Registration No. 2-96456
Rule 497(e)
--------------------------------------------------------------------------------
CONNECTICUT
DAILY TAX FREE
INCOME FUND, INC. 600 Fifth Avenue, New York, NY 10020
(212) 830-5220
================================================================================
STATEMENT OF ADDITIONAL INFORMATION
May 30, 2000
AS SUPPLEMENTED ON OCTOBER 31, 2000
RELATING TO THE CONNECTICUT DAILY TAX FREE INCOME FUND, INC.,
EVERGREEN SHARES OF CONNECTICUT DAILY TAX FREE INCOME FUND, INC. AND THE
CHASE VISTA SELECT SHARES OF THE CONNECTICUT DAILY TAX FREE INCOME FUND, INC.
PROSPECTUSES DATED MAY 30, 2000
This Statement of Additional Information (SAI) is not a Prospectus. The SAI
expands upon and supplements the information contained in the current
Prospectuses of Connecticut Daily Tax Free Income Fund, Inc., Evergreen Shares
of Connecticut Daily Tax Free Income Fund, Inc. and Chase Vista Select Shares of
Connecticut Daily Tax Free Income Fund, Inc. (each, the "Fund"), dated May 30,
2000, and should be read in conjunction with each Fund's Prospectus.
A Prospectus may be obtained from any Participating Organization or by writing
or calling the Fund toll-free at (800) 221-3079. The Financial Statements of the
Fund have been incorporated by reference into the SAI from the Fund's Annual
Report. The Annual Report is available, without charge, upon request by calling
the toll-free number provided. The material relating to Purchase, Redemption and
Pricing of Shares has been incorporated by reference to the Prospectus for each
Class of Shares.
If you wish to invest in Evergreen Shares of the Fund, you should obtain a
separate Prospectus by writing to State Street Bank and Trust Company, P.O. Box
9021, Boston, Massachusetts 02205-9827 or by calling toll free 1-(800) 807-2840.
If you wish to invest in Chase Vista Select Shares of the Connecticut Daily Tax
Free Income Fund, Inc. you should obtain a separate prospectus by writing to
Chase Vista Service Center, P.O. Box 419392, Kansas City, Missouri 64141-6392 or
by calling (800) 34-VISTA.
This Statement of Additional Information is incorporated by reference into the
respective Prospectus in its entirety.
Table of Contents
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Table of Contents
----------------------------------------------------------------------------------
Fund History....................................2 Capital Stock and Other Securities.....................18
Description of the Fund and its Investments Purchase, Redemption and Pricing Shares................18
and Risks.....................................2 Taxation of the Fund...................................19
Management of the Fund.........................11 Underwriters...........................................21
Control Persons and Principal Holders of Calculation of Performance Data........................21
Securities...................................13 Financial Statements...................................22
Investment Advisory and Other Services.........14 Description of Ratings.................................23
Brokerage Allocation and Other Practices.......18 Taxable Equivalent Yield Tables........................24
</TABLE>
<PAGE>
I. FUND HISTORY
The Fund was incorporated on March 8, 1985 in the state of Maryland.
II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
The Fund is an open-end, management investment company that is a short-term,
tax-exempt money market fund. The Fund's investment objectives are to seek as
high a level of current income exempt from regular Federal tax and Connecticut
personal income taxes consistent with preserving capital, maintaining liquidity
and stabilizing principal. No assurance can be given that these objectives will
be achieved.
The following discussion expands upon the description of the Fund's investment
objectives and policies in the Prospectus.
The Fund's assets will be invested primarily in (i) high quality debt
obligations issued by or on behalf of the State of Connecticut, other states,
territories and possessions of the United States and their authorities,
agencies, instrumentalities and political subdivisions, the interest on which
is, in the opinion of bond counsel to the issuer at the date of issuance,
currently exempt from regular Federal income taxation ("Municipal Obligations")
and in (ii) Participation Certificates in Municipal Obligations purchased from
banks, insurance companies or other financial institutions (which, in the
opinion of Battle Fowler LLP, counsel to the Fund, cause the Fund to be treated
as the owner of an interest in the underlying Municipal Obligations for Federal
income tax purposes). Dividends that are properly designated by the Fund as
derived from Municipal Obligations and Participation Certificates will be exempt
from regular Federal income tax provided the Fund qualifies as a regulated
investment company and complies with Section 852(b)(5) of the Internal Revenue
Code of 1986 (the "Code"). Although the Supreme Court has determined that
Congress has the authority to tax the interest on bonds such as the Municipal
Obligations, existing law excludes such interest from regular Federal income
tax. However, such interest, including "exempt-interest dividends" may be
subject to the Federal alternative minimum tax.
Securities, the interest income on which is subject to regular Federal, state
and local income tax, will not exceed 20% of the value of the Fund's total
assets. (See "Federal Income Taxes" herein.) Exempt-interest dividends that are
correctly identified by the Fund as derived from obligations issued by or on
behalf of the State of Connecticut or any Connecticut local governments, or
their instrumentalities, authorities or districts ("Connecticut Municipal
Obligations") will be exempt from Connecticut personal income taxes.
Exempt-interest dividends correctly identified by the Fund as derived from
obligations of Puerto Rico and the Virgin Islands, as well as any other types of
obligations that Connecticut is prohibited from taxing under the Constitution,
the laws of the United States of America or the Connecticut Constitution
("Territorial Municipal Obligations"), also should be exempt from Connecticut
personal income taxes provided the Fund complies with applicable Connecticut
laws. (See "Connecticut Income Taxes" herein.) To the extent that suitable
Connecticut Municipal Obligations are not available for investment by the Fund,
the Fund may purchase Municipal Obligations issued by other states, their
agencies and instrumentalities. The dividends on these will be designated by the
Fund as derived from interest income which will be, in the opinion of bond
counsel to the issuer at the date of issuance, exempt from regular Federal
income tax but will be subject to Connecticut personal income taxes. Except as a
temporary defensive measure during periods of adverse market conditions as
determined by the Manager, the Fund will invest at least 65% of its assets in
Connecticut Municipal Obligations, although the exact amount of the Fund's
assets invested in such securities will vary from time to time. The Fund seeks
to maintain an investment portfolio with a dollar-weighted average maturity of
90 days or less and to value its investment portfolio at amortized cost and
maintain a net asset value at $1.00 per share of each Class. There can be no
assurance that this value will be maintained.
The Fund may hold uninvested cash reserves pending investment. The Fund's
investments may include "when-issued" Municipal Obligations, stand-by
commitments and taxable repurchase agreements. Although the Fund will attempt to
invest 100% of its assets in Municipal Obligations and in Participation
Certificates, the Fund reserves the right to invest up to 20% of the value of
its total assets in securities, the interest income on which is subject to
regular Federal, state and local income tax. The Fund will invest more than 25%
of its assets in Participation Certificates purchased from banks in industrial
revenue bonds and other Connecticut Municipal Obligations. In view of this
"concentration" in bank Participation Certificates in Connecticut Municipal
Obligations, an investment in Fund shares should be made with an understanding
of the characteristics of the banking industry and the risks which such an
investment may entail. (See "Variable Rate Demand Instruments and Participation
Certificates" herein.) The investment objectives of the Fund described in the
preceding paragraphs of this section may not be changed unless approved by the
holders of a majority of the outstanding shares of the Fund that would be
affected by such a change. As used herein, the term "majority of the outstanding
shares" of the Fund means, respectively, the vote of the lesser of (i) 67% or
more of the shares of the Fund present at a meeting, if the holders of more than
50% of the outstanding shares of the Fund are present or represented by proxy,
or (ii) more than 50% of the outstanding shares of the Fund.
2
<PAGE>
The Fund may only purchase United States dollar-denominated securities that have
been determined by the Fund's Board of Directors to present minimal credit risks
and that are Eligible Securities at the time of acquisition. The term Eligible
Securities means: (i) securities which have or are deemed to have remaining
maturities of 397 days or less and rated in the two highest short-term rating
categories by any two nationally recognized statistical rating organizations
("NRSROs") or in such categories by the only NRSRO that has rated the Municipal
Obligations (collectively, the "Requisite NRSROs"); or (ii) unrated securities
determined by the Fund's Board of Directors to be of comparable quality. In
addition, securities which have or are deemed to have remaining maturities of
397 days or less but that at the time of issuance were long-term securities
(i.e. with maturities greater than 366 days) are deemed unrated and may be
purchased if such had received a long-term rating from the Requisite NRSROs in
one of the three highest rating categories. Provided, however, that such may not
be purchased if it (i) does not satisfy the rating requirements set forth in the
preceding sentence and (ii) has received a long-term rating from any NRSRO that
is not within the three highest long-term rating categories. A determination of
comparability by the Board of Directors is made on the basis of its credit
evaluation of the issuer, which may include an evaluation of a letter of credit,
guarantee, insurance or other credit facility issued in support of the
securities. While there are several organizations that currently qualify as
NRSROs, two examples of NRSROs are Standard & Poor's Rating Services, a division
of The McGraw-Hill Companies, ("S&P") and Moody's Investors Service, Inc.
("Moody's"). The two highest ratings by S&P and Moody's are "AAA" and "AA" by
S&P in the case of long-term bonds and notes or "Aaa" and "Aa" by Moody's in the
case of bonds; "SP-1" and "SP-2" by S&P or "MIG-1" and "MIG-2" by Moody's in the
case of notes; "A-1" and "A-2" by S&P or "Prime-1" and "Prime-2" by Moody's in
the case of tax-exempt commercial paper. The highest rating in the case of
variable and floating demand notes is "VMIG-1" by Moody's or "SP-1/AA" by S&P.
Such instruments may produce a lower yield than would be available from less
highly rated instruments.
Subsequent to its purchase by the Fund, a rated security may cease to be rated
or its rating may be reduced below the minimum required for purchase by the
Fund. If this occurs, the Board of Directors of the Fund shall promptly reassess
whether the security presents minimal credit risks and shall cause the Fund to
take such action as the Board of Directors determines is in the best interest of
the Fund and its shareholders. However, reassessment is not required if the
security is disposed of or matures within five business days of the Manager
becoming aware of the new rating and provided further that the Board of
Directors is subsequently notified of the Manager's actions.
In addition, in the event that a security (i) is in default, (ii) ceases to be
an Eligible Security under Rule 2a-7 of the Investment Company Act of 1940 (the
"1940 Act") or (iii) is determined to no longer present minimal credit risks, or
an event of insolvency occurs with respect to the issues of a portfolio security
or the provider of any Demand Feature or Guarantee, the Fund will dispose of the
security absent a determination by the Fund's Board of Directors that disposal
of the security would not be in the best interests of the Fund. Disposal of the
security shall occur as soon as practicable consistent with achieving an orderly
disposition by sale, exercise of any demand feature or otherwise. In the event
of a default with respect to a security which immediately before default
accounted for 1/2 of 1% or more of the Fund's total assets, the Fund shall
promptly notify the SEC of such fact and of the actions that the Fund intends to
take in response to the situation.
All investments by the Fund will mature or will be deemed to mature within 397
days or less from the date of acquisition and the average maturity of the Fund
portfolio (on a dollar-weighted basis) will be 90 days or less. The maturities
of variable rate demand instruments held in the Fund's portfolio will be deemed
to be the longer of the period required before the Fund is entitled to receive
payment of the principal amount of the instrument through demand, or the period
remaining until the next interest rate adjustment, although the stated
maturities may be in excess of 397 days.
With respect to 75% of its total assets, the Fund shall invest not more than 5%
of its total assets in Municipal Obligations or Participation Certificates
issued by a single issuer. The Fund shall not invest more than 5% of its total
assets in Municipal Obligations issued by a single issuer unless the Municipal
Obligations are of the highest quality.
The Fund intends to qualify as a "regulated investment company" under the Code.
The Fund will be restricted in that at the close of each quarter of the taxable
year, at least 50% of the value of its total assets must be represented by cash,
government securities, regulated investment company securities and other
securities which is limited in respect of any one issuer to not more than 5% in
value of the total assets of the Fund and to not more than 10% of the
outstanding voting securities of such issuer. In addition, at the close of each
quarter of its taxable year, not more than 25% in value of the Fund's total
assets may be invested in securities of one issuer other than Government
securities or regulated investment company securities. The limitations described
in this paragraph regarding qualification as a "regulated investment company"
are not fundamental policies and may be revised to the extent applicable Federal
income tax requirements are revised. (See "Federal Income Taxes" herein.)
3
<PAGE>
Description Of Municipal Obligations
As used herein, "Municipal Obligations" include the following as well as
"Variable Rate Demand Instruments" and "Participation Certificates".
1. Municipal Bonds with remaining maturities of 397 days or less that are
Eligible Securities at the time of acquisition. Municipal Bonds are debt
obligations of states, cities, counties, municipalities and municipal
agencies (all of which are generally referred to as "municipalities"). They
generally have a maturity at the time of issue of one year or more and are
issued to raise funds for various public purposes such as construction of a
wide range of public facilities, to refund outstanding obligations and to
obtain funds for institutions and facilities.
