Rule 497(e)
Registration No. 33-41462
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NORTH CAROLINA
DAILY MUNICIPAL
INCOME FUND, INC. 600 Fifth Avenue, New York, NY 10020
(212) 830-5220
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STATEMENT OF ADDITIONAL INFORMATION
January 1, 2000
AS SUPPLEMENTED ON OCTOBER 31, 2000
RELATING TO THE NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
PROSPECTUS DATED JANUARY 1, 2000
AND THE
EVERGREEN SHARES OF NORTH CAROLINA DAILY MUNICIPAL INCOME FUND, INC.
PROSPECTUS DATED JANUARY 1, 2000
This Statement of Additional Information (SAI) is not a Prospectus. The SAI
expands upon and supplements the information contained in the current
Prospectus for the North Carolina Daily Municipal Income Fund, Inc., dated
January 1, 2000, and the Evergreen shares of North Carolina Daily Municipal
Income Fund, Inc. Prospectus, dated January 1, 2000, (each, the "Fund"), and
should be read in conjunction with each of the Fund's Prospectuses.
A Prospectus may be obtained from any Participating Organization or by writing
or calling the Fund toll-free at 1-(800) 221-3079. The audited 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.
This Statement of Additional Information is incorporated by reference into the
Prospectus for each Class of shares in its entirety.
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Table of Contents
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Fund History.........................................2 Capital Stock and Other Securities......................16
Description of the Fund and its Investments and Purchase, Redemption and Pricing Shares.................17
Risks..............................................2 Taxation of the Fund....................................18
Management of the Fund..............................10 Underwriters............................................19
Control Persons and Principal Holders of Calculation of Performance Data.........................20
Securities........................................12 Financial Statements....................................20
Investment Advisory and Other Services..............12 Description of Ratings..................................21
Brokerage Allocation and Other Practices............16 Taxable Equivalent Yield Tables.........................22
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I. FUND HISTORY
The Fund was incorporated on April 18, 1990 in the state of Maryland.
II. DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS
The Fund is an open-end, management investment company that is a short-term,
tax-exempt money market fund. The Fund's investment objectives are to seek a
high level of current income, exempt from regular Federal tax and North Carolina
State income tax, 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 North Carolina, 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 (which, in the opinion of Battle Fowler
LLP, counsel to the Fund, cause the Fund to be treated as the owner of the
underlying Municipal Obligations for Federal income tax purposes) in Municipal
Obligations purchased from banks, insurance companies or other financial
institutions ("Participation Certificates"). Dividends paid by the Fund are
"exempt-interest dividends" by virtue of being properly designated by the Fund
as derived from Municipal Obligations and Participation Certificates. They will
be exempt from regular Federal income tax provided the Fund complies with
Section 852(b)(5) of Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). However, such interest, including exempt-interest
dividends, may be subject to the Federal alternative minimum tax.
Exempt-interest dividends paid by the Fund that are correctly identified by the
Fund as derived from obligations issued by or on behalf of the State of North
Carolina or any North Carolina local governments, or their instrumentalities,
authorities or districts ("North Carolina Municipal Obligations") will be exempt
from the North Carolina Income Tax. 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 North Carolina is
prohibited from taxing under the Constitution, the laws of the United States of
America or the North Carolina Constitution ("Territorial Municipal
Obligations"), also should be exempt from North Carolina Income Tax provided the
Fund complies with applicable North Carolina laws. (See "North Carolina Income
Taxes" herein.) To the extent that suitable North Carolina Municipal Obligations
are not available for investment by the Fund, the Fund may purchase Municipal
Obligations issued by other states, their agencies and instrumentalities. The
dividends on these will be designated by the Fund as derived from interest
income which will be, in the opinion of bond counsel to the issuer at the date
of issuance, exempt from regular Federal Income Tax but will be subject to the
North Carolina Income Tax. 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 North Carolina 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 and other North Carolina Municipal
Obligations. In view of this "concentration" in Participation Certificates in
North Carolina Municipal Obligations, which may be secured by bank letters of
credit or guarantee, an investment in Fund shares should be made with an
understanding of the characteristics of the banking industry and the risks which
such an investment may entail. (See "Variable Rate Demand Instruments and
Participation Certificates" herein.) The investment objectives of the Fund
described in the preceding paragraphs of this section may not be changed unless
approved by the holders of a majority of the outstanding shares of the Fund that
would be affected by such a change. As used herein, the term "majority of the
outstanding shares" of the Fund means, respectively, the vote of the lesser of
(i) 67% or more of the shares of the Fund present at a meeting, if the holders
of more than 50% of the outstanding shares of the Fund are present or
represented by proxy, or (ii) more than 50% of the outstanding shares of the
Fund.
The Fund may only purchase United States dollar-denominated securities that have
been determined by the Fund's Board of Directors to present minimal credit risks
and that are Eligible Securities at the time of acquisition. The term
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Eligible Securities means: (i) securities which have or are deemed to have
remaining maturities of 397 days or less and rated in the two highest short-term
rating categories by any two nationally recognized statistical rating
organizations ("NRSROs") or in such categories by the only NRSRO that has rated
the Municipal Obligations (collectively, the "Requisite NRSROs"); or (ii)
unrated securities determined by the Fund's Board of Directors to be of
comparable quality. In addition, securities which have or are deemed to have
remaining maturities of 397 days or less but that at the time of issuance were
long-term securities (i.e. with maturities greater than 366 days) are deemed
unrated and may be purchased if such had received a long-term rating from the
Requisite NRSROs in one of the three highest rating categories. Provided,
however, that such may not be purchased if it (i) does not satisfy the rating
requirements set forth in the preceding sentence and (ii) has received a
long-term rating from any NRSRO that is not within the three highest long-term
rating categories. A determination of comparability by the Board of Directors is
made on the basis of its credit evaluation of the issuer, which may include an
evaluation of a letter of credit, guarantee, insurance or other credit facility
issued in support of the securities. While there are several organizations that
currently qualify as NRSROs, two examples of NRSROs are Standard & Poor's Rating
Services, a division of The McGraw-Hill Companies, ("S&P") and Moody's Investors
Service, Inc. ("Moody's"). The two highest ratings by S&P and Moody's are "AAA"
and "AA" by S&P in the case of long-term bonds and notes or "Aaa" and "Aa" by
Moody's in the case of bonds; "SP-1" and "SP-2" by S&P or "MIG-1" and "MIG-2" by
Moody's in the case of notes; "A-1" and "A-2" by S&P or "Prime-1" and "Prime-2"
by Moody's in the case of tax-exempt commercial paper. The highest rating in the
case of variable and floating demand notes is "VMIG-1" by Moody's or "SP-1/AA"
by S&P. Such instruments may produce a lower yield than would be available from
less highly rated instruments.
