------------------------------------------------------
SUPPLEMENTAL DATA
Net assets, end of period (000
omitted) $57,370 $52,499 $81,977 $21,967
- ----------------------------------------------------------------------------
</TABLE>
(a) Reflects operations for the period from July 27, 1994 (date of initial
public investment) to September 30, 1994.
(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.
(c) Computed on an annualized basis.
(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(See Notes which are an integral part of the Financial Statements)
THE VIRTUS FUNDS NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
- -------------------------------------------------------------------------------
(1) ORGANIZATION
The Virtus Funds (the "Trust") is registered under the Investment Company Act of
1940, as amended (the "Act"), as an open-end management investment company. The
Trust consists of eight portfolios (individually referred to as the "Fund", or
collectively as the "Funds"). All Funds, except The Style Manager Fund and The
Tax-Free Money Market Fund are offered in two classes of shares: Trust Shares
and Investment Shares. The Style Manager Fund and The Tax-Free Money Market Fund
are presented as Investment Shares for financial statement purposes. The
following portfolios comprise the Trust:
<TABLE>
<CAPTION>
PORTFOLIO NAME INVESTMENT OBJECTIVE
- ------------------------------------------------------------------------------------------
<C> <S>
The U.S. Government Securities Fund Current Income
("Government Securities Fund") (d)
- ------------------------------------------------------------------------------------------
The Style Manager: Large Cap Fund Growth of capital and income
(" Large Cap Fund") (d)
- ------------------------------------------------------------------------------------------
The Style Manager Fund ("Style Manager Growth of capital
Fund") (d)
- ------------------------------------------------------------------------------------------
The Virginia Municipal Bond Fund Current income exempt from federal regular
("Virginia Municipal Bond Fund") (n) income tax and the personal income tax
imposed
by the Commonwealth of Virginia
- ------------------------------------------------------------------------------------------
The Maryland Municipal Bond Fund Current income exempt from federal regular
("Maryland Municipal Bond Fund") (n) income tax and the personal income tax
imposed
by the State of Maryland
- ------------------------------------------------------------------------------------------
The Treasury Money Market Fund Current income consistent with stability of
("Treasury Money Market Fund") (d) principal
- ------------------------------------------------------------------------------------------
The Money Market Fund Current income consistent with stability of
("Money Market Fund") (d) principal
- ------------------------------------------------------------------------------------------
The Tax-Free Money Market Fund Current income exempt from federal income tax
("Tax-Free Money Market Fund") (d) consistent with stability of principal
</TABLE>
(d) Diversified
(n) Non-diversified
The assets of each portfolio are segregated and a shareholder's interest is
limited to the portfolio in which shares are held.
On June 24, 1996, the Large Cap Fund acquired all the net assets of the
Blanchard American Equity Fund ("Acquired Fund") pursuant to a plan of
reorganization approved by the Acquired Fund's shareholders. The acquisition was
accomplished by a tax-free exchange of 695,476 shares of the Large Cap Fund
(valued at $9,245,652) for the 845,351 shares of the Acquired Fund outstanding
on June 21, 1996. The Acquired Fund's net assets of $9,245,652, which consisted
of $7,444,690 of Paid in Capital and $2,066,228 of unrealized appreciation, were
combined at that date with those of the Large Cap Fund. The aggregate net assets
of the Large Cap Fund and the Acquired Fund immediately before the acquisition
were $92,855,251 and $9,245,652, respectively.
On April 21, 1997, the Large Cap Fund acquired all the net assets of the
Blanchard Capital Growth Fund ("Acquired Fund") pursuant to a plan of
reorganization approved by the Acquired Fund's shareholders. The acquisition was
accomplished by a tax-free exchange of 113,473 shares of the Large Cap Fund
(valued at $1,509,197) for the 202,789 shares of the Acquired Fund outstanding
on April 18, 1997. The Acquired Fund's net assets of $1,509,197, which consisted
of $1,319,703 of Paid in Capital and $271,223 of unrealized appreciation, were
combined at that date with those of the Large Cap Fund. The aggregate net assets
of the Large Cap Fund and the Acquired Fund immediately before the acquisition
were $91,970,866 and $1,509,197, respectively.
THE VIRTUS FUNDS
- -------------------------------------------------------------------------------
(2) SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATIONS--Municipal bonds are valued by an independent pricing
service, taking into consideration yield, liquidity, risk, credit quality,
coupon, maturity, type of issue, and any other factors or market data the
pricing service deems relevant. U.S. government securities, listed corporate
bonds, other fixed income and asset-backed securities, and unlisted
securities and private placement securities are generally valued at the mean
of the latest bid and asked price as furnished by an independent pricing
service. Listed equity securities are valued at the last sale price reported
on a national securities exchange. The Funds use the amortized cost method to
value portfolio securities in accordance with Rule 2a-7 under the Act. For
fluctuating net asset value Funds within the Trust, short-term securities are
valued at the prices provided by an independent pricing service. However,
short-term securities purchased with remaining maturities of sixty days or
less may be valued at amortized cost, which approximates fair market value.
Investments in other open-end investment companies are valued at net asset
value.
REPURCHASE AGREEMENTS--It is the policy of the Funds to require a custodian
bank to take possession, to have legally segregated in the Federal Reserve
Book Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral under repurchase agreement transactions.
Additionally, procedures have been established by the Funds to monitor, on a
daily basis, the market value of each repurchase agreement's collateral to
ensure that the value of collateral at least equals the repurchase price to be
paid under the repurchase agreement transaction.
The Funds will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed by
the Funds' adviser to be creditworthy pursuant to guidelines and/or standards
reviewed or established by the Board of Trustees (the "Trustees"). Risks may
arise from the potential inability of counterparties to honor the terms of the
repurchase agreement. Accordingly, the Funds could receive less than the
repurchase price on the sale of collateral securities.
INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS--Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income and expenses are accrued daily. Bond premium and discount, if
applicable, are amortized as required by the Internal Revenue Code, as amended
(the "Code").
FEDERAL TAXES--It is the Funds' policy to comply with the provisions of the
Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of their income. Accordingly, no
provisions for federal tax are necessary.
At September 30, 1997, Government Securities Fund, Virginia Municipal Bond
Fund, and Maryland Municipal Bond Fund, for federal tax purposes, each had a
capital loss carryforward, as noted below. These capital loss carryforwards
will reduce the Fund's taxable income arising from future net realized gain on
investments, if any, to the extent permitted by the Code, and thus will reduce
the amount of the distributions to shareholders which would otherwise be
necessary to relieve the Funds of any liability for federal tax.
<TABLE>
<CAPTION>
FUNDS TOTAL TAX LOSS CARRYFORWARD
---------------------------
<S> <C>
Government Securities Fund $14,431,018
Virginia Municipal Bond Fund $ 178,797
Maryland Municipal Bond Fund $ 351,799
</TABLE>
THE VIRTUS FUNDS
- -------------------------------------------------------------------------------
Pursuant to the Code, such capital loss carryforwards will expire as follows:
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES FUND VIRGINIA MUNICIPAL BOND FUND
------------------------------------- ------------------------------------
EXPIRATION YEAR EXPIRATION AMOUNT EXPIRATION YEAR EXPIRATION AMOUNT
--------------- ----------------- --------------- -----------------
<S> <C> <C> <C>
2003 9,742,636 2004 178,797
2004 1,378,030
2005 3,310,352
</TABLE>
<TABLE>
<CAPTION>
MARYLAND MUNICIPAL BOND FUND
----------------------------------------------
EXPIRATION YEAR EXPIRATION AMOUNT
--------------- -----------------
<S> <C>
2004 351,799
</TABLE>
Additionally, net capital losses, as noted below, attributable to security
transactions incurred after September 30, 1996 are treated as arising on
October 1, 1997 the first day of the Funds' next taxable year.
<TABLE>
<CAPTION>
FUND TOTAL TAX LOSS PUSHFORWARD
-------------------------- --------------------------
<S> <C>
Government Securities Fund $3,736,134
</TABLE>
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Funds may engage in
when-issued or delayed delivery transactions. The Funds record when-issued
securities on the trade date and maintain security positions such that
sufficient liquid assets will be available to make payment for the securities
purchased. Securities purchased on a when-issued or delayed delivery basis are
marked to market daily and begin earning interest on the settlement date.
DEFERRED EXPENSES--The costs incurred by each Fund with respect to
registration of its shares in its first fiscal year, excluding the initial
expense of registering its shares, have been deferred and are being amortized
over a period not to exceed five years from each Fund's commencement date.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets, liabilities, expenses and
revenues reported in the financial statements. Actual results could differ
from those estimated.
OTHER--Investment transactions are accounted for on the trade date.