The two principal classifications of Municipal Bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by
the issuer's pledge of its faith, credit and taxing power for the payment
of principal and interest. Issuers of general obligation bonds include
states, counties, cities, towns and other governmental units. The principal
of, and interest on revenue bonds are payable from the income of specific
projects or authorities and generally are not supported by the issuer's
general power to levy taxes. In some cases, revenues derived from specific
taxes are pledged to support payments on a revenue bond.
In addition, certain kinds of "private activity bonds" are issued by public
authorities to provide funding for various privately operated industrial
facilities (hereinafter referred to as "industrial revenue bonds" or
"IRBs"). Interest on IRBs is generally exempt, with certain exceptions,
from regular Federal income tax pursuant to Section 103(a) of the Code,
provided the issuer and corporate obligor thereof continue to meet certain
conditions. (See "Federal Income Taxes" herein.) IRBs are, in most cases,
revenue bonds and do not generally constitute the pledge of the credit of
the issuer of such bonds. The payment of the principal and interest on IRBs
usually depends solely on the ability of the user of the facilities
financed by the bonds or other guarantor to meet its financial obligations
and, in certain instances, the pledge of real and personal property as
security for payment. If there is no established secondary market for the
IRBs, the IRBs or the Participation Certificates in IRBs purchased by the
Fund will be supported by letters of credit, guarantees or insurance that
meet the definition of Eligible Securities at the time of acquisition and
provide the demand feature which may be exercised by the Fund at any time
to provide liquidity. Shareholders should note that the Fund may invest in
IRBs acquired in transactions involving a Participating Organization. In
accordance with Investment Restriction 6 herein, the Fund is permitted to
invest up to 10% of the portfolio in high quality, short-term Municipal
Obligations (including IRBs) meeting the definition of Eligible Securities
at the time of acquisition that may not be readily marketable or have a
liquidity feature.
2. Municipal Notes with remaining maturities of 397 days or less that are
Eligible Securities at the time of acquisition. The principal kinds of
Municipal Notes include tax anticipation notes, bond anticipation notes,
revenue anticipation notes and project notes. Notes sold in anticipation of
collection of taxes, a bond sale or receipt of other revenues are usually
general obligations of the issuing municipality or agency. Project notes
are issued by local agencies and are guaranteed by the United States
Department of Housing and Urban Development. Project notes are also secured
by the full faith and credit of the United States. The Fund's investments
may be concentrated in Municipal Notes of Connecticut issuers.
3. Municipal Commercial Paper that is an Eligible Security at the time of
acquisition. Issues of Municipal Commercial Paper typically represent very
short-term, unsecured, negotiable promissory notes. These obligations are
often issued to meet seasonal working capital needs of municipalities or to
provide interim construction financing. They are paid from general revenues
of municipalities or are refinanced with long-term debt. In most cases
Municipal Commercial Paper is backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or other institutions which may be called upon in the
event of default by the issuer of the commercial paper.
4. Municipal Leases, which may take the form of a lease or an installment
purchase or conditional sale contract, issued by state and local governments
and authorities to acquire a wide variety of equipment and facilities
such as fire and sanitation vehicles, telecommunications equipment and
other capital assets. Municipal Leases frequently have special risks not
normally associated with general obligation or revenue bonds. Leases and
installment purchase or conditional sale contracts (which normally provide
for title to the leased asset to pass eventually to the governmental
issuer) have evolved as a means for governmental issuers to acquire
property and equipment without meeting the constitutional and statutory
requirements for the issuance of debt. The debt-issuance limitations of
many state constitutions and statutes are deemed to be inapplicable because
of the inclusion in many leases or contracts of "non-appropriation"
clauses. These clauses provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money
is appropriated for such purpose by the appropriate legislative body on a
yearly or other periodic basis. To reduce this risk, the Fund will only
purchase Municipal Leases subject to
4
<PAGE>
a non-appropriation clause where the payment of principal and accrued
interest is backed by an unconditional irrevocable letter of credit, a
guarantee, insurance or other comparable undertaking of an approved
financial institution. These types of Municipal Leases may be considered
illiquid and subject to the 10% limitation of investments in illiquid
securities set forth under "Investment Restrictions" contained herein. The
Board of Directors may adopt guidelines and delegate to the Manager the
daily function of determining and monitoring the liquidity of Municipal
Leases. In making such determination, the Board and the Manager may
consider such factors as the frequency of trades for the obligation, the
number of dealers willing to purchase or sell the obligations and the
number of other potential buyers and the nature of the marketplace for the
obligations, including the time needed to dispose of the obligations and
the method of soliciting offers. If the Board determines that any Municipal
Leases are illiquid, such lease will be subject to the 10% limitation on
investments in illiquid securities.
5. Any other Federal tax-exempt, and to the extent possible, Connecticut gross
income tax-exempt obligations issued by or on behalf of states and
municipal governments and their authorities, agencies, instrumentalities
and political subdivisions whose inclusion in the Fund would be consistent
with the Fund's investment objectives, policies and risks described herein
and permissible under Rule 2a-7 under the 1940 Act.
Subsequent to its purchase by the Fund, a rated Municipal Obligation may cease
to be rated or its rating may be reduced below the minimum required for purchase
by the Fund. If this occurs, the Board of Directors of the Fund shall promptly
reassess whether the Municipal Obligation presents minimal credit risks and
shall cause the Fund to take such action as the Board of Directors determines is
in the best interest of the Fund and its shareholders. However, reassessment is
not required if the Municipal Obligation is disposed of or matures within five
business days of the Manager becoming aware of the new rating and provided
further that the Board of Directors is subsequently notified of the Manager's
actions.
In addition, in the event that a Municipal Obligation (i) is in default, (ii)
ceases to be an Eligible Security under Rule 2a-7 of the 1940 Act or (iii) is
determined to no longer present minimal credit risks, or an event of insolvency
occurs with respect to the issues of a portfolio security or the provider of any
Demand Feature or Guarantee, the Fund will dispose of the security absent a
determination by the Fund's Board of Directors that disposal of the security
would not be in the best interests of the Fund. Disposal of the security shall
occur as soon as practicable consistent with achieving an orderly disposition by
sale, exercise of any demand feature or otherwise. In the event of a default
with respect to a security which immediately before default accounted for 1/2 of
1% or more of the Fund's total assets, the Fund shall promptly notify the SEC of
such fact and of the actions that the Fund intends to take in response to the
situation.
Variable Rate Demand Instruments and Participation Certificates
Variable rate demand instruments that the Fund will purchase are tax-exempt
Municipal Obligations. They provide for a periodic adjustment in the interest
rate paid on the instrument and permit the holder to demand payment of the
unpaid principal balance plus accrued interest at specified intervals upon a
specified number of days notice either from the issuer or by drawing on a bank
letter of credit, a guarantee or insurance issued with respect to such
instrument.
The variable rate demand instruments in which the Fund may invest are payable on
demand on not more than thirty calendar days' notice and may be exercised at any
time or at specified intervals not exceeding 397 days depending upon the terms
of the instrument. Variable rate demand instruments that can not be disposed of
properly within seven days in the ordinary course of business are illiquid
securities. The terms of the instruments provide that interest rates are
adjustable at intervals ranging from daily up to 397 days. The adjustments are
based upon the "prime rate"* of a bank or other appropriate interest rate
adjustment index as provided in the respective instruments. The Fund decides
which variable rate demand instruments it will purchase in accordance with
procedures prescribed by its Board of Directors to minimize credit risks. A fund
utilizing the amortized cost method of valuation under Rule 2a-7 of the 1940 Act
may purchase variable rate demand instruments only if (i) the instrument is
subject to an unconditional demand feature, exercisable by the Fund in the event
of a default in the payment of principal or interest on the underlying
securities, that is an Eligible Security or (ii) the instrument is not subject
to an unconditional demand feature but does qualify as an Eligible Security and
has a long-term rating by the Requisite NRSROs in one of the two highest rating
categories, or if unrated, is determined to be of comparable quality by the
Fund's Board of Directors. The Fund's Board of Directors may determine that an
unrated variable rate demand instrument meets the Fund's high quality criteria
if it is backed by a letter of credit or guarantee or is insured by an insurer
that meets the quality criteria for the Fund stated herein or on the basis of a
credit evaluation of the underlying obligor. If an instrument is ever not deemed
to be an Eligible Security, the Fund either will sell it in the market or
exercise the demand feature.
The variable rate demand instruments that the Fund may invest in include
Participation Certificates purchased by the Fund
--------
* The prime rate is generally the rate charged by a bank to its most
creditworthy customers for short-term loans. The prime rate of a particular bank
may differ from other banks and will be the rate announced by each bank on a
particular day. Changes in the prime rate may occur with great frequency and
generally become effective on the date announced.
5
<PAGE>
from banks, insurance companies or other financial institutions in fixed or
variable rate, tax-exempt Municipal Obligations (expected to be concentrated in
IRBs) owned by such institutions or affiliated organizations. The Fund will not
purchase Participation Certificates in fixed rate tax-exempt Municipal
Obligations without obtaining an opinion of counsel that the Fund will be
treated as the owner thereof for Federal income tax purposes. A Participation
Certificate gives the Fund an undivided interest in the Municipal Obligation in
the proportion that the Fund's participation interest bears to the total
principal amount of the Municipal Obligation and provides the demand repurchase
feature described below. Where the institution issuing the participation does
not meet the Fund's eligibility criteria, the participation is backed by an
irrevocable letter of credit or guaranty of a bank (which may be the bank
issuing the Participation Certificate, a bank issuing a confirming letter of
credit to that of the issuing bank, or a bank serving as agent of the issuing
bank with respect to the possible repurchase of the certificate of
participation) or insurance policy of an insurance company that the Board of
Directors of the Fund has determined meets the prescribed quality standards for
the Fund. The Fund has the right to sell the Participation Certificate back to
the institution. Where applicable, the Fund can draw on the letter of credit or
insurance after no more than 30 days notice either at any time or at specified
intervals not exceeding 397 days (depending on the terms of the participation),
for all or any part of the full principal amount of the Fund's participation
interest in the security plus accrued interest. The Fund intends to exercise the
demand only (i) upon a default under the terms of the bond documents, (ii) as
needed to provide liquidity to the Fund in order to make redemptions of Fund
shares or (iii) to maintain a high quality investment portfolio. The
institutions issuing the Participation Certificates will retain a service and
letter of credit fee (where applicable) and a fee for providing the demand
repurchase feature, in an amount equal to the excess of the interest paid on the
instruments over the negotiated yield at which the participations were purchased
by the Fund. The total fees generally range from 5% to 15% of the applicable
prime rate or other interest rate index. With respect to insurance, the Fund
will attempt to have the issuer of the Participation Certificate bear the cost
of the insurance. However, the Fund retains the option to purchase insurance if
necessary, in which case the cost of insurance will be an expense of the Fund
subject to the expense limitation (see "Expense Limitation" herein). The Manager
has been instructed by the Fund's Board of Directors to continually monitor the
pricing, quality and liquidity of the variable rate demand instruments held by
the Fund, including the Participation Certificates, on the basis of published
financial information and reports of the rating agencies and other bank
analytical services to which the Fund may subscribe. Although these instruments
may be sold by the Fund, the Fund intends to hold them until maturity, except
under the circumstances stated above (see "Federal Income Taxes" herein).
In view of the "concentration" of the Fund in Participation Certificates in
Connecticut Municipal Obligations, which may be secured by bank letters of
credit or guarantees, an investment in the Fund should be made with an
understanding of the characteristics of the banking industry and the risks which
such an investment may entail. Banks are subject to extensive governmental
regulations which may limit both the amounts and types of loans and other
financial commitments which may be made and interest rates and fees which may be
charged. The profitability of this industry is largely dependent upon the
availability and cost of capital funds for the purpose of financing lending
operations under prevailing money market conditions. Also, general economic
conditions play an important part in the operations of this industry and
exposure to credit losses arising from possible financial difficulties of
borrowers might affect a bank's ability to meet its obligations under a letter
of credit. The Fund may invest 25% or more of the net assets of any portfolio in
securities that are related in such a way that an economic, business or
political development or change affecting one of the securities would also
affect the other securities. This includes, for example, securities the interest
upon which is paid from revenues of similar type projects, or securities the
issuers of which are located in the same state.