Subsequent to its purchase by the Fund, a rated security may cease to be rated
or its rating may be reduced below the minimum required for purchase by the
Fund. If this occurs, the Board of Directors of the Fund shall promptly reassess
whether the security presents minimal credit risks and shall cause the Fund to
take such action as the Board of Directors determines is in the best interest of
the Fund and its shareholders. However, reassessment is not required if the
security is disposed of or matures within five business days of the Manager
becoming aware of the new rating and provided further that the Board of
Directors is subsequently notified of the Manager's actions.
In addition, in the event that a security (i) is in default, (ii) ceases to be
an Eligible Security under Rule 2a-7 of the Investment Company Act of 1940 (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.
The Fund intends to qualify as a "regulated investment company" under Subchapter
M of the Code. The Fund will be restricted in that at the close of each quarter
of the taxable year, at least 50% of the value of its total assets must be
represented by cash, government securities, regulated investment company
securities and other securities. The other securities must be 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.)
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
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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 North Carolina issuers.
3. Municipal Commercial Paper that is an Eligible Security at the time of
acquisition. Issues of Municipal Commercial Paper typically represent very
short-term, unsecured, negotiable promissory notes. These obligations are
often issued to meet seasonal working capital needs of municipalities or to
provide interim construction financing. They are paid from general revenues
of municipalities or are refinanced with long-term debt. In most cases
Municipal Commercial Paper is backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or other institutions which may be called upon in the
event of default by the issuer of the commercial paper.
4. Municipal Leases, which may take the form of a lease or an installment
purchase or conditional sale contract, issued by state and local
governments and authorities to acquire a wide variety of equipment and
facilities such as fire and sanitation vehicles, telecommunications
equipment and other capital assets. Municipal Leases frequently have
special risks not normally associated with general obligation or revenue
bonds. Leases and installment purchase or conditional sale contracts (which
normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to
acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt-issuance
limitations of many state constitutions and statutes are deemed to be
inapplicable because of the inclusion in many leases or contracts of
"non-appropriation" clauses. These clauses provide that the governmental
issuer has no obligation to make future payments under the lease or
contract unless money is appropriated for such purpose by the appropriate
legislative body on a yearly or other periodic basis. To reduce this risk,
the Fund will only purchase Municipal Leases subject to a non-appropriation
clause where the payment of principal and accrued interest is backed by an
unconditional irrevocable letter of credit, a guarantee, insurance or other
comparable undertaking of an approved financial institution. These types of
Municipal Leases may be considered illiquid and subject to the 10%
limitation of investments in illiquid securities set forth under
"Investment Restrictions" contained herein. The Board of Directors may
adopt guidelines and delegate to the Manager the daily function of
determining and monitoring the liquidity of Municipal Leases. In making
such determination, the Board and the Manager may consider such factors as
the frequency of trades for the obligation, the number of dealers willing
to purchase or sell the obligations and the number of other potential
buyers and the nature of the marketplace for the obligations, including the
time needed to dispose of the
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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, North Carolina
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" 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 to up to 397 days. The adjustments
are based upon the "prime rate"* of a bank or other appropriate interest rate
adjustment index as provided in the respective instruments. The Fund decides
which variable rate demand instruments it will purchase in accordance with
procedures prescribed by its Board of Directors to minimize credit risks. A fund
utilizing the amortized cost method of valuation under Rule 2a-7 of the 1940 Act
may purchase variable rate demand instruments only if (i) the instrument is
subject to an unconditional demand feature, exercisable by the Fund in the event
of a default in the payment of principal or interest on the underlying
securities, that is an Eligible Security or (ii) the instrument is not subject
to an unconditional demand feature but does qualify as an Eligible Security and
has a long-term rating by the Requisite NRSROs in one of the two highest rating
categories, or if unrated, is determined to be of comparable quality by the
Fund's Board of Directors. The Fund's Board of Directors may determine that an
unrated variable rate demand instrument meets the Fund's high quality criteria
if it is backed by a letter of credit or guarantee or is insured by an insurer
that meets the quality criteria for the Fund stated herein or on the basis of a
credit evaluation of the underlying obligor. If an instrument is ever not deemed
to be an Eligible Security, the Fund either will sell it in the
market or exercise the demand feature.
The variable rate demand instruments that the Fund may invest in include
Participation Certificates purchased by the Fund from banks, insurance companies
or other financial institutions in fixed or variable rate, tax-exempt
Municipal Obligations (expected to be concentrated in IRBs) owned by such
institutions or affiliated organizations. The Fund will not purchase
Participation Certificates in fixed rate tax-exempt Municipal Obligations
without obtaining an opinion of counsel that the Fund will be treated as the
owner thereof for Federal income tax purposes. A participation certificate gives
the Fund an undivided interest in the Municipal Obligation in the proportion
that the
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* The prime rate is generally the rate charged by a bank to its most
creditworthy customers for short-term loans. The prime rate of a particular bank
may differ from other banks and will be the rate announced by each bank on a
particular day. Changes in the prime rate may occur with great frequency and
generally become effective on the date announced.
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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).
Because the Fund may concentrate in Participation Certificates in North Carolina
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 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.
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.