THE VIRTUS FUNDS
- --------------------------------------------------------------------------------
(3) SHARES OF BENEFICIAL INTEREST
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value). At
September 30, 1997, Treasury Money Market Fund, Money Market Fund, and Tax-Free
Money Market Fund, capital paid-in aggregated $317,749,268, $241,510,750, and
$57,369,580, respectively. Transactions in shares were as follows:
<TABLE>
<CAPTION>
GOVERNMENT
SECURITIES FUND LARGE CAP FUND
------------------------ ------------------------
FOR THE YEAR ENDED
SEPTEMBER 30, 1997: SHARES DOLLARS SHARES DOLLARS
- -------------------------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES:
- --------------------------
Shares sold 1,348,256 $ 13,371,271 878,296 $ 12,745,846
- --------------------------
Shares issued in
connection with the
acquisition -- -- 113,473 1,509,197
- --------------------------
Shares issued to
shareholders in payment of
distributions declared 544,149 5,396,169 640,836 8,496,790
- --------------------------
Shares redeemed (3,077,778) (30,479,752) (1,098,303) (16,038,717)
- -------------------------- ---------- ------------ ---------- ------------
Net change resulting from
Investment Share
transactions (1,185,373) $(11,712,312) 534,302 $ 6,713,116
- -------------------------- ---------- ------------ ---------- ------------
TRUST SHARES:
- --------------------------
Shares sold 966,507 $ 9,589,726 64,549 $ 4,455,821
- --------------------------
Shares issued to
shareholders in payment of
distributions declared -- 4 324,411 856,430
- --------------------------
Shares redeemed (3,705,430) (36,748,558) (1,219,486) (17,210,160)
- -------------------------- ---------- ------------ ---------- ------------
Net change resulting from
Trust Share transactions (2,738,923) (27,158,828) (830,526) (11,897,909)
- -------------------------- ---------- ------------ ---------- ------------
Net change resulting from
Fund Share transactions (3,924,296) $(38,871,140) (296,224) $ (5,184,793)
- -------------------------- ---------- ------------ ---------- ------------
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT
SECURITIES FUND LARGE CAP FUND
------------------------ ------------------------
FOR THE YEAR ENDED
SEPTEMBER 30, 1996: SHARES DOLLARS SHARES DOLLARS
- -------------------------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES:
- --------------------------
Shares sold 2,763,200 $ 27,838,858 965,024 $ 12,986,255
- --------------------------
Shares issued in
connection with the
acquisition -- -- 695,147 9,245,450
- --------------------------
Shares issued to
shareholders in payment of
distributions declared 611,870 6,142,678 379,876 4,969,161
- --------------------------
Shares redeemed (2,935,461) (29,411,819) (913,112) (13,464,743)
- -------------------------- ---------- ------------ ---------- ------------
Net change resulting from
Investment Share
transactions 439,609 $ 4,569,717 1,126,935 $ 13,736,123
- -------------------------- ---------- ------------ ---------- ------------
TRUST SHARES:
- --------------------------
Shares sold 1,853,668 $ 18,616,622 395,754 $ 5,277,407
- --------------------------
Shares issued to
shareholders in payment of
distributions declared 1 3 38,987 509,088
- --------------------------
Shares redeemed (3,875,084) (38,751,898) (1,282,606) (18,012,908)
- -------------------------- ---------- ------------ ---------- ------------
Net change resulting from
Trust Share transactions (2,021,415) (20,135,273) (847,865) (12,226,413)
- -------------------------- ---------- ------------ ---------- ------------
Net change resulting from
Fund Share transactions (1,581,806) $(15,565,556) 279,070 $ (1,509,710)
- -------------------------- ---------- ------------ ---------- ------------
</TABLE>
THE VIRTUS FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STYLE MANAGER FUND
------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 1997: SHARES DOLLARS
- ------------------------------------------------- ---------- ------------
<S> <C> <C>
INVESTMENT SHARES:
- -------------------------------------------------
Shares sold 3,251,568 $ 40,136,505
- -------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 383,514 4,503,897
- -------------------------------------------------
Shares redeemed (4,107,368) (50,985,728)
- ------------------------------------------------- ---------- ------------
Net change resulting from Fund Share transactions (472,286) $ (6,345,326)
- ------------------------------------------------- ---------- ------------
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30, 1996: SHARES DOLLARS
- ------------------------------------------------- ---------- ------------
<S> <C> <C>
INVESTMENT SHARES:
- -------------------------------------------------
Shares sold 1,489,971 $16,506,045
- -------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 863,431 9,243,789
- -------------------------------------------------
Shares redeemed (3,397,734) (37,724,499)
- ------------------------------------------------- ---------- ------------
Net change resulting from Fund Share transactions (1,044,332) $(11,974,665)
- ------------------------------------------------- ---------- ------------
</TABLE>
<TABLE>
<CAPTION>
VIRGINIA MUNICIPAL MARYLAND MUNICIPAL
BOND FUND BOND FUND
------------------------ ---------------------
FOR THE YEAR ENDED SEPTEMBER SHARES DOLLARS SHARES DOLLARS
30, 1997: ---------- ------------ -------- -----------
- -----------------------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES:
- -----------------------------
Shares sold 509,188 $ 5,533,656 192,865 $ 2,067,713
- -----------------------------
Shares issued to shareholders
in payment of distributions
declared 173,844 1,888,518 71,862 770,265
- -----------------------------
Shares redeemed (1,515,555) (16,472,000) (679,110) (7,269,728)
- ----------------------------- ---------- ------------ -------- -----------
Net change resulting from
Investment Share transactions (832,523) $ (9,049,826) (414,383) $(4,431,750)
- ----------------------------- ---------- ------------ -------- -----------
TRUST SHARES:
- -----------------------------
Shares sold 120,060 $ 1,306,439 59,419 $ 640,330
- -----------------------------
Shares issued to shareholders
in payment of distributions
declared -- -- -- --
- -----------------------------
Shares redeemed (955,166) (10,316,539) (380,036) (4,057,731)
- ----------------------------- ---------- ------------ -------- -----------
Net change resulting from
Trust Share transactions (835,106) (9,010,100) (320,617) (3,417,401)
- ----------------------------- ---------- ------------ -------- -----------
Net change resulting from
Fund Share transactions (1,667,629) $(18,059,926) (735,000) $(7,849,151)
- ----------------------------- ---------- ------------ -------- -----------
</TABLE>
THE VIRTUS FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VIRGINIA MUNICIPAL MARYLAND MUNICIPAL
BOND FUND BOND FUND
------------------------ ---------------------
FOR THE YEAR ENDED SHARES DOLLARS SHARES DOLLARS
SEPTEMBER 30, 1996: ---------- ------------ -------- -----------
- -----------------------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES:
- -----------------------------
Shares sold 1,022,563 $ 11,073,171 574,103 $ 6,142,806
- -----------------------------
Shares issued to shareholders
in payment of distributions
declared 184,796 1,997,026 92,527 989,879
- -----------------------------
Shares redeemed (1,580,634) (17,022,733) (712,478) (7,557,624)
- ----------------------------- ---------- ------------ -------- -----------
Net change resulting from
Investment Share transactions (373,275) $ (3,952,536) (45,848) $(424,939)
- ----------------------------- ---------- ------------ -------- -----------
TRUST SHARES:
- -----------------------------
Shares sold 468,285 $ 5,052,529 209,103 $ 2,221,208
- -----------------------------
Shares issued to shareholders
in payment of distributions
declared -- -- -- --
- -----------------------------
Shares redeemed (950,703) (10,211,940) (252,990) (2,690,009)
- ----------------------------- ---------- ------------ -------- -----------
Net change resulting from
Trust Share transactions (482,418) (5,159,411) (43,887) (468,801)
- ----------------------------- ---------- ------------ -------- -----------
Net change resulting from
Fund Share transactions (855,693) $ (9,111,947) (89,735) $ (893,740)
- ----------------------------- ---------- ------------ -------- -----------
</TABLE>
<TABLE>
<CAPTION>
TREASURY MONEY
MARKET FUND MONEY MARKET FUND
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INVESTMENT SHARES:
- -----------------------
Shares sold 67,174,914 92,237,108 92,778,441 144,072,045
- -----------------------
Shares issued in
connection with the
Acquisition -- 122,108,127 -- --
- -----------------------
Shares issued to
shareholders in payment
of distributions
declared 5,621,028 4,898,438 3,617,167 3,626,655
- -----------------------
Shares redeemed (97,657,884) (112,278,779) (102,699,797) (105,987,535)
- ----------------------- ------------ ------------ ------------ ------------
Net change resulting
from Investment Share
transactions (24,861,942) 106,964,894 (6,304,189) 41,711,165
- ----------------------- ------------ ------------ ------------ ------------
TRUST SHARES:
- -----------------------
Shares sold 656,686,607 567,506,731 525,853,059 432,856,190
- -----------------------
Shares issued to
shareholders in payment
of distributions
declared 3 3 3 3
- -----------------------
Shares redeemed (687,214,445) (549,184,891) (522,237,956) (445,941,838)
- ----------------------- ------------ ------------ ------------ ------------
Net change resulting
from Trust Share
transactions (30,527,835) 18,321,843 3,615,106 (13,085,645)
- ----------------------- ------------ ------------ ------------ ------------
Net change resulting
from Fund Share
transactions (55,389,777) 125,286,737 (2,689,083) 28,625,520
- ----------------------- ------------ ------------ ------------ ------------
</TABLE>
THE VIRTUS FUNDS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TAX-FREE MONEY MARKET FUND
----------------------------
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
INVESTMENT SHARES:
- -------------------------------------------------
Shares sold 315,423,874 389,800,080
- -------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 417,624 459,305
- -------------------------------------------------
Shares redeemed (310,970,825) (419,737,938)
- ------------------------------------------------- ------------ ------------
Net change resulting from Fund Share transactions 4,870,673 (29,478,553)
- ------------------------------------------------- ------------ ------------
</TABLE>
(4) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISORY FEE--Virtus Capital Management, Inc., the Trust's investment
adviser (the "Adviser"), receives for its services an annual investment advisory
fee based on a percentage of each Fund's average daily net assets (see below).