While the value of the underlying variable rate demand instruments may change
with changes in interest rates generally, the variable rate nature of the
underlying variable rate demand instruments should minimize changes in value of
the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation and the risk of potential capital
depreciation is less than would be the case with a portfolio of fixed income
securities. The portfolio may contain variable maximum rates set by state law,
which limit the degree to which interest on such variable rate demand
instruments may fluctuate; to the extent state law contains such limits,
increases or decreases in value may be somewhat greater than would be the case
without such limits. Additionally, the portfolio may contain variable rate
demand Participation Certificates in fixed rate Municipal Obligations. The fixed
rate of interest on these Municipal Obligations will be a ceiling on the
variable rate of the Participation Certificate. In the event that interest rates
increase so that the variable rate exceeds the fixed rate on the Municipal
Obligations, the Municipal Obligations can no longer be valued at par and may
cause the Fund to take corrective action, including the elimination of the
instruments from the portfolio. Because the adjustment of interest rates on the
variable rate demand instruments is made in relation to movements of the
applicable banks' "prime rates", or other interest rate adjustment index, the
variable rate demand instruments are not comparable to long-term fixed rate
securities. Accordingly, interest rates on the variable rate demand instruments
may be higher or lower than current market rates for fixed rate obligations of
comparable quality with similar maturities.
6
<PAGE>
Because of the variable rate nature of the instruments, the Fund's yield will
decline and its shareholders will forego the opportunity for capital
appreciation during periods when prevailing interest rates have declined. On the
other hand, during periods where prevailing interest rates have increased, the
Fund's yield will increase and its shareholders will have reduced risk of
capital depreciation.
For purposes of determining whether a variable rate demand instrument held by
the Fund matures within 397 days from the date of its acquisition, the maturity
of the instrument will be deemed to be the longer of (i) the period required
before the Fund is entitled to receive payment of the principal amount of the
instrument or (ii) the period remaining until the instrument's next interest
rate adjustment. The maturity of a variable rate demand instrument will be
determined in the same manner for purposes of computing the Fund's
dollar-weighted average portfolio maturity. If a variable rate demand instrument
ceases to be an Eligible Security it will be sold in the market or through
exercise of the repurchase demand feature to the issuer.
When-Issued Securities
New issues of certain Municipal Obligations frequently are offered on a
when-issued basis. The payment obligation and the interest rate received on
these Municipal Obligations are each fixed at the time the buyer enters into the
commitment although delivery and payment of the Municipal Obligations normally
take place within 45 days after the date of the Fund's commitment to purchase.
Although the Fund only makes commitments to purchase when-issued Municipal
Obligations with the intention of actually acquiring them, the Fund may sell
these securities before the settlement date if deemed advisable by the Manager.
Municipal Obligations purchased on a when-issued basis and the securities held
in the Fund's portfolio are subject to changes in value (both generally changing
in the same way; that is, both experiencing appreciation when interest rates
decline and depreciation when interest rates rise) based upon the public's
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Purchasing Municipal Obligations on
a when-issued basis can involve a risk that the yields available in the market
when the delivery takes place may actually be higher or lower than those
obtained in the transaction itself. A separate account of the Fund consisting of
cash or liquid debt securities equal to the amount of the when-issued
commitments will be established at the Fund's custodian bank. For the purpose of
determining the adequacy of the securities in the account, the deposited
securities will be valued at market value. If the market or fair value of such
securities declines, additional cash or highly liquid securities will be placed
in the account daily so that the value of the account will equal the amount of
such commitments by the Fund. On the settlement date of the when-issued
securities, the Fund will meet its obligations from then-available cash flow,
sale of securities held in the separate account, sale of other securities or,
although it will not normally expect to do so, from sale of the when-issued
securities themselves (which may have a value greater or lesser than the Fund's
payment obligations). Sale of securities to meet such obligations may result in
the realization of capital gains or losses, which are not exempt from Federal
income tax.
Stand-by Commitments
When the Fund purchases Municipal Obligations, it may also acquire stand-by
commitments from banks and other financial institutions. Under a stand-by
commitment, a bank or broker-dealer agrees to purchase at the Fund's option a
specified Municipal Obligation at a specified price with same day settlement. A
stand-by commitment is the equivalent of a "put" option acquired by the Fund
with respect to a particular Municipal Obligation held in its portfolio.
The amount payable to the Fund upon its exercise of a stand-by commitment
normally will be (i) the acquisition cost of the Municipal Obligation (excluding
any accrued interest that the Fund paid on the acquisition), less any amortized
market premium or plus any amortized market or original issue discount during
the period the Fund owned the security, plus (ii) all interest accrued on the
security since the last interest payment date during the period the security was
owned by the Fund. Absent unusual circumstances relating to a change in market
value, the Fund will value the underlying Municipal Obligation at amortized
cost. Accordingly, the amount payable by a bank or dealer during the time a
stand-by commitment is exercisable will be substantially the same as the market
value of the underlying Municipal Obligation.
The Fund's right to exercise a stand-by commitment will be unconditional and
unqualified. A stand-by commitment will not be transferable by the Fund,
although it can sell the underlying Municipal Obligation to a third party at any
time.
The Fund expects stand-by commitments to generally be available without the
payment of any direct or indirect consideration. However, if necessary and
advisable, the Fund may pay for stand-by commitments either separately in cash
or by paying a higher price for portfolio securities which are acquired subject
to such a commitment (thus reducing the yield to maturity otherwise available
for the same securities). The total amount paid in either manner for
7
<PAGE>
outstanding stand-by commitments held in the Fund's portfolio will not exceed
1/2 of 1% of the value of the Fund's total assets calculated immediately after
the acquisition of each stand-by commitment.
The Fund will enter into stand-by commitments only with banks and other
financial institutions that, in the Manager's opinion, present minimal credit
risks. If the issuer of the Municipal Obligation does not meet the eligibility
criteria, the issuer of the stand-by commitment will have received a rating
which meets the eligibility criteria or, if not rated, will present a minimal
risk of default as determined by the Board of Directors. The Fund's reliance
upon the credit of these banks and broker-dealers will be supported by the value
of the underlying Municipal Obligations held by the Fund that were subject to
the commitment.
The Fund intends to acquire stand-by commitments solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The purpose of this practice is to permit the Fund to be fully
invested in securities the interest on which is exempt from Federal income tax
while preserving the necessary liquidity to purchase securities on a when-issued
basis, to meet unusually large redemptions and to purchase at a later date
securities other than those subject to the stand-by commitment. The acquisition
of a stand-by commitment will not affect the valuation or assumed maturity of
the underlying Municipal Obligations which will continue to be valued in
accordance with the amortized cost method. Stand-by commitments acquired by the
Fund will be valued at zero in determining net asset value. In those cases in
which the Fund pays directly or indirectly for a stand-by commitment, its cost
will be reflected as unrealized depreciation for the period during which the
commitment is held by the Fund. Stand-by commitments will not affect the
dollar-weighted average maturity of the Fund's portfolio. The maturity of a
security subject to a stand-by commitment is longer than the stand-by repurchase
date.
The stand-by commitments the Fund may enter into are subject to certain risks.
These include the ability of the issuer of the commitment to pay for the
securities at the time the commitment is exercised, the fact that the commitment
is not marketable by the Fund, and that the maturity of the underlying security
will generally be different from that of the commitment.
In addition, the Fund may apply to the Internal Revenue Service for a ruling, or
seek from its counsel an opinion, that interest on Municipal Obligations subject
to stand-by commitments will be exempt from Federal income taxation (see
"Federal Income Taxes" herein). In the absence of a favorable tax ruling or
opinion of counsel, the Fund will not engage in the purchase of securities
subject to stand-by commitments.
Taxable Securities
Although the Fund will attempt to invest 100% of its net assets in tax-exempt
Municipal Obligations, the Fund may invest up to 20% of the value of its total
assets in securities of the kind described below. The interest income from such
securities is subject to regular Federal or Connecticut state income tax, under
any one or more of the following circumstances: (i) pending investment of
proceeds of sales of Fund shares or of portfolio securities, (ii) pending
settlement of purchases of portfolio securities, and (iii) to maintain liquidity
for the purpose of meeting anticipated redemptions. In addition, the Fund may
temporarily invest more than 20% in such taxable securities when, in the opinion
of the Manager, it is advisable to do so because of adverse market conditions
affecting the market for Municipal Obligations. The kinds of taxable securities
in which the Fund may invest are limited to the following short-term,
fixed-income securities (maturing in 397 days or less from the time of
purchase): (i) obligations of the United States Government or its agencies,
instrumentalities or authorities, (ii) commercial paper meeting the definition
of Eligible Securities at the time of acquisition, (iii) certificates of deposit
of domestic banks with assets of $1 billion or more, and (iv) repurchase
agreements with respect to any Municipal Obligations or other securities which
the Fund is permitted to own.
Repurchase Agreements
The Fund may invest in instruments subject to repurchase agreements with
securities dealers or member banks of the Federal Reserve System. Under the
terms of a typical repurchase agreement, the Fund will acquire an underlying
debt instrument for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase and the Fund to resell the
instrument at a fixed price and time, thereby determining the yield during the
Fund's holding period. This results in a fixed rate of return insulated from
market fluctuations during such period. A repurchase agreement is subject to the
risk that the seller may fail to repurchase the security. Repurchase agreements
may be deemed to be loans under the 1940 Act. All repurchase agreements entered
into by the Fund shall be fully collateralized at all times during the period of
the agreement in that the value of the underlying security shall be at least
equal to the amount of the loan, including the accrued interest thereon.
Additionally, the Fund or its custodian shall have possession of the collateral,
which the Fund's Board believes will give it a valid, perfected security
interest in the collateral. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may suffer
time delays and incur costs in connection with the disposition of the
8
<PAGE>
collateral. The Fund's Board believes that the collateral underlying repurchase
agreements may be more susceptible to claims of the seller's creditors than will
be the case with securities owned by the Fund. It is expected that repurchase
agreements will give rise to income which will not qualify as tax-exempt income
when distributed by the Fund. The Fund will not invest in a repurchase agreement
maturing in more than seven days if any such investment, together with illiquid
securities held by the Fund, exceeds 10% of the Fund's total net assets. (See
Investment Restriction Number 6 herein.) Repurchase agreements are subject to
the same risks described herein for stand-by commitments.
Connecticut Risk Factors
As referred to in the Prospectus, the safety of an investment in the Fund
depends importantly on the fiscal stability of Connecticut and its subdivisions,
agencies, instrumentalities or authorities, which issue the Connecticut
Municipal Obligations in which the Fund's investments are concentrated.
The following information is only a summary of risk factors associated with
Connecticut. It has been compiled from official government statements and other
publicly available documents. Although the Sponsors have not independently
verified the information, they have no reason to believe that it is not correct
in all material respects.
Manufacturing has historically been of prime economic importance to Connecticut
(sometimes referred to as the "State"). The State's manufacturing industry is
diversified, with the construction of transportation equipment (primarily
aircraft engines, helicopters and submarines) being the dominant industry,
followed by fabricated metals, non-electrical machinery, and electrical
equipment. As a result of a rise in employment in service-related industries and
a decline in manufacturing employment, however, manufacturing accounted for only
16.92% of total non-agricultural employment in Connecticut in 1998.
Defense-related business represents a relatively high proportion of the
manufacturing sector. On a per capita basis, defense awards to Connecticut have
traditionally been among the highest in the nation, and reductions in defense
spending have considerably reduced this sector's significance in Connecticut's
economy.
The average annual unemployment rate in Connecticut increased from a low of 3.6%
in 1989 to a high of 7.6% in 1992 and, after a number of important changes in
the method of calculation, was reported to be 3.0% in 1999. Per capita personal
income of Connecticut residents increased in every year from 1990 to 1999,
rising from $25,935 to $38,747. However, pockets of significant unemployment and
poverty exist in several Connecticut cities and towns.
At the end of the 1990-1991 fiscal year, the General Fund had an accumulated
unappropriated deficit of $965,712,000. For the eight fiscal years ended June
30, 1999, the General Fund ran operating surpluses, based on the State's
budgetary method of accounting, of approximately $110,200,000, $113,500,000,
$19,700,000, $80,500,000, $250,000,000, $262,600,000, $312,900,000, and
$71,800,000, respectively. General Fund budgets adopted for the biennium ending
June 30, 2001, authorize expenditures of $10,581,600,000 for the 1999-2000
fiscal year and $11,085,200,000 for the 2000-2001 fiscal year and project
surpluses of $64,400,000 and $4,800,000, respectively, for those years. As of
March 31, 2000, the Comptroller estimated a surplus of $247,700,000 for the
1999-2000 fiscal year.
The State's primary method for financing capital projects is through the sale of
general obligation bonds. These bonds are backed by the full faith and credit of
the State. As of January 1, 2000, the State had authorized direct general
obligation bond indebtedness totaling $13,310,385,000, of which $11,338,459,000
had been approved for issuance by the State Bond Commission and $9,872,122,000
had been issued. As of January 1, 2000, net State direct general obligation bond
indebtedness outstanding was $6,795,705,000.
In 1995, the State established the University of Connecticut as a separate
corporate entity to issue bonds and construct certain infrastructure
improvements. The University was authorized to issue bonds totaling $962,000,000
by June 30, 2005, that are secured by a State debt service commitment to finance
the improvements, $359,475,000 of which were outstanding on October 15, 1999.