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For purposes of determining whether a variable rate demand instrument held by
the Fund matures within 397 days from the date of its acquisition, the maturity
of the instrument will be deemed to be the longer of (i) the period required
before the Fund is entitled to receive payment of the principal amount of the
instrument or (ii) the period remaining until the instrument's next interest
rate adjustment. The maturity of a variable rate demand instrument will be
determined in the same manner for purposes of computing the Fund's
dollar-weighted average portfolio maturity. If a variable rate demand instrument
ceases to be an Eligible Security it will be sold in the market or through
exercise of the repurchase demand feature to the issuer.
When-Issued Securities
New issues of certain Municipal Obligations frequently are offered on a
when-issued basis. The payment obligation and the interest rate that will be
received on these Municipal Obligations are each fixed at the time the buyer
enters into the commitment although delivery and payment of the Municipal
Obligations normally take place within 45 days after the date of the Fund's
commitment to purchase. Although the Fund will only make commitments to purchase
when-issued Municipal Obligations with the intention of actually acquiring them,
the Fund may sell these securities before the settlement date if deemed
advisable by the Manager.
Municipal Obligations purchased on a when-issued basis and the securities held
in the Fund's portfolio are subject to changes in value (both generally changing
in the same way; that is, both experiencing appreciation when interest rates
decline and depreciation when interest rates rise) based upon the public's
perception of the creditworthiness of the issuer and changes, real or
anticipated, in the level of interest rates. Purchasing Municipal Obligations on
a when-issued basis can involve a risk that the yields available in the market
when the delivery takes place may actually be higher or lower than those
obtained in the transaction itself. A separate account of the Fund consisting of
cash or liquid debt securities equal to the amount of the when-issued
commitments will be established at the Fund's custodian bank. For the purpose of
determining the adequacy of the securities in the account, the deposited
securities will be valued at market value. If the market or fair value of such
securities declines, additional cash or highly liquid securities will be placed
in the account daily so that the value of the account will equal the amount of
such commitments by the Fund. On the settlement date of the when-issued
securities, the Fund will meet its obligations from then-available cash flow,
sale of securities held in the separate account, sale of other securities or,
although it would not normally expect to do so, from sale of the when-issued
securities themselves (which may have a value greater or lesser than the Fund's
payment obligations). Sale of securities to meet such obligations may result in
the realization of capital gains or losses, which are not exempt from Federal
income tax.
Stand-by Commitments
When the Fund purchases Municipal Obligations, it may also acquire stand-by
commitments from banks and other financial institutions. Under a stand-by
commitment, a bank or broker-dealer agrees to purchase at the Fund's option a
specified Municipal Obligation at a specified price with same day settlement. A
stand-by commitment is the equivalent of a "put" option acquired by the Fund
with respect to a particular Municipal Obligation held in its portfolio.
The amount payable to the Fund upon its exercise of a stand-by commitment
normally would be (i) the acquisition cost of the Municipal Obligation
(excluding any accrued interest that the Fund paid on the acquisition), less any
amortized market premium or plus any amortized market or original issue discount
during the period the Fund owned the security, plus (ii) all interest accrued on
the security since the last interest payment date during the period the security
was owned by the Fund. Absent unusual circumstances relating to a change in
market value, the Fund would value the underlying Municipal Obligation at
amortized cost. Accordingly, the amount payable by a bank or dealer during the
time a stand-by commitment is exercisable would be substantially the same as the
market value of the underlying Municipal Obligation.
The Fund's right to exercise a stand-by commitment would be unconditional and
unqualified. A stand-by commitment would not be transferable by the Fund,
although it could sell the underlying Municipal Obligation to a third party at
any time.
The Fund expects stand-by commitments to generally be available without the
payment of any direct or indirect consideration. However, if necessary and
advisable, the Fund may pay for stand-by commitments either separately in cash
or by paying a higher price for portfolio securities which are acquired subject
to such a commitment (thus reducing the yield to maturity otherwise available
for the same securities). The total amount paid in either manner for outstanding
stand-by commitments held in the Fund's portfolio will not exceed 1/2 of 1% of
the value of the Fund's total assets calculated immediately after the
acquisition of each stand-by commitment.
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
7
<PAGE>
these banks and broker-dealers will be supported by the value of the underlying
Municipal Obligations held by the Fund that were subject to the commitment.
The Fund intends to acquire stand-by commitments solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The purpose of this practice is to permit the Fund to be fully
invested in securities the interest on which is exempt from Federal income tax
while preserving the necessary liquidity to purchase securities on a when-issued
basis, to meet unusually large redemptions and to purchase at a later date
securities other than those subject to the stand-by commitment. The acquisition
of a stand-by commitment would not affect the valuation or assumed maturity of
the underlying Municipal Obligations which will continue to be valued in
accordance with the amortized cost method. Stand-by commitments acquired by the
Fund will be valued at zero in determining net asset value. In those cases in
which the Fund pays directly or indirectly for a stand-by commitment, its cost
will be reflected as unrealized depreciation for the period during which the
commitment is held by the Fund. Stand-by commitments will not affect the
dollar-weighted average maturity of the Fund's portfolio. The maturity of a
security subject to a stand-by commitment is longer than the stand-by repurchase
date.
The stand-by commitments the Fund may enter into are subject to certain risks.
These include the ability of the issuer of the commitment to pay for the
securities at the time the commitment is exercised, the fact that the commitment
is not marketable by the Fund, and that the maturity of the underlying security
will generally be different from that of the commitment.
In addition, the Fund may apply to the Internal Revenue Service for a ruling, or
seek from its counsel an opinion, that interest on Municipal Obligations subject
to stand-by commitments will be exempt from Federal income taxation (see
"Federal Income Taxes" herein). In the absence of a favorable tax ruling or
opinion of counsel, the Fund will not engage in the purchase of securities
subject to stand-by commitments.
Taxable Securities
Although the Fund will attempt to invest 100% of its net assets in tax-exempt
Municipal Obligations, the Fund may invest up to 20% of the value of its total
assets in securities of the kind described below. The interest income from such
securities is subject to regular Federal or North Carolina 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
collateral. The Fund's Board believes that the collateral underlying repurchase
agreements may be more susceptible to claims of the seller's creditors than
would be the case with securities owned by the Fund. It is expected that
repurchase agreements will give rise to income which will not qualify as
tax-exempt income when distributed by the Fund. The Fund will not invest in a
repurchase agreement maturing in more than seven days if any such investment,
together with illiquid securities held by 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.