<TABLE>
<CAPTION>
FUND ANNUAL RATE
---------------------------- -----------
<C> <S>
Government Securities Fund 0.75%
Large Cap Fund 0.75%
Style Manager Fund 1.25%
Virginia Municipal Bond Fund 0.75%
Maryland Municipal Bond Fund 0.75%
Treasury Money Market Fund 0.50%
Money Market Fund 0.50%
Tax-Free Money Market Fund 0.50%
</TABLE>
The Adviser may voluntarily choose to waive a portion of its fee. The Adviser
can modify or terminate this voluntary waiver at any time at its sole
discretion.
Effective October 22, 1996 the Adviser increased its annual fee to 1.25% on the
Style Manager Fund.
Effective October 22, 1996 the Adviser entered into a sub-advisory agreement
with Trend Capital Management ("Trend") on behalf of the Style Manager Fund and
Large Cap Fund. Under the terms of a sub-advisory agreement between the Adviser
and Trend, with respect to the Style Manager Fund, the Adviser will pay Trend an
annual fee as follows: (a) an amount equal to .10% of the first $60 million of
the Fund's average daily net assets; and (b) with respect to average daily net
assets of the Fund in excess of $60 million, an amount equal to (i) one-third of
the Adviser's advisory fee to the extent that such advisory fee is less than or
equals 1% of the Fund's average daily net assets (but not to exceed .25% of the
Fund's average daily net assets); plus (ii) to the extent that the annual
advisory fee exceeds 1% of the Fund's average daily net assets, an additional
amount equal to two-thirds of such excess. With respect to the Large Cap Fund,
the Adviser will pay Trend an amount equal to .15% of the first $100 million of
the Fund's average daily net assets; and .33 1/3% of the Fund's average daily
net assets in excess of $100 million. Trend may voluntarily choose to reduce its
compensation. Trend can modify of terminate this voluntary reduction at any time
at its sole discretion.
ADMINISTRATIVE FEE--Federated Administrative Services ("FAS"), under the
Administrative Services Agreement, provides the Funds with administrative
personnel and services. The fee paid to FAS is based on the level of average
aggregate daily net assets of the Trust, the Blanchard Precious Metals Fund,
Inc., and the Blanchard Funds, all of which are advised by the Adviser. The
administrative fee received during any fiscal year shall be at least $50,000 per
Fund. With respect to the Style Manager Fund and the Tax-Free Money Market Fund,
the fee shall be at least $75,000.
DISTRIBUTION SERVICES FEE--The Trust has adopted a Distribution Plan (the
"Plan") pursuant to Rule 12b-1 under the Act. Under the terms of the Plan, each
Fund will reimburse Federated Securities Corp. ("FSC"), the principal
distributor, from the net assets of the Funds to finance activities intended to
result in the sale of the Funds' Investment Shares. The Plan provides that the
Funds may incur distribution expenses up to 0.25 % of the average daily net
assets of the Investment Shares, annually, to reimburse FSC. The Tax-Free Money
Market Fund and the Style Manager Fund will not accrue or pay any distribution
expenses pursuant to the Plan until a second class of shares has been created
for certain institutional investors.
TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES--Federated Services
Company ("FServ"), through its subsidiary, Federated Shareholder Services
Company ("FSSC") serves as transfer and dividend disbursing agent for the Funds.
The fee paid to FSSC is based on the size, type, and number of accounts
and transactions made by shareholders.
PORTFOLIO ACCOUNTING FEES--FServ also maintains the Funds' accounting records
for which it receives a fee. The fee is based on the level of each Fund's
average net assets for the period, plus out-of-pocket expenses.
CUSTODIAN FEES--Signet Trust Company is the Funds' custodian for which it
receives a fee. The fee is based on the level of each Fund's average net assets
for the period, plus out-of-pocket expenses.
ORGANIZATIONAL EXPENSES--Organizational expenses were borne initially by FAS.
The Funds have agreed to reimburse FAS for the organizational expenses during
the five year period following each Fund's effective date. For the year ended
September 30, 1997, the following amounts were paid pursuant to this agreement:
<TABLE>
<CAPTION>
AMOUNT REIMBURSED
TO FAS FOR THE
EXPENSES OF YEAR ENDED
FUND ORGANIZING THE FUND SEPTEMBER 30, 1997
-------------------------- ------------------- ------------------
<S> <C> <C>
Style Manager Fund $28,773 $4,620
Tax-Free Money Market Fund $17,883 $2,933
</TABLE>
GENERAL--Certain of the Officers and Trustees of the Trust are Officers and
Directors or Trustees of the above companies.
(5) INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities, for the
year ended September 30, 1997, were as follows:
<TABLE>
<CAPTION>
FUND PURCHASES SALES
------------ ------------
<S> <C> <C>
Government Securities Fund $138,698,434 $175,501,963
Large Cap Fund 55,144,492 73,658,378
Style Manager Fund 61,085,310 70,071,792
Virginia Municipal Bond Fund 15,978,372 33,799,963
Maryland Municipal Bond Fund 4,638,966 13,686,700
</TABLE>
(6) CONCENTRATION OF CREDIT RISK
Since Virginia Municipal Bond Fund and Maryland Municipal Bond Fund invest a
substantial portion of their assets in issuers located in one state, they will
be more susceptible to factors adversely affecting issuers of those states than
would be a comparable general tax-exempt mutual fund. In order to reduce the
credit risk associated with such factors, at September 30, 1997, 39% of the
securities in Virginia Municipal Bond Fund's portfolio of investments were
backed by letters of credit or bond insurance of various financial institutions
and financial guaranty assurance agencies. The value of investments insured by
or supported (backed) by a letter of credit from any one institution or agency
did not exceed 11% of total investments. At September 30, 1997, 20% of the
securities in Maryland Municipal Bond Fund's portfolio of investments were
backed by letters of credit or bond insurance of various financial institutions
and financial guaranty assurance agencies. The value of investments insured by
or supported (backed) by a letter of credit from any one institution or agency
did not exceed 9% of total investments.
THE VIRTUS FUNDS
- -------------------------------------------------------------------------------
(7) PROPOSED FUND MERGER
On July 18, 1997, Signet Banking Corporation ("Signet") entered into a
definitive Agreement and Plan of Reorganization whereby Signet was acquired by
First Union Corporation ("First Union"). It is anticipated that the merger will
be consummated on or about November 28, 1997.
As a result of this merger, First Union will succeed to the investment advisory
and functions formerly performed for the funds by various units of Signet and
various unaffiliated parties.
The Board of Trustees of the Trust has approved an Agreement and Plan of
Reorganization pursuant to which, on or about February 27, 1998, all of the
assets, and certain liabilities of the Funds would be acquired in exchange for
shares of a similarly managed fund (the "Acquiring Fund") that is advised by
affiliates of First Union. The reorganizations would result in the liquidation
and termination of the Funds. Pursuant to the reorganizations, shareholders of
the Funds will receive, tax-free, the number of shares of the acquiring fund
having a value equal to the value of their shares immediately prior to the
reorganizations. Consummation of the reorganizations is subject to approval of
the shareholders of the Funds.