Additional costs for the improvements anticipated to be $288,000,000 are
expected to be funded from other sources.
In addition, the State has limited or contingent liability on a significant
amount of other bonds. Such bonds have been issued by the following quasi-public
agencies: the Connecticut Housing Finance Authority, the Connecticut Development
Authority, the Connecticut Higher Education Supplemental Loan Authority, the
Connecticut Resources Recovery Authority and the Connecticut Health and
Educational Facilities Authority. Such bonds have also been issued by the cities
of Bridgeport and West Haven and the Southeastern Connecticut Water Authority.
As of January 1, 2000, the amount of bonds outstanding on which the State has
limited or contingent liability totaled $4,315,600,000.
In 1984, the State established a program to plan, construct and improve the
State's transportation system (other than Bradley International Airport). The
total cost of the program through June 30, 2004, is currently estimated to be
9
<PAGE>
$14.0 billion, to be met from federal, state, and local funds. The State expects
to finance most of its $5.5 billion share of such cost by issuing $5.0 billion
of special tax obligation ("STO") bonds. The STO bonds are payable solely from
specified motor fuel taxes, motor vehicle receipts, and license, permit and fee
revenues pledged therefor and credited to the Special Transportation Fund, which
was established to budget and account for such revenues.
The State's general obligation bonds are rated Aa3 by Moody's and AA by Fitch.
On October 8, 1998, Standard & Poor's upgraded its ratings of the State's
general obligation bonds from AA- to AA.
The State, its officers and its employees are defendants in numerous lawsuits.
Although it is not possible to determine the outcome of these lawsuits, the
Attorney General has opined that an adverse decision in any of the following
cases might have a significant impact on the State's financial position: (i) an
action on behalf of all persons with traumatic brain injury who have been placed
in certain State hospitals, and other persons with acquired brain injury who are
in the custody of the Department of Mental Health and Addiction Services,
claiming that their constitutional rights are violated by placement in State
hospitals alleged not to provide adequate treatment and training, and seeking
placement in community residential settings with appropriate support services;
(ii) litigation involving claims by Indian tribes to portions of the State's
land area; (iii) an action by certain students and municipalities claiming that
the State's formula for financing public education violates the State's
Constitution and seeking a declaratory judgment and injunctive relief; (iv) an
action for money damages for the death of a young physician killed in an
automobile accident allegedly as a result of negligence of the State; (v)
actions by several hospitals claiming partial refunds of taxes imposed on
hospital gross earnings to the extent such taxes related to tangible personal
property transferred in the provision of services to patients; and (vi) an
action against the State and the Attorney General by importers and distributors
of cigarettes previously sold by their manufacturers seeking damages and
injunctive relief relating to business losses alleged to result from the 1998
Master Settlement Agreement entered into by most states in litigation against
the major domestic tobacco companies and challenging certain related so-called
Non Participating Manufacturer statutes.
As a result of litigation on behalf of black and Hispanic school children in the
City of Hartford seeking "integrated education" within the Greater Hartford
metropolitan area, on July 9, 1996, the State Supreme Court directed the
legislature to develop appropriate measures to remedy the racial and ethnic
segregation in the Hartford public schools. The Superior Court ordered the State
to show cause as to whether there has been compliance with the Supreme Court's
ruling and concluded that the State had complied but that the plaintiffs had not
allowed the State sufficient time to take additional remedial steps.
Accordingly, the plaintiffs might be able to pursue their claim at a later date.
The fiscal impact of this matter might be significant but is not determinable at
this time.
The State's Department of Information Technology coordinated a review of the
State's Year 2000 exposure and completed its plans on a timely basis. As of
December 31, 1999, 99.5% of the testing cycles required to validate compliance
in mission critical systems had been completed. Nevertheless, there is still a
risk that testing for all failure scenarios did not reveal all software or
hardware problems or that systems of others on whom the State's systems or
service commitments rely were not tested and remediated in a timely fashion. If
the necessary remediations were not adequately tested, the Year 2000 problem may
have a material impact on the operations of the State.
General obligation bonds issued by municipalities are payable primarily from ad
valorem taxes on property located in the municipality. A municipality's property
tax base is subject to many factors outside the control of the municipality,
including the decline in Connecticut's manufacturing industry. Certain
Connecticut municipalities have experienced severe fiscal difficulties and have
reported operating and accumulated deficits. The most notable of these is the
City of Bridgeport, which filed a bankruptcy petition on June 7, 1991. The State
opposed the petition. The United States Bankruptcy Court for the District of
Connecticut held that Bridgeport had authority to file such a petition but that
its petition should be dismissed on the grounds that Bridgeport was not
insolvent when the petition was filed. State legislation enacted in 1993
prohibits municipal bankruptcy filings without the prior written consent of the
Governor.
In addition to general obligation bonds backed by the full faith and credit of
the municipality, certain municipal authorities finance projects by issuing
bonds that are not considered to be debts of the municipality. Such bonds may be
repaid only from revenues of the financed project, the revenues from which may
be insufficient to service the related debt obligations.
Regional economic difficulties, reductions in revenues and increases in expenses
could lead to further fiscal problems for the State and its political
subdivisions, authorities and agencies. Difficulties in payment of debt service
on borrowings could result in declines, possibly severe, in the value of their
outstanding obligations, increases in their future borrowing costs, and
impairment of their ability to pay debt service on their obligations.
10
<PAGE>
Investment Restrictions
The Fund has adopted the following fundamental investment restrictions which
apply to all portfolios. They may not be changed unless approved by a majority
of the outstanding shares "of each series of the Fund's shares that would be
affected by such a change." The term "majority of the outstanding shares" of the
Fund means the vote of the lesser of (i) 67% or more of the shares of the Fund
present at a meeting, if the holders of more than 50% of the outstanding shares
of the Fund are present or represented by proxy, or (ii) more than 50% of the
outstanding shares of the Fund. The Fund may not:
1. Make portfolio investments other than as described under "Description of
the Fund and its Investments and Risks". Any other form of Federal
tax-exempt investment must meet the Fund's high quality criteria, as
determined by the Board of Directors, and be consistent with the Fund's
objectives and policies.
2. Borrow money. This restriction shall not apply to borrowings from banks
for temporary or emergency (not leveraging) purposes. This includes the
meeting of redemption requests that might otherwise require the untimely
disposition of securities, in an amount up to 15% of the value of the
Fund's total assets (including the amount borrowed) valued at market less
liabilities (not including the amount borrowed) at the time the borrowing
was made. While borrowings exceed 5% of the value of the Fund's total
assets, the Fund will not make any investments. Interest paid on borrowings
will reduce net income.
3. Pledge, hypothecate, mortgage or otherwise encumber its assets, except in
an amount up to 15% of the value of its total assets and only to secure
borrowings for temporary or emergency purposes.
4. Sell securities short or purchase securities on margin, or engage in
the purchase and sale of put, call, straddle or spread options or in
writing such options. However, securities subject to a demand obligation
and stand-by commitments may be purchased as set forth under "Description
of the Fund and its Investments and Risks" herein.
5. Underwrite the securities of other issuers, except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933 in disposing of a
portfolio security.
6. Purchase securities subject to restrictions on disposition under the
Securities Act of 1933 ("restricted securities"), except the Fund may
purchase variable rate demand instruments which contain a demand feature.
The Fund will not invest in a repurchase agreement maturing in more than
seven days if any such investment together with securities that are not
readily marketable held by the Fund exceed 10% of the Fund's net assets.
7. Purchase or sell real estate, real estate investment trust securities,
commodities or commodity contracts, or oil and gas interests. This shall
not prevent the Fund from investing in Municipal Obligations secured by
real estate or interests in real estate.
8. Make loans to others, except through the purchase of portfolio investments,
including repurchase agreements, as described under "Description of the
Fund and its Investments and Risks" herein.
9. Purchase more than 10% of all outstanding voting securities of any one
issuer or invest in companies for the purpose of exercising control.
10. Invest more than 25% of its assets in the securities of "issuers" in any
single industry. The Fund may invest more than 25% of its assets in
Participation Certificates and there shall be no limitation on the
purchase of those Municipal Obligations and other obligations issued or
guaranteed by the United States Government, its agencies or
instrumentalities. When the assets and revenues of an agency, authority,
instrumentality or other political subdivision are separate from those of
the government creating the issuing entity and a security is backed only by
the assets and revenues of the entity, the entity will be deemed to be the
sole issuer of the security. Similarly, in the case of an industrial
revenue bond, if that bond is backed only by the assets and revenues of the
non-government user, then such non-government user will be deemed to be the
sole issuer. If, however, in either case, the creating government or some
other entity, such as an insurance company or other corporate obligor,
guarantees a security or a bank issues a letter of credit, such a guarantee
or letter of credit will be considered a separate security and will be
treated as an issue of such government, other entity or bank. Immediately
after the acquisition of any securities subject to a Demand Feature or
Guarantee (as such terms are defined in Rule 2a-7 of the 1940 Act), with
respect to 75% of the total assets of the Fund, not more than 10% of the
Fund's assets may be invested in securities that are subject to a Guarantee
or Demand Feature from the same institution. However, the Fund may only
invest more than 10% of its assets in securities subject to a Guarantee or
Demand Feature issued by a Non-Controlled Person (as such term is defined
in Rule 2a-7 of the 1940 Act).
11
<PAGE>
11. Invest in securities of other investment companies. The Fund may purchase
unit investment trust securities where such unit trusts meet the
investment objectives of the Fund and then only up to 5% of the Fund's net
assets, except as they may be acquired as part of a merger, consolidation
or acquisition of assets.
12. Issue senior securities, except insofar as the Fund may be deemed to have
issued a senior security in connection with a permitted borrowing.
If a percentage restriction is adhered to at the time of an investment, a later
increase or decrease in percentage resulting from a change in values of
portfolio securities or in the amount of the Fund's assets will not constitute a
violation of such restriction.
III. MANAGEMENT OF THE FUND
The Fund's Board of Directors, which is responsible for the overall management
and supervision of the Fund, employs the Manager to serve as investment manager
of the Fund. The Manager provides persons satisfactory to the Fund's Board of
Directors to serve as officers of the Fund. Such officers, as well as certain
other employees and directors of the Fund, may be directors or officers of Reich
& Tang Asset Management, Inc., the sole general partner of the Manager or
employees of the Manager or its affiliates. Due to the services performed by the
Manager, the Fund currently has no employees and its officers are not required
to devote their full-time to the affairs of the Fund.
The Directors and Officers of the Fund and their principal occupations during
the past five years are set forth below. Unless otherwise specified, the address
of each of the following persons is 600 Fifth Avenue, New York, New York 10020.
Mr. Duff may be deemed an "interested person" of the Fund, as defined in the
1940 Act, on the basis of his affiliation with Reich & Tang Asset Management
L.P.
Steven W. Duff, 46 - President and Director of the Fund, has been President of
the Mutual Funds Division of the Manager since September 1994. Mr. Duff is also
President and a Director/Trustee of 13 other funds in the Reich & Tang Fund
Complex, President of Back Bay Funds, Inc., Director of Pax World Money Market
Fund, Inc., Executive Vice President of Reich & Tang Equity Fund, Inc., and
President and Chief Executive Officer of Tax Exempt Proceeds Fund, Inc.
Dr. W. Giles Mellon, 69 - Director of the Fund, is Professor of Business
Administration in the Graduate School of Management, Rutgers University which he
has been associated with since 1966. His address is Rutgers University Graduate
School of Management, 92 New Street, Newark, New Jersey 07102. Dr. Mellon is
also a Director/Trustee of 15 other funds in the Reich & Tang Fund Complex.
Robert Straniere, 59 - Director of the Fund, has been a member of the New York
State Assembly and a partner with the Straniere Law Firm since 1981. His address
is 182 Rose Avenue, Staten Island, New York 10306. Mr. Straniere is also a
Director/Trustee of 15 other funds in the Reich & Tang Fund Complex.
Dr. Yung Wong, 61 - Director of the Fund, was Director of Shaw Investment
Management (UK) Limited from 1994 to October 1995 and formerly General Partner
of Abacus Partners Limited Partnership (a general partner of a venture capital
investment firm) from 1984 to 1994. His address is 29 Alden Road, Greenwich,
Connecticut 06831. Dr. Wong is also a Director/Trustee of 15 other funds in the
Reich & Tang Fund Complex, and is also a Trustee of Eclipse Financial Asset
Trust.
Molly Flewharty, 49 - Vice President of the Fund, has been Vice President of the
Mutual Funds Division of the Manager since September 1993. Ms. Flewharty is also
Vice President of 18 other funds in the Reich & Tang Fund Complex.