8
<PAGE>
North Carolina Risk Factors
Because of the Fund's concentration in investments in North Carolina Municipal
Obligations, the safety of an investment in the Fund will depend substantially
upon the financial strength of North Carolina and its political subdivisions.
The North Carolina economy relies in part on activities that may be subject to
cyclical change.
The North Carolina Constitution provides that total expenditures for a fiscal
year shall not exceed the total of receipts and the surplus at the beginning of
the year. Effective May 1, 1999, the North Carolina General Assembly eliminated
the State's remaining 2% sales tax on food. The State's inheritance tax was
repealed, effective January 1, 1999. The maximum corporate income tax rate for
corporations with taxable years beginning in 2000 is reduced to 6.9%.
For its fiscal year ended June 30, 1999, the State ended the year with a fund
balance of $1,150.0 million based on unaudited results. The budget adopted for
the fiscal year ending June 30, 2000 projects an ending fund balance of $440.2
million from total available funds of $14,561.7 million. The budget for the
fiscal year ending June 30, 2000 includes increases of $1,069.2 million which
are primarily for increases in teachers' salaries, compensation increases and
bonuses for State employees, bonuses for teachers at public schools that exceed
academic expectations, increased funding for universities and community colleges
and expanded early childhood education. Funds totaling $399 million were
reserved for refunds to certain taxpayers for income taxes paid on governmental
retirement benefits and 200 million was reserved for intangibles tax refunds.
The intangibles tax refunds will require additional funds of $240 million in
July 2000 which has been appropriated. In addition, no funds have been
appropriated nor any bonds or bonds referenda authorized by the North Carolina
General Assembly to fund approximately $7 billion in identified repairs and
renovations to facilities at the University of North Carolina's 16 campuses and
at the State's community colleges.
In a special session in December 1999, the North Carolina General Assembly
appropriated $326 million of reserves for the Hurricane Floyd Reserve Fund. In
addition, $510 million was raised for this Fund from reductions in state agency
expenditures and the freezing of certain capital projects. This Fund was created
in response to the devastation created in Eastern North Carolina by Hurricane
Floyd which left 51 people dead, destroyed or damaged more than 57,000 homes and
caused an estimated $6 billion in property damage and is in addition to over $2
billion in federal aid. The Hurricane Floyd Reserve Fund will be used to assist
residents of Eastern North Carolina obtain permanent housing, match federal aid,
assist small businesses, farmers and commercial fisherman, provide environmental
cleanup and assist county and municipal governments with lost tax revenues. The
obligations of the State of North Carolina are currently rated in the highest
category by the principal rating agencies.
North Carolina county and municipal governments are likewise required to have a
balanced budget. Many political subdivisions have been under increasing
financial pressure resulting from increased taxes and expenditure reductions.
County and municipal governments located in Eastern North Carolina may
experience additional financial pressure as a result of damages from Hurricane
Floyd.
There can be no assurance that general economic difficulties or the financial
circumstances of North Carolina or its counties and municipalities will not
adversely affect the market value of North Carolina Municipal Obligations or the
ability of the obligors to pay debt service on such obligations.
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 "Investment
Objectives, Policies 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.
9
<PAGE>
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 Investment 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 Investment 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 would be deemed to be the sole issuer of the
security. Similarly, in the case of an industrial revenue bond, if that
bond is backed only by the assets and revenues of the non-government user,
then such non-government user would be deemed to be the sole issuer. If,
however, in either case, the creating government or some other entity, such
as an insurance company or other corporate obligor, guarantees a security
or a bank issues a letter of credit, such a guarantee or letter of credit
would be considered a separate security and would be treated as an issue of
such government, other entity or bank. Immediately after the acquisition of
any securities subject to a Demand Feature or Guarantee (as such terms are
defined in Rule 2a-7 of the 1940 Act), with respect to 75% of the total
assets of the Fund, not more than 10% of the Fund's assets may be invested
in securities that are subject to a Guarantee or Demand Feature from the
same institution. However, the Fund may only invest more than 10% of its
assets in securities subject to a Guarantee or Demand Feature issued by a
Non-Controlled Person (as such term is defined in Rule 2a-7 of the 1940
Act).
11. Invest in securities of other investment companies. The Fund may purchase
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, has employed the Manager to serve as investment
manager of the Fund. The Manager provides persons satisfactory to the Fund's
Board of Directors to serve as officers of the Fund. Such officers, as well as
certain other employees and directors of the Fund, may be directors or officers
of Reich & Tang Asset Management, Inc., the sole general partner of the Manager
or employees of the Manager or its affiliates. Due to the services performed by
the Manager, the Fund currently has no employees and its officers are not
required to devote their full-time to the affairs of the Fund.
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<PAGE>
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, 68 - 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, 58 - 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, and a
Director of Life Cycle Mutual Funds, Inc.
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. Dr. Wong is also a Trustee of Eclipse Financial Asset
Trust.
Molly Flewharty, 48 - Vice President of the Fund, has been Vice President of the
Mutual Funds Division of the Manager since September 1993. Ms. Flewharty was
formerly Vice President of Reich & Tang, Inc. which she was associated with from
December 1977 to 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 was
formerly Senior Vice President of Reich & Tang, Inc. which she was associated
with from April 1973 to 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 was formerly
Vice President of Reich & Tang, Inc. with which she was associated with from
December 1980 to September 1993. Ms. Messina is also Vice President of 15 other
funds in the Reich & Tang Fund Complex.
Bernadette N. Finn, 52 - Secretary of the Fund, has been Vice President of the
Mutual Funds Division of the Manager since September 1993. Ms. Finn was formerly
Vice President and Assistant Secretary of Reich & Tang, Inc. which she was
associated with from September 1970 to September 1993. Ms. Finn is also a
Secretary of 14 other funds, and a Vice President and Secretary of five
additional funds in the Reich & Tang Fund Complex.