THE VIRTUS FUNDS
INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------
To the Board of Trustees and Shareholders of
The Virtus Funds:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Virtus Funds (comprising the following
portfolios: The U.S. Government Securities Fund, The Style Manager: Large Cap
Fund, The Style Manager Fund, The Virginia Municipal Bond Fund, The Maryland
Municipal Bond Fund, The Treasury Money Market Fund, The Money Market Fund, and
The Tax-Free Money Market Fund) as of September 30, 1997, and the related
statements of operations for the year then ended, the statements of changes in
net assets for the years ended September 30, 1997 and 1996, and the financial
highlights for the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
September 30, 1997 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Virtus Funds as
of September 30, 1997, the results of its operations, the changes in its net
assets and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
As more fully described in Note 7, in November, 1997 the Funds are expected to
enter into an Agreement and Plan of Reorganization, pursuant to which (subject
to Fund shareholder approval) on or about February 27, 1998, all of the assets,
and certain liabilities of the Funds would be acquired in exchange for shares of
similarly managed funds that are advised by affiliates of First Union
Corporation. The reorganization would result in the liquidation and termination
of the Funds.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
November 7, 1997
TRUSTEES OFFICERS
- --------------------------------------------------------------------------------
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. Edward C. Gonzales
William J. Copeland President and Treasurer
James E. Dowd J. Christopher Donahue
Lawrence D. Ellis, M.D. Executive Vice President
Edward L. Flaherty, Jr. John W. McGonigle
Edward C. Gonzales Executive Vice President and
Peter E. Madden Secretary
John E. Murray, Jr. Joseph S. Machi
Wesley W. Posvar Vice President and Assistant
Marjorie P. Smuts Treasurer
Richard B. Fisher
Vice President
C. Grant Anderson
Assistant Secretary
This report is authorized for distribution to prospective investors only when
preceded or accompanied by the Funds' prospectus which contains facts concerning
their objective and policies, management fees, expenses and other information.
Cusip 927913608 Cusip 927913855 Cusip 927913400
Cusip 927913707 Cusip 927913848 Cusip 927913301
Cusip 927913863 Cusip 927913830 Cusip 927913889
Cusip 927913871 Cusip 927913509 Cusip 927913103
Cusip 927913806 Cusip 927913202
G00716-01 (11/97)
THE VIRTUS FUNDS APPENDIX
A. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The U.S. Government Securities Fund-Investment
Shares (the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Lehman Brothers
Intermediate Government Bond Index is represented by a solid line. The line
graph is a visual representation of a comparison of change in value of a
hypothetical $10,000 purchase in the Fund and The Lehman Brothers Intermediate
Government Bond Index. The "y" axis reflects the cost of the investment. The "x"
axis reflects computation periods from the Fund's start of performance, 10/16/90
through 9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to The Lehman Brothers Intermediate
Government Bond Index; the ending values are $16,120 and $16,983, respectively.
B. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The U.S. Government Securities Fund-Trust Shares
(the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Lehman Brothers
Intermediate Government Bond Index is represented by a solid line. The line
graph is a visual representation of a comparison of change in value of a
hypothetical $10,000 purchase in the Fund and The Lehman Brothers Intermediate
Government Bond Index. The "y" axis reflects the cost of the investment. The "x"
axis reflects computation periods from the Fund's start of performance, 10/16/90
through 9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to The Lehman Brothers Intermediate
Government Bond Index; the ending values are $16,301 and $16,983, respectively.
C. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Style Manager: Large Cap Fund-Investment
Shares (the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Standard & Poor's 500
Index is represented by a solid line. The line graph is a visual representation
of a comparison of change in value of a hypothetical $10,000 purchase in the
Fund and The Standard & Poor's 500 Index. The "y" axis reflects the cost of the
investment. The "x" axis reflects computation periods from the Fund's start of
performance, 10/16/90 through 9/30/97. The right margin reflects the ending
value of the hypothetical investment in the Fund as compared to the Standard &
Poor's 500 Index; the ending values are $24,937 and $37,387, respectively.
D. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Style Manager: Large Cap Fund-Trust Shares
(the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Standard & Poor's 500
Index is represented by a solid line. The line graph is a visual representation
of a comparison of change in value of a hypothetical $10,000 purchase in the
Fund and The Standard & Poor's 500 Index. The "y" axis reflects the cost of the
investment. The "x" axis reflects computation periods from the Fund's start of
performance, 10/16/90 through 9/30/97. The right margin reflects the ending
value of the hypothetical investment in the Fund as compared to the Standard &
Poor's 500 Index; the ending values are $25,208 and $37,387, respectively.
E. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Style Manager Fund (the "Fund"). The
corresponding components of the line graph are listed underneath. The Fund is
represented by a broken line. The Standard & Poor's 500 Index is represented by
a solid line. The line graph is a visual representation of a comparison of
change in value of a hypothetical $10,000 purchase in the Fund and The Standard
& Poor's 500 Index. The "y" axis reflects the cost of the investment. The "x"
axis reflects computation periods from the Fund's start of performance, 3/7/95
through 9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the Standard & Poor's 500 Index; the
ending values are $18,536 and $20,576, respectively.
F. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Virginia Municipal Bond Fund-Investment
Shares (the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Lehman Brothers 10
Year Municipal Bond Index is represented by a solid line. The line graph is a
visual representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund and The Lehman Brothers 10 Year Municipal Bond
Index. The "y" axis reflects the cost of the investment. The "x" axis reflects
computation periods from the Fund's start of performance, 10/24/90 through
9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the Lehman Brothers 10 Year Municipal Bond
Index; the ending values are $15,433 and $17,493, respectively.
G. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Virginia Municipal Bond Fund-Trust Shares
(the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Lehman Brothers 10
Year Municipal Bond Index is represented by a solid line. The line graph is a
visual representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund and The Lehman Brothers 10 Year Municipal Bond
Index. The "y" axis reflects the cost of the investment. The "x" axis reflects
computation periods from the Fund's start of performance, 10/24/90 through
9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the Lehman Brothers 10 Year Municipal Bond
Index; the ending values are $15,605 and $17,493, respectively.
H. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Maryland Municipal Bond Fund-Investment
Shares (the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Lehman Brothers 10
Year Municipal Bond Index is represented by a solid line. The line graph is a
visual representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund and The Lehman Brothers 10 Year Municipal Bond
Index. The "y" axis reflects the cost of the investment. The "x" axis reflects
computation periods from the Fund's start of performance, 10/30/90 through
9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the Lehman Brothers 10 Year Municipal Bond
Index; the ending values are $14,974 and $17,493, respectively.
I. The graphic presentation here displayed consists of a line graph titled
"Growth of $10,000 Invested in The Maryland Municipal Bond Fund-Trust Shares
(the "Fund"). The corresponding components of the line graph are listed
underneath. The Fund is represented by a broken line. The Lehman Brothers 10
Year Municipal Bond Index is represented by a solid line. The line graph is a
visual representation of a comparison of change in value of a hypothetical
$10,000 purchase in the Fund and The Lehman Brothers 10 Year Municipal Bond
Index. The "y" axis reflects the cost of the investment. The "x" axis reflects
computation periods from the Fund's start of performance, 10/30/90 through
9/30/97. The right margin reflects the ending value of the hypothetical
investment in the Fund as compared to the Lehman Brothers 10 Year Municipal Bond
Index; the ending values are $15,142 and $17,493, respectively.