Lesley M. Jones, 51 - Vice President of the Fund, has been Senior Vice President
of the Mutual Funds Division of the Manager since September 1993. Ms. Jones is
also a Vice President of 14 other funds in the Reich & Tang Fund Complex.
Dana E. Messina, 43 - Vice President of the Fund, has been Executive Vice
President of the Mutual Funds Division of the Manager since January 1995 and was
Vice President from September 1993 to January 1995. Ms. Messina is also Vice
President of 15 other funds in the Reich & Tang Fund Complex.
Dawn Fischer 53 - Vice President of the Fund, is a Managing Director of
Thornburg Management Co., Inc. with which she has been associated since August
1982. Her address is 119 East Marcy Street, Suite 202, Santa Fe, New Mexico
87501. Ms. Fischer is also Secretary and Assistant Treasurer of Thornburg
Investment Trust and Secretary of Limited Term Municipal Fund, Inc.
Bernadette N. Finn, 52 - Secretary of the Fund, has been Vice President of the
Mutual Funds Division of the Manager since September 1993. Ms. Finn is also
Secretary of 13 other funds in the Reich & Tang Fund Complex, and a Vice
President and Secretary of 5 funds in the Reich & Tang Fund Complex.
12
<PAGE>
Richard DeSanctis, 43 - Treasurer of the Fund, has been Treasurer of the Manager
of the Manager since 1993. Mr. DeSanctis is also Treasurer of 17 other funds in
the Reich & Tang Fund Complex, and is Vice President and Treasurer of Cortland
Trust, Inc.
Rosanne Holtzer, 35 - Assistant Treasurer of the Fund, has been Vice President
of the Mutual Funds division of the Manager since December 1997. Ms. Holtzer was
formerly Manager of Fund Accounting for the Manager with which she was
associated with from June 1986. Ms. Holtzer is also Assistant Treasurer of 18
other funds in the Reich & Tang Fund Complex.
The Fund paid an aggregate remuneration of $15,000 to its directors with respect
to the period ended January 31, 2000, all of which consisted of directors' fees
paid to the three disinterested directors, pursuant to the terms of the
Investment Management Contract (see "Investment Advisory and Other Services"
herein).
Directors of the Fund not affiliated with the Manager receive from the Fund an
annual retainer of $3,000 and a fee of $500 for each Board of Directors meeting
attended and are reimbursed for all out-of-pocket expenses relating to
attendance at such meetings. Directors who are affiliated with the Manager do
not receive compensation from the Fund. (See "Compensation Table".)
Compensation Table
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Aggregate Compensation Pension or Retirement Estimated Annual Total Compensation From
From the Fund Benefits Accrued as Part Benefits Upon Retirement Fund and Fund Complex Paid
of Fund Expenses to Directors*
Name of Person,
Position
Dr. W. Giles Mellon, $5,000 0 0 $59,500 (16 Funds)
Director
Robert Straniere, $5,000 0 0 $59,500 (16 Funds)
Director
Dr. Yung Wong, $5,000 0 0 $59,500 (16 Funds)
Director
</TABLE>
* The total compensation paid to such persons by the Fund and Fund Complex
for the fiscal year ending January 31, 2000. The parenthetical number
represents the number of investment companies (including the Fund) from
which such person receives compensation that are considered part of the
same Fund complex as the Fund, because, among other things, they have a
common investment advisor.
IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
On April 30, 2000 there were 104,819,082 Class A shares outstanding, 18,947,791
Class B shares outstanding, 31,684,726 Evergreen shares outstanding and
54,077,234 Chase Vista Select shares outstanding. As of April 30, 2000, the
amount of shares owned by all officers and directors of the Fund, as a group,
was less than 1% of the outstanding shares. Set forth below is certain
information as to persons who owned 5% or more of the Fund's outstanding shares
as of April 30, 2000:
Nature of
Name and Address % of Class Ownership
Class A Shares
Paul & Kathleen Kendall 22.42% Record & Beneficial
C/O Morgan Stanley Dean Witter
1251 Avenue of the Americas
New York, NY 10020
James Harmon 11.68% Record & Beneficial
C/O Schroder & Co.
787 Seventh Avenue
New York, NY 10019
13
<PAGE>
Investors Fiduciary Trust 11.39% Record
One South Street - 18th Fl.
Baltimore, MD 21202
Neuberger & Berman 10.88% Record
55 Water Street
New York, NY 10041
Jonathan T. Dawson 6.15% Record & Beneficial
354 Pequot Avenue
Southport, CT 06490
Class B Shares
Anthony B. Evnin 21.03% Record & Beneficial
C/O Morgan Stanley Dean Witter
1251 Avenue of the Americas
New York, NY 10020
T. Scott Case 9.39% Record & Beneficial
C/O Morgan Stanley Dean Witter
1251 Avenue of the Americas
New York, NY 10020
Richard N. Weinrod 5.21% Record & Beneficial
C/O Morgan Stanley Dean Witter
1251 Avenue of the Americas
New York, NY 10020
Evergreen Shares
Evergreen Invest Services 100% Record
201 S. College Street
Charlotte, NC 28288-1195
Chase Vista Select Shares
IFTC /Vista Mutual Funds 100% Record
C/O Vista Institutional Dept.
127 West 10th Street
Kansas City, MO 64105
V. INVESTMENT ADVISORY AND OTHER SERVICES
The Investment Manager for the Fund is Reich & Tang Asset Management L.P., a
Delaware limited partnership with principal offices at 600 Fifth Avenue, New
York, New York 10020. The Manager was, as of April 30, 2000, investment manager,
adviser, or supervisor with respect to assets aggregating in excess of $15.3
billion. In addition to the Fund, the Manager acts as investment manager and
administrator of eighteen other investment companies and also advises pension
trusts, profit-sharing trusts and endowments.
Nvest Companies, L.P. (Nvest Companies) is the limited partner and owner of a
99.5% interest in the Manager. Reich & Tang Asset Management, Inc. (RTAM) is the
sole general partner and owner of the remaining 0.5% interest of the Manager, as
well as being an indirect wholly-owned subsidiary of Nvest Companies. Nvest
Companies is a publicly traded company of which approximately 13% of its
outstanding partnership interests is owned, directly and indirectly, by Reich &
Tang, Inc.
CDC Asset Management ("CDC AM"), the investment management arm of France's
Caisse des Depots Group, has completed its acquisition of Nvest, L.P. and Nvest
Companies. As a result, CDC AM owns, directly or indirectly, a controlling
interest in the Manager. CDC AM is 60% owned by CDC Finance, a wholly-owned
subsidiary of Caisse des depots et Consignations ("CDC"). Founded in 1816, CDC
is a major diversified financial institution. In addition to its 60% ownership
of CDC AM through CDC Finance, CDC owns 40% of CNP Assurances, the leading
French insurance company, which itself owns 20% of CDC AM. CDC also owns 35% of
Caisse National des Caisses d'Epargne, which also owns 20% of CDC AM. CDC is
100% owned by the French state.
Nvest Companies is a holding company offering a broad array of investment styles
across a wide range of asset categories through seventeen subsidiaries,
divisions and affiliates offering a wide array of investment styles and products
to institutional clients. Its business units, in addition to the manager,
include AEW Capital Management, L.P., Back Bay Advisors, L.P.; Capital Growth
Management Limited Partnerships; Greystone Partners, L.P.; Harris Associates,
L.P.; Jurika & Voyles, L.P.; Kobrick Funds, LLP, Loomis, Sayles & Company, L.P.;
New England Funds, L.P.; Nvest Associates, Inc.; Snyder Capital Management,
L.P.; Vaughan, Nelson, Scarborough & McCullough, L.P.; and Westpeak Investment
Advisors, L.P. These affiliates in the aggregate are investment advisors or
managers to more than 80 other registered investment companies.
14
<PAGE>
The Nvest-CDC AM transaction involved a change of ownership of Nvest Companies,
which may be deemed to have caused a "change of control" of the Manager, even
though operations did not change as a result. As required by the 1940 Act, the
Fund's shareholders approved a new Investment Management Contract for the Fund
to assure that there was no interruption in the services that the Manager
provides to the Fund. The new Investment Management Contract was approved by the
shareholders on October 10, 2000 and is effective as of October 30, 2000.
On July 25, 2000, the Board of Directors, including a majority of the directors
who are not interested persons (as defined in the 1940 Act) of the Fund or the
Manager, approved the Investment Management Contract for an initial term of two
years, extending to January 31, 2002. The contract may be continued in force
after the initial term for successive twelve-month periods beginning each
February 1, provided that such majority vote of the Fund's outstanding voting
securities or by a majority of the directors who are not parties to the
Investment Management Contract or interested persons of any such party, by votes
cast in person at a meeting called for the purpose of voting on such matter.
Pursuant to the Investment Management Contract, the Manager manages the Fund's
portfolio of securities and makes decisions with respect to the purchase and
sale of investments, subject to the general control of the Board of Directors of
the Fund.
The Manager provides persons satisfactory to the Board of Directors of the Fund
to serve as officers of the Fund. Such officers, as well as certain other
employees and directors of the Fund, may be directors or officers of NEIC, the
sole general partner of the Manager, or employees of the Manager or its
affiliates.
The Investment Management Contract is terminable without penalty by the Fund on
sixty days' written notice when authorized either by majority vote of its
outstanding voting shares or by a vote of a majority of its Board of Directors,
or by the Manager on sixty days written notice, and will automatically terminate
in the event of its assignment. The Investment Management Contract provides that
in the absence of willful misfeasance, bad faith or gross negligence on the part
of the Manager, or of reckless disregard of its obligations thereunder, the
Manager shall not be liable for any action or failure to act in accordance with
its duties thereunder.
Under the Investment Management Contract, the Manager receives from the Fund a
fee (the "Management Fee") equal to .30% per annum of the Fund's average daily
net assets. The fees are accrued daily and paid monthly. The Manager, at its
discretion, may voluntarily waive all or a portion of the Management Fee.
Pursuant to the Administrative Services Contract with the Fund, the Manager also
performs clerical, accounting supervision, office service and related functions
for the Fund and provides the Fund with personnel to (i) supervise the
performance of accounting related services by Investors Fiduciary Trust Company,
the Fund's bookkeeping or recordkeeping agent, (ii) prepare reports to and
filings with regulatory authorities, and (iii) perform such other services as
the Fund may from time to time request of the Manager. The personnel rendering
such services may be employees of the Manager, of its affiliates or of other
organizations. For its services under the Administrative Services Contract, the
Manager receives from the Fund a fee (the "Administrative Services Fee") equal
to .21% per annum of the Fund's average daily net assets. For the Funds' fiscal
years ended January 31, 2000, 1999 and 1998, the Manager received a fee of
$364,613, 364,904 and $291,418, respectively.
For the Fund's fiscal years ended January 31, 2000, 1999 and 1998, the fee paid
to the Manager under the Investment Management Contract was $520,876, 521,291
and $416,312, respectively, of which none was voluntarily waived. The Fund's net
assets at the close of business on January 31, 2000 totaled $185,776,436. The
Manager may waive its rights to any portion of the Management Fee and may use
any portion of the Management Fee for purposes of shareholder and administrative
services and distribution of the Fund's shares.
The Manager at its discretion may waive its rights to any portion of the
Management Fee or the Administrative Services Fee and may use any portion of the
management fee for purposes of shareholder and administrative services and
distribution of the Fund's shares. There can be no assurance that such fees will
be waived in the future (see "Distribution and Service Plan" herein).
Investment management fees and operating expenses which are attributable to both
Classes of the Fund will be allocated daily to each Class based on the
percentage of outstanding shares at the end of the day. Additional shareholder
services provided by Participating Organizations to Class A shareholders
pursuant to the Plan shall be compensated by the Distributor from its
shareholder servicing fee, the Manager from its Management Fee and the Fund
itself. Expenses incurred in the distribution of Class B shares and the
servicing of Class B shares shall be paid by the Manager.
Expense Limitation
The Manager has agreed, pursuant to the Investment Management Contract, (See
"Distribution and Service Plan" herein), to reimburse the Fund for its expenses
(exclusive of interest, taxes, brokerage and extraordinary expenses) which in
any year exceed the limits on investment company expenses prescribed by any
state in which the Fund's
15
<PAGE>
shares are qualified for sale. For the purpose of this obligation to reimburse
expenses, the Fund's annual expenses are estimated and accrued daily, and any
appropriate estimated payments are made to it on a monthly basis. Subject to the
obligations of the Manager to reimburse the Fund for its excess expenses as
described above, the Fund has, under the Investment Management Contract,
confirmed its obligation for payment of all its other expenses. This includes
all operating expenses, taxes, brokerage fees and commissions, commitment fees,
certain insurance premiums, interest charges and expenses of the custodian,
transfer agent and dividend disbursing agent's fees, telecommunications
expenses, auditing and legal expenses, bookkeeping agent fees, costs of forming
the corporation and maintaining corporate existence, compensation of directors,
officers and employees of the Fund and costs of other personnel performing
services for the Fund who are not officers of the Manager or its affiliates,
costs of investor services, shareholders' reports and corporate meetings, SEC
registration fees and expenses, state securities laws registration fees and
expenses, expenses of preparing and printing the Fund's prospectus for delivery
to existing shareholders and of printing application forms for shareholder
accounts, and the fees and reimbursements payable to the Manager under the
Investment Management Contract and the Distributor under the Shareholder
Servicing Agreement.