Richard De Sanctis, 43 - Treasurer of the Fund, has been Treasurer of the
Manager since September 1993. Mr. De Sanctis 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 $6,000 to its directors with respect
to the period ended August 31, 1999, all of which consisted of directors' fees
paid to the three disinterested directors, pursuant to the terms of the
Investment Management Contract (see "Manager" herein.)
Directors of the Fund not affiliated with the Manager receive from the Fund an
annual retainer of $1,000 and a fee of $250 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.
11
<PAGE>
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 Benefits upon Fund and Fund Complex Paid
Part of Fund Expenses Retirement to Directors*
Name of Person,
Position
Dr. W. Giles Mellon,
Director $2,000 0 0 $59,500 (16 Funds)
Robert Straniere,
Director $2,000 0 0 $59,500 (16 Funds)
Dr. Yung Wong,
Director $2,000 0 0 $59,500 (16 Funds)
</TABLE>
* The total compensation paid to such persons by the Fund and Fund Complex
for the fiscal year ending August 31, 1999. The parenthetical number
represents the number of investment companies (including the Fund) from
which the directors receive compensation. A Fund is considered to be in the
same Fund complex if among other things, it shares a common investment
adviser with the Fund.
IV. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
On November 30, 1999 there were 249,134,273 Class A shares outstanding, no Class
B shares, and no Evergreen shares outstanding. As of November 30, 1999, 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 November 30, 1999:
Nature of
Name and address % of Class Ownership
Class A
Wachovia Bank of North Carolina, N.A. 47% Record
301 North Main Street
Winston-Salem, N.C. 27150-1195
Evergreen Investment Services 8% Record
401 S. Tryon Street 5th Street
Charlotte, NC 28288-1195
Class B
No persons own 5% or more of outstanding common stock of Class B Shares.
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 November 30, 1999, investment
manager, adviser, or supervisor with respect to assets aggregating in excess of
$14.4 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.
12
<PAGE>
Nvest Companies is a holding company offering a broad array of investment styles
across a wide range of asset categories through seventeen subsidiaries,
divisions and affiliates offering a wide array of investment styles and products
to institutional clients. Its business units, in addition to the Manager,
include AEW Capital Management, L.P., Back Bay Advisors, L.P.; Capital Growth
Management Limited Partnerships; Greystone Partners, L.P.; Harris Associates,
L.P.; Jurika & Voyles, L.P.; Kobrick Funds, LLP, Loomis, Sayles & Company, L.P.;
New England Funds, L.P.; Nvest Associates, Inc.; Snyder Capital Management,
L.P.; Vaughan, Nelson, Scarborough & McCullough, L.P.; and Westpeak Investment
Advisors, L.P. These affiliates in the aggregate are investment advisors or
managers to more than 80 other registered investment companies.
The Nvest-CDC AM transaction involved a change of ownership of Nvest Companies,
which may be deemed to have caused a "change of control" of the Manager, even
though operations did not change as a result. As required by the 1940 Act, the
Fund's shareholders approved a new Investment Management Contract for the Fund
to assure that there was no interruption in the services that the Manager
provides to the Fund. The new Investment Management Contract was approved by the
shareholders on October 10, 2000 and is effective as of October 30, 2000.
On July 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 August 31, 2002. The contract may be continued in force
after the initial term for successive twelve-month periods beginning each
September 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 equal to .40% 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 equal to .21% per annum of the Fund's
average daily net assets. For the Funds' fiscal years ended August 31, 1999,
August 31, 1998 and August 31, 1997, the Manager received a fee of $535,768,
$481,880 and $406,136, respectively, of which $256,446, $298,307and $356,429 was
voluntarily waived.
For the Fund's fiscal years ended August 31, 1999, August 31, 1998 and August
31, 1997, the fee paid to the Manager under the Investment Management Contract
was $1,020,511, $917,866 and $773,593, respectively, none of which was
voluntarily waived. The Fund's net assets at the close of business on August 31,
1999 totaled $251,585,899. 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.
13
<PAGE>
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 all
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 own
resources which includes the shareholder servicing fee and past profits, and the
Manager from its own resources which includes the management fee and past
profits 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 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 has required that an
investment company which bears any direct or indirect expense of distributing
its shares must do so only in accordance with a plan permitted by the Rule. The
Fund's Board of Directors has adopted a distribution and service plan (the
"Plan") and, pursuant to the Plan, the Fund has entered into a Distribution
Agreement and a Shareholder Servicing Agreement (with respect to Class A and
Evergreen shares) with Reich & Tang Distributors, Inc., (the "Distributor"), as
distributor of the Fund's shares.
The Class A and Evergreen 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 (with respect to the Class A
and Evergreen shares), the Distributor receives from the Fund a fee equal to
.25% per annum of the Fund's average daily net assets of the Class A and
Evergreen 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 and
Evergreen shares and for payments to Participating Organizations with respect to
servicing their clients or customers who are Class A and Evergreen 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.
With respect to the Class A shares of the Fund, for the Fund's fiscal year ended
August 31, 1997, the amount payable to the Distributor under the Distribution
Plan and Shareholder Servicing Agreement adopted thereunder pursuant to Rule
12b-1 under the 1940 Act, totaled $483,495, none of which was voluntarily
waived. During the same period, the Manager made total payments under the plan
to or on behalf of Participating Organizations of $744,502. For the Fund's
fiscal year ended August 31, 1998, the amount payable to the Distributor under
the
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Distribution Plan and Shareholder Servicing Agreement adopted thereunder
pursuant to Rule 12b-1 under the 1940 Act, totaled $573,667, none of which was
voluntarily waived. During the same period, the Manager made total payments
under the Plan to or on behalf of Participating Organizations of $980,407. For
the Fund's fiscal year ended August 31, 1999, the amount payable to the
Distributor under the Distribution Plan and Shareholder Servicing Agreement
adopted thereunder pursuant to Rule 12b-1 under the 1940 Act, totaled $637,819,
none of which was voluntarily waived. During the same period, the Manager made
total payments under the plan to or on behalf of Participating Organizations of
$1,051,125. 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 Distributor from its own resources, or the Manager from
its own resources (which may be deemed to be an indirect payment by the Fund).