<PAGE>
Evergreen Virginia Municipal Bond Fund
PRO FORMA COMBINING FINANCIAL STATEMENTS (UNAUDITED)
SCHEDULE OF INVESTMENTS (000's omitted)
August 31, 1997
<TABLE>
<CAPTION>
Evergreen Virginia
Municipal Bond Fund
-------------------
Maturity Market
Coupon Date Principal Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long Term Investments - 97.1%
Albemarle County IDA-RB, Residential Care Fac. Our Lady of Peace Inc. 6.450% 7/1/15 $ 100 $ 103
Albemarle County IDA-RB, Residential Care Fac. Our Lady of Peace Inc. 6.625 7/1/21 145 149
Albemarle County, Virginia Hospital Revenue Refunding, Martha Jefferson Hospital 5.750 10/1/08
Arlington County, IDA-RB, The Nature Conservancy 5.400 7/1/17 350 347
Arlington County Virginia 5.300 6/1/11
Big Stone Gap Virginia Redevelopment and Housing Wallens Ridge Dev. Project 6.000 9/1/07
Buena Vista IDA-RB, Water & Sewer Fac. Route 60 Proj. 6.250 7/15/11 390 391
Charlottesville-Albemarle, Airport Authority RB 6.125 12/1/13 250 256
Chesapeake Redev. & Hsg. Auth. RB, MFHB, Cedar Assoc 7.750 6/1/20 500 516
Chesapeake Bay Bridge and Tunnel Common 5.875 7/1/10
Chesapeake Virginia Public Improvement 5.375 5/1/10
Chesterfield County, Virginia Hlth. Ctr. Comn Mtg. RB, Lucy Corr. Nursing Home Proj. 5.875 12/1/21 500 511
Chesterfield County, Virginia Refunding 5.250 3/1/10
Danville Virginia IDA Hospital Danville Regional Medical Center 6.200 10/1/09
Fairfax County, Virginia, IDA-RB Inova Hlth System Project 5.875 8/15/16 370 381
Fairfax County, Virginia Redev. & Hsg. Auth. RB, Hsg. For The Elderly 6.000 9/1/16 500 514
Fairfax County Virginia, Public Improvement Series A 5.250 6/1/09
Fairfax County Virginia Sewer RB 5.300 11/15/06
Fairfax County Virginia Sewer RB 5.400 11/15/07
Fairfax County Virginia Sewer RB 5.625 7/15/11
Fairfax County Virginia Water Authority Revenue Refunding 4.650 4/1/10
Fairfax County Virginia Water Authority Revenue Prerefunded Refunding 6.000 4/1/22
Fairfax County Virginia Water Authority Revenue Refunding 6.000 4/1/22
Giles County, IDA-RB, Hoechst Celanese Proj. 5.950 12/1/25 250 257
Giles County, IDA-RB, Hoechst Celanese Proj. 6.450 5/1/26 500 538
Harrisonburg, Virginia Redev. & Hsg. Auth. RB, Greens of Salem Run Proj. 6.200 4/1/17 500 518
Henrico County, Virginia IDA Refunding Health Care Bon Secours Hosp. 5.600 8/15/10
Isle Wright County IDA-RB Solid Waste Disp. Fac. Union Camp Corp. Proj. 6.550 4/1/24 350 377
James City County IDA-RB Williamsburg Landing 6.625 3/1/23 600 614
King & Queen Cnty. IDA-RB King & Queen Cnty. Courts Complex 5.625 7/15/17 1,000 995
King George Cnty. IDA-RB King George Cnty. School Proj. 6.400 8/1/16 700 723
Loudoun County, Virginia Series A 5.500 10/1/07
Loudoun County, Virginia IDA, North Virginia Criminal Justice Academy 5.500 6/1/08
Metro. Washington DC Airport Authority RB 5.500 10/1/23 250 245
Newport News Virginia 5.750 1/15/17
Norfolk Virginia 5.700 6/1/08
Norfolk Virginia 5.250 6/1/11
Portsmouth, Virginia Redev. & Hsg. Auth. RB, MFHB 6.300 9/1/26 640 668
Portsmouth, Virginia 5.000 8/1/11
Prince William County IDA-RB 6.750 10/1/15 500 543
Prince William County IDA-RB 6.000 2/1/14 500 518
Prince William County Park Authority RB 6.875 10/15/16 1,250 1,366
Riverside, Virginia Regional Jail Authority RB 6.000 7/1/25 400 421
Riverside, Virginia Regional Jail Authority RB 5.625 7/1/07
Roanoke, Virginia IDA Hospital Revenue Series B 6.000 7/1/07
Virginia Port Auth. RB, Comwlth. Port. Fund 5.900 7/1/16 750 769
Virginia Port Auth. RB, Port. Fund 5.600 7/1/27 400 397
Virginia College Building Authority RB, Hampton Univ. Proj. 5.750 4/1/14 700 716
Virginia College Building Authority, 21st Century College Program 5.400 8/1/15
State of Virginia Hsg. Dev. Auth. RB, Comwlth. Mtg. 6.950 1/1/10 100 104
State of Virginia Hsg. Dev. Auth. RB, Comwlth. Mtg. 7.100 1/1/17 100 106
State of Virginia Hsg. Dev. Auth. RB, Comwlth. Mtg. 6.100 1/1/19 300 311
State of Virginia Hsg. Dev. Auth. RB, Comwlth. Mtg. 6.650 1/1/13 500 537
State of Virginia Hsg. Dev. Auth. RB, Comwlth. Mtg. 6.250 7/1/12 300 314
State of Virginia Hsg. Dev. Auth. RB, MFHB 6.350 11/1/11 300 314
State of Virginia Hsg. Dev. Auth. RB, MFHB 6.050 11/1/17 500 507
State of Virginia Series A 5.700 6/1/08
State of Virginia 5.375 6/1/09
Virginia Public Building Authority Revenue 5.200 8/1/10
Virginia Transportation Board Revenue 5.375 5/15/07
Virginia Transportation Board Revenue, Northern Virginia Transportation District Proj. A 6.000 5/15/08
Virginia State University, General Obligation, Series A 5.750 5/1/21
West Point, Virginia, IDA-RB Solid Waste Disposal Facility, Chesapeake Corp. Proj. 6.250 3/1/19 300 315
- ------------------------------------------------------------------------------------------------------------------------------------
Total Long Term Investments (Cost-$89,671) 15,339
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Virtus Virginia Pro Forma
Municipal Bond Fund Combined
------------------- -------------------
Market Market
Principal Value Adj Principal Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Long Term Investments - 97.1%
Albemarle County IDA-RB, Residential Care Fac. Our Lady of Peace Inc. $ 100 $ 103
Albemarle County IDA-RB, Residential Care Fac. Our Lady of Peace Inc. 145 149
Albemarle County, Virginia Hospital Revenue Refunding, Martha Jefferson Hospital $ 1,000 $ 1,046 1,000 1,046
Arlington County, IDA-RB, The Nature Conservancy 350 347
Arlington County Virginia 1,000 1,021 1,000 1,021
Big Stone Gap Virginia Redevelopment and Housing Wallens Ridge Dev. Project 3,675 4,018 3,675 4,018
Buena Vista IDA-RB, Water & Sewer Fac. Route 60 Proj. 390 391
Charlottesville-Albemarle, Airport Authority RB 250 256
Chesapeake Redev. & Hsg. Auth. RB, MFHB, Cedar Assoc 500 516
Chesapeake Bay Bridge and Tunnel Common 2,890 3,075 2,890 3,075
Chesapeake Virginia Public Improvement 3,500 3,596 3,500 3,596
Chesterfield County, Virginia Hlth. Ctr. Comn Mtg. RB, Lucy Corr. Nursing
Home Proj. 500 511
Chesterfield County, Virginia Refunding 2,980 3,026 2,980 3,026
Danville Virginia IDA Hospital Danville Regional Medical Center 2,545 2,751 2,545 2,751
Fairfax County, Virginia, IDA-RB Inova Hlth System Project 370 381
Fairfax County, Virginia Redev. & Hsg. Auth. RB, Hsg. For The Elderly 500 514
Fairfax County Virginia, Public Improvement Series A 4,000 4,101 4,000 4,101
Fairfax County Virginia Sewer RB 1,140 1,185 1,140 1,185
Fairfax County Virginia Sewer RB 1,505 1,570 1,505 1,570
Fairfax County Virginia Sewer RB 2,605 2,716 2,605 2,716
Fairfax County Virginia Water Authority Revenue Refunding 1,000 964 1,000 964
Fairfax County Virginia Water Authority Revenue Prerefunded Refunding 745 825 745 825
Fairfax County Virginia Water Authority Revenue Refunding 1,255 1,322 1,255 1,322
Giles County, IDA-RB, Hoechst Celanese Proj. 250 257
Giles County, IDA-RB, Hoechst Celanese Proj. 500 538
Harrisonburg, Virginia Redev. & Hsg. Auth. RB, Greens of Salem Run Proj. 500 518
Henrico County, Virginia IDA Refunding Health Care Bon Secours Hosp. 2,000 2,065 2,000 2,065
Isle Wright County IDA-RB Solid Waste Disp. Fac. Union Camp Corp. Proj. 350 377
James City County IDA-RB Williamsburg Landing 600 614
King & Queen Cnty. IDA-RB King & Queen Cnty. Courts Complex 1,000 995
King George Cnty. IDA-RB King George Cnty. School Proj. 700 723
Loudoun County, Virginia Series A 1,000 1,051 1,000 1,051
Loudoun County, Virginia IDA, North Virginia Criminal Justice Academy 600 620 600 620
Metro. Washington DC Airport Authority RB 250 245
Newport News Virginia 4,440 4,563 4,440 4,563
Norfolk Virginia 2,000 2,128 2,000 2,128
Norfolk Virginia 3,000 3,027 3,000 3,027
Portsmouth, Virginia Redev. & Hsg. Auth. RB, MFHB 640 668
Portsmouth, Virginia 2,535 2,505 2,535 2,505
Prince William County IDA-RB 500 543
Prince William County IDA-RB 500 518
Prince William County Park Authority RB 1,250 1,366
Riverside, Virginia Regional Jail Authority RB 400 421
Riverside, Virginia Regional Jail Authority RB 3,375 3,602 3,375 3,602
Roanoke, Virginia IDA Hospital Revenue Series B 1,185 1,251 1,185 1,251
Virginia Port Auth. RB, Comwlth. Port. Fund 750 769
Virginia Port Auth. RB, Port. Fund 400 397
Virginia College Building Authority RB, Hampton Univ. Proj. 700 716
Virginia College Building Authority, 21st Century College Program 4,010 4,030 4,010 4,030
State of Virginia Hsg. Dev. Auth. RB, Comwlth. Mtg. 100 104
State of Virginia Hsg. Dev. Auth. RB, Comwlth. Mtg. 100 106
State of Virginia Hsg. Dev. Auth. RB, Comwlth. Mtg. 300 311
State of Virginia Hsg. Dev. Auth. RB, Comwlth. Mtg. 500 537
State of Virginia Hsg. Dev. Auth. RB, Comwlth. Mtg. 300 314
State of Virginia Hsg. Dev. Auth. RB, MFHB 300 314
State of Virginia Hsg. Dev. Auth. RB, MFHB 500 507
State of Virginia Series A 4,000 4,246 4,000 4,246
State of Virginia 2,860 2,962 2,860 2,962
Virginia Public Building Authority Revenue 8,255 8,304 8,255 8,304
Virginia Transportation Board Revenue 1,000 1,039 1,000 1,039
Virginia Transportation Board Revenue, Northern Virginia Transportation District
Proj. A 2,030 2,178 2,030 2,178
Virginia State University, General Obligation, Series A 2,325 2,365 2,325 2,365
West Point, Virginia, IDA-RB Solid Waste Disposal Facility, Chesapeake Corp.