The Fund may from time to time hire its own employees or contract to have
management services performed by third parties (including Participating
Organizations) as discussed herein. The management of the Fund intends to do so
whenever it appears advantageous to the Fund. The Fund's expenses for employees
and for such services are among the expenses subject to the expense limitation
described above.
Distribution And Service Plan
The Fund's distributor is Reich & Tang Distributors, Inc., a Delaware
corporation with principal officers at 600 Fifth Avenue, New York, New York
10020. Pursuant to Rule 12b-1 under the 1940 Act, the SEC requires that an
investment company which bears any direct or indirect expense of distributing
its shares must do so only in accordance with a plan permitted by the Rule. The
Fund's Board of Directors has adopted a distribution and service plan (the
"Plan") and, pursuant to the Plan, the Fund has entered into a Distribution
Agreement and a Shareholder Servicing Agreement (with respect to Class A,
Evergreen and Chase Vista Select shares) with Reich & Tang Distributors, Inc.,
(the "Distributor"), as distributor of the Fund's shares.
The Class A, Evergreen and Chase Vista Select shares will be offered to
investors who desire certain additional shareholder services from Participating
Organizations that are compensated by the Fund's Manager and Distributor for
such services. For its services under the Shareholder Servicing Agreement, the
Distributor receives from the Fund a fee equal to .20% per annum of the Fund's
average daily net assets of the Class A, Evergreen and Chase Vista Select shares
of the Fund (the "Shareholder Servicing Fee"). The fee is accrued daily and paid
monthly and any portion of the fee may be deemed to be used by the Distributor
for purposes of distribution of the Fund's Class A, Evergreen and Chase Vista
Select shares and for payments to Participating Organizations with respect to
servicing their clients or customers who are Class A, Evergreen and Chase Vista
Select shareholders of the Fund. The Class B shareholders will not receive the
benefit of such services from Participating Organizations and, therefore, will
not be assessed a Shareholder Servicing Fee.
The following information applies to the Class A shares of the Fund. For the
Fund's fiscal year ended January 31, 2000, the amount payable to the Distributor
under the Distribution and Service Plan and Shareholder Servicing Agreement
adopted thereunder pursuant to Rule 12b-1, totaled $261,229, none of which was
waived. During the same period, the Manager made total payments under the Plan
to or on behalf of Participating Organizations of $454,414. Of the total amount
paid pursuant to the Plan, $5,770 was utilized for compensation to sales
personnel, $2,927 on Travel & Entertainment for sales personnel, $2,508 on
Prospectus printing and $569 on Miscellaneous expenses. The excess of such
payments over the total payments the Distributor received from the Fund under
the Plan represents distribution and servicing expenses funded by the Manager
from its own resources including the management fee. For the fiscal year ended
January 31, 2000, the total amount spent pursuant to the Plan for Class A shares
was .36% of the average daily net assets of the Fund, of which .20% of the
average daily net assets was paid by the Fund to the Distributor, pursuant to
the Shareholder Servicing Agreement, and an amount representing .16% was paid by
the Manager (which may be deemed an indirect payment by the Fund).
With respect to the Chase Vista Select shares for the Fund's fiscal year ended
January 31, 2000, the amount payable to the Distributor under the Distribution
and Service Plan and Shareholder Servicing Agreement adopted thereunder pursuant
to Rule 12b-1 totaled $36,749. During the same period, the Manager made total
payments under the Plan to or on behalf of Participating Organizations of
$72,854. Of the total amount paid pursuant to the Plan, $0 was utilized for
compensation to sales personnel, $0 on Travel & Entertainment for sales
personnel, $4,246 on Prospectus printing and $0 on Miscellaneous expenses. For
the fiscal year ended January 31, 2000, the total amount spent pursuant to the
Plan for Chase Vista Select shares was .42% of the average daily net assets of
the Fund, of which .20% of the average
16
<PAGE>
daily net assets was paid by the Fund to the Distributor, pursuant to the
Shareholder Servicing Agreement, and an amount representing .22% was paid by the
Manager (which may be deemed an indirect payment by the Fund).
With respect to the Evergreen shares for the Fund's fiscal year ended January
31, 2000, the amount payable to the Distributor under the Distribution and
Service Plan and Shareholder Servicing Agreement adopted thereunder pursuant to
Rule 12b-1 totaled $33,335. During the same period, the Manager made total
payments under the Plan to or on behalf of Participating Organizations of
$74,138. Of the total amount paid pursuant to the Plan, $0 was utilized for
compensation to sales personnel, $0 on Travel & Entertainment for sales
personnel, $3,743 on Prospectus printing and $0 on Miscellaneous expenses. For
the fiscal year ended January 31, 2000, the total amount spent pursuant to the
Plan for Evergreen shares was .47% of the average daily net assets of the Fund,
of which .20% of the average daily net assets was paid by the Fund to the
Distributor, pursuant to the Shareholder Servicing Agreement, and an amount
representing .27% was paid by the Manager (which may be deemed an indirect
payment by the Fund).
Under the Distribution Agreement, the Distributor, for nominal consideration
(i.e., $1.00) and as agent for the Fund, will solicit orders for the purchase of
the Fund's shares, provided that any subscriptions and orders will not be
binding on the Fund until accepted by the Fund as principal.
The Plan and the Shareholder Servicing Agreement provide that the Fund will pay
for (i) telecommunications expenses, including the cost of dedicated lines and
CRT terminals, incurred by the Participating Organizations and Distributor in
carrying out their obligations under the Shareholder Servicing Agreement with
respect to the Class A shares and (ii) preparing, printing and delivering the
Fund's prospectus to existing shareholders of the Fund and preparing and
printing subscription application forms for shareholder accounts.
The Plan provides that the Manager may make payments from time to time from its
own resources, which may include the management fee, and past profits for the
following purposes: (i) to defray the costs of, and to compensate others,
including Participating Organizations with whom the Distributor has entered into
written agreements for performing shareholder servicing and related
administrative functions on behalf of the Class A, Evergreen and Chase Vista
Select shares of the Fund, (ii) to compensate certain Participating
Organizations for providing assistance in distributing the Fund's shares, and
(iii) to pay the costs of printing and distributing the Fund's prospectus to
prospective investors, and to defray the cost of the preparation and printing of
brochures and other promotional materials, mailings to prospective shareholders,
advertising, and other promotional activities, including the salaries and/or
commissions of sales personnel in connection with the distribution of the Fund's
shares. The Distributor may also make payments from time to time from its own
resources, which may include the Shareholder Servicing Fee and past profits for
the purpose enumerated in (i) above. The Distributor determines the amount of
such payments made pursuant to the Plan, provided that such payments will not
increase the amount which the Fund is required to pay to the Manager or the
Distributor for any fiscal year under the Investment Management Contract or the
Shareholder Servicing Agreement in effect for that year.
In accordance with the Rule, the Plan provides that all written agreements
relating to the Plan entered into between either the Fund or the Distributor and
Participating Organizations or other organizations must be in a form
satisfactory to the Fund's Board of Directors. In addition, the Plan requires
the Fund and the Distributor to prepare, at least quarterly, written reports
setting forth all amounts expended for distribution purposes by the Fund and the
Distributor pursuant to the Plan and identifying the distribution activities for
which those expenditures were made.
The Plan was most recently approved on January 27, 2000 to continue in effect
for one year. Thereafter it may continue in effect for successive annual periods
provided it is approved by the Class A, Evergreen and Chase Vista Select
shareholders or by the Board of Directors. This includes a majority of directors
who are not interested persons of the Fund and who have no direct or indirect
interest in the operation of the Plan or in the agreements related to the Plan.
The Plan further provides that it may not be amended to increase materially the
costs which may be spent by the Fund for distribution pursuant to the Plan
without Class A, Evergreen and Chase Vista Select shareholder approval, and the
other material amendments must be approved by the directors in the manner
described in the preceding sentence. The Plan may be terminated at any time by a
vote of a majority of the disinterested directors of the Fund or the Fund's
Class A, Evergreen and Chase Vista Select shareholders.
Custodian And Transfer Agent
State Street Kansas City, 801 Pennsylvania, Kansas City, Missouri 64105, is
custodian for the Fund's cash and securities. Reich & Tang Services, Inc., an
affiliate of the Fund's Manager, located at 600 Fifth Avenue, New York, NY
10020, is transfer agent and dividend agent for the shares of the Fund. State
Street Bank and Trust Company, P.O. Box 9021, Boston, Massachusetts 02205-9827
is the registrar, transfer agent and dividend disbursing agent for the Evergreen
17
<PAGE>
Shares of the Fund. DST Systems, Inc., 127 West 10th Street, Kansas City,
Missouri 64105 is transfer agent and dividend disbursing agent for the Chase
Vista Select shares of the Fund. The custodian and transfer agents do not assist
in, and are not responsible for, investment decisions involving assets of the
Fund.
Counsel and Independent Accountants
Legal matters in connection with the issuance of shares of stock of the Fund are
passed upon by Battle Fowler LLP, 75 East 55th Street, New York, New York 10022.
Matters in connection with Connecticut law are passed upon by Day, Berry and
Howard LLP, City Place I, 185 Asylum Street, Hartford, Connecticut 06103.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, independent certified public accountants, have been selected as auditors
for the Fund.
VI. BROKERAGE ALLOCATION AND OTHER PRACTICES
The Fund's purchases and sales of portfolio securities usually are principal
transactions. Portfolio securities are normally purchased directly from the
issuer, from banks and financial institutions or from an underwriter or market
maker for the securities. There usually are no brokerage commissions paid for
such purchases. The Fund has paid no brokerage commissions since its formation.
Any transaction for which the Fund pays a brokerage commission will be effected
at the best price and execution available. Thus, the Fund will select a broker
for such a transaction based upon which broker can effect the trade at the best
price and execution available. Purchases from underwriters of portfolio
securities include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers serving as market makers include the
spread between the bid and asked price. The Fund purchases Participation
Certificates in variable rate Municipal Obligations with a demand feature from
banks or other financial institutions at a negotiated yield to the Fund based on
the applicable interest rate adjustment index for the security. The interest
received by the Fund is net of a fee charged by the issuing institution for
servicing the underlying obligation and issuing the Participation Certificate,
letter of credit, guarantee or insurance and providing the demand repurchase
feature.
Allocation of transactions, including their frequency, to various dealers is
determined by the Manager in its best judgment and in a manner deemed in the
best interest of shareholders of the Fund rather than by any formula. The
primary consideration is prompt execution of orders in an effective manner at
the most favorable price. No preference in purchasing portfolio securities will
be given to banks or dealers that are Participating Organizations.
Investment decisions for the Fund are made independently from those for any
other investment companies or accounts that may be or become managed by the
Manager or its affiliates. If, however, the Fund and other investment companies
or accounts managed by the Manager are simultaneously engaged in the purchase or
sale of the same security, the transactions may be averaged as to price and
allocated equitably to each account. In some cases, this policy might adversely
affect the price paid or received by the Fund or the size of the position
obtainable for the Fund. In addition, when purchases or sales of the same
security for the Fund and for other investment companies managed by the Manager
occur contemporaneously, the purchase or sale orders may be aggregated in order
to obtain any price advantage available to large denomination purchasers or
sellers.
No portfolio transactions are executed with the Manager or its affiliates acting
as principal. In addition, the Fund will not buy bankers' acceptances,
certificates of deposit or commercial paper from the Manager or its affiliates.
VII. CAPITAL STOCK AND OTHER SECURITIES
The authorized capital stock of the Fund consists of twenty billion shares of
stock having a par value of one tenth of one cent ($.001) per share. The Fund's
Board of Directors is authorized to divide the shares into separate series of
stock, one for each of the portfolios that may be created. Each share of any
series of shares when issued has equal dividend, distribution and liquidation
rights within the series for which it was issued and each fractional share has
those rights in proportion to the percentage that the fractional share
represents of a whole share. Shares of all series have identical voting rights,
except where, by law, certain matters must be approved by a majority of the
shares of the unaffected series. Shares will be voted in the aggregate. There
are no conversion or preemptive rights in connection with any shares of the
Fund. All shares, when issued in accordance with the terms of the offering, will
be fully paid and nonassessable. Shares are redeemable at net asset value, at
the option of the shareholder. The Fund is subdivided into four classes of
common stock: Class A, Class B, Evergreen Class and Chase Vista Select Class.