For the fiscal year ended August 31, 1999, the total amount spent pursuant to
the Plan for Class A shares was 0.42% of the average daily net assets of the
Fund, of which .25% of the average daily net assets was paid by the Fund to the
Distributor, pursuant to the Shareholder Servicing Agreement.
Under the Distribution Agreement, the Distributor, for nominal consideration
(i.e., $1.00) and as agent for the Fund, will solicit orders for the purchase of
the Fund's shares, provided that any subscriptions and orders will not be
binding on the Fund until accepted by the Fund as principal.
The Plan and the Shareholder Servicing Agreement provide that the Distributor
will pay for (i) telecommunications expenses, including the cost of dedicated
lines and CRT terminals, incurred by the Participating Organizations and
Distributor in carrying out their obligations under the Shareholder Servicing
Agreement with respect to the Class A 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
their 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 and Evergreen shares of the
Fund; (ii) to compensate certain Participating Organizations for providing
assistance in distributing the Fund's shares; and (iii) to pay the costs of
printing and distributing the Fund's prospectus to prospective investors, and to
defray the cost of the preparation and printing of brochures and other
promotional materials, mailings to prospective shareholders, advertising, and
other promotional activities, including the salaries and/or commissions of sales
personnel in connection with the distribution of the Fund's shares. The
Distributor may also make payments from time to time from its own resources,
which may include the Shareholder Servicing Fee and past profits for the purpose
enumerated in (i) above. The Distributor will determine the amount of such
payments made pursuant to the Plan, provided that such payments will not
increase the amount which the Fund is required to pay to the Manager or the
Distributor for any fiscal year under the Investment Management Contract or the
Shareholder Servicing Agreement in effect for that year.
In accordance with Rule 12b-1, the Plan provides that all written agreements
relating to the Plan entered into between either the Fund or the Distributor and
Participating Organizations or other organizations must be in a form
satisfactory to the Fund's Board of Directors. In addition, the Plan requires
the Fund and the Distributor to prepare, at least quarterly, written reports
setting forth all amounts expended for distribution purposes by the Fund and the
Distributor pursuant to the Plan and identifying the distribution activities for
which those expenditures were made.
The Plan provides that it will remain in effect until August 31, 2000.
Thereafter it may continue in effect for successive annual periods commencing
September 1, provided it is approved by the Fund's 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 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 shareholders.
Custodian And Transfer Agents
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
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.
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Counsel and Auditors
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 North Carolina law are passed upon by Kennedy
Covington Lobdell and Hickman, L.L.P., NationsBank Corporate Center, Suite 4200,
Charlotte, North Carolina 28202. PricewaterhouseCoopers LLP, 1177 Avenue of the
Americas, New York, NY 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 will be made independently from those for any
other investment companies or accounts that may be or become managed by the
Manager or its affiliates. If, however, the Fund and other investment companies
or accounts managed by the Manager are simultaneously engaged in the purchase or
sale of the same security, the transactions may be averaged as to price and
allocated equitably to each account. In some cases, this policy might adversely
affect the price paid or received by the Fund or the size of the position
obtainable for the Fund. In addition, when purchases or sales of the same
security for the Fund and for other investment companies managed by the Manager
occur contemporaneously, the purchase or sale orders may be aggregated in order
to obtain any price advantage available to large denomination purchasers or
sellers.
No portfolio transactions are executed with the Manager or its affiliates acting
as principal. In addition, the Fund will not buy bankers' acceptances,
certificates of deposit or commercial paper from the Manager or its affiliates.
VII. CAPITAL STOCK AND OTHER SECURITIES
The authorized capital stock of the Fund consists of twenty billion shares of
stock having a par value of one tenth of one cent ($.001) per share. The Fund's
Board of Directors is authorized to divide the shares into separate series of
stock, one for each of the portfolios that may be created. Each share of any
series of shares when issued will have equal dividend, distribution and
liquidation rights within the series for which it was issued and each fractional
share has those rights in proportion to the percentage that the fractional share
represents of a whole share. Shares of all series have identical voting rights,
except where, by law, certain matters must be approved by a majority of the
shares of the 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 three classes of
common stock, Class A, Class B, and Evergreen Class. Each share, regardless of
class, will represent an interest in the same portfolio of investments and will
have identical voting, dividend, liquidation and other rights, preferences,
powers, restrictions, limitations, qualifications, designations and terms and
conditions, except that: (i) the Class A, Class B, and Evergreen shares will
have different class designations; (ii) only the Class A and Evergreen shares
will be assessed a service fee pursuant to the Rule 12b-1 Distribution and
Service Plan of the Fund of .25% of each Classes shares' average daily net
assets; (iii) only the holders of the Class A and Evergreen shares will be
entitled to vote on matters pertaining to the Plan and any related agreements in
accordance with provisions of Rule 12b-1; and (iv) the exchange privilege will
permit 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 currently 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.
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Under its amended 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 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.)
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IX. TAXATION OF THE FUND
The Fund has elected to qualify under the Code, as a "regulated investment
company" that distributes "exempt-interest dividends". The Fund intends to
continue to qualify for regulated investment company status so long as such
qualification is in the best interest of its shareholders. Such qualification
relieves the Fund of liability for Federal income taxes to the extent its
earnings are distributed in accordance with the applicable provisions of the
Code.
The Fund's policy is to distribute as dividends each year 100%, and in no event
less than 90%, of its net tax-exempt interest income. Exempt-interest dividends
are dividends paid by the Fund that are attributable to interest on obligations,
the interest on which is exempt from regular Federal income tax, and designated
by the Fund as exempt-interest dividends in a written notice mailed to the
Fund's shareholders not later than 60 days after the close of its taxable year.
The percentage of the total dividends paid by the Fund during any taxable year
that qualifies as exempt-interest dividends will be the same for all
shareholders receiving dividends during the year.