Proj. 300 315
- ------------------------------------------------------------------------------------------------------------------------------------
Total Long Term Investments (Cost-$89,671) 77,154 92,493
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Evergreen Virginia Municipal Bond Fund
PRO FORMA COMBINING FINANCIAL STATEMENTS (UNAUDITED)
SCHEDULE OF INVESTMENTS (000's omitted)
August 31, 1997
<TABLE>
<CAPTION>
Evergreen Virginia Virtus Virginia Pro Forma
Municipal Bond Fund Municipal Bond Fund Combined
------------------- ------------------- --------------------
Market Market Market
Mutual Fund Shares - 2.0% Shares Value Shares Value Shares Value
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Federated Municipal Obligation Fund 232 232 232 232
Goldman Sachs Institutional Tax Exempt Fund 908 908 908 908
Municipal Fund For Temporary Investment 797 797 797 797
- ------------------------------------------------------------------------------------------------------------------------------------
Total Mutual Fund Shares (Cost - $ 1,937) 232 1,705 1,937
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investments (Cost-$ 91,608) 99.1% 15,571 78,859 94,430
Other Assets and Liabilities 0.9 254 559 813
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS 100.0% $15,825 $ 79,418 $ 95,243
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Legend of Portfolio Abbreviations:
IDA Industrial Development Authority
MFHB Multi Family Housing Revenue Bond
RB Revenue Bond
See Notes to Pro Forma Combining Financial Statements.
<PAGE>
Evergreen Virginia Municipal Bond Fund
PRO FORMA COMBINING FINANCIAL STATEMENTS (UNAUDITED)
Statement of Assets and Liabilities (000's)
August 31, 1997
<TABLE>
<CAPTION>
Evergreen Virtus
Virginia Municipal Virginia Municipal Pro Forma
Bond Fund Bond Fund Adjustments Combined
------------------------------------------------------------ --------------
<S> <C> <C> <C> <C>
Assets
Investments at value (cost $91,608) $15,571 $78,859 $94,430
Cash 1 91 92
Interest receivable 263 995 1,258
Receivable for Fund shares sold 36 5 41
Prepaid expenses 6 0 6
---------------------------------------------------------- --------------
Total Assets 15,877 79,950 95,827
Liabilities
Dividends payable 25 266 291
Payable for Fund shares redeemed 0 173 173
Distribution fees payable 9 15 24
Due to related parties 11 74 85
Accrued expenses and other liabilities 7 4 11
---------------------------------------------------------------------------
Total Liabilities 52 532 584
Net Assets $15,825 $79,418 $95,243
===========================================================================
Net assets are comprised of:
Paid-in capital 15,457 77,311 92,768
Undistributed net investment income 6 0 6
Accumulated net realized loss on investments (205) (238) (443)
Net unrealized appreciation on investments 567 2,345 2,912
---------------------------------------------------------------------------
Net Assets $15,825 $79,418 $95,243
===========================================================================
Class A Shares
Net Assets $2,934 $59,546 $62,480
Shares of Beneficial Interest Outstanding 292 5,431 489 6,212
Net Asset Value $10.05 $10.96 $10.05
Maximum Offering Price (4.75%) $10.55 $10.55
Class B Shares
Net Assets $6,695 $6,695
Shares of Beneficial Interest Outstanding 666 666
Net Asset Value $10.05 $10.05
Class Y Shares
Net Assets $6,195 $19,872 $26,067
Shares of Beneficial Interest Outstanding 616 1,812 163 2,591
Net Asset Value $10.05 $10.97 $10.05
</TABLE>
See Notes to Pro Forma Combining Financial Statements.
<PAGE>
Evergreen Virginia Municipal Bond Fund
PRO FORMA COMBINING FINANCIAL STATEMENTS (UNAUDITED)
Statement of Operations (000's)
Year ended August 31, 1997
<TABLE>
<CAPTION>
Evergreen Virtus
Virginia Municipal Virginia Municipal Pro Forma
Bond Fund Bond Fund Adjustments Combined
------------------------------------------------------ -----------
<S> <C> <C> <C> <C>
Investment income
Interest income $ 849 $ 4,608 $ 5,457
Expenses
Advisory fee 71 659 (220)a 510
Administrative services fees 10 85 (23)b 72
Distribution fee 69 159 228
Transfer agent fee 39 101 65 c 205
Custodian fee 40 32 215 b 287
Registration and filing fees 21 13 (13)d 21
Professional fees 16 73 (68)d 21
Organization expenses 9 0 9
Trustees' fees and expenses 1 2 4 b 7
Other 18 12 19 b 49
Less: Fee waivers and/or reimbursements (114) (3) (340) (457)
-----------------------------------------------------------------------
Total Expenses 180 1,133 (361) 952
Less: Indirectly paid expenses (1) 0 (6)b (7)
-----------------------------------------------------------------------
Net expenses 179 1,133 (367) 945
-----------------------------------------------------------------------
Net investment income 670 3,475 367 4,512
Net realized and unrealized gain on investments:
Net realized gain on investments 177 489 666
Net change in unrealized appreciation
(depreciation) on investments 362 2,247 2,609
-----------------------------------------------------------------------
Net realized and unrealized gain on investments 539 2,736 3,275
Net increase in net assets resulting from operations $ 1,209 $ 6,211 367 $ 7,787
=======================================================================
</TABLE>
a Reflects decrease based on the fee structure of the surviving fund.
b Reflects increase (decrease) based on assets of the combined fund.
d Reflects expected savings from combining the funds together.
e Reflects increase due to additional accounts in the combined fund.
See Notes to Pro Forma Combining Financial Statements.
<PAGE>
Evergreen Virginia Municipal Bond Fund
Notes to Pro Forma Combining Financial Statements (Unaudited)
August 31, 1997
1. Basis of Combination - The Pro Forma Combining Statement of Assets and
Liabilities, including the Pro Forma Schedule of Investments, and the related
Pro Forma Combining Statement of Operations ("Pro Forma Statements") reflect the
accounts of Evergreen Virginia Municipal Bond Fund ("Evergreen") and Virtus
Virginia Municipal Bond Fund ("Virtus") at August 31, 1997 and for the year then
ended.
The Pro Forma Statements give effect to the proposed Agreement and Plan of
Reorganization (the "Reorganization") to be submitted to shareholders of Virtus.
The Reorganization provides for the acquisition of all assets and liabilities of
Virtus by Evergreen, in exchange for shares of Evergreen. Thereafter, there will
be a distribution of such shares of Evergreen to shareholders of Virtus in
liquidation and subsequent termination thereof. As a result of the
Reorganization, the shareholders of Virtus will become the owners of that number
of full and fractional shares of Evergreen having an aggregate net asset value
equal to the aggregate net asset value of their shares of Virtus as of the close
of business immediately prior to the date that Virtus assets are exchanged for
shares of Evergreen.
The Pro Forma Statements reflect the expenses of each Fund in carrying out its
obligations under the Reorganization as though the merger occurred at the
beginning of the period presented.
The information contained herein is based on the experience of each Fund for the
year ended August 31, 1997 and is designed to permit shareholders of the
consolidating mutual funds to evaluate the financial effect of the proposed
Reorganization. The expenses of Virtus in connection with the Reorganization
(including the cost of any proxy soliciting agents) will be borne by First Union
National Bank of North Carolina.
The Pro Forma Statements should be read in conjunction with the historical
financial statements of each Fund incorporated by reference in the Statement of
Additional Information.
2. Shares of Beneficial Interest - The Pro Forma net asset values per share
assume the issuance of shares of Evergreen Class A and Class Y which would have
been issued at August 31, 1997 in connection with the proposed Reorganization.
Shareholders of Virtus Investment Shares and Trust Shares would receive shares
of Evergreen Class A and Class Y, respectively, based on a conversion ratio
determined on August 31, 1997. The conversion ratio is calculated by dividing
the net asset value of Virtus Investment Shares and Trust Shares by the net
asset value per share of the shares of Evergreen Class A and Class Y,
respectively.
3. Pro Forma Operations - The Pro Forma Combining Statement of Operations
assumes similar rates of gross investment income for the investments of each
Fund. Accordingly, the combined gross investment income is equal to the sum of
the Funds' gross investment income. Pro Forma operating expenses include the
actual expenses of the Funds adjusted to reflect the expected expenses of the
combined entity. The investment advisory and distribution fees have been
charged to the combined Fund based on the fee schedule in effect for Evergreen
at the combined level of average net assets for the year ended August 31, 1997.