Each share, regardless of class, represents an interest in the same portfolio of
investments and has identical voting, dividend, liquidation and other rights,
preferences, powers, restrictions, limitations, qualifications, designations and
terms and conditions, except: (i) the Class A, Class B, Evergreen Class and
Chase Vista Select Class shares have different class designations, (ii) only the
Class A, Evergreen
18
<PAGE>
and Chase Vista Select shares are assessed a service fee pursuant to the Rule
12b-1 Distribution and Service Plan of the Fund of .20% of each Class' shares'
average daily net assets, (iii) only the holders of the Class A , Evergreen and
Chase Vista Select shares are entitled to vote on matters pertaining to the Plan
and any related agreements in accordance with provisions of Rule 12b-1, and (iv)
the exchange privilege permits stockholders to exchange their shares only for
shares of the same class of an investment company that participates on an
exchange privilege program with the Fund except for the Evergreen Class, which
does not offer an exchange privilege. Payments that are made under the Plan will
be calculated and charged daily to the appropriate class prior to determining
daily net asset value per share and dividends/distributions.
Under its Articles of Incorporation, the Fund has the right to redeem for cash
shares of stock owned by any shareholder to the extent and at such times as the
Fund's Board of Directors determines to be necessary or appropriate to prevent
an undue concentration of stock ownership which would cause the Fund to become a
"personal holding company" for Federal income tax purposes. In this regard, the
Fund may also exercise its right to reject purchase orders.
The shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares outstanding voting for the election of
directors can elect 100% of the directors if the holders choose to do so. In
that event, the holders of the remaining shares will not be able to elect any
person or persons to the Board of Directors. Unless specifically requested by an
investor, the Fund will not issue certificates evidencing Fund shares.
As a general matter, the Fund will not hold annual or other meetings of the
Fund's shareholders. This is because the By-laws of the Fund provide for annual
or special meetings only (i) for the election (or re-election) of directors,
(ii) for approval of the revised investment advisory contracts with respect to a
particular class or series of stock, (iii) for approval of the Fund's
distribution agreement with respect to a particular class or series of stock,
and (iv) upon the written request of shareholders entitled to cast not less than
25% of all the votes entitled to be cast at such meeting. Annual and other
meetings may be required with respect to such additional matters relating to the
Fund as may be required by the 1940 Act, including the removal of Fund
director(s) and communication among shareholders, any registration of the Fund
with the SEC or any state, or as the Directors may consider necessary or
desirable. Each Director serves until his successor is elected or qualified or
until such Director sooner dies, resigns, retires or is removed by the vote of
the shareholders.
VIII. PURCHASE, REDEMPTION AND PRICING OF SHARES
The material relating to the purchase, redemption and pricing of shares for each
Class of shares is located in the Shareholder Information section of each
prospectus and is hereby incorporated by reference.
Net Asset Value
The Fund does not determine net asset value per share of each Class on any day
in which the New York Stock Exchange is closed for trading. Those days include:
New Year's Day, Martin Luther King Jr. Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas.
The net asset value of the Fund's shares is determined as of 12 noon, New York
City time, on each Fund Business Day. The net asset value of a Class is computed
by dividing the value of the Fund's net assets for such Class (i.e., the value
of its securities and other assets less its liabilities, including expenses
payable or accrued but excluding capital stock and surplus) by the total number
of shares outstanding for such Class.
The Fund's portfolio securities are valued at their amortized cost in compliance
with the provisions of Rule 2a-7 under the 1940 Act. Amortized cost valuation
involves valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium. If fluctuating interest
rates cause the market value of the Fund's portfolio to deviate more than 1/2 of
1% from the value determined on the basis of amortized cost, the Board of
Directors will consider whether any action should be initiated, as described in
the following paragraph. Although the amortized cost method provides certainty
in valuation, it may result in periods during which the value of an instrument
is higher or lower than the price an investment company would receive if the
instrument were sold.
The Fund's Board of Directors has established procedures to stabilize the Fund's
net asset value at $1.00 per share of each Class. These procedures include a
review of the extent of any deviation of net asset value per share, based on
available market rates, from the Fund's $1.00 amortized cost per share of each
Class. Should that deviation exceed 1/2 of 1%, the Board will consider whether
any action should be initiated to eliminate or reduce material dilution or other
unfair results to shareholders. Such action may include redemption of shares in
kind, selling portfolio securities prior to maturity, reducing or withholding
dividends and utilizing a net asset value per share as determined by using
available market quotations. The Fund will maintain a dollar-weighted average
portfolio maturity of 90 days or less, will not purchase any instrument with a
remaining maturity greater than 397 days, will limit portfolio investments,
including repurchase
19
<PAGE>
agreements, to those United States dollar-denominated instruments that the
Fund's Board of Directors determines present minimal credit risks, and will
comply with certain reporting and record keeping procedures. The Fund has also
established procedures to ensure compliance with the requirement that portfolio
securities are Eligible Securities. (See "Description of the Fund and its
Investments and Risks" herein.)
IX. TAXATION OF THE FUND
Federal Income Taxes
The Fund has elected to qualify under the Code as a "regulated investment
company" that distributes "exempt-interest dividends" and intends to continue to
qualify as long as qualification is in the best interests of its shareholders
because qualification as a regulated investment company relieves the Fund of
liability for Federal income taxes to the extent its earnings are distributed in
accordance with the applicable provisions of the Code.
The Fund's policy is to distribute as dividends each year 100% and in no event
less than 90% of its net tax-exempt interest income. Exempt-interest dividends
are dividends paid by the Fund that are attributable to interest on obligations,
the interest on which is exempt from regular Federal income tax, and are
designated by the Fund as exempt-interest dividends in a written notice mailed
to the Fund's shareholders not later than 60 days after the close of its taxable
year. The percentage of the total dividends paid by the Fund during any taxable
year that qualifies as exempt-interest dividends will be the same for all
shareholders receiving dividends during the year.
Exempt-interest dividends are excludable from the Fund's shareholders' gross
income, although the amount of such interest will have to be disclosed on the
shareholder's federal tax return. However, a shareholder should consult its tax
advisors with respect to whether exempt-interest dividends retain the exclusion
if such shareholder will be treated as a "substantial user" or "related person"
of the Code with respect to some or all of the private activity bonds, if any,
held by the Fund. If a shareholder receives an exempt-interest dividend with
respect to any share and such share has been held for six months or less, then
any loss on the sale or exchange of such share will be disallowed to the extent
of the amount of such exempt-interest dividend. Interest on indebtedness
incurred, or continued, to purchase or carry certain tax-exempt securities, such
as shares of the Fund, is not deductible. Therefore, among other consequences, a
certain proportion of interest on indebtedness incurred, or continued, to
purchase or carry securities on margin may not be deductible during the period
an investor holds shares of the Fund. For Social Security recipients, interest
on tax-exempt bonds, including exempt-interest dividends paid by the Fund, is
added to adjusted gross income for purposes of computing the amount of social
security benefits includible in gross income. Taxpayers are required to include
as an item of tax preference for purposes of the Federal alternative minimum tax
all tax-exempt interest on private activity bonds (generally, a bond issue in
which more than 10% of the proceeds are used in a non-governmental trade or
business, other than Section 501(c)(3) bonds) issued after August 7, 1986. Thus,
this provision will apply to any portion of the exempt-interest dividends from
the Fund's assets that are attributable to such private activity bonds less any
deductions (not allowable in computing Federal income tax) which would have been
allowable if such interest were includable in gross income. Corporations are
required to increase their alternative minimum taxable income for purposes of
calculating their alternative minimum tax liability by 75% of the amount by
which the adjusted current earnings (which will include tax-exempt interest) of
the corporation exceeds its alternative minimum taxable income (determined
without this item). In addition, in certain cases, Subchapter S corporations
with accumulated earnings and profits from Subchapter C years are subject to a
tax on tax-exempt interest.
Although not intended, it is possible that the Fund may realize short-term or
long-term capital gains or losses from its portfolio transactions. The Fund may
also realize short-term or long-term capital gains upon the maturity or
disposition of securities acquired at discounts resulting from market
fluctuations. Short-term capital gains are taxable to shareholders as ordinary
income when they are distributed. Any net capital gains (the excess of net
realized long-term capital gain over net realized short-term capital loss) will
be distributed annually to the Fund's shareholders. The Fund will have no tax
liability with respect to distributed net capital gains and the distributions
will be taxable to shareholders as long-term capital gains regardless of how
long the shareholders have held Fund shares. However, Fund shareholders who at
the time of such a net capital gain distribution have not held their Fund shares
for more than 6 months, and who subsequently dispose of those shares at a loss,
are required to treat such loss as a long-term capital loss to the extent of the
net capital gain distribution. Distributions of net capital gain will be
designated as a "capital gain dividend" in a written notice mailed to the Fund's
shareholders not later than 60 days after the close of the Fund's taxable year.
Capital gains realized by corporations are generally taxed at the same rate as
ordinary income. Generally, capital gains are taxable at a maximum rate of 20%
to non-corporate shareholders who have a holding period of more than 12 months.
Corresponding maximum rate rules apply with respect to capital gains dividends
distributed by the Fund, without regard to the length of time shares have been
held by the shareholder.
The Fund intends to distribute at least 90% of its investment company taxable
income (taxable income subject to certain adjustments exclusive of the excess of
net long-term capital gain over net short-term capital loss) for each taxable
year.
20
<PAGE>
These distributions will be taxable to shareholders as ordinary income. The Fund
will be subject to Federal income tax on any undistributed investment company
taxable income. To the extent such income is distributed it will be taxable to
shareholders as ordinary income. Expenses paid or incurred by the Fund will be
allocated between tax-exempt and taxable income in the same proportion as the
amount of the Fund's tax-exempt income bears to the total of such exempt income
and its gross income (excluding from gross income the excess of capital gains
over capital losses).
If the Fund does not distribute at least 98% of its ordinary income and 98% of
its capital gain net income for a taxable year, the Fund will be subject to a
nondeductible 4% excise tax on the excess of such amounts over the amounts
actually distributed.
If a shareholder fails to provide the Fund with a current taxpayer
identification number, the Fund is generally required to withhold 31% of taxable
interest, dividend payments, and proceeds from the redemption of shares of the
Fund.
Dividends and distributions to shareholders are treated in the same manner for
Federal income tax purposes whether received in cash or reinvested in additional
shares of the Fund.
With respect to the variable rate demand instruments, including Participation
Certificates therein, the Fund has obtained and is relying on the opinion of
Battle Fowler LLP, counsel to the Fund, that it will be treated for Federal
income tax purposes as the owner of an interest in the underlying Municipal
Obligations and the interest thereon will be exempt from regular Federal income
taxes to the Fund and its shareholders to the same extent as interest on the
underlying Municipal Obligation. Battle Fowler LLP has pointed out that the
Internal Revenue Service has announced that it will not ordinarily issue advance
rulings on the question of ownership of securities or participation interests
therein subject to a put and, as a result, the Internal Revenue Service can
reach a conclusion different from that reached by counsel.
In South Carolina v. Baker, the United States Supreme Court held that the
Federal government may constitutionally require states to register bonds they
issue and may subject the interest on such bonds to Federal tax if not
registered, and that there is no constitutional prohibition against the Federal
government's taxing the interest earned on state or other municipal bonds. The
Supreme Court decision affirms the authority of the Federal government to
regulate and control bonds such as Municipal Obligations and to tax the interest
on such bonds in the future. The decision does not, however, affect the current
exemption from regular income taxation of the interest earned on the Municipal
Obligations in accordance with Section 103 of the Code.
From time to time, proposals have been introduced before Congress to restrict or
eliminate the Federal income tax exemption for interest on Municipal
Obligations. If such a proposal is introduced and enacted in the future, the
ability of the Fund to pay exempt-interest dividends will be adversely affected
and the Fund will reevaluate its investment objective and policies and consider
changes in the structure.
Connecticut Income Taxes
The designation of all or a portion of a dividend paid by the Fund as an
"exempt-interest dividend" under the Code does not necessarily result in the
exemption of such amount from tax under the laws of any state or local taxing
authority. With respect to "exempt-interest dividends" that are paid by the
Fund, in the opinion of Day, Berry & Howard LLP, special Connecticut tax counsel
to the Fund, exempt-interest dividends correctly designated as derived from
Connecticut Municipal Obligations or Territorial Municipal Obligations received
by the Fund are not subject to the Connecticut Personal Income Tax.
Exempt-interest dividends that are not derived from Connecticut Municipal
Obligations or Territorial Municipal Obligations and any other dividends of the
Fund (including, if any, capital gain dividends) are includible in the tax base
for the Connecticut Personal Income Tax except that, in the case of taxpayers
holding shares of the Fund as capital assets, capital gain dividends derived
from Connecticut Municipal Obligations are not subject to the tax.