Exempt-interest dividends are excludable from are gross income under Section
103(a) of the Code although the amount of tax exempt interest received must be
disclosed on the shareholders' Federal income tax returns. Shareholders should
consult their tax advisors with respect to whether exempt-interest dividends
retain the exclusion under Section 103 of the Code if they would be treated as
"substantial users" or "related persons" under Section 147(a) of the Code with
respect to some or all of any "private activity bonds" held by the Fund. If a
shareholder receives an exempt-interest dividend with respect to any share that
it has 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. For Social Security recipients, interest on tax-exempt
bonds, including exempt-interest dividends paid by the Fund, must be added to
adjusted gross income for purposes of computing the amount of social security
benefits includible in gross income. Taxpayers other than corporations are
required to include as an item of tax preference for purposes of the Federal
alternative minimum tax all tax-exempt interest on "private activity" bonds
(generally, a bond issue in which more than 10% of the proceeds are used in a
non-governmental trade or business, other than Section 501(c)(3) bonds) issued
after August 7, 1986. Thus, this provision will apply to any exempt-interest
dividends from the Fund's assets that are attributable to such post-August 7,
1986 private activity bonds acquired by the Fund. 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 it's 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
minimum tax on excess "passive investment income," which includes 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 market discount income, short-term or long-term capital gains upon
the maturity or disposition of securities acquired at discounts resulting from
market fluctuations. Accrued market discount income and short-term capital gains
will be taxable to shareholders as ordinary income when they are distributed.
Any net capital gains (the excess of net long-term capital gain over net
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 are 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, will be 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 capital
gain dividends in a written notice mailed to the Fund's shareholders not later
than 60 days after the close of the Fund's taxable year. Capital gains realized
by corporations are generally taxed at the same rate as ordinary income.
However, capital gains are generally taxable at a maximum rate of 20% to
non-corporate shareholders who have a holding period of more than 12 months.
Corresponding maximum rate and holding period 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 also intends to distribute at least 90% of its investment company
taxable income (taxable income including short term capital gain but subject to
certain adjustments, exclusive of the excess of its net long-term capital gain
over its net short-term capital loss) for each taxable year. This distribution
will be subject to shareholders as ordinary income. The Fund will be subject to
Federal income tax on any undistributed investment company taxable 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.
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If a shareholder (other than a corporation) fails to provide the Fund with a
current taxpayer identification number, the Fund generally is required to
withhold 31% of taxable interest, dividend payments, and proceeds from the
redemption of shares of the Fund.
Dividends and distributions to shareholders will be treated in the same manner
for Federal 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 that the interest thereon will be exempt from regular Federal
income taxes to the Fund and its shareholders to the same extent as interest on
the underlying Municipal Obligations. Counsel 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 could reach a
conclusion different from that reached by counsel.
The Code provides that interest on indebtedness incurred or continued to
purchase or carry tax-exempt bonds is not deductible by most taxpayers.
Therefore, a certain portion of interest on indebtedness incurred, or continued,
to purchase or carry securities, including margin interest, may not be
deductible during the period an investor holds shares of the Fund.
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 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 were introduced and enacted in the future, the
ability of the Fund to pay exempt-interest dividends would be adversely affected
and the Fund would reevaluate its investment objective and policies and consider
changes in the structure.
The exemption for Federal income tax purposes of exempt-interest dividends does
not necessarily result in an exemption under the income or other tax laws of any
state or local taxing authority. Shareholders of the Fund may be exempt from
state and local taxes on distributions of tax-exempt interest income derived
from obligations of the state and/or municipalities of the state in which they
may reside but may be subject to tax on income derived from obligations of other
jurisdictions. Shareholders are advised to consult with their tax advisers
concerning the application of state and local taxes to investments in the Fund
which may differ from the Federal income tax consequences described above.
North Carolina 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. However, assuming that the Fund is a regulated investment company
within the meaning of Section 851 of the Code and has filed with the North
Carolina Department of Revenue its election to be treated as a regulated
investment company, exempt interest dividends received from the Fund and
correctly identified by the Fund as derived from obligations issued by or on
behalf of the state of North Carolina or any political subdivisions need not be
included in North Carolina taxable income by shareholders of the Fund subject to
North Carolina taxation. Exempt-interest dividends correctly identified by the
Fund as derived from obligations of Puerto Rico and the Virgin Islands, as well
as other types of obligations that North Carolina is prohibited from taxing
under the Constitution or laws of the United States of America or the
constitution or laws of North Carolina ("Territorial Municipal Obligations")
should be exempt from North Carolina income taxation provided the Fund complies
with applicable North Carolina law. Dividends with respect to interest on
obligations from states other than North Carolina and its political subdivisions
are required to be added to Federal taxable income in calculating North Carolina
taxable income. The portion of distributions from the Fund that represents
capital gain is reportable for North Carolina income tax purposes as capital
gain income and not dividend income.
X. UNDERWRITERS
The Fund sells and redeems its shares on a continuing basis at their net asset
value and does not impose a sales charge. The Distributor does not receive an
underwriting commission. In effecting sales of Fund shares under the
Distribution Agreement, the Distributor, for nominal consideration (i.e., $1.00)
and as agent for the Fund, will solicit
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orders for the purchase of the Fund's shares, provided that any subscriptions
and orders will not be binding on the Fund until accepted by the Fund as
principal.
The Glass-Steagall Act and other applicable laws and regulations prohibit banks
and other depository institutions from engaging in the business of underwriting,
selling or distributing most types of securities. In the opinion of the Manager,
however, based on the advice of counsel, these laws and regulations do not
prohibit such depository institutions from providing other services for
investment companies such as the shareholder servicing and related
administrative functions referred to above. The Fund's Board of Directors will
consider appropriate modifications to the Fund's operations, including
discontinuance of any payments then being made under the Plan to banks and other
depository institutions, in the event of any future change in such laws or
regulations which may affect the ability of such institutions to provide the
above-mentioned services. It is not anticipated that the discontinuance of
payments to such an institution would result in loss to shareholders or change
in the Fund's net asset value. In addition, state securities laws on this issue
may differ from the interpretations of Federal law expressed herein and banks
and financial institutions may be required to register 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 would need to receive from a taxable
investment in order to equal a tax-free yield from the Fund. This is calculated
by dividing that portion of the Fund's effective yield that is tax-exempt by 1
minus a stated income tax rate and adding the quotient to that portion, if any,
of the Fund's effective yield that is not tax-exempt. See "Taxable Equivalent
Yield Table" herein.