<PAGE>
EVERGREEN MUNICIPAL TRUST
PART C
OTHER INFORMATION
Item 15. Indemnification.
The response to this item is incorporated by reference to "Liability
and Indemnification of Trustees" under the caption "Comparative Information on
Shareholders' Rights" in Part A of this Registration Statement.
Item 16. Exhibits:
1(a). Declaration of Trust. Incorporated by reference to
Evergreen Municipal Trust's Registration Statement on Form N-1A
filed on October 8, 1997 - Registration No. 333-36033 ("Form
N-1A Registration Statement")
2. Bylaws. Incorporated by reference to the Form N-1A Registration Statement.
3. Not applicable.
4. Agreement and Plan of Reorganization. Exhibit A to Prospectus contained in
Part A of this Registration Statement.
5. Declaration of Trust of Evergreen Municipal Trust Articles II., III.6(c),
IV.(3), IV.(8), V., VI., VII., and VIII and By-Laws Articles II., III. and VIII.
6(a). Form of Investment Advisory Agreement between First Union National Bank
and Evergreen Municipal Trust. Incorporated by reference to the Form N-1A
Registration Statement.
6(b). Form of Interim Investment Advisory Agreement. Exhibit
B to Prospectus contained in Part A of this Registration
Statement.
7(a). Distribution Agreement between Evergreen Distributor,
Inc. and Evergreen Municipal Trust. Incorporated by reference to
the Form N-1A Registration Statement.
7(b). Form of Dealer Agreement for Class A and Class B shares used by Evergreen
Distributor, Inc. Incorporated by reference to the Form N-1A Registration
Statement.
<PAGE>
8. Deferred Compensation Plan. Incorporated by reference to the Form N-1A
Registration Statement.
9. Custody Agreement between State Street Bank and Trust
Company and Evergreen Municipal Trust. Incorporated by reference
to the Form N-1A Registration
Statement.
10. Rule 12b-1 Distribution Plan. Incorporated by reference to the Form N-1A
Registration Statement.
11. Opinion and consent of Sullivan & Worcester LLP. Filed herewith.
12. Tax opinion and consent of Sullivan & Worcester LLP. Filed herewith.
13. Not applicable.
14(a). Consent of KPMG Peat Marwick LLP. Filed herewith.
14(b). Consent of Deloitte & Touche LLP. Filed herewith.
15. Not applicable.
16. Powers of Attorney. Previously filed.
17. Form of Proxy Card. Filed herewith.
Item 17. Undertakings.
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus that is
a part of this Registration Statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933,
the reoffering prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be
<PAGE>
used until the amendment is effective, and that, in determining any liability
under the Securities Act of 1933, each post-effective amendment shall be deemed
to be a new Registration Statement for the securities offered therein, and the
offering of the securities at that time shall be deemed to be the initial bona
fide offering of them.
(3) The undersigned Registrant agrees to file, by post-effective
amendment, an opinion of counsel or copy of an Internal Revenue Service ruling
supporting the tax consequences of the proposed Reorganization within a
reasonable time after receipt of such opinion or ruling.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Post- Effective
Amendment No. 1 to the Registration Statement has been signed on behalf of the
Registrant, in the City of Columbus and State of Ohio, on the 30th day of
December, 1997.
EVERGREEN MUNICIPAL TRUST
By: /s/ William J. Tomko
-----------------------
Name: William J. Tomko
Title: President
As required by the Securities Act of 1933, the following persons have
signed this Post-Effective Amendment No. 1 to the Registration Statement in the
capacities indicated on the 30th day of December, 1997.
Signatures Title
- ---------- -----
/s/William J. Tomko President and
- ------------------- Treasurer
William J. Tomko
/s/Laurence B. Ashkin* Trustee
- ---------------------
Laurence B. Ashkin
/s/Charles A. Austin III* Trustee
- -------------------------
Charles A. Austin III
/s/K. Dun Gifford* Trustee
- -----------------
K. Dun Gifford
/s/James S. Howell* Trustee
- ------------------
James S. Howell
/s/Leroy Keith, Jr.* Trustee
- -------------------
Leroy Keith, Jr.
<PAGE>
/s/Gerald M. McDonnell* Trustee
- ----------------------
Gerald M. McDonnell
/s/Thomas L. McVerry* Trustee
- --------------------
Thomas L. McVerry
/s/William Walt Pettit* Trustee
- ---------------------
William Walt Pettit
/s/David M. Richardson* Trustee
- ----------------------
David M. Richardson
/s/Russell A. Salton III* Trustee
- -------------------------
Russell A. Salton III
/s/Michael S. Scofield* Trustee
- ----------------------
Michael S. Scofield
/s/Richard J. Shima* Trustee
- -------------------
Richard J. Shima
* By: /s/Martin J. Wolin
------------------
Martin J. Wolin
Attorney-in-Fact
Martin J. Wolin, by signing his name hereto, does hereby sign this
document on behalf of each of the above-named individuals pursuant to powers of
attorney duly executed by such persons and included as Exhibit 16 to this
Registration Statement.
<PAGE>
INDEX TO EXHIBITS
N-14
EXHIBIT NO.
11 Opinion and Consent of Sullivan & Worcester LLP
12 Tax Opinion and Consent of Sullivan & Worcester LLP
14(a) Consent of KPMG Peat Marwick LLP
14(b) Consent of Deloitte & Touche LLP
17 Form of Proxy
- --------------------
<PAGE>
SULLIVAN & WORCESTER LLP
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: 202-775-8190
FACSIMILE: 202-293-2275
767 THIRD AVENUE ONE POST OFFICE SQUARE
NEW YORK, NEW YORK 10017 BOSTON, MASSACHUSETTS 02109
TELEPHONE: 212-486-8200 TELEPHONE: 617-338-2800
FACSIMILE: 212-758-2151 FACSIMILE: 617-338-2880
December 30, 1997
Evergreen Municipal Trust
200 Berkeley Street
Boston, Massachusetts 02116
Ladies and Gentlemen:
We have been requested by the Evergreen Municipal Trust, a Delaware
business trust with transferable shares (the "Trust") established under an
Agreement and Declaration of Trust dated September 17, 1997, as amended (the
"Declaration"), for our opinion with respect to certain matters relating to
Evergreen Virginia Municipal Bond Fund (the "Acquiring Fund"), a series of the
Trust. We understand that the Trust is about to file Post- Effective Amendment
No. 1 to its Registration Statement on Form N-14 (Registration No. 333-41251)
for the purpose of registering shares of the Trust under the Securities Act of
1933, as amended (the "1933 Act"), in connection with the proposed acquisition
by the Acquiring Fund of all of the assets of The Virginia Municipal Bond Fund
(the "Acquired Fund"), a series of a Massachusetts business trust with
transferable shares, in exchange solely for shares of the Acquiring Fund and the
assumption by the Acquiring Fund of certain identified liabilities of the
Acquired Fund pursuant to an Agreement and Plan of Reorganization, the form of
which is included in the Form N-14 Registration Statement (the "Plan").
We have, as counsel, participated in various business and other
proceedings relating to the Trust. We have examined copies, either certified or
otherwise proved to be genuine to our satisfaction, of the Trust's Declaration
and By-Laws, and other documents relating to its organization, operation, and
proposed operation, including the proposed Plan and we have made such other
investigations as, in our judgment, are necessary or appropriate to enable us to
render the opinion expressed below.
We are admitted to the Bars of The Commonwealth of Massachusetts and
the District of Columbia and generally do not purport to be familiar with the
laws of the State of Delaware.
<PAGE>
To the extent that the conclusions based on the laws of the State of Delaware
are involved in the opinion set forth herein below, we have relied, in rendering
such opinions, upon our examination of Chapter 38 of Title 12 of the Delaware
Code Annotated, as amended, entitled "Treatment of Delaware Business Trusts"
(the "Delaware business trust law") and on our knowlege of interpretation of
analogous common law of The Commonwealth of Massachusetts.
Based upon the foregoing, and assuming the approval by shareholders of
the Acquired Fund of certain matters scheduled for their consideration at a
meeting presently anticipated to be held on February 20, 1998, it is our opinion
that the shares of the Acquiring Fund currently being registered, when issued in
accordance with the Plan and the Trust's Declaration and By-Laws, will be
legally issued, fully paid and non-assessable by the Trust, subject to
compliance with the 1933 Act, the Investment Company Act of 1940, as amended and
applicable state laws regulating the offer and sale of securities.
We hereby consent to the filing of this opinion with and as a part of
the Registration Statement on Form N-14 and to the reference to our firm under
the caption "Legal Matters" in the Prospectus/Proxy Statement filed as part of
the Registration Statement. In giving such consent, we do not thereby admit that
we come within the category of persons whose consent is required under Section 7
of the 1933 Act or the rules and regulations promulgated thereunder.