Exempt-interest dividends, except those derived from Connecticut Municipal
Obligations or Territorial Municipal Obligations are subject to the net
Connecticut minimum tax imposed on persons subject to the Connecticut Personal
Income Tax who are required to pay the Federal alternative minimum tax. No
exempt-interest dividends derived from Connecticut Municipal Obligations are
exempt from the Connecticut Corporation Business Tax payable by companies taxed
as corporations.
Shareholders are urged to consult their tax advisors with respect to the
treatment of distributions from the Fund in their own states and localities.
X. UNDERWRITERS
The Fund sells and redeems its shares on a continuing basis at their net asset
value and does not impose a sales charge. The Distributor does not receive an
underwriting commission. In effecting sales of Fund shares under the
Distribution Agreement, the Distributor, for nominal consideration (i.e., $1.00)
and as agent for the Fund, solicits orders for the purchase of the Fund's
shares, provided that any subscriptions and orders are not binding on the Fund
until accepted by the Fund as principal.
21
<PAGE>
The Glass-Steagall Act and other applicable laws and regulations prohibit banks
and other depository institutions from engaging in the business of underwriting,
selling or distributing most types of securities. On November 16, 1999,
President Clinton signed the Gramm-Leach-Bliley Act, repealing certain
provisions of the Glass-Steagall Act which have restricted affiliation between
banks and securities firms and amending the Bank Holding Company Act thereby
removing restrictions on banks and insurance companies. The new legislation
grants banks new authority to conduct certain authorized activity through
financial subsidiaries. In the opinion of the Manager, however, based on the
advice of counsel, these laws and regulations do not prohibit such depository
institutions from providing other services for investment companies such as the
shareholder servicing and related administrative functions referred to above.
The Fund's Board of Directors will consider appropriate modifications to the
Fund's operations, including discontinuance of any payments then being made
under the Plan to banks and other depository institutions, in the event of any
future change in such laws or regulations which may affect the ability of such
institutions to provide the above-mentioned services. It is not anticipated that
the discontinuance of payments to such an institution will result in loss to
shareholders or change in the Fund's net asset value. In addition, state
securities laws on this issue may differ from the interpretations of Federal law
expressed herein and banks and financial institutions may be required to
register ad dealers pursuant to state law.
XI. CALCULATION OF PERFORMANCE DATA
The Fund calculates a seven-day yield quotation using a standard method
prescribed by the rules of the SEC. Under that method, the Fund's yield figure,
which is based on a chosen seven-day period, is computed as follows: the Fund's
return for the seven-day period is obtained by dividing the net change in the
value of a hypothetical account having a balance of one share at the beginning
of the period by the value of such account at the beginning of the period
(expected to always be $1.00). This is multiplied by (365/7) with the resulting
annualized figure carried to the nearest hundredth of one percent. For purposes
of the foregoing computation, the determination of the net change in account
value during the seven-day period reflects (i) dividends declared on the
original share and on any additional shares, including the value of any
additional shares purchased with dividends paid on the original share, and (ii)
fees charged to all shareholder accounts. Realized capital gains or losses and
unrealized appreciation or depreciation of the Fund's portfolio securities are
not included in the computation. Therefore, annualized yields may be different
from effective yields quoted for the same period.
The Fund's "effective yield" for each Class is obtained by adjusting its
"current yield" to give effect to the compounding nature of the Fund's
portfolio, as follows: the unannualized base period return is compounded and
brought out to the nearest one hundredth of one percent by adding one to the
base period return, raising the sum to a power equal to 365 divided by 7, and
subtracting one from the result, i.e., effective yield = [(base period return +
1)365/7] - 1.
Although published yield information is useful to investors in reviewing the
Fund's performance, investors should be aware that the Fund's yield fluctuates
from day to day. The Fund's yield for any given period is not an indication, or
representation by the Fund, of future yields or rates of return on the Fund's
shares, and may not provide a basis for comparison with bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors who
purchase the Fund's shares directly may realize a higher yield than Participant
Investors because they will not be subject to any fees or charges that may be
imposed by Participating Organizations.
The Fund may from time to time advertise its tax equivalent current yield. The
tax equivalent yield for each Class is computed based upon a 30-day (or one
month) period ended on the date of the most recent balance sheet included in
this Statement of Additional Information. It is computed by dividing that
portion of the yield of the Fund (as computed pursuant to the formulae
previously discussed) which is tax exempt by one minus a stated income tax rate
and adding the quotient to that portion, if any, of the yield of the Fund that
is not tax exempt. The tax equivalent yield for the Fund may also fluctuate
daily and does not provide a basis for determining future yields.
The Fund may from time to time advertise a tax equivalent effective yield table
which shows the yield that an investor needs to receive from a taxable
investment in order to equal a tax-free yield from the Fund. This is calculated
by dividing that portion of the Fund's effective yield that is tax-exempt by 1
minus a stated income tax rate and adding the quotient to that portion, if any,
of the Fund's effective yield that is not tax-exempt. See "Taxable Equivalent
Yield Table" herein.
The Fund's Class A shares' yield for the seven day period ended January 31, 2000
was 2.34%, which is equivalent to an effective yield of 2.37%. The Fund's Class
B shares' yield for the seven day period ended January 31, 2000 was 2.51%, which
is equivalent to an effective yield of 2.54%. The Fund's Evergreen shares' yield
for the seven day period ended January 31, 2000 was 2.34%, which is equivalent
to an effective yield of 2.37%. The Fund's Chase Vista Select shares' yield for
the seven day period ended January 31, 2000 was 2.34%, which is equivalent to an
effective yield of 2.37%.
XII. FINANCIAL STATEMENTS
The audited financial statements for the Fund for the fiscal year ended January
31, 2000 and the report therein of PricewaterhouseCoopers LLP are herein
incorporated by reference to the Fund's Annual Report. The Annual Report is
available upon request and without charge.
22
<PAGE>
Description of Ratings*
Description of Moody's Investors Service, Inc.'s Two Highest Municipal Bond
Ratings:
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities, or fluctuation of protective elements
may be of greater amplitude, or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
Con. ( c ) Bonds for which the security depends upon the completion of some act
or the fulfillment of some condition are rated conditionally. These are bonds
secured by (i) earnings of projects under construction, (ii) earnings of
projects unseasoned in operating experience, (iii) rentals which begin when
facilities are completed, or (iv) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
Description of Moody's Investors Service, Inc.'s Two Highest Ratings of State
and Municipal Notes and Other Short-Term Loans:
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing, while various factors of the first importance in bond risk
are of lesser importance in the short run. Symbols used are as follows:
MIG-1: Loans bearing this designation are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both.
MIG-2: Loans bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.
Description of Standard & Poor's Rating Services Two Highest Debt Ratings:
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only to a small degree.
Plus ( + ) or Minus ( - ): The AA rating may be modified by the addition of a
plus or minus sign to show relative standing within the AA rating category.
Provisional Ratings: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
Standard & Poor's does not provide ratings for state and municipal notes.
Description of Standard & Poor's Rating Services Two Highest Commercial Paper
Ratings:
A: Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1: This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+) sign
designation.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
Description of Moody's Investors Service, Inc.'s Two Highest Commercial Paper
Ratings:
Moody's employs the following designations, both judged to be investment grade,
to indicate the relative repayment capacity of rated issues: Prime-1, highest
quality; Prime-2, higher quality.
* As described by the rating agencies.
23
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CORPORATE EQUIVALENT YIELD TABLE
(Based on Tax Rates Effective until December 31, 2000)
------------------------------------------------------------------------------------------------------------------------------------
1. If Your Taxable Income Bracket Is . . .
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
Corporate $0- $50,001- $75,001- $100,001- $335,001- $10,000,001- $15,000,001- $18,333,334
Return 50,000 75,000 100,000 335,000 10,000,000 15,000,000 18,333,333 and over
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
------------------------------------------------------------------------------------------------------------------------------------
2. Then Your Combined Income Tax Bracket Is . . .
------------------------------------------------------------------------------------------------------------------------------------
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
Federal
Tax Rate 15.00% 25.00% 34.00% 39.00% 34.00% 35.00% 38.00% 35.00%
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
State
Tax Rate 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50%
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
Combined
Marginal
Tax Rate 21.38% 30.63% 38.95% 43.58% 38.95% 39.88% 42.65% 39.88%
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
------------------------------------------------------------------------------------------------------------------------------------
3. Now Compare Your Tax Free Income Yields With Taxable Income Yields
------------------------------------------------------------------------------------------------------------------------------------
--------------- --------------------------------------------------------------------------------------------------------------------
Tax Exempt Equivalent Taxable Investment Yield
Yield Required to Match Tax Exempt Yield
--------------- --------------------------------------------------------------------------------------------------------------------
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
2.00% 2.54% 2.88% 3.28% 3.54% 3.28% 3.33% 3.49% 3.33%
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
2.50% 3.18% 3.60% 4.10% 4.43% 4.10% 4.16% 4.36% 4.16%
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
3.00% 3.82% 4.32% 4.91% 5.32% 4.91% 4.99% 5.23% 4.99%
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
3.50% 4.45% 5.05% 5.73% 6.20% 5.73% 5.82% 6.10% 5.82%
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
4.00% 5.09% 5.77% 6.55% 7.09% 6.55% 6.65% 6.97% 6.65%
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
4.50% 5.72% 6.49% 7.37% 7.98% 7.37% 7.48% 7.85% 7.48%
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
5.00% 6.36% 7.21% 8.19% 8.86% 8.19% 8.32% 8.72% 8.32%
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
5.50% 7.00% 7.93% 9.01% 9.75% 9.01% 9.15% 9.59% 9.15%
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
6.00% 7.63% 8.65% 9.83% 10.63% 9.83% 9.98% 10.46% 9.98%
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
6.50% 8.27% 9.37% 10.65% 11.52% 10.65% 10.81% 11.33% 10.81%
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
7.00% 8.90% 10.09% 11.47% 12.41% 11.47 11.64% 12.21% 11.64%
--------------- ------------- ----------- ------------- --------------- -------------- --------------- ---------------- ------------
To use this chart, find the applicable level of taxable income based on your tax
filing status in section one. Then read down to section two to determine your
combined tax bracket and, in section three, to see the equivalent taxable yields
for each of the tax free income yields given.
</TABLE>
24
<PAGE>
TAXABLE EQUIVALENT YIELD TABLE
(Based on Tax Rates Effective until December 31, 2000)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------------------------------
1. If Your Taxable Income Bracket Is . . .
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
Single $0- $10,001- $26,251- $63,551- $132,601- $283,151
Return 10,000 26,250 63,550 132,600 283,350 and over
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
Joint $0- $20,001- $43,851- $105,951- $161,451- $283,151
Return 20,000 43,850 105,950 161,450 283,350 and over
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
--------------------------------------------------------------------------------------------------------------------------
2. Then Your Combined Income Tax Rate Is . . .
--------------------------------------------------------------------------------------------------------------------------
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
Federal
Tax Rate 15.00% 15.00% 28.00% 31.00% 36.00% 39.60%
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
State
Tax Rate 3.00% 4.50% 4.50% 4.50% 4.50% 4.50%
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
Combined
Tax Rate 17.55% 18.83% 31.24% 34.11% 38.88% 42.32%
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
--------------------------------------------------------------------------------------------------------------------------
3. Now Compare Your Tax Free Income Yields
With Taxable Income Yields
--------------------------------------------------------------------------------------------------------------------------
------------------ -------------------------------------------------------------------------------------------------------
Tax Exempt Equivalent Taxable Investment Yield
Yield Required to Match Tax Exempt Yield
------------------ -------------------------------------------------------------------------------------------------------
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
2.00% 2.43% 2.46% 2.91% 3.04% 3.27% 3.47%
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
2.50% 3.03% 3.08% 3.64% 3.79% 4.09% 4.33%
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
3.00% 3.64% 3.70% 4.36% 4.55% 4.91% 5.20%
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
3.50% 4.24% 4.31% 5.09% 5.31% 5.73% 6.07%
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
4.00% 4.85% 4.93% 5.82% 6.07% 6.54% 6.93%
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
4.50% 5.46% 5.54% 6.54% 6.83% 7.36% 7.80%
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
5.00% 6.06% 6.16% 7.27% 7.59% 8.18% 8.67%
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
5.50% 6.67% 6.78% 8.00% 8.35% 9.00% 9.54%
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
6.00% 7.28% 7.39% 8.73% 9.11% 9.82% 10.40%
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
6.50% 7.88% 8.01% 9.45% 9.86% 10.63% 11.27%
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
7.00% 8.49% 8.62% 10.18% 10.62% 11.45% 12.14%
------------------ --------------- ----------------- ----------------- ---------------- ----------------- ----------------
</TABLE>
To use this chart, find the applicable level of taxable income based on your tax
filing status in section one. Then read down to section two to determine your
combined tax bracket and, in section three, to see the equivalent taxable yields
for each of the tax free income yields given.
25
<PAGE>