The Fund's Class A shares' yield for the seven day period ended November 30,
1999 was 2.87% which is equivalent to an effective yield of 2.91%. No yield
information is available for Class B or Evergreen shares because there are
currently no shares outstanding in either Class.
XII. FINANCIAL STATEMENTS
The audited financial statements for the Fund for the fiscal year ended August
31, 1999 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.
20
<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 will be
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing, while various factors of the first importance in bond risk
are of lesser importance in the short run. Symbols used will be as follows:
MIG-1: Loans bearing this designation are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both.
MIG-2: Loans bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.
Description of Standard & Poor's Rating Services Two Highest Debt Ratings:
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only to a small degree.
Plus ( + ) or Minus ( - ): The AA rating may be modified by the addition of a
plus or minus sign to show relative standing within the AA rating category.
Provisional Ratings: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
Standard & Poor's does not provide ratings for state and municipal notes.
Description of Standard & Poor's Rating Services Two Highest Commercial Paper
Ratings:
A: Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1: This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+) sign
designation.
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.
21
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
CORPORATE TAXABLE EQUIVALENT YIELD TABLE
(Based on Estimated Tax Rates Effective Until December 31, 2000)
--------------------------------------------------------------------------------------------------------------------------
1. If Your Taxable Income Bracket is . . .
--------------------------------------------------------------------------------------------------------------------------
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
Corporate $50,001- $75,001- $100,001- $335,001- $10,000,001- $15,000,001- $18,333,334
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
25.00% 34.00% 39.00% 34.00% 35.00% 38.00% 35.00%
Tax Rate
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
State
6.90% 6.90% 6.90% 6.90% 6.90% 6.90% 6.90%
Tax Rate
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
State Tax 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Surcharge
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
Combined 30.18% 38.55% 43.21% 38.55% 39.49% 42.28% 39.49%
Marginal
Tax Rate
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
--------------------------------------------------------------------------------------------------------------------------
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% 2.86% 3.25% 3.52% 3.25% 3.30% 3.46% 3.30%
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
2.50% 3.58% 4.07% 4.40% 4.07% 4.13% 4.33% 4.13%
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
3.00% 4.30% 4.88% 5.28% 4.88% 4.96% 5.20% 4.96%
----------------- ------------ ------------ ------------- ------------- ---------------- --------------- ---------------
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
3.50% 5.01% 5.70% 6.16% 5.70% 5.78% 6.06% 5.78%
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
4.00% 5.73% 6.51% 7.04% 6.51% 6.61% 6.93% 6.61%
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
4.50% 6.44% 7.32% 7.92% 7.32% 7.44% 7.80% 7.44%
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
5.00% 7.16% 8.14% 8.80% 8.14% 8.26% 8.66% 8.26%
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
5.50% 7.88% 8.95% 9.68% 8.95% 9.09% 9.53% 9.09%
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
6.00% 8.59% 9.76% 10.57% 9.76% 9.91% 10.39% 9.91%
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
6.50% 9.31% 10.58% 11.45% 10.58% 10.74% 11.26% 10.74%
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
7.00% 10.03% 11.39% 12.33% 11.39% 11.57% 12.13% 11.57%
----------------- ------------ -------------- ------------- ------------- ---------------- --------------- ---------------
</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.
22
<PAGE>
INDIVIDUAL TAXABLE EQUIVALENT YIELD TABLE
(Based on Estimated Tax Rates Effective Until December 31, 2000)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------------
1. If Your Taxable Income Bracket is . . .
-------------------------------------------------------------------------------------------------------------------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
Single $0- $12,751 - $26,251- $60,001- $ 63,551- $132,601- $288,351
Return 12,750 26,250 60,000 63,550 132,600 288,350 and over
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
Joint $0- $21,251 - $43,851- $100,001- $105,951- $161,451- $288,351
Return 21,250 43,850 100,000 105,950 161,450 288,350 and over
-------------------------------------------------------------------------------------------------------------------------
2. Then Your Combined Income Tax Bracket Is . . .
-------------------------------------------------------------------------------------------------------------------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
Federal
15.00% 15.00% 28.00% 28.00% 31.00% 36.00% 39.60%
Tax Bracket
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
State
6.00% 7.00% 7.00% 7.75% 7.75% 7.75% 7.75%
Tax Bracket
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
Combined
20.10% 20.95% 33.04% 33.58% 36.35% 40.96% 44.28%
Tax Bracket
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
-------------------------------------------------------------------------------------------------------------------------
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% 2.50% 2.53% 2.99% 3.01% 3.14% 3.39% 3.59%
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
2.50% 3.13% 3.16% 3.73% 3.76% 3.93% 4.23% 4.49%
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
3.00% 3.75% 3.80% 4.48% 4.52% 4.71% 5.08% 5.38%
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
3.50% 4.38% 4.43% 5.23% 5.27% 5.50% 5.93% 6.28%
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
4.00% 5.01% 5.06% 5.97% 6.02% 6.28% 6.78% 7.18%
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
4.50% 5.63% 5.69% 6.72% 6.78% 7.07% 7.62% 8.08%
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
5.00% 6.26% 6.33% 7.47% 7.53% 7.86% 8.47% 8.97%
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
5.50% 6.88% 6.96% 8.21% 8.28% 8.64% 9.32% 9.87%
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
6.00% 7.51% 7.59% 8.96% 9.03% 9.43% 10.16% 10.77%
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
6.50% 8.14% 8.22% 9.71% 9.79% 10.21% 11.01% 11.67%
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
7.00% 8.76% 8.86% 10.45% 10.54% 11.00% 11.86% 12.56%
----------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------
</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.
23