Very truly yours,
/s/SULLIVAN & WORCESTER LLP
---------------------------
SULLIVAN & WORCESTER LLP
<PAGE>
SULLIVAN & WORCESTER LLP
1025 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20036
TELEPHONE: 202-775-8190
FACSIMILE: 202-293-2275
767 THIRD AVENUE ONE POST OFFICE SQUARE
NEW YORK, NEW YORK 10017 BOSTON, MASSACHUSETTS 02109
TELEPHONE: 212-486-8200 TELEPHONE: 617-338-2800
FACSIMILE: 212-758-2151 FACSIMILE: 617-338-2880
December 30, 1997
The Virginia Municipal Bond Fund
Evergreen Virginia Municipal Bond Fund
200 Berkeley Street
Boston, Massachusetts 02116
Re: Acquisition of Assets of The Virginia Municipal Bond
Fund by Evergreen Virginia Municipal Bond Fund
Ladies and Gentlemen:
You have asked for our opinion as to certain Federal income tax
consequences of the transactions described below:
Parties to the Transaction. The Virginia Municipal Bond Fund ("Target
Fund") is a series of a The Virtus Funds, a Massachusetts business trust.
Evergreen Virginia Municipal Bond Fund ("Acquiring Fund") is a series
of Evergreen Municipal Trust, a Delaware business trust.
Description of Proposed Transaction. Acquiring Fund will issue its
shares to Target Fund and assume certain stated liabilities of Target Fund, in
exchange for all of the assets of Target Fund. Target Fund will then immediately
dissolve and distribute all of the Acquiring Fund shares which it holds to its
shareholders pro rata in proportion to their shareholdings in Target Fund, in
complete redemption of all outstanding shares of Target Fund.
Scope of Review and Assumptions. In rendering our opinion, we have
reviewed and relied upon the form of Agreement and Plan of Reorganization (the
"Reorganization Agreement") between Acquiring Fund and Target Fund dated as of
November 26, 1997 which is enclosed in a draft prospectus/proxy statement to be
dated January 5, 1998 which describes the proposed transaction, and on the
information provided in such prospectus/proxy statement. We have relied, without
independent verification, upon the factual statements made therein, and assume
that there will be no change in material facts disclosed therein between the
date of this letter and the date of the closing of the transaction. We further
assume that the transaction will be carried out in accordance with the
Reorganization Agreement.
<PAGE>
Representations. Written representations, copies of which are attached
hereto, have been made to us by the appropriate officers of Target Fund and of
Acquiring Fund, and we have without independent verification relied upon such
representations in rendering our opinions.
Opinions
Based on and subject to the foregoing, and our examination of the legal
authority we have deemed to be relevant, we have the following opinions:
1. The acquisition by Acquiring Fund of all of the assets of Target
Fund solely in exchange for voting shares of Acquiring Fund and assumption of
certain specified liabilities of Target Fund followed by the distribution by
Target Fund of said Acquiring Fund shares to the shareholders of Target Fund in
exchange for their Target Fund shares will constitute a reorganization within
the meaning of ss. 368(a)(1)(D) of the Code, and Acquiring Fund and Target Fund
will each be "a party to a reorganization" within the meaning of ss. 368(b) of
the Code.
2. No gain or loss will be recognized to Target Fund upon the transfer
of all of its assets to Acquiring Fund solely in exchange for Acquiring Fund
voting shares and assumption by Acquiring Fund of certain specified liabilities
of Target Fund, or upon the distribution of such Acquiring Fund voting shares to
the shareholders of Target Fund in exchange for all of their Target Fund shares.
3. No gain or loss will be recognized by Acquiring Fund upon the
receipt of the assets of Target Fund solely in exchange for Acquiring Fund
voting shares and assumption by Acquiring Fund of any liabilities of Target
Fund.
4. The basis of the assets of Target Fund acquired by Acquiring Fund
will be the same as the basis of those assets in the hands of Target Fund
immediately prior to the transfer, and the holding period of the assets of
Target Fund in the hands of Acquiring Fund will include the period during which
those assets were held by Target Fund.
5. The shareholders of Target Fund will recognize no gain or loss upon
the exchange of all of their Target Fund shares solely for Acquiring Fund voting
shares.
6. The basis of the Acquiring Fund voting shares to be received by the
Target Fund shareholders will be the same as the basis of the Target Fund shares
surrendered in exchange therefor.
<PAGE>
7. The holding period of the Acquiring Fund voting shares to be
received by the Target Fund shareholders will include the period during which
the Target Fund shares surrendered in exchange therefor were held, provided the
Target Fund shares were held as a capital asset on the date of the exchange.
This opinion letter is delivered to you in satisfaction of the
requirements of Section 8.6 of the Reorganization Agreement. We hereby consent
to the filing of this opinion as an exhibit to the Registration Statement on
Form N-14 and to use of our name and any reference to our firm in such
Registration Statement or in the Prospectus/Proxy Statement constituting a part
thereof. In giving such consent, we do not thereby admit that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission thereunder.
Very truly yours,
SULLIVAN & WORCESTER LLP
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Trustees and Shareholders
Evergreen Municipal Trust
We consent to the use of our report dated October 10, 1997 for Evergreen
Virginia Municipal Bond Fund incorporated by reference herein and to the
reference to our firm under the caption "FINANCIAL STATEMENTS AND EXPERTS" in
the prospectus/proxy
statement.
/s/KPMG Peat Marwick LLP
------------------------
KPMG Peat Marwick LLP
Boston, Massachusetts
December 30, 1997
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Evergreen Municipal Trust on Form N-14 of our report on The Virginia Municipal
Bond Fund dated November 7, 1997, appearing in the Annual Report of The Virtus
Funds for the year ended September 30, 1997, and to the reference to us under
the heading "Financial Statements and Experts" in the Prospectus/Proxy
Statement, which is part of this Registration Statement.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
December 30, 1997
<PAGE>
EVERY SHAREHOLDER'S VOTE IS IMPORTANT!
THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR" EACH PROPOSAL.
PLEASE VOTE, SIGN, DATE AND PROMPTLY RETURN
YOUR PROXY IN THE ENCLOSED ENVELOPE TODAY!
Please detach at perforation before mailing.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
THE VIRGINIA MUNICIPAL BOND FUND,
a series of The Virtus Funds
PROXY FOR THE MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 20, 1998
The undersigned, revoking all Proxies heretofore given, hereby appoints
C. Grant Anderson, Carol B. Kayworth, Patricia F. Conner, Ann M. Scanlon and
Catherine C. Ryan or any of them as Proxies of the undersigned, with full power
of substitution, to vote on behalf of the undersigned all shares of The Virginia
Municipal Bond Fund, a series of The Virtus Funds ("Virtus VA") that the
undersigned is entitled to vote at the special meeting of shareholders of Virtus
VA to be held at 2:00 p.m. on Friday, February 20, 1998 at the offices of the
Evergreen Funds, 200 Berkeley Street, Boston, Massachusetts 02116 and at any
adjournments thereof, as fully as the undersigned would be entitled to vote if
personally present.
NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S)
APPEAR ON THIS PROXY. If joint owners,
EITHER may sign this Proxy. When signing as
attorney, executor, administrator, trustee,
guardian, or custodian for a minor, please
give your full title. When signing on behalf
of a corporation or as a partner for a
partnership, please give the full corporate
or partnership name and your title, if any.
Date , 199
----------------------------------------
----------------------------------------
Signature(s) and Title(s), if applicable
<PAGE>
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
OF THE VIRTUS FUNDS. THIS PROXY WILL BE VOTED AS SPECIFIED BELOW
WITH RESPECT TO THE ACTION TO BE TAKEN ON THE FOLLOWING
PROPOSALS. THE SHARES REPRESENTED HEREBY WILL BE VOTED AS
INDICATED OR FOR THE PROPOSALS IF NO CHOICE IS INDICATED. THE
BOARD OF TRUSTEES OF THE VIRTUS FUNDS RECOMMENDS A VOTE FOR THE
PROPOSALS. PLEASE MARK YOUR VOTE BELOW IN BLUE OR BLACK INK. DO
NOT USE RED INK. EXAMPLE: X
1. To approve an Agreement and Plan of Reorganization whereby Evergreen
Virginia Municipal Bond Fund, a series of Evergreen Municipal Trust, will (i)
acquire all of the assets of Virtus VA in exchange for shares of Evergreen
Virginia Municipal Bond Fund; and (ii) assume certain identified liabilities of
Virtus VA, as substantially described in the accompanying Prospectus/Proxy
Statement.
- ---- FOR ---- AGAINST ---- ABSTAIN
2. To approve the proposed Interim Investment Advisory Agreement with
Virtus Capital Management, Inc.
- ---- FOR ---- AGAINST ---- ABSTAIN
3. To consider and vote upon such other matters as may properly come
before said meeting or any adjournments thereof.
<PAGE>
